SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 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 November 12, 1999 was 59,117,238.
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<CAPTION>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
OCTOBER 2, 1999
<S> <C>
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of October 2, 1999, January 2, 1999
and October 3, 1998 ......................................... 3
Consolidated Statements of Income for the Nine and Three Month Periods
Ended October 2, 1999 and October 3, 1998 ................... 4
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended October 2, 1999 and October 3, 1998 ................... 5
Notes to Consolidated Financial Statements ....................... 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 15-21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 22-23
Item 5. Statement Regarding Forward-Looking Disclosure ................... 23-24
Item 6. Exhibits and Reports on Form 8-K ................................. 24
SIGNATURE ..................................................................... 25
(2)
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<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
October 2, January 2, October 3,
1999 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,242 $ 164,659 $ 62,862
Marketable securities -- 65,625 22,071
Accounts receivable - trade 508,887 252,045 426,548
Inventories 408,726 475,077 407,979
Deferred income tax benefits 32,043 35,695 30,613
Other current assets 79,082 82,192 70,032
---------- ----------- -----------
Total current assets 1,039,980 1,075,293 1,020,105
PROPERTY AND EQUIPMENT - NET 275,531 257,362 244,006
GOODWILL 123,737 -- --
OTHER ASSETS 87,238 60,136 65,209
---------- ----------- -----------
TOTAL ASSETS $1,526,486 $ 1,392,791 $ 1,329,320
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowing $ 86,200 $ -- $ --
Accounts payable 217,021 223,400 142,277
Accrued expenses 153,764 128,917 132,679
Income taxes payable 43,438 11,034 32,373
---------- ----------- ------------
Total current liabilities 500,423 363,351 307,329
OTHER NON CURRENT LIABILITIES 15,000 -- --
DEFERRED INCOME TAXES 17,870 17,536 9,675
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST AND PUT WARRANTS 1,811 30,794 35,588
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 79,718 50,428 46,040
Retained earnings 1,784,812 1,662,235 1,641,356
Accumulated other comprehensive income (loss) (2,702) (2,721) (3,543)
----------- ------------ -------------
1,950,047 1,798,161 1,772,072
Common stock in treasury, at cost, 28,120,334, 24,267,957
and 23,599,972 shares (958,665) (817,051) (795,344)
----------- ------------ -------------
Total stockholders' equity 991,382 981,110 976,728
----------- ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,526,486 $ 1,392,791 $ 1,329,320
=========== ============ =============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
(3)
</TABLE>
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<TABLE>
<CAPTION>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited) (Unaudited)
Nine Months Ended Three Months Ended
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $2,129,489 $ 1,925,128 $ 821,024 $ 703,905
Cost of goods sold 1,308,765 1,167,700 499,943 426,931
---------- ----------- --------- ---------
GROSS PROFIT 820,724 757,428 321,081 276,974
Selling, general & administrative expenses 597,268 545,074 216,044 179,926
---------- ----------- --------- ---------
OPERATING INCOME 223,456 212,354 105,037 97,048
Net interest and other income(expense) 486 7,392 (1,167) 1,749
---------- ----------- --------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES 223,942 219,746 103,870 98,797
Provision for income taxes 81,300 80,200 37,500 36,100
---------- ----------- --------- ---------
NET INCOME $ 142,642 $ 139,546 $ 66,370 $ 62,697
========== =========== ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 62,852 65,782 61,357 65,319
BASIC EARNINGS PER COMMON SHARE $2.27 $2.12 $1.08 $0.96
WEIGHTED AVERAGE COMMON
SHARES AND SHARE EQUIVALENTS
OUTSTANDING 63,034 66,088 61,546 65,557
DILUTED EARNINGS PER COMMON SHARE $2.26 $2.11 $1.08 $0.96
DIVIDENDS PAID PER COMMON SHARE $0.23 $0.23 $0.11 $0.11
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
(4)
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<CAPTION>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Nine Months Ended
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 142,642 $ 139,546
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 49,807 41,743
Other - net 4,559 8,161
Change in current assets and liabilities:
(Increase) in accounts receivable (247,640) (245,245)
Decrease (increase) in inventories 84,818 (11,730)
Decrease in deferred income tax benefits 3,926 1,733
Decrease in other current assets 6,564 18,661
(Decrease) in accounts payable (10,937) (31,535)
Increase (decrease) in accrued expenses 20,034 (6,138)
Increase in income taxes payable 32,404 17,344
---------- ----------
Net cash provided by (used in) operating activities 86,177 (67,460)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments -- (167,608)
Disposals of investment instruments 64,874 364,985
Purchases of property and equipment (51,942) (60,227)
Purchases of equity interest, licenses and trademarks (29,000) (30,000)
Purchases of new businesses and payment of related debt (138,311) --
Other - net (4,492) (12,865)
---------- ----------
Net cash (used in) provided by investing activities (158,871) 94,285
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowing, net 86,200 --
Proceeds from exercise of common stock options 4,060 14,691
Dividends paid (21,292) (22,107)
Purchase of common stock, net of put warrant premiums (150,010) (93,522)
---------- ----------
Net cash used in financing activities (81,042) (100,938)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 319 (1,210)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (153,417) (75,323)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 164,659 138,185
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,242 $ 62,862
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
(5)
<PAGE>
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. Certain
items previously reported in specific captions in the accompanying
financial statements have been reclassified to conform with the
current quarter's classifications.
