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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to _____.
Commission file number 1-11226.
TOMMY HILFIGER CORPORATION
(Exact name of registrant as specified in its charter)
British Virgin Islands Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6/F, Precious Industrial Centre
18 Cheung Yue Street
Cheung Sha Wan
Kowloon, Hong Kong Not Applicable
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code 852-2745-7798
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Ordinary Shares, $.01 par value per share New York Stock Exchange
Tommy Hilfiger U.S.A., Inc. 6.50% Notes due 2003 New York Stock Exchange
Tommy Hilfiger U.S.A., Inc. 6.85% Notes due 2008 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price on June 4, 1999: Ordinary Shares, $.01
----------------------
Par Value - $2,776,108,558
- --------------------------
The number of shares outstanding of the registrant's stock as of June 4, 1999:
Ordinary Shares, $.01 Par Value - 47,162,044 shares.
- ---------------------------------------------------
TABLE OF CONTENTS
-----------------
Item Page
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PART I
Item 1. Business.......................................... 3
Item 2. Properties........................................ 12
Item 3. Legal Proceedings................................. 13
Item 4. Submission of Matters to a Vote of
Security Holders................................. 14
PART II
Item 5. Market for Registrant's Common Equity
and Related Matters.............................. 14
Item 6. Selected Financial Data........................... 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................... 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk................................ 25
Item 8. Financial Statements and Supplementary
Data............................................. 26
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure....................................... 27
PART III
Item 10. Directors and Executive Officers of
the Company...................................... 27
Item 11. Executive Compensation............................ 30
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................ 36
Item 13. Certain Relationships and Related
Transactions..................................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................... 40
2
PART I
ITEM 1. BUSINESS
General
Tommy Hilfiger Corporation ("THC" or the "Company"; unless the context
indicates otherwise, all references to the "Company" include THC and its
subsidiaries), through its subsidiaries, designs, sources and markets men's and
women's sportswear, jeanswear and childrenswear under the Tommy Hilfiger
trademarks. See "Acquisition of Womenswear, Jeanswear and Canadian Licensees."
Through a range of strategic licensing agreements, the Company is expanding its
product lines to offer a broader array of apparel, accessories, footwear,
fragrance and home furnishings. The Company's products can be found in leading
department and specialty stores throughout the United States, Canada, Mexico,
Central and South America, Europe, Japan, Hong Kong and other countries in the
Far East. Tommy Hilfiger is the Company's principal designer and provides
leadership and direction for all aspects of the design process. The Company's
apparel is designed to combine classic American styling with unique details and
fit to give time-honored basics a fresh and updated look for customers who
desire high quality, designer clothes at competitive prices. The Company was
organized under the laws of the British Virgin Islands in June 1992.
The Company's principal growth strategy has been to expand its in-store
shop program, whereby participating retailers set aside floor space highlighted
by distinctive fixtures dedicated for the exclusive sale of the Company's
products by the retailer. The Company expects to continue to pursue this
strategy by increasing the number and size of its in-store shops and fixtured
areas in the United States and internationally.
In addition to continuing to expand the in-store shop and fixtured areas
program, the Company plans to grow by broadening its range of product offerings,
both in-house and through licensing arrangements, and by expanding its channels
of distribution. Through the expansion of its product lines, the Company
believes it will serve a wider variety of customer needs. Since 1992, the
Company has introduced several in-house products, including childrenswear,
athleticwear and jeanswear. Additionally, the Company has introduced new
products through licensing agreements, including fragrances, robes and
sleepwear, footwear, home furnishings and other accessories. See "Merchandising
Strategies - Licensing and Distributorships."
As of March 31, 1999, the Company operated 73 outlet stores and five
specialty retail stores, including a store in London, England and currently
plans to open approximately 8 to 10 additional outlet stores by March 31, 2000.
The Company also operates two flagship stores, one in Beverly Hills, California
opened in November 1997 and one in London, England opened in March 1999. See
"Merchandising Strategies - Retailing."
As of March 31, 1999, the Company was engaged in principally three
reportable segments: Wholesale, Retail and Licensing. The Wholesale segment
consists of the design and sourcing of men's sportswear and jeanswear, women's
casualwear and jeanswear and childrenswear for wholesale distribution. The
Retail segment reflects the operations of the Company's outlet, specialty and
flagship stores. The Licensing segment consists of the operations of licensing
the Company's trademarks for specified products in specified geographic areas.
3
Share Split
On June 4, 1999, the Company announced that its Board of Directors had
approved and declared a two-for-one split of the Company's Ordinary Shares, par
value $.01 per share (the "Ordinary Shares"). The split will be effected in the
form of a dividend of one Ordinary Share per Ordinary Share issued and
outstanding or held by the Company in its treasury (the "Share Split"), and will
be payable on July 9, 1999 to shareholders of record at the close of business on
June 18, 1999. In connection with the Share Split, the Board of Directors of
the Company also approved an increase in the number of authorized Ordinary
Shares to 150,000,000 from 75,000,000.
The share and per share amounts in this Annual Report on Form 10-K do not
reflect the effect of the Share Split. The pro forma effect of the Share Split
is disclosed in Note 19 to the Consolidated Financial Statements in Item 8.
Acquisition of Womenswear, Jeanswear and Canadian Licensees
On May 8, 1998, following the approval by the shareholders of the Company
on May 5, 1998, the Company, through its wholly owned subsidiaries, acquired
Pepe Jeans USA, Inc., the Company's United States womenswear and jeanswear
licensee ("Pepe USA"), TJ Far East Limited, Pepe USA's buying agency affiliate
("Pepe Far East"), and Tomcan Investments Inc. ("Tomcan"), the parent
corporation of Tommy Hilfiger Canada Inc. ("TH Canada"), the Company's Canadian
licensee (collectively, the "Acquired Companies"), for an aggregate purchase
price of $755,760,000 in cash plus 9,045,930 Ordinary Shares of the Company (the
"Acquisition"). The cash portion of the purchase price was funded through a
combination of cash on hand, the issuance of debt securities in a public
offering and bank borrowings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in Item 7.
Pursuant to a license granted by the Company, Pepe USA had exclusive United
States rights to develop, source and market men's, women's and girls' jeanswear
and jeans-related apparel, including women's and girls' casualwear, bearing the
Tommy Jeans and Tommy Hilfiger trademarks. Pepe USA markets its products
principally through in-store shops and fixtured areas in leading department
stores and through leading specialty stores. Pepe Far East and its subsidiaries
perform buying agency services for womenswear and jeanswear under the Tommy
Jeans and Tommy Hilfiger trademarks for both Pepe USA and the Company's third-
party distributors outside the United States.
Pursuant to a license granted by the Company, TH Canada had exclusive
Canadian rights to source, manufacture and distribute apparel bearing the Tommy
Hilfiger and Tommy Jeans trademarks, including men's sportswear and
athleticwear, boys' sportswear, women's and girls' casualwear and men's, women's
and girls' jeanswear. TH Canada markets Tommy Hilfiger and Tommy Jeans products
principally through leading specialty stores and through in-store shops and
fixtured areas in leading department stores.
Information on the components of the Company's pro forma net revenue,
giving effect to the Acquisition, is presented in Note 15 to the Consolidated
Financial Statements in Item 8. For more information relating to the
Acquisition, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" in Item 7, Note
4
15 to the Consolidated Financial Statements in Item 8 and "Certain Relationships
and Related Transactions - The Acquisition" in Item 13.
Merchandising Strategies
Wholesale
The Company organizes its men's and children's apparel collections,
including products produced under licensing arrangements, into three primary
product lines: Core, Core Plus and Fashion.
Core
The Core line is comprised of the Company's seasonless, or very basic,
products all in classic solid colors. Core items are made available for sale by
the Company throughout the year and, therefore, generally are kept in stock by
the Company. Since Core items are seasonless, they do not have fixed selling
periods and, therefore, retailers' inventories of Core products tend to be
maintained throughout the year and reordered as necessary. The Company receives
orders from most of its larger customers for Core products on an electronic data
interchange ("EDI") system, which expedites reorders. See "Management
Information Systems."
Core Plus
The Core Plus line is comprised of a broad selection of seasonal "basics"
which are derived from Core but offer a greater variety of fabrics, colors and
patterns, such as stripes and plaids. The Core Plus line also incorporates
certain Fashion products that had previously been successful at retail. The
Company sells four different seasonal groups of Core Plus products each year.
As compared to Fashion items, Core Plus items provide the retailer with longer
selling periods at regular prices. Because Core Plus is a broader product
category than Fashion, with a longer regular-price selling period, the Company's
shipping deadlines are more flexible and the Company may be able to place
reorders when demand is high.
Fashion
The Fashion line represents the most updated component of the Company's
product line. Fashion items consist of a group of product classifications
coordinated around a seasonal theme. The Company offers Fashion products under
at least three themes per season, thereby creating a continual flow of new
merchandise in the marketplace.
5
Licensing and Distributorships
In connection with the Company's business strategy of expanding its market
penetration through product line and geographic expansion, the Company considers
entering into licensing and distribution agreements with respect to certain
products and geographic regions if the Company believes such arrangements
provide more effective manufacturing, distribution and marketing of such
products than could be achieved in-house. The Company continually pursues new
opportunities in product categories which are believed to be complementary to
its existing product lines, as well as opportunities for geographic expansion
through licenses and distributorships to enhance its international presence.
As shown in the table below, since Fall 1992, the Company has introduced
numerous product lines through license arrangements with companies which are
among the industry leaders in their respective categories and has entered into
several strategic geographic licenses and distributorships:
Product Category Licensee Available at Retail
- ---------------- -------- -------------------
Socks Mountain High Hosiery, Inc. Holiday 1992
Neckwear Superba, Inc. Father's Day 1993
Belts and small leather goods Trafalgar, Inc. Fall 1993
Men's suits, sport coats, dress slacks, top coats, formal wear Hartmarx Corporation Fall 1994
Men's dress shirts Oxford Industries, Inc. Fall 1994
Men's underwear Jockey International, Inc. Fall 1994
Men's fragrance Aramis, Inc. (Estee Lauder) Father's Day 1995
Men's jeanswear(a) Pepe Jeans USA, Inc. Fall 1995
Men's robes and sleepwear Russell-Newman, Inc. Holiday 1995
Golfwear Oxford Industries, Inc. Holiday 1995
Eyewear Liberty Optical Fall 1996
Women's fragrance Aramis, Inc. (Estee Lauder) Fall 1996
Women's casualwear(a) Pepe Jeans USA, Inc. Fall 1996
Men's footwear The Stride Rite Corporation Spring 1997
Men's sunglasses Lantis Eyewear Corporation Fall 1997
Athletics fragrance Aramis, Inc. (Estee Lauder) Spring 1998
Formal accessories Marks & Barry Spring 1998
Linens, bedding and bath products Revman Industries, Inc. Summer 1998
Young women's jeanswear(a) Pepe Jeans USA, Inc. Fall 1998
Leather outerwear GIII Leather Fashions, Inc. Fall 1998
Women's footwear The Stride Rite Corporation Holiday 1998
Women's robes and sleepwear Russell-Newman, Inc. Holiday 1998
Women's sunglasses Lantis Eyewear Corporation Holiday 1998
Women's hosiery Mountain High Hosiery, Inc. Holiday 1998
Bicycles Cannondale Corporation Fall 1998
Women's handbags, belts and small leather goods and sportbags Dickson Licensing Limited Fall 1999
Men's tailored clothing (Europe) Strellson AG Fall 1999
Men's and women's jewelry Victoria & Co. Ltd. Spring 2000
Women's hosiery and legwear Holt Hosiery Mills Spring 2000
Women's intimate apparel Bestform Intimates Fall 2000
Men's and women's watches Movado Group, Inc. Spring 2001
Geographic Territory Licensee/Distributor Available at Retail
- -------------------- -------------------- -------------------
Central and South America American Sportswear S.A. 1989
Canada(a) Tommy Hilfiger Canada Inc. 1990
Japan Novel-ITC Licensing Limited 1991(b)
Mexico Tommy Hilfiger Mexico SA de CV 1995
Europe Tommy Hilfiger Europe B.V. 1997
Asia-Pacific KSDP International 1998
______
(a) Businesses acquired by the Company in the Acquisition in fiscal year 1999.
(b) From 1991 to 1996, the operations in Japan were conducted through a Company
joint venture with Itochu.
In addition to a royalty payment or license fee, all of the Company's
licensees and distributors are required to contribute to the advertisement and
promotion of Tommy Hilfiger products on the basis of a percentage of their net
sales of Tommy Hilfiger products or a
6
percentage of their net purchases of Tommy Hilfiger products (depending on the
terms of the license or distributorship agreement), subject to minimum amounts.
Retailing
The Company believes its outlet store business has positioned it to take
advantage of an important segment of the retail apparel industry that appeals to
customers' value orientation and provides the Company with an additional channel
of distribution. The Company stocks its outlet stores with first-quality
products manufactured specifically for its outlet stores' customers and, to a
small degree, with out-of-season products. As of March 31, 1999, the Company
operated 73 outlet stores and currently plans to open approximately 8 to 10
additional outlet stores by March 31, 2000. The Company's outlet stores are
located primarily in major outlet centers in the United States. As of March 31,
1999, the Company operated five specialty retail stores, including a store in
London, England, and two flagship stores. In connection with the Acquisition,
the Company concluded that its specialty store formats could not adequately
accommodate its broad array of merchandise, and decided to discontinue these
operations in their present form. During fiscal 1999, the Company closed three
of its specialty stores.
Flagship stores serve as showcases for all of the Company's products as it
seeks to further establish the brand in the elite circle of designers with
international recognition. This investment underlines the Company's strong
belief in the role of flagships as image builders for the Tommy Hilfiger brand.
These stores may be followed by a flagship in New York City, which represents an
additional key market.
Design
Tommy Hilfiger is the Company's principal designer and provides leadership
and direction for all aspects of the design process. Tommy Hilfiger selects
designers on the basis of their understanding of the retail industry and their
ability to understand what consumers desire and which designs are most likely to
be commercially viable. Design teams are responsible for separate product
classifications. In addition, the Company has senior designers, whose
responsibility is to coordinate the design teams. Design teams utilize computer
aided design stations, which provide timely translation of designs into sample
depictions varying in color, cut and style. The speed of production and breadth
of the resulting output assist the Company in selecting desirable designs for
the sourcing and research and development staffs to assess.
Research and Development
The Company employs senior production executives who oversee a staff whose
primary functions are to identify ways to develop new designs and products more
efficiently, and to identify new and more cost-effective sourcing methods. This
group receives new product direction from Tommy Hilfiger and then researches and
develops the potential product. This process is designed to avoid costly
attempts to develop products that require designs or production methods that are
not efficient. In addition, the staff researches and identifies new sources for
both fabrics and manufacturing worldwide in order to control or reduce
manufacturing costs while maintaining the Company's quality standards.
7
Sales and Marketing
Tommy Hilfiger products are sold throughout the United States in major
department and specialty retail store locations. The Company's department store
customers include major United States retailers such as Dillard Department
Stores, Federated Department Stores (including Macy's, Bloomingdale's, and
Burdines), The May Department Stores Company (including Lord & Taylor and
Foley's), Belk Stores, Saks, Inc. and Dayton Hudson Corporation. The Company
believes that its relationships with major retailers, including the active sales
involvement of the Company's senior management, are important elements of its
marketing strategy. The Company's strategy is to continue to grow by broadening
its United States in-store shop and fixtured areas program, expanding its
product lines and marketing to new customers both in the United States and
internationally.
A significant aspect of the Company's ability to increase the commitment of
its existing customers and to attract new customers is its in-store shop and
fixturing program, whereby participating retailers set aside floor space
highlighted by distinctive fixtures dedicated for exclusive sale of the
Company's products by the retailer. This program enables the retailer to create
an environment consistent with the Company's image and to display and stock a
greater volume of the Company's products per square foot of retail space. Such
shops and fixtured areas encourage longer-term commitment by the retailer to the
Company's products, including the retailer's provision of upgraded staffing.
These shops and fixtured areas also increase consumer product recognition and
loyalty because of the retail customer's familiarity with the location of the
Company's products in the store. The continued expansion of the Company's in-
store shop and fixturing programs is dependent on market conditions, including
continued demand for the Company's products.
The Company's sales and marketing departments include individuals located
in the Company's New York headquarters, Atlanta and Dallas showrooms and Los
Angeles, Chicago, Philadelphia, San Francisco and Cincinnati regional sales
territories. The sales force sells only the Tommy Hilfiger collection.
The Company employs an extensive staff of merchandise coordinators located
throughout the United States. These merchandisers educate the retailers'
salespeople about the Company's current products, provide the Company with
first-hand consumer feedback concerning consumer reaction to the Company's
products and coordinate the in-store displays with the department stores. In
addition to the coordinator program, the Company also conducts a training
program for the department stores' Tommy Hilfiger selling specialists. The
program is designed to educate specialists on the Company's image and
merchandising standards and to promote the development and servicing of
clientele. The program educates specialists in customer assistance and advice,
including merchandise selection and the coordination of complete outfits of
Tommy Hilfiger products.
The Company sells substantially all its out-of-season products, which are
principally from the Fashion and Core Plus product lines, to certain discount
retailers and through its Company owned outlet stores. The net revenues from
such sales represented less than 15% of the Company's total net revenue for each
of the last three fiscal years.
8
Advertising, Public Relations and Promotion
The Company believes that advertising to promote and enhance the Tommy
Hilfiger brand and the image of Tommy Hilfiger products is important to its
long-term growth strategy. All of the Company's licensees and distributors are
required to contribute to the advertisement and promotion of Tommy Hilfiger
products a percentage of their net sales of Tommy Hilfiger products or a
percentage of their net purchases of Tommy Hilfiger products (depending on the
terms of the license or distributorship agreement), subject to minimum amounts.
Advertising by the Company, its licensees and most of its distributors is
coordinated by the Company and principally appears in magazines, newspapers, and
outdoor advertising media. In addition, selected personal appearances by Tommy
Hilfiger, corporate sponsorships and charitable programs are utilized to further
enhance awareness of the Company's image and promote the Company's products.
The Company employs an advertising and public relations staff to implement these
efforts.
Sourcing
The Company's sourcing strategy is to contract for the manufacture of its
products. Outsourcing allows the Company to maximize production flexibility
while avoiding significant capital expenditures, work-in-process inventory
buildups and the costs of managing a large production work force. The Company
inspects products manufactured by contractors to determine whether they meet the
Company's standards. See "Quality Control."
The Company imports most of its finished goods because it believes it can
import higher quality products at lower costs than could be achieved
domestically. Management maintains extensive and long-term relationships with
leading manufacturers in the Far East, including, among others, manufacturers
located in Indonesia, Thailand, India, the Philippines, Taiwan and Mauritius.
None of the countries from which the Company sources accounts for more than 15%
of the total cost of products purchased. The Company monitors duty, tariff and
quota-related developments and continually seeks to minimize its potential
exposure to duty, tariff and quota-related risks through, among other measures,
geographical diversification of its manufacturing sources, the maintenance of
its buying offices in Hong Kong, Macau, India and the United States, allocation
of production to merchandise categories where more quota is available and shifts
of production among countries and manufacturers.
The Company's production and sourcing staff oversees all aspects of apparel
manufacturing and production, the negotiation for raw materials and research and
development of new products and sources. The Company's buying offices perform
product development, sourcing, production scheduling and quality control. In
addition, the Company contracts with various buying subagents that perform
similar services for the Company and its licensees and geographic distributors,
for specified commissions.
