-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MTGdM5FLj7ES19j0rbzeNWpGU7G/+LCruQRXu8bkdQI7aNs0qc9qK9dXvC0GyGqT XZJiWjpAWhWIkDBJUoOU/A== 0000940180-99-000140.txt : 19990212 0000940180-99-000140.hdr.sgml : 19990212 ACCESSION NUMBER: 0000940180-99-000140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILFIGER TOMMY CORP CENTRAL INDEX KEY: 0000888747 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11226 FILM NUMBER: 99531823 BUSINESS ADDRESS: STREET 1: 6/F PRECIOUS INDUSTRIAL CENTRE STREET 2: 18 CHEUNG YUE ST CITY: CHEUNG SHA WAN KOWLO STATE: K3 BUSINESS PHONE: 8522747798 MAIL ADDRESS: STREET 1: 25 WEST 39TH STREET CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 ----------------- COMMISSION FILE NUMBER 1-11226 ------- TOMMY HILFIGER CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) British Virgin Islands NOT APPLICABLE ---------------------- -------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 6/F, Precious Industrial Centre, 18 Cheung Yue Street, Cheung Sha Wan, Kowloon, ------------------------------------------------------------------------------- Hong Kong --------- (Address of principal executive offices) 852-2745-7798 ------------- (Registrant's telephone number, including area code) Indicate by check mark 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______ ----- Ordinary Shares, $0.01 par value per share, outstanding as of January 31, 1999: 47,045,648 TOMMY HILFIGER CORPORATION INDEX TO FORM 10-Q December 31, 1998
PART I - FINANCIAL INFORMATION Page ---- Item 1 Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998............... 3 Condensed Consolidated Statements of Operations for the nine months ended December 31, 1998 and 1997 and the three months ended December 31, 1998 and 1997......................... 4 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1998 and 1997............................................................................... 5 Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine months ended December 31, 1998 and the year ended March 31, 1998................................... 6 Notes to Condensed Consolidated Financial Statements........................................... 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 11 PART II - OTHER INFORMATION Item 1 Legal Proceedings.............................................................................. 19 Item 6 Exhibits and Reports on Form 8-K............................................................... 19 Signatures............................................................................................... 20
2 PART I ITEM 1 - FINANCIAL STATEMENTS TOMMY HILFIGER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, AS OF MARCH 31, 1998 1998 ---- ---- (UNAUDITED) ASSETS Current assets Cash and cash equivalents.............................................. $ 189,884 $157,051 Accounts receivable.................................................... 146,098 104,732 Inventories............................................................ 238,268 150,947 Other current assets................................................... 38,176 25,554 ---------- -------- Total current assets................................................ 612,426 438,284 Property and equipment, at cost, less accumulated depreciation and amortization........................................... 221,228 160,089 Intangible and other assets, net of accumulated amortization............... 1,287,370 19,637 ---------- -------- Total Assets........................................................ $2,121,024 $618,010 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings.................................................. $ 940 $ -- Current portion of long-term debt...................................... 30,000 -- Accounts payable....................................................... 21,810 16,201 Accrued expenses and other current liabilities......................... 159,342 76,197 ---------- -------- Total current liabilities........................................... 212,092 92,398 Long-term debt............................................................. 619,214 -- Deferred tax and other liabilities......................................... 249,606 6,550 Shareholders' equity Preference Shares, $0.01 par value-shares authorized 5,000,000; none issued......................................................... -- -- Ordinary Shares, $0.01 par value-shares authorized 75,000,000; issued and outstanding 47,045,648 and 37,557,934, respectively...... 470 376 Capital in excess of par value......................................... 567,751 173,416 Retained earnings...................................................... 472,679 345,195 Cumulative translation adjustment...................................... (788) 75 ---------- -------- Total shareholders' equity.......................................... 1,040,112 519,062 ---------- -------- Commitments and contingencies Total Liabilities and Shareholders' Equity.......................... $2,121,024 $618,010 ========== ========
See Accompanying Notes to Condensed Consolidated Financial Statements 3 TOMMY HILFIGER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) FOR THE NINE MONTHS FOR THE THREE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net revenue................................................... $1,216,213 $644,385 $463,233 $246,104 Cost of goods sold............................................ 650,182 337,671 248,416 130,801 ---------- -------- -------- -------- Gross profit.................................................. 566,031 306,714 214,817 115,303 Depreciation and amortization................................. 58,177 21,692 21,241 7,196 Other selling, general and administrative expenses............ 281,567 160,784 101,401 55,723 Special charges............................................... 19,800 -- -- -- ---------- -------- -------- -------- Total expenses................................................ 359,544 182,476 122,642 62,919 Income from operations........................................ 206,487 124,238 92,175 52,384 Interest expense.............................................. 29,044 1,049 10,897 355 Interest income............................................... 3,632 5,127 1,383 1,552 ---------- -------- -------- -------- Income before income taxes.................................... 181,075 128,316 82,661 53,581 Provision for income taxes.................................... 53,591 42,534 24,902 17,200 ---------- -------- -------- -------- Net income.................................................... $ 127,484 $ 85,782 $ 57,759 $ 36,381 ========== ======== ======== ======== Earnings per share: Basic earnings per share...................................... $ 2.78 $ 2.30 $ 1.23 $ .97 ========== ======== ======== ======== Weighted average shares outstanding........................... 45,807 37,333 46,944 37,387 ========== ======== ======== ======== Diluted earnings per share.................................... $ 2.75 $ 2.26 $ 1.22 $ .96 ========== ======== ======== ======== Weighted average shares and share equivalents outstanding..... 46,295 37,918 47,278 37,898 ========== ======== ======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements 4 TOMMY HILFIGER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED) FOR THE NINE MONTHS ENDED DECEMBER 31, ------------- 1998 1997 ---- ---- Cash flows from operating activities Net income................................................................ $ 127,484 $ 85,782 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization.......................................... 58,594 21,692 Deferred taxes......................................................... (4,083) -- Provision for special charges.......................................... 19,800 -- Write-off of property and equipment.................................... 379 -- Changes in operating assets and liabilities Decrease (increase) in assets Accounts receivable............................................... 15,977 (11,468) Inventories....................................................... (20,896) (33,592) Other assets...................................................... 