SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
January 6, 2000
---------------
Date of Report (Date of earliest event reported)
POLO RALPH LAUREN CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(State or other jurisdiction of incorporation or organization)
001-13057 13-2622036
--------- ----------
(Commission File Number) (I.R.S. Employer
Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
212-318-7000
------------
(Registrant's telephone number, including area code)
<PAGE>
This Form 8-K/A of Polo Ralph Lauren Corporation ("Polo")
constitutes Amendment No. 1 to the Company's Current Report on Form 8-K
which was filed with the Securities and Exchange Commission (the "SEC")
on January 10, 2000 (the "Form 8-K"). This amendment sets forth the
information required by Items 7 (a) and 7 (b) omitted from the Form 8-K.
Certain statements in this Form 8-K/A and in Polo'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 which may cause the actual
results, performance or achievements of Polo 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 Polo's competitors; changes in global economic conditions;
risks associated with Polo's dependence on sales to a limited number of
large department store customers, including risks related to extending
credit to customers; risks associated with Polo'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 Polo operates, including Polo'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 Polo's ability to implement its growth
strategies; risks associated with Polo's entry into new markets either
through internal development activities or through acquisitions; risks
associated with the ability of Polo or Polo'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
Polo'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 Polo's
ability to establish and protect its trademarks and other proprietary
rights; risks related to fluctuations in foreign currency affecting
Polo's foreign subsidiaries' and foreign licensees' results of operations
and the relative prices at which Polo and foreign competitors sell their
products in the same market and Polo's operating and manufacturing costs
outside of the United States; and, risks associated with Polo's control
by Lauren family members and the anti-takeover effect of multiple classes
of stock. Polo undertakes no obligation to publicly update or revise any
2
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forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
The stock and asset purchase (the "Purchase") by Polo, a
Delaware corporation, of Poloco S.A.S. and certain affiliates
(collectively "Polo Europe") from S.A Louis Dreyfus et Cie, a company
organized under the laws of France ("SALD"), was consummated on January 6,
2000.
Polo acquired Polo Europe for an aggregate cash consideration of
approximately $200.0 million, plus the assumption of approximately $30.0
million of borrowings, pursuant to the terms set forth in the Stock and
Asset Purchase Agreement dated as of November 23, 1999 between Polo and
SALD (the "Purchase Agreement").
A copy of the Purchase Agreement and a copy of the related press
release dated January 6, 2000 were previously filed as Exhibits 2.1 and
99.1, respectively, to the Form 8-K and are hereby incorporated by reference.
3
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ITEM 7. FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
(a) The financial statements of the business acquired, Polo Europe,
are presented as follows:
Page No.
Report of Independent Auditors 5
Financial Statements and notes thereon -
Year Ended December 31, 1998 6 - 20
Unaudited Interim Combined Balance Sheet,
Combined Statement of Income and Combined
Statement of Cash Flows -Nine Months Ended
September 30, 1999 21 - 23
Notes to Unaudited Interim Combined Financial
Statements 24
(b) The pro forma combined financial statements of Polo and Polo
Europe are presented as follows:
Introduction 25 - 26
Unaudited Pro Forma Combined Statement of Income
for the Fiscal Year Ended April 3, 1999 27
Unaudited Pro Forma Combined Statement of Income
for the Nine Months Ended January 1, 2000 28
Unaudited Pro Forma Combined Balance Sheet
as of January 1, 2000 29
Notes to Unaudited Pro Forma Combined Financial
Statements 30 - 32
4
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of S.A. Louis Dreyfus & Cie
We have audited the accompanying combined balance sheet of Polo Europe (a
combination of certain assets and liabilities of S.A. Louis Dreyfus & Cie
- - "SALD" -, as described in Note 1) as of December 31, 1998, and the
related combined statements of income, changes in stockholders' equity
and cash flows for the year ended December 31, 1998. These financial
statements represent the combined operations of Polo Europe and are the
responsibility of SALD 's management. The purpose of this presentation is
to show the combined operations of the Polo Europe business, that is
subject of ongoing negotiations in connection with a potential transfer
of interests (see Note 16). Our responsibility is to express an opinion
on these combined financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the combined financial statements are free of material misstatement. An
audit includes examining, on test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for
our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position
of the Polo Europe at December 31, 1998, and the combined results of
their operations and their cash flows for the year ended December, 1998,
in conformity with accounting principles generally accepted in the United
States of America.