The Company has its products manufactured according to plans prepared each
year which reflect prior years' experience, current fashion trends, economic
conditions and management estimates of a line's performance. In certain cases,
the Company separately negotiates with suppliers for the sale of required raw
materials, which are then purchased by its contractors in accordance with the
Company's specifications. The Company limits its exposure to holding excess
inventory by committing to purchase a portion of total projected demand and the
Company, in its experience, has been able to satisfy its excess demand through
reorders. The
9
Company believes that its policy of limiting its commitments for purchases early
in the season reduces its exposure to excess inventory and obsolescence.
As noted above, the Company does not own or operate any manufacturing
facilities and is therefore dependent upon third parties for the manufacture of
all its products. The inability of a manufacturer to ship orders of the
Company's products in a timely manner, including as a result of local financial
market disruption which could impair the ability of such suppliers to finance
their operations, or to meet quality standards, could cause the Company to miss
the delivery date requirements of its customers for those items, which could
result in cancellation of orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse effect on the
Company's financial condition and results of operations. The Company has no
long-term formal arrangements with any of its suppliers and historically has
experienced only limited difficulty in satisfying its raw material and finished
goods requirements. Although the Company believes it could replace such
suppliers without a material adverse effect on the Company, there can be no
assurance that such suppliers could be replaced in a timely manner, and the loss
of such suppliers could have a significant effect on the Company's short-term
operating results.
Quality Control
The Company's quality control program is designed to ensure that purchased
goods meet the Company's standards. The Company inspects prototypes of each
product prior to cutting by the contractors and performs two in-line inspections
and a final inspection prior to shipment. All finished goods are shipped to the
Company's New Jersey facilities for re-inspection and distribution. While the
Company's return policy permits customers to return defective products for
credit, less than 1% of the Company's shipments in fiscal 1999 were returned as
defective under this policy.
Management Information Systems
The Company believes that high levels of automation and technology are
essential to maintain its competitive position and the Company continues to
invest in computer hardware, systems applications and networks to enhance and to
speed the apparel design process, to support the sale and distribution of
products to its customers and to improve the integration and efficiency of its
United States and Far East operations. The Company utilizes computer-aided
design stations for use by the design teams, which provide timely translations
of designs into sample depictions varying in color, cut and style. The Company
also uses an EDI system to receive on-line orders from its customers and to
accumulate sales information on its products. The EDI technology enables the
Company to provide valuable sales information and inventory maintenance
information services to its customers who have adopted such technology. Nine of
the Company's 10 largest customers communicate with the Company through EDI
technology.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" in Item 7.
Distribution
In the United States, wholesale distribution occurs at three New Jersey
facilities which average approximately 342,000 square feet. The facilities are
operated and principally staffed by
10
an independent contractor who charges the Company on the basis of the number of
items processed, subject to a minimum annual fee. In addition, the Company
utilizes a 203,000 square foot facility in New Jersey for retail distribution.
The Company maintains its distribution management group and certain
administrative functions at its New Jersey facilities.
The Company's Canadian distribution is processed through a 174,000 square
foot facility located in Montreal, Quebec.
Credit and Collection
The Company collects substantially all of its receivables from U.S.
customers through a credit company subsidiary of a large financial institution
pursuant to an agreement whereby the credit company pays the Company after the
credit company receives payment from the Company's customer. The credit company
establishes maximum credit limits for each customer account. If the customer
becomes bankrupt or insolvent the credit company pays the Company 50% of the
outstanding receivable. If the receivable becomes 120 days past due, the full
amount is reimbursable by the credit company.
The Company has a similar arrangement with another large financial
institution for credit services to its Canadian subsidiary. In both cases the
Company believes that the credit risk associated with such financial
institutions is minimal.
Bad debts as a percentage of net sales were less than 0.1% in each of the
Company's last three fiscal years.
Trademarks
The Company owns and utilizes eight principal trademarks: the names TOMMY
HILFIGER (R), TOMMY JEANS(R), TOMMY(R), TOMMY GIRL(R) and HILFIGER ATHLETIC(TM),
and the distinctive flag logo, crest design and green eyelet device. Tommy
Hilfiger Licensing, Inc. ("THLI") is a subsidiary of Tommy Hilfiger U.S.A., Inc.
("TH USA"), which is a subsidiary of THC. THLI has registered or applied for
registration for these trademarks for use in the United States and in numerous
countries worldwide, including, inter alia, in North America, Europe, Asia,
South and Central America. The Company regards its trademarks and other
proprietary intellectual property rights as valuable assets in the marketing of
its products. THLI is a party to an agreement with Mr. Hilfiger that restricts
the sale, lease, license or other conveyance of THLI's trademarks, the amendment
of the license agreement between THLI and TH USA, and the creation of any lien
on THLI's trademarks without Mr. Hilfiger's consent, until Mr. Hilfiger's death,
or until termination of Mr. Hilfiger's employment with TH USA without the
consent of TH USA.
Backlog
The Company generally receives orders approximately three to five months
prior to the time the products are delivered to stores. Thus, the Company's
backlog of orders, which the Company believes, based on industry practice and
past experience, will result in sales, at March 31, 1999 represents a
significant portion of the Company's expected sales through September 30, 1999.
At March 31, 1999, the Company's backlog of orders was approximately $820
million, compared to approximately $303 million at March 31, 1998. Management
believes that the pro
11
forma backlog as of March 31, 1998, including that of the Acquired Companies,
was approximately $638 million. The Company's backlog depends upon a number of
factors, including the timing of "market weeks" during which a significant
percentage of the Company's orders are received and the timing of shipments.
Accordingly, a comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments.
Competition; Changes in Fashion Trends
The apparel industry is highly competitive. The Company competes with
numerous domestic and foreign designers, brands and manufacturers of apparel,
accessories and other products, some of which may be significantly larger and
more diversified, and have greater resources, than the Company. In addition,
the Company believes that its success depends in substantial part on its ability
to anticipate, gauge and respond to changing consumer demand and fashion trends
in a timely manner. The Company attempts to minimize the risk of changing
fashion trends and product acceptance by closely monitoring retail sales trends.
However, if fashion trends shift away from the Company's products, or if the
Company otherwise misjudges the market for its product lines, it may be faced
with a significant amount of unsold finished goods inventory or other conditions
which could have a material adverse effect on the Company.
Dependence on Customers Under Common Control
The Company's department store customers include major United States
retailers, certain of which are under common ownership. When considered
together as a group under common ownership, sales to the department store
customers which were owned by Dillard Department Stores, Federated Department
Stores and The May Department Stores Company accounted for approximately 20%,
18%, and 14%, respectively, of the Company's fiscal 1999 net wholesale product
sales. A decision by the controlling owner of a group of department stores to
decrease the amount purchased from the Company or to cease carrying the
Company's products could have a material adverse effect on the Company.
Employees
At March 31, 1999, the Company had approximately 2,300 full-time employees
and 700 part-time employees. Virtually all of the Company's part-time employees
were employed in the Company's retail stores. None of the Company's employees
is a member of a union. The Company considers its relations with its employees
to be excellent.
ITEM 2. PROPERTIES
The principal executive offices of THC are located at 6/F, Precious
Industrial Centre, 18 Cheung Yue Street, Cheung Sha Wan, Kowloon, Hong Kong. TH
USA's principal executive offices are located at 25 West 39th Street, New York,
New York 10018.
The general location, use and approximate size of the principal properties
which the Company occupied and all of which were leased as of March 31, 1999,
except for the Hong Kong office
12
space and a New York property which houses TH USA's headquarters, sales offices
and showrooms, are set forth below:
Approximate
Area in Square
Location Use Feet
- -------- --- ----
Hong Kong.......................................... Executive offices and principal buying office 20,000
New York, New York................................. TH USA headquarters, sales offices and showrooms 170,000
New York, New York................................. Design, production and administrative offices 115.000
Edison, New Jersey................................. Warehouse distribution and administrative offices 203,000
South Brunswick, New Jersey........................ Warehouse distribution and administrative offices 360,000
Secaucus, New Jersey............................... Warehouse distribution and administrative offices 324,000
Kearny, New Jersey................................. Warehouse distribution 342,500
Montreal, Quebec................................... Warehouse distribution, sales and administrative
offices and showrooms 174,000
The Company operates 73 outlet stores, each averaging approximately 3,900
square feet, generally located in major outlet centers in the U.S., five retail
stores in metropolitan areas, including one in London, England, each averaging
approximately 3,300 square feet, and two flagship stores, each averaging
approximately 18,000 square feet, one in Beverly Hills, California and one in
London, England. In addition, the Company has two regional showrooms outside of
New York City and an administrative office in Wilmington, Delaware. All of such
stores and showrooms are leased.
ITEM 3. LEGAL PROCEEDINGS
Saipan Litigation. On January 13, 1999, two actions were filed against the
-----------------
Company and other garment manufacturers and retailers asserting claims that
garment factories located on the island of Saipan, which allegedly supply
product to the Company and other co-defendants, engage in unlawful practices
relating to the recruitment and employment of foreign workers. One action,
brought in San Francisco Superior Court (the "State Action"), was filed by a
union and three public interest groups alleging unfair competition and false
advertising by the Company and others. It seeks equitable relief, restitution
and disgorgement of profits relating to the allegedly wrongful conduct, as well
as interest and an award of fees to the plaintiffs' attorneys. The other, an
action seeking class action status filed in federal court for the Central
District of California (the "Federal Action"), was brought on behalf of an
alleged class consisting of the Saipanese factory workers. The defendants
include both companies selling goods purchased from factories located on the
island of Saipan and the factories themselves. This complaint alleges claims
under RICO, the Alien Tort Claims Act, federal anti-peonage and indentured
servitude statutes and state and international law. It seeks equitable relief
and damages, including treble and punitive damages, interest and an award of
fees to the plaintiffs' attorneys.
In addition, the same law firm that filed the State Action and the Federal
Action has filed an action seeking class action status in the Federal Court in
Saipan. This action is brought on behalf of Saipanese garment factory workers
against the Saipanese factories and alleges violation of federal and Saipanese
wage and employment laws. The Company is not a defendant in this action.
In the State Action, all defendants, including the Company, have filed a
demurrer challenging the legal sufficiency of the complaint. In the Federal
Action, all defendants, including the Company, have filed a motion to transfer
venue and a motion to dismiss the complaint for failure to state a claim. The
plaintiffs have not yet filed their opposition to these motions.
13
Shareholder Derivative Litigation. On February 2, 1998, February 12, 1998
---------------------------------
and February 17, 1998, three alleged holders of Ordinary Shares filed purported
derivative actions in New York State court on behalf of the Company against the
members of the Board of Directors. The actions were later consolidated and an
amended complaint was served on May 29, 1998. The amended complaint alleged
that the Board's approval of the Acquisition constituted a breach of fiduciary
duty and corporate waste, and sought equitable relief and damages in favor of
the Company, and an award of fees to the plaintiffs' attorneys. On June 15,
1998, the Company and its directors moved to dismiss the consolidated action on
several grounds. On December 9, 1998, the Court dismissed the action, ruling
that the British Virgin Islands, the Company's place of incorporation, is the
appropriate forum in which to litigate these derivative claims. In January
1999, the plaintiffs filed a notice of appeal with respect to the Court's
ruling.
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their businesses. In the opinion of the Company's
management, based on advice of counsel, the resolution of these matters will not
have a material effect on its financial position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The Company's Ordinary Shares, par value U.S. $0.01, are listed and traded
on the New York Stock Exchange under the symbol "TOM." As of June 4, 1999,
there were approximately 913 record holders of the outstanding Ordinary Shares.
The following table sets forth, for each of the periods indicated, the high
and low sales prices per Ordinary Share as reported on the New York Stock
Exchange Composite Tape.
High Low
---- ---
Fiscal Year ended March 31, 1999
First Quarter.......................................... 70 3/8 56 1/2
Second Quarter......................................... 65 1/2 40 1/16
Third Quarter.......................................... 61 3/8 34 1/4
Fourth Quarter......................................... 76 3/4 57 11/16
Fiscal Year ended March 31, 1998
First Quarter.......................................... 53 3/4 36 7/8
Second Quarter......................................... 51 1/8 39 3/16
Third Quarter.......................................... 50 3/8 33
Fourth Quarter......................................... 61 1/2 35 3/16
In the past two fiscal years, the Company has not paid any dividends. The
Company anticipates that all of its earnings in the foreseeable future will be
retained for the development and
14
expansion of its business and, therefore, has no current plans to pay cash
dividends. Future dividend policy will depend on the Company's earnings, capital
requirement, financal condition, restrictions imposed by agreements governing
indebtness of the Company and its subsidiaries, availability of dividends from
subsidiaries, receipt of funds in connection with repayment of loans to
subsidiaries or advances from operating subsidiaries and other factors
considered revelant by the Board of Directors of the Company. For certain
restrictions on the ability of subsidiaries of the Company to pay dividends to
the Company, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" in Item 7.
15
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
The following selected financial data have been derived from the Company's
Consolidated Financial Statements. The information should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
that appear elsewhere in this Annual Report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
Fiscal Year Ended March 31,
-------------------------------------------------------------
1999(1) 1998 1997 1996 1995
------- ---- ---- ---- ----
(in thousands, except per share amounts)
Statement of Operations Data:
- -----------------------------
Net revenue...................................... $1,637,073 $847,110 $661,688 $478,131 $320,985
Cost of goods sold............................... 872,607 447,524 344,884 258,419 174,584
---------- -------- -------- -------- --------
Gross profit..................................... 764,466 399,586 316,804 219,712 146,401
Selling, general and administrative expenses..... 484,185 236,571 190,976 132,270 85,954
---------- -------- -------- -------- --------
Income from operations........................... 280,281 163,015 125,828 87,442 60,447
Interest expense................................. 39,525 1,258 761 754 207
Interest income.................................. 5,615 7,013 6,181 5,712 3,217
---------- -------- -------- -------- --------
Income before income taxes....................... 246,371 168,770 131,248 92,400 63,457
Provision for income taxes....................... 72,654 55,590 44,866 30,900 22,742
---------- -------- -------- -------- --------
Net income....................................... $ 173,717 $113,180 $ 86,382 $ 61,500 $ 40,715
========== ======== ======== ======== ========
Basic earnings per share......................... $3.77 $3.03 $2.33 $1.72 $1.16
========== ======== ======== ======== ========
Weighted average shares outstanding.............. 46,132 37,374 37,059 35,767 34,963
========== ======== ======== ======== ========
Diluted earnings per share....................... $3.72 $2.99 $2.28 $1.65 $1.12
========== ======== ======== ======== ========
Weighted average shares and share
equivalents outstanding........................ 46,688 37,886 37,885 37,241 36,346
========== ======== ======== ======== ========
(1) Reflects the acquisition in May 1998 of the Company's licensees, Pepe USA
and TH Canada, as described further in Item 1. Selling, general and
administrative expenses in fiscal 1999 included special acquisition-related
charges of $19,800 ($11,900 after-tax or $0.27 per diluted share).
As of March 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
- -------------------
Cash, cash equivalents and short-term
investments..................................... $ 241,950 $157,051 $109,908 $127,743 $ 86,031
Working capital.................................. 443,006 345,886 270,667 238,439 165,261
Total assets..................................... 2,206,620 618,010 463,085 358,622 239,493
Short-term borrowings, including current portion
of long-term debt............................... 41,234 -- 275 5,975 275
Long-term debt................................... 609,245 -- 1,510 1,789 2,064
Shareholders' equity............................. 1,092,249 519,062 397,464 301,338 209,024
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands, except per share amounts)
All references to years relate to the fiscal year ended March 31 of such
year.
Results of Operations
The following table sets forth the Consolidated Statements of Operations
data as well as the Pro Forma Statements of Operations data (which are disclosed
in Note 15 to the Consolidated Financial Statements) for the twelve months ended
March 31, as a percentage of net revenue.
Fiscal Year Ended March 31,
-------------------------------------------
Pro Forma Actual
------------------ -----------------------
1999 1998 1999 1998 1997
---------- ------ ------ ------- ------
Net revenue.................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................. 53.3 53.5 53.3 52.8 52.1
----- ----- ----- ----- -----
Gross profit................................................... 46.7 46.5 46.7 47.2 47.9
Depreciation and amortization.................................. 5.0 5.8 5.0 3.5 3.2
Other SG&A expenses............................................ 23.3 24.0 23.4 24.5 25.7
----- ----- ----- ----- -----
SG&A expenses before special charges........................... 28.3 29.8 28.4 28.0 28.9
Special charges................................................ 1.2 -- 1.2 -- --
----- ----- ----- ----- -----
Total SG&A expenses............................................ 29.5 29.8 29.6 28.0 28.9
----- ----- ----- ----- -----
Income from operations......................................... 17.2 16.7 17.1 19.2 19.0
Interest income (expense), net................................. (2.3) (3.6) (2.1) 0.7 0.8
----- ----- ----- ----- -----
Income before taxes............................................ 14.9 13.1 15.0 19.9 19.8
Provision for income taxes..................................... 4.4 4.0 4.4 6.5 6.7
----- ----- ----- ----- -----
Net income..................................................... 10.5 9.1 10.6 13.4 13.1
===== ===== ===== ===== =====
Year Ended March 31, 1999 (Pro Forma) Compared to Year Ended March 31,
1998 (Pro Forma)
The following discussion of the Company's results of operations for the
year ended March 31, 1999 compared to the year ended March 31, 1998 is presented
on a pro forma basis, assuming the Acquired Companies had been combined with the
Company for each of the entire twelve month periods. The pro forma financial
information is derived by applying pro forma adjustments to the historical
financial statements of the Company and the Acquired Companies. The pro forma
adjustments consist of (a) the elimination of certain revenues, cost of goods
sold and royalty expense, (b) amortization of intangible assets, principally
over 40 years, (c) incremental interest and other expenses and (d) applicable
income tax effects. These pro forma results are not necessarily indicative of
the results that would have occurred had the businesses been combined for the
periods indicated.
17
Net revenue increased to $1,685,523 in fiscal 1999 from $1,270,811 in
fiscal 1998, an improvement of 32.6%. This increase is due to increases in each
of the Company's operating divisions, as outlined below.
Fiscal Year Ended March 31,
--------------------------
1999 1998 % Increase
---------- ---------- -----------
Wholesale.............................. $1,414,927 $1,020,388 38.7%
Retail................................. 214,637 196,066 9.5%
Licensing.............................. 55,959 40,731 37.4%
Other non-recurring.................... -- 13,626 --
---------- ---------- ----
Total.................................. $1,685,523 $1,270,811 32.6%
========== ========== ====
The Wholesale increase consists of increases in menswear sales of 13.4% (to
$795,796 from $701,552), womenswear sales of 123.0% (to $405,783 from $181,926)
and childrenswear sales of 55.8% (to $213,348 from $136,910). Each of these
improvements is due to volume increases which resulted primarily from increased
sales to existing customers. The increased sales to existing customers is
principally due to the expansion of the in-store shop and fixtured area
programs, whereby certain of the Company's customers have increased the amount
of square footage where the Company's products are featured. Revenues in the
womenswear division increased in part due to the introduction of the junior
jeans line in Fall, 1998, while sales in the childrenswear division benefited
from the introduction of infants and toddlers in Holiday, 1997.
The improvement in the Company's Retail division is due to an increase in
the number of stores, partially offset by a decrease in sales at existing
stores. At March 31, 1999, the Company operated 80 retail stores as compared to
66 stores at March 31, 1998. Retail stores opened since March 31, 1998
contributed $29,662 of net revenue during the fiscal year ended March 31, 1999.
Revenue from the Licensing division, which consists of licensing royalties
and buying agency commissions, increased due to a general increase in sales of
existing licensed products and buying agency services and the incremental
revenue associated with newly licensed products. Of the increase, $3,191, or
21.0%, was due to products introduced under licenses entered into since March
31, 1998.
