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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 1, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13057
POLO RALPH LAUREN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2622036
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-318-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
At August 10, 2000, 30,921,874 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 1, 2000 (Unaudited)
and April 1, 2000 ............................................. 3
Consolidated Statements of Income for the three months ended
July 1, 2000 and July 3, 1999 (Unaudited) ..................... 4
Consolidated Statements of Cash Flows for the three months ended
July 1, 2000 and July 3, 1999 (Unaudited) ..................... 5-6
Notes to Consolidated Financial Statements ...................... 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 12-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 18
PART II. OTHER INFORMATION
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 1, APRIL 1,
2000 2000
---------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 139,907 $ 164,571
Accounts receivable, net of allowances of $15,619 and $16,631 respectively 172,063 204,447
Inventories 446,624 390,953
Deferred tax assets 40,297 40,378
Prepaid expenses and other 49,149 52,542
------------ -----------
TOTAL CURRENT ASSETS 848,040 852,891
Property and equipment, net 375,071 372,977
Deferred tax assets 10,801 11,068
Goodwill, net 271,251 277,822
Other assets, net 103,876 105,804
------------ -----------
$ 1,609,039 $ 1,620,562
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $ 67,418 $ 86,131
Accounts payable 175,567 151,281
Income taxes payable 7,819 -
Accrued expenses and other 120,050 168,816
------------ -----------
TOTAL CURRENT LIABILITIES 370,854 406,228
Long-term debt 343,368 342,707
Other noncurrent liabilities 111,663 99,190
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,500,653 and 34,381,655 shares issued, respectively 345 344
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 452,029 450,030
Retained earnings 394,768 370,785
Treasury Stock, Class A, at cost (3,427,706 and 2,952,677 shares) (65,344) (57,346)
Accumulated other comprehensive income 4,248 9,655
Unearned compensation (3,552) (1,691)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 783,154 772,437
------------ -----------
$ 1,609,039 $ 1,620,562
============ ===========
</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 1, JULY 3,
2000 1999
------------- -------------
<S> <C> <C>
Net sales $ 433,727 $ 384,472
Licensing revenue 52,436 47,876
Other income 1,134 2,073
------------- -------------
Net revenues 487,297 434,421
Cost of goods sold 234,750 217,446
------------- -------------
Gross profit 252,547 216,975
Selling, general and administrative expenses 206,400 167,098
------------- -------------
Income from operations 46,147 49,877
Interest expense 6,505 2,488
------------- -------------
Income before income taxes and cumulative effect of change
in accounting principle 39,642 47,389
Provision for income taxes 15,659 19,312
------------- -------------
Income before cumulative effect of change in accounting principle 23,983 28,077
Cumulative effect of change in accounting principle, net of taxes - 3,967
------------- -------------
Net income $ 23,983 $ 24,110
============= =============
Income per share before cumulative effect of change in
accounting principle - Basic and Diluted $ 0.25 $ 0.28
Cumulative effect of change in accounting principle - Basic and Diluted $ 0.00 $ 0.04
------------- -------------
Net income per share - Basic and Diluted $ 0.25 $ 0.24
============= =============
Weighted average common shares outstanding - Basic 97,092,017 99,533,454
============= =============
Weighted average common shares outstanding - Diluted 97,350,907 99,704,140
============= =============
</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 1, JULY 3,
2000 1999
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,983 $ 24,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 20,327 11,417
Cumulative effect of change in accounting principle - 3,967
Provision for losses on accounts receivable 904 639
Changes in deferred liabilities 9,323 (162)
Other 554 1,845
Changes in assets and liabilities, net of acquisition
Accounts receivable 31,480 9,563
Inventories (56,646) (26,409)
Prepaid expenses and other 3,393 11,349
Other assets, net 2,348 (2,243)
Accounts payable 24,884 (2,232)
Income taxes payable and accrued expenses and other (17,970) (12,356)
----------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 42,580 19,488
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (17,987) (13,414)
Acquisition, net of cash acquired (21,637) (50,824)
Proceeds from release of restricted cash held for Club Monaco acquisition - 44,217
Cash surrender value - officers' life insurance, net (1,108) (1,721)
----------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (40,732) (21,742)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchases of common stock (7,998) (6,499)
(Repayments of) proceeds from short-term borrowings, net (18,713) 10,000
Repayments of long-term debt - (37,358)
Proceeds from long-term debt - 35,783
----------------- -------------------
NET CASH USED IN (PROVIDED BY) FINANCING ACTIVITIES (26,711) 1,926
----------------- -------------------
Effect of exchange rate changes on cash 199 -
----------------- -------------------
Net decrease in cash and cash equivalents (24,664) (328)
Cash and cash equivalents at beginning of period 164,571 44,458
----------------- -------------------
Cash and cash equivalents at end of period $ 139,907 $ 44,130
================= ===================
</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 1, JULY 3,
2000 1999
----------------- -------------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 2,742 $ 2,554
================= ===================
Cash paid for income taxes $ 3,077 $ 11,218
================= ===================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired, excluding cash $ 110,617
Less:
Cash paid 50,824
----------------- -------------------
Liabilities assumed $ 59,793
===================
</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 1, 2000 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 1, 2000 and July 3,
1999 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 2000 audited
consolidated financial statements.
