UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2005
Commission File Number 1-11226
TOMMY HILFIGER CORPORATION
(Exact name of registrant as specified in its charter)
British Virgin Islands | 98-0372112 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
9/F, Novel Industrial Building, 850-870 Lai Chi Kok Road, Cheung Sha Wan, Kowloon, Hong Kong
(Address of principal executive offices)
852-2216-0668
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Ordinary Shares, $0.01 par value per share, outstanding as of November 22, 2005: 92,162,581
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
June 30, 2005
2
Cautionary Statement Regarding Forward-Looking Information for the purpose of Safe Harbor provisions of 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, expect, believe and similar words or phrases. Such statements are based on current expectations and are subject to certain risks and uncertainties, many of which are beyond our control including, but not limited to, the overall level of consumer spending on apparel; the financial strength of the retail industry generally and the Companys customers, distributors and licensees in particular; changes in trends in the market segments and geographic areas in which the Company competes; the level of demand for the Companys products; actions by our major customers or existing or new competitors; the effect of the Companys strategy to reduce U.S. distribution in order to bring supply and demand into balance; changes in currency and interest rates; changes in applicable tax laws, regulations and treaties and changes in economic or political conditions or trade regulations in the markets where the Company sells or sources its products, as well as other risks and uncertainties set forth in the Companys publicly-filed documents, including the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2005 (including those set forth under the heading Risk Factors in Part I, Item 1 of that document). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
3
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Three Months Ended June 30, |
||||||||
(Unaudited)
|
2005 |
2004 |
||||||
Net revenue |
$ | 319,902 | $ | 328,847 | ||||
Cost of goods sold |
159,511 | 183,449 | ||||||
Gross profit |
160,391 | 145,398 | ||||||
Depreciation and amortization |
17,448 | 17,127 | ||||||
Other selling, general and administrative expenses |
144,108 | 131,832 | ||||||
Total selling, general and administrative expenses |
161,556 | 148,959 | ||||||
Income (loss) from operations |
(1,165 | ) | (3,561 | ) | ||||
Interest and other expense |
6,277 | 7,162 | ||||||
Interest income |
3,760 | 1,046 | ||||||
Income (loss) before income taxes |
(3,682 | ) | (9,677 | ) | ||||
Provision (benefit) for income taxes |
(1,031 | ) | (965 | ) | ||||
Net income (loss) |
$ | (2,651 | ) | $ | (8,712 | ) | ||
Earnings (loss) per share: |
||||||||
Basic earnings (loss) per share |
$ | (0.03 | ) | $ | (0.10 | ) | ||
Weighted average shares outstanding |
91,872 | 91,317 | ||||||
Diluted earnings (loss) per share |
$ | (0.03 | ) | $ | (0.10 | ) | ||
Weighted average shares and share equivalents outstanding |
91,872 | 91,317 | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
4
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
|
June 30, 2005 |
March 31, 2005 |
||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 382,328 | $ | 480,987 | ||||
Short-term investments |
37,825 | 40,650 | ||||||
Restricted cash |
150,000 | | ||||||
Accounts receivable, less allowances of $3,143 and $2,768, respectively |
75,982 | 153,925 | ||||||
Inventories |
249,449 | 203,261 | ||||||
Deferred tax assets |
43,793 | 47,193 | ||||||
Other current assets |
45,147 | 38,029 | ||||||
Total current assets |
984,524 | 964,045 | ||||||
Property and equipment, at cost, less accumulated depreciation and amortization |
202,812 | 250,072 | ||||||
Intangible assets, subject to amortization |
42,177 | 24,419 | ||||||
Intangible assets, not subject to amortization |
631,936 | 643,888 | ||||||
Goodwill |
260,852 | 264,499 | ||||||
Other assets |
11,430 | 11,136 | ||||||
Total Assets |
$ | 2,133,731 | $ | 2,158,059 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 352 | $ | 359 | ||||
Accounts payable |
34,290 | 41,266 | ||||||
Accrued expenses and other current liabilities |
271,204 | 261,444 | ||||||
Total current liabilities |
305,846 | 303,069 | ||||||
Long-term debt |
344,024 | 343,987 | ||||||
Deferred tax liability |
172,194 | 166,489 | ||||||
Other liabilities |
20,127 | 20,245 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Shareholders equity |
||||||||
Preference Shares, $0.01 par value-shares authorized 5,000,000; none issued |
| | ||||||
Ordinary Shares, $0.01 par value-shares authorized 150,000,000; issued 98,069,703 and 98,054,261 shares, respectively |
981 | 981 | ||||||
Capital in excess of par value |
621,981 | 621,774 | ||||||
Retained earnings |
639,058 | 641,709 | ||||||
Accumulated other comprehensive income |
90,751 | 121,036 | ||||||
Treasury shares, at cost: 6,192,600 Ordinary Shares |
(61,231 | ) | (61,231 | ) | ||||
Total Shareholders equity |
1,291,540 | 1,324,269 | ||||||
Total Liabilities and Shareholders Equity |
$ | 2,133,731 | $ | 2,158,059 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements
5
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended June 30, |
||||||||
(Unaudited)
|
2005 |
2004 |
||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | (2,651 | ) | $ | (8,712 | ) | ||
Adjustments to reconcile net income (loss) to net cash from operating activities |
||||||||
Depreciation and amortization |
17,706 | 17,989 | ||||||
Gain on sale of building |
(2,320 | ) | | |||||
Deferred taxes |
3,400 | 1,525 | ||||||
Changes in operating assets and liabilities, net of acquisition |
||||||||
Decrease (increase) in assets |
||||||||
Accounts receivable |
91,828 | 113,246 | ||||||
Inventories |
(51,184 | ) | (33,837 | ) | ||||
Other assets |
(8,060 | ) | (2,490 | ) | ||||
Increase (decrease) in liabilities |
||||||||
Accounts payable |
(7,019 | ) | (11,322 | ) | ||||
Accrued expenses and other liabilities |
2,533 | (37,587 | ) | |||||
Net cash provided by operating activities |
44,233 | 38,812 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(18,503 | ) | (16,657 | ) | ||||
Net proceeds from sale of building |
45,900 | | ||||||
Net sales (purchases) of short-term investments |
2,825 | (3,635 | ) | |||||
Acquisition of business, net of cash acquired |
(18,842 | ) | | |||||
Restriction of cash for letter of credit facility |
(150,000 | ) | | |||||
Net provided by (cash used) in investing activities |
(138,620 | ) | (20,292 | ) | ||||
Cash flows from financing activities |
||||||||
Payments of long-term debt |
(40 | ) | (238 | ) | ||||
Proceeds from the exercise of employee stock options |
131 | 4,165 | ||||||
Net cash provided by (used in) financing activities |
91 | 3,927 | ||||||
Effect of exchange rates on cash |
(4,363 | ) | (360 | ) | ||||
Net increase (decrease) in cash |
(98,659 | ) | 22,087 | |||||
Cash and cash equivalents, beginning of period |
480,987 | 414,548 | ||||||
Cash and cash equivalents, end of period |
$ | 382,328 | $ | 436,635 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements
6
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(dollar amounts in thousands)
(Unaudited)
|
Ordinary Shares |
Capital in |
Retained |
Accumulated |
Treasury |
Total |
||||||||||||||||||
Outstanding (1) |
Amount |
|||||||||||||||||||||||
Balance, March 31, 2004 | 91,306,676 | 975 | 615,691 | 556,058 | 95,678 | (61,231 | ) | 1,207,171 | ||||||||||||||||
Net income |
| | | 85,651 | | | 85,651 | |||||||||||||||||
Foreign currency translation |
| | | | 25,125 | | 25,125 | |||||||||||||||||
Change in fair value of hedging instruments |
| | | | 233 | | 233 | |||||||||||||||||
Amortization of deferred compensation costs |
| | 66 | | | | 66 | |||||||||||||||||
Exercise of employee stock options |
554,985 | 6 | 5,096 | | | | 5,102 | |||||||||||||||||
Tax benefits from exercise of stock options |
| | 921 | | | | 921 | |||||||||||||||||
Balance, March 31, 2005 | 91,861,661 | 981 | 621,774 | 641,709 | 121,036 | (61,231 | ) | 1,324,269 | ||||||||||||||||
Net loss |
| | | (2,651 | ) | | | (2,651 | ) | |||||||||||||||
Foreign currency translation |
| | | | (32,178 | ) | | (32,178 | ) | |||||||||||||||
Change in fair value of hedging instruments |
| | | | 1,893 | | 1,893 | |||||||||||||||||
Amortization of deferred compensation costs |
| | 59 | | | | 59 | |||||||||||||||||
Exercise of employee stock options |
15,442 | | 131 | | | | 131 | |||||||||||||||||
Tax benefits from exercise of stock options |
| | 17 | | | | 17 | |||||||||||||||||
Balance, June 30, 2005 | 91,877,103 | $ | 981 | $ | 621,981 | $ | 639,058 | $ | 90,751 | $ | (61,231 | ) | $ | 1,291,540 | ||||||||||
(1) | Net of Treasury shares |
Comprehensive income consists of net income (loss), foreign currency translation and unrealized gains and losses on hedging instruments and totaled ($32,936) for the three months ended June 30, 2005 and $111,009 for the fiscal year ended March 31, 2005. For the three months ended June 30, 2004, comprehensive income totaled ($11,904) and consisted of a net loss of $8,712, a foreign currency translation adjustment of ($3,649) and a gain on hedging instruments of $457. The cumulative translation adjustment was $88,929 and $121,107 at June 30, 2005 and March 31, 2005, respectively. The net fair value adjustment of hedging instruments was $1,822 and ($71) at June 30, 2005 and March 31, 2005, respectively. The Company had unamortized deferred compensation costs at June 30, 2005 and March 31, 2005, of $582 and $641, respectively.
