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 DECEMBER 27, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13057
POLO RALPH LAUREN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2622036
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-318-7000
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 registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At February 10, 1998, 34,272,726 shares of the registrant's Class A Common
Stock, $.01 par value, were outstanding, 43,280,021 shares of the registrant's
Class B Common Stock, $.01 par value, were outstanding and 22,720,979 shares of
the registrant's Class C Common Stock, $.01 par value were outstanding.
<PAGE>
POLO RALPH LAUREN CORPORATION
INDEX TO FORM 10-Q
PART 1. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of December 27, 1997
(Unaudited) and March 29, 1997..................................3
Consolidated Statements of Income (Unaudited) for the three
months and nine months ended December 27, 1997 and December
28, 1996........................................................4
Consolidated Statements of Cash Flows (Unaudited) for the nine
months ended December 27, 1997 and December 28, 1996............5-6
Notes to Consolidated Financial Statements......................7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................12-19
PART II. OTHER INFORMATION
Item 5. Other Information...............................................20
Item 6. Exhibits and Reports on Form 8-K................................20
2
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<TABLE>
<CAPTION>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE
SHEETS
(In thousands, except share data)
December 27, March 29,
1997 1997
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $116,504 $ 29,599
Accounts receivable, net of allowances of $11,144 and $12,845,
respectively 115,119 144,303
Inventories 280,042 222,147
Deferred tax asset 15,862 2,669
Prepaid expenses and other 16,434 37,621
------------ ------------
Total current assets 543,961 436,339
Property and equipment, net 131,927 83,240
Investments in and advances to affiliates 5,914 17,977
Deferred tax asset 14,012 84
Other assets 77,443 39,103
------------ ------------
$773,257 $576,743
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities
Notes and acceptances payable - banks -- $ 26,777
Current portion of long-term debt $507 22,248
Current portion of subordinated notes -- 20,000
Accounts payable 66,024 89,417
Income taxes payable 15,773 2,357
Accrued expenses and other 112,919 63,168
------------ ------------
Total current liabilities 195,223 223,967
Long-term debt -- 47,875
Other noncurrent liabilities 22,548 20,216
Subordinated notes -- 24,000
Stockholders' equity and partners' capital
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,272,726 shares issued and outstanding 343 --
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Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 --
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 --
Additional paid-in-capital 446,435 --
Retained earnings and partners' capital 108,048 260,685
------------ ------------
Total stockholders' equity and partners' capital 555,486 260,685
------------ ------------
$773,257 $576,743
============ ============
See accompanying notes to financial statements.
3
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<TABLE>
<CAPTION>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF
INCOME
(In thousands, except share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
December 27, December 28, December 27, December 28,
------------ ------------ ------------ ------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $361,222 $268,634 $989,294 $764,374
Licensing revenue 44,450 37,825 125,468 98,132
------------ ------------ ------------ ------------
Net revenues 405,672 306,459 1,114,762 862,506
Cost of goods sold 214,047 168,605 570,680 473,629
------------ ------------ ------------ ------------
Gross profit 191,625 137,854 544,082 388,877
Selling, general and administrative expenses 142,399 102,882 390,208 274,450
------------ ------------ ------------ ------------
Income from operations 49,226 34,972 153,874 114,427
Interest (income) expense (453) 2,882 2,056 10,725
Equity in net loss of affiliate -- 52 -- 1,654
------------ ------------ ------------ ------------
Income before income taxes 49,679 32,038 151,818 102,048
Provision for income taxes 20,368 7,253 32,936 20,688
------------ ------------ ------------ ------------
Net income $29,311 $24,785 $118,882 $81,360
============ ============ ============ ============
Pro forma - (unaudited)
Historical income before income taxes $32,038 $151,818 $102,048
Pro forma adjustments other than income taxes 3,009 3,162 11,038
------------ ------------ ------------ ------------
Pro forma income before income taxes 35,047 154,980 113,086
Pro forma provision for income taxes 14,724 63,542 47,496
------------ ------------ ------------ ------------
Pro forma net income $20,323 $91,438 $65,590
============ ============ ============
Pro forma net income per share - Basic and Diluted $0.29 $0.20 $0.91 $0.65
============ ============ ============ ============
Pro forma common shares outstanding 100,222,444 100,222,444 100,222,444 100,222,444
============ ============ ============ ============
See accompanying notes to financial statements.