(B) ACQUISITION
On January 6, 2000, the Company completed the acquisition of stock and
certain assets of Poloco S.A.S. and certain of its affiliates ("Poloco"),
which hold licenses to sell men's and boys' Polo apparel, men's and women's
Polo Jeans apparel, and certain Polo accessories in Europe. In addition to
acquiring Poloco's wholesale business, the Company acquired one flagship
store in Paris and six outlet stores located in France, the United Kingdom
and Austria. The Company acquired Poloco for an aggregate cash
consideration of $209.7 million, plus the assumption of $10.0 million in
short-term debt. The Company used a portion of the net proceeds from the
Eurobond Offering (as defined) to finance this acquisition. During the
quarter ended July 1, 2000, the final 10% of the acquisition price for
Poloco in the amount of $21.6 million was distributed in accordance with
the terms of the agreement. This acquisition has been accounted for as a
purchase. The March 31, 2000 consolidated balance sheet and January 6, 2000
combined balance sheet of Poloco have been included in the accompanying
July 1, 2000 and April 1, 2000 consolidated balance sheets, respectively,
and the Company has consolidated the results of operations of Poloco for
the three months ended March 31, 2000 in the July 1, 2000 results of
operations. The purchase
7
<PAGE>
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 $206.5
million, which has been recorded as goodwill and is being amortized on a
straight-line basis over an estimated useful life of 40 years.
The following table sets forth unaudited pro forma combined statement
of income information for the three months ended July 3, 1999 which present
the effects on the Company's historical results as if the acquisition of
Poloco occurred at the beginning of the period:
QUARTER ENDED
JULY 3, 1999
(UNAUDITED)
Pro forma net revenues $ 499,321
Pro forma net income 33,864
Pro forma net income per share- Basic and Diluted .34
The unaudited pro forma information above has been prepared for
comparative purposes only and includes certain adjustments to the Company's
historical statements of income, such as additional amortization as a
result of goodwill and increased interest expense on acquisition debt. The
results do not purport to be indicative of the results of operations that
would have resulted had the acquisition occurred at the beginning of the
period, or of future results of operations of the consolidated entities.
2 COMPREHENSIVE INCOME
For the three months ended July 1, 2000, comprehensive income was as
follows:
QUARTER ENDED
JULY 1, 2000
Net income $ 23,983
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments (5,407)
---------
Comprehensive income $ 18,576
=========
Income tax benefit related to foreign currency translation adjustments
was $3.5 million in the three months ended July 1, 2000.
For the three months ended July 3, 1999, comprehensive income was equal
to net income.
8
<PAGE>
3 RECENTLY ISSUED PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, Accounting
for Certain Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133. This Statement addresses a limited number of
implementation issues for entities applying SFAS No. 133. SFAS No. 133
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.