14,573 (3) Increase (decrease) in liabilities Accounts payable................................................... (11,573) 10,791 Accrued expenses and other liabilities............................. (13,608) 8,791 Net cash provided by operating activities.............................. --------- -------- 186,647 81,993 --------- -------- Cash flows from investing activities Purchases of property and equipment....................................... (57,483) (49,993) Purchases of investments.................................................. -- (20,000) Maturities of investments................................................. -- 20,000 Acquisition of businesses, net of cash acquired........................... (736,508) -- --------- -------- Net cash used in investing activities.................................. (793,991) (49,993) --------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt.................................. 649,151 -- Payments on long-term debt................................................ (10,000) (1,510) Proceeds from the exercise of employee stock options...................... 11,435 3,886 Tax benefit from exercise of stock options................................ 5,479 1,334 Short-term bank borrowings (repayments)................................... (15,025) 3,343 Other..................................................................... (863) (50) --------- -------- Net cash provided by financing activities.............................. 640,177 7,003 --------- -------- Net increase in cash................................................... 32,833 39,003 Cash and cash equivalents, beginning of period............................. 157,051 109,908 --------- -------- Cash and cash equivalents, end of period................................... $ 189,884 $148,911 ========= ========
See Accompanying Notes to Condensed Consolidated Financial Statements 5 TOMMY HILFIGER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
CAPITAL IN EXCESS CUMULATIVE TOTAL ORDINARY OF PAR RETAINED TRANSLATION SHAREHOLDERS' SHARES VALUE EARNINGS ADJUSTMENT EQUITY ------ ----- -------- ---------- ------ BALANCE, MARCH 31, 1997 $ 372 $ 165,032 $ 232,015 $ 45 $ 397,464 Comprehensive income....................... 113,180 30 113,210 Exercise of employee stock options......... 4 5,681 5,685 Tax benefits from exercise of stock options............................... 2,703 2,703 ------ --------- --------- ------ ----------- BALANCE, MARCH 31, 1998 376 173,416 345,195 75 519,062 Comprehensive income....................... 127,484 (863) 126,621 Issuance of shares in connection with the Acquisition....... 90 377,425 377,515 Exercise of employee stock options......... 4 11,431 11,435 Tax benefits from exercise of stock options.................................. 5,479 5,479 ------ --------- --------- ------ ----------- BALANCE, DECEMBER 31, 1998 (UNAUDITED)........... $ 470 $ 567,751 $ 472,679 ($788) $ 1,040,112 ====== ========= ========= ====== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements 6 TOMMY HILFIGER CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by Tommy Hilfiger Corporation ("THC" or the "Company"; unless the context indicates otherwise, all references to the "Company" include THC and its subsidiaries) in a manner consistent with that used in the preparation of the consolidated financial statements included in the Company's Annual Report as filed with the Securities and Exchange Commission on Form 10-K (the "Form 10- K"). Certain items contained in these statements are based on estimates. In the opinion of management, the accompanying financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated. Operating results for the nine month period ended December 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1999. These unaudited financial statements should be read in conjunction with the financial statements included in the Form 10-K. The financial statements as of and for the nine month and the three month periods ended December 31, 1998 and 1997 are unaudited. The Condensed Consolidated Balance Sheet as of March 31, 1998, as presented, has been prepared from the Consolidated Balance Sheet as of March 31, 1998 included in the Company's Form 10-K. Effective April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. The Company's comprehensive income consists of net income and the cumulative translation adjustment and is reported in the Condensed Consolidated Statements of Changes in Shareholders' Equity. NOTE 2 - ACQUISITION OF WOMENSWEAR, JEANSWEAR AND CANADIAN LICENSEES On May 8, 1998, following the approval by the shareholders of the Company on May 5, 1998, the Company, through its wholly owned subsidiaries, acquired from related parties Pepe Jeans USA, Inc., the Company's United States womenswear and jeanswear licensee ("Pepe USA"), TJ Far East Limited, Pepe USA's buying agency affiliate, and Tomcan Investments Inc., the parent corporation of Tommy Hilfiger Canada Inc. ("TH Canada"), the Company's Canadian licensee (collectively, the "Acquired Companies") (the "Acquisition"). The aggregate purchase price was $1,166,239, comprised of the following: cash - $755,760, the issuance of 9,045,930 Ordinary Shares of the Company - $377,515 and related transaction costs. For accounting purposes, the Ordinary Shares of the Company were valued at $46.37 per share (the average closing price for the five days before and after the announcement of the Acquisition) reduced by a valuation adjustment of $41,960 to reflect restrictions on the sale of the shares. The cash portion of the purchase price was funded from a combination of debt financing and cash on hand. 7 Purchase price allocation The Acquisition has been accounted for as a purchase and, accordingly, the operating results of the Acquired Companies are included in the consolidated results of the Company from the date of the Acquisition. The purchase price has been allocated as follows: Cash................................................ $ 19,252 Accounts receivable................................. 57,343 Inventories......................................... 67,723 Other current assets................................ 13,359 Property and equipment.............................. 49,212 Intangible assets, including goodwill............... 1,307,376 Other assets........................................ 1,075 Short-term bank borrowings.......................... (15,965) Accounts payable.................................... (17,183) Accrued expenses and other current liabilities...... (51,457) Long-term debt...................................... (10,000) Deferred tax liability.............................. (252,320) Other liabilities................................... (2,176) ---------- Total purchase price $1,166,239 ==========
Pro forma results The pro forma combined condensed results of operations of the Company and the Acquired Companies for the nine months ended December 31, 1998 and 1997 and the three months ended December 31, 1998 and 1997, after giving effect to certain pro forma adjustments, are as follows:
Nine Months Ended Three Months Ended ----------------- ------------------ December 31, December 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- (Actual) Net revenue........................... $1,264,663 $949,539 $463,233 $358,962 Gross profit.......................... 588,222 442,346 214,817 164,843 Income from operations................ 216,295 166,200 92,175 67,213 Net income............................ 131,217 92,005 57,759 38,604 Diluted earnings per share............ $2.77 $1.96 $1.22 $.82 Weighted average shares and share equivalents outstanding.......... 47,289 46,964 47,278 46,944
The pro forma net income and diluted earnings per share, before special, acquisition-related charges of $19,800 taken in the quarter ended June 30, 1998, for the nine months ended December 31, 1998 and 1997 are as follows: Nine Months Ended ----------------- December 31, ------------ 1998 1997 ---- ---- Net income............................ $143,097 $92,005 Diluted earnings per share............ $ 3.03 $ 1.96 8 The foregoing pro forma statement of operations data assumes that the Acquisition took place as of the beginning of each fiscal year. The results also reflect (a) the elimination of certain revenues, cost of goods sold and royalty expense, (b) amortization of intangible assets, principally over 40 years, (c) incremental interest and other expenses and (d) applicable income tax effects. On a combined pro forma basis, components of the Company's net revenue for the nine months ended December 31, 1998 and 1997 and the three months ended December 31, 1998 and 1997 are as follows:
