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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 28, 1998
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
(State or other jurisdiction of 13-2622036
incorporation or organization) (IRS Employer Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
212-318-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Class A Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant was approximately $915,070,414 at June 18, 1998.
At June 18, 1998, 34,083,302 shares of the registrant's Class A Common Stock,
$.01 par value, and 43,280,021 shares of the registrant's Class B Common Stock,
$.01 par value and 22,720,979 shares of the registrant's Class C Common Stock,
$.01 par value, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Proxy Statement for Annual Meeting of Part III
Stockholders to be held August 13, 1998
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PART I
ITEM 1. BUSINESS.
Unless the context requires otherwise, references to the "Company"
or to "Polo" are to Polo Ralph Lauren Corporation and its subsidiaries. Due to
the collaborative and ongoing nature of the Company's relationships with its
licensees, such licensees are referred to in this Form 10-K as "licensing
partners" and the relationships between the Company and such licensees are
referred to in this Form 10-K 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.
Polo is a leader in the design, marketing and distribution of
premium lifestyle products. For more than 30 years, Polo's reputation and
distinctive image have been consistently developed across an expanding number of
products, brands and international markets. The Company's brand names, which
include "Polo," "Polo by Ralph Lauren," "Polo Sport," "Ralph Lauren," "RALPH,"
"Lauren," "Polo Jeans Co." and "Chaps," among others, constitute one of the
world's most widely recognized families of consumer brands. Directed by Ralph
Lauren, the internationally renowned designer, the Company believes it has
influenced the manner in which people dress and live in contemporary society,
reflecting an American perspective and lifestyle uniquely associated with Polo
and Ralph Lauren.
Polo combines its consumer insight and design, marketing and imaging
skills to offer, along with its licensing partners, broad lifestyle product
collections in four categories: apparel, home, accessories and fragrance.
Apparel products include extensive collections of menswear, womenswear and
children's clothing. The Ralph Lauren Home Collection offers coordinated
products for the home including bedding and bath products, interior decor and
tabletop and gift items. Accessories encompass a broad range of products such as
footwear, eyewear, jewelry and leather goods (including handbags and luggage).
Fragrance and skin care products are sold under the Company's Polo, Lauren,
Safari and Polo Sport brands, among others.
OPERATIONS
Polo's business consists of three integrated operations: wholesale,
retail and licensing. Each is driven by the Company's guiding philosophy of
style, innovation and quality.
Details of the Company's net revenues are shown in the table below.
FISCAL YEAR PRO FORMA
----------- FISCAL 1997(3)
1998 1997 1996 (unaudited)
---------- ---------- ---------- ----------
(IN THOUSANDS)
Wholesale net sales(1) $ 733,065 $ 663,358 $ 606,022 $ 623,041
Retail sales ................. 570,751 379,972 303,698 508,645
---------- ---------- ---------- ----------
Net sales .................. 1,303,816 1,043,330 909,720 1,131,686
Licensing revenue(1)(2) 167,119 137,113 110,153 137,113
---------- ---------- ---------- ----------
Net revenues ............... $1,470,935 $1,180,443 $1,019,873 $1,268,799
========== ========== ========== ==========
(1) The Company purchased certain of the assets of its former womenswear
licensing partner in October 1995. The fiscal 1998, fiscal 1997 and
fiscal 1996 net revenues reflect the inclusion of
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womenswear wholesale net sales of $98.4 million, $98.8 million and
$36.7 million, respectively, and an elimination of licensing revenue
associated with the operations of the womenswear business after the
acquisition.
(2) Licensing revenue includes royalties received from Home Collection
licensing partners.
(3) In February 1993, the Company entered into a joint venture to combine
certain of its retail operations with those of its joint venture
partner, Perkins Shearer Venture, to form Polo Retail Corporation
("PRC"). On March 21, 1997, the Company entered into an agreement,
effective April 3, 1997, to acquire the 50% interest it did not own
from its joint venture partner (the "PRC Acquisition"). Prior to the
PRC Acquisition, the Company accounted for its interest in PRC under
the equity method. Effective April 3, 1997, the Company consolidated
the operations of PRC in fiscal 1998 and accounted for the transaction
under the purchase method. On a pro forma basis for fiscal 1997,
wholesale net sales by the Company to PRC are eliminated and PRC net
revenues are reflected as retail sales. Assuming the acquisition had
taken place at March 31, 1996, pro forma wholesale net sales and
retail sales in fiscal 1997 would have been $623.0 million and $508.7
million, respectively. Pro forma fiscal 1997 net revenues reflect the
inclusion of womenswear wholesale net sales of $79.6 million and an
elimination of licensing revenue associated with the operations of the
womenswear business after the acquisition.
WHOLESALE
Polo's wholesale business is subdivided into two divisions: Polo Ralph
Lauren Menswear and Ralph Lauren Womenswear. In both of its wholesale divisions,
the Company offers discrete brand offerings to compete at various price levels.
See "-- Domestic Wholesale and Home Collection Customers and Services."
POLO RALPH LAUREN MENSWEAR
The Menswear division designs, sources, markets and distributes menswear
under its Polo by Ralph Lauren, Polo Sport, Ralph Lauren/Purple Label Collection
and Polo Golf brands. Each line is directed by a team consisting of design,
merchandising, sales and production staff who work together to conceive, develop
and merchandise product groupings organized to convey a variety of design
concepts. Generally, there are four annual seasonal presentations for each line:
Fall, Cruise/Holiday, Spring and Summer. Within each line, the Company offers
core and recurring styles complemented by fashion forward items reflecting
contemporary trends. Polo is recognized worldwide as one of the premier men's
designer collections, and Mr. Lauren was named 1996 Menswear Designer of the
Year by the Council of Fashion Designers of America ("CFDA").
POLO BY RALPH LAUREN. The Polo by Ralph Lauren menswear collection is a
complete men's wardrobe consisting of products related by theme, style, color
and fabric. Polo by Ralph Lauren menswear is generally priced at a range of
price points within the men's premium ready-to-wear apparel market. This line is
currently sold through approximately 1,620 department store, specialty store and
Polo store doors in the United States, including approximately 1,200 department
store shop-within-shops.
POLO SPORT. The Polo Sport line of activewear and sportswear is designed to
meet the growing consumer demand for functional sport and outdoor apparel. Polo
Sport is offered at a range of price points generally consistent with prices for
the Polo by Ralph Lauren line, and is distributed through the same channels as
Polo by Ralph Lauren.
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RALPH LAUREN/PURPLE LABEL COLLECTION. In Fall 1995, the Company introduced
its Purple Label Collection of men's tailored clothing and, in Fall 1997, to
complement the tailored clothing line, the Company launched its Purple Label
sportswear line. Purple Label Collection tailored clothing is manufactured and
distributed by a licensee, and dress shirts and ties and sportswear are sourced
and distributed by the Company. The Purple Label lines are sold through a
limited number of premier fashion retailers, currently numbering 26 doors in the
United States and eight internationally.
POLO GOLF. The Polo Golf line is targeted at the golf and resort markets.
Price points are similar to those charged for products in the Polo Sport line.
The Polo Golf line is presently sold in the United States through approximately
1,600 leading golf clubs, pro shops and resorts, in addition to department,
specialty and Polo stores.
RALPH LAUREN WOMENSWEAR
The Womenswear division designs, sources, markets and distributes
womenswear under its Ralph Lauren Collection and Collection Classics,
RALPH/Ralph Lauren and Ralph Lauren Polo Sport brands. Representatives from each
of the design, merchandising, sales and production staffs work together to
conceive, develop and sell product groupings organized to convey a variety of
design concepts. Each of the women's apparel lines (except Ralph Lauren
Collection) consists of core, recurring styles, complemented by more
fashion-oriented items which reflect contemporary trends. Mr. Lauren introduced
his first womenswear products in 1971 and subsequently licensed the line in
1973.
In October 1995, to capitalize further on its position, both domestically
and internationally, as a leading designer of womenswear, Polo acquired the
business of its former licensing partner and commenced its own womenswear
wholesale operations. Since acquiring control of these operations, the Company
has centralized control of its womenswear design, merchandising and sales
activities and focused its efforts on improving the quality, production and
delivery of its products. In addition, the Company has sought to build its
womenswear business by capitalizing on the relationships developed with its
menswear customers and by devoting resources to creating and renovating
shop-within-shops and other exclusively fixtured areas within department stores.
The womenswear industry's three basic selling seasons are Fall,
Cruise/Holiday and Spring/Summer. The women's ready-to-wear apparel market in
the United States is divided into four segments defined by price levels, ranging
from lowest to highest, as follows: moderate, better, bridge and designer. The
Company competes directly in the bridge and designer segments of the womenswear
industry, and competes through its licensing partner for the Lauren line in the
better segment.
RALPH LAUREN COLLECTION AND COLLECTION CLASSICS. The Ralph Lauren
Collection, sold under the purple label and the Custom Collection Label (the
"Collection"), expresses the Company's up-to-the-moment fashion vision for
women. Collection Classics, sold under Ralph Lauren's black label, include
timeless versions of the Company's most successful Collection styles, as well as
newly-designed classic signature styles which tend to remain in a women's
wardrobe for several seasons. Collection and Collection Classics are offered for
limited distribution to premier fashion retailers and through Polo stores. Price
points are at the upper end or luxury ranges. The lines are currently sold by
the Company through over 86 doors in the United States by the Company and over
235 international doors by the Company and its licensing partners.
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RALPH/RALPH LAUREN. The RALPH/Ralph Lauren brand was established in 1994
and presents a distinct and more casual fashion identity for the bridge market,
while retaining a strong association with the Ralph Lauren Collection designer
image. The line is sold through approximately 145 doors in the United States and
Canada. In fall 1999, this line will be renamed and the RALPH/Ralph Lauren brand
will be relaunched and used in connection with a newly licensed young women's
(ages 16-24) line.
RALPH LAUREN POLO SPORT. Similar to its menswear counterpart, the Ralph
Lauren Polo Sport line for women includes activewear for a variety of sports, as
well as weekend sportswear. The Ralph Lauren Polo Sport line is currently
carried by approximately 500 doors in the United States, including approximately
185 shop-within-shops, and sells at a wide range of bridge prices.
HOME COLLECTION
With the introduction of the Ralph Lauren Home Collection in 1983, Polo
became one of the first major apparel designers to extend its design principles
and brands to a complete line of home furnishings. Today, in conjunction with
its licensing partners, Polo offers an extensive collection of home products
which both draw upon, and add to, the design themes of the Company's other
product lines, contributing to Polo's complete lifestyle concept. Products are
sold under the Ralph Lauren Home Collection brands in three primary categories:
bedding and bath, interior decor, and tabletop and gift.
In addition to developing the Home Collection, Polo acts as sales and
marketing agent for its domestic Home Collection licensing partners. Together
with its eight domestic home product licensing partners, representatives of the
Company's design, merchandising, production and sales staffs collaborate to
conceive, develop and merchandise the various products as a complete home
furnishing collection. Polo's personnel market and sell the products to domestic
customers and certain international accounts. Polo's licensing partners, many of
which are leaders in their particular product category, manufacture, own the
inventory and ship the products. As compared to its other licensing alliances,
Polo performs a broader range of services for its Home Collection licensing
partners, which, in addition to sales and marketing, include operating showrooms
and incurring advertising expenses. Consequently, Polo receives a higher royalty
rate from its Home Collection licensing partners, which rates typically range
from 15% to 25%. Home Collection licensing alliances generally have three to
five-year terms and often grant the licensee conditional renewal options.
Home Collection products are positioned at the upper tiers of their
respective markets and are offered at a range of price levels.
The Company's home furnishings products generally are distributed through
department stores, specialty furniture stores, interior design showrooms,
customer catalogs and home centers. As with its other products, the use of
shop-within-shops is central to the Company's distribution strategy. Certain
licensing partners, including those selling furniture, wall coverings, blankets,
bed pillows, tabletop, flatware, home fragrance and paint, also sell their
products directly through their own staffs to reach additional customer markets.
The home furnishings products offered by the Company and its domestic
licensing partners are listed below.
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CATEGORY Product Licensing Partner
Bedding and Bath Towels, sheets, pillowcases and matching WestPoint Stevens, Inc.
bedding accessories
Blankets, bed pillows, comforters and Pillowtex
Corporation other decorative bedding accessories,
excluding those matched to sheets, and bath rugs
Interior Decor Upholstered furniture and case goods Henredon Furniture
Industries, Inc.