See Accompanying Notes to Condensed Consolidated Financial Statements
7
TOMMY HILFIGER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared by Tommy Hilfiger Corporation (THC or the Company; unless the context indicates otherwise, all references to the Company include THC and its subsidiaries) in a manner consistent with that used in the preparation of the Consolidated Financial Statements included in the Companys Annual Report on Form 10-K, for the fiscal year ended March 31, 2005, as filed with the Securities and Exchange Commission (the Form 10-K). Certain items contained in these statements are based on estimates. In the opinion of management, the accompanying financial statements reflect all adjustments, which consist of only normal and recurring adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the three-month period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2006, as the Companys business is impacted by the general seasonal trends characteristic of the apparel and retail industries as well as other factors. These unaudited financial statements should be read in conjunction with the financial statements included in the Form 10-K.
The financial statements for the three-month period ended June 30, 2005 are unaudited. The Condensed Consolidated Balance Sheet as of March 31, 2005, and the Condensed Consolidated Statement of Changes in Shareholders Equity through March 31, 2005, as presented, have been derived from the consolidated financial statements included in the Form 10-K.
Note 2 Summary of Significant Accounting Policies
For a description of the Companys significant accounting policies, see Note 1 to the Consolidated Financial Statements included in the Form 10-K. Additional information regarding the Companys significant accounting policies is set forth below.
Stock Options
The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123) as amended by SFAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure.
At June 30, 2005, the Company had four stock-based employee compensation plans, which are described more fully in Note 14 to the Consolidated Financial Statements included in the Form 10-K. No stock-based employee compensation expense is reflected in net income for those options granted under the plans that had an exercise price equal to the market value of the underlying common stock on the date of grant. For the quarter ended June 30, 2005, the Company recorded $59 of stock compensation expense related to the issuance of restricted stock. There was no stock-based employee compensation expense for the quarter ended June 30, 2004.
8
The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
For the Three Months Ended June 30, |
||||||||
2005 |
2004 |
|||||||
Net income (loss), as reported |
$ | (2,651 | ) | $ | (8,712 | ) | ||
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects |
(1,259 | ) | (1,785 | ) | ||||
Pro forma net income (loss) |
$ | (3,910 | ) | $ | (10,497 | ) | ||
Earnings (loss) per share: |
||||||||
Basic - as reported |
$ | (0.03 | ) | $ | (0.10 | ) | ||
Basic - pro forma |
$ | (0.04 | ) | $ | (0.11 | ) | ||
Diluted - as reported |
$ | (0.03 | ) | $ | (0.10 | ) | ||
Diluted - pro forma |
$ | (0.04 | ) | $ | (0.11 | ) |
Shipping and Handling Costs
The Company reflects shipping and handling costs as a component of selling, general and administrative expenses in its condensed consolidated statements of operations. Shipping and handling costs approximated $9,402 and $9,640 for the three months ended June 30, 2005 and 2004, respectively. Amounts billed to customers that relate to shipping and handling on related sales transactions are de minimis.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued Statements No. 123R, Share-Based Payment (FAS 123R), an amendment of FASB Statements No. 123 and 95. Under FAS 123R, all forms of share-based payment to employees, including employee stock options, would be treated as compensation and recognized in the income statement. This statement is effective for fiscal years beginning on or after June 15, 2005. The Company anticipates adopting the provisions of FAS 123R beginning April 1, 2006, but cannot at this time assess the financial statement impact of adopting this statement. The Company currently provides the disclosure requirements of FAS 123, which provides a pro-forma historical impact of recording stock compensation expense.
Note 3 Acquisition
Effective April 1, 2005, the Company, through its wholly owned subsidiary, TH Europe, B.V., acquired 100% of the outstanding shares of TH Italia SpA (TH Italia), an unrelated third party, for approximately $21,361, which includes $323 of transaction costs. The Company acquired net assets of approximately $15,739 which includes $19,754 of distribution rights. The excess purchase price of $5,622 has been allocated to goodwill. The distribution rights are being amortized over their useful life of five years. As a result of this transaction, the Company has acquired full distribution rights of the Tommy Hilfiger brand and products in Italy, and now has greater direct control and impact over all areas of the business in Italy, including operations, sales and marketing. Unaudited pro-forma information related to this transaction has not been included as the effect of this acquisition is not material to the consolidated results of the Company.
Note 4 Debt Obligations and Credit Facilities
As of June 30, 2005, the Companys principal debt obligations and credit facilities consisted of $192,470 of 6.85% notes maturing on June 1, 2008 (the 2008 Notes), $150,000 of 9% bonds maturing on December 1, 2031 (the 2031 Bonds) and a $150,000, cash-collateralized, letter of credit facility, which expires on April 19, 2006 (the Letter of Credit Facility). The 2008 Notes and the 2031 Bonds (collectively, the Notes) were issued by Tommy Hilfiger U.S.A., Inc., (TH USA) a subsidiary of THC, and are fully and unconditionally guaranteed by THC. The indenture under which
9
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 certain sale and leaseback transactions and restrict the ability of THC and TH USA to engage in mergers or consolidations.
At March 31, 2005, the revolving credit facility (the Credit Facility), which was guaranteed by THC, consisted of an unsecured $300,000 TH USA three-year revolving credit facility, expiring on July 1, 2005, of which up to $175,000 could be used for direct borrowings. The Credit Facility was available for letters of credit, working capital and other general corporate purposes. As of March 31, 2005, there were no direct borrowings outstanding under the Credit Facility, and $51,198 of the available borrowings under the Credit Facility had been used to open letters of credit, including $20,336 for inventory purchased that were included in current liabilities and $30,862 related to commitments to purchase inventory.
On April 20, 2005, the Company terminated the Credit Facility, and entered into the Letter of Credit Facility to be used for normal trade financing and other general purposes. No cash borrowings are available under the Letter of Credit Facility.
As of June 30, 2005, $80,646 of the total available commitments under the Letter of Credit Facility had been used to open letters of credit, including $20,492 for inventory purchased that are included in current liabilities and $60,154 related to commitments to purchase inventory. The Letter of Credit Facility is collateralized by $150,000 of cash maintained by a wholly owned subsidiary at designated bank accounts. This cash is classified as Restricted cash in the current assets section of the accompanying condensed consolidated balance sheet. The Letter of Credit Facility will expire on April 19, 2006.
Certain of the Companys non-U.S. subsidiaries have separate credit facilities, totaling approximately $152,410 at June 30, 2005, for working capital or trade financing purposes. As of June 30, 2005, $11,761 of available borrowings under these facilities had been used to open letters of credit, including $5,092 for inventory purchased that is included in current liabilities and $6,669 related to commitments to purchase inventory. There were no short-term borrowings as of June 30, 2005 under these facilities. Borrowings under these credit facilities bear interest at variable rates which, on a weighted average annual basis, amounted to 3.64% for the three-month period ended, June 30, 2005.
Note 5 Condensed Consolidating Financial Information
The Notes discussed in Note 4 were issued by TH USA and are fully and unconditionally guaranteed by THC. Accordingly, condensed consolidating balance sheets as of June 30, 2005 and March 31, 2005, and the related condensed consolidating statements of operations and cash flows for each of the three-month periods ended June 30, 2005 and 2004 are provided. The operations of TH USA, excluding its subsidiaries, consist of the U.S. operations of certain wholesale divisions, together with TH USA corporate overhead charges not allocated to subsidiaries. The non-guarantor subsidiaries of TH USA consist of the Companys U.S. retail, licensing and other wholesale divisions, as well as the Companys Canadian operations. Such operations contributed net revenue of $201,344 and $219,526 for the three-month periods ended June 30, 2005 and 2004, respectively. The other non-guarantor subsidiaries of THC are primarily those non-U.S. subsidiaries involved in investing and buying office operations, as well as the Companys European operations. These condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information under which TH USAs and THCs results reflect 100% of the earnings of their respective subsidiaries in each of the years presented.