October 22, 1999
Paris, France
/s/ Constantin Associes
CONSTANTIN ASSOCIES
Represented by
Francois-Xavier AMEYE
5
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POLO EUROPE
COMBINED BALANCE SHEET
Year ended December 31, 1998
(in thousands)
U.S. Dollars French Francs
ASSETS
- ------
Current assets
Cash and cash equivalents $ 5,171 FF 29,061
Trade accounts receivable, net of allowance
of FF 6 771 22,206 124,806
Inventories 43,546 244,728
Receivables from affiliates 5,410 30,403
Other receivables 3,092 17,375
Prepaid and deferred expenses 1,696 9,532
-------- ----------
81,121 455,905
Other Assets
Deferred income tax 36,045 202,572
Property and equipment, net 7,647 42,978
Intangibles, net 5,175 29,083
Other investments, deposits and sundry 655 3,679
-------- ----------
49,522 278,312
Total Assets $130,643 FF 734,217
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank loans and acceptances $ 12,706 FF 71,410
Payables to affiliates 12,751 71,660
Trade payables and accrued expenses 24,757 139,134
Other payables 3,437 19,316
------- ----------
53,651 301,520
Long term liabilities
Employee benefits 9,850 55,358
Debt due to affiliates 7,447 41,852
Other long term debt 1,779 10,000
Deferred income tax 934 5,250
-------- ----------
20,010 112,460
Equity 56,982 320,237
Total Liabilities and Stockholders' Equity $130,643 FF 734,217
======== ==========
See Notes to Combined Financial Statements
6
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POLO EUROPE
COMBINED STATEMENT OF INCOME
Year ended December 31, 1998
(in thousands)
U.S. Dollars French Francs
Net sales $169,132 FF 997,880
Licensing and commission income 10,687 63,052
-------- -----------
Net revenue 179,819 1,060,932
Cost of sales 73,615 434,329
-------- -----------
Gross margin 106,204 626,603
OPERATING COSTS AND EXPENSES
Selling, general and administrative expenses 57,894 341,577
Depreciation and amortization 4,025 23,745
-------- -----------
61,919 365,322
-------- -----------
Income from operations 44,285 261,281
OTHER INCOME (EXPENSE)
Interest, net of interest income of FF 3 981 (3,585) (21,149)
Exchange loss (9) (52)
Gain (loss) on sale of assets (12) (69)
Sundry, net (31) (185)
-------- -----------
(3,637) (21,455)
-------- -----------
Income before income taxes 40,648 239,826
INCOME TAXES
Current 13,279 78,347
Deferred 2,520 14,868
-------- -----------
15,799 93,215
-------- -----------
NET INCOME $ 24,849 FF 146,611
-------- -----------
See Notes to Combined Financial Statements
7
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POLO EUROPE
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1998
(in thousands)
U.S. Dollars French Francs
OPERATING ACTIVITIES
Net income $ 24,849 FF 146,611
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,025 23,745
Deferred taxes 2,520 14,868
Other provisions, net 112 661
Gain from sale of assets 12 69
-------- ----------
31,518 185,954
Changes in operating assets and liabilities :
Inventories (12,389) (73,093)
Trade and other receivables (2,194) (12,946)
Trade and other payables (46,901) (276,715)
-------- ----------
Net cash used in operating activities (29,966) (176,800)
INVESTING ACTIVITIES
Purchases of property and equipment (2,320) (13,688)
Proceeds from sale of property and equipment 5 30
-------- ----------
Net cash used in investing activities (2,315) (13,658)
FINANCING ACTIVITIES
Repayment of bank loans and acceptances, net (2,112) (12,462)
Increase in long term debt 9,146 53,964
Repayment of long term debt (5,096) (30,066)
Changes in advances from stockholders 45,868 274,874
Dividends to stockholders (15,240) (91,286)
-------- ----------
Net cash from financing activities 32,566 195,024
Effect of exchange rates on cash and cash
equivalents (694) (8,927)
-------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS (409) (4,361)
Cash and cash equivalents at beginning of year 5,580 33,422
-------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,171 FF 29,061
======== ==========
See Notes to Combined Financial Statements
8
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POLO EUROPE
COMBINED STATEMENT OF CHANGES IN EQUITY
(in thousands) Equity
------
Balance at January 1, 1998 FF 277,048
----------
Dividends to common stockholders (91,286)
Net income 146,611
Foreign currency translation adjustment (12,136)
----------
Total comprehensive income 134,475
Balance at December 31, 1998 FF 320,237
==========
See Notes to Combined Financial Statements
9
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NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of presentation
The Louis Dreyfus/Polo Ralph Lauren Business ("Polo Europe") refers to
all the operations conducted by S.A. Louis Dreyfus & Cie ("SALD") in
connection with Polo Ralph Lauren licenses.
Polo Europe holds exclusive licenses for the manufacture and wholesale
distribution of Polo Ralph Lauren menswear, boyswear and related
accessories in Western and Eastern Europe, the Middle East and Northern
Africa. It also has the exclusive manufacture and wholesale distribution
license for Polo Jeans Company menswear, womenswear and related
accessories in Western and Eastern Europe, the Middle East and Northern
Africa. In addition, Polo Europe operates the Polo Ralph Lauren retail
store in Paris, two Polo Ralph Lauren outlet stores in France and two in
England. In 1999, Polo Europe has opened two new stores, one in the U.K.
and one in Austria.
Polo Europe operates as one business segment due to its centralized
strategic initiatives and centralized performance evaluation by senior
management.
The accompanying combined financial statements include the assets and
liabilities used in the operations of Polo Europe and their resultant
revenues, expenses and cash flows.
2. Summary of Significant Accounting Policies
The combined accounts of Polo Europe have been prepared in accordance
with United States Generally Accepted Accounting Principles ("U.S.
GAAP").
