<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement [_]CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TOMMY HILFIGER CORPORATION
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Ordinary Shares, par value $.01 per share ("Company Shares")
(2) Aggregate number of securities to which transaction applies:
9,045,930 shares of Company Shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
The amount on which the filing fee of $250,375 is calculated was
determined pursuant to Rule 0-11(a)(4) and (c)(1) of the Securities
Exchange Act of 1934, as amended, by multiplying 1/50th of 1% by an amount
equal to the sum of (x) $755,760,000.00, the cash portion of the
consideration in the transaction described herein and (y) the product of
(A) $54.8438, the average of the high and the low sale prices of Company
Shares as reported on the New York Stock Exchange on February 18, 1998,
and (B) 9,045,930, the number of Company Shares to be issued in connection
with the transaction.
(4) Proposed maximum aggregate value of transaction:
$1,251,872,723
(5) Total fee paid:
$250,375
[X]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[LOGO OF TOMMY HILFIGER]
March 30, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Tommy Hilfiger Corporation (the "Company") to be held at the Royal Pavillion
Hotel, Porters, St. James, Barbados, on Tuesday, May 5, 1998, at 8:00 a.m.,
local time.
At the Special Meeting you will be asked to vote on a proposal to approve a
Stock Purchase Agreement, dated as of January 31, 1998, providing for the
purchase (the "Acquisition") by the Company of Pepe Jeans USA, Inc. ("Pepe
USA"), the Company's U.S. licensee for womenswear and jeanswear, and its
buying office affiliate from Pepe Jeans London Corporation ("PJLC"). The Stock
Purchase Agreement contemplates that Pepe USA will purchase the Company's
Canadian licensee immediately following the Acquisition with funds provided by
PJLC. The purchase price for the Acquisition consists of approximately $756
million in cash and 9,045,930 ordinary shares of the Company.
The Company believes that the integration of these fast-growing businesses
will add powerful platforms for the re-acceleration of the Company's revenue
and earnings per share growth rates. The Acquisition will afford the Company
increased control over the brand as it seeks to establish TOMMY HILFIGER(R) as
the premier global lifestyle brand. In addition, the Acquisition will result
in the Company's founding partners and senior management once again becoming
significant shareholders in the Company. The shares they will receive in
connection with the Acquisition are subject to a two-year restriction on
transfers, reflecting a long-term ownership commitment which will more closely
align the interests of the Company's management and shareholders.
Because of the interests of certain officers and directors in the proposed
Acquisition, a special committee of independent directors of the Board of
Directors of the Company considered and assisted in the negotiation of the
transaction. The Special Committee has received the written opinion of
Wasserstein Perella & Co., Inc., the Special Committee's independent financial
advisor, to the effect that as of the date thereof the consideration to be
paid in the proposed Acquisition is fair to the Company from a financial point
of view. In addition, the Board of Directors of the Company has received the
written opinion of its financial advisor, Morgan Stanley & Co. Incorporated,
to the effect that as of the date thereof the consideration to be paid in the
proposed Acquisition is fair from a financial point of view to the Company.
Copies of Wasserstein Perella's and Morgan Stanley's written opinions, which
describe the assumptions made, matters considered and limitations on the
review undertaken by each financial advisor, are annexed to the accompanying
Proxy Statement and should be read in their entirety.
THE SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS AND THE FULL BOARD OF
DIRECTORS HAVE EACH UNANIMOUSLY DETERMINED THAT THE TERMS OF THE STOCK
PURCHASE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE ADVISABLE AND
IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
---
APPROVAL OF THE STOCK PURCHASE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
We urge you to review carefully the accompanying Notice of Special Meeting
of Shareholders and the Proxy Statement, including the annexes thereto.
Whether or not you expect to attend the Special Meeting, please complete, sign
and date the enclosed proxy and return it as promptly as possible.
Sincerely,
/s/ Silas K.F. Chou /s/ Simon Murray
Silas K.F. Chou Simon Murray
Chairman Chairman of the
Special Committee
<PAGE>
TOMMY HILFIGER CORPORATION
6/F, PRECIOUS INDUSTRIAL CENTRE
18 CHEUNG YUE STREET
CHEUNG SHA WAN, KOWLOON, HONG KONG
TEL: 852-2745-7798
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD TUESDAY, MAY 5, 1998
----------------
To the Shareholders of Tommy Hilfiger Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of Tommy Hilfiger Corporation, a British Virgin Islands corporation
(the "Company"), will be held at the Royal Pavillion Hotel, Porters, St.
James, Barbados, on Tuesday, May 5, 1998 at 8:00 a.m., local time, for the
following purposes:
1. To consider and act upon a proposal (the "Acquisition Proposal") to
approve the Stock Purchase Agreement, dated as of January 31, 1998, by and
among the Company, Tommy Hilfiger U.S.A., Inc., Tommy Hilfiger (Eastern
Hemisphere) Limited and Pepe Jeans London Corporation and the transactions
contemplated thereby, including the issuance of 9,045,930 Ordinary Shares,
par value $.01 per share, of the Company ("Company Shares") pursuant to the
Stock Purchase Agreement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on Friday, March 27,
1998, as the record date for the determination of the shareholders entitled to
notice of, and to vote at, the Special Meeting or any adjournments or
postponements thereof. The Acquisition Proposal requires the affirmative vote
of a majority of the votes cast by the holders of the Company Shares voting at
the Special Meeting, provided that holders of at least 50% of the votes
entitled to be cast thereon are represented at the Special Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
---
APPROVAL OF THE ACQUISITION PROPOSAL AT THE SPECIAL MEETING.
Information regarding the proposal is contained in the accompanying Proxy
Statement and the annexes thereto, which form a part of this Notice.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
IT IS IMPORTANT THAT YOUR INTERESTS BE REPRESENTED AT THE SPECIAL MEETING.
By Order of the Board of
Directors
/s/ Lawrence T.S. Lok
LAWRENCE T.S. LOK
Secretary
March 30, 1998
<PAGE>
TOMMY HILFIGER CORPORATION
PROXY STATEMENT
----------------
This Proxy Statement is being furnished to holders of ordinary shares, par
value $.01 per share ("Company Shares"), of Tommy Hilfiger Corporation, a
British Virgin Islands corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board"
or the "Board of Directors") for use at the Special Meeting of the
shareholders of the Company to be held on Tuesday, May 5, 1998, at the Royal
Pavillion Hotel, Porters, St. James, Barbados, commencing at 8:00 a.m., local
time, and at any adjournment or postponement thereof (the "Special Meeting").
At the Special Meeting, holders of Company Shares ("Company Shareholders")
as of the close of business on Friday, March 27, 1998 will be asked to
consider and vote on a proposal (the "Acquisition Proposal") to approve the
Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of January
31, 1998, by and among the Company, Tommy Hilfiger U.S.A., Inc., a wholly
owned subsidiary of the Company ("TH USA"), Tommy Hilfiger (Eastern
Hemisphere) Limited, a wholly owned subsidiary of the Company ("THEH"), and
Pepe Jeans London Corporation ("PJLC"), and the transactions contemplated
thereby. The Stock Purchase Agreement provides for TH USA to purchase from
PJLC all of the outstanding shares of common stock, without par value ("Pepe
USA Shares"), of the Company's U.S. womenswear and jeanswear licensee, Pepe
Jeans USA, Inc. ("Pepe USA"), and for THEH to purchase from PJLC all of the
outstanding ordinary shares, $1.00 par value per share (the "Pepe Far East
Shares"), of Pepe USA's buying office, TJ Far East Limited ("Pepe Far East"
and, together with its subsidiaries and Pepe USA, "Pepe Jeans") (such stock
purchases, the "Acquisition"). Under the Stock Purchase Agreement, the total
purchase price for the Pepe USA Shares and the Pepe Far East Shares is
$755,760,000 in cash (the "Cash Consideration") plus 9,045,930 Company Shares
(the "Purchase Price Shares"). The Stock Purchase Agreement contemplates that,
immediately following the Acquisition, Pepe USA will purchase from Lawvest
Holdings Inc. ("Lawvest") all of the outstanding shares of Tomcan Investments
Inc. ("Tomcan"), the parent corporation of Tommy Hilfiger Canada Inc., the
Company's Canadian licensee ("TH Canada" and, together with Tomcan, "Tommy
Canada," and, collectively with Pepe Jeans, the "Acquired Companies"), with
funds provided by PJLC using proceeds from the Cash Consideration (the "Canada
Purchase") under a Share Purchase Agreement dated as of January 26, 1998
between Pepe USA and Lawvest (the "Canada Purchase Agreement").
The Company Shares are listed on the New York Stock Exchange, Inc. (the
"NYSE"). On January 30, 1998, the last trading day prior to the public
announcement of the execution of the Stock Purchase Agreement, the closing
price of the Company Shares on the NYSE Composite Tape was $43 9/16. On March
26, 1998, the last trading day prior to the printing of this Proxy Statement,
the closing price of the Company Shares on the NYSE Composite Tape was $59
1/4. Company Shareholders should obtain current quotes for the Company Shares.
This Proxy Statement, the Letter to Shareholders, the Notice of the Special
Meeting and the form of proxy for use at the Special Meeting are first being
mailed to Company Shareholders on or about March 30, 1998. Any Company
Shareholder who has given his, her or its proxy may revoke it at any time
prior to its use. See "The Special Meeting--Voting of Proxies."
----------------
The date of this Proxy Statement
is March 30, 1998.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT DOES
NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION IN WHICH OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION IN SUCH
JURISDICTION. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROXY STATEMENT OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME AFTER THE DATE OF THIS PROXY STATEMENT.
FORWARD-LOOKING STATEMENTS
This Proxy Statement includes and incorporates by reference forward-looking
statements based on current plans and expectations of the Company, Pepe Jeans
and Tommy Canada relating to, among other matters, analyses of value,
forecasts of future results, and estimates of amounts that are not yet
determinable. Such forward-looking statements are contained in the sections
entitled "Summary," "The Proposed Acquisition--Reasons for the Acquisition"
and "--Recommendations of the Special Committee and the Board of Directors;
Information and Factors Considered," "Description of Pepe Jeans and Tommy
Canada" and other sections of this Proxy Statement. Such statements involve
risks and uncertainties which may cause actual future activities and results
of operations to be materially different from that suggested in this Proxy
Statement, including, among others, the factors disclosed in Item 1 of the
Company's Report on Form 10-K for the fiscal year ended March 31, 1997, the
Company's dependence on its current management, competition in the apparel
industry and the Company's ability to achieve synergies and growth
projections, as well as other factors described elsewhere in this Proxy
Statement.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at its principal office at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048, and Chicago Regional Office, Citicorp Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates, or, with respect to
certain of such material, through the Commission's World Wide Web site
(http://www.sec.gov). The Company Shares are listed on the NYSE, and such
reports, proxy statements and other information concerning the Company are
available for inspection and copying at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
Statements contained herein concerning the provisions of any document are
necessarily summaries of such documents and not complete, and, in each
instance, reference is made to the copy of such document attached to this
Proxy Statement or filed with the Commission. Each such statement is qualified
in its entirety by such reference.
COMPANY SHAREHOLDERS WHO HAVE ANY QUESTIONS ABOUT EXECUTING, CHANGING OR
REVOKING A PROXY SHOULD CONTACT THE FOLLOWING:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
CALL TOLL FREE (800) 322-2885
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (Commission File No. 1-11226) are hereby incorporated by
reference in this Proxy Statement:
1. the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1997, filed with the Commission on June 27, 1997 (the "1997 Company
Form 10-K");
2. the Company's Proxy Statement for the October 27, 1997 Annual Meeting of
Company Shareholders;
3. the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 30, 1997, September 30, 1997 and December 31, 1997, filed
with the Commission on August 5, 1997, November 5, 1997 and February 9,
1998, respectively; and
4. the Company's Current Report on Form 8-K dated January 31, 1998, filed
with the Commission on February 5, 1998.
All reports and other documents filed with the Commission by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement and prior to the Special Meeting shall be deemed
to be incorporated by reference herein and to be a part hereof from the
respective dates of filing of such reports and other documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
to the extent that a statement contained herein or in any other subsequently
filed document that is also incorporated or deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WITH RESPECT TO THE
COMPANY THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE
DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS OR HEREIN) ARE
AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY STATEMENT IS
DELIVERED UPON WRITTEN OR ORAL REQUEST TO THE FOLLOWING:
TOMMY HILFIGER U.S.A., INC.
25 WEST 39TH STREET
NEW YORK, NEW YORK 10018
ATTN: INVESTOR RELATIONS
TELEPHONE: (212) 840-8888
IN ORDER TO ENSURE TIMELY DELIVERY, ANY REQUEST FOR DOCUMENTS SHOULD BE MADE
BY APRIL 28, 1998.
3
<PAGE>
EXCHANGE RATES
All currency amounts in this Proxy Statement are expressed in U.S. dollars
("US$" or "$") unless it is specifically indicated that a different currency
is being used. Certain portions of this Proxy Statement contain amounts which
have been converted from Canadian dollars ("C$") into US$ using specified
exchange rates. Use of these exchange rates is not a representation that the
converted C$ amounts actually represent the corresponding US$ amounts or that
C$ could be converted into US$ at the exchange rates used or at any other
exchange rate. The table below lists the noon buying rate, certified by the
Federal Reserve Bank of New York for customs purposes, in New York City, New
York for cable transfers in C$ (the "Noon Buying Rate") at fiscal year-end for
each of the years 1993 through 1997 and at December 31, 1997 and 1996. The
table also indicates the average, the high and the low Noon Buying Rates for
each of these periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
----------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1997 1996 1995 1994 1993
-------- -------- ------ ------ ------ ------ ------
End of period.............. 1.4288 1.3697 1.3835 1.3635 1.3993 1.3838 1.2573
Average for period*........ 1.3894 1.3644 1.3634 1.3613 1.3815 1.3177 1.2334
High for period............ 1.4398 1.3822 1.3835 1.3998 1.4238 1.3838 1.2885
Low for period............. 1.3357 1.3310 1.3310 1.3285 1.3410 1.2562 1.1799
</TABLE>
- --------
* The average for the period was calculated by averaging the Noon Buying Rate
on the last business day of each month during the relevant period.
During the period from January 1, 1998 to March 25, 1998, the high Noon
Buying Rate was C$1.4637 and the low Noon Buying Rate was C$1.4075. The
closing spot rate for C$ in the United States on March 25, 1998, the most
recent practicable date prior to the printing of this Proxy Statement, was
US$1 to C$1.4103.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD-LOOKING STATEMENTS................................................ 2
AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 3
EXCHANGE RATES............................................................ 4
INDEX OF DEFINED TERMS.................................................... 7
SUMMARY................................................................... 8
THE SPECIAL MEETING....................................................... 17
Date, Place and Time.................................................... 17
Matters to Be Considered at the Special Meeting......................... 17
Record Date; Vote Required; Voting at the Meeting....................... 17
Voting of Proxies....................................................... 17
Solicitation of Proxies................................................. 18
THE PROPOSED ACQUISITION.................................................. 19
General................................................................. 19
Background of the Acquisition........................................... 19
Reasons for the Acquisition............................................. 24
Recommendations of the Special Committee and the Board of Directors;
Information and Factors Considered..................................... 25
Opinion of the Company's Financial Advisor.............................. 28
Opinion of the Special Committee's Financial Advisor.................... 31
Accounting Treatment.................................................... 35
Certain U.S. Federal Income Tax Consequences............................ 36
Management of the Company Following the Acquisition..................... 36
Interests of Certain Persons in the Acquisition; Potential Conflicts of
Interest............................................................... 36
Regulatory Approvals.................................................... 37
Financing of the Acquisition............................................ 37
No Dissenters' Rights................................................... 38
Federal Securities Laws Consequences; Stock Transfer Restrictions....... 38
Certain Litigation...................................................... 38
THE STOCK PURCHASE AGREEMENT.............................................. 39
General................................................................. 39
Purchase Price.......................................................... 39
Restrictions on Transfer of Shares; Registration Rights................. 39
Non-Competition Agreement............................................... 40
Termination of Pepe International License and Amendment of Pepe European
License................................................................ 40
Covenants............................................................... 41
Representations and Warranties.......................................... 43
Conditions to the Acquisition........................................... 43
Indemnification......................................................... 45
AIHL Guarantee.......................................................... 45
Fees and Expenses....................................................... 46
Termination of the Stock Purchase Agreement; Effect of Termination...... 46
Amendment and Waiver.................................................... 46
THE CANADA PURCHASE AGREEMENT............................................. 47
MARKET PRICE AND DIVIDEND INFORMATION..................................... 48
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY.................. 49
SELECTED HISTORICAL FINANCIAL INFORMATION OF PEPE JEANS................... 51
PEPE JEANS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 53
SELECTED HISTORICAL FINANCIAL INFORMATION OF TOMMY CANADA................. 58
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TOMMY CANADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 60
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................... 64
DESCRIPTION OF PEPE JEANS AND TOMMY CANADA................................. 69
Pepe Jeans............................................................... 69
Tommy Canada............................................................. 70
SECURITY OWNERSHIP OF THE COMPANY.......................................... 73
OTHER MATTERS.............................................................. 74
SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS................................. 74
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
Annex A -- Stock Purchase Agreement, dated as of January 31, 1998, by and
among Tommy Hilfiger Corporation, Tommy Hilfiger U.S.A., Inc.,
Tommy Hilfiger (Eastern Hemisphere) Limited and Pepe Jeans London
Corporation...................................................... A-1
Annex B -- Opinion of Morgan Stanley & Co. Incorporated, dated
January 31, 1998........................................................ B-1
Annex C -- Opinion of Wasserstein Perella & Co., Inc., dated January 31,
1998.................................................................... C-1
</TABLE>
6
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
1997 Company Form 10-K...................................................... 3
Acquired Companies.......................................................... 1
Acquisition................................................................. 1
Acquisition Proposal........................................................ 1
Aggregate Value............................................................. 29
Agreements.................................................................. 25
AIHL........................................................................ 19
AIHL Guarantee.............................................................. 23
Allen & Company............................................................. 21
AMVESCAP.................................................................... 73
Anasta...................................................................... 39
Antitrust Division.......................................................... 37
Bentley Trust Guarantee..................................................... 23
Blackwatch.................................................................. 39
Board or Board of Directors................................................. 1
C$.......................................................................... 4
Canada Credit Agreement..................................................... 62
Canada Purchase............................................................. 1
Canada Purchase Agreement................................................... 1
Canadian GAAP............................................................... 58
Canadian Liabilities........................................................ 45
Canadian License............................................................ 19
Cash Consideration.......................................................... 1
Chadbourne & Parke.......................................................... 21
Closing..................................................................... 39
Closing Date................................................................ 40
Commission.................................................................. 2
Company..................................................................... 1
Company Articles............................................................ 17
Company Memorandum.......................................................... 17
Company Shareholders........................................................ 1
Company Shares.............................................................. 1
Comparable Companies........................................................ 33
Consideration............................................................... 28
Continuing Affiliates....................................................... 42
Credit Agreement............................................................ 56
DCF......................................................................... 33
Debt Securities............................................................. 38
Directors Option Plan....................................................... 74
EBIT........................................................................ 29
EBITDA...................................................................... 29
Enterprise Purchase Price................................................... 34
Enterprise Value............................................................ 33
Equity Market Value......................................................... 33
EPS......................................................................... 33
Equitable................................................................... 73
Exchange Act................................................................ 2
FTC......................................................................... 37
Gadwal...................................................................... 36
goodwill.................................................................... 64
Guaranteed Parties.......................................................... 45
Holders..................................................................... 39
HSR Act..................................................................... 37
IBES........................................................................ 29
</TABLE>
<TABLE>
<S> <C>
Lawvest..................................................................... 1
L.C. Agreement.............................................................. 62
Leading Companies........................................................... 33
Lock-Up Agreement........................................................... 23
Morgan Stanley.............................................................. 20
Noon Buying Rate............................................................ 4
NFY......................................................................... 33
Non-Competition Agreement................................................... 23
NYSE........................................................................ 1
operating earnings.......................................................... 37
Other Companies............................................................. 33
Peer Group.................................................................. 29
P/E......................................................................... 29
Pepe Europe................................................................. 21
Pepe European License....................................................... 21
Pepe European License Amendment............................................. 23
Pepe Far East............................................................... 1
Pepe Far East Shares........................................................ 1
Pepe International License.................................................. 20
Pepe Jeans.................................................................. 1
Pepe Material Adverse Effect................................................ 42
Pepe United States License.................................................. 20
Pepe USA.................................................................... 1
Pepe USA Shares............................................................. 1
PJLC........................................................................ 1
PJLC Affiliates............................................................. 39
Proxy Statement............................................................. 8
Purchase Price Shares....................................................... 1
Record Date................................................................. 17
Registration Rights Agreement............................................... 23
Retained Liabilities........................................................ 45
Retained Note............................................................... 41
Securities Act.............................................................. 37
Selected Transactions....................................................... 34
Special Committee........................................................... 21
Special Meeting............................................................. 1
Sportswear Holdings......................................................... 36
Stock Purchase Agreement.................................................... 1
TH Canada................................................................... 1
TH USA...................................................................... 1
THEH........................................................................ 1
THLI........................................................................ 20
Tomcan...................................................................... 1
Tommy Canada................................................................ 1
Tommy Jeanswear............................................................. 53
Tommy Men's Jeanswear....................................................... 53
Tommy Women's Jeanwear...................................................... 53
Tommy Womenswear............................................................ 53
US$ or $.................................................................... 4
U.S. GAAP................................................................... 58
Wachtell Lipton............................................................. 20
Wasserstein Perella......................................................... 21
Wasserstein Perella Letter Agreement........................................ 35
Westleigh................................................................... 36
</TABLE>
7
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement and the Annexes hereto (this "Proxy Statement"). This summary
is not intended to be complete and is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere or
incorporated by reference in this Proxy Statement. Company Shareholders are
urged to read and consider carefully all of the information contained or
incorporated by reference in this Proxy Statement, including the Annexes.
Capitalized terms used in this summary that have not previously been defined
are defined elsewhere in this Proxy Statement. See "Index of Defined Terms."
THE COMPANY
The Company, through its subsidiaries, designs, sources and markets men's
sportswear and childrenswear under the TOMMY HILFIGER(R) trademark. Through a
range of strategic licensing agreements, the Company continues to expand its
product lines to offer a broader array of apparel, accessories, footwear and
fragrance for men, women and children, as well as a home furnishings
collection. The Company's products can be found in leading department and
specialty stores throughout the United States, Canada, Europe, Mexico, Japan,
Hong Kong, Central and South America and, commencing Spring 1998, other Far
East locations. The principal executive offices of the Company are located at
6/F, Precious Industrial Centre, 18 Cheung Yue Street, Cheung Sha Wan, Kowloon,
Hong Kong, and its telephone number is 852-2745-7798.
PEPE JEANS (SEE PAGE 69)
Pepe USA has exclusive United States rights to develop, source and market
men's, women's and girls' jeanswear and jeans-related apparel, including
women's and girls' casualwear, bearing the TOMMY JEANS(R) and TOMMY HILFIGER(R)
trademarks pursuant to a license granted by the Company in August 1995. Pepe
USA markets its products principally through in-store shops and fixtured areas
in leading department stores and through leading specialty stores. Pepe USA
will be launching the TOMMY JEANS(R) women's line, which will include jeanswear
and jeans-related apparel for young women, in Fall 1998. Pepe Far East and its
subsidiaries perform buying agency services for womenswear and jeanswear under
the TOMMY HILFIGER(R) and TOMMY JEANS(R) trademarks for both Pepe USA and the
Company's third-party distributors outside the United States. The principal
executive offices of Pepe USA are located at 485 Fifth Avenue, New York, New
York 10017 and its telephone number is 212-681-6433.
TOMMY CANADA (SEE PAGE 70)
Tommy Canada has exclusive Canadian rights to source, manufacture and
distribute apparel bearing the TOMMY HILFIGER(R) and TOMMY JEANS(R) trademark,
including men's sportswear and athleticwear, boys' sportswear, women's and
girls' casualwear, and men's, women's and girls' jeanswear, pursuant to a
license granted by the Company in 1990. Tommy Canada markets TOMMY HILFIGER(R)
and TOMMY JEANS(R) products principally through leading specialty stores and
through in-store shops and fixtured areas in leading department stores. The
principal executive offices of Tommy Canada are located at 7077, avenue du
Parc, Suite #502, Montreal, Quebec, Canada H3N 1X7 and its telephone number is
514-278-6000.
SPECIAL MEETING AND VOTE REQUIRED (SEE PAGE 17)
The Special Meeting will be held on Tuesday, May 5, 1998, at 8:00 a.m., local
time, at the Royal Pavillion Hotel, Porters, St. James, Barbados. At the
Special Meeting, Company Shareholders will consider and vote upon a proposal to
approve the Stock Purchase Agreement and the transactions contemplated thereby.
Each Company Shareholder of record at the close of business on Friday, March
27, 1998 will be entitled to cast one vote per share at the Special Meeting. As
of the Record Date, there were 37,557,934 Company Shares outstanding and
8
<PAGE>
entitled to vote. The affirmative vote of a majority of the votes cast by
Company Shareholders voting at the Special Meeting is required to approve the
proposal, provided that holders of at least 50% of the votes entitled to be
cast thereon are represented at the Special Meeting.
THE ACQUISITION (SEE PAGE 19)
In the Acquisition, the Company, through its wholly owned subsidiaries, will
purchase from PJLC all of the outstanding Pepe USA Shares and Pepe Far East
Shares for an aggregate purchase price of $755,760,000 in cash plus 9,045,930
Company Shares. Immediately following the Acquisition, Pepe USA will purchase
all of the outstanding shares of Tomcan, the parent of TH Canada, with funds
provided by PJLC.
REASONS FOR THE ACQUISITION (SEE PAGE 24)
The Company believes that the acquisition of the U.S. womenswear and
jeanswear businesses and the Canadian business will enhance shareholder value
by providing significant strategic, financial and other benefits:
.BRAND DEVELOPMENT
Combining the major core components of its business under one corporate
umbrella will afford the Company increased control over the TOMMY
HILFIGER(R) brand and greater leverage with its department store
customers and suppliers. The Company believes these factors are becoming
increasingly important in the current global lifestyle brand business
environment, particularly in light of the recent trends toward
consolidation of the Company's competitors as well as its department
store customers.
.OPPORTUNITY FOR ACCELERATED GROWTH
The Company believes the integration of these established high-growth,
profitable business lines into the Company offers an excellent and unique
opportunity to re-accelerate the Company's growth rate in both revenue
and earnings.
.POTENTIAL FOR EARNINGS ACCRETION
The Acquisition is expected to be meaningfully accretive in the first
full year of combined operations, before giving effect to a one-time pre-
tax charge of approximately $15 million to $20 million expected to be
taken in the first quarter of fiscal 1999.
.MANAGEMENT OWNERSHIP
The Acquisition will result in the Company's founding partners and
senior-most management, Messrs. Silas K.F. Chou, Lawrence S. Stroll,
Thomas J. Hilfiger and Joel J. Horowitz, once again becoming significant
shareholders in the Company through their beneficial ownership interests
in PJLC, which will own approximately 19% of the outstanding shares of
the Company following the Acquisition.
.SEAMLESS INTEGRATION
Given the close working relationships between the Company and each of
Pepe Jeans and Tommy Canada as well as the Company's divisional operating
structure, the Company believes the integration of the womenswear,
jeanswear and Canadian businesses should be virtually seamless.
RECOMMENDATIONS TO SHAREHOLDERS (SEE PAGE 25)
Because of the interests of certain officers and directors in the proposed
Acquisition, a special committee of independent directors of the Board of
Directors considered and assisted in the negotiation of the transaction. THE
SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDED THAT THE BOARD OF DIRECTORS APPROVE
THE ACQUISITION. The full Board of Directors of the Company unanimously
determined that the Stock Purchase Agreement and the transactions contemplated
thereby are advisable and in the best interests of the Company and its
shareholders. THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ACQUISITION PROPOSAL.
9
<PAGE>
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 28 AND 31)
In connection with the Acquisition, Morgan Stanley served as financial
advisor to the Company and Wasserstein Perella served as financial advisor to
the Special Committee. Morgan Stanley has delivered a written opinion to the
Board of Directors dated January 31, 1998 that, as of the date of the opinion,
the consideration to be paid in the Acquisition is fair from a financial point
of view to the Company. Wasserstein Perella has delivered a written opinion to
the Special Committee dated January 31, 1998 that, as of the date of the
opinion, the consideration to be paid in the Acquisition is fair to the Company
from a financial point of view. Copies of Morgan Stanley's and Wasserstein
Perella's written opinions, which describe the assumptions made, matters
considered and limitations on the review undertaken by each financial advisor,
are annexed to the Proxy Statement and should be read in their entirety.
CONDITIONS TO THE ACQUISITION (SEE PAGE 43)
The Acquisition will not be completed unless a number of conditions are
met, including:
.Approval of the Acquisition Proposal at the Special Meeting
.Receipt of all requisite regulatory approvals and specified contractual
consents
.Receipt by the Company of financing for the Acquisition on reasonably
satisfactory terms
. Satisfaction of all conditions to consummation of the Canada Purchase by
Pepe USA, other than payment for and delivery of the Tomcan shares
.Approval for listing by the NYSE of the Purchase Price Shares
LOCK-UP, REGISTRATION RIGHTS AND NON-COMPETITION AGREEMENTS (SEE PAGE 39)
PJLC and certain of its affiliates have agreed, with certain exceptions, that
they will not sell or transfer any of the Company Shares received in the
Acquisition for two years thereafter. Following the two-year period, such
holders will have certain rights to require the Company to register their
shares for sale.
Mr. Silas K.F. Chou, Chairman of the Boards of Directors of the Company and
PJLC, and Mr. Lawrence S. Stroll, a director and executive officer of the
Company and a director and Group Chief Executive Officer of PJLC, have agreed
to enter into an four-year agreement not to compete in the United States or
Canada with the businesses engaged in by Pepe USA prior to the Acquisition.
ACCOUNTING TREATMENT (SEE PAGE 35)
The Acquisition is expected to be accounted for as a purchase for financial
accounting purposes.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION; POTENTIAL CONFLICTS OF
INTEREST (SEE PAGE 36)
Certain officers and directors of the Company have interests in the
transaction that are different from and in addition to the interests of Company
Shareholders generally which may create conflicts of interest. PJLC is
indirectly owned by affiliates of the Chao family (including Messrs. Silas K.F.
Chou, Chairman of the Board of the Company, and Ronald K.Y. Chao, a director of
the Company), Lawrence S. Stroll, a director and executive officer of the
Company, Thomas J. Hilfiger, the Honorary Chairman of the Board and principal
designer of the Company, and Joel J. Horowitz, Chief Executive Officer and a
director of the Company. Mr. Stroll and his descendants also indirectly own all
of the beneficial interest in Tommy Canada. Messrs. Benjamin M.T. Ng, a
director and executive officer of the Company, and Lester M.Y. Ma, a director
of the Company, may have certain economic interests based on the performance of
PJLC's parent and/or certain of its affiliates. Each of these
10
<PAGE>
individuals also is a director and/or officer of PJLC and/or certain of its
affiliates. Under Messrs. Hilfiger's and Horowitz's employment arrangements,
they receive formula compensation based on net sales or operating earnings,
respectively, of the Company. As a result of the Acquisition, the Company's net
sales and operating earnings are expected to increase substantially.
The Special Committee and the full Board of Directors were aware of these
interests and took them into account in approving the Stock Purchase Agreement
and the transactions contemplated thereby.
NO DISSENTERS' RIGHTS
Under British Virgin Islands law, Company Shareholders have no right to an
appraisal of the value of their shares in connection with the Acquisition.
SUMMARY HISTORICAL FINANCIAL INFORMATION (SEE PAGE 49)
Set forth below is summary historical financial information. The summary
financial information should be read in conjunction with the historical
financial statements and related notes thereto of the Company, Pepe Jeans and
Tommy Canada incorporated herein by reference or included elsewhere in this
Proxy Statement. See "Available Information," "Incorporation of Certain
Documents by Reference," "Selected Historical Financial Information of the
Company," "Selected Historical Financial Information of Pepe Jeans," "Selected
Historical Financial Information of Tommy Canada" and "Index to Financial
Statements."
The summary historical financial information of the Company for the five
years ended March 31, 1997, and of Pepe Jeans and Tommy Canada for the three
years ended March 31, 1997, set forth below has been derived from audited
financial statements. The summary historical financial information of the
Company and Pepe Jeans as of and for the nine months ended December 31, 1997
and 1996, and the summary historical financial information of Tommy Canada as
of and for the nine months ended December 31, 1996, has been derived from
unaudited financial statements. The summary historical financial information of
Tommy Canada as of and for the nine months ended December 31, 1997 has been
derived from audited financial statements.
11
<PAGE>
TOMMY HILFIGER CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
----------------------- --------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ----------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue(a).......... $644,385 $491,235 $661,688 $478,131 $320,985 $227,201 $138,638
Cost of goods sold...... 337,671 255,954 344,884 258,419 174,584 127,053 81,502
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 306,714 235,281 316,804 219,712 146,401 100,148 57,136
Selling, general and
administrative
expenses............... 182,476 141,145 190,976 132,270 85,954 58,702 33,181
-------- -------- -------- -------- -------- -------- --------
Income from operations. 124,238 94,136 125,828 87,442 60,447 41,446 23,955
Interest income
(expense).............. 4,078 3,860 5,420 4,958 3,010 320 (1,129)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. 128,316 97,996 131,248 92,400 63,457 41,766 22,826
Provision for income
taxes.................. 42,534 33,931 44,866 30,900 22,742 16,422 8,220
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 85,782 $ 64,065 $ 86,382 $ 61,500 $ 40,715 $ 25,344 $ 14,606
======== ======== ======== ======== ======== ======== ========
Earnings per share
Basic(b)............... $ 2.30 $ 1.73 $ 2.33 $ 1.72 $ 1.16 $ 0.80 $ 0.55
======== ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding........... 37,333 37,015 37,059 35,767 34,963 31,779 26,394
======== ======== ======== ======== ======== ======== ========
Diluted(b)............. $ 2.26 $ 1.69 $ 2.28 $ 1.65 $ 1.12 $ 0.77 $ 0.55
======== ======== ======== ======== ======== ======== ========
Weighted average shares
and share equivalents
outstanding........... 37,918 37,838 37,885 37,241 36,346 32,836 26,394
======== ======== ======== ======== ======== ======== ========
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- --------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ----------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $148,911 $119,659 $109,908 $127,743 $ 86,031 $ 50,867 $ 18,671
Working capital......... 331,746 261,952 270,667 238,439 165,261 110,589 53,748
Total assets............ 575,452 429,804 463,085 358,622 239,493 190,378 84,704
Short-term borrowings... 9,323 5,301 5,980 13,755 13,487 10,319 8,068
Long-term debt.......... -- 1,581 1,510 1,789 2,064 2,341 --
Shareholders' equity.... 488,416 372,781 397,464 301,338 209,024 161,715 68,700
</TABLE>
- --------
(a) On October 1, 1995, the Company entered into the Pepe United States License
with the parent of Pepe USA, for the manufacture, sale and distribution in
the United States of men's, women's and girls' jeanswear and jeans related
apparel (which includes women's and girls' casualwear) bearing the TOMMY
JEANS(R) and TOMMY HILFIGER(R) registered trademarks. Included in net
revenue is royalty income of $13,311 and $5,894 for the nine months ended
December 31, 1997 and 1996, respectively, and $9,963 and $1,915 in the
fiscal years ended March 31, 1997 and 1996, respectively. Net revenue
includes denim product sales prior to entering into this license of $12,370
and $9,104 during the fiscal years ended March 31, 1996 and 1995,
respectively. Amounts for prior years are not material.
(b) Earnings per share data have been restated to be in accordance with
Statement of Financial Accounting Standards No. 128 (Earnings Per Share).
12
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED COMBINED(A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
----------------------- ---------------------------------------------------
1997 1996 1997(B) 1996 1995 1994 1993
----------- ----------- -------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues(c)(d)...... $278,445 $158,267 $234,920 $ 89,029 $75,807 $89,408 $72,819
Cost of goods sold...... 150,673 98,091 146,948 61,875 48,697 55,037 47,273
-------- -------- -------- -------- ------- ------- -------
Gross profit........... 127,772 60,176 87,972 27,154 27,110 34,371 25,546
Selling, general and
administrative ex-
penses................. 65,198 38,366 69,046 35,657 26,710 31,729 27,960
-------- -------- -------- -------- ------- ------- -------
Income (loss) from
operations............ 62,574 21,810 18,926 (8,503) 400 2,642 (2,414)
Interest expense, net... 838 1,278 1,650 1,543 1,533 641 608
-------- -------- -------- -------- ------- ------- -------
Income (loss) before
income taxes.......... 61,736 20,532 17,276 (10,046) (1,133) 2,001 (3,022)
Provision for income 24,977 4,074 2,113 400 338 335 892
taxes.................. -------- -------- -------- -------- ------- ------- -------
Net income (loss)...... $ 36,759 $ 16,458 $ 15,163 $(10,446) $(1,471) $ 1,666 $(3,914)
======== ======== ======== ======== ======= ======= =======
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- ---------------------------------------------------
1997 1996 1997(B) 1996 1995 1994 1993
----------- ----------- -------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments.................. $ 5,325 $ 3,360 $ 2,092 $ 2,407 $ 221 $ 446 $ 3,256
Working capital......... 56,279 30,212 27,717 21,373 16,753 21,402 29,694
Total assets............ 141,155 98,332 106,507 55,993 43,906 48,890 45,497
Short-term borrowings... 13,228 24,716 16,665 11,939 10,376 7,439 3,925
Long-term debt.......... 58,634 48,310 48,384 43,079 17,500 17,500 17,500
Shareholders' equity
(deficiency)........... 34,244 3,205 1,931 (13,355) 7,595 9,108 11,187
</TABLE>
- --------
(a) The information presented reflects the financial statements of Pepe USA and
Pepe Far East, which have been combined due to their common ownership. All
material intercompany transactions and balances have been eliminated.
(b) During the year ended March 31, 1997, Pepe USA recorded a restructuring
charge of $3,590, which is included in selling, general and administrative
expenses, related to the discontinuance of the PEPE(R) jeans product line.
(c) Net revenues include sales of the discontinued PEPE(R) jeans product line
as follows: $4,821 and $28,426 in the nine months ended December 31, 1997
and 1996, respectively, and $33,289, $56,646, $69,126, $79,769 and $57,969
in the fiscal years ended March 31, 1997, 1996, 1995, 1994 and 1993,
respectively. Net revenues include $3,686 and $2,877 for the nine months
ended December 31, 1997 and 1996, respectively, and $5,188, $4,355, $6,681,
$9,639 and $14,850 for the fiscal years ended March 31, 1997, 1996, 1995,
1994 and 1993, respectively, related to the wholesale sale of products to
distributors and buying agency commissions on PEPE(R) products, which are
not expected to recur prospectively.
(d) On October 1, 1995, Pepe USA was assigned the Pepe United States License
for the manufacture, sale and distribution in the United States of men's,
women's and girls' jeanswear and jeans related apparel (which includes
women's and girls' casualwear) bearing the TOMMY JEANS(R) and TOMMY
HILFIGER(R) registered trademarks. Net revenues include $264,726 and
$125,899 in the nine months ended December 31, 1997 and 1996, respectively,
and $194,647 and $28,028 in the fiscal years ended March 31, 1997 and 1996,
respectively, of sales of products related to this license.
13
<PAGE>
TOMCAN INVESTMENTS INC. AND TOMMY HILFIGER CANADA INC.(A)
(AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(PREPARED IN ACCORDANCE WITH CANADIAN GAAP EXCEPT AS NOTED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
-------------------- ----------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- ----------- -------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................... C$70,063 C$33,929 C$50,297 C$29,330(b) C$17,627 C$11,931 C$8,746
Cost of sales........... 37,269 19,797 29,858 18,642 11,010 7,066 4,949
-------- -------- -------- -------- -------- -------- -------
Gross profit........... 32,794 14,132 20,439 10,688 6,617 4,865 3,797
Selling, general and
administrative
expenses............... 14,608 9,097 14,388 8,765 5,319 4,059 3,230
-------- -------- -------- -------- -------- -------- -------
Income from operations. 18,186 5,035 6,051 1,923 1,298 806 567
Other expense........... 899 407 491 810 560 177 223
-------- -------- -------- -------- -------- -------- -------
Income before income
taxes................. 17,287 4,628 5,560 1,113 738 629 344
Provision for income
taxes.................. 6,585 1,758 2,309 503 306 210 94
-------- -------- -------- -------- -------- -------- -------
Net income............. C$10,702 C$ 2,870 C$ 3,251 C$ 610 C$ 432 C$ 419 C$ 250
======== ======== ======== ======== ======== ======== =======
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------- ----------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- ----------- -------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ C$ 318 C$ 756 C$ 550 C$ 185 C$ 138 C$ -- C$ 56
Working capital......... 13,113 3,437 2,677 870 1,156 1,300 620
Total assets............ 34,931 22,832 27,795 18,068 10,463 6,706 4,823
Short-term borrowings... 1,337 9,164 11,131 11,195 5,245 3,211 2,292
Long-term debt.......... 9,570 -- -- -- -- -- --
Shareholders' equity.... 10,703 5,725 6,106 2,855 2,245 1,863 1,493
FINANCIAL DATA (IN ACCORDANCE
WITH U.S. GAAP):
Net income.............. C$10,420 C$ 2,870 C$ 3,251 C$ 610 C$ 432 C$ 419 C$ 250
Total assets............ 31,874 22,832 27,795 18,068 10,463 6,706 4,823
Redeemable preferred
stock.................. -- 750 750 750 750 750 750
Shareholders' equity.... 7,646 4,975 5,356 2,105 1,495 1,113 743
</TABLE>
- --------
(a) Tomcan was incorporated on February 28, 1997 and, on April 1, 1997,
acquired the outstanding shares of TH Canada. Tomcan is a non-operating
entity and has no operating subsidiary other than TH Canada. The total
assets and shareholders' equity of Tomcan are not material. Therefore, the
above table includes the results of Tomcan for the nine month period ended
December 31, 1997 and the results of TH Canada for each of the remaining
periods.
(b) In fiscal 1996, TH Canada sold the net assets associated with the PEPE(R)
jeans line to a related party at net book value. Included in the results of
operations for the fiscal year ended March 31, 1996 are sales of C$3.7
million related to this line.
14
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION (SEE PAGE 63)
The following summary unaudited pro forma financial information has been
derived from the application of pro forma adjustments to the combined
historical financial statements of the Company, Pepe Jeans and Tommy Canada.
The summary unaudited pro forma financial information gives effect to the
Acquisition as if it had occurred on (1) December 31, 1997 for purposes of the
unaudited pro forma balance sheet data and (2) April 1, 1996 for purposes of
the unaudited pro forma statements of operations data for the year ended March
31, 1997 and the nine months ended December 31, 1997. The summary unaudited pro
forma financial information should be read in conjunction with the unaudited
pro forma combined financial statements and the related notes thereto included
elsewhere in this Proxy Statement. The summary unaudited pro forma financial
information does not purport to present the financial position or results of
operations of the Company had the Acquisition occurred on the dates specified,
nor is it necessarily indicative of the results of operations that may be
achieved in the future. See "Unaudited Pro Forma Combined Financial
Statements."
The exchange rates applied for purposes of preparing the summary unaudited
pro forma financial information were US$1 to C$1.43 for the December 31, 1997
balance sheet data, and US$1 to C$1.39 and US$1 to C$1.36 for the statement of
operations data for the nine months ended December 31, 1997 and the fiscal year
ended March 31, 1997, respectively.
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION OF
THE COMPANY, PEPE JEANS AND TOMMY CANADA COMBINED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS FISCAL YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------ -----------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue........................................... $950,367 $908,382
Cost of goods sold.................................... 507,254 500,061
-------- --------
Gross profit......................................... 443,113 408,321
Selling, general and administrative expenses.......... 276,852 297,552
-------- --------
Income from operations............................... 166,261 110,769
Interest expense, net................................. 33,749 46,003
-------- --------
Income before income taxes........................... 132,512 64,766
Provision for income taxes............................ 39,737 7,891
-------- --------
Net income........................................... $ 92,775 $ 56,875
======== ========
Earnings per share
Basic................................................ $ 2.00 $ 1.23
======== ========
Weighted average shares outstanding.................. 46,379 46,105
======== ========
Diluted.............................................. $ 1.98 $ 1.21
======== ========
Weighted average shares and share equivalents out- 46,964 46,931
standing............................................ ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
<S> <C>
BALANCE SHEET DATA:
ASSETS
Current Assets
Cash.............................................................. $ 64,939
Accounts receivable............................................... 141,598
Inventory......................................................... 215,840
Other............................................................. 27,289
----------
Total current assets............................................. 449,666
Property and equipment, net........................................ 190,007
Other assets....................................................... 1,329,632
----------
Total assets..................................................... $1,969,305
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank borrowings........................................ $ 23,487
Accounts payable.................................................. 28,806
Accrued expenses and other current liabilities.................... 95,889
----------
Total current liabilities........................................ 148,182
Long-term debt..................................................... 700,000
Deferred tax liability............................................. 251,600
Other liabilities.................................................. 3,591
Shareholders' equity
Common stock...................................................... 464
Capital in excess of par value.................................... 547,676
Retained earnings................................................. 317,797
Cumulative translation adjustment................................. (5)
----------
Total shareholders' equity......................................... 865,932
----------
Total liabilities and shareholders' equity....................... $1,969,305
==========
</TABLE>
16
<PAGE>
THE SPECIAL MEETING
DATE, PLACE AND TIME
This Proxy Statement is being furnished to Company Shareholders in
connection with the solicitation of proxies by the Board of Directors for use
at the Special Meeting to be held on Tuesday, May 5, 1998, at the Royal
Pavillion Hotel, Porters, St. James, Barbados, commencing at 8:00 a.m., local
time, and at any adjournment or postponement thereof.
This Proxy Statement, the Letter to Company Shareholders, the Notice of the
Special Meeting and the form of proxy for use at the Special Meeting are first
being mailed to Company Shareholders on or about March 30, 1998.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, Company Shareholders will consider and vote on:
1. The Acquisition Proposal, which is a proposal to approve the Stock
Purchase Agreement and the transactions contemplated thereby, including the
issuance of 9,045,930 Company Shares in connection with the Acquisition.
2. Such other business as may properly come before the Special Meeting or
any adjournment or postponement thereof.
The Special Meeting may be adjourned, if necessary, to permit further
solicitation of proxies in the event that there are not sufficient votes at
the time of the Special Meeting to approve the Acquisition Proposal.
The Board of Directors has adopted an amendment to the Company's Memorandum
of Association (the "Company Memorandum") to increase from 50,000,000 to
75,000,000 the number of authorized Company Shares. This amendment will become
effective only upon the approval of the Acquisition Proposal at the Special
Meeting and upon the filing of an amendment to the Company Memorandum with the
Registrar of Companies of the British Virgin Islands. UNDER THE COMPANY'S
ARTICLES OF ASSOCIATION (THE "COMPANY ARTICLES") AND THE LAWS OF THE BRITISH
VIRGIN ISLANDS, SHAREHOLDER APPROVAL IS NOT REQUIRED TO INCREASE THE COMPANY'S
AUTHORIZED CAPITAL AND SHAREHOLDER APPROVAL IS NOT BEING SOUGHT WITH RESPECT
TO THE BOARD-APPROVED INCREASE.
RECORD DATE; VOTE REQUIRED; VOTING AT THE MEETING
The Board of Directors has fixed the close of business on Friday, March 27,
1998, as the record date (the "Record Date") for the determination of the
Company Shareholders entitled to notice of, and to vote at, the Special
Meeting or any adjournments or postponements thereof. Accordingly, only
holders of Company Shares of record at the close of business on the Record
Date will be entitled to notice of and to vote at the Special Meeting. Each
holder of record of Company Shares on the Record Date is entitled to cast one
vote per share, exercisable in person or by a properly executed proxy, at the
Special Meeting. As of the Record Date, there were 37,557,934 Company Shares
outstanding and entitled to vote which were held by approximately 850 holders
of record.
Pursuant to the Company Articles, the Company Memorandum, the rules and
regulations of the NYSE and applicable law, the affirmative vote of a majority
of the votes cast by Company Shareholders entitled to vote and voting at the
Special Meeting is required to approve the Acquisition Proposal, provided that
holders of at least 50% of the votes entitled to be cast thereon are
represented at the Special Meeting. As of the Record Date, the directors and
executive officers of the Company may be deemed to be beneficial owners of
less than 1% of the outstanding Company Shares entitled to vote at the Special
Meeting. See "Security Ownership of the Company."
VOTING OF PROXIES
All Company Shareholders who are entitled to vote and are represented at the
Special Meeting by properly executed proxies received prior to or at such
meeting and not revoked will be voted at such meeting in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted FOR approval of the Acquisition Proposal.
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If any other matters are properly presented at the Special Meeting for
consideration, the persons named in the enclosed form of proxy, and acting
thereunder, will have discretion to vote on such matters in accordance with
their best judgment (unless authorization to use such discretion is withheld).
The Company is not aware of any matters expected to be presented at the
Special Meeting other than as described in the Notice of Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (1) filing
(including by telegram or telecopy) with the Secretary of the Company, before
the taking of the vote at the Special Meeting, a written notice of revocation
bearing a later date than the date of the proxy or by giving notice of
revocation in open meeting, (2) duly executing a later-dated proxy relating to
the same Company Shares and delivering (including by telegram or telecopy) it
to the Secretary of the Company before the taking of the vote at the Special
Meeting, or (3) attending the Special Meeting and voting in person. In order
to vote in person at the Special Meeting, Company Shareholders must attend the
Special Meeting and cast their votes in accordance with the voting procedures
established for such meeting. Attendance at the Special Meeting will not in
and of itself constitute a revocation of a proxy. Any written notice of
revocation or subsequent proxy must be sent so as to be delivered at or before
the taking of the vote at the Special Meeting to MacKenzie Partners, Inc., 156
Fifth Avenue, Penthouse 3, New York, New York, 10010, Telecopy: (212) 929-
0308, Attention: Lawrence E. Dennedy.
Company Shareholders who require assistance in changing or revoking a proxy
should contact MacKenzie Partners, Inc. at the address or phone number(s)
provided in this Proxy Statement under "Available Information."
Broker non-votes and abstaining votes will not be counted in favor of the
Acquisition Proposal and will not be treated as votes cast on such proposal.
Since the Acquisition Proposal requires the affirmative vote of a majority of
the votes cast by the holders of Company Shares entitled to vote and voting at
the Special Meeting, abstentions and broker non-votes will have no effect with
respect to the Acquisition Proposal, provided that a quorum (including such
abstentions and broker non-votes) is present.
SOLICITATION OF PROXIES
The expenses of the solicitation of proxies for the Special Meeting,
including the cost of filing, printing and mailing this Proxy Statement, will
be borne by the Company. In addition to solicitation by mail, proxies may be
solicited by directors, officers and employees of the Company in person or by
telephone, telegram or other means of communication. These individuals will
receive no additional compensation for solicitation of proxies, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. The Company has retained MacKenzie Partners, Inc. at an
estimated cost of $12,500, plus reimbursement of expenses, to assist in its
solicitation of proxies from brokers, nominees, institutions and individuals.
Arrangements will also be made by the Company with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial
owners of Company Shares held of record by such custodians, nominees and
fiduciaries, and the Company will reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
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THE PROPOSED ACQUISITION
GENERAL
The Stock Purchase Agreement provides for TH USA to acquire all of the
outstanding stock of Pepe USA and for THEH to acquire all of the outstanding
stock of Pepe Far East. Immediately following these purchases, Pepe USA will
acquire all of the outstanding stock of Tomcan, the parent corporation of TH
Canada, using funds provided by PJLC. It is currently anticipated that the
Acquisition will be completed shortly after the Special Meeting, assuming the
Acquisition Proposal is approved at such meeting and all other conditions to
the Acquisition have been satisfied or waived.
BACKGROUND OF THE ACQUISITION
In 1990, the Company's predecessor granted a master geographic license for
Canada to TH Canada (the "Canadian License"), a company which is indirectly
beneficially owned by Mr. Lawrence S. Stroll, a director and executive officer
of the Company, and members of his immediate family. In 1992, the Company
consummated the initial public offering of the Company Shares. By the summer
of 1995, the Company was experiencing high revenue and earnings growth in, and
had dedicated substantially all of its management attention to, its core men's
sportswear line. By this time, the Company had also established a strategy of
strengthening its market penetration through product line and geographic
expansion in furtherance of its goal of becoming the premier global lifestyle
brand. The Company sought to implement this strategy in large part through
select licensing and distribution arrangements, which provided the Company a
relatively steady, predictable earnings stream, with respect to product lines
and geographic areas where (1) such arrangements would provide more effective
manufacturing, distribution and marketing than could be achieved in house and
(2) licensing offered superior potential returns relative to the risk of in-
house development.