10
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2005
Parent Company Guarantor (THC) |
Subsidiary Issuer (TH USA) |
Non-Guarantor Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Net revenue |
$ | | $ | 43,825 | $ | 281,108 | $ | (5,031 | ) | $ | 319,902 | |||||||||
Cost of goods sold |
| 30,928 | 131,256 | (2,673 | ) | 159,511 | ||||||||||||||
Gross profit |
| 12,897 | 149,852 | (2,358 | ) | 160,391 | ||||||||||||||
Depreciation and amortization |
| 3,537 | 13,911 | | 17,448 | |||||||||||||||
Other selling, general and administrative expenses |
1,217 | 8,374 | 136,678 | (2,161 | ) | 144,108 | ||||||||||||||
Total selling, general, and administrative expenses |
1,217 | 11,911 | 150,589 | (2,161 | ) | 161,556 | ||||||||||||||
Income (loss) from operations |
(1,217 | ) | 986 | (737 | ) | (197 | ) | (1,165 | ) | |||||||||||
Interest and other expense |
| 6,997 | (720 | ) | | 6,277 | ||||||||||||||
Interest income |
626 | 426 | 2,708 | | 3,760 | |||||||||||||||
Intercompany interest expense (income) |
(11,630 | ) | 11,630 | | | | ||||||||||||||
Income (loss) before income taxes |
11,039 | (17,215 | ) | 2,691 | (197 | ) | (3,682 | ) | ||||||||||||
Provision (benefit) for income taxes |
3,564 | (6,358 | ) | 1,763 | | (1,031 | ) | |||||||||||||
Equity in net earnings of unconsolidated subsidiaries |
(10,126 | ) | 5,803 | | 4,323 | | ||||||||||||||
Net income (loss) |
$ | (2,651 | ) | $ | (5,054 | ) | $ | 928 | $ | 4,126 | $ | (2,651 | ) | |||||||
11
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2004
Parent Company Guarantor (THC) |
Subsidiary Issuer (TH USA) |
Non-Guarantor Subsidiaries |
Eliminations |
Total |
|||||||||||||||
Net revenue |
$ | | $ | 56,597 | $ | 278,172 | $ | (5,922 | ) | $ | 328,847 | ||||||||
Cost of goods sold |
| 40,587 | 145,795 | (2,933 | ) | 183,449 | |||||||||||||
Gross profit |
| 16,010 | 132,377 | (2,989 | ) | 145,398 | |||||||||||||
Depreciation and amortization |
| 2,606 | 14,521 | | 17,127 | ||||||||||||||
Other selling, general and administrative expenses |
(581 | ) | 21,827 | 113,410 | (2,824 | ) | 131,832 | ||||||||||||
Total selling, general, and administrative expenses |
(581 | ) | 24,433 | 127,931 | (2,824 | ) | 148,959 | ||||||||||||
Income (loss) from operations |
581 | (8,423 | ) | 4,446 | (165 | ) | (3,561 | ) | |||||||||||
Interest and other expense |
| 7,003 | 159 | | 7,162 | ||||||||||||||
Interest income |
272 | 293 | 481 | | 1,046 | ||||||||||||||
Intercompany interest expense (income) |
(12,151 | ) | 9,591 | 2,560 | | | |||||||||||||
Income (loss) before income taxes |
13,004 | (24,724 | ) | 2,208 | (165 | ) | (9,677 | ) | |||||||||||
Provision (benefit) for income taxes |
4,558 | (5,827 | ) | 304 | | (965 | ) | ||||||||||||
Equity in net earnings of unconsolidated subsidiaries |
(17,158 | ) | 10,249 | | 6,909 | | |||||||||||||
Net income (loss) |
$ | (8,712 | ) | $ | (8,648 | ) | $ | 1,904 | $ | 6,744 | $ | (8,712 | ) | ||||||
12
Condensed Consolidating Balance Sheets
June 30, 2005
Parent Company Guarantor (THC) |
Subsidiary (TH USA) |
Non-Guarantor Subsidiaries |
Eliminations |
Total | ||||||||||||||
Assets |
||||||||||||||||||
Current Assets |
||||||||||||||||||
Cash and cash equivalents |
$ | 61,806 | $ | 65,763 | $ | 254,759 | $ | | $ | 382,328 | ||||||||
Short - term investments |
| | 37,825 | | 37,825 | |||||||||||||
Restricted Cash |
| | 150,000 | | 150,000 | |||||||||||||
Accounts receivable |
| 448 | 75,534 | | 75,982 | |||||||||||||
Inventories |
| 25,435 | 224,947 | (933 | ) | 249,449 | ||||||||||||
Deferred tax assets |
| 28,566 | 15,227 | | 43,793 | |||||||||||||
Other current assets |
1,211 | 8,249 | 35,687 | | 45,147 | |||||||||||||
Total current assets |
63,017 | 128,461 | 793,979 | (933 | ) | 984,524 | ||||||||||||
Property, plant and equipment, at cost, less accumulated depreciation and amortization |
| 80,649 | 122,163 | | 202,812 | |||||||||||||
Intangible assets, subject to amortization |
| | 42,177 | | 42,177 | |||||||||||||
Intangible assets, not subject to amortization |
| | 631,936 | | 631,936 | |||||||||||||
Goodwill |
| | 260,852 | | 260,852 | |||||||||||||
Investment in subsidiaries |
743,687 | 1,238,919 | | (1,982,606 | ) | | ||||||||||||
Other assets |
| 7,297 | 4,133 | | 11,430 | |||||||||||||
Total Assets |
$ | 806,704 | $ | 1,455,326 | $ | 1,855,240 | $ | (1,983,539 | ) | $ | 2,133,731 | |||||||
Liabilities and Shareholders Equity |
||||||||||||||||||
Current liabilities |
||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | 352 | $ | | $ | 352 | ||||||||
Accounts payable |
| 3,666 | 30,624 | | 34,290 | |||||||||||||
Accrued expenses and other current liabilities |
857 | 127,311 | 143,036 | | 271,204 | |||||||||||||
Total current liabilities |
857 | 130,977 | 174,012 | | 305,846 | |||||||||||||
Intercompany payable (receivable) |
(485,693 | ) | 424,381 | 61,312 | | | ||||||||||||
Long-term debt |
| 342,325 | 1,699 | | 344,024 | |||||||||||||
Deferred tax liability |
| (29,469 | ) | 201,663 | | 172,194 | ||||||||||||
Other liabilities |
| 10,826 | 9,301 | | 20,127 | |||||||||||||
Shareholders equity |
1,291,540 | 576,286 | 1,407,253 | (1,983,539 | ) | 1,291,540 | ||||||||||||
Total Liabilities and Shareholders Equity |
$ | 806,704 | $ | 1,455,326 | $ | 1,855,240 | $ | (1,983,539 | ) | $ | 2,133,731 | |||||||
13
Condensed Consolidating Balance Sheets
March 31, 2005
Parent Company Guarantor (THC) |
Subsidiary (TH USA) |
Non-Guarantor Subsidiaries |
Eliminations |
Total | ||||||||||||||
Assets |
||||||||||||||||||
Current Assets |
||||||||||||||||||
Cash and cash equivalents |
$ | 215,526 | $ | 34,995 | $ | 230,466 | $ | | $ | 480,987 | ||||||||
Short-term investments |
| | 40,650 | | 40,650 | |||||||||||||
Accounts receivable |
| | 153,925 | | 153,925 | |||||||||||||
Inventories |
| 24,401 | 179,596 | (736 | ) | 203,261 | ||||||||||||
Deferred tax assets |
| 31,966 | 15,227 | | 47,193 | |||||||||||||
Other current assets |
1,793 | 6,533 | 29,703 | | 38,029 | |||||||||||||
Total current assets |
217,319 | 97,895 | 649,567 | (736 | ) | 964,045 | ||||||||||||
Property, plant and equipment, at cost, less accumulated depreciation and amortization |
| 122,086 | 127,986 | | 250,072 | |||||||||||||
Intangible assets, subject to amortization |
| | 24,419 | | 24,419 | |||||||||||||
Intangible assets, not subject to amortization |
| | 643,888 | | 643,888 | |||||||||||||
Goodwill |
| | 264,499 | | 264,499 | |||||||||||||
Investment in subsidiaries |
603,815 | 1,083,116 | | (1,686,931 | ) | | ||||||||||||
Other assets |
| 7,428 | 3,708 | | 11,136 | |||||||||||||
Total Assets |
$ | 821,134 | $ | 1,310,525 | $ | 1,714,067 | $ | (1,687,667 | ) | $ | 2,158,059 | |||||||
Liabilities and Shareholders Equity |
||||||||||||||||||
Current liabilities |
||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 31 | $ | 328 | $ | | $ | 359 | ||||||||
Accounts payable |
| 11,427 | 29,839 | | 41,266 | |||||||||||||
Accrued expenses and other current liabilities |
1,016 | 139,808 | 125,870 | (5,250 | ) | 261,444 | ||||||||||||
Total current liabilities |
1,016 | 151,266 | 156,037 | (5,250 | ) | 303,069 | ||||||||||||
Intercompany payable (receivable) |
(504,151 | ) | 404,268 | 99,883 | | | ||||||||||||
Long-term debt |
| 342,325 | 1,662 | | 343,987 | |||||||||||||
Deferred tax liability |
| (29,469 | ) | 195,958 | | 166,489 | ||||||||||||
Other liabilities |
| 10,795 | 9,450 | | 20,245 | |||||||||||||
Shareholders equity |
1,324,269 | 431,340 | 1,251,077 | (1,682,417 | ) | 1,324,269 | ||||||||||||
Total Liabilities and Shareholders Equity |
$ | 821,134 | $ | 1,310,525 | $ | 1,714,067 | $ | (1,687,667 | ) | $ | 2,158,059 | |||||||
14
Condensed Consolidating Statements of Cash Flows
Three Months Ended June 30, 2005
Parent Company Guarantor (THC) |
Subsidiary (TH USA) |
Non-Guarantor Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net income (loss) |
$ | (2,651 | ) | $ | (5,054 | ) | $ | 928 | $ | 4,126 | $ | (2,651 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||||||||||||||
Depreciation and amortization |
59 | 3,787 | 13,860 | | 17,706 | |||||||||||||||
Gain on sale of building |
| (2,320 | ) | | | (2,320 | ) | |||||||||||||
Deferred taxes |
| 3,400 | | | 3,400 | |||||||||||||||
Equity in earnings of subsidiaries |
10,126 | (5,803 | ) | | (4,323 | ) | | |||||||||||||
Changes in operating assets and liabilities |
(11,385 | ) | (50 | ) | 39,336 | 197 | 28,098 | |||||||||||||
Net cash provided by (used in) operating activities |
(3,851 | ) | (6,040 | ) | 54,124 | | 44,233 | |||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchases of property and equipment |
| (9,061 | ) | (9,442 | ) | | (18,503 | ) | ||||||||||||
Net proceeds from sale of building |
