<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, 1999
-----------------
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,
2000: 94,828,038
<PAGE>
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
December 31, 1999
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three and nine months ended December
31, 1999 and 1998.............................................................................. 3
Condensed Consolidated Balance Sheets as of December 31, 1999 and March 31, 1999............... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1999
and 1998....................................................................................... 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine months
ended December 31, 1999 and the year ended March 31, 1999...................................... 6
Notes to Condensed Consolidated Financial Statements........................................... 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk..................................... 18
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 STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited) For the Nine Months Ended For the Three Months Ended
December 31, December 31,
------------------------- ----------------------
1999 1998 1999 1998
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net revenue.............................................. $1,501,930 $1,216,213 $521,204 $463,233
Cost of goods sold....................................... 808,212 650,182 294,170 248,416
---------- ---------- -------- --------
Gross profit............................................. 693,718 566,031 227,034 214,817
Depreciation and amortization............................ 71,579 58,177 25,043 21,241
Other selling, general and administrative expenses....... 356,971 281,567 114,515 101,401
Special charges.......................................... - 19,800 - -
---------- ---------- -------- --------
Total selling, general and administrative expenses....... 428,550 359,544 139,558 122,642
Income from operations................................... 265,168 206,487 87,476 92,175
Interest expense......................................... 31,452 29,044 10,192 10,897
Interest income.......................................... 8,621 3,632 3,647 1,383
---------- ---------- -------- --------
Income before income taxes............................... 242,337 181,075 80,931 82,661
Provision for income taxes............................... 68,460 53,591 21,814 24,902
---------- ---------- -------- --------
Net income............................................... $ 173,877 $ 127,484 $ 59,117 $ 57,759
========== ========== ======== ========
Earnings per share:
Basic earnings per share................................. $1.84 $1.39 $0.62 $0.62
========== ========= ======== ========
Weighted average shares outstanding...................... 94,606 91,614 94,791 93,888
========== ========= ======== ========
Diluted earnings per share............................... $1.81 $1.38 $0.62 $0.61
========== ========= ======== ========
Weighted average shares and share equivalents outstanding 95,844 92,590 95,293 94,556
========== ========= ======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited) As of As of
December 31, March 31,
1999 1999
---------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents..........................................$ 399,257 $ 241,950
Accounts receivable................................................ 113,374 186,640
Inventories........................................................ 238,499 222,928
Other current assets............................................... 88,182 48,638
---------- ----------
Total current assets............................................... 839,312 700,156
Property and equipment, at cost, less accumulated
depreciation and amortization...................................... 282,499 228,294
Intangible assets, net of accumulated amortization................. 1,248,355 1,275,485
Other assets....................................................... 3,187 2,685
---------- ----------
Total Assets.......................................................$2,373,353 $2,206,620
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings..............................................$ 225 $ 1,234
Current portion of long-term debt.................................. 47,500 40,000
Accounts payable................................................... 16,840 27,310
Accrued expenses and other current liabilities..................... 215,405 188,606
---------- ----------
Total current liabilities.......................................... 279,970 257,150
Long-term debt..................................................... 571,839 609,245
Deferred tax liability............................................. 238,330 242,546
Other liabilities.................................................. 3,901 5,430
Shareholders' equity
Preference Shares, $0.01 par value-shares authorized 5,000,000;
none issued........................................................ - -
Ordinary Shares, $0.01 par value-shares authorized 150,000,000;
issued and outstanding 94,828,038 and 94,324,088, respectively..... 948 943
Capital in excess of par value..................................... 584,893 572,809
Retained earnings.................................................. 692,789 518,912
Accumulated other comprehensive income (loss)...................... 683 (415)
---------- ----------
Total shareholders' equity......................................... 1,279,313 1,092,249
---------- ----------
Commitments and contingencies
Total Liabilities and Shareholders' Equity.........................$2,373,353 $2,206,620
========== ==========
</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,
---------------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................................... $173,877 $ 127,484
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization................................................. 72,541 58,594
Deferred taxes................................................................ (33,117) (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........................................................... 73,266 15,977
Inventories................................................................... (15,571) (20,896)
Other assets.................................................................. (9,913) 14,573
Increase (decrease) in liabilities
Accounts payable.............................................................. (10,470) (11,573)
Accrued expenses and other liabilities........................................ 15,469 (8,129)
---------------- ----------------
Net cash provided by operating activities..................................... 266,082 192,126
---------------- ----------------
Cash flows from investing activities
Purchases of property and equipment........................................... (87,773) (57,483)
Acquisition of businesses, net of cash acquired............................... - (736,508)
---------------- ----------------
Net cash used in investing activities......................................... (87,773) (793,991)
