================================================================================ 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 January 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 February 10, 2000, 32,670,476 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. ================================================================================
POLO RALPH LAUREN CORPORATION INDEX TO FORM 10-Q PART 1. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of January 1, 2000 (Unaudited) and April 3, 1999.............................................. 3 Consolidated Statements of Income for the three and nine months ended January 1, 2000 and September 26, 1998 (Unaudited)....... 4 Consolidated Statements of Cash Flows for the nine months ended January 1, 2000 and December 26, 1998 (Unaudited)............. 5-6 Notes to Consolidated Financial Statements....................... 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 14-22 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 23 Item 5. Other Information................................................. 23 Item 6. Exhibits and Reports on Form 8-K.................................. 24 2
POLO RALPH LAUREN CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> January 1, April 3, 2000 1999 ----------- ----------- (Unaudited) <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 345,330 $ 44,458 Accounts receivable, net of allowances of $14,341 and $13,495 respectively 128,908 157,203 Inventories 343,210 376,860 Deferred tax assets 51,939 51,939 Prepaid expenses and other 29,411 48,994 ----------- ----------- Total current assets 898,798 679,454 Property and equipment, net 334,901 261,799 Deferred tax assets 12,737 12,493 Restricted cash -- 44,217 Goodwill, net 76,937 27,464 Other assets, net 96,278 79,157 ----------- ----------- $ 1,419,651 $ 1,104,584 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes and acceptances payable - banks $ 25,000 $ 115,500 Accounts payable 82,741 88,898 Income taxes payable 16,639 17,432 Accrued expenses and other 111,555 126,142 ----------- ----------- Total current liabilities 235,935 347,972 Long-term debt 356,705 44,217 Other noncurrent liabilities 73,198 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 339,015 227,288 Treasury Stock, Class A, at cost (1,711,177 and 603,864 shares) (36,829) (16,084) Accumulated other comprehensive income 2,425 -- Unearned compensation (1,832) (3,333) ----------- ----------- Total stockholders' equity 753,813 658,905 ----------- ----------- $ 1,419,651 $ 1,104,584 =========== =========== </TABLE> See accompanying notes to financial statements. 3
POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------- ------------------------- January 1, December 26, January 1, December 26, 2000 1998 2000 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 453,015 $ 395,436 $ 1,307,996 $ 1,116,047 Licensing revenue 55,741 49,164 174,945 153,951 Other income 1,543 2,930 5,664 11,115 ----------- ----------- ----------- ----------- Net revenues 510,299 447,530 1,488,605 1,281,113 Cost of goods sold 270,719 240,661 762,635 657,917 ----------- ----------- ----------- ----------- Gross profit 239,580 206,869 725,970 623,196 Selling, general and administrative expenses 181,696 163,009 521,105 456,756 ----------- ----------- ----------- ----------- Income from operations 57,884 43,860 204,865 166,440 Interest expense 3,422 1,074 9,597 1,070 ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of change in accounting principle 54,462 42,786 195,268 165,370 Provision for income taxes 22,194 17,435 79,574 67,389 ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 32,268 25,351 115,694 97,981 Cumulative effect of change in accounting principle, net of taxes -- -- 3,967 -- ----------- ----------- ----------- ----------- Net income $ 32,268 $ 25,351 $ 111,727 $ 97,981 =========== =========== =========== =========== Income per share before cumulative effect of change in accounting principle - Basic and Diluted $ 0.33 $ 0.25 $ 1.17 $ 0.98 Cumulative effect of change in accounting principle, net of taxes, per share - Basic and Diluted $ -- $ -- 0.04 $ -- ----------- ----------- ----------- ----------- Net income per share - Basic and Diluted $ 0.33 $ 0.25 $ 1.13 $ 0.98 =========== =========== =========== =========== Weighted average common shares outstanding - Basic 98,807,754 99,622,932 99,155,088 99,881,675 =========== =========== =========== =========== Weighted average common shares outstanding - Diluted 98,938,341 99,674,214 99,299,695 99,932,957 =========== =========== =========== =========== </TABLE> See accompanying notes to financial statements. 4
POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended ---------------------- January 1, December 26, 2000 1998 --------- --------- <S> <C> <C> Cash flows from operating activities Net income $ 111,727 $ 97,981 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 53,074 33,288 Cumulative effect of change in accounting principle 3,967 -- Provision for losses on accounts receivable 2,268 653 Other 1,579 (1,199) Changes in assets and liabilities, net of acquisition Accounts receivable 26,420 15,515 Inventories 57,713 (79,415) Prepaid expenses and other 15,943 (13,438) Other assets, net (8,672) (9,879) Accounts payable (19,221) (17,768) Income taxes payable and accrued expenses and other (11,039) 16,601 --------- --------- Net cash provided by operating activities 233,759 42,339 --------- --------- Cash flows from investing activities Purchases of property and equipment, net (88,627) (94,991) Acquisition, net of cash acquired (52,391) (6,981) Proceeds from release of restricted cash held for Club Monaco acquisition 44,217 -- Cash surrender value - officers' life insurance, net (4,065) (1,737) --------- --------- Net cash used in investing activities (100,866) (103,709) --------- --------- Cash flows from financing activities Proceeds from issuance of common stock, net -- 113 Repurchases of common stock (20,745) (16,084) (Repayments of) proceeds from short-term borrowings, net (90,500) 40,000 Repayments of long-term debt (37,358) (337) Proceeds from long-term debt 319,611 -- --------- --------- Net cash provided by financing activities 171,008 23,692 --------- --------- Net increase (decrease) in cash and cash equivalents 303,901 (37,678) Effect of exchange rate changes on cash and cash equivalents (3,029) -- Cash and cash equivalents at beginning of period 44,458 58,755 --------- --------- Cash and cash equivalents at end of period $ 345,330 $ 21,077 ========= ========= </TABLE> See accompanying notes to financial statements. 5
POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended --------------------- January 1, December 26, 2000 1998 -------- -------- <S> <C> <C> Supplemental cash flow information Cash paid for interest $ 10,085 $ 127 ======== ======== Cash paid for income taxes $ 79,648 $ 55,464 ======== ======== Supplemental schedule of non-cash investing and financing activities Fair value of assets acquired, excluding cash $113,492 $ 14,868 Less: Cash paid 54,314 6,981 Promissory notes issued -- 5,000 -------- -------- Liabilities assumed $ 59,178 $ 2,887 ======== ======== Fair market value of restricted stock grants $ 1,501 ======== </TABLE> See accompanying notes to financial statements. 6
POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information for January 1, 2000 and December 26, 1998 is unaudited) 1 Basis of Presentation (a) Unaudited Interim Financial Statements The accompanying unaudited consolidated financial statements include the results of operations of Polo Ralph Lauren Corporation and its subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in a manner consistent with that used in the preparation of the April 3, 1999 audited consolidated financial statements of the Company. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. Operating results for the three months and nine months ended January 1, 2000 and December 26, 1998 are not necessarily indicative of the results that may be expected for a full year. In addition, the unaudited interim consolidated financial statements do not include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. These unaudited consolidated financial statements should be read in conjunction with the Company's fiscal 1999 audited consolidated financial statements. (b) Acquisition On April 6, 1999, PRL Acquisition Corp., a Nova Scotia unlimited liability corporation and a wholly owned subsidiary of the Company, acquired, through a tender offer, 98.83% of the outstanding shares of Club Monaco Inc. ("Club Monaco"), a corporation organized under the laws of the Province of Ontario, Canada. On May 3, 1999, PRL Acquisition Corp. acquired the remaining outstanding 1.17% shares pursuant to a statutory compulsory acquisition. The total purchase price was approximately $51.0 million in cash based on the then current foreign exchange rates. The Company used funds from its credit facility to finance this acquisition and to repay in full assumed debt of Club Monaco of approximately $35.0 million. This acquisition has been accounted for as a purchase and the Company has consolidated the operations of Club Monaco in the accompanying financial statements from the effective date of the transaction. The purchase price has been preliminarily allocated based upon fair values at the date of acquisition, pending final determination of certain acquired balances. This preliminary allocation resulted in an excess of purchase price over the estimated fair value of net assets acquired of approximately $51.0 million, which has been recorded as goodwill and is being amortized on a straight-line basis over an estimated useful life of 40 years. 7
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 and nine months ended January 1, 2000, comprehensive income was as follows: Three Months Nine Months January 1, January 1, 2000 2000 Net income $ 32,268 $111,727 Other comprehensive income, net of taxes: Foreign currency translation adjustments 2,425 2,425 -------- -------- Comprehensive income $ 34,693 $114,152 ======== ======== Income tax expense related to foreign currency translation adjustments was $1.7 million in the three and nine months ended January 1, 2000, respectively. For the three and nine months ended December 26, 1998, comprehensive income was equal to net income. (c) Accounting Changes Effective April 4, 1999, the Company adopted the provisions of Statement of Position No. 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP 98-5 requires that costs of start-up activities, including store pre-opening costs, be expensed as incurred. Prior to its adoption of SOP 98-5, the Company's accounting policy was to capitalize store pre-opening costs as prepaid expenses and amortize such costs over a twelve-month period following store opening. As a result of adopting SOP 98-5, the Company recorded a charge of $4.0 million, after taxes, as the cumulative effect of a change in accounting principle in the accompanying financial statements. Effective April 4, 1999, the Company changed its method of valuing its retail inventories from the retail method to the lower of cost (first-in, first-out) or market. The impact of this change was not material and is included in selling, general and administrative expenses in the accompanying financial statements. 8