Other non-recurring revenue consists of sales of Pepe brand product as well
as product sales of the jeanswear buying office, each of which will not recur
prospectively.
Gross profit as a percentage of net revenue increased to 46.7% in fiscal
1999 from 46.5% in fiscal 1998. This increase is due to improved wholesale
margins, offset, in part, by a reduction in the proportion of revenue from the
Retail and Licensing divisions, each of which produces higher margins than the
Company's consolidated total.
Selling, general and administrative expenses, before the special charge
described below, decreased to 28.3% of net revenue in fiscal 1999 from 29.8% of
net revenue in fiscal 1998. The decrease as a percentage of net revenue is
primarily due to leveraging certain expenses against the higher revenue base.
The increase in expenses to $476,768 in fiscal 1999 from $377,733 in fiscal 1998
is principally due to increased volume related expenses to support the higher
revenue as well as increased depreciation and amortization. Included in
selling, general and administrative expenses is amortization of goodwill and
acquired intangibles of $34,528 and $36,008 in fiscal 1999 and fiscal 1998,
respectively.
18
During the quarter ended June 30, 1998, the Company recorded a special
charge for non-recurring expenses of $19,800, before income taxes, related to
the Acquisition. This special charge consists of provisions of $7,000 for the
write-off of the fixed assets and operating leases of the Company's specialty
stores, $7,000 for redundant MIS equipment, furniture, fixtures and other
equipment, $3,800 for severance and other employee costs and $2,000 for the
termination of certain vendor contracts.
Interest expense, net of interest income, has decreased to $38,256 in
fiscal 1999 from $46,274 last year. Interest expense includes interest on the
debt incurred in connection with the Acquisition. The decrease from fiscal 1998
to fiscal 1999 is primarily due to improved cash flow and, therefore, lower
borrowing levels of both the Company and the Acquired Companies.
The provision for income taxes has decreased to 29.5% of income before
taxes in the twelve month period ended March 31, 1999 from 30.2% in the
corresponding period last year. This decrease was primarily attributable to the
relative level of earnings in the various taxing jurisdictions to which the
Company's earnings are subject, together with the effects of the special charges
which are tax effected at a higher rate than the Company's weighted average tax
rate.
Year Ended March 31, 1999 (Actual) Compared to Year Ended March 31,
1998 (Actual)
Net revenue increased to $1,637,073 in fiscal 1999 from $847,110 in fiscal
1998, an improvement of 93.3%. This increase is due to increases in the
Company's Wholesale and Retail divisions, partially offset by a decrease in the
Licensing division, as outlined below.
Fiscal Year Ended March 31,
---------------------------
1999 1998 % Increase/(Decrease)
---- ---- ----------------------
Wholesale........................... $1,364,946 $587,922 132.2%
Retail.............................. 214,637 196,066 9.5%
Licensing........................... 57,490 63,122 (8.9)%
---------- -------- -----
Total............................... $1,637,073 $847,110 93.3%
========== ======== =====
The Wholesale increase is due to volume increases which resulted from the
Acquisition and from increased sales to existing customers. This increase is
principally attributed to the change in status of Pepe USA and TH Canada, which
contributed to the Company in the form of royalty income for the entire fiscal
year ended March 31, 1998, compared to a combination of royalty income and
wholesale revenue (since the Acquisition) in the fiscal year ended March 31,
1999. A comparison of Wholesale revenue components after adjusting for these
changes is made in the previous section of Management's Discussion and Analysis.
The improvement in the Company's Retail division is due to an increase in
the number of stores, partially offset by a decrease in sales at existing
stores. At March 31, 1999, the Company operated 80 retail stores as compared to
66 stores at March 31, 1998. Retail stores opened since March 31, 1998
contributed $29,662 of net revenue during the fiscal year ended March 31, 1999.
Revenue from the Licensing division, which consists of licensing royalties
and buying agency commissions, decreased due to the change in status of Pepe USA
and TH Canada mentioned above offset, in part, by a general increase in sales of
existing licensed products and buying agency services and the incremental
revenue associated with newly licensed products. For fiscal 1999, $3,191 of the
revenue amount was due to products introduced under licenses entered into since
March 31, 1998.
19
Gross profit as a percentage of net revenue decreased to 46.7% in fiscal
1999 from 47.2% in fiscal 1998. This decrease is primarily due to the increased
proportion of revenue from the Wholesale divisions following the Acquisition.
Partially offsetting this decrease, the Wholesale margin improved during fiscal
1999 due to the addition of the Acquired Companies.
Selling, general and administrative expenses, before the special charge
described above, increased to 28.4% of net revenue in fiscal 1999 from 28.0% of
net revenue in fiscal 1998. The increase as a percentage of net revenue is
primarily due to an increase in depreciation and amortization, including
amortization of goodwill and other intangibles of $31,651 during fiscal 1999,
partially offset by leveraging certain expenses against the higher revenue base.
The increase in expenses to $464,385 in fiscal 1999 from $236,571 in fiscal 1998
is principally due to increased volume related expenses to support the higher
revenue as well as increased depreciation and amortization.
The Company incurred interest expense, net of interest income, of $33,910
in fiscal 1999 and generated net interest income of $5,755 last year. Interest
expense in the current year includes interest on the debt incurred in connection
with the Acquisition.
The provision for income taxes has decreased to 29.5% of income before
taxes in the twelve month period ended March 31, 1999 from 32.9% in the
corresponding period last year. This decrease was primarily attributable to the
relative level of earnings in the various taxing jurisdictions to which the
Company's earnings are subject, together with the effects of the special charges
which are tax effected at a higher rate than the Company's weighted average tax
rate.
Year Ended March 31, 1998 (Actual) Compared to Year Ended March 31,
1997 (Actual)
Net revenue increased $185,422, or 28.0%, to $847,110 in fiscal 1998 from
$661,688 in fiscal 1997. This improvement is principally due to volume
increases in each of the Company's operating divisions, as outlined below.
Wholesale net revenue increased to $587,922 in fiscal 1998 from $479,307 in
fiscal 1997, an improvement of $108,615 or 22.7%. This improvement consists of
a menswear wholesale sales increase of 12.3% and a childrenswear wholesale sales
increase of 79.5%. In fiscal 1998, menswear wholesale sales were $455,127 while
childrenswear wholesale sales were $132,795. In fiscal 1997, menswear wholesale
sales were $405,319 while childrenswear wholesale sales were $73,988. These
increases were due to increases in volume, which resulted primarily from
increased sales to existing customers, offset by a decrease in the average sales
price per unit. The increased sales to existing customers were partially the
result of the Company's in-store shop and fixtured area expansion program,
whereby certain of the Company's customers have increased the amount of square
footage where the Company's products are featured.
Net revenue in the Company's Retail division increased 31.3% to $196,066 in
fiscal 1998 from $149,312 in fiscal 1997. The increase in the number of stores,
as well as an increase in sales at existing stores, contributed to the improved
revenue. Of the total increase of $46,754, $17,371 was attributable to retail
stores opened since March 31, 1997. The total number of retail stores open as
of March 31, 1998 and 1997 were 66 and 55, respectively.
Net revenue from royalties and buying agency commissions increased 90.9% to
$63,122 in fiscal 1998 from $33,069 in fiscal 1997. Of the increase of $30,053,
approximately 31.8% was due
20
to the introduction of new licensed products since March 31, 1997. The remainder
of the increase reflects the incremental revenue associated with a general
increase in sales of existing licensed products and buying agency services.
Included in net revenue from royalties and buying agency commissions is $22,901
and $12,341, in fiscal 1998 and fiscal 1997, respectively, from the Company's
womenswear, jeanswear and Canadian licensees, which were acquired by the Company
effective May 8, 1998.
Gross profit as a percentage of net revenue decreased to 47.2% in fiscal 1998
from 47.9% in fiscal 1997. This decrease is attributable to lower margins in
menswear wholesale operations and a greater contribution to wholesale operations
of childrenswear, which typically produces lower margins than menswear. This
was partially offset by increased royalty and buying agency commissions, which
produce higher margins than wholesale and retail operations.
Selling, general and administrative expenses, as a percentage of net revenue,
decreased to 28.0% in fiscal 1998 from 28.9% in fiscal 1997. This decrease is
due to the leveraging of these expenses against the higher revenue base.
Selling, general and administrative expenses increased to $236,571 in fiscal
1998 from $190,976 in fiscal 1997. This increase is primarily due to increased
volume related expenses of the Company's wholesale and retail operations to
support the higher revenue. In addition, depreciation and amortization has
increased due to the greater number of in-store shops and fixtured areas.
The provision for taxes decreased to 32.9% of income before taxes in fiscal
1998 from 34.2% in fiscal 1997. The decrease was primarily attributable to the
relative level of earnings in the various taxing jurisdictions to which the
Company's earnings are subject.
Liquidity and Capital Resources
The Company's primary ongoing funding requirements are to finance working
capital and the continued growth of the business. Principally, this includes
the purchase of inventory in anticipation of increased sales of the Wholesale
and Retail divisions as well as capital expenditures related to the expansion of
the Company's in-store shop and fixtured area programs and additional retail
stores. The Company's sources of liquidity are cash on hand, cash from
operations and the Company's available credit. Additionally, the Company
required Acquisition-related financing in May 1998 as discussed further below.
The Company's cash and cash equivalents balance increased from $157,051 at
March 31, 1998 to $241,950 at March 31, 1999. This represented an overall
increase of $84,899 due primarily to cash provided by operating activities,
partially offset by cash used in investing activities. A detailed analysis of
the changes in cash and cash equivalents is presented in the Consolidated
Statements of Cash Flows.
Capital expenditures were $79,422 in fiscal 1999, compared with $67,814 on an
actual basis and $96,295 on a pro forma basis in fiscal 1998. Significant
capital expenditures included additions related to the Company's flagship stores
and in-store shop and fixtured area expansion program.
At March 31, 1999, accrued expenses and other current liabilities included
$48,081 of open letters of credit for inventory purchased. Additionally, at
March 31, 1999, TH USA was contingently liable for unexpired bank letters of
credit of $72,419 related to commitments of TH USA to suppliers for the purchase
of inventories.
21
On May 8, 1998, the Company acquired its womenswear, jeanswear and Canadian
licensees for an aggregate purchase price of $755,760 in cash and 9,045,930
Ordinary Shares of the Company. The cash portion of the purchase price was
funded from a combination of debt financing and cash on hand. The debt
financing portion of the purchase price consisted of $250,000 of 6.50% notes
maturing on June 1, 2003 (the "2003 Notes"), $200,000 of 6.85% notes maturing on
June 1, 2008 (the "2008 Notes") and $200,000 of term loan borrowings pursuant to
new $450,000 term and revolving credit facilities (the "Credit Facilities").
The 2003 Notes and the 2008 Notes (collectively, the "Notes") were issued by TH
USA and guaranteed by THC. The indenture under which the Notes were issued
contains covenants that are more fully explained in Note 7 to the Consolidated
Financial Statements.
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 loan
facility which was borrowed by TH USA in connection with the Acquisition and
remains outstanding at March 31, 1999. The term loan bears interest at variable
rates which, on a weighted average basis, amounted to 5.66% and 6.19% as of, and
for the period ended, March 31, 1999, respectively. The revolving credit
facility will be available for letters of credit, working capital and other
general corporate purposes. The Credit Facilities replaced the Company's
secured revolving credit agreement which had been in place since April 1, 1996.
Borrowings under the term loan facility are repayable in quarterly
installments as follows: $40,000 in the 12-month period ending March 31, 2000;
$50,000 in each of the next two succeeding 12-month periods; and $60,000 in the
next succeeding 12-month period.
Under the Credit Facilities, subsidiaries of THC may not pay dividends or make
other payments in respect of capital stock to THC that in the aggregate exceed
33% of the Company's cumulative consolidated net income, commencing with the
fiscal year ended March 31, 1998, less certain deductions. The Credit
Facilities also contain a number of other restrictive covenants that are more
fully explained in Note 7 to the Consolidated Financial Statements.
The Company was in compliance with all covenants in respect of the Notes and
the Credit Facilities as of March 31, 1999.
The Company attempts to mitigate the risks associated with adverse movements
in interest rates by establishing and maintaining a favorable balance of fixed
and floating rate debt and cash on hand. Management also believes that
significant flexibility remains available in the form of additional borrowing
capacity and the ability to prepay term debt, if so desired, in response to
changing conditions in the debt markets. Because such flexibility exists, the
Company does not normally enter into specific hedging transactions to further
mitigate interest rate risks, except in the case of specific, material borrowing
transactions such as those associated with the Acquisition. No interest rate
hedging contracts were in place as of March 31, 1999.
There were no significant committed capital expenditures at March 31, 1999.
The Company expects fiscal 2000 capital expenditures to approximate $130,000 to
$150,000. The Company intends to fund such cash requirements for fiscal 2000
and future years from available cash balances, internally generated funds and
borrowings available under the Credit Facilities. The Company believes that
these resources will be sufficient to fund its cash requirements for such
periods.
22
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 quantify in any meaningful way the
potential effect of such fluctuations on future income. The Company does not
engage in hedging activities with respect to such exchange rate risk.
The Company does, however, seek to protect against adverse movements in
foreign currency which might affect certain firm commitments or transactions.
These include the purchase of inventory, capital expenditures and the collection
of certain foreign receivables. The Company enters into forward contracts with
maturities of up to one year to sell or purchase foreign currency in order to
hedge against such risks. The Company does not use financial instruments for
speculative or trading purposes. No significant gain or loss was inherent in
such contracts at March 31, 1999. While a hypothetical 10% adverse change in
all of the relevant exchange rates would potentially cause a decrease in the
fair value of the contracts of approximately $2,359, the Company would
experience an offsetting benefit in the spot rate on the associated underlying
transactions.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging
Activities" ("SFAS 133"). It is expected that SFAS 133 will be effective for
the Company beginning in fiscal 2002. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to the limited use of derivative
instruments, the nature of such instruments and the nature of the underlying
transactions being hedged, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
23
Year 2000
During the year ended March 31, 1998, the Company initiated a comprehensive
program to evaluate and address the impact of the year 2000 on its operations
and those of the Acquired Companies in order to ensure that its computer systems
properly recognize calendar year 2000. This program included steps to identify
each item or element that would require date code remediation and make
appropriate modifications to ensure a seamless transition to the year 2000. The
Company has now completed the major portion of its internal date remediation
activity.
The Company is using internal staff resources to accomplish most of this
activity and estimates that the cost will not exceed $500. Certain other costs,
which are capitalized, represent investment in new hardware and software systems
upgrades, the timing of which was planned to coincide with the integration of
the Acquired Companies. Principal among these is a new investment in packaged
financial systems software to which the Company and its major subsidiaries
converted during 1999. Such costs represent only a nominal percentage of
capital expenditures. The estimate of costs of the Year 2000 compliance effort
and the timetable for internal Year 2000 modifications are management's best
estimates. There can be no guarantee that these estimates will prove accurate
and actual results could differ materially from the estimates. Based upon
progress to date, however, the Company believes that it is unlikely that actual
results would differ significantly from the estimates.
The Company is also corresponding with significant suppliers, customers,
transportation carriers and general service providers whose computer systems'
functionality could impact the Company and in particular its ability to schedule
forward production and procurement of merchandise from suppliers and to fulfill
customer orders. These communications will facilitate coordination of Year 2000
conversions and will additionally permit the Company to determine its exposure
to the failure of third parties to address their own Year 2000 issues.
Although the Company is not aware of any material issues that would impede
its ability to prepare its internal systems for the year 2000, and therefore has
not prepared a contingency plan, there can be no assurance that the systems of
other companies on which the Company's processes rely will be timely converted,
or that a failure to successfully convert by another company, or a conversion
that is incompatible with the Company's systems, would not have an adverse
impact on the Company's operations. The need for contingency plans in this
regard will continue to be assessed.
The foregoing commentary should be considered to fall within the coverage of
the "Safe Harbor Statement" under the Private Securities Litigation Reform Act
of 1995 included in this report.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements are indicated by words or phrases such as "anticipate," "estimate,"
"project," "management expects," "the Company believes" and similar words or
phrases. Such statements are based on current expectations and are subject to
certain risks, uncertainties and assumptions, including, but not limited to,
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Should one or
more of these risks or uncertainties materialize, or should
24
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the sections entitled "Liquidity and Capital Resources" and "Exchange
Rates" in Item 7 above, which sections are incorporated herein by reference.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Accountants
Consolidated Statements of Operations for the years ended March 31, 1999, 1998,
and 1997
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998
and 1997
Consolidated Statements of Changes in Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants........................................................ F-2
Consolidated Statements of Operations for the
years ended March 31, 1999, 1998 and 1997................................................ F-3
Consolidated Balance Sheets as of March 31, 1999
and 1998................................................................................. F-4
Consolidated Statements of Cash Flows for the
years ended March 31, 1999, 1998 and 1997................................................ F-5
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997............................................................ F-6
Notes to Consolidated Financial Statements............................................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of
Tommy Hilfiger Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1. presents fairly, in all material respects, the
financial position of Tommy Hilfiger Corporation and its subsidiaries (the
"Company") at March 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)2. presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
May 20, 1999
F-2
TOMMY HILFIGER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Fiscal Year Ended
March 31,
------------------------------------------------------
1999 1998 1997
---- ---- ----
Net revenue................................................... $1,637,073 $847,110 $661,688
Cost of goods sold............................................ 872,607 447,524 344,884
---------- -------- --------
Gross profit.................................................. 764,466 399,586 316,804
Depreciation and amortization................................. 81,180 29,840 20,842
Other selling, general and administrative expenses............ 383,205 206,731 170,134
Special charges............................................... 19,800 -- --
---------- -------- --------
Total selling, general and administrative expenses............ 484,185 236,571 190,976
---------- -------- --------
Income from operations........................................ 280,281 163,015 125,828
Interest expense.............................................. 39,525 1,258 761
Interest income............................................... 5,615 7,013 6,181
---------- -------- --------
Income before income taxes.................................... 246,371 168,770 131,248
Provision for income taxes.................................... 72,654 55,590 44,866
---------- -------- --------
Net income.................................................... $ 173,717 $113,180 $ 86,382
========== ======== ========
Earnings per share:
Basic earnings per share...................................... $3.77 $3.03 $2.33
========== ======== ========
Weighted average shares outstanding........................... 46,132 37,374 37,059
========== ======== ========
Diluted earnings per share.................................... $3.72 $2.99 $2.28
========== ======== ========
Weighted average shares and share equivalents outstanding..... 46,688 37,886 $ 37,885
========== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
F-3
TOMMY HILFIGER CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31,
----------------------------------------------------
1999 1998
---- ----
Assets
Current assets
Cash and cash equivalents.............................................. $ 241,950 $157,051
Accounts receivable.................................................... 186,640 104,732
Inventories............................................................ 222,928 150,947
Other current assets................................................... 48,638 25,554
---------- --------
Total current assets.............................................. 700,156 438,284
Property and equipment, at cost, less accumulated
depreciation and amortization........................................... 228,294 160,089
Intangible assets, net of accumulated amortization of $32,191 and
$469, respectively...................................................... 1,275,485 692
Other assets............................................................... 2,685 18,945
---------- --------
Total Assets..................................................... $2,206,620 $618,010
========== ========
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings.................................................. $ 1,234 $ --
Current portion of long-term debt...................................... 40,000 --
Accounts payable....................................................... 27,310 16,201
Accrued expenses and other current liabilities......................... 188,606 76,197
---------- --------
Total current liabilities........................................ 257,150 92,398
Long-term debt............................................................. 609,245 --
Deferred tax liability..................................................... 242,546 --
Other liabilities.......................................................... 5,430 6,550
Shareholders' equity
Preference Shares, $0.01 par value-shares authorized 5,000,000;
none issued......................................................... -- --
Ordinary Shares, $0.01 par value-shares authorized 75,000,000;
issued and outstanding 47,162,044 and 37,557,934, respectively...... 472 376
Capital in excess of par value......................................... 573,280 173,416
Retained earnings...................................................... 518,912 345,195
Accumulated other comprehensive income (loss).......................... (415) 75
---------- --------
Total shareholders' equity.......................................... 1,092,249 519,062
---------- --------
Commitments and contingencies
Total Liabilities and Shareholders' Equity.......................... $2,206,620 $618,010
========== ========
See Accompanying Notes to Consolidated Financial Statements.
