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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 July 3, 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
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(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 August 12, 1999, 33,286,716 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 July 3, 1999 (Unaudited)
and April 3, 1999................................................3
Consolidated Statements of Income for the three months ended
July 3, 1999 and June 27, 1998 (Unaudited).......................4
Consolidated Statements of Cash Flows for the three months
ended July 3, 1999 and June 27, 1998 (Unaudited)...............5-6
Notes to Consolidated Financial Statements........................7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................11-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................19
2
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
July 3, April 3,
1999 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $44,130 $44,458
Accounts receivable, net of allowances of $13,700 and $13,495 respectively 148,660 157,203
Inventories 426,457 376,860
Deferred tax assets 51,939 51,939
Prepaid expenses and other 34,005 48,994
-------------- -------------
Total current assets 705,191 679,454
Property and equipment, net 299,308 261,799
Deferred tax assets 12,737 12,493
Restricted cash - 44,217
Goodwill, net 77,209 27,464
Other assets, net 84,239 79,157
-------------- -------------
$1,178,684 $1,104,584
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $125,500 $115,500
Accounts payable 99,730 88,898
Income taxes payable 22,472 17,432
Accrued expenses and other 105,508 126,142
-------------- -------------
Total current liabilities 353,210 347,972
Long-term debt 80,000 44,217
Other noncurrent liabilities 68,291 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 251,398 227,288
Treasury Stock, Class A, at cost (923,764 and 603,864 shares) (22,583) (16,084)
Unearned compensation (2,666) (3,333)
-------------- -------------
Total stockholders' equity 677,183 658,905
-------------- -------------
$1,178,684 $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
-----------------------------
July 3, June 27,
1999 1998
-------------- -------------
<S> <C> <C>
Net sales $384,472 $311,155
Licensing revenue 47,876 43,283
Other income 2,073 4,338
-------------- -------------
Net revenues 434,421 358,776
Cost of goods sold 217,446 176,162
-------------- -------------
Gross profit 216,975 182,614
Selling, general and administrative expenses 167,098 144,963
-------------- -------------
Income from operations 49,877 37,651
Interest (expense) income (2,488) 680
-------------- -------------
Income before income taxes and cumulative effect of change
in accounting principle 47,389 38,331
Provision for income taxes 19,312 15,620
-------------- -------------
Income before cumulative effect of change in accounting principle 28,077 22,711
Cumulative effect of change in accounting principle, net of taxes 3,967 -
-------------- -------------
Net income $24,110 $22,711
============== =============
Income per share before cumulative effect of change in
accounting principle - Basic and Diluted $0.28 $0.23
Cumulative effect of change in accounting principle - Basic and Diluted $0.04 -
-------------- -------------
Net income per share - Basic and Diluted $0.24 $0.23
============== =============
Weighted average common shares outstanding - Basic 99,533,454 100,195,134
============== =============
Weighted average common shares outstanding - Diluted 99,704,140 100,570,710
============== =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
July 3, June 27,
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $24,110 $22,711
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 11,417 10,759
Cumulative effect of change in accounting principle 3,967 -
Provision for losses on accounts receivable 639 188
Other 1,683 1,092
Changes in assets and liabilities, net of acquisition
Accounts receivable 9,563 37,108
Inventories (26,409) (59,225)
Prepaid expenses and other 11,349 (4,139)
Other assets, net (2,243) (2,814)
Accounts payable (2,232) (7,613)
Income taxes payable and accrued expenses and other (12,356) 5,365
-------------- -------------
Net cash provided by operating activities 19,488 3,432
-------------- -------------
Cash flows from investing activities
Purchases of property and equipment, net (13,414) (21,550)
Acquisition, net of cash acquired (50,824) -
Proceeds from release of restricted cash held for Club Monaco acquisition 44,217 -
Cash surrender value - officers' life insurance, net (1,721) (1,060)
-------------- -------------
Net cash used in investing activities (21,742) (22,610)
-------------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock, net - 18
Repurchases of common stock (6,499) (7,248)
Proceeds from short-term borrowings, net 10,000 3,000
Repayments of long-term debt (37,358) (174)
Proceeds from long-term debt 35,783 -
-------------- -------------
Net cash provided by (used in) financing activities 1,926 (4,404)
-------------- -------------
Net decrease in cash and cash equivalents (328) (23,582)
Cash and cash equivalents at beginning of period 44,458 58,755
-------------- -------------