Interior and exterior paints, stains and The Sherwin-Williams
special finishes Company
Fabric and wallpaper P. Kaufmann, Inc.
Table and Giftware Sterling, silverplate and stainless Reed and Barton
steel flatware and picture frames Corporation
Crystal and glass tableware and RJS Scientific, Inc.
giftware, ceramic dinnerware and
giftware, home fragrances (potpourri,
scented candles, etc.) and Polo bears
Placemats, tablecloths, napkins Designers Collection, Inc.
The Company's three most significant Home Collection licensing partners
based on aggregate licensing revenue paid to the Company are WestPoint Stevens,
Inc., Pillowtex Corporation and Henredon Furniture Industries, Inc. WestPoint
Stevens, Inc. accounted for approximately 45% of Home Collection licensing
revenue in fiscal 1998.
DOMESTIC WHOLESALE AND HOME COLLECTION CUSTOMERS AND SERVICE
GENERAL. Consistent with the appeal and distinctive image of its products
and brands, the Company sells its menswear, womenswear and home furnishings
products primarily to leading upscale department stores, specialty stores, golf
and pro shops and Polo stores located throughout the United States which have
the reputation and merchandising expertise required for the effective
presentation of Polo products.
The Company's wholesale and home furnishings products are distributed
through the primary distribution channels listed in the table below. In
addition, the Company also sells excess and out-of-season products through
secondary distribution channels.
Approximate Number of
Doors as of March 28, 1998
Menswear Womenswear Home Collection
Department Stores ................. 1,300 390 1,375
Specialty Stores .................. 285 90 50
Polo Stores ....................... 40 50 40
Golf & Pro Shops .................. 1,600 710 --
Department stores represent the largest customer group of each wholesale
division and of Home Collection. Major department store customers include
Federated Department Stores, Inc., Dillard Department Stores, Inc. and The May
Department Stores Company. During fiscal 1998, Federated Department Stores,
Inc., Dillard Department Stores, Inc. and
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The May Department Stores Company accounted for 19.1%, 16.4% and 15.8%,
respectively, of the Company's wholesale net sales.
Menswear, womenswear and Home Collection wholesale products are primarily
sold through their respective sales forces aggregating approximately 125
salespersons employed by Polo. The Menswear division maintains its primary
showroom at Polo's New York City executive headquarters. Regional showrooms for
menswear are located in Atlanta, Chicago, Dallas and Los Angeles. An independent
sales representative promotes sales to U.S. military exchanges. The Womenswear
and Home Collection divisions maintain their primary showrooms in New York City.
Regional sales representatives for the Home Collection are located in the
Company's showrooms in Atlanta, Chicago, Dallas and Los Angeles. The Company
also operates a separate tabletop showroom in New York City.
SHOP-WITHIN-SHOPS. As a critical element of its distribution to department
stores, the Company and its licensing partners utilize shop-within-shops to
enhance brand recognition, permit more complete merchandising of the Company's
lines and differentiate the presentation of products. The Company intends to add
approximately 230 shop-within-shops and refurbish approximately 270
shop-within-shops in fiscal 1999. At March 28, 1998, department store customers
in the United States had installed over 1,900 shop-within-shops dedicated to the
Company's products and over 1,000 shops-within-shops dedicated to Polo's
licensed products. The size of Polo shop-within-shops (excluding significantly
larger shop-within-shops in key department store locations) typically ranges
from approximately 1,000 to 1,500 square feet for menswear, from approximately
800 to 1,200 square feet for womenswear, and from approximately 800 to 1,200
square feet for home furnishings. The Company estimates that, in total,
approximately 2.0 million square feet of department store space in the United
States is dedicated to Polo shop-within-shops. In addition to shop-within-shops,
the Company utilizes exclusively fixtured areas in department stores.
BASIC STOCK REPLENISHMENT PROGRAM. The menswear and womenswear programs
allow products such as knit shirts, chino pants, oxford cloth shirts and navy
blazers to be ordered at any time through basic stock replenishment programs.
For customers who reorder basic products, Polo generally ships these products
within one to five days of order receipt. These products accounted for
approximately 21% of menswear and womenswear wholesale net sales in fiscal 1998.
The Company has also implemented a seasonal quick response program to allow
replenishment of products which can be ordered for only a portion of each year.
Certain Home Collection licensing partners also offer a basic stock
replenishment program which includes towels, bedding and tabletop products.
Basic stock products accounted for approximately 75% of net sales of Home
Collection licensing partners in fiscal 1998.
DIRECT RETAILING
The Company operates three types of retail stores dedicated to the sale of
Polo products. Located in prime retail areas, the Company's 29 Polo stores
operate under the Polo Ralph Lauren, Polo Sport and Polo Jeans Co. names. The
Company's 72 outlet stores are generally located in outlet malls and operate
under the Polo Ralph Lauren Factory Store name.
In addition to its own retail operations, the Company has granted licenses
to independent parties to operate 14 stores in the United States and 76 stores
internationally. The Company receives the proceeds from the sale of its menswear
and womenswear products, which are included in wholesale net sales, to these
stores and also receives royalties, which are included
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in licensing revenue, from its licensing partners who sell to these stores. The
Company generally does not receive any other compensation from these licensed
store operators. See "-- Licensing Alliances."
POLO STORES
In addition to generating sales of Polo Ralph Lauren products, Polo stores
set, reinforce and capitalize on the image of Polo's brands. The Company's two
flagship stores located on Madison Avenue in New York City showcase Polo
products and demonstrate Polo's most refined merchandising techniques. In
addition to its New York flagship stores, Polo operates 27 other Polo stores.
Ranging in size from approximately 2,000 to over 15,000 square feet, the
non-flagship stores are situated in upscale regional malls and major high street
locations generally in the largest urban markets in the United States. Polo has
also operated a Polo store on New Bond Street in London since 1983. In
aggregate, the Company operates 25 Polo Ralph Lauren stores, two Polo Sport
stores, one Polo Jeans Co. store and one Polo Country store (offering primarily
leisure and weekend apparel). Stores are generally leased for initial periods
ranging from five to fifteen years with renewal options.
The Company plans to continue to invest in Polo stores. In fiscal 1998,
Polo Ralph Lauren stores were opened in Las Vegas, Nevada and Oakbrook, Illinois
and a Polo Jeans Co. store was opened in Garden State Plaza, New Jersey. Among
other locations, new stores are planned for Palm Beach, Florida, Point Orlando,
Florida and Burlingame, California, and new flagship stores are planned for
Chicago and London. In fiscal 1998, Polo renovated or relocated its stores in
Phoenix, Arizona, Manhasset, New York and Short Hills, New Jersey. Polo plans to
convert its Polo Ralph Lauren store in Santa Clara, California to a Polo Jeans
Co. store in fiscal 1999.
Effective March 31, 1997, the Company entered into a joint venture
agreement with a nonaffiliated partner to acquire real property in New York
City. The Company and its partner are discussing possible concepts for such
location. Concurrent with the signing of the agreement, the Company made an
initial contribution for its 50% interest in the joint venture in the amount of
$5.0 million. On December 16, 1997, the Company entered into another joint
venture agreement with this nonaffiliated partner. The entity formed through
this joint venture entered into a long-term lease of a building located in the
Soho District of New York City.
OUTLET STORES
Polo extends its reach to additional consumer groups through its 72 Polo
Ralph Lauren Factory Stores. Outlet stores offer selections of the Company's
menswear, womenswear, children's apparel, accessories, home furnishings and
fragrances. Ranging in size from 5,000 to 13,000 square feet, with an average of
approximately 8,000 square feet, the stores are generally located in major
outlet centers in 30 states and Puerto Rico.
Outlet stores purchase products from Polo, its licensing partners and its
suppliers and from Polo stores in the United States. Outlet stores purchase
products from Polo generally at cost and from Polo's domestic product licensing
partners and Polo stores at negotiated prices. Outlet stores also source basic
products and styles directly from the Company's suppliers. In fiscal 1998, the
outlet stores purchased approximately 29%, 38% and 33% of products from the
Company, licensing partners and other suppliers, respectively.
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The Company plans to add ten to twenty new outlet stores (net of
anticipated store closings) over the next three years. In addition, in fiscal
1999, the Company plans to add approximately 20 factory outlet concept stores
which will carry only certain Polo brands and products and will be smaller than
typical outlet stores.
LICENSING ALLIANCES
Through licensing alliances, Polo combines its consumer insight and design,
marketing and imaging skills with the specific product or geographic
competencies of its licensing partners to create and build new businesses. The
Company's licensing partners, who are often leaders in their respective markets,
generally contribute the majority of product development costs, provide the
operational infrastructure required to support the business and own the
inventory.
Product and international licensing partners are granted the right to
manufacture and sell at wholesale specified products under one or more of Polo's
trademarks. International licensing partners produce and source products
independently and in conjunction with the Company and its product licensing
partners. As compensation for the Company's contributions under these
agreements, each licensing partner pays royalties to the Company based upon its
sales of Polo Ralph Lauren products, subject generally, to payment of a minimum
royalty. With the exception of Home Collection licenses, these payments
generally range from five to eight percent of the licensing partners's sales of
the licensed products. See "-- Home Collection" for a description of royalty
arrangements for Home Collection products. In addition, licensing partners are
required to allocate between two and four percent of their sales to advertise
Polo products. Larger allocations are required in connection with launches of
new products or in new territories.
Polo works in close collaboration with its licensing partners to ensure
that products are developed, marketed and distributed to address the intended
market opportunity and present consistently to consumers worldwide the
distinctive perspective and lifestyle associated with the Company's brands.
Virtually all aspects of the design, production quality, packaging,
merchandising, distribution, advertising and promotion of Polo products are
subject to the Company's prior approval and ongoing oversight. The result is a
consistent identity for Polo products across product categories and
international markets.
Polo has 20 product and 11 international licensing partners. A substantial
portion of the Company's net income is derived from licensing revenue received
from its licensing partners. The Company's three largest licensing partners by
licensing revenue, WestPoint Stevens, Inc., Seibu Department Stores, Ltd. and
Jones Apparel Group, Inc. accounted for 12.5%, 11.5% and 11.4%, respectively, of
licensing revenue in fiscal 1998.
PRODUCT LICENSING ALLIANCES
Polo has agreements with 20 product licensing partners relating to men's
and women's sportswear, men's tailored clothing, children's apparel,
personalwear, accessories and fragrances. The products offered by the Company's
product licensing partners as of March 28, 1998 are listed below.
LICENSING PARTNER LICENSED PRODUCT CATEGORY
Warnaco, Inc. Men's Chaps Sportswear
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Sun Apparel, Inc. Men's & Women's Polo Jeans Co. Casual
Apparel & Sportswear
Jones Apparel Group, Inc. Women's Lauren Better Sportswear
Chester Barrie, Ltd. Men's Purple Label Tailored Clothing
Pietrafesa Co. Men's Polo Tailored Clothing
Peerless Inc. Men's Chaps Tailored Clothing
Oxford Industries, Inc. Children's (boys) Apparel
S. Schwab Company, Inc. Infants, Toddlers & Girls
Sara Lee Corporation Men's & Women's Personal Wear Apparel
The Rockport Company Men's & Women's Dress,
Casual and Performance Athletic Footwear
Wathne, Inc. Handbags & Luggage
Hot Sox, Inc. Men's, Women's & Children's Hosiery
New Campaign, Inc. Belts & other Small Leather Goods
Echo Scarves, Inc. Scarves for Men & Women
Carolee, Inc. Jewelry
Swany, Inc. Men's, Women's & Children's Gloves
L'Oreal S.A./Cosmair, Inc. Men's & Women's Fragrances and skin
care products
Authentic Fitness Products, Inc. Women's & Girls' Swimwear
Burton Golf, Inc. Golf bags
Safilo USA, Inc. Eyewear
INTERNATIONAL LICENSING ALLIANCES
The Company believes that international markets offer additional
opportunities for Polo's quintessential American designs and lifestyle image and
is committed to the global development of its businesses. International
expansion opportunities may include the roll out of new products and brands
following their launch in the U.S., the introduction of additional product
lines, the entrance into new international markets and the addition of Polo
stores in these markets. For example, following the successful launch of Polo
Jeans Co. in the U.S. in Fall 1996, the Company launched the line in Canada, the
U.K., Germany, Spain, Japan, Israel, Hong Kong, Singapore and Taiwan. Polo works
with its 11 international licensing partners to facilitate this international
expansion. International licensing partners also operate 76 Polo stores.