F-4
TOMMY HILFIGER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
March 31,
---------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Cash flows from operating activities
Net income................................................................ $ 173,717 $113,180 $ 86,382
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.......................................... 81,112 29,840 20,842
Deferred income taxes.................................................. (15,793) (410) (4,428)
Provision for special charges.......................................... 19,800 -- --
Write-off of property and equipment.................................... 1,820 -- --
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable............................................ (24,565) (24,748) (11,582)
Inventories........................................................ (5,556) (27,100) (42,419)
Other assets....................................................... 8,538 (17,520) (748)
Increase (decrease) in liabilities
Accounts payable................................................... (6,074) 10,205 (3,458)
Accrued expenses and other liabilities............................. 26,986 27,335 23,861
--------- --------
Net cash provided by operating activities.............................. 259,985 110,782 68,450
--------- -------- -------
Cash flows from investing activities
Purchases of property and equipment....................................... (79,422) 60)
Purchases of investments.................................................. -- (20,000) --
Maturities of investments................................................. -- 20,000 --
Acquisition of businesses, net of cash acquired........................... (735,263) -- --
--------- ------- -------
Net cash used in investing activities.................................. (814,685) (67,814) (83,960)
--------- -------- -------
Cash flows from financing activities
Proceeds from issuance of long-term debt.................................. 649,151 -- --
Payments on long-term debt................................................ (10,000) (1,510) (279)
Proceeds from the exercise of stock options............................... 15,180 5,685 3,929
Repayments of short-term bank borrowings.................................. (14,732) -- (5,975)
--------- -------- -------
Net cash provided by (used in) financing activities.................... 639,599 4,175 (2,325)
--------- -------- -------
Net increase (decrease) in cash........................................ 84,899 47,143 (17,835)
Cash and cash equivalents, beginning of period............................. 157,051 109,908 127,743
--------- ------- -------
Cash and cash equivalents, end of period................................... $ 241,950 $157,051 $109,908
========= ======== ========
See Accompanying Notes to Consolidated Financial Statements.
F-5
TOMMY HILFIGER CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Capital in other Total
Ordinary excess of Retained comprehensive shareholders'
shares par value earnings income (loss) equity
------ --------- -------- ------------- ------
Balance, March 31, 1996 $ 369 $ 155,294 $145,633 $ 42 $ 301,338
Net income........................................ 86,382 86,382
Foreign currency translation...................... 3 3
Exercise of stock options......................... 3 3,926 3,929
Tax benefit from exercise of stock options........ 5,812 5,812
-------- ---------- -------- ------ ------------
Balance, March 31, 1997 372 165,032 232,015 45 397,464
Net income........................................ 113,180 113,180
Foreign currency translation...................... 30 30
Exercise of stock options......................... 4 5,681 5,685
Tax benefit from exercise of stock options........ 2,703 2,703
-------- ---------- -------- ------ ------------
Balance, March 31, 1998 376 173,416 345,195 75 519,062
Net income........................................ 173,717 173,717
Foreign currency translation...................... (490) (490)
Issuance of shares in connection with the
Acquisition...................................... 90 377,425 377,515
Exercise of stock options......................... 6 15,174 15,180
Tax benefit from exercise of stock options........ 7,265 7,265
-------- ---------- -------- ------ ------------
Balance, March 31, 1999 $ 472 $ 573,280 $518,912 $ (415) $ 1,092,249
======== ========== ======== ====== ============
Comprehensive income consists of net income and foreign currency translation and
totaled $173,227, $113,210 and $86,385 in fiscal 1999, 1998 and 1997,
respectively.
See Accompanying Notes to Consolidated Financial Statements.
F-6
TOMMY HILFIGER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
Note 1 - Summary of Significant Accounting Policies
(a) Basis of Consolidation
The consolidated financial statements include the accounts of Tommy
Hilfiger Corporation ("THC" or the "Company"; unless the context indicates
otherwise, all references to the "Company" include THC and its subsidiaries) and
all majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(b) Organization and Business
THC, through its subsidiaries, designs, sources and markets men's and
women's sportswear, jeanswear and childrenswear under the Tommy Hilfiger
trademarks. Through licensing agreements, the Company is expanding its product
lines to offer a broader array of apparel, accessories, footwear, fragrance and
home furnishings.
(c) Cash and Cash Equivalents and Investments
The Company considers all financial instruments purchased with original
maturities of three months or less to be cash equivalents. Short-term
investments include investments with an original maturity of greater than three
months and a remaining maturity of less than one year.
(d) Inventories
Inventories are valued at the lower of cost (weighted average method) or
market.
(e) Property and Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, ranging from three to twenty-five years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the terms of the leases or the estimated useful lives of the assets.
Major additions and betterments are capitalized and repairs and maintenance are
charged to operations in the period incurred. The Company's share of the cost of
constructing in-store shop displays is capitalized and amortized using the
straight-line method over their estimated useful lives. These costs are included
in "Furniture and fixtures".
(f) Intangible Assets
Intangible assets are comprised principally of goodwill and other
intangibles acquired during fiscal 1999 of $662,212 and $612,268, respectively.
The principal intangible assets acquired were the licenses between the Acquired
Companies (as defined in Note 15) and the Company described in Note 15, which
had remaining terms in excess of 40 years. Accordingly, these intangibles and
goodwill are being amortized principally over 40 years on a straight line basis.
F-7
(g) Long Lived Assets
The Company reviews long lived assets including goodwill and other
intangibles to assess recoverability from future operations using undiscounted
cash flows. Impairments would be recognized in earnings to the extent that
carrying value exceeds fair value.
(h) Income Taxes
The Company has recorded its provision for income taxes under the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized based on differences between the financial statement and tax bases of
assets and liabilities using presently enacted tax rates.
(i) Earnings Per Share and Authorized Shares
Earnings per share and equivalents reflect the adoption of Statement of
Financial Acounting Standards ("SFAS") No. 128, "Earnings Per Share", in fiscal
1998. Diluted earnings per share reflect the potentially dilutive effect of
common stock issuable under the Company's stock option plans.
Included in the Company's authorized, issued and outstanding shares are
9,045,930 shares issued in connection with the Acquisition (as defined in Note
15). Transfers of these shares are restricted for two years following the date
of the Acquisition with additional restrictions during the following three years
on transfers of the shares as a block, subject to certain exceptions.
(j) Revenues
Net revenues from wholesale product sales are recognized upon shipment of
products to customers. Allowances for estimated returns, discounts and doubtful
accounts are provided when sales are recorded. Retail store revenues are
recognized at the time of sale. Licensing royalties and buying agency fees are
recognized as earned.
Net wholesale sales to major customers as a percentage of total net
wholesale sales, for the three-year period ended March 31, 1999 were as follows:
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
---- ---- ----
Customer A 20% 22% 21%
Customer B 18% 22% 23%
Customer C 14% 15% 16%
F-8
(k) Foreign Currency Translation
The consolidated financial statements of the Company are prepared in United
States dollars as this is the currency of the primary economic environment in
which the Company operates, and the vast majority of its revenues are received
and expenses are disbursed in United States dollars. Adjustments resulting from
translating the financial statements of those non-United States subsidiaries
which do not use the United States dollar as their functional currency are
recorded in shareholders' equity.
(l) Advertising Costs
Advertising costs are charged to operations when incurred and totaled
$44,040, $21,841 and $19,651 during the years ended March 31, 1999, 1998 and
1997, respectively. The increase in advertising costs in fiscal 1999 is
principally due to the change in status of the Acquired Companies which made
advertising contributions to the Company prior to the Acquisition. Advertising
costs of the Acquired Companies were $14,718 and $8,459 in fiscal 1998 and 1997,
respectively.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(n) Segments and Foreign Operations
Effective January 1, 1999, the Company adopted SFAS No.131, "Disclosures
About Segments of an Enterprise and Related Information". This statement
establishes disclosure requirements about reportable operating segments as well
as related disclosures about products and services, geographic areas and major
customers.
The Company's operations are reported on the basis of three segments:
wholesale, retail, and licensing, as further discussed in Note 10.
Substantially all of the Company's net revenue and income from operations
as well as identifiable assets constitute foreign operations in that the Company
is incorporated in the British Virgin Islands ("BVI").
(o) Reclassification of Prior Year Balances
Certain prior year balances have been reclassified to conform to current
year presentation.
F-9
Note 2 - Cash Equivalents
As of March 31, 1999, the balance in Cash and Cash Equivalents was
comprised entirely of overnight deposits at several financial institutions
earning interest at a weighted average interest rate of 4.64%. As part of its
ongoing control procedures, the Company monitors its concentration of deposits
with various financial institutions in order to avoid any undue exposure.
Note 3 - Financial Instruments
Accounts Receivable
The Company collects substantially all of its receivables from U.S.
customers through a credit company subsidiary of a large financial institution
pursuant to an agreement whereby the credit company pays the Company after the
credit company receives payment from the Company's customer. The credit company
establishes maximum credit limits for each customer account. If the customer
becomes bankrupt or insolvent the credit company pays the Company 50% of the
outstanding receivable. If the receivable becomes 120 days past due, the full
amount is reimbursable by the credit company.
The Company has a similar arrangement with another large financial
institution for credit services to its Canadian subsidiary. In both cases the
Company believes that the credit risk associated with such financial
institutions is minimal. The Company also may grant credit directly to customers
in the normal course of business without participation by a credit company. In
such cases the Company monitors its credit exposure limits to avoid any
significant concentration of risk. Bad debts have been minimal.
Interest Rate Risk Management
Interest rate protection is used very selectively on certain borrowing
transactions. Such contracts are integral to the underlying borrowing
transaction and are therefore not recognized at fair value at any balance sheet
date. Following the announcement of the proposed Acquisition on February 1,
1998, the Company sold U.S. Treasury futures contracts to protect against the
potential increase in interest rates which would be in effect upon the funding
of the Acquisition. At March 31, 1998, such contracts, having a notional value
of $675,000, had generated deferred gains of approximately $4,490. The
cumulative gains of $3,737 resulting from changes in the market values of the
futures contracts through the time of transaction financing are being amortized
as adjustments to interest expense over the appropriate debt amortization
periods. No interest rate protection agreements existed at March 31, 1999.
Foreign Currency Risk Management
The Company seeks to protect against adverse movements in foreign currency
which might affect certain firm commitments or transactions. These include the
purchase of inventory, capital expenditures and the collection of certain
foreign receivables. The Company enters into forward contracts with maturities
of up to one year to sell or purchase foreign currency in order
F-10
to hedge against such risks. The Company does not use financial instruments for
speculative or trading purposes.
Gains and losses on such forward contracts are recognized at the time the
underlying hedged transaction is completed or recognized in earnings. At March
31, 1999, the Company had contracts to exchange foreign currencies, principally
the Canadian dollar, Japanese yen and Great Britain pound in the following
notional amounts:
Forward sale contracts $20,745
Forward purchase contracts $275
No significant gain or loss was inherent in such contracts at March 31,
1999.
Fair Value of Other Financial Instruments
The fair value of the Company's cash and cash equivalents is equal to their
carrying value at March 31, 1999 and 1998. The fair value of the Company's
long-term debt approximates carrying value. The fair value of the Company's
other monetary assets and liabilities approximate carrying value due to the
relatively short-term nature of these items.
Note 4 - Inventories
Inventories are summarized as follows:
March 31,
---------
1999 1998
---- ----
Finished goods........................... $219,254 $148,488
Raw materials............................ 3,674 2,459
-------- --------
$222,928 $150,947
======== ========
Note 5 - Property and Equipment
Property and equipment consists of the following:
March 31,
---------
1999 1998
---- ----
Furniture and fixtures................... $208,662 $121,669
Leasehold improvements................... 59,567 51,840
Buildings and land....................... 47,076 41,211
Machinery and equipment.................. 26,643 23,673
-------- --------
341,948 238,393
Less: accumulated depreciation and
amortization.......................... 113,654 78,304
-------- --------
$228,294 $160,089
======== ========
F-11
Note 6 - Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
March 31,
---------
1999 1998
Accrued compensation..................... $ 48,569 $22,187
Letters of credit payable................ 48,081 18,863
Other.................................... 91,956 35,147
-------- -------
$188,606 $76,197
======== =======
Note 7 - Long-Term Debt
Long-term debt consists of the following:
March 31,
---------
1999 1998
---- ----
Term and revolving credit facilities at a
weighted average interest rate of
approximately 5.66% at March 31, 1999........... $200,000 $ --
Unsecured 6.85% notes due June 1, 2008, less
unamortized discount of $445 at
March 31, 1999.................................. 199,555
Unsecured 6.50% notes due June 1, 2003, less
unamortized discount of $310 at
March 31, 1999.................................. 249,690 --
Less current maturities.......................... (40,000)
-------- --------
Total $609,245 $ --
======== ========
The 6.50% notes maturing on June 1, 2003 and the 6.85% notes maturing on
June 1, 2008 (collectively, the "Notes") were issued by Tommy Hilfiger U.S.A.,
Inc., a subsidiary of THC ("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 term and revolving credit facilities (the "Credit Facilities"), which
are guaranteed by THC, consist of an unsecured $250,000 TH USA five-year
revolving credit facility, of which up to $150,000 may be used for direct
borrowings, and an unsecured $200,000 five-year term credit facility which was
borrowed by TH USA in connection with the Acquisition. The revolving credit
facility will be available for letters of credit, working capital and other
general corporate purposes. As of March 31, 1999, $122,000 of the available
borrowings had been used to open letters of credit. The Credit Facilities
replaced the Company's secured revolving credit agreement which had been in
place since April 1, 1996.
F-12
Borrowings under the term loan facility are repayable in quarterly
installments as follows: $40,000 in the 12-month period ending March 31, 2000;
$50,000 in each of the next two succeeding 12-month periods; and $60,000 in the
next succeeding 12-month period.
The Credit Facilities contain a number of covenants that, among other
things, restrict the ability of subsidiaries of THC to dispose of assets, incur
additional indebtedness, create liens on assets, pay dividends or make other
payments in respect of capital stock, make investments, loans and advances,
engage in transactions with affiliates, enter into sale and leaseback
transactions, engage in mergers or consolidations or change the businesses
conducted by them. The Credit Facilities also restrict the ability of THC to
create liens on assets or enter into sale and leaseback transactions. Under the
Credit Facilities, subsidiaries of THC may not pay dividends or make other
payments in respect of capital stock to THC that in the aggregate exceed 33% of
the Company's cumulative consolidated net income, commencing with the fiscal
year ended March 31, 1998, less certain deductions. In addition, under the
Credit Facilities, THC and TH USA are required to comply with and maintain
specified financial ratios and tests (based on the Company's consolidated
financial results), including, without limitation, an interest expense coverage
ratio, a maximum leverage ratio and a minimum consolidated net worth test.
The Company was in compliance with all covenants in respect of the Notes
and the Credit Facilities as of March 31, 1999.
In connection with the purchase of real estate, Tommy Hilfiger (Eastern
Hemisphere) Limited, a subsidiary of THC ("THEH"), obtained a ten-year, $2,746
mortgage. The debt, payable in equal quarterly installments through August
2003, was repaid in its entirety during fiscal 1998.
Note 8 - Commitments and Contingencies
Leases
The Company leases office, warehouse and showroom space, retail stores and
office equipment under operating leases, which expire not later than 2023. The
Company normalizes fixed escalations in rental expense under its operating
leases. Minimum annual rentals under non-cancelable operating leases, excluding
operating cost escalations and contingent rental amounts based upon retail
sales, are payable as follows:
Fiscal Year Ending March 31,
----------------------------
2000...................................... $17,038
2001...................................... 14,787
2002...................................... 13,000
2003...................................... 11,166
2004...................................... 9,140
Thereafter................................ 38,726
Rent expense was $16,362, $12,551 and $8,911 for the years ended March 31,
1999, 1998 and 1997, respectively.
F-13
Letters of credit
TH USA is contingently liable for unexpired bank letters of credit at March
31, 1999 of $72,419 related to commitments for the purchase of inventories.
Legal matters
Saipan Litigation. On January 13, 1999, two actions were filed against the
-----------------
Company and other garment manufacturers and retailers asserting claims that
garment factories located on the island of Saipan, which allegedly supply
product to the Company and other co-defendants, engage in unlawful practices
relating to the recruitment and employment of foreign workers. One action,
brought in San Francisco Superior Court (the "State Action"), was filed by a
union and three public interest groups alleging unfair competition and false
advertising by the Company and others. It seeks equitable relief, restitution
and disgorgement of profits relating to the allegedly wrongful conduct, as well
as interest and an award of fees to the plaintiffs' attorneys. The other, an
action seeking class action status filed in federal court for the Central
District of California (the "Federal Action"), was brought on behalf of an
alleged class consisting of the Saipanese factory workers. The defendants
include both companies selling goods purchased from factories located on the
island of Saipan and the factories themselves. This complaint alleges claims
under RICO, the Alien Tort Claims Act, federal anti-peonage and indentured
servitude statutes and state and international law. It seeks equitable relief
and damages, including treble and punitive damages, interest and an award of
fees to the plaintiffs' attorneys.
In addition, the same law firm that filed the State Action and the Federal
Action has filed an action seeking class action status in the Federal Court in
Saipan. This action is brought on behalf of Saipanese garment factory workers
against the Saipanese factories and alleges violation of federal and Saipanese
wage and employment laws. The Company is not a defendant in this action.
In the State Action, all defendants, including the Company, have filed a
demurrer challenging the legal sufficiency of the complaint. In the Federal
Action, all defendants, including the Company, have filed a motion to transfer
venue and a motion to dismiss the complaint for failure to state a claim. The
plaintiffs have not yet filed their opposition to these motions.
Shareholder Derivative Litigation. On February 2, 1998, February 12, 1998
---------------------------------
and February 17, 1998, three alleged holders of Ordinary Shares filed purported
derivative actions in New York State court on behalf of the Company against the
members of the Board of Directors. The actions were later consolidated and an
amended complaint was served on May 29, 1998. The amended complaint alleged
that the Board's approval of the Acquisition constituted a breach of fiduciary
duty and corporate waste, and sought equitable relief and damages in favor of
the Company, and an award of fees to the plaintiffs' attorneys. On June 15,
1998, the Company and its directors moved to dismiss the consolidated action on
several grounds. On December 9, 1998, the Court dismissed the action, ruling
that the British Virgin Islands, the Company's place of incorporation, is the
appropriate forum in which to litigate these derivative claims. In January
1999, the plaintiffs filed a notice of appeal with respect to the Court's
ruling.
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their businesses. In the opinion of the Company's
management, based on advice of
F-14
counsel, the resolution of these matters will not have a material effect on its
financial position or its results of operations.