Nine Months Ended Three Months Ended ----------------- ------------------ December 31, December 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- (Actual) Wholesale: Menswear............................. $ 601,425 $524,434 $214,251 $189,383 Womenswear........................... 294,276 123,256 110,375 44,865 Childrenswear........................ 154,996 96,971 50,849 39,500 ---------- -------- -------- -------- Total Wholesale........................ 1,050,697 744,661 375,475 273,748 Retail................................. 173,215 161,972 72,165 70,871 Licensing.............................. 40,751 30,210 15,593 11,550 Other non-recurring.................... -- 12,696 -- 2,793 ---------- -------- -------- -------- Total net revenue...................... $1,264,663 $949,539 $463,233 $358,962 ========== ======== ======== ========
Wholesale revenue includes revenues from the sale of menswear, womenswear and childrenswear in the United States and Canada. Menswear is comprised of men's sportswear and jeanswear. Womenswear is comprised of women's casualwear and jeanswear. Childrenswear includes boys' sizes 4-20, and infants and toddlers. Retail revenue reflects sales from the Company's outlet, specialty and flagship stores. Licensing includes licensing royalties and buying agency commissions. Other non-recurring revenue consists of sales of Pepe brand product as well as product sales of the jeanswear buying office, each of which will not recur prospectively. Special acquisition-related charges During the quarter ended June 30, 1998, the Company recorded a special charge for non-recurring expenses of $19,800, before income taxes, related to the Acquisition. This special charge consists of provisions of $7,000 for the write-off of the fixed assets and operating leases of the Company's specialty stores, $7,000 for redundant MIS equipment, furniture, fixtures and other equipment, $3,800 for severance and other employee costs and $2,000 for the termination of certain vendor contracts. NOTE 3 - INVENTORIES Inventories are summarized as follows:
December 31, 1998 March 31, 1998 ----------------- -------------- Finished Goods................................. $234,266 $148,488 Raw Materials.................................. 4,002 2,459 -------- -------- $238,268 $150,947 ======== ========
NOTE 4 - CREDIT FACILITIES The debt financing portion of the Acquisition purchase price consisted of $250,000 of 6.50% notes maturing on June 1, 2003 (the "2003 Notes"), $200,000 of 6.85% notes maturing on June 1, 2008 (the "2008 Notes") and $200,000 of term loan borrowings pursuant to new $450,000 term and revolving credit facilities (the "New Credit Facilities"). The 2003 Notes and the 2008 Notes (collectively, the "Notes") were issued by Tommy Hilfiger U.S.A., Inc. ("TH USA") and guaranteed by THC. The indenture under which the Notes were issued contains covenants that, among other things, restrict the ability of subsidiaries of THC to incur additional indebtedness, restrict the ability of THC and its subsidiaries to incur indebtedness secured by liens or enter into sale and leaseback transactions and restrict the ability of THC and TH USA to engage in mergers or consolidations. The New Credit Facilities, which are guaranteed by THC, consist of an unsecured $250,000 TH USA five-year revolving credit facility, of which up to $150,000 may be used for direct borrowings, and an unsecured $200,000 five-year term credit facility which was borrowed by TH USA in connection with the Acquisition. The revolving credit facility, which accrues interest at varying interest rates, will be available for letters of credit, working capital and other general corporate purposes. There were no direct borrowings outstanding under the revolving credit facility at December 31, 1998. The New Credit Facilities replaced the Company's secured revolving credit agreement 9 which had been in place since April 1, 1996. The Company's Canadian subsidiary is financed under a separate revolving credit facility under which $940 was outstanding at December 31, 1998. Borrowings under the term loan facility bear interest at varying rates (weighted average rate of 5.81% as of December 31, 1998) and are repayable in quarterly installments as follows: $40,000 in the 12-month period ending March 31, 2000, $50,000 in each of the next two succeeding 12-month periods and $60,000 in the next succeeding 12-month period. The New Credit Facilities contain a number of covenants that, among other things, restrict the ability of subsidiaries of THC to dispose of assets, incur additional indebtedness, create liens on assets, pay dividends or make other payments in respect of capital stock, make investments, loans and advances, engage in transactions with affiliates, enter into sale and leaseback transactions, engage in mergers or consolidations or change the businesses conducted by them. The New Credit Facilities also restrict the ability of THC to create liens on assets or enter into sale and leaseback transactions. Under the New Credit Facilities, subsidiaries of THC may not pay dividends or make other payments in respect of capital stock to THC that in the aggregate exceed 33% of the Company's cumulative consolidated net income, commencing with the fiscal year ended March 31, 1998, less certain deductions. In addition, under the New Credit Facilities, THC and TH USA are required to comply with and maintain specified financial ratios and tests (based on the Company's consolidated financial results), including, without limitation, an interest expense coverage ratio, a maximum leverage ratio and a minimum consolidated net worth test. The Company was in compliance with all covenants in respect of the Notes and the New Credit Facilities as of December 31, 1998. NOTE 5 - SUMMARIZED FINANCIAL INFORMATION The following presents summarized financial information of TH USA, a wholly owned subsidiary of THC, and its consolidated subsidiaries, as of December 31, 1998 and March 31, 1998 and for each of the nine months and three months ended December 31, 1998 and 1997. TH USA is the issuer and THC is the guarantor of the Notes. The Company has not presented separate financial statements and other disclosures concerning TH USA because management has determined that such information is not material to holders of the Notes.
December 31, 1998 March 31, 1998 ----------------- -------------- Current assets.................................. 547,692 $354,128 Noncurrent assets............................... 1,480,536 179,556 Current liability due to THC.................... 39,178 28,669 Other current liabilities....................... 201,507 89,197 Noncurrent liability due to THC................. 785,197 216,651 Other noncurrent liabilities.................... 864,176 6,550
Nine Months Ended Three Months Ended ----------------- ------------------ December 31, December 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net revenue...................................... $1,208,205 $638,025 $460,819 $243,611 Gross profit..................................... 542,395 294,308 206,396 112,083 Net income (loss)................................ 59,922 70,483 20,538 37,460
10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) GENERAL In May 1998, the Company acquired its licensed jeanswear, womenswear and Canadian businesses for an aggregate purchase price of $755,760 in cash plus 9,045,930 Ordinary Shares of the Company. The cash portion of the purchase price was funded through a combination of cash on hand, the issuance of debt securities in a public offering, and bank borrowings. The Company has included the results of the Acquired Companies in its consolidated statements of operations from the date of the Acquisition. Because of the significance of the Acquired Companies, management's discussion and analysis is presented on both a pro forma and actual basis. RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31 The following table sets forth the Condensed Consolidated Statements of Operations data as well as the Pro Forma Statements of Operations data (which are disclosed in Note 2 to the Condensed Consolidated Financial Statements) for the nine months ended December 31, as a percentage of net revenue.
