<PAGE>
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 JUNE 30, 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 JUNE 30,
1998: 46,797,313
<PAGE>
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
June 30, 1998
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and
March 31, 1998............................................... 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997.......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 1998 and 1997.......................... 5
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the three months ended June 30, 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................................................. 17
Item 2 Changes in Securities and Use of Proceeds......................... 17
Item 6 Exhibits and Reports on Form 8-K.................................. 17
Signatures.................................................................. 18
</TABLE>
2
<PAGE>
PART I
ITEM 1 - FINANCIAL STATEMENTS
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) AS OF JUNE 30, AS OF MARCH 31,
1998 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 51,574 $157,051
Accounts receivable.................................................... 127,032 104,732
Inventories............................................................ 263,556 150,947
Other current assets................................................... 45,995 25,554
---------- --------
Total current assets................................................ 488,157 438,284
Property and equipment, at cost, less accumulated
depreciation and amortization........................................... 202,549 160,089
Intangible and other assets, net of accumulated amortization............... 1,305,375 19,637
---------- --------
Total Assets........................................................ $1,996,081 $618,010
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings.................................................. $ 8,172 $ --
Accounts payable....................................................... 11,584 16,201
Accrued expenses and other current liabilities......................... 155,837 76,197
---------- --------
Total current liabilities........................................... 175,593 92,398
Long-term debt............................................................. 649,151 --
Deferred tax and other liabilities......................................... 254,532 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 46,797,313 and 37,557,934, respectively...... 468 376
Capital in excess of par value......................................... 558,178 173,416
Retained earnings...................................................... 358,170 345,195
Cumulative translation adjustment...................................... (11) 75
---------- --------
Total shareholders' equity.......................................... 916,805 519,062
---------- --------
Commitments and contingencies
Total Liabilities and Shareholders' Equity.......................... $1,996,081 $618,010
========== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED) FOR THE THREE MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
<S> <C> <C>
Net revenue........................................................... $287,656 $173,735
Cost of goods sold.................................................... 152,988 92,032
-------- --------
Gross profit.......................................................... 134,668 81,703
Depreciation and amortization......................................... 16,832 7,128
Other selling, general and administrative expenses.................... 76,034 49,516
Special charges....................................................... 19,800 --
-------- --------
Total expenses........................................................ 112,666 56,644
Income from operations................................................ 22,002 25,059
Interest expense...................................................... 7,122 179
Interest income....................................................... 1,701 1,749
-------- --------
Income before income taxes............................................ 16,581 26,629
Provision for income taxes............................................ 3,606 9,122
-------- --------
Net income............................................................ $ 12,975 $ 17,507
======== ========
Earnings per share:
Basic earnings per share.............................................. $ .30 $ .47
======== ========
Weighted average shares outstanding................................... 43,643 37,262
======== ========
Diluted earnings per share............................................ $ .29 $ .46
======== ========
Weighted average shares and share equivalents outstanding............. 44,307 37,880
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) FOR THE THREE MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income................................................................ $ 12,975 $ 17,507
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization........................................... 16,832 7,128
Deferred taxes.......................................................... (929) --
Provision for special charges........................................... 19,800 --
Changes in operating assets and liabilities
Decrease (increase) in assets
Accounts receivable................................................... 35,042 (14,132)
Inventories........................................................... (46,184) (31,567)
Other assets.......................................................... 5,983 1,680
Increase (decrease) in liabilities
Accounts payable...................................................... (21,800) 37
Accrued expenses and other liabilities................................ (15,340) (1,721)
--------- --------
Net cash provided by (used in) operating activities..................... 6,379 (21,068)
--------- --------
Cash flows from investing activities
Purchases of property and equipment....................................... (13,959) (11,152)
Purchases of investments.................................................. -- (20,000)
Acquisition of businesses, net of cash acquired......................... (736,508) --
--------- --------
Net cash used in investing activities................................... (750,467) (31,152)
--------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt................................ 649,151 --
Payments on long-term debt.............................................. (10,000) (68)
Proceeds from the exercise of employee stock options.................... 4,634 2,441
Tax benefit from exercise of stock options.............................. 2,705 588
Short-term bank borrowings (repayments)................................. (7,794) 27,227
Other................................................................... (85) (5)
--------- --------
Net cash provided by financing activities.............................. 638,611 30,183
--------- --------
Net decrease in cash................................................... (105,477) (22,037)
Cash and cash equivalents, beginning of period............................. 157,051 109,908
--------- --------
Cash and cash equivalents, end of period................................... $ 51,574 $ 87,871
========= ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN
EXCESS CUMULATIVE TOTAL
ORDINARY OF PAR RETAINED TRANSLATION SHAREHOLDERS'
SHARES VALUE EARNINGS ADJUSTMENT EQUITY
------ ----- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
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....................... 12,975 (86) 12,889
Issuance of shares
in connection with the Acquisition....... 90 377,425 377,515
Exercise of employee stock options......... 2 4,632 4,634
Tax benefits from exercise of stock........