In the spring of 1995, the Company's management identified a growing demand
for designer jeanswear and believed that this market was poised for
significant growth. At that time, the Company produced a small number of denim
items as part of its men's sportswear line. Also at that time, a number of the
Company's competitors had determined to license their jeanswear businesses. In
the summer of 1995, AIHL Investment Group Limited (formerly known as SEL
International Investments Corp., "AIHL"), a company controlled by four
directors and executive officers of the Company, notified the Board of
Directors of its intention to make a proposal to act as the Company's
jeanswear licensee. AIHL was the parent of PJLC, a leading supplier of quality
jeanswear in Europe and the United States sold under the PEPE(R) brand. At
that time, the Board of Directors convened a special committee of independent
directors (1) to consider whether the Company should pursue an in-house or
licensing strategy for jeanswear and (2) if a licensing strategy were chosen,
to consider and negotiate licensing proposals from potential candidates.
In considering whether to adopt a licensing strategy for jeanswear, the
special committee applied the Company's established criteria for evaluating
internal development of product lines against the alternative of third-party
license arrangements (including the potential size of the business, the
expected profit margin, the infrastructure needed to support an "expanded"
jeanswear business and the need and the Company's ability to ramp-up quickly
to capitalize on the market window). The special committee determined that
licensing was a more advantageous and prudent path for the Company to follow
than pursuing an in-house strategy for jeanswear. An in-house strategy
entailed several disadvantages, including (1) high start-up costs, (2)
substantial delays in product launches, (3) diversion of management's
attention from the core men's sportswear business and other risks involved in
starting a new business, (4) lower profit margins for the Company's existing
denim products than for its core men's sportswear business and the fact that
increasing the size of the lower margin business would have a negative impact
on the Company's earnings and operating ratios, and (5) the Company's lack of
a dedicated jeanswear sales force, distribution channels and infrastructure to
quickly ramp-up the business to capitalize on the window of opportunity and to
handle the increased demand that entry into the market would stimulate. By
contrast, the special committee determined that adopting a licensing strategy
for jeanswear would, among other benefits, give the Company the potential to
earn substantial licensing royalties and participate in the upside of the
business with low risk and no adverse impact on profit margins, earnings and
operating ratios.
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The special committee then addressed the task of selecting a jeanswear
licensee. The special committee applied the Company's established criteria for
evaluating potential product licensees (i.e., the licensee's willingness to
give the Company sufficient product control to assure, and the trust in the
licensee to maintain, the quality, vision and image for the TOMMY HILFIGER(R)
brand, established global player, strong financial backing, experienced
management team, ability to launch men's and women's lines simultaneously
(where applicable) and to ramp-up quickly, having no directly competitive
product line and willingness to accept market-based licensing terms) to narrow
the list of potential candidates to a short list which included AIHL/PJLC. In
addition, the special committee considered PJLC's commitment to support an in-
store shop and fixtured-area program. Prior to that time, the Company's
management had been in contact with a potential licensee which ultimately
determined not to pursue a licensing arrangement with the Company. The special
committee then considered the AIHL proposal and negotiated several substantive
improvements for the Company to ensure that the terms were at least as
favorable to the Company as the terms of its other product licenses. In order
to seek further assurance that these terms were market based, the special
committee also solicited the opinion of an industry analyst as to whether the
terms were consistent with other jeanswear licenses and discussed the proposal
with another potential licensing candidate and major jeanswear supplier (which
showed no interest in pursuing a licensing arrangement with the Company on the
terms negotiated with AIHL).
On August 28, 1995, AIHL and Tommy Hilfiger Licensing, Inc. ("THLI") entered
into a license agreement for the manufacture, sale and distribution of men's,
women's and girls' jeanswear and jeans-related apparel in the United States
(the "Pepe United States License") and a license agreement covering the same
product lines outside of the United States (the "Pepe International License").
On October 1, 1995, AIHL assigned the Pepe United States License to PJLC,
which in turn assigned such license to Pepe USA. Also on October 1, 1995, AIHL
assigned the Pepe International License to PJLC, which assigned such license
to Pepe Jeans London Corporation (Netherlands Antilles) N.V., which in turn
assigned the license to T.H. International N.V. on January 15, 1997. On May
30, 1996, each of the Pepe United States License and the Pepe International
License was amended with the approval of the special committee to clarify that
the scope of such licenses included women's and girls' casualwear.
At a regularly scheduled meeting of the Board of Directors on October 27,
1997, the Company's management reported to the Board on the Company's
financial performance and its prospects for future growth in light of
consolidations among its competitors and department store customers and a
moderation of growth in the men's casualwear sector of the apparel industry.
Management also discussed with the Board ongoing shareholder concerns
regarding the Company's moderating growth rate, the lack of significant equity
ownership by the Company's directors and executive officers and the perceived
inefficiency of the Company's capital structure. Following these
presentations, the Board discussed with management the Company's current
business strategy and the possibility of pursuing strategic business
acquisitions and other strategic alternatives in light of shareholders'
expressed concerns over growth and the Company's long-term goal of creating a
global lifestyle "mega-brand." The Board of Directors reviewed the criteria
that it had previously set for evaluating the possible purchase of one of the
Company's third-party licensees. Mr. Chou suggested that the Board of
Directors consider acquiring the Company's womenswear, jeanswear and Canadian
licensees, businesses which are owned by affiliates of certain members of the
Board of Directors.
Also at the October 27, 1997 Board meeting, representatives of Morgan
Stanley and Co. Incorporated ("Morgan Stanley"), the Company's financial
advisor, made a presentation to the Board of Directors that included a review
of trends in the U.S. apparel industry and the product development phases
associated with global brand development experienced by other apparel industry
participants, the market performance of the Company Shares since the Company's
initial public offering, including the recent underperformance of the Company
Shares relative to other industry participants, and a review of possible
strategic alternatives for the Company. A representative of Wachtell, Lipton,
Rosen & Katz ("Wachtell Lipton"), the Company's regular corporate legal
counsel, discussed the Board's obligations with respect to a possible
transaction between the Company and its affiliates and outlined in detail the
interests in the proposed transaction of each interested director. See "--
Interests of Certain Persons in the Acquisition; Potential Conflicts of
Interest." Based on the
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presentations of management and the Company's advisors, the Board of Directors
determined to pursue further the possible acquisition of the Company's
womenswear, jeanswear and Canadian licensees. The Board formed a special
committee of independent directors consisting of Messrs. Simon Murray, Joseph
M. Adamko and Clinton V. Silver (the "Special Committee") and authorized the
Special Committee to consider and negotiate any proposed acquisition of such
businesses. At the October 27, 1997 meeting, the Special Committee members
selected Mr. Murray as Chairman of the Special Committee. Following the Board
meeting, the Special Committee met separately to discuss the process for
selecting independent advisors.
Over the next several weeks, members of the Special Committee interviewed
certain candidates to serve as its legal and financial advisors and, at a
telephonic meeting of the Special Committee on December 8, 1997, the Special
Committee decided to engage Wasserstein Perella & Co., Inc. ("Wasserstein
Perella") as its financial advisor and Chadbourne & Parke LLP ("Chadbourne &
Parke") as its legal advisors. In view of the significant time and effort
expected to be devoted to their consideration and negotiation of the proposed
acquisition, the Company agreed to pay each member of the Special Committee a
supplemental fee of $15,000 (plus the Company's standard $2,000 fee for each
meeting attended by an outside director).
The Special Committee met with its legal and financial advisors on December
17, 1997. At the meeting, representatives of Chadbourne & Parke discussed the
role of the Special Committee in reviewing the proposed transaction and the
fiduciary duties of the Special Committee members under the laws of the
British Virgin Islands. Wasserstein Perella indicated to the Special Committee
that it would conduct its due diligence on the Pepe Jeans and Tommy Canada
businesses and report to the Special Committee at a meeting scheduled for
January 6, 1998. The Company's legal and financial advisors and members of the
Company's management joined the meeting. Representatives of Morgan Stanley
then made a presentation to the Special Committee that included a discussion
of the Company's objectives for the proposed transaction, the equity market's
view of the Company, an overview of Pepe Jeans' businesses and Tommy Canada's
business, and an overview of possible terms of the proposed acquisition.
The Special Committee met with its legal and financial advisors on January
6, 1998. Wasserstein Perella informed the Special Committee of discussions and
due diligence meetings it had conducted with representatives of the management
of and financial advisors to the Company and with representatives of the
managements of Pepe Jeans and Tommy Canada. The Special Committee then
examined the Company's original rationales for granting the licenses for the
womenswear and jeanswear businesses, as well as for the Canadian business. It
was decided that members of management of the Company would be invited to the
next Special Committee meeting to present the Company's rationale for the
proposed acquisition. The Special Committee also reviewed various reasons for
not including the business conducted under the license agreement that had been
granted to an affiliate of PJLC ("Pepe Europe") in February 1997 for the sale
and distribution of men's and boys' sportswear lines in Europe and certain
other countries (the "Pepe European License") in the proposed acquisition and
discussed the possibility of seeking rights to acquire that business in the
future. The Special Committee also discussed the potential impact that the
proposed acquisition would have on the incentive-based compensation of Messrs.
Hilfiger and Horowitz and directed its advisors to discuss with the Company
the possibility of modifying the compensation agreements with respect to these
individuals. The Company's legal and financial advisors joined the meeting,
and representatives of Morgan Stanley then made a presentation to the Special
Committee that included a preliminary valuation analysis of Pepe Jeans and
Tommy Canada, a preliminary valuation analysis of the Company, a review of
potential synergies expected to result from the proposed acquisition and a pro
forma acquisition analysis. Morgan Stanley also reviewed with the Special
Committee certain projections in connection with the businesses of Pepe Jeans
and Tommy Canada.
During the week of January 12, 1998, Wachtell Lipton distributed a draft
stock purchase agreement to PJLC and its legal and financial advisors and to
Chadbourne & Parke. Also that week, Simpson Thacher & Bartlett, legal counsel
to PJLC, provided a draft of the proposed agreement relating to the Canada
Purchase to the Company and its advisors and to Chadbourne & Parke. Over the
course of the week, representatives of Morgan Stanley and Allen & Company
Incorporated ("Allen & Company"), PJLC's financial advisor, held ongoing
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negotiations regarding the financial and certain other terms of the proposed
transaction, including the time period following the transaction during which
Messrs. Chou, Stroll, Hilfiger and Horowitz would agree not to sell the
Purchase Price Shares.
The Special Committee met with its legal and financial advisors on January
16, 1998. Chadbourne & Parke reviewed with the Special Committee the terms of
the draft stock purchase agreement that had been distributed by Wachtell
Lipton earlier that week. Wasserstein Perella made a presentation to the
Special Committee, which included an overview of the proposed acquisition, a
review of the business performance of and financial projections for Pepe Jeans
and Tommy Canada, a pro forma acquisition analysis, a review of the business
performance of and the financial projections for the Company and other
considerations. The Company's legal and financial advisors and members of the
Company's management joined the meeting. Mr. Horowitz then made a presentation
to the Special Committee, including a discussion of the timing of the proposed
acquisition relative to the life cycles of the Pepe Jeans businesses and the
Tommy Canada business, management's view of the strategic rationale for, and
benefits of, the proposed acquisition, the achievability of the projections of
the businesses to be acquired in the proposed transaction and the expected
financial impact of the proposed transaction on the Company. Also at the
meeting, representatives of Morgan Stanley advised the Special Committee on
the status of the ongoing negotiations between Morgan Stanley and Allen &
Company on behalf of the Company and PJLC, respectively. Morgan Stanley
reported that, after discussions between the Company's and PJLC's financial
advisors, PJLC had indicated that it would consider a purchase price of
between $1.2 billion and $1.225 billion to be paid 50% in cash and 50% in
Company Shares, and that the parties were near agreement on a two-year
restriction on transfers of the Purchase Price Shares by Messrs. Hilfiger and
Horowitz, who owned an aggregate of 29.1% of PJLC, and a one-year transfer
restriction on transfers by affiliates of Messrs. Chou and Stroll, which owned
an aggregate of 70.9% of PJLC. Morgan Stanley also presented to the Special
Committee its preliminary analysis of the value of the Pepe Jeans womenswear
and jeanswear and Tommy Canada businesses and advised the Special Committee on
the availability of debt financing to fund the cash portion of the purchase
price. At the meeting, the Special Committee indicated to the Company's
advisors its desire that Messrs. Chou and Stroll agree not to compete with the
businesses being acquired for a negotiated period of time, that the period of
restriction on transfers of Purchase Price Shares by the affiliates of Messrs.
Stroll and Chou be extended, and that the Company obtain certain additional
rights with respect to any proposed sale to third parties of interests in the
business conducted under the Pepe European License. The Special Committee
further indicated to the Company's advisors that it would reconvene the
following week at which time the Special Committee would provide specific
proposals regarding these terms as well as the financial terms of the proposed
acquisition.
Prior to the next Special Committee meeting, Wachtell Lipton negotiated
proposed rights with respect to the business conducted under the Pepe European
License with representatives of PJLC, which included a prohibition on any
transfers of the business conducted under such license for a period of two
years following the Acquisition and certain rights of first refusal or first
offer in connection with any proposed transfer or initial public offering of
shares of Pepe Europe thereafter. See "The Stock Purchase Agreement--
Termination of Pepe International License and Amendment of Pepe European
License." In addition, the managements of the Pepe Jeans and Tommy Canada
businesses furnished the Company and the Special Committee with updated
financial projections reflecting their improved financial results compared
with budget through December 31, 1997 and higher than expected orders for the
Spring and Summer seasons of fiscal 1999.
The Special Committee held a telephonic meeting on the morning of January
21, 1998. Wasserstein Perella reviewed with the Special Committee its analysis
of the financial impact the proposed acquisition would have on the Company,
including its analysis of the accretion or dilution to the Company's earnings
at different purchase prices, and reviewed financial information for Pepe
Jeans, indicating that Pepe Jeans' financial projections had improved due
primarily to increased sales. The Special Committee authorized its advisors to
propose a purchase price of $1.095 billion to be paid 70% in cash and 30% in
Company Shares, subject to securing a two-year lock-up on all the Purchase
Price Shares and entering into a satisfactory non-competition agreement with
Messrs. Chou and Stroll. The Special Committee also indicated its acceptance
of the proposed amendments to the Pepe European License. Following the Special
Committee meeting, the Special Committee's legal and financial advisors
informed the Company's legal and financial advisors of the Special Committee's
proposal.
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Over the course of the next week, the Special Committee's and the Company's
legal and financial advisors negotiated the terms of the proposal with PJLC's
legal and financial advisors. In addition, members of the Special Committee
participated in negotiations with Messrs. Chou and Stroll regarding certain
terms of the proposed transaction, including the purchase price and the terms
of the proposed agreement by Messrs. Chou and Stroll not to compete with the
businesses being acquired. Following the negotiations, the parties agreed on a
purchase price of $1.128 billion, 67% to be paid in cash and 33% in Company
Shares (the number of shares to be based on the average closing price of the
Company Shares over the five trading days prior to execution of the Stock
Purchase Agreement). In addition, Messrs. Chou and Stroll agreed to a
restriction on their ability to compete in the U.S. or Canada with the Pepe
USA businesses for four years following the proposed transaction (the "Non-
Competition Agreement") and to restrictions on transfers of the Purchase Price
Shares for two years following the transaction with additional restrictions
during the following three years on transfers of the shares as a block,
subject to certain exceptions (the "Lock-Up Agreement"). The parties also
agreed that the two-year prohibition on transfers could not be amended without
the approval of the holders of a majority of the Company Shares, excluding
Company Shares held by interested shareholders.
On January 26, 1998, Lawvest and Pepe USA executed the Canada Purchase
Agreement and the trustee of Lawvest's sole shareholder executed a guarantee
of Lawvest's indemnification obligations under the Canada Purchase Agreement
(the "Bentley Trust Guarantee").
On January 27, 1998, the Special Committee met with its legal and financial
advisors to review the status of the proposal. The Special Committee
considered a presentation by Wasserstein Perella regarding executive
compensation arrangements at comparable companies in the industry and the fact
that the financial impact of the incremental costs of compensation had been
considered by Wasserstein Perella and Morgan Stanley in connection with their
respective financial analyses, as well as the expiration of Mr. Horowitz's
employment agreement with the Company in March 31, 1999, and determined not to
pursue the executive compensation issues at this time. During that week, the
legal advisors for the Company and PJLC finalized the terms of the Stock
Purchase Agreement, the Lock-Up Agreement, an agreement giving PJLC and
certain of its shareholders rights to register the Purchase Price Shares
following the second anniversary of the Acquisition (the "Registration Rights
Agreement"), an agreement by AIHL to guarantee the performance by PJLC of its
obligations under the Stock Purchase Agreement (the "AIHL Guarantee"), the
terms of the Non-Competition Agreement and the amendment to the Pepe European
License (the "Pepe European License Amendment").
On January 31, 1998, the Special Committee met with its legal and financial
advisors. Chadbourne & Parke reviewed with the Special Committee in detail the
terms of, and the documents relating to, the proposed Acquisition, including
the provisions of the Stock Purchase Agreement, the Lock-Up Agreement, the
Non-Competition Agreement and the Pepe European License Amendment. Mr.
Horowitz reported to the Special Committee on management's then-current view
of the business and prospects of Pepe Jeans and Tommy Canada, including
management's belief that the financial projections of those companies were
achievable. Wasserstein Perella made a presentation that included a discussion
of its valuation analyses used in arriving at its fairness opinion.
Wasserstein Perella then delivered its oral opinion to the Special Committee
(subsequently confirmed in writing) that, as of such date, the consideration
to be paid by TH USA and THEH pursuant to the Acquisition is fair to the
Company from a financial point of view. See "--Opinion of the Special
Committee's Financial Advisor." After considering such reports and opinion,
the Special Committee unanimously determined that the Stock Purchase Agreement
and the transactions contemplated thereby, including the issuance of the
Purchase Price Shares, are advisable and in the best interests of the Company
and the Company Shareholders and unanimously determined to recommend that the
full Board of Directors approve the Stock Purchase Agreement and the
transactions contemplated thereby.
On January 31, 1998, following the meeting of the Special Committee, the
full Board of Directors convened with its legal and financial advisors and the
legal and financial advisors of the Special Committee to review the proposed
Acquisition and to consider the recommendations of the Special Committee. A
representative of the Special Committee delivered the Special Committee's
report to the full Board, including the Special Committee's
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recommendation that the Board of Directors approve the Stock Purchase
Agreement and the transactions contemplated thereby. Wasserstein Perella
presented to the full Board a summary of the presentation that it had made
earlier that day to the Special Committee. Morgan Stanley made a presentation
that included a review of the financial and other terms of the Stock Purchase
Agreement and related agreements and a discussion of Morgan Stanley's
valuation methodologies and the analyses used in arriving at its fairness
opinion. A representative of Morgan Stanley also reviewed with the Board
Morgan Stanley's view of the anticipated market response to the proposed
Acquisition in light of the issues that had from time to time been raised by
investors and market analysts. At the meeting, Morgan Stanley delivered its
oral opinion to the Board of Directors (subsequently confirmed in writing)
that, as of the date of the opinion, the consideration to be paid pursuant to
the Stock Purchase Agreement is fair from a financial point of view to the
Company. A representative of Wachtell Lipton reviewed the advice that the
Board had received at the October 27, 1997 Board meeting, including as to the
directors' fiduciary duties with respect to the proposed Acquisition, and
noted that a detailed presentation on the potential conflicts of interest in
the transaction had been provided at the October 27, 1997 Board meeting. After
considering such reports and opinion, the full Board of Directors unanimously
determined that the Stock Purchase Agreement and the transactions contemplated
thereby, including the issuance of the Purchase Price Shares, are advisable
and in the best interests of the Company and the Company Shareholders,
unanimously approved the Acquisition and the Stock Purchase Agreement, the
Lock-Up Agreement, the Registration Rights Agreement and the terms of the Pepe
European License Amendment and the Non-Competition Agreement, and unanimously
determined to recommend that the shareholders of the Company approve the Stock
Purchase Agreement and the transactions contemplated thereby, including the
issuance of the Purchase Price Shares, at the Special Meeting.
Following the Board meeting, the parties executed the Stock Purchase
Agreement, the Lock-Up Agreement and the AIHL Guarantee. The Company publicly
announced the proposed Acquisition in a press release issued on February 1,
1998.
REASONS FOR THE ACQUISITION
The Company's objective has long been to establish TOMMY HILFIGER(R) as the
premier global lifestyle brand while maintaining superior sales and profit
growth. The Company believes that the proposed Acquisition will enhance
shareholder value by providing significant strategic, financial and other
benefits to the Company and its shareholders:
.BRAND DEVELOPMENT
By bringing the U.S. womenswear and jeanswear businesses and the
Canadian business in house alongside its men's and boys' sportswear
business, the Company will combine the major core components of its
business under one corporate umbrella, thereby affording the Company
increased control over the brand and greater leverage with its
department store customers and suppliers. The Company believes these
factors are becoming increasingly important in the current global
lifestyle brand business environment, particularly in light of the
recent trends toward consolidation of the Company's competitors as well
its department store customers.
.OPPORTUNITY FOR ACCELERATED GROWTH
The Company believes that the proposed Acquisition offers an excellent
and unique opportunity to re-accelerate the Company's growth rate in
both revenue and earnings by integrating established high growth,
profitable business lines into the Company.
Net sales of the TOMMY HILFIGER(R) womenswear line are expected to be
approximately $165 million in the fiscal year ending March 31, 1998,
compared to $72.3 million in fiscal 1997, an increase of over 100%. Net
sales of the TOMMY JEANS(R) men's line are expected to rise to $200
million in fiscal 1998, compared to $122.3 million in fiscal 1997, an
increase of approximately 64%. Tommy Canada's net sales are expected to
increase to approximately C$94.5 million in fiscal 1998 from C$50.3
million in fiscal 1997, an increase of approximately 88%. Together,
these businesses are expected to
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have net sales of approximately $430 million in fiscal 1998, compared
to approximately $229 million in fiscal 1997 (based on an exchange rate
of US$1 to C$1.45), a top-line year over year growth rate of
approximately 88%. In addition, these businesses have all achieved
profitability levels that are consistent with the Company's standards.
Moreover, the Company believes there are significant growth
opportunities in each of these three businesses beyond fiscal year
1998. The Company plans to expand the womenswear and jeanswear
businesses into additional department store and specialty store doors
consistent with the successful market penetration of the Company's
men's sportswear line. The Company estimates that womenswear industry
sales are twice those of men's with a greater number of categories,
thus providing additional opportunities for future growth. In addition,
the Company believes that women's jeans industry sales are at least as
great as those of men's jeans. The Company plans to roll out the TOMMY
JEANS(R) women's line for fall 1998. The Company also plans to leverage
the distribution network established by Tommy Canada to drive sales of
additional product in Canada, an effort which will also benefit from
growth opportunities in the womenswear and jeanswear businesses.
.POTENTIAL FOR EARNINGS ACCRETION
The proposed Acquisition is expected to be meaningfully accretive in
the first full year of combined operations, before giving effect to a
one-time pre-tax charge of approximately $15 million to $20 million
expected to be taken in the first quarter of fiscal 1999.
While the growth of the acquired businesses will be the primary factor
accounting for the transaction's accretive effect on earnings, the
Company expects an additional positive impact on earnings from an
estimated $15 to $20 million in annual operating synergies. Cost
savings are expected to result principally from the combined companies'
greater scale, which will reduce both aggregate expense from common
vendors and depreciation and amortization in connection with
consolidation of facilities. Such growth and synergies will be
partially offset by amortization of intangible assets, including
goodwill, interest on acquisition debt, and increased incentive-based
compensation under certain existing compensation arrangements. See "--
Interests of Certain Persons in the Acquisition; Potential Conflicts of
Interest." There can be no assurance as to the amount or timing of cost
savings from expected synergies. See "Forward-Looking Statements."
.MANAGEMENT OWNERSHIP
The proposed Acquisition will result in the Company's founding partners
and senior-most management, Silas Chou, Lawrence Stroll, Tommy Hilfiger
and Joel Horowitz, once again becoming significant shareholders in the
Company. The Company believes that the two-year restriction on sales of
the Purchase Price Shares, which can be amended only with the approval
of a majority of disinterested shareholders, reflects the commitment of
these key individuals to a long-term ownership position in the Company.
.SEAMLESS INTEGRATION
The Company believes that, given the nature of its close working
relationships with each of Pepe Jeans and Tommy Canada, and in light of
the Company's divisional operating structure, the integration of the
women's, jeans and Canadian businesses should be virtually seamless.
Following the Acquisition, the divisional president of each of the
womenswear, jeanswear and Canadian businesses will report directly to
Joel Horowitz, the Company's Chief Executive Officer.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS;
INFORMATION AND FACTORS CONSIDERED
The Special Committee
At a meeting held on January 31, 1998, the Special Committee unanimously
recommended that the Board of Directors approve the Acquisition, as
contemplated by certain agreements, including the Stock Purchase Agreement,
the Canada Purchase Agreement, the AIHL Guarantee, the Bentley Trust
Guarantee, the Lock-Up Agreement, the Registration Rights Agreement and the
terms of the Pepe European License Amendment and the Non-Competition Agreement
(collectively, the "Agreements").
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In making its recommendation, the Special Committee carefully considered
several factors, including, without limitation, those listed below, which are
the material factors considered by the Special Committee.
(a) The Special Committee considered the terms of the Acquisition, as set
forth in the Agreements, including the purchase price, the Non-Competition
Agreement, the Lock-up Agreement, the indemnification and guarantee
provisions, the representations and warranties and the conditions to the
Acquisition.
(b) The Special Committee considered that the Special Committee assisted in
the negotiations of the principal terms of the Acquisition and had the
ultimate responsibility to make a determination with respect to a
recommendation to the Board of Directors of definitive Acquisition agreements.
The Special Committee also considered that certain of the terms of the
Acquisition were determined through extensive arm's-length negotiations
between the Special Committee and its advisors, on the one hand, and PJLC and
its advisors, on the other hand.
(c) The Special Committee reviewed the Company's considerations for
originally licensing the womenswear and jeanswear businesses, which included,
among other factors, (1) the potential negative impact on the Company's
earnings due to the high start-up costs, substantial delays in product
launches, diversion of management's attention from the core business and other
risks involved in starting a new business; (2) the potential to earn
substantial licensing royalties and participate in the upside of the business
with low risk; (3) lower profit margins for the Company's existing jeanswear
business than for its core men's sportswear business and the fact that
increasing the size of the lower margin business through the pursuit of an in-
house strategy would have a negative impact on the Company's earnings and
operating ratios; and (4) the Company's lack of a dedicated jeanswear sales
force, distribution channels and infrastructure that could quickly ramp-up to
capitalize on the window of opportunity and handle the increased demand that
entry into the market would stimulate.
(d) The Special Committee considered the Company's management's view of the
changes that have taken place in the industry and in the business of the
Company and Pepe Jeans since the womenswear and jeanswear businesses were
licensed, including management's views that (1) the licensed womenswear and
jeanswear businesses are now developed and the risks attendant with ownership
of the businesses of the Acquired Companies are far less than those involved
in starting the same businesses anew; (2) the profit margins of the Acquired
Companies are at levels that are now in line with those of the Company; (3)
the Acquired Companies have in place dedicated sales forces, distribution
channels and infrastructure necessary to successfully operate the womenswear
and jeanswear businesses; (4) the current competitive landscape is undergoing
change, including the continued consolidation of the Company department store
customers and competitors; and (5) the businesses of the Acquired Companies
are at an ideal point in their growth curves to provide both top and bottom
line growth to the Company through expansion of the womenswear and jeanswear
lines into additional department and specialty store doors, the roll-out of
the TOMMY JEANS(R) women's line in the fall of 1998 and leveraging Tommy
Canada's distribution network to increase sales of TOMMY HILFIGER(R) and TOMMY
JEANS(R) products in Canada.
(e) The Special Committee considered management's presentations regarding
(1) the moderating rate of growth of the Company's core menswear business; and
(2) the businesses, assets, capital structures, financial performance and
condition and prospects of the Acquired Companies, which show that the net
sales of these businesses are expected to reach $430 million in fiscal 1998,
an increase of 88% over the prior year, with significant further growth
opportunities in the future.
(f) The Special Committee, with the advice of Wasserstein Perella and Morgan
Stanley, considered the impact of the Acquisition upon the Company's capital
structure and expected debt rating, as well as the substantial cash flow which
the Company expects to generate to reduce its initial debt level.
(g) The Special Committee considered that acquisition of the womenswear and
jeanswear businesses will combine the major core components of the Company's
business under one corporate umbrella that, according to management, will give
the Company greater control over the TOMMY HILFIGER(R) brand, including
quality control and future product development, and greater leverage with
large retailers needed to obtain greater amounts of retail square footage and
store-in-store presentations with dedicated fixtures.
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(h) The Special Committee considered that the Acquisition will result in the
Company's founding partners and senior-most management beneficially owning
approximately 19% of the Company Shares, thereby more closely aligning their
interests with those of the Company's public shareholders. Furthermore, the
Lock-Up Agreement restricts the sale of these shares for a period of two
years.
(i) The Special Committee considered that the Acquisition is expected to be
meaningfully accretive to the earnings of the Company in the first full year
of combined operations before giving effect to a one-time charge expected to
be taken in the first quarter of fiscal 1999, based upon the projections
provided by the respective managements of the Company and the Acquired
Companies.
(j) The Special Committee considered management's view that there is a
natural cultural fit between the Company and the Acquired Companies arising
from promotion of a common brand and the close working relationship between
those companies and the Company, with little risk of disruption from the
integration of these businesses into the Company's divisional operating
structure.
(k) The Special Committee considered management's estimates of certain
operational and financing synergies as a result of the Acquisition as well as
the estimated one-time charges to be incurred in connection with the
transaction.
(l) The Special Committee was fully aware of and considered the conflicts of
interest of certain directors and officers of the Company who are also
directors, officers and/or shareholders of Pepe USA, Pepe Far East, Tommy
Canada or their affiliates, including Silas K.F. Chou, Lawrence S. Stroll,
Thomas J. Hilfiger, Joel J. Horowitz, Ronald K.Y. Chao, Benjamin M.T. Ng and
Lester M.Y. Ma, including the fact that the Acquisition would result in
increased incentive-based compensation for Mr. Hilfiger and Mr. Horowitz under
their existing employment agreements and the Supplemental Executive Incentive
Compensation Plan approved by Company Shareholders in 1995. In connection
therewith, the Special Committee considered a presentation by Wasserstein
Perella regarding executive compensation arrangements at comparable companies
in the industry.
(m) At the January 31, 1998 meeting of the Special Committee, Wasserstein
Perella gave a presentation on its financial analyses with respect to the
Acquisition and orally delivered, and subsequently confirmed in writing, its
opinion to the effect that, as of the date of such opinion, the consideration
to be paid pursuant to the Acquisition is fair to the Company from a financial
point of view (a copy of the written opinion dated January 31, 1998 of
Wasserstein Perella, setting forth the assumptions made, matters considered
and limitations on the review undertaken, is attached as Annex C to this Proxy
Statement). Company Shareholders are urged to read the Wasserstein Perella
opinion in its entirety.
The Board of Directors
At a meeting held on January 31, 1998, the full Board of Directors
unanimously determined that the Acquisition and the transactions contemplated
by the Stock Purchase Agreement are advisable and in the best interests of the
Company and its shareholders. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE FOR THE ACQUISITION PROPOSAL.
In reaching its conclusions to approve the Acquisition and the Stock
Purchase Agreement and in determining to recommend that Company Shareholders
approve the Acquisition Proposal, the full Board of Directors carefully
considered a number of factors, including those factors considered by the
Special Committee described above and the following additional factors:
(a) the presentation of Morgan Stanley at the meeting of the Board of
Directors on January 31, 1998 and described under "--Background of the
Acquisition" and "--Opinion of the Company's Financial Advisor," including
the oral opinion of Morgan Stanley (subsequently confirmed in writing as of
such date) to the effect that, as of the date of such opinion, the
consideration to be paid in the Acquisition is fair from a financial point
of view to the Company (a copy of the written opinion dated January 31,
1998 of Morgan Stanley, setting forth the assumptions made, matters
considered and limitations on the review undertaken is attached as Annex B
to this Proxy Statement). Company Shareholders are urged to read the Morgan
Stanley opinion in its entirety.
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(b) Wasserstein Perella's summary of its analysis at the meeting of the
Board of Directors on January 31, 1998 described under "Background of the
Acquisition."
(c) the recommendation of the Special Committee that the Board of
Directors approve the Stock Purchase Agreement and the transactions
contemplated thereby.
The foregoing discussion of the factors considered by the Special Committee
and the Board of Directors is not intended to be exhaustive but includes the
material factors considered by the Special Committee and the Board of
Directors. Additionally, in view of the wide variety of factors considered in
connection with their evaluations of the Acquisition and the complexity of
these matters, neither the Special Committee nor the Board of Directors found
it practicable to, nor did either the Special Committee or the Board of
Directors attempt to quantify, rank or otherwise assign relative weights to
these factors. In addition, neither the Special Committee nor the Board of
Directors undertook to make any specific determination as to whether any
particular factor (or any aspects of any particular factor) was favorable or
unfavorable to their respective ultimate determinations, but rather conducted
an overall analysis of the factors described above, including thorough
discussions with and questioning of the Special Committee's and the Company's
financial and legal advisors. Furthermore, in considering the factors
described above, individual members of the Special Committee and the Board of
Directors may have given different weight to different factors. The Special
Committee and the Board of Directors considered all these factors as a whole,
and believed that the combination of these factors supported their respective
decisions to recommend the Stock Purchase Agreement and the transactions
contemplated thereby.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Morgan Stanley was retained by the Company to act as its financial advisor
in connection with the Acquisition.
On January 31, 1998, Morgan Stanley rendered to the Board of Directors an
oral opinion to the effect that, as of such date and based on and subject to
certain matters stated therein, the cash consideration and Purchase Price
Shares to be paid by TH USA and THEH for the Acquisition, taken together (the
"Consideration"), is fair from a financial point of view to the Company.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED JANUARY 31, 1998,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF COMPANY SHARES ARE URGED TO, AND
SHOULD, READ THIS OPINION CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS AND THE FAIRNESS OF THE
CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE COMPANY; IT DOES NOT
ADDRESS ANY OTHER ASPECT OF THE ACQUISITION NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF COMPANY SHARES AS TO HOW TO VOTE AT THE
SPECIAL MEETING. SPECIFICALLY, MORGAN STANLEY'S OPINION DOES NOT ADDRESS THE
COMPANY'S UNDERLYING BUSINESS DECISION TO EFFECT THE ACQUISITION. THE SUMMARY
OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Stanley, among other things, (1) reviewed
certain publicly available financial statements and other information of the
Company, (2) reviewed certain internal financial statements and other
financial operating data concerning the Company, Pepe USA, Pepe Far East and
Tommy Canada prepared by the managements of the Company, Pepe USA, Pepe Far
East and Tommy Canada, respectively, (3) analyzed certain financial
projections prepared by the managements of the Company, Pepe USA (including
projections giving effect to the Canada Purchase) and Pepe Far East,
respectively, (4) discussed the past and current operations and financial
condition and the prospects of the Company with senior executives of the
Company, (5) discussed the past and current operations and financial condition
and the prospects of Pepe USA and Pepe Far East with senior executives of
PJLC, (6) discussed the past and current operations and financial condition
and the prospects of Tommy Canada with senior executives of Tommy Canada, (7)
discussed the financial performance and certain financial projections for the
Company, Pepe USA (including projections giving effect to
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the Canada Purchase) and Pepe Far East prepared by the managements of the
Company, Pepe USA and Pepe Far East with an industry consultant, (8) reviewed
the reported prices and trading activity for the Company Shares, (9) compared
the financial performance of Pepe USA, Pepe Far East, Tommy Canada and the
Company and the prices and trading activity of the Company Shares with that of
certain comparable publicly traded companies and their securities, (10)
reviewed the prices and trading activity of the common stock of certain
publicly traded companies comparable to Pepe USA and Pepe Far East, (11)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions, (12) reviewed and discussed with the
senior executives of the Company their estimates of the operational and
financial synergies, incremental costs and long-term benefits (including, but
not limited to, the tax and accounting impact) anticipated from the
Acquisition, (13) analyzed the pro forma impact of the Acquisition on the
Company's earnings per share, cash flow, consolidated capitalization and
financial ratios, (14) participated in certain discussions and negotiations
among representatives of PJLC and the Company and their financial and legal
advisors, (15) reviewed the Stock Purchase Agreement and certain related
documents and the Canada Purchase Agreement, and (16) performed such other
analyses as Morgan Stanley has deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon without
assuming responsibility for independent verification the accuracy and
completeness of the information supplied or otherwise made available to Morgan
Stanley for the purposes of its opinion. With respect to the financial
projections of Pepe USA (including projections giving effect to the Canada
Purchase), Pepe Far East and the Company, including the synergies, incremental
costs and long-term benefits (including, but not limited to, the tax and
accounting impact) anticipated from the Acquisition, Morgan Stanley assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of Pepe
USA, Tommy Canada, Pepe Far East and the Company. Morgan Stanley assumed that
the Acquisition will be consummated on the terms set forth in the Stock
Purchase Agreement and that the Canada Purchase will be consummated
immediately after the Acquisition on the terms set forth in the Canada
Purchase Agreement. Morgan Stanley did not make any independent valuation or
appraisal of the assets or liabilities of the Acquired Companies or the
Company, nor was Morgan Stanley furnished with any such appraisals. Morgan
Stanley's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to Morgan
Stanley as of, the date of its opinion.
The following is a brief summary of the financial analyses performed by
Morgan Stanley and reviewed with the Board of Directors on January 31, 1998 in
connection with Morgan Stanley's presentation and opinion to the Board on such
date:
Comparable Company Analysis. As part of its analysis, Morgan Stanley
compared certain financial information of the Acquired Companies with
corresponding publicly available information of a group of seven publicly
traded retail apparel companies that Morgan Stanley considered comparable in
certain respects with the Company (the "Peer Group"). The Peer Group consisted
of Jones Apparel Group, Inc., Liz Claiborne, Inc., Nautica Enterprises, Inc.,
Phillips-Van Heusen Corporation, Polo Ralph Lauren Corporation, St. John
Knits, Inc. and the Company. Morgan Stanley reviewed the relative financial
performance of the Acquired Companies by comparing certain financial and
operating statistics of the Acquired Companies with the Peer Group. Market
information used in the valuation was as of January 29, 1998. The Peer Group
market trading information used in the valuation analysis was calendarized
1998 and 1999 market price to earnings ("P/E") ratios ranging from 13.1x to
19.4x and 11.0x to 16.4x, respectively; Aggregate Value to 1998 and 1999
earnings before interest, taxes, depreciation and amortization ("EBITDA")
adjusted to a March 31 year end ranging from 6.1x to 9.9x and 5.7x to 8.9x,
respectively; Aggregate Value to 1998 and 1999 earnings before interest and
taxes ("EBIT") adjusted to a March 31 year end ranging from 7.2x to 11.4x and
6.6x to 10.1x, respectively; 1998E P/E to estimated five-year growth rate
ranging from .60x to 1.24x. "Aggregate Value" was calculated as the market
value of equity plus net total debt (short-term debt plus long-term debt plus
capital leases less cash). Market value was calculated as the number of shares
outstanding multiplied by the stock price as of January 29, 1998. The five-
year growth rate was based on International Broker Estimate Services ("IBES")
estimates as of January
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21, 1998. The implied range of values for the Acquired Companies derived from
the comparable company analysis ranged from approximately $990 million to
$1,340 million.
No company utilized as a comparison in the comparable company analysis is
identical to the Acquired Companies. In evaluating the comparable companies,
Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the Company, Pepe USA,
Pepe Far East and Tommy Canada (such as the impact of competition on the
Company, Pepe USA, Pepe Far East and Tommy Canada and the industry generally)
industry growth and the absence of any adverse material change in the
financial condition and prospects of the Company, Pepe USA, Pepe Far East and
Tommy Canada or the industry or in the financial markets in general.
Mathematical analysis (such as determining the average or the median) is not
in itself a meaningful method of using comparable transaction data.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow analysis of the Company, Pepe USA, Pepe Far East and Tommy Canada for
fiscal years ended 1999 through 2007 based on certain financial projections
prepared by the respective managements of each company. Unlevered free cash
flows of each company were calculated as net income available to common
shareholders plus depreciation and amortization plus deferred taxes plus other
noncash expenses plus after-tax net interest expense less capital expenditures
less investment in working capital. EBITDA for each company was calculated as
net earnings before deducting extraordinary items, income tax expenses, net
interest expense, other expenses and depreciation and amortization expense.
Morgan Stanley calculated terminal values by applying an exit EBITDA multiple
range to the unlevered free cash flows in fiscal 2007 ranging from 6x to 7x.
The cash-flow streams and terminal values were then discounted to the present
using a range of discount rates from 14% to 16% for the management case for
the Company, Pepe USA, Pepe Far East and Tommy Canada and 12% to 14% for the
downside case for Pepe USA, Pepe Far East and Tommy Canada, representing an
estimated weighted average cost of capital range for the Company, Pepe USA,
Pepe Far East and Tommy Canada. The present value of the cash-flow streams and
terminal values for Tommy Canada, which were calculated in Canadian dollars,
were converted into U.S. dollars based on an exchange rate of 1.4677 Canadian
dollars per U.S. dollar (the exchange rate on January 29, 1998). Based on this
analysis, Morgan Stanley calculated values for the Company ranging from $42.75
to $51.50 per Company Share and for the Acquired Companies ranging from $1,070
million to $1,490 million.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed the pro forma
impact of the Acquisition on the Company's earnings per share for the fiscal
years ended 1998 through 2007. Such analysis was based on earnings estimates
for the fiscal years ended 1998 through 2007 for the Company, Pepe USA, Pepe
Far East, and Tommy Canada based on certain financial projections prepared by
the respective managements of each company and taking into account the cost
savings expected to be derived from the Acquisition as estimated by the
Company, Pepe USA, Pepe Far East, and Tommy Canada. Based on the analysis,
Morgan Stanley concluded that the Acquisition would be meaningfully accretive
to earnings per share in the first full year of combined operations before
giving effect to a one-time charge expected to be taken in the first quarter
of fiscal 1999.
Analysis of Selected Precedent Transactions. Using publicly available
information, Morgan Stanley reviewed the following eight proposed or completed
transactions in the retail apparel industry: Designer Holdings and the Warnaco
Group, Gucci and Investcorp, Playtex Apparel and Sara Lee, Champion Products
and Sara Lee, Allied Stores-Ann Taylor and Merrill Lynch, General Mills-Eddie
Bauer and Spiegel, General Mills-Talbots and Jusco, Allied Stores-Brooks
Brothers and Marks & Spencer. Morgan Stanley concluded that these precedent
transactions were not necessarily comparable for valuation purposes.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In addition,
Morgan Stanley may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions,
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so that the ranges of valuations resulting for any particular analysis
described above should not be taken to be Morgan Stanley's view of the actual
value of the Company and the Acquired Companies.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company and the
Acquired Companies. The analyses performed by Morgan Stanley are not
necessarily indicative of actual values, which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as a part of Morgan Stanley's analysis of the fairness of the
Consideration from a financial point of view to the Company and were provided
to the Board in connection with the delivery of Morgan Stanley's opinion. The
analyses do not purport to be appraisals or to reflect the prices at which the
Acquired Companies might actually be sold. As described above, Morgan
Stanley's opinion and presentation to the Board was one of many factors taken
into consideration by the Board in making its determination to approve the
Stock Purchase Agreement and the transactions contemplated thereby.
Consequently, the Morgan Stanley analyses described above should not be viewed
as determinative of the opinions of the Board of Directors of the Company with
respect to the value of the Company and the Acquired Companies. The
Consideration was determined through negotiations between the Special
Committee and PJLC and was approved by the Board of Directors of the Company.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. As part of its investment banking business, Morgan Stanley is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwriting, competitive bidding,
secondary distributions of listed and unlisted securities, private placements
and valuation for estate, corporate and other purposes. In the ordinary course
of its trading, brokerage and financing activities, Morgan Stanley and its
affiliates may at any time hold long or short positions, and may trade or
otherwise effect transactions for its own account for the accounts of
customers in debt or debt and equity securities and senior loans of the
Company. Morgan Stanley has provided financial advisory and investment banking
services to the Company and certain affiliates of PJLC in the past, for which
services Morgan Stanley has received customary fees.
Pursuant to a letter agreement dated September 17, 1997 between the Company
and Morgan Stanley, Morgan Stanley is entitled to a transaction fee of $4.5
million that is payable if the Acquisition is consummated. The Company has
agreed to reimburse Morgan Stanley for its expenses, including fees and
expenses of its counsel, and to indemnify Morgan Stanley for liabilities and
expenses arising out of the engagement and the transactions in connection
therewith, including liabilities under U.S. federal securities laws. If the
Company retains Morgan Stanley to assist it in connection with the financing
of the Acquisition, an amount of up to $1 million of the $4.5 million
transaction fee will be credited towards 50% of the associated financing fees
(including, without limitation, selling discounts and commissions).
OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL ADVISOR
The Special Committee retained Wasserstein Perella to act as its financial
advisor in connection with the Acquisition. On January 31, 1998, Wasserstein
Perella delivered its oral opinion (subsequently confirmed in writing) to the
Special Committee to the effect that, subject to the various assumptions and
limitations set forth therein, as of the date thereof, the consideration to be
paid by TH USA and THEH pursuant to the Acquisition is fair to the Company
from a financial point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF WASSERSTEIN PERELLA, DATED JANUARY
31, 1998, WHICH SETS FORTH AMONG OTHER THINGS THE OPINIONS EXPRESSED,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS OF
THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX C
TO THIS PROXY STATEMENT AND COMPANY SHAREHOLDERS ARE URGED TO READ IT IN ITS
ENTIRETY. WASSERSTEIN PERELLA'S OPINION DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY COMPANY SHAREHOLDER OR OTHER PERSON AS TO HOW SUCH COMPANY SHAREHOLDER
SHOULD VOTE OR OTHERWISE ACT WITH RESPECT TO THE ACQUISITION AND SHOULD
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NOT BE RELIED UPON BY ANY SHAREHOLDER OR OTHER PERSON AS SUCH. THE SUMMARY OF
THE WASSERSTEIN PERELLA OPINION SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED AS ANNEX C TO THIS PROXY
STATEMENT.
In connection with rendering its opinion, Wasserstein Perella, among other
things: (1) reviewed the Stock Purchase Agreement and certain related
agreements; (2) reviewed and analyzed certain publicly available business and
financial information relating to the Company for recent years and interim
periods to date, and certain financial and operating information, including
financial forecasts, analyses and projections prepared by the managements of
the Company and the Acquired Companies and provided to Wasserstein Perella for
purposes of its analyses; (3) met with the managements of the Company and the
Acquired Companies to review and discuss such information and, among other
matters, the Company's and the Acquired Companies' businesses, assets,
financial condition, results of operations and prospects; (4) reviewed and
considered certain financial data relating to the Company and the Acquired
Companies as well as certain stock market data relating to the Company, and
compared that data with similar data for certain other companies, the
securities of which are publicly traded, that Wasserstein Perella believes may
be relevant or comparable in certain respects to the Company or the Acquired
Companies or one or more of their businesses or assets; (5) reviewed and
considered the financial terms of certain recent acquisitions and business
combination transactions in the apparel industry specifically, and in other
industries generally, that Wasserstein Perella believes to be reasonably
comparable to the Acquisition or otherwise relevant to its inquiry; and (6)
performed such other financial studies, analyses and investigations and
reviewed such other information as Wasserstein Perella considered appropriate
for purposes of its opinion. No limitations were imposed by the Special
Committee upon Wasserstein Perella with respect to the analyses employed or
the procedures followed by it in rendering its opinion.
In its review and analyses and in formulating its opinion, Wasserstein
Perella assumed and relied upon the accuracy and completeness of all the
financial and other information provided to or discussed with it or made
publicly available, including the financial projections, forecasts, analyses
and other information provided to Wasserstein Perella, without assuming any
responsibility for independent verification of, or expressing an opinion as
to, any of such information. Wasserstein Perella also relied upon the
reasonableness and accuracy of the financial forecasts, projections and
analyses, and other information furnished to Wasserstein Perella (including
estimates of certain cost and tax savings and other operating efficiencies
expected to result from consummation of the Acquisition), and assumed, with
the Special Committee's consent, that such forecasts, projections, analyses
and other information were reasonably prepared in good faith and on bases
reflecting the best currently available judgments and estimates of the
Company's and the Acquired Companies' respective managements. Wasserstein
Perella expressed no opinion with respect to such projections, forecasts and
analyses or the assumptions upon which they are based. In addition,
Wasserstein Perella did not assume any responsibility for conducting a
physical inspection of the properties or facilities of the Company or the
Acquired Companies, or for making or obtaining an independent valuation or
appraisal of the assets or liabilities of the Company or the Acquired
Companies, and no such independent valuation or appraisal was provided to it.
Wasserstein Perella assumed that the transactions described in the Stock
Purchase Agreement will be consummated on the terms set forth therein, without
material waiver or modification. The opinion of Wasserstein Perella is based
on economic and market conditions and other circumstances as they existed and
could be evaluated by it on January 31, 1998. Wasserstein Perella did not
express any opinion as to the prices at which any securities of the Company
will actually trade at any time.
The following is a summary of the report presented by Wasserstein Perella to
the Special Committee in connection with the delivery of its opinion on
January 31, 1998.
Stock Price Analyses. Wasserstein Perella reviewed the weekly stock market
performance history of the Company from January 27, 1997 to January 23, 1998,
including a comparison of the relative stock price performance of the Company
as compared to the S&P 500 and other leading apparel companies. Wasserstein
Perella also reviewed the quarterly P/E ratio of the Company as compared to
the S&P 500 from December 30, 1994 through December 31, 1997. Wasserstein
Perella observed that the Company Shares had significantly underperformed the
market over the last year and that the Company's P/E multiple had dropped from
a peak of 30.8x in September 1996 to 13.5x in December 1997.
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Comparable Company Analysis. Wasserstein Perella reviewed and compared
certain financial information of the Company to corresponding financial
information for six of the leading designer apparel companies (collectively,
the "Leading Companies"): Liz Claiborne, Inc., Polo Ralph Lauren Corp.,
Warnaco Group, Inc., Jones Apparel Group, Inc., Nautica Enterprises, Inc. and
St. John Knits, Inc. It also reviewed and compared certain financial
information of the Company to five other apparel companies: V.F. Corporation,
Fruit of the Loom, Inc., Kellwood Co., Phillips-Van Heusen Corporation and
Novel Denim Holdings Ltd. (collectively, the "Other Companies" and, together
with the Leading Companies, the "Comparable Companies"). Wasserstein Perella
also reviewed financial information for Guess? Inc., Donna Karan
International, Inc. and Mossimo, Inc., but excluded these companies from its
analysis as their results were determined to be not meaningful.
Such financial information was used to calculate next fiscal year ("NFY")
multiples, including the "Equity Market Value" (defined as the market value
including currently exercisable options, calculated using the treasury method)
as a multiple of each of estimated net income and book value, and "Enterprise
Value" (defined generally as the Equity Market Value plus net debt (short-and-
long term debt less cash)) as a multiple of each of estimated net sales,
EBITDA and EBIT. Equity Market Value and Enterprise Value multiples of the
Comparable Companies were based on stock prices as of January 28, 1998. Such
analyses indicated that, as of January 28, 1998, based on a NFY analysis: (1)
Equity Market Value multiples of net income ranged from 13.3x to 18.4x (the
mean for which was 16.4x and the median for which was 16.8x) for the Leading
Companies and from 11.3x to 14.6x (the mean for which was 12.6x and the median
for which was 12.2x) for the Other Companies; (2) Equity Market Value
multiples of book value ranged from 2.4x to 4.4x (the mean for which was 3.5x
and the median for which was 3.6x) for the Leading Companies and from 1.0x to
2.8x (the mean for which was 1.9x and the median for which was 1.5x) for the
Other Companies; (3) Enterprise Value multiples of net sales ranged from 1.0x
to 2.3x (the mean and median for which was 1.7x) for the Leading Companies and
0.4x to 2.0x (the mean and median for which was 1.0x) for the Other Companies;
(4) Enterprise Value multiples of EBITDA ranged from 8.6x to 11.0x (the mean
for which was 9.9x and the median for which was 10.0x) for the Leading
Companies and from 6.3x to 11.6x (the mean for which was 7.9x and the median
for which was 7.4x) for the Other Companies; and (5) Enterprise Value
multiples of EBIT ranged from 8.5x to 12.8x (the mean for which was 10.6x and
the median for which was 10.8x) for the Leading Companies and from 7.9x to
12.0x (the mean for which was 10.0x and the median for which was 10.2x) for
the Other Companies.
Wasserstein Perella also compared the three-year estimated earnings per
share ("EPS") growth rate using IBES estimates for the Comparable Companies.
The three-year estimated EPS growth rate ranged from 14.8% to 22.7% for the
Leading Companies, with a mean of 19.3% and a median of 19.1%, and ranged from
10.3% to 25.0% for the Other Companies, with a mean of 15.0% and a median of
13.8%. Wasserstein Perella also compared the P/E ratio as a percentage of
three-year EPS estimated growth rate. The ratio of P/E to three-year estimated
EPS growth rate ranged from 74.5% to 101.8% for the Leading Companies, with a
mean of 86.0% and a median of 84.6%, and ranged from 45.0% to 141.9% for the
Other Companies, with a mean of 94.0% and a median of 88.4%.
Based on the comparable company analysis, Wasserstein Perella obtained an
equity valuation range for the Acquired Companies of $925,000,000 to
$1,575,000,000.
