<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 September 30, 2000
------------------
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 November 1,
2000: 90,763,038
<PAGE>
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
September 30, 2000
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three and six months ended September
30, 2000 and 1999................................................................................... 3
Condensed Consolidated Balance Sheets as of September 30, 2000 and March 31, 2000................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2000
and 1999............................................................................................ 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months
ended September 30, 2000 and the year ended March 31, 2000.......................................... 6
Notes to Condensed Consolidated Financial Statements................................................ 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......................................... 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.................................................................................... 16
Item 4 Submission of Matters to a Vote of Security Holders.................................................. 16
Item 6 Exhibits and Reports on Form 8-K..................................................................... 17
Signatures.......................................................................................................... 18
</TABLE>
2
<PAGE>
PART I
ITEM 1 - FINANCIAL STATEMENTS
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited) For the Six Months Ended For the Three Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
-------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenue................................................... $ 933,179 $ 980,726 $ 533,301 $ 561,623
Cost of goods sold............................................ 549,459 514,042 309,360 292,436
-------------- ---------- ------------ -----------
Gross profit.................................................. 383,720 466,684 223,941 269,187
-------------- ---------- ------------ -----------
Depreciation and amortization................................. 51,172 46,536 25,588 24,058
Other selling, general and administrative expenses............ 245,299 242,456 130,378 129,667
-------------- ---------- ------------ -----------
Total operating expenses...................................... 296,471 288,992 155,966 153,725
-------------- ---------- ------------ -----------
Income from operations........................................ 87,249 177,692 67,975 115,462
Interest expense.............................................. 21,186 21,260 10,592 10,593
Interest income............................................... 8,711 4,974 3,892 2,067
-------------- ---------- ------------ -----------
Income before income taxes.................................... 74,774 161,406 61,275 106,936
Provision for income taxes.................................... 20,114 46,646 16,351 30,905
-------------- ---------- ------------ -----------
Net income.................................................... $ 54,660 $ 114,760 $ 44,924 $ 76,031
============== ========== ============ ===========
Earnings per share:
Basic earnings per share...................................... $ 0.59 $ 1.21 $ 0.49 $ 0.80
============== ========== ============ ===========
Weighted average shares outstanding........................... 92,577 94,514 91,802 94,667
============== ========== ============ ===========
Diluted earnings per share.................................... $ 0.59 $ 1.19 $ 0.49 $ 0.79
============== ========== ============ ===========
Weighted average shares and share equivalents outstanding..... 92,681 96,120 91,982 96,259
============== ========== ============ ===========
</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) September 30, March 31,
2000 2000
------------- -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents...................................................... $ 254,020 $ 309,397
Accounts receivable............................................................ 221,193 221,110
Inventories.................................................................... 278,432 218,793
Other current assets........................................................... 102,744 103,707
------------ -----------
Total current assets........................................................ 856,389 853,007
Property and equipment, at cost, less accumulated
depreciation and amortization................................................... 275,411 282,743
Intangible assets, net of accumulated amortization............................... 1,223,672 1,240,945
Other assets..................................................................... 4,278 4,826
------------ -----------
Total Assets................................................................ $ 2,359,750 $ 2,381,521
============ ===========
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings.......................................................... $ - $ 523
Current portion of long-term debt.............................................. 50,000 50,000
Accounts payable............................................................... 41,358 31,289
Accrued expenses and other current liabilities................................. 211,652 233,430
------------ -----------
Total current liabilities................................................... 303,010 315,242
Long-term debt................................................................... 554,433 579,370
Deferred tax liability........................................................... 202,764 205,910
Other liabilities................................................................ 3,336 3,285
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 94,831,638 and 94,830,638 shares, respectively........................ 948 948
Capital in excess of par value................................................. 584,931 584,920