---------------- ----------------
Cash flows from financing activities
Proceeds from issuance of long-term debt...................................... - 649,151
Payments on long-term debt.................................................... (30,000) (10,000)
Proceeds from the exercise of employee stock options.......................... 8,909 11,435
Short-term bank borrowings (repayments)....................................... (1,009) (15,025)
Other......................................................................... 1,098 (863)
---------------- ----------------
Net cash (used in) provided by financing activities........................... (21,002) 634,698
---------------- ----------------
Net increase in cash.......................................................... 157,307 32,833
Cash and cash equivalents, beginning of period................................ 241,950 157,051
---------------- ----------------
Cash and cash equivalents, end of period...................................... $399,257 $ 189,884
================ ================
</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 Accumulated
excess other Total
Ordinary of par Retained comprehensive shareholders'
shares value earnings income (loss) equity
-------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
C>
Balance, March 31, 1998.................. $752 $173,040 $345,195 $ 75 $ 519,062
Net income............................... - - 173,717 - 173,717
Foreign currency translation............. - - - (490) (490)
Issuance of shares in connection
with the Acquisition..................... 180 377,335 - - 377,515
Exercise of employee stock options....... 11 15,169 - - 15,180
Tax benefits from exercise of stock
options.................................. - 7,265 - - 7,265
-------------- ------------- ------------- ----------- ----------
Balance, March 31, 1999.................. 943 572,809 518,912 (415) 1,092,249
Net income............................... - - 173,877 - 173,877
Foreign currency translation............. - - - 1,098 1,098
Exercise of employee stock options....... 5 8,904 - - 8,909
Tax benefits from exercise of stock
options.................................. - 3,180 - - 3,180
-------------- ------------- ------------- ----------- ----------
Balance, December 31, 1999 (Unaudited)... $948 $584,893 $692,789 $ 683 $1,279,313
============== ============= ============= =========== ==========
</TABLE>
Comprehensive income consists of net income and foreign currency translation
and totaled $173,227 for the fiscal year ended March 31, 1999 and $174,975 for
the nine months ended December 31, 1999.
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. Certain prior year amounts have been
reclassed to conform with current year presentation.
Operating results for the nine-month period ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2000. 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, 1999 and 1998 are unaudited. The Condensed
Consolidated Balance Sheet as of March 31, 1999, as presented, has been prepared
from the Consolidated Balance Sheet as of March 31, 1999 included in the
Company's Form 10-K.
Note 2 - Share Split
On June 4, 1999, the Company announced that its Board of Directors had
approved and declared a two-for-one split of the Company's Ordinary Shares, par
value $0.01 per share (the "Ordinary Shares"). The split was effected in the
form of a dividend of one Ordinary Share per Ordinary Share issued and
outstanding or held by the Company in its treasury (the "Share Split"), and was
paid on July 9, 1999 to shareholders of record at the close of business on June
18, 1999. Accordingly, all share amounts, earnings per share and share
equivalents have been restated to reflect the Share Split. In connection with
the Share Split, the Board of Directors of the Company also approved an increase
in the number of authorized Ordinary Shares to 150,000,000 from 75,000,000.
Note 3 - 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 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 18,091,860 Ordinary Shares of the
Company - $377,515 and related transaction costs. For accounting purposes, the
Ordinary Shares of the Company were valued at $23.185 per share (the average
closing price for the five days before and after the announcement of the
Acquisition) reduced by a valuation adjustment of $41,960 to reflect
restrictions on the sale of the shares. The cash portion of the purchase price
was funded from a combination of debt financing and cash on hand.
7
<PAGE>
Purchase price allocation
The Acquisition has been accounted for as a purchase and, accordingly, the
operating results of the Acquired Companies are included in the consolidated
results of the Company from the date of the Acquisition. The purchase price has
been allocated as follows:
<TABLE>
<S> <C>
Cash................................................................... $ 19,252
Accounts receivable.................................................... 57,343
Inventory.............................................................. 67,723
Other current assets................................................... 13,359
Property and equipment................................................. 49,212
Intangible assets, including goodwill.................................. 1,307,376
Other assets........................................................... 1,075
Short-term bank borrowings............................................. (15,965)
Accounts payable....................................................... (17,183)
Accrued expenses and other current liabilities......................... (51,457)
Long-term debt......................................................... (10,000)
Deferred tax liability................................................. (252,320)
Other liabilities...................................................... (2,176)
------------------
Total purchase price................................................... $1,166,239
==================
</TABLE>
Pro forma results
The pro forma combined condensed results of operations of the Company and the
Acquired Companies for the nine months ended December 31, 1998, after giving
effect to certain pro forma adjustments, are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
-----------------
<S> <C>
Net revenue.......................................... $1,264,663
Gross profit......................................... 588,222
Income from operations............................... 216,295
Net income........................................... 131,217
Diluted earnings per share........................... $ 1.39
Weighted average shares and share
equivalents outstanding.............................. 94,578
</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 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
-----------------
<S> <C>
Net income........................................... $143,097
Diluted earnings per share........................... $ 1.51
</TABLE>
8
<PAGE>
The foregoing pro forma statement of operations data assumes that the
Acquisition took place as of the beginning of the 1999 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.