4 INVENTORIES
JULY 1, APRIL 1,
2000 2000
Raw materials $ 14,133 $ 13,649
Work-in-process 8,345 6,337
Finished goods 424,146 370,967
--------- ---------
$ 446,624 $ 390,953
========= =========
5 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.
9
<PAGE>
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 1, 2000 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>
Balance at April 1, 2000 ..... $ 7,265 $ - $ 4,878 $ 140 $12,283
2001 activity ................ (856) - (1,228) - (2,084)
-------- ----- -------- ----- -------
Balance at July 1, 2000 ...... $ 6,409 $ - $ 3,650 $ 140 $10,199
======== ===== ======== ===== =======
</TABLE>
Total severance and termination benefits as a result of the
Restructuring Plan relate to approximately 280 employees, all of which have
been terminated. Total cash outlays related to the Restructuring Plan are
approximately $39.5 million, $29.3 million of which have been paid to date.
The Company completed the implementation of the Restructuring Plan in
fiscal 2000.
6 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.
10
<PAGE>
The Company's net revenues and income from operations for the three
months ended July 1, 2000 and July 3, 1999 by segment were as follows:
THREE MONTHS ENDED
JULY 1, JULY 3,
2000 1999
NET REVENUES:
Wholesale $ 226,154 $ 196,651
Retail 208,707 189,894
Licensing 52,436 47,876
--------- ---------
$ 487,297 $ 434,421
========= =========
INCOME FROM OPERATIONS:
Wholesale $ 21,264 $ 11,781
Retail (61) 8,100
Licensing 24,944 23,300
--------- ---------
46,147 43,181
Add: Cumulative effect of change
in accounting principle before taxes - 6,696
--------- ---------
$ 46,147 $ 49,877
========= =========
The Company's net revenues for the three months ended July 1, 2000 and
July 3, 1999 and its long-lived assets as of July 1, 2000 and April 1, 2000
by geographic location were as follows:
THREE MONTHS ENDED
JULY 1, JULY 3,
2000 1999
NET REVENUES:
United States $ 394,830 $ 400,849
France 50,860 2,891
Other foreign countries 41,607 30,681
--------- ---------
$ 487,297 $ 434,421
========= =========
JULY 1, APRIL 1,
2000 2000
LONG-LIVED ASSETS:
United States $ 307,089 $ 306,439
Other foreign countries 67,982 66,538
--------- ---------
$ 375,071 $ 372,977
========= =========
11
<PAGE>
POLO RALPH LAUREN CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and related notes thereto which
are included herein. The Company utilizes a 52-53 week fiscal year ending on the
Saturday nearest March 31. Fiscal years 2001 and 2000 end on March 31, 2001 and
April 1, 2000, 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 in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral statements made by or with the approval of authorized personnel
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward- looking statements are
based on current expectations and are indicated by words or phrases such as
"anticipate," "estimate," "expect," "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, including risks related to extending credit to customers; risks
associated with the Company's dependence on its licensing partners for a
substantial portion of its net income and risks associated with a lack of
operational and financial control over licensed businesses; risks associated
with consolidations, restructurings and other ownership changes in the retail
industry; risks associated with competition in the segments of the fashion and
consumer product industries in which the Company operates, including the
Company's ability to shape, stimulate and respond to changing consumer tastes
and demands by producing attractive products, brands and marketing, and its
ability to remain competitive in the areas of quality and price; risks
associated with uncertainty relating to the Company's ability to implement its
growth strategies; risks associated with the Company's entry into new markets
either through internal development activities or through acquisitions; risks
associated with the 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
12
<PAGE>
POLO RALPH LAUREN CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 affecting the Company's foreign subsidiaries' and foreign
licensees' results of operations and the relative prices at which the Company
and foreign competitors sell their products in the same market and the Company's
operating and manufacturing costs outside of the United States; 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.
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.
