SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JULY 31, 1998. OR
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION FROM ________ TO _____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 FIFTH AVE. NEW YORK, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
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 ____.
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock as of the latest practicable
date: Common Stock, $.01 par value, 35,077,231 shares outstanding at the close
of business on JULY 31, 1998.
<PAGE>
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 1998
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - July 31, 1998
(Unaudited), January 31, 1998 and
July 31, 1997 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and six months ended July 31, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows - for the
six months ended July 31, 1998 and 1997
(Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 5. Stockholder Proposals for 1999 Annual Meeting of 15-16
Stockholders to be Received No Later than
February 20, 1999 and No Earlier than
January 21, 1999 Unless Submitted for Inclusion
in Registrant's Proxy Statement.
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
July 31, January 31, July 31,
1998 1998 1997
----------- -------------- ------------
(Unaudited) (Unaudited)
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 53,326 $ 107,252 $ 61,538
Short-term investments -- -- 15,000
Accounts receivable, less allowances
of $7,622, $6,988 and $6,774 72,053 99,492 69,412
Inventories 430,886 386,431 372,787
Deferred income taxes 21,633 17,373 19,105
Prepaid expenses 32,681 20,539 31,437
----------- ----------- ----------
Total current assets 610,579 631,087 569,279
Property and equipment, net 173,100 156,367 134,996
Deferred income taxes 7,108 8,859 10,029
Other assets, net 39,107 30,754 30,419
----------- ----------- ----------
$ 829,894 $ 827,067 $ 744,723
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 93,622 $ 90,054 $ 68,489
Accounts payable and accrued liabilities 118,794 118,456 112,000
Income taxes payable 8,113 23,501 7,379
Merchandise and other customer credits 18,808 17,992 15,098
----------- ----------- ----------
Total current liabilities 239,337 250,003 202,966
Reserve for product return -- 2,580 5,622
Long-term debt 86,305 90,930 93,685
Postretirement/employment benefit obligations 20,811 20,121 19,656
Other long-term liabilities 24,603 19,709 17,235
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized
60,000 shares, outstanding 35,077, 34,930 and 35,027 351 349 350
Additional paid-in capital 182,094 168,085 164,581
Retained earnings 299,898 293,689 253,033
Accumulated other comprehensive loss -
Foreign currency translation adjustments (23,505) (18,399) (12,405)
----------- ----------- ----------
Total stockholders' equity 458,838 443,724 405,559
----------- ----------- ----------
$ 829,894 $ 827,067 $ 744,723
=========== =========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 3 -
<PAGE>
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
July 31, July 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $247,722 $217,149 $473,881 $416,848
Cost of sales 112,036 100,522 217,187 193,967
-------- -------- -------- --------
Gross profit 135,686 116,627 256,694 222,881
Selling, general and administrative expenses 110,289 97,018 210,484 186,230
Provision for uncollectible accounts 417 364 764 703
-------- -------- -------- --------
Earnings from operations 24,980 19,245 45,446 35,948
Other expenses, net 1,458 1,035 2,587 2,159
-------- -------- -------- --------
Earnings before income taxes 23,522 18,210 42,859 33,789
Provision for income taxes 9,997 7,830 18,214 14,529
-------- -------- -------- --------
Net earnings $ 13,525 $ 10,380 $ 24,645 $ 19,260
======== ======== ======== ========
Net earnings per share:
Basic $ 0.38 $ 0.30 $ 0.70 $ 0.55
======== ======== ======== ========
Diluted $ 0.37 $ 0.29 $ 0.68 $ 0.53
======== ======== ======== ========
Weighted average number of common shares:
Basic 35,169 34,990 35,171 34,856
Diluted 36,268 36,177 36,306 36,044
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
<PAGE>
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the
Six Months Ended
July 31,
------------------
1998 1997
---- ----
Cash Flows From Operating Activities:
<S> <C> <C>
Net earnings $ 24,645 $ 19,260
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 13,959 10,811
Provision for uncollectible accounts 764 703
Reduction in reserve for product return (2,580) (178)
Provision for inventories 2,780 4,902
Tax benefit from exercise of stock options 5,242 5,290
Deferred income taxes (2,977) (4,416)
Provision for postretirement/employment benefits 690 465
Changes in assets and liabilities:
Accounts receivable 22,906 9,704
Inventories (60,501) (42,742)
Prepaid expenses (12,510) (10,124)
Other assets, net (2,224) (324)
Accounts payable 3,249 5,840
Accrued liabilities (4) (2,383)
Income taxes payable (14,880) (18,420)
Merchandise and other customer credits 816 861