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 then
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 85.0 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.
(6)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Subsequent to the end of the third quarter, on November 2, 1999, the
Company consummated the purchase of the entire equity interest of
Podell Industries, Inc., whose core business consists of the Laundry
by Shelli Segal apparel line. Laundry is marketed under the Laundry by
Shelli Segal name primarily to select department and specialty stores.
The total purchase price of Laundry, including the repayment of
indebtedness was approximately $39 million, which may be increased to
a maximum of approximately $42.5 million based on the achievement of
certain earnings targets and other factors. The excess purchase price
over the fair market value of the underlying net assets is being
determined and will be allocated to goodwill and property based on
preliminary estimates of fair values, and will be subject to
adjustment. Goodwill will be amortized on a straight-line basis over
20 years. Annual net sales of Laundry in 1998 were approximately $78
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.
5. In August 1999, the Company consummated 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.COM". In addition, the Company consummated the purchase of
one million shares of Kenneth Cole Productions Class A stock at a
price of $29 per share. This amount is recorded as a component of
other assets on the Consolidated Balance Sheet as of October 2, 1999.
In October 1999, the Company entered into an additional license
agreement with an affiliate of Donna Karan International, Inc. to
design, produce, market and sell a new line of career and casual
sportswear for the "better" market under a trademark, which will be a
derivative of the DKNY brand name, to be determined. Consummation of
this transaction 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 fourth quarter.
6. In December 1998, the Company recorded a $27.0 million (pre-tax)
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 October 2, 1999 was $7.1
million. Of the $19.9 million expended for restructuring costs, $8.3
million was related to severance costs and $11.6 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.
(7)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. 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:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
(Dollars in thousands) 1999 1998 1999 1998
---------------------------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Comprehensive income, net of tax:
Net income $142,642 $139,546 $66,370 $62,697
Foreign currency translation 319 (1,210) 303 (447)
Changes in unrealized gains or losses on
securities (177) (680) (360) (775)
Reclassification adjustment for gains or
losses included in net income (300) (523) -- 82
-------- -------- ------- -------
Comprehensive income, net of tax: $142,484 $137,133 $66,313 $61,557
======== ======== ======= =======
</TABLE>
(8)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. The following are summaries of available-for-sale marketable
securities and maturities:
<TABLE>
<CAPTION>
(Dollars in thousands)
October 2, 1999
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
------- ------ ------- ----------
<S> <C> <C> <C> <C>
Equity securities $ 7,557 $ -- $ (278) $ 7,279
------- ------ ------- ----------
$ 7,557 $ -- $ (278) $ 7,279
======= ====== ======== ==========
(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)
October 3, 1998
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
--------- ------ ------- ----------
Tax exempt notes and bonds $ 69,193 $ 124 $ -- $ 69,317
Commercial paper 4,001 1 -- 4,002
Equity securities 6,030 -- (487) 5,543
--------- ------ ------- ----------
$ 79,224 $ 125 $ (487) $ 78,862
========= ====== ======= ==========
</TABLE>
At October 2, 1999, January 2, 1999 and October 3, 1998, the above
investments included $7,279,000, $137,520,000, and $56,791,000
respectively, which are classified as cash equivalents.