Nine Months Ended December 31, ----------------------------------- Pro Forma Actual ----------------- -------------- 1998 1997 1998 1997 ---------- ------- ------ ------ Net revenue............................................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold........................................ 53.5 53.4 53.5 52.4 ----- ----- ----- ----- Gross profit.............................................. 46.5 46.6 46.5 47.6 Depreciation and amortization............................. 4.9 5.6 4.8 3.4 Other SG&A expenses....................................... 22.9 23.5 23.1 24.9 ----- ----- ----- ----- SG&A expenses before special charges...................... 27.8 29.1 27.9 28.3 Special charges........................................... 1.6 -- 1.6 -- ----- ----- ----- ----- Total SG&A expenses....................................... 29.4 29.1 29.5 28.3 ----- ----- ----- ----- Income from operations................................... 17.1 17.5 17.0 19.3 Interest income (expense), net........................... (2.4) (3.6) (2.1) 0.6 ----- ----- ----- ----- Income before taxes...................................... 14.7 13.9 14.9 19.9 Provision for income taxes............................... 4.3 4.2 4.4 6.6 ----- ----- ----- ----- Net income............................................... 10.4 9.7 10.5 13.3 ===== ===== ===== =====
Nine months ended December 31, 1998 (Pro Forma) compared to nine months ended December 31, 1997 (Pro Forma) The following discussion of the Company's results of operations for the nine months ended December 31, 1998 compared to the nine months ended December 31, 1997 is presented on a pro forma basis, assuming the Acquired Companies had been combined with the Company for each of the entire nine month periods. The pro forma financial information is derived by applying pro forma adjustments to the historical financial statements of the Company and the Acquired Companies. The pro forma adjustments consist of (a) the elimination of certain revenues, cost of goods sold and royalty expense, (b) amortization of intangible assets, principally over 40 years, (c) incremental interest and other expenses and (d) applicable income tax effects. These pro forma results are not necessarily indicative of the results that would have occurred had the businesses been combined for the periods indicated. 11 Net revenue increased to $1,264,663 in the nine months ended December 31, 1998 from $949,539 in the corresponding period of fiscal 1998, an improvement of 33.2%. This increase is due to increases in each of the Company's operating divisions, as outlined below.
Nine Months Ended December 31, ------------------------------ 1998 1997 % Increase ---- ---- ---------- Wholesale.............................. $1,050,697 $744,661 41.1% Retail................................. 173,215 161,972 6.9% Licensing.............................. 40,751 30,210 34.9% Other non-recurring.................... -- 12,696 -- ---------- -------- ---- Total.................................. $1,264,663 $949,539 33.2% ========== ======== ====
The Wholesale increase consists of increases in menswear sales of 14.7% (to $601,425 from $524,434), womenswear sales of 138.8% (to $294,276 from $123,256) and childrenswear sales of 59.8% (to $154,996 from $96,971). Each of these improvements is due to volume increases which resulted primarily from increased sales to existing customers. The increased sales to existing customers is principally due to the expansion of the in-store shop and fixtured area program, whereby certain of the Company's customers have increased the amount of square footage where the Company's products are featured. Revenues in the womenswear division increased in part due to the introduction of the junior jeans line in Fall, 1998, while sales in the childrenswear division benefited from the introduction of infants and toddlers in Holiday, 1997. The improvement in the Company's Retail division is due to an increase in the number of stores, partially offset by a decrease in sales at existing stores. At December 31, 1998, the Company operated 82 retail stores as compared to 64 stores at December 31, 1997. Retail stores opened since December 31, 1997 contributed $23,964 of net revenue during the nine months ended December 31, 1998. Revenue from the Licensing division, which consists of licensing royalties and buying agency commissions, increased due to a general increase in sales of existing licensed products and buying agency services and the incremental revenue associated with newly licensed products. Of the increase, $1,711, or 16.2%, was due to products introduced under licenses entered into since December 31, 1997. Other non-recurring revenue consists of sales of Pepe brand product as well as product sales of the jeanswear buying office, each of which will not recur prospectively. Gross profit as a percentage of net revenue decreased to 46.5% in the first nine months of fiscal 1999 from 46.6% in the first nine months of fiscal 1998. This decrease is primarily due to the decreased proportion of revenue from the Retail and Licensing divisions, each of which produces higher margins than the Company's consolidated total. Partially offsetting this decrease, the Wholesale division's margin was improved during fiscal 1999, despite the adverse effect of the sale of certain residual prior season goods through normal channels at margins which were lower than the normal wholesale margin. Selling, general and administrative expenses, before the special charge described below, decreased to 27.8% of net revenue in the first nine months of fiscal 1999 from 29.1% of net revenue in the first nine months of fiscal 1998. The decrease as a percentage of net revenue is primarily due to leveraging certain expenses against the higher revenue base. The increase in expenses to $352,127 in fiscal 1999 from $276,146 in fiscal 1998 is principally due to increased volume related expenses to support the higher revenue as well as increased depreciation and amortization. Included in selling, general and administrative expenses is goodwill amortization of $25,896 and $27,156 in the nine months ended December 31, 1998 and 1997, respectively. During the quarter ended June 30, 1998, the Company recorded a special charge for non-recurring expenses of $19,800, before income taxes, related to the Acquisition. This special charge consists of provisions of $7,000 for the write-off of the fixed assets and operating leases of the Company's specialty stores, $7,000 for redundant MIS equipment, furniture, fixtures and other equipment, $3,800 for severance and other employee costs and $2,000 for the termination of certain vendor contracts. Interest expense, net of interest income, has decreased to $29,758 in the first nine months of fiscal 1999 from $34,387 in the corresponding period of last year. Interest expense includes interest on the debt incurred in connection with the Acquisition. The decrease from fiscal 1998 to fiscal 1999 is primarily due to improved cash flow and, therefore, lower borrowing levels of both the Company and the Acquired Companies. The provision for income taxes has decreased to 29.7% of income before taxes in the nine month period ended December 31, 1998 from 30.2% in the corresponding period last year. This decrease was primarily attributable to the relative level of earnings in the various taxing 12 jurisdictions to which the Company's earnings are subject, together with the effects of the special charges which are tax effected at a higher rate than the Company's weighted average tax rate. Nine months ended December 31, 1998 (Actual) compared to nine months ended December 31, 1997 (Actual) Net revenue increased to $1,216,213 in the nine months ended December 31, 1998 from $644,385 in the corresponding period of fiscal 1998, an improvement of 88.7%. This increase is due to increases in the Company's Wholesale and Retail divisions, partially offset by a decrease in the Licensing division, as outlined below.