Retained earnings.............................................................. 745,930 691,270
Accumulated other comprehensive income......................................... (551) 576
Treasury shares, at cost: 4,068,600 and zero Ordinary Shares, respectively..... (35,051) -
------------ -----------
Total shareholders' equity.................................................. 1,296,207 1,277,714
------------ -----------
Commitments and contingencies
Total Liabilities and Shareholders' Equity.................................. $ 2,359,750 $ 2,381,521
============ ===========
</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 Six Months Ended
September 30,
----------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activitities
Net income................................................................ $ 54,660 $ 114,760
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization............................................ 51,637 47,217
Deferred taxes........................................................... (3,146) (8,900)
Changes in operating assets and liabilities
Decrease (increase) in assets
Accounts receivable................................................... (83) (13,633)
Inventories........................................................... (59,639) (41,556)
Other assets.......................................................... 537 (13,450)
Increase (decrease) in liabilities
Accounts payable...................................................... 10,069 (18,660)
Accrued expenses and other liabilities................................ (19,521) 36,490
------------------- ------------------
Net cash provided by operating activities................................ 34,514 102,268
------------------- ------------------
Cash flows from investing activities
Purchases of property and equipment....................................... (29,328) (59,014)
------------------- ------------------
Net cash used in investing activities.................................... (29,328) (59,014)
------------------- ------------------
Cash flows from financing activities
Payments on long-term debt................................................ (25,000) (20,000)
Proceeds from the exercise of employee stock options...................... 11 8,009
Purchase of treasury shares............................................... (35,051) -
Short-term bank borrowings (repayments)................................... (523) (1,234)
------------------- ------------------
Net cash used in financing activities.................................... (60,563) (13,225)
------------------- ------------------
Net increase (decrease) in cash.......................................... (55,377) 30,029
Cash and cash equivalents, beginning of period............................. 309,397 241,950
------------------- ------------------
Cash and cash equivalents, end of period................................... $ 254,020 $ 271,979
=================== ==================
</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>
(Unaudited) Capital in Accumulated
excess other Total
Ordinary of par Retained comprehensive Treasury shareholders'
shares value earnings income (loss) shares equity
-------- ---------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1999..................... $ 943 $ 572,809 $ 518,912 $ (415) $ - $ 1,092,249
Net income................................. - - 172,358 - - 172,358
Foreign currency translation............... - - - 991 - 991
Exercise of employee stock options......... 5 8,928 - - - 8,933
Tax benefits from exercise of stock
options................................... - 3,183 - - - 3,183
-------- ---------- ---------- ------------- ----------- ------------
Balance, March 31, 2000..................... 948 584,920 691,270 576 - 1,277,714
Net income................................. - - 54,660 - - 54,660
Foreign currency translation............... - - - (1,127) - (1,127)
Exercise of employee stock options - 11 - - - 11
Treasury shares............................ - - - - (35,051) (35,051)
-------- ---------- ---------- ------------- ----------- ------------
Balance, September 30, 2000 (Unaudited)..... $ 948 $ 584,931 $ 745,930 $ (551) $ (35,051) $ 1,296,207
======== ========== ========== ============= =========== ============
</TABLE>
Comprehensive income consists of net income and foreign currency
translation and totaled $173,349 for the fiscal year ended March 31, 2000 and
$53,533 for the six months ended September 30, 2000.
See Accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
TOMMY HILFIGER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
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 six-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2001. 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 six-month and the three-month
periods ended September 30, 2000 and 1999 are unaudited. The Condensed
Consolidated Balance Sheet as of March 31, 2000, as presented, has been prepared
from the Consolidated Balance Sheet as of March 31, 2000 included in the
Company's Form 10-K.
Certain prior year balances have been reclassified to conform to current
year presentation.
Note 2 - Credit Facilities
The debt financing portion of the purchase price for the Company's fiscal
1999 acquisition of its womenswear, jeanswear and Canadian licensees (the
"Acquisition") 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 $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, of
which $135,000 remained outstanding as of September 30, 2000. The revolving
credit facility is available for letters of credit, working capital and other
general corporate purposes. As of September 30, 2000, $126,625 of the available
borrowings had been used to open letters of credit and $20,000 had been borrowed
and remained outstanding. The Credit Facilities bear interest at variable rates
which, on a weighted average annual basis, amounted to 7.31% and 7.09% as of,
and for the six-month period ended, September 30, 2000, respectively, and 5.83 %
and 5.72 % as of, and for the six-month period ended, September 30, 1999,
respectively.