(d) 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. 3 Inventories January 1, April 3, 2000 1999 Raw materials $ 14,304 $ 17,675 Work-in-process 8,940 8,545 Finished goods 319,966 350,640 -------- -------- $343,210 $376,860 ======== ======== Merchandise inventories of $196.1 million at April 3, 1999 were valued utilizing the retail method and are included in finished goods. 9
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 January 1, 2000 were as follows: <TABLE> <CAPTION> Lease and Severance and Asset Contract Termination Write Termination Other Total Benefits Downs Costs Costs <S> <C> <C> <C> <C> <C> 1999 provision ............. $ 15,277 $ 17,788 $ 24,665 $ 830 $ 58,560 1999 activity .............. (3,318) (17,788) (1,112) (105) (22,323) -------- -------- -------- -------- -------- Balance at April 3, 1999 ... 11,959 -- 23,553 725 36,237 2000 activity .............. (3,557) -- (16,344) (250) (20,151) -------- -------- -------- -------- -------- Balance at January 1, 2000 . $ 8,402 $ -- $ 7,209 $ 475 $ 16,086 ======== ======== ======== ======== ======== </TABLE> Total severance and termination benefits as a result of the Restructuring Plan relate to approximately 280 employees, 223 of which have been terminated through January 2000. Total cash outlays related to the Restructuring Plan are expected to be approximately $39.5 million, $19.7 million of which was paid in the nine months ended January 1, 2000. The Company expects to substantially complete the implementation of the Restructuring Plan in fiscal 2000. 10
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 and nine months ended January 1, 2000 and December 26, 1998 and total assets as of January 1, 2000 and April 3, 1999 by segment were as follows: Three Months Ended January 1, December 26, 2000 1998 Net revenues: Wholesale $ 197,831 $ 193,233 Retail 256,727 205,133 Licensing 55,741 49,164 ---------- ---------- $ 510,299 $ 447,530 ========== ========== Income from operations: Wholesale $ 12,100 $ 2,207 Retail 12,684 16,440 Licensing 33,100 25,213 ---------- ---------- $ 57,884 $ 43,860 ========== ========== Nine Months Ended January 1, December 26, 2000 1998 Net revenues: Wholesale $ 643,125 $ 605,231 Retail 670,535 521,931 Licensing 174,945 153,951 ---------- ---------- $1,488,605 $1,281,113 ========== ========== 11
Nine Months Ended January 1, December 26, 2000 1998 Income from operations: Wholesale $ 49,539 $ 31,500 Retail 42,431 48,040 Licensing 106,199 86,900 ---------- ---------- 198,169 166,440 Add: Cumulative effect of change in accounting principle before taxes 6,696 -- ---------- ---------- $ 204,865 $ 166,440 ========== ========== January 1, April 3, 2000 1999 Segment assets: Wholesale $ 296,902 $ 376,154 Retail 532,321 424,203 Licensing 82,663 73,389 Corporate 507,765 230,838 ---------- ---------- $1,419,651 $1,104,584 ========== ========== A substantial portion of the Company's net revenues and income from operations are derived from, and identifiable assets are located in, the United States. 6 Borrowings On November 22, 1999, the Company issued euro 275.0 million of 6.125 per cent 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 $274.4 million based on current exchange rates. A portion of the net proceeds from the issuance was used to pay down existing debt under the Company's credit facilities while the remaining proceeds were used to complete the acquisition discussed in Note 7 below. Interest on the Eurobonds is payable annually. 12
7 Subsequent Events 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 in Europe men's and boys' Polo apparel, the men's and women's Polo Jeans business, and certain Polo accessories. In addition to the wholesale business, included in the acquisition is a Polo store in Paris and six outlet stores located in France, the United Kingdom and Austria. Poloco had revenues of approximately $180.0 million for calendar year 1998. The Company acquired Poloco for an aggregate cash consideration of approximately $210.0 million, plus the assumption of approximately $30 million in short-term debt. The Company used a portion of the net proceeds from the Eurobond Offering to finance this acquisition. The acquisition will be accounted for as a purchase from the effective date of the transaction. On February 7, 2000, the Company announced the formation of Ralph Lauren Media, LLC ("RL Media"), a joint venture between the Company and NBC and certain affiliated companies. RL Media was created to bring the Company's American lifestyle experience to