For the nine month period ended October 2, 1999, gross realized gains
on sales of available-for-sale securities totaled $751,000. For the
nine month period ended October 3, 1998, gross realized gains on sales
of available-for-sale securities totaled $1,209,000. The net
adjustment to unrealized holding gains and losses on
available-for-sale securities for the nine month period ended October
2, 1999 and October 3, 1998, was a charge of $477,000 (net of $275,000
in deferred taxes) and a charge of $1,196,000 (net of $699,000 in
deferred income taxes), respectively, which was included in retained
earnings.
(9)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Inventories are stated at the lower of cost (using the first-in,
first-out method) or market and consist of the following:
(Dollars in thousands)
October 2, January 2, October 3,
1999 1999 1998
--------- --------- ---------
Raw materials $ 13,021 $ 18,909 $ 14,470
Work in process 10,345 8,841 14,170
Finished goods 385,360 447,327 379,339
--------- --------- ---------
$408,726 $475,077 $407,979
========= ========= =========
10. Property and equipment - net
(Dollars in thousands)
October 2, January 2, October 3,
1999 1999 1998
--------- --------- ---------
Land and buildings $134,548 $131,297 $132,288
Machinery and equipment 240,960 199,769 181,564
Furniture and fixtures 64,652 67,862 63,528
Leasehold improvements 134,795 141,491 150,850
--------- --------- ---------
574,955 540,419 528,230
Less: Accumulated depreciation
and amortization 299,424 283,057 284,224
--------- --------- ---------
$275,531 $257,362 $244,006
========= ========= =========
11. In the first nine months of 1999, in connection with its stock
repurchase program, put warrants on 500,000 shares of common stock
were exercised and put warrants on 400,000 shares of common stock
expired unexercised.
12. On October 14, 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 December 3, 1999 to stockholders of
record at the close of business on November 12, 1999. Also, on October
14, 1999, the Company's Board of Directors authorized the Company to
purchase up to an additional $450 million of its common stock in open
market purchases and privately negotiated transactions.
(10)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. The following is an analysis of the differences between basic and
diluted earnings per share in accordance with SFAS No. 128 "Earnings
per Share."
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
(Dollars in thousands) 1999 1998 1999 1998
---------------------------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income $142,642 $139,546 $66,370 $62,697
-------- ------- ------- -------
Weighted average common
Shares outstanding 62,852 65,782 61,357 65,319
Effect of dilutive securities:
Stock options 172 297 189 160
Put warrants 10 9 -- 78
-------- ------- ------- -------
Weighted average common
Shares and common share equivalents 63,034 66,088 61,546 65,557
======== ======= ======= =======
</TABLE>
14. During the nine months ended October 2, 1999 the Company made income
tax payments of $40,488,000 and interest payments of $641,000. During
the nine months ended October 3, 1998 the Company made income tax
payments of $56,129,000.
15. 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 October 2, 1999, the Company had
forward contracts maturing through April 2000 to sell 18,000,000
Canadian dollars and contracts maturing through July 2000 to sell
5,000,000 British pounds sterling. The aggregate U.S. dollar value of
the foreign exchange contracts is approximately $20,500,000.
Unrealized gains and losses for outstanding foreign exchange forward
contracts were not material at October 2, 1999.
(11)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. 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 sales and
profits credited to the wholesale segments from the Retail segment are
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.