Discounted Cash Flow Analysis. Wasserstein Perella performed a discounted
cash flow ("DCF") analysis of the Acquired Companies for the fiscal years 1999
through 2008. The unlevered free cash flows of Pepe USA and Pepe Far East were
discounted to a present value using a range of discount rates from 12% to 13%
and growth rates of unlevered cash flows in perpetuity ranging from 3% to 4%.
The unlevered free cash flows of Tommy Canada were discounted to a present
value using a range of discount rates from 11% to 12% and growth rates of
unlevered cash flows in perpetuity ranging from 1% to 2%. The DCF analysis
resulted in an equity valuation range for the Acquired Companies of
$1,000,000,000 to $1,225,000,000.
Wasserstein Perella also performed a DCF analysis of the synergies expected
in the Acquisition for the fiscal years 1999 through 2008. The value of
synergies and cost savings, taking into consideration cost savings for both
the Company and the Acquired Companies, additional merger costs, certain tax
savings and additional
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compensation costs, was discounted to a present value using a range of
discount rates from 12% to 14%, growth rates for synergies in perpetuity
ranging from 2% to 4% and a 40% tax rate. Based on these assumptions, the
valuation of total synergies in the Acquisition ranged from $54,000,000 to
$67,000,000.
With respect to the DCF analysis, Wasserstein Perella noted that DCF
analysis is a widely used valuation methodology, but that it relies on
numerous assumptions regarding the future performance of a company and the
future economic environment, including earnings growth rates, unlevered free
cash flows, terminal values and discount rates, all of which are inherently
uncertain because they are predicated on future events and circumstances.
Comparable Transactions Analysis. Wasserstein Perella analyzed certain
information relating to the following eight acquisition transactions in the
apparel industry since August 1991 (the "Selected Transactions") (listed by
target/acquiror): Designer Holdings Ltd./Warnaco Group, Inc.; Helly Hansen
International/Investcorp Bank E.C.; Levi Strauss & Co./LSAI Holdings Corp.;
Calvin Klein Jeanswear Company/Charterhouse Equity Partners II, L.P., & Rio
Sportswear, Inc.; Nutmeg Industries, Inc./V.F. Corp.; Salem Sportswear
Corp./Fruit of the Loom, Inc.; Gucci America, Inc./Investcorp Bank E.C.; and
Playtex Apparel, Inc./Sara Lee Corp. Wasserstein Perella also analyzed certain
information relating to (listed by target/acquiror): Crystal Brands,
Inc./Phillips-Van Heusen Corporation; Gitano Fashions Limited/Fruit of the
Loom, Inc.; and Guess?, Inc./the Marciano family, but excluded these
transactions as these results were determined to be not meaningful. In
connection therewith, Wasserstein Perella noted, among other things, that (1)
the reasons for, and circumstances surrounding each of the transactions
analyzed were diverse, (2) the percent of the target acquired ranged from 31%
to 100% and (3) the characteristics of the companies involved were not
necessarily comparable to those of the Acquired Companies.
Wasserstein Perella compared the prices paid in the Selected Transactions in
terms of, among other things, "Enterprise Purchase Price" (defined as purchase
price plus net debt less cash) as a multiple of trailing 12 months net sales,
EBITDA and EBIT and the purchase price as a multiple of net income. An
analysis of the multiples for the Selected Transactions produced the following
results: (1) Enterprise Purchase Price as a multiple of net sales yielded a
range of 0.7x to 2.4x, with a mean of 1.4x and a median of 1.1x; (2)
Enterprise Purchase Price as a multiple of EBITDA yielded a range of 7.1x to
13.0x, with a mean of 10.0x and a median of 9.0x; (3) Enterprise Purchase
Price as a multiple of EBIT yielded a range of 8.4x to 15.6x, with a mean of
11.1x and a median of 10.0x; and (4) the purchase price as a multiple of net
income yielded a range of 18.6x to 23.7x, with a mean of 22.2x and a median of
23.2x. Wasserstein Perella compared these multiples to the Enterprise Purchase
Price of the Acquired Companies as a multiple of estimated net sales, EBITDA
and EBIT, for the 12 months ended March 31, 1998 and purchase price of the
Acquired Companies as a multiple of estimated net income for the 12 months
ended March 31, 1998.
Based on the comparable transactions analysis, Wasserstein Perella obtained
an equity valuation range for the Acquired Companies of $825,000,000 to
$1,225,000,000.
Pro Forma Acquisition Analysis. Wasserstein Perella analyzed the
accretive/dilutive impact of the Acquisition on a pro forma basis with respect
to the Company's estimated fiscal years 1999 through 2001 fully diluted EPS.
This analysis was based on a number of assumptions, including, among other
things, the estimated amounts and timing of the synergies. Wasserstein Perella
compared the EPS of the Company on a stand-alone basis to, among other things,
the EPS for the Company on a pro forma basis giving effect to the Acquisition.
Based on such analysis, the Acquisition would be accretive to the Company's
estimated EPS, before giving effect to a one-time charge expected to be taken
in the first quarter of fiscal 1999, for each of the fiscal years ended March
31, 1999, March 31, 2000 and March 31, 2001.
Certain General Matters. No company or transaction used in the comparable
companies and comparable transactions analyses is identical to the Acquired
Companies. In addition, the DCF analyses and the pro forma acquisition
analysis are based and heavily dependent upon, among other factors,
assumptions as to future performance and other factors, and are subject to the
limitations described herein and in the Wasserstein Perella
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opinion. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the acquisition value or the
public trading value of the companies to which they are being compared and the
Acquired Companies.
The fairness analysis is a complex process and is not necessarily
susceptible to a partial analysis or summary description. Wasserstein Perella
believes that its analyses must be considered as a whole and that selecting
portions of its analyses, without considering the analyses taken as a whole,
would create an incomplete view of the process underlying the analyses
performed in reaching its opinion. In addition, Wasserstein Perella considered
the results of all such analyses and did not assign relative weights to any of
the analyses, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Wasserstein Perella's view
of the actual value of the Acquired Companies.
In performing its analyses, Wasserstein Perella made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the Company. The
analyses performed by Wasserstein Perella are not necessarily indicative of
actual values, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Wasserstein Perella's opinion. The analyses do not purport to be appraisals or
to reflect the prices at which a company might actually be sold.
The Special Committee retained Wasserstein Perella based upon its experience
and expertise. Wasserstein Perella is an internationally recognized investment
banking and advisory firm. Wasserstein Perella, as part of its investment
banking business, is continuously engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Wasserstein Perella Engagement Agreement. Pursuant to the terms of a letter
agreement, dated November 11, 1997, between Wasserstein Perella, the Special
Committee and the Company (the "Wasserstein Perella Letter Agreement"), the
Special Committee retained Wasserstein Perella to serve as exclusive financial
advisor to the Special Committee with respect to a proposal for the
acquisition by the Company or an affiliate thereof, in one or a series of
transactions, of in excess of 50% of the outstanding shares of common stock or
assets by means of a purchase of stock of the Acquired Companies.
The Company agreed in the Wasserstein Perella Letter Agreement to pay
Wasserstein Perella a fee of $1.5 million. The Company has also agreed to
reimburse Wasserstein Perella, subject to certain limitations, for travel and
all other reasonable out-of pocket expenses (including all reasonably incurred
fees, disbursements and other charges of counsel to be retained by Wasserstein
Perella and of other consultants and advisors retained by Wasserstein Perella
with the Special Committee's consent) incurred by Wasserstein Perella in
connection with any matter referred to or contemplated by the engagement. In
addition, pursuant to the terms of an indemnification agreement, dated
November 11, 1997, the Company agreed to indemnify Wasserstein Perella (and
its affiliates and their respective directors, officers, agents, employees and
controlling persons) against certain liabilities arising out of or in
connection with Wasserstein Perella's engagement, including liabilities under
the United States federal securities laws.
In the ordinary course of its business, Wasserstein Perella and its
affiliates may from time to time make a market in, have a long or short
position in, buy and sell or otherwise effect transactions for customer
accounts and for their own accounts in the securities of the Company.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the Acquisition is expected
to be treated as a purchase under generally accepted accounting principles.
Under the purchase method of accounting, the assets and liabilities of the
acquired company are, as of the effective date of the transaction, recorded at
their respective fair
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values and added to those of the acquiring company. Financial statements of
the acquiring company issued after the transaction reflect such values and are
not restated retroactively to include the historical financial position or
results of operations of the acquired company. The unaudited pro forma
combined financial statements included in this Proxy Statement have been
prepared using the purchase method of accounting. See "Selected Historical
Financial Information of the Company," "Selected Historical Financial
Information of Pepe Jeans," "Selected Historical Financial Information of
Tommy Canada" and "Unaudited Pro Forma Combined Financial Statements."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Acquisition will not result in the recognition of any
income, gain or loss for United States federal income tax purposes by the
Company, the Company Shareholders, TH USA or THEH.
MANAGEMENT OF THE COMPANY FOLLOWING THE ACQUISITION
It is expected that the Company's current senior management team will
continue in their respective positions following the Acquisition, with the
following modifications: (1) Joel H. Newman, currently Executive Vice
President -- Operations of the Company, will become Chief Administrative
Officer and Executive Vice President-- Finance; (2) Benjamin M.T. Ng,
currently Executive Vice President -- Corporate Finance of the Company, will
become Chief Financial Officer and Executive Vice President -- Strategic
Development; and (3) Arthur A. Bargonetti, Chief Operating Officer and
Executive Vice President of Pepe USA, will also serve as the Company's Senior
Vice President -- Operations. As is currently the case with the Company's
men's, retail and licensing units, after the Acquisition, the divisional
president of each of the womenswear, jeanswear and Canadian businesses will
report directly to Joel J. Horowitz, the Company's Chief Executive Officer.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION; POTENTIAL CONFLICTS OF
INTEREST
In considering the recommendation of the Board of Directors with respect to
the Stock Purchase Agreement and the transactions contemplated thereby,
Company Shareholders should be aware that certain officers and directors of
the Company (or their affiliates) have interests in the Acquisition that are
different from and in addition to the interests of Company Shareholders
generally which may create conflicts of interest. The Special Committee and
the full Board of Directors were aware of these interests and took them into
account in approving the Stock Purchase Agreement and the transactions
contemplated thereby.
Ownership of PJLC. Messrs. Silas K.F. Chou, Ronald K.Y. Chao, Lawrence S.
Stroll, Thomas J. Hilfiger and Joel J. Horowitz will benefit from the
Acquisition through their ownership of affiliates of PJLC, the seller in the
Acquisition. The ownership interests of these four individuals are as follows:
PJLC is indirectly owned 97% by AIHL and 3% by an affiliate of Mr. Chou.
AIHL is owned 70% by Sportswear Holdings Limited ("Sportswear Holdings"),
22.5% by Mr. Hilfiger and 7.5% by Mr. Horowitz. Sportswear Holdings is owned
49.99% by Westleigh Limited, a British Virgin Islands corporation
("Westleigh") privately owned by members of the Chao family (including Messrs.
Silas K.F. Chou and Ronald K.Y. Chao), and 49.99% owned by Gadwal Limited, a
Hong Kong corporation ("Gadwal") in which Mr. Stroll has an indirect
beneficial ownership interest. Mr. Benjamin M.T. Ng, an executive officer and
director of the Company, and Mr. Lester M.Y. Ma, a director of the Company,
may have certain economic interests based on the performance of AIHL and its
affiliates.
Ownership of Lawvest. Mr. Stroll and his descendants have a 100% beneficial
ownership interest in Lawvest, the seller under the Canada Purchase Agreement.
Other Relationships. Mr. Chou, the Chairman of the Board of Directors of the
Company, is Chairman of the Board of Directors of PJLC and Pepe USA. Mr.
Stroll, a director of the Company and Chief Executive Officer of Tommy
Hilfiger (H.K.) Limited, is Group Chief Executive Officer and a director of
PJLC, as well as a director
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of TH Canada and certain of its affiliates. Messrs. Chou and Stroll are also
directors of Pepe USA and Mr. Chou is a director of Pepe Far East and each of
its subsidiaries. Mr. Ng, an executive officer and director of the Company, is
also a director of PJLC and an executive officer and director of Pepe USA.
Messrs. Chao and Ma, directors of the Company, are directors of certain
subsidiaries of PJLC (including Pepe Far East and each of its subsidiaries).
Messrs. Chou, Stroll, Hilfiger and Horowitz, executive officers and
directors of the Company, are executive officers and directors of AIHL. Mr.
Ma, a director of the Company, is an executive officer and director of AIHL.
Mr. Ng, an executive officer and director of the Company, is an executive
officer, and until May 1997 was a director, of AIHL.
Messrs. Chou and Stroll, executive officers and directors of the Company,
are executive officers and directors of Sportswear Holdings. Mr. Chao, a
director of the Company, is a director of Sportswear Holdings.
Mr. Chou, an executive officer and director of the Company, and Messrs. Chao
and Ma, directors of the Company, are executive officers and directors of
Westleigh.
Executive Employment Agreements. Under Mr. Hilfiger's employment agreement,
if net sales of TH USA and its subsidiaries are greater than $48,333,333 in
any fiscal year, Mr. Hilfiger receives a payment equal to 1.5% of such excess.
As a result of the Acquisition, the Company's sales are expected to increase
substantially over their level prior to the Acquisition, with a corresponding
increase in Mr. Hilfiger's compensation.
Under Mr. Horowitz's amended employment agreement, and the Supplemental
Executive Incentive Compensation Plan approved by the Company's shareholders
in 1995, Mr. Horowitz is entitled to receive an amount equal to 5% of the
Company's earnings before depreciation, interest on financing of fixed assets,
non-operating expenses and taxes ("operating earnings"), subject to certain
offsets. As a result of the Acquisition, the Company's operating earnings are
expected to increase substantially over their level prior to the Acquisition,
with a corresponding increase in Mr. Horowitz's compensation.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and the rules that have been promulgated thereunder by the
United States Federal Trade Commission ("FTC"), the Acquisition may not be
consummated unless certain filings have been submitted to the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the FTC and certain waiting period requirements have been satisfied. On
February 24, 1998, the Company and PJLC submitted the required filings to the
FTC and the Antitrust Division. On March 10, 1998, the Company and PJLC
received notice from the FTC that the applicable waiting period under the HSR
Act was terminated.
At any time before or after the completion of the Acquisition, the Antitrust
Division or the FTC could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to
enjoin the consummation of the Acquisition or seeking the divestiture of
substantial assets of the Company, Pepe Jeans or Tommy Canada. Private parties
and state attorneys general may also bring actions under the U.S. antitrust
laws under certain circumstances. Although the Company believes that the
Acquisition is legal under the U.S. antitrust laws, there can be no assurance
that a challenge to the Acquisition on antitrust grounds will not be made or
if such a challenge is made, that it would not be successful.
Other than under the U.S. antitrust laws, consummation of the Acquisition
does not require the approval of any U.S. federal or state agency or any
Canadian regulatory authority.
FINANCING OF THE ACQUISITION
The Company and TH USA have filed with the Commission a combined
Registration Statement on Form S-3 under the Securities Act of 1933, as
amended (the "Securities Act"), relating to an aggregate principal
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amount of up to $700 million of debt securities of TH USA and related
guarantees of the Company ("Debt Securities"). In addition, the Company
expects to enter into new senior term and revolving credit facilities in an
aggregate amount of up to $450 million. The Company expects to use a
combination of proceeds from an offering of Debt Securities, borrowings under
the new senior credit facilities and cash on hand to fund the Cash
Consideration. See "Unaudited Pro Forma Combined Financial Statements."
NO DISSENTERS' RIGHTS
Company Shareholders will not be entitled to dissenters' appraisal rights
under the laws of the British Virgin Islands or any other statute in
connection with the proposed Acquisition.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
Because the issuance of the Purchase Price Shares in connection with the
Acquisition will not have been registered under the Securities Act, and
because PJLC is (and will continue to be, following the Acquisition) an
"affiliate" (as such term is defined under the Securities Act) of the Company,
PJLC may not sell the Company Shares acquired in connection with the
Acquisition, except pursuant to an effective registration statement under the
Securities Act covering such shares or in transactions permitted by the resale
provisions of Rule 144 under the Securities Act, or as otherwise permitted
under the Securities Act. PJLC and certain of its affiliates have agreed,
among other things, that they will not sell or otherwise transfer the Purchase
Price Shares for a period of two years following the Acquisition, other than
certain permitted transfers. See "The Stock Purchase Agreement--Restrictions
on Transfer of Shares; Registration Rights."
CERTAIN LITIGATION
On February 2, 1998, February 12, 1998 and February 17, 1998, three alleged
holders of Company Shares filed purported derivative actions in New York state
court on behalf of the Company against the members of the Board of Directors.
The complaints allege that the Board's approval of the Acquisition constitutes
a breach of fiduciary duty and corporate waste. The complaints seek equitable
relief and damages in favor of the Company, and awards of fees to the
plaintiffs' attorneys. Plaintiffs have moved for an order consolidating the
actions for all purposes, and defendants have agreed to the proposed
consolidation. Plaintiffs have agreed to file a consolidated complaint within
thirty days of the entry of an order consolidating the actions.
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THE STOCK PURCHASE AGREEMENT
The following is a summary of material provisions of the Stock Purchase
Agreement, a copy of which is attached as Annex A to this Proxy Statement.
This summary is qualified in its entirety by reference to the Stock Purchase
Agreement which is incorporated herein by this reference.
GENERAL
The Stock Purchase Agreement provides for TH USA to acquire all of the
outstanding stock of Pepe USA and for THEH to acquire all of the outstanding
stock of Pepe Far East. Immediately following these purchases, Pepe USA will
acquire (with funds provided by PJLC using proceeds from the Cash
Consideration) all of the outstanding stock of Tomcan, the parent corporation
of TH Canada. It is currently anticipated that the Acquisition will be
completed shortly after the Special Meeting, assuming the Acquisition Proposal
is approved at such meeting and all other conditions to the Acquisition have
been satisfied or waived.
PURCHASE PRICE
Under the Stock Purchase Agreement, the total purchase price for the
Acquisition is $755,760,000 in cash plus 9,045,930 Company Shares. Of this
total, THEH will pay to PJLC $25,000,000 in cash for the Pepe Far East Shares
and TH USA will pay to PJLC $730,760,000 in cash plus the Purchase Price
Shares for the Pepe USA Shares. Since the number of Purchase Price Shares is
fixed, the value of the consideration to be paid in the Acquisition will vary
based on changes in the underlying value of the Purchase Price Shares.
RESTRICTIONS ON TRANSFER OF SHARES; REGISTRATION RIGHTS
At the time that the parties entered into the Stock Purchase Agreement, PJLC
and certain of its affiliates entered into the Lock-Up Agreement. Under the
Lock-Up Agreement, PJLC, Blackwatch Investments Limited ("Blackwatch") (PJLC's
direct parent corporation), AIHL (a 97% shareholder of Blackwatch), Anasta
Holdings Limited ("Anasta") (an affiliate of Mr. Chou and a 3% shareholder of
Blackwatch), Sportswear Holdings (a 70% shareholder of AIHL), Westleigh (a
corporation controlled by members of the Chao family and a 49.99% shareholder
of Sportswear Holdings), Gadwal (a corporation in which Mr. Stroll has an
indirect beneficial ownership interest and a 49.99% shareholder of Sportswear
Holdings), Mr. Hilfiger and Mr. Horowitz (collectively, the "PJLC Affiliates")
have agreed, with certain exceptions, that they will not sell or transfer the
Purchase Price Shares for a period of two years following the completion of
the Acquisition. This two-year restriction does not apply to (1) sales or
transfers of 3% of the Purchase Price Shares (representing the Purchase Price
Shares that will be beneficially owned by Anasta upon consummation of the
Acquisition) (a) to another PJLC Affiliate or a permitted transferee thereof
or (b) to any person or entity so long as Anasta beneficially owns such shares
following the sale or transfer, (2) sales or transfers of the remaining 97% of
the Purchase Price Shares so long as following such sale or transfer such
Purchase Price Shares are beneficially owned 22.5% by Mr. Hilfiger, 7.5% by
Mr. Horowitz, 35% by Westleigh and 35% by Gadwal, (3) sales or transfers upon
Mr. Hilfiger's or Mr. Horowitz's death or incapacity to their respective legal
or personal representatives and (4) transfers or sales in connection with a
merger, consolidation or other business combination of the Company. The PJLC
Affiliates have also agreed in the Lock-Up Agreement, subject to certain
exceptions, that for three additional years they will not sell or transfer the
Purchase Price Shares to any person or entity who would, to such PJLC
Affiliate's knowledge, beneficially own, immediately following the sale or
transfer, 5% or more of the then outstanding Company Shares.
The provisions of the Lock-Up Agreement providing for the initial two-year
restriction on transfers and the permitted exceptions described above may be
amended only with the approval of a majority of votes cast at a meeting of
Company Shareholders (excluding the votes cast by the PJLC Affiliates and
their affiliates).
At the closing of the Acquisition (the "Closing"), the Company and the PJLC
Affiliates will enter into the Registration Rights Agreement under which the
PJLC Affiliates, along with their successors and permitted transferees under
the Lock-Up Agreement (collectively, the "Holders"), will have the right to
require the Company to register sales by the Holders of the Purchase Price
Shares following the second anniversary of the
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Closing. The Holders are limited to a total of four such demand registrations.
Any demand registration must include at least 1,000,000 Purchase Price Shares
(subject to adjustment for stock splits and similar actions involving the
Company Shares).
In addition, if following the second anniversary of the Closing, the Company
proposes to file a registration statement under the Securities Act that would
also permit registration of the Purchase Price Shares (with certain
exceptions), then the Company will provide the Holders an opportunity to
register their Purchase Price Shares in connection with such registration.
This provision is customarily referred to as a "piggyback registration."
The Holders will be responsible for all expenses associated with any demand
registration in which the Company is not also registering Company Shares for
sale by the Company. In all other registrations, the Company will be
responsible for the expenses of the registration, except that the Holders will
be responsible for underwriting discounts and filing fees relating to the
Company Shares being sold by the Holders and fees and expenses of counsel to
the Holders. In addition, the Company will indemnify each Holder and its
affiliates against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments that the Holders may be
required to make in respect thereof.
NON-COMPETITION AGREEMENT
Pursuant to the Stock Purchase Agreement, at the Closing Messrs. Chou and
Stroll will enter into the Non-Competition Agreement which will provide that
for a period of four years from the date of Closing (the "Closing Date"),
without the consent of the disinterested directors of the Company, each of
Messrs. Chou and Stroll will not become an officer, director, employee,
consultant, partner or investor (other than as a passive investor in less than
5% of the outstanding capital stock of a publicly traded corporation) in any
entity that is, or is intended to become, a direct and substantial competitor
in the United States or Canada of the businesses engaged in by Pepe USA prior
to the Closing Date, other than passive investments in an entity in which the
annual revenues for the most recently completed fiscal year relating to the
business of such entity that competes with Pepe USA are less than 20% of such
entity's total revenues for such fiscal year. Pursuant to their existing
employment agreements with the Company, Messrs. Hilfiger and Horowitz are
subject to certain non-competition obligations.
TERMINATION OF PEPE INTERNATIONAL LICENSE AND AMENDMENT OF PEPE EUROPEAN
LICENSE
The current licenses between the Pepe entities and the Company include the
Pepe United States License, covering jeans and jeans related apparel and
women's and girl's casualwear in the United States; the Pepe International
License, covering jeans and jeans related apparel and women's and girls'
casualwear worldwide (other than in the United States and certain specified
countries); and the Pepe European License, covering men's and boys' sportswear
lines in Europe and certain other countries.
In connection with the Acquisition, the Pepe International License and all
sublicenses granted thereunder will be cancelled and the license arrangements
for Europe previously covered by the Pepe International License will be
consolidated under the Pepe European License.
Accordingly, the Pepe European License will be amended to include in its
scope men's, women's and children's jeanswear and jeans related apparel
(including women's and girls' casualwear); to increase the minimum sales
levels, guaranteed minimum royalties and minimum advertising payments; and to
provide for additional buying office arrangements with the buying offices that
are being acquired in the Acquisition by the Company and its subsidiaries.
The Pepe European License will also be amended to provide the Company
certain additional rights in connection with any proposed future transfer of
the business conducted under the Pepe European License. These amendments will
prohibit all transfers of such business for a period of two years following
the Acquisition. Thereafter, the Company may withhold its consent to any
transfer of 50% or more of such business (other than following the first
anniversary of an initial public offering, as discussed below) and the Company
will have a right of first refusal in connection with transfers (other than in
an initial public offering) of less than 50% of
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such business. In the event that PJLC proposes (following the two-year
prohibition period) to make an initial public offering of less than 50% of the
shares of Pepe Europe, the Company will have the right to offer to purchase
100% of Pepe Europe and, if PJLC rejects the Company's offer, PJLC may go
forward with the initial public offering only if the initial public offering
is consummated within six months and at an initial public offering price of at
least 110% of the Company's offer price. Beginning six months after any
initial public offering involving Pepe Europe until the first anniversary of
such offering, the Company will have the right to purchase all of the Pepe
Europe shares not sold in the initial public offering at a price per share
equal to the average closing market price of Pepe Europe's shares over the 30
trading days preceding the Company's exercise of such right. Following the
first anniversary of any initial public offering involving Pepe Europe, the
Company will have the right to purchase any Pepe Europe shares proposed to be
sold to third parties (other than in public offerings or under Rule 144 under
the Securities Act) at the proposed sale price to such third parties.
COVENANTS
Mutual Covenants. Each of PJLC and the Company has agreed in the Stock
Purchase Agreement that they will (1) use all reasonable efforts to take such
actions as are necessary, proper or advisable to consummate the Acquisition as
promptly as practicable and to cooperate with each other for such purpose,
including, among other things (a) to obtain all necessary third party
consents, (b) to make all necessary filings with, and obtain any required
consents of, governmental authorities and (c) to lift or rescind any
injunction, restraining order, decree or other order adversely affecting the
parties' ability to consummate the Acquisition; (2) promptly make all required
filings under the U.S. antitrust laws; (3) promptly notify the other party of
any events, facts and occurrences that would result in a breach of any
representation, warranty or covenant by such party in the Stock Purchase
Agreement; and (4) cooperate with each other to arrange the financing for the
Acquisition.
The parties have also agreed that all intercompany and intracompany payables
and receivables (other than those for goods and services in the ordinary
course of business) and loans between Pepe Jeans, on the one hand, and PJLC
and certain of its affiliates, on the other hand (other than a $10,000,000
note from Pepe USA to PJLC (the "Retained Note"), which will be purchased by
the Company for face value, and a note of PJLC's parent to fund the purchase
price under the Canada Purchase Agreement, which will be paid off by PJLC
immediately prior to the completion of the Canada Purchase) will be released,
eliminated or forgiven immediately prior to the closing of the Acquisition. In
addition, the parties have agreed that a note from AIHL to THLI with a face
amount of $5,000,000 issued in connection with the initial grant of the Pepe
United States License and the Pepe International License will be cancelled as
of the Closing in consideration of the cancellation of an outstanding note
from Pepe USA to PJLC having substantially identical terms.
Covenants of the Company. The Company further covenants in the Stock
Purchase Agreement:
(1) without PJLC's consent, it will not (a) issue, sell or agree to sell
any shares of its capital stock or any securities convertible into, or
options with respect to, or warrants to purchase or rights to subscribe
for, any shares of its capital stock or make any change in its issued
and outstanding capital stock or redeem, purchase or otherwise acquire
any of its capital stock (other than in connection with the Company's
stock incentive plans or as contemplated in the Stock Purchase
Agreement), (b) amend the Company Memorandum or Company Articles (other
than in connection with increasing the number of authorized Company
Shares to 75 million), (c) declare any dividend or make any
distribution with respect to its capital stock or (d) purchase any
Company Shares other than in open market transactions;
(2) to cause THLI to enter into the Pepe European License Amendment;
(3) to include the recommendation of the Board of Directors in favor of the
Stock Purchase Agreement and the transactions contemplated thereby in
this Proxy Statement;
(4) to cause the Special Meeting to be held as promptly as reasonably
practicable;
(5) to submit a supplemental listing application covering the Purchase
Price Shares to the NYSE and to use all reasonable efforts to cause the
Purchase Price Shares to be approved for listing, subject to official
notice of issuance; and
(6) to use all reasonable efforts to obtain the financing for the
Acquisition.
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<PAGE>
Covenants of PJLC. PJLC further covenants in the Stock Purchase Agreement:
(1) from the date of the Stock Purchase Agreement through the Closing,
except as otherwise provided for in the Stock Purchase Agreement or as
consented to or approved by the Company (a) Pepe Jeans will operate its
business in the ordinary and usual course in accordance with past
practices; (b) Pepe Jeans will not issue, sell or agree to issue or
sell any shares of its capital stock, or any securities convertible
into, or options with respect to, or warrants to purchase or rights to
subscribe for, any shares of its capital stock or make any change in
its issued and outstanding capital stock or redeem, purchase or
otherwise acquire any of its capital stock; (c) Pepe Jeans will not (i)
increase in any manner the compensation of, or enter into any new bonus
or incentive agreement or arrangement with, any of its directors,
officers or other employees other than increases in compensation in the
ordinary course of business and consistent with past practice and which
are not material in the aggregate; (ii) pay or agree to pay any
pension, retirement allowance or other employee benefit to any
director, officer or employee, whether past or present, other than as
required by applicable law, contracts or plan documents in effect on
the date of the Stock Purchase Agreement; (iii) enter into any new
employment, severance, consulting, or other compensation agreement with
any director, officer or employee or other person other than in
connection with any new hires or promotions in the ordinary course and
consistent with past practice; or (iv) commit itself to any additional
pension, profit-sharing, deferred compensation, group insurance,
severance pay, retirement or other employee benefit plan, fund or
similar arrangement or adopt or amend or commit itself to adopt or
amend any of such plans, funds or similar arrangements in existence on
the date of the Stock Purchase Agreement (except that Pepe Jeans may
pay or make commitments to pay bonuses to certain employees of up to $3
million in the aggregate); (d) Pepe Jeans will not (i) amend its
memorandum or articles of association (or similar instruments), (ii)
declare any dividend or make any distribution with respect to its
capital stock, (iii) assume, incur or guarantee any obligation for
borrowed money other than trade payables in the ordinary course of
business consistent with past practice, (iv) cancel or compromise,
except for compromises of current or former short-term trade
receivables or other current assets in the ordinary course of business
consistent with past practice, any debts owed to it, or (v) waive or
release any rights of material value; (e) Pepe Jeans will not (i) sell,
transfer, lease or otherwise dispose of any of its assets other than
inventory, accounts receivable or fixtures in the ordinary course of
business consistent with prior practice, (ii) create or permit to exist
any new security interest, lien or encumbrance on any of its properties
or assets, other than certain specified permitted exceptions, (iii)
enter into any joint venture, partnership or other similar arrangement,
(iv) make any investment in or purchase any securities of any person or
entity, other than in connection with (A) the cash management
activities of Pepe Jeans in the ordinary course of business consistent
with past practice or (B) the formation of a wholly owned subsidiary or
(v) purchase any assets of any person or entity other than in the
ordinary course of business consistent with past practice; (f) Pepe
Jeans will not permit a change in its methods of maintaining its books,
accounts or business records or, except as required by United States
generally accepted accounting principles, change any of its accounting
principles or the methods by which such principles are applied for tax
or financial reporting purposes; (g) Pepe Jeans will incur capital
expenditures only in the ordinary course of business consistent with
prior practice and not in excess of the capital budget provided to the
Company prior to the date of the Stock Purchase Agreement; (h) Pepe
Jeans will not (i) enter into or terminate any material lease, contract
or agreement, or make any change in any of its material leases,
contracts and agreements, (ii) enter into any transaction with any of
PJLC, AIHL, Blackwatch, Lawvest or any of their respective corporate
affiliates (other than the Company, the Acquired Companies and their
respective subsidiaries) (the "Continuing Affiliates") or any director,
officer or shareholder of any Continuing Affiliate other than as
contemplated in the Stock Purchase Agreement, (iii) reclassify any
assets or liabilities, or (iv) do any other act that (A) would cause
any representation or warranty of PJLC in the Stock Purchase Agreement
to be or become untrue in any material respect or (B) could reasonably
be expected to be materially adverse to the business assets,
liabilities, condition (financial or otherwise), results of operations
or prospects of Pepe Jeans, taken as a whole (a "Pepe Material Adverse
Effect"); (i) Pepe Jeans will comply in all material respects with all
material laws and
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regulations applicable to it; (j) the Canada Purchase Agreement and the
Bentley Trust Guarantee will not be amended nor will any obligations of
the parties thereunder be waived; (k) Pepe Jeans will not make any
payment of interest on or principal of any intercompany indebtedness to
any Continuing Affiliate, other than payment of accrued interest on the
Retained Note; (l) Pepe Jeans will not make any election with respect to
taxes, consent to any waiver or extension of time to assess or collect
any taxes without the consent of the Company or file any tax return
other than a tax return filed in the ordinary course of business and
prepared in a manner consistent with past practice; and (m) Pepe Jeans
will not agree to take any action prohibited by the provisions described
above;
(2) except with respect to the Canada Purchase or as otherwise
contemplated in the Stock Purchase Agreement, the Continuing
Affiliates will not, and will not permit Pepe Jeans to, directly or
indirectly, (a) solicit any inquiries or proposals for, or enter into
or continue or resume any discussions with respect to or enter into
any negotiations or agreements relating to the sale or exchange of any
shares of capital stock of Pepe Jeans or all, or a substantial part,
of the assets of Pepe Jeans or (b) furnish or cause to be furnished
any non-public information concerning the business and operations of
Pepe Jeans to any person or entity (other than to or at the request of
the Company and its representatives) other than in the ordinary course
of business consistent with past practice;
(3) prior to the Closing, to deliver to the Company promptly after they are
prepared such monthly or other financial statements or financial
reports of Pepe Jeans as are prepared by or relating to Pepe Jeans and
Tommy Canada in the ordinary course of business and such other
financial information as the Company may reasonably request, promptly
after such request; and
(4) that PJLC will contribute, immediately prior to the Closing, a note of
Blackwatch in the principal amount of the purchase price under the
Canada Purchase Agreement to Pepe USA and Blackwatch will repay such
note in full immediately following the Closing.
REPRESENTATIONS AND WARRANTIES
The Stock Purchase Agreement contains various representations and warranties
of the Company relating to, among other matters, (1) organization and other
corporate matters; (2) capitalization of the Company; (3) authorization,
execution, delivery, performance and enforceability of the Stock Purchase
Agreement and the related transaction agreements and the absence of conflicts,
violations and defaults under the organizational documents of the Company and
its subsidiaries and certain other agreements and documents; (4) the accuracy
of documents filed by the Company with the Commission; and (5) information
supplied by the Company for inclusion in this Proxy Statement.
The Stock Purchase Agreement also contains various representations and
warranties of PJLC relating to, among other matters, (1) organization and
other corporate matters; (2) capitalization of Pepe Jeans and ownership of,
and title to, the Pepe USA Shares and the Pepe Far East Shares; (3)
authorization, execution, delivery, performance and enforceability of the
Stock Purchase Agreement and the related transaction agreements and the
absence of conflicts, violations and defaults under the organizational
documents of PJLC and Pepe Jeans and certain other agreements and documents;
(4) litigation; (5) compliance with laws and governmental consents;
(6) properties and leases; (7) environmental compliance; (8) the absence of
certain changes and events since March 31, 1997; (9) the financial statements
of Pepe Jeans provided to the Company; (10) taxes and tax returns;
(11) certain employee benefits and labor matters; (12) material contracts and
debt instruments; (13) insurance coverage; (14) transactions with affiliates;
(15) undisclosed liabilities; and (16) information supplied by PJLC for
inclusion in this Proxy Statement.
CONDITIONS TO THE ACQUISITION
Mutual Conditions. The obligations of the Company, TH USA and THEH, on the
one hand, and PJLC, on the other hand, to consummate the Acquisition are
subject to fulfillment of the following conditions, among others:
(1) Each of the representations and warranties of the other party will be
true and correct when made and as of the Closing Date, except (a) in
the case of representations and warranties of PJLC, such
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<PAGE>
inaccuracies or breaches as would not, individually or in the aggregate,
have a Pepe Material Adverse Effect and (b) in the case of
representations and warranties of the Company, such inaccuracies or
breaches as would not, individually or in the aggregate, have a material
adverse effect on the Company and its subsidiaries taken as a whole;
(2) the covenants and agreements of the other party contained in the Stock
Purchase Agreement to be performed on or before the Closing Date will
have been performed in all material respects;
(3) all necessary regulatory approvals will have been received and the
notice of amendment to the Company Memorandum will have been filed with
the Registry of Companies of the British Virgin Islands reflecting an
increase in the number of authorized Company Shares to 75 million;
(4) no order or injunction will have been issued by any governmental
authority which prohibits or prevents the consummation of the
transactions contemplated by the Stock Purchase Agreement;
(5) the Acquisition Proposal will have been approved at the Special
Meeting;
(6) all consents or waivers under specified credit agreements will have
been obtained or renegotiated on terms satisfactory to the Company and
PJLC; and
(7) the Purchase Price Shares will have been approved for listing on the
NYSE, subject to official notice of issuance.
Conditions to the Company's, TH USA's and THEH's Obligations to Consummate
the Acquisition. The obligations of the Company, TH USA and THEH to consummate
the Acquisition and the other transactions contemplated by the Stock Purchase
Agreement are further subject to the receipt of a certain closing certificate
and fulfillment of the following conditions:
(1) the Company shall have received an opinion of counsel to PJLC relating
to the ownership of the Pepe USA Shares and the Pepe Far East Shares
and certain other corporate matters;
(2) the Pepe International License and any sublicenses granted thereunder
will have been cancelled, the Pepe European License Amendment will have
been executed and delivered by PJLC and Pepe Europe, the Non-
Competition Agreement will have been executed and delivered by Messrs.
Chou and Stroll, and the Bentley Trust Guarantee and the AIHL Guarantee
will be in full force and effect;
(3) all of the conditions to Pepe USA's and Lawvest's obligations to
consummate the Canada Purchase under the Canada Purchase Agreement,
other than delivery by Lawvest of the Tomcan shares and the delivery by
Pepe USA of the purchase price thereunder, shall have been satisfied,
without any waiver thereof (See "The Canada Purchase Agreement");
(4) the Company and/or its subsidiaries will have obtained financing for
the Acquisition on terms and conditions reasonably satisfactory to the
Company; and
(5) all consents or waivers to specified agreements entered into by Pepe
Jeans will have been obtained.
Conditions to the Obligations of PJLC to Consummate the Acquisition. The
obligations of PJLC to consummate the Acquisition and the other transactions
contemplated by the Stock Purchase Agreement are further subject to the
receipt of a certain closing certificate and fulfillment of the following
conditions:
(1) PJLC will have received an opinion of counsel to the Company relating
to title to the Purchase Price Shares and certain other corporate
matters; and
(2) THLI will have executed and delivered the Pepe European License
Amendment and the Company will have executed and delivered the
Registration Rights Agreement.
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INDEMNIFICATION
PJLC has agreed in the Stock Purchase Agreement, subject to the limits
described below, to indemnify the Company and its subsidiaries and their
respective officers and directors on a net after-tax basis, from and against
any and all losses and expenses suffered by such indemnified parties resulting
from or arising out of (1) any breach of any of the representations or
warranties of PJLC, (2) any breach of any covenants or agreements made by any
Seller Affiliate in the Stock Purchase Agreement, (3) any liability or
obligation of Pepe Jeans arising from or relating to any business other than
the business of Pepe Jeans and Tommy Canada conducted under the Pepe United
States License, the Pepe International License and the Canadian License
(collectively, "Retained Liabilities") and (4) the failure by Lawvest or the
guarantor under the Bentley Trust Guarantee to timely satisfy upon demand
therefor its liabilities and obligations to Pepe USA pursuant to the
indemnification provisions of the Canada Purchase Agreement or the Bentley
Trust Guarantee, as applicable ("Canadian Liabilities"). The indemnity by PJLC
described above will not affect or limit the separate indemnification with
respect to tax matters provided by PJLC under the Stock Purchase Agreement.
The indemnified parties will not be entitled to assert any indemnification
pursuant to clause (1) or (2) of the preceding paragraph (in the case of
covenants and agreements which by their terms do not contemplate performance
after the Closing Date) (1) after the statute of limitations period, with
respect to breaches of the representations and warranties by PJLC in the Stock
Purchase Agreement with respect to tax matters, (2) after the third
anniversary of the Closing Date, with respect to covenant breaches or breaches
of the representations and warranties by PJLC in the Stock Purchase Agreement
with respect to environmental matters or (3) after September 30, 1999, with
respect to all other breaches of the representations and warranties by PJLC
contained in any other provision of the Stock Purchase Agreement (other than
PJLC's representations and warranties concerning the ownership of the Pepe USA
Shares and the Pepe Far East Shares which are not subject to any time
limitation) or any breach or nonfulfillment of any covenants or agreements
made by PJLC in the Stock Purchase Agreement that by their terms were required
to be performed prior to the Closing Date.
Under the Stock Purchase Agreement, PJLC will have no liability for
indemnification unless losses exceed in the aggregate a $500,000 threshold.
If, however, aggregate losses exceed the $500,000 threshold, PJLC will be
liable for all such losses. These threshold provisions do not apply to
Retained Liabilities or the Canadian Liabilities. PJLC will not be required to
indemnify the Company and its subsidiaries pursuant to the indemnification
provisions described above for losses in excess of $1.128 billion.
PJLC has agreed to provide the Company and its subsidiaries a separate
indemnification with respect to tax matters. Under these provisions, PJLC will
be liable for (1) taxes imposed upon, or with respect to the income or
operations of, Pepe Jeans (a) with respect to any taxable period ending on or
before December 31, 1997 and (b) in the case of any taxable period beginning
before and ending after December 31, 1997 allocable to the portion of such
period beginning before and ending on December 31, 1997, in each case, to the
extent such taxes are not reflected in the reserve for tax liabilities shown
on the combined balance sheet of Pepe Jeans as of December 31, 1997 and (2)
taxes attributable to the operations of an entity (other than Pepe Jeans or
any of its predecessors) for which Pepe Jeans may be held liable by virtue of
a relationship to or affiliation with such entity under certain tax laws.
AIHL GUARANTEE
Pursuant to the AIHL Guarantee, AIHL has agreed to unconditionally and
irrevocably guarantee to the Company, TH USA and THEH (collectively, the
"Guaranteed Parties") the prompt and complete payment and performance of all
obligations of PJLC (AIHL's indirect 97% owned subsidiary) in the Stock
Purchase Agreement and to pay all reasonable expenses which the Guaranteed
Parties may pay or incur in enforcing the AIHL Guarantee. AIHL's obligations
under the AIHL Guarantee are limited to $1.128 billion but may be satisfied in
full by delivery to the Guaranteed Parties of $755,760,000 and the Purchase
Price Shares. AIHL may assign its obligations under the AIHL Guarantee
(whether by operation of law or otherwise) only with the consent of the
Company, which consent may not be unreasonably withheld.
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FEES AND EXPENSES
If the transactions contemplated by the Stock Purchase Agreement are not
consummated, all legal and other costs and expenses incurred in connection
with the Stock Purchase Agreement (other than filing fees under the HSR Act)
will be paid by the party incurring such costs and expenses. If the
transactions contemplated by the Stock Purchase Agreement are consummated, the
legal and other expenses (including the fees of financial advisors) incurred
in connection with the Stock Purchase Agreement will be paid by Pepe USA and
TH USA and the legal and other expenses (including the fees of financial
advisors) incurred in connection with the Canada Purchase Agreement will be
paid by Pepe USA and Tommy Canada.
TERMINATION OF THE STOCK PURCHASE AGREEMENT; EFFECT OF TERMINATION
The Stock Purchase Agreement may be terminated at any time prior to the
Closing, whether before or after approval of the Acquisition Proposal at the
Special Meeting:
(1) by mutual consent of the Company and PJLC;
(2) by either the Company or PJLC, if any governmental authority has issued
an injunction, restraining order or decree that restrains or prohibits
the consummation of the Acquisition or the performance by the parties
to the Stock Purchase Agreement of their obligations thereunder, and
such injunction, restraining order or decree has become final and
nonappealable;
(3) by either the Company or PJLC, if the Closing has not occurred by the
close of business on September 30, 1998, unless the failure of the
Closing to occur by such date is due to the failure of the party
seeking to terminate this Stock Purchase Agreement to perform or
observe in all material respects the covenants and agreements of such
party set forth in the Stock Purchase Agreement; or
(4) by either the Company or PJLC, if the Acquisition Proposal is not
approved by the Company Shareholders at the Special Meeting.
Upon written notice by the terminating party to the other party, the Stock
Purchase Agreement will terminate and become void and have no effect, except
that the provisions governing expenses will survive the termination. No
termination will relieve any party to the Stock Purchase Agreement of any
liability for any willful breach of the Stock Purchase Agreement (other than a
breach of a representation, as to which no party will be liable).
AMENDMENT AND WAIVER
The Stock Purchase Agreement may not be modified or amended except in
writing. Any party to the Stock Purchase Agreement may, in writing, waive
compliance by the other parties with any term or provision of the Stock
Purchase Agreement to be performed or complied with by such other parties. The
waiver by any party to the Stock Purchase Agreement of a breach of any term or
provision of the Stock Purchase Agreement will not be construed as a waiver of
any subsequent breach.
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THE CANADA PURCHASE AGREEMENT
On January 26, 1998, Pepe USA and Lawvest entered into the Canada Purchase
Agreement pursuant to which Pepe USA will purchase all of the capital stock of
Tomcan. Pepe USA will pay a purchase price of C$125 million for the Tomcan
shares using funds provided by PJLC. The obligations of the Company, TH USA
and THEH to consummate the Acquisition are conditioned on all of the
conditions to Pepe USA's and Lawvest's obligations under the Canada Purchase
Agreement (other than the payment of the purchase price by Pepe USA and the
delivery of the Tomcan shares by Lawvest) having been satisfied, without
waiver thereof.
Each of Pepe USA's and Lawvest's obligations to consummate the Canada
Purchase are conditioned on (1) the representations and warranties of the
other party being true and correct in all material respects (except those
qualified by materiality, which must be true in all respects) as of the
Closing Date, and the other party having performed the covenants required to
be performed by such party prior to the Closing Date and (2) there being no
statute, rule, regulation or order of a court or other governmental authority
that prohibits the Canada Purchase.
Pepe USA's obligations to consummate the Canada Purchase are further
conditioned on, among other things, (1) the receipt of third-party and
required governmental consents, (2) there having not occurred any event,
change or development or absence of the foregoing which has had or is
reasonably likely to have an effect which is materially adverse to the
business, assets, liabilities, financial condition, earnings, operations or
prospects of Tomcan and TH Canada taken as a whole, (3) there being no pending
or threatened action which seeks to impose limitations on the ability of Pepe
USA to exercise full rights of ownership of the Tomcan shares or Pepe USA's
ability to conduct the Canadian businesses, or that requires Pepe USA or any
of its affiliates to divest the Tomcan shares or any assets or businesses, or
which Pepe USA reasonably believes presents a material risk that it would not
realize substantially all of the benefits of the Canada Purchase or would
cause it to suffer substantial monetary damages, (4) the Acquisition having
been consummated, (5) the receipt of an opinion of Lawvest's counsel,
reasonably satisfactory to Pepe USA, with respect to the capitalization of
Tomcan and certain other corporate matters and (6) the Bentley Trust Guarantee
being in full force and effect.
The Canada Purchase Agreement contains customary representations and
warranties, including representations of Lawvest with respect to the financial
statements previously delivered to Pepe USA, litigation, and transactions with
affiliates, and customary covenants, including a covenant that Tommy Canada
will conduct its business in the ordinary course from the date of signing of
the Canada Purchase Agreement through the Closing. Under the Canada Purchase
Agreement, prior to the Closing all indebtedness from Tommy Canada to Lawvest
and its affiliates reflected on Tomcan's consolidated balance sheet as of
December 31, 1997 will be released and forgiven, and all indebtedness from
Lawvest and its affiliates reflected on such balance sheet will be repaid in
full.
Lawvest has agreed to indemnify Pepe USA and PJLC and their respective
affiliates against losses arising out of breaches of representations,
warranties and covenants of Lawvest in the Canada Purchase Agreement. The
survival periods of Lawvest's representations, warranties and covenants in the
Canada Purchase Agreement generally expire on September 30, 1999, except
longer periods apply to representations relating to taxes, capitalization and
ownership of the Tomcan shares.
Under the Bentley Trust Guarantee, ATC Trustees (Cayman) Limited, as trustee
for Lawvest's sole shareholder, has guaranteed the fulfillment of Lawvest's
indemnification obligations under the Canada Purchase Agreement. Lawvest's and
the guarantor's obligations under these provisions are limited to C$125
million, and neither Lawvest nor the guarantor will be liable under the
indemnity or guarantee, as applicable, unless all losses exceed C$75,000.
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MARKET PRICE AND DIVIDEND INFORMATION
The Company Shares are listed and traded on the NYSE under the symbol "TOM."
The following table reflects the range of the reported high and low sale
prices of the Company Shares on the NYSE Composite Tape for the periods
indicated.
<TABLE>
<CAPTION>
COMPANY SHARES
------------------
FISCAL YEAR HIGH LOW
----------- ------- -------
<S> <C> <C>
ENDED MARCH 31, 1996:
First quarter..................................... $ 29 1/8 $ 20 5/8
Second quarter.................................... 37 7/8 27 1/8
Third quarter..................................... 45 3/4 29 5/8
Fourth quarter.................................... 48 32 5/8
ENDED MARCH 31, 1997:
First quarter..................................... $ 55 7/8 $ 41 1/2
Second quarter.................................... 59 3/8 41 3/4
Third quarter..................................... 61 1/8 44 1/8
Fourth quarter.................................... 59 1/8 42 1/2
ENDING MARCH 31, 1998:
First quarter..................................... $ 53 3/4 $ 36 7/8
Second quarter.................................... 51 1/8 39 3/16
Third quarter..................................... 50 3/8 33
Fourth quarter (through March 26, 1998)........... 61 3/8 35 3/16
</TABLE>
On January 30, 1998, the last full trading day prior to the execution,
delivery and public announcement of the Stock Purchase Agreement, the closing
price of the Company Shares was $43 9/16 per share, as reported on the NYSE
Composite Tape. On March 26, 1998, the most recent practicable date prior to
the printing of this Proxy Statement, the closing price of the Company Shares
was $59 1/4 per share, as reported on the NYSE Composite Tape. Company
Shareholders are encouraged to obtain current market quotations for the
Company Shares. Because the number of Company Shares to be issued in the
Acquisition is fixed and the market price of Company Shares is subject to
fluctuation, the value of the Purchase Price Shares PJLC will receive in the
Acquisition may increase or decrease prior to or after the consummation of the
Acquisition and such shares are subject to certain transfer restrictions. See
"The Stock Purchase Agreement--Restrictions on Transfer of Shares;
Registration Rights."
The Company has never paid any dividends on the Company Shares. The Company
anticipates that all of its earnings in the foreseeable future will be
retained for the development and expansion of its businesses and, therefore,
has no current plans to pay cash dividends. Future dividend policy will depend
on the Company's earnings, capital requirements, financial condition,
restrictions imposed by agreements governing the Company's indebtedness,
availability of dividends, receipt of funds in connection with repayment of
loans to subsidiaries or advances from operating subsidiaries and other
factors considered relevant by the Board of Directors.
48
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
The following tables present selected historical financial information for
the Company which should be read in conjunction with the historical financial
statements, and the related notes thereto, of the Company, management's
discussion and analysis of financial condition and results of operations, and
other financial data incorporated by reference into this Proxy Statement. The
selected historical financial data of the Company for each of the three fiscal
years in the period ended March 31, 1997 have been derived from the Company's
audited financial statements and other information contained in the 1997
Company Form 10-K. The selected historical financial data of the Company for
the fiscal years ended March 31, 1994 and 1993 have been derived from the
Company's audited financial statements. The selected financial data as of, and
for the nine months ended, December 31, 1997 and 1996 were derived from the
Company's unaudited financial statements and other information contained in
the Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997 and are not necessarily indicative of results for a full year. All
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of results of the unaudited historical interim periods have
been included. See "Available Information."