The conversion of the balance sheet to U.S. dollars from French Francs is
at the quoted exchange rate from "Banque de France" at December 31, 1998
of FF5.62 to one U.S. dollar. The income statement and statement of cash
flows are converted at the average rate for the year 1998 of FF5.90.
Equity accounts are translated at historical rates of exchange.
Transaction gains and losses are included in the determination of net
income. Translation gains and losses are included as a component of other
comprehensive income in the statement of stockholders' equity.
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Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Foreign Currencies (Currencies other than French Franc)
Financial statements of foreign operations are translated from the local
currency into French Francs using exchange rates in effect at period end
for assets and liabilities, and average exchange rates during the period
for results of operations and cash flows. Related translation adjustments
are reported as a separate component of stockholders' equity.
Gains and losses from foreign currency transactions are included in
current year's operations.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with an
original maturity of three months or less.
Inventories
Wholesale and retail inventories are valued at the lower of cost (first-
in, first-out method) or market.
Income Taxes
Most of the entities of Polo Europe are included in the consolidated tax
return of SALD and subsidiaries. The income tax provision for Polo Europe
has been computed on a stand alone company basis in accordance with the
tax allocation agreements. Deferred taxes arise from reporting temporary
differences between financial and income tax reporting. Polo Europe
accounts for deferred income taxes in accordance with the liability
method using the most recent established tax rates. Polo Europe gives
recognition to future tax benefits, to the extent deemed appropriate, in
conformity with the U.S. Financial Accounting Standard Board ("FASB")
Statement No. 109, "Accounting for Income Taxes". This Statement allows
for the recognition of future tax benefits, including net operating loss
carryforwards, to the extent the realization of such benefits is more
likely than not.
11
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Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, as follows:
Machinery and equipment 5 to 10 years
Leasehold improvements 8 to 10 years
Furniture, fixture and other 2 to 10 years
Intangible assets
The long lived intangible assets consist principally of the Polo Ralph
Lauren license bought in 1990 with a complementary purchase in 1993, that
is being amortized using the straight line method over the duration of
the license. The license expires in September 2002.
Impairment of Long-Lived And Intangible Assets
The carrying value of long-lived and intangible assets are periodically
evaluated for recoverability, comparing the respective carrying values to
the current and expected future cash flows, on an undiscounted basis, to
be generated from such assets. If the estimated cash flows are less than
the carrying value of the asset, the loss is measured as the amount by
which the carrying value of the asset exceeds the fair value.
Revenue Recognition
Sales are recognized upon shipment of products to customers and, in the
case of sales by company-owned retail and outlet stores, when goods are
sold to consumers. Allowances for estimated uncollectible accounts are
provided when sales are recorded.
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Financial Instruments
Polo Europe from time to time uses derivative financial instruments to
reduce its exposure to changes in foreign exchange and interest rates.
While these instruments are subject to risk of loss from changes in
exchange or interest rates, those losses would generally be offset by
gains on the related exposure. Polo Europe does not hold or issue
financial instruments for trading or speculative purposes.
Stock Options
Polo Europe uses the intrinsic value method to account for stock-based
compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
13
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Employee Benefits
Employee benefits include the retirement commitments and the French
"Participation des salaries".
Other comprehensive income
According to FASB Statement No. 130, "Reporting Comprehensive Income", the
components of the other comprehensive income that relates to Polo Europe
are foreign currency translation adjustments, which are presented in the
Statement of Changes in Stockholders' Equity.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement 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. Statement No. 133 will be effective for Polo
Europe for the year ending January 1, 2000. Polo Europe has not yet
determined whether the application of Statement No. 133 will have a
material impact on its financial position or results of operations.
3. Inventories
Inventories at December 31, 1998 consist of the following :
- ----------------------------------------------------------------
(in thousands) 1998
- ----------------------------------------------------------------
Wholesale inventories 220,274
Retail inventories 24,454
- ----------------------------------------------------------------
FF 244,728
================================================================
4. Income Taxes
The consolidated net deferred tax asset at December 31, 1998 consists of
the following:
(in thousands)
- ----------------------------------------------------------------
Net deferred tax asset arising 18,601
from timing differences
Net deferred tax asset arising from sale 176,103
of license by Poloco to LD Fashions
Tax benefits from carryforward losses 2,618
- ----------------------------------------------------------------
FF 197,322
================================================================
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The components of the income tax provision for 1998 are as follows :
- -------------------------------------------------------------------------------
(in thousands) Current Deferred Total
- -------------------------------------------------------------------------------
Europe 53,005 3,570 56,575
United States 25,342 11,298 36,640
- -------------------------------------------------------------------------------
FF 78,347 FF 14,868 FF 93,215
===============================================================================
Following is a reconciliation between the French statutory tax rate and
the effective tax rate on income before tax:
- -------------------------------------------------------------------------------
Statutory tax rate 42%
- -------------------------------------------------------------------------------
Adjustments for foreign income tax rates (4)
different from the French statutory tax rate
Taxes paid on French royalties 4
Tax credit utilization (2)
Miscellaneous (1)
- -------------------------------------------------------------------------------
Effective tax rate 39%
===============================================================================
Polo Europe's tax returns from 1996 to 1998, for one entity included in
Polo Europe, are currently being reviewed by the tax authorities. At the
date of issuance of this financial report, no amount has been notified
and the management believes that Polo Europe has strong arguments to
support its position.
