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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 October 2, 1999
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 of (I.R.S. Employer
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 November 11, 1999, 33,023,776 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.
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<PAGE>
POLO RALPH LAUREN CORPORATION
INDEX TO FORM 10-Q
PART 1. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of October 2, 1999 (Unaudited)
and April 3, 1999.............................................. 3
Consolidated Statements of Income for the three and six months
ended October 2, 1999 and September 26, 1998 (Unaudited)....... 4
Consolidated Statements of Cash Flows for the six months ended
October 2, 1999 and September 26, 1998 (Unaudited)............. 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 1. Legal Proceedings................................................. 20
Item 4. Submission of Matters to a Vote of Security-Holders............... 20
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 22
2
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
October 2, April 3,
1999 1999
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 42,353 $ 44,458
Accounts receivable, net of allowances of $16,079 and
$13,495 respectively 212,331 157,203
Inventories 420,769 376,860
Deferred tax assets 51,939 51,939
Prepaid expenses and other 33,794 48,994
----------- -----------
Total current assets 761,186 679,454
Property and equipment, net 326,070 261,799
Deferred tax assets 12,737 12,493
Restricted cash - 44,217
Goodwill, net 76,014 27,464
Other assets, net 88,315 79,157
----------- -----------
$ 1,264,322 $ 1,104,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $ 154,800 $ 115,500
Accounts payable 107,196 88,898
Income taxes payable 18,943 17,432
Accrued expenses and other 106,623 126,142
----------- -----------
Total current liabilities 387,562 347,972
Long-term debt 80,000 44,217
Other noncurrent liabilities 71,794 53,490
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,381,653 shares issued 344 344
Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 433
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 227
Additional paid-in-capital 450,030 450,030
Retained earnings 306,747 227,288
Treasury Stock, Class A, at cost (1,319,795 and 603,864 shares) (30,149) (16,084)
Unearned compensation (2,666) (3,333)
----------- -----------
Total stockholders' equity 724,966 658,905
----------- -----------
$ 1,264,322 $ 1,104,584
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
October 2, September 26, October 2, September 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 470,509 $ 409,456 $ 854,981 $ 720,611
Licensing revenue 71,328 61,503 119,204 104,787
Other income 2,048 3,847 4,121 8,185
------------ ------------ ------------ ------------
Net revenues 543,885 474,806 978,306 833,583
Cost of goods sold 274,470 241,095 491,916 417,256
------------ ------------ ------------ ------------
Gross profit 269,415 233,711 486,390 416,327
Selling, general and administrative expenses 172,311 148,783 339,410 293,747
------------ ------------ ------------ ------------
Income from operations 97,104 84,928 146,980 122,580
Interest (expense) income (3,687) (676) (6,175) 4
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect
of change in accounting principle 93,417 84,252 140,805 122,584
Provision for income taxes 38,068 34,333 57,379 49,954
------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 55,349 49,919 83,426 72,630
Cumulative effect of change in accounting
principle, net of taxes - - 3,967 -
------------ ------------ ------------ ------------
Net income $ 55,349 $ 49,919 $ 79,459 $ 72,630
============ ============ ============ ============
Income per share before cumulative effect of change in
accounting principle - Basic and Diluted $ 0.56 $ 0.50 $ 0.84 $ 0.73
Cumulative effect of change in accounting
principle, net of taxes, per share - Basic and Diluted - - 0.04 -
------------ ------------ ------------ ------------
Net income per share - Basic and Diluted $ 0.56 $ 0.50 $ 0.80 $ 0.73
============ ============ ============ ============
Weighted average common shares outstanding - Basic 99,117,576 99,826,960 99,328,755 100,011,047
============ ============ ============ ============
Weighted average common shares outstanding - Diluted 99,250,565 99,878,242 99,510,226 100,151,156
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
October 2, September 26,
1999 1998
---------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 79,459 $ 72,630
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 32,288 22,142
Cumulative effect of change in accounting principle 3,967 -
Provision for losses on accounts receivable 1,410 435
Other 256 707
Changes in assets and liabilities, net of acquisition
Accounts receivable (54,879) (21,717)
Inventories (20,721) (97,696)
Prepaid expenses and other 11,560 (5,884)
Other assets, net (3,325) (7,923)
Accounts payable 5,234 30,438
Income taxes payable and accrued expenses and other (12,832) 12,148
-------- --------
Net cash provided by operating activities 42,417 5,280
-------- --------
Cash flows from investing activities
Purchases of property and equipment, net (58,682) (72,407)
Acquisition, net of cash acquired (50,824) (6,981)
Proceeds from release of restricted cash held for Club Monaco acquisition 44,217 -
