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 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 numbe0-9831
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 14, 1999 was 63,039,446.
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NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 3, 1999 and
January 2, 1999 ............................................. 3
Consolidated Statements of Income for the Three Month Periods
Ended April 3, 1999 and April 4, 1998 ....................... 4
Consolidated Statements of Cash Flows for the Three Month Periods
Ended April 3, 1999 and April 4, 1998 ....................... 5
Notes to Consolidated Financial Statements ....................... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 14-18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 19-21
Item 5. Statement Regarding Forward-Looking Disclosure.................... 21
Item 6. Exhibits and Reports on Form 8-K ................................. 22
SIGNATURE ..................................................................... 23
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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 3, January 2,
ASSETS 1999 1999
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CURRENT ASSETS:
Cash and cash equivalents $ 24,738 $ 164,659
Marketable securities -- 65,625
Accounts receivable - trade 474,607 252,045
Inventories 406,616 475,077
Deferred income tax benefits 36,182 35,695
Other current assets 82,902 82,192
Total current assets 1,025,045 1,075,293
PROPERTY AND EQUIPMENT - NET 263,127 257,362
OTHER ASSETS 94,476 60,136
$1,382,648 $ 1,392,791
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 150,559 $ 223,400
Accrued expenses 140,578 128,917
Income taxes payable 32,337 11,034
Total current liabilities 323,474 363,351
DEFERRED INCOME TAXES 17,107 17,536
COMMITMENTS AND CONTINGENCIES
PUT WARRANTS 20,801 30,794
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 59,406 50,428
Retained earnings 1,699,970 1,662,235
Accumulated other comprehensive income(loss) (2,638) (2,721)
1,844,957 1,798,161
Common stock in treasury, at cost, 24,475,302 shares and
24,267,957 shares (823,691) (817,051)
Total stockholders' equity 1,021,266 981,110
$1,382,648 $ 1,392,791
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Three Months Ended
April 3, April 4,
1999 1998
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NET SALES $ 700,789 $ 656,005
Cost of goods sold 438,157 400,467
GROSS PROFIT 262,632 255,538
Selling, general & administrative expenses 192,890 185,950
OPERATING INCOME 69,742 69,588
Investment and other income-net 671 2,698
INCOME BEFORE PROVISION
FOR INCOME TAXES 70,413 72,286
Provision for income taxes 25,700 26,400
NET INCOME $ 44,713 $ 45,886
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 63,962 66,050
BASIC EARNINGS PER COMMON SHARE $0.70 $0.69
WEIGHTED AVERAGE COMMON
SHARES AND SHARE EQUIVALENTS
OUTSTANDING 64,122 66,482
DILUTED EARNINGS PER COMMON SHARE $0.70 $0.69
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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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Three Months Ended
April 3, April 4,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,713 $ 45,886
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 15,864 13,362
Other - net 717 4,890
Change in current assets and liabilities,
net of acquisitions:
(Increase) in accounts receivable (215,342) (201,870)
Decrease in inventories 78,535 55,119
(Increase)decrease in deferred income tax benefits (523) 2,725
Decrease in other current assets 1,678 5,377
(Decrease) in accounts payable (74,306) (87,659)
(Decrease) in accrued expenses (2,175) (5,949)
Increase in income taxes payable 21,303 14,669
Net cash used in operating activities (129,536) (153,450)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments -- (37,845)
Disposals of investment instruments 65,152 151,642
Acquisition (including repayment of debt, net of cash) (53,735) --
Purchases of property and equipment (17,037) (13,102)
Purchases of licenses and trademarks -- (30,000)
Other - net 990 (777)
Net cash (used in) provided by investing activities (4,630) 69,918
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under lines of credit 75,000 --
Payments on lines of credit (75,000) --
Proceeds from exercise of common stock options 1,385 10,102
Dividends paid (7,159) (7,381)
Purchase of common stock, net of put warrant premiums -- (35,502)
Net cash used in financing activities (5,774) (32,781)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 19 285
NET CHANGE IN CASH AND CASH EQUIVALENTS (139,921) (116,028)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 164,659 138,185
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,738 $ 22,157
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 included
herein 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 lines of women's sportswear. The total
amount of funds required to acquire the interest and refinance 100% of
certain indebtedness was approximately $54 million. The fair value of
assets acquired was $60 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 the
fair market value at the time of such purchase. 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. In December 1998, the Company recorded a $27.0 million pretax 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. The remaining balance of the restructuring liability as of April 3,
1999 was $15.1 million. Of the $11.9 million expended for restructuring
costs, $5.9 million was related to severance costs and $6.0 million to
losses on contracts and write-off of certain assets related to the closure
of 20 specialty retail stores. The majority of the remaining liabilities
should be paid or settled during the 1999 fiscal year.