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5. Property and Equipment
At December 31, 1998 the property and equipment, consist of the
following:
- ----------------------------------------------------------------
(in thousands) 1998
- ----------------------------------------------------------------
Leasehold improvements 74,655
Computer equipment 13,716
Furniture and fixtures 5,613
Machinery and equipment 590
Tangible assets in process 42
- ----------------------------------------------------------------
Total Property and Equipment, Gross 94,616
Accumulated depreciation (51,638)
- ----------------------------------------------------------------
Total Property and Equipment, net FF 42,978
================================================================
6. Short Term Credit Facilities
Borrowings under short term facilities represent overdraft positions on
Polo Europe's bank accounts. Such borrowings bear interest at .5% to .8%
over the TMP (Paris Overnight Interbank Offered rate), 3.06% at December
31, 1998. On January 4, 1999, the TMP reference was changed to the EONIA
(Euro Overnight Indexed Average). The short term facilities were
providing for a maximum amount of borrowing of FF 281 million as of
December 31, 1998.
7. Long Term Debt
Long term debt from bank financing
The long term debt at December 31, 1998 amounts to FF 10 million, due over
the next five years (in millions, 1999 -FF 2; 2000 -FF 2, 2001 -FF2, 2002
- -FF2, and 2003 - FF2) and bears interest at 1.5% over PIBOR, 3.32% at
December 31, 1998.
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Long term debt due to affiliates
The long term debt due to affiliates consists in a (Pound Sterling)4.5
million loan due by Polo Europe to LD&CO, a subsidiary of SALD. The loan
bears interest at .5% above the average cost of borrowing computed
monthly by the lender and is repayable by the borrower in Pound sterling
installments at any time that the borrower has sufficient cash surplus
arising from operations.
8. Stock Options
Certain officers of Polo Europe have been granted options to purchase
stock of a company included in Polo Europe. In December 1997, 47 400
options were granted at the fair market value as determined by the
Directors. Polo Europe accounts for stock options under APB No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation
cost has been recognized for stock options that were granted at fair
market value on the date of grant. Had compensation cost for the stock
options been determined based upon the fair value of such awards at the
grant date, consistent with the methods of SFAS No. 123, pro forma net
income for the year ended December 31, 1998 would have been FF 143,907
thousand. The fair value of each option grant was determined using the
Black-Sholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 0% and 0%;
expected volatility of 0%; risk-free interest rate of 4.65%, and expected
lives of 7 years.
During 1999, all officers to whom options had been granted, renounced
their exercise rights.
9. Retirement Benefits
Polo Europe maintains pension plans in various countries as prescribed by
local laws and practices.
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United Kingdom
Polo Europe, together with other affiliates of SALD in the U.K., operates
a pension scheme providing benefits based on final pensionable salary.
Contribution to the scheme are determined by an actuary. Contributions
for the year ended December 31, 1998 were FF 185 thousand. The most
recent actuarial valuation was carried at January 1, 1998 using the
projected unit method of funding. The main actuarial assumptions were
that investment returns, net of expenses, would be 8.5% and the rate of
salary increase would be 7% per annum. The valuation showed that the
actuarial value of the assets did not exceed 105% of the value of the
liabilities, on the prescribed basis.
Since the last valuation there have been changes in the membership of the
plan. The effect of these will be reviewed at the next valuation at
January 1, 2001.
France
French companies are obligated to make an award upon the employees'
retirement based on years of services and earnings. At December 31, 1998,
Polo Europe had an unfunded obligation for retirement awards amounting to
FF 2,692 thousand that is recorded as a liability.
10. Net Sales by Operations
Sales for the year ended December 31, 1998 consist of the following :
- -------------------------------------------------------------------
(in thousands) 1998
- -------------------------------------------------------------------
Wholesale 829,926
Retail 167,954
- -------------------------------------------------------------------
FF 997,880
===================================================================
11. Supplemental cash flows information
For the year ended 1998, Polo Europe paid income taxes of FF 317 million
and interest of FF 20 million.
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12. Commitments and Contingencies
Polo Europe leases office, warehouse and retail space and office
equipment under operating leases which expire through 2007. These leases
provide the company with the option after the initial lease term to
either renew the lease at the current fair rental value or purchase the
equipment at the current fair value. Polo Europe expects that leases will
be renewed or replaced by other leases in the normal course of business.
As of December 31, 1998, aggregate minimum annual rental payments under
non cancelable operating leases with lease terms in excess of one year
were payable as follows :
- -------------------------------------------------------------------------
(in millions)
- -------------------------------------------------------------------------
1999 19.8
2000 13.6
2001 6.8
2002 0.1
2003 --
Thereafter --
- -------------------------------------------------------------------------
FF 40.3
=========================================================================
Rent charged to operations was FF 33 million in 1998. Certain retail
stores provide for contingent rental based on sales. Contingent rental
expenses charges included in rent expense were FF 7 million for the year
ended December 31, 1998.
Polo Europe is contingently liable at December 31, 1998 in the amount of
FF 52 million on open letters of credit.