49
<PAGE>
TOMMY HILFIGER CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
----------------------- --------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ----------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue (a)......... $644,385 $491,235 $661,688 $478,131 $320,985 $227,201 $138,638
Cost of goods sold...... 337,671 255,954 344,884 258,419 174,584 127,053 81,502
-------- -------- -------- -------- -------- -------- --------
Gross profit.......... 306,714 235,281 316,804 219,712 146,401 100,148 57,136
Selling, general and
administrative
expenses............... 182,476 141,145 190,976 132,270 85,954 58,702 33,181
-------- -------- -------- -------- -------- -------- --------
Income from
operations........... 124,238 94,136 125,828 87,442 60,447 41,446 23,955
Interest income
(expense).............. 4,078 3,860 5,420 4,958 3,010 320 (1,129)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes................ 128,316 97,996 131,248 92,400 63,457 41,766 22,826
Provision for income
taxes.................. 42,534 33,931 44,866 30,900 22,742 16,422 8,220
-------- -------- -------- -------- -------- -------- --------
Net income............ $ 85,782 $ 64,065 $ 86,382 $ 61,500 $ 40,715 $ 25,344 $ 14,606
======== ======== ======== ======== ======== ======== ========
Earnings per share
Basic (b)............. $ 2.30 $ 1.73 $ 2.33 $ 1.72 $ 1.16 $ 0.80 $ 0.55
======== ======== ======== ======== ======== ======== ========
Weighted average
shares outstanding... 37,333 37,015 37,059 35,767 34,963 31,779 26,394
======== ======== ======== ======== ======== ======== ========
Diluted (b)........... $ 2.26 $ 1.69 $ 2.28 $ 1.65 $ 1.12 $ 0.77 $ 0.55
======== ======== ======== ======== ======== ======== ========
Weighted average
shares and share
equivalents
outstanding.......... 37,918 37,838 37,885 37,241 36,346 32,836 26,394
======== ======== ======== ======== ======== ======== ========
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- --------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ----------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments.................. $148,911 $119,659 $109,908 $127,743 $ 86,031 $ 50,867 $ 18,671
Working capital......... 331,746 261,952 270,667 238,439 165,261 110,589 53,748
Total assets............ 575,452 429,804 463,085 358,622 239,493 190,378 84,704
Short-term borrowings... 9,323 5,301 5,980 13,755 13,487 10,319 8,068
Long-term debt.......... -- 1,581 1,510 1,789 2,064 2,341 --
Shareholders' equity.... 488,416 372,781 397,464 301,338 209,024 161,715 68,700
</TABLE>
- --------
(a) On October 1, 1995, the Company entered into the Pepe United States License
with the parent of Pepe USA for the manufacture, sale and distribution in
the United States of men's, women's and girls' jeanswear and jeans related
apparel (which includes women's and girls' casualwear) bearing the TOMMY
JEANS(R) and TOMMY HILFIGER(R) registered trademarks. Included in net
revenue is royalty income of $13,311 and $5,894 for the nine months ended
December 31, 1997 and 1996, respectively, and $9,963 and $1,915 in the
fiscal years ended March 31, 1997 and 1996, respectively. Net revenue
includes denim product sales prior to entering into this license of $12,370
and $9,104 during the fiscal years ended March 31, 1996 and 1995,
respectively. Amounts for prior years are not material.
(b) Earnings per share data have been restated to be in accordance with
Statement of Financial Accounting Standards No. 128 (Earnings Per Share).
50
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF PEPE JEANS
The following tables present selected historical financial information for
Pepe Jeans. The selected historical financial information should be read in
conjunction with the historical combined financial statements, including the
related notes thereto, of Pepe Jeans, management's discussion and analysis of
financial condition and results of operations and other financial data
included elsewhere in this Proxy Statement. The selected historical financial
data of Pepe Jeans for each of the three fiscal years in the period ended
March 31, 1997 have been derived from its audited combined financial
statements included elsewhere in this Proxy Statement. The selected financial
data for each of the two fiscal years in the period ended March 31, 1994 and
as of, and for the nine months ended, December 31, 1997 and 1996, were derived
from the unaudited combined financial statements of Pepe Jeans. The selected
financial data for the nine months ended December 31, 1997 and 1996 are not
necessarily indicative of results for a full year. All adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
results of the unaudited historical interim periods have been included. See
"Pepe Jeans Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Index to Financial Statements--Pepe Jeans USA,
Inc. and TJ Far East Limited."
51
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED COMBINED(A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
----------------------- ---------------------------------------------------
1997 1996 1997(B) 1996 1995 1994 1993
----------- ----------- -------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues(c)(d)...... $278,445 $158,267 $234,920 $ 89,029 $75,807 $89,408 $72,819
Cost of goods sold...... 150,673 98,091 146,948 61,875 48,697 55,037 47,273
-------- -------- -------- -------- ------- ------- -------
Gross profit........... 127,772 60,176 87,972 27,154 27,110 34,371 25,546
Selling, general and
administrative
expenses............... 65,198 38,366 69,046 35,657 26,710 31,729 27,960
-------- -------- -------- -------- ------- ------- -------
Income (loss) from
operations............ 62,574 21,810 18,926 (8,503) 400 2,642 (2,414)
Interest expense, net... 838 1,278 1,650 1,543 1,533 641 608
-------- -------- -------- -------- ------- ------- -------
Income (loss) before
income taxes.......... 61,736 20,532 17,276 (10,046) (1,133) 2,001 (3,022)
Provison for income
taxes.................. 24,977 4,074 2,113 400 338 335 892
-------- -------- -------- -------- ------- ------- -------
Net income (loss)...... $ 36,759 $ 16,458 $ 15,163 $(10,446) $(1,471) $ 1,666 $(3,914)
======== ======== ======== ======== ======= ======= =======
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- ---------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ----------- -------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 5,325 $ 3,360 $ 2,092 $ 2,407 $ 221 $ 446 $ 3,256
Working capital......... 56,279 30,212 27,717 21,373 16,753 21,402 29,694
Total assets............ 141,155 98,332 106,507 55,993 43,906 48,890 45,497
Short-term borrowings... 13,228 24,716 16,665 11,939 10,376 7,439 3,925
Long-term debt.......... 58,634 48,310 48,384 43,079 17,500 17,500 17,500
Shareholders' equity
(deficiency)........... 34,244 3,205 1,931 (13,355) 7,595 9,108 11,187
</TABLE>
- --------
(a) The information presented reflects the financial statements of Pepe USA
and Pepe Far East, which have been combined due to their common ownership.
All material intercompany transactions and balances have been eliminated.
(b) During the year ended March 31, 1997, Pepe USA recorded a restructuring
charge of $3,590, which is included in selling, general and administrative
expenses, related to the discontinuance of the PEPE(R) jeans product line.
(c) Net revenues include sales of the discontinued PEPE(R) jeans product line
as follows: $4,821 and $28,426 in the nine months ended December 31, 1997
and 1996, respectively, $33,289, $56,646, $69,126, $79,769 and $57,969 in
the fiscal years ended March 31, 1997, 1996, 1995, 1994 and 1993,
respectively. Net revenues include $3,686 and $2,877 for the nine months
ended December 31, 1997 and 1996, respectively, and $5,188, $4,355,
$6,681, $9,639 and $14,850 for the fiscal years ended March 31, 1997,
1996, 1995, 1994 and 1993, respectively, related to the wholesale sale of
products to distributors and buying agency commissions on PEPE(R)
products, which are not expected to recur prospectively.
(d) On October 1, 1995, Pepe USA was assigned the Pepe United States License
for the manufacture, sale and distribution in the United States of men's,
women's and girls' jeanswear and jeans related apparel (which includes
women's and girls' casualwear) bearing the TOMMY JEANS(R) and TOMMY
HILFIGER(R) registered trademarks. Net revenues include $264,726 and
$125,899 in the nine months ended December 31, 1997 and 1996,
respectively, and $194,647 and $28,028 in the fiscal years ended March 31,
1997 and 1996, respectively, of sales of products related to this license.
52
<PAGE>
PEPE JEANS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in Pepe Jeans' unaudited
condensed combined statements of operations and retained earnings:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenues.......................................... 100.0% 100.0%
Cost of goods sold.................................... 54.1 62.0
-------- --------
Gross profit........................................ 45.9 38.0
Selling, general and administrative expenses.......... 23.4 24.2
-------- --------
Operating income.................................... 22.5 13.8
Interest expense, net................................. 0.3 0.8
-------- --------
Income before income taxes.......................... 22.2 13.0
Income tax provision.................................. 9.0 2.6
-------- --------
Net income.......................................... 13.2% 10.4%
======== ========
</TABLE>
Pepe Jeans' net income increased 123.4% to $36,759,000 during the nine
months ended December 31, 1997 from $16,458,000 in the corresponding period of
1996.
Net revenues increased $120,178,000, or 75.9%, to $278,445,000 during the
nine months ended December 31, 1997 from $158,267,000 during the nine months
ended December 31, 1996. This improvement includes net sales increases of
177.2% from women's and girls' casualwear bearing the TOMMY HILFIGER(R)
trademark ("Tommy Womenswear") and 78.2% from men's jeanswear and jeans-
related apparel bearing the TOMMY JEANS(R) trademark ("Tommy Men's
Jeanswear"), partially offset by a net sales decrease of 83.0% from PEPE(R)
jeans. Net revenues by division during the nine months ended December 31, 1997
compared to the nine months ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Tommy Womenswear................................ $113,166,000 $ 40,830,000
Tommy Men's Jeanswear........................... 151,560,000 85,069,000
PEPE(R) jeans................................... 4,821,000 28,426,000
Buying agency revenues.......................... 8,898,000 3,942,000
------------ ------------
Net revenues.................................... $278,445,000 $158,267,000
============ ============
</TABLE>
Net revenues increases from Tommy Womenswear and Tommy Men's Jeanswear are
primarily the result of Pepe Jeans' in-store shop and fixtured area expansion
program, whereby certain of Pepe Jeans' customers have increased the number of
stores as well as the amount of square footage in which Pepe Jeans' products
are sold. The net revenues decrease from PEPE(R) jeans reflects Pepe Jeans'
decision to focus on Tommy Womenswear, Tommy Men's Jeanswear and the TOMMY
JEANS(R) women's line, which will include jeanswear and jeans-related apparel
for young women ("Tommy Women's Jeanswear" and, collectively with Tommy Men's
Jeanswear, "Tommy Jeanswear"), thereby ceasing to distribute the PEPE(R) jeans
product line during the nine months ended December 31, 1997. Buying agency
revenues include $3,686,000 and $2,877,000 for the nine months ended December
31, 1997 and 1996, respectively, which are related to the wholesale sale of
product to distributors and buying agency commissions on PEPE(R) jeans
products, which are not expected to recur prospectively.
53
<PAGE>
Gross profit improved to 45.9% of net revenues in the nine months ended
December 31, 1997 from 38.0% of net revenues in the nine months ended December
31, 1996. Gross profit has increased primarily due to the increased volume in
the Tommy Womenswear and Tommy Men's Jeanswear product lines, which produce
higher margins than the PEPE(R) jeans product line.
Selling, general and administrative expenses decreased as a percentage of
net revenues to 23.4% during the nine months ended December 31, 1997 from
24.2% of net revenues during the nine months ended December 31, 1996. The
decreased percentage was largely due to increased sales volume. Selling,
general and administrative expenses increased to $65,198,000 in the nine
months ended December 31, 1997 from $38,366,000 in the nine months ended
December 31, 1996. This overall increase was principally due to volume-related
expenses to support the higher revenues, including royalties and advertising
contributions relating to the Pepe United States License.
The income tax provision in the nine months ended December 31, 1997
increased to 40.5% of income before taxes from 19.8% in the corresponding
period of 1996. The 1996 rate is after the application of net operating loss
carryforwards.
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
All references to years relate to the fiscal year ended March 31 of such
year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in Pepe Jeans' combined
statements of operations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
--------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues....................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 62.6 69.5 64.2
----- ----- -----
Gross profit..................................... 37.4 30.5 35.8
Selling, general and administrative expenses....... 29.3 40.1 35.3
----- ----- -----
Operating income (loss).......................... 8.1 (9.6) 0.5
Interest expense, net.............................. 0.7 1.7 2.0
----- ----- -----
Income (loss) before income taxes................ 7.4 (11.3) (1.5)
Income tax provision............................... 0.9 0.4 0.4
----- ----- -----
Net income (loss)................................ 6.5% (11.7)% (1.9)%
===== ===== =====
</TABLE>
In October 1995, Pepe Jeans was assigned the Pepe United States License from
its parent, PJLC. Pepe Jeans began importing and distributing jeanswear and
jeans related apparel under the TOMMY JEANS(R) name in October 1995 and
womenswear under the TOMMY HILFIGER(R) name in July 1996. During 1997, Pepe
Jeans decided to focus its selling and marketing efforts on the Tommy
Jeanswear and Tommy Womenswear product lines and decided that it would no
longer distribute the PEPE jeans product line.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Pepe Jeans' net income increased to $15,163,000 in 1997 from a net loss of
$10,446,000 in 1996. This represents an improvement of $25,609,000. As a
percentage of net revenues, net income increased to 6.5% in 1997 from a net
loss of 11.7% in 1996.
Net revenues increased 163.9% to $234,920,000 in 1997 from $89,029,000 in
1996. This improvement includes $72,310,000 of net sales from Tommy
Womenswear, which was launched in the Fall of 1996. Additionally, net sales
from Tommy Men's Jeanswear increased 336.5% to $122,337,000 in 1997 from
54
<PAGE>
$28,028,000 in 1996, while buying agency revenues increased 60.4% to
$6,984,000 in 1997 from $4,355,000 in 1996. Partially offsetting these
increases was a decrease from PEPE(R) jeans net sales by 41.2% to $33,289,000
in 1997 from $56,646,000 in 1996. The net sales increases from Tommy
Womenswear and Tommy Men's Jeanswear were primarily the result of opening in-
store shops and fixtured areas.
Gross profit improved to 37.4% of net revenues in 1997 from 30.5% of net
revenues in 1996. Gross profit increased primarily due to the increased volume
in the Tommy Womenswear and Tommy Men's Jeanswear product lines, which produce
higher margins than the PEPE(R) jeans product line. Additionally, the 1996
gross margin was impacted by higher initial-year costs associated with the
Pepe United States License.
Selling, general and administrative expenses decreased as a percentage of
net revenues to 29.3% in 1997 from 40.1% of net revenues in 1996. The
decreased percentage was largely due to increased sales volume. Selling,
general and administrative expenses increased to $69,046,000 in 1997 from
$35,657,000 in 1996. This increase was principally due to volume-related
expenses to support the higher revenues, including royalties and advertising
contributions relating to the Pepe United States License, as well as to start-
up costs relating to the launch of Tommy Womenswear in the Fall of 1996. Also
included in 1997 is a restructuring charge of $3,590,000 associated with Pepe
Jeans' decision to no longer distribute the PEPE(R) jeans product line.
The 1997 income tax provision of $2,113,000, or 12.2% of pre-tax income, was
recorded net of operating loss carryforwards of approximately $16,700,000. No
tax benefit was recorded on Pepe Jeans' loss before income taxes of
$10,046,000 in 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Pepe Jeans' net loss increased to $10,446,000 in 1996 from $1,471,000 in
1995. This represents a loss increase of $8,975,000. As a percentage of net
revenues, net loss increased to 11.7% in 1996 from 1.9% in 1995.
Net revenues increased 17.4% to $89,029,000 in 1996 from $75,807,000 in
1995. This improvement includes $28,028,000 of net sales from Tommy Men's
Jeanswear, which Pepe Jeans began distributing in October 1995, and was
partially offset by an 18.1% decrease in PEPE(R) jeans net sales to
$56,646,000 in 1996 from $69,126,000 in 1995. Buying agency revenues of
$4,355,000 and $6,681,000 for the fiscal years ended March 31, 1997 and 1996,
respectively, relate to the PEPE(R) jeans line and are not expected to recur
prospectively.
Gross profit decreased to 30.5% of net revenues in 1996 from 35.8% of net
revenues in 1995. The decrease was largely attributable to the effects of
initial year costs associated with the Pepe United States License.
Selling, general and administrative expenses increased as a percentage of
net revenues to 40.1% in 1996 from 35.3% of net revenues in 1995. Selling,
general and administrative expenses increased to $35,657,000 in 1996 from
$26,710,000 in 1995. These increases were primarily due to start-up costs
associated with the Pepe United States License as well as to the volume-
related expenses to support the higher revenues, including royalties and
advertising contributions relating to the license.
Income tax provisions were minimal in both 1996 and 1995 due to Pepe Jeans'
losses from operations.
LIQUIDITY AND CAPITAL RESOURCES
Pepe Jeans' primary funding requirements are to finance working capital and
the continued growth of the business. This includes primarily the purchase of
inventory in anticipation of increased sales as well as capital expenditures
related to the expansion of the Tommy Womenswear and Tommy Men's Jeanswear in
store-shops and fixtured areas. Pepe Jeans' sources of liquidity are cash on
hand, cash from operations, funds provided by its parent and available credit.
55
<PAGE>
As of December 31, 1997, Pepe Jeans had approximately $5,325,000 of cash and
cash equivalents compared to a March 31, 1997 balance of $2,092,000. This
represented an overall increase of $3,233,000 due to cash provided by
operating and financing activities, partially offset by cash used in investing
activities. A detailed analysis of the changes in cash and cash equivalents is
presented in the unaudited condensed combined statements of cash flows. See
"Index to Financial Statements--Pepe Jeans USA, Inc. and TJ Far East Limited."
Net cash provided by operating activities during the nine months ended
December 31, 1997 was $19,554,000. This amount is primarily made up of cash
generated from net earnings offset by an increase in other components of
working capital. The increase in working capital is primarily due to a higher
inventory level which increased 67.5% to $44,992,000 at December 31, 1997 from
$26,868,000 at March 31, 1997. The increase in inventory levels were required
for the growing Tommy Womenswear and Tommy Men's Jeanswear businesses.
Capital expenditures were $18,275,000 for the nine months ended December 31,
1997. Significant capital expenditures in the nine months ended December 31,
1997 include approximately $16,004,000 related to Pepe Jeans' in-store shop
and fixtured area programs.
In March 1997, Pepe Jeans amended its credit agreement (the "Credit
Agreement") originally entered into on December 31, 1995. The Credit
Agreement, as amended, provides for direct borrowings and letters of credit
ranging from $55,000,000 to $75,000,000 through May 31, 1999. Pepe Jeans is
currently negotiating an increase in the amount available under the Credit
Agreement to a range from $90,000,000 to $140,000,000, which increase will
require the consent of the Company pursuant to the Stock Purchase Agreement
(see "The Stock Purchase Agreement--Covenants--Covenants of PJLC"). Available
borrowings are subject to increases of availability under the Credit Agreement
and are based upon eligible accounts receivable, inventory and open letters of
credit. As of December 31, 1997, $60,000,000 was available for utilization
under the Credit Agreement of which $26,464,000 was utilized. Available
borrowings under the Credit Agreement are collateralized by substantially all
the assets of Pepe Jeans. Borrowings under the Credit Agreement accrue
interest at or slightly above the prime rate.
At December 31, 1997, total short-term borrowings of $13,228,000 consisted
entirely of open letters of credit for inventory purchased. Additionally, at
December 31, 1997, Pepe Jeans was contingently liable for unexpired bank
letters of credit of $13,236,000 related to commitments of Pepe Jeans to
suppliers for the purchase of inventories and leases.
The Credit Agreement contains various covenants, including, among others,
certain restrictions upon capital expenditures, investments, indebtedness,
dividends, loans and advances. The Credit Agreement, as amended, also requires
the maintenance of minimum tangible net worth, certain leverage and current
ratios as well as limitations on losses. At December 31, 1997, Pepe Jeans was
in compliance with all covenants.
Cash requirements in 1999 will primarily include capital expenditures
relating to the in-store shops and fixtured area programs and the roll-out of
Tommy Women's Jeanswear beginning in Fall 1998. While Pepe Jeans historically
has relied to a significant extent on funds provided by PJLC to support the
growth of its business, Pepe Jeans is negotiating an increase in its bank
credit lines which, together with cash on hand and cash from operations, it
expects will be sufficient to support its operations through 1999 without
financing from PJLC.
INFLATION
Pepe Jeans does not believe that the relatively moderate rates of inflation
experienced over the last few years in the United States, where it primarily
operates, have had a significant effect on its net revenue or profitability.
Higher rates of inflation have previously been experienced in a number of
foreign countries in which Pepe Jeans' products are manufactured but have not
had a material effect on Pepe Jeans' net revenue or profitability. Pepe Jeans
has been able to partially offset its cost increases by increasing prices or
changing suppliers. See "--Exchange Rates."
56
<PAGE>
EXCHANGE RATES
Pepe Jeans receives United States dollars for all of its product sales.
Inventory purchases from contract manufacturers throughout the world are
denominated in United States dollars; however, purchase prices for Pepe Jeans'
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 Pepe Jeans' cost of goods in the
future. During the last three fiscal years, exchange rate fluctuations have
not had a material impact on Pepe Jeans' inventory costs. Pepe Jeans does not
engage in hedging activities with respect to such exchange rate risk.
A number of countries from which Pepe Jeans sources products have recently
experienced currency fluctuations and economic conditions which may result in
deflationary pressures. Pepe Jeans' ability to benefit from such conditions,
should they occur, is uncertain, and would be dependent upon competitive
conditions in the United States, among other factors.
YEAR 2000
Pepe Jeans is assessing the ability of its computerized information systems
to process transactions relating to years 2000 and beyond. While certain
modifications are required, Pepe Jeans expects to achieve necessary
modifications on a timely basis at a cost that will not be material to
operations.
57
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF TOMMY CANADA
The following table presents selected historical financial information for
Tomcan and, prior to April 1, 1997, TH Canada. The selected historical
financial information should be read in conjunction with the historical
financial statements, and the related notes thereto, of Tomcan and TH Canada,
management's discussion and analysis of financial condition and results of
operations, and other financial data included elsewhere in this Proxy
Statement. The financial statements of Tomcan and TH Canada were prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"). Material variations in Canadian GAAP from accounting principles
generally accepted in the United States ("U.S. GAAP") are summarized in Notes
14 and 13 to the respective financial statements of Tomcan and TH Canada,
respectively, included elsewhere in this Proxy Statement. The selected
historical financial statements of TH Canada for each of the five fiscal years
in the period ended March 31, 1997 and as of and for the nine months ended
December 31, 1997 have been derived from TH Canada's and Tomcan's respective
audited financial statements and are not necessarily indicative of results for
a full year. The selected financial information as of, and for the nine months
ended, December 31, 1996 were derived from the unaudited financial statements
for TH Canada. All adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results of the unaudited
historical interim periods have been included. See "Tommy Canada Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Index to Financial Statements--Tomcan Investments Inc." and "--Tommy Hilfiger
Canada Inc."
58
<PAGE>
TOMCAN INVESTMENTS INC. AND TOMMY HILFIGER CANADA INC.(A)
(AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(PREPARED IN ACCORDANCE WITH CANADIAN GAAP EXCEPT AS NOTED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
-------------------- ----------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- ----------- -------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... C$70,063 C$33,929 C$50,297 C$29,330(b) C$17,627 C$11,931 C$8,746
Cost of sales........... 37,269 19,797 29,858 18,642 11,010 7,066 4,949
-------- -------- -------- -------- -------- -------- -------
Gross profit.......... 32,794 14,132 20,439 10,688 6,617 4,865 3,797
Selling, general and ad-
ministrative expenses.. 14,608 9,097 14,388 8,765 5,319 4,059 3,230
-------- -------- -------- -------- -------- -------- -------
Income from
operations........... 18,186 5,035 6,051 1,923 1,298 806 567
Other expense........... 899 407 491 810 560 177 223
-------- -------- -------- -------- -------- -------- -------
Income before
income taxes......... 17,287 4,628 5,560 1,113 738 629 344
Provision for income
taxes.................. 6,585 1,758 2,309 503 306 210 94
-------- -------- -------- -------- -------- -------- -------
Net income............ C$10,702 C$ 2,870 C$ 3,251 C$ 610 C$ 432 C$ 419 C$ 250
======== ======== ======== ======== ======== ======== =======
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------- ----------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- ----------- -------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ C$ 318 C$ 756 C$ 550 C$ 185 C$ 138 C$ -- C$ 56
Working capital......... 13,113 3,437 2,677 870 1,156 1,300 620
Total assets............ 34,931 22,832 27,795 18,068 10,463 6,706 4,823
Short-term borrowings... 1,337 9,164 11,131 11,195 5,245 3,211 2,292
Long-term debt.......... 9,570 -- -- -- -- -- --
Shareholders' equity.... 10,703 5,725 6,106 2,855 2,245 1,863 1,493
FINANCIAL DATA (IN
ACCORDANCE WITH U.S.
GAAP):
Net income.............. C$10,420 C$ 2,870 C$ 3,251 C$ 610 C$ 432 C$ 419 C$ 250
Total assets............ 31,874 22,832 27,795 18,068 10,463 6,706 4,823
Redeemable preferred
stock.................. -- 750 750 750 750 750 750
Shareholders' equity.... 7,646 4,975 5,356 2,105 1,495 1,113 743
</TABLE>
- --------
(a) Tomcan was incorporated on February 28, 1997 and, on April 1, 1997,
acquired the outstanding shares of TH Canada. Tomcan is a non-operating
entity and has no operating subsidiary other than TH Canada. The total
assets and shareholders' equity of Tomcan are not material. Therefore, the
above table includes the results of Tomcan for the nine-month period ended
December 31, 1997 and the results of TH Canada for each of the remaining
periods.
(b) In fiscal 1996, TH Canada sold the net assets associated with the PEPE(R)
jeans line to a related party at net book value. Included in the results
of operations for the fiscal year ended March 31, 1996 are sales of C$3.7
million related to this line.
59
<PAGE>
TOMMY CANADA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following financial information is based upon Canadian GAAP and
shareholders should refer to Notes 14 and 13 to the historical financial
statements of Tomcan and TH Canada, respectively, for U.S. GAAP information.
See "Index to Financial Statements." All references to dollars are to Canadian
dollars.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996
Effective April 1, 1997, Tomcan purchased TH Canada and, accordingly, all
references to years are comparing nine months of Tomcan ended December 31,
1997 to nine months of TH Canada ended December 31, 1996. Tomcan's financial
data consist of the TH Canada operations and the debt and goodwill related to
the purchase. References to Tommy Canada refer to Tomcan with respect to
periods on or after April 1, 1997 and TH Canada with respect to periods prior
to April 1, 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in consolidated statements of
income:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Sales................................................. 100.0% 100.0%
Cost of sales......................................... 53.2 58.3
-------- --------
Gross margin.......................................... 46.8 41.7
Operating expenses.................................... 20.8 26.9
-------- --------
Income from operations................................ 26.0 14.8
Other expense......................................... 1.3 1.2
-------- --------
Income before income taxes............................ 24.7 13.6
Current income taxes.................................. 9.4 5.1
-------- --------
Net income............................................ 15.3% 8.5%
======== ========
</TABLE>
Tommy Canada's net income increased to $10,701,705 for the nine months ended
December 31, 1997 from $2,869,552 in the corresponding period of 1996. This
represents an improvement of $7,832,153 or 272.9%. As a percentage of sales,
net income increased to 15.3% in 1997 from 8.5% in 1996.
Tommy Canada's sales for the nine months ended December 31, 1997 increased
to $70,062,783, compared to $33,929,249 for the prior period. This improvement
is primarily volume related reflecting increased sales of men's, women's and
children's sportswear, both with existing customers and through new in-store
shops.
Gross margin as a percentage of sales increased to 46.8% in 1997 from 41.7%
in 1996. This increase can be attributable in part to the improved gross
margin for the women's sportswear and men's denim divisions following the
initial planned launch inefficiencies and greater economies of scale on
domestic production due to changes in product mix.
Operating expenses increased to $14,607,502 in 1997 from $9,096,650 in 1996.
This increase was primarily attributable to increased volume related expenses
to support higher sales. As a percentage of sales, operating expenses
decreased to 20.8% from 26.9% due to the economies of scale in relation to the
increase in sales.
The provision for income taxes remained constant at approximately 38.1% of
income before taxes in 1997 and in 1996.
60
<PAGE>
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
All references to years relate to fiscal year ended March 31 of such year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to sales of certain items in Tommy Canada's consolidated
statements of income:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Sales................................................ 100.0% 100.0% 100.0%
Cost of sales........................................ 59.4 63.6 62.5
----- ----- -----
Gross margin......................................... 40.6 36.4 37.5
Operating expenses................................... 28.6 29.8 30.1
----- ----- -----
Income from operations............................... 12.0 6.6 7.4
Other expense........................................ 0.9 2.8 3.2
----- ----- -----
Income before income taxes........................... 11.1 3.8 4.2
Current income taxes................................. 4.6 1.7 1.7
----- ----- -----
Net income........................................... 6.5% 2.1% 2.5%
===== ===== =====
</TABLE>
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Tommy Canada's net income increased to $3,251,492 in 1997 from $609,844 in
1996. This represents an improvement of $2,641,648 or 433.2%. As a percentage
of sales, net income increased to 6.5% in 1997 from 2.1% in 1996.
Sales increased 71.5% to $50,296,666 in 1997 from $29,330,172 in 1996. This
increase is primarily volume related and reflects the launch of women's
sportswear and men's denim in the Fall of 1996. Additionally, sales of men's
and children's sportswear increased, both with existing customers and through
new in-store shops.
Gross margin improved to 40.6% of sales in 1997 from 36.4% of sales in 1996.
This increase in gross margin was primarily due to the change in mix of
products sold resulting from the launching of the new divisions.
As a percentage of sales, operating expenses decreased to 28.6% in 1997 from
29.8% in 1996 due to economies of scale in relation to the increase in sales.
Operating expenses increased to $14,387,957 in 1997 from $8,765,694 in 1996.
This increase was principally due to increased volume-related expenses to
support the higher sales.
The provision for income taxes decreased to 41.5% of income before taxes in
1997 from 45.2% in 1996. This decrease was primarily attributable to the
relative effect of a tax assessment in 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Tommy Canada's net income increased to $609,844 in 1996 from $432,230 in
1995. This represented an improvement of $177,614 or 41.1%. As a percentage of
sales, net income decreased to 2.1% in 1996 from 2.5% in 1995.
Sales increased 66.4% to $29,330,172 in 1996 from $17,626,925 in 1995. This
increase was primarily volume related from increased sales to existing
customers and through new in-store shops.
Gross margin declined to 36.4% of sales in 1996 from 37.5% of sales in 1995.
This decrease in gross margin was primarily due to a change in mix of products
and inventory valuation.
61
<PAGE>
Operating expenses increased to $8,765,694 in 1996 from $5,319,648 in 1995.
This increase was primarily attributable to increased volume related expenses
to support higher sales. As a percentage of sales, operating expenses
decreased to 29.8% from 30.1% due to the economies of scale achieved in
relation to the increase in sales.
The provision for income taxes increased to 45.2% of income before taxes in
1996 from 41.4% in 1995. This increase was primarily attributable to the
relative effect of a tax assessment in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Tommy Canada's primary funding requirements are to finance working capital
and the continued growth of the business. This includes primarily the purchase
of inventory in anticipation of increased sales as well as capital
expenditures related to the expansion of the in-store shop and fixtured area
programs. Tommy Canada expects to fund its operations through cash on hand,
cash from operations and available credit.
Tommy Canada's cash and cash equivalents balance has decreased from $550,317
at March 31, 1997 to $318,018 at December 31, 1997.
Net cash provided by operating activities for the nine months ended December
31, 1997 was $9,611,011. The primary source of such cash was net income
offset, in part, by an increase in working capital. The increase in working
capital was principally due to a higher inventory level which is the result of
a planned build-up in anticipation of the Spring and Summer seasons of fiscal
1998, as well as an increase in core inventory to meet the demands of Tommy
Canada's replenishment business. Inventory increased from $10,015,591 at March
31, 1997 to $19,156,331 at December 31, 1997, an increase of $9,140,740 or
91.3%.
Capital expenditures were $1,912,754 for the nine months ended December 31,
1997. The capital expenditures were primarily related to the expansion of
Tommy Canada's in-store shop programs. Tommy Canada has continued to install
new in-store shops, as well as to expand existing shops.
In June 1996, Tommy Canada entered into an amended and restated Security and
Loan Agreement (the "Canada Credit Agreement") effective June 5, 1996, which
was once again amended on September 1, 1997. The Canada Credit Agreement,
which expires in June 2000, provides for direct borrowings, bankers
acceptances and letters of credit of amounts in the aggregate ranging from
$20,000,000 in fiscal 1997 to $25,000,000 in fiscal 1998. Available borrowings
are subject to the timed increase of availability under the Canada Credit
Agreement and are based upon eligible accounts receivable, inventory and open
letters of credit. As of December 31, 1997, approximately $13,240,739 was
available for utilization under the Canada Credit Agreement of which the total
short-term borrowings of $1,337,066 consisted of the bank loans, bank
indebtedness and demand loans to related company. Obligations under the Canada
Credit Agreement are collateralized by substantially all the assets of Tommy
Canada. Direct borrowings under the Canada Credit Agreement accrued interest
at prime plus 1.25% until September 1, 1997 and at prime plus 1.00%
thereafter.
On April 22, 1997, Tommy Canada entered into an amended credit accommodation
agreement (the "L.C. Agreement"), which was further amended on December 16,
1997, with an institution which is separate and independent from the
institution related to the Canada Credit Agreement. The L.C. Agreement, which
provided for an additional sight documentary credit facility of $9,000,000
and/or US dollar equivalent, required limited cash collateral margin, and as
amended December 16, 1997, increased the additional sight documentary credit
facility to $12,000,000 and/or US dollar equivalent, which required no cash
collateral margin. At December 31, 1997, Tommy Canada was contingently liable
for unexpired bank letters of credit of $5,598,175 related to commitments to
suppliers for the purchase of inventories.
Tommy Canada was in compliance with all covenants under the Canada Credit
Agreement and L.C. Agreement as of, and for the nine month period ended,
December 31, 1997.
62
<PAGE>
INFLATION
Tommy Canada does not believe that the relatively moderate rates of
inflation experienced over the last few years in Canada, where it competes,
have had a significant effect on its net sales or profitability. Higher rates
of inflation have been experienced in a number of foreign countries in which
Tommy Canada's products are manufactured but have not had a material effect on
Tommy Canada's net sales or profitability. Tommy Canada has been able to
partially offset its cost increases by increasing prices or changing
suppliers.
EXCHANGE RATES
Tommy Canada receives Canadian dollars for substantially all of its products
sales and its licensing sales. Approximately 65% of Tommy Canada's inventory
purchases are from contract manufacturers throughout the world and are
denominated in United States dollars. The balance of Tommy Canada's inventory
purchases are from domestic manufacturers which are funded in Canadian
dollars. The purchase prices for the non-Canadian portion of Tommy Canada'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 affect Tommy Canada's cost of goods in the future. During the last
three fiscal years, exchange rate fluctuations have not had a material impact
on Tommy Canada's inventory costs. A number of countries from which Tommy
Canada sources products have recently experienced currency fluctuations and
economic conditions which may result in deflationary pressures. Tommy Canada's
ability to benefit from such conditions, should they occur, is uncertain, and
would be dependent upon competitive conditions in the United States, among
other factors. Due to the fluctuations of the United States dollar against the
Canadian dollar, Tommy Canada periodically engages in hedging activities with
respect to such exchange rate risk in an effort to mitigate the effects of
such fluctuations on future income.
YEAR 2000
Tommy Canada is assessing the ability of its computerized information
systems to process transactions relating to years 2000 and beyond. While
certain modifications are required, Tommy Canada expects to achieve necessary
modifications on a timely basis at a cost that will not be material to
operations.
63
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have been
derived from the application of pro forma adjustments to the combined
historical consolidated financial statements of the Company, which are
incorporated by reference into this Proxy Statement, and to those of the
Acquired Companies, which are included in this Proxy Statement. The unaudited
pro forma combined financial statements give effect to the Acquisition as if
it had occurred on (1) December 31, 1997 for purposes of the unaudited pro
forma combined balance sheet and (2) April 1, 1996 for purposes of the
unaudited pro forma combined statements of operations for the year ended March
31, 1997 and the nine months ended December 31, 1997. The unaudited pro forma
combined financial statements should be read in conjunction with the Company's
consolidated financial statements which are incorporated by reference, and
with the historical financial statements of the Acquired Companies which are
included in this Proxy Statement.
The pro forma adjustments are described in the notes to the unaudited pro
forma combined financial statements and are based on available information and
assumptions that management believes are reasonable. The unaudited pro forma
combined financial statements do not purport to present the financial position
or results of operations of the Company had the Acquisition occurred on the
dates specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future. The unaudited pro forma
combined financial statements do not reflect any adjustments for synergies
that management expects to realize in connection with the Acquisition. No
assurances can be made as to the amount or timing of such synergies, if any,
that may be realized.
The Acquisition will be accounted for using the purchase method of
accounting. Under this method, tangible and identifiable intangible assets
acquired and liabilities assumed are recorded at their estimated fair values.
The excess of the purchase price, including estimated fees and expenses
related to the acquisition, over the net assets acquired ("goodwill") is
classified with intangible and other assets on the accompanying unaudited pro
forma balance sheet. The estimated fair values and useful lives of assets
acquired and liabilities assumed are based upon a preliminary valuation and
are subject to final valuation adjustments. Final allocation of the purchase
price to the net assets acquired could vary the related amortization period of
the excess of cost over the fair value of net assets acquired.
The exchange rates applied for purposes of preparing the unaudited pro forma
combined financial statements were US$1 to C$1.43 for the December 31, 1997
balance sheet data, and US$1 to C$1.39 and US$1 to C$1.36 for the statement of
operations data for the nine months ended December 31, 1997 and the fiscal
year ended March 31, 1997, respectively.
64
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOMMY
HILFIGER
CORPORATION PEPE JEANS TOMCAN PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue............. $644,385 $278,445 $50,305 $ (7,849)(a) $950,367
(14,919)(b)
Cost of goods sold...... 337,671 150,673 26,759 (7,849)(a) 507,254
-------- -------- ------- -------- --------
Gross profit.......... 306,714 127,772 23,546 (14,919) 443,113
Selling, general and
administrative
expenses............... 182,476 65,198 10,489 (14,919)(b) 276,852
27,006 (c)
6,602 (d)
-------- -------- ------- -------- --------
Income from
operations........... 124,238 62,574 13,057 (33,608) 166,261
Interest income
(expense), net......... 4,078 (838) (645) (2,744)(e) (33,749)
(33,600)(f)
-------- -------- ------- -------- --------
Income before income
taxes................ 128,316 61,736 12,412 (69,952) 132,512
Provision for income
taxes.................. 42,534 24,977 4,729 (32,503)(g) 39,737
-------- -------- ------- -------- --------
Net income............ $ 85,782 $ 36,759 $ 7,683 $(37,449) $ 92,775
======== ======== ======= ======== ========
Earnings per share
Basic................. $ 2.30 $ 2.00
======== ========
Weighted average
shares outstanding... 37,333 9,046 46,379
======== ======== ========
Diluted............... $ 2.26 $ 1.98
======== ========
Weighted average
shares and share
equivalents
outstanding.......... 37,918 9,046 46,964
======== ======== ========
</TABLE>
65
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOMMY
HILFIGER
CORPORATION PEPE JEANS TH CANADA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue............. $661,688 $234,920 $36,968 $(13,716)(a) $908,382
(11,478)(b)
Cost of goods sold...... 344,884 146,948 21,945 (13,716)(a) 500,061
-------- -------- ------- -------- --------
Gross profit........... 316,804 87,972 15,023 (11,478) 408,321
Selling, general and
administrative
expenses............... 190,976 69,046 10,575 (11,478)(b) 297,552
36,008 (c)
2,425 (d)
-------- -------- ------- -------- --------
Income from operations. 125,828 18,926 4,448 (38,433) 110,769
Interest income
(expense), net......... 5,420 (1,650) (361) (4,612)(e) (46,003)
(44,800)(f)
-------- -------- ------- -------- --------
Income before income
taxes................. 131,248 17,276 4,087 (87,845) 64,766
Provision for income
taxes.................. 44,866 2,113 1,697 (40,785)(g) 7,891
-------- -------- ------- -------- --------
Net income............. $ 86,382 $ 15,163 $ 2,390 $(47,060) $ 56,875
======== ======== ======= ======== ========
Earnings per share
Basic.................. $ 2.33 $ 1.23
======== ========
Weighted average shares
outstanding........... 37,059 9,046 46,105
======== ======== ========
Diluted................ $ 2.28 $ 1.21
======== ========
Weighted average shares
and share equivalents
outstanding........... 37,885 9,046 46,931
======== ======== ========
</TABLE>
- --------
(a) Reflects elimination of revenue and cost of sales between the Company and
the Acquired Companies, principally related to merchandise which the
Company purchased from Pepe USA. The intercompany inventory profit related
to the merchandise on hand at December 31, 1997 and March 31, 1997 is not
considered material for elimination in the unaudited pro forma combined
statements of operations.
(b) Reflects elimination of revenue and royalty expense for sales of
merchandise bearing the licensed trademarks between the Company and the
Acquired Companies.
(c) Reflects amortization of the intangible assets, including goodwill, of the
Acquired Companies, primarily over a 40 year period.
(d) Reflects incremental contractual management compensation.
(e) Reflects elimination of interest income earned on approximately $79.5
million of the Company's cash and investment balances expected to be used
for the Acquisition.
(f) Reflects interest expense, calculated at an annual rate of 6.4%, on $700.0
million of long term debt expected to be incurred in connection with the
Acquisition.
(g) Records the income tax effect for the applicable pro forma adjustments.
66
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOMMY
HILFIGER
CORPORATION PEPE JEANS TOMCAN PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash................... $148,911 $ 5,325 $ 223 $ (79,520)(a) $ 64,939
(10,000)(b)
Accounts receivable.... 91,452 44,401 5,745 -- 141,598
Inventory.............. 157,439 44,992 13,409 -- 215,840
Other.................. 18,764 8,463 62 -- 27,289
-------- -------- ------- ---------- ----------
Total current assets.. 416,566 103,181 19,439 (89,520) 449,666
Property and equipment,
net................... 150,272 36,862 2,873 -- 190,007
Intangible and other
assets................ 8,614 1,112 -- 1,323,857 (c) 1,329,632
(3,951)(c)
-------- -------- ------- ---------- ----------
Total assets.......... $575,452 $141,155 $22,312 $1,230,386 $1,969,305
======== ======== ======= ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank
borrowings............ $ 9,323 $13,228 $ 936 $ -- $ 23,487
Accounts payable....... 16,787 8,492 3,527 -- 28,806
Accrued expenses and
other current
liabilities........... 58,710 25,182 5,797 6,200 (a) 95,889
-------- -------- ------- ---------- ----------
Total current
liabilities.......... 84,820 46,902 10,260 6,200 148,182
Long-term debt.......... -- 58,634 6,699 700,000 (a) 700,000
(10,000)(b)
(48,634)(d)
(6,699)(e)
Deferred tax liability.. -- -- -- 251,600 (c) 251,600
Other liabilities....... 2,216 1,375 -- -- 3,591
Shareholders' Equity
Common stock........... 374 51 1 90 (c) 464
(52)(f)(g)
Capital in excess of
par value............. 170,250 333 -- 377,093 (h) 547,676
Retained earnings...... 317,797 33,904 5,352 (33,904)(f) 317,797
(5,352)(g)
Cumulative translation
adjustment............ (5) (44) -- 44 (f) (5)
-------- -------- ------- ---------- ----------
Total shareholders'
equity................. 488,416 34,244 5,353 337,919 865,932
-------- -------- ------- ---------- ----------
Total liabilities and
shareholders' equity. $575,452 $141,155 $22,312 $1,230,386 $1,969,305
======== ======== ======= ========== ==========
</TABLE>
67
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the funding of the $755.7 million cash portion of the purchase
price and $30.0 million of transaction costs using $79.5 million of
corporate cash, $700.0 million of long-term debt and $6.2 million of
accrued liabilities. Transaction costs consist primarily of legal,
financing, accounting and other costs associated with the Acquisition.
(b) Reflects the repayment by the Company of a $10.0 million note owed by Pepe
USA to PJLC.
(c) Records the purchase of the acquired businesses for approximately $1,167.2
million, comprised of the following: cash--$755.7 million; the issuance of
9,045,930 Company Shares--$377.5 million; transaction costs--$30.0 million
and the elimination of $4.0 million, representing the present value of the
$5.0 million note payable to the Company by AIHL, which is included in the
Company's other assets and which will be cancelled in connection with the
Acquisition. The deferred tax liability of $251.6 million reflects deferred
taxes associated with acquired identifiable intangible assets other than
goodwill. For accounting purposes, the Company Shares 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 $41.9
million to reflect the Lock-Up Agreement). The purchase price was allocated
to the fair value of the net assets acquired as summarized below (amounts
in millions):
<TABLE>
<S> <C>
Cash........................................................... $ 5.5
Accounts receivable............................................ 50.1
Inventory...................................................... 58.4
Other current assets........................................... 8.5
Property and equipment......................................... 39.7
Intangible assets, including goodwill.......................... 1,323.9
Other assets................................................... 1.1
Short-term bank borrowings..................................... (14.1)
Accounts payable............................................... (12.0)
Accrued expenses and other current liabilities................. (30.9)
Long-term debt................................................. (10.0)
Deferred tax liability......................................... (251.6)
Other liabilities.............................................. (1.4)
--------
Total purchase price........................................... $1,167.2
========
</TABLE>
(d) Reflects the reclassification of $48.6 million of Pepe USA's long-term debt
payable to PJLC to shareholders' equity.
(e) Reflects the reclassification of $6.7 million of Tomcan's long-term debt
payable to a related party to shareholders' equity.
(f) Records the elimination of Pepe Jeans historical shareholders' equity.
(g) Records the elimination of Tomcan's historical shareholders' equity.
(h) Records the net effect of the following adjustments on capital in excess of
par value (amounts in millions):
<TABLE>
<S> <C>
. Issuance of shares............................................. $377.5
. Reclassification of Pepe debt.................................. 48.6
. Reclassification of TH Canada debt............................. 6.7
. Elimination of Pepe's equity................................... (49.0)
. Elimination of TH Canada's equity.............................. (6.7)
------
$377.1
======
</TABLE>
68
<PAGE>
DESCRIPTION OF PEPE JEANS AND TOMMY CANADA
PEPE JEANS
General. Pepe USA was organized in 1984 to design, source and sell PEPE(R)
jeanswear throughout the United States. In December 1997, Pepe USA
discontinued marketing its PEPE(R) jeanswear in order to focus its full
attention and resources on its Tommy Womenswear and Tommy Jeanswear
businesses. Pursuant to the Pepe United States License, Pepe USA has exclusive
United States rights to develop, source and market Tommy Womenswear, Tommy
Men's Jeanswear and Tommy Women's Jeanswear.
Sales and Marketing. Pepe USA currently markets Tommy Womenswear and Tommy
Men's Jeanswear throughout the United States principally through in-store
shops and fixtured areas in leading department stores and through leading
specialty stores. Its department store customers include major United States
retailers such as Dillard Department Stores, Federated Department Stores
(including Macy's, Bloomingdale's and Burdines), The May Department Stores
Company (including Lord & Taylor and Foley's), Belk Stores and Dayton Hudson.
Tommy Womenswear is nationally marketed principally through dedicated in-
store shops and fixtured areas in department stores and, to a lesser degree,
through womenswear specialty stores. As of December 31, 1997, Tommy Womenswear
was sold in over 700 in-store shops and fixtured areas in department stores
and in over 100 specialty store doors. Tommy Womenswear net sales are expected
to be approximately $165 million in the fiscal year ending March 31, 1998,
compared to $72.3 million in fiscal 1997, an increase of approximately 128%.
Tommy Men's Jeanswear is nationally marketed principally through fixtured
areas in leading department stores and through jeanswear specialty stores. As
of December 31, 1997, Tommy Men's Jeanswear products were sold in over 1800
department store doors, including over 500 fixtured areas, and in over 1,200
specialty store doors. Tommy Men's Jeanswear net sales are expected to be
approximately $200 million in fiscal 1998, compared to $122.3 million in
fiscal 1997, an increase of approximately 64%.
Following the Acquisition, Tommy Women's Jeanswear will be nationally
marketed principally through fixtured areas in leading department stores and
through jeanswear specialty stores. Tommy Women's Jeanswear will be initially
rolled out in Fall 1998 in over 500 department store doors (virtually all of
which will have dedicated fixtured areas) and approximately 150 specialty
store doors.
Growth Strategy. The Company's strategy is to continue to grow these
businesses by rolling out the existing lines in additional department and
specialty retail store doors, by expanding the in-store shop and fixtured area
programs to a greater number of doors and increasing the size of the dedicated
areas in existing doors, by expanding its product offerings (including the
launch of Tommy Women's Jeanswear) and by marketing to new customers. The
Company believes the Tommy Womenswear business in particular provides a major
platform for product expansion, by in-house production or through licensees,
into additional classifications (e.g. juniors, petites, career) and
accessories.
Sourcing. Pepe Jeans' sourcing strategy is to contract for the manufacture
of its products. Outsourcing allows Pepe Jeans to maximize production
flexibility while avoiding significant capital expenditures, work-in-process
inventory buildups and the costs of managing a large production work force.
Pepe Jeans inspects products manufactured by contractors to determine whether
they meet Pepe Jeans' standards.
Pepe Far East operates a buying office based in Hong Kong that performs
product development, sourcing, production scheduling and quality control
services. In addition, Pepe Far East contracts with various buying subagents.
Pepe Far East and its subsidiaries perform buying agency services with respect
to Tommy Womenswear, Tommy Men's Jeanswear and Tommy Women's Jeanswear for
both Pepe USA and the Company's third-party distributors outside the United
States.
Pepe USA imports much of its finished goods because it believes it can
import higher quality products at lower costs. Pepe Jeans maintains strong
relationships with leading manufacturers in the Far East, including
69
<PAGE>
manufacturers located in Hong Kong, Indonesia, Thailand, India, Singapore and
Taiwan, among other countries. Pepe Far East monitors duty, tariff and quota-
related developments and continually seeks to minimize its potential exposure
to duty, tariff and quota-related risks through, among other measures,
geographical diversification of its manufacturing sources, the maintenance of
its buying office in Hong Kong, allocation of production to merchandise
categories where more quota is available and shifts of production among
countries and manufacturers.
Distribution. Wholesale distribution is centralized in a 312,000 square foot
New Jersey facility to which all products are shipped. The facility is
operated and principally staffed by an independent contractor that charges
Pepe USA on the basis of the number of items processed, subject to a minimum
annual fee. The contract period is for one year, expiring on July 1, 1998. The
contract automatically renews for an additional one-year term unless either
party gives 60 days' notice prior to expiration. Pepe Jeans maintains its
distribution management group and certain administrative functions at its New
Jersey facilities. Pepe Jeans believes that these distribution facilities are
adequate for Pepe Jeans' current level of sales, and provide Pepe Jeans with
enough space and flexibility to support the expected growth of Pepe Jeans'
business over the next several years.
Backlog. Pepe Jeans generally receives orders approximately three to five
months prior to the time the products are delivered to stores. Thus, Pepe
Jean's backlog of orders, which Pepe Jeans believes, based on industry
practice and past experience, will result in sales, at December 31, 1997
represents a significant portion of Pepe Jeans' expected sales through June
30, 1998. At December 31, 1997, Pepe Jeans' backlog of orders was
approximately $209 million, compared to approximately $79 million at December
31, 1996 (in each case excluding PEPE(R) products). Pepe Jeans' backlog
depends upon a number of factors, including the timing of "market weeks"
during which a significant percentage of Pepe Jeans' orders are received and
timing of shipments. Accordingly, a comparison of backlog from period to
period is not necessarily meaningful and may not be indicative of eventual
actual shipments.
Employees. At December 31, 1997, Pepe Jeans had approximately 265 employees.
None of Pepe Jeans' employees is a member of a union. Pepe Jeans considers its
relations with its employees to be excellent.
Properties. The principal executive offices of Pepe Jeans are located at 485
Fifth Avenue, New York, New York 10017.
The general location, use and approximate size of the principal properties
which Pepe Jeans currently occupies, all of which were leased as of December
31, 1997, are set forth below:
<TABLE>
<CAPTION>
APPROXIMATE AREA
LOCATION USE IN SQUARE FEET
-------- --- ----------------
<C> <S> <C>
New York, New York Headquarters and sales showrooms 42,000
Secaucus, New Jersey Warehouse distribution 312,000
Administrative Offices 12,000
Hong Kong Buying office 24,000
</TABLE>
TOMMY CANADA
General. Pursuant to the Canadian License, since 1990 Tommy Canada has had
exclusive Canadian rights to source, manufacture and distribute apparel
bearing the TOMMY HILFIGER(R) trademark (and since 1995 the TOMMY JEANS(R)
trademark), including men's sportswear and athleticwear, boys' sportswear,
Tommy Womenswear and Tommy Men's and Women's Jeanswear.
Sales and Marketing. Tommy Canada markets TOMMY HILFIGER(R) and TOMMY
JEANS(R) products principally through leading specialty and department stores
in Canada. Approximately 55% of Tommy Canada's sales are made through
specialty stores, with the remainder made through department stores. Tommy
Canada's major department store customers are the Eaton and The Bay chains. As
of December 31, 1997, TOMMY HILFIGER(R) and TOMMY JEANS(R) products were sold
in Canada in over 2,200 specialty store doors and over 160 department store
doors (substantially all of which had dedicated in-store shops or fixtured
areas). Tommy
70
<PAGE>
Canada's net sales of these products are expected to increase to approximately
C$94.5 million in fiscal 1998 from C$50.3 million in fiscal 1997, an increase
of approximately 88%. Set forth below is a table of Tommy Canada's sales by
product category for the two fiscal years ended March 31, 1997 and the
estimated sales for the fiscal year ending March 31, 1998:
TOMMY CANADA SALES BY PRODUCT CATEGORY
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SALES FOR FISCAL YEARS ENDED
MARCH 31,
-----------------------------
PRODUCT CATEGORY 1996 1997 1998
---------------- -------- -------- -----------
(ESTIMATED)
<S> <C> <C> <C>
Men's and boys' sportswear (including
men's athleticwear) C$25,633 C$28,479 C$48,300
Tommy Womenswear.......................... -- 8,116 20,400
Tommy Men's Jeanswear..................... -- 13,702 25,800
Tommy Women's Jeanswear................... -- -- --
-------- -------- --------
Total..................................... C$25,633 C$50,297 C$94,500
======== ======== ========
</TABLE>
Growth Strategy. The Company plans to continue to grow Tommy Canada's
business by expanding its product offerings, by rolling out TOMMY HILFIGER(R)
and TOMMY JEANS(R) products in additional specialty and department store
doors, by broadening its in-store shop and fixtured area programs and by
marketing to new customers. While the expansion of Tommy Canada's business
will be dependent on market conditions, including continued demand for the
Company's products in Canada, the Company's management believes that the
continued roll-out and expansion of the Tommy Womenswear, Tommy Men's
Jeanswear and Tommy childrenswear lines, as well as the launch of Tommy
Women's Jeanswear, represents a significant growth opportunity for Tommy
Canada. The Company plans to initially roll out Tommy Women's Jeanswear in
Canada in Fall 1998 to approximately 800 specialty store doors and
approximately 160 department store doors.