| 45,900 | | | 45,900 | |||||||||||||||
Purchase of short-term investments, net |
| | 2,825 | | 2,825 | |||||||||||||||
Acquisition of business, net of cash acquired |
| | (18,842 | ) | | (18,842 | ) | |||||||||||||
Restriction of cash for letter of credit facility |
| | (150,000 | ) | | (150,000 | ) | |||||||||||||
Net cash (used in) provided by investing activities |
| 36,839 | (175,459 | ) | | (138,620 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payments on long-term debt |
| (31 | ) | (9 | ) | | (40 | ) | ||||||||||||
Proceeds from the exercise of stock options |
131 | | | | 131 | |||||||||||||||
Capital contribution made to subsidiary |
(150,000 | ) | (150,000 | ) | | 300,000 | | |||||||||||||
Capital contribution received from parent company |
| 150,000 | 150,000 | (300,000 | ) | | ||||||||||||||
Net cash provided by (used in) financing activities |
(149,869 | ) | (31 | ) | 149,991 | | 91 | |||||||||||||
Effect of exchange rates on cash |
| | (4,363 | ) | | (4,363 | ) | |||||||||||||
Net increase (decrease) in cash |
(153,720 | ) | 30,768 | 24,293 | | (98,659 | ) | |||||||||||||
Cash and cash equivalents, beginning of period |
215,526 | 34,995 | 230,466 | | 480,987 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 61,806 | $ | 65,763 | $ | 254,759 | $ | | $ | 382,328 | ||||||||||
15
Condensed Consolidating Statements of Cash Flows Three Months Ended June 30, 2004
|
||||||||||||||||||||
Parent Company Guarantor (THC) |
Subsidiary (TH USA) |
Non-Guarantor Subsidiaries |
Eliminations |
Total |
||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net income (loss) |
$ | (8,712 | ) | $ | (8,648 | ) | $ | 1,904 | $ | 6,744 | $ | (8,712 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||||||||||||||
Depreciation and amortization |
| 2,605 | 15,384 | | 17,989 | |||||||||||||||
Deferred taxes |
| 623 | 902 | | 1,525 | |||||||||||||||
Equity in earnings of subsidiaries |
17,158 | (10,249 | ) | | (6,909 | ) | | |||||||||||||
Changes in operating assets and liabilities |
(12,340 | ) | (13,617 | ) | 53,802 | 165 | 28,010 | |||||||||||||
Net cash provided by (used in) operating activities |
(3,894 | ) | (29,286 | ) | 71,992 | | 38,812 | |||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchases of property and equipment |
| (4,237 | ) | (12,420 | ) | | (16,657 | ) | ||||||||||||
Purchase of short-term investments, net |
| | (3,635 | ) | | (3,635 | ) | |||||||||||||
Net cash (used in) provided by investing activities |
| (4,237 | ) | (16,055 | ) | | (20,292 | ) | ||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payments on long-term debt |
| (35 | ) | (203 | ) | | (238 | ) | ||||||||||||
Proceeds from the exercise of stock options |
4,165 | | | | 4,165 | |||||||||||||||
Repayments of short-term bank borrowings |
| | | | | |||||||||||||||
Intercompany dividends (paid) |
| | | | | |||||||||||||||
Net cash provided by (used in) financing activities |
4,165 | (35 | ) | (203 | ) | | 3,927 | |||||||||||||
Effect of exchange rates on cash |
| | (360 | ) | | (360 | ) | |||||||||||||
Net increase (decrease) in cash |
271 | (33,558 | ) | 55,374 | | 22,087 | ||||||||||||||
Cash and cash equivalents, beginning of period |
126,120 | 137,523 | 150,905 | | 414,548 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 126,391 | $ | 103,965 | $ | 206,279 | $ | | $ | 436,635 | ||||||||||
16
Note 6 Segment Reporting
As defined and prescribed by SFAS 131, Disclosures about Segments of an Enterprise and Related Information and related interpretations, the Company has four reportable segments: U.S. Wholesale, International Wholesale, Retail and Licensing. The Companys reportable segments are business units that offer different products and services or similar products through different distribution channels. The Wholesale segments consist of the design and sourcing of mens sportswear and jeanswear, womens casualwear and jeanswear and childrenswear for wholesale distribution in their respective geographic region. The Retail segment reflects the operations of the Companys outlet and specialty stores. The Licensing segment consists of the services related to licensing the Companys trademarks for specified products in specified geographic areas and the operations of the Companys Far East buying offices. The Company evaluates performance and allocates resources based on segment Income (loss) from operations. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements included in the Form 10-K.
Business units that are not aggregated in the above mentioned reportable segments either do not qualify as a segment or do not meet the quantitative threshold or aggregation criteria of SFAS 131. These units are included in Other and consist of Corporate, E-commerce and the Karl Lagerfeld businesses. Included within Corporate are certain executive compensation and marketing costs, amortization of certain intangibles and other corporate overhead. Eliminations consist of intercompany revenue and expenses.
Financial information for the Companys reportable segments is as follows:
U.S. Wholesale |
International Wholesale |
Retail |
Licensing |
Other |
Eliminations |
Total |
||||||||||||||||||||
Three Months Ended June 30, 2005 | ||||||||||||||||||||||||||
Net revenue |
$ | 115,836 | $ | 64,243 | $ | 121,678 | $ | 28,484 | $ | 703 | $ | (11,042 | ) | $ | 319,902 | |||||||||||
Income (loss) from operations |
(4,484 | ) | (14,060 | ) | 15,334 | 16,631 | (23,783 | ) | 9,197 | (1,165 | ) | |||||||||||||||
Depreciation and amortization |
5,332 | 4,618 | 4,956 | 33 | 2,509 | | 17,448 | |||||||||||||||||||
Three Months Ended June 30, 2004 | ||||||||||||||||||||||||||
Net revenue |
$ | 163,449 | $ | 47,241 | $ | 103,272 | $ | 29,331 | $ | | $ | (14,446 | ) | $ | 328,847 | |||||||||||
Income (loss) from operations |
(1,719 | ) | (14,880 | ) | 9,966 | 19,165 | (28,753 | ) | 12,660 | (3,561 | ) | |||||||||||||||
Depreciation and amortization |
6,756 | 3,348 | 4,557 | 32 | 2,434 | | 17,127 |
Note 7 Retirement Plans
The Company maintains a supplemental executive retirement plan (SERP) 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. During fiscal 2006, the SERP was amended, effective December 31, 2004 whereby benefits as to future service periods ceased to accrue. Prior vested benefits remain unchanged. See Note 14 to the Consolidated Financial Statements included in the Form 10-K for further description of the Companys retirement plans.
The components of net periodic benefit cost are as follows:
Three Months Ended June 30, | ||||||
2005 |
2004 | |||||
Service cost | $ | | $ | 241 | ||
Interest cost | 175 | 182 | ||||
Amortization of prior service cost | | 77 | ||||
Net periodic benefit cost | $ | 175 | $ | 500 | ||
17
Note 8 Earnings Per Share
Basic earnings per share is computed by dividing net income by the average number of the Companys Ordinary Shares, par value $0.01 per share (the Ordinary Shares), outstanding during the respective period. Diluted earnings per share is computed by dividing net income by the average number of Ordinary Shares outstanding plus the incremental shares that would be outstanding assuming the exercise of stock options and warrants or conversion of convertible securities. In computing diluted earnings per share, only potential common shares that are dilutive (those that reduce earnings per share) are included. Exercise of options and issuances of restricted stock are not assumed if the result would be antidilutive, such as when a net loss is reported. The Company reported a net loss for each of the quarters ended June 30, 2005 and 2004, and accordingly, the impact of its outstanding stock options have been excluded from the diluted earnings per share calculation.
Note 9 Legal Matters
U.S. Attorneys Office Investigation
On September 24, 2004, TH USA announced that it had received a grand jury subpoena issued by the United States Attorneys Office for the Southern District of New York (USAO) seeking documents generally related to domestic and/or international buying office commissions since 1990 and that certain of TH USAs current and former employees had received subpoenas. Several domestic and international subsidiaries of the Company pay buying office commissions to Tommy Hilfiger (Eastern Hemisphere), Limited (THEH), a British Virgin Islands corporation which is a wholly-owned and consolidated subsidiary of the Company, pursuant to contracts to provide or otherwise secure through third parties certain services, including product development, sourcing, production scheduling and quality control functions. The USAO investigation was focused on the appropriateness of the commission rate paid by the Companys subsidiaries to THEH, as well as other related tax matters.