Other long-term liabilities 2,466 885
-------- --------
Net cash used in operating activities (18,159) (19,866)
-------- --------
Cash Flows From Investing Activities:
Purchase of short-term investments -- (15,000)
Capital expenditures (30,658) (16,301)
Acquisitions, net of liabilities assumed (8,150) --
Proceeds from lease incentives 1,150 831
-------- --------
Net cash used in investing activities (37,658) (30,470)
-------- --------
Cash Flows From Financing Activities:
Proceeds from (payments on) short-term borrowings 12,959 (8,552)
Repurchase of Common Stock (13,713) --
Proceeds from exercise of stock options 8,279 7,451
Cash dividends on Common Stock (5,634) (4,186)
-------- -------
Net cash provided by (used in) financing activities 1,891 (5,287)
-------- --------
Net decrease in cash and cash equivalents (53,926) (55,623)
Cash and cash equivalents at beginning of year 107,252 117,161
-------- --------
Cash and cash equivalents at end of six months $ 53,326 $ 61,538
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
<PAGE>
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The accompanying consolidated financial statements include the accounts
of Tiffany & Co. and all majority-owned domestic and foreign
subsidiaries (the "Company"). All material intercompany balances and
transactions have been eliminated. The interim statements are unaudited
and, in the opinion of management, include all adjustments (which
include only normal recurring adjustments including the adjustment
necessary as a result of the use of the LIFO(last-in, first-out) method
of inventory valuation, which is based on assumptions as to inflation
rates and projected fiscal year-end inventory levels) necessary to
present fairly the Company's financial position as of July 31, 1998 and
the results of operations and cash flows for the interim periods
presented. The consolidated balance sheet data for January 31, 1998 is
derived from the audited financial statements which are included in the
Company's report on Form 10-K, which should be read in connection with
these financial statements. In accordance with the rules of the
Securities and Exchange Commission, these financial statements do not
include all disclosures required by generally accepted accounting
principles.
Since the Company's business is seasonal, with a higher proportion of
sales and income generated in the last quarter of the fiscal year, the
results of operations for the three and six months ended July 31, 1998
and 1997 are not necessarily indicative of the results of the entire
fiscal year.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Supplemental cash flow information for the six months ended July 31, 1998
and 1997 is as follows:
July 31, July 31,
(in thousands) 1998 1997
- -------------- --------- --------
Cash paid during the six months for:
Interest $ 3,698 $ 3,643
========= ========
Income taxes $ 30,488 $ 33,439
========= ========
Details of businesses acquired in
purchase transactions were as follows:
Fair value of assets acquired $ 12,302 $ --
Less: Liabilities assumed 4,152 --
--------- --------
Net cash paid for acquisitions $ 8,150 $ --
========= ========
Supplemental Noncash Investing
and Financing Activities:
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 1,400 $ 1,800
========= ========
- 6 -
<PAGE>
3. INVENTORIES
-----------
Inventories at July 31, 1998, January 31, 1998 and July 31, 1997 are
summarized as follows:
July 31, January 31, July 31,
(in thousands) 1998 1998 1997
- -------------- --------- ----------- ---------
Finished goods $ 362,253 $ 327,314 $ 320,029
Raw materials 69,188 57,926 55,488
Work-in-process 3,131 2,918 1,761
---------- --------- ---------
434,572 388,158 377,278
Reserves (3,686) (1,727) (4,491)
---------- --------- ---------
$ 430,886 $ 386,431 $ 372,787
========== ========= =========
At July 31, 1998, January 31, 1998 and July 31, 1997, $341,282,000,
$292,353,000 and $283,597,000, respectively, of inventories were valued
using the LIFO method. The excess of current cost over the LIFO
inventory value was $16,870,000 at July 31, 1998, $15,870,000 at
January 31, 1998 and $16,670,000 at July 31, 1997. The LIFO valuation
method had the effect of decreasing net earnings by $0.01 per diluted
share in both of the three month periods ended July 31, 1998 and 1997
and by $0.02 and $0.03 per diluted share in the six month periods
ended July 31, 1998 and 1997.
4. DEBT
----
During the quarter ended April 30, 1998, the Company's $130,000,000
multicurrency revolving credit facility (the "Credit Facility") was
amended to increase the amount the Company is entitled to borrow to
$160,000,000 and to increase the number of participating banks from
four to five. The amended Credit Facility entitles the Company to
borrow up to $31,250,000 on a pro-rata basis from each of the three
existing banks, up to $30,000,000 from the new bank and up to
$36,250,000 from an agent bank at interest rates based on a prime rate
or a reserve-adjusted LIBOR.