<TABLE>
<CAPTION>
For The Nine Months Ended October 2, 1999
Wholesale Wholesale Corporate/
(in thousands) Apparel Non-Apparel Retail Eliminations Total
---------------------------------- ---------- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $1,587,642 $229,093 $305,724 $7,030 $2,129,489
Intercompany sales 126,847 17,943 -- (144,790) --
Segment operating profit (loss) 184,036 36,722 36,861 (34,163) 223,456
For The Nine Months Ended October 3, 1998
Wholesale Wholesale Corporate/
(in thousands) Apparel Non-Apparel Retail Eliminations Total
---------------------------------- ---------- ------------ -------- ------------ ----------
Revenue from external customers $1,409,334 $208,874 $303,493 $3,427 $1,925,128
Intercompany sales 151,736 16,963 -- (168,699) --
Segment operating profit (loss) 155,374 39,493 28,848 (11,361) 212,354
</TABLE>
(12)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For The Third Quarter Ended October 2, 1999
Wholesale Wholesale Corporate/
(in thousands) Apparel Non-Apparel Retail Eliminations Total
---------------------------------- ---------- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $607,181 $103,855 $107,181 $2,807 $821,024
Intercompany sales 36,528 5,314 -- (41,842) --
Segment operating profit (loss) 79,931 31,561 15,559 (22,014) 105,037
For The Third Quarter Ended October 3, 1998
Wholesale Wholesale Corporate/
(in thousands) Apparel Non-Apparel Retail Eliminations Total
---------------------------------- ---------- ------------ -------- ------------ ----------
Revenue from external customers $505,229 $90,474 $107,205 $997 $703,905
Intercompany sales 56,901 5,886 -- (62,787) --
Segment operating profit (loss) 58,503 33,553 13,125 (8,133) 97,048
</TABLE>
The reconciling item to adjust segment operating profit to
consolidated pre-tax income consists of net interest and other income
(expense) generated by the Company's investment portfolio and the
Company's short term borrowings, in the amount of $0.5 million and
$7.4 million for the first nine months of 1999 and 1998, respectively,
and ($1.2) million and $1.7 million for the third quarter of 1999 and
1998, respectively.
(13)
<PAGE>
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. On September 30, 1997, a putative class action, Chun Hua Mui v. Union
of Needletrades Industrial and Textile Employees, 97 Civ. 7270, was
filed in the United States District Court for the Southern District of
New York by three current and former employees of Mademoiselle
Knitware, Inc. ("Mademoiselle"), a former knitgoods supplier for the
Company, 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
employees. 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. On August 31, 1999, the
Court granted the union defendants' summary judgment motion and
thereafter entered a final judgment dismissing the amended complaint,
triggering plaintiffs' right to appeal from all prior orders. On
September 27, 1999, the plaintiffs filed a notice of appeal and
thereafter filed a pre-argument statement raising issues related to
the claims against the union defendants. No briefing schedule has been
set.
The Company believes that if the plaintiffs in Chun Hua Mui v. Union
of Needletrades Industrial and Textile Employees pursue an appeal
with respect to the dismissal of claims against the Company, that
appeal will lack merit and the Company intends to vigorously defend
such an appeal. Although the outcome of any such litigation or claim
cannot be determined with certainty, management is of the opinion that
the final outcome of this litigation should not have a material
adverse effect on the Company's results of operations or financial
position.
(14)
<PAGE>
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 16 of Notes to
Consolidated Financial Statements.
Third quarter ended October 2, 1999 compared to third quarter ended
October 3, 1998
Net sales for the third quarter of 1999 were $821.0 million, an
increase of $117.1 million, or 16.6%, over net sales of $703.9 million
for the third quarter of 1998. This increase reflected a 14.5%
increase in our Wholesale Apparel segment to $643.7 million and an
increase of 13.3% in Wholesale Non-Apparel to $109.2 million. Our
Retail net sales for the third quarter of $107.2 million were
essentially flat to last year. The third quarter typically represents
the Company's highest sales quarter in each year, reflecting normal
seasonal variations.