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by and
distribution to owners, in a financial statement for the period in
which they are recognized. The Company has elected to disclose
Comprehensive Income, which includes net income, the effects of foreign
currency translation and changes in unrealized gains and losses on
securities in the Notes to Consolidated Financial Statements for
interim periods, as follows:
Three Months Ended
April 3, April 4,
(Dollars in thousands) 1999 1998
Comprehensive income, net of tax:
Net income ................................... $ 44,713 $ 45,886
Foreign currency translation ................. 19 285
Changes in unrealized gains or
losses on securities ........................ 215 (498)
Reclassification adjustment for gains
or losses included in net income ............ (151) (326)
Comprehensive income ............................... $ 44,796 $ 45,347
5. The following are summaries of available-for-sale marketable
securities and maturities:
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(Dollars in thousands)
April 3, 1999
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
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Tax exempt notes and bonds $ 3,887 $ -- $ -- $ 3,887
Equity securities 6,567 573 -- 7,140
$ 10,454 $ 573 $ -- $ 11,027
(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)
April 3, 1999
Estimated
Fair
Cost Value
Due in one year or less $ 3,887 $ 3,887
Equity securities 6,567 7,140
$ 10,454 $ 11,027
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At April 3, 1999 and January 2, 1999, the above investments included
$11,027,000 and $137,520,000, respectively, which are classified as
cash equivalents.
For the three month period ended April 3, 1999, gross realized gains on
sales of available-for-sale securities totaled $297,000. For the three
month period ended April 4, 1998, gross realized gains on sales of
available-for-sale securities totaled $514,000. The net adjustment to
unrealized holding gains and losses on available-for-sale securities
for the three month periods ended April 3, 1999 and April 4, 1998, was
a credit of $64,000 (net of $36,000 in deferred income taxes) and a
charge of $824,000 (net of $485,000 in deferred income taxes),
respectively, which were included in accumulated other comprehensive
income(loss).
6. Inventories are stated at the lower of cost (using the first-in,
first-out method) or market and consist of the following:
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(Dollars in thousands)
April 3, January 2,
1999 1999
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Raw materials $14,733 $ 18,909
Work in process 6,101 8,841
Finished goods 385,782 447,327
$406,616 $475,077
7. Property and equipment - net
(Dollars in thousands)
April 3, January 2,
1999 1999
Land and buildings $133,475 $131,297
Machinery and equipment 215,136 199,769
Furniture and fixtures 65,497 67,862
Leasehold improvements 135,467 141,491
549,575 540,419
Less: Accumulated depreciation
and amortization 286,448 283,057
$263,127 $257,362
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(10)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. In the first three months of 1999, in connection with its stock repurchase
program, warrants on 250,000 shares of common stock were exercised and
settled subsequent to April 3, 1999. The unexpired warrants on April 3,
1999, if exercised, will require the Company to purchase up to a total of
650,000 shares of its common stock at various dates ranging from May 5
through July 7, 1999, with strike prices ranging from $26.49 to $37.07. The
Company has the option to settle in cash or shares of common stock. The
Company's potential $20.8 million obligation to buy back 650,000 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 3, 1999, warrants on an additional 250,000 shares of common stock
were exercised. The effect of the subsequent transaction is a decrease in
the Company's potential obligation to buy back common stock to $11,534,000.
9. On March 3, 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 June 1, 1999 to stockholders of record at the
close of business on May 3, 1999.
10. The following is an analysis of the differences between basic and
diluted earnings per share in accordance with SFAS No. 128 "Earnings
per Share."
Three Months Ended
(In thousands) April 3, 1999 April 4, 1998
Net income ..................................... $44,713 $45,886
Weighted average common
shares outstanding ........................ 63,962 66,050
Effect of dilutive securities:
Stock options .............................. 131 357
Put warrants ............................... 29 75
Weighted average common
shares and common share
equivalents ............................... 64,122 66,482
11. During the three months ended April 3, 1999 the Company made income tax
payments of $3,047,000 and interest payments of $238,000. During the
three months ended April 4, 1998 the Company made income tax payments
of $5,594,000.