5. FINANCIAL HEDGING INSTRUMENTS
-----------------------------
In accordance with the Company's foreign currency hedging program at
July 31, 1998 the Company had outstanding purchased put options
maturing at various dates through July 22, 1999, giving it the right,
but not the obligation, to sell yen 10,569,000,000 for dollars at
predetermined contract-exchange rates. The deferred unrealized gain on
the Company's purchased put options amounted to $6,429,000 at July 31,
1998. If the market yen-exchange rates at maturity are below the
contract rates, the Company will allow the options to expire.
To mitigate the exchange rate fluctuations primarily related to
intercompany inventory purchases for the Company's business in Japan,
the Company enters into forward exchange yen contracts. At July 31,
1998, the Company had $10,372,000 of such contracts outstanding, which
will mature on August 26, 1998. At July 31, 1997, the Company had
$8,376,000 of such contracts outstanding, which subsequently matured on
August 26, 1997.
- 7 -
<PAGE>
6. EARNINGS PER SHARE
------------------
Basic earnings per share are computed by dividing net earnings by the
weighted average number of shares outstanding during the period.
Diluted earnings per share are calculated to give effect to potentially
dilutive stock options that were outstanding during the period.
The following table summarizes the reconciliation of the numerators and
denominators, as required by SFAS No. 128, for the basic and diluted
EPS computations for the three and six months ended July 31, 1998 and
1997:
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
(in thousands) July 31, July 31,
- ------------- ------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Net earnings for basic and
<S> <C> <C> <C> <C>
diluted EPS $13,525 $10,380 $24,645 $19,260
======= ======= ======= =======
Weighted average shares
for basic EPS 35,169 34,990 35,171 34,856
Incremental shares from
assumed exercise of
stock options: 1,099 1,187 1,135 1,188
------- ------- ------- -------
Weighted average shares
for diluted EPS
36,268 36,177 36,306 36,044
======= ======= ======= =======
</TABLE>
7. COMPREHENSIVE EARNINGS
----------------------
Effective February 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires disclosure of
comprehensive earnings in interim periods and additional disclosures of
the components of comprehensive earnings on an annual basis.
Comprehensive earnings include all changes in equity during a period
except those resulting from investments by and distributions to
stockholders. Under SFAS No. 130, the Company's foreign currency
translation adjustments, reported separately in stockholders' equity,
are required to be included in the determination of comprehensive
earnings.
The components of comprehensive earnings for the three and six months
ended July 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
(in thousands) July 31, July 31,
------------- ------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 13,525 $ 10,380 $ 24,645 $ 19,260
Other comprehensive loss:
Foreign currency
translation adjustments (4,741) 729 (5,106) (2,320)
--------- --------- -------- --------
Comprehensive earnings $ 8,784 $ 11,109 $ 19,539 $ 16,940
========= ========= ======== ========
</TABLE>
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
Prior year financial statements have been presented to conform with
SFAS No. 130.
- 8 -
<PAGE>
8. ACCOUNTING STANDARDS
--------------------
In February 1998,the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use,"("SOP No. 98-1"). SOP No. 98-1 requires
certain costs incurred in connection with developing or obtaining
internal-use software to be capitalized and other costs to be expensed.
The Company adopted SOP No. 98-1 effective February 1998, and its
application for the three and six months ended July 31, 1998 had no
material effect on the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS
No. 133"), which requires that an entity recognize all derivative
instruments as either assets or liabilities on its balance sheet at
their fair value. Gains and losses resulting from changes in the fair
value of derivatives are recorded each period in current earnings or
comprehensive earnings, depending on whether a derivative is designated
as part of a hedge transaction, and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in
comprehensive earnings will be reclassified as earnings in the period
in which earnings are affected by the hedged item. SFAS No. 133 is
effective for the Company's financial statements for the fiscal year
ending January 31, 2001 and the Company is currently evaluating the
impact, if any, of this new FASB statement on its financial position
and results of operations.
9. SUBSEQUENT EVENT
----------------
On August 26, 1998, the Company's Board of Directors declared a quarterly
dividend of $0.09 per common share. This dividend will be paid on October
12, 1998 to stockholders of record on September 21, 1998.
- 9 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
- --------
The Company operates three channels of distribution: U.S. Retail includes retail
sales in Company-operated stores in the U.S., wholesale sales to independent
retailers in the U.S. and wholesale sales of fragrance products to independent
retailers in the Americas; Direct Marketing includes corporate
(business-to-business) and catalog sales in the U.S.; and International Retail
includes retail sales through Company-operated stores and boutiques, corporate
sales and wholesale sales to independent retailers and distributors in the
Asia-Pacific region, Europe, Canada, the Middle East and Latin America.