The increase in net sales of Wholesale Apparel primarily reflected the
inclusion of sales of our Segrets business acquired on February 12,
1999 (see Note 2 of Notes to Consolidated Financial Statements), and
our Lucky Brand Dungarees business acquired on June 8, 1999 (see Note
3 of Notes to Consolidated Financial Statements). Our Special Markets
and DKNY(R) JEANS and DKNY(R) ACTIVE businesses also significantly
contributed to our quarterly sales increase, in each case due to both
higher volume and higher average unit selling prices. The increase
also reflected increased sales in our Casual, and to a lesser extent,
our Men's and ELISABETH businesses, in each case due primarily to
higher unit volume. These gains were partially offset by sales
declines in our Career business due primarily to lower average unit
selling prices, as well as lower sales in our DANA BUCHMAN and Dress
businesses due primarily to unit volume, in each case reflecting
weakness in demand. The increase in our Wholesale Non-Apparel segment
was due to significant net sales increases in our Cosmetics business,
which successfully launched the licensed Candies brand fragrance in
the third quarter, and to a lesser extent, our jewelry business,
principally reflecting higher unit volume. These gains were partially
offset by declines in our handbag and fashion accessories businesses,
due primarily to lower average unit selling prices. The sales
increases in our Wholesale Apparel and Wholesale Non-Apparel segments
also reflected the accelerated liquidation of excess inventories in
the quarter. Sales in our Retail segment were essentially flat to last
year as increased Outlet store sales were offset by a planned decline
in our Specialty Retail store sales. Our Outlet stores achieved a high
single-digit sales increase, reflecting 32 new stores on a
period-to-period basis, partially offset by a mid single-digit
comparable store sales decrease, reflecting primarily in-store
inventories being nearly 5% below last year levels. The expected
decline in our Specialty Retail store sales reflected the closure of
30 under-performing stores during 1999, offset by a high single-digit
comparable store sales increase in the quarter.
(15)
<PAGE>
Gross profit dollars increased $44.1 million, or 15.9%, in 1999 over
1998. Gross profit as a percent of sales decreased to 39.1% in 1999
from 39.3% in 1998; this result principally reflected accelerated
liquidation of excess inventories mentioned above, which adversely
affected our gross profit percentage. The decline in our gross profit
rate also reflected higher markdown allowances in our Wholesale
Non-Apparel segment, offset by lower markdown allowances and higher
going-in margins in our Wholesale Apparel segment, and a lower
percentage of sales represented by our Retail segment, which generates
a higher gross profit rate than the Company average.
Selling, general and administrative expenses ("SG&A") increased $36.1
million, or 20.1% in 1999 over 1998. These expenses as a percent of
sales increased to 26.3% in 1999 from 25.6% in 1998. The 1999 dollar
increase was due to promotional costs associated with the launch of
the Candies fragrance, higher performance-based compensation expense
relative to last year's third quarter's depressed levels, and an
increase in our depreciation costs. Also, additional operating
expenses related to our Segrets, Lucky Brand Dungarees, DKNY(R)JEANS
and DKNY(R) ACTIVE businesses, the expansion of our Outlet and Special
Markets businesses, and increased distribution costs to support our
sales growth contributed to the above dollar increase. The dollar
increase was moderated by lower SG&A in our other Wholesale Apparel
businesses, and lower Specialty Retail costs principally due to the
store closures mentioned above. The increase in SG&A expressed as a
percent of sales was primarily driven by increased promotional costs
associated with the Candies fragrance launch mentioned above. The
increase was partially offset by the positive leverage we obtain from
adding incremental sales to our essentially fixed corporate overhead
base, lower employee and related costs (other than performance-based
compensation expense) as a result of headcount reductions, and
increased penetration of our Special Markets brands, which are
supported by lower SG&A levels.
As a result of the factors described above, period-to-period operating
income increased $8.0 million, or 8.2%, to $105.0 million in 1999, and
operating income as a percent of sales declined to 12.8% in 1999
compared to 13.8% in 1998. Segment operating profit in Wholesale
Apparel increased $21.4 million to $79.9 million (12.4% of sales) in
1999 compared to $58.5 million (10.4% of sales) in 1998, principally
reflecting improvement in our Casual and Special Markets businesses,
as well as significant contributions from our new Lucky Brand
Dungarees and Segrets businesses and our DKNY(R)JEANS and DKNY(R)
ACTIVE businesses. Operating profit in our Wholesale Non-Apparel
segment decreased $2.0 million to $31.6 million (28.9% of sales) in
1999 compared to $33.6 million (34.8% of sales) in 1998, primarily
reflecting higher markdowns in our handbag business. Segment operating
profit in Retail increased $2.4 million to $15.6 million (14.5% of
sales) in 1999 compared to $13.1 million (12.2% of sales) in 1998,
principally reflecting increased profit dollars from our Outlet stores
with 32 new stores on a period-to-period basis and an increase in our
Specialty Retail store profits.
Net interest and other income in the third quarter declined by $2.9
million to expense of $1.2 million compared to income of $1.7 million
in 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 ongoing investment in fixed assets.
For the third quarter our effective income tax rate declined from
36.5% to 36.1%.