Cash surrender value - officers' life insurance, net (2,893) (1,409)
-------- --------
Net cash used in investing activities (68,182) (80,797)
-------- --------
Cash flows from financing activities
Proceeds from issuance of common stock, net - 113
Repurchases of common stock (14,065) (16,084)
Proceeds from short-term borrowings, net 39,300 79,600
Repayments of long-term debt (37,358) (337)
Proceeds from long-term debt 35,783 -
-------- --------
Net cash provided by financing activities 23,660 63,292
-------- --------
Net decrease in cash and cash equivalents (2,105) (12,225)
Cash and cash equivalents at beginning of period 44,458 58,755
-------- --------
Cash and cash equivalents at end of period $ 42,353 $ 46,530
======== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
October 2, September 26,
1999 1998
-------- -------------
<S> <C> <C>
Supplemental cash flow information
Cash paid for interest $ 6,651 $ 1
======== =======
Cash paid for income taxes $ 51,978 $34,583
======== =======
Supplemental schedule of non-cash investing and financing activities
Fair value of assets acquired, excluding cash $110,617 $14,868
Less:
Cash paid 51,481 6,981
Promissory notes issued - 5,000
-------- -------
Liabilities assumed $ 59,136 $ 2,887
======== =======
Fair market value of restricted stock grants $ 667
========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for October 2, 1999 and September 26, 1998 is unaudited)
1 Basis of Presentation
(a) Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements include
the results of operations of Polo Ralph Lauren Corporation and
subsidiaries (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated.
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 April 3, 1999 audited consolidated
financial statements of the Company. 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 three months and six months ended October
2, 1999 and September 26, 1998 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 1999 audited consolidated financial statements.
(b) Acquisition
On April 6, 1999, PRL Acquisition Corp., a Nova Scotia unlimited
liability corporation and a wholly owned subsidiary of the Company,
acquired, through a tender offer, 98.83% of the outstanding shares of Club
Monaco Inc. ("Club Monaco"), a corporation organized under the laws of the
Province of Ontario, Canada. On May 3, 1999, PRL Acquisition Corp.
acquired the remaining outstanding 1.17% shares pursuant to a statutory
compulsory acquisition. The total purchase price was approximately $51.0
million in cash based on the then current foreign exchange rates. The
Company used funds from its credit facility to finance this acquisition
and to repay in full assumed debt of Club Monaco of approximately $35.0
million. This acquisition has been accounted for as a purchase and the
Company has consolidated the operations of Club Monaco in the accompanying
financial statements from the effective date of the transaction. The
purchase price has been preliminarily allocated based upon fair values at
the date of acquisition, pending final determination of certain acquired
balances. This preliminary allocation resulted in an excess of purchase
price over the estimated fair value of net assets acquired of
approximately $51.0 million, which has been recorded as goodwill and is
being amortized on a straight-line basis over an estimated useful life of
40 years.
7
<PAGE>
2 Significant Accounting Policies
(a) Net income per share
Basic net income per share was calculated by dividing net income by
the weighted average number of shares outstanding during the period and
excluded any potential dilution. Diluted net income per share was
calculated similarly but included potential dilution from the exercise of
stock options and awards.
(b) Comprehensive Income
For the three months and six months ended October 2, 1999 and
September 26, 1998, comprehensive income was equal to net income.
(c) Accounting Changes
Effective April 4, 1999, the Company adopted the provisions of
Statement of Position No. 98-5 ("SOP 98-5"), Reporting on the Costs of
Start-up Activities. SOP 98-5 requires that costs of start-up activities,
including store pre-opening costs, be expensed as incurred. Prior to its
adoption of SOP 98-5, the Company's accounting policy was to capitalize
store pre-opening costs as prepaid expenses and amortize such costs over a
twelve-month period following store opening. As a result of adopting SOP
98-5, the Company recorded a charge of $4.0 million, after taxes, as the
cumulative effect of a change in accounting principle in the accompanying
financial statements.
Effective April 4, 1999, the Company changed its method of valuing
its retail inventories from the retail method to the lower of cost
(first-in, first-out) or market. The impact of this change was not
material and is included in selling, general and administrative expenses
in the accompanying financial statements.
(e) Recently Issued Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The accounting for changes
in the fair value of a derivative is dependent upon the intended use of
the derivative. SFAS No. 133 is effective for the Company's first quarter
of fiscal year ending March 30, 2002 and retroactive application is not
permitted. The Company has not yet determined whether the application of
SFAS No. 133 will have a material impact on the Company's financial
position or results of operations.