Sourcing. Tommy Canada sources most of its products through the buying
offices of the Company and Pepe Far East, for which Tommy Canada pays the
Company and Pepe Jeans a fee based on a percentage of the cost of the sourced
products. In addition, Tommy Canada sources certain products directly from
manufacturers located in Canada.
Distribution. Wholesale distribution is centralized in a facility located in
Montreal, Canada. Tommy Canada maintains its distribution management group and
all administrative functions in the same facility. Tommy Canada believes that
these distribution facilities are adequate for its current level of sales, and
such facilities, along with additional space available in the current
facility, will provide Tommy Canada with enough space and flexibility to
support the expected growth of Tommy Canada's business over the next several
years.
Backlog. Tommy Canada generally receives orders approximately three to five
months prior to the time the products are delivered to stores. Thus, Tommy
Canada's backlog of orders, which Tommy Canada believes, based on industry
practice and past experience, at December 31, 1997 represents a significant
portion of Tommy Canada's expected sales through June 30, 1998. At December
31, 1997, Tommy Canada's backlog of orders was approximately C$40 million,
compared to approximately C$27 million at December 31, 1996. Tommy Canada's
backlog depends upon a number of factors, including the timing of "market
weeks" during which a significant percentage of Tommy Canada's orders are
received and the timing of shipments. Accordingly, a comparison of backlog
from period to period is not necessarily meaningful and may not be indicative
of eventual actual shipments.
Employees. At December 31, 1997, Tommy Canada had approximately 180
employees. None of Tommy Canada's employees is a member of a union. Tommy
Canada considers its relations with its employees to be excellent.
71
<PAGE>
Properties. The principal executive offices of Tommy Canada are located at
7077, avenue du Parc, Suite #502, Montreal, Quebec, Canada H3N 1X7.
The general location, use and approximate size of the principal properties
which Tommy Canada currently occupies, all of which were leased as of December
31, 1997, are set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
AREA IN
LOCATION USE SQUARE FEET
-------- --- -----------
<C> <S> <C>
Montreal, Quebec Executive, administrative and
sales offices and warehouse
distribution 138,495
Toronto, Ontario Sales office 5,777
Vancouver, British Columbia Sales office 3,743
</TABLE>
72
<PAGE>
SECURITY OWNERSHIP OF THE COMPANY
The following table set forth data as of January 31, 1998 (except as
indicated below) concerning the beneficial ownership of Company Shares by (1)
the persons known to the Company to beneficially own more than 5% of the
outstanding Company Shares, (2) all directors, the Company's Chief Executive
Officer and the four other most highly compensated executive officers and (3)
all directors and executive officers as a group as reported by each person.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY
OWNED PERCENT
OF CLASS (1)
------------ ------------
<S> <C> <C>
The Equitable Companies Incorporated (2)
1290 Avenue of the Americas
New York, NY 10104................................. 4,474,120 11.7%
AMVESCAP PLC(3)
11 Devonshire Square
London EC2M 4YR
England............................................ 1,987,900 5.2%
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Silas K.F. Chou..................................... -- --
Thomas J. Hilfiger.................................. 10,000 *
Joel J. Horowitz.................................... 10,600 *
Benjamin M.T. Ng.................................... 151,070 (4) *
Lawrence S. Stroll.................................. -- --
Ronald K.Y. Chao.................................... 2,400 (5) *
Lester M.Y. Ma...................................... 4,600 (5) *
Joseph M. Adamko.................................... 6,000 (6) *
Clinton V. Silver................................... 6,600 (5) *
Simon Murray........................................ -- --
All directors and executive officers as a group
(13 persons)....................................... 202,270 *
</TABLE>
- --------
* Less than 1%.
(1) Shares outstanding includes the right to acquire beneficial ownership of
648,625 Company Shares pursuant to currently exercisable stock options
under Company stock incentive plans. For purposes of this table,
"currently exercisable" stock options include options becoming vested and
exercisable within 60 days from January 31, 1998.
(2) Information based on Amendment to Schedule 13G filed with the Commission
on March 10, 1998 by The Equitable Companies Incorporated ("Equitable").
According to the Schedule 13G, (a) Equitable, a parent holding company,
has sole dispositive power over 4,417,920 of the shares, shared
dispositive power over 1,600 of the shares, sole voting power over
1,134,032 of the shares and shared voting power over 3,281,200 of the
shares and (b) certain of Equitable's subsidiaries have sole dispositive
power over 4,472,500 of the shares, shared dispositive power over 1,600 of
the shares, sole voting power over 1,188,632 of the shares and shared
voting power over 3,281,200 of the shares.
(3) Information based on Amendment to Schedule 13G filed with the Commission
on February 12, 1998 by AMVESCAP PLC ("AMVESCAP"). According to the
Schedule 13G, AMVESCAP, a parent holding company, and certain of its
subsidiaries (which include INVESCO Funds Group, Inc., an investment
adviser) have shared dispositive and voting power over all of the shares.
73
<PAGE>
(4) Issuable upon the exercise of currently exercisable stock options under
the Company's employee stock incentive plans.
(5) Issuable upon the exercise of currently exercisable stock options under
the Company's Non-Employee Directors Stock Option Plan (the "Directors
Option Plan").
(6) Includes 4,600 Company Shares issuable upon the exercise of currently
exercisable stock options under the Directors Option Plan.
OTHER MATTERS
Representatives of Price Waterhouse LLP, the Company's independent
accountants, are expected to be present at the Special Meeting with the
opportunity to make statements if they so desire. Such representatives are
also expected to be available to respond to appropriate questions.
SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS
Any Company Shareholder who intends to present a proposal at the Company's
1998 Annual Meeting of Shareholders for inclusion in the proxy statement and
form of proxy relating to that meeting is reminded that the proposal must be
received by the Company at its principal executive offices not later than May
22, 1998. The Company will not be required to include in its proxy statement a
form of proxy or shareholder proposal which is received after that date or
which otherwise fails to meet the requirements for shareholder proposals
established by regulations of the Commission.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PEPE JEANS USA, INC. and TJ FAR EAST LIMITED
Condensed Combined Balance Sheets as of December 31, 1997 (Unaudited) and
March 31, 1997........................................................... F-2
Condensed Combined Statements of Operations and Retained Earnings
(Accumulated Deficit) for the Nine Months Ended December 31, 1997 and
1996 (Unaudited)......................................................... F-3
Condensed Combined Statements of Cash Flows for the Nine Months Ended
December 31, 1997 and 1996 (Unaudited)................................... F-4
Notes to Condensed Combined Unaudited Financial Statements ............... F-5
Report of Independent Accountants......................................... F-7
Combined Balance Sheets as of March 31, 1997 and 1996 .................... F-8
Combined Statements of Operations and Retained Earnings (Accumulated
Deficit) for the Years Ended March 31, 1997, 1996 and 1995............... F-9
Combined Statements of Cash Flows for the Years Ended March 31, 1997, 1996
and 1995................................................................. F-10
Notes to Combined Financial Statements.................................... F-11
TOMCAN INVESTMENTS INC.
Auditors' Report.......................................................... F-20
Consolidated Balance Sheet as of December 31, 1997........................ F-21
Consolidated Statement of Income and Retained Earnings for the Nine Month
Period Ended December 31, 1997........................................... F-22
Consolidated Statement of Changes in Financial Position for the Nine Month
Period Ended December 31, 1997........................................... F-23
Notes to Consolidated Financial Statements................................ F-24
TOMMY HILFIGER CANADA INC.
Statement of Income and Retained Earnings for the Nine Month Period Ended
December 31, 1996 (Unaudited)............................................ F-31
Statement of Changes in Financial Position for the Nine Month Period Ended
December 31, 1996 (Unaudited)............................................ F-32
Notes to Unaudited Financial Statements................................... F-33
Auditors' Report (Price Waterhouse)....................................... F-34
Auditors' Report (Ptack Schnarch Basevitz)................................ F-35
Balance Sheets as of March 31, 1997 and 1996.............................. F-36
Statements of Income and Retained Earnings for the Years Ended March 31,
1997, 1996 and 1995...................................................... F-37
Statements of Changes in Financial Position for the Years Ended March 31,
1997, 1996 and 1995...................................................... F-38
Notes to Financial Statements............................................. F-39
</TABLE>
F-1
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
1997 1997
------------------ ---------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash...................................... $ 5,325 $ 2,092
Receivable from factor.................... 42,104 39,776
Accounts receivable, net.................. 2,297 4,237
Merchandise inventories................... 44,992 26,868
Due from affiliates, net.................. 270 2,115
Deferred taxes............................ 6,947 6,731
Prepaid expenses and other................ 1,246 541
---------- --------
Total current assets.................... 103,181 82,360
Property and equipment, net................. 36,862 23,195
Deferred taxes.............................. 1,005 845
Other....................................... 107 107
---------- --------
Total Assets............................ $ 141,155 $106,507
========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................... $ 8,492 $ 11,181
Accrued liabilities....................... 23,429 18,246
Bank borrowings........................... 13,228 16,665
Restructuring accrual..................... 157 798
Income taxes payable...................... 1,343 7,518
Obligations under capital leases.......... 253 235
---------- --------
Total current liabilities............... 46,902 54,643
---------- --------
Noncurrent liabilities
Subordinated payables to affiliates....... 58,634 48,384
Obligations under capital leases.......... 421 610
Other..................................... 954 939
---------- --------
Total noncurrent liabilities............ 60,009 49,933
---------- --------
Commitments and contingencies
Stockholder's equity
Combined share capital...................... 51 51
Additional paid-in capital................ 333 275
Retained earnings......................... 33,904 1,645
Cumulative translation adjustment......... (44) (40)
---------- --------
Total stockholder's equity.............. 34,244 1,931
---------- --------
Total Liabilities and Stockholder's
Equity................................. $ 141,155 $106,507
========== ========
</TABLE>
See accompanying Notes to Condensed Combined Unaudited Financial Statements.
F-2
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenues........................................... $278,445 $158,267
Cost of goods sold..................................... 150,673 98,091
-------- --------
Gross profit.......................................... 127,772 60,176
Selling, general and administrative expenses........... 65,198 38,366
-------- --------
Operating income...................................... 62,574 21,810
Interest, net.......................................... 838 1,278
-------- --------
Income before income taxes............................ 61,736 20,532
Income tax provision................................... 24,977 4,074
-------- --------
Net income............................................ 36,759 16,458
Retained earnings (accumulated deficit), beginning of
period................................................ 1,645 (13,518)
Dividends declared by TJFE............................. (4,500) --
-------- --------
Retained earnings, end of period....................... $ 33,904 $ 2,940
======== ========
</TABLE>
See accompanying Notes to Condensed Combined Unaudited Financial Statements.
F-3
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
----------------------------
1997 1996
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 36,759 $ 16,458
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 4,522 2,443
Bad debt expense............................... 100 100
Amortization of debt discount.................. 250 229
Deferred taxes................................. (377) --
Loss on disposition of fixed assets............ 23 54
(Increase) decrease in:
Factor and accounts receivable................ (488) (10,309)
Merchandise inventories....................... (18,125) (16,845)
Affiliated receivables, net................... 1,845 (1,244)
Prepaid expenses and other.................... (705) 390
Increase (decrease) in:
Accounts payable.............................. (2,689) 1,223
Accrued liabilities........................... 5,183 2,611
Accrued restructuring......................... (641) (21)
Income taxes payable.......................... (6,175) 3,551
Other liabilities............................. 72 263
------------ ------------
Net cash provided by (used in) operating
activities.................................. 19,554 (1,097)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.............. (18,275) (15,671)
Proceeds from disposition of property and
equipment...................................... 63 15
------------ ------------
Net cash used in investing activities........ (18,212) (15,656)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under credit
agreements..................................... (3,437) 12,778
Proceeds from subordinated debt................. 10,000 5,000
Dividends paid by TJFE.......................... (4,500) --
Payments of capital lease obligations........... (172) (72)
------------ ------------
Net cash provided by financing activities.... 1,891 17,706
------------ ------------
Increase in cash................................. 3,233 953
Cash at beginning of period...................... 2,092 2,407
------------ ------------
Cash at end of period............................ $ 5,325 $ 3,360
============ ============
</TABLE>
See accompanying Notes to Condensed Combined Unaudited Financial Statements.
F-4
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED
NOTES TO CONDENSED COMBINED UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements have been
prepared by Pepe Jeans USA, Inc. ("PJUSA") and TJ Far East Limited ("TJFE")
(formerly Pepe Jeans Far East Limited) (collectively, the "Company") in a
manner consistent with that used in the preparation of the combined financial
statements of the Company for the years ended March 31, 1997, 1996 and 1995
included elsewhere herein. Certain items contained in these statements are
based on estimates. In the opinion of management, the accompanying financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments, necessary for 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 months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1998. These unaudited financial statements should be read in
conjunction with the Company's financial statements for the years ended March
31, 1997, 1996 and 1995 included elsewhere herein.
2. INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
----------- -----------
<S> <C> <C>
Finished goods.................................. $44,992,000 $26,833,000
Raw materials................................... -- 35,000
----------- -----------
$44,992,000 $26,868,000
=========== ===========
</TABLE>
3. SUBORDINATED PAYABLES DUE AFFILIATES
Noncurrent amounts payable to affiliates are as follows:
<TABLE>
<CAPTION>
INTEREST DECEMBER 31, MARCH 31,
DUE DATE RATE 1997 1997
------------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
Pepe Jeans London
Corporation............ June 30, 1999 0% $44,683,000 $44,683,000
Pepe Jeans London
Corporation............ September 30, 2000 0% 3,951,000 3,701,000
Pepe Jeans London
Corporation............ March 31, 2002 8% 10,000,000 --
----------- -----------
$58,634,000 $48,384,000
=========== ===========
</TABLE>
On April 1, 1997, the Company entered into a $10 million, 8% interest
bearing unsecured subordinated note payable to Pepe Jeans London Corporation
("PJLC") which is due on March 31, 2002.
F-5
<PAGE>
PEPE JEANS USA, INC. AND TJ FAR EAST LIMITED
NOTES TO CONDENSED COMBINED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
Leases
The Company is bound by non-cancelable lease agreements involving offices,
showrooms and equipment. Future minimum rental payments, by year and in total,
under non-cancelable operating leases with terms of one year or more and under
capital leases, consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
OPERATING
LEASES CAPITAL LEASES
----------- -----------------------------------
TOTAL IMPUTED INTEREST PRINCIPAL TOTAL
<S> <C> <C> <C> <C>
Three months ended March 31,
1998...................... $ 827,000 $13,000 $ 62,000 $ 75,000
Year ended March 31,
1999...................... 3,260,000 40,000 256,000 296,000
2000...................... 2,627,000 19,000 265,000 284,000
2001...................... 2,222,000 2,000 91,000 93,000
2002...................... 2,036,000 -- -- --
2003 and thereafter....... 909,000 -- -- --
----------- ------- -------- --------
$11,881,000 $74,000 $674,000 $748,000
=========== ======= ======== ========
</TABLE>
Sublease income commitments are $35,000 for the three months ended March 31,
1998 and $140,000 for the year ended March 31, 1999.
In addition to the above amounts, certain of these leases contain inflation
escalation clauses and requirements for the payment of property taxes,
insurance and maintenance expenses. Rent expense for the nine months ended
December 31, 1997 and 1996 was $1,672,000 and $1,251,000, respectively.
5. SUBSEQUENT EVENTS
On January 26, 1998, PJUSA entered into an agreement to purchase all the
issued and outstanding shares of Tomcan Investments Inc. ("Tomcan") for C$125
million (U.S. $86 million at January 26, 1998). The beneficial owners of
Tomcan include members of the family of a director of PJUSA as well as such
director. The closing of such transaction is subject to the acquisition of
PJUSA by Tommy Hilfiger U.S.A., Inc. or one of its subsidiaries.
On January 31, 1998, PJLC entered into an agreement with Tommy Hilfiger
Corporation and its subsidiaries to sell (subject to approval of the
shareholders of Tommy Hilfiger Corporation) PJUSA and TJFE to such
subsidiaries. These financial statements do not reflect any adjustments which
may be required as a result of such sale.
F-6
<PAGE>
[LETTERHEAD OF PRICE WATERHOUSE LLP]
REPORT OF INDEPENDENT ACCOUNTANTS
May 14, 1997, except Note 16 for which
the date is January 31, 1998
To the Boards of Directors of
Pepe Jeans USA, Inc. and Pepe Jeans Far East Limited
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and retained earnings (accumulated deficit)
and of cash flows present fairly, in all material respects, the combined
financial position of Pepe Jeans USA, Inc. and Pepe Jeans Far East Limited at
March 31, 1997 and 1996 and the combined results of their operations and cash
flows for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles. These combined
financial statements are the responsibility of the companies' managements; our
responsibility is to express an opinion on these combined financial statements
based on our audits. We conducted our audits of these combined statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements, assessing the accounting
principles used and significant estimates made by management and evaluating
the overall combined financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
F-7
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets
Cash..................................................... $ 2,092 $ 2,407
Receivable from factor................................... 39,776 23,287
Accounts receivable, net................................. 4,237 2,645
Merchandise inventories.................................. 26,868 16,671
Due from affiliates, net................................. 2,115 890
Deferred taxes........................................... 6,731 --
Prepaid expenses and other............................... 541 1,161
-------- --------
Total current assets................................... 82,360 47,061
Property and equipment, net................................ 23,195 8,756
Deferred taxes............................................. 845 --
Other...................................................... 107 176
-------- --------
Total Assets........................................... $106,507 $ 55,993
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities
Accounts payable......................................... $ 11,181 $ 6,668
Accrued liabilities...................................... 18,246 6,706
Bank borrowings.......................................... 16,665 11,939
Restructuring accrual.................................... 798 --
Income taxes payable..................................... 7,518 298
Obligations under capital leases......................... 235 77
-------- --------
Total current liabilities.............................. 54,643 25,688
-------- --------
Noncurrent liabilities
Subordinated payables to affiliates...................... 48,384 43,079
Obligations under capital leases......................... 610 268
Other.................................................... 939 313
-------- --------
Total noncurrent liabilities........................... 49,933 43,660
-------- --------
Commitments and contingencies (Note 14)
Stockholder's equity (deficiency)
Combined share capital................................... 51 51
Additional paid-in capital............................... 275 135
Retained earnings (accumulated deficit).................. 1,645 (13,518)
Cumulative translation adjustment........................ (40) (23)
-------- --------
Total stockholder's equity (deficiency)................ 1,931 (13,355)
-------- --------
Total Liabilities and Stockholder's Equity (Deficien-
cy)................................................... $106,507 $ 55,993
======== ========
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-8
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
COMBINED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------
<S> <C> <C> <C>
1997 1996 1995
-------- -------- -------
Net revenues...................................... $234,920 $ 89,029 $75,807
Cost of goods sold................................ 146,948 61,875 48,697
-------- -------- -------
Gross profit.................................... 87,972 27,154 27,110
Selling, general and administrative expenses...... 69,046 35,657 26,710
-------- -------- -------
Operating income (loss)......................... 18,926 (8,503) 400
Interest expense.................................. 1,650 1,543 1,533
-------- -------- -------
Income (loss) before income taxes............... 17,276 (10,046) (1,133)
Income tax provision.............................. 2,113 400 338
-------- -------- -------
Net income (loss)............................... 15,163 (10,446) (1,471)
Retained earnings (accumulated deficit), beginning
of year.......................................... (13,518) 7,518 8,989
Dividends declared by PJFE........................ -- (10,590) --
-------- -------- -------
Retained earnings (accumulated deficit), end of
year............................................. $ 1,645 $(13,518) $ 7,518
======== ======== =======
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-9
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH
31,
--------------------------
<S> <C> <C> <C>
1997 1996 1995
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net income/(loss)............................. $15,163 $(10,446) $(1,471)
Adjustments to reconcile net income/(loss) to
net cash provided by
(used in) operating activities:
Depreciation and amortization............... 3,757 2,601 2,253
Writedown of in-store shops and other equip-
ment....................................... 211 2,215 3
Bad debt expense............................ 150 50 213
Amortization of debt discount............... 306 146 --
Restructuring charge........................ 3,590 -- --
Deferred taxes.............................. (7,576) -- (280)
(Increase) decrease in:
Factor and accounts receivable............ (18,231) (14,670) 2,241
Merchandise inventories................... (10,196) (5,943) (1,707)
Affiliated receivables, net............... (1,225) 6,487 (1,144)
Prepaid expenses and other................ 829 (774) 25
Increase (decrease) in:
Accounts payable.......................... 4,513 1,044 (861)
Accrued liabilities....................... 11,657 5,292 332
Income taxes payable...................... 7,220 (286) (47)
Other liabilities......................... 576 (698) 196
------- -------- -------
Net cash provided by (used in) operating
activities............................. 10,744 (14,982) (247)
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............ (20,676) (3,880) (2,863)
Proceeds from disposition of property and 18 17 --
equipment.................................... ------- -------- -------
Net cash used in investing activities....... (20,658) (3,863) (2,863)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit agreements........ 4,726 1,562 2,937
Proceeds from subordinated debt............... 5,000 25,579 --
Dividends paid by PJFE........................ -- (5,960) --
Payments of capital lease obligations......... (127) (150) (52)
------- -------- -------
Net cash provided by financing activities... 9,599 21,031 2,885
------- -------- -------
(Decrease) increase in cash................... (315) 2,186 (225)
Cash at beginning of the year................. 2,407 221 446
------- -------- -------
Cash at end of the year....................... $ 2,092 $ 2,407 $ 221
======= ======== =======
Supplemental disclosure of cash flow informa-
tion
Cash payments made during the year:
Income taxes................................ $ 2,468 $ 575 $ 393
======= ======== =======
Interest.................................... $ 1,702 $ 1,055 $ 1,055
======= ======== =======
Noncash activities:
Equipment under capital lease obligations... $ 627 $ 294 $ 0
======= ======== =======
</TABLE>
Note: Accounts receivable from a corporate parent was charged against equity
as deemed dividends from PJFE in the amount of $4,630 during the year ended
March 31, 1997.
See accompanying Notes to Combined Financial Statements.
F-10
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
1. THE COMPANY
Pepe Jeans USA, Inc. ("PJUSA") imports and distributes men's and women's
casual and jeanswear sold under the "Pepe Jeans", "Tommy Jeans" and "Tommy
Hilfiger Womenswear" names. During the year ended March 31, 1997, PJUSA
decided it would exit the "Pepe Jeans" line (see Note 9). PJUSA financial
statements include the accounts of PJUSA's wholly-owned subsidiary, PJ
Advertising, Inc. (which was dissolved on March 24, 1997).
Pepe Jeans Far East Limited (the "PJFE") and its subsidiaries act as
commissioned buying agents for PJUSA and other affiliates as well as unrelated
distributors. PJFE financial statements include the accounts of Pepe Clothing
(HK) Limited and Pepe International Limited, wholly-owned subsidiaries, and
THHK Womenswear Limited, a 75.5% owned subsidiary (which was formed during the
year ended March 31, 1997).
Until September 26, 1995, PJUSA and PJFE were wholly-owned subsidiaries of
Pepe Group PLC, a company incorporated in the United Kingdom. In September
1995, as a result of a restructuring, PJUSA and PJFE became wholly-owned
subsidiaries of Pepe Jeans London Corporation ("PJLC"), a company incorporated
in the British Virgin Islands.
The consolidated financial statements of PJUSA and PJFE (collectively "the
Company") have been combined on the basis of common ownership. Transactions
and balances between PJUSA, PJFE and their subsidiaries have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
Cash includes temporary investments (cash equivalents) with maturities of
three months or less.
MERCHANDISE INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
ranging from 3 to 5 years. Leasehold improvements and property under capital
leases are amortized using the straight-line method over the lesser of the
terms of the leases or the estimated useful lives of the assets. The Company's
share of the cost of constructing in-store shop displays is capitalized and
amortized using the straight-line method over five years. Major additions and
betterments are capitalized and repairs and maintenance are charged to
operations in the period incurred.
REVENUES
Net revenues from product sales are recognized upon shipment of products to
customers. Allowances for estimated returns and discounts are provided when
sales are recorded.
SEGMENT INFORMATION
The Company is engaged in principally one industry segment--the design,
importation and distribution of denim-related apparel and women's casual wear.
F-11
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The combined financial statements of the Company are prepared in United
States dollars as this is the currency of the primary environment in which the
Company operates and substantially all of its revenues are received and
expenditures are disbursed in United States dollars. The financial statements
of PJFE are translated into United States dollars in accordance with Statement
of Financial Accounting Standards No. 52 (Foreign Currency Translation).
Assets and liabilities of PJFE are translated at year-end exchange rates.
Income and expense items are translated at average rates of exchange
prevailing during the year. Adjustments resulting from translating the
financial statements of the non-United States entities are recorded as a
component of stockholder's equity (deficiency).
ADVERTISING AND SALES PROMOTION COSTS
Advertising and sales promotion costs are expensed as incurred. These
expenses were $7,538,000, $4,668,000 and $4,655,000 for the years ended March
31, 1997, 1996 and 1995, respectively.
FINANCIAL INSTRUMENTS
Financial assets and liabilities for which carrying values approximate fair
value include cash, accounts receivable, accounts payable, accrued liabilities
and short-term bank borrowings. Management believes the fair value of
subordinated payables to affiliates is substantially less than their carrying
value.
MINORITY INTEREST
Minority interest of $309,000 at March 31, 1997 represents a 24.5% ownership
in THHK Womenswear Limited by an unaffiliated third party and is classified in
"Other non-current liabilities". The minority interest in the earnings of THHK
Womenswear Limited for the year ended March 31, 1997 of $8,000 is included in
"Selling, general and administrative expenses".
INCOME TAXES
The Company uses the asset and liability approach to accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax bases using enacted
tax rates in effect for the year in which the differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change is enacted.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues, costs and expenses during the
reporting period. Actual results could differ from those estimates. As of
March 31, 1997, such estimates included provisions for inventory and accounts
receivable associated with the Pepe Jeans product line which the Company
ceased to distribute (see Note 9).
3. RECEIVABLES
PJUSA has an agreement with a commercial finance company (the "factor")
which provides for the factoring of certain trade receivables. Receivables are
factored without recourse as to credit risk and with
F-12
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
recourse for any claims by the customer for adjustments in the normal course
of business relating to pricing errors, shortages, damaged goods, etc.
Factored receivables subject the Company to a concentration of credit risk as
substantially all of the Company's receivables are collected from the factor.
Management does not consider this risk to be significant.
Effective December 21, 1995, as a result of a new credit facility agreement
(see Note 7), the factoring agreement was amended so that it no longer
provided for advances against factored receivables. Prior to December 21,
1995, the factoring agreement provided for advances against factored
receivables with accrued interest at the prime interest rate plus 1%.
Receivables at March 31, 1997 and 1996 are stated net of allowance for
doubtful accounts in the amounts of $182,000 and $262,000, respectively.
4. MERCHANDISE INVENTORIES
Merchandise inventories at March 31, 1997 and 1996 comprise:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Finished goods.................................... $26,833,000 $14,762,000
Work in process................................... -- 461,000
Raw materials..................................... 35,000 1,448,000
----------- -----------
$26,868,000 $16,671,000
=========== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1997 and 1996 comprise:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Leasehold improvements......................... $ 5,713,000 $ 4,788,000
In-store shops................................. 16,560,000 3,019,000
Furniture and fixtures......................... 1,128,000 1,858,000
Equipment...................................... 1,443,000 883,000
Computer hardware and software................. 3,137,000 1,610,000
----------- -----------
27,981,000 12,158,000
Less--accumulated depreciation and
amortization.................................. (4,786,000) (3,402,000)
----------- -----------
$23,195,000 $ 8,756,000
=========== ===========
</TABLE>
Property and equipment includes capital leases of $1,137,000 and $528,000
less accumulated amortization of $229,000 and $116,000 at March 31, 1997 and
1996, respectively.
F-13
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities at March 31, 1997 and 1996 comprise:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Inventory in-transit.............................. $ 1,772,000 $ 612,000
Payable to licensor (see Note 14)................. 4,215,000 2,830,000
Duties and freight................................ 2,229,000 446,000
Compensation...................................... 5,189,000 292,000
Management fee (see Note 8) 1,000,000 --
Other............................................. 3,841,000 2,526,000
----------- ----------
$18,246,000 $6,706,000
=========== ==========
</TABLE>
7. BANK BORROWINGS
Effective March 31, 1997, PJUSA amended its credit agreement (the
"Agreement") originally entered into on December 31, 1995 with several
lenders. The Agreement, as amended, provides for direct borrowings and letters
of credit through May 31, 1999. The total facility available is as follows:
<TABLE>
<CAPTION>
FACILITY
PERIOD AVAILABLE
------ -----------
<S> <C>
April 1, 1997--May 31, 1997.................................. $55,000,000
June 1, 1997--October 31, 1997............................... 70,000,000
November 1, 1997--March 31, 1998............................. 60,000,000
April 1, 1998--May 31, 1998.................................. 65,000,000
June 1, 1998--October 31, 1998............................... 75,000,000
November 1, 1998--January 31, 1999........................... 65,000,000
February 1, 1999--May 31, 1999............................... 60,000,000
</TABLE>
Available borrowings under the Agreement are collateralized by substantially
all the assets of PJUSA. Borrowings under the Agreement accrue interest at the
lead bank's alternate base rate for advances (ABR) and ABR plus 1% for
overadvances.
At March 31, 1997 and 1996, total letters of credit against the facility
were $21,667,000 and $6,751,000, respectively.
The Agreement, as amended, contains various covenants, including, among
others, certain restrictions upon capital expenditures, investments,
indebtedness, dividends, loans and advances. The Agreement, as amended, also
requires the maintenance of minimum tangible net worth, certain leverage and
current ratios as well as limitations on losses. At March 31, 1997, PJUSA was
in compliance with the covenants.
Available borrowings under the agreement prior to March 31, 1997 were
collateralized by substantially all the assets of PJUSA. These borrowings
accrued interest at the lead bank's ABR plus 1% for advances and 1.5% for
overadvances.
Prior to December 21, 1995, PJUSA was a co-guarantor and borrower under a
long-term committed banking facility that was established for its parent
company and certain of its subsidiaries. At March 31, 1995, PJUSA had
outstanding advances of $6,500,000 against this facility. These amounts were
repaid in the year ended March 31, 1996.
PJFE had a credit facility in the amount of HK $15 million (approximately US
$2 million) which expired on December 31, 1996.
F-14
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS
On October 1, 1995, PJLC was assigned the exclusive license to the Tommy
Jeans trademark worldwide and, concurrently, assigned the exclusive license to
the Tommy Jeans trademark in the United States to PJUSA. PJUSA, PJFE and Tommy
Hilfiger USA, Inc. are related as a result of common members of the boards of
directors.
PJUSA paid royalty, advertising, design and other expenses aggregating
$14,293,000 and $4,098,000 for the years ended March 31, 1997 and 1996,
respectively. PJUSA also purchased inventory from Tommy Hilfiger USA, Inc. for
$7,955,000 during the year ended March 31, 1996. The combined balance sheet
includes trade receivables of $1,020,000 at March 31, 1997, non-trade
receivables of $122,000 and $764,000 at March 31, 1997 and 1996, respectively,
and accrued liabilities of $4,215,000 and $2,830,000 at March 31, 1997 and
1996, respectively, from or to Tommy Hilfiger USA, Inc. and its subsidiaries
in connection with the licensing agreement.
In connection with a change in senior management of PJUSA, during the fiscal
year ended March 31, 1997, an affiliated company, AIHL Investment Group (USA),
Inc., provided extensive senior management services to the PJUSA. As a result,
during the year ended March 31, 1997 PJUSA accrued $1,000,000 for such
services. During the prior year, similar services to a lesser extent had been
provided without charge to PJUSA.
PJFE received buying commissions from affiliates and related parties in the
amounts of $1,263,000, $1,042,000 and $1,437,000 during the years ended March
31, 1997, 1996 and 1995, respectively. In addition, PJFE had sales to related
parties totaling $385,000 and $88,000 for the years ended March 31, 1997 and
1996, respectively.
Rent charged to PJFE from related parties totaled $491,000 and $339,000
during the years ended March 31, 1997 and 1996, respectively.
PJFE has a sub-contract agreement with an affiliate whereby PJFE pays 5% of
sales for the exclusive right to supply product to distributors, mainly in
Central and South America. Such expenses amounted to $223,000 and $167,000
during the years ended March 31, 1997 and 1996, respectively.
During the year ended March 31, 1995, PJFE was charged $262,000 for
marketing services from an affiliate.
Amounts receivable from (payable to) affiliates at March 31, 1997 and 1996
comprise:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Pepe (UK) Limited................................ $ (311,000) $ 4,482,000
Pepe Jeans Europe BV............................. 609,000 774,000
Pepe Overseas Holdings BV........................ -- (4,630,000)
Pepe Jeans Corporation (Netherlands NV).......... 2,000,000 --
Pepe Europe SARL................................. -- 346,000
Others........................................... (183,000) (82,000)
---------- -----------
Net receivable from affiliates.................. $2,115,000 $ 890,000
========== ===========
</TABLE>
Amounts receivable from (payable to) Pepe (UK) Limited arose from sales to
that affiliate net of operating expense reimbursements. The amount payable to
Pepe Overseas Holdings BV represents dividends payable from PJFE. Interest
expense relating to this amount was $115,000 during the year ended March 31,
1996. The amount receivable from Pepe Europe SARL arose from sales to that
affiliate. The amount receivable from Pepe Jeans Corporation represents a
short term non-interest bearing note receivable.
F-15
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. RESTRUCTURING CHARGE
During the year ended March 31, 1997, PJUSA decided that it would no longer
distribute the Pepe Jeans product line. A restructuring charge of $3,590,000,
recorded in "Selling, general and administrative expenses", represents future
minimum non-cancelable lease payments, property and equipment write-offs and
severance costs. At March 31, 1997, the restructuring accrual balance of
$798,000 represents the remaining severance and estimated net lease payments.
10. SUBORDINATED PAYABLES DUE AFFILIATES
Noncurrent amounts payable to affiliates at March 31, 1997 and 1996
comprise:
<TABLE>
<CAPTION>
DUE DATE INTEREST 1997 1996
------------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
Pepe Jeans London Corpora-
tion...................... June 30, 1999 0% $44,683,000 $21,000,000
Pepe Jeans London Corpora-
tion...................... September 30, 2000 0% 3,701,000 3,396,000
Pepe (UK) Limited.......... 6.5% -- 2,250,000
Pepe (UK) Limited.......... 0% -- 16,433,000
----------- -----------
$48,384,000 $43,079,000
=========== ===========
</TABLE>
The September 30, 2000 note payable to PJLC relates to a $5,000,000 face
value note relating to the signing of the Tommy Jeans license (see Note 14) at
October 1, 1995. For financial reporting purposes, the note is presented at
its net discounted value of $3,701,000 and $3,396,000 at March 31, 1997 and
1996, respectively.
On April 1, 1997, the Company entered into a $10 million, 8% interest
bearing unsecured subordinated note payable to PJLC which is due on March 31,
2002.
Interest expense relating to amounts payable to Pepe (UK) Limited was
$97,500, $146,000 and $146,000 for the years ended March 31, 1997, 1996 and
1995, respectively.
11. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1997 1996 1995
----------- -------- --------
<S> <C> <C> <C>
CURRENT
Federal......................................... $ 7,766,000 $ -- $ --
Foreign......................................... -- 1,000 175,000
State........................................... 1,922,000 399,000 163,000
----------- -------- --------
9,688,000 400,000 338,000
----------- -------- --------
DEFERRED
Federal......................................... (6,117,000) -- --
State........................................... (1,458,000) -- --
----------- -------- --------
(7,575,000) -- --
----------- -------- --------
Total........................................... $ 2,113,000 $400,000 $338,000
=========== ======== ========
</TABLE>
F-16
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets at March 31 are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
CURRENT
Accrued expenses and other............................. $5,556,000 $ 962,000
Inventory capitalization............................... 1,175,000 720,000
Valuation allowance.................................... -- (1,682,000)
---------- -----------
Total current......................................... $6,731,000 $ --
========== ===========
NONCURRENT
Net operating loss carryforwards....................... $ -- $ 6,669,000
Depreciation........................................... 845,000 119,000
Valuation allowance.................................... -- (6,788,000)
---------- -----------
Total noncurrent...................................... $ 845,000 $ --
========== ===========
</TABLE>
The Company believes that, at March 31, 1997, it is more likely than not
that the results of future operations will generate sufficient taxable income
to realize the deferred tax asset as the temporary differences reverse.
Accordingly, a valuation allowance has not been provided.
At March 31, 1996, PJUSA had net operating loss carryforwards of
approximately $16.7 million, all of which were utilized during the year ended
March 31, 1997.
The provision for income taxes differs from the amounts computed by applying
the applicable U.S. federal statutory rates to income (loss) before taxes as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- ---------
Provision for income taxes at the federal
statutory rate........................... $ 6,047,000 $(3,516,000) $(397,000)
Net operating loss........................ (2,531,000) -- --
Valuation allowance....................... (1,454,000) 3,574,000 763,000
State and local income taxes, net of fed-
eral benefits............................ 355,000 399,000 162,000
Other..................................... (304,000) (57,000) (190,000)
----------- ----------- ---------
Provision for income taxes.............. $ 2,113,000 $ 400,000 $ 338,000
=========== =========== =========
</TABLE>
12. COMBINED SHARE CAPITAL
Combined share capital at March 31, 1997 and 1996 are comprised of:
PJUSA common stock, $1 par value per share (authorized,
100,000 shares; issued and outstanding, 50,000 shares)
PJFE common stock, $1 par value per share (authorized, 10,000
shares; issued and outstanding, 1,000 shares)
F-17
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. MAJOR CUSTOMERS
Gross sales to major customers as a percentage of total sales for the years
ended March 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer A............................................... 23% 27% 21%
Customer B............................................... 18% * *
</TABLE>
--------
*less than 10%
14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is bound by non-cancelable lease agreements involving offices,
showrooms and equipment. Future minimum rental payments, by year and in total,
under non-cancelable operating leases with terms of one year or more and under
capital leases, consists of the following at March 31, 1997:
<TABLE>
<CAPTION>
OPERATING
LEASES CAPITAL LEASES
---------- ----------------------------------- ---
TOTAL IMPUTED INTEREST PRINCIPAL TOTAL
YEAR ENDING MARCH 31, ---------- ---------------- --------- --------
<S> <C> <C> <C> <C> <C>
1998......................... $1,830,000 $ 61,000 $235,000 $296,000
1999......................... 1,490,000 43,000 254,000 297,000
2000......................... 864,000 19,000 265,000 284,000
2001......................... 596,000 2,000 91,000 93,000
2002......................... 524,000 -- -- --
2003 and thereafter.......... 542,000 -- -- --
---------- -------- -------- --------
Total...................... $5,846,000 $125,000 $845,000 $970,000
========== ======== ======== ========
</TABLE>
Sub-lease income commitments are $149,000 for the year ending March 31,
1998.
In addition to the above amounts, certain leases contain inflation
escalation clauses and requirements for the payment of property taxes,
insurance and maintenance expenses. Rent expense for the years ended March 31,
1997, 1996 and 1995 was $1,698,000, $1,127,000 and $746,000, respectively.
LEGAL MATTERS
The Company is subject to various claims and assessments which arise in the
ordinary course of its business. In the opinion of management, the disposition
of all such items will not have a material adverse effect on the Company's
financial position, cash flows or results of operations.
LICENSING
In consideration of the transfer and receipt of all the Licensor's men's
core denim line open orders, during the year ended March 31, 1996, PJUSA
agreed to pay $5,000,000, without interest, to Tommy Hilfiger Licensing Inc.
on or before September 30, 2000. During the year ended March 31, 1996, PJUSA
expensed the present value of the note, $3,250,000, as cost of goods sold.
Imputed interest will be expensed during the five year period of the note. The
note was subsequently assigned to PJLC (see Note 10).
F-18
<PAGE>
PEPE JEANS USA, INC. AND PEPE JEANS FAR EAST LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Under the licensing agreement, PJUSA must make certain minimum royalty and
advertising payments. A minimum royalty payment of $3,800,000 is owed in the
first licensing year of the agreement and increases by the greater of 80% of
the preceding annual period's actual royalty or $500,000 in each of the next
four years. A minimum advertising payment of $2,600,000 and $2,100,000 is owed
in the first and second years, respectively, and increases by $300,000 in each
of the next three years. During the years ended March 31, 1997 and 1996,
payments pursuant to the Licensing Agreement exceeded such minimums.
LETTERS OF CREDIT
At March 31, 1997 and 1996, the Company had letters of credit outstanding,
principally for inventory purchases, totaling $21,667,000 and $6,751,000,
respectively, of which $9,123,000 and $1,413,000, respectively, were accrued
in "Bank borrowings".
IN-STORE SHOPS
At March 31, 1997, PJUSA committed to pay approximately $697,000 as deposits
for the manufacturing of in-store fixtures.
EMPLOYMENT CONTRACT
PJUSA has an employment contract through March 31, 2002 with one of its
executives.
15. EMPLOYEE BENEFIT PLAN
In January 1994, PJUSA established a deferred compensation plan (401-(k))
for the benefit of its employees. The plan provides for optional matching
contributions by the Company. There were no such matching contributions for
the years ended March 31, 1997, 1996, and 1995. PJUSA paid expenses on behalf
of the Plan of $5,000, $4,000, $4,000 for the years ended March 31, 1997, 1996
and 1995, respectively.
16. SUBSEQUENT EVENTS
On January 26, 1998, PJUSA entered into an agreement to purchase all the
issued and outstanding shares of Tomcan Investments Inc. ("Tomcan") for C$125
million (U.S. $86 million at January 26, 1998). The beneficial owners of
Tomcan include members of the family of a director of PJUSA as well as such
director. The closing of such transaction is subject to the acquisition of
PJUSA by Tommy Hilfiger U.S.A., Inc. or one of its subsidiaries.
On January 31, 1998, PJLC entered into an agreement with Tommy Hilfiger
Corporation and its subsidiaries to sell (subject to approval of the
shareholders of Tommy Hilfiger Corporation) PJUSA and PJFE (which has been
renamed TJ (Far East) Limited) to such subsidiaries. These financial
statements do not reflect any adjustments which may be required as a result of
such sale.
F-19
<PAGE>
[LETTERHEAD OF PRICE WATERHOUSE]
JANUARY 23, 1998
AUDITORS' REPORT
TO THE DIRECTORS OF
TOMCAN INVESTMENTS INC.
We have audited the consolidated balance sheet of TOMCAN INVESTMENTS INC. as
at December 31, 1997 and the consolidated statements of income and retained
earnings and changes in financial position for the nine-month period then
ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31,
1997 and the results of its operations and the changes in its financial
position for the nine-month period then ended in accordance with generally
accepted accounting principles in Canada.
/s/ Price Waterhouse
CHARTERED ACCOUNTANTS
F-20
<PAGE>
TOMCAN INVESTMENTS INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................. C$ 318,018
Accounts receivable.............................................. 8,206,972
Inventories (Note 4)............................................. 19,156,331
Prepaid expenses................................................. 38,749
Loan receivable--related party (Note 5).......................... 48,893
Subscription receivable.......................................... 1,370
------------
27,770,333
CAPITAL ASSETS (Note 6)........................................... 4,104,986
UNREALIZED FOREIGN EXCHANGE LOSS ON LONG-TERM DEBT................ 333,540
GOODWILL (NET OF ACCUMULATED AMORTIZATION OF $52,014)............. 2,722,119
------------
C$34,930,978
============
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness................................................ C$ 87,831
Bank loans (Note 7).............................................. 1,234,908
Accounts payable and accrued liabilities......................... 8,378,558
Income taxes payable............................................. 4,941,798
Demand loan payable--related company............................. 14,327
------------
14,657,422
LONG-TERM DEBT--RELATED PARTY (Note 8)............................ 9,570,481
------------
24,227,903
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9)............................................ 1,370
RETAINED EARNINGS................................................. 10,701,705
------------
10,703,075
------------
C$34,930,978
============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-21
<PAGE>
TOMCAN INVESTMENTS INC.
CONSOLIDATED STATEMENT OF INCOME
AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1997
------------
<S> <C>
SALES............................................................... C$70,062,783
COST OF SALES....................................................... 37,268,888
------------
GROSS MARGIN........................................................ 32,793,895
EXPENSES
Selling........................................................... 10,066,633
Administrative.................................................... 2,919,642
Financial (Note 11)............................................... 1,621,227
------------
14,607,502
------------
INCOME BEFORE UNDERNOTED ITEMS...................................... 18,186,393
AMORTIZATION OF GOODWILL............................................ (52,014)
INTEREST EXPENSE.................................................... (1,086,211)
INTEREST INCOME..................................................... 61,062
ROYALTY INCOME...................................................... 178,246
------------
INCOME BEFORE INCOME TAXES.......................................... 17,287,476
CURRENT INCOME TAXES................................................ 6,585,771
------------
NET INCOME FOR THE PERIOD........................................... 10,701,705
------------
RETAINED EARNINGS, BEGINNING OF PERIOD.............................. --
------------
RETAINED EARNINGS, END OF PERIOD.................................... C$10,701,705
============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-22
<PAGE>
TOMCAN INVESTMENTS INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1997
------------
<S> <C>
OPERATING ACTIVITIES
Net income for the period....................................... C$10,701,705
Items not affecting cash
Amortization of capital assets................................. 1,236,794
Amortization of goodwill....................................... 52,014
Amortization of unrealized foreign exchange loss on long-term 58,859
debt.......................................................... ------------
12,049,372
Changes in non-cash working capital components relating to (2,438,361)
operations..................................................... ------------
Net cash provided by operating activities....................... 9,611,011
INVESTING ACTIVITIES
Acquisition of capital assets................................... (1,912,754)
Acquisition of a business (net of cash, bank indebtedness and
bank loans acquired)........................................... (18,711,648)
Change in loan receivable--related party........................ 1,566,261
------------
Net cash used in investing activities........................... (19,058,141)
FINANCING ACTIVITIES
Change in demand loan payable--related company.................. 14,327
Issuance of long-term debt--related party....................... 9,178,082
Redemption of preferred shares of subsidiary.................... (750,000)
------------
Net cash provided by financing activities....................... 8,442,409
------------
CHANGE IN CASH POSITION DURING THE PERIOD........................ (1,004,721)
CASH POSITION, BEGINNING OF PERIOD............................... --
------------
CASH POSITION, END OF PERIOD .................................... C$(1,004,721)
============
CASH POSITION CONSISTS OF:
Cash............................................................ C$ 318,018
Bank indebtedness............................................... (87,831)
Bank loans...................................................... (1,234,908)
------------
C$(1,004,721)
============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. INCORPORATION AND NATURE OF BUSINESS
Tomcan Investments Inc. (the "company") was incorporated under the
International Business Companies Act on February 28, 1997 in the British
Virgin Islands. The company acts as a holding company for its operating
wholly-owned subsidiary, Tommy Hilfiger Canada Inc.
Tommy Hilfiger Canada Inc. is a licensee that sources, manufactures and
distributes sportswear and jeans for men, women, juniors and kids. The
company's products, which can be found in leading department and specialty
stores throughout Canada, are marketed through its sales offices in Montreal,
Toronto and Vancouver.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in Canadian dollars.
BASIS OF CONSOLIDATION
The consolidated financial statement include the accounts of the company and
its wholly-owned subsidiary, Tommy Hilfiger Canada Inc.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. Cost
is determined on a first-in, first-out basis.
CAPITAL ASSETS
Capital assets are recorded at cost. Amortization is calculated on the
declining balance basis at the following annual rates:
<TABLE>
<S> <C>
Furnitures and fixtures.................. 20%
Equipment................................ 20%
Computer hardware........................ 30%
Computer software........................ 30%
</TABLE>
Leasehold improvements are amortized on the straight-line basis over five
years.
In-store boutiques located in certain of the company's customers' premises
are amortized on the straight-line basis over three years.
INCOME TAXES
The company follows the tax allocation basis for accounting for income
taxes. Deferred income taxes are provided for on timing differences between
accounting income and income for tax purposes.
GOODWILL
Goodwill is amortized on the straight-line basis over a period of 40 years.
The company assesses at each balance sheet date whether there has been a
permanent impairment in the value of goodwill. This is accomplished mainly by
determining whether projected undiscounted future cash flows from operations
exceed the net book value of goodwill as of the assessment date.
F-24
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities are translated from foreign currencies into
Canadian dollars at rates of exchange at the date of the balance sheet.
The gains and losses resulting from the translation of foreign currency
transactions are included in earnings, except for those on long-term debt
denominated in foreign currencies. Such exchange gains and losses are deferred
and amortized over the term of the debt.
FORWARD EXCHANGE CONTRACTS
Gains and losses on forward contracts are recognized in income in the period
in which they arise.
3. PURCHASE OF A BUSINESS
On April 1, 1997, the company acquired the common shares of Tommy Hilfiger
Canada Inc. which were owned by Mr. Leo Stroll for a total cash consideration
of C$8,130,500. Tomcan Investments Inc. is a wholly-owned subsidiary of
Lawvest Holdings Inc. Mr. Lawrence Stroll (son of Mr. Leo Stroll) and members
of his immediate family have a 100% indirect ownership in Lawvest Holdings
Inc.
This acquisition has been accounted for using the purchase method and
accordingly, the purchase price was allocated to assets and liabilities based
on their estimated fair values as of the acquisition date. The excess of
purchase price over the fair value of the net assets acquired has been
recorded as goodwill and is being amortized on the straight-line basis over 40
years. The results of operations relating to Tommy Hilfiger Canada Inc. have
been included in these consolidated financial statements from the date of
acquisition.
Details of the acquisition are as follows:
<TABLE>
<S> <C>
Net assets acquired
Assets acquired
Working capital............................................ C$2,677,339
Capital assets............................................. 3,429,028
Goodwill................................................... 2,774,133
Liabilities assumed
Preferred shares........................................... (750,000)
-----------
C$8,130,500
===========
</TABLE>
4. INVENTORIES
<TABLE>
<S> <C>
Raw materials................................................ C$ 1,762,623
Work in process.............................................. 1,552,666
Finished goods............................................... 15,841,042
------------
C$19,156,331
============
</TABLE>
F-25
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
5. LOAN RECEIVABLE--RELATED PARTY
This loan to a general partnership which is controlled by certain of the
company's ultimate shareholders is unsecured, bears interest at prime plus 1-
1/4% and has no specific terms of repayment.
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
----------- ------------ -----------
<S> <C> <C> <C>
Furniture and fixtures..................... C$ 893,534 C$ 468,090 C$ 425,444
Equipment.................................. 196,711 43,247 153,464
Computer hardware.......................... 346,744 104,125 242,619
Computer software.......................... 60,663 25,727 34,936
Leasehold improvements..................... 1,293,587 702,798 590,789
In-store boutiques......................... 5,381,674 2,723,940 2,657,734
----------- ----------- -----------
C$8,172,913 C$4,067,927 C$4,104,986
=========== =========== ===========
</TABLE>
7. BANK LOANS
The bank loans are secured by a moveable hypothec up to an amount of
C$25,000,000 covering accounts receivable, inventories and a debenture with a
fixed and floating charge on all assets of the company. The unused portion of
the bank loans at March 31, 1997 is C$23,765,092.
8. LONG-TERM DEBT--RELATED PARTY
This loan from a company associated with certain of the company's directors
is in the amount of US$6,700,000, bears interest at 8% per annum until April
1999, and 2% above U.S. dollar prime rate thereafter, and is due on April 1,
2002.
As security, the company has hypothecated the shares of Tommy Hilfiger
Canada Inc. (its wholly-owned subsidiary) for an amount of C$10,000,000 and an
additional amount to the extent of C$2,000,000 to further secure the
performance and observance of the company's obligation.
9. SHARE CAPITAL
Authorized
50,000 shares, one class, voting, US$1.00 par value each, redeemable by the
company at fair market value
Issued
<TABLE>
<S> <C>
1,000 Class A common shares......................................... C$1,370
-------
</TABLE>
F-26
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
10. COMMITMENTS
Total commitments under long-term operating leases ranging from 12 to 55
months approximate C$2,105,011. The minimum amounts payable in each of the
next five years are as follows:
<TABLE>
<S> <C>
1998.......................................................... C$811,039
1999.......................................................... 813,319
2000.......................................................... 445,661
2001.......................................................... 22,100
2002.......................................................... 12,892
</TABLE>
At December 31, 1997, there are letters of credit outstanding of
approximately C$5,598,175.
At December 31, 1997, the company has entered into foreign exchange forward
contracts to purchase U.S. dollars with notional amounts totalling
US$7,000,000.