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 consisted 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 4 - Inventories
Substantially all inventories are comprised of finished goods.
Note 5 - 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 "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 Credit Facilities, which are guaranteed by THC, consist of an unsecured
$250,000 TH USA five-year revolving credit facility, of which up to $150,000 may
be used for direct borrowings, and an unsecured $200,000 five-year term credit
facility which was borrowed by TH USA in connection with the Acquisition. The
revolving credit facility, which accrues interest at varying interest rates,
will be available for letters of credit, working capital and other general
corporate purposes. The Credit Facilities replaced the Company's secured
revolving credit agreement which had been in place since April 1, 1996.
Borrowings under the term loan facility bear interest at varying rates which,
on a weighted average annual basis, amounted to 6.50% and 5.89% as of and for
the nine-month period ended, December 31, 1999, respectively. Borrowings under
the term loan facility 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 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 Credit Facilities also restrict the ability of THC to
create liens on assets or enter into sale and leaseback transactions. Under the
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
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 Credit Facilities as of December 31, 1999.
9
<PAGE>
Note 6 - 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,
1999 and March 31, 1999 and for each of the nine months and three months ended
December 31, 1999 and 1998. 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, 1999 March 31, 1999
-------------------------- -----------------------
<S> <C> <C>
Current assets............................................... $ 616,415 $ 595,819
Noncurrent assets............................................ 1,507,301 1,478,790
Current liability due to THC................................. 32,126 26,494
Other current liabilities.................................... 265,784 240,851
Noncurrent liability due to THC.............................. 751,791 801,511
Other noncurrent liabilities................................. 813,303 852,329
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
------------------------------------ ------------------------------------
1999 1998 1999 1998
--------------- --------------- -------------- ------------
<S> <C> <C> <C>
Net revenue............................. $1,493,510 $1,208,205 $518,547 $460,819
Gross profit............................ 664,612 542,395 216,838 206,396
Net income.............................. 106,190 59,922 36,786 20,538
</TABLE>
Note 7 - Segment Reporting
The Company has three reportable segments: Wholesale, Retail and Licensing.
The Company's reportable segments are business units that offer different
products and services or similar products through different distribution
channels. The Wholesale segment consists of the design and sourcing of men's
sportswear and jeanswear, women's casualwear and jeanswear and childrenswear for
wholesale distribution. The Retail segment reflects the operations of the
Company's outlet, specialty and flagship stores. The Licensing segment consists
of the operations of licensing the Company's trademarks for specified products
in specified geographic areas. The Company evaluates performance and allocates
resources based on segment profits. The accounting policies of the reportable
segments are the same as those described in Note 1, "Summary of Significant
Accounting Policies", to the Consolidated Financial Statements included in the
Form 10-K. Segment profits are comprised of segment net revenue less cost of
goods sold and selling, general and administrative expenses. Excluded from
segment profits, however, are the vast majority of executive compensation,
marketing, brand image marketing costs associated with its flagship stores,
amortization of intangibles including goodwill, special charges and interest
costs. Financial information for the Company's reportable segments is as
follows:
<TABLE>
<CAPTION>
Wholesale Retail Licensing Total
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Nine Months Ended December 31, 1999
- -----------------------------------
Total segment revenue.................. $1,225,611 $230,549 $90,145 $1,546,305
Segment profit......................... 220,556 64,258 58,334 343,148
Depreciation and amortization
included in segment profits............ 32,820 6,880 882 40,582
Nine Months Ended December 31, 1998
- -----------------------------------
Total segment revenue.................. $1,000,716 $173,215 $80,129 $1,254,060
Segment profits........................ 211,533 39,136 48,567 299,236
Depreciation and amortization
included in segment profits............ 20,893 5,945 791 27,629
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Wholesale Retail Licensing Total
------------ --------------- --------------- ----------
Three Months Ended December 31, 1999
- ------------------------------------
<S> <C> <C> <C> <C>
Total segment revenue................. $407,715 $97,399 $29,551 $534,665
Segment profits....................... 52,819 30,847 16,847 100,513
Depreciation and amortization
included in segment profits........... 11,575 2,436 300 14,311
Three Months Ended December 31, 1998
- ------------------------------------
Total segment revenue................. $375,475 $72,165 $27,442 $475,082
Segment profits....................... 80,511 15,628 16,494 112,633
Depreciation and amortization
included in segment profits........... 7,607 1,893 253 9,753
</TABLE>
Licensing segment profits include $6,400 from a settlement of a trademark
infringement lawsuit with Wal-Mart Stores Inc. during the quarter ended
September 30, 1999.
A reconciliation of total segment revenue to consolidated net revenue is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
-------------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- ------------- -------------
<S> <C> <C> <C>
Total segment revenue.................... $1,546,305 $1,254,060 $534,665 $475,082
Intercompany revenue..................... 44,375 37,847 13,461 11,849
--------------- --------------- ------------- -------------
Consolidated net revenue................. $1,501,930 $1,216,213 $521,204 $463,233
=============== =============== ============= =============
</TABLE>
Intercompany revenue represents buying agency commissions from consolidated
subsidiaries.