options.............................. 2,705 2,705
---- -------- -------- ------ --------
BALANCE, JUNE 30, 1998 (UNAUDITED)............... $468 $558,178 $358,170 $ (11) $916,805
==== ======== ======== ====== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
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 three-month period ended June 30, 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 three-month periods ended June 30,
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.
During the three months ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. The
Company's comprehensive income consists of net income, adjusted by 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
<PAGE>
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:
<TABLE>
<S> <C>
Cash................................................................................... $ 19,252
Accounts receivable.................................................................... 57,343
Inventory.............................................................................. 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
==========
</TABLE>
Pro forma results
The pro forma combined condensed results of operations of the Company and the
Acquired Companies for the three months ended June 30, 1998 and 1997, after
giving effect to certain pro forma adjustments, are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net revenue........................................... $336,106 $254,644
Gross profit.......................................... 156,859 118,450
Income from operations................................ 31,810 35,720
Net income............................................ 16,708 17,230
Diluted earnings per share............................ $ .35 $ .37
Weighted average shares and share
equivalents outstanding........................... 47,289 46,926
</TABLE>
The pro forma results of operations, before special, acquisition-related
charges of $19,800, for the three months ended June 30, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net income................................................ $28,588 $17,230
Diluted earnings per share................................ $ .60 $ .37
</TABLE>
The foregoing pro forma statement of operations data assumes that the
Acquisition took place as of the beginning of each quarter. 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.
8
<PAGE>
On a combined pro forma basis, components of the Company's net revenue for
the three months ended June 30, 1998 and 1997 would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Wholesale:
Menswear............................................ $175,279 $151,078
Womenswear.......................................... 71,518 31,430
Childrenswear....................................... 36,991 21,293
-------- --------
Total Wholesale....................................... 283,788 203,801
Retail................................................ 41,235 36,153
Licensing............................................. 11,083 7,488
Other non-recurring................................... -- 7,202
-------- --------
Total net revenue..................................... $336,106 $254,644
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Finished Goods................................. $258,625 $148,488
Raw Materials.................................. 4,931 2,459
-------- --------
$263,556 $150,947
======== ========
</TABLE>
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. The New Credit Facilities replaced the
Company's secured revolving credit agreement which had been in place since April
1, 1996.
Borrowings under the term loan facility bear interest at varying rates
(6.375% as of June 30, 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.
9
<PAGE>
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, and for the period ended, June 30, 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 June 30, 1998
and March 31, 1998 and for each of the three months ended June 30, 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.