Borrowings under the term loan facility are repayable in quarterly
installments in the following annual aggregate amounts: $50,000 in each of
fiscal 2001 and 2002; and $60,000 in fiscal 2003.
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, and for the twelve-month period ended,
September 30, 2000.
7
<PAGE>
Note 3 - Summarized Financial Information
The following presents summarized financial information of TH USA, a wholly
owned subsidiary of THC, and its consolidated subsidiaries, as of September 30,
2000 and March 31, 2000 and for each of the six-month and the three-month
periods ended September 30, 2000 and 1999. 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>
September 30, 2000 March 31, 2000
-------------------- ---------------------------
<S> <C> <C>
Current assets..................... $ 675,055 $ 611,967
Noncurrent assets.................. 1,477,569 1,501,533
Current liability due to THC....... 47,848 7,843
Other current liabilities.......... 243,736 269,593
Noncurrent liability due to THC.... 797,964 798,472
Other noncurrent liabilities....... 773,794 801,827
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended September 30, Three Months Ended September 30,
------------------------------ --------------------------------
2000 1999 2000 1999
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net revenue........................ $ 926,855 $ 974,962 $ 529,958 $ 558,892
Gross profit....................... 362,131 447,773 211,783 258,289
Net income......................... 4,657 69,404 14,822 58,599
</TABLE>
Note 4 - 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
Company's 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 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>
Six Months Ended September 30, 2000
-----------------------------------
Total segment revenue.............................. $ 736,682 $ 165,145 $ 62,687 $ 964,514
Segment profits.................................... 78,305 35,833 36,988 151,126
Depreciation and amortization
included in segment profits....................... 25,046 3,633 502 29,181
Six Months Ended September 30, 1999
-----------------------------------
Total segment revenue.............................. $ 817,896 $ 133,150 $ 60,594 $ 1,011,640
Segment profits.................................... 167,737 33,411 41,487 242,635
Depreciation and amortization
included in segment profits....................... 21,245 4,444 582 26,271
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Wholesale Retail Licensing Total
--------- ------ --------- -----
<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000
-------------------------------------
Total segment revenue................. $ 418,579 $ 97,359 $ 32,587 $ 548,525
Segment profits....................... 57,142 22,395 20,103 99,640
Depreciation and amortization
included in segment profits.......... 12,552 1,806 251 14,609
Three Months Ended September 30, 1999
-------------------------------------
Total segment revenue................. $ 464,315 $ 81,027 $ 32,490 $ 577,832
Segment profits....................... 99,148 21,423 26,341 146,912
Depreciation and amortization
included in segment profits.......... 11,225 2,337 297 13,859
</TABLE>
For the six months and three months ended September 30, 1999, Licensing
segment profits include $6,400 from a settlement of a trademark infringement
lawsuit with Wal-Mart Stores, Inc.
A reconciliation of total segment revenue to consolidated net revenue is as
follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total segment revenue...................... $ 964,514 $ 1,011,640 $ 548,525 $ 577,832
Intercompany revenue....................... (31,335) (30,914) (15,224) (16,209)
----------- ----------- ----------- ----------
Consolidated net revenue................... $ 933,179 $ 980,726 $ 533,301 $ 561,623
=========== =========== =========== ==========
</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>
Six Months Ended Three Months Ended
September 30, September 30,
--------------------------- ------------------------
2000 1999 2000 1999
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Segment profits................................. $ 151,126 $ 242,635 $ 99,640 $ 146,912
Corporate expenses not allocated................ 63,877 64,943 31,665 31,450
Interest expense, net........................... 12,475 16,286 6,700 8,526
--------- ---------- --------- ----------
Consolidated income before income taxes......... $ 74,774 $ 161,406 $ 61,275 $ 106,936
========= ========== ========= ==========
</TABLE>
The Company does not disaggregate assets on a segment basis for internal
management reporting and, therefore, such information is not presented.