In October 2004, the Board of Directors of the Company formed a Special Committee of independent directors to conduct an independent investigation into matters arising out of the governmental investigation. The Special Committee retained Debevoise & Plimpton LLP as legal counsel, with a team headed by Mary Jo White, former U.S. Attorney for the Southern District of New York. The Special Committee reported on its investigation to the Board in March 2005 and to the USAO in April 2005. The Special Committee found that the Company had a good faith basis for adopting the buying office commission rate paid by the Companys subsidiaries to THEH. The Special Committee did identify certain questions about Hong Kong tax matters and supported the Companys determination to engage the Hong Kong Inland Revenue Department (IRD) in discussions regarding whether THEH was subject to profits tax in Hong Kong. The Special Committee made recommendations to the Company to enhance procedures for tax matters, including transfer pricing, and to review its buying office structure. The Companys management has adopted all of the Special Committees recommendations.
After the Special Committee made its report, the Company in May 2005 initiated discussions with the USAO about the possible resolution of the investigation on a civil basis, and the Company also initiated discussions with the IRD in an effort to resolve any issues concerning whether THEH is subject to profits tax in Hong Kong.
On August 10, 2005, the Company announced that it had resolved the previously announced investigation by executing a non-prosecution agreement with the USAO. The USAO has concluded that criminal tax charges are not warranted and closed its investigation. In addition, the USAO has agreed that it will not criminally prosecute TH USA, or its parent or affiliates for any offenses relating to underpayment of Hong Kong taxes as a result of activities attributed to THEH.
The non-prosecution agreement with the USAO is subject to certain understandings, including that TH USA file amended U.S. federal income tax returns for the fiscal years ending March 31, 2001 through 2004 reflecting a reduced buying office commission rate for those four years, adopt and implement the recommendations of the Special Committee of the Companys Board of Directors, adopt and implement an effective ethics and compliance program, and provide information to the IRD for it to evaluate whether THEH or its Hong Kong subsidiary owe any Hong Kong taxes to the IRD. TH USA also agreed for a period of three years to provide the USAO, upon request, with information so that the USAO can monitor TH USAs compliance with the agreement. TH USA has now filed the amended tax returns required under the non-prosecution agreement.
18
As a result of the reduction in the buying office commission rate and other unrelated adjustments that were also reflected in the amended tax returns, TH USA paid approximately $15,400 in additional federal income taxes and $2,700 in interest for the four years covered by the amended tax returns, taking into account the effect of changes in other tax attributes, including net operating loss carry forwards.
As previously disclosed, the Company initiated discussions in May 2005 with the IRD with respect to the potential Hong Kong profits tax liability of THEH. In the course of these discussions, the Company made a settlement offer to the IRD to resolve this issue that was not accepted and discussions are ongoing. Accordingly, there can be no assurance as to the ultimate resolution of this matter, although the Company does not believe that the final resolution will have a material effect on the Companys financial position.
Following the Companys September 24, 2004 announcement of the investigation, approximately eleven purported shareholder class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, as well as certain current and former officers and directors of the Company. The Court has consolidated the purported shareholder class action lawsuits, and has appointed lead counsel and lead plaintiffs. The lead plaintiffs filed a consolidated, amended complaint on May 13, 2005. On August 1, 2005, the Company filed a motion to dismiss the complaint. On September 30, 2005, the Company and lead plaintiffs agreed to a new schedule, which was subsequently ordered by the Court, pursuant to which lead plaintiffs filed a Second Consolidated Amended Complaint on October 31, 2005 and the Company filed a new motion to dismiss on December 5, 2005. The Company currently expects that a hearing on such motion will be scheduled by the Court for early 2006. The Company intends to defend itself vigorously against plaintiffs claims. Since the case is in its very early stages, the Company is unable to predict its outcome. Accordingly, the Company has not recorded any provision for potential loss associated with this matter.
Other Matters
The Company and its subsidiaries are otherwise involved from time to time in other routine legal matters incidental to their business. In the opinion of the Companys management, based on advice of counsel, the resolution of these other matters will not individually or in aggregate have a material effect on its financial position, results of operations or its cash flows.
Note 10 Sale of Building
In May 2005, the Company sold its office building at 485 Fifth Avenue in New York City for net proceeds of $45,900. The net book value of the building was $43,580 resulting in a pretax gain on the sale of $2,320. This gain is reflected with other selling, general and administrative expenses.
Note 11 Subsequent Events
Sale of Building
In August 2005, the Company entered into an agreement to sell its office building at 25 West 39th Street in New York City for net proceeds of approximately $50,000. The net book value of this building is approximately $30,000, which is expected to result in a pretax gain on the sale of approximately $20,000. Although this transaction closed on December 2, 2005, the timing of the recognition of the gain will depend upon the Companys continuing involvement in the building and is not expected to be recognized until fiscal 2007.
Amended Tax Returns
As more fully described in Note 11 in the Form 10-K, on August 22, 2005, the Company filed amended U.S. Federal income tax returns for fiscal years 2001 through 2004, as required in connection with the resolution of the USAO investigation. Included with the amended returns was payment of $18,100 for additional taxes and related interest.
U.S. Wholesale Restructuring
During October 2005, the Company completed a review of its U.S. Wholesale organization and determined that activities were required to streamline the structure and more effectively support the current level of business. On October 6, 2005, the Company announced a series of actions to accomplish these goals. In order to achieve operating efficiencies, the Company terminated approximately 135 employees. These actions are expected to result in a pretax charge to earnings in the third quarter of fiscal 2006 of approximately $5,000 primarily related to severance payments to the affected employees. This streamlining along with associated expense reductions is expected to result in annual cost savings beginning in the fourth quarter of fiscal 2006.
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands, except per share amounts)
General
The following discussion and analysis should be read in conjunction with the Companys Condensed Consolidated Financial Statements and related notes thereto in Item 1 above. All references to years relate to the fiscal year ended March 31 of such year.
Business Segments
The Company has four reportable segments: U.S. Wholesale, International Wholesale, Retail and Licensing. The Companys reportable segments are business units that offer different products and services or similar products through different distribution channels. The Wholesale segments consist of the design and sourcing of mens sportswear and jeanswear, womens casualwear and jeanswear and childrenswear for wholesale distribution in their respective geographic region. The Retail segment reflects the operations of the Companys outlet and specialty stores. The Licensing segment consists of the services relating to licensing the Companys trademarks for specified products in specified geographic areas and the services related to the Companys Far East buying offices. The Company evaluates performance and allocates resources based on segment operating profits. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements included in the Form 10-K. Income (loss) from operations or Segment Profits are comprised of segment net revenue less cost of goods sold and selling, general and administrative expenses.
Business units that are not aggregated in the above mentioned reportable segments either do not qualify as a segment or do not meet the quantitative threshold or aggregation criteria of SFAS 131. These units are included in Other and consist of Corporate, E-commerce and the Karl Lagerfeld businesses. Included within Corporate are certain executive compensation and marketing costs, amortization of certain intangibles and other corporate overhead. Eliminations consist of intercompany revenue and expenses.
Results of Operations
The following table sets forth the Condensed Consolidated Statements of Operations data as a percentage of net revenue.
Three Months Ended June 30, |
||||||
2005 |
2004 |
|||||
Net revenue |
100.0 | % | 100.0 | % | ||
Cost of goods sold |
49.9 | 55.8 | ||||
Gross profit |
50.1 | 44.2 | ||||
Depreciation and amortization |
5.5 | 5.2 | ||||
Other SG&A expenses |
45.0 | 40.1 | ||||
Total SG&A expenses |
50.5 | 45.3 | ||||
Income (loss) from operations |
(0.4 | ) | (1.1 | ) | ||
Interest and other expense, net |
0.8 | 1.8 | ||||
Income (loss) before taxes |
(1.2 | ) | (2.9 | ) | ||
Provision (benefit) for income taxes |
(0.4 | ) | (0.3 | ) | ||
Net income (loss) |
(0.8 | ) | (2.6 | ) | ||
20
Items Affecting Comparability
During the first quarter of fiscal 2006, the Company sold one of its office buildings and recorded a pretax gain on the sale of $2,320. The gain is classified as a reduction of selling, general and administrative expenses and is included in Other in the Companys reportable segment disclosure.
During the second quarter of fiscal 2005, the Company reduced its commission rate on certain intercompany transactions between its Hong Kong based buying office and other consolidated subsidiaries. For the quarter ended June 30, 2005, this reduced commission rate had the effect of decreasing intercompany revenue by approximately $3,000 at the buying office, with corresponding decreases in cost of sales at the affected consolidated subsidiaries, with no net impact on consolidated pretax results. Additionally, the change in commission rate results in a change in taxable income between various taxing jurisdictions and has the effect of increasing the Companys overall effective tax rate.
Effective February 1, 2005, the U.S. tax treaty with Barbados was amended whereby certain tax benefits that the Company had been utilizing were eliminated. These benefits contributed approximately $3,000 to net income in the first quarter of fiscal 2005.