In fiscal 1998, the Company added nine new Polo stores in international
markets including a Polo Sport store, a Polo Jeans Co. store and a Polo Ralph
Lauren store in Tel Aviv, a Polo Sport store in Kuwait City, a Polo Ralph Lauren
store in Dubai, two Polo Jeans Co. stores in Singapore and one Polo Jeans Co.
store in each of Hong Kong and Taiwan. The Company is also pursuing plans for
expansion into Mexico.
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International licensing partners acquire the right to source, produce,
market and/or sell some or all Polo products in a given geographical area.
Economic arrangements are similar to those of domestic product licensing
partners. Licensed products are designed by the Company, either alone or in
collaboration with its domestic licensing partners. Domestic licensees generally
provide international licensing partners with patterns, piece goods,
manufacturing locations and other information and assistance necessary to
achieve product uniformity, for which they are, in many cases, compensated.
The most significant international licensing partners by royalties in
fiscal 1998 were Seibu Department Stores, Ltd., which oversees distribution of
virtually all of the Company's products in Japan, L'Oreal S.A., which
distributes fragrances and toiletries outside of the United States and Poloco,
S.A., which distributes men's and boys' Polo apparel, men's and women's Polo
Jeans Co. apparel and certain accessories in Europe. The Company's ability to
maintain and increase royalties under foreign licenses is dependent upon certain
factors not within the Company's control, including fluctuating currency rates,
currency controls, withholding requirements levied on royalty payments,
governmental restrictions on royalty rates, political instability and local
market conditions.
DESIGN
The Company's products reflect a timeless and innovative American style
associated with and defined by Polo and Ralph Lauren. The Company's consistent
emphasis on innovative and distinctive design has been an important contributor
to the prominence, strength and reputation of the Polo Ralph Lauren brands. For
some 30 years, the Company's designers have influenced, anticipated and
responded to evolving consumer tastes within the context of Polo's defining
aesthetic principles. Mr. Lauren, supported by Polo's design staff, has won
numerous awards for Polo's designs including the prestigious 1996 Menswear
Designer of the Year award and 1995 Womenswear Designer of the Year award, both
of which were awarded by the CFDA. In addition, Mr. Lauren was honored with the
CFDA Lifetime Achievement Award in 1991 and the CFDA Award for Humanitarian
Leadership in 1998, and is the only person to have won all four of these awards.
Design teams are formed around the Company's brands and product categories
to develop concepts, themes and products for each of Polo's businesses. These
teams work in close collaboration with merchandising, sales and production staff
and licensing partners in order to gain market and other input.
All Polo Ralph Lauren products are designed by or under the direction of
Mr. Ralph Lauren and the Company's design staff of approximately 210, which is
divided into three departments: Menswear, Womenswear and Home Collection.
The Company operates a research, development and testing facility in
Greensboro, North Carolina, testing labs in New Jersey and Singapore and pattern
rooms in New York and New Jersey.
MARKETING
Polo's marketing program communicates the themes and images of the Polo
Ralph Lauren brands and is an integral feature of its product offering.
Worldwide marketing is managed on a centralized basis through the Company's
advertising and public relations departments in order to ensure consistency of
presentation.
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The Company creates the distinctive image advertising for all Polo Ralph
Lauren products, conveying the particular message of each brand within the
context of Polo's core themes. Advertisements generally portray a lifestyle
rather than a specific item and often include a variety of Polo products offered
by both the Company and its licensing partners. Polo's primary advertising
medium is print, with multiple page advertisements appearing regularly in a
range of fashion, lifestyle and general interest magazines including Elle,
Esquire, GQ, The New York Times Magazine, Town and Country, Vanity Fair and
Vogue. Major print advertising campaigns are conducted during the Fall and
Spring retail seasons with additions throughout the year to coincide with
product deliveries. In addition to print, certain product categories utilize
television and outdoor media in their marketing programs.
The Company's licensing partners contribute a percentage (usually between
two and four percent) of their sales of Polo products for advertising. The
Company directly coordinates advertising placement for domestic product
licensing partners. During fiscal 1998, Polo and its licensing partners
collectively spent more than $154 million worldwide to advertise and promote
Polo products.
Polo conducts a variety of public relations activities. Each of the Spring
and Fall womenswear collections is introduced at major fashion shows in New York
which generate extensive domestic and international media coverage. In
recognition of the increasing role menswear plays in the fashion industry, each
of the Spring and Fall menswear collections is introduced at fashion
presentations organized for the fashion press. In addition, Polo sponsors
professional golfers, organizes in-store appearances by its models and sponsors
sports teams.
SOURCING, PRODUCTION AND QUALITY
The Company's apparel products are produced for the Company by
approximately 180 different manufacturers worldwide. The Company contracts for
the manufacture of its products and does not own or operate any production
facilities. During fiscal 1998, approximately 42% (by dollar volume) of men's
and women's products were produced in the United States and its territories and
approximately 58% (by dollar volume) of such products were produced in Hong
Kong, Malaysia and other foreign countries. Two manufacturers engaged by the
Company accounted for approximately 10% and 8%, respectively, of the Company's
total production during fiscal 1998. The primary production facilities of these
two manufacturers are located in Hong Kong and Saipan, in the case of the
manufacturer that accounted for approximately 10% of the Company's total
production during fiscal 1998 and in Malaysia, Sri Lanka, Hong Kong and
Mauritius, in the case of the manufacturer that accounted for approximately 8%
of the Company's total production during fiscal 1998. No other manufacturer
accounted for more than five percent of the Company's total production in fiscal
1998.
Production is divided broadly into purchases of finished products, where
the supplier is responsible for the purchasing and carrying of raw materials,
and cut, make and trim ("CMT") purchasing, where the Company is responsible for
the purchasing and movement of raw materials to finished product assemblers
located throughout the world. CMT arrangements typically allow the Company more
latitude to incorporate unique detailing elements and to develop specialty
items. The Company uses a variety of raw materials, principally consisting of
woven and knitted fabrics and yarns.
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The Company must commit to manufacture the majority of its garments before
it receives customer orders. In addition, the Company must commit to purchase
fabric from mills well in advance of its sales. If the Company overestimates the
demand for a particular product which it cannot sell to its primary customers,
it may use the excess for distribution in its outlet stores or sell the product
through secondary distribution channels. If the Company overestimates the need
for a particular fabric or yarn, that fabric or yarn can be used in garments
made for subsequent seasons or made into past season's styles for distribution
in its outlet stores.
The Company has been working closely with suppliers in recent years to
reduce lead times to maximize fulfillment (i.e., shipment) of orders and to
permit re-orders of successful programs. In particular, the Company has
increased the number of deliveries within certain brands each season so that
merchandise is kept fresh at the retail level.
Suppliers operate under the close supervision of Polo's product management
department in the United States, and in the Far East under that of a wholly
owned subsidiary which performs buying agent functions for the Company and third
parties. All garments are produced according to Polo's specifications.
Production and quality control staff in the United States and in the Far East
monitor manufacturing at supplier facilities in order to correct problems prior
to shipment of the final product to Polo. While final quality control is
performed at Polo's distribution centers, procedures have been implemented under
Polo's vendor certification program, so that quality assurance is focused as
early as possible in the production process, allowing merchandise to be received
at the distribution facilities and shipped to customers with minimal
interruption.
The Company retains independent buying agents in Europe and South America
to assist the Company in selecting and overseeing independent third-party
manufacturers, sourcing fabric and other products and materials, monitoring
quota and other trade regulations, as well as performing some quality control
functions.
COMPETITION
Competition is strong in the segments of the fashion and consumer product
industries in which the Company operates. The Company competes with numerous
designers and manufacturers of apparel and accessories, fragrances and home
furnishing products, domestic and foreign, some of which may be significantly
larger and have substantially greater resources than the Company. The Company
competes primarily on the basis of fashion, quality, and service. The Company's
business depends on its ability to shape, stimulate and respond to changing
consumer tastes and demands by producing innovative, attractive, and exciting
products, brands and marketing, as well as on its ability to remain competitive
in the areas of quality and price.
DISTRIBUTION
To facilitate distribution, men's products are shipped from manufacturers
to the Company's distribution center in Greensboro, North Carolina for
inspection, sorting, packing and shipment to retail customers. The Company's
distribution/customer service facility is designed to allow for high density
cube storage and utilizes bar code technology to provide inventory management
and carton controls. Product traffic management is coordinated from this
facility in conjunction with the Company's product management and buying agent
staffs. During fiscal 1998, womenswear distribution was provided by a "pick and
pack" facility in
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New Jersey under a warehousing distribution agreement with an unaffiliated third
party. Pursuant to a warehousing distribution agreement entered into by the
Company and another unaffiliated third party on December 1, 1997, the Company
plans to move its Womenswear warehousing distribution facility to Secaucus, New
Jersey commencing on approximately April 1, 1998. This agreement provides that
the warehouse distributor will perform storage, quality control and shipping
services for the Company. In return, the Company must pay the warehouse
distributor a per unit rate and special processing charges for services such as
ticketing, bagging and steaming. The initial term of this agreement is through
December 1, 2000 and is thereafter renewable annually. Outlet store distribution
and warehousing is principally handled through the Greensboro distribution
center as well as a satellite center also located in North Carolina. Polo store
distribution is provided by a facility in Columbus, Ohio and a facility in New
Jersey which services the Company's stores in New York City and East Hampton,
New York. The Company's licensing partners are responsible for the distribution
of licensed products, including Home Collection products. The Company is
currently evaluating warehousing and distribution facilities for its retail
stores.
MANAGEMENT INFORMATION SYSTEM
The Company's management information system is designed to provide, among
other things, comprehensive order processing, production, accounting and
management information for the marketing, manufacturing, importing and
distribution functions of the Company's business. The Company has installed
sophisticated point-of-sale registers in its Polo stores and outlet stores that
enable it to track inventory from store receipt to final sale on a real-time
basis. The Company believes its merchandising and financial system, coupled with
its point-of-sale registers and software programs, allow for rapid stock
replenishment, concise merchandise planning and real-time inventory accounting
practices.
In addition, the Company utilizes an electronic data interchange ("EDI")
system to facilitate the processing of replenishment and fashion orders from its
wholesale customers, the movement of goods through distribution channels, and
the collection of information for planning and forecasting. The Company has EDI
relationships with customers who represent a significant majority of its
wholesale business and is working to expand its EDI capabilities to include most
of its suppliers. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of the Year 2000 Issue."
CREDIT CONTROL
The Company manages its own credit and collection functions. The Company
sells its merchandise primarily to major department stores across the United
States and extends credit based on an evaluation of the customer's financial
condition, usually without requiring collateral. The Company monitors credit
levels and the financial condition of its customers on a continuing basis to
minimize credit risk. The Company does not factor its accounts receivables or
maintain credit insurance to manage the risks of bad debts. The Company's bad
debt write-offs were less than 1% of net revenues for fiscal 1998.
BACKLOG
The Company generally receives wholesale orders for apparel products
approximately three to five months prior to the time the products are delivered
to stores. All such orders are subject to cancellation for late delivery. At
March 28, 1998, Summer and Fall backlog, presented on a pro forma basis to
reflect the PRC Acquisition, was $340.1 million and $41.3
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million, as compared to $304.4 million and $28.0 million at March 29, 1997 for
men's and women's apparel, respectively. The Company's backlog depends upon a
number of factors, including the timing of the market weeks for its particular
lines, during which a significant percentage of the Company's orders are
received, and the timing of shipments. As a consequence, a comparison of backlog
from period to period is not necessarily meaningful and may not be indicative of
eventual shipments.
TRADEMARKS
The Company is the owner of the "Polo," "Ralph Lauren" and the famous polo
player astride a horse trademarks in the United States. Additional trademarks
owned by the Company include, among others, "Chaps," "Polo Sport," "Lauren/Ralph
Lauren," "RALPH" and "RRL"and certain trademarks pertaining to fragrances and
cosmetics. In connection with the adoption of the "RRL" trademarks by the
Company, pursuant to an agreement with the Company, Mr. Lauren retained the
royalty-free right to use as trademarks "Ralph Lauren," "Double RL" and "RRL" in
perpetuity in connection with, among other things, beef and living animals. The
trademarks "Double RL" and "RRL" are currently used by the Double RL Company, an
entity wholly owned by Mr. Lauren. In addition, Mr. Lauren engages in personal
projects involving non-Company related film or theatrical productions through
RRL Productions, Inc., a Company wholly owned by Mr. Lauren.