Polo Europe is from time to time involved in legal claims, involving
trademark, employee relations and other matters incidental to its
activity. In the opinion of the management, the resolution of any matter
currently pending will not have a material effect on the financial
condition or results of operations of Polo Europe.
13. Concentration of Credit Risk
Polo Europe sells its merchandise primarily to upscale department stores
and independent retailers throughout Western Europe. Credit is extended
based on an evaluation of the customer's financial condition without
requiring collateral. Credit risk is driven by conditions or occurrences
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within the various Western European economies and the retail industry and
is principally dependent on each customer' financial condition. A
decision by the controlling owner of a group of stores or any substantial
customer to decrease the amount of merchandise purchased from Polo Europe
or to cease carrying its products could have a material adverse effect on
the companies. Polo Europe has two customers who in aggregate account for
25% of all trade accounts receivables outstanding as at December 31,
1998.
Polo Europe monitors credit levels and the financial condition of its
customers on a continuing basis to minimize credit risk. The management
believes that adequate provision for credit loss has been made in the
accompanying financial statements.
14. Derivative Financial Instruments
Polo Europe from time to time enters into forward exchange contracts as
hedges to reduce the risk from exchange rate fluctuations associated with
future purchase. Unrealized gains and losses on these contracts are
deferred until the actual transaction. The unrealized gain associated
with these foreign exchange contracts was not material at December 31,
1998.
At December 31, 1998, Polo Europe had foreign exchange contracts
outstanding to deliver FF 232 million in 1999 in exchange of $ 47
million, FF 37 million in 1999 in exchange of (Pound Sterling) 4 million,
(Pound Sterling) 15 million in 1999 in exchange of $ 24 million, FF 283
million in 2000 in exchange of $ 50 million, and FF 279 million in 2001
in exchange of $ 50 million.
15. Related Party Transactions
Receivables due from affiliates represent advances made by Polo Europe to
affiliates of SALD for working capital purpose. Payables due to
affiliates represent advances made by SALD and its subsidiaries for
working capital purposes and amount owed by Polo Europe for tax payable.
16. Subsequent Event
On September 7, 1999, SALD reached an agreement in principle to sell Polo
Europe to Ralph Lauren Corporation. The sale is expected to close in
January 2000.
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- -------------------------------------------------------------------------------
POLO EUROPE
COMBINED BALANCE SHEET
September 30, 1999
- -------------------------------------------------------------------------------
(in thousands)
U.S. Dollars French Francs
ASSETS Unaudited Unaudited
- ------
Current assets
Cash and cash equivalents $ 9,286 FF 57,202
Trade accounts receivable, net of
allowance of FF 8 112 32,493 200,157
Inventories 37,144 228,808
Receivables from affiliates 19,157 118,010
Other receivables 3,120 19,221
Prepaid and deferred expenses 1,580 9,730
--------- ----------
102,780 633,128
Other Assets
Deferred income tax 33,160 204,268
Property and equipment, net 7,306 45,006
Intangibles, net 3,565 21,957
Other investments, deposits and sundry 693 4,262
--------- ----------
44,724 275,493
Total Assets $ 147,504 FF 908,621
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank loans and acceptances $ 15,395 FF 94,835
Payables to affiliates 13,327 82,092
Trade payables and accrued expenses 18,434 113,556
Other payables 9,524 58,666
--------- ----------
56,680 349,149
Long term liabilities
Employee benefits 8,551 52,672
Other long term debt 1,299 8,000
Deferred income tax 1,634 10,066
--------- ----------
11,484 70,738
Equity 79,340 488,734
Total Liabilities and Stockholders' Equity $ 147,504 FF 908,621
========= ==========
See Notes to Unaudited Interim Combined Financial Statements
21
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POLO EUROPE
COMBINED STATEMENT OF INCOME
Nine Months ended September 30, 1999
(in thousands)
U.S. Dollars French Francs
Unaudited Unaudited
Net sales $ 147,336 FF 898,756
Licensing and commission income 6,348 38,721
--------- ----------
Net revenue 153,684 937,477
Cost of sales 63,610 388,022
--------- ----------
Gross margin 90,074 549,455
OPERATING COSTS AND EXPENSES
Selling, general and administrative expenses 46,155 281,548
Depreciation and amortization 2,938 17,921
-------- ----------
49,093 299,469
-------- ----------
Income from operations 40,981 249,986
OTHER INCOME (EXPENSE)
Interest, net of interest income (3,156) (19,252)
Exchange gain (35) (214)
Sundry, net 59 359
-------- ----------
(3,132) (19,107)
-------- ----------
Income before income taxes 37,849 230,879
INCOME TAXES
Current 12,546 76,532
Deferred 2,026 12,358
-------- ----------
14,572 88,890
NET INCOME $ 23,277 FF 141,989
======== ==========
See Notes to Unaudited Interim Combined Financial Statements
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POLO EUROPE
COMBINED STATEMENT OF CASH FLOWS
Nine Months ended September 30, 1999
(in thousands)
U.S. Dollars French Francs
Unaudited Unaudited
OPERATING ACTIVITIES
Net income $ 23,277 FF 141,989
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,938 17,921
Deferred taxes 2,026 12,358
Other provisions, net 14 86
Gain from sale of assets 8 45
-------- ----------