The Company consolidates entities whose functional currencies include the Euro and the Canadian dollar. Comparability to prior periods is impacted as a result of changes in these exchange rates. The average annual Euro to U.S. dollar exchange rates for the first quarter of fiscal 2006 and 2005 approximated 1.26 and 1.21, respectively, and the average annual Canadian to U.S. dollar exchange rates for the first quarter of fiscal 2006 and 2005 approximated 0.80 and 0.74 respectively. The table below shows the translation impact of these changes on the amounts recorded in the first quarter of fiscal 2006, for the respective income statement captions.
Euro |
Canadian $ |
Total |
|||||||||
Revenue |
$ | 3,314 | $ | 2,461 | $ | 5,775 | |||||
Gross margin |
1,922 | 1,411 | 3,333 | ||||||||
Operating expenses |
2,658 | 1,344 | 4,002 | ||||||||
Operating income |
(736 | ) | 67 | (669 | ) |
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
Overview
The Companys net revenue decreased 2.7% to $319,902 in the first quarter of fiscal 2006, as compared to $328,847 in the first quarter of fiscal 2005. A decrease in the U.S. Wholesale segment was partially offset by increases in the International Wholesale and Retail segments, while the Licensing segment remained virtually unchanged. Revenue classified as Other includes that of E-commerce and the Karl Lagerfeld businesses. E-commerce was launched in the third quarter of fiscal 2005, while the Karl Lagerfeld businesses, including one retail store, were acquired in the fourth quarter of fiscal 2005.
Gross margin increased to 50.1% for the three months ended June 30, 2005, as compared to 44.2% for the three months ended June 30, 2004. Increases in the International Wholesale and Retail segments along with the acquisition of Karl Lagerfeld businesses and the launching or E-commerce were partially offset by a decrease in the U.S. Wholesale segment. Additionally, there was a change in revenue mix, whereby a greater percentage of net revenue is being contributed by the International Wholesale and Retail segments, which generate a higher gross margin than the Companys consolidated gross margin. The Companys gross margins may not be directly comparable to those of its competitors, as income statement classifications of certain expenses may vary by company.
Selling, general and administrative expenses increased 8.5% to $161,556 for the three months ended June 30, 2005, as compared to $148,959 for the three months ended June 30, 2004. As a percentage of net revenue, Selling, general and administrative expenses increased to 50.5% for the three months ended June 30, 2005, as compared to 45.3% for the three months ended June 30, 2004. Increases in the International Wholesale and Retail segments, along with the acquisition of the Karl Lagerfeld businesses and the launching of E-commerce were partially offset by decreases in the U.S. Wholesale segment and the Corporate division. The decreased expenses in Other resulted from lower corporate marketing and compensation expenses, and the gain on the sale of an office building as noted above.
21
The Company reflects shipping and handling costs as a component of selling, general and administrative expenses in its condensed consolidated statements of operations. Shipping and handling costs approximated $9,402 and $9,640 for the three months ended June 30, 2005 and 2004, respectively. Amounts billed to customers that relate to shipping and handling on related sales transactions are de minimis.
Interest and other expense decreased 12.4% to $6,277 for the three months ended June 30, 2005, as compared to $7,162 for the three months ended June 30, 2004. This decrease results primarily from the repurchase in the second quarter of fiscal 2005, of $7,530 of principal amount of the 6.85% notes due on June 1, 2008.
Interest income increased to $3,760 for the three months ended June 30, 2005, as compared to $1,046 for the three months ended June 30, 2004. This increase results from higher average invested cash balances and from higher interest rates earned on those balances. Interest rates earned on invested cash balances for the three-month periods ended June 30, 2005 and 2004 were 2.85% and 0.98%, respectively.
The provision for income taxes for the first quarter of fiscal 2006 increased to 28.0% of income before taxes from 10.0% in the corresponding period last year. This increase was attributable to the elimination of tax benefits under the amended U.S. tax treaty with Barbados, the effect of the reduced buying office commission rate as mentioned above and a change in taxable income between various taxing jurisdictions.
Segment Operations
Financial information for the Companys reportable segments is as follows:
U.S. Wholesale |
International Wholesale |
Retail |
Licensing |
Other |
Eliminations |
Total |
||||||||||||||||||||||
Three Months Ended June 30, 2005 |
||||||||||||||||||||||||||||
Net revenue |
$ | 115,836 | $ | 64,243 | $ | 121,678 | $ | 28,484 | $ | 703 | $ | (11,042 | ) | $ | 319,902 | |||||||||||||
Income (loss) from operations |
(4,484 | ) | (14,060 | ) | 15,334 | 16,631 | (23,783 | ) | 9,197 | (1,165 | ) | |||||||||||||||||
Operating margin |
(3.9 | )% | (21.9 | )% | 12.6 | % | 58.4 | % | (0.4 | )% | ||||||||||||||||||
Three Months Ended June 30, 2004 |
||||||||||||||||||||||||||||
Net revenue |
$ | 163,449 | $ | 47,241 | $ | 103,272 | $ | 29,331 | $ | | $ | (14,446 | ) | $ | 328,847 | |||||||||||||
Income (loss) from operations |
(1,719 | ) | (14,880 | ) | 9,966 | 19,165 | (28,753 | ) | 12,660 | (3,561 | ) | |||||||||||||||||
Operating margin |
(1.1 | )% | (31.5 | )% | 9.7 | % | 65.3 | % | (1.1 | )% |
U.S. Wholesale Segment. U.S. Wholesale segment net revenue decreased by $47,613, or 29.1%, for the three months ended June 30, 2005, as compared to the three months ended June, 30, 2004. Within the U.S. Wholesale segment, net revenue by component was as follows:
Three Months Ended June 30, | ||||||
2005 |
2004 | |||||
Menswear |
$ | 38,760 | $ | 58,289 | ||
Womenswear |
56,338 | 81,398 | ||||
Childrenswear |
20,738 | 23,762 | ||||
$ | 115,836 | $ | 163,449 | |||
The decrease in net revenue reflects lower volume and lower average unit prices as compared to the same period in the prior year. The lower volume is attributable to a continued decline in sales trends of Company products at U.S. retailers. The lower average unit prices reflect increased pricing adjustments to regular priced customers, and also a greater percentage of sales through off-price channels.
U.S. Wholesale segment operating loss increased to $4,484 for the three months ended June 30, 2005, as compared to $1,719 for the three months ended June 30, 2004. As a percentage of net revenue, operating loss was 3.9% and 1.1% for the three months ended June 30, 2005 and 2004, respectively. The increase in operating loss is primarily attributable to
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the revenue decrease as noted above and a decrease in gross margin, partially offset by lower expenses. The decrease in gross margin results from the increased pricing adjustments and greater percentage of off-price sales as noted above. Operating expenses decreased as a result of a restructuring in the fourth quarter of fiscal 2005, lower variable expenses resulting from lower revenue, and decreased depreciation and amortization reflects fewer locations of in-store shop fixtures. The fourth quarter of fiscal 2005 restructuring included a reduction in headcount, the exit of the Young Mens and Wholesale H Hilfiger businesses, and other cost saving initiatives.
International Wholesale Segment. International Wholesale segment revenue increased $17,002, or 36.0% for the three months ended June 30, 2005, as compared to the three months ended June, 30, 2004. Within the segment, net revenue by component was as follows:
Three Months Ended June 30, | ||||||
2005 |
2004 | |||||
Menswear |
$ | 35,356 | $ | 27,304 | ||
Womenswear |
21,657 | 15,857 | ||||
Childrenswear |
7,230 | 4,080 | ||||
$ | 64,243 | $ | 47,241 | |||
Net revenue in the International Wholesale segment increased as a result of increased volume, increased average unit prices and increased exchange rates as noted above. The increased volume is attributable to expansion in the European markets, mainly Germany and Spain. The increased average unit prices results from lower price adjustments, and higher exchange rates. The effect of exchange rates on the International Wholesale segment net revenue approximated $3,039.
International Wholesale segment operating loss decreased 5.5% to $14,060 for the three months ended June 30, 2005, as compared to $14,880 for the three months ended June 30, 2004. The first quarter of each fiscal year is traditionally a loss quarter for this segment due to the seasonality of the international wholesale market. As a percentage of net revenue, operating loss was 21.9% and 31.5% for the three months ended June 30, 2005 and 2004, respectively. Increased revenue and increased gross margin was mostly offset by increased expenses. Gross margin increased primarily as a result of the decrease in price adjustments. Operating expenses increased as a result of increased revenue, and additional costs incurred to support growth, including the investment in building its newly acquired business in Italy.
Retail Segment. Retail segment net revenue increased 17.8% to $121,678 for the three months ended June 30, 2005, as compared to $103,272 for the three months ended June 30, 2004. The increase is due to new stores opened since June 30, 2004, and a net increase in revenue from existing stores. Retail stores opened since June 30, 2004 contributed net revenue of $13,233 during the quarter ended June 30, 2005, consisting of approximately $2,223 of revenue in the U.S. and $11,010 of non-U.S. revenue. At June 30, 2005, the Retail segment operated 211 retail stores, consisting of 165 outlet stores and 46 specialty stores, compared to 181 stores consisting of 146 outlets and 35 specialty stores a year ago.