A reconciliation of total segment profits to consolidated income before income
taxes is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Segment profits.................................... $343,148 $299,236 $100,513 $112,633
Corporate expenses not allocated................... 77,980 72,949 13,037 20,458
Special charge..................................... - 19,800 - -
Interest expense, net.............................. 22,831 25,412 6,545 9,514
------------- ------------- ------------- ------------
Consolidated income before income taxes............ $242,337 $181,075 $ 80,931 $ 82,661
============= ============= ============= ============
</TABLE>
The Company does not disaggregate assets on a segment basis for internal
management reporting and, therefore, such information is not presented.
Note 8 - Subsequent Event
On February 2, 2000, the Company announced that it expects to incur special
charges in connection with the relocation of its existing Flagship stores in
Beverly Hills, CA and London, England and the postponement of the planned launch
of the women's dress-up division. These charges will consist primarily of the
write-down of fixed assets, estimated lease termination costs and employee
costs. The Company will record the charges, a large portion of which are
expected to be non-cash, in its fiscal quarter ending March 31, 2000. The
actual amount of the charges will be dependent upon facility appraisals,
contractual negotiations and further study. Preliminary estimates of the
charges range up to $65,000 on a pre-tax basis, or up to $0.50 per diluted
share.
11
<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
18,091,860 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 for the nine-month
period ended December 31, 1998 is presented on both a pro forma and an 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 3 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,
---------------------------------------------------------------
1999 1998 1998
---------- ---------------------- ----------
Actual Pro Forma Actual
---------- ---------------------- ----------
<S> <C> <C> <C>
Net revenue......................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................. 53.8 53.5 53.5
---------- ---------- ----------
Gross profit........................................ 46.2 46.5 46.5
Depreciation and amortization....................... 4.8 4.9 4.8
Other SG&A expenses................................. 23.7 22.9 23.1
---------- ---------- ----------
SG&A expenses before special charges................ 28.5 27.8 27.9
Special charges..................................... - 1.6 1.6
---------- ---------- ----------
Total SG&A expenses................................. 28.5 29.4 29.5
---------- ---------- ----------
Income from operations.............................. 17.7 17.1 17.0
Interest expense, net............................... 1.6 2.4 2.1
---------- ---------- ----------
Income before taxes................................. 16.1 14.7 14.9
Provision for income taxes.......................... 4.5 4.3 4.4
---------- ---------- ----------
Net income.......................................... 11.6 10.4 10.5
========== ========== ==========
</TABLE>
Nine months ended December 31, 1999 (Actual) compared to nine months
ended December 31, 1998 (Pro Forma)
The following discussion of the Company's results of operations for the nine
months ended December 31, 1999 compared to the nine months ended December 31,
1998 is presented on a pro forma basis for the 1998 nine-month period, assuming
the Acquired Companies had been combined with the Company for the entire 1998
nine-month period. 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 period indicated.
12
<PAGE>
Net revenue increased to $1,501,930 in the nine months ended December 31, 1999
from $1,264,663 in the corresponding period of fiscal 1999, an improvement of
18.8%. This increase is due to increases in each of the Company's operating
divisions, as outlined below.
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------------------
%
1999 1998 Increase
---------------- ---------------- --------
<S> <C> <C> <C>
Wholesale..................... $1,225,611 $1,050,697 16.6 %
Retail........................ 230,549 173,215 33.1 %
Licensing..................... 45,770 40,751 12.3 %
----------- ----------- ------
Total......................... $1,501,930 $1,264,663 18.8 %
=========== =========== ======
</TABLE>
The Wholesale increase consists of increases in womenswear sales of 43.7% (to
$422,962 from $294,276) and childrenswear sales of 45.5% (to $225,580 from
$154,996) offset, in part, by a decrease in menswear sales of 4.1% (to $577,069
from $601,425). The improvements in womenswear and childrenswear are due to
volume increases which resulted primarily from increased sales to existing
customers. The increased sales to existing customers is principally due to the
expansion of the in-store shop and fixtured area program, whereby certain of the
Company's customers have increased the amount of square footage where the
Company's products are featured. The decrease in menswear sales is due to price
adjustments caused by the promotional environment of department stores where the
Company's products are sold particularly during the Holiday selling season. In
addition, the Company sold less product through off-price channels than in the
prior year.
The improvement in the Company's Retail division is due to an increase in the
number of stores and an increase in sales at existing stores. At December 31,
1999, the Company operated 90 retail stores as compared to 82 stores at December
31, 1998. Retail stores opened since December 31, 1998 contributed $31,878 of
net revenue during the nine months ended December 31, 1999.
Revenue from the Licensing division, which consists of third-party licensing
royalties and buying agency commissions, increased principally due to a general
increase in sales of existing licensed products and buying agency services. Of
the increase, approximately $1,030 was due to products introduced under licenses
entered into since December 31, 1998.