4
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<TABLE>
<CAPTION>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
------------------------
December December
27, 1997 28, 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 118,882 $ 81,360
Adjustments to reconcile net income to net
cash provided by operating activities
Benefit from deferred income taxes (21,746) --
Equity in net loss of affiliate -- 1,654
Depreciation and amortization 19,964 9,039
Provision for doubtful accounts 589 563
Other 2,629 1,559
Changes in assets and liabilities, net of acquisition
Accounts receivable 30,215 24,884
Inventories (30,538) 32,035
Prepaid expenses and other 5,381 (3,884)
Other assets (12,740) (1,183)
Accounts payable (30,888) (9,551)
Accrued expenses and other and income taxes
payable 47,073 21,100
--------- ---------
Net cash provided by operating activities 128,821 157,576
--------- ---------
Cash flows from investing activities
Acquisition, net of cash acquired (8,551) --
Investments in joint ventures (5,914) --
Purchases of property and equipment (39,556) (24,179)
Cash surrender value - officers' life insurance (1,315) (2,186)
--------- ---------
Net cash used in investing activities (55,336) (26,365)
--------- ---------
Cash flows from financing activities
(Repayments of) proceeds from short-term borrowings, net (26,777) (49,592)
Repayments of borrowings against officers' life insurance
policies (5,757) --
Repayments of long-term debt and subordinated notes (134,964) (12,470)
Payment of Dividend and Reorganization Notes (43,024) --
Proceeds from issuance of common stock, net 268,797 --
Distributions paid to partners (44,855) (63,857)
--------- ---------
Net cash provided by (used in) financing activities 13,420 (125,919)
--------- ---------
Net increase in cash and cash equivalents 86,905 5,292
Effect of exchange rate changes on cash and cash equivalents -- 83
Cash and cash equivalents at beginning of period 29,599 13,568
--------- ---------
Cash and cash equivalents at end of period $ 116,504 $ 18,943
========= =========
</TABLE>
5
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<TABLE>
<CAPTION>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
------------------------
December December
27, 1997 28, 1996
----------- ----------
<S>
Supplemental cash flow information <C> <C>
Cash paid for interest $4,196 $12,770
=========== ==========
Cash paid for income taxes $38,485 $15,380
=========== ==========
Supplemental schedule of non-cash investing and financing
activities
Foreign tax credits distributed to stockholders/partners $509 $2,733
=========== ==========
Capital obligations for completed shop-within-shops $2,701 $12,319
=========== ==========
Fair value of assets acquired $69,537
Less:
Cash paid 8,551
Fair market value of common stock issued for PRC
Acquisition 697
Liabilities assumed $60,289
===========
Fair market value of common stock issued for stock bonus
award $667
===========
See accompanying notes to financial statements.
6
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<PAGE>
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR DECEMBER 27, 1997 AND DECEMBER 28, 1996
IS UNAUDITED)
1 Basis of Presentation
(A) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in a manner consistent with that used in
the preparation of the fiscal 1997 audited combined financial statements of
Polo Ralph Lauren Corporation and subsidiaries (collectively, "Polo"). In
the opinion of management, the accompanying consolidated financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments, necessary for a fair presentation of the financial position
and results of operations and cash flows for the periods presented.
Operating results for the nine months ended December 27, 1997 and
December 28, 1996 are not necessarily indicative of the results that may be
expected for a full year. In addition, the unaudited interim consolidated
financial statements do not include all information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
Company's fiscal 1997 audited combined financial statements.
(B) BASIS OF PRESENTATION
Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware in
March 1997. Prior to the completion on June 17, 1997 of Polo's initial
public offering of its Class A Common Stock (the "Offerings"), the partners
and certain of their affiliates contributed to PRLC all of the outstanding
stock of, and partnership interests in, the entities which comprise the
predecessor group of companies in exchange for various combinations of
common stock and cash (the "Reorganization"), effective June 9, 1997. The
accompanying combined financial statements for the three months and nine
months ended December 28, 1996 include the accounts of Polo Ralph Lauren
Enterprises, L.P. ("Enterprises"), Polo Ralph Lauren, L.P. ("Polo
Partnership") and subsidiaries, The Ralph Lauren Womenswear Company, L.P.
and subsidiary ("Womenswear") and Polo Retail Corporation and subsidiaries
("PRC"), a 50% joint venture with a previously nonaffiliated partner
(collectively, the "Predecessor Company"). The controlling interests of the
Predecessor Company were held by Mr. Ralph Lauren, with a 28.5% interest
held by certain investment funds affiliated with The Goldman Sachs Group,
L.P. (collectively, the "GS Group").
The accompanying consolidated financial statements as of and for the
three months and nine months ended December 27, 1997 include the combined
results of operations of the Predecessor Company through June 9, 1997 and
the consolidated results of operations of Polo (Polo together with the
Predecessor Company referred to herein as the "Company") thereafter through
December 27, 1997. The financial statements of PRLC have not been included
prior to its acquisition of the Predecessor Company because PRLC was a
shell company with no business operations.
7
<PAGE>
The financial statements of the Predecessor Company are being presented
on a combined basis because of their common ownership. The combined
financial statements have been prepared as if the entities had operated as
a single consolidated group since their respective dates of organization.
All significant intercompany balances and transactions have been
eliminated. The equity method of accounting was used for the Company's
investment in PRC during the period in which 50% of PRC was owned by a
previously nonaffiliated partner (three months and nine months ended
December 28, 1996). Subsequent to the Company's acquisition of the
remaining 50% interest in PRC effective April 3, 1997, as discussed further
in Note 1 (e) below, the results of operations of PRC have been
consolidated and the acquisition has been accounted for as a purchase.