Nine Months Ended December 31, ------------------------------------ 1998 1997 % Increase ---- ---- ---------- Wholesale.............................. $1,000,716 $436,265 129.4% Retail................................. 173,215 161,972 6.9% Licensing.............................. 42,282 46,148 (8.4)% ---------- -------- ----- Total.................................. $1,216,213 $644,385 88.7% ========== ======== =====
The Wholesale increase is due to volume increases which resulted from the Acquisition and from increased sales to existing customers. This increase is principally attributed to the change in status of Pepe USA and TH Canada, which contributed to the Company in the form of royalty income for the entire nine month period ended December 31, 1997, compared to a combination of royalty income and wholesale revenue (since the Acquisition) in the nine month period ended December 31, 1998. A comparison of Wholesale revenue components after adjusting for these changes is made in the previous section of Management's Discussion and Analysis. The improvement in the Company's Retail division is due to an increase in the number of stores, partially offset by a decrease in sales at existing stores. At December 31, 1998, the Company operated 82 retail stores as compared to 64 stores at December 31, 1997. Retail stores opened since December 31, 1997 contributed $23,964 of net revenue during the nine months ended December 31, 1998. Revenue from the Licensing division, which consists of licensing royalties and buying agency commissions, decreased due to the change in status of Pepe USA and TH Canada mentioned above offset, in part, by a general increase in sales of existing licensed products and buying agency services and the incremental revenue associated with newly licensed products. For the fiscal 1999 period, $1,711 of the revenue amount was due to products introduced under licenses entered into since December 31, 1997. Gross profit as a percentage of net revenue decreased to 46.5% in the first nine months of fiscal 1999 from 47.6% in the first nine months of fiscal 1998. This decrease is primarily due to the decreased proportion of revenue from the Retail and Licensing divisions following the Acquisition, each of which produce higher margins than the Company's consolidated total. Partially offsetting this decrease, the Wholesale division's margin was improved during fiscal 1999, despite the adverse effect of the sale of certain residual prior season goods through normal channels at margins which were lower than the normal wholesale margin. Selling, general and administrative expenses, before the special charge, decreased to 27.9% of net revenue in the first nine months of fiscal 1999 from 28.3% of net revenue in the first nine months of fiscal 1998. The decrease as a percentage of net revenue is primarily due to leveraging certain expenses against the higher revenue base. The increase in expenses to $339,744 in fiscal 1999 from $182,476 in fiscal 1998 is principally due to increased volume related expenses to support the higher revenue as well as increased depreciation and amortization. Included in selling, general and administrative expenses is goodwill amortization of $23,019 in the nine months ended December 31, 1998. The Company incurred interest expense, net of interest income, of $25,412 in the first nine months of fiscal 1999 and generated net interest income of $4,078 in the corresponding period of last year. Interest expense in the current year includes interest on the debt incurred in connection with the Acquisition. The provision for income taxes has decreased to 29.6% of income before taxes in the nine month period ended December 31, 1998 from 33.1% in the corresponding period last year. This decrease was primarily attributable to the relative level of earnings in the various taxing jurisdictions to which the Company's earnings are subject, together with the effects of the special charges which are tax effected at a higher rate than the Company's weighted average tax rate. 13 THREE MONTHS ENDED DECEMBER 31 The following table sets forth the Condensed Consolidated Statements of Operations data as well as the Pro Forma Statements of Operations data (which are disclosed in Note 2 to the Condensed Consolidated Financial Statements) for the three months ended December 31, as a percentage of net revenue.
Three Months Ended December 31, ------------------------------------ Actual Pro Forma Actual ------ --------- ------ 1998 1997 1998 1997 ---- ---- ---- ---- Net revenue.......................................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold................................... 53.6 54.1 53.6 53.1 ----- ----- ----- ----- Gross profit......................................... 46.4 45.9 46.4 46.9 Depreciation and amortization........................ 4.6 5.1 4.6 2.9 Other SG&A expenses.................................. 21.9 22.1 21.9 22.7 ----- ----- ----- ----- Total SG&A expenses.................................. 26.5 27.2 26.5 25.6 ----- ----- ----- ----- Income from operations............................... 19.9 18.7 19.9 21.3 Interest income (expense), net....................... (2.1) (3.3) (2.1) 0.5 ----- ----- ----- ----- Income before taxes.................................. 17.8 15.4 17.8 21.8 Provision for income taxes........................... 5.3 4.6 5.3 7.0 ----- ----- ----- ----- Net income........................................... 12.5 10.8 12.5 14.8 ===== ===== ===== =====
Three months ended December 31, 1998 (Actual) compared to three months ended December 31, 1997 (Pro Forma) The following is a discussion of the Company's actual results of operations for the quarter ended December 31, 1998 compared to the pro forma quarter ended December 31, 1997, that is, assuming the Acquired Companies had been combined with the Company for the entire quarter ended December 31, 1997. The pro forma financial information is derived by applying pro forma adjustments to the historical financial statements of the Company and the Acquired Companies. The pro forma adjustments consist of (a) the elimination of certain revenues, cost of goods sold and royalty expense, (b) amortization of intangible assets, principally over 40 years, (c) incremental interest and other expenses and (d) applicable income tax effects. These pro forma results are not necessarily indicative of the results that would have occurred had the businesses been combined for the periods indicated. Net revenue increased to $463,233 in the third quarter of fiscal 1999 from $358,962 in the corresponding quarter of fiscal 1998, an improvement of 29.0%. This increase is due to increases in each of the Company's operating divisions, as outlined below.