Gross profit as a percentage of net revenue decreased to 46.2% in the first
nine months of fiscal 2000 from 46.5% in the first nine months of fiscal 1999.
This decrease is mainly due to reduced wholesale margins caused by the
promotional environment of department stores, principally during the holiday
selling season. Wholesale gross margin declines were offset partially by
increased sales in the Retail division, which produce higher margins than the
Wholesale division.
Selling, general and administrative expenses, before the special charge
described below, increased to 28.5% of net revenue in the first nine months of
fiscal 2000 from 27.8% of net revenue in the first nine months of fiscal 1999.
The increase in expenses to $428,550 in fiscal 2000 from $352,127 in fiscal 1999
is principally due to increased volume related expenses to support the higher
revenue as well as increased depreciation and amortization. In addition, in the
fiscal 2000 period, the Company incurred higher marketing and advertising costs
to promote the brand and incurred expenses related to the start up of the womens
dress-up and junior sportswear divisions. These expenses were also the primary
reasons for the increase as a percentage of net revenue.
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 consisted 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, decreased to $22,831 in the first
nine months of fiscal 2000 from $29,758 in the corresponding period of last
year. Interest expense includes interest on the debt incurred in connection
with the Acquisition for both periods. The decrease from fiscal 1999 to fiscal
2000 is primarily due to improved cash flow and, therefore, lower net borrowing
levels of both the Company and the Acquired Companies.
The provision for income taxes decreased to 28.2% of income before taxes in
the nine-month period ended December 31, 1999 from 29.7% 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, offset by the effects of the special charges which were
tax effected at a higher rate than the Company's weighted average tax rate in
the nine-month period ended December 31, 1998.
13
<PAGE>
Nine months ended December 31, 1999 (Actual) compared to nine months
ended December 31, 1998 (Actual)
Net revenue increased to $1,501,930 in the nine months ended December 31, 1999
from $1,216,213 in the corresponding period of fiscal 1999, an improvement of
23.5%. This increase is due to increases in each of the Company's operating
divisions, as outlined below.
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------------------
%
1999 1998 Increase
---------------- ---------------- ----------
<S> <C> <C> <C>
Wholesale..................... $1,225,611 $1,000,716 22.5 %
Retail........................ 230,549 173,215 33.1 %
Licensing..................... 45,770 42,282 8.2 %
----------- ----------- ------
Total......................... $1,501,930 $1,216,213 23.5 %
=========== =========== ======
</TABLE>
The Wholesale increase is due to volume increases which resulted from the
Acquisition and from increased sales to existing customers. The Acquisition
related increase is principally attributed to the change in status of Pepe USA
and TH Canada, which contributed to the Company in the form of wholesale revenue
for the entire nine-month period ended December 31, 1999, compared to a
combination of royalty income and wholesale revenue (since the Acquisition) in
the nine-month period ended December 31, 1998. 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. 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 and an increase in sales at existing stores. At December 31,
1999, the Company operated 90 retail stores as compared to 82 stores at December
31, 1998. Retail stores opened since December 31, 1998 contributed $31,878 of
net revenue during the nine months ended December 31, 1999.
Revenue from the Licensing division, which consists of third-party licensing
royalties and buying agency commissions, increased due to the incremental
revenue associated with newly licensed products and a general increase in sales
of existing licensed products and buying agency services. Approximately $1,030
of the fiscal 2000 revenue amount was due to products introduced under licenses
entered into since December 31, 1998. Offsetting this increase, in part, was
the inclusion of royalties from Pepe USA and TH Canada for a partial quarter in
fiscal 1999. A comparison of licensing division revenue after adjusting for
these changes is made in the previous section of Management's Discussion and
Analysis.
Gross profit as a percentage of net revenue decreased to 46.2% in the first
nine months of fiscal 2000 from 46.5% in the first nine months of fiscal 1999.
This decrease is mainly due to reduced wholesale margins caused by the
promotional environment of department stores, principally during the holiday
selling season. Wholesale gross margin declines were offset partially by
increased sales in the Retail division, which produce higher margins than the
Wholesale division.
Selling, general and administrative expenses, before the special charge,
increased to 28.5% of net revenue in the first nine months of fiscal 2000 from
27.9% of net revenue in the first nine months of fiscal 1999. The increase in
expenses to $428,550 in fiscal 2000 from $339,744 in fiscal 1999 is principally
due to increased volume related expenses to support the higher revenue as well
as increased depreciation and amortization. In addition, in the fiscal 2000
period, the Company incurred higher marketing and advertising costs to promote
the brand and incurred expenses related to the start up of the womens dress-up
and junior sportswear divisions. These expenses were also the primary reasons
for the increase as a percentage of net revenue.
The Company incurred interest expense, net of interest income, of $22,831 in
the first nine months of fiscal 2000 compared to $25,412 in the corresponding
period of last year. Interest expense in the current year includes interest on
the debt incurred in connection with the Acquisition for the full nine-month
period. The decrease from fiscal 1999 to fiscal 2000 is primarily due to
improved cash flow and, therefore, lower net borrowing levels of both the
Company and the Acquired Companies.