(C) DIVIDEND AND REORGANIZATION NOTES
On June 9, 1997, in connection with the Reorganization, the Company
declared a dividend and issued reorganization notes aggregating $43.0
million to Mr. Lauren and the GS Group representing estimated undistributed
earnings of the Predecessor Company through the closing of the
Reorganization ("Dividend and Reorganization Notes"). The Dividend and
Reorganization Notes were paid with a portion of the proceeds of the
Offerings (see Note 1 (d)). Effective June 9, 1997, the Company declared a
second dividend (the "Second Dividend") to Mr. Lauren and the GS Group in
an amount representing the difference between the actual amount of
undistributed earnings through the closing of the Reorganization and the
estimated amount of the Dividend and Reorganization Notes. The amount of
the Second Dividend is currently estimated to be $5.7 million and will be
paid in the fourth quarter of fiscal 1998.
(D) INITIAL PUBLIC OFFERING
On June 17, 1997, Polo completed the sale of 11,170,000 shares of its
Class A Common Stock at $26.00 per share in connection with the Offerings.
The net proceeds from the Offerings, after deducting underwriting discounts
and commissions and offering expenses, aggregated $268.8 million. The
proceeds from the Offerings were used as follows: (i) to repay borrowings
outstanding under the Company's New Credit Facility (as defined - see Note
4) in the amount of $163.5 million; (ii) to pay the Dividend and
Reorganization Notes in the amount of $43.0 million to Mr. Lauren and
related entities and the GS Group; and (iii) to repay subordinated notes
and interest thereon in the amount of $24.3 million to Mr. Lauren and the
GS Group. The remaining $38.0 million has been used for other general
corporate purposes.
(E) ACQUISITIONS AND JOINT VENTURE
Concurrent with the Reorganization, the Company acquired from an entity
under common control the trademarks and rights under a licensing agreement
associated with its U.S. fragrance business and the interests it did not
already own in another related entity that holds the trademarks related to
its international licensing business in exchange for shares of its Class B
Common Stock ("Trademark Acquisition"). The operating results of these
entities have been included in the results of operations of the Predecessor
Company for all periods presented based on their common ownership.
8
<PAGE>
Effective March 31, 1997, the Company entered into a joint venture
agreement with a nonaffiliated partner to acquire real property in New York
City. The Company and its partners expect to own and operate a concept
store in New York City and are discussing a restaurant and other possible
concepts at the location. Concurrent with the signing of the agreement, the
Company made an initial contribution for its 50% interest in the joint
venture in the amount of $5.0 million. The Company accounts for its 50%
interest in the joint venture under the equity method commencing from the
effective date of the agreement.
On March 21, 1997, the Company entered into purchase agreements with
its joint venture partners to acquire the remaining 50% interest in PRC,
effective April 3, 1997, for consideration aggregating $10.4 million in
cash and Class A Common Stock of Polo ("PRC Acquisition"). The PRC
Acquisition was completed simultaneously with the Offerings.
2 SIGNIFICANT ACCOUNTING POLICIES
(A) PRO FORMA ADJUSTMENTS (UNAUDITED)
The pro forma statement of income data for the nine months ended
December 27, 1997 and for the three months and nine months ended December
28, 1996 presents the effects on the historical financial statements of
certain transactions as if they had occurred at March 31, 1996. The pro
forma statement of income data reflects adjustments for: (i) income taxes
based upon pro forma pre-tax income as if the Company had been subject to
additional Federal, state and local income taxes, calculated using a pro
forma effective tax rate of 41.0% for the nine months ended December 27,
1997 and 42.0% for the three months and nine months ended December 28, 1996
(see Note 5); (ii) the reduction of interest expense resulting from the
application of the net proceeds from the Offerings to outstanding
indebtedness; and (iii) the PRC Acquisition, including the consolidation of
PRC's operations, the amortization of goodwill over 25 years associated
with the acquisition and the elimination of the Company's equity in net
loss of PRC for the three months and nine months ended December 28, 1996.
(B) NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per share has been computed by dividing pro forma
net income by the weighted average number of shares outstanding during the
period, assuming the Offerings had been completed on March 31, 1996. For
comparison purposes only, the weighted average number of shares outstanding
immediately following the completion of the Offerings were considered to be
outstanding during the nine months ended December 27, 1997 and during the
three months and nine months ended December 28, 1996. The weighted average
number of shares outstanding during the three months ended December 27,
1997 represent the actual number of shares outstanding during such period.
Outstanding stock options are not included in the computation of diluted
net income per share because the options' exercise price was equal to the
average market price of the common shares during the three months ended
December 27, 1997.
(C) RECENTLY ISSUED PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. This Statement is effective for
the fiscal year ending March 28, 1998 as a
9
<PAGE>
result of the Company's adoption of the 1997 Long-Term Stock Incentive Plan
and the 1997 Stock Option Plan for Non-Employee Directors (see Note 6). The
Company has adopted only the disclosure provision of SFAS No. 123 and
accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The required disclosures will be
presented in the Company's Annual Report on Form 10-K for the fiscal year
ending March 28, 1998.
3 INVENTORIES
DECEMBER 27, MARCH 29,
1997 1997
Raw materials $ 23,450 $ 32,781
Work-in-process 11,058 5,788
Finished goods 245,534 183,578
------- -------
$280,042 $222,147
-------- --------
Merchandise inventories of $112,497 and $93,874 at December 27, 1997 and
March 29, 1997, respectively, were valued utilizing the retail method and
are included in finished goods.