Three Months Ended December 31, ---------------------------------------- 1998 1997 % Increase ---- ---- ----------- Wholesale................................ $375,475 $273,748 37.2% Retail................................... 72,165 70,871 1.8% Licensing................................ 15,593 11,550 35.0% Other non-recurring...................... -- 2,793 -- -------- -------- ------ Total.................................... $463,233 $358,962 29.0% ======== ======== ======
The Wholesale increase consists of increases in menswear sales of 13.1% (to $214,251 from $189,383), womenswear sales of 146.0% (to $110,375 from $44,865) and childrenswear sales of 28.7% (to $50,849 from $39,500). Each of these improvements is due to volume increases which resulted primarily from increased sales to existing customers. The increased sales to existing customers is principally due to the expansion of the in-store shop and fixtured area program, whereby certain of the Company's customers have increased the amount of square footage where the Company's products are featured. Revenues in the womenswear division increased in part due to the introduction of the junior jeans line in Fall, 1998. The improvement in the Company's Retail division is due to an increase in the number of stores, partially offset by a decrease in sales 14 at existing stores. At December 31, 1998, the Company operated 82 retail stores as compared to 64 stores at December 31, 1997. Retail stores opened since December 31, 1997 contributed $14,145 of net revenue during the quarter ended December 31, 1998. Additionally, fiscal 1998 sales include $5,961 resulting from actions taken to reduce Retail division inventory through channels normally used by the Wholesale division. Revenue from the Licensing division, which consists of licensing royalties and buying agency commissions, increased principally due to a general increase in sales of existing licensed products and buying agency services and the incremental revenue associated with newly licensed products. Of the increase, $1,220, or 30.2%, was due to products introduced under licenses entered into since December 31, 1997. Other non-recurring revenue consists of sales of Pepe brand product as well as product sales of the jeanswear buying office, each of which will not recur prospectively. Gross profit as a percentage of net revenue increased to 46.4% in the third quarter of fiscal 1999 from 45.9% in the third quarter of fiscal 1998. This increase is primarily due to improved Wholesale margins offset, in part, by decreased margins in the Retail division and the decreased proportion of revenue from the Retail and Licensing divisions, each of which produces higher margins than the Company's consolidated total. Selling, general and administrative expenses decreased to 26.5% of net revenue in the third quarter of fiscal 1999 from 27.2% of net revenue in the third quarter of fiscal 1998. The decrease as a percentage of net revenue is primarily due to leveraging certain expenses against the higher revenue base. The increase in expenses to $122,642 in fiscal 1999 from $97,630 in fiscal 1998 is principally due to increased volume related expenses to support the higher revenue as well as increased depreciation and amortization. Included in selling, general and administrative expenses is goodwill amortization of $8,632 and $9,052 in the quarters ended December 31, 1998 and 1997, respectively. Interest expense, net of interest income, has decreased to $9,514 in the third quarter of fiscal 1999 from $11,906 in the corresponding quarter of last year. Interest expense includes interest on the debt incurred in connection with the Acquisition. The decrease from fiscal 1998 to fiscal 1999 is primarily due to improved cash flow and, therefore, lower borrowing levels of both the Company and the Acquired Companies. The provision for income taxes has decreased slightly to 30.1% of income before taxes in the quarter ended December 31, 1998 from 30.2% in the corresponding quarter last year. Three months ended December 31, 1998 (Actual) compared to three months ended December 31, 1997 (Actual) Net revenue increased to $463,233 in the third quarter of fiscal 1999 from $246,104 in the corresponding quarter of fiscal 1998, an improvement of 88.2%. This increase is due to increases in the Company's Wholesale and Retail divisions, partially offset by a decrease in the Licensing division, as outlined below.
Three Months Ended December 31, ---------------------------------- 1998 1997 % Increase ---- ---- ------------ Wholesale.............................. $375,475 $157,561 138.3% Retail................................. 72,165 70,871 1.8% Licensing.............................. 15,593 17,672 (11.8)% -------- -------- ------ Total.................................. $463,233 $246,104 88.2% ======== ======== ======
The Wholesale increase is due to volume increases which resulted from the Acquisition and from increased sales to existing customers. This increase is principally attributed to the change in status of Pepe USA and TH Canada, which contributed to the Company in the form of royalty income for the quarter ended December 31, 1997, compared to wholesale revenue in the quarter ended December 31, 1998. A comparison of Wholesale revenue components after adjusting for these changes is made in the previous section of Management's Discussion and Analysis. The improvement in the Company's Retail division is due to an increase in the number of stores, partially offset by a decrease in sales at existing stores. At December 31, 1998, the Company operated 82 retail stores as compared to 64 stores at December 31, 1997. Retail stores opened since December 31, 1997 contributed $14,145 of net revenue during the quarter ended December 31, 1998. Additionally, fiscal 1998 sales include $5,961 resulting from actions taken to reduce Retail division inventory through channels normally used by the Wholesale division. 15 Revenue from the Licensing division, which consists of licensing royalties and buying agency commissions, decreased due to the change in status of Pepe USA and TH Canada mentioned above offset, in part, by a general increase in sales of existing licensed products and buying agency services and the incremental revenue associated with newly licensed products. For the fiscal 1999 period, $1,220 of the third quarter revenue amount was due to products introduced under licenses entered into since December 31, 1997. Gross profit as a percentage of net revenue decreased to 46.4% in the third quarter of fiscal 1999 from 46.9% in the third quarter of fiscal 1998. This decrease is primarily due to the decreased proportion of revenue from the Retail and Licensing divisions following the Acquisition, each of which produces higher margins than the Company's consolidated total. Selling, general and administrative expenses increased to 26.5% of net revenue in the third quarter of fiscal 1999 from 25.6% of net revenue in the third quarter of fiscal 1998. The increase as a percentage of net revenue is primarily due to goodwill amortization of $8,632 in the quarter ended December 31, 1998 related to the Acquisition offset, in part, by the leveraging of certain expenses against the higher revenue base. The increase in expenses to $122,642 in fiscal 1999 from $62,919 in fiscal 1998 is principally due to increased volume related expenses to support the higher revenue as well as increased depreciation and amortization. The Company incurred interest expense, net of interest income, of $9,514 in the third quarter of fiscal 1999 and generated net interest income of $1,197 in the corresponding quarter of last year. Interest expense in the current year includes interest on the debt incurred in connection with the Acquisition. The provision for income taxes has decreased to 30.1% of income before taxes in the quarter ended December 31, 1998 from 32.1% in the corresponding quarter last year. This decrease was primarily attributable to the relative level of earnings in the various taxing jurisdictions to which the Company's earnings are subject. LIQUIDITY AND CAPITAL RESOURCES The Company's primary ongoing funding requirements are to finance working capital and the continued growth of the business. Principally, this includes the purchase of inventory in anticipation of increased sales of the wholesale and retail divisions as well as capital expenditures related to the expansion of the Company's in-store shop and fixtured area program