consumers via multiple media platforms, including the Internet, broadcast, cable and print. Under the 30-year joint venture agreement, RL Media will be owned 50% by the Company, 25% by NBC, 12.5% by ValueVision International, Inc. ("ValueVision"), 10% by NBC Internet, Inc. ("NBCi") and 2.5% by CNBC.com. In exchange for its 50% interest, the Company will provide marketing through its annual print advertising campaign, make its merchandise available at initial cost of inventory, provide customer service via its full-price retail stores and handle excess inventory through its outlet stores. NBC will contribute $110.0 million of television and online advertising on NBC and CNBC.com properties. NBCi will contribute $40.0 million in online distribution and promotion and ValueVision will contribute a cash funding commitment up to $50.0 million. Under the arrangement, the Company will not absorb any losses from the joint venture up to the first $50.0 million incurred and will share proportionately in the net income or losses thereafter. Additionally, the Company will receive a royalty on the sale of its products by RL Media based on specified percentages of net sales over a predetermined threshold, subject to certain limitations. RL Media's managing board will have equal representation from the Company and NBC, including its affiliated companies. 13
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 in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, and in oral statements made by or with the approval of authorized personnel constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "project," " we believe," "is or remains optimistic," "currently envisions" and similar words or phrases and involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: risks associated with changes in the competitive marketplace, including the introduction of new products or pricing changes by the Company's competitors; changes in global economic conditions; risks associated with the Company's dependence on sales to a limited number of large department store customers, including risks related to extending credit to customers; risks associated with the Company's dependence on its licensing partners for a substantial portion of its net income and risks associated with a lack of operational and financial control over licensed businesses; risks associated with consolidations, restructurings and other ownership changes in the retail industry; risks associated with competition in the segments of the fashion and consumer product industries in which the Company operates, including the Company's ability to shape, stimulate and respond to changing consumer tastes and demands by producing attractive products, brands and marketing, and its ability to remain competitive in the areas of quality and price; risks associated with uncertainty relating to the Company's ability to implement its growth strategies; risks associated with the Company's entry into new markets either through internal development activities or through acquisitions; risks associated with the ability of the Company or the Company's third party customers and suppliers and government agencies to timely and adequately remedy any Year 2000 issues; risks associated with the possible adverse impact of the Company's unaffiliated manufacturers' inability to manufacture 14
POLO RALPH LAUREN CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. 15
Results of Operations The following discussion provides information and analysis of the Company's results of operations for the three and nine months ended January 1, 2000 compared to December 26, 1998. The table below sets forth the percentage relationship to net revenues of certain items in the Company's statements of income for the three and nine months ended January 1, 2000 and December 26, 1998: <TABLE> <CAPTION> Jan. 1, 2000 Dec. 26, 1998 Three Nine Three Nine Months Months Months Months <S> <C> <C> <C> <C> Net sales .................................. 88.8% 87.9% 88.4% 87.1% Licensing revenue .......................... 10.9 11.8 11.0 12.0 Other income ............................... 0.3 0.3 0.6 0.9 ----- ----- ----- ----- Net revenues ............................... 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Gross profit ............................... 46.9 48.8 46.2 48.7 Selling, general and administrative expenses 35.6 35.0 36.4 35.7 ----- ----- ----- ----- Income from operations ..................... 11.3 13.8 9.8 13.0 Interest expense ........................... 0.7 0.6 0.2 0.1 ----- ----- ----- ----- Income before income taxes and change in accounting ..................... 