11. AMORTIZATION EXPENSE AND FINANCIAL EXPENSES
<TABLE>
<S> <C>
AMORTIZATION EXPENSE
Furniture and fixtures...................................... C$ 68,271
Equipment................................................... 19,560
Computer hardware........................................... 46,464
Computer software........................................... 6,675
Leasehold improvements...................................... 157,460
In-store boutiques.......................................... 938,364
-----------
C$1,236,794
===========
FINANCIAL EXPENSES
Credit insurance............................................ C$ 446,920
Discounts allowed........................................... 1,115,448
Amortization of unrealized foreign exchange loss............ 58,859
-----------
C$1,621,227
===========
</TABLE>
12. FINANCIAL INSTRUMENTS
CREDIT RISK
The company is not exposed to any significant credit risks since the
majority of its trade receivables are insured by the bank under a financing
agreement based on a percentage of accounts receivable and inventories.
Approximately 45% of sales are made to two customers.
F-27
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
INTEREST RATE RISK
The company's exposure to interest rate risk is summarized as follows:
<TABLE>
<S> <C>
Cash........................... Floating interest rate
Accounts receivable............ Non-interest bearing
Loan receivable--related party. Floating interest rate (prime plus 1.25%)
Bank indebtedness.............. Floating interest rate (prime plus 1.00%)
Bank loans..................... Floating interest rate (prime plus 1.00%)
Accounts payable and accrued
liabilities................... Non-interest bearing
Demand loan payable--related
company....................... Non-interest bearing
Long-term debt--related party.. Fixed interest rate (8%)
</TABLE>
13. RELATED PARTY TRANSACTIONS
The company paid buying commissions of C$705,000 to TJ Far East Ltd. and to
Pepe Jeans (Far East) Ltd for the nine-month period ended December 31, 1997.
These transactions are all in the normal course of operations and thus are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. At December 31, 1997,
included in accounts payable and accrued liabilities is a payable to TJ Far
East Ltd. of C$116,000.
The companies mentioned above have an ultimate shareholder who, together
with members of his immediate family, since April 1, 1997, have a 100%
indirect ownership interest in Tomcan Investments Inc.
14. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in Canada. Material variations
in Canadian GAAP from U.S. GAAP are summarized hereafter. All amounts are in
Canadian dollars.
(A) EARNINGS AND BALANCE SHEET ADJUSTMENTS
<TABLE>
<S> <C> <C>
EARNINGS ADJUSTMENTS
Net income for the period in accordance with Canadian
GAAP................................................. C$ 10,701,705
Adjustments
Unrealized foreign exchange loss on long-term debt... (333,540)(ii)
Amortization of goodwill............................. 52,014 (iii)
-------------
Net income for the period in accordance with U.S.
GAAP................................................. C$ 10,420,179
=============
BALANCE SHEET ADJUSTMENTS
<CAPTION>
CANADIAN
GAAP U.S. GAAP
------------ -------------
<S> <C> <C>
Subscription receivable.................. C$ 1,370(i) C$ --
Unrealized foreign exchange loss on long-
term debt............................... 333,540(ii) --
Goodwill................................. 2,722,119(iii) --
Share capital............................ 1,370(i) --
Retained earnings........................ 10,701,705(iii) 7,646,046
============ =============
</TABLE>
F-28
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(B) STATEMENT OF CHANGES IN FINANCIAL POSITION
Under U.S. GAAP, the statement of changes in financial position would
reconcile to cash and cash equivalents at the end of the year without regard
to bank indebtedness or bank loans. Consequently, under U.S. GAAP, the
decrease in bank indebtedness and bank loan in the amount of C$9,808,726 would
be disclosed as a financing activity. Under U.S. GAAP, cash and cash
equivalents consist of assets maturing within three months.
The business acquisition in the amount of C$18,711,648, the redemption of
preferred shares of subsidiary in the amount of C$750,000 and issuance of
long-term debt for C$8,880,500 would be excluded from the statement of changes
in financial position for U.S. GAAP.
(i) Under U.S. GAAP, unpaid share subscription receivables are required to
be reflected as an offset to shareholder's equity.
(ii) Under Canadian GAAP, unrealized exchange gains and losses arising on
the translation of long-term debt are deferred and amortized over the
remaining life of the debt. Under U.S. GAAP, such exchange gains and
losses are included in net income.
(iii) Under U.S. GAAP, the acquisition of Tommy Hilfiger Canada Inc.
referred to in Note 3 would be accounted for as a common control
transaction under a method similar to the pooling of interests method
rather than as a purchase. Under the purchase method, goodwill is
recognized on the excess of the purchase price over the net assets
acquired, and the results of operations are included only from the
date of acquisition. Under the pooling of interests, the financial
position and the results of the two companies are combined from
inception, and, accordingly, all of the Company's consolidated
financial statements would be restated to combine the financial
statements of Tommy Hilfiger Canada Inc. for all periods prior to the
merger. No goodwill is recognized on the transaction. The entire
purchase price flows through shareholder's equity.
(C) DISCLOSURE REQUIREMENTS
U.S. GAAP requires disclosure of the company's foreign currency hedging
activities.
Approximately 65% of the company's inventory purchases are denominated in
United States dollars. The balance of the company's inventory purchases are
from domestic manufacturers, which purchases are funded in Canadian dollars.
The purchase prices for the non-Canadian portion of 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
affect the company's cost of goods in the future. Due to the fluctuation of
the United States dollar against the Canadian dollar, the company periodically
engages in hedging activities with respect to such exchange rate risk in an
effort to mitigate the effects of such fluctuations on future income. In
September 1997, the company purchased forward contracts with maturities
through April 1998, for the purchase of U.S. dollars. At December 31, 1997,
the company had outstanding forward contracts with a notional value of U.S.
$7.0 million and an unrealized gain of approximately U.S.$260,000.
F-29
<PAGE>
TOMCAN INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(D) RELATED PARTY TRANSACTIONS
For U.S. GAAP purposes, the following items would also be considered related
party transactions for the nine-month period ended December 31, 1997:
. The company paid royalties and buying agency commissions of C$3,947,000 to
Tommy Hilfiger Licensing, Inc. and Tommy Hilfiger (Eastern Hemisphere)
Limited (formerly Tommy Hilfiger (Far East) Limited).
. The company paid sample expenses of C$181,000 to Tommy Hilfiger (HK)
Limited.
. The company made various other payments to other related parties totalling
C$171,000.
Amounts payable to related parties at December 31, 1997 which are recorded
in accounts payable and accrued liabilities amounted to C$1,585,000.
The entities mentioned above have a director who, together with members of
his immediate family, have a 100% indirect ownership interest in the company.
F-30
<PAGE>
TOMMY HILFIGER CANADA INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
SALES............................................................... C$33,929,249
COST OF SALES....................................................... 19,797,549
------------
<CAPTION>
GROSS MARGIN........................................................ 14,131,700
<S> <C>
EXPENSES
Selling........................................................... 6,493,039
Administrative.................................................... 1,726,087
Financial......................................................... 877,524
------------
9,096,650
------------
INCOME BEFORE UNDERNOTED ITEMS...................................... 5,035,050
INTEREST EXPENSE.................................................... (610,838)
INTEREST INCOME..................................................... 84,266
ROYALTY INCOME...................................................... 119,832
------------
<CAPTION>
INCOME BEFORE INCOME TAXES.......................................... 4,628,310
<S> <C>
CURRENT INCOME TAXES................................................ 1,758,758
------------
<CAPTION>
NET INCOME FOR THE PERIOD........................................... 2,869,552
<S> <C>
RETAINED EARNINGS, BEGINNING OF PERIOD.............................. 2,103,875
------------
RETAINED EARNINGS, END OF PERIOD.................................... C$ 4,973,427
============
</TABLE>
F-31
<PAGE>
TOMMY HILFIGER CANADA INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
OPERATING ACTIVITIES
Net income for the period....................................... C$ 2,869,552
Item not affecting cash
Amortization of capital assets................................. 525,969
------------
3,395,521
Changes in non-cash working capital components relating to oper-
ations......................................................... (1,675,651)
------------
Net cash provided by operating activities....................... 1,719,870
INVESTING ACTIVITIES
Acquisition of capital assets................................... (828,400)
Change in loan receivable--related party........................ 1,710,138
------------
Net cash provided by investing activities....................... 881,738
FINANCING ACTIVITIES
Change in demand loan payable--shareholder...................... (227,988)
Change in demand loan payable--related company.................. 64,743
------------
Net cash provided by financing activities....................... (163,245)
------------
CHANGE IN CASH POSITION DURING THE PERIOD........................ 2,438,363
CASH POSITION, BEGINNING OF PERIOD............................... (10,566,595)
------------
CASH POSITION, END OF PERIOD..................................... C$(8,128,232)
============
CASH POSITION CONSISTS OF:
Cash............................................................ C$ 755,703
Bank indebtedness and loans..................................... (8,883,935)
C$(8,128,232)
============
</TABLE>
F-32
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. INCORPORATION AND NATURE OF BUSINESS
Tommy Hilfiger Canada Inc. (the "company") was incorporated on December 19,
1989 under Federal law.
Tommy Hilfiger Canada Inc. is a licensee that sources, manufactures and
distributes sportswear and jeans for men, women, juniors and kids. The
company's products, which can be found in leading department and speciality
stores throughout Canada, are marketed through its sales offices in Montreal,
Toronto and Vancouver.
2. BASIS OF PRESENTATION
These financial statements are prepared in Canadian dollars.
The statements of income and retained earnings and changes in financial
position for the nine-month period ended December 31, 1996 are unaudited.
These unaudited financial statements have been prepared by the company in a
manner consistent with audited financial statements as at March 31, 1997, 1996
and 1995. 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 period presented.
3. SUBSEQUENT EVENT
The common shares of the company were purchased by Tomcan Investments Inc.
on April 1, 1997.
F-33
<PAGE>
[LETTERHEAD OF PRICE WATERHOUSE]
MAY 30, 1997
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
TOMMY HILFIGER CANADA INC.
We have audited the balance sheet of TOMMY HILFIGER CANADA INC. as at March
31, 1997 and the statements of income and retained earnings and changes in
financial position for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at March 31, 1997 and the
results of its operations and the changes in its financial position for the
year then ended in accordance with generally accepted accounting principles in
Canada.
The 1996 and 1995 comparative figures are based on financial statements which
were reported upon by other auditors.
/s/ Price Waterhouse
CHARTERED ACCOUNTANTS
F-34
<PAGE>
[LETTERHEAD OF PTACK SCHNARCH BASEVITZ]
AUDITORS' REPORT
To the Shareholders of
TOMMY HILFIGER CANADA INC.
We have audited the balance sheet of TOMMY HILFIGER CANADA INC. as at March 31,
1996 and the statements of earnings and retained earnings and changes in
financial position for the years ended March 31, 1996 and March 31, 1995. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at March 31, 1996 and the
results of its operations and the changes in its financial position for the
years ended March 31, 1996 and March 31, 1995 in accordance with generally
accepted accounting principles in Canada.
/S/ Ptack Schnarch Basevitz
Chartered Accountants
Montreal, May 31, 1996
F-35
<PAGE>
TOMMY HILFIGER CANADA INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................ C$ 550,317 C$ 185,057
Accounts receivable................................. 12,089,584 7,868,157
Inventories (Note 3)................................ 10,015,591 4,542,102
Prepaid expenses.................................... 95,129 43,488
Loan receivable--related party (Note 4)............. 1,615,154 3,444,042
------------ ------------
24,365,775 16,082,846
CAPITAL ASSETS (Note 5).............................. 3,429,028 1,984,680
------------ ------------
C$27,794,803 C$18,067,526
============ ============
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness................................... C$ 1,249,786 C$ 539,502
Bank loans (Note 6)................................. 9,881,679 10,212,150
Accounts payable and accrued liabilities............ 8,765,641 3,931,050
Income taxes payable................................ 1,791,330 86,800
Demand loan payable--shareholder.................... -- 227,988
Demand loan payable--related company................ -- 215,161
------------ ------------
21,688,436 15,212,651
------------ ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7)............................... 751,000 751,000
RETAINED EARNINGS.................................... 5,355,367 2,103,875
------------ ------------
6,106,367 2,854,875
------------ ------------
C$27,794,803 C$18,067,526
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
F-36
<PAGE>
TOMMY HILFIGER CANADA INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
SALES.................... C$50,296,666 C$29,330,172 C$17,626,925
COST OF SALES............ 29,857,379 18,641,762 11,009,720
------------ ------------ ------------
GROSS MARGIN............. 20,439,287 10,688,410 6,617,205
EXPENSES
Selling................. 9,041,208 5,155,274 2,874,559
Administrative.......... 4,232,939 3,003,542 2,153,297
Financial (Note 9)...... 1,113,810 606,878 291,792
------------ ------------ ------------
14,387,957 8,765,694 5,319,648
------------ ------------ ------------
INCOME BEFORE UNDERNOTED
ITEMS................... 6,051,330 1,922,716 1,297,557
INTEREST INCOME.......... 168,349 107,069 --
ROYALTY INCOME........... 139,674 49,579 --
INTEREST EXPENSE ON BANK
LOANS................... (799,022) (966,526) (559,961)
------------ ------------ ------------
INCOME BEFORE INCOME TAX-
ES...................... 5,560,331 1,112,838 737,596
CURRENT INCOME TAXES..... 2,308,839 502,994 305,366
------------ ------------ ------------
NET INCOME FOR THE YEAR.. 3,251,492 609,844 432,230
RETAINED EARNINGS, BEGIN-
NING OF YEAR............ 2,103,875 1,494,031 1,111,801
DIVIDENDS................ -- -- (50,000)
------------ ------------ ------------
RETAINED EARNINGS, END OF
YEAR.................... C$ 5,355,367 C$ 2,103,875 C$ 1,494,031
============ ============ ============
</TABLE>
See accompanying Notes to Financial Statements.
F-37
<PAGE>
TOMMY HILFIGER CANADA INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income for the year........... C$ 3,251,492 C$ 609,844 C$ 432,230
Item not affecting cash
Amortization expense............. 1,054,088 529,892 258,168
------------- ------------- ------------
4,305,580 1,139,736 690,398
Changes in non-cash working capi-
tal components relating
to operations.................... (3,207,436) (2,173,912) (1,820,979)
------------- ------------- ------------
Net cash provided by (used in)
operating activities........... 1,098,144 (1,034,176) (1,130,581)
------------- ------------- ------------
INVESTING ACTIVITIES
Acquisition of capital assets..... (2,498,436) (1,562,715) (824,098)
Proceeds on disposal of capital
assets........................... -- 136,492 --
Change in loan receivable--related
party............................ 1,828,888 (3,444,042) 121,860
------------- ------------- ------------
Net cash used in investing ac-
tivities....................... (669,548) (4,870,265) (702,238)
------------- ------------- ------------
FINANCING ACTIVITIES
Change in loan receivable--direc-
tor.............................. -- -- 50,000
Dividends......................... -- -- (50,000)
Change in demand loan payable--re-
lated company.................... (215,161) 121,028 27,430
Change in demand loan payable--
shareholder...................... (227,988) -- (471,388)
------------- ------------- ------------
Net cash (used in) provided by
financing activities........... (443,149) 121,028 (443,958)
------------- ------------- ------------
DECREASE IN CASH POSITION DURING
THE YEAR.......................... (14,553) (5,783,413) (2,276,777)
CASH, BANK INDEBTEDNESS AND BANK
LOANS, BEGINNING
OF YEAR........................... (10,566,595) (4,783,182) (2,506,405)
------------- ------------- ------------
CASH, BANK INDEBTEDNESS AND BANK
LOANS, END OF YEAR................ C$(10,581,148) C$(10,566,595) C$(4,783,182)
============= ============= ============
</TABLE>
See accompanying Notes to Financial Statements.
F-38
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. INCORPORATION AND NATURE OF BUSINESS
Tommy Hilfiger Canada Inc. (the "company") was incorporated on December 19,
1989 under the Canada Business Corporations Act. Tommy Hilfiger Canada Inc. is
a licensee that sources, manufactures and distributes sportswear and jeans for
men, women, juniors and kids. The company's products, which can be found in
leading department and specialty stores throughout Canada, are marketed
through its sales offices in Montreal, Toronto and Vancouver.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements are prepared in Canadian dollars.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. Cost
is determined on a first-in, first-out basis.
CAPITAL ASSETS
Capital assets are recorded at cost. Amortization is calculated on the
declining balance basis at the following annual rates:
<TABLE>
<S> <C>
Furniture and fixtures............................................. 20%
Equipment.......................................................... 20%
Computer hardware.................................................. 30%
Computer software.................................................. 30%
</TABLE>
Leasehold improvements are amortized on the straight-line basis over five
years.
In-store boutiques located in certain of the company's customers' premises
are amortized on the straight-line basis over three years.
INCOME TAXES
The company follows the tax allocation basis of accounting for income taxes.
Deferred income taxes are provided for on timing differences between
accounting income and income for tax purposes. There are no material timing
differences as at the balance sheet dates.
FOREIGN EXCHANGE
Monetary assets and liabilities in foreign currencies are translated into
Canadian dollars at rates of exchange in effect on the balance sheet date.
F-39
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
3. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Raw materials.......................................... C$ 526,187 C$ --
Work in process........................................ 958,836 34,215
Finished goods......................................... 8,530,568 4,507,887
------------ -----------
C$10,015,591 C$4,542,102
============ ===========
</TABLE>
4. LOAN RECEIVABLE--RELATED PARTY
This loan to a general partnership which is ultimately controlled by certain
of the company's shareholders is unsecured, bears interest at prime plus 1
1/4% and has no specific terms of repayment.
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
1997
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
----------- ------------ -----------
<S> <C> <C> <C>
Furniture and fixtures..................... C$ 816,366 C$ 399,820 C$ 416,546
Equipment.................................. 111,462 23,687 87,775
Computer hardware.......................... 181,589 57,661 123,928
Computer software.......................... 36,773 19,053 17,720
Leasehold improvements..................... 1,121,387 545,335 576,052
In-store boutiques......................... 3,992,584 1,785,577 2,207,007
----------- ----------- -----------
C$6,260,161 C$2,831,133 C$3,429,028
=========== =========== ===========
<CAPTION>
1996
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
----------- ------------ -----------
<S> <C> <C> <C>
Furniture and fixtures..................... C$ 595,315 C$ 323,315 C$ 272,000
Equipment.................................. 21,632 12,972 8,660
Computer hardware.......................... 80,730 26,161 54,569
Computer software.......................... 32,064 12,467 19,597
Leasehold improvements..................... 1,166,755 343,515 823,240
In-store boutiques......................... 1,865,229 1,058,615 806,614
----------- ----------- -----------
C$3,761,725 C$1,777,045 C$1,984,680
=========== =========== ===========
</TABLE>
6. BANK LOANS
The bank loans are secured by a moveable hypothec up to an amount of
C$25,000,000 covering accounts receivable, inventories and a debenture with a
fixed and floating charge on all assets of the company.
The unused portion of the bank loans at March 31, 1997 is C$15,118,321.
F-40
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
7. SHARE CAPITAL
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
AUTHORIZED
An unlimited number of Class A preferred shares, voting,
non-cumulative dividend not exceeding 15% per annum, non-
participating, redeemable and retractable at the issuance
amount...................................................
An unlimited number of Class B preferred shares, non-
voting, non-cumulative dividend of 7%, non-participating,
redeemable and retractable at the issuance amount........
An unlimited number of Class C preferred shares, non-
voting, non-cumulative dividend not exceeding 15% per
annum, non-participating, retractable at the issuance
amount
An unlimited number of Class D preferred shares, voting,
non-cumulative dividend not exceeding 15% per annum, non-
participating, redeemable at the issuance amount.........
An unlimited number of Class A common shares, voting,
participating............................................
An unlimited number of Class B common shares, non-voting,
participating............................................
ISSUED
1,000 Class A common shares............................... C$ 1,000 C$ 1,000
750,000 Class B preferred shares.......................... 750,000 750,000
--------- ---------
C$751,000 C$751,000
========= =========
</TABLE>
8. COMMITMENTS
Total commitments under long-term operating leases approximate C$1,963,000
at March 31, 1997. The minimum amounts payable in each of the next five years
are as follows:
<TABLE>
<S> <C>
1998.......................................................... C$606,000
1999.......................................................... 584,000
2000.......................................................... 561,000
2001.......................................................... 190,000
2002.......................................................... 22,000
</TABLE>
F-41
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
9. AMORTIZATION EXPENSE AND FINANCIAL EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
AMORTIZATION EXPENSE
Furniture and fixtures......................... C$ 60,541 C$ 58,264 C$ 1,879
Equipment...................................... 26,679 1,857 1,824
Computer hardware.............................. 31,500 13,232 5,026
Computer software.............................. 6,585 6,761 3,671
Leasehold improvements......................... 201,821 163,451 76,086
In-store boutiques............................. 726,962 286,327 99,682
----------- --------- ---------
C$1,054,088 C$529,892 C$258,168
=========== ========= =========
FINANCIAL EXPENSES
Credit insurance............................... C$ 546,206 C$251,949 C$152,833
Discounts allowed.............................. 567,604 354,929 138,959
----------- --------- ---------
C$1,113,810 C$606,878 C$291,792
=========== ========= =========
</TABLE>
10. CONTINGENT LIABILITIES
At March 31, 1997, there are letters of credit outstanding relating to
operations of approximately C$4,620,000 (1996--C$4,013,000).
11. RELATED PARTY TRANSACTIONS
Included in administrative expenses for the years ended March 31, 1997, 1996
and 1995 are administration fees paid to a company which is ultimately
controlled by certain of the company's shareholders of C$161,000, C$175,000
and C$156,000, respectively.
Included in administrative expenses for the year ended March 31, 1996, are
fees of C$413,000 paid to the general partnership referred to in Note 4.
In fiscal 1996, the company sold to a general partnership, which is
ultimately controlled by certain of the company's shareholders, assets and
liabilities of a separate division. The assets comprised accounts receivable,
inventories, prepaid expenses, deferred charges and capital assets having an
aggregate carrying value of approximately C$5,030,000.
In consideration for the assets, the general partnership assumed the
following liabilities: bank indebtedness and accounts payable having an
aggregate carrying value of approximately C$1,435,000. In addition, the
general partnership issued a note payable for the difference.
This transaction was recorded at the carrying values of the assets
transferred.
F-42
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
12. FINANCIAL INSTRUMENTS
CREDIT RISK
The company is not exposed to any significant credit risks since the
majority of its trade receivables are insured by the bank under a financing
agreement based on a percentage of accounts receivable and inventories.
Approximately 45% of sales for the years ended March 31, 1997, 1996 and 1995
are made to two customers.
INTEREST RATE RISK
The company's exposure to interest rate risk is summarized as follows:
<TABLE>
<S> <C>
Cash........................... Floating interest rate
Accounts receivable............ Non-interest bearing
Loan receivable--related party. Floating interest rate (prime plus 1.25%)
Bank indebtedness.............. Floating interest rate (prime plus 1.25%)
Bank loans..................... Floating interest rate (prime plus 1.25%)
Accounts payable and accrued
liabilities................... Non-interest bearing
Demand loan payable--
shareholder................... Non-interest bearing
Demand loan payable--related
company....................... Non-interest bearing
</TABLE>
13. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with generally
accepted accounting principles in Canada (Canadian GAAP), which, in the case
of the company, conform in all material respects with GAAP in the United
States (U.S. GAAP) except as follows:
(a) BALANCE SHEET ADJUSTMENTS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CANADIAN U.S. CANADIAN U.S.
GAAP GAAP GAAP GAAP
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Share capital..................... C$751,000 C$1,000(/1/) C$751,000 C$1,000(/1/)
</TABLE>
- --------
(1) Under Canadian GAAP, preferred shares which are redeemable and retractable
are classified as equity for private companies. Under U.S. GAAP, such
amounts are classified outside of equity.
(b) STATEMENT OF CHANGES IN FINANCIAL POSITION
FINANCING ACTIVITIES
Under U.S. GAAP, the statements of changes in financial position would
reconcile to cash and cash equivalents at the end of the year without regard
to bank indebtedness and bank loans. Consequently, under U.S. GAAP, the
increase in bank indebtedness and bank loans of C$379,813, C$5,829,877 and
C$2,415,372 for the years ended March 31, 1997, 1996 and 1995 respectively
would be disclosed as financing activities. Under U.S. GAAP, cash and cash
equivalents consist of assets maturing within three months.
INVESTING ACTIVITIES
Under U.S. GAAP, certain items included as investing activities in the
statement of changes in financial position do not result in cash flows and
therefore should be excluded.
For the year ended March 31, 1996, the loan receivable in the amount of
C$3,444,042 received as part of the transaction detailed in Note 11 to the
financial statements would be excluded from investing activities. In addition,
cash provided by operating activities would increase by the same amount.
F-43
<PAGE>
TOMMY HILFIGER CANADA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(c)For U.S. GAAP purposes, the following items would also be considered
related party transactions.
. The company paid royalties and buying agency commissions of C$3,263,000,
C$2,386,000 and C$1,172,000 to Tommy Hilfiger Licensing, Inc. and Tommy
Hilfiger (Eastern Hemisphere) Limited (formerly Tommy Hilfiger (Far East)
Limited) for the years ended March 31, 1997, 1996 and 1995, respectively.
. The company paid buying office commissions of C$592,000 to Pepe Jeans
(Far East) Limited for the year ended March 31, 1997.
. The company paid a samples expense of $183,000, C$192,000 and C$173,000
to Tommy Hilfiger (HK) Limited for the years ended March 31, 1997, 1996
and 1995, respectively.
. The company made various other payments to other related parties
totalling C$133,000, C$185,000 and C$59,000 for the years ended March 31,
1997, 1996 and 1995, respectively.
Amounts payable to related parties as at March 31, 1997 and 1996 which are
recorded in accounts payable and accrued liabilities amounted to C$1,396,000
and C$690,000, respectively.
The entities mentioned above have a director or an ultimate shareholder who
is an immediate family member of the shareholder of Tommy Hilfiger Canada Inc.
14. SUBSEQUENT EVENT
On April 1, 1997, 750,000 Class B preferred shares were redeemed for cash
consideration of C$750,000.
15. COMPARATIVE FIGURES
Certain figures in the 1995 and 1996 financial statements have been
reclassified to conform with the basis of presentation adopted for 1997.
F-44
<PAGE>
ANNEX A
CONFORMED COPY
STOCK PURCHASE AGREEMENT
BY AND AMONG
TOMMY HILFIGER CORPORATION,
TOMMY HILFIGER U.S.A., INC.,
TOMMY HILFIGER (EASTERN HEMISPHERE) LIMITED
AND
PEPE JEANS LONDON CORPORATION
DATED AS OF JANUARY 31, 1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
<C> <S> <C>
Certain Definitions..................................................... A-5
ARTICLE II
Purchase and Sale of Stock; Closing..................................... A-10
Section 2.1. Purchase and Sale.................................... A-10
Section 2.2. Time and Place of Closing............................ A-11
ARTICLE III
Representations and Warranties of Seller................................ A-11
Section 3.1. Incorporation; Authorization; etc. .................. A-11
Section 3.2. Capitalization; Structure............................ A-12
Section 3.3. Financial Statements................................. A-13
Section 3.4. Properties; Leases................................... A-14
Section 3.5. Absence of Certain Changes........................... A-14
Section 3.6. Litigation; Orders................................... A-14
Licenses, Approvals, Other Authorizations, Consents,
Section 3.7. Reports, etc......................................... A-14
Section 3.8. Labor Matters........................................ A-14
Section 3.9. Compliance with Laws................................. A-15
Section 3.10 Insurance............................................ A-15
Section 3.11. Material Contracts................................... A-15
Section 3.12. Brokers, Finders, etc. .............................. A-15
Section 3.13. Affiliate Transactions............................... A-16
Section 3.14. Environmental Compliance............................. A-16
Section 3.15. Undisclosed Liabilities.............................. A-17
Section 3.16. Proxy Statement...................................... A-17
Section 3.17. Acquisition of Shares for Investment................. A-17
ARTICLE IV
Representations and Warranties of Parent................................ A-18
Section 4.1. Incorporation; Authorization; etc. .................. A-18
Section 4.2. Capitalization....................................... A-19
Section 4.3. Other Authorizations, Consents, Reports, etc......... A-19
Section 4.4. Brokers, Finders, etc. .............................. A-19
Section 4.5. Acquisition of Shares for Investment................. A-19
Section 4.6. SEC Filings; Financial Statements.................... A-20
Section 4.7. Proxy Statement...................................... A-20
ARTICLE V
Covenants of Seller and Parent.......................................... A-20
Investigation of Business; Access to Properties and
Section 5.1. Records.............................................. A-20
Section 5.2. Efforts; Obtaining Consents.......................... A-21
Section 5.3. Further Assurances................................... A-21
Section 5.4. Conduct of Business by Seller........................ A-21
Section 5.5. Conduct of Business by Parent........................ A-23
Section 5.6. Preservation of Business............................. A-23
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Section 5.7. Non-Solicitation........................................ A-23
Section 5.8. Notice of Developments.................................. A-23
Section 5.9. License Agreements...................................... A-23
Section 5.10. Financial Statements.................................... A-23
Section 5.11. Intercompany Accounts; Indebtedness..................... A-24
Section 5.12. Proxy Statement......................................... A-24
Section 5.13. Stockholders Meeting.................................... A-24
Section 5.14. NYSE Listing............................................ A-24
Section 5.15. Financing............................................... A-24
Section 5.16. Blackwatch Note......................................... A-25
Section 5.17. Resignation of Directors................................ A-25
ARTICLE VI
Employee Benefits........................................................ A-25
Section 6.1. Employee Benefit Plans.................................. A-25
Section 6.2. Company Employee Benefit Plans.......................... A-26
Section 6.3. Non-U.S. Company Employee Benefit Plans................. A-27
Section 6.4. Administration.......................................... A-27
Section 6.5. Reportable Event........................................ A-27
ARTICLE VII
Tax Matters.............................................................. A-27
Section 7.1. Tax Returns of the Companies and the Subsidiaries....... A-27
Section 7.2. Allocation of Certain Taxes............................. A-28
Section 7.3. Filing Responsibility................................... A-28
Section 7.4. Refunds and Carrybacks.................................. A-29
Section 7.5. Cooperation and Exchange of Information................. A-29
Section 7.6. Tax Indemnification by Seller........................... A-30
Section 7.7. Tax Certification....................................... A-30
Section 7.8. Definitions............................................. A-30
ARTICLE VIII
Conditions to Parent's, TH USA's and THEH's Obligations to Close......... A-31
Section 8.1. Representations, Warranties and Covenants of Seller..... A-31
Section 8.2. Regulatory Approvals.................................... A-31
Section 8.3. No Orders or Injunctions................................ A-31
Section 8.4. Opinions of Seller's Counsel............................ A-31
Section 8.5. Certain Agreements...................................... A-32
Section 8.6. Stockholder Approval.................................... A-32
Section 8.7. Canada Purchase......................................... A-32
Section 8.8. NYSE Listing............................................ A-32
Section 8.9. Parent Financing........................................ A-32
Section 8.10. Consents................................................ A-32
ARTICLE IX
Conditions to Seller's Obligation to Close............................... A-32
Section 9.1. Representations, Warranties and Covenants of Parent..... A-32
Section 9.2. Regulatory Approvals.................................... A-32
Section 9.3. No Orders or Injunctions................................ A-32
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Section 9.4. Opinions of Parent's Counsel........................... A-32
Section 9.5. Certain Agreements..................................... A-32
Section 9.6. Stockholder Approval................................... A-32
Section 9.7. NYSE Listing........................................... A-32
Section 9.8. Consents............................................... A-32
ARTICLE X
Survival; Indemnification................................................. A-33
Section 10.1. Survival............................................... A-33
Section 10.2. Indemnification by Seller.............................. A-33
Section 10.3. Indemnification Procedures............................. A-33
Section 10.4. Limits on Indemnification.............................. A-34
Section 10.5. Losses Net of Insurance................................ A-34
ARTICLE XI
Termination............................................................... A-35
Section 11.1. Termination............................................ A-35
Section 11.2. Procedure and Effect of Termination.................... A-35
ARTICLE XII
Miscellaneous............................................................. A-35
Section 12.1. Counterparts........................................... A-35
Section 12.2. Governing Law.......................................... A-35
Section 12.3. Jurisdiction; Waiver of Trial by Jury.................. A-35
Section 12.4. Entire Agreement....................................... A-36
Section 12.5. Expenses............................................... A-36
Section 12.6. Notices................................................ A-36
Section 12.7. Successors and Assigns................................. A-37
Section 12.8. Headings; Definitions.................................. A-37
Section 12.9. Amendments and Waivers................................. A-37
Section 12.10. Severability........................................... A-37
Section 12.11. Interpretation......................................... A-37
Signatures............................................................. A-38
</TABLE>
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<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement"), dated as of January 31,
1998, is by and among Tommy Hilfiger Corporation, a British Virgin Islands
corporation ("Parent"), Tommy Hilfiger U.S.A., Inc., a Delaware corporation
and a wholly owned subsidiary of Parent ("TH USA"), Tommy Hilfiger (Eastern
Hemisphere) Limited, a British Virgin Islands corporation and a wholly owned
subsidiary of Parent ("THEH"), and Pepe Jeans London Corporation, a British
Virgin Islands corporation ("Seller").
Whereas, Seller owns (a) 100% of the issued and outstanding shares of common
stock of Pepe Jeans USA, Inc., a California corporation ("Pepe USA"), and (b)
100% of the issued and outstanding ordinary shares of TJ Far East Limited, a
British Virgin Islands corporation ("Pepe Far East" and, together with Pepe
USA, the "Companies");
Whereas, TH USA and THEH desire to purchase from Seller, and Seller desires
to sell to TH USA and THEH, 100% of the issued and outstanding shares of
common stock of Pepe USA and 100% of the issued and outstanding ordinary
shares of Pepe Far East, respectively, upon the terms and subject to the
conditions set forth herein (the "Stock Purchases");
Whereas, AIHL Investment Group Limited ("AIHL"), a British Virgin Islands
corporation, has entered into a Guarantee, dated of even date herewith,
pursuant to which AIHL has guaranteed all of the obligations of Seller under
the Stock Purchase Agreement (the "AIHL Guarantee"); and
Whereas, Pepe USA has agreed to purchase (the "Canada Purchase") from
Lawvest Holdings Inc., a British Virgin Islands corporation ("Lawvest"), all
of the issued and outstanding ordinary shares of Tomcan Investments, Inc., a
British Virgin Islands corporation ("Tomcan"), which will be consummated
immediately after the consummation of the Stock Purchases.
Now, Therefore, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
As used in this Agreement the following terms shall have the following
respective meanings:
"Action" shall mean any complaint, claim, prosecution, indictment, action,
suit, arbitration, investigation, inquiry or proceeding by or before any
Governmental Authority.
"Affiliate" shall mean any Person that directly, or indirectly through one
or more intermediaries, controls or is controlled by or is under common
control with the party specified.
"Agreement" shall have the meaning set forth in the preamble hereof.
"AIHL" shall have the meaning set forth in the recitals hereof.
"AIHL Guarantee" shall have the meaning set forth in the recitals hereof.
"Amended European License Agreement" shall mean the License Agreement dated
as of February 1, 1997 by and between Tommy Hilfiger Licensing, Inc. and
Seller, as assigned by Seller to TH Europe and as amended by the First
Amendment thereto, as further amended by the Second Amendment thereto
containing substantially the terms set forth on Exhibit 1.1(a) hereto, to be
entered into between Tommy Hilfiger Licensing, Inc., Seller and TH Europe.
"Ancillary Agreements" shall mean, collectively, the Amended European
License Agreement, the Canada Purchase Agreement, the Lock-Up Agreement and
the Registration Rights Agreement.
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<PAGE>
"Applicable Return" shall have the meaning set forth in Section 10.1(a)
hereof.
"Assets" shall have the meaning set forth in Section 3.4 hereof.
"Bentley Trust Guarantee" shall mean the Guarantee, dated as of January 26,
1998 made by ATC Trustees (Cayman) Limited in trust for the Bentley Trust, in
favor of Pepe USA.
"Blackwatch" shall mean Blackwatch Investments Limited, a British Virgin
Islands corporation.
"Blackwatch Note" shall have the meaning set forth in Section 5.16 hereof.
"Canada Financial Statements" shall have the meaning set forth in Section
3.3(b) hereof.
"Canadian Liabilities" shall have the meaning set forth in Section 10.2(a).
"Canada Purchase" shall have the meaning set forth in the recitals hereof.
"Canada Purchase Agreement" shall mean the Share Purchase Agreement, dated
as of January 26, 1998, between Pepe USA and Lawvest.
"Canadian Subsidiaries" shall mean Tomcan and TH Canada.
"Closing" shall mean the consummation of the transactions contemplated by
Section 2.1 of this Agreement.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor thereto.
"Companies" shall have the meaning set forth in the recitals hereof.
"Company Employee Benefit Plans" shall have the meaning set forth in Section
6.1(a) hereof.
"Company Group" shall have the meaning set forth in Section 7.3(a) hereof.
"Company Material Adverse Effect" shall have the meaning set forth in
Section 3.5 hereof.
"Company Pension Plan" shall have the meaning set forth in Section 6.1(c)
hereof.
"Continuing Affiliate" shall mean Seller, AIHL, Blackwatch, Lawvest or any
of their respective corporate Affiliates (other than the Companies, Tomcan,
Parent and their respective subsidiaries).
"Controlled Group Liability" shall have the meaning set forth in Section
6.2(f) hereof.
"Covered Losses" shall mean any and all debts, losses, liabilities, claims,
fines, royalties, deficiencies, damages, obligations, payments (including,
without limitation, those arising out of any demand, assessment, settlement,
judgment or compromise relating to any Action), costs and expenses (including,
without limitation, interest and penalties due and payable with respect
thereto and reasonable attorneys' and accountants' fees and any other out-of-
pocket expenses incurred in investigating, preparing, defending, avoiding or
settling any Action or in enforcing another party's obligations hereunder),
including, without limitation, any of the foregoing arising under, out of or
in connection with any Action, order or consent decree of any Governmental
Authority or award of any arbitrator of any kind, or any law, rule,
regulation, contract, commitment or undertaking.
"Determination" shall have the meaning set forth in Section 7.8(a) hereof.
"Encumbrance" shall mean any mortgage, pledge, lien, easement, restrictive
covenant, right of way, lease, purchase agreement, option, security interest
or other encumbrance and agreement.
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<PAGE>
"Environmental Law" shall have the meaning set forth in Section 3.14(a)(ii)
hereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall have the meaning set forth in Section 6.2(e) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Expiration Date" shall have the meaning set forth in Section 10.1(a)
hereof.
"Financial Statements" shall have the meaning set forth in Section 3.3(b)
hereof.
"GAAP" shall mean United States generally accepted accounting principles.
"Governmental Authority" shall have the meaning set forth in Section 3.1(d)
hereof.
"Hazardous Substance" shall have the meaning set forth in Section 3.14(a)(i)
hereof.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Income Taxes" shall have the meaning set forth in Section 7.8(c).
"Income Tax Returns" shall have the meaning set forth in Section 7.8(b).
"Indemnification Threshold" shall have the meaning set forth in Section 10.4
hereof.
"Indemnified Parties" shall have the meaning set forth in Section 10.2(a)
hereof.
"Intellectual Property" means all United States and foreign (a) patents,
patent applications, patent disclosures and improvements thereto, (b)
trademarks, service marks, logos, trade names and corporate names and
registrations and applications for registration thereof, including, but not
limited to, all marks registered in the United States Patent and Trademark
Office, (c) copyrights and registrations and applications for registration
thereof, (d) computer software, data and documentation, (e) trade secrets and
confidential business information (including ideas, formulas, compositions,
inventions (whether patentable or unpatentable and whether or not reduced to
practice), know-how, manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs,
plans, proposals, technical data, copyrightable works, financial, marketing
and business data, pricing and cost information, business and marketing plans
and customer and supplier lists and information) and (f) copies and tangible
embodiments thereof (in whatever form or medium) in which any Company or
Subsidiary has any rights.
"International License Agreement" shall mean the International License
Agreement dated August 28, 1995 between Tommy Hilfiger Licensing, Inc. and SEL
International Investments Corp., as ultimately assigned to T.H. International
N.V., as amended.
"IRS" shall have the meaning set forth in Section 7.8(d).
"Lawvest" shall have the meaning set forth in the recitals hereof.
"Licenses" shall have the meaning set forth in Section 3.7(a).
"Lock-Up Agreement" shall mean the Lock-Up Agreement, dated of even date
herewith, among Parent, Seller and certain direct and indirect stockholders of
Seller.
"Memorandum Amendment" shall have the meaning set forth in Section 4.1(a)
hereof.
"Multiemployer Plan" shall have the meaning set forth in Section 6.2(e)
hereof.
A-7
<PAGE>
"Multiple Employer Plan" shall have the meaning set forth in Section 6.2(e)
hereof.
"Net After-Tax Basis" shall mean, with respect to the calculation of any
indemnification payment owed to any party pursuant to this Agreement,
calculation thereof in a manner taking into account any Taxes owing by the
indemnified party or its Affiliates as a result of receipt or accrual of the
indemnity payment and any Tax benefit received or accrued by the indemnified
party or its Affiliates as a result of the indemnified liability.
"Non-Competition Agreement" shall mean the Non-Competition Agreement
containing substantially the terms set forth on Exhibit 1.1(b) hereto, to be
entered into between the Company, Silas K.F. Chou and Lawrence S. Stroll.
"Non-U.S. Company Employee Benefit Plans" shall have the meaning set forth
in Section 6.1(a) hereof.
"Notice of Claim" shall have the meaning set forth in Section 10.3(a)
hereof.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Other Taxes" shall have the meaning set forth in Section 7.8(e).
"Parent" shall have the meaning set forth in the preamble hereof.
"Parent SEC Reports" shall have the meaning set forth in Section 4.6(a)
hereof.
"Parent Shares" shall mean the Ordinary Shares, $.01 par value per share, of
Parent.
"Parent Stockholders Meeting" shall have the meaning set forth in Section
3.16 hereof.
"Pepe Balance Sheet" shall have the meaning set forth in Section 3.3(a)
hereof.
"Pepe Far East" shall have the meaning set forth in the recitals hereof.
"Pepe Far East Purchase Price" shall have the meaning set forth in Section
2.1(a) hereof.
"Pepe Far East Shares" shall mean the Ordinary Shares, $1.00 par value per
share, of Pepe Far East.
"Pepe Financial Statements" shall have the meaning set forth in Section
3.3(a) hereof.
"Pepe USA" shall have the meaning set forth in the recitals hereof.
"Pepe USA Cash Purchase Price" shall have the meaning set forth in Section
2.1(a) hereof.
"Pepe USA Shares" shall mean the shares of Common Stock, without par value,
of Pepe USA.
"Pepe Year-End Balance Sheet" shall mean the condensed combined balance
sheet of Pepe USA and Pepe Far East and its subsidiaries as of December 31,
1997, previously provided by Seller to TH USA and THEH.
"Permitted Exceptions" shall mean (a) mechanics', materialmen's, carriers',
workmen's, warehousemen's, repairmen's, landlords' or similar liens imposed by
law arising and incurred in the ordinary course of business and securing
obligations that are not delinquent, (b) liens for taxes and other
governmental charges, assessments or fees which (i) are not yet due and
payable or which may be paid without penalty or (ii) are being contested in
good faith through appropriate procedures and in respect of which a Company or
Subsidiary has created adequate reserves or (c) Encumbrances which
individually or in the aggregate do not detract from the value of any of the
property or assets subject thereto or interfere with the present use thereof.
"Person" shall mean any individual, firm, corporation, partnership or other
entity (including Governmental Authorities), and shall include any successor
(by merger or otherwise) of such entity.
A-8
<PAGE>
"Price Waterhouse" shall mean Price Waterhouse LLP or one of its
international affiliates.
"Proxy Statement" shall have the meaning set forth in Section 5.12 hereof.
"Purchase Price Cash Amount" shall have the meaning set forth in Section
2.1(a) hereof.
"Purchase Price Shares" shall have the meaning set forth in Section 2.1(a)
hereof.
"RCRA Hazardous Waste" shall have the meaning set forth in Section
3.14(a)(iii) hereof.
"Real Property" shall have the meaning set forth in Section 3.4 hereof.
"Registration Rights Agreement" shall mean the Registration Rights Agreement
in the form attached hereto as Exhibit 1.1(c), to be entered into between the
Company, Seller and certain direct and indirect stockholders of Seller.
"Retained Liabilities" shall have the meaning set forth in Section 10.2(a)
hereof.
"Retained Note" shall have the meaning set forth in Section 2.1(c) hereof.
"Returns" shall have the meaning set forth in Section 7.8(f).
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Seller" shall have the meaning set forth in the preamble hereof.
"Seller Affiliate" shall mean any of Seller, the Companies, the
Subsidiaries, the Canadian Subsidiaries, AIHL, Blackwatch, Anasta Holdings
Limited, Sportswear Holdings Limited, Westleigh Limited and Gadwal Limited.
"Seller's knowledge" or "knowledge of Seller" shall mean the knowledge of
those individuals who as of the date hereof or at anytime thereafter are
officers or directors of Seller, after due inquiry by such officers and
directors of the officers and directors of the Companies and the Subsidiaries.
"Seller Note" shall have the meaning set forth in Section 5.16 hereof.
"Shares" shall have the meaning set forth in Section 2.1(a) hereof.
"Stock Purchases" shall have the meaning set forth in the recitals hereof.
"Subsidiaries" shall mean TJ Clothing (H.K.) Limited, a Hong Kong
corporation, Pepe International Limited, a Hong Kong corporation, THHK
Womenswear Limited, a Hong Kong corporation, and any subsidiary of a Company
formed after the date of this Agreement.
"Taxes" shall have the meaning set forth in Section 7.8(h) hereof.
"Tax Laws" shall have the meaning set forth in Section 7.8(g).
"Taxing Authority" shall have the meaning set forth in Section 7.8(i)
hereof.
"TH Canada" shall mean Tommy Hilfiger Canada, Inc., a company incorporated
under the Canada Business Corporations Act.
"THEH" shall have the meaning set forth in the preamble hereof.
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<PAGE>
"TH Europe" shall mean Tommy Hilfiger Europe B.V., a corporation organized
under the laws of The Netherlands.
"TH Incentive Plans" shall mean, collectively, the Tommy Hilfiger (Eastern
Hemisphere) Limited 1992 Stock Incentive Plan, as amended, the Tommy Hilfiger
U.S.A., Inc. 1992 Stock Incentive Plan, as amended, and the Tommy Hilfiger
Corporation Non-Employee Directors Stock Option Plan.
"T.H. International N.V." shall mean T.H. International N.V., a corporation
organized under the laws of The Netherlands Antilles.
"TH Licenses" shall mean, collectively, the International License Agreement;
the Amended and Restated License Agreement, dated as of May 24, 1995, between
TH Canada and Tommy Hilfiger Licensing, Inc., as amended; the Amended and
Restated License Agreement, dated as of May 24, 1995, between TH Canada (d/b/a
Tommy Hilfiger Shops Inc.) and Tommy Hilfiger Licensing, Inc., as amended; and
the United States License Agreement, dated as of August 28, 1995, between SEL
International Investments Corp. and Tommy Hilfiger Licensing, Inc., as
ultimately assigned to Pepe USA, as amended.
"TH USA" shall have the meaning set forth in the preamble hereof.
"Tomcan" shall have the meaning set forth in the recitals hereof.
"Tomcan Balance Sheet" shall have the meaning set forth in Section 3.3(b)
hereof.
"Tomcan Shares" shall mean the shares, par value $1.00 per share, of Tomcan.
"Withdrawal Liability" shall have the meaning set forth in Section 6.2(d)
hereof.
ARTICLE II
Purchase and Sale of Stock; Closing
Section 2.1. Purchase and Sale. (a) On the basis of the representations,
warranties, covenants and agreements and subject to the satisfaction or waiver
(to the extent permitted) of the conditions set forth in Articles VIII and IX,
at the Closing Seller will sell and TH USA and THEH, respectively, will
purchase fifty thousand (50,000) Pepe USA Shares and one thousand (1,000) Pepe
Far East Shares (collectively, the "Shares"), which constitute, and will
constitute as of the Closing, 100% of the issued and outstanding shares of
capital stock or other equity interests of Pepe USA and Pepe Far East,
respectively. In payment for such Pepe Far East Shares, simultaneously with
the delivery by Seller of certificates for such Pepe Far East Shares, with all
appropriate stock powers and requisite tax stamps attached, properly signed,
in form suitable for the transfer of such Pepe Far East Shares to THEH, and
subject to the satisfaction or waiver (to the extent permitted) of the
applicable conditions set forth herein, THEH will wire transfer $25,000,000.00
(the "Pepe Far East Purchase Price") in immediately available funds to the
account or accounts specified by Seller. In payment for such Pepe USA Shares,
simultaneously with the delivery by Seller of certificates for such Pepe USA
Shares, with all appropriate stock powers and requisite tax stamps attached,
properly signed, in form suitable for the transfer of such Pepe USA Shares to
TH USA, and subject to the satisfaction or waiver (to the extent permitted) of
the applicable conditions set forth herein, (i) TH USA will wire transfer
$730,760,000.00 (the "Pepe USA Cash Purchase Price" and, together with the
Pepe Far East Purchase Price, the "Purchase Price Cash Amount") in immediately
available funds to the account or accounts specified by Seller and (ii) Parent
will deliver to TH USA and TH USA will deliver to Seller certificates
representing 9,045,930 Parent Shares (the "Purchase Price Shares").
(b) Certificates for the Purchase Price Shares shall be in definitive form
and registered in the name of Seller and shall be delivered to Seller bearing
a legend or legends referencing restrictions under the Securities Act on
transfer of the Purchase Price Shares and such other legends as the Board of
Directors of Parent determines to be necessary or appropriate, including any
required by the Lock-Up Agreement.
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<PAGE>
(c) In addition, at the Closing Parent will purchase from Seller the
$10,000,000.00 Subordinated Promissory Note dated April 1, 1997 from Pepe USA
to Seller (the "Retained Note") for an amount equal to the principal thereof
as of the Closing Date.
Section 2.2. Time and Place of Closing. Subject to satisfaction or waiver of
the conditions to Closing set forth herein, the Closing shall take place at
the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York,
New York, as promptly as practicable after satisfaction or waiver, if
permissible, of the conditions set forth in Articles VIII and IX or at such
other time and date as Parent and Seller may agree (the "Closing Date").
ARTICLE III
Representations and Warranties of Seller
Seller hereby represents and warrants to Parent as follows:
Section 3.1. Incorporation; Authorization; etc. (a) Each of the Companies
and Subsidiaries has been duly organized, is validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each of the
Companies and Subsidiaries has full corporate power and authority to own its
properties and assets and to conduct its business as it is now being conducted
and is in good standing and is duly qualified to transact business in each
jurisdiction in which the nature of property owned or leased by it or the
conduct of its business requires it to be so qualified except where the
failure to be in good standing or so qualified would not have a material
adverse effect on the Companies and the Subsidiaries, taken as a whole. Each
jurisdiction in which any of the Companies or Subsidiaries is qualified to do
business is set forth on Schedule 3.1(a).
(b) Seller has been duly organized, is validly existing and in good standing
under the laws of the British Virgin Islands.
(c) Seller has full corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. Each Seller Affiliate has full corporate
power and authority to execute each of the Ancillary Agreements to which it is
a party, to perform its obligations thereunder and to consummate the
transactions contemplated thereby. The execution and delivery of this
Agreement, the performance of Seller's obligations hereunder and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate proceedings on the part of
Seller, and no other corporate proceeding or action on the part of Seller or
its Board of Directors and stockholders are necessary therefor. The execution
and delivery of each Ancillary Agreement to which any Seller Affiliate is a
party, the performance of their respective obligations thereunder and the
consummation of the transactions contemplated thereby by each Seller Affiliate
party to such agreements have been duly and validly authorized by all
necessary corporate proceedings on the part of such Seller Affiliate, and no
other corporate proceeding or action on the part of any Seller Affiliate and
their respective Boards of Directors and stockholders are necessary therefor.