28,263 172,399
Changes in operating assets and liabilities :
Inventories 3,180 19,399
Trade and other receivables (12,092) (73,762)
Changes in advances to affiliates (14,450) (88,148)
Trade and other payables 2,656 16,201
-------- ----------
Net cash from operating activities 7,557 46,089
INVESTING ACTIVITIES
Purchases of property and equipment (1,972) (12,029)
Proceeds from sale of property and equipment 164 1,000
-------- ----------
Net cash used in investing activities (1,808) (11,029)
FINANCING ACTIVITIES
Increase in capital 7,307 44,576
Increase in bank loans, acceptances, net 3,775 23,028
Repayment of long term debt (7,587) (46,280)
Sundry (140) (857)
Dividends to common stockholders (5,155) (31,446)
-------- ----------
Net cash from financing activities (1,800) (10,979)
Exchange difference on cash 166 4,060
-------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 4,115 28,141
Cash and cash equivalents at beginning of year 5,171 29,061
CASH AND CASH EQUIVALENTS -------- ----------
AT SEPTEMBER 30, 1999 $ 9,286 FF 57,202
======== ==========
See Notes to Unaudited Interim Combined Financial Statements
23
<PAGE>
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying unaudited combined financial statements of The Louis
Dreyfus/Polo Ralph Lauren Business ("Polo Europe") refers to all of the
operations conducted by S.A. Louis Dreyfus & Cie ("SALD") in connection
with certain Polo Ralph Lauren Corporation licenses. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited combined financial statements have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information and in a manner consistent
with that used in the preparation of the December 31, 1998 audited
combined financial statements of Polo Europe. In the opinion of
management, the accompanying combined 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 period presented.
Operating results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for a full
year. In addition, the unaudited interim combined financial statements
do not include all information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles. These unaudited combined financial statements
should be read in conjunction with Polo Europe's December 31, 1998
audited financial statements.
24
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial statements (the
"Unaudited Pro Forma Information") have been derived from the application
of pro forma adjustments to the combined historical financial statements
of Polo Ralph Lauren Corporation and its subsidiaries (collectively,
"Polo") and Polo Europe. The Unaudited Pro Forma Information gives
effect to the acquisition of Polo Europe as if it had occurred as of the
beginning of the periods presented for purposes of the Unaudited Pro
Forma Combined Statement of Income and on January 1, 2000 for purposes of
the Unaudited Pro Forma Balance Sheet. The Unaudited Pro Forma Combined
Statement of Income for the year ended April 3, 1999 combines Polo's
results for its fiscal year ended April 3, 1999 with Polo Europe's
results for the year ended December 31, 1998. The Unaudited Pro Forma
Combined Statement of Income for the nine months ended January 1, 2000
combines Polo's results for the nine months ended January 1, 2000 with
Polo Europe's results for the nine months ended September 30, 1999. The
Unaudited Pro Forma Combined Balance Sheet combines Polo and Polo
Europe's historical balance sheets as of January 1, 2000 and September
30, 1999, respectively. The pro forma adjustments to the Unaudited Pro
Forma Financial Information are described in the accompanying notes
thereto. The Unaudited Pro Forma Financial Information is presented for
informational purposes only and does not purport to represent what the
financial position or results of operations for the combined companies
would actually have been had the acquisition occurred on the dates
specified or to project the financial position or results of operations
for the combined companies at any future date or for any future periods.
The Unaudited Pro Forma Financial Information, including the
notes thereto, should be read in conjunction with the historical
consolidated financial statements of Polo and of Polo Europe,
respectively, including notes thereto.
The acquisition is being accounted for using the purchase method
of accounting. A portion of the purchase price for the outstanding common
stock and assets of Polo Europe, including estimated fees and expenses related
to the acquisition, has been allocated to the assets and liabilities of Polo
Europe based upon Polo's preliminary estimates of the fair value of the
assets acquired and the liabilities assumed, and is subject to
adjustment. The remaining purchase price has been allocated to the
excess of cost over the fair value of the net assets acquired
("Goodwill"), which is included in Goodwill, net, in the Unaudited Pro
Forma Combined Balance Sheet.
The allocation of purchase price is subject to revision when
additional information concerning the asset and liability valuations
becomes available. Accordingly, the final purchase price allocation
could be different from the amounts reflected in the Unaudited Pro Forma
Information. Final allocation of the liabilities could change the
25
<PAGE>
related amortization period of the excess of cost over the fair value of
the net assets acquired, which is currently expected to be forty years.
The Unaudited Pro Forma Information gives effect only to the
adjustments set forth in the accompanying notes thereto and does not
reflect management's estimate of anticipated cost savings and other
benefits as a result of the acquisition.