The provision for income taxes decreased to 28.2% of income before taxes in
the nine-month period ended December 31, 1999 from 29.6% 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, offset by the effects of the special charges which were
tax effected at a higher rate than the Company's weighted average tax rate in
the nine-month period ended December 31, 1998.
14
<PAGE>
Three Months Ended December 31
The following table sets forth the Condensed Consolidated Statements of
Operations data for the three months ended December 31, as a percentage of net
revenue.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net revenue......................................... 100.0% 100.0%
Cost of goods sold.................................. 56.4 53.6
---------- ----------
Gross profit........................................ 43.6 46.4
Depreciation and amortization....................... 4.8 4.6
Other SG&A expenses................................. 22.0 21.9
---------- ----------
Total SG&A expenses................................. 26.8 26.5
---------- ----------
Income from operations.............................. 16.8 19.9
Interest expense, net............................... 1.3 2.1
---------- ----------
Income before taxes................................. 15.5 17.8
Provision for income taxes.......................... 4.2 5.3
---------- ----------
Net income.......................................... 11.3 12.5
========== ==========
</TABLE>
Three months ended December 31, 1999 compared to three months ended
December 31, 1998
Net revenue increased to $521,204 in the third quarter of fiscal 2000 from
$463,233 in the corresponding quarter of fiscal 1999, an improvement of 12.5%.
This increase is due to increases in each of the Company's operating divisions
as outlined below.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------------------
%
1999 1998 Increase
-------------- ---------------- ----------
<S> <C> <C> <C>
Wholesale..................... $407,715 $375,475 8.6 %
Retail........................ 97,399 72,165 35.0 %
Licensing..................... 16,090 15,593 3.2 %
-------------- ---------------- ----------
Total......................... $521,204 $463,233 12.5 %
============== ================ ==========
</TABLE>
The Wholesale increase consists of increases in womenswear sales of 35.6% (to
$149,695 from $110,375) and childrenswear sales of 58.9% (to $80,816 from
$50,849) offset, in part, by a decrease in menswear sales of 17.3% (to $177,204
from $214,251). The improvements in womenswear and childrenswear are due to
volume increases which resulted primarily from increased sales to existing
customers. The increased sales to existing customers is principally due to the
expansion of the in-store shop and fixtured area program, whereby certain of the
Company's customers have increased the amount of square footage where the
Company's products are featured. The decrease in menswear sales is due to price
adjustments caused by the promotional environment of department stores where the
Company's products are sold. In addition, the Company sold less product through
off-price channels than in the prior year.
The improvement in the Company's Retail division is due to an increase in the
number of stores and an increase in sales at existing stores. At December 31,
1999, the Company operated 90 retail stores as compared to 82 stores at December
31, 1998. Retail stores opened since December 31, 1998 contributed $21,884 of
net revenue during the quarter ended December 31, 1999.
Revenue from the Licensing division, which consists of licensing royalties and
buying agency commissions, increased mainly due to products introduced under
licenses entered into since December 31, 1998.
15
<PAGE>
Gross profit as a percentage of net revenue decreased to 43.6% in the third
quarter of fiscal 2000 from 46.4% in the third quarter of fiscal 1999. This
decrease is mainly due to reduced wholesale margins caused by the promotional
department store environment mentioned above, offset partially by an improvement
due to the favorable mix generated by the increase in the Retail division, which
produces higher margins than the Wholesale division.
Selling, general and administrative expenses increased to 26.8% of net revenue
in the third quarter of fiscal 2000 from 26.5% of net revenue in the third
quarter of fiscal 1999. The increase in expenses to $139,558 in fiscal 2000
from $122,642 in fiscal 1999 is principally due to increased volume related
expenses to support the higher revenue as well as increased depreciation and
amortization. In addition, in the fiscal 2000 period, the Company incurred
higher marketing and advertising costs, to promote the brand and incurred
expenses related to the start up of the womens dress-up and junior sportswear
divisions.
The Company incurred interest expense, net of interest income, of $6,545 in
the third quarter of fiscal 2000 compared to $9,514 in the corresponding quarter
of last year. The decrease from fiscal 1999 to fiscal 2000 is primarily due to
improved cash flow and, therefore, lower net borrowing levels.
The provision for income taxes decreased to 27.0% of income before taxes in
the quarter ended December 31, 1999 from 30.1% 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 $241,950 at
March 31, 1999 to $399,257 at December 31, 1999. This represented an overall
increase of $157,307 due primarily to cash from operating activities partially
offset by cash used in investing activities. A detailed analysis of the changes
in cash and cash equivalents is presented in the Condensed Consolidated
Statements of Cash Flows.
Capital expenditures were $87,773 during the nine months ended December 31,
1999. Significant capital expenditures included additions related to the
Company's in-store shop and fixtured area expansion programs as well as
showrooms.