The Company's net sales increased 14% to $247,722,000 in the three months
(second quarter) ended July 31, 1998 and rose 14% to $473,881,000 in the six
months (first half) ended July 31, 1998. Net earnings rose 30% to $13,525,000,
or $0.37 per diluted share, in the second quarter and increased 28% to
$24,645,000, or $0.68 per diluted share, in the first half due to the sales
growth and higher operating margins.
NET SALES BY CHANNEL OF DISTRIBUTION WERE AS FOLLOWS:
- -----------------------------------------------------
Three Months Six Months
Ended July 31, Ended July 31,
---------------------- -------------------
(in thousands) 1998 1997 1998 1997
- -------------- -------- -------- -------- -------
U.S. Retail $129,733 $105,244 $237,757 $193,193
Direct Marketing 24,723 20,997 46,386 37,724
International Retail 93,266 90,908 189,738 185,931
-------- -------- -------- --------
$247,722 $217,149 $473,881 $416,848
======== ======== ======== ========
U.S. Retail sales rose 23% in both the second quarter and first half, largely
due to comparable store sales growth of 15% in the quarter and 13% in the first
half, as well as sales results in new stores that were opened during the past
year. In the Company's New York flagship store, comparable store sales increased
9% in the second quarter and 8% in the first half while comparable branch store
sales rose 18% and 17% in the second quarter and first half. Comparable store
sales growth was primarily due to an increased number of retail transactions.
Growth was generated by sales to domestic customers; sales to foreign tourists
have declined as a percentage of sales in each of the past several years.
Direct Marketing sales increased 18% and 23% in the second quarter and first
half. Corporate division sales rose 4% in the second quarter and 12% in the
first half, while catalog division sales rose 42% and 44% in the respective
periods. Customer demand was strong in the current periods but, in assessing the
increases, it should also be noted that the transition in April 1997 to the
Company's new Customer Service/Distribution Center affected sales in 1997 due to
decreased order fulfillment and catalog mailings. The Company anticipates
increasing its catalog mailings by approximately 15% to 24 million catalogs in
Fiscal 1998.
International Retail sales increased 3% in the second quarter and 2% in the
first half, which equated to increases of 18% in the second quarter and 12% in
the first half on a constant-currencies basis (excluding the effect of
translating local-currency-denominated sales into the generally stronger U.S.
dollar). In Japan, Tiffany's largest international market, total retail sales in
local currency rose 37% in the second quarter and 21% in the first half,
primarily due to comparable store sales growth of 30% in the second quarter and
15% in the first half. Sales in 1997's second quarter and first half, and
- 10 -
<PAGE>
comparisons with the 1998 periods, were affected by strong consumer demand in
anticipation of an April 1, 1997 increase in the consumption tax.
The Company's reported sales and earnings reflect either a translation-related
benefit from a strengthening Japanese yen or a detriment from a strengthening
U.S. dollar. The Company maintains a foreign currency hedging program for
merchandise purchase transactions initiated from Japan in order to reduce the
potentially negative impact on the Company's financial results of a significant
strengthening of the U.S. dollar. The hedging program has achieved its objective
by stabilizing product costs, over the short-term, despite exchange rate
fluctuations. However, as a result of changes in the relationship between the
yen and the dollar, the Company adjusts its retail prices when necessary to
maintain its gross margin over the longer-term.
In Asia-Pacific markets outside Japan, comparable store sales in local
currencies declined 13% in the second quarter and 16% in the first half.
Management attributes this to adverse local economic conditions and reduced
spending by Japanese travelers to that region. In Europe, comparable store sales
in local currencies increased 10% in the second quarter and 17% in the first
half due to retail sales growth in most markets.
GROSS PROFIT
- ------------
Gross profit as a percentage of net sales (gross margin) was 54.8% and 54.2% in
the second quarter and first half, compared with 53.7% and 53.5% in the prior
year. The Company's ongoing gross margin and pricing strategy is to pass through
product-cost increases with higher retail selling prices, in order to at least
maintain gross margin at prior-year levels.
OPERATING EXPENSES
- ------------------
Operating expenses (selling, general and administrative expenses plus the
provision for uncollectible accounts) increased 14% and 13% in the second
quarter and first half. The increases were primarily due to incremental
occupancy, staffing and marketing expenses related to the Company's worldwide
expansion program, as well as to sales-related variable expenses. As a
percentage of net sales, the operating expense ratios of 44.7% and 44.6% in the
second quarter and first half were slightly lower than the prior year.
