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, 2001
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Commission File Number 1-11226
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TOMMY HILFIGER CORPORATION
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(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
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(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, 2001: 89,154,235
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
June 30, 2001
PART I - FINANCIAL INFORMATION
Page
----
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three months
ended June 30, 2001 and 2000........................................................ 3
Condensed Consolidated Balance Sheets as of June 30, 2001 and March 31, 2001.............. 4
Condensed Consolidated Statements of Cash Flows for the three months ended
June 30, 2001 and 2000.............................................................. 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three
months 6
ended June 30, 2001 and the year ended March 31, 2001................................
Notes to Condensed Consolidated Financial Statements...................................... 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..... 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk................................ 20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings......................................................................... 21
Item 6 Exhibits and Reports on Form 8-K.......................................................... 21
Signatures.................................................................................................. 22
2
PART I
ITEM 1 - FINANCIAL STATEMENTS
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited) For the Three Months Ended
June 30,
----------------------------
2001 2000
-------- --------
Net revenue ............................................. $355,688 $399,878
Cost of goods sold ...................................... 203,946 240,099
-------- --------
Gross profit ............................................ 151,742 159,779
-------- --------
Depreciation and amortization ........................... 26,419 25,584
Other selling, general and administrative expenses ...... 108,893 114,921
-------- --------
Total operating expenses ................................ 135,312 140,505
-------- --------
Income from operations .................................. 16,430 19,274
Interest expense ........................................ 9,316 10,594
Interest income ......................................... 4,127 4,819
-------- --------
Income before income taxes .............................. 11,241 13,499
Provision for income taxes .............................. 2,228 3,763
-------- --------
Net income .............................................. $ 9,013 $ 9,736
======== ========
Earnings per share:
Basic earnings per share ................................ $ 0.10 $ 0.10
======== ========
Weighted average shares outstanding ..................... 89,008 93,351
======== ========
Diluted earnings per share .............................. $ 0.10 $ 0.10
======== ========
Weighted average shares and share equivalents outstanding 89,626 93,379
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements
3
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited) June 30, March 31,
2001 2001
----------- -----------
Assets
Current assets
Cash and cash equivalents ................................................ $ 366,850 $ 318,431
Accounts receivable ...................................................... 131,482 237,414
Inventories .............................................................. 253,053 205,446
Other current assets ..................................................... 91,338 90,353
----------- -----------
Total current assets.................................................. 842,723 851,644
Property and equipment, at cost, less accumulated
depreciation and amortization................................................ 280,510 281,682
Intangible assets, net of accumulated amortization ............................ 1,197,701 1,206,358
Other assets .................................................................. 1,139 2,872
----------- -----------
Total Assets ......................................................... $ 2,322,073 $ 2,342,556
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt ......................................... $ 52,500 $ 50,000
Accounts payable .......................................................... 15,123 38,628
Accrued expenses and other current liabilities............................. 176,268 171,640
----------- -----------
Total current liabilities............................................. 243,891 260,268
Long-term debt ................................................................ 514,526 529,495
Deferred tax liability ........................................................ 200,550 202,123
Other liabilities ............................................................. 2,147 2,077
Commitments and contingencies
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 95,346,835 and 95,169,402 shares, respectively.................... 953 952
Capital in excess of par value ............................................ 591,414 589,184
Retained earnings ......................................................... 831,244 822,231
Accumulated other comprehensive (loss) .................................... (1421) (2,543)
Treasury shares, at cost: 6,192,600 Ordinary Shares ....................... (61,231) (61,231)
----------- -----------
Total shareholders' equity ........................................... 1,360,959 1,348,593
----------- -----------
Total Liabilities and Shareholders' Equity ........................... $ 2,322,073 $ 2,342,556
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
4
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) For the Three Months Ended
June 30,
----------------------------
2001 2000
--------- ---------
Cash flows from operating activitities
Net income ................................................................... $ 9,013 $ 9,736
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization .............................................. 26,604 25,816
Deferred taxes ............................................................. (1,573) (1,573)
Changes in operating assets and liabilities
Decrease (increase) in assets
Accounts receivable ................................................... 105,932 85,171
Inventories ........................................................... (47,607) (58,089)
Other assets .......................................................... 1,744 (3,192)