8
<PAGE>
3 Inventories
October 2, April 3,
1999 1999
Raw materials $ 17,226 $ 17,675
Work-in-process 8,246 8,545
Finished goods 395,297 350,640
-------- --------
$420,769 $376,860
======== ========
Merchandise inventories of $196.1 million at April 3, 1999 were
valued utilizing the retail method and are included in finished goods.
4. Restructuring Charge
During the fourth quarter of fiscal 1999, the Company formalized its
plans to streamline operations within its wholesale and retail operations
and reduce its overall cost structure ("Restructuring Plan"). The major
initiatives of the Restructuring Plan included the following: (1) an
evaluation of the Company's retail operations and site locations; (2) the
realignment and operational integration of the Company's wholesale
operating units; and (3) the realignment and consolidation of corporate
strategic business functions and internal processes.
In connection with the implementation of the Restructuring Plan, the
Company recorded a pre-tax restructuring charge of $58.6 million in its
fourth quarter of fiscal 1999. The major components of the restructuring
charge and the activity through October 2, 1999 were as follows:
<TABLE>
<CAPTION>
Lease and
Severance and Asset Contract
Termination Write Termination Other
Benefits Downs Costs Costs Total
<S> <C> <C> <C> <C> <C>
1999 provision .............. $15,277 $17,788 $ 24,665 $ 830 $ 58,560
1999 activity ............... ( 3,318) (17,788) (1,112) ( 105) (22,323)
------- ------ -------- ------- --------
Balance at April 3, 1999 .... 11,959 - 23,553 725 36,237
2000 activity ............... ( 3,252) - (13,054) ( 244) (16,550)
------- ------ -------- ------- --------
Balance at October 2, 1999 .. $ 8,707 $ - $ 10,499 $ 481 $ 19,687
======= ====== ======== ======= ========
</TABLE>
Total severance and termination benefits as a result of the
Restructuring Plan relate to approximately 280 employees, 215 of which
have been terminated through October 1999. Total cash outlays related to
the Restructuring Plan are expected to be approximately $39.5 million,
$16.1 million of which was paid in the six months ended October 2, 1999.
The Company expects to substantially complete the implementation of the
Restructuring Plan in fiscal 2000.
9
<PAGE>
5. Segment Reporting
The Company has three reportable business segments: wholesale,
retail and licensing. The Company's reportable segments are individual
business units that offer different products and services. They are
managed separately because each segment requires different strategic
initiatives, promotional campaigns, marketing and advertising, based upon
its own individual positioning in the market. Additionally, these segments
reflect the reporting basis used internally by senior management to
evaluate performance and the allocation of resources.
The Company's net revenues and income from operations for the three
months and six months ended October 2, 1999 and September 26, 1998 and
total assets as of October 2, 1999 and April 3, 1999 by segment were as
follows:
Three Months Ended
October 2, September 26,
1999 1998
Net revenues:
Wholesale $248,643 $237,698
Retail 223,914 175,605
Licensing 71,328 61,503
-------- --------
$543,885 $474,806
======== ========
Income from operations:
Wholesale $ 25,658 $ 26,842
Retail 21,647 16,300
Licensing 49,799 41,786
-------- --------
$ 97,104 $ 84,928
======== ========
Six Months Ended
October 2, September 26,
1999 1998
Net revenues:
Wholesale $445,294 $411,998
Retail 413,808 316,798
Licensing 119,204 104,787
-------- --------
$978,306 $833,583
======== ========
10
<PAGE>
Six Months Ended
October 2, September 26,
1999 1998
Income from operations:
Wholesale $ 37,439 $ 29,293
Retail 29,747 31,600
Licensing 73,098 61,687
---------- ----------
140,284 122,580
Add: Cumulative effect of change
in accounting principle before taxes 6,696 -
---------- ----------
$ 146,980 $ 122,580
========== ==========
October 2, April 3,
1999 1999
Segment assets:
Wholesale $ 403,826 $ 376,154
Retail 574,430 424,203
Licensing 80,873 73,389
Corporate 205,193 230,838
---------- ----------
$1,264,322 $1,104,584
========== ==========
A substantial portion of the Company's net revenues and income from
operations are derived from, and identifiable assets are located in, the
United States.