Management's ongoing objective is to reduce the expense ratio by leveraging the
Company's fixed-expense base.
OTHER EXPENSES, NET
- -------------------
Other expenses (primarily interest expense) increased in the second quarter and
first half. On the basis of current plans, anticipated share repurchases,
interest rates and foreign currency exchange rates, management expects interest
expense for the remaining quarters of Fiscal 1998 to be higher than the
prior-year periods.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes resulted in an effective tax rate of 42.5% in the
second quarter and first half, compared with 43.0% in the prior year, due to a
shift in the geographical business mix toward lower-tax jurisdictions.
NEW ACCOUNTING STANDARDS
- ------------------------
In February 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," ("SOP No. 98-1"). SOP No. 98-1 requires certain costs incurred in
connection with developing or obtaining internal-use software to be capitalized
and other costs to be expensed. The Company adopted SOP No. 98-1 effective
February 1998, and its application for the three and six months ended July 31,
1998 had no material effect on the Company's financial position or results of
operations.
- 11 -
<PAGE>
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"), which requires that an
entity recognize all derivative instruments as either assets or liabilities on
its balance sheet at their fair value. Gains and losses resulting from changes
in the fair value of derivatives are recorded each period in current earnings or
comprehensive earnings, depending on whether a derivative is designated as part
of a hedge transaction, and, if it is, the type of hedge transaction. Gains and
losses on derivative instruments reported in comprehensive earnings will be
reclassified as earnings in the period in which earnings are affected by the
hedged item. SFAS No. 133 is effective for the Company's financial statements
for the fiscal year ending January 31, 2001 and the Company is currently
evaluating the impact, if any, of this new FASB statement on its financial
position and results of operations.
YEAR 2000
- ---------
The Company recognizes the need to ensure that its operations will not be
adversely affected by year 2000 computer hardware and software failures. Certain
systems will, unless modified, be unable to process date-sensitive calculations
using the year 2000. Such failures are a known risk to the future integrity of
the Company's' financial reports and to virtually all aspects of the Company's
operations, including the Company's ability to process sales transactions,
fulfill customer orders and receive and manage inventories and other assets.
Accordingly, the Company has established a disciplined process to identify,
prioritize and evaluate year 2000 problems and to replace or revise and test
computer software and operating procedures. The objective of these efforts is to
achieve year 2000 compliance with minimal effect on customer service or other
disruption to, or loss of integrity in, business or financial operations. At
this date, sources of potential failure in internal systems have been identified
and conversion efforts are underway. These conversion efforts are scheduled to
be complete by spring 1999. By that time, the Company will have been required to
remediate or replace (i) internally-developed computer code, and (ii) code
purchased from third-party software vendors. On July 31, 1998, these efforts
were 14% complete in category (i) and 51% complete in category (ii), on schedule
with the Company's timetable for completion.
The foregoing conversion efforts address "information technology" systems, i.e.
those operated and maintained by the Company's U.S.-based information technology
staff, such as financial, order entry, inventory control and forecasting
systems. Other applications software is maintained on personal computers by
end-users in the U.S. and by wholly-owned Company subsidiaries outside the U.S.
Typically, such software has been purchased from third-party vendors and
specific applications have been developed by the end-user. The information
technology staff is assisting users in evaluating and determining whether such
applications are material to the Company and are year 2000 compliant and, if
necessary, in developing a plan for remediation and testing. The Company is also
in the process of evaluating year 2000 issues that may be experienced by key
merchandise and service vendors in order to evaluate the potential effect of
vendor failure on the Company's operations; at this date, that evaluation has
not been completed, although responses to date indicate that many, if not most,
of the Company's merchandise vendors are not dependent upon computer-technology.
Successful remediation of year 2000 issues will depend, to some extent, on the
Company's ability to retain or otherwise secure sufficient programming resources
to timely complete this process given the high demand for such resources
throughout the world.
The Company has not yet established a contingency plan in the event of year 2000
failure. Because the theoretical possibility for such failure now exists for
numerous applications throughout the operations of the Company, management
- 12 -
<PAGE>
considers the present expenditure of resources to develop contingency plans for
all such operations to be counterproductive to ongoing efforts to define and
remediate deficiencies. At such time as the remediation program has further
progressed and likely failures have been identified, contingency plans,
including for manual and delayed information processing, may be created.
