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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 April 4, 1998 TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ...............to......................
Commission file number: 0-9831
LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2842791
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1441 Broadway, New York, New York 10018
(Address of principal executive offices) (Zip Code)
(212) 354-4900
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.Yes X No.
The number of shares of Registrant's Common Stock, par value $1.00
per share, outstanding at May 15, 1998 was 66,034,289.
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PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 4, 1998 and
January 3, 1998 ............................................. 3
Consolidated Statements of Income for the Three Month Periods
Ended April 4, 1998 and April 5, 1997 ....................... 4
Consolidated Statements of Cash Flows for the Three Month Periods
Ended April 4, 1998 and April 5, 1997 ....................... 5
Notes to Consolidated Financial Statements ....................... 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 11-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 14-15
Item 6. Exhibits and Reports on Form 8-K ................................. 15
SIGNATURE ..................................................................... 16
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(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)
April 4, January 3,
ASSETS 1998 1998
CURRENT ASSETS:
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Cash and cash equivalents $ 22,157 $ 138,185
Marketable securities 106,236 221,343
Accounts receivable - trade 383,173 181,303
Inventories 341,130 396,249
Deferred income tax benefits 29,407 31,647
Other current assets 76,602 88,693
Total current assets 958,705 1,057,420
PROPERTY AND EQUIPMENT - NET 217,891 214,624
OTHER ASSETS 67,205 33,241
$1,243,801 $ 1,305,285
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 86,153 $ 173,812
Accrued expenses 140,216 138,816
Income taxes payable 29,698 15,029
Total current liabilities 256,067 327,657
DEFERRED INCOME TAXES 10,727 10,542
COMMITMENTS AND CONTINGENCIES
PUT WARRANTS 43,307 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 36,101 30,731
Retained earnings 1,555,359 1,541,894
Cumulative translation adjustment (2,388) (2,673)
1,677,291 1,658,171
Common stock in treasury, at cost, 22,162,720 shares and
22,120,305 shares (743,591) (736,544)
Total stockholders' equity 933,700 921,627
$1,243,801 $ 1,305,285
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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(4)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Three Months Ended
(13 Weeks) (14 Weeks)
April 4, April 5,
1998 1997
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NET SALES $ 656,005 $ 596,556
Cost of goods sold 400,467 365,235
GROSS PROFIT 255,538 231,321
Selling, general & administrative expenses 185,950 168,499
OPERATING INCOME 69,588 62,822
Investment and other income-net 2,698 4,099
INCOME BEFORE PROVISION
FOR INCOME TAXES 72,286 66,921
Provision for income taxes 26,400 24,800
NET INCOME $ 45,886 $ 42,121
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 66,050 70,929
BASIC EARNINGS PER COMMON SHARE $0.69 $0.59
WEIGHTED AVERAGE COMMON
SHARES AND SHARE EQUIVALENTS
OUTSTANDING 66,482 71,366
DILUTED EARNINGS PER COMMON SHARE $0.69 $0.59
DIVIDENDS PAID PER COMMON SHARE $0.11 $0.11
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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(5)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Three Months Ended
(13 Weeks) (14 Weeks)
April 4, April 5,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income $ 45,886 $ 42,121
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 13,362 11,414
Other - net 4,890 1,769
Change in current assets and liabilities:
(Increase) in accounts receivable (201,870) (149,070)
Decrease in inventories 55,119 47,412
Decrease (increase) in deferred income tax benefits 2,725 (346)
Decrease in other current assets 5,377 1,243
(Decrease) in accounts payable (87,659) (43,074)
(Decrease) in accrued expenses (5,949) (20,401)
Increase in income taxes payable 14,669 16,356
Net cash used in operating activities (153,450) (92,576)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments (37,845) (206,054)
Disposals of investment instruments 151,642 48,002
Purchases of property and equipment (13,102) (5,011)
Purchases of licenses and trademarks (30,000) (3,750)
Other - net (777) 222
Net cash provided by (used in) investing activities 69,918 (166,591)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 10,102 5,585
Dividends paid (7,381) (7,929)
Purchase of common stock, net of put warrant premiums (35,502) (15,744)
Net cash used in financing activities (32,781) (18,088)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 285 1,024
NET CHANGE IN CASH AND CASH EQUIVALENTS (116,028) (276,231)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 138,185 322,881
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,157 $ 46,650
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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(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 1998, the Company adopted Statement of Financial Accounting Standards
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:
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Three Months Ended
(Dollars in thousands) (13 weeks) (14 weeks)
April 4, 1998 April 5, 1997
Comprehensive income, net of tax:
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Net income $45,886 $42,121
Foreign currency translation 285 1,024
Changes in unrealized gains
and losses on securities (804) (1,102)
Reclassification adjustment for
gains included in net income (326) (123)
Comprehensive income $45,041 $41,920
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(7)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. The following are summaries of available-for-sale marketable
securities and maturities:
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(Dollars in thousands)
April 4, 1998
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
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Tax exempt notes and bonds $ 113,563 $ 242 $ (39) $ 113,766
Commercial paper 4,857 -- -- 4,857
118,420 242 (39) 118,623
Equity securities 1,004 21 -- 1,025
$ 119,424 $ 263 $ (39) $ 119,648
(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)
April 4, 1998
Estimated
Fair
Cost Value
Due in one year or less $ 36,820 $ 36,844
Due after one year through three years 81,600 81,779
118,420 118,623
Equity securities 1,004 1,025
$ 119,424 $ 119,648
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At April 4, 1998 and January 3, 1998, the above investments included
$13,412,000 and $128,092,000, respectively, which are classified as
cash equivalents.