(16)
<PAGE>
Net income increased $3.7 million in 1999 to $66.4 million and
declined as a percent of net sales to 8.1% in 1999 from 8.9% in 1998,
due to the factors described above. Diluted earnings per common share
increased 12.5% to $1.08 in 1999 from $0.96 in 1998, reflecting higher
net income and a lower number of average outstanding common shares and
share equivalents in 1999. Our average diluted shares outstanding
declined by 1.9 million in the third quarter to 61.5 million as a
result of our ongoing stock repurchase program. We purchased 2.968
million shares during the third quarter for $113.5 million. Since the
end of the third quarter, the Company's Board of Directors has
authorized the Company to purchase up to an additional $450 million of
its common stock in open market purchases and privately negotiated
transactions. As part of this authorization, since the end of the
third quarter, we have purchased an additional 1.0 million shares for
$39.8 million. As of November 12, 1999, we have $410.2 million
remaining in our buyback authorization.
Nine months ended October 2, 1999 compared to nine months ended
October 3, 1998
Net sales for the nine months of 1999 were $2,129.5 million, an
increase of $204.4 million, or 10.6%, over net sales of $1,925.1
million for the nine months of 1998. This increase reflected a 9.8%
increase in Wholesale Apparel to $1,714.5 million, an increase of 9.4%
in Wholesale Non-Apparel to $247.0 million, and an increase of 0.7% in
Retail to $305.7 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, Men's and ELISABETH businesses
in each case due primarily to higher unit volume partially offset by
lower average unit selling prices. These gains were partially offset
by sales declines in our Career, DANA BUCHMAN, and Dress businesses,
in each case reflecting lower unit volume and lower average unit
selling prices reflecting a weakness in demand. The increase in our
Wholesale Non-Apparel segment was due primarily to increased sales in
our Cosmetics business, which successfully launched the Candies brand
fragrance in the third quarter, and our jewelry business principally
reflecting higher unit volume. These increases were somewhat offset by
lower sales in our handbag business principally due to lower average
unit selling prices. The increase in our Retail segment was due to a
10.4% increase in our Outlet store sales, reflecting 32 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 30 under-performing stores, and a low single-digit comparable store
sales decline in our Liz Claiborne stores, slightly offset by a low
single-digit comparable store increase in our ELISABETH stores.
Gross profit dollars increased $63.3 million, or 8.4%, in 1999 over
1998. Gross profit as a percent of sales decreased to 38.5% 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 in the
percentage of sales represented by our Specialty Retail businesses, as
well as higher markdowns in our Wholesale Apparel and Wholesale
Non-Apparel businesses, partially offset again by higher going-in
margins in our Wholesale Apparel segment.
(17)
<PAGE>
SG&A increased $52.2 million, or 9.6%, in 1999 over 1998. These
expenses as a percentage of sales declined to 28.0% in 1999 from 28.3%
in 1998. The 1999 dollar increase was due primarily to promotional
costs associated with the launch of the Candies brand fragrance,
higher performance-based compensation expense in the third quarter, as
well as additional operating expenses related to our new Segrets,
Lucky Brand Dungarees, and DKNY(R) JEANS and DKNY(R) ACTIVE
businesses, the expansion of our Special Markets and Outlet
businesses, and increased information systems and depreciation costs
related to our transformation initiatives. These dollar increases were
moderated by lower SG&A in our other Wholesale Apparel businesses, and
lower Specialty Retail costs principally due to the store closures
mentioned above. The improvement in the SG&A rate 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 (other than performance-based compensation expense) as a
result of headcount reductions, and increased penetration of our
Special Markets brands, which are supported by lower SG&A levels.
As a result of the factors described above, period-to-period operating
income increased $11.1 million, or 5.2% to $223.5 million in 1999 and
operating income as a percent of sales declined to 10.5% in 1999
compared to 11.0% in 1998. Segment operating profit in Wholesale
Apparel increased $28.6 million to $184.0 million (10.7% of sales) in
1999, compared to $155.4 million (10.0% of sales) in 1998. The dollar
increase was principally due to improved profitability in our Casual
and Special Markets businesses. Operating profit in Wholesale
Non-Apparel decreased $2.8 million to $36.7 million (14.9% of sales)
in 1999, compared to $39.5 million (17.5% of sales) in 1998,
reflecting primarily higher markdowns in our handbag business. Segment
operating profit in Retail increased $8.1 million to $36.9 million
(12.1% of sales) in 1999, compared to $28.8 million (9.5% of sales) in
1998. This increase principally reflected increased profit dollars
from our Outlet stores, with 32 new stores on a period-to-period basis
and an increase in our Specialty Retail store profits.