Increase (decrease) in liabilities
Accounts payable ...................................................... (23,505) (12,724)
Accrued expenses and other liabilities ................................ 4,961 (40,028)
--------- ---------
Net cash provided by operating activities................................... 75,569 5,117
--------- ---------
Cash flows from investing activities
Purchases of property and equipment........................................... (16,510) (16,635)
--------- ---------
Net cash used in investing activities.................................. (16,510) (16,635)
--------- ---------
Cash flows from financing activities
Payments on long-term debt .................................................... (12,500) (12,500)
Proceeds from the exercise of employee stock options........................... 1,860 --
Purchase of treasury shares ................................................... -- (19,993)
Short-term bank borrowings (repayments) ....................................... -- (523)
--------- ---------
Net cash used in financing activities ................................. (10,640) (33,016)
--------- ---------
Net increase (decrease) in cash ....................................... 48,419 (44,534)
Cash and cash equivalents, beginning of period ................................. 318,431 309,397
--------- ---------
Cash and cash equivalents, end of period ....................................... $ 366,850 $ 264,863
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements
5
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollar amounts in thousands)
(Unaudited)
Capital in Accumulated
Ordinary Shares excess other Total
-------------------- of par Retained comprehensive Treasury shareholders'
Outstanding Amount value earnings income (loss) shares equity
------------ ------ -------- -------- ------------- -------- -----------
Balance, March 31, 2000 ............... 94,830,638 $948 $584,920 $691,270 $ 576 $ -- $ 1,277,714
Net income .......................... -- -- -- 130,961 -- -- 130,961
Foreign currency translation ........ -- -- -- -- (3,119) -- (3,119)
Exercise of employee stock options .. 338,764 4 3,706 -- -- -- 3,710
Tax benefits from exercise of stock
options............................ -- -- 558 -- -- -- 558
Purchase of treasury shares ......... (6,192,600) -- -- -- -- (61,231) (61,231)
----------- ---- -------- -------- ------- -------- -----------
Balance, March 31, 2001 ............... 88,976,802 952 589,184 822,231 (2,543) (61,231) 1,348,593
Net income .......................... -- -- -- 9,013 -- -- 9,013
Foreign currency translation ........ -- -- -- -- 1,122 -- 1,122
Exercise of employee stock options .. 177,433 1 1,859 -- -- -- 1,860
Tax benefits from exercise of stock
options............................ -- -- 371 -- -- -- 371
----------- ---- -------- -------- ------- -------- -----------
Balance, June 30, 2001 (Unaudited) ... 89,154,235 $953 $591,414 $831,244 $(1,421) $(61,231) $ 1,360,959
=========== ==== ======== ======== ======= ======== ===========
Comprehensive income consists of net income and foreign currency
translation and totaled $10,135 for the three months ended June 30, 2001 and
$127,842 for the fiscal year ended March 31, 2001.
See Accompanying Notes to Condensed Consolidated Financial Statements
6
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 on
Form 10-K for the fiscal year ended March 31, 2001, as filed with the Securities
and Exchange Commission (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, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2002 as the Company's business is impacted by the general
seasonal trends characteristic of the apparel and retail industries as well as
other factors. These unaudited financial statements should be read in
conjunction with the financial statements included in the Form 10-K.
The financial statements as of June 30, 2001 and for the three-month
periods ended June 30, 2001 and 2000 are unaudited. The Condensed Consolidated
Balance Sheet as of March 31, 2001, as presented, has been prepared from the
Consolidated Balance Sheet as of March 31, 2001 included in the Form 10-K.
Note 2 - Credit Facilities
The Company's principal credit facilities consist 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 term and revolving credit
facilities which expire on March 31, 2003 (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, of which $97,500 remained outstanding as of June 30, 2001. The
revolving credit facility is available for letters of credit, working capital
and other general corporate purposes. As of June 30, 2001, $149,060 of the
available borrowings had been used to open letters of credit and $20,000 had
been borrowed and remained outstanding. Borrowings under the Credit Facilities
bear interest at variable rates which, on a weighted average annual basis,
amounted to 4.98% and 5.53% as of, and for the three-month period ended, June
30, 2001, respectively, and 6.98% and 6.85% as of, and for the three-month
period ended June 30, 2000.
Borrowings under the term loan facility are repayable in quarterly
installments totaling $50,000 in fiscal 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, June 30,
2001. Certain of the Company's non-U.S. subsidiaries have separate credit
facilities for working capital or trade financing purposes.
7
Note 3 - Condensed Consolidating Financial Information
The Notes discussed in Note 2 were issued by TH USA and guaranteed by THC.
Accordingly, condensed consolidating balance sheets as of June 30, 2001 and
March 31, 2001, and the related condensed consolidating statements of operations
and cash flows for each of the three-month periods ended June 30, 2001 and 2000
are provided. The operations of TH USA, excluding its subsidiaries, comprise the
U.S. operations of certain wholesale divisions, together with TH USA corporate
overhead charges not allocated to subsidiaries, including amortization of
intangibles (including goodwill). The non-guarantor subsidiaries of TH USA
comprise the Company's U.S. retail, licensing and other wholesale divisions, as
well as the Company's Canadian operations. Such operations contributed net
revenue of $232,359 and $259,853 for the quarters ended June 30, 2001 and 2000,
respectively. The other non-guarantor subsidiaries of THC are primarily those
non-U.S. subsidiaries involved in investing and buying office operations. These
condensed consolidating financial statements have been prepared using the equity
method of accounting in accordance with the requirements for presentation of
such information under which TH USA's and THC's results reflect 100% of the
earnings of their respective subsidiaries in each of the years presented.