(d) The execution, delivery and performance of this Agreement and each of
the Ancillary Agreements by the Seller Affiliates will not (i) violate or
conflict with any provision of the memorandum of association or articles of
association (or similar instruments) of any Seller Affiliate, (ii) except as
set forth on Schedule 3.1(d), conflict with, violate or constitute a default
under any provision of, or be an event that is (or with the giving of notice
or passage of time or both will result in) a violation of or default under, or
result in the acceleration of or entitle any party to accelerate (whether
after the giving of notice or lapse of time or both) any obligation or right
under, or result in the imposition of any lien upon or the creation of a
security interest in any of the Shares or any of the assets or properties of
any of the Companies or of any of the Subsidiaries pursuant to, or require a
consent or create a penalty or increase any Company's or Subsidiary's payment
or performance obligations under, any material mortgage, lien, lease,
instrument, order, arbitration award, judgment or decree, or any material
contract, agreement, license or permit, to which Seller, any Company or any
Subsidiary is a party or by which any of them or any of their property is
bound, or (iii) assuming that all consents, approvals, authorizations and
other actions described in Section 3.7(b) have been obtained and all filings
and obligations set forth in
A-11
<PAGE>
Section 3.7(b) have been made, violate or conflict with in any material
respect, or result in the imposition of any material lien (other than liens
arising from any actions taken or arrangements made by Parent or any of its
subsidiaries) upon any of the Shares, or any of the assets or properties of
any Company or any Subsidiary pursuant to, any provision of law, regulation,
rule, writ, injunction, decree, statute, order, judgment or ruling of any
federal, state, local, foreign, supernational or supranational court or
tribunal (including any court or tribunal dealing with labor matters),
governmental, regulatory or administrative agency, department, bureau,
authority or commission or arbitral panel ("Governmental Authority") or any
other material restriction of any kind or character to which Seller, any
Company or any Subsidiary is or may be subject or by which any of them or any
of their property is or may be bound. This Agreement, the Canada Purchase
Agreement and the Lock-Up Agreement have been, and, at the Closing, the
Registration Rights Agreement and the Amended European License Agreement will
be, duly executed and delivered by each Seller Affiliate that is a party to
such agreements, and, assuming the due execution hereof and thereof by Parent
and any subsidiary of Parent that is a party to such agreements, this
Agreement, the Canada Purchase Agreement and the Lock-Up Agreement constitute,
and at the Closing the Registration Rights Agreement and the Amended European
License Agreement will constitute, the legal, valid and binding obligations of
such Seller Affiliates enforceable against such parties in accordance with
their respective terms except, in each case, as such enforceability may be
limited by any applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally, and except as the
availability of equitable remedies may be limited by the application of
general principles of equity (regardless of whether such equitable principles
are applied in a proceeding at law or in equity).
(e) Upon consummation of the Stock Purchases at the Closing, as contemplated
by this Agreement, Seller will deliver to TH USA and THEH good and valid title
to all of the outstanding Pepe USA Shares and Pepe Far East Shares,
respectively, free and clear of any liens, claims, charges, security
interests, options or other legal or equitable encumbrances or other rights of
third parties (except those imposed by the federal securities laws or any
action taken or arrangement made by Parent or any of its subsidiaries).
(f) Seller has made available to TH USA and THEH complete and correct copies
of the memorandum of association and articles of association (or similar
instruments), as amended to date, of Seller and each of the Companies and
Subsidiaries, and has made available to TH USA and THEH the corporate minute
books containing the records of meetings of the stockholders and boards of
directors, the stock certificate books and the stock record books of the
Companies and the Subsidiaries. The stock record books of the Companies and
the Subsidiaries which Seller has made available to TH USA and THEH are
complete and correct in all respects and accurately reflect the ownership of
all of the outstanding shares of the Companies' and the Subsidiaries'
respective capital stock and all other securities issued by any of the
Companies or Subsidiaries. All material corporate actions taken by the
Companies and the Subsidiaries since their respective organization and
incorporation have been duly authorized and subsequently ratified as
necessary. None of the Companies or the Subsidiaries is in default under or in
violation of any provision of its memorandum of association or articles of
association (or similar instruments).
Section 3.2. Capitalization; Structure. (a) The authorized capital stock of
Pepe USA consists of 100,000 Pepe USA Shares, of which 50,000 shares are
issued and outstanding. The authorized capital stock of Pepe Far East consists
of 10,000 Pepe Far East Shares, of which 1,000 shares are issued and
outstanding. All of the outstanding shares of capital stock of the Companies
are validly issued, fully paid and nonassessable and are owned beneficially
and of record by Seller. All of the outstanding shares of capital stock or
other equity interests of the Subsidiaries, as listed on Schedule 3.2(a), are
validly issued, fully paid and nonassessable. Except as listed on Schedule
3.2(a), all of the outstanding shares of capital stock or other equity
interests (i) of the Subsidiaries (other than Pepe International Limited) are
owned by Pepe Far East, (ii) of Pepe International Limited are owned by TJ
Clothing (H.K.) Limited, (iii) of TH Canada are owned by Tomcan and (iv) of
Tomcan are owned by Lawvest, all in the amounts set forth on Schedule 3.2(a).
Neither the Shares nor the shares of outstanding common stock or other equity
interests of any Subsidiary have been issued in violation of, or are subject
to, any preemptive rights. The shares of capital stock or other equity
interests of the Subsidiaries and the Shares are
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owned in each case free and clear of any liens, claims, charges, security
interests, options or other legal or equitable encumbrances or restrictions.
Immediately following the consummation of the Canada Purchase pursuant to the
terms of the Canada Purchase Agreement, the Tomcan Shares will be owned
directly or indirectly by Pepe USA and the shares of capital stock or other
equity interests of TH Canada will be owned by Tomcan, in each case free and
clear of any liens, claims, charges, security interests, options or other
legal or equitable encumbrances or restrictions. There are no outstanding
options, warrants, subscriptions or other rights of any kind to acquire, or
obligations to issue, shares of capital stock of any class of, or other equity
interests in, any Company or, except as set forth on Schedule 3.2(a), any
Subsidiary, or any securities convertible into or exchangeable or exercisable
for any shares of capital stock of any class of, or other equity interests in,
any Company or any Subsidiary.
(b) None of the Companies or Subsidiaries directly or indirectly owns or has
the right to acquire any capital stock of or other equity interests,
investment, partnership, joint venture or similar interest in any corporation,
partnership or other entity or other Person except for (i) the ownership of
the outstanding shares or other equity interests of the Subsidiaries, as set
forth on Schedule 3.2(a) and (ii) the right of Pepe USA to purchase the Tomcan
Shares pursuant to the Canada Purchase Agreement. Except for (i) obligations
or liabilities incurred in connection with its incorporation or organization,
(ii) ownership of the equity interests of TH Canada and (iii) as set forth on
the Tomcan Balance Sheet, Tomcan has not and will not have incurred, directly
or indirectly, through any subsidiary or Affiliate, any obligations or
liabilities or engaged in any business activities of any type or kind
whatsoever or entered into any agreements or arrangements with any Person.
Section 3.3. Financial Statements. (a) Seller has previously furnished to TH
USA true and complete copies of (i) the combined financial statements of Pepe
USA and Pepe Far East and its subsidiaries, including combined balance sheets
as of March 31, 1997 and March 31, 1996, combined statements of operations and
retained earnings (accumulated deficit) and combined statements of cash flows
for the fiscal-year periods ended March 31, 1997, March 31, 1996 and March 31,
1995 (such financial statements being audited and accompanied by the
unqualified opinion of Price Waterhouse) and (ii) unaudited condensed combined
financial statements for Pepe USA and Pepe Far East and its subsidiaries as of
and for the nine-month period ended December 31, 1997 (the "Pepe Financial
Statements"). The audited combined balance sheet as of March 31, 1997 is
referred to in this Agreement as the "Pepe Balance Sheet." The Pepe Financial
Statements (including, in each case, any notes thereto) present fairly in all
material respects the combined financial position and results of operations
and cash flows of Pepe USA and Pepe Far East and its subsidiaries for the
respective periods or as of the respective dates set forth therein, in each
case in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as otherwise indicated therein or on Schedule 3.3(a)
and except, in the case of the unaudited Pepe Financial Statements, for
changes resulting from normal and recurring year-end adjustments). The Pepe
Financial Statements have been prepared from and in accordance with the books
and records of Pepe USA and Pepe Far East and its subsidiaries.
(b) Seller has previously furnished to TH USA true and complete copies of
the financial statements of (i) TH Canada, including balance sheets as of
March 31, 1997, March 31, 1996 and March 31, 1995, the statements of income
and retained earnings and statements of changes in financial position for the
fiscal-year periods ended March 31, 1997, March 31, 1996 and March 31, 1995
and (ii) Tomcan, including a consolidated balance sheet as of December 31,
1997, and statements of income and retained earnings and statements of changes
in financial position for the nine-month period ended December 31, 1997 (such
financial statements as of and for the fiscal-year period ended March 31, 1997
and as of and for the nine-month period ended December 31, 1997 being audited
and accompanied by the unqualified opinion of Price Waterhouse and such
financial statements as of and for the fiscal-year periods ended March 31,
1996 and March 31, 1995 being audited and accompanied by the unqualified
opinions of Ptack Schnarch Basevitz) (the "Canada Financial Statements" and
together with the Pepe Financial Statements, the "Financial Statements"). The
Canada Financial Statements have been prepared in accordance with GAAP applied
on a consistent basis throughout the periods involved (except as otherwise
indicated therein or on Schedule 3.3(b)). The audited condensed balance sheet
of Tomcan as of December 31, 1997 is referred to in this Agreement as the
"Tomcan Balance Sheet."
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Section 3.4. Properties; Leases. Except for Permitted Exceptions or as set
forth on Schedule 3.4 hereto, at the Closing a Company or a Subsidiary will
have good and marketable title to, or valid leasehold interests in, as the
case may be, and hold free and clear of all Encumbrances, all of the
properties and assets reflected in the Pepe Balance Sheet or acquired in the
ordinary course of business since the date of the Pepe Balance Sheet (the
"Assets") other than assets sold or fixtures transferred in the ordinary
course of business consistent with past practice. Schedule 3.4 sets forth a
list of all real property used in conducting the businesses of the Companies
and the Subsidiaries (collectively, the "Real Property"). Seller has delivered
to TH USA and THEH or otherwise made available, correct and complete copies of
all leases, subleases and other material agreements or other material
instruments relating to the Real Property to which any of the Companies or
Subsidiaries is a party, all of which are identified on Schedule 3.4 hereto.
There are no pending or, to Seller's knowledge, threatened condemnation
proceedings relating to any of the Real Property. None of the real property
improvements (including leasehold improvements), equipment and other assets
owned or used by the Companies or the Subsidiaries is subject to any
commitment or other arrangement for their sale or use by any Affiliate of any
of the Companies or the Subsidiaries or by third parties.
Section 3.5. Absence of Certain Changes. Except as set forth on Schedule 3.5
hereto and except as contemplated by this Agreement, since March 31, 1997,
there has been no (a) change or development in, or effect on, the business or
businesses of the Companies and the Subsidiaries that is, or could reasonably
be expected to be, materially adverse to the business, assets, liabilities,
condition (financial or otherwise), results of operations or prospects of the
Companies and the Subsidiaries, taken as a whole (a "Company Material Adverse
Effect") or (b) action taken by any Company or any Subsidiary which, if taken
from the date hereof through the Closing, would violate Section 5.4(b) through
(m).
Section 3.6. Litigation; Orders. Except as set forth on Schedule 3.6 hereto,
there are no Actions pending or, to the knowledge of Seller, threatened or
claims asserted against any Company or Subsidiary other than routine Actions
in the ordinary course of business as to which the claims against the
Companies and the Subsidiaries are less than $100,000 individually and
$250,000 in the aggregate. Except as set forth on Schedule 3.6 hereto, there
are no material judgments or material outstanding orders, injunctions,
decrees, stipulations, settlement agreements, citations, investigations, fines
or awards against or binding upon any Company or Subsidiary or any of their
respective properties or businesses.
Section 3.7. Licenses, Approvals, Other Authorizations, Consents, Reports,
etc. (a) The Companies and the Subsidiaries possess or have been granted all
material registrations, filings, applications, certifications, notices,
consents, licenses, permits, approvals, certificates, franchises, orders,
qualifications, authorizations and waivers ("Licenses") of any Governmental
Authority necessary to entitle them to conduct their businesses in the manner
in which they are presently being conducted.
(b) Except (i) as set forth on Schedule 3.7(b) hereto, (ii) for the pre-
merger notification requirements of the HSR Act and any necessary approvals or
filings under the Competition Act (Canada) or the Investment Canada Act and
(iii) those the failure to make, file, give or obtain which would not have a
Company Material Adverse Effect or prevent the consummation of the Stock
Purchases and the other transactions contemplated hereby, there are no
Licenses required to be made, filed, given or obtained by Seller, or any of
the Companies or Subsidiaries with, to or from any Governmental Authority in
connection with the consummation of the Stock Purchases, the Canada Purchase
and the other transactions contemplated under this Agreement or any of the
Ancillary Agreements.
Section 3.8. Labor Matters. Schedule 3.8 hereto sets forth all collective
bargaining or other agreements with labor unions, trade unions, employee
representatives, work committees, guilds or associations representing
employees of any of the Companies or Subsidiaries. As of the date hereof, none
of the Companies or Subsidiaries is involved in or, to Seller's knowledge,
threatened with any labor dispute, arbitration, lawsuit, grievance or
administrative proceeding (other than immaterial grievances), relating to
labor matters involving any current or former employee of any Company or
Subsidiary. Except as set forth on Schedule 3.8, as of the date hereof, no
union or association organizing or election activities involving any nonunion
employees of any Company or Subsidiary are in progress or, to the knowledge of
Seller, have been threatened since April 1, 1995.
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Section 3.9. Compliance with Laws. Except as may be disclosed in Schedule
3.9, the conduct of the businesses of the Companies and Subsidiaries is in and
has been in compliance in all material respects with all material statutes,
laws, regulations, ordinances, rules, judgments, orders or decrees applicable
thereto. Except as set forth on Schedule 3.9, neither Seller nor any Company
or Subsidiary has received written notice of any alleged violation of any
statute, law, regulation, ordinance, rule, judgment, order or decree from any
Governmental Authority applicable to any of the Companies or Subsidiaries or
to their properties which has not been satisfactorily addressed and which give
rise to material fines or other civil penalties or to any criminal
liabilities. In furtherance and not in limitation of the foregoing, neither
Seller nor any Company or Subsidiary has, directly or indirectly, paid or
delivered any fee, commission or other sum of money or item of property,
however characterized, to any government official or other governmental party,
in the United States or any other country, which is in any manner related to
the businesses or operations of the Companies or the Subsidiaries and which
was illegal under any statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees of any Governmental Authority (including, without
limitation, the U.S. Foreign Corrupt Practices Act).
Section 3.10. Insurance. Each of the Companies and Subsidiaries is covered
by valid and currently effective insurance policies issued in its favor that
are customary in scope and amount of coverage for privately-owned companies of
similar size and financial condition in the industry and locale in which it
operates. Schedule 3.10 lists all insurance policies which are in effect
covering any of the Companies, the Subsidiaries or their employees, or the
Real Property and such Schedule lists each of the parties to such policies.
Except as set forth on Schedule 3.10, all such policies are in full force and
effect, all premiums due thereon have been paid and the Companies and the
Subsidiaries have complied with the provisions of such policies in all
material respects.
Section 3.11. Material Contracts. Except as set forth on Schedule 3.11
hereto, neither any Company nor any Subsidiary is a party to or bound by any
written or oral (a) employment, consulting or non-competition agreement or
contract requiring payments of compensation to any one Person in excess of
$75,000 per year or aggregate payments of compensation to any one Person in
excess of $150,000; (b) joint venture or partnership contract or agreement;
(c) contract or agreement restricting the right of any of the Companies or the
Subsidiaries to compete in any way with any other Person; (d) other than trade
payables in the ordinary course of business, agreement or contract creating,
evidencing or securing, as of the date hereof, obligations of any of the
Companies or the Subsidiaries for (i) borrowed money, (ii) purchase money
indebtedness, (iii) any guarantee or assumption of an obligation for borrowed
money or purchase money indebtedness or other obligations of reimbursement of
any maker of a letter of credit or any guaranty of minimum equity or capital
or any make-whole or similar agreement, (iv) any loan or extension of credit
by any Company or Subsidiary or (v) bankers acceptance; (e) agreement or
contract relating to any outstanding commitment for capital expenditures in
excess of the amount set forth on the capital budget provided to Parent prior
to the date hereof; (f) licenses, whether as licensor or licensee, of any
Intellectual Property; (g) any material lease as lessee or lessor of real or
personal property; (h) capitalized lease or sale-leaseback or material
conditional sale agreement; (i) distributorship or franchise agreement; (j)
material raw material or other supply agreements or any exclusive dealing,
requirements or take-or-pay contracts; (k) other than as identified in Section
3.12, any brokerage or finders fee agreements; or (l) other contract or
agreement, entered into other than in the ordinary course of business,
involving an estimated total future payment or payments in excess of $100,000.
Each contract or agreement set forth on Schedule 3.11 hereto is in full force
and effect, and, to Seller's knowledge, is legal, valid and binding and
enforceable against each other Person party thereto. Neither any of the
Companies or Subsidiaries, nor, to Seller's knowledge, any other party to any
such contract or agreement, is in material breach thereof or default
thereunder and there does not exist under any provision thereof, any event
that, with the giving of notice or the lapse of time or both, would constitute
such a breach or default by any Company or Subsidiary or, to Seller's
knowledge, by any other party to any such contract or agreement, except for
such breaches, defaults and events as to which requisite waivers or consents
have been or prior to the Closing will have been obtained. Seller has made
available to TH USA and THEH true and correct copies of each of such written
agreements and contracts or provided written summaries of any such oral
agreements and contracts.
Section 3.12. Brokers, Finders, etc. No Seller Affiliate has employed, or is
subject to any valid claim of, any broker, finder, or other similar
intermediary in connection with the transactions contemplated by this
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Agreement or the Ancillary Agreements who might be entitled to a fee or
commission in connection with such transactions, other than pursuant to an
engagement letter with each of Allen & Company Incorporated and Smith Barney
Canada, true and correct copies of which Seller has previously provided to TH
USA and THEH, the fees and expenses of which will be payable by Pepe USA and
TH Canada, respectively.
Section 3.13. Affiliate Transactions. Except as disclosed in the notes to
the Financial Statements or as set forth on Schedule 3.13 hereto, (a) no
Continuing Affiliate or any officer, director or employee of any Continuing
Affiliate provides or causes to be provided to any of the Companies or the
Subsidiaries any assets, loans, advances, services or facilities and (b) none
of the Companies or Subsidiaries provides or causes to be provided to any such
officer, director or employee or Continuing Affiliate any assets, loans,
advances, services or facilities. Except as set forth on Schedule 3.13 hereto,
none of the Companies or the Subsidiaries, jointly with any Continuing
Affiliate, purchases or sells goods or services.
Section 3.14. Environmental Compliance. (a) For purposes of this Section
3.14, (i) "Hazardous Substance" means any pollutant, contaminant, hazardous or
toxic substance or waste, solid waste, petroleum, petroleum product, by-
product or breakdown product, or any other chemical, substance or material
listed or identified in or regulated by or under any Environmental Law; (ii)
"Environmental Law" means the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq., the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act, 42
U.S.C. (S) 6901 et seq., the Clean Water Act, 33 U.S.C. (S) 1251 et seq., the
Clean Air Act, 42 U.S.C. (S) 7401 et seq., the Toxic Substances Control Act,
15 U.S.C. (S) 2601 et seq., the Safe Drinking Water Act, 42 U.S.C. (S) 300f et
seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C. (S)
11001 et seq., the Occupational Safety and Health Act, 29 U.S.C. (S) 651 et
seq., the Oil Pollution Act, 33 U.S.C. (S) 2701 et seq., in each case as
amended from time to time, and any other statute, rule, regulation, law, by-
law, ordinance or directive of any Governmental Authority dealing with the
pollution or protection of natural resources or the indoor or ambient
environment or with the protection of human health or safety; and (iii) "RCRA
Hazardous Waste" means a solid waste that is listed or classified as a
hazardous waste, as that term is defined in or pursuant to the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. (S) 6901 et seq.
(b) Except as set forth on Schedule 3.14, there are no claims pending or, to
the knowledge of Seller, threatened, and none of Seller, the Companies or
Subsidiaries has received any written notice, alleging, warning or notifying
any Company or Subsidiary that any Company or Subsidiary is, has been or may
be in violation of, or non-compliance with, in any material respect, any
Environmental Law.
(c) Except as set forth on Schedule 3.14, to the knowledge of Seller, no
Hazardous Substances have ever been buried, spilled, leaked, discharged,
emitted, generated, stored, used or released, and no Hazardous Substances are
now present in amounts, concentrations or conditions requiring investigation,
study, removal, remediation or any other response action or corrective action
under, or forms the basis of a claim pursuant to, any Environmental Law, in,
on, from or under the Real Property or any other property with respect to
which any Company or Subsidiary may be identified as a potentially responsible
party or otherwise bear liability, except for immaterial quantities stored or
used by any Company or Subsidiary in the ordinary course of its business and
in accordance, in all material respects, with all applicable Environmental
Laws.
(d) Except as set forth on Schedule 3.14, the Real Property is not being
used and, to the knowledge of Seller, never has been used in connection with
the business of manufacturing, storing or transporting Hazardous Substances,
and, to the knowledge of Seller, no RCRA Hazardous Wastes have been treated,
stored or disposed of there.
(e) Except as set forth on Schedule 3.14, to Seller's knowledge, there are
not now and never have been any underground or above ground storage tanks or
other containment facilities of any kind on the Real Property which contain or
contained any Hazardous Substances.
(f) Except as set forth on Schedule 3.14, none of the Real Property is or
has been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
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any similar federal, state, local or foreign list, schedule, log, inventory or
database of sites or facilities with potential, threatened, suspected or
actual releases of Hazardous Substances.
(g) Schedule 3.14 identifies, and Seller has provided to TH USA and THEH
true and correct copies of, all environmental audits or assessments relating
in whole or in part to any of the Companies or the Subsidiaries undertaken by
or on behalf of any of the Seller Affiliates, or, to Seller's knowledge, by
Governmental Authorities or other third parties, and any written
communications by the Companies or the Subsidiaries or, to Seller's knowledge,
relating in whole or in part to any of the Companies or the Subsidiaries with
environmental agencies, within the past six years which describe the status of
any Real Property or the compliance of the owners or lessees thereof with
respect to any Environmental Law.
(h) Except as set forth on Schedule 3.14, no Seller Affiliate has received
any written notice from any Governmental Authority or other third party that
any of the Companies or Subsidiaries or any of their predecessors is or may be
a potentially responsible party or may otherwise bear liability for any actual
or threatened release of Hazardous Substances at or from any site or facility
other than the Real Property.
Section 3.15. Undisclosed Liabilities. Except (a) as disclosed in Schedule
3.15 hereto, (b) obligations to consummate the Canada Purchase pursuant to the
Canada Purchase Agreement, (c) as and to the extent disclosed or reserved
against on the Pepe Balance Sheet or identified in the notes thereto, (d) as
and to the extent disclosed on the face of the Pepe Year-End Balance Sheet or
identified in the notes thereto, (e) as incurred after the date of the Pepe
Balance Sheet in the ordinary course of business consistent with prior
practice and not prohibited by this Agreement or (f) liabilities or
obligations relating to Actions, contracts, agreements or environmental
matters disclosed on or not required to be disclosed on Schedules 3.6, 3.11 or
3.14, respectively, the Companies and Subsidiaries do not have any liabilities
or obligations of any nature, whether known or unknown, absolute, accrued,
contingent or otherwise and whether due or to become due.
Section 3.16. Proxy Statement. The information supplied by Seller, the
Companies or the Subsidiaries for inclusion in the Proxy Statement (as defined
in Section 5.12) to be sent to the stockholders of Parent in connection with
the meeting of the stockholders of Parent to consider this Agreement (the
"Parent Stockholders Meeting"), will not, on the date the Proxy Statement (or
any amendment thereof or supplement thereto) is first mailed to the
stockholders of Parent, at the time of the Parent Stockholders Meeting or on
the Closing Date, contain any statement which, at such time and in light of
the circumstances under which it shall be made, is false or misleading with
respect to any material fact, or shall omit to state any material fact
necessary in order to make the statements made therein not false or
misleading. If at any time prior to the Closing Date any event relating to
Seller or any of the Companies or Subsidiaries or any of their respective
Affiliates, officers or directors should be discovered by Seller, any of the
Companies or any of the Subsidiaries which should be set forth in an amendment
or supplement to the Proxy Statement, Seller shall promptly inform Parent.
Section 3.17. Acquisition of Shares for Investment. Seller has such
knowledge and experience in financial and business matters that it is capable
of evaluating the merits and risks of Seller's acquisition of the Purchase
Price Shares and has been provided access to personnel and books of Parent and
its subsidiaries for purposes of making its evaluation. Seller is acquiring
the Purchase Price Shares for investment and not with a view toward or for
sale in connection with any distribution thereof, or with any present
intention of distributing or selling the Purchase Price Shares. Seller agrees
that the Purchase Price Shares may not be sold, transferred, offered for sale,
pledged, hypothecated or otherwise disposed of without registration under the
Securities Act, except pursuant to an exemption from such registration
available under the Securities Act.
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ARTICLE IV
Representations and Warranties of Parent
Parent hereby represents and warrants to Seller as follows:
Section 4.1. Incorporation; Authorization; etc. (a) Parent has been duly
incorporated and is validly existing as a company limited by shares in good
standing under the laws of the British Virgin Islands. Each of TH USA and THEH
has been duly incorporated and is validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Parent has full corporate
power and authority to own its property and to conduct its business as it is
now being conducted and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the conduct of
its business or ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on Parent and its
subsidiaries, taken as a whole. Parent and each subsidiary of Parent which is
a party to this Agreement or any of the Ancillary Agreements has full
corporate power and authority to execute and deliver this Agreement and each
of the Ancillary Agreements to which Parent or such subsidiary is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. Each of (i) the execution and
delivery of this Agreement and each of the Ancillary Agreements to which
Parent or any of its subsidiaries is a party, and the performance by Parent or
such subsidiaries of their respective obligations hereunder and thereunder and
the consummation of the transactions contemplated hereby and thereby by Parent
or such subsidiaries and (ii) an amendment to the memorandum of association of
Parent to increase the number of authorized Parent Shares to 75,000,000 (the
"Memorandum Amendment") have been duly authorized by the Board of Directors of
Parent and each such subsidiary, as applicable, and no other corporate
proceedings on the part of Parent or its subsidiaries or their respective
Boards of Directors or stockholders are necessary therefor, other than the
approval of this Agreement by a majority of the votes cast at the Parent
Stockholders Meeting. The Board of Directors of Parent has directed that this
Agreement be submitted to Parent's stockholders for approval at the Parent
Stockholders Meeting and has recommended that Parent's stockholders approve
this Agreement.
(b) The execution, delivery and performance by Parent and its subsidiaries
of this Agreement and each of the Ancillary Agreements to which Parent or any
such subsidiary is a party will not (i) (assuming the stockholder approval set
forth in Section 4.1(a) is obtained and the Memorandum Amendment has become
effective) violate or conflict with any provision of the memorandum of
association or articles of association (or similar instruments) of Parent or
such subsidiaries, (ii) except as set forth on Schedule 4.1(b), conflict with,
violate or constitute a default under any provision of, or be an event that is
(or with the giving of notice or passage of time or both will result in) a
violation of or default under, or result in the acceleration of or entitle any
party to accelerate (whether after the giving of notice or lapse of time or
both) any obligation or right under, or result in the imposition of any lien
upon or the creation of a security interest in any of the Purchase Price
Shares or any of the assets or properties of Parent or its subsidiaries
pursuant to, or require a consent or create a penalty or increase Parent's or
any of its subsidiary's payment or performance obligations under, any material
mortgage, lien, lease, instrument, order, arbitration award, judgment or
decree, or any material contract, agreement, license or permit, to which
Parent or any of its subsidiaries is a party or by which any of them or any of
their property is bound, or (iii) assuming that all consents, approvals,
authorizations and other actions described in Section 4.3 have been obtained
and all filings and obligations set forth in Section 4.3 have been made,
violate or conflict with in any material respect, or result in the imposition
of any material lien (other than liens arising from any actions taken or
arrangements made by any Seller Affiliate) upon any of the Purchase Price
Shares, or any of the assets or properties of Parent or any of its
subsidiaries pursuant to, any provision of law, regulation, rule, writ,
injunction, decree, statute, order, judgment or ruling of any Governmental
Authority or any other material restriction of any kind or character to which
Parent or any of its subsidiaries is or may be subject or by which any of them
or any of their property is or may be bound. This Agreement and the Lock-Up
Agreement have been, and, as of the Closing, the Registration Rights Agreement
and the Amended European License Agreement will be, duly executed and
delivered by Parent and each of its subsidiaries parties to such agreements
and, assuming the due execution hereof and thereof by Seller and the
subsidiaries of Seller parties to such agreements,
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this Agreement and the Lock-Up Agreement constitute, and as of the Closing the
Registration Rights Agreement and the Amended European License Agreement will
constitute, the legal, valid and binding obligations of Parent and such
subsidiaries enforceable against such parties in accordance with their
respective terms except, in each case, as such enforceability may be limited
by any applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally, and except as the
availability of equitable remedies may be limited by the application of
general principles of equity (regardless of whether such equitable principles
are applied in a proceeding at law or in equity).
(c) Upon consummation of the Stock Purchases at the Closing, as contemplated
by this Agreement, Parent will deliver to TH USA and TH USA will deliver to
Seller good and valid title to the Purchase Price Shares free and clear of any
liens, claims, charges, security interests, options or other legal or
equitable encumbrances or other rights of third parties (except those imposed
by the federal securities laws or any action taken or arrangement made by any
Continuing Affiliate).
Section 4.2. Capitalization. (a) As of January 30, 1998, the authorized
capital stock of Parent consisted of (i) 50,000,000 Ordinary Shares, $.01 par
value per share ("Parent Shares"), of which: 37,436,929 shares were issued and
outstanding, all of which are validly issued, fully paid and nonassessable, no
shares were held in treasury, 2,769,410 shares were reserved for future
issuance upon exercise of outstanding options to purchase Parent Shares under
the TH Incentive Plans, and an additional 775,085 shares were reserved for
issuance under the TH Incentive Plans; and (ii) 5,000,000 Preference Shares,
$.01 par value per share, of which no shares were issued and outstanding.
(b) Except (i) as set forth on Schedule 4.2(b) or in the Parent SEC Reports,
(ii) as contemplated by this Agreement and (iii) for stock options issued
pursuant to the TH Incentive Plans, there are no outstanding options,
warrants, subscriptions or other rights of any kind to acquire, or obligations
to issue, shares of capital stock of any class of, or other equity interests
in, Parent or any securities convertible into or exchangeable or exercisable
for any shares of capital stock of any class of, or other equity interests in,
Parent. The Purchase Price Shares, when issued as contemplated herein, will be
duly authorized, validly issued, fully paid and nonassessable, and will not
have been issued in violation of, or be subject to, any preemptive rights.
Section 4.3. Other Authorizations, Consents, Reports, etc. Except (a) as set
forth on Schedule 4.3 hereto, (b) for applicable requirements, if any, of the
Securities Act, the Exchange Act, the Blue Sky Laws, the pre-merger
notification requirements of the HSR Act, any necessary approvals or filings
under the Competition Act (Canada) or the Investment Canada Act, the filing of
an amendment to Parent's Memorandum of Association evidencing the Memorandum
Amendment and the listing requirements of the NYSE and (c) those the failure
to make, file, give or obtain which would not have a material adverse effect
on Parent and its subsidiaries taken as a whole or prevent the consummation of
the Stock Purchases and the other transactions contemplated hereby, there are
no Licenses required to be made, filed, given or obtained by Parent with, to
or from any Governmental Authority in connection with the consummation of the
Stock Purchases and the transactions contemplated under this Agreement or any
of the Ancillary Agreements.
Section 4.4. Brokers, Finders, etc. Except for the services of Morgan
Stanley & Co. Incorporated and Wasserstein Perella & Co., Inc., Parent has not
employed, nor is Parent subject to any valid claim of, any broker, finder, or
other similar intermediary in connection with the transactions contemplated by
this Agreement who might be entitled to a fee or commission in connection with
such transactions. No Continuing Affiliate has or will have any obligations to
Morgan Stanley & Co. Incorporated and Wasserstein Perella & Co., Inc. with
respect to the transactions contemplated by this Agreement or the Ancillary
Agreements.
Section 4.5. Acquisition of Shares for Investment. Each of TH USA and THEH
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of its purchase of the Shares and
has been provided access to personnel and books of the Companies and the
Subsidiaries for purposes of making its evaluation. Each of TH USA and THEH is
acquiring the Shares for investment and not with a view toward or for sale in
connection with any distribution thereof, or with any present intention of
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distributing or selling the Shares. Each of TH USA and THEH agrees that the
Shares may not be sold, transferred, offered for sale, pledged, hypothecated
or otherwise disposed of without registration under the Securities Act, except
pursuant to an exemption from such registration available under the Securities
Act.
Section 4.6. SEC Filings; Financial Statements. (a) Parent has filed all
forms, reports, statements and other documents required to be filed by it with
the SEC since March 31, 1996 (such forms, reports, statements and other
documents are hereinafter referred to as the "Parent SEC Reports"). Except as
disclosed in Schedule 4.6 hereto, the Parent SEC Reports (i) were prepared in
all material respects in accordance with the applicable requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) The consolidated financial statements (including, in each case, any
notes thereto) contained in the Parent SEC Reports were prepared in accordance
with GAAP applied on a consistent basis throughout the periods involved
(except as may be indicated therein or in the notes thereto) and fairly
presented in all material respects the consolidated financial position,
results of operations and cash flows of Parent and its consolidated
subsidiaries as at the respective dates thereof, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments.
Section 4.7. Proxy Statement. The information supplied by Parent for
inclusion in the Proxy Statement to be sent to the stockholders of Parent in
connection with the Parent Stockholders Meeting, will not, on the date the
Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to the stockholders of Parent, at the time of the Parent Stockholders
Meeting or on the Closing Date, contain any statement which, at such time and
in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or shall omit to state any
material fact necessary in order to make the statements made therein not false
or misleading. Notwithstanding the foregoing, Parent makes no representation
or warranty with respect to any information supplied by Seller which is
contained or incorporated by reference in the Proxy Statement or any amendment
or supplement thereto.
ARTICLE V
Covenants of Seller and Parent
Section 5.1. Investigation of Business; Access to Properties and
Records. (a) Prior to the Closing Date, Seller shall and shall cause the
Companies and the Subsidiaries to, and Parent shall, afford to representatives
of the other party full access to their respective personnel, offices, plants,
properties, books and records during normal business hours, in order that
Seller and Parent may have full opportunity to make such investigations as
such party desires of the affairs and assets of Parent, on the one hand, or
the Companies and Subsidiaries on the other hand; provided, however, that such
investigation by Seller and Parent shall not unreasonably disrupt the
personnel and operations of Parent, on the one hand, or the Companies or
Subsidiaries, on the other hand.
(b) At the Closing or as soon thereafter as practicable, Seller will deliver
or cause to be delivered to TH USA and THEH all corporate records of the
Companies and Subsidiaries, and all other original (or copies thereof, if
originals are not immediately available) agreements, documents, books and
records relating to the businesses of the Companies and the Subsidiaries.
(c) Except as required by law and except to the extent such information
becomes publicly available other than as a result of any action taken by any
Continuing Affiliate, from and after the Closing Date, the Continuing
Affiliates shall maintain the confidentiality of non-public information with
respect to the Companies and Subsidiaries. In the event that any of the
Continuing Affiliates after the Closing Date is requested, or becomes
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required by law, to disclose any confidential information relating to the
Companies and the Subsidiaries, Seller will provide Parent with prompt notice
thereof (before such information is disclosed if practicable) so that Parent
may seek a protective order or other appropriate remedy and/or waive
compliance with the terms of this Section 5.1(c).
Section 5.2. Efforts; Obtaining Consents. (a) Subject to the terms and
conditions herein provided, each of Seller and Parent agrees to use all
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by
this Agreement and to cooperate with the other in connection with the
foregoing, including using its reasonable efforts (i) to obtain all waivers,
consents and approvals from other parties to loan agreements, leases,
mortgages and other contracts necessary for the consummation of the
transactions contemplated hereby including, without limitation, the credit
agreements listed on Schedule 5.2 hereto, (ii) to make all filings with, and
to obtain all consents, approvals and authorizations that are required to be
obtained from, Governmental Authorities, including without limitation the
filing by or on behalf of Parent with the Registrar of Companies of the
British Virgin Islands of a notice of amendment to the Memorandum of
Association of Parent to reflect the Memorandum Amendment, (iii) to lift or
rescind any injunction, restraining order, decree or other order adversely
affecting the ability of the parties hereto to consummate the transactions
contemplated hereby, (iv) to effect all necessary registrations and filings
and submissions of information requested by Governmental Authorities, and (v)
to fulfill all conditions to this Agreement. Each of Seller and Parent shall
use all reasonable efforts to prevent the entry, enactment or promulgation of
any threatened or pending preliminary or permanent injunction or other order,
decree or ruling or statute, rule, regulation or executive order that would
adversely affect the ability of the parties hereto to consummate the
transactions contemplated hereby.
(b) Seller and Parent shall promptly file or cause to be filed with the
Antitrust Division of the United States Department of Justice and the Federal
Trade Commission pursuant to the HSR Act all requisite documents and
notifications in connection with the transactions contemplated by this
Agreement. Parent shall pay the filing fee incurred in connection with such
filings under the HSR Act. Each party hereto shall promptly inform the other
of any material communication from the Federal Trade Commission, the
Department of Justice or any other Governmental Authority regarding any of the
transactions contemplated hereby. If either Parent or Seller or any Affiliate
thereof receives a request for additional information or documentary material
from any such government or Governmental Authority with respect to the
transactions contemplated hereby, then such party shall endeavor in good faith
to make, or cause to be made, as soon as reasonably practicable and after
consultation with the other party, an appropriate response in compliance with
such request. Each of Parent and Seller will advise the other promptly in
respect of any understandings, undertakings or agreements (oral or written)
which it proposes to make or enter into with the Federal Trade Commission, the
Department of Justice or any other Governmental Authority in connection with
the transactions contemplated hereby.
Section 5.3. Further Assurances. Seller, Parent, TH USA and THEH agree that,
from time to time, whether before, at or after the Closing Date, each of them
will take such other action (including, on the part of Seller, using its best
efforts to cause the Continuing Affiliates to take such action and, on the
part of Parent, using its best efforts to cause its subsidiaries to take such
action) as may be necessary to carry out the purposes and intents of this
Agreement and the Ancillary Agreements including, without limitation, Parent
and TH USA taking such actions as may be necessary to enable TH USA to deliver
to Seller the Purchase Price Shares.
Section 5.4. Conduct of Business by Seller. From the date hereof through the
Closing, except as disclosed on Schedule 5.4 hereto or otherwise provided for
in this Agreement, and, except as consented to or approved by Parent in
writing, Seller covenants and agrees that:
(a) each of the Companies and the Subsidiaries shall operate its business in
the ordinary and usual course in accordance with past practices;
(b) neither any Company nor any Subsidiary shall issue, sell or agree to
issue or sell (i) any shares of its capital stock, or (ii) any securities
convertible into, or options with respect to, or warrants to purchase or
rights
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to subscribe for, any shares of its capital stock or make any change in its
issued and outstanding capital stock or redeem, purchase or otherwise acquire
any of its capital stock;
(c) neither any Company nor any Subsidiary shall (i) increase in any manner
the compensation of, or enter into any new bonus or incentive agreement or
arrangement with, any of its directors, officers or other employees other than
increases in compensation in the ordinary course of business and consistent
with past practice and which are not material in the aggregate; (ii) pay or
agree to pay any pension, retirement allowance or other employee benefit to
any director, officer or employee, whether past or present, other than as
required by applicable law, contracts or plan documents in effect on the date
of this Agreement; (iii) enter into any new employment, severance, consulting,
or other compensation agreement with any director, officer or employee or
other person other than in connection with any new hires or promotions in the
ordinary course and consistent with past practice; or (iv) commit itself to
any additional pension, profit-sharing, deferred compensation, group
insurance, severance pay, retirement or other employee benefit plan, fund or
similar arrangement or adopt or amend or commit itself to adopt or amend any
of such plans, funds or similar arrangements in existence on the date hereof;
(d) neither any Company nor any Subsidiary shall (i) amend its memorandum or
articles of association (or similar instruments), (ii) declare any dividend or
make any distribution with respect to its capital stock, (iii) assume, incur
or guarantee any obligation for borrowed money other than trade payables in
the ordinary course of business consistent with past practice, (iv) cancel or
compromise, except for compromises of current or former short-term trade
receivables or other current assets in the ordinary course of business
consistent with past practice, any debts owed to it, or (v) waive or release
any rights of material value;
(e) neither any Company nor any Subsidiary shall (i) sell, transfer, lease
or otherwise dispose of any of its assets other than inventory, accounts
receivable or fixtures in the ordinary course of business consistent with
prior practice, (ii) create or permit to exist any new security interest, lien
or encumbrance on any of its properties or assets, other than Permitted
Exceptions, (iii) enter into any joint venture, partnership or other similar
arrangement, (iv) make any investment in or purchase any securities of any
Person other than in connection with (A) the cash management activities of the
Companies and the Subsidiaries in the ordinary course of business consistent
with past practice or (B) the formation of a wholly owned subsidiary or (v)
purchase any assets of any Person other than in the ordinary course of
business consistent with past practice;
(f) neither any Company nor any Subsidiary shall permit a change in its
methods of maintaining its books, accounts or business records or, except as
required by GAAP (in which event prior notice shall be given to Parent),
change any of its accounting principles or the methods by which such
principles are applied for tax or financial reporting purposes;
(g) the Companies and the Subsidiaries together shall incur capital
expenditures only in the ordinary course of business consistent with prior
practice and not in excess of the capital budget provided to Parent prior to
the date hereof;
(h) neither any of the Companies nor any of the Subsidiaries shall (i) enter
into or terminate any material lease, contract or agreement, or make any
change in any of their material leases, contracts and agreements, (ii) enter
into any transaction with any Continuing Affiliate or any director, officer or
shareholder of any Continuing Affiliate other than as contemplated by Sections
5.11 and 5.16, (iii) reclassify any assets or liabilities, or (iv) do any
other act that (A) would cause any representation or warranty of Seller in
this Agreement to be or become untrue in any material respect or (B) could
reasonably be expected to have a Company Material Adverse Effect;
(i) the Companies and Subsidiaries will comply in all material respects with
all material laws and regulations applicable to them;
(j) the Canada Purchase Agreement and the Bentley Trust Guarantee shall not
be amended nor shall any obligations of the parties thereunder be waived;
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(k) neither any of the Companies nor any of the Subsidiaries will make any
payment of interest on or principal of any intercompany indebtedness to any
Continuing Affiliate, other than payment of accrued interest on the Retained
Note;
(l) neither any of the Companies nor any of the Subsidiaries shall make any
election with respect to Taxes, consent to any waiver or extension of time to
assess or collect any Taxes without the consent of Parent (which consent shall
not be unreasonably withheld) or file any Return other than a Return filed in
the ordinary course of business and prepared in a manner consistent with past
practice; and
(m) neither any of the Companies nor any of the Subsidiaries shall agree to
take any action prohibited by this Section 5.4.
Section 5.5. Conduct of Business by Parent. From the date hereof through the
Closing, except as otherwise contemplated in this Agreement and except as
consented to or approved by Seller in writing, Parent covenants and agrees
that it shall not (a) except for issuances of Parent Shares upon exercise of
outstanding stock options under the TH Incentive Plans and grants of stock
options pursuant to the TH Incentive Plans, issue, sell or agree to issue or
sell (i) any shares of its capital stock or (ii) any securities convertible
into, or options with respect to, or warrants to purchase or rights to
subscribe for, any shares of its capital stock or make any change in its
issued and outstanding capital stock or redeem, purchase or otherwise acquire
any of its capital stock; (b) except pursuant to the Memorandum Amendment,
amend its memorandum or articles of association; (c) declare any dividend or
make any distribution with respect to its capital stock; or (d) purchase any
Parent Shares other than in open market transactions.
Section 5.6. Preservation of Business. From the date hereof until the
Closing, subject to the terms and conditions of this Agreement, Seller and
Parent shall, and shall cause each of their respective subsidiaries to, use
all reasonable efforts to preserve the business of the Companies and
Subsidiaries intact, to preserve the good will of customers, suppliers,
employees and others having business relations with the Companies and
Subsidiaries, to retain its key employees, and to maintain insurance in full
force and effect.
Section 5.7. Non-Solicitation. Except with respect to the Canada Purchase or
as otherwise contemplated in this Agreement, the Continuing Affiliates shall
not, and shall not permit the Companies or Subsidiaries to, directly or
indirectly, (a) solicit any inquiries or proposals for, or enter into or
continue or resume any discussions with respect to or enter into any
negotiations or agreements relating to the sale or exchange of any Shares, any
shares of capital stock of any Subsidiary or all, or a substantial part, of
the assets of any of the Companies or Subsidiaries or (b) furnish or cause to
be furnished any non-public information concerning the business and operations
of the Companies or Subsidiaries to any Person (other than to or at the
request of Parent and its representatives) other than in the ordinary course
of business consistent with past practice.
Section 5.8. Notice of Developments. Each party shall promptly notify the
other party in writing of any events, facts and occurrences which would result
in any breach of any representation or warranty or breach of any covenant by
such party contained in this Agreement.
Section 5.9. License Agreements. (a) At the Closing, Parent shall cause
Tommy Hilfiger Licensing, Inc. to, and Seller shall and shall cause TH Europe
to, execute and deliver the Amended European License Agreement.
(b) Effective as of the consummation of the Stock Purchases and the
execution and delivery of the Amended European License Agreement, Seller shall
and shall cause T.H. International N.V. to, and Parent shall cause Tommy
Hilfiger Licensing, Inc. to, cancel the International License Agreement and
any sublicenses thereunder.
Section 5.10. Financial Statements. Prior to the Closing, Seller shall
deliver to Parent promptly after they are prepared such monthly or other
financial statements or financial reports of the Companies and the
Subsidiaries as are prepared by or relating to the Companies, the Subsidiaries
and the Canadian Subsidiaries in the ordinary course of business and such
other financial information as Parent may reasonably request, promptly
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after such request. Seller shall use its reasonable efforts to have Price
Waterhouse's and Ptack Schnarch Basevitz's consent to Parent's use of and
reliance on the Financial Statements and such other financial statements of
the Companies, the Subsidiaries and the Canadian Subsidiaries as may be
required in connection with filings under the federal securities laws.
Section 5.11. Intercompany Accounts; Indebtedness. Except for the Retained
Note and the Blackwatch Note, all intercompany and intracompany payables and
receivables (other than payables and receivables for goods and services,
including buying office commissions, in the ordinary course) and loans between
the Companies and the Subsidiaries, on the one hand, and the Continuing
Affiliates, on the other hand, shall be eliminated, released or forgiven,
without the transfer of any cash and without the need for any further
documentation, by dividends or capital contributions, as appropriate,
immediately prior to the Closing. The note outstanding from AIHL to Tommy
Hilfiger Licensing, Inc. dated August 28, 1995 in the face amount of $5
million shall be cancelled as of the Closing without the transfer of any cash
and without the need for any further documentation.
Section 5.12. Proxy Statement. (a) As promptly as practicable after the
execution of this Agreement, Parent shall prepare and file with the SEC (with
appropriate requests for confidential treatment) under the Exchange Act a
proxy statement and a form of proxy (such proxy statement, together with any
amendments thereof or supplements thereto, in the form delivered to the
stockholders of Parent, the "Proxy Statement") relating to Parent Stockholders
Meeting and the vote of the stockholders of Parent with respect to this
Agreement and the transactions contemplated hereby. Parent will cause the
Proxy Statement to comply as to form in all material respects with the
Exchange Act and the rules and regulations thereunder. Parent shall use all
reasonable efforts to cause the Proxy Statement to be cleared with the SEC as
promptly as reasonably practicable thereafter, and shall take any and all
actions required under any applicable federal or state securities or Blue Sky
Laws in connection with the issuance of the Purchase Price Shares. Parent
shall provide Seller an opportunity to review and comment upon the Proxy
Statement prior to any filing with the SEC. Seller shall use all reasonable
efforts to cooperate with Parent in connection with the preparation and
clearance of the Proxy Statement. Without limiting the generality of the
foregoing, Parent and Seller shall each notify the other as promptly as
practicable upon becoming aware of any event or circumstance which should be
described in an amendment of, or a supplement to, the Proxy Statement. To the
extent required to comply with the federal securities laws, upon notification
by Seller to Parent pursuant to the preceding sentence and prior to the Parent
Stockholders Meeting, Parent shall use all reasonable efforts to prepare and
file with the SEC an amendment or supplement to the Proxy Statement reflecting
such event or circumstance.
(b) The Proxy Statement shall include the recommendation of the Board of
Directors of Parent in favor of this Agreement.
Section 5.13. Stockholders Meeting. Parent shall cause the Parent
Stockholders Meeting to be held as promptly as reasonably practicable and in
accordance with applicable laws for the purpose of voting upon the approval of
this Agreement. Parent shall use all reasonable efforts to hold such
stockholders meeting as soon as reasonably practicable after the date on which
the Proxy Statement is cleared by the SEC.
Section 5.14. NYSE Listing. Parent shall promptly prepare and submit to the
NYSE a supplemental listing application covering the Purchase Price Shares,
and shall use all reasonable efforts to cause such shares to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
consummation of the Stock Purchases.
Section 5.15. Financing. (a) Parent shall, and shall cause its subsidiaries
to, use all reasonable efforts to obtain the financing for the Purchase Price
Cash Amount and to enter into appropriate documentation with respect thereto.
(b) Parent and Seller shall, and shall cause their respective subsidiaries
to, cooperate with each other to arrange the financing for the Purchase Price
Cash Amount and to provide such information as Parent's financing sources
shall reasonably request or that Parent shall reasonably request in connection
with such financing.
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Section 5.16. Blackwatch Note. Immediately prior to the transaction
contemplated by the next sentence, Blackwatch shall deliver to Seller an
interest-bearing demand note of Blackwatch to Seller in the principal amount
of the Purchase Price (as defined in the Canada Purchase Agreement) (the
"Blackwatch Note") in exchange for a demand note of Seller in the principal
amount and with the interest rate of the Blackwatch Note (the "Seller Note").
Immediately prior to the Closing, Seller shall make a capital contribution to
Pepe USA of the Blackwatch Note. Immediately after the Closing, Seller shall
repay the Seller Note in full and Blackwatch shall repay the Blackwatch Note
in full.
Section 5.17. Resignation of Directors. At the Closing, Seller shall cause
to be delivered to Parent duly signed resignations, effective as of the
Closing, of all directors and officers of all of the Companies and
Subsidiaries designated in writing by Parent to Seller at least five business
days prior to the Closing Date, or shall take such other action as is
necessary to ensure that such persons are not directors or officers of the
Companies or Subsidiaries after the Closing.
ARTICLE VI
Employee Benefits
Section 6.1. Employee Benefit Plans. Seller hereby represents and warrants
to Parent as follows:
(a) Schedule 6.1(a) includes a complete list of all employee benefit plans,
programs, policies, practices, and other arrangements providing benefits to
any employee or former employee primarily employed in the United States or
subject to the laws of the United States or any state or jurisdiction thereof
or any beneficiary or dependent thereof, whether covering one person or more
than one person, sponsored or maintained by any of the Companies or the
Subsidiaries or to which any of the Companies or the Subsidiaries contribute
or are obligated to contribute, other than solely by reason of being an ERISA
Affiliate of another entity (collectively, "Company Employee Benefit Plans").
Without limiting the generality of the foregoing, the term "Company Employee
Benefit Plans" includes all employee welfare benefit plans within the meaning
of Section 3(1) of ERISA and all employee pension benefit plans within the
meaning of Section 3(2) of ERISA. Schedule 6.1(a) also includes a complete
list of all employee benefit plans, programs, policies, retirement schemes,
practices, and other arrangements for any employee or former employee
(including arrangements for the payment to employees or their retirement or
death or on the occurrence of any permanent or temporary disability) primarily
employed in countries other than the United States or subject to the laws of
countries other than the United States or any beneficiary or dependent
thereof, whether covering one person or more than one person, sponsored or
maintained by any of the Companies or the Subsidiaries or to which any of the
Companies or the Subsidiaries contribute or are obligated to contribute
(collectively, "Non-U.S. Company Employee Benefit Plans").
(b) With respect to each Company Employee Benefit Plan and Non-U.S. Company
Employee Benefit Plan, Seller has delivered or made available to Parent a
true, correct and complete copy of (i) each writing constituting a part of
such Company Employee Benefit Plan and Non-U.S. Company Employee Benefit Plan,
including without limitation all plan documents, benefit schedules,
participant agreements, trust agreements, and insurance contracts and other
funding vehicles; (ii) the three most recent Annual Reports (Form 5500 Series
where applicable) and accompanying schedules, if any; (iii) the current
summary plan description, if any; (iv) the most recent annual financial
report, if any; and (v) the most recent determination letter from the IRS or
other relevant Taxing Authority, if any. Except as specifically provided in
the foregoing documents delivered or made available to Parent, there are no
amendments to any Company Employee Benefit Plan or Non-U.S. Company Employee
Benefit Plan that have been adopted or approved nor has Seller or any Company
or Subsidiary taken any formal steps to make any such amendments.
(c) Schedule 6.1(a) identifies each Company Employee Benefit Plan that is
intended to be a "qualified plan" satisfying the requirements of Section
401(a) of the Code (a "Company Pension Plan").
(d) Except as otherwise set forth in Schedule 6.1(d) hereto, none of the
execution and delivery of this Agreement, the Ancillary Agreements or the
consummation of the transactions contemplated hereby or thereby
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will (either alone or in conjunction with any related event, including without
limitation, termination of employment) (i) result in any payment (including,
without limitation, severance, unemployment compensation, an "excess parachute
payment" (as defined in Section 280G of the Code) or otherwise) becoming due
from the Companies or the Subsidiaries under any Company Employee Benefit Plan
or Non-U.S. Company Employee Benefit Plan or any collective bargaining
agreement, (ii) increase any compensation or benefits otherwise payable under
any such Company Employee Benefit Plan or Non-U.S. Company Employee Benefit
Plan or collective bargaining agreement or (iii) accelerate any liability
under any Company Employee Benefit Plan or Non-U.S. Company Employee Benefit
Plan because of an acceleration of the time of payment or vesting of any
rights or benefits to which employees may be entitled thereunder.