4 FINANCING AGREEMENTS
On June 9, 1997, the Company entered into a new financing arrangement
(the "New Credit Facility") providing for a $375.0 million revolving line
of credit available for the issuance of letters of credit, acceptances or
direct borrowings. Upon the closing of the Offerings, the amount available
under the revolving line of credit was reduced to $225.0 million. The New
Credit Facility matures on December 31, 2002. Borrowings under the New
Credit Facility were used to refinance the Polo Partnership credit facility
of $104.5 million and to repay in full $56.7 million of aggregate
borrowings outstanding under the Womenswear credit facility and the PRC
credit facility. Such borrowings were repaid from the net proceeds of the
Offerings (see Note 1 (d)). Borrowings under the New Credit Facility bear
interest, as determined by the Company, at either the lender's Base Rate
(as defined) or at the London Interbank Offered Rate plus an interest
margin. The New Credit Facility is collateralized by trade accounts
receivable and requires, among other things, the maintenance of restrictive
covenants including net worth and leverage ratios, and sets limitations on
indebtedness and incurrences of liens, and restrictions on sales of assets
and transactions with affiliates. Additionally, the agreement provides that
an event of default will occur if Mr. Lauren and related entities fail to
maintain a specified minimum percentage of the voting power of Polo's
Common Stock (as defined herein).
5 INCOME TAXES
The entities which comprise the Predecessor Company included
principally partnerships which were not subject to Federal or certain state
income taxes. Concurrent with the Reorganization and the termination of the
Company's partnership status, the Company became fully subject to such
taxes. As a result and in accordance with the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES, the Company recorded a deferred tax asset and
a
10
<PAGE>
corresponding tax benefit in the amount of $32.1 million in its
consolidated financial statements during the first quarter of fiscal 1998.
The deferred tax asset recorded is in addition to $3.0 million of Federal,
state and local deferred tax assets previously recorded by the Company. The
deferred income taxes reflect the net tax effect of temporary differences,
primarily uniform inventory capitalization, depreciation, allowance for
doubtful accounts and other accruals, between the carrying amounts of
assets and liabilities for financial reporting and the amounts used for
income tax purposes.
6 STOCK INCENTIVE PROGRAM
In connection with the Offerings, the Board of Directors of Polo
granted options to purchase an aggregate of 4,366,300 shares of Polo's
Class A Common Stock to certain employees of the Company under the 1997
Long-Term Stock Incentive Plan adopted on June 9, 1997. At December 27,
1997, the Company had an additional 5,888,615 options reserved for issuance
under this plan. The options vest in equal installments over three years
for officers and other executives of the Company and over two years for all
remaining employees. The options granted in connection with the Offerings
have an exercise price of $26.00 per share (equal to the price of the
Offerings). The options expire 10 years after the date of grant.
Additionally, on June 9, 1997, the Company adopted the 1997 Stock
Option Plan for Non-Employee Directors. During the nine months ended
December 27, 1997, the Board of Directors of Polo granted options to
purchase 22,500 shares of Polo's Class A Common Stock to non-employee
directors participating in the plan. The options vest in equal installments
over two years and have an exercise price equal to the market value of
Polo's stock on the date of grant. The options expire 10 years after the
date of grant. At December 27, 1997, the Company had 477,500 options
reserved for issuance under this plan.
7 COMMON STOCK
Polo's Class B Common Stock is owned by Mr. Lauren and related entities
and its Class C Common Stock is owned by the GS Group. Shares of Class B
Common Stock are convertible at any time into shares of Class A Common
Stock on a one-for-one basis and may not be transferred to anyone other
than the related entities of Mr. Lauren. Shares of Class C Common Stock are
convertible at any time into shares of Class A Common Stock on a
one-for-one basis and may not be transferred to anyone other than among
members of the GS Group or any successor of a member of the GS Group. The
holders of Class A Common Stock generally have rights identical to holders
of Class B Common Stock and Class C Common Stock, except that holders of
Class A Common Stock and Class C Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to ten votes per
share. Holders of all classes of Common Stock (as hereinafter defined)
entitled to vote will vote together as a single class on all matters
presented to the stockholders for their vote or approval except for the
election and the removal of directors and as otherwise required by
applicable law. Class A Common Stock, Class B Common Stock and Class C
Common Stock are collectively referred to herein as "Common Stock."
11
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POLO RALPH LAUREN CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO WHICH
ARE INCLUDED HEREIN. THE COMPANY UTILIZES A 52-53 WEEK FISCAL YEAR ENDING ON THE
SATURDAY NEAREST MARCH 31. ACCORDINGLY, FISCAL YEARS 1997 AND 1998 END ON MARCH
29, 1997 AND MARCH 28, 1998, RESPECTIVELY. DUE TO THE COLLABORATIVE AND ONGOING
NATURE OF THE COMPANY'S RELATIONSHIPS WITH ITS LICENSEES, SUCH LICENSEES ARE
REFERRED TO HEREIN AS "LICENSING PARTNERS" AND THE RELATIONSHIPS BETWEEN THE
COMPANY AND SUCH LICENSEES ARE REFERRED TO HEREIN AS "LICENSING ALLIANCES."
NOTWITHSTANDING THESE REFERENCES, HOWEVER, THE LEGAL RELATIONSHIP BETWEEN THE
COMPANY AND ITS LICENSEES IS ONE OF LICENSOR AND LICENSEE, AND NOT ONE OF
PARTNERSHIP.