Condensed Consolidating Statements of Operations
Quarter Ended June 30, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
------------ ----------------- ------------- -------------- -------------
Net revenue $133,624 $ 250,260 $ - $ (28,196) $ 355,688
Cost of goods sold 88,023 127,142 - (11,219) 203,946
------------ ----------------- ------------- -------------- -------------
Gross profit 45,601 123,118 - (16,977) 151,742
------------ ----------------- ------------- -------------- -------------
Depreciation and amortization 16,099 10,320 - - 26,419
Other operating expenses 39,347 85,535 (1,502) (14,487) 108,893
------------ ----------------- ------------- -------------- -------------
Total operating expenses 55,446 95,855 (1,502) (14,487) 135,312
------------ ----------------- ------------- -------------- -------------
Income / (loss) from operations (9,845) 27,263 1,502 (2,490) 16,430
Interest expense 9,304 12 - - 9,316
Interest income 994 2,077 1,056 - 4,127
Intercompany interest expense / (income) 22,524 (3,597) (18,927) - -
------------ ----------------- ------------- -------------- -------------
Income / (loss) before taxes (40,679) 32,925 21,485 (2,490) 11,241
Provision / (benefit) for income taxes (10,995) 11,425 1,798 - 2,228
Equity in net earnings of
unconsolidated subsidiaries 10,669 - (8,184) (2,485) -
------------ ----------------- ------------- -------------- -------------
Net income / (loss) $ (19,015) $ 21,500 $ 11,503 $ (4,975) $ 9,013
============ ================= ============= ============== =============
8
Condensed Consolidating Statements of Operations
Quarter Ended June 30, 2000
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
------------ ----------------- ------------- -------------- -------------
Net revenue $161,909 $ 278,946 $ - $ (40,977) $ 399,878
Cost of goods sold 102,184 159,548 - (21,633) 240,099
------------ ----------------- ------------- -------------- -------------
Gross profit 59,725 119,398 - (19,344) 159,779
------------ ----------------- ------------- -------------- -------------
Depreciation and amortization 16,080 9,504 - - 25,584
Other operating expenses 47,196 86,814 (1,622) (17,467) 114,921
------------ ----------------- ------------- -------------- -------------
Total operating expenses 63,276 96,318 (1,622) (17,467) 140,505
------------ ----------------- ------------- -------------- -------------
Income / (loss) from operations (3,551) 23,080 1,622 (1,877) 19,274
Interest expense 10,581 13 - - 10,594
Interest income 714 1,820 2,285 - 4,819
Intercompany interest expense / (income) 20,849 (1,414) (19,435) - -
------------ ----------------- ------------- -------------- -------------
Income / (loss) before taxes (34,267) 26,301 23,342 (1,877) 13,499
Provision / (benefit) for income taxes (5,928) 7,890 1,801 - 3,763
Equity in net earnings of
unconsolidated subsidiaries 7,971 - (9,928) 1,957 -
------------ ----------------- ------------- -------------- -------------
Net income / (loss) $ (20,368) $ 18,411 $ 11,613 $ 80 $ 9,736
============ ================= ============= ============== =============
9
Condensed Consolidating Balance Sheets
June 30, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
--------------- --------------- -------------- -------------- ------------
Assets
Current Assets
Cash and cash equivalents $ 52,622 $ 273,064 $ 41,164 $ -- $ 366,850
Accounts receivable 61,887 69,595 -- -- 131,482
Inventories 91,877 168,451 -- (7,275) 253,053
Other current assets 14,339 75,526 1,474 (1) 91,338
---------- --------- ----------- --------- ----------
Total current assets 220,725 586,636 42,638 (7,276) 842,723
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 163,079 117,431 -- -- 280,510
Intangible assets, net of accumulated amortization 1,172,841 24,610 -- 250 1,197,701
Investment in subsidiaries 444,355 -- 371,849 (816,204) --
Other assets 510 627 -- 2 1,139
---------- --------- ----------- --------- ----------
Total Assets $2,001,510 $ 729,304 $ 414,487 $(823,228) $2,322,073
========== ========= =========== ========= ==========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 52,500 $ -- $ -- $ -- $ 52,500
Accounts payable 2,712 12,411 -- -- 15,123
Accrued expenses and other current liabilities 55,962 119,062 1,062 182 176,268
Intercompany payable / (receivable) 1,007,362 (209,875) (797,304) (183) --
---------- --------- ----------- --------- ----------
Total current liabilities 1,118,536 (78,402) (796,242) (1) 243,891
Long-term debt 514,526 -- -- -- 514,526
Deferred tax liability 212,422 (11,872) -- -- 200,550
Other liabilities 32 2,115 -- -- 2,147
Shareholders' equity 155,994 817,463 1,210,729 (823,227) 1,360,959
---------- --------- ----------- --------- ----------
Total Liabilities and Shareholders' Equity $2,001,510 $ 729,304 $ 414,487 $(823,228) $2,322,073
========== ========= =========== ========= ==========
10
Condensed Consolidating Balance Sheets
March 31, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
--------------- ----------------- -------------- -------------- ------------
Assets
Current Assets
Cash and cash equivalents $ 45,001 $ 173,171 $ 100,259 $ -- $ 318,431
Accounts receivable 105,716 131,698 -- -- 237,414
Inventories 76,511 133,720 -- (4,785) 205,446
Other current assets 14,715 74,157 1,579 (98) 90,353
---------- --------- ----------- --------- ----------