10.6% 13.2% 9.6% 12.9% ===== ===== ===== ===== </TABLE> Three Months Ended January 1, 2000 Compared to Three Months Ended December 26, 1998 Net Sales. Net sales increased 14.6% to $453.0 million in the three months ended January 1, 2000 from $395.4 million in the three months ended December 26, 1998. Wholesale net sales increased 3.1% to $196.3 million in the three months ended January 1, 2000 from $190.3 million in the corresponding period of fiscal 1999. Wholesale growth primarily reflects increased unit sales of existing Polo and Collection brand products offset by a decline in average selling prices resulting from changes in product mix and increased promotions. Retail sales increased by 25.2% to $256.7 million in the three months ended January 1, 2000 from $205.1 million in the corresponding period in fiscal 1999. This increase is primarily attributable to the $65.0 million benefit from the following: (a) new store openings in fiscal 2000 (11 Polo full-price and 13 outlet stores, net of store closures); (b) new store openings in the second half of fiscal 1999; and (c) 70 Club Monaco stores acquired in the quarter ended July 3, 1999. Although the Company's stores remain highly productive, comparable store sales decreased by 8.1%. Comparable store sales, which represent net sales of stores open in both reporting periods for the full portion of such periods, declined due to a promotionally driven retail environment, an inadequate 16
supply of leading product categories and the effects of a mature and challenging outlet store environment. The Company anticipates that some of these factors affecting its retail operations will continue for the foreseeable future. At January 1, 2000, the Company operated 44 Polo full-price stores, 112 outlet stores and 72 Club Monaco stores. Licensing Revenue. Licensing revenue increased 13.4% to $55.7 million in the three months ended January 1, 2000 from $49.2 million in the corresponding period of fiscal 1999. This increase is primarily attributable to overall increases in sales of existing licensed products, particularly Lauren, Polo Jeans and Chaps. Gross Profit. Gross profit as a percentage of net revenues increased to 46.9% in the three months ended January 1, 2000 from 46.2% in the corresponding period of fiscal 1999. This increase was mainly attributable to a higher concentration of retail sales to net revenues in the current period as a result of the acquisition of Club Monaco in fiscal 2000. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses as a percentage of net revenues decreased to 35.6% in the three months ended January 1, 2000 from 36.4% of net revenues in the corresponding period of fiscal 1999. This decrease 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 $3.4 million in the quarter ended January 1, 2000 from $1.1 million in the comparable period in fiscal 1999. This increase was primarily due to a higher level of borrowings incurred to fund the acquisitions of Club Monaco and Poloco. Nine Months Ended January 1, 2000 Compared to Nine Months Ended December 26, 1998 Net Sales. Net sales increased 17.2% to $1.3 billion in the nine months ended January 1, 2000 from $1.1 billion in the nine months ended December 26, 1998. Wholesale net sales increased 7.3% to $637.5 million in the nine months ended January 1, 2000 from $594.1 million in the corresponding period of fiscal 1999. Wholesale growth primarily reflects increased unit sales of existing Polo and Collection brand products and the timing of shipments to retailers. These unit increases were partially offset by a decline in average selling prices resulting from changes in product mix. Retail sales increased by 28.5% to $670.5 million in the nine months ended January 1, 2000 from $521.9 million in the corresponding period in fiscal 1999. This increase is primarily attributable to the $172.9 million benefit from the following: (a) new store openings in fiscal 2000 (11 Polo full-price and 13 outlet stores, net of store closures); (b) new store openings in the second half of fiscal 1999; and (c) 70 Club Monaco stores acquired in the quarter ended July 3, 1999. Although the Company's stores remain highly productive, comparable store sales decreased by 5.4%. The decline was due to a promotionally driven retail environment, an inadequate supply of leading product categories and the effects of a mature and challenging outlet store environment. 17
Licensing Revenue. Licensing revenue increased 13.6% to $174.9 million in the nine months ended January 1, 2000 from $154.0 million in the corresponding period of fiscal 1999. This increase is primarily attributable to overall general increases in sales of existing licensed products, particularly Lauren, Polo Jeans and Home Collection. Gross Profit. Gross profit as a percentage of net revenues increased slightly to 48.8% in the nine months ended January 1, 2000 from 48.7% in the corresponding period of fiscal 1999. This increase was mainly attributable to a higher concentration of retail sales to net revenues in the current period as a result of the acquisition of Club Monaco in fiscal 2000. Selling, General and Administrative Expenses. SG&A expenses as a percentage of net revenues decreased to 35.0% in the nine months ended January 1, 2000 from 35.7% 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 $9.6 million in the nine months ended January 1, 2000 from $1.1 million in the comparable period in fiscal 1999. This increase was due to a higher level of borrowings incurred during the current period to fund the acquisitions of Club Monaco and Poloco. 