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(11)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. The Company enters into foreign exchange forward contracts to hedge
transactions denominated in foreign currencies for periods of less than one
year and to hedge expected payment of intercompany transactions with its
non-U.S. subsidiaries. Gains and losses on contracts which hedge specific
foreign currency denominated commitments are recognized in the period in
which the transactions are completed and are accounted for as part of the
underlying transaction. As of April 3, 1999, the Company had forward
contracts maturing through May 1999 to sell 6,000,000 Canadian dollars and
contracts maturing through August 1999 to sell 2,100,000 British pounds
sterling. The aggregate U.S. dollar value of the foreign exchange contracts
is approximately $7,500,000. Unrealized gains and losses for outstanding
foreign exchange forward contracts were not material at April 3, 1999.
13. 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 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 distinct products with different production processes or
distribute products through different distribution channels.
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For The Three Months Ended April 3, 1999
Wholesale Wholesale Corporate/
(In thousands) Apparel Non-Apparel Retail Eliminations Total
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Revenues from external
customers .............................................. $546,938 $ 64,997 $ 86,551 $ 2,303 $700,789
Intercompany sales ........................................ 47,169 7,055 -- (54,224) --
Segment operating
profit/ (loss) .......................................... 74,523 5,140 (2,863) (7,058) 69,742
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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For The Three Months Ended April 2, 1998
Wholesale Wholesale Corporate/
(In thousands) Apparel Non-Apparel Retail Eliminations Total
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Revenues from external
customers .............................. $505,040 $ 66,537 $ 83,111 $ 1,317 $656,005
Intercompany sales ........................ 54,645 4,921 -- (59,566) --
Segment operating
profit (loss) .......................... 75,145 1,725 (4,112) (3,170) 69,588
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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 $671,000 for the first three months of 1999
and $2,698,000 for the first three months of 1998.
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(13)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. On May 6, 1998, Mademoiselle Knitwear, Inc. ("Mademoiselle"), a former
knitgoods supplier for the Company, filed suit against the Company and
three labor unions. The suit seeks $30 million in compensatory damages,
trebling under civil RICO, and $50 million in punitive damages for a
variety of claims against the Company related to an alleged commitment by
the Company to supply orders to Mademoiselle for a certain number of
knitwear goods during the period June 1992 through June 1998. On June 26,
1998 the Company and the union defendants moved to dismiss the complaint
for failure to state a claim for relief. The court heard oral argument on
the motion on October 1, 1998. At the conclusion of the argument, the court
indicated that it would dismiss the RICO and prima facie tort claims
against the Company and would issue a later decision on the remainder of
the claims. Discovery remains stayed.
On September 30, 1997, a related putative class action, Chun Hua Mui v.
Union of Needletrades Industrial and Textile Employees (UNITE), et.
al., was filed against the Company and the three unions who are
defendants in the Mademoiselle lawsuit noted above. The employee
complaint seeks on behalf of a class of current and former Mademoiselle
employees $30 million in damages, an injunction requiring the Company
to provide knitwear orders to Mademoiselle through June 1998, and a
constructive trust on certain liquidated damage payments paid by the
Company to UNITE in May 1997. The Company and the unions moved to
dismiss the complaint for failure to state a claim for relief. On
August 18, 1998, the court issued an opinion dismissing all of the
claims against the Company, including the claim under Section 302 of
the NLRA brought jointly against the Company and the unions. On
September 2, 1998, plaintiffs moved for reargument of the dismissal of
the contract claims against the Company or, alternatively, for leave to
amend the complaint. The Company 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.
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.
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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
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 13 of Notes to
Consolidated Financial Statements.
Our net sales for the first quarter of 1999 were $700.8 million, an increase of
6.8% compared to $656.0 million in the first quarter of 1998. This increase
reflected a 6.2% increase in Wholesale Apparel to $594.1 million, a 0.8%
increase in Wholesale Non-Apparel to $72.1 million and a 4.1% increase in Retail
to $86.6 million.