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
--------------- ----------------
<S> <C> <C>
Current assets............................................ $ 471,741 $ 354,128
Noncurrent assets......................................... 1,479,770 179,556
Current liability due to THC.............................. 42,490 28,669
Other current liabilities................................. 167,485 89,197
Noncurrent liability due to THC........................... 767,302 216,651
Other noncurrent liabilities.............................. 899,150 6,550
Three months ended June 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net revenue............................................... $285,147 $172,056
Gross profit.............................................. 128,997 78,657
Net income (loss)......................................... (3,941) 15,840
</TABLE>
10
<PAGE>
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
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) as a
percentage of net revenue.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
Pro Forma Actual
--------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue.................................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................. 53.3 53.5 53.2 53.0
----- ----- ----- -----
Gross profit................................................... 46.7 46.5 46.8 47.0
Depreciation and amortization.................................. 6.1 6.8 5.9 4.1
Other SG&A expenses............................................ 25.2 25.7 26.4 28.5
----- ----- ----- -----
SG&A expenses before special charges........................... 31.3 32.5 32.3 32.6
Special charges................................................ 5.9 -- 6.9 --
----- ----- ----- -----
Total SG&A expenses............................................ 37.2 32.5 39.2 32.6
----- ----- ----- -----
Income from operations......................................... 9.5 14.0 7.6 14.4
Interest income (expense), net................................. (2.9) (4.3) (1.8) 0.9
----- ----- ----- -----
Income before taxes............................................ 6.6 9.7 5.8 15.3
Provision for income taxes..................................... 1.6 2.9 1.3 5.2
----- ----- ----- -----
Net income..................................................... 5.0 6.8 4.5 10.1
===== ===== ===== =====
</TABLE>
Three months ended June 30, 1998 (Pro Forma) compared to three months
ended June 30, 1997 (Pro Forma)
The following discussion of the Company's results of operations for the
quarter ended June 30, 1998 compared to the quarter ended June 30, 1997 is
presented on a pro forma basis, assuming the Acquired Companies had been
combined with the Company for each of the entire quarters. 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
<PAGE>
Net revenue increased to $336,106 in the first quarter of fiscal 1999 from
$254,644 in the corresponding quarter of fiscal 1998, an improvement of 32.0%.
This increase is due to increases in each of the Company's operating divisions,
as outlined below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997 % Increase
---- ---- -----------
<S> <C> <C> <C>
Wholesale......................................... $283,788 $203,801 39.2%
Retail............................................ 41,235 36,153 14.1%
Licensing......................................... 11,083 7,488 48.0%
Other non-recurring............................... -- 7,202 --
-------- -------- ----
Total............................................. $336,106 $254,644 32.0%
======== ======== ====
</TABLE>
The Wholesale increase consists of increases in menswear sales of 16.0% (to
$175,279 from $151,078), womenswear sales of 127.5% (to $71,518 from $31,430)
and childrenswear sales of 73.7% (to $36,991 from $21,293). 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.
The improvement in the Company's Retail division is due to an increase in the
number of stores offset by a decrease in sales of existing stores. At June 30,
1998, the Company operated 72 retail stores as compared to 57 stores at June 30,
1997. Retail stores opened since June 30, 1997 contributed $9,021 of net
revenue during the quarter ended June 30, 1998.
Revenue from the Licensing division, which consists of licensing royalties
and buying agency commissions, increased due to the incremental revenue
associated with newly licensed products and a general increase in sales of
existing licensed products and buying agency services. Of the increase,
approximately $1,017, or 28.3%, was due to products introduced under licenses
entered into since June 30, 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 46.7% in the first
quarter of fiscal 1999 from 46.5% in the first quarter of fiscal 1998. This
increase is mainly due to the increased revenue of the Licensing division, which
produces higher margins than the Company's consolidated total.
Selling, general and administrative expenses, before the special charge
described below, increased to $105,249, or 31.3% of net revenue in the first
quarter of fiscal 1999, from $82,730, or 32.5% of net revenue in the first
quarter of fiscal 1998. The increase in expenses 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 June 30, 1998 and 1997, respectively, recorded in connection with
the Acquisition. The decrease in selling, general and administrative expenses
as a percentage of net revenue is primarily due to leveraging certain expenses
against the higher revenue base.
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 $9,767 in the
first quarter of fiscal 1999 from $11,035 in the corresponding quarter of last
year. Interest expense includes interest on the debt incurred in connection
with the Acquisition. The decrease from 1998 to 1999 is primarily due to
improved cash flow of both the Company and the Acquired Companies.
The provision for income taxes has decreased to 24.2% of income before taxes
in the quarter ended June 30, 1998 from 30.2% 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, together with the effects of the special charges which are tax effected
at a higher rate than the Company's weighted average tax rate.