For the three month period ended April 4, 1998, gross realized gains on
sales of available-for-sale securities totaled $514,000. For the three
month period ended April 5, 1997, gross realized gains and (losses) on
sales of available-for-sale securities totaled $199,000 and ($3,000),
respectively. The net adjustment to unrealized holding gains and losses
on available-for-sale securities for the three month periods ended
April 4, 1998 and April 5, 1997, was a charge of $824,000 (net of
$485,000 in deferred income taxes) and $1,152,000 (net of $672,000 in
deferred income taxes), respectively, which were included in retained
earnings.
5. 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)
April 4, January 3,
1998 1998
Raw materials $ 24,402 $ 27,924
Work in process 9,821 16,020
Finished goods 306,907 352,305
$341,130 $396,249
6. Property and equipment - net
(Dollars in thousands)
April 4, January 3,
1998 1998
Land and buildings $127,072 $125,538
Machinery and equipment 160,123 153,040
Furniture and fixtures 60,545 59,869
Leasehold improvements 134,850 131,730
482,590 470,177
Less: Accumulated depreciation
and amortization 264,699 255,553
$217,891 $214,624
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(8)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. In the first quarter of 1998, in connection with its stock repurchase
program, the Company sold new put warrants in privately negotiated
transactions based on the then-current market prices of the common stock.
In addition, warrants on 250,000 shares of common stock were exercised. The
unexpired warrants on April 4, 1998, if exercised, will require the Company
to purchase up to a total of 900,000 shares of its common stock at various
dates ranging from May 25 through August 17, 1998, with strike prices
ranging from $41.35 to $53.25. The Company has the option to settle in cash
or shares of common stock. The proceeds of $868,000 from the sale of the
new put warrants have been credited to capital in excess of par value. The
Company's potential $43.3 million obligation to buy back 900,000 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
April 4, 1998, warrants on 100,000 shares of common stock, expiring in
November 1998, were sold with proceeds of $432,000. The net effect of the
subsequent item is an increase in the Company's potential obligation to buy
back common stock to $48.1 million.
8. On March 12, 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 June 1, 1998 to stockholders of record at the close of
business on May 4, 1998.
9. During the three months ended April 4, 1998 and April 5, 1997, the Company
made income tax payments of $5,594,000 and $7,687,000, respectively.
10. 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 April 4, 1998, the Company had forward
contracts maturing through June 1998 to sell 13,000,000 Canadian dollars
and contracts maturing through May 1998 to sell 1,000,000 British pounds
sterling. The aggregate U.S. dollar value of the foreign exchange contracts
is approximately $10,796,000. Unrealized gains and losses for outstanding
foreign exchange forward contracts were not material at April 4, 1998.
11. 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. The Company
has not yet responded to the complaint but believes it has meritorious
defenses to Mademoiselle's claims.
On September 30, 1997, a related putative class action, Chun Hua Mui v.
Union of Needletrades Industrial and Textile Employees (UNITE), et. al.,
was filed against the Company and the three unions who are defendants in
the Mademoiselle lawsuit noted above. The employee complaint seeks on
behalf of a class of current and former Mademoiselle employees $30 million
in damages, an injunction requiring the Company to provide knitwear orders
to Mademoiselle through June 1998, and a constructive trust on certain
liquidated damage payments paid by the Company to UNITE in May 1997. The
Company and the unions have moved to dismiss the complaint for failure to
state a claim for relief.
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 results of operations or financial
position.