The increase in net sales of Wholesale Apparel primarily reflected increased
sales 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 business, which
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 increase also reflected higher sales in our ELISABETH business, due
primarily to higher unit volume. These increases were moderated by significant
decreases in our career and dress businesses due primarily to planned lower unit
volume and to a lesser extent lower average unit selling prices reflecting
weakness in demand. The net sales result also reflected lower sales of DANA
BUCHMAN, due primarily to lower unit volume and to a lesser extent lower average
unit selling prices, and men's sportswear and furnishings due to lower average
unit selling prices. The increase in Wholesale Non-Apparel net sales was due to
increased sales of jewelry principally reflecting higher unit volume, partially
offset by decreased sales of accessories due to lower average unit selling
prices. The increase in net sales of Retail reflected increased outlet store
sales reflecting 20 more stores on a period-to-period basis, partially offset by
a decline in sales of our specialty retail stores reflecting the closing (as
previously announced) of 23 stores during the quarter as well as weakness in
demand for our career and dress product.
Gross profit dollars increased $7 million, or 2.8%, in 1999 over 1998. Gross
profit margins declined to 37.5% in 1999, compared to 39.0% in 1998, principally
reflecting lower margins within Wholesale Apparel due to lower prices realized
on close-out sales, higher markdown allowances and a higher percentage of sales
of the special markets business (which generate lower gross profit margins).
These lower margins were partially offset by higher margins in Retail, due to
lower store markdowns, and slightly higher margins in Wholesale Non-Apparel,
principally due to higher sales and higher margins within the jewelry business,
partially offset by lower accessories margins.
Selling, general and administrative expenses ("SG&A") increased $7 million, or
3.7%, in 1999 over 1998. These expenses as a percent of net sales declined to
27.5% in 1999 from 28.3% in 1998. The 1999 dollar increase was due primarily to
the technological upgrading of our distribution centers and information systems
associated with our transformation initiatives, additional operating expenses
related to our Segrets, DKNY(R) JEANS and DKNY(R) ACTIVE businesses, the
expansion of our outlet and DANA BUCHMAN retail businesses. 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.
As a result of the factors described above, operating income in the first
quarter increased $0.2 million, or 0.2%, in 1999 compared to 1998, and operating
income as a percent of sales decreased to 10.0% in 1999 compared to 10.6% in
1998. Segment operating profit in Wholesale Apparel remained constant at $75
million, but declined to 12.5% of net sales in 1999 compared to 13.4% in 1998,
due primarily to significantly lower margins on close-out sales and higher
markdown allowances. Operating profit in the Wholesale Non-Apparel segment
increased to $5 million (7.1% of net sales) in 1999 from $2 million (2.4% of net
sales) in 1998, due primarily to increased sales of jewelry and lower SG&A
levels in cosmetics, partially offset by decreased sales volume and lower gross
profit margins in accessories. Segment operating losses in Retail decreased
slightly to a loss of $3 million (3.3% of net sales) in 1999 from a loss of $4
million (4.9% of net sales) in 1998, principally reflecting higher gross margins
due to lower store markdowns. See Note 13 of Notes to Consolidated Financial
Statements.
Investments and other income-net decreased by $2 million in 1999 compared to
1998 resulting from a decrease in our average cash and marketable securities
portfolio due primarily to our ongoing stock repurchase program, the acquisition
of Segrets and investments in working capital and fixed assets.
Income taxes were $0.7 million lower and decreased as a percent of sales to 3.7%
in 1999 from 4.0% in 1998, primarily reflecting lower pre-tax income and the
higher net sales base.
Net income in 1999 was $1.2 million lower than in 1998 and declined as a
percentage of net sales to 6.4% in 1999 from 7.0% in 1998, due to the factors
described above. Diluted earnings per common share increased 1.4% to $0.70 in
1999 from $0.69 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.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
Our primary ongoing cash requirements are to fund growth in working capital
(principally accounts receivable and inventory) to support increased sales,
investment in our transformation initiatives and other expenditures related to
retail store expansion, in-store concept shops and normal maintenance
activities. Sources of liquidity to fund these cash requirements are cash flow
from operations, cash and marketable securities on hand and bank lines of
credit.
First Quarter of 1999 vs. First Quarter of 1998
Net cash used by operating activities for the first quarter of 1999 was $129
million, compared to $153 million in the first quarter of 1998. This $24 million
improvement in cash flow reflected year over year increases in the amount of
cash generated by changes in our inventory and current liabilities, partially
offset by an increase in cash needed to fund increased accounts receivable
balances. Accounts receivable increased 24% in 1999 over 1998 reflecting higher
net sales in the second half of the quarter.