6 Subsequent Events
In September 1999, the Company reached an agreement in principle to
acquire the stock and certain assets of Poloco S.A. and certain affiliates
which hold licenses to sell men's and boy's Polo apparel, the men's and
women's Polo Jeans business and certain Polo accessories in Europe. The
purchase price will approximate $200.0 million, plus the assumption of
short-term debt outstanding at closing. The Company will fund this
acquisition and repayment of debt with the proceeds from the issuance of
e275.0 million Notes with a seven-year maturity and 6.125% coupon rate
(the "Eurobond Offering"). The net proceeds from the Eurobond Offering,
not including proceeds from the exercise by the underwriters of their
overallotment option, will approximate $280.0 million based on current
exchange rates. The Eurobond Offering is expected to be completed during
the Company's third fiscal quarter. The acquisition is expected to close
in January 2000 and will be accounted for as a purchase from the effective
date of the transaction.
11
<PAGE>
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. Fiscal years 2000 and 1999 end on April 1, 2000 and
April 3, 1999, 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. 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 three
integrated operations: wholesale, retail and licensing alliances. Licensing
revenue includes royalties received from home collection licensing partners.
12
<PAGE>
Results of Operations
The following discussion provides information and analysis of the
Company's results of operations for the three months and six months ended
October 2, 1999 compared to September 26, 1998. 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 six months ended October 2, 1999
and September 26, 1998:
Oct. 2, 1999 Sept. 26, 1998
Three Six Three Six
Months Months Months Months
Net sales ................................... 86.5% 87.4% 86.2% 86.4%
Licensing revenue ........................... 13.1 12.2 13.0 12.6
Other income ................................ 0.4 0.4 0.8 1.0
----- ----- ----- -----
Net revenues ................................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Gross profit ................................ 49.5 49.7 49.2 49.9
Selling, general and administrative expenses 31.7 34.7 31.3 35.2
----- ----- ----- -----
Income from operations ...................... 17.8 15.0 17.9 14.7
Interest (expense) income ................... (0.7) (0.6) (0.1) 0.0
----- ----- ----- -----
Income before income taxes and
change in accounting ...................... 17.1% 14.4% 17.8% 14.7%
===== ===== ===== =====
Three Months Ended October 2, 1999 Compared to Three Months Ended September 26,
1998
Net Sales. Net sales increased 14.9% to $470.5 million in the three months
ended October 2, 1999 from $409.5 million in the three months ended September
26, 1998. Wholesale net sales increased 5.4% to $246.6 million in the three
months ended October 2, 1999 from $233.9 million in the corresponding period of
fiscal 1999. Wholesale growth primarily reflects increased volume-driven sales
of existing Polo and Collection brand products and the timing of shipments to
retailers. These unit increases were partially offset by a decline in average
selling prices resulting from changes in product mix. Retail sales increased by
27.5% to $223.9 million in the three months ended October 2, 1999 from $175.6
million in the corresponding period in fiscal 1999. This increase is primarily
attributable to the $54.2 million benefit from new store openings in fiscal 2000
(three Polo full-price and six outlet stores, net of store closures) and fiscal
1999 (six Polo full-price and 30 outlet stores) and the benefit of three months
of operations for 70 Club Monaco stores acquired in the quarter ended July 3,
1999. Comparable store sales, which represent net sales of stores open in both
reporting periods for the full portion of such periods, decreased by 3.95%. At
October 2, 1999, the Company operated 36 Polo full-price stores, 105 outlet
stores and 68 Club Monaco stores.
13
<PAGE>
Licensing Revenue. Licensing revenue increased 16.0% to $71.3 million in
the three months ended October 2, 1999 from $61.5 million in the corresponding
period of fiscal 1999. This increase is primarily attributable to overall
general increases in sales of existing licensed products, particularly Lauren,
Polo Jeans and Home Collection.
Gross Profit. Gross profit as a percentage of net revenues increased to
49.5% in the three months ended October 2, 1999 from 49.2% in the corresponding
period of fiscal 1999. This increase was mainly attributable to an increase in
retail gross margins due to an improved initial mark-up and increased licensing
revenue which has no associated cost of goods sold. These improvements were
offset by lower wholesale gross margins as a result of higher off-price sales to
reduce inventory levels.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses as a percentage of net revenues increased to
31.7% in the three months ended October 2, 1999 from 31.3% of net revenues in
the corresponding period of fiscal 1999. This increase in SG&A expenses as a
percentage of net revenues was primarily due to the acquisition of Club Monaco
which was partially offset by expense leveraging achieved with the Company's
revenue growth.
Interest Expense. Interest expense increased to $3.7 million in the
quarter ended October 2, 1999 from $0.7 million in the comparable period in
fiscal 1999. This increase was primarily due to a higher level of borrowings
during the second quarter, primarily as a result of the acquisition of Club
Monaco.