The Company's trademarks are the subject of registrations and pending
applications throughout the world for use on a variety of items of apparel,
apparel-related products, home furnishings and beauty products, as well as in
connection with retail services, and the Company continues to expand its
worldwide usage and registration of related trademarks. The Company regards the
license to use the trademarks and its other proprietary rights in and to the
trademarks as valuable assets in the marketing of its products and, on a
worldwide basis, vigorously seeks to protect them against infringement. As a
result of the appeal of its trademarks, Polo's products have been the object of
counterfeiting. The Company has a broad enforcement program which has been
generally effective in controlling the sale of counterfeit products in the
United States and in major markets abroad.
In markets outside of the United States, the Company's rights to some or
all of its trademarks may not be clearly established. In the course of its
international expansion, the Company has experienced conflicts with various
third parties which have acquired ownership rights in certain trademarks which
include "Polo" and/or a representation of a polo player astride a horse which
would have impeded the Company's use and registration of its principal
trademarks. While such conflicts are common and may arise again from time to
time as the Company continues its international expansion, the Company has in
the past successfully resolved such conflicts through both legal action and
negotiated settlements with third-party owners of such conflicting marks.
Two agreements by which the Company resolved conflicts with third-party
owners of other trademarks impose current restrictions or monetary obligations
on the Company. In one, the Company reached an agreement with a third party
which owned competing registrations in numerous European and South American
countries for the trademark "Polo" and a symbol of a polo player astride a
horse. By virtue of the agreement, Polo has acquired that third party's
portfolio of trademark registrations, in consideration of the payment (capped as
set forth below) of 30% of the Company's European and Mexican royalties and 50%
of its South American royalties (solely in respect of the Company's use of
trademarks which include "Polo" and the polo player symbol, and not, for
example, "Ralph Lauren"
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alone, "Lauren/Ralph Lauren," "RRL," etc.). Remittances to this third party are
not reflected in licensing revenue in the Company's financial statements and
will cease no later than 2008, or sooner, when the remittances with respect to
Europe and Mexico to this third party aggregate $15.0 million. As of March 28,
1998, the Company has paid approximately $8.9 million to this third party. The
Company's obligation to share royalties with respect to Central and South
America and parts of the Caribbean expires in 2013, but the Company also has the
right to terminate this obligation at any time by paying $3.0 million. The
second agreement was reached with a third party which owned conflicting
registrations of the trademarks "Polo" and a polo player astride a horse in the
U.K., Hong Kong, and South Africa. Pursuant to the agreement, the third party
retains the right to use its "Polo" and polo player symbol marks in South Africa
and certain other African countries, and the Company agreed to restrict use of
those Polo marks in those countries to fragrances and cosmetics (as to which the
Company's use is unlimited) and to the use of the Ralph (polo player symbol)
Lauren mark on women's and girls' apparel and accessories. By agreeing to those
restrictions, the Company secured the unlimited right to use its trademarks
(without payment of any kind) in the United Kingdom and Hong Kong, and the third
party is prohibited from distributing products under those trademarks in those
countries.
GOVERNMENT REGULATION
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements, which have been negotiated bilaterally either under
the framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable statutes,
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. These agreements also allow the
signatories to adjust the quantity of imports for categories of merchandise
that, under the terms of the agreements, are not currently subject to specific
limits. The Company's imported products are also subject to United States
customs duties which comprise a material portion of the cost of the merchandise.
Apparel products are subject to regulation by the Federal Trade Commission
in the United States. Regulations relate principally to the labeling of the
Company's products. The Company believes that it is in substantial compliance
with such regulations, as well as applicable federal, state, local, and foreign
rules and regulations governing the discharge of materials hazardous to the
environment. There are no significant capital expenditures for environmental
control matters either estimated in the current year or expected in the near
future. The Company's licensed products and licensing partners are, in addition,
subject to additional regulation. The Company's agreements require its licensing
partners to operate in compliance with all laws and regulations, and the Company
is not aware of any violations which could reasonably be expected to have a
material adverse effect on the Company's business.
Although the Company has not in the past suffered any material inhibition
from doing business in desirable markets, there can be no assurance that
significant impediments will not arise in the future as it expands product
offerings and additional trademarks to new markets.
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EMPLOYEES
As of March 28, 1998, the Company had approximately 5,800 employees,
including 5,500 in the United States and 300 in foreign countries. Of the total,
approximately 60 employees hold executive and administrative positions, 210 are
engaged in design, 130 are engaged in advertising, public relations and creative
services, 180 are engaged in production, 240 are engaged in wholesale sales and
merchandising, 3,200 are engaged in retail sales, 700 are engaged in
distribution and the remaining employees are engaged in other aspects of the
business. Approximately 1,000 of the Company's total employees were hired in
connection with the PRC Acquisition. Approximately 30 of the Company's United
States production and distribution employees in the womenswear business are
members of the Union of Needletrades, Industrial & Textile Employees under an
industry association collective bargaining agreement which the Company's
womenswear subsidiary has adopted. This contract was renegotiated in fiscal 1998
and extended to May 31, 2000. The Company considers its relations with both its
union and non-union employees to be good.
ITEM 2. PROPERTIES
The Company does not own any real property except an undeveloped parcel of
land adjacent to its leased Greensboro, North Carolina distribution facility and
a 50% joint venture interest in a 44,000 square foot building located in the
Soho district of New York City. Certain information concerning the Company's
principal facilities in excess of 100,000 rentable square feet and of its
existing flagship stores of 20,000 rentable square feet or more, all of which
are leased, is set forth below:
Approximate Current Lease
LOCATION Use Sq. Ft. Term Expiration
-------- --- ------- ---------------
Greensboro, N.C. Distribution 357,000 January 31, 2006
650 Madison Avenue, NYC Executive, December 31, 2009
corporate 206,000
and design
offices,
men's showrooms
Lyndhurst, N.J. Corporate and 162,000 February 28, 2008
retail
administrative
offices
Winston-Salem, N.C. Distribution 115,000 June 30, 1999
867 Madison Avenue, NYC Direct Retail 27,000 December 31, 2004
During fiscal 1998, the Company leased additional space at its two corporate
headquarters (at 650 Madison Avenue, New York City and Lyndhurst, New Jersey)
and extended the terms of such leases for an additional five-year period in each
case.
The leases for the Company's non-retail facilities (approximately 22 in all)
provide for aggregate annual rentals of $18.6 million in fiscal 1998. The
Company anticipates that it will be able to extend those leases which expire in
the near future on terms satisfactory to the Company or, if necessary, locate
substitute facilities on acceptable terms.
As of March 28, 1998, the Company operated 29 Polo stores and 72 outlet
stores in leased premises. Aggregate annual rent paid for retail space by the
Company in fiscal 1998 totaled $29.7 million. Except for approximately two
outlet stores for which the Company will not seek renewal upon lease expiration,
the Company anticipates that it will be able to extend those leases which expire
in the near future on satisfactory terms or to relocate to more desirable
locations.
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The Company is currently re-evaluating its warehousing and distribution
needs for its retail operations. The Company believes that its existing
facilities are well maintained and in good operating condition, and plans to
expand its warehousing and distribution capacity over the next two fiscal years.
ITEM 3. 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 intends to vigorously defend this lawsuit and
believes that it has substantial and meritorious defenses.
The Company is involved from time to time in legal claims involving
trademark and intellectual property, licensing, employee relations and other
matters incidental to its business. See "Item 1. Business -- Trademarks." In the
opinion of the Company's management, the resolution of any matter currently
pending will not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended March 28, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock is publicly traded on the New York Stock
Exchange under the symbol "RL." The following table sets forth the high and low
sales prices for each quarterly period from June 11, 1997 (i.e., the day the
Class A Common Stock was priced in the initial public offering) through March
27, 1998 as reported on the New York Stock Exchange Composite Tape. The Company
did not declare any cash dividends during fiscal 1998 on its Common Stock other
than dividends declared to holders of Class B Common Stock and Class C Common
Stock in connection with the Company's Reorganization (as defined) on June 9,
1997. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Market Price of Class
A
Common Stock
--------------------------
HIGH LOW
---- ---
First Quarter (since June 11, 1997) $32.375 $26
Second Quarter ................. 28.0625 23.0625
Third Quarter................... 28.75 22.3125
Fourth Quarter.................. 30.8125 21.9375
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends on its Common Stock.
As of June 18, 1998, there were approximately 34,083,302 record holders of
Class A Common Stock, 43,280,021 record holders of Class B Common Stock and
22,720,979 record holders of Class C Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected historical financial data presented below as of and for each of
the fiscal years in the five-year period ended March 28, 1998 have been derived
from the Company's audited Consolidated Financial Statements. The following
table also includes unaudited pro forma statements of income for fiscal 1998 and
fiscal 1997 which give effect to the Reorganization, the initial public offering
and the PRC Acquisition as if they had occurred on March 31, 1996. The financial
data should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and Notes thereto and other financial data included
elsewhere herein.
FISCAL YEAR ENDED
MARCH 28, MARCH 29, MARCH 30, APRIL 1, APRIL 2,
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Statements of Income:
Net sales $1,303,816 $1,043,330 $ 909,720 $746,595 $726,568
Licensing revenue 167,119 137,113 110,153 100,040 84,174
---------- ---------- ---------- -------- --------
Net revenues 1,470,935 1,180,443 1,019,873 846,635 810,742
Cost of goods sold 755,654 648,597 583,546 474,999 466,525
---------- ---------- ---------- -------- --------
Gross profit 715,281 531,846 436,327 371,636 344,217
Selling, general and
administrative expenses 515,526 374,483 309,207 261,506 262,825
---------- ---------- ---------- -------- --------
Income from operations 199,755 157,363 127,120 110,130 81,392
Interest expense 159 13,660 16,287 16,450 15,880
Equity in net loss of
joint venture -- 3,599 1,101 262 2,837
---------- ---------- ---------- -------- --------
Income before income
taxes 199,596 140,104 109,732 93,418 62,675
Provision for income taxes 52,025 22,804 10,925 13,244 8,778
---------- ---------- ---------- -------- --------
Net income $ 147,571 $ 117,300 $ 98,807 $ 80,174 $ 53,897
========== ========== ========== ======== ========
Pro Forma Statements of
Income (Unaudited) (1):
Net sales $ 1,303,816 $ 1,131,686
Licensing revenue 167,119 137,113
------------ ------------
Net revenues 1,470,935 1,268,799
Cost of goods sold 755,654 687,003
------------ ------------
Gross profit 715,281 581,796
Selling, general and
administrative expenses 515,526 429,163
------------ ------------
Income from operations 199,755 152,633
Interest income 3,003 1,629
------------ ------------
Income before income taxes 202,758 154,262
Provisions for income taxes 82,631 64,790
------------ ------------
Net income $ 120,127 $ 89,472
============ ============
Pro forma net income per
share - Basic and Diluted $ 1.20 $ 0.89
============ ============
Pro forma common and
diluted shares outstanding 100,222,444 100,222,444
============ ============
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March 28, March 29, March 30, April 1, APRIL 2,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital .......................... $354,206 $209,038 $262,844 $221,050 $ 84,663
Inventories .............................. 298,485 222,147 269,113 271,220 209,540
Total assets ............................. 825,130 588,758 563,673 487,547 456,076
Total debt ............................... 337 140,900 199,645 186,361 230,034
Stockholders' equity and partners' capital 584,326 260,685 237,653 188,579 118,037
(1) The pro forma statements of income present the effects on the historical
financial statements of certain transactions as if they had occurred at the
beginning of the period. These statements reflect adjustments for: (i) income
taxes based upon pro forma pre-tax income as if the Company had been subject to
additional Federal, state and local income taxes calculated using a pro forma
effective tax rate of approximately 40.8% and 42.0% for the year ended March 28,
1998 and March 29, 1997, respectively; (ii) the reduction of interest expense
resulting from the application of the net proceeds from the initial public
offering to outstanding indebtedness; and (iii) the PRC Acquisition, including
the consolidation of PRC's operations, the amortization of goodwill over 25
years associated with the acquisition and the elimination of the Company's
equity in the net loss of PRC for the year ended March 29, 1997.