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 $233.8 million in the nine months ended January 1, 2000 from $42.3 million in the comparable period in fiscal 1999. This improvement was driven by favorable changes in inventories as the Company implemented a strategic initiative in its fourth fiscal quarter of 1999 to reduce inventory levels and move excess product. This improvement was also impacted by favorable changes in accounts receivable and general expenses due to timing (i.e., customer remittances and vendor payments). Net cash used in investing activities decreased to $100.9 million in the nine months ended January 1, 2000 from $103.7 million in the comparable period in fiscal 1999. This decrease principally reflects a decline in capital expenditures in the nine months ended January 1, 2000. Net cash provided by financing activities increased to $171.0 million in the nine months ended January 1, 2000 from $23.7 million in the comparable period in fiscal 1999. This increase primarily reflects the proceeds received by the Company in connection with the Eurobond Offering offset by the use of a portion of these proceeds to repay outstanding indebtedness under the Credit Facilities. 18
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. In April 1999, the Company entered into interest rate swap agreements with an aggregate notional amount of $100.0 million to convert the variable interest rate on the 1999 Credit Facility to a fixed rate of 5.5%. The Credit Facility and 1999 Credit Facility (collectively, the "Credit Facilities") contain customary representations, warranties, covenants and events of default, including covenants regarding maintenance of net worth and leverage ratios, limitations on indebtedness, loans, investments and incurrences of liens, and restrictions on sales of assets and transactions with affiliates. Additionally, the Credit Facilities provide that an event of default will occur if Mr. Lauren and related entities fail to maintain a specified minimum percentage of the voting power of the Company's common stock. On November 22, 1999, the Company issued euro 275.0 million of 6.125 per cent 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 $274.4 million based on current exchange rates. A portion of the net proceeds from the issuance was used to pay down existing debt under the Company's Credit Facilities while the remaining proceeds were used to complete the acquisition of Poloco, as discussed further below. Interest on the Eurobonds is payable annually. As of January 1, 2000, the Company had $25.0 million outstanding in direct borrowings and $80.0 million outstanding under the Term Loan and was contingently liable for $32.9 million in outstanding letters of credit under the Credit Facilities. Additionally, the Company had $276.7 million outstanding in Eurobonds. The weighted average interest rate on outstanding borrowings was 6.0% at January 1, 2000. 19
Capital expenditures were $88.6 million and $95.0 million in the nine months ended January 1, 2000 and December 26, 1998, respectively. Capital expenditures primarily reflect costs associated with the following: (i) the Company's expansion of its distribution facilities; (ii) the shop-within-shops development program which includes new shops, renovations and expansions; (iii) the expansion of the Company's retail concept and outlet stores; and (iv) the Company's 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. 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 January 1, 2000, the Company had repurchased 1,711,177 shares of its Class A Common Stock at an aggregate cost of $36.8 million. 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 in Europe men's and boys' Polo apparel, the men's and women's Polo Jeans business, and certain Polo accessories. In addition to the wholesale business, included in the acquisition is a Polo store in Paris and six outlet stores located in France, the United Kingdom and Austria. Poloco had revenues of approximately $180.0 million for calendar year 1998. The acquisition is expected to be accretive to earnings beginning in fiscal year 2001. The Company acquired Poloco for an aggregate cash consideration of approximately $210.0 million, plus the assumption of approximately $30.0 million in short-term debt. The Company used a portion of the net proceeds from the Eurobond Offering to finance this acquisition. On February 7, 2000, the Company announced the formation of Ralph Lauren Media, LLC ("RL Media"), a joint venture between the Company and NBC and certain affiliated companies. RL Media was created to bring the Company's American lifestyle experience to consumers via multiple media platforms, including the Internet, broadcast, cable and print. Under the 30-year joint venture agreement, RL Media will be owned 50% by the Company, 25% by NBC, 12.5% by ValueVision International, Inc. ("ValueVision"), 10% by NBC Internet, Inc. ("NBCi") and 2.5% by CNBC.com. In exchange for its 50% interest, the Company will provide marketing through its annual print advertising campaign, make its merchandise available at initial cost of inventory, provide customer service via its full-price retail stores and handle excess inventory through its outlet stores. NBC will contribute $110.0 million of television and online advertising on NBC and CNBC.com properties. NBCi will contribute $40.0 million in online distribution and promotion and ValueVision will contribute a cash funding commitment up to $50.0 million. Under the arrangement, the Company will not absorb any losses from the joint venture up to the first $50.0 million incurred and will share proportionately in the net income or losses thereafter. Additionally, the Company will receive a royalty on the sale of its products by RL Media based on specified percentages of net sales over a predetermined threshold, subject to certain limitations. RL Media's managing board will have equal representation from the Company and NBC, including its affiliated companies. 20