Six Months Ended October 2, 1999 Compared to Six Months Ended September 26, 1998
Net Sales. Net sales increased 18.6% to $855.0 million in the six months
ended October 2, 1999 from $720.6 million in the six months ended September 26,
1998. Wholesale net sales increased 9.3% to $441.2 million in the six months
ended October 2, 1999 from $403.8 million in the corresponding period of fiscal
1999. Wholesale growth primarily reflects increased volume-driven sales of
existing Polo and Collection brand products and the timing of shipments to
retailers. These unit increases were partially offset by a decline in average
selling prices resulting from changes in product mix. Retail sales increased by
30.6% to $413.8 million in the six months ended October 2, 1999 from $316.8
million in the corresponding period in fiscal 1999. This increase is primarily
attributable to the $106.2 million benefit from new store openings in fiscal
2000 (three Polo full-price and six outlet stores, net of store closures) and
fiscal 1999 (six Polo full-price and 30 outlet stores) and the benefit of six
months of operations for 70 Club Monaco stores acquired in the quarter ended
July 3, 1999. Comparable store sales decreased by 3.2%.
Licensing Revenue. Licensing revenue increased 13.8% to $119.2 million in
the six months ended October 2, 1999 from $104.8 million in the corresponding
period of fiscal 1999. This increase is primarily attributable to overall
general increases in sales of existing licensed products, particularly Lauren,
Polo Jeans and Home Collection.
14
<PAGE>
Gross Profit. Gross profit as a percentage of net revenues decreased to
49.7% in the six months ended October 2, 1999 from 49.9% in the corresponding
period of fiscal 1999. This decrease was mainly attributable to lower wholesale
gross margins as a result of higher off-price sales to reduce inventory levels.
Selling, General and Administrative Expenses. SG&A expenses as a
percentage of net revenues decreased to 34.7% in the six months ended October 2,
1999 from 35.2% of net revenues in the corresponding period of fiscal 1999. This
improvement in SG&A expenses as a percentage of net revenues was primarily due
to expense leveraging achieved with the Company's revenue growth.
Interest Expense. Interest expense increased to $6.2 million in the six
months ended October 2, 1999 due to a higher level of borrowings during the
current period, primarily as a result of the acquisition of Club Monaco.
Liquidity and Capital Resources
The Company's capital requirements primarily derive from working capital
needs, construction and renovation of shop-within-shops, retail expansion and
other corporate activities. The Company's main sources of liquidity are cash
flows from operations and credit facilities.
Net cash provided by operating activities increased to $42.4 million in
the six months ended October 2, 1999 from $5.3 million in the comparable period
in fiscal 1999. This improvement was driven by favorable changes in inventories
as the Company implemented a strategic initiative to reduce inventory levels and
move excess inventories. This improvement was partially offset by unfavorable
changes in accounts receivable and liabilities due to timing (i.e., shipments,
vendor payments and customer remittances). Net cash used in investing activities
decreased to $68.2 million in the six months ended October 2, 1999 from $80.8
million in the comparable period in fiscal 1999. This decrease principally
reflects a decline in capital expenditures in the six months ended October 2,
1999. Net cash provided by financing activities decreased to $23.4 million in
the six months ended October 2, 1999 from $63.3 million in the comparable period
in fiscal 1999. This decrease primarily reflects a reduction in the utilization
of short-term borrowings under the Credit Facility (as defined) required for
working capital needs.
On June 9, 1997, the Company entered into a credit facility with a
syndicate of banks which provides for a $225.0 million revolving line of credit
available for the issuance of letters of credit, acceptances and direct
borrowings and matures on December 31, 2002 (the "Credit Facility"). Borrowings
under the Credit Facility bear interest, at the Company's option, at a Base Rate
equal to the higher of: (i) the Federal Funds Rate, as published by the Federal
Reserve Bank of New York, plus 1/2 of one percent; and (ii) the prime commercial
lending rate of The Chase Manhattan Bank in effect from time to time, or at the
Eurodollar Rate plus an interest margin.