CERTAIN STATEMENTS CONTAINED IN THIS REPORT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE "REFORM ACT"). SEE PART II. OTHER INFORMATION. ITEM 5. -"STATEMENT
REGARDING FORWARD-LOOKING DISCLOSURE."
OVERVIEW
The Company began operations in 1968 as a designer and marketer of premium
quality men's clothing and sportswear. Since inception, the Company, through
internal operations and in conjunction with its licensing partners, has grown
through increased sales of existing product lines, the introduction of new
brands and products, expansion into international markets and development of its
retail operations. The Company's net revenues are generated from its four
integrated operations: wholesale, Home Collection, direct retail and licensing
alliances. Licensing revenue includes royalties received from Home Collection
licensing partners.
Prior to the Reorganization, the Company's operations were conducted
predominantly through a partnership structure. Accordingly, the earnings of the
Company (other than earnings of certain retail operations) were included in the
taxable income of the Company's partners for Federal and certain state income
tax purposes, and the Company has generally not been subject to income tax on
such earnings, other than certain state and local franchise and similar taxes.
In connection with the Reorganization on June 9, 1997, the Company became fully
subject to such taxes. As a result, the Company recorded a deferred tax asset
and a corresponding tax benefit in the amount of $32.1 million in its
consolidated financial statements during the first quarter of fiscal 1998 in
accordance with the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The
Company's pro forma effective tax rate, excluding the non-recurring tax benefit
discussed above, for fiscal 1997 and fiscal 1998 was 42% and 41%, respectively.
See Part II. Other Information. Item 5. - "Statement Regarding Forward-Looking
Disclosure." The effect of taxes in Results of Operations is not discussed below
because the historic taxation of the operations of the Company is not meaningful
with respect to periods following the Reorganization.
12
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PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS
ENDED DECEMBER 28, 1996 (UNAUDITED)
The following tables set forth for the three month and nine month periods
ended December 28, 1996: (i) actual combined statement of income; (ii) pro forma
adjustments to reflect the PRC Acquisition, the Offerings and the Reorganization
as if they had occurred on March 31, 1996; and (iii) pro forma combined
statement of income.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 28, 1996
(IN THOUSANDS)
(UNAUDITED)
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
Net sales $ 268,634 $ 25,580 (1) $ 294,214
Licensing revenue 37,825 37,825
--------- ---------
Net revenues 306,459 332,039
Cost of goods sold 168,605 12,603 (1) 181,208
--------- ---------
Gross profit 137,854 150,831
Selling, general and
administrative expenses 102,882 13,252 (1)
125 (1) 116,259
---------
Income from operations 34,972 34,572
Interest expense (income) 2,882 (3,357) (1)(2) (475)
Equity in net loss of affiliate 52 (52) (1) --
--------- ---------
Income before income taxes 32,038 35,047
Provision for income taxes 7,253 7,471 (3) 14,724
--------- ---------
Net income $ 24,785 $ 20,323
========= =========
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PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 28, 1996
(IN THOUSANDS)
(UNAUDITED)
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
Net sales $ 764,374 $ 63,380 (1) $ 827,754
Licensing revenue 98,132 98,132
--------- ---------
Net revenues 862,506 925,886
Cost of goods sold 473,629 26,901 (1) 500,530
--------- ---------
Gross profit 388,877 425,356
Selling, general and
administrative expenses 274,450 38,290 (1)
559 (1) 313,299
--------- ---------
Income from operations 114,427 112,057
Interest expense (income) 10,725 (11,754)(1)(2) (1,029)
Equity in net loss of affiliate 1,654 (1,654)(1) --
--------- ---------
Income before income taxes 102,048 113,086
Provision for income taxes 20,688 26,808 (3) 47,496
--------- ---------
Net income $ 81,360 $ 65,590
========= =========
(1) Effective April 3, 1997, the Company acquired the remaining 50%
interest in PRC. The adjustments above reflect the PRC Acquisition
which is accounted for under the purchase method. As a result of
this transaction, the Company's combined statement of income has
been adjusted to reflect the consolidation of PRC's operations
from March 31, 1996, the amortization of goodwill over 25 years
and the elimination of the Company's equity in net loss of PRC.
(2) Adjustment to reduce interest expense, assuming the application of
the proceeds from the Offerings were used to repay outstanding
indebtedness of the Company as of March 31, 1996.
(3) Adjustment to reflect income taxes based upon pro forma pre-tax
income as if the Company had been subject to additional Federal,
state and local income taxes, calculated using a pro forma
effective tax rate of 42%.
14
<PAGE>
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations is
presented on a pro forma basis, assuming the PRC Acquisition had occurred as of
March 31, 1996. Additionally, as a result of the Offerings and the use of
proceeds thereon to reduce outstanding indebtedness of the Company, interest
expense incurred on a historical basis is not comparable to the prior period.