Total current assets 241,943 512,746 101,838 (4,883) 851,644
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 170,398 111,284 -- -- 281,682
Intangible assets, net of accumulated amortization 1,181,259 24,849 -- 250 1,206,358
Investment in subsidiaries 433,686 -- 380,033 (813,719) --
Other assets 469 2,397 -- 6 2,872
---------- --------- ----------- --------- ----------
Total Assets $2,027,755 $ 651,276 $ 481,871 $(818,346) $2,342,556
========== ========= =========== ========= ==========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 50,000 $ -- $ -- $ -- $ 50,000
Accounts payable 20,813 17,815 -- -- 38,628
Accrued expenses and other current liabilities 56,334 114,511 821 (26) 171,640
Intercompany payable / (receivable) 982,480 (266,097) (716,316) (67) --
---------- --------- ----------- --------- ----------
Total current liabilities 1,109,627 (133,771) (715,495) (93) 260,268
Long-term debt 529,495 -- -- -- 529,495
Deferred tax liability 213,995 (11,872) -- -- 202,123
Other liabilities -- 2,078 -- (1) 2,077
Shareholders' equity 174,638 794,841 1,197,366 (818,252) 1,348,593
---------- --------- ----------- --------- ----------
Total Liabilities and Shareholders' Equity $2,027,755 $ 651,276 $ 481,871 $(818,346) $2,342,556
========== ========= =========== ========= ==========
11
Condensed Consolidating Statements of Cash Flows
Quarter Ended June 30, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
------------ ------------- ---------- ------------ ------------
Cash flows from operating activities
Net income / (loss) $(19,015) $ 21,500 $ 11,503 $(4,975) $ 9,013
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 18,031 8,573 -- -- 26,604
Deferred taxes (1,573) -- -- -- (1,573)
Changes in operating assets and liabilities 35,515 84,162 (80,642) 2,490 41,525
-------- --------- --------- ------- ---------
Net cash provided by / (used in) operating activities 32,958 114,235 (69,139) (2,485) 75,569
-------- --------- --------- ------- ---------
Cash flows from investing activities
Purchases of property and equipment (2,168) (14,342) -- -- (16,510)
Net activity in investment in subsidiaries (10,669) -- 8,184 2,485 --
-------- --------- --------- ------- ---------
Net cash (used in) / provided by investing activities (12,837) (14,342) 8,184 2,485 (16,510)
-------- --------- --------- ------- ---------
Cash flows from financing activities
Payments on long-term debt (12,500) -- -- -- (12,500)
Proceeds from the exercise of stock options -- -- 1,860 -- 1,860
-------- --------- --------- ------- ---------
Net cash provided by / (used in) financing activities (12,500) -- 1,860 -- (10,640)
-------- --------- --------- ------- ---------
Net increase / (decrease) in cash 7,621 99,893 (59,095) -- 48,419
Cash and cash equivalents, beginning of period 45,001 173,171 100,259 -- 318,431
-------- --------- --------- ------- ---------
Cash and cash equivalents, end of period $ 52,622 $ 273,064 $ 41,164 $ -- $ 366,850
======== ========= ========= ======= =========
12
Condensed Consolidating Statements of Cash Flows
Quarter Ended June 30, 2000
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
----------- ------------- ----------- ------------ ---------
Cash flows from operating activities
Net income / (loss) $(20,368) $ 18,411 $ 11,613 $ 80 $ 9,736
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 18,019 7,797 -- -- 25,816
Deferred taxes (1,573) -- -- -- (1,573)
Changes in operating assets and liabilities 5,027 (14,296) (21,470) 1,877 (28,862)
-------- --------- --------- -------- ---------
Net cash provided by operating activities 1,105 11,912 (9,857) 1,957 5,117
-------- --------- --------- -------- ---------
Cash flows from investing activities
Purchases of property and equipment (4,808) (11,827) -- -- (16,635)
Net activity in investment in subsidiaries (7,971) -- 9,928 (1,957) --
-------- --------- --------- -------- ---------
Net cash (used in) / provided by investing activities (12,779) (11,827) 9,928 (1,957) (16,635)
-------- --------- --------- -------- ---------
Cash flows from financing activities
Payments on long-term debt (12,500) -- -- -- (12,500)
Purchase of treasury shares -- -- (19,993) -- (19,993)
Repayments of short-term bank borrowings -- (523) -- -- (523)
-------- --------- --------- -------- ---------
Net cash used in financing activities (12,500) (523) (19,993) -- (33,016)
-------- --------- --------- -------- ---------
Net decrease in cash (24,174) (438) (19,922) -- (44,534)
Cash and cash equivalents, beginning of period 25,500 115,756 168,141 -- 309,397
-------- --------- --------- -------- ---------
Cash and cash equivalents, end of period $ 1,326 $ 115,318 $ 148,219 $ -- $ 264,863
======== ========= ========= ======== =========
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 and specialty stores, and flagship stores through February 2001
(see Note 5 below). The Licensing segment consists of the operations of
licensing the Company's trademarks for specified products in specified
geographic areas. The Company evaluates performance and allocates resources
based on segment profits. The accounting policies of the reportable segments are
the same as those described in Note 1, "Summary of Significant Accounting
Policies", to the Consolidated Financial Statements included in the Form 10-K.