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First quarter 1998 (13 weeks) net sales were $656 million, representing a 10%
increase over the 1997 first quarter (14 weeks). The net sales result
principally reflected increased net sales of better casual women's sportswear
and Special Markets product and initial shipments of DKNY JEANS product,
partially offset by lower net sales of dresses.
As previously announced, the Company has eliminated its Special Sizes Unit and
realigned its Elisabeth and Petite operations as separate businesses. The
increase in women's sportswear reflected a 15% increase in sales of Casual
product, to $224 million, and a 16% increase in sales of Petite product, to $83
million, due in each case to increases in unit volume. Sales of Special Markets
product increased 46%, to $32 million, due to higher unit volume. Also
contributing to the sales increase was $20 million of net sales of DKNY JEANS
product, reflecting the initial shipments under a licensing agreement with an
affiliate of Donna Karan International, Inc., consummated in January 1998. The
sales increase also reflected $5 million of net sales of the Company's latest
fragrances, Lizsport and Claiborne Sport (initially shipped in July 1997), more
than offsetting the continuing decline in net sales of the Company's ongoing
fragrance products. Sales of menswear increased 14%, to $36 million, due to
higher unit volume. These sales increases were moderated by a 12% decrease in
dress sales, to $27 million, due to lower unit volume, reflecting weakness in
demand.
The 1998 first quarter gross profit margin rose to 39.0%, from 38.8% for the
1997 first quarter, principally reflecting higher initial gross margins
primarily due to slightly lower average unit costs, as well as a higher
proportion of net sales represented by the Cosmetics Division (which is a higher
margin business). The increase in gross margin percentage was moderated by a
higher proportion of close-out sales within the wholesale apparel operations
(primarily on Petite, Collection and Elisabeth product), and lower margins
realized on close-out sales, as well as significantly lower margins within the
Company's domestic retail store operations due to higher store markdowns.
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 Most Favored Nation ("MFN")
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 MFN treatment was
renewed in July 1997 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.
Selling, general and administrative ("SG&A") expenses for the 1998 first quarter
increased $17 million, or 10.4%, over the 1997 first quarter, representing 28.3%
of first quarter 1998 sales as compared to 28.2% of first quarter 1997 sales.
Approximately three-quarters of the dollar increase reflected start-up costs
(including marketing) related to the Company's licensed DKNY JEANS business and
marketing expenses related to the Company's new Sport fragrances. Also
contributing to the increases were incremental expenses related to the higher
sales volume, moderated by continuing expense reduction initiatives.
The period-to-period decrease in investment and other income-net reflected a
decrease in the Company's investment portfolio, reflecting the ongoing stock
repurchase program.
As a result of the factors described above, the Company's income before
provision for income taxes increased 8.0% for the first quarter of 1998. These
results included start-up operating losses within the licensed DKNY JEANS
business. The provision for income taxes reflected the change in pre-tax income
and a decrease in the effective tax rate in 1998. As a result of the foregoing,
net income increased 8.9% for the first quarter of 1998.
The earnings per common share computation reflected 4.9 million fewer shares
outstanding on a period-to-period basis as a result of the Company's stock
repurchase program.
The retail environment remains intensely competitive and highly promotional, and
the tone of business continues to be challenging. The Company is currently
implementing the second phase of a comprehensive business transformation program
which includes goals relating to cost reduction, improvements in operating
margins and return on operating capital, and enhanced customer and consumer
responsiveness. The Company has previously announced that while management
continues to expect the Company's rate of sales growth to slow somewhat in the
remaining 1998 quarters, management remains optimistic about the Company's
ability to report improvement in earnings for the remainder of 1998.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities increased to $153 million during the 1998
first quarter, from $93 million during the 1997 quarter, primarily due to an
increase in accounts receivable of $202 million in 1998, compared to an increase
of $149 million in 1997. Changes in the remaining components of working capital
generally offset each other for the quarter. Net cash provided by investing
activities was $70 million in 1998, compared to net cash used in investing
activities of $167 million in 1997. The fluctuations in net cash provided by and
used in investing activities are related to the net increase or decrease in
marketable securities and capital expenditures on a period-to-period basis. The
net cash provided by investing activities in 1998 was partially offset by an
increase in the amount expended on purchases of licenses and trademarks of $26
million. Net cash used in financing activities was $33 million in the 1998
quarter, compared to $18 million in 1997, principally reflecting an increase in
the amount expended in the Company's stock repurchase program, partially offset
by the proceeds from the exercise of stock options. As of May 15, 1998, the
Company had expended, or committed to expend through the sale of put warrants
(see Note 7 of Notes to Consolidated Financial Statements), approximately $895
million of the $975 million authorized under its stock repurchase program,
covering an aggregate of 27.6 million shares.