Therefore, interest expense is not discussed below. The table below sets forth
the percentage relationship to net revenues of certain items in the Company's
statements of income for the three months and nine months ended December 27,
1997 (historical) and December 28, 1996 (pro forma):
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
DEC. 27, 1997 DEC. 28, 1996
THREE NINE THREE NINE
MONTHS MONTHS MONTHS MONTHS
<S> <C> <C> <C> <C>
Net sales.......................................... 89.0% 88.7% 88.6% 89.4%
Licensing revenue.................................. 11.0 11.3 11.4 10.6
---- ---- ---- ----
Net revenues....................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Gross profit....................................... 47.2 48.8 45.4 45.9
Selling, general and administrative expenses....... 35.1 35.0 35.0 33.8
----- ----- ----- ----
Income from operations............................. 12.1% 13.8% 10.4% 12.1%
===== ==== ==== ====
</TABLE>
THREE MONTHS ENDED DECEMBER 27, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 28,
1996
NET SALES. Net sales increased 22.8% to $361.2 million in the three months
ended December 27, 1997 from $294.2 million in the three months ended December
28, 1996. Wholesale net sales increased 29.3% to $185.1 million in the three
months ended December 27, 1997 from $143.1 million in the corresponding period
of fiscal 1997. Wholesale growth primarily reflects increased menswear sales
resulting from improved sales in existing brands, a shift in the sales mix to
higher priced wholesale products, growth in the Company's basic stock
replenishment program and sales from the Company's third party wholesale trading
business which began operations in the fourth quarter of fiscal 1997. Wholesale
growth also reflects increased womenswear sales due to the introduction of Polo
Sport in the fourth quarter of fiscal 1997. Retail sales increased 16.6% to
$176.1 million in the three months ended December 27, 1997 from $151.1 million
in the corresponding period in fiscal 1997. Of this increase, $19.4 million is
attributable to the opening of two new Polo stores and nine new outlet stores
(net of one store closing) in fiscal 1998 and the benefit of a full three months
of operations for three new Polo stores and ten new outlet stores opened during
fiscal 1997. Comparable store sales for the three months ended December 27, 1997
increased by 3.8% or $5.6 million. Comparable store sales represent net sales of
stores open in both reporting periods for the full portion of such periods. At
December 27, 1997, the Company operated 29 Polo stores and 74 outlet stores.
15
<PAGE>
LICENSING REVENUE. Licensing revenue increased 17.5% to $44.5 million in
the three months ended December 27, 1997 from $37.8 million in the corresponding
period of fiscal 1997. This increase reflects the benefit of a full three months
of licensing revenue in the three months ended December 27, 1997 from the launch
of the Lauren women's line in fiscal 1997. Additionally, licensing revenue
improved due to an overall increase in sales of existing licensed products,
particularly Chaps and Home Collection, due to the introduction of new product
categories.
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
47.2% in the three months ended December 27, 1997 from 45.4% in the
corresponding period of fiscal 1997. This increase was primarily attributable to
improvements in wholesale and retail gross margins. Wholesale gross margins
increased significantly in the three months ended December 27, 1997 over the
comparable period in fiscal 1997 as a direct result of increased fulfillment of
customer orders and improved supply chain management. Retail gross margins also
increased significantly in the three months ended December 27, 1997 as compared
to the corresponding period in fiscal 1997 primarily due to the opening of five
new Polo stores during fiscal 1997 and fiscal 1998 and an improved initial
markup.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased to $142.4 million or 35.1% of net
revenues in the three months ended December 27, 1997 from $116.3 million or
35.0% of net revenues in the corresponding period of fiscal 1997. This increase
as a percentage of net revenues was primarily attributable to increased
advertising, marketing and public relations expenditures to support the
Company's brands and increased depreciation expense associated with the
Company's shop-within-shops development program.
NINE MONTHS ENDED DECEMBER 27, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 28,
1996
NET SALES. Net sales increased 19.5% to $989.3 million in the nine months
ended December 27, 1997 from $827.8 million in the nine months ended December
28, 1996. Wholesale net sales increased 21.8% to $520.5 million in the nine
months ended December 27, 1997 from $427.4 million in the corresponding period
of fiscal 1997. Wholesale growth primarily reflects increased menswear sales
resulting from growth in the Company's basic stock replenishment program,
improved sales in existing brands, a shift in the sales mix to higher priced
wholesale products and sales from the Company's third party wholesale trading
business which began operations in the fourth quarter of fiscal 1997. Wholesale
growth also reflects increased womenswear sales due to the introduction of Polo
Sport in the fourth quarter of fiscal 1997. Retail sales increased 17.1% to
$468.8 million in the nine months ended December 27, 1997 from $400.4 million in
the corresponding period in fiscal 1997. Of this increase, $50.9 million is
attributable to the opening of two new Polo stores and nine new outlet stores
(net of one store closing) in fiscal 1998 and the benefit of a full nine months
of operations for three new Polo stores and ten new outlet stores opened during
fiscal 1997. Comparable store sales for the nine months ended December 27, 1997
increased by 4.4% or $17.5 million.
LICENSING REVENUE. Licensing revenue increased 27.9% to $125.5 million in
the nine months ended December 27, 1997 from $98.1 million in the corresponding
period of fiscal 1997. This increase reflects the benefit of a full nine months
of licensing revenue in the nine months ended December 27, 1997 from the launch
of the Lauren women's line in the second quarter of fiscal 1997. Additionally,
licensing revenue improved due to an overall increase in sales of existing
licensed products, particularly Chaps and Home Collection, due to the
introduction of new product categories.