Segment profits are comprised of segment net revenue less cost of goods sold and
selling, general and administrative expenses. Excluded from segment profits,
however, are the vast majority of executive compensation, marketing, brand image
marketing costs associated with its flagship stores (through February 2001),
amortization of intangibles (including goodwill) and interest costs. Financial
information for the Company's reportable segments is as follows:
13
Wholesale Retail Licensing Total
------------- ------------- ------------- -----------
Three Months Ended June 30, 2001
----------------------------------------
Total segment revenue ............... $269,394 $72,256 $27,747 $369,397
Segment profits ..................... 15,807 11,291 16,181 43,279
Depreciation and amortization
included in segment profits..... 12,998 2,272 198 15,468
Three Months 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
A reconciliation of total segment revenue to consolidated net revenue is as
follows:
Three Months Ended June 30,
---------------------------------------
2001 2000
----------------- -----------------
Total segment revenue.......... $ 369,397 $ 415,989
Intercompany revenue........... (13,709) (16,111)
----------------- -----------------
Consolidated net revenue....... $ 355,688 $ 399,878
================= =================
Intercompany revenue represents buying agency commissions from consolidated
subsidiaries, which is classified under Licensing for segment reporting
purposes.
A reconciliation of total segment profits to consolidated income before
income taxes is as follows:
Three Months Ended June 30,
---------------------------------------
2001 2000
----------------- -----------------
Segment profits........................... $ 43,279 $ 51,487
Corporate expenses not allocated.......... 26,849 32,213
Interest expense, net..................... 5,189 5,775
----------------- -----------------
Consolidated income before income taxes... $ 11,241 $ 13,499
================= =================
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
redirection 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, 2001, the
balance in the accrued special charge liability was $1,255, primarily related to
liabilities of closing the Company's flagship store in Beverly Hills.
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, 2001, the Company repurchased 6,192,600
shares at an aggregate cost of $61,231. In connection with the TH Europe
Acquisition (as defined in Note 8 below), the Company's Board of Directors
terminated the remaining portion of the share repurchase program, effective June
28, 2001.
14
Note 7 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
average number of Ordinary Shares outstanding during the respective period, as
required by the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Diluted
earnings per share have been computed by dividing net income by the average
number of Ordinary Shares outstanding plus the incremental shares that would
have been outstanding assuming the exercise of stock options.
A reconciliation of shares used for basic earnings per share and those used
for diluted earnings per share is as follows:
Three Months Ended June 30,
---------------------------------------
2001 2000
----------------- -----------------
Weighted average shares outstanding.................... 89,008,000 93,351,000
Net effect of dilutive stock options based on the
treasury stock method using average market price... 618,000 28,000
----------------- -----------------
Weighted average share and share equivalents
outstanding........................................ 89,626,000 93,379,000
================= =================
Options to purchase 4,526,520 shares at June 30, 2001 and 9,909,415 shares
at June 30, 2000 were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the Ordinary Shares.
Note 8 - Acquisition of European Licensee
THC and Tommy Hilfiger (Eastern Hemisphere) Limited, a wholly owned
subsidiary of THC ("THEH"), entered into a stock purchase agreement with TH
Europe Holdings Limited, a related party ("TH Europe Holdings"), pursuant to
which THEH agreed to acquire from TH Europe Holdings all of the issued and
outstanding shares of capital stock of T.H. International N.V., the owner of the
Company's European licensee, for a cash purchase price of $200,000 (such
transaction being referred to herein as the "TH Europe Acquisition"). The TH
Europe Acquisition was completed on July 5, 2001 and was funded using available
cash.
The TH Europe Acquisition will be accounted for under the purchase method
of accounting and, accordingly, the operating results of the acquired companies
will be included in the consolidated results of the Company from the date of the
acquisition.
The Company will apply the provisions of FASB Statement No. 141 "Business
Combinations", to the TH Europe Acquisition. See Note 9 below.
Note 9 - Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative and
Hedging Activities" ("SFAS 133"). This statement became 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.
The Company seeks to protect against adverse movements in foreign currency
which might affect certain firm commitments or anticipated cash flows. These
include the purchase of inventory and capital expenditures, and the collection
of foreign royalty payments. The Company enters into forward contracts with
maturities of up to 15 months to sell or purchase foreign currency in order to
hedge against such risks. Forward contracts used for the purchase of inventory
and capital expenditures are designated as fair value hedging instruments and
forward contracts used in the collection of foreign royalty payments are
designated as cash flow hedging instruments. The Company does not use financial
instruments for speculative or trading purposes. At June 30, 2001, the Company
had contracts to exchange foreign currencies, principally, the Japanese yen and
Canadian dollar, having a total notional amount of $10,198. No significant gain
or loss was inherent in such contracts at June 30, 2001. Gains or losses on such
forward contracts are recognized in other comprehensive income on a
mark-to-market basis and, ultimately, in earnings at the time the underlying
hedge transaction is completed or recognized in earnings. Because the Company
only enters into fair value hedging instruments and cash flow hedging
instruments and due to the limited use of derivative instruments, the adoption
of SFAS 133 did not have a significant effect on the Company's results of
operations or its financial position.