Inventories at April 4, 1998 were $341 million, compared with $396 million at
1997 year-end and $302 million at April 5, 1997. The period-to-period increase
in inventory principally reflected earlier receipt of summer merchandise and
higher ongoing inventory levels across substantially all of the Company's
wholesale apparel divisions, as well as higher levels of prior season
merchandise, partially offset by lower domestic retail inventory levels. The
increase also reflected the addition of the licensed DKNY JEANS business.
The Company's anticipated capital expenditures for 1998 currently approximate
$80 million, of which $13 million has been expended through April 4, 1998. These
expenditures consist primarily of the information systems upgrade discussed
below, the technological upgrading and expansion of the Company's distribution
facilities (including certain building and equipment expenditures) and the
expansion of the outlet and Dana Buchman retail operations. Capital expenditures
will be financed through available capital and future earnings. Any increased
working capital needs will be met by current funds. Bank lines of credit, which
are available to finance import transactions through the issuance of letters of
credit, were $470 million as of April 4, 1998. The Company expects to be able to
adjust these lines as required.
YEAR 2000/INFORMATION SYSTEMS UPGRADE
Many existing computer systems and software products, including many used by the
Company, accept only two digit entries in the date code field. Beginning in the
year 2000, and in certain instances prior to the year 2000, these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, the Company's date critical functions may
be materially adversely affected unless these computer systems and software
products are or become able to accept four digit entries ("year 2000
compliant").
In 1996, the Company commenced a comprehensive upgrade of its management
information systems, which involves substantial changes to the Company's present
hardware and software, and is expected to provide certain competitive benefits
and also result in the Company's information systems being year 2000 compliant
upon completion. The planning stage of this project has been completed and the
systems development and pilot implementation stages are in progress. Management
currently expects that full implementation of the project will involve a
commitment of approximately $50-$60 million over the four year period ending
with year end 1999. Approximately $40-$45 million of such amount is in the form
of capital expenditures, while the remaining $10-$15 million is being expensed
as incurred. As of April 4, 1998, capital expenditures related to the project
totaled $16 million and an additional $4 million had been expensed as incurred.
The Company's financial systems were upgraded for year 2000 compliance in 1997.
Project purchases of approximately $20 million are included in the anticipated
1998 capital expenditures, and approximately $5 million in project associated
expenses are expected to be incurred in 1998. The testing and the initial
implementation phases of a significant portion of the project are currently
expected to be completed during the first six months of 1998. The Company
expects that with the completion of the project, the year 2000 issue will not
pose significant operational problems. There can be no assurance, however, that
the Company's systems will be rendered year 2000 compliant in a timely manner,
or that the Company will not incur significant unforeseen additional expenses to
assure such compliance. Failure to successfully complete and implement the
upgrade project on a timely basis could have a material adverse effect on the
Company's operations.
The Company has begun formal communications with all of its suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own year 2000 issues. The Company's
estimated project costs and timetables are based on presently available
information, and include the Company's assessment of the abilities of third
parties to address the issue effectively. There can be no assurance, however,
that the systems of other companies on which the Company's processes rely will
be timely converted, or that a failure to successfully convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have an impact on the Company's operations.
CERTAIN INTEREST RATE AND FOREIGN CURRENCY RISKS
The Company has no long-term debt, and finances its capital needs through
available capital and current earnings. The Company's exposure to market risk
for changes in interest rates relates primarily to the Company's investment
portfolio. The Company, by policy, mitigates its exposure by limiting
maturities, placing its investments with high credit quality issuers and
limiting the amount of credit exposure to any one issuer. The Company reduces
the risks associated with changes in foreign currency rates by entering into
foreign exchange forward contracts to hedge transactions denominated in foreign
currencies for periods of less than one year and to hedge expected payment of
intercompany transactions with its non-U.S. subsidiaries. The market risks
associated with the Company's investment portfolio and foreign currency exposure
has not changed materially since January 3, 1998.
**************************************
Statements contained herein that relate to the Company's future performance,
including, without limitation, statements with respect to the Company's
anticipated results for any portion of the remainder of fiscal 1998, shall be
deemed forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, as a number of factors
affecting the Company's business and operations could cause actual results to
differ materially from those contemplated by the forward-looking statements.
Those factors include the overall level of consumer spending and the performance
of the Company's products within the prevailing retail environment, as well as
such other factors as are set forth in the Company's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998, including, without limitation, those
set forth under the heading "Business Competition; Certain Risks".
