<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 August 1, 2000:
92,222,038
<PAGE>
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
June 30, 2000
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
Item 1 Financial Statements
<S> <C>
Condensed Consolidated Statements of Operations for the three months ended June 30,
2000 and 1999........................................................................... 3
Condensed Consolidated Balance Sheets as of June 30, 2000 and March 31, 2000................. 4
Condensed Consolidated Statements of Cash Flows for the three months ended June 30,
2000 and 1999........................................................................... 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months
ended June 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........ 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk................................... 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings........................................................................... 14
Item 6 Exhibits and Reports on Form 8-K............................................................ 14
Signatures.................................................................................................. 15
</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 Three Months Ended
June 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenue ............................................. $399,878 $419,103
Cost of goods sold ...................................... 240,099 221,606
-------- --------
Gross profit ............................................ 159,779 197,497
-------- --------
Depreciation and amortization ........................... 25,584 22,478
Other selling, general and administrative expenses ...... 114,921 112,789
-------- --------
Total operating expenses ................................ 140,505 135,267
-------- --------
Income from operations .................................. 19,274 62,230
Interest expense ........................................ 10,594 10,667
Interest income ......................................... 4,819 2,907
-------- --------
Income before income taxes .............................. 13,499 54,470
Provision for income taxes .............................. 3,763 15,741
-------- --------
Net income .............................................. $ 9,736 $ 38,729
======== ========
Earnings per share:
Basic earnings per share ................................ $ 0.10 $ 0.41
======== ========
Weighted average shares outstanding ..................... 93,351 94,360
======== ========
Diluted earnings per share .............................. $ 0.10 $ 0.40
======== ========
Weighted average shares and share equivalents outstanding 93,379 95,980
======== ========
</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) June 30, March 31,
2000 2000
----------- -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ................................................. $ 264,863 $ 309,397
Accounts receivable ....................................................... 135,939 221,110
Inventories ............................................................... 276,882 218,793
Other current assets ...................................................... 108,145 103,707
----------- -----------
Total current assets ..................................................... 785,829 853,007
Property and equipment, at cost, less accumulated
depreciation and amortization ............................................. 281,295 282,743
Intangible assets, net of accumulated amortization ......................... 1,232,288 1,240,945
Other assets ............................................................... 4,218 4,826
----------- -----------
Total Assets ............................................................. $ 2,303,630 $ 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 .......................................................... 18,565 31,289
Accrued expenses and other current liabilities ............................ 191,207 233,430
----------- -----------
Total current liabilities ................................................ 259,772 315,242
Long-term debt ............................................................. 566,901 579,370
Deferred tax liability ..................................................... 204,337 205,910
Other liabilities .......................................................... 4,708 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 94,830,638 and 94,830,638 shares, respectively ................... 948 948
Capital in excess of par value ............................................ 584,920 584,920
Retained earnings ......................................................... 701,006 691,270
Accumulated other comprehensive income .................................... 1,031 576
Treasury shares, at cost: 2,533,600 and zero Ordinary Shares,
respectively.............................................................. (19,993) --
----------- -----------
Total shareholders' equity ............................................... 1,267,912 1,277,714
Commitments and contingencies
Total Liabilities and Shareholders' Equity................................ $ 2,303,630 $ 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>
For the Three Months Ended
June 30,
------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activitities
Net income .............................................................. $ 9,736 $ 38,729
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization .......................................... 25,816 22,748
Deferred taxes ......................................................... (1,573) (6,900)
Changes in operating assets and liabilities
Decrease (increase) in assets
Accounts receivable .................................................. 85,171 42,407
Inventories .......................................................... (58,089)
Other assets ......................................................... (3,192) (1,100)
Decrease in liabilities
Accounts payable ..................................................... (12,724) (12,971)
Accrued expenses and other liabilities ............................... (40,028) (6,292)
--------- ---------
Net cash provided by operating activities .............................. 5,117 32,130
--------- ---------