Note 9 - Income Taxes
The components of the provision for income taxes are as follows:
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
-------- -------- -------
Current:
U.S. Federal........................... $ 60,530 $48,463 $39,276
State and Local........................ 10,149 5,810 6,688
Non-U.S................................ 17,768 1,727 3,330
-------- ------- -------
88,447 56,000 49,294
-------- ------- -------
Deferred:
U.S. Federal........................... (12,305) (510 (3,724
State and Local........................ (3,488) 100 (737
Non-U.S................................ -- -- 33
-------- ------- -------
(15,793) (410 (4,428)
-------- ------- -------
Provision for income taxes............... $ 72,654 $55,590 $44,866
======== ======= =======
Significant components of the Company's deferred tax assets and liabilities
are summarized as follows:
March 31,
---------
1999 1998
--------- --------
Deferred tax assets - current:
Inventory costs........................ $ 5,940 $ 5,082
Accrued marketing costs................ 18,150 1,453
Accrued compensation................... 2,615 2,490
Other items, net....................... 7,349 2,222
--------- -------
34,054 11,247
--------- -------
Deferred tax assets (liabilities) -
non-current:
Depreciation and amortization.......... 7,798 3,670
Intangible assets...................... (250,344) --
--------- -------
(242,546) 3,670
--------- -------
Total deferred tax assets (liabilities).. $(208,492) $14,917
========= =======
The deferred tax liability of $250,344 reflects deferred taxes associated
with acquired identifiable intangible assets other than goodwill. The increase
in the accrued marketing costs from March 31, 1998 to March 31, 1999 is
primarily due to the inclusion of the balances of the Acquired Companies.
The U.S. and non-U.S. components of income before income taxes are as
follows:
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
-------- -------- --------
U.S...................................... $121,437 $136,793 $104,671
Non-U.S.................................. 124,934 31,977 26,577
-------- -------- --------
$246,371 $168,770 $131,248
======== ======== ========
F-15
The provision for income taxes differs from the amounts computed by
applying the applicable U.S. federal statutory rate to income before taxes as
follows:
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
---- ---- ----
Provision for income taxes at the
U.S. federal statutory rate............... $ 86,230 $ 59,070 $45,937
State and local income taxes, net of
federal benefits.......................... 4,330 3,841 3,868
Non-U.S. income taxed at different
rates..................................... (27,529) (10,031) (6,350)
Goodwill amortization......................... 5,691 -- --
Other......................................... 3,932 2,710 1,411
-------- -------- -------
Provision for income taxes.................... $ 72,654 $ 55,590 $44,866
======== ======== =======
THC is not taxed on income in the BVI, where it is incorporated. THC's
subsidiaries are subject to taxation in the jurisdictions in which they operate.
Provision has not been made for taxes on undistributed non-BVI earnings of
$267,062 at March 31, 1999, as those earnings will continue to be reinvested. As
a result of various tax planning strategies available to the Company, it is not
practical to estimate the amount of tax, if any, that might be payable on the
eventual remittance of such earnings.
Note 10 - Segment Reporting
The Company has three reportable segments: Wholesale, Retail and Licensing.
The Company's reportable segments are business units that offer different
products and services or similar products through different distribution
channels. The Wholesale segment consists of the design and sourcing of men's
sportswear and jeanswear, women's casualwear and jeanswear and childrenswear for
wholesale distribution. The Retail segment reflects the operations of the
Company's outlet, specialty and flagship stores. The Licensing segment consists
of the operations of licensing the Company's trademarks for specified products
in specified geographic areas. The Company evaluates performance and allocates
resources based on segment profits. The accounting policies of the reportable
segments are the same as those described in Note 1, "Summary of Significant
Accounting Policies". Segment profits are comprised of segment net revenue less
cost of goods sold and selling, general and administrative expenses. Excluded
from segment profits, however, are the vast majority of executive compensation,
marketing, brand image marketing costs associated with its flagship stores,
amortization of intangibles including goodwill, special charges and interest
costs. Financial information for the Company's reportable segments is as
follows:
F-16
Wholesale Retail Licensing Total
--------- ------ --------- -----
Fiscal year ended March 31, 1999
- --------------------------------
Total segment revenue $1,364,945 $214,637 $106,309 $1,685,891
Segment profits 275,312 44,183 60,645 380,140
Depreciation and amortization
included in segment profits 32,532 7,686 1,228 41,446
Fiscal year ended March 31, 1998
- --------------------------------
Total segment revenue $ 587,922 $196,066 $ 90,337 $ 874,325
Segment profits 98,275 50,015 57,274 205,564
Depreciation and amortization
included in segment profits 17,462 4,169 934 22,565
Fiscal year ended March 31, 1997
- --------------------------------
Total segment revenue $ 479,307 $149,312 $ 56,180 $ 684,799
Segment profits 92,091 37,833 29,479 159,403
Depreciation and amortization
included in segment profits 16,048 2,400 790 19,238
A reconciliation of total segment revenue to consolidated net revenue is
as follows :
Fiscal Year Ended March 31,
-----------------------------
1999 1998 1997
---- ---- ----
Total segment revenue $1,685,891 $874,325 $684,799
Intercompany revenue (48,818) (27,215) (23,111)
---------- -------- --------
Consolidated net revenue $1,637,073 $847,110 $661,688
========== ======== ========
Intercompany revenue represents buying agency commissions from
consolidated subsidiaries.
A reconciliation of total segment profits to consolidated income before
income taxes is as follows:
Fiscal Year Ended March 31,
-----------------------------
1999 1998 1997
---- ---- ----
Segment profits $ 380,140 $205,564 $159,403
Corporate expenses not allocated 80,059 42,549 33,575
Special charge 19,800 - -
Interest income (expense), net (33,910) 5,755 5,420
---------- -------- --------
Consolidated income before income taxes $ 246,371 $168,770 $131,248
========== ======== ========
The Company is domiciled in the BVI; accordingly all sales outside the
BVI are considered foreign. Countries representing 5% or more of consolidated
net revenue are as follows:
Fiscal Year Ended March 31,
-----------------------------
1999 1998 1997
---- ---- ----
United States $1,529,465 $826,419 $652,917
Canada 82,465 4,100 2,511
Other 25,143 16,591 6,260
---------- -------- --------
Consolidated net revenue $1,637,073 $847,110 $661,688
========== ======== ========
F-17
The Company does not disaggregate assets on a segment basis for internal
management reporting and, therefore, such information is not presented.
Note 11 - Related Parties
See related disclosures in Note 15 - Acquisition of Womenswear, Jeanswear
and Canadian Licensees.
Effective February 1, 1997, the Company entered into the Pepe European
License (as defined in Note 15) with Pepe Jeans London Corporation ("PJLC")
which provides for the distribution of the Company's products throughout the
European market. PJLC subsequently assigned this license to a subsidiary. Under
this agreement, the licensee pays Tommy Hilfiger Licensing, Inc., a subsidiary
of THC ("THLI"), a royalty based on a percentage of the value of licensed
products sold by the licensee. Except with the approval of THLI, all products
sold by or through the licensee must be purchased through THEH or TH USA
pursuant to buying agency agreements. Under these agreements, THEH and TH USA
are paid a buying agency commission based on a percentage of the cost of
products sourced through them. The distribution of products under this
arrangement began in fiscal 1998. Results of operations include $4,748 and
$1,641, for the years ended March 31, 1999 and 1998, respectively, of royalties
and commissions under this arrangement.
Effective June 30, 1996, the Company's joint venture arrangement with Tommy
Hilfiger Japan Co., Ltd. covering the Company's Japanese operations expired.
Effective July 1, 1996, the Company entered into an exclusive license agreement
for Japan with Novel-ITC Licensing Limited ("NIL"), a related party. Under the
license agreement, NIL pays THLI a royalty based on a percentage of the value of
licensed products sold by NIL's sublicensee. Except with the approval of THLI,
all products sold by or through NIL or its sublicensee must be purchased through
THEH or TH USA pursuant to buying agency agreements. Under these agreements,
THEH and TH USA are paid a buying agency commission based on a percentage of the
cost of products sourced through them. Pursuant to this new arrangement,
royalties and commissions totaled $3,119, $4,211 and $2,745 in fiscal 1999, 1998
and 1997, respectively. Pursuant to the prior arrangement, royalties and
commissions totaled $488 in fiscal 1997.
Effective October 1, 1995, the Company entered into the Pepe United States
License and the Pepe International License (each as defined in Note 15). Other
assets as of March 31, 1998 in the Consolidated Balance Sheets include a note
receivable from an affiliate of the licensees in connection with this
transaction. The note, which was canceled in connection with the Acquisition,
had a face value of $5,000, and had a maturity of September 30, 2000. The note
was recorded at its present value of $4,097 at March 31, 1998. Under this
license arrangement, which terminated as a result of the Acquisition, the
Company received royalties from subsidiaries of PJLC based upon a percentage of
net sales of licensed products. The fiscal 1999, 1998 and 1997 results of
operations include $1,990, $19,016 and $9,963 of such royalties. In addition, in
connection with this license, a subsidiary of PJLC leased certain space at the
Company's U.S. headquarters, for which rent of $22, $262 and $214 was received
by the Company in fiscal 1999, 1998 and 1997, respectively. Prior to the
Acquisition, TH USA purchased finished goods in the ordinary course of business
from PJLC and its subsidiaries. Such purchases amounted to $1,004, $8,400 and
$14,100 during the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
TH USA purchases finished goods in the ordinary course of business from
other affiliated companies. Such purchases amounted to $47,734, $14,600 and
$9,852 during the
F-18
fiscal years ended March 31, 1999, 1998 and 1997, respectively. In addition,
contractors of the Company purchased raw materials in the ordinary course of
business from affiliates of the Company. Such purchases amounted to $15,051,
$5,930 and $5,811 during the fiscal years ended March 31, 1999, 1998 and 1997,
respectively. The significant increases in 1999 reflect the inclusion of
purchases made by the Acquired Companies.
Under the Canadian License arrangement (as defined in Note 15), which
terminated as a result of the Acquisition, the Company received a royalty from
the licensee based upon a percentage of net sales of licensed products and a
buying agency commission based on a percentage of the cost of goods sourced on
behalf of the licensee. Results of operations include $399, $3,885 and $2,378
for the years ended March 31, 1999, 1998 and 1997, respectively, for royalties
and commissions earned from this licensee.
TH USA sells merchandise in the ordinary course of business to a retail
store that is owned by a relative of a director and executive officer of the
Company. Sales to this customer amounted to approximately $732, $476 and $435
during the years ended March 31, 1999, 1998 and 1997, respectively.
In connection with the shareholder derivative litigation described in Note
8 above, the Company has agreed to advance legal fees and other expenses to the
Company's directors. Each director has delivered a written undertaking to repay
the Company in the event that a court ultimately determines that such director
was not entitled to indemnification. An aggregate of approximately $600 was
advanced pursuant to these arrangements in fiscal 1999.
THEH has two consulting agreements with affiliates. THEH paid fees of
$1,000 in fiscal 1999 and $875 in each of fiscal 1998 and 1997 under such
agreements.
Under the terms of an agreement with an affiliate, Tommy Hilfiger (HK)
Limited, a subsidiary of THC ("THHK"), reimburses the affiliate for certain
general and administrative expenses incurred by the affiliate on behalf of THHK.
Payments made to the affiliate for the years ended March 31, 1999, 1998 and 1997
were $133, $77 and $58, respectively.
Note 12 - Retirement Plans
The Company maintains employee savings plans for eligible U.S. employees.
The Company's contributions to the plans are discretionary with matching
contributions of up to 50% of employee contributions of up to 5% of employee
compensation. For the years ended March 31, 1999, 1998 and 1997, the Company
made plan contributions of $1,171, $568 and $345, respectively.
Effective January 1, 1998, the Company adopted a supplemental executive
retirement plan which provides certain members of senior management with a
supplemental pension. The supplemental executive retirement plan is an unfunded
plan for purposes of both the Internal Revenue Code of 1986 and the Employee
Retirement Income Security Act of 1974. Included in accrued expenses and other
current liabilities is $1,600 and $300 at March 31, 1999 and 1998, respectively,
related to this plan.
Effective January 1, 1998, the Company adopted a voluntary deferred
compensation plan which provides certain members of senior management with an
opportunity to defer a portion of base salary or bonus pursuant to the terms of
the plan. The voluntary deferred compensation
F-19
plan is an unfunded plan for purposes of both the Internal Revenue Code of 1986
and the Employee Retirement Income Security Act of 1974.
Note 13 - Stock Option Plans
In September 1992, the Company and its subsidiaries adopted stock option
plans (the "Plans") authorizing the issuance of an aggregate of up to 2,970,000
Ordinary Shares to directors, officers and employees of the Company.
Subsequently, through June 1999, a total of 5,750,000 additional Ordinary Shares
of THC were authorized and reserved for issuance to directors, officers and
employees of the Company, under the Plans. In August 1994, the Board of
Directors and shareholders of the Company approved the Tommy Hilfiger
Corporation Non-Employee Directors Stock Option Plan (the "Directors Option
Plan"). Under the Directors Option Plan, directors who are not officers or
employees of the Company are eligible to receive stock option grants. The total
number of Ordinary Shares for which options may be granted under the Directors
Option Plan may not exceed 200,000 Ordinary Shares in the aggregate, subject to
certain adjustments.
Transactions involving the Plans and the Directors Option Plan are
summarized as follows:
Weighted Average
Exercise
Option Shares Price Per Share
------------- ---------------
Outstanding as of March 31, 1996 1,601,600 $20.10
Granted...................................... 708,300 $48.20
Exercised.................................... (369,605) $10.64
Canceled..................................... (51,725) $39.56
---------
Outstanding as of March 31, 1997 1,888,570 $31.26
Granted...................................... 1,358,950 $42.20
Exercised.................................... (308,405) $18.44
Canceled..................................... (312,580) $40.46
---------
Outstanding as of March 31, 1998 2,626,535 $37.34
Granted...................................... 1,856,800 $52.00
Exercised.................................... (558,180) $27.00
Canceled..................................... (438,430) $45.42
---------
Outstanding as of March 31, 1999 3,486,725 $45.77
=========
Options exercisable at March 31, 1999, 1998 and 1997 were 311,935, 527,570
and 290,520, respectively, at weighted average exercise prices of $31.07, $24.85
and $20.53, respectively.
F-20
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------
$ 7.50 - $39.13 643,115 7.00 $30.47 212,755 $25.51
$39.70 - $46.00 888,020 7.98 $41.99 77,920 $45.18
$46.13 - $50.47 1,455,550 9.18 $50.01 2,600 $49.34
$51.75 - $69.47 500,040 8.79 $59.84 18,660 $55.70
--------- ---- ------ ------- ------
$ 7.50 - $69.47 3,486,725 8.42 $45.77 311,935 $31.07
========= ==== ====== ======= ======
Options vest over periods ranging from 1-6 years with a maximum term of 10
years. The exercise price of all options granted under the Plans and the
Directors Option Plan is the market price on the dates of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock option
awards. Accordingly, no compensation expense has been recognized for stock
options granted in 1999, 1998 and 1997. Had compensation cost been recorded
based upon the fair value at the grant dates as an alternative provided by SFAS
No. 123, "Accounting for Stock Based Compensation", the Company's net income and
earnings per share (basic and diluted) would have been reduced by approximately
$8,221 and $.18, respectively, in 1999, $4,824 and $.13, respectively, in 1998
and $2,998 and $.08, respectively, in 1997. These amounts are for disclosure
purposes only and may not be representative of future calculations since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years. The fair values
of options granted were estimated at $29.39 in 1999, $21.38 in 1998 and $22.33
in 1997 on the dates of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions for 1999, 1998 and 1997,
respectively: volatility of 43%, 43% and 40%; risk free interest rate of 5.4%,
6.5% and 6.1%; expected life of 6.0 years, 5.9 years and 5.7 years; and no
future dividends.
F-21
Note 14 - Statements of Cash Flows
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
---- ---- ----
Supplemental disclosure of cash
flow information:
Cash paid during the year:
Interest $28,018 $ 1,142 $ 930
======= ======= =======
Income taxes $89,189 $54,749 $34,559
======= ======= =======
The impact of exchange rate movements on cash balances was insignificant in
fiscal 1999, fiscal 1998 and fiscal 1997.
Note 15 - Acquisition of Womenswear, Jeanswear and Canadian Licensees
On May 8, 1998, following the approval by the shareholders of the Company
on May 5, 1998, the Company acquired from related parties Pepe Jeans USA, Inc.,
the Company's United States womenswear and jeanswear licensee ("Pepe USA"), TJ
Far East Limited, Pepe USA's buying agency affiliate, and Tomcan Investments
Inc., the parent corporation of Tommy Hilfiger Canada Inc. ("TH Canada"), the
Company's Canadian licensee (collectively, the "Acquired Companies"), for an
aggregate purchase price of $755,760 in cash plus 9,045,930 Ordinary Shares of
the Company (the "Acquisition"). The cash portion of the purchase price was
funded from a combination of debt financing and cash on hand. The Ordinary
Shares were valued at $46.37 per share, the average closing price for the five
days before and after the announcement of the Acquisition, reduced by a
valuation adjustment of $41,946 to reflect the restriction on the shares.
At the date of the Acquisition, the licenses between the Acquired Companies
and the Company consisted of: a license with Pepe USA covering jeans and jeans
related apparel and women's and girls' casualwear in the United States (the
"Pepe United States License"); a license with T.H. International N.V., a
subsidiary of PJLC, covering jeans and jeans related apparel and women's and
girls' casualwear worldwide (other than in the United States and certain
specified countries) (the "Pepe International License"); a geographic license
with Tommy Hilfiger Europe B.V., a subsidiary of PJLC, covering men's and boys'
sportswear lines in Europe and certain other countries (the "Pepe European
License"); and a master geographic license for Canada with TH Canada (the
"Canadian License").
In connection with the Acquisition, the Company acquired the businesses
operated under the Pepe United States License and the Canadian License, the Pepe
International License was canceled and the license arrangements for Europe
previously covered by the Pepe International License were consolidated under the
Pepe European License. Accordingly, the Pepe European License was amended to,
among other things, include in its scope men's, women's and children's jeanswear
and jeans related apparel (including women's and girls' casualwear) and to
increase the minimum sales levels, guaranteed minimum royalties and minimum
advertising payments required thereunder. The Pepe European License was also
amended to provide the Company certain additional rights in connection with any
proposed future transfer of the business conducted under the Pepe European
License. In addition, in connection with the
F-22
Acquisition, a $5,000 note receivable (see Note 11 - Related Parties) was
canceled in consideration for a capital contribution being made to Pepe USA in
the same amount as the receivable.
The Acquisition has been accounted for using the purchase method of
accounting and, accordingly, the operating results of the Acquired Companies are
included in the consolidated results of the Company from the date of the
Acquisition. The purchase price has been allocated as follows:
Cash............................................................................. $ 19,252
Accounts receivables............................................................. 57,343
Inventories...................................................................... 67,723
Other current assets............................................................. 13,359
Property and equipment........................................................... 49,212
Intangible assets, including goodwill............................................ 1,307,376
Other assets..................................................................... 1,075
Short-term bank borrowings....................................................... (15,965)
Accounts payable................................................................. (17,183)
Accrued expenses and other current liabilities................................... (51,457)
Long-term debt................................................................... (10,000)
Deferred tax liability........................................................... (252,320)
Other liabilities................................................................ (2,176)
----------
Total purchase price $1,166,239
==========
The unaudited pro forma combined condensed results of operations of the
Company and the Acquired Companies for the years ended March 31, 1999 and 1998,
after giving effect to certain pro forma adjustments, are as follows:
Fiscal Year Ended March 31,
---------------------------
1999 1998
---- ----
Net revenue $1,685,523 $1,270,811
Gross profit 786,657 590,412
Income from operations 290,089 212,679
Income before taxes 251,833 166,405
Provision for income taxes 74,383 50,236
Net income 177,450 116,169
Diluted earnings per share $3.74 $2.48
The foregoing unaudited pro forma statement of operations data reflect (a)
the elimination of certain revenues, cost of sales and royalty expense, (b)
amortization of intangible assets, principally over 40 years, (c) incremental
management compensation and net interest expense and (d) applicable income tax
effects.