Note 5 - Special Charges
During the quarter ended March 31, 2000, the Company recorded a special charge
of $62,153, before income taxes, principally related to the following: a re-
direction of the Company's full-price retail store program, which includes the
closure of its flagship stores in Beverly Hills, California and London, England;
the postponement of the launch of a new women's dress-up division; and the
consolidation of the junior sportswear and junior jeans divisions. This charge
consisted of provisions of $44,857 for the write-off of fixed assets and
operating leases of the Company's flagship stores and the write-off of fixed
assets related to the dress-up and junior sportswear divisions, $11,700 for
inventory of the junior sportswear division and, to a lesser extent, the
flagship stores, and $5,596 for severance and other costs. Inventory provisions
were included in cost of sales in fiscal year 2000. As of September 30, 2000,
the balance in the accrued special charge liability of $5,140 consists primarily
of operating leases.
Of approximately $14,000 in expected cash charges included in the fiscal 2000
special charges, approximately $9,500 was paid through September 30, 2000. The
remaining cash charges are expected to be substantially paid by the end of
fiscal year 2001.
9
<PAGE>
Note 6 - Share Repurchase Program
On April 7, 2000 the Company announced that its Board of Directors
authorized the repurchase of up to $150,000 of its outstanding shares over a
period of up to 18 months using available cash.
Since the inception of the share repurchase program through September 30,
2000, the Company has repurchased 4,068,600 shares at an aggregate cost of
$35,051.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(dollar amounts in thousands)
General
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related notes thereto
which are included herein.
Results of Operations
The following table sets forth the Condensed Consolidated Statements of
Operations data as a percentage of net revenue.
<TABLE>
<CAPTION>
Six Months Ended September 30, Three Months ended September 30,
----------------------------- --------------------------------
2000 1999 2000 1999
------- ------ --------- -------
<S> <C> <C> <C> <C>
Net revenue..................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 58.9 52.4 58.0 52.1
----- ----- ----- -----
Gross profit.................................... 41.1 47.6 42.0 47.9
Depreciation and amortization................... 5.5 4.8 4.8 4.2
Other SG&A expenses............................. 26.3 24.7 24.4 23.1
----- ----- ----- -----
Total operating expenses........................ 31.8 29.5 29.2 27.3
----- ----- ----- -----
Income from operations.......................... 9.3 18.1 12.8 20.6
Interest expense, net........................... 1.3 1.6 1.3 1.6
----- ----- ----- -----
Income before taxes............................. 8.0 16.5 11.5 19.0
Provision for income taxes...................... 2.1 4.8 3.1 5.5
----- ----- ----- -----
Net income...................................... 5.9 11.7 8.4 13.5
===== ===== ===== =====
</TABLE>
Six Months Ended September 30, 2000 Compared to Six Months Ended September 30,
1999
Net revenue decreased 4.8% to $933,179 in the six months ended September 30,
2000 from $980,726 in the corresponding period in fiscal 2000. This decrease is
due to a decrease in the Company's Wholesale division offset, in part, by
increases in the Retail and Licensing divisions, as outlined below.
Six Months Ended September 30,
------------------------------
% Increase
2000 1999 /(Decrease)
----------- ---------- ----------
Wholesale........................ $ 736,682 $ 817,896 (9.9)%
Retail........................... 165,145 133,150 24.0 %
Licensing........................ 31,352 29,680 5.6 %
----------- ---------- ----------
Total............................ $ 933,179 $ 980,726 (4.8)%
=========== ========== ==========
Within the Wholesale division, decreases in menswear sales of 12.7% (to
$348,946 from $399,865) and womenswear sales of 19.3% (to $220,651 from
$273,267) were partially offset by an increase in childrenswear sales of 15.4%
(to $167,085 from $144,764). The decreases in menswear and womenswear sales were
due to price reductions caused by an oversupply of product and the promotional
environment of department stores where the Company's products are sold offset,
in part, by the liquidation of substantially higher levels of prior seasons
goods. The improvement in childrenswear sales was due to volume increases which
resulted primarily from increased sales to existing customers. The increased
sales to existing customers was 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.
11
<PAGE>
The improvement in the Company's Retail division was due to an increase in the
number of stores and certain larger store formats offset, in part, by a decrease
in sales at existing stores. At September 30, 2000, the Company operated 95
retail stores as compared to 83 stores at September 30, 1999. Retail stores
opened since September 30, 1999 contributed $32,811 of net revenue during the
six months ended September 30, 2000.