Retail segment operating income increased 53.9% to $15,334, as compared to $9,966 for the three months ended June 30, 2004. As a percentage of segment revenue, operating income was 12.6% and 9.7 % for the three months ended June 30, 2005 and 2004, respectively. This increase is attributable to increased revenue as noted above and increased gross margins, partially offset by increased expenses. Increased gross margins reflect lower markdowns in the first quarter fiscal 2006 as compared to the first quarter of fiscal 2005. In the U.S., comparable store sales continue to show positive improvement over the comparable sales of the prior year. Outside the U.S., operating income and operating margin increased due to a higher gross margin, which offset higher operating expenses, as those non-U.S. divisions continue to expand their retail businesses.
Licensing Segment. Licensing segment net revenue decreased 2.9% to 28,484 for the three months ended June 30, 2005, as compared to $29,331 for the three months ended June 30, 2004. The net decrease results from a reduction in intercompany buying office commission rates beginning in the second quarter of fiscal 2005, partially offset by higher royalties earned from third-party licensees. Higher royalties earned from third-party licensees included, notably, the Companys geographic license in Korea, and the licenses for fragrance and footwear. New products introduced under licenses entered into during the first quarters of fiscal 2006 and 2005 contributed a de minimis amount of revenue during those respective periods.
Licensing segment profits decreased 13.2% to 16,631 for the three months ended June 30, 2005, as compared to $19,165 for the three months ended June 30, 2004. As a percentage of segment revenue, Licensing segment profits were 58.4% and 65.3% for the three months ended June 30, 2005 and 2004, respectively. This decrease principally resulted from decreased intercompany buying office commission rates as described above in Items Affecting Comparability.
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Forward Outlook
For a discussion of the Companys fiscal 2006 forward outlook as of November 18, 2005, the date of the filing of the Companys Form 10-K for the year ended March 31, 2005, see Managements Discussion and Analysis of Financial Condition and Results of Operations Forward Outlook in such Form 10-K. As a matter of policy, the Company disclaims any intention to update or revise such forward-looking statements during the period between Thanksgiving and the completion of the Fall/Holiday retail selling season in January.
Liquidity and Capital Resources
Cash provided by operations continues to be the Companys primary source of funds to finance operating needs, capital expenditures and debt service. Capital expenditures relate to construction of additional retail stores and maintenance or selective expansion of the Companys in-store shop and fixtured area program, as well as improvements in facilities and information systems. The Companys sources of liquidity are cash on hand, cash from operations and the Companys available credit.
The Companys cash and cash equivalents balance decreased $98,659 from $480,987 at March 31, 2005 to $382,328 at June 30, 2005. This net decrease resulted primarily from the $150,000 restriction of cash used as collateral for the Letter of Credit Facility, $18,503 of capital expenditures and $18,842 of net cash paid for an acquisition, partially offset by $45,900 of proceeds on the sale of one of the Companys office buildings, and $44,233 of net cash provided by operating activities. Capital expenditures were made principally in support of the expansion of the European business, for retail store openings and maintenance, and build-out of the Companys information system infrastructure. Included in net cash from operating activities is $16,135 of net income excluding non-cash items, and $28,098 of seasonal changes in primarily working capital accounts. Additionally during the quarter, the Companys short-term investments decreased by $2,825 as the net result of investment maturities, sales and purchases. A more detailed analysis of the changes in cash and cash equivalents is presented in the Condensed Consolidated Statements of Cash Flows.
As of June 30, 2005, the Companys principal debt obligations and credit facilities consisted of $192,470 of the 2008 Notes, $150,000 of the 2031 Bonds and the Letter of Credit Facility. The Notes were issued by TH USA and are fully and unconditionally 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 certain sale and leaseback transactions and restrict the ability of THC and TH USA to engage in mergers or consolidations.
The Letter of Credit Facility, which is guaranteed by THC, is to be used for normal trade financing and other general purposes. As of June 30, 2005, $80,646 of the total available commitments under the Letter of Credit Facility had been used to open letters of credit, including $20,492 for inventory purchased that are included in current liabilities and $60,154 related to commitments to purchase inventory. No cash borrowings are available under the Letter of Credit Facility. The Letter of Credit Facility is collateralized by $150,000 of cash maintained by a wholly owned subsidiary at designated bank accounts. The Letter of Credit Facility will expire on April 19, 2006. The Company expects to enter into an alternate facility before the end of fiscal 2006.
Certain of the Companys non-U.S. subsidiaries have separate credit facilities, totaling approximately $152,410 at June 30, 2005, for working capital or trade financing purposes. As of June 30, 2005, $11,761 of available borrowings under these facilities had been used to open letters of credit, including $5,092 for inventory purchased that is included in current liabilities and $6,669 related to commitments to purchase inventory. There were no short-term borrowings as of June 30, 2005 under these facilities. Borrowings under these credit facilities bear interest at variable rates which, on a weighted average annual basis, amounted to 3.64% for the three-month period ended, June 30, 2005.
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 ability to prepay long-term debt, if so desired, in response to changing conditions in the debt markets. Because such flexibility exists, the Company does not normally enter into specific hedging transactions to further mitigate interest rate risks, except in the case of specific, material borrowing transactions. No interest rate hedging contracts were in place as of June 30, 2005.
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The Company expects to fund its cash requirements for current operations for fiscal 2006 and the foreseeable future from available cash balances, and internally generated funds. The Company believes that these resources will be sufficient to fund its cash requirements for such periods.
Seasonality
The Companys business is impacted by the general seasonal trends characteristic of the apparel and retail industries. The Companys Wholesale revenue, particularly from its European operations, is generally highest during the second and fourth fiscal quarters, while the Companys Retail segment generally contributes its highest levels of revenue during the third fiscal quarter. As the timing of Wholesale product shipments and other events affecting the retail business may vary, results for any particular quarter might not be indicative of results for the full year.
Inflation
The Company believes that inflation has not had a material effect on its net revenue or profitability in recent years.
Exchange Rates
The Company received United States dollars for approximately 67% of its product sales for the three months ended June 30, 2005. Substantially all inventory purchases from contract manufacturers throughout the world are also denominated in United States dollars; however, purchase prices for the Companys 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 Companys cost of goods in the future. During the last three fiscal years, exchange rate fluctuations have not had a material impact on the Companys 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 anticipated cash flows. These include the purchase of inventory, capital expenditures, collection of foreign royalty payments and certain intercompany commitments. The Company enters into forward contracts, generally with maturities of up to 15 months, to sell or purchase foreign currency in order to hedge against such risks. The Company does not use financial instruments for speculative or trading purposes. At June 30, 2005, the Company had contracts to exchange foreign currencies, principally the Japanese yen, the Canadian dollar and the Euro, having a total notional amount of $75,689. The unrealized gain associated with these contracts at June 30, 2005 approximated $2,002, net of deferred taxes. $1,822 of this gain was recorded in Other comprehensive income and $180 was charged to Cost of sales in accordance with SFAS 133 Accounting for Derivative Instruments and Hedging Activities.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued Statements No. 123R, Share-Based Payment (FAS 123R), an amendment of FASB Statements No. 123 and 95. Under FAS 123R, all forms of share-based payment to employees, including employee stock options, would be treated as compensation and recognized in the income statement. This statement is effective for fiscal years beginning on or after June 15, 2005. The Company anticipates adopting the provisions of FAS 123R beginning April 1, 2006, but cannot at this time assess the financial statement impact of adopting this statement. The Company currently provides the disclosure requirements of FAS 123, which provides a pro-forma historical impact of recording stock compensation expense. See Note 2 to the accompanying consolidated financial statements for such disclosure.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the sections entitled Liquidity and Capital Resources and Exchange Rates in Item 2 above, which sections are incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities and Exchange Act Rule 13a-15. Based upon this evaluation as of June 30, 2005, management concluded that the Companys disclosure controls and procedures were not effective for the reasons more fully described below related to the unremediated material weakness in the Companys internal control over financial reporting identified during the Companys evaluation pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 as of the year ended March 31, 2005. To address this control weakness, the Company performed additional analysis and performed other procedures in order to prepare the unaudited quarterly consolidated financial statements in accordance with generally accepted accounting principles in the United States of America. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Managements assessment identified a material weakness in the Companys internal control over financial reporting as of March 31, 2005 that is in the process of being remediated as of June 30, 2005, as described further below. This section of Item 4, Controls and Procedures, should be read in conjunction with Item 9A, Controls and Procedures, included in the Companys Form 10-K for the year ended March 31, 2005, for additional information on Managements Report on Internal Controls Over Financial Reporting.
As of March 31, 2005, the Company did not maintain effective controls over the accounting for income taxes, including the determination and reporting of income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Specifically, the Company did not have adequate personnel to enable the Company to properly consider and apply generally accepted accounting principles for taxes, ensure that the rationale for certain tax positions was adequately documented and appropriately communicated and ensure that effective oversight of the work performed by its outside tax advisors was exercised. Additionally, the Company did not maintain effective controls to review and monitor the accuracy of the components of the income tax provision calculations and the related deferred income taxes, and income taxes payable, including monitoring the differences between the tax basis and the financial reporting basis of assets and liabilities to effectively reconcile the deferred tax balances. Furthermore, the Company did not have effective controls to identify, evaluate and accurately record provisions for profits tax in Hong Kong. This control deficiency resulted in the restatement of the annual consolidated financial statements for 2004 and 2003, the interim consolidated financial statements for the first quarter of 2005 and all quarters in 2004, as well as audit adjustments to the 2005 consolidated financial statements. Additionally, this control deficiency could result in the misstatement of income taxes payable, deferred income tax assets and liabilities and the related income tax provision, that would result in a material misstatement to annual or consolidated interim financial statements that would not be prevented or detected.