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 6, 1998, Mademoiselle Knitwear, Inc. ("Mademoiselle"), a former knitgoods
supplier for the Company, now operating as a debtor-in-possession pursuant to
Chapter 11 of the United States Bankruptcy Code, filed suit against the Company
and three labor unions -- the Union of Needletrades, Industrial and Textile
Employees ("UNITE"), UNITE Local 23-25, which represents a substantial number of
the Company's employees, and UNITE Local 155, which represents Mademoiselle's
employees. The suit, Mademoiselle Knitwear, Inc. v. Liz Claiborne, Inc., et al.,
98 Civ. 3252, pending in the United States District Court for the Southern
District of New York, asserts a variety of claims against the Company, all
stemming from an alleged commitment by the Company to supply orders to
Mademoiselle for a certain number of knitwear goods for the period June 1992
through June 1998. The complaint includes claims against the Company for breach
of contract, fraud, civil RICO, and prima facie tort, and asserts claims against
the Company and the union defendants for conversion of property of the estate of
a debtor-in-bankruptcy. The Mademoiselle action seeks $30 million in
compensatory damages from the Company, trebling of those damages under the
provisions of the civil RICO statute, and $50 million in punitive damages. The
Company has not yet responded to the complaint, but believes that it has
meritorious defenses to Mademoiselle's claims.
On September 30, 1997, a related putative class action, Chun Hua Mui v. Union of
Needletrades Industrial and Textile Employees, 97 Civ. 7270, was filed by three
current and former employees of Mademoiselle in the United States District Court
for the Southern District of New York against the Company and the same three
unions. An amended complaint (the "employee complaint") was filed on October 15,
1997. The employee complaint, brought on behalf of a purported class of 600
current and former Mademoiselle employees, seeks $30 million in damages
supposedly owed to the employees as alleged third-party beneficiaries of either
the 1992-1998 alleged production agreement on which Mademoiselle has also sued,
or of a supposed parallel agreement with Local 23-25; an injunction requiring
the Company to provide orders for knitgoods to Mademoiselle through June 1998;
and the imposition of "a constructive trust" on certain liquidated damage
payments made by the Company to UNITE in May 1997 -- payments the employee
complaint, like the Mademoiselle action, contends violated Section 302 of the
National Labor Relations Act. The Company and the union defendants have moved to
dismiss the employee complaint for failure to state a claim for relief. All but
certain preliminary document discovery and discovery related to whether class
certification is proper has been stayed pending resolution of the motions to
dismiss. Plaintiffs have not sought preliminary injunctive relief. See Note 11
of Notes to Consolidated Financial Statements.
The Company and certain of its present and former officers and directors are
defendants in an action styled Ressler et al. vs. Liz Claiborne, Inc., et al.,
pending in the United States District Court for the Eastern District of New
York. The plaintiffs seek 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 allege 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. In December 1995, the Company moved to dismiss that
complaint. The motion was argued in May 1996 and has not yet been decided.
In April 1994, two stockholder derivative actions, which contain substantially
similar allegations, styled Goldberg Family Trust vs. Chazen, et al. and Liz
Claiborne, Inc., nominal defendant, and Laz Schneider vs. Chazen, et al. and Liz
Claiborne, Inc., nominal defendant, were brought in the Court of Chancery of the
State of Delaware against certain of the Company's former and present directors
and two of its former Vice Chairmen. The complaints contain allegations that the
individual defendants breached their fiduciary obligations to the Company and
its stockholders, committed corporate mismanagement and wasted corporate assets
in connection with the Company's stock repurchase program and the defense of
pending legal proceedings, and were unjustly enriched in connection with the
sale of shares of the Company's Common Stock between September 1992 and July
1993 by certain of its present and former officers and directors. In July 1994,
the Laz Schneider action was consolidated with the Goldberg action. In August
1994, the defendants moved to dismiss the consolidated complaint. The motion is
pending.
The Company believes that the litigations described above are without merit and
intends to vigorously defend these actions. Although the outcome of any such
litigation or claim cannot be determined with certainty, management is of the
opinion that the final outcome of these litigations should not have a material
adverse effect on the Company's results of operations or financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule as of April 4, 1998.
(b) The Company did not file any reports on Form 8-K in
the quarter.
<PAGE>
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: May 19, 1998 BY /s/ Samuel M. Miller
SAMUEL M. MILLER
Senior Vice President - Finance
Chief Financial and Accounting Officer
<PAGE>
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