F-23
Note 16 - Special Acquisition-Related Charges
During the first quarter of fiscal 1999, the Company recorded a special
charge for non-recurring expenses of $19,800, before income taxes, related to
the Acquisition. This special charge consists of provisions of $7,000 for the
write-off of the fixed assets and operating leases of the Company's specialty
stores, $7,000 for redundant MIS equipment, furniture, fixtures and other
equipment, $3,800 for severance and other employee costs and $2,000 for the
termination of certain vendor contracts.
At March 31, 1999, $6,900 of the special charge remains in accrued
liabilities. The balance principally relates to the closure of the specialty
stores and restructuring of the related leases.
Note 17 - Summarized Financial Information
The following presents summarized financial information of TH USA, a wholly
owned subsidiary of THC, and its consolidated subsidiaries, as of March 31, 1999
and 1998 and for each of the three years in the period ended March 31, 1999. TH
USA is the issuer and THC is the guarantor of the Notes. The Company has not
presented separate financial statements and other disclosures concerning TH USA
because management has determined that such information is not material to
holders of the Notes.
March 31,
---------
1999 1998
---- ----
Current assets $ 595,819 $354,128
Noncurrent assets 1,478,790 179,556
Current liability due to THC 26,494 28,669
Other current liabilities 240,851 89,197
Noncurrent liability due to THC 801,511 216,651
Other noncurrent liabilities 852,329 6,550
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
---- ---- ----
Net revenue $1,625,407 $838,622 $656,526
Gross profit 734,157 384,190 304,420
Net income 74,751 72,415 52,956
F-24
Note 18 - Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1999
- ----
Net revenue................ $287,656 $465,324 $463,233 $420,860
Gross profit............... 134,668 216,546 214,817 198,435
Net income................. 12,975 56,750 57,759 46,233
Basic earnings per share... .30 1.21 1.23 .98
Diluted earnings per share .29 1.20 1.22 .97
1998
- ----
Net revenue................ $173,735 $224,546 $246,104 $202,725
Gross profit............... 81,703 109,708 115,303 92,872
Net income................. 17,507 31,894 36,381 27,398
Basic earnings per share... .47 .85 .97 .73
Diluted earnings per share .46 .84 .96 .73
The quarterly financial data for fiscal 1999 reflects the Acquisition in
May 1998 of the Company's licensees, Pepe USA and TH Canada, described in Note
15. Fiscal 1999 first quarter financial data reflects special acquisition-
related charges of $19,800 ($11,900 after-tax, or $0.27 per diluted share).
The quarterly financial data for the years ended March 31, 1999 and 1998
are unaudited; however, in the opinion of the Company, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary to
present such data fairly.
Note 19 - Share Split (Unaudited)
On June 4, 1999, the Company announced that its Board of Directors had
approved and declared a two-for-one split of the Company's Ordinary Shares, par
value $.01 per share (the "Ordinary Shares"). The split will be effected in the
form of a dividend of one Ordinary Share per Ordinary Share issued and
outstanding or held by the Company in its treasury (the "Share Split"), and will
be payable on July 9, 1999 to shareholders of record at the close of business on
June 18, 1999. In connection with the Share Split, the Board of Directors of the
Company also approved an increase in the number of authorized Ordinary Shares to
150,000,000 from 75,000,000.
F-25
The share and per share amounts in these Consolidated Financial Statements
and the accompanying Notes do not reflect the effect of the Share Split. The
following information reflects the pro forma effect of the Share Split:
Fiscal Year Ended March 31,
---------------------------
1999 1998
---- ----
Basic earnings per share $1.88 $1.51
Weighted average shares outstanding 92,264,674 74,747,853
Diluted earnings per share $1.86 $1.49
Weighted average shares and
share equivalents outstanding 93,375,934 75,771,799
Fiscal Year Ended March 31,
---------------------------
1999 1998
---- ----
Ordinary Shares, $0.01 par value-
shares authorized 150,000,000;
issued and outstanding
94,324,088 and 75,115,868,
respectively $943 $751
Capital in excess of par value 572,809 173,041
F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors and Executive Officers
Name Age Present Position
- ---- --- ----------------
Silas K.F. Chou 52 Co-Chairman of the Board and Director
Lawrence S. Stroll 39 Co-Chairman of the Board and Director
Thomas J. Hilfiger 48 Honorary Chairman of the Board, Principal Designer and Director
Joel J. Horowitz 48 Chief Executive Officer, President and Director
Benjamin M.T. Ng 36 Chief Financial Officer, Executive Vice President-Strategic Development,
Assistant Secretary and Director
Ronald K.Y. Chao 60 Director
Lester M.Y. Ma 52 Director
Joseph M. Adamko 66 Director
Clinton V. Silver 69 Director
Simon Murray 59 Director
Joel H. Newman 57 Chief Administrative Officer and Executive Vice President-Finance
Arthur Bargonetti 65 Senior Vice President-Operations
Joseph Scirocco 42 Senior Vice President and Treasurer
Lawrence T.S. Lok 42 Secretary
Silas K.F. Chou has been Co-Chairman of the Board of the Company since 1998 and
served as Chairman of the Board from 1992 to 1998. Mr. Chou also has served as
an Executive Director of Novel Enterprises Limited ("Novel Enterprises"), where
he was appointed as Managing Director in 1996, for more than the past five years
and as Chairman of the Board of Novel Denim Holdings Limited, a Mauritius-based
manufacturer of denim garments and fabric quoted on the Nasdaq National Market
and an affiliate of Novel Enterprises ("Novel Denim"), since 1996. In addition,
Mr. Chou has served as Chief Executive Officer of AIHL Investment Holdings
Limited, its predecessors and certain of its affiliates (collectively, "AIHL")
since 1992 and was Chairman of the Board of Pepe Jeans London Corporation and
its predecessor (collectively, "PJLC") from 1992 to 1998.
Lawrence S. Stroll has been Co-Chairman of the Board of the Company since 1998
and served as Chief Executive Officer of Tommy Hilfiger (HK) Limited, a
subsidiary of the Company ("THHK"), from 1993 to 1998. Mr. Stroll has been a
Director of the Company since 1992. In
27
addition, Mr. Stroll has served as Chairman of the Board of AIHL since 1992 and
was Group Chief Executive Officer of PJLC from 1993 to 1998.
Thomas J. Hilfiger has been a Director of the Company since 1992 and Honorary
Chairman of the Board of the Company since 1994. Mr. Hilfiger was Vice Chairman
of the Board of the Company and its predecessors from 1989 to 1994, and
President of Tommy Hilfiger, Inc. from 1982 to 1989. Mr. Hilfiger has been
designing clothes under the Tommy Hilfiger trademarks since 1984.
Joel J. Horowitz is Chief Executive Officer and President of the Company. Mr.
Horowitz has served as Chief Executive Officer since 1994 and as President since
1995. From 1989 to 1994, Mr. Horowitz served as President and Chief Operating
Officer of the Company and its predecessors. Mr. Horowitz has been a Director of
the Company since 1992.
Benjamin M.T. Ng has been a Director of the Company since 1992 and its Chief
Financial Officer and Executive Vice President-Strategic Development since May
1998. From 1992 to 1998, Mr. Ng served as Executive Vice President-Corporate
Finance of the Company. From 1988 to 1991, Mr. Ng was employed in the mergers
and acquisitions department at Goldman, Sachs & Co. Mr. Ng devotes a significant
portion of his time to matters related to AIHL and its affiliates other than the
Company.
Ronald K.Y. Chao has been a Director of the Company since 1992. In 1996, Mr.
Chao was appointed as Vice Chairman of Novel Enterprises. For more than five
years prior thereto, Mr. Chao served as the Managing Director of Novel
Enterprises. In addition, Mr. Chao has served as a director of Novel Denim since
February 1997.
Lester M.Y. Ma has been a Director of the Company since 1992 and served as its
Treasurer from 1996 to 1997. Mr. Ma has been an Executive Director and Group
Chief Accountant of Novel Enterprises for more than the past five years. In
addition, Mr. Ma has been a director of Novel Denim since 1992 and its Treasurer
since February 1997.
Joseph M. Adamko has been a Director of the Company since 1993. Since 1992, Mr.
Adamko has been Vice Chairman and a director of Sterling Bancorp and Sterling
National Bank. Prior thereto, Mr. Adamko was employed by Manufacturers Hanover
Trust Company of New York in a variety of positions for over 30 years, including
most recently as a Managing Director.
Clinton V. Silver has been a Director of the Company since 1994. Mr. Silver
currently serves as a consultant to, and from 1991 until his retirement in 1994,
served as Deputy Chairman of, Marks & Spencer plc, an international retailer
based in London ("Marks & Spencer"). Mr. Silver served as a director of Marks &
Spencer from 1974 to 1994 and as Joint Managing Director from 1990 to 1994. Mr.
Silver is also a non-executive director of the Pentland Group plc.
Simon Murray has been a Director of the Company since April 1997. From 1993 to
1997, Mr. Murray was the Executive Chairman Asia Pacific of Deutsche Bank AG and
is currently the Chairman of General Enterprise Management Services Limited, a
private equity fund management company sponsored by Simon Murray & Company Ltd
and Deutsche Bank. Mr. Murray is also a director of a number of public companies
in the Far East, including Hutchison Whampoa Limited and Orient Overseas
(International) Limited, and other companies in Europe, including Hermes
International and Vivendi of France.
28
Joel H. Newman has been the Company's Chief Administrative Officer and Executive
Vice President-Finance since May 1998. From 1997 to 1998, Mr. Newman served as
Executive Vice President-Operations of the Company. Since 1993, Mr. Newman has
also held various senior operations and financial positions with TH USA. Prior
to joining the Company, Mr. Newman held various senior operations and financial
positions with major companies in the apparel wholesale and retail industries.
Arthur Bargonetti has been Senior Vice President-Operations of the Company since
May 1998. From 1994 to 1998, Mr. Bargonetti served as Chief Operating Officer
and Executive Vice President of Pepe USA. Prior thereto, Mr. Bargonetti was the
Chief Operating Officer and Executive Vice President of Bidermann Industries
U.S.A., Inc.
Joseph Scirocco has been Senior Vice President and Treasurer of the Company
since December 1997. Prior to joining the Company, Mr. Scirocco was employed in
the Retail and Consumer Products Group of Price Waterhouse LLP, where he served
as an Audit Partner from 1990 to 1997.
Lawrence T.S. Lok has been Secretary of the Company and Novel Enterprises since
1994. In addition, Mr. Lok has been Secretary of Novel Denim since February
1997. Mr. Lok has also been Deputy Financial Controller of Novel Enterprises for
more than the past five years.
Ronald K.Y. Chao and Silas K.F. Chou are brothers.
Terms of Directors
The Company's Board of Directors is divided into three classes with
staggered three-year terms. At each Annual Meeting of Shareholders, the
successors of the class of directors whose terms expire at such meeting are
elected for three-year terms. The terms of Messrs. Chou, Hilfiger and Adamko
expire in 1999; the terms of Messrs. Stroll, Ng, Ma and Silver expire in 2000;
and the terms of Messrs. Horowitz, Chao and Murray expire in 2001.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and certain persons who own more than ten percent of a registered
class of the Company's equity securities ("Reporting Persons") to file reports
of ownership and changes in ownership ("Section 16 Reports") with the Securities
and Exchange Commission (the "SEC") and the New York Stock Exchange. Reporting
Persons are required by the SEC to furnish the Company with copies of all
Section 16 Reports they file.
Based solely on its review of the copies of such Section 16 Reports
received by it, or written representations received from certain Reporting
Persons, all Section 16(a) filing requirements applicable to the Company's
Reporting Persons during and with respect to the fiscal year ended March 31,
1999 have been complied with on a timely basis.
29
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the compensation paid and accrued by the
Company and its subsidiaries for the fiscal years ended March 31, 1999, 1998 and
1997 to the Company's chief executive officer and the four other most highly
compensated executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------- ------------
Awards
------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Stock Options (#) Compensation ($)
--------------------------- --- ---------- --------- ----------------- ----------------
Joel J. Horowitz................. 1999 540,000 15,374,000 -- 4,000(1)
Chief Executive Officer and 1998 505,000 9,343,000 -- --
President 1997 473,000 7,174,000 -- --
Thomas J. Hilfiger............... 1999 22,275,000 0 -- 4,000(1)
Honorary Chairman and 1998 10,464,000 3,500,000(2) -- --
Principal Designer 1997 8,498,223 4,500,000(2) -- --
Silas K.F. Chou.................. 1999 750,000(3) 1,750,000 -- --
Co-Chairman of the Board 1998 750,000(3) 325,000 -- --
1997 750,000(3) 325,000 -- --
Lawrence S. Stroll............... 1999 750,000(4) 1,750,000 -- --
Co-Chairman of the Board 1998 625,000(4) 325,000 -- --
1997 625,000(4) 325,000 -- --
Benjamin M.T. Ng................. 1999 257,500 1,442,500 -- 4,742(1)
Chief Financial Officer and 1998 257,500 700,000 5,000 4,629
Executive Vice President- 1997 250,000 211,375 5,000 3,750
Strategic Development
________
(1) Amount represents employer matching contribution under the Tommy Hilfiger
U.S.A. 401(k) Profit Sharing Plan.
(2) All of the 1998 amount, and $3,500,000 of the 1997 amount, will be payable
on a deferred basis. See "Certain Employment Agreements."
(3) Includes 50% of the fees paid pursuant to a consulting agreement between
Tommy Hilfiger (Eastern Hemisphere) Limited, a subsidiary of the Company
("THEH"), and Fasco International, Inc. ("Fasco International"), a
subsidiary of Sportswear Holdings Limited ("Sportswear"). See "Certain
Relationships and Related Transactions."
(4) Includes (i) 50% of the fees paid pursuant to a consulting agreement between
THEH and Fasco International, and (ii) all of the fees paid pursuant to a
consulting agreement between THEH and an affiliate of Mr. Stroll. See
"Certain Relationships and Related Transactions."
30
Stock Option Exercises and Fiscal Year-End Option Values
The following table sets forth information regarding stock option exercises
during fiscal year 1999 by the only Named Executive Officer who has received
Company option grants, and the values of such officer's unexercised options as
of March 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
Number of Unexercised Stock Value of Unexercised In-the-
Shares Stock Options at Money Stock Options at
Acquired on Value Fiscal Year-End (#) Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
Benjamin M.T. Ng... 55,070 1,740,625 98,000/7,000 3,747,125/192,250
Certain Employment Agreements
Subsidiaries of the Company had employment agreements with Messrs. Hilfiger
and Horowitz during fiscal year 1999.
The employment agreement with Tommy Hilfiger, the Company's Honorary
Chairman of the Board and Principal Designer, provides for his employment as the
designer of all products carrying the Tommy Hilfiger trademarks until his death,
disability or incompetence. Mr. Hilfiger receives an annual base salary of
$900,000, subject to adjustments. If net sales of TH USA and its subsidiaries
are less than $48,333,333 in any year, Mr. Hilfiger's base salary for such year
is reduced by 1.5% of such shortfall, to not less than $500,000. If net sales
are greater than $48,333,333 in any fiscal year, Mr. Hilfiger receives an
additional payment equal to 1.5% of such excess. If Mr. Hilfiger terminates his
employment without the consent of TH USA other than by reason of his death,
disability or incompetence, TH USA will have no further obligations under the
agreement. The employment agreement provides that TH USA and its subsidiaries
cannot enter into any line of business without the consent of Mr. Hilfiger if he
shall reasonably determine that such line of business would be detrimental to
the Tommy Hilfiger trademarks.
The employment agreement with Mr. Horowitz provides for his employment as
Chief Executive Officer of the Company and TH USA until March 31, 2004. The
agreement provided for an annual base salary in fiscal year 1999 of $540,000.
The base salary is subject to increase each year thereafter by the average
percentage increase for all employees of TH USA.
Beginning in fiscal 1995, the Company became subject to Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), under which public
companies are not permitted to deduct annual compensation paid to certain
executive officers in excess of $1,000,000 per executive, unless such excess is
paid pursuant to an arrangement based upon performance and approved by
shareholders and provided that the other requirements set forth in Section
162(m) and related regulations are met. Payments required to be made pursuant to
the aforementioned employment agreement with Mr. Hilfiger, which was entered
into prior to the effective date of Section 162(m), are not subject to such
restrictions.
31
On August 6, 1998, the Company's Compensation Committee approved and the
Board of Directors adopted, and on November 2, 1998, the shareholders approved,
the renewal of the Tommy Hilfiger U.S.A., Inc. Supplemental Executive Incentive
Compensation Plan (the "SEIC Plan"), which was scheduled to terminate on April
1, 1999, for each of the five fiscal years in the period ending March 31, 2004.
The purpose of the SEIC Plan is to provide a significant and flexible economic
opportunity to Mr. Horowitz, Chief Executive Officer and President of the
Company and Chief Executive Officer of TH USA, in an effort to reward his
contribution to the Company and its subsidiaries. The SEIC Plan is administered
by the Company's Compensation Committee and provides for a cash award to Mr.
Horowitz equal to 5 percent of the Company's consolidated earnings before
depreciation, interest on financing of fixed assets, non-operating expenses and
taxes ("operating earnings"). Awards under the plan are calculated and paid
quarterly based on 3.75 percent of operating earnings for the first three fiscal
quarters, with the remaining amount of the bonus (based on the 5 percent rate)
payable at the end of the fiscal year. The amount of the award is reduced by the
amount of any other bonuses paid or payable under any employment or bonus
agreement between the Company or TH USA and Mr. Horowitz. The SEIC Plan does not
contain any cap on the maximum amount of the bonus payable thereunder. The SEIC
Plan bonus payable to Mr. Horowitz in respect of fiscal year 1999 was
$15,374,000. While the Company believes that compensation payable pursuant to
the SEIC Plan will be deductible for federal income tax purposes pursuant to
Section 162(m), there can be no assurance in this regard.
The employment agreements with Messrs. Hilfiger and Horowitz also provide
that such executives are eligible to receive additional annual bonuses at the
discretion of TH USA's Compensation Committee if the TH USA Compensation
Committee determines that certain performance levels established by the
Company's Compensation Committee have been satisfied. If, however, compensation
is awarded based on an arrangement that does not satisfy the requirements of
Section 162(m), the Company would not be allowed to deduct for tax purposes any
payments in excess of the $1,000,000 limitation. The Compensation Committee
approved discretionary bonuses of $3,500,000 and $4,500,000 for Mr. Hilfiger in
fiscal years 1998 and 1997, respectively. The full amount of the fiscal year
1998 bonus, and $3,500,000 of the fiscal year 1997 bonus, was granted on a
deferred basis as described below (the "Deferred Bonuses").
The Deferred Bonuses (and any interest accrued thereon) will be paid in
annual installments on the last day of each fiscal year of the Company in the
largest possible amounts that can be paid, after taking into account any base
salary and other compensation in that fiscal year which would be counted for
purposes of Section 162(m), and still be fully deductible under such
regulations. The unpaid portion of the Deferred Bonuses will accrue interest at
a rate equal to TH USA's bank borrowing rate. While the Company believes that
such Deferred Bonus payments will be deductible for federal income tax purposes
pursuant to Section 162(m), there can be no assurance in this regard.