Revenue from the Licensing division, which consists of third-party licensing
royalties and buying agency commissions, increased due to a general increase in
sales of existing licensed products and an increase in the incremental revenue
associated with newly licensed products. Of the increase, approximately $273 was
due to products introduced under licenses entered into since September 30, 1999.
Gross profit as a percentage of net revenue decreased to 41.1% in the first
six months of fiscal 2001 from 47.6% in the same period in fiscal 2000. The
decrease was mainly due to reduced wholesale margins in the menswear and
womenswear components caused by the price reductions and liquidation of prior
season goods referred to above. Wholesale gross margin declines were partially
offset by increased sales in the Retail and Licensing divisions, each of which
produce higher margins than those in the Wholesale division.
The Company anticipates that the promotional environment of department stores
will continue to prevail during the balance of fiscal 2001 and therefore expects
a significant decline in revenue from fiscal 2000 levels in its menswear and
womenswear components until supply and demand are brought more closely into
balance. The Company also anticipates that continued pressure on its gross
margins in menswear and womenswear will result in a significant reduction in
consolidated net income in fiscal 2001 from the fiscal 2000 level.
Operating expenses increased to $296,471, or 31.8%, of net revenue in the
first six months of fiscal 2001 from $288,992, or 29.5%, of net revenue in the
corresponding period in fiscal 2000. The Company's fiscal 2000 operating
expenses benefited by $6,400 from a settlement of a trademark infringement
lawsuit with Wal-Mart Stores, Inc. The increase in expenses is principally due
to increased depreciation and amortization as well as expenses associated with
retail stores opened and expanded since last year.
Interest expense, net of interest income, decreased to $12,475 in the first
six months of fiscal year 2001 from $16,286 in the corresponding six-month
period last year. The decrease from 2000 to 2001 was primarily due to higher
cash balances and higher interest rates earned on those balances.
The provision for income taxes decreased to 26.9% of income before taxes in
the six-month period ended September 30, 2000 from 28.9% 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.
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Net revenue decreased 5.0% to $533,301 in the three months ended September 30,
2000 from $561,623 in the corresponding period in fiscal 2000. This decrease is
due to a decrease in the Company's Wholesale division offset, in part, by
increases in the Retail and Licensing divisions, as outlined below.
Three Months Ended September 30,
----------------------------------
%Increase
2000 1999 /(Decrease)
---------- ----------- ----------
Wholesale.................. $ 418,579 $ 464,315 (9.9)%
Retail..................... 97,359 81,027 20.2 %
Licensing.................. 17,363 16,281 6.6 %
---------- ----------- ----------
Total...................... $ 533,301 $ 561,623 (5.0)%
========== =========== ==========
Within the Wholesale division, decreases in menswear sales of 8.9% (to
$194,928 from $214,010) and womenswear sales of 19.0% (to $128,053 from
$158,074) were partially offset by an increase in childrenswear sales of 3.7%
(to $95,598 from $92,231). The decreases in menswear and womenswear sales were
due to price reductions caused by an oversupply of product and the promotional
environment of department stores where the Company's products are sold offset,
in part, by the liquidation of substantially higher levels of prior seasons
goods. The improvement in childrenswear sales was due to volume increases, which
resulted primarily from increased sales to existing customers. The increased
sales to existing customers was principally due to the expansion of the in-store
shop and fixtured area program, whereby certain of the Company's customers have
increased the amount of square footage where the Company's products are
featured.
The improvement in the Company's Retail division was due to an increase in the
number of stores offset, in part, by a decrease in sales at existing stores. At
September 30, 2000, the Company operated 95 retail stores as compared to 83
stores at September 30, 1999. Retail stores opened since September 30, 1999
contributed $22,106 of net revenue during the quarter ended September 30, 2000.
12
<PAGE>
Revenue from the Licensing division, which consists of third party
licensing royalties and buying agency commissions, increased due to a general
increase in sales of existing licensed products and an increase in the
incremental revenue associated with newly licensed products. Of the increase,
approximately $107 was due to products introduced under licenses entered into
since September 30, 1999.