12
<PAGE>
Three months ended June 30, 1998 (Actual) compared to three months ended June
30, 1997 (Actual)
Net revenue increased to $287,656 in the first quarter of fiscal 1999 from
$173,735 in the corresponding quarter of fiscal 1998, an improvement of 65.6%.
This increase is due to increases in each of the Company's operating divisions,
as outlined below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
1998 1997 % Increase
---- ---- ----------
<S> <C> <C> <C>
Wholesale..................................... $233,807 $125,444 86.4%
Retail........................................ 41,235 36,153 14.1%
Licensing..................................... 12,614 12,138 3.9%
-------- -------- ----
Total......................................... $287,656 $173,735 65.6%
======== ======== ====
</TABLE>
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 quarter
ended June 30, 1997, compared to a combination of royalty income and wholesale
revenue (since the Acquisition) in the quarter ended June 30, 1998. A
comparison of Wholesale revenue components after adjusting for these changes is
made in the pro forma 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 offset by a decrease in sales of existing stores. At June 30,
1998, the Company operated 72 retail stores as compared to 57 stores at June 30,
1997. Retail stores opened since June 30, 1997 contributed $9,021 of net
revenue during the quarter ended June 30, 1998.
Revenue from the Licensing division, which consists of licensing royalties
and buying agency commissions, increased due to the incremental revenue
associated with newly licensed products and a general increase in sales of
existing licensed products and buying agency services. Approximately $1,017 of
the fiscal 1999 revenue amount was due to products introduced under licenses
entered into since June 30, 1997. Offsetting this increase, in part, was the
inclusion of royalties from Pepe USA and TH Canada for a full quarter in fiscal
1998 as opposed to a partial quarter in fiscal 1999.
Gross profit as a percentage of net revenue decreased to 46.8% in the first
quarter of fiscal 1999 from 47.0% in the first quarter of fiscal 1998. This
decrease is mainly due to the decreased proportion of revenue of the Licensing
division following the Acquisition, which produces higher margins than the
Company's consolidated total.
Selling, general and administrative expenses, before the special charge,
increased to $92,866, or 32.3% of net revenue in the first quarter of fiscal
1999, from $56,644, or 32.6% of net revenue in the first quarter of fiscal 1998.
The increase in expenses 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 $5,755 in the quarter ended June 30, 1998 recorded in
connection with the Acquisition. The decrease in selling, general and
administrative expenses as a percentage of net revenue is primarily due to
leveraging certain expenses against the higher revenue base.
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.
The Company incurred interest expense, net of interest income, of $5,421 in
the first quarter of fiscal 1999 and generated net interest income of $1,570 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 21.7% of income before taxes
in the quarter ended June 30, 1998 from 34.3% 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, 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
<PAGE>
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 menswear in-store shop and childrenswear fixtured area programs 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 decreased from $157,051 at
March 31, 1998 to $51,574 at June 30, 1998. This represented an overall
decrease of $105,477 due primarily to cash used in connection with the
Acquisition offset, in part, by the issuance of long-term debt. A detailed
analysis of the changes in cash and cash equivalents is presented in the
Condensed Consolidated Statements of Cash Flows.
Net cash provided by operating activities during the first quarter of fiscal
1999 was $6,379, an increase of $27,447 over the fiscal 1998 amount of $21,068
of cash used in operating activities. This amount is primarily made up of cash
generated by net earnings offset, in part, by an increase in working capital.
The increase in working capital was due principally to an increase in inventory
due to the Acquisition.
Capital expenditures were $13,959 during the three months ended June 30,
1998. Significant capital expenditures included additions related to the
Company's in-store shop and fixtured area expansion program.
At June 30, 1998, accrued expenses and other current liabilities included
$34,504 of open letters of credit for inventory purchased. Additionally, at
June 30, 1998, TH USA was contingently liable for unexpired bank letters of
credit of $72,329 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 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 US 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, will be available for letters of credit, working capital and
other general corporate purposes. The New Credit Facilities replaced the
Company's secured revolving credit agreement, which had been in place since
April 1, 1996.
Borrowings under the term loan facility bear interest at varying rates (6.375%
as of June 30, 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.
14
<PAGE>
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, and for the period ended, June 30, 1998.