26
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
(Unaudited)
<TABLE>
Fiscal Year Ended
April 3, 1999
---------------------------------------------------------------------------
<CAPTION>
Polo Europe
Polo Year Ended
Year Ended December 31, Pro Forma Pro Forma
April 3, 1999 <F(1)> 1998 <F(1)> Adjustments Combined
--------------------- ------------- --------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Net sales $1,505,056 $169,132 $1,674,188
Licensing revenue 208,009 10,687 (6,674)<F(2)> 212,022
Other income 13,794 - 13,794
---------- -------- ----------
Net revenues 1,726,859 179,819 1,900,004
Cost of goods sold 904,586 73,615 (6,674)<F(2)> 971,527
---------- -------- ----------
Gross profit 822,273 106,204 928,477
Selling, general and administrative expenses 608,128 61,971 3,850 <F(3)>
860 <F(4)> 674,809
Restructuring charge 58,560 - 58,560
---------- -------- ----------
Income from operations 155,585 44,233 195,108
Interest expense 2,759 3,585 11,600 <F(5)> 17,944
---------- -------- ----------
Income before income taxes 152,826 40,648 177,164
Provision for income taxes 62,276 15,799 (5,881)<F(6)> 72,194
---------- -------- ----------
Net income $90,550 $ 24,849 $104,970
========== ======== ===========
Net income per share - Basic and Diluted $0.91 $1.05
========== ===========
Common shares outstanding - Basic 99,813,328 99,813,328
========== ===========
Common shares outstanding - Diluted 99,972,152 99,972,152
========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statements of Income.
27
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
January 1, 2000
----------------------------------------------------------------------------------
Polo Europe
Polo Nine Months Ended
Nine Months Ended September 30, Pro Forma Pro Forma
January 1, 2000 <F(1)> 1999 <F(1)> Adjustments Combined
----------------------- ------------------- --------------- -----------------
(In thousands)
<S> <C> <C> <C> <C>
Net sales $ 1,307,996 $ 147,336 $ 1,455,332
Licensing revenue 174,945 6,348 (5,100)<F(2)> 176,193
Other income 5,664 - 5,664
----------- ---------- ------------
Net revenues 1,488,605 153,684 1,637,189
Cost of goods sold 762,635 63,610 (5,100)<F(2)> 821,145
----------- ---------- ------------
Gross profit 725,970 90,074 816,044
Selling, general and administrative expenses 521,105 49,069 2,900 <F(3)>
650 <F(4)> 573,724
----------- -----------
Income from operations 204,865 41,005 242,320
Interest expense 9,597 3,156 8,200 <F(5)> 20,953
----------- ---------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 195,268 37,849 221,367
Provision for income taxes 79,574 14,572 (3,937)<F(6)> 90,209
----------- ---------- -----------
Income before cumulative effect of
change in accounting principle 115,694 23,277 131,158
Cumulative effect of change in accounting
principle, net of taxes 3,967 3,967
----------- ---------- -----------
Net income $ 111,727 $ 23,277 $ 127,191
============= =========== ===========
Income per share before cumulative effect of
of change in accounting principle - Basic
and Diluted $1.17 $ 1.32
Cumulative effect of change in accounting
principle, net of taxes, per share - Basic
and Diluted 0.04 0.04
----------- -----------
Net income per share - Basic and Diluted $ 1.13 $ 1.28
=========== ===========
Common shares outstanding - Basic
99,155,088 99,155,088
=========== ===========
Common shares outstanding - Diluted 99,299,695 99,299,695
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statements of Income.
28
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(Unaudited)
<TABLE>
January 1, 2000
-----------------------------------------------------------------------------
Polo Europe
Polo September 30, 1999 Pro Forma Pro Forma
January 1, 2000 (1) (1) Adjustments Combined
------------------- ------------------ ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 345,330 $ 9,286 ($199,924)(2)
(9,286)(3)
(47,346)(4) $ 98,060
Accounts receivable, net 128,908 32,493 (4,117)(5) 157,284
Inventories 343,210 37,144 - 380,354
Deferred tax assets 51,939 - - 51,939
Prepaid expenses and other 29,411 23,857 (7,383)(3) 45,885
---------- --------- --------- -----------
Total current assets 898,798 102,780 (268,056) 733,522
Property and equipment, net 334,901 7,306 - 342,207
Deferred tax assets 12,737 33,160 (30,401)(3) 15,496
Goodwill, net 76,937 3,565 199,950 (2) 3,565
(3,565)(3) 276,887
Other assets, net 96,278 692 - 96,970
---------- -------- --------- ----------
$1,419,651 $147,503 ($102,072) $1,465,082
========== ======== ========= ==========
Current liabilities
Notes and acceptances payable - banks $ 25,000 $ 15,394 $ 31,952 (3)
(47,346)(4) $ 25,000
Income taxes payable 16,639 - - 16,639
Accounts payable 82,741 18,434 (4,117)(5) 97,058
Accrued expenses and other 111,555 22,851 5,000 (6) 132,819
---------- -------- (6,587)(3) ----------
---------
Total current liabilities 235,935 56,679 (21,098) 271,516
Long-term debt 356,705 1,299 - 358,004
Other noncurrent liabilities 73,198 10,185 (1,634)(3) 81,749
Stockholders' equity
Common stock 1,004 - - 1,004
Additional paid-in capital 450,030 - - 450,030
Retained earnings 339,015 79,340 (79,340)(3) 339,015
Treasury stock (36,829) - - (36,829)
Unearned compensation (1,832) - - (1,832)
Accumulated other comprehensive Income 2,425 - - 2,425
---------- -------- --------- ----------
Total stockholders' equity 753,813 79,340 (79,340) 753,813
---------- -------- --------- ----------
$1,419,651 $147,503 ($102,072) $1,465,082
========== ======== ========= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
29
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
[FN]
(1) The accompanying Unaudited Pro Forma Combined Statement of
Income for the year ended April 3, 1999 is based upon the
historical results of operations of Polo for the fiscal year
then ended and the historical results of Polo Europe for the
year ended December 31, 1998. The Unaudited Pro Forma Combined
Statement of Income for the nine months ended January 1, 2000 is
based upon the historical results of Polo for the nine months
then ended and the historical results of operations for Polo
Europe for the nine months ended September 30, 1999. The
Unaudited Pro Forma Combined Statements of Income have been
prepared assuming that the acquisition had been consummated,
using the purchase method of accounting, as of March 29, 1998.