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Remediation
The Company has taken the following actions to address the material weakness in its tax function:
| Increased the Companys internal tax resources by hiring a Vice President of Taxation and a Tax Manager into newly created positions; |
| Retained new tax advisors and increased the level of involvement of outside external tax advisers pertaining to, among other things, the adequacy and design of the Companys tax strategies and entity structure; |
| Retained a tax consultant with significant experience in managing corporate tax functions to review and complete documentation of critical procedures within the corporate tax department, specifically including documentation requirements, in order to strengthen the reliability and timeliness of the Companys tax accounting and to prepare for internal control audits; and |
| Increased the level of review and discussion of significant tax matters and supporting documentation with senior finance management. |
Management has taken the actions described above, which it believes address the material weakness related to accounting for income taxes. Testing the effectiveness of these controls will be completed as part of the year end procedures. As a result, management will not be able to conclude on the remediation until that time.
Changes in Internal Control over Financial Reporting
There have been no changes in the Companys internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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U.S. Attorneys Office Investigation
On September 24, 2004, TH USA announced that it had received a grand jury subpoena issued by the United States Attorneys Office for the Southern District of New York (USAO) seeking documents generally related to domestic and/or international buying office commissions since 1990 and that certain of TH USAs current and former employees had received subpoenas. Several domestic and international subsidiaries of the Company pay buying office commissions to Tommy Hilfiger (Eastern Hemisphere) Limited (THEH), a British Virgin Islands corporation which is a wholly-owned and consolidated subsidiary of the Company, pursuant to contracts to provide or otherwise secure through third parties certain services, including product development, sourcing, production scheduling and quality control functions. The USAO investigation was focused on the appropriateness of the commission rate paid by the Companys subsidiaries to THEH, as well as other related tax matters.
In October 2004, the Board of Directors of the Company formed a Special Committee of independent directors to conduct an independent investigation into matters arising out of the governmental investigation. The Special Committee retained Debevoise & Plimpton LLP as legal counsel, with a team headed by Mary Jo White, former U.S. Attorney for the Southern District of New York. The Special Committee reported on its investigation to the Board in March 2005 and to the USAO in April 2005. The Special Committee found that the Company had a good faith basis for adopting the buying office commission rate paid by the Companys subsidiaries to THEH. The Special Committee did identify certain questions about Hong Kong tax matters and supported the Companys determination to engage the Hong Kong Inland Revenue Department (IRD) in discussions regarding whether THEH was subject to profits tax in Hong Kong. The Special Committee made recommendations to the Company to enhance procedures for tax matters, including transfer pricing, and to review its buying office structure. The Companys management has adopted all of the Special Committees recommendations.
After the Special Committee made its report, the Company in May 2005 initiated discussions with the USAO about the possible resolution of the investigation on a civil basis, and the Company also initiated discussions with the IRD in an effort to resolve any issues concerning whether THEH is subject to profits tax in Hong Kong.
On August 10, 2005, the Company announced that it had resolved the previously announced investigation by executing a non-prosecution agreement with the USAO. The USAO has concluded that criminal tax charges are not warranted and closed its investigation. In addition, the USAO has agreed that it will not criminally prosecute TH USA, or its parent or affiliates for any offenses relating to underpayment of Hong Kong taxes as a result of activities attributed to THEH.
The non-prosecution agreement with the USAO is subject to certain understandings, including that TH USA file amended U.S. federal income tax returns for the fiscal years ending March 31, 2001 through 2004 reflecting a reduced buying office commission rate for those four years, adopt and implement the recommendations of the Special Committee of the Companys Board of Directors, adopt and implement an effective ethics and compliance program, and provide information to the IRD for it to evaluate whether THEH or its Hong Kong subsidiary owe any Hong Kong taxes to the IRD. TH USA also agreed for a period of three years to provide the USAO, upon request, with information so that the USAO can monitor TH USAs compliance with the agreement. TH USA has now filed the amended tax returns required under the non-prosecution agreement.
As a result of the reduction in the buying office commission rate and other unrelated adjustments that were also reflected in the amended tax returns, TH USA paid approximately $15.4 million in additional federal income taxes and $2.7 million in interest for the four years covered by the amended tax returns, taking into account the effect of changes in other tax attributes, including net operating loss carry forwards.
As previously disclosed, the Company initiated discussions in May 2005 with the IRD with respect to the potential Hong Kong profits tax liability of THEH. In the course of these discussions, the Company made a settlement offer to the IRD to resolve this issue that was not accepted and discussions are ongoing. Accordingly, there can be no assurance as to the ultimate resolution of this matter, although the Company does not believe that the final resolution will have a material effect on the Companys financial position.
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Following the Companys September 24, 2004 announcement of the investigation, approximately eleven purported shareholder class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, as well as certain current and former officers and directors of the Company. The Court has consolidated the purported shareholder class action lawsuits, and has appointed lead counsel and lead plaintiffs. The lead plaintiffs filed a consolidated, amended complaint on May 13, 2005. On August 1, 2005, the Company filed a motion to dismiss the complaint. On September 30, 2005, the Company and lead plaintiffs agreed to a new schedule, which was subsequently ordered by the Court, pursuant to which lead plaintiffs filed a Second Consolidated Amended Complaint on October 31, 2005 and the Company filed a new motion to dismiss on December 5, 2005. The Company currently expects that a hearing on such motion will be scheduled by the Court for early 2006. The Company intends to defend itself vigorously against plaintiffs claims. Since the case is in its very early stages, the Company is unable to predict its outcome. Accordingly, the Company has not recorded any provision for potential loss associated with this matter.
Other Matters
The Company and its subsidiaries are from time to time involved in routine legal matters incidental to their business. In the opinion of the Companys management, based on advice of counsel, the resolution of these matters will not have a material effect on its financial position, its results of operations or its cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 | First Amendment to Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
10.2 | Assignment of Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
10.3 | Supplemental letter to Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
10.4 | Second Amendment to Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
11 | Computation of Net Income Per Ordinary Share | |
31.1 | Certification of the principal executive officer pursuant to Rule 13a 14 (a) or Rule 15d 14 (a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) | |
31.2 | Certification of the principal financial officer pursuant to Rule 13a 14 (a) or Rule 15d 14 (a) of the Exchange Act | |
32.1 | Certification of the principal executive officer pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of the principal financial officer pursuant to 18 U.S.C. Section 1350 |
(b) Reports on Form 8-K
During the quarter ended June 30, 2005, the Company submitted the following Current Reports on Form 8-K with the Securities and Exchange Commission:
(1) | The Company submitted a Current Report on Form 8-K, dated April 1, 2005, announcing that Joel J. Horowitz will retire as Non-Executive Chairman of the Company, following the Companys Annual Meeting of Shareholders, tentatively scheduled for October 31, 2005. Until such time, Mr. Horowitz will serve as Non-Executive Chairman of the Companys Board of Directors. |
(2) | The Company submitted a Current Report on Form 8-K, on April 6, 2005, announcing that the Company had entered into indemnification agreements with its officers and directors as permitted by its Articles of Association. |
(3) | The Company submitted a Current Report on Form 8-K, dated April 19, 2005, announcing the execution of a $150,000 letter of credit facility with J.P. Morgan Securities Inc. acting as sole lead arranger. |
(4) | The Company submitted a Current Report on Form 8-K, dated June 15, 2005, announcing its preliminary fiscal 2005 pretax results, a revised outlook for fiscal 2006, and an update on the investigation by the U.S. Attorneys Office. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
TOMMY HILFIGER CORPORATION | ||||
Date: December 15, 2005 |
By: |
/s/ David F. Dyer | ||
David F. Dyer | ||||
Chief Executive Officer and President | ||||
(Principal Executive Officer) | ||||
Tommy Hilfiger Corporation | ||||
Date: December 15, 2005 |
By: |
/s/ Joseph Scirocco | ||
Joseph Scirocco | ||||
Chief Financial Officer, Executive Vice President and Treasurer | ||||
(Principal Financial Officer) | ||||
Tommy Hilfiger Corporation |
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EXHIBIT INDEX
Exhibit Number |
Description | |
10.1 | First Amendment to Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
10.2 | Assignment of Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
10.3 | Supplemental letter to Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
10.4 | Second Amendment to Contract, dated July 14, 2004, by and between Tommy Hilfiger 485 Fifth, Inc., as Seller and Park & 5th Property LLC, as Purchaser. | |
11 | Computation of Net Income Per Ordinary Share | |
31.1 | Certification of the principal executive officer pursuant to Rule 13a - 14 (a) or Rule 15d 14 (a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) | |
31.2 | Certification of the principal financial officer pursuant to Rule 13a 14 (a) or Rule 15d 14 (a) of the Exchange Act | |
32.1 | Certification of the principal executive officer pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of the principal financial officer pursuant to 18 U.S.C. Section 1350 |
31