32
Stock Option Plans
Tommy Hilfiger U.S.A., Inc. and Tommy Hilfiger (Eastern Hemisphere) Limited 1992
Stock Incentive Plans
In September 1992, the Company and its subsidiaries adopted stock options
plans (collectively, the "Plans") authorizing the issuance of an aggregate of up
to 2,970,000 Ordinary Shares to directors, officers and employees of the Company
and its subsidiaries. Subsequently, through June 1999, 5,750,000 additional
Ordinary Shares were authorized and reserved for issuance under the Plans. The
number of Ordinary Shares subject to the Plans is subject to certain adjustments
as provided in the Plans.
Currently, over half of the full-time employees of the Company and its
subsidiaries are participants in the Plans. Messrs. Hilfiger, Horowitz, Chou,
Stroll and Chao are not eligible for grants under the Plans.
The Plan for employees of TH USA and its subsidiaries is administered by
the Compensation Committee of the Board of Directors of TH USA and the Plan for
employees of the Company's Far East subsidiaries is administered by the
Company's Compensation Committee (collectively, the "Compensation Committees").
Under the Plans, awards may include stock options, stock appreciation rights and
restricted stock. An option or right granted under the Plans must have an
exercise price of not less than market value at the date of grant.
Options may be exercisable at such times, in such amounts, in accordance
with such terms and conditions, and subject to such restrictions as are set
forth in the option agreement evidencing the grant of such options. In addition,
the grants may provide for acceleration or immediate vesting in the event of a
change of control of the Company or its subsidiaries.
Non-Employee Directors Stock Option Plan
In August 1994, the Board of Directors and shareholders of the Company
approved the Tommy Hilfiger Corporation Non-Employee Directors Stock Option Plan
(the "Directors Option Plan"). Options for up to 200,000 Ordinary Shares,
subject to certain adjustments, may be granted under the Directors Option Plan.
Each director who is not an officer or employee of the Company or any subsidiary
of the Company (a "Non-Employee Director") receives an initial stock option to
purchase 10,000 Ordinary Shares, and subsequent annual grants of options to
purchase 1,000 Ordinary Shares, in each case at a price equal to the fair market
value at the time of the grant of the Ordinary Shares subject to such stock
option.
The Directors Option Plan is administered by the Company's Compensation
Committee. However, grants of stock options to participants under the Plan and
the amount, nature and timing of the grants are not subject to the determination
of the Committee.
The term of each stock option granted under the Directors Option Plan is 10
years unless earlier terminated by termination of the director status of a Non-
Employee Director, and the stock options are exercisable in equal installments
over five years from the date of grant.
33
Director Compensation
Directors who are officers or employees of the Company or any of its
subsidiaries receive no additional compensation for their service on the Board
and its Committees. All Non-Employee Directors receive the following retainers:
$40,000 per annum for members of the Board; $5,000 per annum for members of
standing committees; and $3,000 per annum for Chairmen of standing committees.
The Non-Employee Directors also receive $2,000 for attendance at each meeting of
the Board or a Committee. In addition, the Non-Employee Directors participate in
the Directors Option Plan. See "Stock Option Plans."
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee consists of Mr. Adamko, who is the
Chairman, Mr. Silver and Mr. Murray.
Sportswear, a British Virgin Islands corporation, is indirectly 50% owned
by Westleigh Limited, a British Virgin Islands corporation privately owned by
members of the Chao family (including Messrs. Silas K.F. Chou, Co-Chairman of
the Board and a Director of the Company, and Ronald K.Y. Chao, a Director of the
Company) and an affiliate of Novel Enterprises ("Westleigh"), and 50% owned by
Flair Investment Holdings Limited, a British Virgin Islands corporation in which
Mr. Stroll, Co-Chairman of the Board and a Director of the Company, has an
indirect beneficial ownership interest ("Flair").
Prior to the Acquisition, (i) PJLC, a British Virgin Islands corporation,
was owned 100% by Blackwatch Investments Limited, a British Virgin Islands
corporation ("Blackwatch"), (ii) Blackwatch was owned 97% by AIHL, a British
Virgin Islands corporation, and 3% by Anasta Holdings Limited, a British Virgin
Islands corporation and an affiliate of Mr. Chou ("Anasta"), and (iii) AIHL was
owned 70% by Sportswear, 22.5% by Mr. Hilfiger, Honorary Chairman of the Board
and Principal Designer of the Company, and 7.5% by Mr. Horowitz, Chief Executive
Officer, President and a Director of the Company.
Following the Acquisition, PJLC and Blackwatch were dissolved and AIHL was
reorganized. As a result of this restructuring, (i) AIHL is owned 67.9% by
Sportswear, 21.825% by Mr. Hilfiger, 7.275% by Mr. Horowitz and 3% by Anasta,
and (ii) PJLC's former subsidiaries that hold the Pepe European License (as
defined below) are owned 92.167% by AIHL and 2.851% by Anasta.
Mr. Ng, Chief Financial Officer, Executive Vice President-Strategic
Development and a Director of the Company, and Mr. Ma, a Director of the
Company, may have certain economic interests based on the performance of AIHL
and its affiliates. Novel Enterprises and its affiliates also hold other
interests in the apparel industry, including an approximately 48% ownership
interest in Novel Denim.
Prior to the dissolution of PJLC and Blackwatch, (i) Messrs. Chou and
Stroll were executive officers and directors of PJLC, (ii) Mr. Ng was a director
of PJLC, (iii) Messrs. Chao and Ma were directors of certain subsidiaries of
PJLC and (iv) Messrs. Chou, Stroll and Ng were executive officers and directors
of Blackwatch.
34
Messrs. Chou, Stroll, Hilfiger, Horowitz, Ng and Ma are executive officers
and directors of AIHL.
Messrs. Chou and Stroll are executive officers and directors of Sportswear
and Mr. Chao is a director of Sportswear.
Messrs. Chou and Chao are directors of Westleigh Limited.
Messrs. Chou, Chao and Ma are executive officers and directors of Novel
Enterprises.
Mr. Chou is an executive officer, director and Chairman of the compensation
committee of Novel Denim. Mr. Chao is a director of Novel Denim and Mr. Ma is an
executive officer and director of Novel Denim.
See "Certain Relationships and Related Transactions" in Item 13.
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth data as of June 4, 1999 concerning the
beneficial ownership of Ordinary Shares by (i) the persons known to the Company
to beneficially own more than five percent of the outstanding Ordinary Shares of
the Company, (ii) all directors and nominees and each Named Executive Officer
and (iii) all directors and executive officers as a group.
Amount Percent
Beneficially Owned of Class/(1)/
------------------ -------------
AIHL Investment Holdings Limited(2)
Craigmuir Chambers
P.O. Box 71
Road Town, Tortola
British Virgin Islands............................ 9,045,930 19.0%
The Equitable Companies Incorporated(3)
1290 Avenue of the Americas
New York, NY 10104................................ 4,664,860 9.8%
Directors and Named Executive Officers:
Silas K.F. Chou.................................... ---(4) ---
Lawrence S. Stroll................................. ---(4) ---
Thomas J. Hilfiger................................. 10,000(4) *
Joel J. Horowitz................................... 10,600(4) *
Benjamin M.T. Ng................................... 100,000(5) *
Ronald K.Y. Chao................................... 2,000(4)(6) *
Lester M.Y. Ma..................................... 5,000(7) *
Joseph M. Adamko................................... 8,600(8) *
Clinton V. Silver.................................. 9,200(6) *
Simon Murray....................................... 4,000(6) *
All directors and executive officers as a group (including
Ordinary Shares owned by AIHL)
(14 persons)(2)................................... 9,230,330 19.4%
- --------
* Less than 1%.
(1) Shares outstanding includes the right to acquire beneficial ownership of
493,205 Ordinary Shares pursuant to currently exercisable stock options
under Company stock option plans. For purposes of this table, "currently
exercisable" stock options include options becoming vested and exercisable
within 60 days from June 4, 1999.
(2) Information based on Amendment to Schedule 13D dated September 7, 1998
filed with the SEC by AIHL. According to the Schedule 13D, AIHL has shared
dispositive power and shared voting power over all of the shares. As set
forth in the Schedule 13D, AIHL is owned 67.9% by Sportswear, 21.825% by
Mr. Hilfiger, 7.275% by Mr. Horowitz and 3% by Anasta, an affiliate of Mr.
Chou, and Sportswear is owned 50% by Westleigh, which is privately owned by
members of the Chao family (including Messrs. Chou and Chao), and 50% by
Flair, in which Mr. Stroll has an indirect beneficial ownership interest.
According to the Schedule 13D, each of Sportswear, Anasta, Westleigh,
Flair, Mr. Hilfiger and Mr. Horowitz may be deemed to have shared
dispositive power and shared voting power over, and thus to beneficially
own, all of the Ordinary Shares owned by AIHL through their respective
direct or indirect ownership of the capital stock of AIHL.
(3) Information based on Amendment to Schedule 13G dated February 10, 1999
filed with the SEC by The Equitable Companies Incorporated ("Equitable").
According to the Schedule 13G, subsidiaries and affiliates of Equitable, a
parent holding company, have sole dispositive power over 4,653,043 of the
shares, shared dispositive power over 11,817 of the shares, sole voting
power over 1,341,150 of the shares and shared voting power over 3,309,300
of the shares.
(4) Not including Ordinary Shares owned by AIHL. See footnote 2 above.
(5) Issuable upon the exercise of currently exercisable stock options under the
Plans.
(6) Issuable upon the exercise of currently exercisable stock options under the
Directors Option Plan.
(7) Issuable upon the exercise of currently exercisable stock options under the
Plans and the Directors Option Plan.
36
(8) Includes 7,200 Ordinary Shares issuable upon the exercise of currently
exercisable stock options under the Directors Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and transactions between the Company and certain
directors and officers of the Company and certain of their affiliates are
described below.
The Acquisition
On January 26, 1998, Pepe USA entered into a share purchase agreement with
Lawvest Holdings Inc. ("Lawvest"), a company in which Mr. Stroll and his
descendants have a 100% beneficial ownership interest, to acquire Tomcan, the
parent corporation of TH Canada, the Company's Canadian licensee. Lawvest's sole
shareholder executed a guarantee of Lawvest's indemnification obligations under
this agreement. On January 31, 1998, the Company entered into a stock purchase
agreement (the "Stock Purchase Agreement") with PJLC to acquire Pepe USA, the
Company's United States womenswear and jeanswear licensee, and Pepe Far East,
Pepe USA's buying agency affiliate. Also on January 31, 1998, AIHL executed a
guarantee of the performance by PJLC of its obligations under the Stock Purchase
Agreement. On May 8, 1998, following the approval by the shareholders of the
Company on May 5, 1998, the Company, through its wholly owned subsidiaries,
acquired Pepe USA and Pepe Far East from PJLC for an aggregate purchase price of
$755,760,000 in cash plus 9,045,930 Ordinary Shares of the Company (the
"Purchase Price Shares"). Immediately following this transaction, Pepe USA
acquired from Lawvest all of the outstanding shares of Tomcan with funds
provided by PJLC using proceeds from the cash consideration paid to it in the
Acquisition.
At the time of the execution of the Stock Purchase Agreement, the Company
entered into a lock-up agreement (the "Lock-Up Agreement") with PJLC,
Blackwatch, AIHL, Anasta, Sportswear, Westleigh, Flair, Mr. Hilfiger and Mr.
Horowitz (collectively, the "PJLC Affiliates"), prohibiting the transfer of the
Purchase Price Shares for two years from the date of the Acquisition, with
additional restrictions during the following three years on transfers of the
shares as a block, subject in each case to certain exceptions. Under the Lock-Up
Agreement, the two-year prohibition on transfers may only be amended with the
approval of a majority of the votes cast by disinterested holders of Ordinary
Shares at a meeting of the Company's shareholders.
At the time of the closing of the Acquisition, the Company entered into a
registration rights agreement with the PJLC Affiliates under which the PJLC
Affiliates, along with their successors and permitted transferees under the
Lock-Up Agreement, will have the right to require the Company to register sales
of the Purchase Price Shares following the second anniversary of the
Acquisition. At that time, Messrs. Chou and Stroll also entered into a non-
competition agreement with the Company restricting their ability to compete in
the United States or Canada with the Pepe USA businesses for four years
following the Acquisition.
At the date of the Acquisition, the licenses between the Acquired Companies
and the Company consisted of: a license with Pepe USA covering jeans and jeans
related apparel and women's and girls' casualwear in the United States (the
"Pepe United States License"); a license with T.H. International N.V., a
subsidiary of PJLC, covering jeans and jeans related apparel and women's and
girls' casualwear worldwide (other than in the United States and certain
specified
37
countries) (the "Pepe International License"); a geographic license with Tommy
Hilfiger Europe B.V., a subsidiary of PJLC, covering men's and boys' sportswear
lines in Europe and certain other countries (the "Pepe European License"); and a
master geographic license for Canada with TH Canada (the "Canadian License").
In connection with the Acquisition, the Company acquired the businesses
operated under the Pepe United States License and the Canadian License, the Pepe
International License was canceled and the license arrangements for Europe
previously covered by the Pepe International License were consolidated under the
Pepe European License. Accordingly, the Pepe European License was amended to,
among other things, include in its scope men's, women's and children's jeanswear
and jeans related apparel (including women's and girls' casualwear) and to
increase the minimum sales levels, guaranteed minimum royalties and minimum
advertising payments required thereunder. The Pepe European License was also
amended to provide the Company certain additional rights in connection with any
proposed future transfer of the business conducted under the Pepe European
License. In addition, in connection with the Acquisition, a $5,000,000 note
receivable from AIHL was canceled in consideration for a capital contribution
being made to Pepe USA in the same amount as the receivable.
Other Relationships and Transactions
Effective February 1, 1997, the Company entered into the Pepe European
License with PJLC. PJLC subsequently assigned the license to a subsidiary, Tommy
Hilfiger Europe B.V. Under this agreement, the licensee pays THLI a royalty
based on a percentage of the value of licensed products sold by the licensee.
Except with the approval of THLI, all products sold by or through the licensee
must be purchased through THEH or TH USA pursuant to buying agency agreements.
Under these agreements, THEH and TH USA are paid a buying agency commission
based on a percentage of the cost of products sourced through them. Results of
operations include $4,748,000, for the fiscal year ended March 31, 1999, of
royalties and commissions under this arrangement. In addition, in connection
with this license, a subsidiary of the licensee leases certain space at the
Company's New Bond Street flagship store in London for a rent of (Pounds)60,000
per annum.
Effective July 1, 1996, the Company entered into an exclusive license
agreement for Japan with Novel-ITC Licensing Limited ("NIL"), a company jointly
controlled by Itochu Corporation, which was the 51% owner of TH Japan, and Novel
Enterprises. Mr. Stroll indirectly owns a 3.5% equity interest in NIL. Under the
license agreement, NIL pays THLI a royalty based on a percentage of the value of
licensed products sold by THMJ Incorporated ("THMJ"), NIL's sublicensee. Novel
Enterprises and its affiliates and Messrs. Stroll, Hilfiger and Horowitz
indirectly own equity interests of 15.2%, 15.2%, 9.7% and 3.2%, respectively, in
THMJ. Except with the approval of THLI, all products sold by or through NIL or
THMJ must be purchased through THEH or TH USA pursuant to buying agency
agreements. Under these agreements, THEH and TH USA are paid a buying agency
commission based on a percentage of the cost of products sourced through them.
Pursuant to this arrangement, royalties and commissions totaled $3,119,000
during fiscal 1999.
Prior to the Acquisition in fiscal 1999, (i) royalties under the Pepe
United States License and the Pepe International License totaled $1,990,000,
(ii) royalties and commissions with respect to the Canadian License totaled
$399,000 and (iii) TH USA purchased $1,004,000 of finished goods in the ordinary
course of business from subsidiaries of PJLC.
38
TH USA purchases finished goods in the ordinary course of business from
affiliates of Novel Enterprises. Such purchases amounted to $47,734,000 during
the fiscal year ended March 31, 1999. In addition, contractors of the Company
purchase raw materials in the ordinary course of business from affiliates of
Novel Enterprises pursuant to the Company's designation of such sources as
acceptable suppliers. Such purchases amounted to $15,051,000 during the fiscal
year ended March 31, 1999.
The Company sells merchandise in the ordinary course of business to a
retail store that is owned by Mr. Hilfiger's sister. Sales to this customer
amounted to approximately $732,000 during fiscal 1999.
In April 1999, TH USA sold to Mr. Hilfiger a whole life insurance policy
under which he is the named insured for its cash surrender value of $290,000.
In connection with the shareholder derivative litigation described in Item
3 above, the Company has agreed to advance legal fees and other expenses to the
Company's directors. Each director has delivered a written undertaking to repay
the Company in the event that a court ultimately determines that such director
was not entitled to indemnification. An aggregate of approximately $600,000 was
advanced pursuant to these arrangements in fiscal 1999.
THEH has a consulting agreement with Fasco International, an affiliate of
Messrs. Chou and Stroll. The fees under this agreement totaled $500,000 during
fiscal 1999.
THEH has a consulting agreement with an affiliate of Mr. Stroll. THEH paid
fees of $500,000 in fiscal 1999 to such affiliate.
Under the terms of an agreement with Novel Enterprises, THHK reimburses
Novel Enterprises for certain general and administrative expenses incurred by it
on behalf of THHK. Payments made to Novel Enterprises for the fiscal year ended
March 31, 1999 were $133,000.
The Audit Committee of the Board of Directors monitors and approves
transactions between the Company and its affiliates to seek to provide that such
transactions are on terms which are no less favorable as a whole to the Company
than could be obtained from unaffiliated parties. The Audit Committee is
comprised of independent Non-Employee Directors.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Index to Financial Statements and Financial Statement Schedules
(a) 1. Financial Statements
The following consolidated financial statements of the Company are included
in Item 8:
Consolidated Statements of Operations for the years ended March 31,
1999, 1998 and 1997
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended March 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the
years ended March 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Form 10-K
Page
----
Schedule I - Condensed Financial
Information of Registrant 46
All other schedules have been omitted because of the absence of the
conditions under which they are required or because the required information is
included in the Consolidated Financial Statements or Notes thereto.