Section 6.2. Company Employee Benefit Plans. Seller hereby represents and
warrants to Parent as follows: (a) All Company Employee Benefit Plans which
are "employee benefit plans," as defined in Section 3(3) of ERISA, are in
compliance with and have been administered in all material respects in
compliance with their terms and with all applicable requirements of law,
including but not limited to the Code and ERISA, and all contributions
required to be made to each such plan under the terms of such plan, ERISA or
the Code for all periods of time prior to the Closing Date will by the Closing
Date be timely made or paid in full or, to the extent not required to be made
or paid to each such Plan on or before the Closing Date, have been fully
reflected on the Pepe Balance Sheet or the balance sheets of the Companies and
the Subsidiaries as of the Closing Date.
(b) A favorable determination letter as to the qualification of each Company
Pension Plan under Section 401(a) of the Code has been issued and remains in
effect and the related trust has been determined to be exempt from taxation
under Section 501(a) of the Code and any amendment made or event relating to
such Company Pension Plan subsequent to the date of such determination letter
has not adversely affected the qualified status of such Company Pension Plan.
No issue concerning qualification of any Company Pension Plan is pending
before or, to the best knowledge and belief of Seller, threatened by, the IRS.
None of Seller, the Companies or the Subsidiaries or any other "disqualified
person" (as defined in Section 4975 of the Code) or "party-in-interest" (as
defined in Section 3(14) of ERISA) has engaged in any nonexempt "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section
406 of ERISA), which could subject any Company Employee Benefit Plan (or its
related trust), the Companies or the Subsidiaries or any officer, director or
employee of the Companies or the Subsidiaries to tax or penalty imposed under
Section 4975 of the Code. The Companies and the Subsidiaries have not
incurred, and do not reasonably expect to incur, any material liability to the
Pension Benefit Guaranty Corporation (except for required premium payments and
contributions, which payments and contributions have been made when due).
(c) No Company Employee Benefit Plan is subject to Title IV or Section 302
of ERISA or Section 412 or 4971 of the Code (including any Multiemployer
Plan).
(d) There does not now exist, nor do any circumstances exist that could
result in, any Controlled Group Liability that would be a material liability
of the Companies or the Subsidiaries following the Closing. "Controlled Group
Liability" means any and all liabilities under (i) Title IV of ERISA, (ii)
section 302 of ERISA, (iii) sections 412 and 4971 of the Code, (iv) the
continuation coverage requirements of section 601 et seq. of ERISA and section
4980B of the Code, and (v) corresponding or similar provisions of foreign laws
or regulations, other than such liabilities that arise solely out of, or
relate solely to, the Company Employee Benefit Plans. For purposes of this
Section 6.2, "ERISA Affiliate" means, with respect to any entity, trade or
business, any other entity, trade or business that is a member of a group
described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1)
of ERISA that includes the first entity, trade or business, or that is a
member of the same "controlled group" as the first entity, trade or business
pursuant to Section 4001(a)(14) of ERISA.
(e) There are no pending or, to Seller's knowledge, threatened claims (other
than claims for benefits in the ordinary course), lawsuits, audits,
investigations or arbitrations which have been threatened, asserted or
instituted against the Company Employee Benefit Plans, any fiduciaries thereof
with respect to their duties to the Company Employee Benefit Plans or the
assets of any of the trusts under any of the Company Employee Benefit Plans
which could reasonably be expected to result in any material liability of the
Companies or the Subsidiaries to the
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Pension Benefit Guaranty Corporation, the Department of Treasury, the
Department of Labor or any Multiemployer Plan.
Section 6.3. Non-U.S. Company Employee Benefit Plans. Seller hereby
represents and warrants to Parent as follows:
(a) The Non-U.S. Company Employee Benefit Plans comply in all material
respects with, and have been managed in accordance with, their terms and all
applicable laws, regulations and requirements.
(b) Where Non-U.S. Company Employee Benefit Plans are funded or insured, all
contributions and other amounts due to or in respect of them or any state
pension arrangements by the Companies and the Subsidiaries have been fully
paid at Closing. Where such Non-U.S. Company Employee Benefit Plans are
unfunded or underfunded, appropriate reserves are established therefor in the
Financial Statements. The Companies and the Subsidiaries have not by any act
or omission, direct or indirect, materially increased their liabilities or
obligations to the Non-U.S. Company Employee Benefit Plans since the date of
the last actuary's report described in Section 6.3(c) below.
(c) Seller has given or made available to Parent the actuary's report on the
latest actuarial valuation of each of the Non-U.S. Company Employee Benefit
Plans or such other information which accurately describes the financial
position of each of the Non-U.S. Company Employee Benefit Plans. Nothing has
happened since the date of that information which would adversely affect the
funding position of the Non-U.S. Company Employee Benefit Plans in a material
way.
(d) There is no material dispute about the entitlements or benefits payable
under any of the Non-U.S. Company Employee Benefit Plans, no material claim by
or against the managers or administrators of the Non-U.S. Company Employee
Benefit Plans or any of the Companies or the Subsidiaries has been made or
threatened, and there are no circumstances which would reasonably be expected
to give rise to any such claim.
Section 6.4. Administration. Seller and Parent shall each make their
appropriate employees available to the other at such reasonable times as may
be necessary for the proper administration by the other of any and all matters
relating to employee benefits affecting employees of the Companies and the
Subsidiaries, including benefits to which such employees may become entitled
after the Closing Date under any tax-qualified retirement plan maintained by
the Continuing Affiliates.
Section 6.5. Reportable Event. Seller represents and warrants that the
consummation of the transactions contemplated hereby will not result in a
reportable event within the meaning of Section 4043 of ERISA with respect to
either (a) a Company Employee Benefit Plan, or (b) any other employee benefit
plan sponsored by or maintained by Seller, the Companies, the Subsidiaries or
any of their respective ERISA Affiliates to which Section 4043(b) of ERISA is
applicable. Seller shall not give any notice of a reportable event pursuant to
Section 4043 of ERISA before the Closing.
ARTICLE VII
Tax Matters
Section 7.1. Tax Returns of the Companies and the Subsidiaries. Seller
represents and warrants to Parent that:
(a) Except as set forth in Schedule 7.1(a) (i) all Income Tax Returns
required to be filed for taxable periods ending on or prior to the Closing
Date by the Companies or the Subsidiaries have been or will be timely filed
and all Taxes shown to be due on such Income Tax Returns have been or will be
paid and (ii) all other material Returns required to be filed before the
Closing Date by the Companies or the Subsidiaries have been or will be timely
filed and all Taxes shown as due on such Returns have been or will be paid.
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(b) Except as set forth on Schedule 7.1(b), (i) to the knowledge of Seller,
no claim has been made by any authority in a jurisdiction where the Companies
or the Subsidiaries do not file Returns that any of the Companies or the
Subsidiaries are or may be subject to taxation by that jurisdiction; (ii)
except for Taxes being contested in good faith and by appropriate proceedings
and for which appropriate reserves are established on the Pepe Year-End
Balance Sheet, all Taxes owed by any of the Companies and the Subsidiaries
with respect to any taxable period (or portion thereof) ending on or prior to
December 31, 1997 (whether or not shown on any Return) have (or by the Closing
Date will have) been duly and timely paid; and (iii) all material Taxes
required to be withheld from employee salaries, wages and other compensation
and from royalty payments by or on behalf of each of the Companies and the
Subsidiaries with respect to periods for which the statute of limitations has
not expired have been withheld, and such withheld Taxes have been duly and
timely paid to the proper Taxing Authorities.
(c) Except as set forth on Schedule 7.1(c), no agreement or other document
extending, or having the effect of extending, the period of assessment,
payment or collection of any material Taxes for which any of the Companies or
the Subsidiaries or any of their predecessors may be held liable and no power
of attorney with respect to any such material Taxes have been executed or
filed with the IRS or any other Taxing Authority.
(d) Seller has provided to Parent copies of all federal, state and local
Income Tax Returns that have been filed for all taxable periods for which the
statute of limitations has not expired, examination reports, and statements of
deficiencies assessed against or agreed to by any of the Companies or the
Subsidiaries. Except as set forth on Schedule 7.1(d), (i) no lien exists with
respect to any asset of any of the Companies or the Subsidiaries that arose in
connection with any failure to pay Taxes (other than for Taxes not yet due and
payable); (ii) there are no material Taxes for which any of the Companies or
the Subsidiaries could be held liable which have been asserted in writing by
any Taxing Authority to be due; and (iii) there are no pending audits,
examinations, or investigations with respect to any material Taxes of any of
the Companies or the Subsidiaries.
(e) No consent or election has been made to have the provisions of Section
341(f) of the Code apply to any of the Companies or the Subsidiaries.
(f) None of the Companies or the Subsidiaries is party to or bound by any
closing agreement, gain recognition agreement, tax sharing, tax indemnity, tax
allocation or similar agreement or arrangement.
Section 7.2. Allocation of Certain Taxes. Each of Parent and Seller agrees
that if any of the Companies are permitted but not required under applicable
state or local Income Tax laws to treat the Closing Date as the last day of a
taxable period, Parent and Seller shall treat such day as the last day of a
taxable period.
Section 7.3. Filing Responsibility. (a) Seller shall prepare and file or
shall cause each of the Companies and the Subsidiaries to prepare and file all
Returns with respect to each of the Companies and the Subsidiaries required to
be filed (taking into account any extension of time within which to file) on
or before the Closing Date. Seller shall prepare and file or shall cause to be
filed any consolidated, combined, unitary or group relief system Returns
(other than any consolidated, combined, unitary or group relief system Returns
of an affiliated group (within the meaning of Section 1504(a) of the Code
without regard to the limitations of Section 1504(b) of the Code) of which any
of the Companies or the Subsidiaries is the common parent (each, a "Company
Group")).
(b) Parent, the Companies and the Subsidiaries shall file all other Returns
with respect to the Companies and the Subsidiaries.
(c) With respect to any state, local or foreign Income Tax Return for
taxable periods beginning before the Closing Date and ending after the Closing
Date, Parent shall cause each of the Companies and the Subsidiaries to consult
with Seller concerning such Return. Each of the Companies and the Subsidiaries
shall provide Seller a copy of its proposed Return to review and comment upon
at least 30 days prior to the filing of such Return, and Seller may provide
comments to each of the Companies and the Subsidiaries, which comments shall
be delivered to each of the Companies and the Subsidiaries within 10 days of
receiving such copies from each of the
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Companies and the Subsidiaries. The Companies and the Subsidiaries shall make
such revisions to such Tax Returns as are reasonably requested by Seller.
Section 7.4. Refunds and Carrybacks. (a) Seller shall be entitled to any
refunds or amounts credited against Taxes for which Seller is liable (except
for refunds or credits accrued on the Pepe Year-End Balance Sheet) pursuant to
Section 7.6.
(b) Parent, the Companies or the Subsidiaries, as the case may be, shall be
entitled to all other refunds or credits of Taxes other than refunds or
credits of consolidated, combined, unitary or group relief system Taxes for a
Tax year in which the Companies or the Subsidiaries were included in a
consolidated, combined, unitary or group relief system Return, unless such
Return is a Return of a Company Group.
(c) Parent shall cause each of the Companies and the Subsidiaries promptly
to forward to Seller or to reimburse Seller for any refunds or credits due
Seller (pursuant to the terms of this Article VII) after receipt thereof, and
Seller shall promptly forward to Parent or reimburse Parent for any refunds or
credits due Parent (pursuant to the terms of this Article VII) after receipt
thereof.
(d) Except (i) as required by a Determination, (ii) as otherwise required by
applicable law, or (iii) in connection with a matter described in the second
sentence of Section 7.5(d), none of Parent, the Companies nor the Subsidiaries
will, after the Closing Date, amend any tax return relating to a period ending
on or before the Closing Date without the prior written consent of Seller,
which consent will not unreasonably be withheld.
Section 7.5. Cooperation and Exchange of Information. (a) Seller shall
prepare and submit to Parent no later than three months after the Closing
Date, 1997 blank tax return workpaper packages for Tax Returns for which
Parent has responsibility to prepare pursuant to Section 7.3. Parent shall and
shall cause each of the Companies and the Subsidiaries to prepare completely
and accurately and to submit to Seller within three months of receipt all
information as Seller shall reasonably request in such tax return workpaper
packages.
(b) As soon as practicable, but in any event within 30 days after Seller's
request, from and after the Closing Date, Parent shall provide Seller with
such cooperation and shall deliver to Seller such information and data
concerning the pre-Closing operations of each of the Companies and the
Subsidiaries and make available such knowledgeable employees of the Companies
and the Subsidiaries as Seller may reasonably request, including providing the
information and data required by Seller's customary tax and accounting
questionnaires, in order to enable Seller to complete and file all Returns
which it may be required to file with respect to the operations and business
of each of the Companies and the Subsidiaries through the Closing Date or to
respond to audits by any Taxing Authorities with respect to such operations
and to otherwise enable Seller to satisfy its internal accounting, tax and
other legitimate requirements. Such cooperation and information shall include
without limitation provision of powers of attorney for the purpose of signing
Returns and defending audits and promptly forwarding copies of appropriate
notices and forms or other communications received from or sent to any Taxing
Authority which relate to each of the Companies and the Subsidiaries, and
providing copies of all relevant Returns, together with accompanying schedules
and related workpapers, documents relating to rulings or other determinations
by any Taxing Authority and records concerning the ownership and tax basis of
property, which Parent, the Companies and the Subsidiaries may possess.
Parent, the Companies and the Subsidiaries shall make their employees and
facilities available on a mutually convenient basis to provide explanation of
any documents or information provided hereunder.
(c) Parent and Seller and their respective Affiliates shall cooperate in the
preparation of all Returns relating in whole or in part to taxable periods
ending on or before or including the Closing Date that are required to be
filed after such date. Such cooperation shall include, but not be limited to,
furnishing prior years' Returns or return preparation packages illustrating
previous reporting practices or containing historical information relevant to
the preparation of such Returns, and furnishing such other information within
such party's possession requested by the party filing such Returns as is
relevant to their preparation. In the case of any state, local or foreign
joint, consolidated, combined, unitary or group relief system Returns, such
cooperation shall also relate to any other taxable periods in which one party
could reasonably require the assistance of the other party in obtaining any
necessary information.
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(d) Seller shall have the right, at its own expense, to control any audit or
examination by any Taxing Authority ("Tax Audit"), initiate any claim for
refund, contest, resolve and defend against any assessment, notice of
deficiency, or other adjustment or proposed adjustment which in any such case
relates to Taxes for which Seller is liable pursuant to Section 7.6, with
respect to each of the Companies and the Subsidiaries; provided, however, that
no claim, contest or settlement shall be resolved by Seller if such claim,
contest, or settlement could reasonably be expected to have a material adverse
effect on such Companies or Subsidiaries after the Closing. Parent shall have
the right, at its own expense, to control any other Tax Audit, initiate any
other claim for refund, and contest, resolve and defend against any other
assessment, notice of deficiency, or other adjustment or proposed adjustment;
provided, however, any such resolution shall not have a material adverse
effect on the Seller. Seller shall furnish Parent and each of the Companies
and the Subsidiaries with its cooperation in a manner comparable to that
described in Section 7.5(b) hereof to effect the purposes of this Section
7.5(d).
Section 7.6. Tax Indemnification by Seller. Seller shall be liable for, and
shall hold Parent and each of the Companies and the Subsidiaries and any
successor corporations thereto or Affiliates thereof harmless from and
against, on a Net After-Tax Basis, the following Taxes:
(a) any and all Taxes imposed upon, or with respect to the income or
operations of, any of the Companies or the Subsidiaries (i) with respect to
any taxable period ending on or before December 31, 1997 and (ii) in the case
of any taxable period beginning before and ending after December 31, 1997,
allocable to the portion of such period beginning before and ending on
December 31, 1997, in each case to the extent such Taxes are not reflected in
the reserve for Tax liabilities (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown
on the Pepe Year-End Balance Sheet; and
(b) any and all Taxes attributable to the operations of an entity (other
than the Companies and the Subsidiaries or any of their predecessors) for
which the Companies or the Subsidiaries may be held liable by virtue of a
relationship to or affiliation with such entity under Treasury Regulation
Section 1.1502-6 (relating to several liability) or any comparable or similar
provision providing for joint and/or several liability under state, local or
foreign Tax Laws.
Section 7.7. Tax Certification. On or before the Closing Date, Seller shall
provide Parent a copy of a statement, dated not more than 30 days prior to the
Closing Date, issued by Pepe USA, meeting the requirements of Treasury
Regulation Sections 1.897-2(h) and 1.1445-2(c)(3), substantially in the form
of the sample certification set forth therein.
Section 7.8. Definitions. For purposes of this Article VII, the following
terms shall have the meanings ascribed to them below:
(a) "Determination" means a determination as defined by Section 1313(a) of
the Code.
(b) "Income Tax Returns" means federal, state, local or foreign Returns
relating to Income Taxes required to be filed with any Taxing Authority that
include any of the Companies or the Subsidiaries.
(c) "Income Taxes" means federal, state, local or foreign income, profits,
capital gains, franchise taxes or other taxes measured by reference to income,
profits, capital gains and all other taxes reported on any Returns, together
with any interest, penalties, charges or fees imposed with respect thereto.
(d) "IRS" means the United States Internal Revenue Service.
(e) "Other Taxes" means all Taxes which are not Income Taxes.
(f) "Returns" means returns, reports and forms required to be filed with any
Taxing Authority.
(g) "Tax Laws" means the Code, federal, state, county, local, or foreign
laws relating to Taxes and any regulations or official administrative
pronouncements released thereunder.
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(h) "Taxes" means all taxes (whether federal, state, local or foreign) based
upon or measured by income and any other tax whatsoever, including, without
limitation, gross receipts, profits, sales, levies, imposts, deductions,
charges, rates, duties, use, occupation, value added, ad valorem, transfer,
franchise, withholding, payroll and social security, employment, excise, stamp
duty or property taxes, together with any interest, penalties, charges or fees
imposed with respect thereto.
(i) "Taxing Authority" means any Governmental Authority including social
security administration, domestic or foreign, having responsibility for or
jurisdiction over the assessment, determination, collection, or other
imposition of Tax.
ARTICLE VIII
Conditions to Parent's, TH USA's and THEH's
Obligations to Close
The respective obligations of Parent, TH USA and THEH to consummate the
Stock Purchases shall be subject to the satisfaction on or prior to the
Closing Date of all of the following conditions:
Section 8.1. Representations, Warranties and Covenants of Seller. The
representations and warranties of Seller contained in this Agreement shall be
true and correct when made and, except for representations and warranties that
speak as of a specific date or time (which need only be true and correct as of
such date or time), on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of such
date, except for such inaccuracies or breaches as would not, individually or
in the aggregate, have a Company Material Adverse Effect, and the covenants
and agreements of Seller contained in this Agreement to be performed on or
before the Closing Date in accordance with this Agreement shall have been duly
performed in all material respects, and Parent shall have received at the
Closing a certificate to the effect of the foregoing dated the Closing Date
and validly executed by the President or a Vice President of Seller.
Section 8.2. Regulatory Approvals. (a) All applicable waiting periods under
the HSR Act shall have expired or been terminated, (b) a notice of amendment
to the Memorandum of Association of Parent to reflect the Memorandum Amendment
shall have been filed by or on behalf of Parent with the Registrar of
Companies of the British Virgin Islands and (c) any necessary approvals or
filings under the Competition Act (Canada) or the Investment Canada Act shall
have been obtained or made.
Section 8.3. No Orders or Injunctions. No order or injunction shall have
been issued by any Governmental Authority which prevents or prohibits the
consummation of the Stock Purchases or any other transaction contemplated by
this Agreement.
Section 8.4. Opinions of Seller's Counsel. Parent shall have received at
Closing opinions addressed to Parent and dated the Closing Date from counsel
to Seller in form and substance reasonably satisfactory to Parent with respect
to certain corporate matters in Sections 3.1 and 3.2.
Section 8.5. Certain Agreements. The International License and any
sublicenses thereunder shall have been cancelled, the Amended European License
Agreement shall have been executed and delivered by TH Europe and Seller, the
Non-Competition Agreement shall have been executed and delivered by the
parties thereto other than Parent, and the Bentley Trust Guarantee and the
AIHL Guarantee shall be in full force and effect.
Section 8.6. Stockholder Approval. This Agreement shall have been approved
by a majority of the votes cast at the Parent Stockholders Meeting.
Section 8.7. Canada Purchase. All of the conditions to Pepe USA's and
Lawvest's respective obligations to consummate the transactions contemplated
by the Canada Purchase Agreement, other than the delivery by Lawvest of the
Tomcan Shares and the delivery by Pepe USA of the Purchase Price (as defined
in the Canada Purchase Agreement) pursuant to Article II thereof, shall have
been satisfied, without any waiver
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thereof and Parent shall have received at the Closing a certificate to such
effect dated the Closing Date and validly executed by the President, a Vice
President or other senior officer of each of Lawvest and Seller.
Section 8.8. NYSE Listing. The Purchase Price Shares shall have been
approved for listing on the NYSE, subject to official notice of issuance.
Section 8.9. Parent Financing. Parent and/or its subsidiaries shall have
received the financing for the Purchase Price Cash Amount on terms and
conditions reasonably satisfactory to Parent.
Section 8.10. Consents. All consents or waivers of the parties to (i) the
credit agreements set forth on Schedule 5.2 hereto shall have been obtained or
such credit agreements shall have been renegotiated on terms reasonably
satisfactory to Parent and (ii) the agreements listed on Schedule 3.1(d)
reasonably requested by Parent shall have been obtained.
ARTICLE IX
Conditions to Seller's Obligation to Close
Seller's obligation to consummate the Stock Purchases shall be subject to
the satisfaction on or prior to the Closing Date of all of the following
conditions:
Section 9.1. Representations, Warranties and Covenants of Parent. The
representations and warranties of Parent contained in this Agreement shall be
true and correct when made and, except for representations and warranties that
speak as of a specific date or time (which need only be true and correct as of
such date or time), on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of such
date, except for such inaccuracies or breaches as would not, individually or
in the aggregate, have a material adverse effect on Parent and its
subsidiaries taken as a whole, and the covenants and agreements of Parent
contained in this Agreement to be performed on or before the Closing Date in
accordance with this Agreement shall have been duly performed in all material
respects, and Seller shall have received at the Closing a certificate to the
effect of the foregoing dated the Closing Date and validly executed by the
President, a Vice President or other senior officer of Parent.
Section 9.2. Regulatory Approvals. (a) All applicable waiting periods under
the HSR Act shall have expired or been terminated, (b) a notice of amendment
to the Memorandum of Association of Parent to reflect the Memorandum Amendment
shall have been filed by or on behalf of Parent with the Registrar of
Companies of the British Virgin Islands and (c) any necessary approvals or
filings under the Competition Act (Canada) or the Investment Canada Act shall
have been obtained or made.
Section 9.3. No Orders or Injunctions. No order or injunction shall have
been issued by any Governmental Authority which prevents or prohibits the
consummation of the Stock Purchases or any other transaction contemplated by
this Agreement.
Section 9.4. Opinions of Parent's Counsel. Seller shall have received at
Closing opinions from counsel to Parent in form and substance reasonably
satisfactory to Seller with respect to certain corporate matters in Sections
4.1 and 4.2.
Section 9.5. Certain Agreements. Tommy Hilfiger Licensing, Inc. shall have
executed and delivered the Amended European License Agreement and Parent shall
have executed and delivered the Registration Rights Agreement.
Section 9.6. Stockholder Approval. This Agreement shall have been approved
by a majority of the votes cast at the Parent Stockholders Meeting.
Section 9.7. NYSE Listing. The Purchase Price Shares shall have been
approved for listing on the NYSE, subject to official notice of issuance.
Section 9.8. Consents. All consents or waivers of the parties to the credit
agreements set forth on Schedule 5.2 hereto to which any of the Companies or
Subsidiaries is a party shall have been obtained or such credit agreements
shall have been renegotiated on terms reasonably satisfactory to Seller.
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ARTICLE X
Survival; Indemnification
Section 10.1. Survival. (a) The representations and warranties of Seller
contained in this Agreement shall survive the Closing until September 30,
1999, except the representations and warranties set forth (i) in Sections
3.1(e) and 3.2(a) which shall survive the Closing indefinitely, (ii) in
Section 3.14 which shall survive the Closing until the third anniversary of
the Closing Date and (iii) in Article VII which shall survive the Closing
until expiration of the relevant statute of limitations (including any
extensions thereof) or, if later, until resolution of any disputes arising
during such period applicable to the income tax return (the "Applicable
Return") of each of the Companies and Subsidiaries for the period ending on
the Closing Date (such later date being the "Expiration Date").
(b) The covenants and agreements contained in this Agreement which by their
terms do not contemplate performance after the Closing Date shall survive the
Closing until September 30, 1999. The covenants and agreements contained in
this Agreement which by their terms contemplate performance after the Closing
Date (including but not limited to the indemnities) shall survive the
completion of the transactions contemplated herein.
Section 10.2. Indemnification by Seller. (a) Subject to Section 10.4 hereof,
from and after the Closing Date, Seller shall indemnify and hold harmless
Parent and its subsidiaries and their respective officers and directors
(collectively, the "Indemnified Parties"), on a Net After-Tax Basis, from and
against any and all Covered Losses suffered by such Indemnified Parties
resulting from or arising out of (i) any inaccuracy in or breach of any of the
representations or warranties of Seller when made, and, except for
representations and warranties that speak of a specific date or time (which
need only be true and correct as of such date and time), on and as of the
Closing Date, (ii) any breach or nonfulfillment of any covenants or agreements
made by any Seller Affiliate herein, (iii) any liability or obligation of the
Companies or Subsidiaries arising from or relating to any business other than
the business of the Companies, the Subsidiaries, Tomcan and TH Canada
conducted under the TH Licenses, including without limitation all liabilities
and obligations of the Companies and Subsidiaries, if any, under the Actions
set forth on Schedule 10.2(a) hereto (collectively, "Retained Liabilities")
and (iv) the failure by Lawvest or the Guarantor (as defined in the Bentley
Trust Guarantee) to timely satisfy upon demand therefor its liabilities and
obligations to Pepe USA pursuant to the indemnification provisions of the
Canada Purchase Agreement or the Bentley Trust Guarantee, as applicable
("Canadian Liabilities"). The indemnity by Seller under this Section 10.2
shall not affect or limit the indemnification provided by Seller under Section
7.6.
(b) The Indemnified Parties shall not be entitled to assert any
indemnification pursuant to clause (i) or (ii) (in the case of covenants and
agreements which by their terms do not contemplate performance after the
Closing Date) of Section 10.2(a): (i) after the Expiration Date, with respect
to inaccuracies in or breaches of the representations and warranties by Seller
contained in Article VII, (ii) after the third anniversary of the Closing
Date, with respect to such covenant breaches or inaccuracies in or breaches of
the representations and warranties by Seller contained in Section 3.14 or
(iii) after September 30, 1999, with respect to all other inaccuracies in or
breaches of the representations and warranties by Seller contained in any
other Section hereof (other than Sections 3.1(e) and 3.2(a), which shall have
no such limitation) or any breach or nonfulfillment of any covenants or
agreements made by Seller herein which by their terms were required to be
performed prior to the Closing Date; provided that if on or prior to such
Expiration Date, third anniversary of the Closing Date or September 30, 1999,
as the case may be, a Notice of Claim shall have been given to Seller pursuant
to Section 10.3 hereof for such indemnification, the Indemnified Parties shall
continue to have the right to be indemnified on a Net After-Tax Basis with
respect to such indemnification claim until such claim for indemnification has
been satisfied or otherwise resolved as provided in this Article X.
Section 10.3. Indemnification Procedures. (a) Upon obtaining knowledge of
any claim or demand which has given rise to, or is expected to give rise to, a
claim for indemnification hereunder, Parent shall give written notice ("Notice
of Claim") of such claim or demand to Seller. Parent shall furnish to Seller
in reasonable detail
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such information as the Indemnified Parties may have with respect to such
indemnification claim (including copies of any summons, complaint or other
pleading which may have been served on it and any written claim, demand,
invoice, billing or other document evidencing or asserting the same). Subject
to the limitations set forth in Section 10.2(b) hereof, no failure or delay by
Parent in the performance of the foregoing shall reduce or otherwise affect
the obligation of Seller to indemnify and hold the Indemnified Parties
harmless on a Net After-Tax Basis, except to the extent that such failure or
delay shall have actually adversely affected Seller's ability to defend
against, settle or satisfy any Losses for which the Indemnified Parties are
entitled to indemnification hereunder.
(b) If the claim or demand set forth in the Notice of Claim given by Parent
pursuant to Section 10.3(a) hereof is a claim or demand asserted by a third
party, Seller shall have 15 days after the date on which Notice of Claim is
given to notify Parent in writing of its election to defend such third party
claim or demand on behalf of the Indemnified Party. If Seller elects to defend
such third party claim or demand, Parent shall make available to Seller and
its agents and representatives all records and other materials which are
reasonably required in the defense of such third party claim or demand and
shall otherwise cooperate with, and assist Seller in the defense of, such
third party claim or demand, and so long as Seller is defending such third
party claim in good faith, the Indemnified Parties shall not pay, settle or
compromise such third party claim or demand. If Seller elects to defend such
third party claim or demand, the Indemnified Party shall have the right to
participate in the defense of such third party claim or demand, at such
Indemnified Party's own expense. In the event, however, that such Indemnified
Party reasonably determines that representation by counsel to Seller of both
Seller and such Indemnified Party could reasonably be expected to present such
counsel with a conflict of interest, then the Indemnified Party may employ
separate counsel to represent or defend it in any such action or proceeding
and Seller will pay the fees and expenses of such counsel; provided, that
Seller shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm of attorneys (in addition to local counsel) at any time for all
Indemnified Parties. If Seller does not elect to defend such third party claim
or demand or does not defend such third party claim or demand in good faith,
the Indemnified Party shall have the right, in addition to any other right or
remedy it may have hereunder, at Seller's expense, to defend such third party
claim or demand; provided, however, that (i) such Indemnified Party shall not
have any obligation to participate in the defense of, or defend, any such
third party claim or demand; (ii) such Indemnified Party's defense of or its
participation in the defense of any such third party claim or demand shall not
in any way diminish or lessen the obligations of Seller under the agreements
of indemnification set forth in this Article X; and (iii) such Indemnified
Party may not settle any claim without the consent of Seller (which consent
shall not be unreasonably withheld or delayed).
(c) Seller and Parent shall cooperate in the defense of any claim or
litigation subject to this Article X and the records of each shall be
available to the other with respect to such defense.
(d) Except for third party claims being defended in good faith, Seller shall
satisfy its obligations under this Article X in respect of a valid claim for
indemnification hereunder which is not contested by Seller in good faith in
cash within 30 days after the date on which Notice of Claim is given.
Section 10.4. Limits on Indemnification. Seller shall have no liability for
indemnification pursuant to this Article X with respect to Covered Losses
unless such Covered Losses exceed in the aggregate $500,000 (the
"Indemnification Threshold"); provided, however, that in the event that
Covered Losses shall exceed in the aggregate the Indemnification Threshold,
Seller shall be liable hereunder for all such Covered Losses; and provided,
further, that Covered Losses with respect to Retained Liabilities or the
Canadian Liabilities shall not be subject to the Indemnification Threshold.
Notwithstanding anything herein to the contrary, in no event shall Seller be
required to indemnify Parent and its subsidiaries pursuant to this Article X
for Covered Losses in excess of $1,128,000,000.00; provided, however, that
Seller shall be entitled to satisfy in full its obligations under this Article
X by delivery to the Indemnified Parties of the Purchase Price Cash Amount and
the Purchase Price Shares.
Section 10.5. Losses Net of Insurance. The amount of any Covered Loss for
which indemnification is provided under this Article X shall be net of any
amounts recovered by the Indemnified Parties under insurance
A-34
<PAGE>
policies with respect to such Covered Loss. In the event that the Indemnified
Parties shall later collect any such amounts recovered under insurance
policies with respect to any Covered Loss for which any of them has previously
received payments under this Article X from Seller, such Indemnified Party
shall promptly repay to Seller such amount recovered.
ARTICLE XI
Termination
Section 11.1. Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual consent of Seller and Parent;
(b) by either Seller or Parent, if any Governmental Authority of competent
jurisdiction shall have issued an injunction, restraining order or decree that
restrains or prohibits the consummation of the Stock Purchases or the
performance by the parties hereto of the other obligations hereunder, and such
injunction, restraining order or decree shall have become final and
nonappealable;
(c) by either Seller or Parent, if the Closing has not occurred by the close
of business on September 30, 1998, unless the failure of the Closing to occur
by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe in all material respects the covenants
and agreements of such party set forth herein; or
(d) by either Seller or Parent if this Agreement shall not have been
approved by a majority of the votes cast at the Parent Stockholders Meeting.
Section 11.2. Procedure and Effect of Termination. In the event of
termination of this Agreement by either or both of Seller and Parent pursuant
to Section 11.1, written notice thereof shall forthwith be given by the
terminating party or parties to the other party or parties hereto, and this
Agreement shall thereupon terminate and become void and have no effect, and
the transactions contemplated hereby shall be abandoned without further action
by the parties hereto, except that the provisions of Section 12.5 shall
survive the termination of this Agreement; provided, however, that such
termination shall not relieve any party hereto of any liability for any wilful
breach of this Agreement (other than a breach of a representation, as to which
no party shall be liable hereunder). If this Agreement is terminated as
provided herein all filings, applications and other submissions contemplated
by Sections 3.7 and 4.3 and Article V shall, to the extent practicable, be
withdrawn from the agency or other persons to which they were made.
ARTICLE XII
Miscellaneous
Section 12.1. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party.
Section 12.2. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York as applied to
contracts to be performed in New York.
Section 12.3. Jurisdiction; Waiver of Trial by Jury. The parties hereby
consent to the jurisdiction of the United States District Court for the
Southern District of New York and any of the courts of the state of New York
in any dispute arising under this Agreement and agree further that service of
process or notice in any such action, suit or proceeding shall be effective if
in writing and delivered in person or sent as provided in Section 12.6 hereof.
ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF
THIS AGREEMENT OR IN CONNECTION HEREWITH IS HEREBY WAIVED.
A-35
<PAGE>
Section 12.4. Entire Agreement. This Agreement (including the Ancillary
Agreements) and the Schedules and Exhibits hereto contain the entire agreement
between the parties with respect to the subject matter hereof and there are no
agreements, understandings, representations or warranties between the parties
other than those set forth or referred to herein. Except for the provisions of
Article X, which are intended to benefit, and to be enforceable by, any of the
Indemnified Parties, this Agreement is not intended to confer and shall not
confer upon any Person not a party hereto any rights or remedies hereunder.
Section 12.5. Expenses. Except as otherwise set forth in this Agreement, if
the transactions contemplated hereby are not consummated, all legal and other
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
costs and expenses. If the transactions contemplated hereby are consummated,
the legal and other expenses incurred in connection with this Agreement shall
be paid by Pepe USA and TH USA.
Section 12.6. Notices. All notices hereunder shall be sufficiently given for
all purposes hereunder if in writing and delivered personally, sent by
documented overnight delivery service or, to the extent receipt is confirmed,
telecopy, telefax or other electronic transmission service to the appropriate
address or number as set forth below. Notices to Seller shall be addressed to:
Pepe Jeans London Corporation
11 Lower Square
Old Isleworth
Middlesex
United Kingdom
Attn: Sydney R. Neil
Telecopier No.: 44-181-568-4111
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attn: Gary I. Horowitz
Telecopier No.: (212) 455-2502
or at such other address and to the attention of such other person as Seller
may designate by written notice to Parent.
Notices to Parent, TH USA or THEH shall be made to Parent and shall be
addressed to:
Tommy Hilfiger Corporation
c/o Tommy Hilfiger U.S.A., Inc.
25 West 39th Street
New York, New York 10018,
Attn: Joel J. Horowitz
Telecopier No.: (212) 548-1818
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Attn: Eric S. Robinson
Telecopier No: (212) 403-2000
or at such other address and to the attention of such other person as Parent
may designate by written notice to Seller.
A-36
<PAGE>
Section 12.7. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that no party hereto will assign its rights or
delegate its obligations under this Agreement without the express prior
written consent of each other party hereto. Notwithstanding the foregoing,
Parent may assign its rights under this Agreement to any wholly-owned
subsidiary of Parent; provided that no such assignment by Parent of its rights
hereunder to any wholly-owned subsidiary shall in any way affect Parent's
obligations or liabilities under this Agreement.
Section 12.8. Headings; Definitions. The Section and Article headings
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All
references to Sections or Articles contained herein mean Sections or Articles
of this Agreement unless otherwise stated. All capitalized terms defined
herein are equally applicable to both the singular and plural forms of such
terms.
Section 12.9. Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing waive compliance by the
other parties hereto with any term or provision of this Agreement on the part
of such other parties hereto to be performed or complied with. The waiver by
any party hereto of a breach of any term or provision of this Agreement shall
not be construed as a waiver of any subsequent breach.
Section 12.10. Severability. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties
shall be excused from performance of such portions of this Agreement as shall
be found to be illegal or unenforceable under the applicable laws or
regulations without affecting the validity of the remaining provisions of the
Agreement; provided that (i) the remaining provisions of the Agreement shall
in their totality constitute a commercially reasonable agreement, and (ii)
should any method of termination of this Agreement or a portion thereof be
found to be illegal or unenforceable, such method shall be reformed to comply
with the requirements of applicable law so as, to the greatest extent
possible, to allow termination by that method. Nothing herein shall be
construed as a waiver of any party's right to challenge the validity of such
law.
Section 12.11. Interpretation. For the purposes of this Agreement, (i) a
"subsidiary" of an entity means any entity more than 50% of the voting power
of whose outstanding voting securities or equity interests are directly or
indirectly owned by such other entity, and (ii) "including" shall mean
"including without limitation."
A-37
<PAGE>
In Witness Whereof, this Agreement has been signed by or on behalf of each
of the parties as of the day first above written.
TOMMY HILFIGER CORPORATION
By: /s/ Joel J. Horowitz
-------------------------------------------
Name: Joel J. Horowitz
Title: Chief Executive Officer and
President
TOMMY HILFIGER U.S.A., INC.
By: /s/ Joel J. Horowitz
-------------------------------------------
Name: Joel J. Horowitz
Title: Chief Executive Officer
TOMMY HILFIGER (EASTERN HEMISPHERE) LIMITED
By: /s/ Joel J. Horowitz
-------------------------------------------
Name: Joel J. Horowitz
Title: Chief Executive Officer and
President
PEPE JEANS LONDON CORPORATION
By: /s/ Lawrence S. Stroll
-------------------------------------------
Name: Lawrence S. Stroll
Title: Group CEO
A-38
<PAGE>
ANNEX B
[LETTERHEAD OF MORGAN STANLEY]
January 31, 1998
The Board of Directors
Tommy Hilfiger Corporation
6/F, Precious Industrial Centre
18 Cheung Yue Street
Cheung Sha Wan, Kowloon
HONG KONG
Dear Members of the Board:
We understand that Pepe Jeans London Corporation (the "Seller"), Tommy
Hilfiger Corporation ("Parent"), Tommy Hilfiger U.S.A., Inc. ("Tommy USA") and
Tommy Hilfiger (Eastern Hemisphere) Limited ("Tommy Far East") have entered
into a Stock Purchase Agreement dated as of January 31, 1998 (the "Stock
Purchase Agreement"), which provides, among other things, for (i) the purchase
(the "Pepe USA Purchase") of all of the issued and outstanding shares of
common stock (the "Pepe USA Shares") of Pepe Jeans USA, Inc. ("Pepe USA"), a
wholly owned subsidiary of the Seller, by Tommy USA and (ii) the purchase (the
"Pepe Far East Purchase" and, together with the Pepe USA Purchase, the
"Purchase") of all of the issued and outstanding ordinary shares (the "Pepe
Far East Shares" and together with the Pepe USA Shares, the "Pepe Shares") of
TJ Far East Limited ("Pepe Far East" and together with Pepe USA, the
"Companies"), a wholly owned subsidiary of the Seller, by Tommy Far East.
Pursuant to the Purchase, Pepe USA and Pepe Far East will become indirect
wholly owned subsidiaries of Parent. Pursuant to the Stock Purchase Agreement,
(i) Tommy USA will pay Seller $730,760,000 in cash (the "Pepe USA Cash
Consideration") and will deliver 9,045,930 ordinary shares (the "Parent
Shares"), par value $0.01 per share, of Parent (the "Parent Common Stock") for
the Pepe USA Shares and (ii) Tommy Far East will pay to Seller $25,000,000 in
cash (the "Pepe Far East Cash Consideration" and, together with the Pepe USA
Cash Consideration, the "Cash Consideration") for the Pepe Far East Shares. We
also understand that Pepe USA and Lawvest Holdings Inc. have entered into a
share purchase agreement dated as of January 26, 1998 (the "Canadian Purchase
Agreement") which provides for the purchase (the "Canadian Purchase") by Pepe
USA (with funds to be provided by the Seller) of all of the issued and
outstanding capital stock of Tomcan Investments Inc. ("Tommy Canada") which
transaction is expected to close immediately following the consummation of the
Purchase. The terms and conditions of the Purchase are more fully set forth in
the Stock Purchase Agreement.
You have asked for our opinion as to whether the Cash Consideration and the
Parent Shares to be paid by Tommy USA and Tommy Far East for the Purchase,
taken together, are fair from a financial point of view to Parent.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Parent;
(ii) reviewed certain internal financial statements and other financial
operating data concerning Parent, Pepe USA, Pepe Far East and Tommy Canada
prepared by the managements of Parent, Pepe USA, Pepe Far East and Tommy
Canada, respectively;
(iii) analyzed certain financial projections prepared by the managements
of Parent, Pepe USA (including projections giving effect to the Canadian
Purchase) and Pepe Far East, respectively;
B-1
<PAGE>
[LOGO OF MORGAN STANLEY]
(iv) discussed the past and current operations and financial condition
and the prospects of Parent with senior executives of Parent;
(v) discussed the past and current operations and financial condition and
the prospects of Pepe USA and Pepe Far East with senior executives of the
Seller;
(vi) discussed the past and current operations and financial condition
and the prospects of Tommy Canada with senior executives of Tommy Canada;
(vii) discussed the financial performance and certain financial
projections for Parent, Pepe USA (including projections giving effect to
the Canadian Purchase) and Pepe Far East prepared by the managements of
Parent, Pepe USA and Pepe Far East with an industry consultant;
(viii) reviewed the reported prices and trading activity for Parent
Common Stock;
(ix) compared the financial performance of Pepe USA, Pepe Par East, Tommy
Canada and Parent and the prices and trading activity of Parent Common
Stock with that of certain comparable publicly traded companies and their
securities;
(x) reviewed the prices and trading activity of the common stock of
certain publicly traded companies comparable to Pepe USA and Pepe Far East;
(xi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(xii) reviewed and discussed with the senior executives of Parent their
estimates of the operational and financial synergies, incremental costs and
long-term benefits (including, but not limited to, the tax and accounting
impact) anticipated from the Purchase;
(xiii) analyzed the pro forma impact of the Purchase on Parent's earnings
per share, cash flow, consolidated capitalization and financial ratios;
(xiv) participated in certain discussions and negotiations among
representatives of the Seller and Parent and their financial and legal
advisors;
(xv) reviewed the Stock Purchase Agreement and certain related documents
and the Canadian Purchase Agreement; and
(xvi) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without assuming responsibility for the
independent verification the accuracy and completeness of the information
supplied or otherwise made available to us for the purposes of this opinion.
With respect to the financial projections of Pepe USA (including projections
giving effect to the Pepe USA purchase of the outstanding stock of Tommy
Canada), Pepe Far East and Parent, including the synergies, incremental costs
and longterm benefits (including, but not limited to, the tax and accounting
impact) anticipated from the Purchase, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance of Pepe USA, Tommy Canada,
Pepe Far East and Parent, respectively. We have assumed that the Purchase will
be consummated on the terms set forth in the Stock Purchase Agreement and that
the Canadian Purchase will be consummated immediately after the Purchase on
the terms set forth in the Canadian Purchase Agreement. We have not made any
independent valuation or appraisal of the assets or liabilities of the
Companies, Tommy Canada or Parent, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
Our opinion addresses only the fairness from a financial point of view to
Parent of the Cash Consideration and the Parent Shares to be paid by Tommy USA
and Tommy Far East for the Purchase, and we do not express any views on any
other terms of the Acquisition. Specifically, our opinion does not address
Parent's underlying business decision to effect the Acquisition.
B-2
<PAGE>
[LOGO OF MORGAN STANLEY]
We have acted as financial advisor to Parent in connection with this
transaction and will receive a fee for our services. In the past, Morgan
Stanley & Co. Incorporated and its affiliates have provided financial advisory
and financing services for Parent and have received fees for the rendering of
these services. In addition, Morgan Stanley or its affiliates expect to
provide financing services to Parent in connection with the Purchase.
It is understood that this letter is for the information of the Board of
Directors of Parent and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by Parent in respect of the transaction with the
Securities and Exchange Commission and in the Proxy to be mailed to the
shareholders. In addition, Morgan Stanley expresses no opinion or
recommendation as to how the shareholders of Parent should vote at the Parent
shareholders' meeting in connection with the Purchase.
Based on the foregoing, we are of the opinion on the date hereof that the
Cash Consideration and the Parent Shares to be paid by Tommy USA and Tommy Far
East for the Purchase, taken together, are fair from a financial point of view
to Parent.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Robert W. Kitts
Robert W. Kitts
Managing Director
B-3
<PAGE>
ANNEX C
[LETTERHEAD OF WASSERSTEIN PERELLA & CO., INC.]
January 31, 1998
Special Committee of the
Board of Directors of
Tommy Hilfiger Corporation
Members of the Special Committee:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to Tommy Hilfiger Corporation (the "Company") of the
consideration to be paid by Tommy Hilfiger USA, Inc. ("Tommy USA") and Tommy
Hilfiger (Eastern Hemisphere) Limited ("Tommy Far East") pursuant to the terms
of the Stock Purchase Agreement dated as of January 31, 1998 by and among the
Company, Tommy USA, Tommy Far East and Pepe Jeans London Corporation ("Seller")
(the "Stock Purchase Agreement"). The Stock Purchase Agreement provides for,
among other things, the purchase of 100% of the issued and outstanding shares
of common stock of Pepe Jeans USA, Inc. ("Pepe USA") and 100% of the issued and
outstanding ordinary shares of TJ Far East Limited (together with Pepe USA, the
"Target"), each of which are wholly owned subsidiaries of Seller (the
"Transaction"), for a combination of cash and ordinary shares of the Company as
provided in the Stock Purchase Agreement. We also understand that Pepe USA and
Lawvest Holdings Inc. have entered into a Share Purchase Agreement dated as of
January 26, 1998 (the "Canadian Purchase Agreement") which provides for the
purchase (the "Canadian Purchase") by Pepe USA (with funds to be provided by
Seller) of all of the issued and outstanding capital stock of TomCan
Investments Inc. ("Tommy Canada") which transaction is expected to close
immediately following the consummation of the Transaction. The terms and
conditions of the Transaction are set forth in more detail in the Stock
Purchase Agreement.
In connection with rendering our opinion, we have reviewed the Stock Purchase
Agreement and certain related documents. We have also reviewed and analyzed
certain publicly available business and financial information relating to the
Company for recent years and interim periods to date, as well as certain
financial and operating information, including financial forecasts, analyses
and projections prepared by the managements of the Company, the Target and
Tommy Canada and provided to us for purposes of our analysis, and we have met
with the managements of the Company, the Target and Tommy Canada to review and
discuss such information and, among other matters, the Company's, the Target's
and Tommy Canada's businesses, assets, financial condition, results of
operations and prospects.
We have reviewed and considered certain financial data relating to the
Company, the Target and Tommy Canada, as well as certain stock market data
relating to the Company, and we have compared that data with similar data for
certain other companies, the securities of which are publicly traded, that we
believe may be relevant or comparable in certain respects to the Company, the
Target, Tommy Canada or one or more of their businesses or assets, and we have
reviewed and considered the financial terms of certain recent acquisitions and
business combination transactions in the apparel industry specifically, and in
other industries generally, that we believe to be reasonably comparable to the
Transaction or otherwise relevant to our inquiry. We have also performed such
other financial studies, analyses and investigations and reviewed such other
information as we considered appropriate for purposes of this opinion.
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all the financial and other
information provided to or discussed with us for purposes of
C-1
<PAGE>
this opinion or publicly available, and we have not assumed any responsibility
for independent verification of and express no opinion as to any of such
information. We have also relied upon the reasonableness and accuracy of the
financial projections, forecasts and analyses provided to us (including
estimates of certain cost and tax savings and other operating efficiencies
expected to result from consummation of the Transaction), and we have assumed,
with the Special Committee's consent, that such projections, forecasts and
analyses were reasonably prepared in good faith and on bases reflecting the
best currently available judgments and estimates of the Company's, the
Target's and Tommy Canada's respective managements, and we express no opinion
with respect to such projections, forecasts and analyses or the assumptions
upon which they are based. In addition, we have not assumed any responsibility
for conducting a physical inspection of the properties or facilities of the
Company, the Target or Tommy Canada or for making or obtaining an independent
valuation or appraisal of the assets or liabilities of the Company, the Target
or Tommy Canada, and no such independent valuation or appraisal was provided
to us. We have assumed that the transactions described in the Stock Purchase
Agreement will be consummated on the terms set forth therein, without material
waiver or modification. Our opinion is necessarily based on economic and
market conditions and other circumstances as they exist and can be evaluated
by us as of the date hereof. We are not expressing any opinion herein as to
the prices at which any securities of the Company will actually trade at any
time.
In the ordinary course of our business, we may actively trade the equity
securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our opinion addresses only the fairness from a financial point of view to
the Company of the consideration to be paid by Tommy USA and Tommy Far East
pursuant to the Transaction, and we do not express any views on any other
terms of the Transaction. Specifically, our opinion does not address the
Company's underlying business decision to effect the Transaction.
It is understood that this letter is for the benefit and use of the Special
Committee of the Board of Directors of the Company in its consideration of the
Transaction and may not be disseminated, quoted, referred to or reproduced at
any time or in any manner without our prior written consent; provided,
however, that this opinion may be reproduced in full in a proxy statement
relating to the Transaction. This opinion does not constitute a recommendation
to any shareholder or other person as to how such shareholder should vote at
the special meeting of the Company's shareholders or otherwise act with
respect to the Transaction, and should not be relied upon by any shareholder
or other person as such.
Based upon and subject to the foregoing it is our opinion that as of the
date hereof the consideration to be paid by Tommy USA and Tommy Far East
pursuant to the Transaction is fair to the Company from a financial point of
view.
Very truly yours,
WASSERSTEIN PERELLA & CO., INC.
/s/ Wasserstein Perella & Co., Inc.
C-2
<PAGE>
- --------------------------------------------------------------------------------
FORM OF PROXY
TOMMY HILFIGER CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING OF SHAREHOLDERS -- MAY 5, 1998
The undersigned hereby appoints Silas K.F. Chou and Benjamin M.T. Ng, and
each of them, with full power of substitution, for and in the name of the
undersigned to vote all Ordinary Shares, par value $.01 per share, of Tommy
Hilfiger Corporation, a British Virgin Islands corporation, that the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders, to be held at the Royal Pavillion Hotel, Porters,
St. James, Barbados on Tuesday, May 5, 1998 at 8:00 a.m., local time, and
any adjournment thereof, upon the matters described in the Notice of
Special Meeting and Proxy Statement dated March 30, 1998, receipt of which
is hereby acknowledged, subject to any direction indicated on the reverse
side of this card and upon any other business that may properly come before
the meeting or any adjournment thereof, hereby revoking any proxy
heretofore executed by the undersigned to vote at said meeting.
This proxy is being solicited by the Board of Directors of Tommy Hilfiger
Corporation. THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED "FOR" PROPOSAL 1 AND, WITH RESPECT TO
ITEM 2, AS SAID PROXIES, AND EACH OF THEM, MAY DETERMINE.
[SEE
REVERSE
SIDE]
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
- --------------------------------------------------------------------------------
REVERSE SIDE OF FORM OF PROXY Please mark
your vote
as indicated [X]
in this
example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. Approval of Stock Purchase FOR AGAINST ABSTAIN 2. In their
Agreement dated as of [ ] [ ] [ ] discretion
January 31, 1998 and the on such
transactions contemplated matters as
thereby, including the may properly
issuance of 9,045,930 come before
Ordinary Shares of Tommy the meeting
Hilfiger Corporation. or any
adjournment
thereof.
--
Signature ____________ Signature ____________Date _____________________________
NOTE: PLEASE DATE AND SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS HEREON. IN
THE CASE OF JOINT OWNERS, EACH JOINT OWNER SHOULD SIGN. WHEN SIGNING IN A
FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE GIVE YOUR FULL TITLE. IF THIS
PROXY IS SUBMITTED BY A CORPORATION OR PARTNERSHIP, IT SHOULD BE EXECUTED IN
THE FULL CORPORATE OR PARTNERSHIP NAME BY A DULY AUTHORIZED PERSON.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