Inventory increased 19% in 1999 over 1998, primarily reflecting an increase in
the number of styles we carry in our essential and replenishment inventory
programs, as well as higher than required continuing essential and replenishment
inventory levels. Also contributing to the increase was the expansion of our
special markets, DKNY(R) JEANS and DKNY(R) ACTIVE and outlet store businesses,
as well as the acquisition of Segrets. We have implemented inventory management
initiatives designed to improve our inventory turnover rate for essential and
replenishment inventories, which management expects to show effect starting with
the third quarter of 1999.
Net cash used in investing activities was $5 million in 1999, compared to net
cash provided by investing activities of $70 million in 1998. The $75 million
year over year decrease in cash flow reflected the cost of the acquisition of an
84.5% interest in Segrets for $54 million in 1999 compared to the acquisition of
a license for $30 million in 1998 as well as a decrease in cash generated by net
disposals of investments which were $65 million in 1999 compared to $114 million
in 1998.
Net cash used in financing activities was $6 million in 1999, compared to $33
million in 1998. This $27 million year over year improvement in cash flow
reflected a decrease of $36 million in the amount expended for stock purchases,
partially offset by a $9 million decrease in proceeds from the exercise of stock
options.
Our anticipated capital expenditures for the full year 1999 approximate $100
million, of which $17 million has been expended through April 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 29 outlet stores and 10
retail specialty 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 $470 million at April 3, 1999 and $425
million at year end 1998 and are available to finance cash needs and letters of
credit. At April 3, 1999, we had outstanding letters of credit of $231 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 $60-65 million of such amount is in the form of capital
expenditures, while the remaining $15 million will be expensed as incurred. As
of April 3, 1999, capital expenditures related to the project totaled $49
million and an additional $8 million was expensed as incurred. Approximately $18
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. We expect that with the successful implementation of this project, the
year 2000 issue will not pose significant operational problems. There can be no
assurance, however, 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. Failure to successfully complete
and implement this project on a timely basis could have a material adverse
affect on our operations.
We have also begun formal communications with all of our 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. To date, approximately 90% of those
contacted have responded, none of which have raised any year 2000 issues which
we believe would have a material adverse effect on us. We are in the process of
conducting detailed follow-up inquires to our critical suppliers and customers
and expect to complete the survey in the first half of 1999. We are also in the
process of evaluating our vulnerability to governmental 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 and to hedge expected payment of
intercompany transactions with our non-U.S. subsidiaries. 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, now operating as a debtor-in-possession pursuant to
Chapter 11 of the United States Bankruptcy Code, filed suit against the Company
and three labor unions -- the Union of Needletrades, Industrial and Textile
Employees ("UNITE"), UNITE Local 23-25, which represents a substantial number of
the Company's employees, and UNITE Local 155, which represents Mademoiselle's
employees. The suit, Mademoiselle Knitwear, Inc. v. Liz Claiborne, Inc, et al.,
98 Civ. 3252, pending in the United States District Court for the Southern
District of New York, asserts a variety of claims against the Company, all
stemming from an alleged commitment by the Company to supply orders to
Mademoiselle for a certain number of knitwear goods for the period June 1992
through June 1998. The complaint includes claims against the Company for breach
of contract, fraud, civil RICO, and prima facie tort, and asserts claims against
the Company and the union defendants for conversion of property of the estate of
a debtor-in-bankruptcy. The Mademoiselle action seeks $30 million in
compensatory damages from the Company, trebling of those damages under the
provisions of the civil RICO statute, and $50 million in punitive damages. On
June 26, 1998 the Company and the union defendants moved to dismiss the
complaint for failure to state a claim for relief. The court heard oral argument
on the motion on October 1, 1998. At the conclusion of the argument, the court
indicated that it would dismiss the RICO and prima facie tort claims against the
Company and would issue a later decision on the remainder of the claims.
Discovery remains stayed.
On 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 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.
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 order has been appealed to
the United States Court of Appeals for the Second Circuit. Briefing of the
appeal has been completed, and the appeal was argued on May 6, 1999.
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. In April 1999,
plantiffs stipulated to dismiss without prejudice their 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 8 and Note 17 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 Saipanese 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 state 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,
recently received indications from counsel for the plaintiffs that they are
considering adding a number of additional apparel companies, which may include
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 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
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 April 3, 1999.
(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.
DATE: May 17, 1999
LIZ CLAIBORNE, INC.
By: /s/ Richard F. Zannino By: /s/Elaine Goodell
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)
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