[FN]
(2) Reflects the elimination of intercompany licensing revenue and
cost of sales of approximately $6.7 million and $5.1 million for
the fiscal year ended April 3, 1999 and for the nine months
ended January 1, 2000, respectively.
[FN]
(3) Reflects amortization in the net amount of approximately $3.9
million and $2.9 million for the fiscal year ended April 3, 1999
and for the nine months ended January 1, 2000, respectively,
based on the excess of cost over fair value of net assets
acquired of approximately $200.0 million arising from the
acquisition of Polo Europe, calculated using the straight-line
method over forty years. The amortization adjustments are net
of historical amortization recorded by Polo Europe of $1.2
million and $0.9 million for the fiscal year ended April 3, 1999
and for the nine months ended January 1, 2000, respectively.
[FN]
(4) Reflects amortization of deferred financing costs of
approximately $0.9 million and $0.7 million for the fiscal year
ended April 3, 1999 and for the nine months ended January 1,
2000, respectively, related to additional financing from the
Eurobond Offering (as defined below in Note 5), a portion of the
net proceeds of which were used to finance the acquisition of
Polo Europe. Deferred financing costs of approximately $6.0
million are being amortized over the seven-year term of the Euro
notes issued pursuant to the Eurobond Offering.
[FN]
(5) Reflects net interest expense of approximately $11.6 million and
$8.2 million for the fiscal year ended April 3, 1999 and for the
nine months ended January 1, 2000, respectively, from additional
financing necessary to finance the acquisition of Polo Europe
and to repay its outstanding short-term indebtedness. The
interest expense adjustments are net of historical interest
expense recorded by Polo Europe of $3.6 million and $3.2 million
30
<PAGE>
for the fiscal year ended April 3, 1999 and for the nine months
ended January 1, 2000, respectively. The funds used to acquire
Polo Europe were raised through Polo's issuance of euro 275
million of 6.125 per cent Notes due November 2006 (the
"Eurobond Offering").
[FN]
(6) Reflects the income tax effect of the combined results of
operations of Polo and Polo Europe after giving effect to the
pro forma adjustments above, based upon a pro forma effective
tax rate of 40.8%.
31
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED BALANCE SHEET
[FN]
(1) The Unaudited Pro Forma Balance Sheet at January 1, 2000
represents the historical consolidated balance sheet of Polo at
January 1, 2000 and the historical combined balance sheet of
Polo Europe at September 30, 1999. The Unaudited Pro Forma
Balance Sheet has been prepared using the purchase method of
accounting and assuming the acquisition occurred as of
January 1, 2000.
[FN]
(2) Reflects the preliminary allocation to goodwill of the purchase
price of approximately $200.0 million over the fair value of the
net assets acquired and the liabilities assumed based on preliminary
estimates and including the adjustments set forth in Note 3 and
Note 6 below.
[FN]
(3) Reflects adjustments to Polo Europe's combined balance sheet as
of September 30, 1999 for the following: (a)the elimination of assets
and liabilities of Louis Dreyfus Fashion Corp ("LDFC") which are not
being acquired or assumed by Polo of $42.3 million, net, comprised of
the following: (i) a reduction of the deferred tax asset of $30.4
million and the deferred tax liability of $1.6 million arising
from Polo Europe's sales to LDFC in December 1997 of the license
granted by Polo, (ii) cash of $9.2 million, (iii) prepaid expenses
of $7.3 million, (iv) existing intangibles of $3.5 million, and
(v) other liabilities of $6.5 million; and (b) the liability assumed
for dividends declared by Polo Europe subsequent to September 30, 1999
to existing stockholders and unpaid as of September 30, 1999 of
$32.0 million.
[FN]
(4) Reflects the pay down of outstanding short-term indebtedness
under Polo Europe's existing credit facility of $47.3 million.
[FN]
(5) Reflects the elimination of intercompany balances between Polo
and Polo Europe of $4.1 million.
[FN]
(6) Reflects an adjustment for estimated transaction fees associated
with the acquisition of $5.0 million.
32
<PAGE>
SIGNATURE
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 hereunto duly authorized.
POLO RALPH LAUREN CORPORATION
By: /s/ Nancy A. Platoni Poli
Name: Nancy A. Platoni Poli
Title: Senior Vice President and
Chief Financial Officer
Dated: March 20, 2000
33