In addition to the cost of internal resources, the Company's cost of achieving
year 2000 compliance is estimated to be $8,000,000 for third-party service
providers and will be incurred through the year ending January 31, 2000. Year
2000 costs for such providers are charged to operations as incurred and amounted
to $2,080,000 in the first half and $2,666,000 on a cumulative basis. A
substantial portion of the Company's programming and system design resources has
been and will be devoted to the year 2000 project. As a consequence, many
projects intended to improve asset efficiency and customer service have been
deferred.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal, working capital requirements which have increased due
to the Company's expansion. Management believes that the Company's financial
condition at July 31, 1998 provides sufficient resources to support current
business activities and planned expansion. Working capital (current assets minus
current liabilities) and the corresponding current ratio (current assets divided
by current liabilities) were $371,242,000 and 2.6:1 at July 31, 1998, compared
with $381,084,000 and 2.5:1 at January 31, 1998 and $366,313,000 and 2.8:1 at
July 31, 1997.
Accounts receivable at July 31, 1998 were 28% below January 31, 1998 (which
represents a seasonally-high point) but were 4% above July 31, 1997. The
increased receivables versus prior year largely reflected sales growth.
Inventories (which represent the largest portion of total assets) at July 31,
1998 were 12% higher than January 31, 1998 and were 16% above July 31, 1997 in
order to support overall sales growth, new stores and new products, as well as
to deepen product availability in the engagement jewelry category. The Company's
ongoing objective is to improve inventory performance through: refinement of
worldwide replenishment systems; focus on the specialized disciplines of product
development, assortment planning and inventory management; improved presentation
and management of display inventories in each store; assortment editing by
product category; and a time-phased program of improvements in warehouse
management and supply-chain logistics.
The Company incurred a net cash outflow from operating activities of $18,159,000
in the first half ended July 31, 1998, compared with an outflow of $19,866,000
in the corresponding period a year ago.
Capital expenditures were $30,658,000 in the first half ended July 31, 1998
compared with $16,301,000 in the prior year. The increase was due to costs
associated with new store openings, relocation of an existing store and
expansion of manufacturing and administrative facilities. Based on current
plans, management expects that capital expenditures will be approximately
$70,000,000 in Fiscal 1998.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under a five-year, $160,000,000 multicurrency,
noncollateralized revolving credit facility (amended in the first quarter of
Fiscal 1998 to increase the amount from $130,000,000 and the number of banks
from four to five) which expires on June 30, 2002. Management anticipates that
internally-generated cash flows and funds available under the revolving credit
facility will be sufficient to support the Company's planned worldwide
- 13 -
<PAGE>
business expansion and the seasonal working capital increases that are typically
required during the third and fourth quarters of the year.
SEASONALITY
- -----------
The Company's business is seasonal in nature, with the fourth quarter typically
representing a proportionally greater percentage of annual sales, earnings from
operations and cash flow. Management expects such seasonality to continue.
RISK FACTORS
- ------------
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to retail prices, gross
profit, expenses, inventory performance, capital expenditures, cash flow and
year 2000 compliance. In addition, management makes other forward-looking
statements from time to time concerning objectives and expectations for store
openings, sales, earnings and cash flow. As a retailer, the Company's success in
achieving its objectives and expectations is partially dependent upon economic
conditions and consumer attitudes. However, certain assumptions are specific to
the Company and/or the markets in which it operates. The following assumptions,
among others, are "risk factors" which could affect the likelihood that the
Company will achieve the objectives and expectations communicated by management:
(i) that new stores and other sales locations can be leased or otherwise
obtained on suitable lease terms in desired markets and that construction can be
completed on a timely basis; (ii) that existing product supply arrangements,
including license agreements with third-party designers, will continue; (iii)
that the market for high-quality cut diamonds will provide continuity of supply
and pricing; (iv) that new systems, particularly for inventory management, can
be successfully integrated into the Company's operations and that warehousing
and distribution productivity can be further improved to support the Company's
worldwide distribution requirements; (v) that the exchange relationship between
the Japanese yen and the U.S. dollar in Fiscal 1998 will not substantially
change during the year; and (vi) that the year 2000 compliance program can be
timely completed.
- 14 -
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At Registrant's Annual Meeting of Stockholders held on May 21, 1998 each of the
nominees listed below was elected a director of Registrant to hold office until
the next annual meeting of the stockholders and until his or her respective
successor has been elected and qualified. Tabulated with the name of each of the
nominees elected is the number of Common shares cast for each nominee and the
number of Common shares withholding authority to vote for each nominee. There
were no broker non-votes or abstentions with respect to the election of
directors.
