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