Cash flows from investing activities
Purchases of property and equipment ..................................... (16,635) (33,065)
--------- ---------
Net cash used in investing activities .................................. (16,635) (33,065)
--------- ---------
Cash flows from financing activities
Payments on long-term debt .............................................. (12,500) (10,000)
Proceeds from the exercise of employee stock options .................... -- 4,732
Purchase of treasury shares ............................................. (19,993) --
Short-term bank borrowings (repayments) ................................. (523) (451)
--------- ---------
Net cash used in financing activities .................................. (33,016) (5,719)
--------- ---------
Net decrease in cash ................................................... (44,534) (6,654)
Cash and cash equivalents, beginning of period .......................... 309,397 241,950
--------- ---------
Cash and cash equivalents, end of period ................................ $ 264,863 $ 235,296
========= =========
</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 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 ........................ -- -- 9,736 -- -- 9,736
Foreign currency translation ...... -- -- -- 455 -- 455
Treasury shares ................... -- -- -- -- (19,993) (19,993)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 (Unaudited) $ 948 $ 584,920 $ 701,006 $ 1,031 $ (19,993) $ 1,267,912
=========== =========== =========== =========== =========== ===========
</TABLE>
Comprehensive income consists of net income and foreign currency
translation and totaled $173,349 for the fiscal year ended March 31, 2000 and
$10,191 for the three months ended June 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, except per share amounts)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Tommy Hilfiger Corporation ("THC" or the "Company"; unless the
context indicates otherwise, all references to the "Company" include THC and its
subsidiaries) in a manner consistent with that used in the preparation of the
consolidated financial statements included in the Company's Annual Report as
filed with the Securities and Exchange Commission on Form 10-K (the "Form
10-K"). Certain items contained in these statements are based on estimates. In
the opinion of management, the accompanying financial statements reflect all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair presentation of the financial position and results of operations and cash
flows for the periods presented. All significant intercompany accounts and
transactions have been eliminated.
Operating results for the three-month period ended June 30, 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 three-month periods ended June
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 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, of
which $147,500 remained outstanding as of June 30, 2000. The revolving credit
facility is available for letters of credit, working capital and other general
corporate purposes. As of June 30, 2000, $166,116 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 6.98% and 6.85% as of,
and for the period ended, June 30, 2000, respectively, and 5.53% and 5.69% as
of, and for the period ended, June 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 period ended June 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 June 30, 2000
and March 31, 2000 and for the three months ended June 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.
June 30, 2000 March 31, 2000
------------- --------------
Current assets ................ $ 551,993 $ 611,967
Noncurrent assets ............. 1,491,652 1,501,533
Current liability due to THC .. 27,979 7,843
Other current liabilities ..... 202,766 269,593
Noncurrent liability due to THC 797,633 798,472
Other noncurrent liabilities .. 789,207 801,827
Three Months Ended June 30,
---------------------------
2000 1999
---- ----
Net revenue ..... $396,897 $416,070
Gross profit .... 150,348 189,484
Net income (loss) (10,165) 10,805
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 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. 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:
Wholesale Retail Licensing Total
--------- ------ --------- -----
Quarter Ended June 30, 2000
Total segment revenue ....... $318,103 $ 67,786 $ 30,100 $415,989
Segment profits ............. 21,164 13,438 16,885 51,487
Depreciation and amortization
included in segment profits . 12,493 1,827 251 14,571
Quarter Ended June 30, 1999
Total segment revenue ....... $353,582 $ 52,123 $ 28,105 $433,810
Segment profits ............. 68,589 11,988 15,146 95,723
Depreciation and amortization
included in segment profits . 10,020 2,107 285 12,412
8
<PAGE>
A reconciliation of total segment revenue to consolidated net revenue is as
follows:
Quarter Ended June 30,
----------------------
2000 1999
--------- ---------
Total segment revenue .. $ 415,989 $ 433,810
Intercompany revenue ... (16,111) (14,707)
--------- ---------
Consolidated net revenue $ 399,878 $ 419,103
========= =========
Intercompany revenue represents buying agency commissions from consolidated
subsidiaries.
A reconciliation of total segment profits to consolidated income before
income taxes is as follows:
Quarter Ended June 30,
----------------------
2000 1999
------- -------
Segment profits ....................... $51,487 $95,723
Corporate expenses not allocated ...... 32,213 33,493
Interest expense, net ................. 5,775 7,760
------- -------
Consolidated income before income taxes $13,499 $54,470
======= =======
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 June 30, 2000, the
balance in the accrued special charge liability of $7,314 consists of $900 for
severance, $1,520 for adverse inventory commitments and $4,894 for operating
leases and other expenses.
Of approximately $14,000 in expected cash charges included in the fiscal
2000 special charges, approximately $7,300 was paid through June 30, 2000. The
remaining cash charges are expected to be substantially paid by the end of
fiscal year 2001.
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 June 30, 2000,
the Company has repurchased 2,533,600 shares at an aggregate cost of $19,993.
9
<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.