Gross profit as a percentage of net revenue decreased to 42.0% in the
second quarter of fiscal 2001 from 47.9% in the second quarter of fiscal 2000.
The decrease was mainly due to reduced wholesale margins in the menswear and
womenswear components caused by the price reductions and liquidation of prior
season goods referred to above. Wholesale gross margin declines were partially
offset by increased sales in the Retail and Licensing divisions, each of which
produce higher margins than those in the Wholesale division.
The Company anticipates that the promotional environment of department
stores will continue to prevail during the balance of fiscal 2001 and therefore
expects a significant decline in revenue from fiscal 2000 levels in its menswear
and womenswear components until supply and demand are brought more closely into
balance. The Company also anticipates that continued pressure on its gross
margins in menswear and womenswear will result in a significant reduction in
consolidated net income in fiscal 2001 from the fiscal 2000 level.
Operating expenses increased to $155,966, or 29.2%, of net revenue in the
second quarter of fiscal 2001 from $153,725, or 27.3%, of net revenue in the
second quarter of fiscal 2000. The Company's fiscal 2000 operating expenses
benefited by $6,400 from a settlement of a trademark infringement lawsuit with
Wal-Mart Stores, Inc. This benefit was partially offset by increased
depreciation and amortization as well as expenses associated with retail stores
opened and expanded since last year.
Interest expense, net of interest income, decreased to $6,700 in the second
quarter of fiscal year 2001 from $8,526 in the corresponding quarter last year.
The decrease from 2000 to 2001 was primarily due to higher interest rates earned
on invested cash balances.
The provision for income taxes decreased to 26.7% of income before taxes in
the quarter ended September 30, 2000 from 28.9% 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
Cash provided by operations continues to be the Company's primary source of
funds to finance operating needs, capital expenditures and debt service.
Capital expenditures primarily relate to the Company's in-store shop and
fixtured areas program and the construction of additional retail stores. The
Company's sources of liquidity are cash on hand, cash from operations and the
Company's available credit.
The Company's cash and cash equivalents balance decreased from $309,397 at
March 31, 2000 to $254,020 at September 30, 2000. This represented an overall
decrease of $55,377 due primarily to the excess of capital expenditures,
scheduled debt repayments and share repurchases over cash generated from
operations. A detailed analysis of the changes in cash and cash equivalents is
presented in the Condensed Consolidated Statements of Cash Flows.
Capital expenditures were $29,328 during the six months ended September 30,
2000. Capital expenditures were made principally in support of the Company's
retail outlet store openings, as well as on facilities and selected in-store
shops and fixtured areas, principally in the childrenswear area.
At September 30, 2000, accrued expenses and other current liabilities
included $51,177 of open letters of credit for inventory purchased.
Additionally, at September 30, 2000, TH USA was contingently liable for
unexpired bank letters of credit of $75,448 related to commitments of TH USA to
suppliers for the purchase of inventories.
The Company issued debt in connection with the Acquisition in fiscal year
1999, consisting 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, of which $20,000 was outstanding at September 30,
2000, 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 is available for letters of credit, working capital and other general
corporate purposes. The Credit Facilities bear interest at variable rates
which, on a weighted average annual basis, amounted to 7.31% and 7.09% as of,
and for the six-month period ended, September 30, 2000, respectively and 5.83%
and 5.72% as of, and for the six-month period ended, September 30, 1999,
respectively.
13
<PAGE>
Borrowings under the term loan facility are repayable in quarterly
installments in the following annual aggregate amounts: $50,000 in each of
fiscal 2001 and 2002; and $60,000 in fiscal 2003.
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 2 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, and for the twelve-month period ended,
September 30, 2000.
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 September 30, 2000.
There were no significant committed capital expenditures at September 30,
2000. The Company expects fiscal 2001 capital expenditures to approximate
$80,000 to $90,000. Funds may also be required to conduct the Company's share
repurchase program, announced April 7, 2000, over a period of up to 18 months.
Since the inception of the share repurchase program through September 30, 2000,
the Company has repurchased 4,068,600 shares at an aggregate cost of $35,051.