In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached
consensus on EITF 00-25, "Vendor Income Statement Characterizations of
Consideration from a Vendor to a Retailer"("EITF 00-25"). This issue addresses
when consideration from a vendor
15
to a retailer (i) in connection with the retailer's purchase of the vendor's
products or (ii) to promote sales of the vendor's products by the retailer
should be classified in the vendor's income statement as a reduction of revenue.
EITF 00-25 is applicable for fiscal quarters beginning after December 15, 2001
and requires reclassification of prior periods. The impact of this statement is
expected to result in an immaterial reclassification on the Company's statement
of operations.
In late July 2001, the FASB released SFAS No. 141, "Business Combinations"
("SFAS 141"). This statement is effective for all business combinations
completed after June 30, 2001. SFAS 141 prohibits the pooling-of-interests
method of accounting for business combinations and prescribes criteria for the
initial recognition and measurement of goodwill and other intangible assets,
accounting for negative goodwill and the required disclosures in respect of
business combinations.
In late July 2001, the FASB also released SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). This statement is effective for fiscal years
beginning after December 15, 2001 and may not be retroactively applied to
financial statements of prior periods. SFAS 142 requires that goodwill,
including previously existing goodwill, and intangible assets with indefinite
useful lives should not be amortized but should be tested for impairment at
least annually. Additionally, SFAS 142 provides new criteria for performing
impairment tests on goodwill and intangible assets with indefinite useful lives,
and requires that such tests on goodwill and indefinite lived intangibles be
performed within six months and three months, respectively, upon adoption.
The Company will apply the provisions of SFAS 141 to the TH Europe
Acquisition, since it was completed after June 30, 2001. Any goodwill and any
intangible asset determined to have an indefinite useful life will not be
amortized and will continue to be evaluated for impairment under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), or APB 17 ,"Intangible Assets", until the date
that SFAS 142 is adopted. The Company plans to adopt SFAS 142 on April 1, 2002,
as required.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until the adoption of SFAS
142. At the date of adoption, the Company expects to have unamortized goodwill
and other intangibles of approximately $611,290 and $560,536, respectively,
which relates to the acquisitions of the Company's womenswear, jeanswear and
Canadian licensees on May 8, 1998. Such intangibles will be subject to the
provisions of SFAS 142. Amortization expense related to goodwill and other
intangibles was $16,974 and $17,558, respectively, for the year ended March 31,
2001. Upon adoption, the Company will no longer amortize existing goodwill.
Additionally, the Company expects the other intangibles, consisting principally
of trademark rights, to be classified as indefinite life assets which will no
longer be amortized. Any impairment loss recognized on the date of adoption will
be recorded as a cumulative effect of a change in accounting principle. Because
of the complexity involved in adopting SFAS 141 and SFAS 142, it is not
practicable to reasonably estimate the impact of adopting these statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized.
16
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,
-------------------------------
2001 2000
-------- --------
Net revenue ................. 100.0% 100.0%
Cost of goods sold .......... 57.3 60.0
-------- --------
Gross profit ................ 42.7 40.0
Depreciation and amortization 7.4 6.4
Other SG&A expenses ......... 30.6 28.8
-------- --------
Total operating expenses .... 38.0 35.2
-------- --------
Income from operations ...... 4.7 4.8
Interest expense, net ....... 1.5 1.4
-------- --------
Income before taxes ......... 3.2 3.4
Provision for income taxes .. 0.7 1.0
-------- --------
Net income .................. 2.5 2.4
======== ========
Three Months Ended June 30, 2001 Compared to Three Months Ended
June 30, 2000
Net revenue decreased 11.1% to $355,688 in the three months ended June 30,
2001 from $399,878 in the corresponding period in fiscal 2001. This decrease was
due to a decrease in the Company's Wholesale segment offset, in part, by
increases in the Retail and Licensing segments, as outlined below.
Three Months Ended June 30,
------------------------------------
% Increase /
2001 2000 (Decrease)
--------------- ---------------- ----------------
Wholesale............. $ 269,394 $ 318,103 (15.3)%
Retail................ 72,256 67,786 6.6 %
Licensing............. 14,038 13,989 0.4 %
--------------- ---------------- ----------------
Total................. $ 355,688 $ 399,878 (11.1)%
=============== ================ ================
Within the Wholesale segment, menswear sales decreased 16.2% (to $129,007
from $154,017), womenswear sales decreased 9.9% (to $83,397 from $92,598) and
childrenswear sales decreased 20.3% (to $56,990 from $71,488). Approximately 90%
of the decrease in Wholesale revenue was due to volume reductions, reflecting
the Company's efforts to balance supply and demand. Unit price reductions
accounted for the remainder of the revenue decrease.
The improvement in the Company's Retail segment was due to an increase in
the number of stores and the expansion of certain stores into larger formats
offset, in part, by a decrease in sales at existing stores. Management believes
that the decrease at existing stores was due to reduced customer traffic at
outlet malls and softer economic conditions. At June 30, 2001, the Company
operated 116 retail stores as compared to 96 stores at June 30, 2000. Retail
stores opened since June 30, 2000 contributed $8,975 of net revenue during the
quarter ended June 30, 2001.
17
Revenue from the Licensing segment consists of third party licensing
royalties and buying agency commissions. New products introduced under licenses
entered into since June 30, 2000 contributed a de minimus amount of revenue in
the first quarter of fiscal year 2002.