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ITEM 7. 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. Accordingly, fiscal years 1998, 1997, 1996, 1995 and
1994 ended on March 28, 1998, March 29, 1997, March 30, 1996, April 1, 1995 and
April 2, 1994, respectively.
Certain statements in this Form 10-K 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 an authorized executive
officer constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements 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 and 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; uncertainties relating to the Company's ability to
implement its growth strategy; risks associated with the possible adverse impact
of the Company's unaffiliated manufacturers inability to manufacture in a timely
manner, to meet quality standards or to use acceptable labor practices; risks
associated with changes in social, political, economic and other conditions
affecting foreign operations and sourcing; and, the possible adverse impact of
changes in import restrictions. 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.
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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. Over the last five years, net revenues have increased to
nearly $1.5 billion in fiscal 1998 from $810.7 million in fiscal 1994, while
income from operations has grown to $199.8 million in fiscal 1998 from $81.4
million in fiscal 1994. The Company's net revenues are generated from its three
integrated operations: wholesale, direct retail and licensing alliances.
Licensing revenue includes royalties received from Home Collection licensing
partners.
PRO FORMA
FISCAL YEAR FISCAL 1997
(3)
1998 1997 1996 1995 1994 (UNAUDITED)
---------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS)
Wholesale net sales (1)(2) $ 733,065 $ 663,358 $ 606,022 $496,876 $508,402 $ 623,041
Retail sales (2) ......... 570,751 379,972 303,698 249,719 218,166 508,645
---------- ---------- ---------- -------- -------- ----------
Net sales ................ 1,303,816 1,043,330 909,720 746,595 726,568 1,131,686
Licensing revenue (1) .... 167,119 137,113 110,153 100,040 84,174 137,113
---------- ---------- ---------- -------- -------- ----------
Total net revenues ....... $1,470,935 $1,180,443 $1,019,873 $846,635 $810,742 $1,268,799
========== ========== ========== ======== ======== ==========
(1) The Company purchased certain of the assets of its former womenswear
licensing partner in October 1995. The fiscal 1998, fiscal 1997 and
fiscal 1996 net revenues reflect the inclusion of womenswear wholesale
net sales of $98.4 million, $98.8 million and $36.7 million,
respectively, and an elimination of licensing revenue associated with
the operations of the womenswear business after the acquisition.
(2) Prior to the PRC Acquisition, the Company accounted for its interest in
PRC under the equity method. Effective April 3, 1997, the Company
consolidated the operations of PRC in fiscal 1998 and accounted for the
transaction under the purchase method. On a pro forma basis for fiscal
1997, wholesale net sales by the Company to PRC are eliminated and PRC
net revenues are reflected as retail sales. Assuming the acquisition had
taken place at March 31, 1996, pro forma wholesale net sales and retail
sales in fiscal 1997 would have been $623.0 million and $508.7 million,
respectively.
(3) Pro forma financial information presented above gives effect to the PRC
Acquisition as if it had occurred on March 31, 1996, the first day of
fiscal 1997. Pro forma fiscal 1997 net revenues reflect the inclusion of
womenswear wholesale net sales of $79.6 million, and an elimination of
licensing revenue associated with the operations of the womenswear
business after the acquisition.
Wholesale net sales result from the sale by the Company of men's and women's
apparel to wholesale customers, principally to major department stores,
specialty stores and non-Company operated Polo stores located throughout the
United States. Net sales for the wholesale division have increased to $733.1
million in fiscal 1998 from $508.4 million in fiscal 1994. This increase is a
result of growth in sales of the Company's menswear products driven by the
introduction of new brands such as Polo Sport and growth in sales of products
under existing brands.
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Polo's retail sales are generated from the Polo stores and outlet stores
operated by the Company. Since the beginning of fiscal 1994, the Company has
added 26 Polo stores (net of store closings, including 21 Polo stores acquired
in connection with the PRC Acquisition), and 32 outlet stores (net of store
closings). At March 28, 1998, the Company operated 29 Polo stores and 72 outlet
stores. Retail sales have grown to $570.8 million in fiscal 1998 from $218.2
million in fiscal 1994.
Licensing revenue consists of royalties paid to the Company under its
licensing alliances. In fiscal 1998, Product, International and Home Collection
licensing alliances accounted for 47.0%, 24.6% and 28.4% of total licensing
revenue, respectively. Through these alliances, Polo combines its core skills
with the product or geographic competencies of its licensing partners to create
and develop specific businesses. The growth of existing and development of new
businesses under licensing alliances has resulted in an increase in licensing
revenue to $167.1 million in fiscal 1998 from $84.2 million in fiscal 1994.
On June 9, 1997, the partners and certain of their affiliates contributed to
Polo Ralph Lauren Corporation all of the outstanding stock of, and partnership
interests in, the entities which comprised the predecessor group of companies in
exchange for common stock and cash (the "Reorganization"). Prior to the
Reorganization, the Company's operations were conducted predominantly through a
partnership structure. Accordingly, the earnings of the Company (other than
earnings of certain retail operations) were included in the taxable income of
the Company's partners for Federal and certain state income tax purposes, and
the Company has generally not been subject to income tax on such earnings, other
than certain state and local franchise and similar taxes. In connection with the
Reorganization, on June 9, 1997, the Company became fully subject to such taxes.
As a result, the Company recorded a deferred tax asset and a corresponding tax
benefit in the amount of $27.4 million in its consolidated financial statements
in the first quarter of fiscal 1998 in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. The Company's pro forma effective tax rate, excluding the
non-recurring tax benefit discussed above, for fiscal 1998 was 40.8%. The effect
of taxes is not discussed in Results of Operations below because the historic
taxation of the operations of the Company is not meaningful with respect to
periods following the Reorganization.
In connection with the Company's growth strategy, the Company plans to
introduce new products and brands and expand its retail operations, including
the opening of flagship stores. Implementation of these strategies may require
significant investments for advertising, furniture and fixtures, infrastructure,
design and additional inventory. There can be no assurance, notwithstanding the
Company's investment, that its growth strategies will be successful.
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PRO FORMA COMBINED STATEMENT OF INCOME FOR FISCAL 1997
The following table sets forth for fiscal 1997: (i) actual combined
statement of income; (ii) pro forma adjustments to reflect the PRC Acquisition,
the initial public offering and the Reorganization as if they had occurred on
March 31, 1996; and (iii) pro forma combined statement of income:
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
(IN THOUSANDS) (UNAUDITED)
Net sales $1,043,330 $ 88,356(1) $ 1,131,686
Licensing revenue 137,113 137,113
---------- -----------
Net revenues 1,180,443 1,268,799
Cost of goods sold 648,597 38,406(1) 687,003
---------- -----------
Gross profit 531,846 581,796
Selling, general and administrative 374,483 53,812(1) 429,163
expenses 868(1)
---------- -----------
Income from operations 157,363 152,633
Interest expense (income) 13,660 (15,289)(1)(2) (1,629)
Equity in net loss of joint venture 3,599 (3,599)(1) --
---------- -----------
Income before income taxes 140,104 154,262
Provision for income taxes 22,804 41,986(3) 64,790
---------- -----------
Net income $ 117,300 $ 89,472
========== ===========
(1) Effective April 3, 1997, the Company acquired the remaining 50% interest
in PRC. The adjustments above reflect the PRC Acquisition which is
accounted for under the purchase method. As a result of this
transaction, the Company's combined statement of income has been
adjusted to reflect the consolidation of PRC's operations from March 31,
1996, the amortization of goodwill over 25 years and the elimination of
the Company's equity in net loss of PRC.
(2) Adjustment to reduce interest expense, assuming the application of the
net proceeds from the initial public offering were used to repay
outstanding indebtedness of the Company as of March 31, 1996.
(3) Adjustment to reflect income taxes based upon pro forma pre-tax income
as if the Company had been subject to additional Federal, state and
local income taxes, calculated using a pro forma effective tax rate of
42.0% for fiscal 1997.
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RESULTS OF OPERATIONS
The following discussion of the Company's results of operations for fiscal
1998 compared to fiscal 1997 is presented on a pro forma basis for fiscal 1997,
assuming the PRC Acquisition had occurred as of March 31, 1996. The discussion
of the Company's results of operations for fiscal 1997 compared to fiscal 1996
is presented on a historical basis. Additionally, as a result of the Company's
initial public offering and the use of a portion of the net proceeds therefrom
to reduce outstanding indebtedness, historical interest expense is not discussed
below because the results are not meaningful.
The table below sets forth the percentage relationship to net revenues of
certain items in the Company's statements of income for fiscal 1998, fiscal 1997
and fiscal 1996 presented on a historical and pro forma basis, as indicated:
PRO
HISTORICAL FORMA
--------------------------------------------- -------
1998 1997 1996 1997
------ ------ ------ ------
Net sales 88.6% 88.4% 89.2% 89.2%
Licensing revenue 11.4 11.6 10.8 10.8
------ ------ ------ ------
Net revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Gross profit 48.6 45.1 42.8 45.8
Selling, general and
administrative expenses 35.0 31.8 30.3 33.8
------ ------ ------ ------
Income from operations
13.6% 13.3% 12.5% 12.0%
====== ====== ====== ======
FISCAL 1998 (HISTORICAL BASIS) COMPARED TO FISCAL 1997 (PRO FORMA BASIS)
NET SALES. Net sales increased 15.2% to $1.304 billion in fiscal 1998 from
$1.132 billion in fiscal 1997. Wholesale net sales increased 17.7% to $733.1
million in fiscal 1998 from $623.0 million in fiscal 1997. Wholesale growth
primarily reflects increased menswear sales resulting from growth in the
Company's basic stock replenishment program, improved sales in existing brands,
a shift in the sales mix to higher priced wholesale products and sales from the
Company's third party wholesale trading business which began operations in the
fourth quarter of fiscal 1997. Wholesale growth also reflects increased
womenswear sales due to the introduction of Polo Sport in the fourth quarter of
fiscal 1997. Retail sales increased 12.2% to $570.8 million in fiscal 1998 from
$508.6 million in fiscal 1997. Of this increase, $60.9 million is attributable
to the opening of two new Polo stores (net of one store closing) and seven new
outlet stores (net of three store closings) in fiscal 1998 and the benefit of a
full year of operations for three new Polo stores and ten new outlet stores
opened in fiscal 1997.
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LICENSING REVENUE. Licensing revenue increased 21.9% to $167.1 million in
fiscal 1998 from $137.1 million in fiscal 1997. This increase reflects the
benefit of a full year of licensing revenue in fiscal 1998 from the launch of
the Lauren women's line in the second quarter of fiscal 1997. Additionally,
licensing revenue improved due to an overall increase in sales of existing
licensed products, particularly Chaps and Home Collection, both of which
introduced new product categories.
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
48.6% in fiscal 1998 from 45.8% in fiscal 1997. This increase was attributable
to improvements in each of the Company's integrated operations. Wholesale gross
margins increased significantly in fiscal 1998 over fiscal 1997 as a direct
result of increased fulfillment of customer orders, improved supply chain
management and a planned reduction in off-price sales. Retail gross margins also
increased significantly in fiscal 1998 as compared to fiscal 1997 primarily due
to the benefit of operating five new Polo stores (net of one store closing)
which were opened in fiscal 1998 and fiscal 1997, and an improved initial
markup. Licensing revenue, which has no associated cost of goods sold, increased
as a percentage of net revenues to 11.4% in fiscal 1998 from 10.8% in fiscal
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased to $515.5 million or 35.0% of net
revenues in fiscal 1998 from $429.2 million or 33.8% of net revenues in fiscal
1997. This increase as a percentage of net revenues was attributable to
increased depreciation expense associated with the Company's shop-within-shops
development program, increased advertising, marketing and public relations
expenditures to support the Company's brands and a one-time charge under terms
of a long-term contract with a former executive.
FISCAL 1997 (HISTORICAL BASIS) COMPARED TO FISCAL 1996 (HISTORICAL BASIS)
NET SALES. Net sales increased 14.7 % to $1.043 billion in fiscal 1997 from
$909.7 million in fiscal 1996. Wholesale net sales increased 9.5 % to $663.4
million in fiscal 1997 from $606.0 million in fiscal 1996. This increase
primarily reflects the benefit of a full year of womenswear sales in fiscal 1997
compared to five and one-half months in fiscal 1996. Retail sales increased by
25.1% to $380.0 million in fiscal 1997 from $303.7 million in fiscal 1996. Of
this increase, $58.8 million is attributable to the opening of three new Polo
stores and seven new outlet stores (net of four outlet store closings) in fiscal
1997 and the benefit of a full year of operations for seven outlet stores opened
in fiscal 1996. Comparable store sales in fiscal 1997 increased 6.3% or $17.5
million. Comparable store sales represent net sales of stores open in both
reporting periods for the full duration of such periods.