On March 30, 1999, in connection with the Company's acquisition of Club
Monaco, the Company entered into a $100.0 million senior credit facility (the
"1999 Credit Facility") with a syndicate of banks consisting of a $20.0 million
revolving line of credit and an $80.0 million term
15
<PAGE>
loan (the "Term Loan"). The revolving line of credit is available for working
capital needs and general corporate purposes and matures on June 30, 2003. The
Term Loan was used to finance the acquisition of all of the outstanding common
stock of Club Monaco and to repay indebtedness of Club Monaco. The Term Loan is
also repayable on June 30, 2003. Borrowings under the 1999 Credit Facility bear
interest, at the Company's option, at a Base Rate equal to the higher of: (i)
the Federal Funds Rate, as published by the Federal Reserve Bank of New York,
plus 1/2 of one percent; and (ii) the prime commercial lending rate of The Chase
Manhattan Bank in effect from time to time, or at the Eurodollar Rate plus an
interest margin. In April 1999, the Company entered into interest rate swap
agreements with an aggregate notional amount of $100.0 million to convert the
variable interest rate on the 1999 Credit Facility to a fixed rate of 5.5%.
The Credit Facility and 1999 Credit Facility (collectively, the "Credit
Facilities") contain customary representations, warranties, covenants and events
of default, including covenants regarding maintenance of net worth and leverage
ratios, limitations on indebtedness, loans, investments and incurrences of
liens, and restrictions on sales of assets and transactions with affiliates.
Additionally, the Credit Facilities provide 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 the Company's common stock.
As of October 2, 1999, the Company had $154.8 million outstanding in
direct borrowings and $80.0 million outstanding under the Term Loan and was
contingently liable for $23.4 million in outstanding letters of credit under the
Credit Facilities. The weighted average interest rate on outstanding borrowings
under the Credit Facilities was 6.6% at October 2, 1999.
Capital expenditures were $58.7 million and $72.4 million in the six
months ended October 2, 1999 and September 26, 1998, respectively. Capital
expenditures primarily reflect costs associated with the following: (i) the
Company's expansion of its distribution facilities; (ii) the shop-within-shops
development program which includes new shops, renovations and expansions; (iii)
the expansion of the Company's retail concept and outlet stores; and (iv) its
information systems. The Company plans to invest approximately $130.0 million,
net of landlord incentives, over the current fiscal year for the aforementioned
projects and other capital projects. See Part II. Other Information. Item 5. -
"Statement Regarding Forward-Looking Disclosure."
In March 1998, the Board of Directors authorized the repurchase, subject
to market conditions, of up to $100.0 million of the Company's Class A Common
Stock. Share repurchases under this plan will be made from time to time in the
open market over a two-year period which commenced April 1, 1998. Shares
acquired under the repurchase program will be used for stock option programs and
for other corporate purposes. As of October 2, 1999, the Company had repurchased
1,319,795 shares of its Class A Common Stock at an aggregate cost of $30.1
million.
In September 1999, the Company reached an agreement in principle to
acquire the stock and certain assets of Poloco S.A. and certain affiliates which
hold licenses to sell men's and boy's Polo apparel, the men's and women's Polo
Jeans business and certain Polo accessories in Europe. The purchase price will
approximate $200.0 million, plus the assumption of short-term debt outstanding
at closing. The Company will fund this acquisition and repayment of debt with
the proceeds from
16
<PAGE>
the issuance of e275.0 million Notes with a seven-year maturity and 6.125%
coupon rate (the "Eurobond Offering"). The net proceeds from the Eurobond
Offering, not including proceeds from the exercise by the underwriters of their
overallotment option, will approximate $280.0 million based on current exchange
rates. The Eurobond Offering is expected to be completed during the Company's
third fiscal quarter. The acquisition is expected to close in January 2000.
Management believes that cash from ongoing operations and funds available
under the Credit Facilities and Eurobond Offering will be sufficient to satisfy
the Company's current level of operations, the Restructuring Plan, capital
requirements, stock repurchase program, the acquisition of Poloco S.A. and
certain affiliates and other corporate activities for the next 12 months.
Additionally, the Company does not currently intend to pay dividends on its
Common Stock in the next 12 months. See Part II. Other Information. Item 5. -
"Statement Regarding Forward-Looking Disclosure."
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 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 U.S. dollars; however, purchase prices for the
Company's products may be affected by fluctuations in the exchange rate between
the U.S. 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.
17
<PAGE>
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and measurement of those instruments at fair
value. The accounting for changes in the fair value of a derivative is dependent
upon the intended use of the derivative. SFAS No. 133 is effective for the
Company's first quarter of fiscal year ending March 30, 2002 and retroactive
application is not permitted. The Company has not yet determined whether the
application of SFAS No. 133 will have a material impact on the Company's
financial position or results of operations.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain of the
Company's computer programs have date-sensitive software which may recognize a
date using "00" as the year 1900 rather than the year 2000. This situation could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
In 1997, the Company, with the aid of outside consultants, initiated a
program to assess the impact of Year 2000 issues on its information technology
("IT") systems and its non-IT systems.