13
<PAGE>
RESULTS OF OPERATIONS
The following discussion provides information and analysis of the Company's
results of operations for the three months ended July 1, 2000 compared to July
3, 1999. 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 1, 2000 and July 3, 1999:
JULY 1, JULY 3,
2000 1999
---- ----
Net sales 89.0% 88.5%
Licensing revenue 10.8 11.0
Other income 0.2 0.5
----- -----
Net revenues 100.0 100.0
----- -----
Gross profit 51.8 49.9
Selling, general and administrative expenses 42.4 38.5
----- -----
Income from operations 9.4 11.4
Interest expense 1.3 .5
----- -----
Income before income taxes and
accounting change 8.1% 10.9%
====== ======
THREE MONTHS ENDED JULY 1, 2000 COMPARED TO THREE MONTHS ENDED JULY 3, 1999
NET SALES. Net sales increased 12.8% to $433.7 million in the three months
ended July 1, 2000 from $384.5 million in the three months ended July 3, 1999.
Wholesale net sales increased 15.6% to $225.0 million in the three months ended
July 1, 2000 from $194.6 million in the corresponding period of fiscal 1999.
Wholesale growth primarily reflects the benefit of three months of operations
for Poloco's wholesale division acquired on January 6, 2000. This increase was
offset by the negative impact caused by a change in the timing of Fall shipments
to retailers in the three months ended July 1, 2000 compared to the prior period
last year. Retail sales increased by 9.9% to $208.7 million in the three months
ended July 1, 2000 from $189.9 million in the corresponding period in fiscal
2000. This increase is primarily attributable to the $28.3 million benefit from
the following: (a) new store openings in the three months ended July 1, 2000
(seven outlet stores, net of store closures); (b) a full quarter of revenues for
new stores opened in fiscal 2000; and (c) the inclusion of the results of one
flagship and six outlet stores purchased in connection with the acquisition of
Poloco. Although the Company's stores remain highly productive, comparable store
sales, which represent net sales of stores open in both reporting periods for
the full portion of such periods, decreased by 5.6%. The decline was due to a
promotionally driven retail environment and the effects of a mature and
challenging outlet store environment. At July 1, 2000, the Company operated 46
Polo stores, 123 outlet stores and 71 Club Monaco stores.
14
<PAGE>
LICENSING REVENUE. Licensing revenue increased 9.5% to $52.4 million in the
three months ended July 1, 2000 from $47.9 million in the corresponding period
of fiscal 2000. This increase is primarily attributable to increases in sales of
existing licensed products, particularly women's and children's products.
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
51.8% in the three months ended July 1, 2000 from 49.9% in the corresponding
period of fiscal 2000. This increase was mainly attributable to the increase in
licensing revenue which has no associated cost of goods sold. Wholesale gross
margins increased significantly as a result of the acquisition of Poloco, which
generates higher margins than the Company's domestic wholesale operations, and
savings in the costs associated with the sourcing of the Company's products.
Retail gross margins were relatively consistent with the comparable prior
period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses as a percentage of net revenues increased to
42.4% in the three months ended July 1, 2000 from 38.5% of net revenues in the
corresponding period of fiscal 2000. This increase in SG&A expenses as a
percentage of net revenues was primarily due to an increase in depreciation and
amortization expense associated with the Company's shop-within-shops development
program and other capital projects as well as start-up costs associated with the
expansion of the Company's retail operations.
INTEREST EXPENSE. Interest expense increased to $6.5 million in the three
months ended July 1, 2000 from $2.5 million in the comparable period in fiscal
2000. This increase was due to a higher level of borrowings during the current
quarter attributable to the additional financing used for the acquisition of
Poloco.
INCOME TAXES. The effective tax rate decreased to 39.5% in the three months
ended July 1, 2000 from 40.8% in the corresponding period in fiscal 2000. This
decline is primarily a result of the benefit of tax strategies implemented by
the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash 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.