LICENSING REVENUE. Licensing revenue increased 24.4 % to $137.1 million in
fiscal 1997 from $110.2 million in fiscal 1996. This increase reflects the
launch of Polo Jeans Co. in fiscal 1997 and an overall increase in sales of
licensed products, particularly Chaps, accessories and Home Collection.
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GROSS PROFIT. Gross profit as a percentage of net revenues increased to
45.1% in fiscal 1997 from 42.8% in fiscal 1996. The increase was primarily
attributable to the increase, as a percentage of total net revenues, in net
sales of the Company's higher margin retail sales (relative to wholesale sales)
and to increased licensing revenue. In fiscal 1997, wholesale gross margins
improved slightly while retail gross margins increased significantly due to a
reduction in markdowns as compared to fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to
$374.5 million or 31.8% of net revenues in fiscal 1997 from $309.2 million or
30.3% of net revenues in fiscal 1996. This increase as a percentage of net
revenues was primarily attributable to investment in organizational
infrastructure to support growth, increased advertising, marketing and public
relations expenditures to support the Company's brands, and personnel and
start-up costs associated with the opening of three Polo stores in fiscal 1997.
Additionally, SG&A expenses in fiscal 1997 include a full year of womenswear
SG&A expenses as compared to five and one-half months in the prior period.
EQUITY IN NET LOSS OF JOINT VENTURE. Equity in net loss of joint venture
represents the Company's 50% equity interest in PRC. Such losses increased to
$3.6 million in fiscal 1997 from $1.1 million in fiscal 1996, primarily as a
result of lost revenues and expenses associated with temporary store closings
for renovations in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity historically have been cash flows
from operations, credit facilities and, prior to the Reorganization, partners'
financing. The Company's capital requirements primarily derive from working
capital needs, construction and renovation of shop-within-shops, retail
expansion and other corporate activities.
Net cash provided by operating activities decreased to $96.2 million in
fiscal 1998 from $203.6 million in fiscal 1997. This decrease is primarily a
result of increases in inventory levels during fiscal 1998 due to the timing of
wholesale shipments and the overall growth of the business, and a planned
reduction in wholesale inventory levels in fiscal 1997. Net cash used in
investing activities increased to $74.9 million in fiscal 1998 from $38.6
million in fiscal 1997. This increase principally reflects an increase in
capital expenditures, the use of $8.6 million in cash to acquire the operations
of PRC and investments in joint ventures with nonaffiliated partners. Net cash
provided by financing activities increased to $7.8 million in fiscal 1998 from
net cash used in financing activities of $149.0 million in fiscal 1997. This
increase primarily reflects the net proceeds received from the initial public
offering, offset by the application of a portion of the net proceeds to repay
outstanding indebtedness and an increase in scheduled debt and subordinated note
repayments.
As a result of the initial public offering, the Company's cash flow needs
reflect the elimination of ongoing distributions to the partners. Partially
offsetting these changes will be the application of funds for the payment of
additional Federal, state and local income taxes.
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Simultaneously with the closing of the Reorganization, the Company entered
into a new financing arrangement (the "New Credit Facility") providing for a
$375.0 million revolving line of credit available for the issuance of letters of
credit, acceptances or direct borrowings. Upon the closing of the initial public
offering, the amount available under the revolving line of credit was reduced to
$225.0 million. The New Credit Facility matures on December 31, 2002. Borrowings
under the New Credit Facility were used to refinance the Polo Ralph Lauren, L.P.
and subsidiaries credit facility of $104.5 million and to repay in full $56.7
million of aggregate borrowings outstanding under The Ralph Lauren Womenswear,
L.P. and subsidiaries credit facility and the PRC credit facility.
Borrowings under the New Credit Facility bear interest, at the Company's
option, at a Base Rate (the "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 London Interbank Offered Rate plus
an interest margin. The agreement contains customary representations,
warranties, covenants and events of default, including covenants regarding
maintenance of net worth and leverage ratios, limitations on indebtedness and
incurrences of liens, and restrictions on sales of assets and transactions with
affiliates. Additionally, the agreement provides that an event of default will
occur if Mr. Lauren and related entities fail to maintain a specified minimum
percentage of the voting power of the Company's common stock. As of March 28,
1998, the Company had no direct borrowings and $19.9 million in outstanding
letters of credit under the New Credit Facility.
On June 17, 1997, the Company completed the sale of 11,170,000 shares of its
Class A Common Stock at $26.00 per share in its initial public offering. The net
proceeds from the initial public offering, after deducting underwriting
discounts and commissions and offering expenses, aggregated $268.8 million. The
net proceeds from the initial public offering increased liquidity of the Company
by reducing indebtedness as follows: (i) by repayment of borrowings outstanding
under the Company's New Credit Facility in the amount of $163.5 million; (ii) by
payment of a dividend declared and reorganization notes issued by the Company in
connection with the Reorganization in the amount of $43.0 million to Mr. Lauren
and related entities and certain investment funds affiliated with The Goldman
Sachs Group, L.P. (collectively, the "GS Group"); and (iii) by repayment of
subordinated notes and interest thereon in the amount of $24.3 million to Mr.
Lauren and the GS Group. The remaining $38.0 million has been used for other
general corporate purposes.
Capital expenditures were $63.1 million, $35.3 million and $5.6 million in
fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The increase in capital
expenditures in fiscal 1998 represents primarily expenditures associated with
the Company's shop-within-shops development program which includes new shops,
renovations and expansions as well as expenditures incurred in connection with
the expansion of the Company's retail operations. The Company plans to invest
approximately $120.0 million, net of landlord incentives, over the next fiscal
year for its retail stores, including flagship stores, the shop-within-shops
development program 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 commencing April 1, 1998. Shares acquired
under the repurchase program will be used for stock option programs and for
other corporate purposes.
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The Company extends credit to its customers, including those which have
accounted for significant portions of its net revenues. The Company had three
customers, Dillard Department Stores, Inc., Federated Department Stores, Inc.
and The May Department Stores Company, which in aggregate constituted 53.0% and
48.0% of trade accounts receivable outstanding at March 28, 1998 and March 29,
1997, respectively. Additionally, the Company had three licensing partners,
WestPoint Stevens, Inc. ("WPS"), Seibu Department Stores, Ltd. ("Seibu") and
Jones Apparel Group, Inc., which in aggregate constituted approximately 35.0% of
licensing revenue in fiscal 1998. WPS, Seibu and L'Oreal S.A./Cosmair Inc.
constituted, in aggregate, 39.0% and 43.0% of licensing revenue in fiscal 1997
and fiscal 1996, respectively. Accordingly, the Company may have significant
exposure in collecting accounts receivable from its customers. The Company has
credit policies and procedures which it uses to manage its credit risk.
Management believes that cash from ongoing operations and funds available
under the New Credit Facility will be sufficient to satisfy the Company's
current level of operations, capital requirements and stock repurchase program
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 AND QUARTERLY FLUCTUATIONS
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 PRC
Acquisition and 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 United States dollars; however, purchase prices for the
Company's products may be affected by fluctuations in the exchange rate between
the United States dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods sold in the
future. During the last two years, exchange rate fluctuations have not had a
material impact on the Company's inventory cost. Additionally, certain
international licensing revenue could be materially affected by currency
fluctuations. From time to time, the Company hedges certain exposures to foreign
currency exchange rate changes arising in the ordinary course of business.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income. This Statement establishes standards
for reporting of comprehensive income and its components (revenues, expenses,
gains and losses) in the financial statements. SFAS No. 130 requires an
enterprise to: (i) reconcile net income to comprehensive income; (ii) classify
items of other comprehensive income (e.g., foreign currency translation
adjustments, unearned compensation, etc.) by their nature in a financial
statement; and (iii) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in-capital in the
equity section of a statement of financial position. SFAS No.130 is effective
for the Company's first quarter of fiscal year ending April 3, 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for
reporting selected financial data and descriptive information about an
enterprise's reportable operating segments (as defined). This Statement also
requires the reconciliation of total segment information presented to the
corresponding amounts in the general purpose financial statements. Additionally,
SFAS No. 131 establishes
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standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 is effective for the Company's fiscal year
ending April 3, 1999. The Company has not yet determined what additional
disclosures, if any, may be required in connection with adopting this Statement.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued 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 organization costs and
retail store openings, be expensed as incurred. SOP 98-5 is effective for the
Company's fiscal year ending April 1, 2000. The Company has not yet determined
whether the application of SOP 98-5 will have a material impact on the Company's
financial position or results of operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain of the
Company's computer programs have date-sensitive software which may recognize a
date using "00" as the year 1900 rather than the year 2000. This situation could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Based on an internal assessment, the Company determined that it will be
required to modify or replace portions of its software applications so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such modifications and conversions are not made or are not timely completed, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with its significant
suppliers, licensees, transportation carriers, general service providers and
large customers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 Issue. In
addition, third party vendors of hardware and packaged software have been
contacted about their products' compliance status. There can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram,
replace and test the software for Year 2000 modifications. The Company plans to
complete the major initiatives of its Year 2000 project within the current
fiscal year. To date, the Company has incurred expenses of approximately $1.1
million related to the assessment of, and preliminary efforts in connection
with, its Year 2000 project and the development of a remediation plan. The total
remaining cost of the Year 2000 project is estimated at $5.0 to $6.0 million and
is being funded through operating cash flows. Of the total project cost,
approximately $0.5 million is attributable to the purchase of new software which
will be capitalized. The remainder will be expensed as incurred.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item appears beginning on page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The other information required to be included herein by Item 10 of Form 10-K
will be included in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders which will be filed within 120 days after the close of the
Company's fiscal year ended March 28, 1998 and such information is incorporated
herein by reference to such Proxy Statement.
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of June 11, 1998.
NAME Age Position
- ------------------------- --- ------------------------------------------
Ralph Lauren.......... 58 Chairman, Chief Executive Officer and
Director
Michael J. Newman..... 52 Vice Chairman, Chief Operating Officer and
Director
Richard A. Friedman 40 Director
Frank A. Bennack, Jr.... 65 Director
Allen Questrom......... 58 Director
Terry S. Semel.......... 55 Director
Peter Strom............. 69 Director
Victor Cohen.......... 44 Senior Vice President, General Counsel and
Secretary
Nancy A. Platoni Poli 42 Senior Vice President and Chief Financial Officer
Karen L. Rosenbach 43 Senior Vice President, Human Resources and
Administration
RALPH LAUREN has been a director of the Company since prior to the
commencement of the Company's initial public offering and a member of the
Advisory Board or Board of Directors of the Company's predecessors since their
organization. Mr. Lauren is the Company's Chairman and Chief Executive Officer.
He founded Polo in 1968 and has provided leadership in the design, marketing and
operational areas since such time.
MICHAEL J. NEWMAN has been a director of the Company since prior to the
commencement of the Company's initial public offering and a member of the
Advisory Board of the Company's predecessor since April 1995. Mr. Newman has
been Vice Chairman and Chief Operating Officer of the Company since 1995. He was
President and Chief Operating Officer of the Company's Menswear operations from
1991 to 1994, and Executive Vice President from 1989 to 1991. Mr. Newman joined
Polo as Vice President of Finance and Chief Financial Officer in 1987. Prior to
joining the Company, Mr. Newman was Senior Vice President of Finance at
Kaiser-Roth Apparel.
RICHARD A. FRIEDMAN has been a director of the Company since prior to the
commencement of the Company's initial public offering and a member of the
Advisory Board of the Company's predecessor since 1994. Mr. Friedman is a
Managing Director of Goldman, Sachs & Co., and head of the Principal Investment
Area. He joined Goldman, Sachs & Co. in 1981. Mr. Friedman is a member of the
Board of Directors of AMF Bowling, Inc., AMF Bowling Worldwide, Inc., and
Diamond Cable Communications PLC.