Net interest and other income for the nine months declined by $6.9
million to $0.5 million in 1999 compared to $7.4 million in 1998. This
decline in net interest income 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 nine months our effective income tax rate declined to 36.3%
from 36.5% last year as a result of the third quarter reduction of the
effective tax rate to 36.1%.
(18)
<PAGE>
Net income increased $3.1 million in 1999 to $142.6 million and
declined as a percent of net sales to 6.7% in 1999 from 7.2% in 1998,
due to the factors described above. Diluted earnings per common share
increased 7.1% to $2.26 in 1999 from $2.11 in 1998, reflecting a lower
number of average outstanding common shares and share equivalents in
1999. Our average diluted shares outstanding declined by 2.8 million
for the nine months to 63.0 million as a result of our ongoing stock
repurchase program. We purchased 3.978 million shares during the nine
months for $150.0 million.
The Company has previously announced that the growth of our existing
portfolio, combined with our 1999 strategic business initiatives,
makes us optimistic about our ability to achieve a low double-digit
sales increase and 10% EPS growth in 2000.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
We ended the third quarter with $11.2 million in cash and marketable
securities, versus $84.9 million last year, and $86.2 million in debt
compared to virtually none last year. This reduction in cash flow over
the last twelve months is primarily attributable to our expenditure of
$138 million for purchase price payments in connection with the
acquisitions of Segrets and Lucky Brand Dungarees, $171.6 million for
the repurchase of common stock, $75.0 million for capital expenditures
primarily related to our warehouse automation and information system
initiatives, as well as $29.0 million for our 7% equity investment in
Kenneth Cole Productions. This was partially offset by increased cash
from operations including a $ 176.4 million increase in cash flow as a
result of a reduction in working capital over the last twelve months.
Our borrowings peaked at $144.2 million during the quarter.
Net cash provided by operating activities for the nine months of 1999
was $86.2 million, compared to net cash used of $67.5 million in 1998.
This $153.7 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
accounts payable. Our accounts receivable ended the quarter at $508.9
million, up 19.3% over last year. Approximately 30% of this increase
was driven by the assumption of accounts receivable in the
acquisitions of Segrets and Lucky Brands with the balance reflecting
increased sales as compared to the same period last year.
Inventories at October 2, 1999 were $408.7 million, virtually flat to
last year. Increased stock levels to support sales increases in our
DKNY(R) JEANS, DKNY(R) ACTIVE and Special Markets businesses, and the
additional inventory of the acquired Segrets and Lucky Brand Dungarees
businesses have been entirely offset by lower inventory levels in the
balance of our wholesale business.
(19)
<PAGE>
Net cash used in investing activities was $158.9 million in 1999,
compared to net cash provided by investing activities of $94.3 million
in 1998. The $253.2 million year over year decrease in cash flow
reflected the 1999 acquisition costs of our 84.5% interest in Segrets,
our 85% interest in Lucky Brand Dungarees, and our 7% equity
investment in Kenneth Cole Productions, compared to our acquisition of
the DKNY(R) JEANS and DKNY(R) ACTIVE license in 1998.
Net cash used in financing activities was $81.0 million in 1999,
compared to $100.9 million in 1998. This $19.9 million year over year
improvement in cash flow reflected net borrowings of $86.2 million in
fiscal 1999, partially offset by an increase of $56.5 million in the
amount expended for stock purchases.
Our anticipated capital expenditures for the full year 1999
approximate $85 million, of which $51.9 million has been expended
through October 2, 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 32 outlet stores and
12 ELISABETH specialty retail stores. In addition, we anticipate
spending approximately $25 million on in-store concept shops for the
full year of 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 $558 million at
October 2, 1999 and $425 million at year end 1998 and are available to
finance cash needs and letters of credit. At October 2, 1999, we had
outstanding letters of credit of $236 million. We expect to be able to
continue to adjust these lines as required. The Company is in the
process of finalizing a $600 million commercial paper financing, which
will be used to fund the Company's growth initiatives, share
repurchases and seasonal changes in working capital. The facility will
be supported by a $600 million, 364 day bank facility.