16
<PAGE>
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
48.8% in the nine months ended December 27, 1997 from 45.9% in the corresponding
period of fiscal 1997. This increase was attributable to improvements in each of
the Company's integrated operations. Wholesale gross margins increased
significantly in the nine months ended December 27, 1997 over the comparable
period in fiscal 1997 as a direct result of increased fulfillment of customer
orders, improved supply chain management and a planned reduction in off-price
sales. Retail gross margins increased slightly in the nine months ended December
27, 1997 as compared to the corresponding period in fiscal 1997 primarily due to
the opening of five new Polo stores in fiscal 1997 and fiscal 1998 and an
improved initial markup. Licensing revenue, which has no associated cost of
goods sold, increased as a percentage of net revenues to 11.3% in the nine
months ended December 27, 1997 from 10.6% in the corresponding period in fiscal
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased to $390.2 million or 35.0% of net
revenues in the nine months ended December 27, 1997 from $313.3 million or 33.8%
of net revenues in the corresponding period of fiscal 1997. This increase as a
percentage of net revenues was attributable to a one time charge under terms of
a long-term contract with a former executive, increased advertising, marketing
and public relations expenditures to support the Company's brands and increased
depreciation expense associated with the Company's shop-within-shops development
program. Excluding the one-time charge, SG&A expenses as a percentage of net
revenues would have been 34.7% in the nine months ended December 27, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity historically have been cash flows
from operations, credit facilities and, prior to the Reorganization, partners'
financing. The Company's capital requirements primarily result from working
capital needs, investing activities including construction and renovation of
shop-within-shops, retail expansion and other corporate activities.
Net cash provided by operating activities decreased to $128.8 million
during the nine months ended December 27, 1997 from $157.6 million during the
comparable period in fiscal 1997. This decrease is primarily a result of
increases in inventory levels during fiscal 1998 due to the timing of wholesale
shipments and the overall growth of the business and a planned reduction in
wholesale inventory levels during the comparable period in fiscal 1997 offset by
improved operating results. Net cash used in investing activities increased to
$55.3 million during the nine months ended December 27, 1997 from $26.4 million
during the comparable period in fiscal 1997. This increase principally reflects
an increase in capital expenditures, the use of $8.6 million in cash to acquire
the operations of PRC and investments in joint ventures with nonaffiliated
partners totaling $5.9 million during the nine months ended December 27, 1997.
Net cash provided by financing activities increased to $13.4 million during the
nine months ended December 27, 1997 from net cash used in financing activities
of $125.9 million during the comparable period in fiscal 1997. This improvement
primarily reflects the net proceeds received from the Offerings, offset by the
application of the net proceeds to repay outstanding indebtedness, an increase
in scheduled debt repayments and an increase in partner distributions.
As a result of the Offerings, the Company's cash flow needs reflect the
elimination of ongoing distributions to the partners. Partially offsetting these
changes will be the application of funds for the payment of additional Federal,
state and local income taxes.
17
<PAGE>
Simultaneous with the closing of the Reorganization, the Company entered
into the New Credit Facility and borrowed funds to refinance the amounts
outstanding under the Polo Partnership's credit facility of $104.5 million and
to repay in full $56.7 million of aggregate borrowings outstanding under the
Womenswear credit facility and the PRC credit facility, thereby terminating such
credit facilities. The New Credit Facility consists of a $375.0 million
revolving line of credit available for the issuance of letters of credit,
acceptances and direct borrowings and matures on December 31, 2002. Upon
completion of the Offerings, the amount available under the revolving line of
credit was reduced to $225.0 million. Borrowings under the New Credit Facility
bear interest, as determined by the Company, at either the lender's Base Rate
(as defined) or at the London Interbank Offered Rate plus an interest margin.
The agreement contains customary representations, warranties, covenants and
events of default for bank financings for borrowers similar to the Company,
including covenants regarding maintenance of net worth and leverage ratios,
limitations on indebtedness and incurrences of liens, and restrictions on sales
of assets and transactions with affiliates. Additionally, the agreement provides
that an event of default will occur if Mr. Lauren and related entities fail to
maintain a specified minimum percentage of the voting power of Polo's Common
Stock. As of December 27, 1997, the Company had no direct borrowings and $27.2
million in outstanding letters of credit under the New Credit Facility.
Capital expenditures were $39.6 million and $24.2 million in the nine
months ended December 27, 1997 and December 28, 1996, respectively. The increase
in capital expenditures represents primarily expenditures associated with the
Company's shop-within-shops development program which includes new shops,
renovations and expansions as well as expenditures incurred in connection with
the expansion of the Company's retail operations. The Company plans to invest
approximately $150.0 million over fiscal years 1998 and 1999, for its retail
stores including flagship stores, the shop- within-shops development program and
other capital projects. See Part II. Other Information. Item 5. - "Statement
Regarding Forward-Looking Disclosure."