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FRANK A. BENNACK, JR. has been a director of the Company since January
1998. Mr. Bennack has been the President and Chief Executive Officer of The
Hearst Corporation since 1979. He is a member of the Board of Directors of The
Hearst Corporation, Hearst-Argyle Television, Inc., American Home Products
Corporation, The Chase Manhattan Corporation and The Chase Manhattan Bank.
ALLEN QUESTROM who was the Chairman and Chief Executive Officer of
Federated Department Stores, Inc. from February 1990 to May 1997, has been a
Director of the Company since September 1997. He is a member of the Board of
Directors of Interpublic Group of Companies, Inc. and AEA Investors, Inc.
TERRY S. SEMEL has been a director of the Company since September 1997.
Mr. Semel has been the Chairman of the Board and Co-Chief Executive Officer of
the Warner Bros. Division of Time Warner Entertainment LP ("Warner Brothers"),
since March 1994 and of Warner Music Group since November 1995. For more than
ten years prior to that he was President of Warner Brothers or its predecessor,
Warner Bros. Inc. Mr. Semel is a member of the Board of Directors of Revlon,
Inc.
PETER STROM has been a director of the Company since September 1997 and was
a member of the Advisory Board of the Company's predecessor from October 1994
until his retirement in April 1995. Mr. Strom was an initial officer of Polo in
1968 and held various management positions in the Company, including, at the
time of his retirement, serving as the Company's Vice Chairman and Chief
Operating Officer.
VICTOR COHEN has been Senior Vice President, General Counsel and Secretary
of the Company since 1996. Mr. Cohen joined Polo in 1983 as its senior legal
officer responsible for all legal and corporate affairs. Prior to joining the
Company, he was associated with the law firm of Skadden, Arps, Slate, Meagher &
Flom.
NANCY A. PLATONI POLI has been Chief Financial Officer of the Company
since 1996 and Senior Vice President since 1997. Ms. Poli was Vice President and
Controller from 1989 to 1996, and assumed responsibility for treasury functions
in addition to her controller functions in 1995. Prior to that, she was
Controller of Retail Finance. Ms. Poli joined the Company in 1984.
KAREN L. ROSENBACH has been Senior Vice President, Human Resources and
Administration of the Company since 1996. Ms. Rosenbach joined the Company in
1988 as Vice President of Human Resources. Prior to joining the Company, she was
Vice President of Human Resources, Real Estate Group at Chemical Bank.
Each executive officer serves for a one-year term ending at the next annual
meeting of the Company's Board of Directors, subject to his or her applicable
employment agreement and his or her earlier death, resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be included herein by Items 11 through 13 of
Form 10-K will be included in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders, which will be filed within 120 days after the close of
the Company's fiscal year ended March 28, 1998 and such information is
incorporated herein by reference to such Proxy Statement.
33
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1, 2. Financial Statements and Schedules. See index on Page
F-1.
3. Exhibits --
EXHIBIT
NUMBER DESCRIPTION
- ------------------- --------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 333-24733)) (the "S-1").*
3.2 Amended and Restated By-laws of the Company (filed as Exhibit
3.2 to the S-1).*
10.1 Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan
(filed as Exhibit 10.1 to the S-1)*+
10.2 Polo Ralph Lauren Corporation 1997 Stock Option Plan for Non-Employee
Directors (filed as Exhibit 10.2 to the S-1)*+
10.3 Registration Rights Agreement dated as of June 9, 1997 by and among
Ralph Lauren, GS Capital Partners, L.P., GS Capital Partners PRL Holding
I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund
1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994,
L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to the S-1)*
10.4 U.S.A. Design and Consulting Agreement, dated January 1, 1985, between
Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, and
Cosmair, Inc., and letter agreement related thereto dated January 1,
1985** (filed as Exhibit 10.4 to the S-1)*
10.5 Restated U.S.A. License Agreement, dated January 1, 1985, between Ricky
Lauren and Mark N. Kaplan, as Licensor, and Cosmair, Inc., as Licensee,
and letter agreement related thereto dated January 1, 1985** (filed as Exhibit 10.5 to the
S-1)*
10.6 Foreign Design and Consulting Agreement, dated January 1, 1985, between
Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, as
Licensor, and L'Oreal S.A., as Licensee, and letter agreements related
thereto dated January 1, 1985, September 16, 1994 and October 25, 1994** (filed as
Exhibit 10.6 to the S-1)*
10.7 Restated Foreign License Agreement, dated January 1, 1985, between The
Polo/Lauren Company, as Licensor, and L'Oreal S.A., as Licensee, letter
agreement related thereto dated January 1, 1985, and Supplementary
Agreement thereto, dated October 1, 1991** (filed as Exhibit 10.7 to the S-1)*
10.8 Amendment, dated November 27, 1992, to Foreign Design And Consulting
Agreement and Restated Foreign License Agreement** (filed as Exhibit 10.8 to the S-1)*
10.9 License Agreement, made as of January 1, 1998, between Ralph Lauren
Home Collection, Inc. and WestPoint Stevens Inc.**
10.10 License Agreement, dated March 1, 1998, between The Polo/Lauren Company, L.P. and
Polo Ralph Lauren Japan Co., Ltd., and undated letter agreement related thereto** (filed
as Exhibit 10.10 to the S-1)*
10.11 Design Services Agreement, dated March 1, 1998, between Polo Ralph
Lauren Enterprises, L.P. and Polo Ralph Lauren Japan Co., Ltd.** (filed as Exhibit 10-11
to the S-1)*
10.12 Deferred Compensation Agreement dated April 1, 1993, between Michael J.
Newman and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph
Lauren, L.P. (filed as Exhibit 10.12 to the S-1)*+
10.14 Deferred Compensation Agreement dated April 2, 1995 between F. Lance Isham and Polo
Ralph Lauren, L.P.(filed as Exhibit 10.14 to the S-1)*+
34
37
10.15 Deferred Compensation Agreement dated April 1, 1993 between Cheryl L.
Sterling Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo
Ralph Lauren, L.P.(filed as Exhibit 10.15 to the S-1)*+
10.16 Amended and Restated Employment Agreement dated October 26, 1993 between
Michael J. Newman and Polo Ralph Lauren Corporation, as amended and
assigned October 31, 1994 to Polo Ralph Lauren, L.P. and as further amended as of June
9, 1997 (filed as Exhibit 10.17 to the S-1)*+
10.17 Employment Agreement dated April 2, 1995 between F. Lance Isham and Polo Ralph
Lauren, L.P. (filed as Exhibit 10.19 to the S-1)*+
10.18 Employment Agreement dated October 26, 1993 between Cheryl L. Sterling
Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph
Lauren, L.P. (filed as Exhibit 10.20 to the S-1)*+
10.19 Stockholders Agreement dated as of June 9, 1997 among Polo Ralph Lauren
Corporation, GS Capital Partners, L.P., GS Capital Partners PRL Holding
I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund
1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., Mr. Ralph
Lauren, RL Holding, L.P. and RL Family (filed as Exhibit 10.22 to the S-1)*
10.20 Form of Reorganization Note (filed as Exhibit 10.23 to the S-1)*
10.21 Form of Credit Agreement between Polo Ralph Lauren Corporation and The Chase
Manhattan Bank (filed as Exhibit 10.24 to the S-1)*
10.22 Form of Guarantee and Collateral Agreement by Polo Ralph
Lauren Corporation in favor of The Chase Manhattan Bank
(filed as Exhibit 10.25 to the S-1)*
10.23 Form of Indemnification Agreement between Polo Ralph Lauren
Corporation and its Directors and Executive Officers (filed
as Exhibit 10.26 to the S-1)*
10.24 Employment Agreement dated June 9, 1997 between Ralph Lauren and Polo Ralph Lauren
Corporation (filed as Exhibit 10.27 to the S-1)*+
10.25 Design Services Agreement, dated as of October 18, 1995, by and between Polo Ralph
Lauren Enterprises, L.P. and Jones Apparel Group, Inc.**
10.26 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren
Enterprises, L.P. and Jones Apparel Group, Inc.**
21.1 List of Significant Subsidiaries of the Company.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
- ------------------------------------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
** Portions of Exhibits 10.4 - 10.11 and 10.25 and 10.26 have been omitted
pursuant to a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission.
(b) The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.
35
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
By: /s/ Ralph Lauren
--------------------------------------
Ralph Lauren
Chairman of the Board of Directors and
Chief Executive Officer
Date: June 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE(S) DATE
- -------------------------------------- ------------------------------------------------------ -------
/s/ Ralph Lauren Chairman of the Board of Directors June 26, 1998
- ------------------------------------- and Chief Executive Officer
Ralph Lauren (Principal Executive Officer)
/s/ Michael J. Newman Vice Chairman of the Board of Directors and Chief June 26, 1998
- ------------------------------------- Operating Officer
Michael J. Newman
/s/ Nancy A. Platoni Poli Senior Vice President and Chief Financial Officer June 26, 1998
(Principal Financial and Accounting Officer)
- -------------------------------------
Nancy A. Platoni Poli
/s/ Richard A. Friedman Director June 26, 1998
- -------------------------------------
Richard A. Friedman
/s/ Frank A. Bennack, Jr. Director June 26, 1998
- -------------------------------------
Frank A. Bennack, Jr.
/s/ Allen Questrom Director June 26, 1998
- -------------------------------------
Allen Questrom
/s/ Terry S. Semel Director June 26, 1998
- -------------------------------------
Terry S. Semel
/s/ Peter Strom Director June 26, 1998
- -------------------------------------
Peter Strom
36
39
POLO RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE
Independent Auditors' Report................................................ F-2
Independent Auditor's Report................................................ F-3
Consolidated Balance Sheets as of March 28, 1998 and March 29, 1997 F-4
Consolidated Statements of Income for the Years Ended March 28, 1998, March
29, 1997 and March 30, 1996................................................. F-5
Consolidated Statements of Stockholders' Equity and Partners' Capital for the
Years Ended March 28, 1998, March 29, 1997 and March 30, 1996 ............ F-6
Consolidated Statements of Cash Flows for the Years Ended March 28, 1998,
March 29, 1997 and March 30, 1996........................................... F-7
Notes to Consolidated Financial Statements.................................. F-9
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report.................................................. S-1
Independent Auditor's Report.................................................. S-2
Schedule II - Valuation and Qualifying Accounts............................... S-3
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
F-1
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Polo Ralph Lauren Corporation
New York, New York
We have audited the accompanying consolidated balance sheet as of March 28, 1998
and the combined balance sheet as of March 29, 1997 of Polo Ralph Lauren
Corporation and subsidiaries (the "Company") and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
March 28, 1998 and the combined statements of income, partners' capital, and
cash flows for the year ended March 29, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of the Company as of
March 28, 1998 and March 29, 1997, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 15, 1998
F-2
41
INDEPENDENT AUDITOR'S REPORT
The Partners
Polo Ralph Lauren Enterprises, L.P.
We have audited the accompanying combined statements of income,
partners' capital, and cash flows of Polo Ralph Lauren Corporation (the
"Company" as defined in Note 1(a)) for the year ended March 30, 1996. These
combined financial statements are the responsibility of management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Polo Ralph Lauren Corporation for the year ended March 30, 1996 in
conformity with generally accepted accounting principles.
/s/ Mahoney Cohen Rashba & Pokart, CPA, PC
MAHONEY COHEN RASHBA & POKART, CPA, PC
New York, New York
June 21, 1996
except as to Note 1(a)
dated March 14, 1997
F-3
42
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 28, MARCH 29,
1998 1997
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 58,755 $ 29,599
Accounts receivable, net of allowances of $12,447 and $12,845, respectively 149,120 144,303
Inventories 298,485 222,147
Deferred tax assets 24,448 2,669
Prepaid expenses and other 25,656 37,621
--------- ---------
TOTAL CURRENT ASSETS 556,464 436,339
Property and equipment, net 175,348 95,255
Investments in and advances to joint ventures 5,683 17,977
Deferred tax assets 14,213 84
Other assets, net 73,422 39,103
--------- ---------
$ 825,130 $ 588,758
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities
Notes and acceptances payable - banks -- $ 26,777
Current portion of long-term debt $ 337 22,248
Current portion of subordinated notes -- 20,000
Accounts payable 100,126 89,417
Accrued expenses and other 101,795 68,859
--------- ---------
TOTAL CURRENT LIABILITIES 202,258 227,301
Long-term debt -- 47,875
Other noncurrent liabilities 38,546 28,897
Subordinated notes -- 24,000
Commitments and contingencies (Note 14) -- --
Stockholders' equity and partners' capital
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,272,726 shares issued and outstanding 343 --
Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 --
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 --
Additional paid-in-capital 447,918 --
Retained earnings and partners' capital 136,738 260,837
Cumulative translation adjustment -- (152)
Unearned compensation (1,333) --
--------- ---------
TOTAL STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL 584,326 260,685
--------- ---------
$ 825,130 $ 588,758
========= =========
See accompanying notes to financial statements.