Cash and cash equivalents at end of period $44,130 $35,173
============== =============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
July 3, June 27,
1999 1998
-------------- -------------
<S> <C> <C>
Supplemental cash flow information
Cash paid for interest $2,554 $631
============== =============
Cash paid for income taxes $11,218 $5,922
============== =============
Supplemental schedule of non-cash investing and financing activities
Fair value of assets acquired, excluding cash $110,617
Less:
Cash paid 51,481
--------------
Liabilities assumed $59,136
==============
Fair market value of restricted stock grants $667
==============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
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
(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 ended July 3, 1999 and June 27,
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 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 ended July 3, 1999 and June 27, 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
July 3, April 3,
1999 1999
-------------- -------------
Raw materials $ 8,719 $ 17,675
Work-in-process 15,980 8,545
Finished goods 401,758 350,640
-------------- -------------
$ 426,457 $ 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 July 3, 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.................. (1,846) - (10,693) (154) (12,693)
------------- ---------- ----------- ----- -----
Balance at July 3, 1999........ $10,113 $ - $12,860 $ 571 $23,544
============= ========== =========== ===== =====
</TABLE>
Total severance and termination benefits as a result of the
Restructuring Plan relate to approximately 280 employees, 210 of which have
been terminated through July 1999. Total cash outlays related to the
Restructuring Plan are expected to be approximately $39.5 million, $12.7
million of which was paid in the quarter ended July 3, 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 ended July 3, 1999 and June 27, 1998 and total assets as of July 3,
1999 and April 3, 1999 by segment were as follows:
<TABLE>
<CAPTION>
Three Months Ended
July 3, June 27,
1999 1998
<S> <C> <C>
Net revenues:
Wholesale $ 196,651 $ 174,295
Retail 189,894 141,198
Licensing 47,876 43,283
------------ ------------
$ 434,421 $ 358,776
============ ============
Income from operations:
Wholesale $ 11,781 $ 2,451
Retail 8,100 15,300
Licensing 23,300 19,900
------------ ------------
43,181 37,651
Add: Cumulative effect of change
in accounting principle before taxes 6,696 -
------------ ------------
$ 49,877 $ 37,651
============ ============
July 3, April 3,
1999 1999
Segment assets:
Wholesale $ 370,220 $ 376,154
Retail 551,347 424,203
Licensing 58,883 73,389
Corporate 198,234 230,838
------------ ------------
$ 1,178,684 $ 1,104,584
============ ============
</TABLE>
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.
10
<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 (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 three
integrated operations: wholesale, retail and licensing alliances. Licensing
revenue includes royalties received from home collection licensing partners.
11
<PAGE>
Results of Operations
The following discussion provides information and analysis of the Company's
results of operations for the three months ended July 3, 1999 compared to June
27, 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
ended July 3, 1999 and June 27, 1998:
July 3, June 27,
1999 1998
---- ----
Net sales........................................ 88.5% 86.7%
Licensing revenue................................ 11.0 12.1
Other income..................................... 0.5 1.2
----- -----
Net revenues..................................... 100.0 100.0
----- -----
Gross profit..................................... 49.9 50.9
Selling, general and administrative expenses 38.5 40.4
----- -----
Income from operations........................... 11.4 10.5
Interest (expense) income........................ (.5) .2
----- -----
Income before income taxes and
accounting change............................. 10.9% 10.7%
===== =====
Three Months Ended July 3, 1999 Compared to Three Months Ended June 27, 1998
Net Sales. Net sales increased 23.6% to $384.5 million in the three months
ended July 3, 1999 from $311.2 million in the three months ended June 27, 1998.
Wholesale net sales increased 14.5% to $194.6 million in the three months ended
July 3, 1999 from $170.0 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.
Retail sales increased by 34.5% to $189.9 million in the three months ended July
3, 1999 from $141.2 million in the corresponding period in fiscal 1999. Retail
sales increased primarily due to the $50.1 million benefit from three months of
operations for six new Polo stores and 30 new outlet stores opened in fiscal
1999 as well as 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 2%. At July 3, 1999, the Company operated
32 Polo stores, 105 outlet stores and 70 Club Monaco stores.
12
<PAGE>
Licensing Revenue. Licensing revenue increased 10.6% to $47.9 million in
the three months ended July 3, 1999 from $43.3 million in the corresponding
period of fiscal 1999. This increase is primarily attributable to overall
general increases in sales of existing licensed products and the Company's
continued expansion in international markets.