The Company expects to incur approximately $14,000 of cash charges related
to the fiscal 2000 special charges (See Note 5 to the Condensed Consolidated
Financial Statements), of which approximately $9,500 was paid through September
30, 2000. The remaining cash charges are expected to be substantially paid by
the end of fiscal year 2001.
The Company intends to fund its cash requirements for fiscal 2001 and
future years from available cash balances, internally generated funds and
borrowings available under the Credit Facilities. The Company believes that
these resources will be sufficient to fund its cash requirements for such
periods.
Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced over the last few years in the United States, where it
primarily competes, have had a significant effect on its net revenue or
profitability. Higher rates of inflation have been experienced in a number of
foreign countries in which the Company's products are manufactured but have not
had a material effect on the Company's net revenue or profitability. The Company
has historically been able to partially offset its cost increases by increasing
prices or changing suppliers.
Exchange Rates
The Company receives United States dollars for substantially all of its
product sales, other than those in Canada, and its licensing revenues. Inventory
purchases from contract manufacturers throughout the world, other than those in
Canada, are denominated in United States dollars; however, purchase prices for
the Company's products may be impacted by fluctuations in the exchange rate
between the United States dollar and the local currencies of the contract
manufacturers, which may have the effect of increasing the Company's cost of
goods sold 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.
Gains or losses on such forward contracts are recognized at the time the
underlying hedge transaction is completed or recognized in earnings. At
September 30, 2000, the Company had contracts to exchange foreign currencies,
principally the Canadian dollar, the Japanese yen and the Euro, having a
notional amount of $20,083. No significant gain or loss was inherent in such
contracts at September 30, 2000.
14
<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"). This statement will become 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.
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, the level of demand for the Company's products,
actions by our major customers or 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, 2000. 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. The Company disclaims any intention or obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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.
15
<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 and subsequently transferred to the Federal Court in the
District of Hawaii (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.
The Company has entered into settlement agreements with the plaintiffs in
the Federal Action and in the State Action. As part of these agreements, the
Company specifically denies any wrongdoing or any liability with regard to the
claims made in the Federal Action and the State Action. The settlement agreement
provides for a monetary payment, in an amount that is not material to the
Company's financial position or results of operations, to a class of plaintiffs
in the Federal Action, as well as the creation of a monitoring program for
factories in Saipan. The settlement must be approved by the Federal Court, and a
class of plaintiffs certified. The Federal Action has been transferred to the
federal judge in Saipan. Plaintiffs are presently challenging the transfer
order. Once the matter has been transferred, the judge will schedule the hearing
on settlement approval and preliminary class certification.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 2000, the Company held its Annual Meeting of Shareholders at
the offices of PricewaterhouseCoopers, The Financial Services Centre, Bishop's
Court Hill, St. Michael, Barbados. There were a total of 91,152,038 Ordinary
Shares entitled to vote, in person or by proxy, at the meeting.
The following matters were voted upon and approved at the meeting:
(i) The election of three directors to the Board of Directors of the
Company for a term to expire at the 2003 Annual Meeting of Shareholders;
and
(ii) A proposal to ratify the selection of PricewaterhouseCoopers LLP as
the Company's auditors for the fiscal year ending March 31, 2001.
With respect to the election of the directors, the following votes were
cast:
Nominee For Withheld Authority
------- --- ------------------
Lawrence S. Stroll 69,504,813 1,597,182
Lester M. Y. Ma 69,521,515 1,580,480
Clinton V. Silver 69,881,100 1,220,895
With respect to the ratification of PricewaterhouseCoopers LLP as
auditors, a total of 70,601,959 votes were cast in favor of the proposal,
384,397 votes were cast against and 115,639 votes abstained.
16
<PAGE>
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 September 30, 2000.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
Tommy Hilfiger Corporation
Date: November 10, 2000 By: /s/ Joel J. Horowitz
----------------- ------------------------
Joel J. Horowitz
Chief Executive Officer and President
Tommy Hilfiger Corporation
Date: November 10, 2000 By: /s/ Joseph Scirocco
----------------- ------------------------
Joseph Scirocco
Principal Accounting Officer
Tommy Hilfiger Corporation
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
11. Computation of Net Income Per Ordinary Share
27. Financial Data Schedule
19