and additional retail stores. The Company's sources of liquidity are cash on hand, cash from operations and the Company's available credit. Additionally, the Company required financing in May 1998 to acquire its womenswear, jeanswear and Canadian licensees as discussed further below. The Company's cash and cash equivalents balance increased from $157,051 at March 31, 1998, to $189,884 at December 31, 1998, for an overall increase of $32,833. A detailed analysis of the changes in cash and cash equivalents is presented in the Condensed Consolidated Statements of Cash Flows. Capital expenditures were $57,483 during the nine months ended December 31, 1998. Significant capital expenditures included additions related to the Company's in-store shop and fixtured area expansion program. At December 31, 1998, accrued expenses and other current liabilities included $28,042 of open letters of credit for inventory purchased. Additionally, at December 31, 1998, TH USA was contingently liable for unexpired bank letters of credit of $73,678 related to commitments of TH USA to suppliers for the purchase of inventories and leases. On May 8, 1998, the Company, through its wholly owned subsidiaries, acquired its womenswear, jeanswear and Canadian licensees for an aggregate purchase price of $755,760 in cash and 9,045,930 Ordinary Shares of the Company. The cash portion of the purchase price was funded from a combination of debt financing and cash on hand. The debt financing portion of the purchase price consisted of $250,000 of the 2003 Notes, $200,000 of the 2008 Notes and $200,000 of term loan borrowings pursuant to the New Credit Facilities. The Notes were issued by TH USA and guaranteed by THC. Following the announcement of the proposed Acquisition on February 1, 1998, the Company sold U.S. Treasury futures contracts to protect against the potential increase in interest rates between the announcement and the closing date of the Acquisition. These transactions resulted in deferred gains of approximately $3,737 which will be amortized over the respective terms of the Notes to reduce the effective interest rate. The indenture under which the Notes were issued contains covenants that, among other things, restrict the ability of subsidiaries of THC to incur additional indebtedness, restrict the ability of THC and its subsidiaries to incur indebtedness secured by liens or enter into sale and leaseback transactions and restrict the ability of THC and TH USA to engage in mergers or consolidations. The New Credit Facilities, which are guaranteed by THC, consist of an unsecured $250,000 TH USA five-year revolving credit facility, of which up to $150,000 may be used for direct borrowings, and an unsecured $200,000 five-year term credit facility which was borrowed by TH USA in connection with the Acquisition. The revolving credit facility, which accrues interest at varying interest rates, 16 will be available for letters of credit, working capital and other general corporate purposes. There were no direct borrowings outstanding under the revolving credit facility at December 31, 1998. The New Credit Facilities replaced the Company's secured revolving credit agreement, which had been in place since April 1, 1996. The Company's Canadian subsidiary is financed under a separate revolving credit facility under which $940 was outstanding at December 31, 1998. Borrowings under the term loan facility bear interest at varying rates (weighted average rate of 5.81% as of December 31, 1998) and are repayable in quarterly installments as follows: $40,000 in the 12-month period ending March 31, 2000, $50,000 in each of the next two succeeding 12-month periods and $60,000 in the next succeeding 12-month period. The New Credit Facilities contain a number of covenants that, among other things, restrict the ability of subsidiaries of THC to dispose of assets, incur additional indebtedness, create liens on assets, pay dividends or make other payments in respect of capital stock, make investments, loans and advances, engage in transactions with affiliates, enter into sale and leaseback transactions, engage in mergers or consolidations or change the businesses conducted by them. The New Credit Facilities also restrict the ability of THC to create liens on assets or enter into sale and leaseback transactions. Under the New Credit Facilities, subsidiaries of THC may not pay dividends or make other payments in respect of capital stock to THC that in the aggregate exceed 33% of the Company's cumulative consolidated net income, commencing with the fiscal year ended March 31, 1998, less certain deductions. In addition, under the New Credit Facilities, THC and TH USA are required to comply with and maintain specified financial ratios and tests (based on the Company's consolidated financial results), including, without limitation, an interest expense coverage ratio, a maximum leverage ratio and a minimum consolidated net worth test. The Company was in compliance with all covenants in respect of the Notes and the New Credit Facilities as of December 31, 1998. Cash requirements for the remainder of fiscal 1999 and for fiscal 2000 will primarily include working capital and capital expenditures relating to the in- store shop and fixtured area programs and the opening of additional retail stores, including a flagship store in London. The Company expects fiscal 1999 capital expenditures to approximate $100,000, with somewhat higher levels in fiscal 2000 principally due to its growing womens and jeans businesses, which will include the womens dress up collection and junior sportswear. The Company intends to fund such cash requirements for fiscal 1999 and future years from available cash balances, internally generated funds and borrowings available under the New Credit Facilities. The Company believes that these resources will be sufficient to fund its cash requirements for such periods. INFLATION The Company does not believe that the relatively moderate rates of inflation experienced over the last few years in the United States, where it primarily competes, have had a significant effect on its net revenue or profitability. Higher rates of inflation have been experienced in a number of foreign countries in which the Company's products are manufactured but have not had a material effect on the Company's net revenue or profitability. The Company has historically been able to partially offset its cost increases by increasing prices or changing suppliers. EXCHANGE RATES The Company receives United States dollars for substantially all of its product sales, other than those in Canada, and its licensing revenues. Inventory purchases from contract manufacturers throughout the world, other than those in Canada, are almost exclusively denominated in United States dollars; however, purchase prices for the Company's products may be impacted by fluctuations in the exchange rate between the United States dollar and the local currencies of the contract manufacturers, which may have the effect of increasing the Company's cost of goods in the future. During the last three fiscal years, exchange rate fluctuations have not had a material impact on the Company's inventory costs; however, due to the number of currencies involved and the fact that not all foreign currencies react in the same manner against the United States dollar, the Company cannot quantify in any meaningful way the potential effect of such fluctuations on future income. The operations of the Company's Canadian business and certain international licensees are conducted principally in local foreign currencies. The Company therefore has certain exposure to U.S. dollar purchases by its Canadian subsidiary, as well as to rate fluctuations upon conversion of Canadian earnings and foreign royalties into U.S. dollars. The Company attempts to protect against the adverse effects of such fluctuations, where potentially significant, principally through selective use of forward foreign currency contracts. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal years beginning after June 15, 1999. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction 17 and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to the limited use of derivative instruments, the nature of such instruments and the nature of the underlying transactions being hedged, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. YEAR 2000 During the year ended March 31, 1998, the Company initiated a comprehensive program to evaluate and address the impact of the year 2000 on its operations and those of the Acquired Companies in order to ensure that its computer systems properly recognize calendar year 2000. This program included steps to identify each item or element that will require date code remediation and make appropriate modifications to ensure a seamless transition to the year 2000. The Company has now completed the major portion of its internal date remediation activity. The Company is using internal staff resources to accomplish most of this activity and estimates that the cost will not exceed $500. Certain other costs, which will be capitalized, represent investment in new hardware and software systems upgrades, the timing of which was planned to coincide with the integration of the Acquired Companies. Principal among these is a new investment in packaged financial systems software to which the Company and its subsidiaries will convert during 1999. Such costs represent only a nominal percentage of planned capital expenditures. The estimate of costs of the Year 2000 compliance effort and the timetable for internal Year 2000 modifications are management's best estimates. There can be no guarantee that these estimates will prove accurate and actual results could differ from the estimates. Based upon progress to date, however, the Company believes that it is unlikely that actual results would differ significantly from the estimates. The Company has also begun to correspond with significant suppliers, customers, transportation carriers and general service providers whose computer systems' functionality could impact the Company and in particular its ability to schedule forward production and procurement of merchandise from suppliers and to fulfill customer orders. These communications will facilitate coordination of Year 2000 conversions and will additionally permit the Company to determine its exposure to the failure of third parties to address their own Year 2000 issues. Although the Company is not aware of any material issues that would impede its ability to prepare its internal systems for the year 2000, and therefore has not prepared a contingency plan, there can be no assurance that the systems of other companies on which the Company's processes rely will be timely converted, or that a failure to successfully convert by another company, or a conversion that is incompatible with the Company's systems, would not have an adverse impact on the Company's operations. The need for contingency plans in this regard will continue to be assessed. The foregoing commentary should be considered to fall within the coverage of the "Safe Harbor Statement" under the Private Securities Litigation Reform Act of 1995 included in this report. SAFE HARBOR STATEMENT Safe Harbor Statement under the Private Securities Litigation Reform Act of --------------------------------------------------------------------------- 1995. This report contains forward-looking statements within the meaning of - ---- Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are indicated by words or phrases such as "anticipate," "estimate," "project," "management expects," "the Company believes" and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. 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. 18 PART II ITEM 1 LEGAL PROCEEDINGS Saipan Litigation. On January 13, 1999, two actions were filed against the ----------------- Company and other garment manufacturers and retailers asserting claims that garment factories located in Saipan, which allegedly supply product to the Company and other co-defendants, engage in unlawful practices relating to the recruitment and employment of foreign workers. One action, filed in the California superior court located in San Francisco (the "San Francisco Action"), was brought by a union and three public interest groups alleging unfair competition and false advertising by the Company and others. It seeks equitable relief, unspecified amounts for restitution and disgorgement of profits relating to the allegedly wrongful conduct, interest and an award of fees to the plaintiffs' attorneys. The other, an action seeking class action status filed in federal court for the Central District of California (the "Central District Action"), was brought on behalf of an alleged class consisting of the Saipanese factory workers. This complaint alleges claims under RICO, the Alien Tort Claims Act, federal anti-peonage and indentured servitude statutes and state and international law. It seeks equitable relief and an unspecified amount of damages, including treble and punitive damages, interest and an award of fees to the plaintiffs' attorneys. In addition, the same law firm that filed the San Francisco Action and the Central District Action has filed an action seeking class action status in the Federal Court in Saipan (the "Saipan Action"). This action is brought on behalf of Saipanese garment factory workers against the Saipanese factories and alleges violation of federal and Saipanese wage and employment laws. The Company is not a defendant in this action. The Company has not yet responded to either the San Francisco Action or the Central District Action, and is reviewing their allegations, as well as the allegations of the Saipan Action. Shareholder Derivative Litigation. On February 2, 1998, February 12, 1998 and --------------------------------- February 17, 1998, three alleged holders of Ordinary Shares filed purported derivative actions in New York State court on behalf of the Company against the members of the Board of Directors. The actions were later consolidated and an amended complaint was served on May 29, 1998. The amended complaint alleged that the Board's approval of the Acquisition constituted a breach of fiduciary duty and corporate waste, and sought equitable relief and damages in favor of the Company, and an award of fees to the plaintiffs' attorneys. On June 15, 1998, the Company and its directors moved to dismiss the consolidated action on several grounds. On December 9, 1998, the Court dismissed the action, ruling that the British Virgin Islands, the Company's place of incorporation, is the appropriate forum in which to litigate these derivative claims. In January 1999, the plaintiffs filed a notice of appeal with respect to the Court's ruling. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11. Computation of Net Income Per Ordinary Share 27. Financial Data Schedule (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the three months ended December 31, 1998. 19 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: Tommy Hilfiger Corporation Date: February 10, 1999 By: /s/ Joel J. Horowitz ----------------- ---------------- Joel J. Horowitz Chief Executive Officer and President Tommy Hilfiger Corporation Date: February 10, 1999 By: /s/ Joseph Scirocco ----------------- --------------- Joseph Scirocco Principal Accounting Officer Tommy Hilfiger Corporation 20 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 11. Computation of Net Income Per Ordinary Share 27. Financial Data Schedule EX-11 2 COMPUTATION OF NET INCOME PER ORDINARY SHARE EXHIBIT 11 TOMMY HILFIGER CORPORATION COMPUTATION OF NET INCOME PER ORDINARY SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED ----------------- ------------------ DECEMBER 31, DECEMBER 31, --------------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- FINANCIAL STATEMENT PRESENTATION BASIC Weighted average shares outstanding 45,807 37,333 46,944 37,387 ======== ======= ======= ======= Net Income $127,484 $85,782 $57,759 $36,381 ======== ======= ======= ======= Per share amount $ 2.78 $ 2.30 $ 1.23 $ .97 ======== ======= ======= ======= DILUTED Weighted average shares outstanding 45,807 37,333 46,944 37,387 Net effect of dilutive stock options based on the treasury stock method using average market price 488 585 334 511 -------- ------- ------- ------- Total 46,295 37,918 47,278 37,898 ======== ======= ======= ======= Net Income $127,484 $85,782 $57,759 $36,381 ======== ======= ======= ======= Per share amount $ 2.75 $ 2.26 $ 1.22 $ .96 ======== ======= ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TOMMY HILFIGER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1999 DEC-31-1998 189,884 0 146,098 0 238,268 612,426 221,228 0 2,121,024 212,092 619,214 0 0 470 1,039,642 2,121,024 0 1,216,213 0 650,182 384,956 0 0 181,075 53,591 127,484 0 0 0 127,484 2.78 2.75
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