THC and THEH entered into a stock purchase agreement with TH Europe
Holdings, pursuant to which THEH agreed to acquire from TH Europe Holdings all
of the issued and outstanding shares of capital stock of T.H. International
N.V., the owner of the Company's European licensee ("THNV"), for a cash purchase
price of $200,000. The TH Europe Acquisition was completed on July 5, 2001 and
was funded using available cash.
The consolidation of THNV and its subsidiaries with the Company is expected
to contribute an incremental $112,000 in wholesale revenues and $12,000 in
retail revenues to the Company, and reduce licensing segment revenues by
approximately $12,000, during the remainder of fiscal 2002.
Gross profit as a percentage of net revenue increased to 42.7% in the first
quarter of fiscal 2002 from 40.0% in the first quarter of fiscal 2001. The
increase was mainly due to overall better sell-through at retail, led by the
womenswear component and a higher contribution to total revenue of the retail
and licensing segments, which generate higher gross margins than the wholesale
segment.
Operating expenses decreased to $135,312, or 38.0% of net revenue, in the
first quarter of fiscal 2002 from $140,505 or 35.2% of net revenue, in the first
quarter of fiscal 2001. The decrease reflects savings realized by the Company's
divisional consolidations and other streamlining efforts. This decrease was
partially offset by increased expenses associated with retail stores opened and
expanded since last year.
Interest expense, net of interest income, decreased to $5,189 in the first
quarter of fiscal year 2002 from $5,775 in the corresponding quarter last year.
The decrease from 2001 to 2002 was primarily due to higher average cash balances
as well as a reduction in the Company's long-term debt balance. This decrease
was partially offset by lower interest rates on invested cash balances in fiscal
year 2002 when compared to the first quarter of fiscal year 2001.
The provision for income taxes decreased to 19.8% of income before taxes in
the quarter ended June 30, 2001 from 27.9% 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 construction of additional retail stores as
well as maintenance or selective expansion of the Company's in-store shop and
fixtured area program. 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 increased from $318,431 at
March 31, 2001 to $366,850 at June 30, 2001. This increase resulted from cash
generated from operations in excess of capital expenditures and scheduled debt
repayments. A detailed analysis of the changes in cash and cash equivalents is
presented in the Condensed Consolidated Statements of Cash Flows. As described
in Note 8 to the Condensed Consolidated Financial Statements, on July 5, 2001
the Company completed the TH Europe Acquisition for $200,000 funded from
existing cash.
Capital expenditures were $16,510 during the three months ended June 30,
2001. Capital expenditures were made principally in support of the Company's
retail store openings, as well as on existing facilities and selected in-store
shops and fixtured areas.
At June 30, 2001, accrued expenses and other current liabilities included
$38,127 of open letters of credit for inventory purchased. Additionally, at June
30, 2001, TH USA was contingently liable for unexpired bank letters of credit of
$110,933 related to commitments of TH USA to suppliers for the purchase of
inventories.
The Company's principal credit facilities consist of $250,000 of the 2003
Notes, $200,000 of the 2008 Notes and the Credit Facilities. The Notes were
issued by TH USA and guaranteed by THC. The indenture under which the Notes were
issued contains covenants that, among other things, restrict the ability of
subsidiaries of THC to incur additional indebtedness, restrict the ability of
THC and its subsidiaries to incur indebtedness secured by liens or enter into
sale and leaseback transactions and restrict the ability of THC and TH USA to
engage in mergers or consolidations.
The Credit Facilities, which are guaranteed by THC, consist of an unsecured
$250,000 TH USA five-year revolving credit facility, of which up to $150,000 may
be used for direct borrowings, and an unsecured $200,000 five-year term credit
facility, of which $97,500 remained outstanding as of June 30, 2001. The
revolving credit facility is available for letters of credit, working capital
and other general corporate purposes. As of June 30, 2001, $149,060 of the
available borrowings had been used to open letters of credit and $20,000 had
been borrowed and remained outstanding. Borrowings under the Credit Facilities
bear interest at variable rates which, on a weighted
18
average annual basis, amounted to 4.98% and 5.53% as of, and for the three-month
period ended, June 30, 2001, respectively, and 6.98% and 6.85% as of, and for
the three-month period ended, June 30, 2000.
Borrowings under the term loan facility are repayable in quarterly
installments totaling $50,000 in fiscal 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, June 30,
2001. Certain of the Company's non-U.S. subsidiaries have separate credit
facilities for working capital or trade financing purposes.
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. No interest rate hedging contracts were in place as of June 30,
2001.
As described in Note 8 to the Condensed Consolidated Financial Statements,
on July 5, 2001 the Company completed the TH Europe Acquisition for $200,000
funded from existing cash. Other than this transaction, there were no
significant committed capital expenditures at June 30, 2001. The Company expects
fiscal 2002 capital expenditures, excluding the TH Europe Acquisition, to
approximate $90,000 to $100,000, primarily related to the construction of
additional retail stores as well as maintenance or selective expansion of the
Company's in-store shop and fixtured area program.
The Company intends to fund its cash requirements for the balance of fiscal
2002 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.