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, stock repurchase program, the acquisition of Poloco 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. 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 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 and the results of operations of foreign subsidiaries could be materially affected by currency fluctuations. From time to time, the Company hedges certain exposures to foreign currency exchange rate changes arising in the ordinary course of business. New Accounting Standards In June 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. 21
Year 2000 Compliance Update The Company has reviewed its operations relating to Year 2000 issues. Remediation and testing are complete for both information technology ("IT") and non-IT systems that required attention and resources to be Year 2000 compliant. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 issue that may affect the Company, including those relating to third parties with whom the Company has material business relationships (such as customers, licensees, transportation carriers, utility and other general service providers), have been resolved. To date, the Company has not experienced any significant disruptions in its operations relating to Year 2000 issues. The Company has a contingency plan in place to mitigate the potential effects, if any, that may arise. The costs to address the Company's Year 2000 issues were approximately $5.3 million. Substantially all of these costs had been incurred as of January 1, 2000. 22
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is a defendant in a purported national class action lawsuit filed in the Delaware Supreme Court in July 1997. The plaintiff has brought the action allegedly on behalf of a class of persons who purchased products at the Company's outlet stores throughout the United States at any time since July 15, 1991. The complaint alleges that advertising and marketing practices used by the Company in connection with the sales of its products at its outlet stores violate guidelines established by the Federal Trade Commission and the consumer protection statutes of Delaware and other states with statutes similar to Delaware's Consumer Fraud Act and Delaware's Consumer Contracts Act. The lawsuit seeks, on behalf of the class, compensatory and punitive damages as well as attorneys' fees. The Company answered the complaint and filed a motion for judgment on the pleadings. At a hearing on that motion on March 5, 1999, the Court ruled that the plaintiff must file an amended complaint within 30 days in order to avoid dismissal. The plaintiff filed an amended complaint, essentially containing the same allegations as the initial complaint, which the Company answered on April 26, 1999. On August 5, 1999, the Company again filed a motion for judgment on the pleadings and, on September 3, 1999, the plaintiff filed a brief in opposition to such motion for judgment. On November 19, 1999, the Company and the plaintiff entered into a Stipulation and Agreement of Compromise, Settlement and Agreement, none of the provisions of which are expected to have a material adverse impact on the business and financial condition of the Company. By February 1, 2000, notice of the settlement was published in a publication of national circulation and mailed to persons listed on the Company's outlet customer list. A hearing will be held on April 18, 2000 to determine the fairness of the settlement to class members and to approve the settlement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the sections entitled "Liquidity and Capital Resources" and "Exchange Rates" in Item 2 above, which sections are incorporated herein by reference. ITEM 5. OTHER INFORMATION. On November 22, 1999, the Company issued euro 275 million of 6.125 per cent Notes due November 2006. The Eurobonds were offered outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended, through a group of managers led by Goldman Sachs International. The Eurobonds are listed on the London Stock Exchange. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits-- 10.1 Fiscal and Paying Agency Agreement dated November 22, 1999 among Polo Ralph Lauren Corporation, its subsidiary guarantors and The Bank of New York, as fiscal and principal paying agent. 27.1 Financial Data Schedule (b) Reports on Form 8-K-- The Company filed one current report on Form 8-K on January 10, 2000 with respect to Item 2 - Acquisition or Disposition of Assets in connection with the stock and asset purchase by the Company of Poloco, S.A.S. and certain of its affiliates from S.A Louis Dreyfus et Cie, a company organized under the laws of France, on January 6, 2000. 24
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLO RALPH LAUREN CORPORATION Date: February 15, 2000 By: /s/ Nancy A. Platoni Poli Nancy A. Platoni Poli Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25