Nominee Voted For Withholding Authority
William R. Chaney 31,441,037 654,872
Rose Marie Bravo 31,432,269 663,640
Samuel L. Hayes III 31,438,911 656,998
Michael J. Kowalski 31,422,583 673,326
Charles K. Marquis 31,301,147 794,762
James E. Quinn 31,421,005 674,904
Yoshiaki Sakakura 28,891,393 3,204,516
William A. Shutzer 31,439,841 656,068
Geraldine Stutz 31,393,043 702,866
At such meeting, the stockholders approved the Company's 1998 Directors Option
Plan. With respect to such approval, 26,145,263 shares were voted to approve,
1,849,589 were voted against, and 85,803 shares abstained from voting. There
were 4,015,254 broker non-votes with respect to the approval of the Company's
1998 Directors Option Plan.
In addition, the stockholders also approved the Company's 1998 Employee
Incentive Plan. With respect to such approval, 25,409,290 shares were voted to
approve, 1,464,334 were voted against, and 1,207,031 shares abstained from
voting. There were 4,015,254 broker non-votes with respect to the approval of
the Company's 1998 Employee Incentive Plan.
The stockholders also approved the appointment of Coopers & Lybrand L.L.P. as
independent accountants of the Company's fiscal 1998 financial statements. With
respect to such appointment, 31,958,871 shares were voted to approve, 27,779
were voted against, and 19,259 shares abstained from voting. There were 89,900
broker non-votes with respect to the approval of the appointment of Coopers &
Lybrand L.L.P.
ITEM 5. STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING OF
STOCKHOLDERS TO BE RECEIVED NO LATER THAN FEBRUARY 20, 1999
AND NO EARLIER THAN JANUARY 21, 1999 UNLESS SUBMITTED FOR
INCLUSION IN REGISTRANT'S PROXY STATEMENT.
Effective June 29, 1998, SEC Rule 14a-4 was changed. Rule 14a-4 states when a
stockholder's proxy may confer discretionary authority upon a proxy holder to
vote.
- 15 -
<PAGE>
With respect to stockholder proposals not included in a proxy statement for the
1999 Annual Meeting of Stockholders, Registrant will generally be permitted to
exercise discretionary authority to vote under the proxies its solicits unless
timely notice of the proposal is given. Under Rule 14a-4, timely notice is
determined by the advance notice provisions of the Registrant's By-Laws. Section
1.08 of the Registrant's By-Laws, as amended March 19, 1998, states when notice
is timely and requires that the stockholder submitting the proposal submit
specific information. Copies of the Registrant's By-laws may be obtained by
contacting the Registrant's Corporate Secretary at 727 Fifth Avenue, New York,
NY 10022, Attn: Patrick B. Dorsey.
To be timely, stockholder proposals that are not to be included in the
Registrant's proxy statement must be delivered to the Registrant's Corporate
Secretary no later than February 20, 1999 and no earlier than January 21, 1999.
These dates will be applicable unless there is a significant change in the
annual meeting date or an increase in the number of directors to be elected.
Separately, under SEC Rule 14a-8, a stockholder wishing to submit a proposal
that qualifies for inclusion in the Registrant's proxy statement must submit his
or her proposal to the Registrant no later than December 10, 1998 and must
satisfy the other requirements of Rule 14a-8.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.111a Amendment to Agreement made June 12, 1993 by
and between Tiffany-Japan (Delaware) Inc.,
Tiffany and Company and Mitsukoshi Limited.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On April 17, 1998 Registrant filed a report on Form 8-K
reporting its Financial Data Schedules for the last three
fiscal years and interim periods of the last two fiscal years,
restated in compliance with SFAS No. 128.
- 16 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: August 28,1998 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
- 17 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ------
10.111a Amendment to Agreement made June 12, 1993 by and between
Tiffany-Japan (Delaware) Inc., Tiffany and Company and
Mitsukoshi Limited.
27 Financial Data Schedule
(submitted to SEC only)
Exhibit 10.111a
Tiffany & Co.