Seasonality
The Company's business is impacted by the general seasonal trends
characteristic of the apparel and retail industries. Wholesale revenues are
generally highest during the second and fourth fiscal quarters, while the
Company's Retail segment generally contributes its highest levels of revenue
during the third fiscal quarter. As the timing of Wholesale product shipments
and other events affecting the retail business may vary, results for any
particular quarter might not be indicative of results for the full year.
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. Substantially all inventory purchases from contract manufacturers
throughout the world are also denominated in United States dollars; however,
purchase prices for the Company's products may be impacted by fluctuations in
the exchange rate between the United States dollar and the local currencies of
the contract manufacturers, which may have the effect of increasing the
Company's cost of goods in the future. During the last three fiscal years,
exchange rate fluctuations have not had a material impact on the Company's
inventory costs; however, due to the number of currencies involved and the fact
that not all foreign currencies react in the same manner against the United
States dollar, the Company cannot
19
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 anticipated cash
flows. These include the purchase of inventory, capital expenditures and the
collection of foreign royalty payments. The Company enters into forward
contracts with maturities of up to 15 months 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. At June 30, 2001, the
Company had contracts to exchange foreign currencies, principally, the Japanese
yen and the Canadian dollar, having a total notional amount of $10,198. No
significant gain or loss was inherent in such contracts at June 30, 2001. Gains
or losses on such forward contracts are recognized in other comprehensive income
on a mark-to-market basis and, ultimately, in earnings at the time the
underlying hedge transaction is completed or recognized in earnings.
Recently Issued Accounting Standards
A discussion of the effects of recently issued accounting standards appears
in Note 9 to the Condensed Consolidated Financial Statements in Item 1.
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 and uncertainties, 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,
distributors and franchisees in particular, changes in trends in the market
segments and geographic areas in which the Company competes, the level of demand
for the Company's products, actions by our major customers or existing or new
competitors, changes in currency and interest rates 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, 2001. 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.
20
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, results of operations or cash flows 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. The federal judge in Saipan has
scheduled the hearing on the defendants' motion to dismiss the complaint for
August 10, 2001, the hearing on class certification for February 14, 2002 and
the hearing on preliminary settlement approval for February 28, 2002.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Material Contracts
(a) Stock Purchase Agreement, dated as of June 29, 2001, by
and among THC, THEH and TH Europe Holdings (previously
filed as Exhibit 10.1 to THC's Current Report on Form
8-K dated July 6, 2001 and incorporated herein by
reference)
(b) Guarantee, dated as of June 29, 2001, by AIHL-TH Limited
in favor of THC and THEH (previously filed as Exhibit
10.2 to THC's Current Report on Form 8-K dated July 6,
2001 and incorporated herein by reference)
(c) Waiver of Certain Payments, dated as of June 29, 2001,
by Thomas J. Hilfiger (previously filed as Exhibit 10.3
to THC's Current Report on Form 8-K dated July 6, 2001
and incorporated herein by reference)
(d) Waiver of Certain Payments, dated as of June 29, 2001,
by Joel J. Horowitz (Previously filed as Exhibit 10.4 to
THC's Current Report on Form 8-K dated July 6, 2001 and
incorporated herein by reference)
(e) Non-Competition Agreement, dated as of June 29, 2001,
among Silas K.F. Chou, Lawrence S. Stroll and THC
(previously filed as Exhibit 10.5 to THC's Current
Report on From 8-K dated July 6, 2001 and incorporated
herein by reference)
11. Computation of Net Income Per Ordinary Share
(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, 2001.
21
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, 2001 By: /s/ Joel J. Horowitz
-------------- -------------------------
Joel J. Horowitz
Chief Executive Officer and President
Tommy Hilfiger Corporation
Date: August 9, 2001 By: /s/ Joseph Scirocco
-------------- -------------------------
Joseph Scirocco
Principal Accounting Officer
Tommy Hilfiger Corporation
22
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10. Material Contracts
(a) Stock Purchase Agreement, dated as of June 29, 2001, by and
among THC, THEH and TH Europe Holdings (previously filed as
Exhibit 10.1 to THC's Current Report on Form 8-K dated July
6, 2001 and incorporated herein by reference)
(b) Guarantee, dated as of June 29, 2001, by AIHL-TH Limited in
favor of THC and THEH (previously filed as Exhibit 10.2 to
THC's Current Report on Form 8-K dated July 6, 2001 and
incorporated herein by reference)
(c) Waiver of Certain Payments, dated as of June 29, 2001, by
Thomas J. Hilfiger (previously filed as Exhibit 10.3 to THC's
Current Report on Form 8-K dated July 6, 2001 and
incorporated herein by reference)
(d) Waiver of Certain Payments, dated as of June 29, 2001, by
Joel J. Horowitz (Previously filed as Exhibit 10.4 to THC's
Current Report on Form 8-K dated July 6, 2001 and
incorporated herein by reference)
(e) Non-Competition Agreement, dated as of June 29, 2001, among
Silas K.F. Chou, Lawrence S. Stroll and THC (previously filed
as Exhibit 10.5 to THC's Current Report on From 8-K dated
July 6, 2001 and incorporated herein by reference)
11. Computation of Net Income Per Ordinary Share
23