Three Months Ended June 30,
---------------------------
2000 1999
---- ----
Net revenue ................. 100.0% 100.0%
Cost of goods sold .......... 60.0 52.9
----- -----
Gross profit ................ 40.0 47.1
Depreciation and amortization 6.4 5.4
Other SG&A expenses ......... 28.8 26.9
----- -----
Total operating expenses .... 35.2 32.3
----- -----
Income from operations ...... 4.8 14.8
Interest expense, net ....... 1.4 1.8
----- -----
Income before taxes ......... 3.4 13.0
Provision for income taxes .. 1.0 3.8
----- -----
Net income .................. 2.4 9.2
===== =====
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net revenue decreased 4.6% to $399,878 in the first quarter of fiscal 2001
from $419,103 in the corresponding quarter of 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.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
% Increase
2000 1999 /(Decrease)
------------ --------------- -------------
<S> <C> <C> <C>
Wholesale . . . . . . . . . . . . . . $318,103 $ 353,582 (10.0)%
Retail. . . . . . . . . . . . . . . . . 67,786 52,123 30.1 %
Licensing. . . . . . . . . . . . . . . .13,989 13,398 4.4 %
------------ --------------- -------------
Total . . . . . . . . . . . . . . . . $399,878 $ 419,103 (4.6)%
============ =============== =============
</TABLE>
Within the Wholesale division, decreases in menswear sales of 17.1% (to
$154,017 from $185,856) and womenswear sales of 19.6% (to $92,598 from $115,192)
were partially offset by an increase in childrenswear sales of 36.1% (to $71,488
from $52,534). The decreases in menswear and womenswear sales were due to price
adjustments caused by an oversupply of product and the promotional environment
of department stores where the Company's products are sold. 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.
10
<PAGE>
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 June 30, 2000, the Company operated 96 retail stores as compared to 80 stores
at June 30, 1999. Retail stores opened since June 30, 1999 contributed $17,042
of net revenue during the quarter ended June 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 $166 was due to products introduced under licenses entered into
since June 30, 1999.
Gross profit as a percentage of net revenue decreased to 40.0% in the first
quarter of fiscal 2001 from 47.1% in the first quarter of fiscal 2000. The
decrease was mainly due to reduced wholesale margins in the menswear and
womenswear components caused by the price adjustments 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 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 $140,505, or 35.2%, of net revenue in the
first quarter of fiscal 2001 from $135,267, or 32.3%, of net revenue in the
first quarter of fiscal 2000. The increase in expenses is principally due to
increased depreciation and amortization and increased volume-related expenses in
the Retail division.
Interest expense, net of interest income, decreased to $5,775 in the first
quarter of fiscal year 2001 from $7,760 in the corresponding quarter of 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 27.9% of income before taxes in
the quarter ended June 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 $264,863 at June 30, 2000. This represented an overall
decrease of $44,534 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 $16,635 during the three months ended June 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 June 30, 2000, accrued expenses and other current liabilities included
$52,863 of open letters of credit for inventory purchased. Additionally, at June
30, 2000, TH USA was contingently liable for unexpired bank letters of credit of
$113,253 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 June 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
11
<PAGE>
which, on a weighted average annual basis, amounted to 6.98% and 6.85% as of,
and for the period ended, June 30, 2000, respectively and 5.53% and 5.69% as of,
and for the period ended, June 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.
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 period ended, June 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 June 30, 2000.
There were no significant committed capital expenditures at June 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 June 30, 2000, the Company has
repurchased 2,533,600 shares at an aggregate cost of $19,993.
The Company will 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 $7,300 was paid through June 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 June 30,
2000, the Company had contracts to exchange foreign currencies, principally the
Canadian dollar, the Japanese yen the Euro, having a notional amount of $17,851.
No significant gain or loss was inherent in such contracts at June 30, 2000.
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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 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, 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.
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.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
Saipan Litigation. On January 13, 1999, two actions were filed against
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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 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 June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
Tommy Hilfiger Corporation
Date: August 9, 2000 By: /s/ Joel J. Horowitz
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Joel J. Horowitz
Chief Executive Officer and President
Tommy Hilfiger Corporation
Date: August 9, 2000 By: /s/ Joseph Scirocco
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Joseph Scirocco
Principal Accounting Officer
Tommy Hilfiger Corporation
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EXHIBIT INDEX
Exhibit
Number Description
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11. Computation of Net Income Per Ordinary Share
27. Financial Data Schedule
16