AMENDMENT
TO
AGREEMENT MADE 12TH JUNE 1993
This Amendment is made to that certain Agreement made the 12th day of June, 1993
by and between (i) Tiffany & Co. Japan Inc. (formerly known as Tiffany-Japan
(Delaware) Inc.) ("Tiffany-Japan"), a corporation organized and existing under
the laws of the State of Delaware with its Japan branch offices at
Ohtemachi-Tatemono Aoyama Bldg. 10th Floor, 3-1-31, Minami-Aoyama, Minato-ku,
Tokyo 107-0062, Japan, (ii) Tiffany and Company ("Tiffany"), a corporation
organized and existing under the laws of the State of New York with its
executive offices at 727 Fifth Avenue, New York, NY 10022, United States of
America and (iii) Mitsukoshi Limited ("Mitsukoshi"), a corporation organized and
existing under the laws of Japan with its executive offices at 4-1, Nihonbashi
Muromachi, 1-chome, Chuo-Ku, Tokyo 103-8001, Japan (the "93 Agreement").
IT IS HEREBY AGREED THAT:
Except as expressly amended below, the 93 Agreement shall continue to have full
force and effect pursuant to the terms and conditions set forth in the 93
Agreement and those set forth in that certain letter agreement dated September
2, 1997;
The Agreement dated February 23, 1996 by and between the parties hereto with
respect to the Ginza Store (the "Flagship Store Agreement") shall not be
affected or amended in any manner by this document, and the Flagship Store
Agreement shall continue to have full force and effect pursuant to the terms and
conditions set forth in the Flagship Store Agreement; and
The 93 Agreement be and hereby is amended as follows, all such amendments to be
effective as of September 1, 1998:
A. The defined term "New York Retail Price" is deleted from Article I of the
93 Agreement in its entirety and replaced with following new definition:
"New York Retail Price" means the price in U.S. dollars, estimated by
Tiffany-Japan in good faith after consultation with Tiffany, at which
an item of Tiffany Merchandise would be offered for sale to retail
customers by Tiffany at Tiffany's Fifth Avenue store in New York City
at the time in question.
Page 1 of 3
<PAGE>
B. The defined term "Base Percentage" is deleted from Article I of the 93
Agreement in its entirety and replaced with the following new definition:
"Base Percentage" means the applicable percentage of Net Sales for the
month in question, as listed below:
(i) 23% for items of Tiffany Merchandise each having a
New York Retail Price of less than U.S.$60,000;
(ii) 19% for items of Tiffany Merchandise each having a
New York Retail Price equal to or greater than
U.S.$60,000 but less than U.S.$80,000;
(iii) 16% for items of Tiffany Merchandise each having a
New York Retail Price equal to or greater than
U.S.$80,000; and
(iv) 5% for items of Fine Merchandise, regardless of the
New York Retail Price.
C. The following new Section 6.3.2 is hereby added to Article VI of the 93
Agreement:
6.3.2 From time to time Tiffany-Japan shall provide to each Host
Store a list of all Tiffany Merchandise available at such Host
Store having a Base Percentage lower than 23%. Such list shall
contain the following information for all such items of
Tiffany Merchandise: the product description, the
stock-keeping number, the Current Retail Price and the
applicable Base Percentage.
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT TO THE 93 AGREEMENT
EFFECTIVE AS OF SEPTEMBER 1, 1998.
MITSUKOSHI LIMITED
("Mitsukoshi")
By: -------------------------------
Name:
Title:
Page 2 of 3
<PAGE>
TIFFANY AND COMPANY
("Tiffany")
By: ----------------------------------
Name:
Title:
TIFFANY & CO. JAPAN, INC.
("Tiffany-Japan")
By: -----------------------------------
Name:
Title:
Page 3 of 3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 53,326,000
<SECURITIES> 0
<RECEIVABLES> 79,675,000
<ALLOWANCES> 7,622,000
<INVENTORY> 430,886,000
<CURRENT-ASSETS> 610,579,000
<PP&E> 278,612,000
<DEPRECIATION> 105,512,000
<TOTAL-ASSETS> 829,894,000
<CURRENT-LIABILITIES> 239,337,000
<BONDS> 0
0
0
<COMMON> 351,000
<OTHER-SE> 458,487,000
<TOTAL-LIABILITY-AND-EQUITY> 829,894,000
<SALES> 247,722,000
<TOTAL-REVENUES> 247,722,000
<CGS> 112,036,000
<TOTAL-COSTS> 222,325,000
<OTHER-EXPENSES> 1,458,000
<LOSS-PROVISION> 417,000
<INTEREST-EXPENSE> 2,093,000
<INCOME-PRETAX> 23,522,000
<INCOME-TAX> 9,997,000
<INCOME-CONTINUING> 13,525,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,525,000
<EPS-PRIMARY> .38<F1>
<EPS-DILUTED> .37<F2>
<FN>
NOTE: The amount reported for EPS primary and fully diluted is in compliance
with with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" and represents the Basic and Diluted calculation as required
by this standard.
</FN>
</TABLE>