At December 31, 1999, accrued expenses and other current liabilities included
$68,325 of open letters of credit for inventory purchased. Additionally, at
December 31, 1999, TH USA was contingently liable for unexpired bank letters of
credit of $85,399 related to commitments of TH USA to suppliers for the purchase
of inventories.
On May 8, 1998, the Company acquired its womenswear, jeanswear and Canadian
licensees for an aggregate purchase price of $755,760 in cash and 18,091,860
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
Credit Facilities. The Notes were issued by 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 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
term loan bears interest at variable rates which, on a weighted average annual
basis, amounted to 6.50% and 5.89% as of and for the nine-month period ended,
December 31, 1999, respectively. 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, 1999.
The Credit Facilities replaced the Company's secured revolving credit agreement,
which had been in place since April 1, 1996.
Borrowings under the term loan facility 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.
16
<PAGE>
Under the 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. The Credit
Facilities also contain a number of other restrictive covenants that are more
fully explained in Note 5 to the Condensed Consolidated Financial Statements.
The Company was in compliance with all covenants in respect of the Notes and
the Credit Facilities as of December 31, 1999.
The Company attempts to mitigate the risks associated with adverse movements
in interest rates by establishing and maintaining a favorable balance of fixed
and floating rate debt and cash on hand. Management also believes that
significant flexibility remains available in the form of additional borrowing
capacity and the ability to prepay term debt, if so desired, in response to
changing conditions in the debt markets. Because such flexibility exists, the
Company does not normally enter into specific hedging transactions to further
mitigate interest rate risks, except in the case of specific, material borrowing
transactions such as those associated with the Acquisition. No interest rate
hedging contracts were in place as of December 31, 1999.
There were no significant committed capital expenditures at December 31, 1999.
The Company expects fiscal 2000 capital expenditures to approximate $130,000 to
$150,000. The Company intends to fund such cash requirements for fiscal 2000
and future years from available cash balances, internally generated funds and
available credit. The Company believes that these resources will be sufficient
to fund its cash requirements for such periods.
Subsequent Event
On February 2, 2000, the Company announced that it expects to incur special
charges in connection with the relocation of its existing Flagship stores in
Beverly Hills, CA and London, England and the postponement of the planned launch
of the women's dress-up division. These charges will consist primarily of the
write-down of fixed assets, estimated lease termination costs and employee
costs. The Company will record the charges, a large portion of which are
expected to be non-cash, in its fiscal quarter ending March 31, 2000. The
actual amount of the charges will be dependent upon facility appraisals,
contractual negotiations and further study. Preliminary estimates of the
charges range up to $65,000 on a pre-tax basis, or up to $0.50 per diluted
share.
Inflation
The Company does not believe that the relatively moderate rates of inflation
experienced over the last few years in the United States, where it primarily
competes, have had a significant effect on its net revenue or profitability.
Higher rates of inflation have been experienced in a number of foreign countries
in which the Company's products are manufactured but have not had a material
effect on the Company's net revenue or profitability. The Company has
historically been able to partially offset its cost increases by increasing
prices or changing suppliers.
Exchange Rates
The Company receives United States dollars for substantially all of its
product sales, other than those in Canada, and its licensing revenues.
Inventory purchases from contract manufacturers throughout the world, other than
those in Canada, are denominated in United States dollars; however, purchase
prices for the Company's products may be impacted by fluctuations in the
exchange rate between the United States dollar and the local currencies of the
contract manufacturers, which may have the effect of increasing the Company's
cost of goods in the future. During the last three fiscal years, exchange rate
fluctuations have not had a material impact on the Company's inventory costs;
however, due to the number of currencies involved and the fact that not all
foreign currencies react in the same manner against the United States dollar,
the Company cannot quantify in any meaningful way the potential effect of such
fluctuations on future income. The Company does not engage in hedging
activities with respect to such exchange rate risk.
The Company does, however, seek to protect against adverse movements in
foreign currency which might affect certain firm commitments or transactions.
These include the purchase of inventory, capital expenditures and the collection
of certain foreign receivables. The Company enters into forward contracts with
maturities of up to one year to sell or purchase foreign currency in order to
hedge against such risks. The Company does not use financial instruments for
speculative or trading purposes. No significant gain or loss was inherent in
such contracts at December 31, 1999.
17
<PAGE>
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" ("SFAS 133"). It is expected that SFAS 133 will be effective for
the Company beginning in fiscal 2002. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to the limited use of derivative
instruments, the nature of such instruments and the nature of the underlying
transactions being hedged, the adoption of SFAS 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 would require date code remediation and make
appropriate modifications to ensure a seamless transition to the year 2000. The
Company completed its internal date remediation program in the second quarter of
fiscal 2000 and the final testing phase of this program during the third quarter
within its original estimate of $500.
The Company also corresponded 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 facilitated coordination of Year 2000
conversions.
Activity since December 31, 1999 confirms that all systems, hardware, and
relationships with suppliers, customers, transportation carriers and general
service providers, continue to function without problems related to the year
2000.