Gross Profit. Gross profit as a percentage of net revenues decreased to
49.9% in the three months ended July 3, 1999 from 50.9% in the corresponding
period of fiscal 1999. This decrease was mainly attributable to lower retail
gross margins as a result of higher markdowns realized during the current
quarter to move excess inventories.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses as a percentage of net revenues decreased to
38.5% in the three months ended July 3, 1999 from 40.4% 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 $2.5 million in the quarter
ended July 3, 1999 from interest income of $.7 million in the comparable period
in fiscal 1999. This increase was due to a higher level of borrowings during the
current quarter, 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 $19.5 million in the
three months ended July 3, 1999 from $3.4 million in the comparable period in
fiscal 1999. This improvement was driven by favorable changes in inventories and
prepaid expenses offset by unfavorable changes in accounts receivable. These
changes were primarily due to timing (i.e., shipments, vendor payments and
customer remittances). Net cash used in investing activities decreased to $21.7
million in the three months ended July 3, 1999 from $22.6 million in the
comparable period in fiscal 1999. This decrease principally reflects a decrease
in capital expenditures offset by the use of $6.6 million, net to complete the
acquisition of Club Monaco in the three months ended July 3, 1999. Net cash
provided by financing activities increased to $1.9 million in the three months
ended July 3, 1999 from net cash used in financing activities of $4.4 million in
the comparable period in fiscal 1999. This increase is primarily due to an
increase in proceeds from short-term borrowings under the Credit Facility (as
defined) used for working capital needs.
13
<PAGE>
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 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.
On April 12, 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 July 3, 1999, the Company had $125.5 million outstanding in direct
borrowings and $80.0 million outstanding under the Term Loan and was
contingently liable for $30.2 million in outstanding letters of credit under the
Credit Facilities. The weighted average interest rate on outstanding borrowings
under the Credit Facilities was 6.2% at July 3, 1999.
Capital expenditures were $13.4 million and $21.6 million in the three
months ended July 3, 1999 and June 27, 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."
14
<PAGE>
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 July 3, 1999, the Company had repurchased
923,764 shares of its Class A Common Stock at an aggregate cost of $22.6
million.
Management believes that cash from ongoing operations and funds available
under the Credit Facilities will be sufficient to satisfy the Company's current
level of operations, the Restructuring Plan, capital requirements, stock
repurchase program 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.
15
<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 has 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 is
addressing these deficiencies through upgrades, replacements and other
remediation. The Company has substantially 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 is in the process of
identifying those items which may require replacement or other remediation and,
in a significant majority of the cases, believes it has taken steps adequate to
ensure such equipment is Year 2000 compliant. The Company expects to complete
testing and replacement or other remediation of this equipment no later than the
late summer of 1999.
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 includes the
solicitation of written responses to questionnaires, followed, in some cases, by
meetings with certain of such third parties. To date, approximately 60.0% of
those contacted have responded, none of whom have raised any Year 2000 issues
which the Company believes would have a materially adverse affect on the
Company. The Company is in the process of sending follow-up inquiries to third
parties and expects to complete its survey of third parties in the late summer
of 1999.
16
<PAGE>
To date, the Company has incurred expenses of approximately $5.1 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 $1.0 to $2.0 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 dates upon
which the Company plans to complete its Year 2000 initiatives 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. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ
materially from those plans.
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 continues to develop contingency plans to limit the effect of
any Year 2000 issues on its operations and results, and intends to finalize its
contingency plans by no later than the late summer of 1999. As an example, the
Company continues to explore, where possible, alternate service providers. The
Company's Year 2000 efforts are ongoing and its overall plan, as well as its
development of contingency plans, will continue to evolve as new information
becomes available. 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.
17
<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, 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. A third action, brought in Federal Court in Saipan
solely against the garment factory defendants on behalf of a putative class of
their workers, alleges violations of Federal and local wage and employment laws.
The Company has not been named as a defendant in any of these suits, but the
Company sources products in Saipan and counsel for the plaintiffs in these
actions has informed the Company that it is a potential defendant in these or
similar actions. The Company and counsel have entered into an oral nonbinding
agreement in principle to settle any claims for nonmaterial consideration. Such
an agreement, if ultimately documented and finalized, would 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 no settlement is reached and it were named in any such suit.
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 (the "Reform Act"). 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, 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,
18
<PAGE>
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 ability of 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--
27.1 Financial Data Schedule
(b) Reports on Form 8-K--
During the quarter ended July 3, 1999, the Company filed a Report
on Form 8-K dated May 4, 1999, reporting matters under Item 5 thereof,
with respect to the Company's announcement that its wholly owned
subsidiary, PRL Acquisition Corp., had completed its acquisition of
Club Monaco Inc., an Ontario corporation.
19
<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: August 17, 1999 By: /s/ Nancy A. Platoni Poli
-------------------------
Nancy A. Platoni Poli
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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