(a) 3. Exhibits
Exhibit
Number Description
- ------ -----------
2. -- Stock Purchase Agreement, dated as of January 31, 1998, by
and among the Company, Tommy Hilfiger U.S.A., Inc., Tommy
Hilfiger (Eastern Hemisphere) Limited and Pepe Jeans London
Corporation (the Company hereby undertakes to furnish
supplementally to the Securities and Exchange Commission
upon request copies of all omitted schedules to this
exhibit) (previously filed as Exhibit 2 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1998 and incorporated herein by reference)
3.1 -- Amendment, dated May 5, 1998, to Memorandum of Association
of the Company
40
3.2 -- Amendment, dated June 4, 1999, to Memorandum of Association
of the Company
3.3 -- Amendment, dated January 20, 1999, to Articles of
Association of the Company
3.4 -- Memorandum of Association and Articles of Association of the
Company, as amended (conformed to reflect all amendments
through June 4, 1999)
4.1 -- Indenture, dated as of May 1, 1998, among Tommy Hilfiger
U.S.A., Inc., as Issuer, the Company, as Guarantor, and The
Chase Manhattan Bank, as Trustee (previously filed as
Exhibit 4.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998 and incorporated herein
by reference)
4.2 -- Forms of Tommy Hilfiger U.S.A., Inc. 6.50% Note due 2003 and
6.85% Note due 2008 (previously filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 5, 1998 and
incorporated herein by reference)
10.1 -- Credit Agreement, dated as of May 8, 1998, among the
Company, as Guarantor, Tommy Hilfiger U.S.A., Inc., as
Borrower, the several Lenders from time to time parties
thereto, Fleet Bank, N.A., as Documentation Agent,
Nationsbank, N.A., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent (previously filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998 and incorporated herein
by reference)
*10.2 -- Stock Option Plans of the Company and its subsidiaries, as
amended and restated (previously filed as Exhibits 4.1 and
4.2 with Registration No. 333-80027 and incorporated herein
by reference)
*10.3 -- Tommy Hilfiger Corporation Non-Employee Directors Stock
Option Plan (previously filed as Exhibit 10.3 with
Registration No. 33-88906 and incorporated herein by
reference)
*10.4 -- Tommy Hilfiger U.S.A., Inc. Supplemental Executive Incentive
Compensation Plan (previously filed as Exhibit A to the
Company's Proxy Statement dated September 25, 1998 and
incorporated herein by reference)
*10.5 -- Tommy Hilfiger U.S.A., Inc. Voluntary Deferred Compensation
Plan (previously filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1998 and incorporated herein by reference)
*10.6 -- Tommy Hilfiger U.S.A., Inc. Supplemental Executive
Retirement Plan (previously filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and incorporated herein by reference)
*10.7 -- Amended and Restated Employment Agreement, dated as of June
30, 1992, between Tommy Hilfiger U.S.A., Inc. and Tommy
Hilfiger (previously filed as Exhibit 10.3 with Registration
No. 33-48587 and incorporated herein by reference)
*10.8 -- Amended and Restated Employment Agreement, dated as of June
30, 1992, between Tommy Hilfiger U.S.A., Inc. and Joel
Horowitz (previously filed as Exhibit 10.4 with Registration
No. 33-48587 and incorporated herein by reference)
41
*10.9 -- Amendment, dated as of March 8, 1994, to Amended and
Restated Employment Agreement, dated as of June 30, 1992,
between Tommy Hilfiger U.S.A., Inc. and Joel Horowitz
(previously filed as Exhibit 7 to the Company's Annual
Report on Form 20-F for the fiscal year ended March 31, 1994
and incorporated herein by reference)
*10.10 -- Amendment No. 2, dated as of August 7, 1998, to Amended and
Restated Employment Agreement, dated as of June 30, 1992,
between Tommy Hilfiger U.S.A., Inc. and Joel Horowitz
(previously filed as Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 and incorporated herein by reference)
*10.11 -- Consulting Agreement, dated April 1, 1991, between Polostro
Limited and Tommy Hilfiger (Eastern Hemisphere) Limited
(previously filed as Exhibit 10.13 with Registration No. 33-
48587 and incorporated herein by reference)
*10.12 -- Amendment, dated April 1, 1993, to Consulting Agreement,
dated April 1, 1991, between Polostro Limited and Tommy
Hilfiger (Eastern Hemisphere) Limited (previously filed as
Exhibit 18 to the Company's Annual Report on Form 20-F for
the fiscal year ended March 31, 1994 and incorporated herein
by reference)
*10.13 -- Amendment No. 2, dated November 2, 1998, to Consulting
Agreement, dated April 1, 1991, between Polostro Limited and
Tommy Hilfiger (Eastern Hemisphere) Limited (previously
filed as Exhibit 10(c) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998
and incorporated herein by reference)
*10.14 -- Consulting Agreement, dated April 1, 1996, between Fasco
International, Inc. and Tommy Hilfiger (Eastern Hemisphere)
Limited (previously filed as Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and incorporated herein by reference)
10.15 -- Amended and Restated Factoring Agreement, dated as of April
1, 1998, between Tommy Hilfiger U.S.A., Inc. and Century
Business Credit Corporation (previously filed as Exhibit
10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by
reference)
10.16 -- Amended and Restated Factoring Agreement, dated as of April
1, 1998, between Pepe Jeans USA, Inc. and Century Business
Credit Corporation (previously filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and incorporated herein by reference)
10.17 -- Lease, dated April 24, 1995, between Forsgate Industrial
Complex L.P. and Tommy Hilfiger U.S.A., Inc. (previously
filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995 and
incorporated herein by reference)
10.18 -- Lease, dated June 10, 1997, between Hartz Mountain
Industries, Inc. and Pepe Jeans USA, Inc. (previously filed
as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998 and incorporated
herein by reference)
10.19 -- Form of Memorandum of Agreement, dated as of January 1,
1999, between Tandem Distribution Services, Inc. and Tommy
Hilfiger U.S.A., Inc.
42
10.20 -- Trademark Agreement, dated June 30, 1992, between Thomas J.
Hilfiger and Tommy Hilfiger, Inc. (previously filed as
Exhibit 10.15 with Registration No. 33-48587 and
incorporated herein by reference)
10.21 -- License Agreement, dated June 24, 1996 (the "Japan
License"), between Tommy Hilfiger Licensing, Inc. and Novel-
ITC Licensing Limited (portions of this exhibit, which have
been filed separately with the Securities and Exchange
Commission, have been omitted pursuant to an order of the
Commission granting confidential treatment) (previously
filed as Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996 and
incorporated herein by reference)
10.22 -- First Amendment, dated September 14, 1998, to the Japan
License (previously filed as Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 and incorporated herein by reference)
10.23 -- License Agreement, dated as of February 1, 1997 (the "Pepe
European License"), between Tommy Hilfiger Licensing, Inc.
and Pepe Jeans London Corporation (as assigned to Tommy
Hilfiger Europe B.V.) (portions of this exhibit, which have
been filed separately with the Securities and Exchange
Commission, have been omitted and are the subject of a
request made to the Commission for confidential treatment)
(previously filed as Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997
and incorporated herein by reference)
10.24 -- First Amendment, dated December 1, 1997, to the Pepe
European License (previously filed as Exhibit 10(d) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 1997 and incorporated herein by
reference)
10.25 -- Second Amendment, dated May 8, 1998, to the Pepe European
License (portions of this exhibit, which have been filed
separately with the Securities and Exchange Commission, have
been omitted pursuant to an order of the Commission granting
confidential treatment) (previously filed as Exhibit 10.24
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998 and incorporated herein by
reference)
10.26 -- Lock-Up Agreement, dated as of January 31, 1998, by and
among the Company, Pepe Jeans London Corporation, Blackwatch
Investments Limited, AIHL Investment Holdings Limited,
Anasta Holdings Limited, Sportswear Holdings Limited,
Westleigh Limited, Flair Investment Holdings Limited, Thomas
J. Hilfiger and Joel J. Horowitz (previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated April 1, 1998 and incorporated herein by reference)
10.27 -- Registration Rights Agreement, dated as of May 8, 1998, by
and among the Company, Pepe Jeans London Corporation,
Blackwatch Investments Limited, AIHL Investment Group
Limited, Anasta Holdings Limited, Sportswear Holdings
Limited, Westleigh Limited, Flair Investment Holdings
Limited, Thomas J. Hilfiger and Joel J. Horowitz (previously
filed as Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 and
incorporated herein by reference)
43
10.28 -- Non-Competition Agreement, dated as of May 8, 1998, among
the Company, Silas K.F. Chou and Lawrence S. Stroll
(previously filed as Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998
and incorporated herein by reference)
11. -- Statement re: Computation of Per Share Earnings
21. -- Subsidiaries of the Company
23. -- Consent of PricewaterhouseCoopers LLP
24. -- Powers of Attorney
27. -- Financial Data Schedule
________
* Management contract or compensatory plan or arrangement.
(b) 1. Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the three
months ended March 31, 1999.
44
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
TOMMY HILFIGER CORPORATION
/s/ Benjamin M.T. Ng
----------------------
Benjamin M.T. Ng
Chief Financial Officer and Executive Vice
President-Strategic Development
June 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
* Director and Co-Chairman of the Board June 24, 1999
---------------
(Silas K.F. Chou)
* Director and Co-Chairman of the Board June 24, 1999
---------------
(Lawrence S. Stroll)
* Director and Honorary Chairman June 24, 1999
---------------
(Thomas J. Hilfiger)
* Director, Chief Executive Officer and June 24, 1999
--------------- President (principal executive officer)
(Joel J. Horowitz)
/s/ Benjamin M.T. Ng Director, Chief Financial Officer, Executive June 24, 1999
--------------------
(Benjamin M.T. Ng) Vice President-Strategic Development
(principal financial officer)
* Director June 24, 1999
---------------
(Ronald K.Y. Chao)
* Director June 24, 1999
---------------
(Lester M.Y. Ma)
* Director June 24, 1999
---------------
(Joseph Adamko)
* Director June 24, 1999
---------------
(Clinton V. Silver)
* Director June 24, 1999
---------------
(Simon Murray)
* Senior Vice President and Treasurer June 24, 1999
---------------
(Joseph Scirocco) (principal accounting officer)
* /s/ Benjamin M.T. Ng
- ----------------------
Benjamin M.T. Ng
(Attorney-in-Fact)
45
SCHEDULE I
TOMMY HILFIGER CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(in thousands)
1999 1998 1997
-------- -------- --------
Equity in income of subsidiaries.................... $246,371 $168,770 $131,248
Income before income taxes.......................... 246,371 168,770 131,248
Provision for income taxes.......................... 72,654 55,590 44,866
-------- -------- --------
Net income.......................................... $173,717 $113,180 $ 86,382
======== ======== ========
Note 1
Registrant is a British Virgin Islands holding company formed in June 1992.
See Notes 1(a) and 1(b) to the Consolidated Financial Statements.
Note 2
Certain provisions of the agreements governing indebtedness of the Company
and its subsidiaries restrict the distribution of income and assets by the
Company's subsidiaries. See Note 7 to the Consolidated Financial Statements.
46
SCHEDULE I
(continued)
TOMMY HILFIGER CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands, except share data)
March 31,
---------
1999 1998
---------- ----------
Investment in subsidiaries............................................. $1,092,249 $ 519,062
---------- ----------
Total Assets......................................................... $1,092,249 $ 519,062
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity
Preference shares, $0.01 par value-shares authorized
5,000,000; none issued................................................ $ -- $ --
Common shares, $0.01 par value-shares authorized
75,000,000; issued and outstanding
47,162,044 and 37,557,934, respectively................................ 472 376
Capital in excess of par value......................................... 573,280 173,416
Retained earnings...................................................... 518,912 345,195
Accumulated other comprehensive income (loss).......................... (415) 75
---------- ----------
Total shareholders' equity........................................... 1,092,249 519,062
---------- ----------
Total Liabilities and Shareholders' Equity........................ $1,092,249 $ 519,062
========== ==========
47
SCHEDULE I
(continued)
TOMMY HILFIGER CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended March 31,
-----------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
Net income............................................. $ 173,717 $ 113,180 $ 86,382
Adjustments to reconcile net income to net cash from
operating activities:
Net equity in income of subsidiaries.............. (173,717) (113,180) (86,382)
---------- ---------- ----------
Net cash provided by operating activities......... -- -- --
---------- ---------- ----------
Cash flows from investing -- -- --
activities............................ ---------- ---------- ----------
Cash flows from financing -- -- --
activities............................ ---------- ---------- ----------
Net change in cash....................................... -- -- --
Cash at beginning of year................................ -- -- --
---------- ---------- ----------
Cash at end of year...................................... $ -- $ -- $ --
========== ========== ==========
48
EXHIBIT INDEX
-------------
Exhibit
Number Description
- --------- -----------
2. -- Stock Purchase Agreement, dated as of January 31, 1998, by
and among the Company, Tommy Hilfiger U.S.A., Inc., Tommy
Hilfiger (Eastern Hemisphere) Limited and Pepe Jeans London
Corporation (the Company hereby undertakes to furnish
supplementally to the Securities and Exchange Commission
upon request copies of all omitted schedules to this
exhibit) (previously filed as Exhibit 2 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1998 and incorporated herein by reference)
3.1 -- Amendment, dated May 5, 1998, to Memorandum of Association
of the Company
3.2 -- Amendment, dated June 4, 1999, to Memorandum of Association
of the Company
3.3 -- Amendment, dated January 20, 1999, to Articles of
Association of the Company
3.4 -- Memorandum of Association and Articles of Association of the
Company, as amended (conformed to reflect all amendments
through June 4, 1999)
4.1 -- Indenture, dated as of May 1, 1998, among Tommy Hilfiger
U.S.A., Inc., as Issuer, the Company, as Guarantor, and The
Chase Manhattan Bank, as Trustee (previously filed as
Exhibit 4.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998 and incorporated herein
by reference)
4.2 -- Forms of Tommy Hilfiger U.S.A., Inc. 6.50% Note due 2003 and
6.85% Note due 2008 (previously filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 5, 1998 and
incorporated herein by reference)
10.1 -- Credit Agreement, dated as of May 8, 1998, among the
Company, as Guarantor, Tommy Hilfiger U.S.A., Inc., as
Borrower, the several Lenders from time to time parties
thereto, Fleet Bank, N.A., as Documentation Agent,
Nationsbank, N.A., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent (previously filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998 and incorporated herein
by reference)
*10.2 -- Stock Option Plans of the Company and its subsidiaries, as
amended and restated (previously filed as Exhibits 4.1 and
4.2 with Registration No. 333-80027 and incorporated herein
by reference)
*10.3 -- Tommy Hilfiger Corporation Non-Employee Directors Stock
Option Plan (previously filed as Exhibit 10.3 with
Registration No. 33-88906 and incorporated herein by
reference)
*10.4 -- Tommy Hilfiger U.S.A., Inc. Supplemental Executive Incentive
Compensation Plan (previously filed as Exhibit A to the
Company's Proxy Statement dated September 25, 1998 and
incorporated herein by reference)
49
*10.5 -- Tommy Hilfiger U.S.A., Inc. Voluntary Deferred Compensation
Plan (previously filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1998 and incorporated herein by reference)
*10.6 -- Tommy Hilfiger U.S.A., Inc. Supplemental Executive
Retirement Plan (previously filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and incorporated herein by reference)
*10.7 -- Amended and Restated Employment Agreement, dated as of June
30, 1992, between Tommy Hilfiger U.S.A., Inc. and Tommy
Hilfiger (previously filed as Exhibit 10.3 with Registration
No. 33-48587 and incorporated herein by reference)
*10.8 -- Amended and Restated Employment Agreement, dated as of June
30, 1992, between Tommy Hilfiger U.S.A., Inc. and Joel
Horowitz (previously filed as Exhibit 10.4 with Registration
No. 33-48587 and incorporated herein by reference)
*10.9 -- Amendment, dated as of March 8, 1994, to Amended and
Restated Employment Agreement, dated as of June 30, 1992,
between Tommy Hilfiger U.S.A., Inc. and Joel Horowitz
(previously filed as Exhibit 7 to the Company's Annual
Report on Form 20-F for the fiscal year ended March 31, 1994
and incorporated herein by reference)
*10.10 -- Amendment No. 2, dated as of August 7, 1998, to Amended and
Restated Employment Agreement, dated as of June 30, 1992,
between Tommy Hilfiger U.S.A., Inc. and Joel Horowitz
(previously filed as Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 and incorporated herein by reference)
*10.11 -- Consulting Agreement, dated April 1, 1991, between Polostro
Limited and Tommy Hilfiger (Eastern Hemisphere) Limited
(previously filed as Exhibit 10.13 with Registration No. 33-
48587 and incorporated herein by reference)
*10.12 -- Amendment, dated April 1, 1993, to Consulting Agreement,
dated April 1, 1991, between Polostro Limited and Tommy
Hilfiger (Eastern Hemisphere) Limited (previously filed as
Exhibit 18 to the Company's Annual Report on Form 20-F for
the fiscal year ended March 31, 1994 and incorporated herein
by reference)
*10.13 -- Amendment No. 2, dated November 2, 1998, to Consulting
Agreement, dated April 1, 1991, between Polostro Limited and
Tommy Hilfiger (Eastern Hemisphere) Limited (previously
filed as Exhibit 10(c) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998
and incorporated herein by reference)
*10.14 -- Consulting Agreement, dated April 1, 1996, between Fasco
International, Inc. and Tommy Hilfiger (Eastern Hemisphere)
Limited (previously filed as Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and incorporated herein by reference)
10.15 -- Amended and Restated Factoring Agreement, dated as of April
1, 1998, between Tommy Hilfiger U.S.A., Inc. and Century
Business Credit Corporation (previously filed as Exhibit
10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by
reference)
50
10.16 -- Amended and Restated Factoring Agreement, dated as of April
1, 1998, between Pepe Jeans USA, Inc. and Century Business
Credit Corporation (previously filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 and incorporated herein by reference)
10.17 -- Lease, dated April 24, 1995, between Forsgate Industrial
Complex L.P. and Tommy Hilfiger U.S.A., Inc. (previously
filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995 and
incorporated herein by reference)
10.18 -- Lease, dated June 10, 1997, between Hartz Mountain
Industries, Inc. and Pepe Jeans USA, Inc. (previously filed
as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998 and incorporated
herein by reference)
10.19 -- Form of Memorandum of Agreement, dated as of January 1,
1999, between Tandem Distribution Services, Inc. and Tommy
Hilfiger U.S.A., Inc.
10.20 -- Trademark Agreement, dated June 30, 1992, between Thomas J.
Hilfiger and Tommy Hilfiger, Inc. (previously filed as
Exhibit 10.15 with Registration No. 33-48587 and
incorporated herein by reference)
10.21 -- License Agreement, dated June 24, 1996 (the "Japan
License"), between Tommy Hilfiger Licensing, Inc. and Novel-
ITC Licensing Limited (portions of this exhibit, which have
been filed separately with the Securities and Exchange
Commission, have been omitted pursuant to an order of the
Commission granting confidential treatment) (previously
filed as Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996 and
incorporated herein by reference)
10.22 -- First Amendment, dated September 14, 1998, to the Japan
License (previously filed as Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 and incorporated herein by reference)
10.23 -- License Agreement, dated as of February 1, 1997 (the "Pepe
European License"), between Tommy Hilfiger Licensing, Inc.
and Pepe Jeans London Corporation (as assigned to Tommy
Hilfiger Europe B.V.) (portions of this exhibit, which have
been filed separately with the Securities and Exchange
Commission, have been omitted and are the subject of a
request made to the Commission for confidential treatment)
(previously filed as Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997
and incorporated herein by reference)
10.24 -- First Amendment, dated December 1, 1997, to the Pepe
European License (previously filed as Exhibit 10(d) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 1997 and incorporated herein by
reference)
10.25 -- Second Amendment, dated May 8, 1998, to the Pepe European
License (portions of this exhibit, which have been filed
separately with the Securities and Exchange Commission, have
been omitted pursuant to an order of the Commission granting
confidential treatment) (previously filed as Exhibit 10.24
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998 and incorporated herein by
reference)
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10.26 -- Lock-Up Agreement, dated as of January 31, 1998, by and
among the Company, Pepe Jeans London Corporation, Blackwatch
Investments Limited, AIHL Investment Holdings Limited,
Anasta Holdings Limited, Sportswear Holdings Limited,
Westleigh Limited, Flair Investment Holdings Limited, Thomas
J. Hilfiger and Joel J. Horowitz (previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated April 1, 1998 and incorporated herein by reference)
10.27 -- Registration Rights Agreement, dated as of May 8, 1998, by
and among the Company, Pepe Jeans London Corporation,
Blackwatch Investments Limited, AIHL Investment Group
Limited, Anasta Holdings Limited, Sportswear Holdings
Limited, Westleigh Limited, Flair Investment Holdings
Limited, Thomas J. Hilfiger and Joel J. Horowitz (previously
filed as Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 and
incorporated herein by reference)
10.28 -- Non-Competition Agreement, dated as of May 8, 1998, among
the Company, Silas K.F. Chou and Lawrence S. Stroll
(previously filed as Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998
and incorporated herein by reference)
11. -- Statement re: Computation of Per Share Earnings
21. -- Subsidiaries of the Company
23. -- Consent of PricewaterhouseCoopers LLP
24. -- Powers of Attorney
27. -- Financial Data Schedule
________
* Management contract or compensatory plan or arrangement.
52