15
<PAGE>
Net cash provided by operating activities increased to $42.6 million in the
three months ended July 1, 2000 from $19.5 million in the comparable period in
fiscal 2000. This improvement was driven by favorable changes in accounts
receivable and accounts payable as a result of timing (i.e., customer
remittances and payments to vendors). Net cash provided by operating activities
was negatively impacted by increases in inventory levels during the current
quarter as a result of seasonality, the timing of shipments to retailers and the
overall growth of the business. Net cash used in investing activities increased
to $40.7 million in the three months ended July 1, 2000 from $21.7 million in
the comparable period in fiscal 2000. This increase principally reflects the use
of $21.6 million to complete the acquisition of Poloco in the three months ended
July 1, 2000. Net cash used in financing activities increased to $26.7 million
in the three months ended July 1, 2000 from net cash provided by financing
activities of $1.9 million in the comparable period in fiscal 2000. This
increase is primarily due to the use of funds to repay short-term borrowings
under the Credit Facilities (as defined below) and to repurchase shares of the
Company's common stock in the three months ended July 1, 2000.
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.
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On November 22, 1999, the Company issued euro 275.0 million of 6.125
percent Notes (the "Eurobonds") due November 2006 (the "Eurobond Offering"). The
Eurobonds are listed on the London Stock Exchange. The net proceeds from the
Eurobond Offering were $281.5 million based on the foreign exchange rate on the
issuance date. Interest on the Eurobonds is payable annually. A portion of the
net proceeds from the issuance was used to pay down existing debt under the
Company's Credit Facilities and to acquire Poloco.
As of July 1, 2000, the Company had $67.4 million outstanding in direct
borrowings, $80.0 million outstanding under the Term Loan and $263.4 million
outstanding in Eurobonds based on the quarter end exchange rate. The Company was
also contingently liable for $54.6 million in outstanding letters of credit
related to commitments for the purchase of inventory and in connection with its
leases under the Credit Facilities. The weighted average interest rate on
borrowings at July 1, 2000, was 6.0%.
Capital expenditures were $18.0 million and $13.4 million in the three
months ended July 1, 2000 and July 3, 1999, 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 operations; and (iv) additional purchases of
information systems. The Company plans to invest approximately $150.0 million,
net of landlord incentives, over the current fiscal year primarily for its
retail concepts, outlet and Club Monaco stores, its European expansion, the
shop-within-shops development program, its information systems and other capital
projects.
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 were made in the open market over a
two-year period which commenced April 1, 1998. On March 2, 2000, the Board of
Directors authorized a two-year extension to the stock repurchase program.
Shares acquired under the repurchase program will be used for stock option
programs and for other corporate purposes. As of July 1, 2000, the Company had
repurchased 3,427,706 shares of its Class A Common Stock at an aggregate cost of
$65.3 million.
Management believes that cash from ongoing operations and funds available
under the Credit Facilities and from the Eurobond Offering will be sufficient to
satisfy the Company's current level of operations, the Restructuring Plan,
capital requirements, the 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.
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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.
NEW ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, Accounting for
Certain Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133. This Statement addresses a limited number of implementation
issues for entities applying SFAS No. 133. SFAS No. 133 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 the 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 its
financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The market risk inherent in the Company's financial instruments represents
the potential loss in fair value, earnings or cash flows arising from adverse
changes in interest rates or foreign currency exchange rates. The Company
manages these exposures through operating and financing activities and, when
appropriate, through the use of derivative financial instruments. The policy of
the Company allows for the use of derivative financial instruments for
identifiable market risk exposures, including interest rate and foreign currency
fluctuations. The Company does not enter into derivative financial contracts for
trading or other speculative purposes. Since April 1, 2000, there have been no
significant changes in the Company's interest rate and foreign currency
exposures, changes in the types of derivative instruments used to hedge those
exposures, or significant changes in underlying market conditions.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits--
10.1 Second Amended and Restated Limited Liability Company
Agreement of Ralph Lauren Media, LLC, a Delaware limited
liability company, dated as of May 18, 2000, by and among Polo
Ralph Lauren Corporation, National Broadcasting Company, Inc.,
ValueVision International, Inc., CNBC.com LLC, NBC Internet,
Inc. and Jeffrey D. Morgan.
27.1 Financial Data Schedule
(b) Reports on Form 8-K--
No reports on Form 8-K were filed by the Company in the three months
ended July 1, 2000.
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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 15, 2000 By: /s/ Nancy A. Platoni Poli
---------------------------------------
Nancy A. Platoni Poli
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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