10-Q 1 0001.txt FORM 10-Q QUARTERLY REPORT ================================================================================ 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. ================================================================================ 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 POLO RALPH LAUREN CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JULY 1, APRIL 1, 2000 2000 ---------------- ------------ (UNAUDITED) ASSETS 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 ============ ===========
See accompanying notes to financial statements. 3 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED ---------------------------------- JULY 1, JULY 3, 2000 1999 ------------- ------------- 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 ============= =============
See accompanying notes to financial statements. 4 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED --------------------------------------- JULY 1, JULY 3, 2000 1999 ----------------- ------------------- 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 ================= ===================
See accompanying notes to financial statements. 5 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED --------------------------------------- JULY 1, JULY 3, 2000 1999 ----------------- ------------------- 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 ===================
See accompanying notes to financial statements. 6 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 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 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 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:
LEASE AND SEVERANCE AND ASSET CONTRACT TERMINATION WRITE TERMINATION OTHER BENEFITS DOWNS COSTS COSTS TOTAL 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 ======== ===== ======== ===== =======
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 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 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 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 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 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 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. 16 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. 17 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. 18 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. 19 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) 20