On June 17, 1997, the Company completed the sale of 11,170,000 shares of
its Class A Common Stock at $26.00 per share in its Offerings. The net proceeds
from the Offerings, after deducting underwriting discounts and commissions and
offering expenses, aggregated $268.8 million. The net proceeds from the
Offerings increased liquidity of the Company by reducing indebtedness as
follows: (i) to repay borrowings outstanding under the Company's New Credit
Facility in the amount of $163.5 million; (ii) to pay the Dividend and
Reorganization Notes in the amount of $43.0 million to Mr. Lauren and related
entities and the GS Group; and (iii) to repay subordinated notes and interest
thereon in the amount of $24.3 million to Mr. Lauren and the GS Group. The
remaining $38.0 million has been used for other general corporate purposes.
Management believes that cash remaining from the Offerings, cash from ongoing
operations and funds available under the New Credit Facility will be sufficient
to satisfy the Company's current level of operations and capital requirements
for the next 12 months. See Part II. Other Information. Item 5. - "Statement
Regarding Forward-Looking Disclosure."
18
<PAGE>
SEASONALITY OF BUSINESS
The Company's business is affected by seasonal trends, with higher levels
of wholesale sales in its second and fourth quarters and higher retail sales in
its second and third quarters. These trends result primarily from the timing of
seasonal wholesale shipments to retail customers and key vacation travel and
holiday shopping periods in the retail segment. As a result of the PRC
Acquisition and growth in the Company's retail operations and licensing revenue,
historical quarterly operating trends and working capital requirements may not
accurately reflect future performances. In addition, fluctuations in sales and
operating income in any fiscal quarter may be affected by the timing of seasonal
wholesale shipments and other events affecting retail.
EXCHANGE RATES
Inventory purchases from contract manufacturers in the Far East are
primarily denominated in United States dollars; however, purchase prices for the
Company's products may be affected by fluctuations in the exchange rate between
the United States dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods sold in the
future. During the last two years, exchange rate fluctuations have not had a
material impact on the Company's inventory cost. Additionally, certain
international licensing revenue could be materially affected by currency
fluctuations. From time to time, the Company hedges certain exposures to foreign
currency exchange rate changes arising in the ordinary course of business.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
This Statement establishes standards for reporting of comprehensive income and
its components (revenues, expenses, gains and losses) in the financial
statements. SFAS No. 130 requires an enterprise to: (i) reconcile net income to
comprehensive income; (ii) classify items of other comprehensive income (e.g.,
foreign currency translation adjustments, unearned compensation, etc.) by their
nature in a financial statement; and (iii) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position. SFAS
No.130 is effective for the Company's fiscal year ending March 27, 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This Statement establishes standards for
reporting selected financial data and descriptive information about an
enterprises' reportable operating segments (as defined). This Statement also
requires the reconciliation of total segment information presented to the
corresponding amounts in the general purpose financial statements. Additionally,
SFAS No. 131 establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is effective for
the Company's fiscal year ending March 27, 1999. The Company has not yet
determined what additional disclosures, if any, may be required in connection
with adopting this Statement.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
office constitute "forward-looking statements" within the meaning of the Reform
Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
risks associated with changes in the competitive marketplace, including the
introduction of new products or pricing changes by the Company's competitors;
changes in global economic conditions; risks associated with the Company's
dependence on sales to a limited number of large department store customers and
risks related to extending credit to customers; risked associated with the
Company's dependence on its licensing partners for a substantial portion of its
net income and risks associated with a lack of operational and financial control
over licensed businesses; risks associated with consolidations, restructurings
and other ownership changes in the retail industry; uncertainties relating to
the Company's ability to implement its growth strategy; risks associated with
the possible adverse impact of the Company's unaffiliated manufacturers
inability to manufacture in a timely manner, to meet quality standards or to use
acceptable labor practices; risks associated with changes in social, political,
economic and other conditions affecting foreign operations and sourcing; and,
the possible adverse impact of changes in import restrictions. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits--
27.1 Financial Data Schedule
(b) Reports on Form 8-K--
No reports on Form 8-K were filed by the Company during the quarter
ended December 27, 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLO RALPH LAUREN CORPORATION
Date: February 6, 1998
By: /s/ Nancy A. Platoni Poli
-----------------------------------------------
Nancy A. Platoni Poli
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037038
<NAME> POLO RALPH LAUREN
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1997
<PERIOD-END> DEC-27-1997
<CASH> 116,504
<SECURITIES> 0
<RECEIVABLES> 126,263
<ALLOWANCES> 11,144
<INVENTORY> 280,042
<CURRENT-ASSETS> 543,961
<PP&E> 239,249
<DEPRECIATION> 107,322
<TOTAL-ASSETS> 773,257
<CURRENT-LIABILITIES> 195,223
<BONDS> 0
0
0
<COMMON> 1,003
<OTHER-SE> 554,483
<TOTAL-LIABILITY-AND-EQUITY> 773,257
<SALES> 989,294
<TOTAL-REVENUES> 1,114,762
<CGS> 570,680
<TOTAL-COSTS> 570,680
<OTHER-EXPENSES> 390,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,056
<INCOME-PRETAX> 151,818
<INCOME-TAX> 32,936
<INCOME-CONTINUING> 118,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,882
<EPS-PRIMARY> 0.91 <F1>
<EPS-DILUTED> 0.91
<FN>
EPS is presented on a pro forma basis. See Notes 2.a. and 2.b. to the
consolidated financial statements for the nine months ended December 27, 1997 on
Form 10-Q for basis of presentation.
</FN>
</TABLE>