Through its assessment, the Company identified potential date deficiencies
in its IT systems, both hardware and software and in its non-IT systems
(including functions involving embedded chip technology), and has addressed
these deficiencies through upgrades, replacements and other remediation. The
Company has completed the remediation of its material IT systems. In connection
with other equipment with date sensitive operating controls such as distribution
center equipment, HVAC, employee time clocks, security and other similar
systems, the Company identified those items which required replacement or other
remediation and believes it has taken steps adequate to ensure such equipment is
Year 2000 compliant.
The Company has made inquiries of third parties with whom it has material
business relationships (such as customers, suppliers, licensees, transportation
carriers, utility and other general service providers) to determine whether they
will be able to resolve in a timely manner any Year 2000 issues that will
materially and adversely impact the Company. This process included the
solicitation of written responses to questionnaires, followed, in some cases, by
meetings with certain of such third parties. To date, virtually all of those
contacted have responded, none of whom have raised any Year 2000 issues which
the Company believes would have a material adverse effect on the Company.
18
<PAGE>
To date, the Company has incurred expenses of approximately $5.2 million
related to the assessment of its Year 2000 issues and development and
implementation of its remediation plan. The total remaining cost of the
Company's Year 2000 project is estimated at approximately $0.5 million and is
being funded through operating cash flows. Such costs do not include internal
management time and the deferral of other projects, the effects of which are not
expected to be material to the Company's results of operations or financial
condition. Of the total project cost, approximately $0.6 million is attributable
to the purchase of new software which will be capitalized. The remainder will be
expensed as incurred. The costs of the Year 2000 project and the successful
assessment and remediation of the Company's Year 2000 issues are based on
management's best estimates, which were derived by utilizing several assumptions
of future events including continued availability of certain resources, third
party modification plans and other factors. There can be no guarantee that these
estimates are correct or that they will be achieved, and actual results could
differ materially from those plans. See Part II. Other Information. Item 5. --
"Statement Regarding Forward-Looking Disclosure."
The Company believes that it is difficult to identify its most reasonable
worst case Year 2000 scenario. However, a reasonable worst case Year 2000
scenario would be a failure by a significant third party in the Company's supply
and distribution chain (including, without limitation, utility or other general
service provider, government authority or third party with whom it has a
material business relationship) to remediate its Year 2000 deficiencies that
continues for several days or more. Any such failure could impair the
manufacture and/or delivery of products, and/or the processing of orders, and
shipments. In addition, a failure by the Company to remediate any of its
internal inventory management systems would adversely affect its stock
allocation program, resulting in mistimed shipments and potential order
cancellations. These scenarios would likely have a material adverse effect on
the Company's results of operations, and, in particular, would result in the
loss of sales and revenue. The extent of lost revenue as a result of these
scenarios cannot be estimated at this time.
The Company has developed contingency plans to limit the effect of any
Year 2000 issues on its operations and results. As an example, the Company plans
to use where possible, alternate service providers. While the Company
anticipates continuity of its business activities, that continuity will be
dependent upon its ability, and the ability of third parties with whom the
Company relies on directly, or indirectly, to be Year 2000 compliant in a timely
fashion.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January 1999, two actions were filed in California naming as defendants
more than a dozen United States-based companies that source apparel garments
from Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based factories. The actions assert that the Saipan factories engage in
unlawful practices relating to the recruitment and employment of foreign workers
and that the apparel companies, by virtue of their alleged relationships with
the factories, have violated various Federal and state laws. One action, filed
in California Superior Court in San Francisco by a union and three public
interest groups, alleges unfair competition and false advertising and seeks
equitable relief, unspecified amounts for restitution and disgorgement of
profits, interest and an award of attorney's fees. The second, filed in Federal
Court for the Central District of California and recently transferred to the
United States District Court for the District of Hawaii, is brought on behalf of
a purported class consisting of the Saipan factory workers. It alleges claims
under the Federal civil RICO statute, Federal peonage and involuntary servitude
laws, the Alien Tort Claims Act, and state tort law, and seeks equitable relief
and unspecified damages, including treble and punitive damages, interest and an
award of attorney's fees. Although the Company was not named as a defendant in
these suits, the Company sources products in Saipan, and counsel for the
plaintiffs in these actions informed the Company that it is a potential
defendant in these or similar actions. The Company and counsel have recently
agreed to settle any claims for nonmaterial consideration. The final agreement,
when completed and filed, will be subject to court approval. The Company has
denied any liability and is not at this preliminary stage in a position to
evaluate the likelihood of a favorable or unfavorable outcome if the settlement
is not approved and it were named in any such suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
(a) The Annual Meeting of Stockholders of the Company was held on August 19,
1999.