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 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," "expect," "believe" 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, the overall level of consumer spending on apparel, the financial
strength of the retail industry generally and the Company's customers in
particular, changes in trends in the market segments in which the Company
competes, actions of existing or new competitors and changes in economic or
political conditions in the markets where the Company sells or sources its
products, as well as other risks and uncertainties set forth in the Company's
publicly-filed documents, including its Annual Report on Form 10-K for the
fiscal year ended March 31, 1999. 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the sections entitled "Liquidity and Capital Resources" and "Exchange
Rates" in Item 2 above, which sections are incorporated herein by reference.
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 on the island of 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,
brought in San Francisco Superior Court (the "State Action"), was filed by a
union and three public interest groups alleging unfair competition and false
advertising by the Company and others. It seeks equitable relief, restitution
and disgorgement of profits relating to the allegedly wrongful conduct, as well
as 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 "Federal Action"), was brought on behalf of an
alleged class consisting of the Saipanese factory workers. The defendants
include both companies selling goods purchased from factories located on the
island of Saipan and the factories themselves. 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 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 State Action and the Federal
Action has filed an action seeking class action status in the Federal Court in
Saipan. 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.
In the State Action, the demurrer of the defendants, including the Company,
challenging the legal sufficiency of the complaint was heard and denied by the
Court. The defendants have now moved for the Court to implement a case
management order. The Company has secured extensions from the plaintiffs to
answer the complaint in the State Court action and respond to discovery.
In the Federal Action, the Federal Court in Los Angeles transferred venue to
the District of Hawaii. The defendants, including the Company, filed a writ of
mandamus with the Ninth Circuit Court of Appeals challenging this order. The
writ of mandamus was denied by the Court of Appeals without comment. A case
scheduling conference will be held by the Court on February 15, 2000. The
motion to dismiss the Federal Action filed by the defendants, including the
Company, is fully briefed, but has not yet been decided by the Court.
Several defendants have entered into settlements with the plaintiffs in both
actions, but the settlements of the Federal Action have not yet been submitted
for approval to the Federal Court.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Stock Option Plans of the Company and its subsidiaries, as amended and
restated (previously filed as Exhibits 4.1 and 4.2 with Registration No.
333-96011 and incorporated herein by reference).
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, 1999.
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 11, 2000 By: /s/ Joel J. Horowitz
----------------- --------------------------
Joel J. Horowitz
Chief Executive Officer and President
Tommy Hilfiger Corporation
Date: February 11, 2000 By: /s/ Joseph Scirocco
----------------- --------------------------
Joseph Scirocco
Principal Accounting Officer
Tommy Hilfiger Corporation
20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10. Stock Option Plans of the Company and its subsidiaries, as amended and
restated (previously filed as Exhibit 4.1 and 4.2 with Registration No.
333-96011 and incorporated herein by reference).
11. Computation of Net Income Per Ordinary Share
27. Financial Data Schedule
21
<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,
------------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
FINANCIAL STATEMENT PRESENTATION
BASIC
<S> <C> <C> <C> <C>
Weighted average shares outstanding.... 94,606 91,614 94,791 93,888
======== ======== ======= =======
Net income............................. $173,877 $127,484 $59,117 $57,759
======== ======== ======= =======
Per share amount....................... $ 1.84 $ 1.39 $ 0.62 $ 0.62
======== ======== ======= =======
DILUTED
Weighted average shares outstanding... 94,606 91,614 94,791 93,888
Net effect of dilutive stock
options based on the
treasury stock method using
average market price.................. 1,238 976 502 668
-------- -------- ------- -------
Total................................. 95,844 92,590 95,293 94,556
======== ======== ======= =======
Net Income............................ $173,877 $127,484 $59,117 $57,759
======== ======== ======= =======
Per share amount...................... $ 1.81 $ 1.38 $ 0.62 $ 0.61
======== ======== ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TOMMY
HILFIGER CORPORATION CONDENSED CONSOLDIATED BALANCE SHEET AS OF DECEMBER 31,
1999 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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 399,257
<SECURITIES> 0
<RECEIVABLES> 113,374
<ALLOWANCES> 0
<INVENTORY> 238,499
<CURRENT-ASSETS> 839,312
<PP&E> 440,400
<DEPRECIATION> 157,901
<TOTAL-ASSETS> 2,373,353
<CURRENT-LIABILITIES> 279,970
<BONDS> 571,839
0
0
<COMMON> 948
<OTHER-SE> 1,278,365
<TOTAL-LIABILITY-AND-EQUITY> 2,373,353
<SALES> 0
<TOTAL-REVENUES> 1,501,930
<CGS> 0
<TOTAL-COSTS> 808,212
<OTHER-EXPENSES> 451,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 242,337
<INCOME-TAX> 68,460
<INCOME-CONTINUING> 173,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,877
<EPS-BASIC> 1.84
<EPS-DILUTED> 1.81
</TABLE>