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").
(20)
<PAGE>
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 October 2, 1999, capital expenditures
related to the project totaled $53 million and an additional $15
million was expensed as incurred. Approximately $7 million in capital
expenditures and approximately $3 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 fourth 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 that 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.
(21)
<PAGE>
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 currently have no long-term debt, and have financed 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 has primarily been in our short-term
borrowings. The Company is in the process of finalizing a $600 million
commercial paper financing, which will be used to fund the Company's
growth initiatives, share repurchases and seasonal changes in working
capital. The facility will be supported by a $600 million, 364 day
bank facility. 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 risk associated with
our foreign currency exposure has not changed materially since January
2, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 30, 1997, a putative class action, Chun Hua Mui v. Union
of Needletrades Industrial and Textile Employees, 97 Civ. 7270, was
filed in the United States District Court for the Southern District of
New York by three current and former employees of Mademoiselle
Knitware, Inc. ("Mademoiselle"), a former knitgoods supplier for the
Company, 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
employees. 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. On August 31, 1999, the
Court granted the union defendants' summary judgment motion and
thereafter entered a final judgment dismissing the amended complaint,
triggering plaintiffs' right to appeal from all prior orders. On
September 27, 1999, the plaintiffs filed a notice of appeal and
thereafter filed a pre-argument statement raising issues related to
the claims against the union defendants. No briefing schedule has been
set.
(22)
<PAGE>
The Company believes that if the plaintiffs in Chun Hua Mui v. Union
of Needletrades Industrial and Textile Employees pursue an appeal
with respect to the dismissal of claims against the Company, that
appeal will lack merit and the Company intends to vigorously defend
such an appeal. Although the outcome of any such litigation or claim
cannot be determined with certainty, management is of the opinion that
the final outcome of this litigation should not have a material
adverse effect on the Company's results of operations or financial
position. See 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 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. On September 29, 1999, the District Judge in
California transferred venue of that action to the District of Hawaii.
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 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, are 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 only, and are subject to certain
risks, uncertainties and assumptions, referred to below, including but
not limited to economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products,
services and prices, 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. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated or projected.
(23)
<PAGE>
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, 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; uncertainties
relating to the Company's ability to successfully implement its growth
strategies; the 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 1999 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 October 2, 1999.
(b) The Company did not file any reports on Form 8-K in the quarter.
(24)
<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: November 16, 1999
LIZ CLAIBORNE, INC.
By: /s/ Richard F. Zannino By: /s/ Elaine H. Goodell
---------------------- ---------------------
RICHARD F. ZANNINO ELAINE H. GOODELL
Senior Vice President - Finance Vice President - Corporate
& Administration and Chief Financial Controller and Chief Accounting
Officer Officer
(principal financial officer) (principal accounting officer)
(25)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LIZ
CLAIBORNE, INC. CONSOLIDATED BALANCE SHEET AS OF OCTOBER 2, 1999 AND CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jan-01-2000
<PERIOD-END> Oct-02-1999
<CASH> 12,242
<SECURITIES> 0
<RECEIVABLES> 508,887
<ALLOWANCES> 0
<INVENTORY> 408,726
<CURRENT-ASSETS> 1,039,980
<PP&E> 574,995
<DEPRECIATION> 299,424
<TOTAL-ASSETS> 1,526,486
<CURRENT-LIABILITIES> 500,423
<BONDS> 0
0
0
<COMMON> 88,219
<OTHER-SE> 903,163
<TOTAL-LIABILITY-AND-EQUITY> 1,526,486
<SALES> 2,129,484
<TOTAL-REVENUES> 2,129,484
<CGS> 1,308,765
<TOTAL-COSTS> 1,308,765
<OTHER-EXPENSES> 597,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 223,942
<INCOME-TAX> 81,300
<INCOME-CONTINUING> 142,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,642
<EPS-BASIC> 2.27
<EPS-DILUTED> 2.26
</TABLE>