Cash requirements in fiscal 1999 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 flagship stores. The
amount of total committed capital expenditures at June 30, 1998, including
expenditures relating to these projects, was approximately $3,500. The Company
expects fiscal 1999 capital expenditures (including those of the Acquired
Companies) to approximate $100,000. 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 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 Company does not engage in hedging
activities with respect to such exchange rate risk.
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 rate fluctuations upon conversion of Canadian
earnings and foreign royalties. The Company attempts to protect against the
adverse effects of such fluctuations, where potentially significant, principally
through selective use of forward foreign currency contracts. No such contracts
were in effect as of June 30, 1998.
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 and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use, the nature of such derivative
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.
15
<PAGE>
YEAR 2000
The Company has assessed the ability of its computerized information systems
to process transactions relating to years 2000 and beyond. While certain
modifications are required, the Company expects to achieve necessary
modifications on a timely basis at a cost which will not be material to
operations. There can be no assurance, however, that the systems of other
companies on which the Company's processes rely will be timely converted, or
that a failure to successfully convert by another company, or a conversion that
is incompatible with the Company's systems, would not have an adverse impact on
the Company's operations.
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.
16
<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
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 alleges that the Board's approval of the
Acquisition constitutes a breach of fiduciary duty and corporate waste, and
seeks 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. The motion to
dismiss remains pending.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 8, 1998, 9,045,930 of the Company's Ordinary Shares were issued to
Pepe Jeans London Corporation as part of the purchase price for the Acquisition.
These shares were issued without registration under the Securities Act of 1933,
as amended, in reliance upon the exemptions set forth in Sections 4(1) and 4(2)
thereof.
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
During the quarter ended June 30, 1998, the Company filed Current Reports on
Form 8-K (i) dated April 1, 1998 reporting matters under Item 5 thereof and
including consolidated financial statements of the Company for each of the three
years in the period ended March 31, 1997 and condensed consolidated financial
statements of the Company for the nine months ended December 31, 1997, (ii)
dated May 5, 1998 reporting matters under Item 5 thereof and (iii) dated May 8,
1998 reporting matters under Item 2 thereof.
17
<PAGE>
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: August 12, 1998 By: /s/ Joel J. Horowitz
--------------- ----------------
Joel J. Horowitz
Chief Executive Officer and President
Tommy Hilfiger Corporation
Date: August 12, 1998 By: /s/ Joseph Scirocco
--------------- ---------------
Joseph Scirocco
Principal Accounting Officer
Tommy Hilfiger Corporation
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ -----------
Number
------
11. Computation of Net Income Per Ordinary Share 20
27. Financial Data Schedule 21
19
<PAGE>
EXHIBIT 11
TOMMY HILFIGER CORPORATION
COMPUTATION OF NET INCOME PER ORDINARY SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JUNE 30,
--------
1998 1997
---- ----
<S> <C> <C>
FINANCIAL STATEMENT PRESENTATION
BASIC
Weighted average shares outstanding 43,643 37,262
======= =======
Net Income $12,975 $17,507
======= =======
Per share amount $ .30 $ .47
======= =======
DILUTED
Weighted average shares outstanding 43,643 37,262
Net effect of dilutive stock options based on the
treasury stock method using average
market price
664 618
------- -------
Total 44,307 37,880
======= =======
Net Income $12,975 $17,507
======= =======
Per share amount $ .29 $ .46
======= =======
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TOMMY
HILFIGER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998
AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 51,574
<SECURITIES> 0
<RECEIVABLES> 127,032
<ALLOWANCES> 0
<INVENTORY> 263,556
<CURRENT-ASSETS> 488,157
<PP&E> 202,549
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,996,081
<CURRENT-LIABILITIES> 175,593
<BONDS> 649,151
0
0
<COMMON> 468
<OTHER-SE> 916,337
<TOTAL-LIABILITY-AND-EQUITY> 1,996,081
<SALES> 0
<TOTAL-REVENUES> 287,656
<CGS> 0
<TOTAL-COSTS> 152,988
<OTHER-EXPENSES> 118,087
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,581
<INCOME-TAX> 3,606
<INCOME-CONTINUING> 12,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,975
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