(b) The following directors were elected at the Annual Meeting of Stockholders
to serve until the 2000 Annual Meeting and until their respective
successors are duly elected and qualified:
Class A Director:
-----------------
Allen Questrom
Class B Directors:
------------------
Ralph Lauren
Michael J. Newman*
Frank A. Bennack, Jr.
Joel L. Fleishman
Terry S. Semel
20
<PAGE>
Class C Director:
-----------------
Richard A. Friedman
(c)(i) Each person elected as a director received the number of votes (shares
of Class B Common Stock are entitled to ten votes per share) indicated
beside his name:
Number of Number of
Votes For Votes Withheld
--------- --------------
Class A Director:
-----------------
Allen Questrom 30,290,852 119,662
Class B Directors:
------------------
Ralph Lauren 432,800,210 -0-
Michael J. Newman* 432,800,210 -0-
Frank A. Bennack, Jr. 432,800,210 -0-
Joel L. Fleishman 432,800,210 -0-
Terry S. Semel 432,800,210 -0-
Class C Director:
-----------------
Richard A. Friedman 22,720,979 -0-
* Mr. Newman resigned as Vice Chairman and Director effective
November 1, 1999
(ii) 485,844,428 votes were cast for and 59,131 votes were cast against
the ratification of the selection of Deloitte & Touche LLP as the independent
auditors of the Company for the year ending April 1, 2000. Abstentions totaled
28,144; there were no broker nonvotes.
(iii) 485,312,474 votes were cast for and 537,931 votes were cast against
the approval of the terms of the Polo Ralph Lauren Corporation Executive Officer
Annual Incentive Plan to qualify such plan under Section 162 (m) of the Internal
Revenue Code, as amended. Abstentions totaled 81,298; there were no broker
nonvotes.
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 authorized personnel
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on current expectations and are indicated by words or phrases such as
"anticipate," "estimate," "project," " we believe," "is or remains optimistic,"
"currently envisions" and similar words or phrases and involve known and unknown
risks, uncertainties and other factors,
21
<PAGE>
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, including risks related to extending credit to
customers; risks 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; risks associated with competition in the segments of the
fashion and consumer product industries in which the Company operates, including
the Company's ability to shape, stimulate and respond to changing consumer
tastes and demands by producing attractive products, brands and marketing, and
its ability to remain competitive in the areas of quality and price; risks
associated with uncertainty relating to the Company's ability to implement its
growth strategies; risks associated with the Company's entry into new markets
either through internal development activities or through acquisitions; risks
associated with the ability of the Company or the Company's third party
customers and suppliers and government agencies to timely and adequately remedy
any Year 2000 issues; 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; risks related to the Company's ability to
establish and protect its trademarks and other proprietary rights; risks related
to fluctuations in foreign currency as the Company's international licensing
revenue generally is derived in foreign currencies, including the Japanese yen
and the French franc, and, in addition, changes in currency exchange rates may
also affect the relative prices at which the Company and foreign competitors
sell their products in the same market; and, risks associated with the Company's
control by Lauren family members and the anti-takeover effect of multiple
classes of stock. 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--
18 Preferability Letter
27.1 Financial Data Schedule
(b) Reports on Form 8-K--
No reports on Form 8-K were filed by the Company in the quarter ended
October 2, 1999.
22
<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: November 16, 1999 By: /s/ Nancy A. Platoni Poli
Nancy A. Platoni Poli
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
23
Exhibit 18
November 5, 1999
Polo Ralph Lauren Corporation
650 Madison Avenue
New York, New York 10022
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
July 3, 1999, of the facts relating to changing from the retail method of
valuing its retail inventories to the lower of cost (first-in, first-out) or
market. We believe, on the basis of the facts so set forth and other information
furnished to us by appropriate officials of the Company, that the accounting
change described in your Form 10-Q is to an alternative accounting principle
that is preferable under the circumstances.
We have not audited any consolidated financial statements of Polo Ralph Lauren
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to April 3, 1999. Therefore, we are unable to express, and we do not
express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on
the related information furnished to us by officials of the Company, or on the
financial position, results of operations, or cash flows of Polo Ralph Lauren
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to April 3, 1999.
Yours truly,
/s/ Deloitte & Touche LLP
New York, New York
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