F-4
43
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEAR ENDED
--------------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
------------ ------------ ------------
Net sales $ 1,303,816 $ 1,043,330 $ 909,720
Licensing revenue 167,119 137,113 110,153
------------ ------------ ------------
Net revenues 1,470,935 1,180,443 1,019,873
Cost of goods sold 755,654 648,597 583,546
------------ ------------ ------------
Gross profit 715,281 531,846 436,327
Selling, general and administrative expenses 515,526 374,483 309,207
------------ ------------ ------------
Income from operations 199,755 157,363 127,120
Interest expense 159 13,660 16,287
Equity in net loss of joint venture -- 3,599 1,101
------------ ------------ ------------
Income before income taxes 199,596 140,104 109,732
Provision for income taxes 52,025 22,804 10,925
------------ ------------ ------------
Net income $ 147,571 $ 117,300 $ 98,807
============ ============ ============
PRO FORMA (NOTE 1) - (UNAUDITED)
Historical income before income taxes $ 199,596 $ 140,104
Pro forma adjustments other than income taxes 3,162 14,158
------------ ------------
Pro forma income before income taxes 202,758 154,262
Pro forma provision for income taxes 82,631 64,790
------------ ------------
Pro forma net income $ 120,127 $ 89,472
============ ============
Pro forma net income per share - Basic and Diluted $ 1.20 $ 0.89
============ ============
Pro forma common shares outstanding - Basic and Diluted 100,222,444 100,222,444
============ ============
See accompanying notes to financial statements.
F-5
44
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS AND CUMULATIVE
-------------------------- PAID-IN- PARTNERS' TRANSLATION UNEARNED
SHARES AMOUNT CAPITAL CAPITAL ADJUSTMENT COMPENSATION TOTAL
------------ --------- -------- --------- ---------- ------------ -----
BALANCE AT APRIL 1, 1995 -- -- -- $ 188,635 $ (56) -- $188,579
Net income 98,807 98,807
Translation adjustment 168 168
Capital contributions 10,000 10,000
Distributions to partners (59,901) (59,901)
------------ --------- -------- --------- ------- ------- --------
BALANCE AT MARCH 30, 1996 -- -- -- 237,541 112 -- 237,653
Net income 117,300 117,300
Translation adjustment (264) (264)
Distributions to partners (94,004) (94,004)
------------ --------- -------- --------- ------- ------- --------
BALANCE AT MARCH 29, 1997 -- -- -- 260,837 (152) -- 260,685
Net income 147,571 147,571
Translation adjustment 25 25
Distributions to partners (45,665) (45,665)
Reorganization 89,000,000 890 176,537 (177,554) 127 --
Dividend and Reorganization Notes paid (48,451) (48,451)
Common stock issued in
public offering, net 11,170,000 112 268,685 268,797
Common stock issued in PRC Acquisition 26,803 -- 697 697
Restricted stock grants 76,923 1 1,999 (1,333) 667
------------ --------- -------- --------- ----- ------- --------
BALANCE AT MARCH 28, 1998 100,273,726 $ 1,003 $447,918 $ 136,738 -- $(1,333) $584,326
============ ========= ======== ========= ===== ======= ========
See accompanying notes to financial statements.
F-6
45
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 147,571 $ 117,300 $ 98,807
Adjustments to reconcile net income to net cash provided by
operating activities:
Benefit from deferred income taxes (27,997) -- --
Depreciation and amortization 27,402 13,755 9,743
Equity in net loss of joint venture -- 3,599 1,101
Provision for losses on accounts receivable 1,155 833 1,122
Changes in deferred liabilities 9,584 5,067 909
Other 3,198 (5,109) (3,505)
Changes in assets and liabilities, net of acquisition
Accounts receivable (4,352) (137) (34,155)
Inventories (48,942) 46,702 21,811
Prepaid expenses and other (2,031) (9,223) (10,428)
Other assets (18,922) (4,323) (6,733)
Accounts payable 3,215 15,173 9,798
Accrued expenses and other 6,325 19,943 2,855
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 96,206 203,580 91,325
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (63,079) (35,330) (5,575)
Acquisition, net of cash acquired (8,551) -- (39,726)
Investments in joint ventures (5,812) -- --
Cash surrender value - officers' life insurance, net 2,569 (3,230) (3,685)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (74,873) (38,560) (48,986)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of) proceeds from short-term borrowings, net (26,777) (46,954) 14,109
Repayments of borrowings against officers' life insurance policies (5,757) -- --
Repayments of long-term debt and subordinated notes (135,134) (11,791) (11,719)
Proceeds from long-term debt -- -- 10,000
Payment of Dividend and Reorganization Notes (48,451) -- --
Proceeds from issuance of common stock, net 268,797 -- --
Distributions paid to partners (44,855) (90,284) (56,284)
Capital contributions -- -- 10,000
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,823 (149,029) (33,894)
--------- --------- ---------
Net increase in cash and cash equivalents 29,156 15,991 8,445
Effect of exchange rate changes on cash and cash equivalents -- 40 (26)
Cash and cash equivalents at beginning of period 29,599 13,568 5,149
--------- --------- ---------
Cash and cash equivalents at end of period $ 58,755 $ 29,599 $ 13,568
========= ========= =========
F-7
46
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-----------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
------- ------- -------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 4,410 $16,005 $17,189
======= ======= =======
Cash paid for income taxes $73,873 $22,280 $11,602
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreign tax credits distributed to partners $ 509 $ 3,720 $ 3,617
======= ======= =======
Capital obligations for completed shop-within-shops $15,102 $ 8,600
======= =======
Fair value of assets acquired, excluding cash $69,537 $40,260
Less:
Cash paid 8,551 39,726
Fair market value of common stock issued for PRC Acquisition 697 --
------- -------
Liabilities assumed $60,289 $ 534
======= =======
Fair market value of restricted stock grants $ 667
=======
See accompanying notes to financial statements.
F-8
47
1 BASIS OF PRESENTATION AND ORGANIZATION
(a) BASIS OF PRESENTATION
Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware in
March 1997. PRLC and its subsidiaries are collectively referred to herein
as "Polo." On June 9, 1997, the partners and certain of their affiliates
contributed to PRLC all of the outstanding stock of, and partnership
interests in, the entities which comprised the predecessor group of
companies in exchange for common stock and cash (the "Reorganization"). The
accompanying combined financial statements for the years ended March 29,
1997 and March 30, 1996 include the accounts of Polo Ralph Lauren
Enterprises, L.P. ("Enterprises"), Polo Ralph Lauren, L.P. and subsidiaries
("Polo Partnership"), The Ralph Lauren Womenswear Company, L.P. and
subsidiaries ("Womenswear") and Polo Retail Corporation and subsidiaries
("PRC"), a 50% joint venture with a previously nonaffiliated partner
(collectively, the "Predecessor Company"). The controlling interests of the
Predecessor Company were held by Mr. Ralph Lauren, with a 28.5% interest
held by certain investment funds affiliated with The Goldman Sachs Group,
L.P. (collectively, the "GS Group").
The accompanying consolidated financial statements as of and for the
year ended March 28, 1998 include the combined results of operations of the
Predecessor Company through June 9, 1997 and the consolidated results of
operations of Polo thereafter (Polo, together with the Predecessor Company,
is referred to herein as the "Company"). The financial statements of PRLC
have not been included prior to the Reorganization as PRLC was a shell
company with no business operations.
The financial statements of the Predecessor Company are being presented
on a combined basis because of their common ownership. The combined
financial statements have been prepared as if the entities had operated as
a single consolidated group since their respective dates of organization.
All significant intercompany balances and transactions have been
eliminated. The equity method of accounting was used for the Company's
investment in PRC during the period in which 50% of PRC was owned by a
previously nonaffiliated partner (years ended March 29, 1997 and March 30,
1996). Subsequent to the Company's acquisition of the remaining 50%
interest in PRC effective April 3, 1997, as discussed further in Note 1 (d)
below, the results of operations of PRC have been consolidated and the
acquisition has been accounted for as a purchase.
F-9
48
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
(b) INITIAL PUBLIC OFFERING
On June 17, 1997, PRLC completed the sale of 11.17 million shares of
its Class A Common Stock at $26.00 per share in connection with its initial
public offering. The net proceeds from the initial public offering, after
deducting underwriting discounts and commissions and offering expenses,
aggregated $268.8 million. The net proceeds from the initial public
offering were used as follows: (i) to repay borrowings outstanding under
the Company's New Credit Facility (as defined - see Note 7) in the amount
of $163.5 million; (ii) to pay the Dividend and Reorganization Notes (as
defined - see Note 1 (c)) in the amount of $43.0 million to Mr. Lauren and
related entities and the GS Group; and (iii) to repay subordinated notes
and interest thereon (see Note 8) in the amount of $24.3 million to Mr.
Lauren and the GS Group. The remaining $38.0 million was used for other
general corporate purposes.
(c) DIVIDEND AND REORGANIZATION NOTES
On June 9, 1997, in connection with the Reorganization, the Company
declared a dividend and issued reorganization notes aggregating $43.0
million to Mr. Lauren and the GS Group representing estimated undistributed
earnings of the Predecessor Company through the closing of the
Reorganization ("Dividend and Reorganization Notes"). The Dividend and
Reorganization Notes were paid with a portion of the net proceeds of the
initial public offering (see Note 1 (b)). Effective June 9, 1997, the
Company declared a second dividend (the "Second Dividend") to Mr. Lauren
and the GS Group in an amount representing the difference between the
actual amount of undistributed earnings through the closing of the
Reorganization and the estimated amount of the Dividend and Reorganization
Notes. The Second Dividend amounted to $5.4 million and was paid in the
fourth quarter of fiscal 1998.
(d) ACQUISITIONS
Simultaneously with the Reorganization, the Company acquired from a
partnership of which Mr. Lauren is the sole general partner, the
partnership's sole membership interest in an entity which holds the
trademarks and other rights under a license agreement relating to the
Company's U.S. fragrance business and the interest which the Company did
not previously own in the entity that holds the trademarks relating to the
Company's international licensing business in exchange for shares of Class
B Common Stock. The operating results of these entities have been included
in the results of operations of the Predecessor Company for all periods
presented based on their common ownership.
On March 21, 1997, the Company entered into purchase agreements with
its joint venture partners to acquire the remaining 50% interest in PRC,
effective April 3, 1997, for consideration aggregating $10.4 million in
cash and Class A Common Stock of PRLC ("PRC Acquisition"). The PRC
Acquisition was completed simultaneously with the Company's initial public
offering.
On October 16, 1995, Womenswear acquired the assets of Ralph Lauren
Womenswear, Inc. ("RLW"), a nonaffiliated licensee, at book value which
approximated fair value, consisting principally of inventories ($19.7
million) and accounts receivable ($18.2 million) for $40.3 million in cash.
This acquisition was accounted for as a purchase.
F-10
49
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
(e) BUSINESS
The Company designs, licenses, contracts for the manufacture of,
markets and distributes men's and women's apparel, accessories, fragrances,
skin care products and home furnishings. The Company's sales are
principally to major department and specialty stores located throughout the
United States. Additionally, the Company also sells directly to consumers
through Company-owned Polo stores, including flagship stores in New York
City, and outlet stores located throughout the United States. 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.
The Company is party to licensing agreements which grant the licensee
exclusive rights to use the various trademarks owned by the Company in
connection with the manufacture and sale of designated products in
specified geographical areas. The license agreements typically provide for
designated terms with renewal options based on achievement of specified
sales targets. The agreements also require that certain minimum amounts be
spent on advertising for licensed products. Additionally, as part of the
licensing arrangements, each licensee is typically required to enter into a
design services agreement pursuant to which design and other creative
services are provided. The license and design services agreements provide
for payments based on specified percentages of net sales. Additionally, the
Company has granted royalty-free licenses to independent parties to operate
Polo stores to promote the sale of merchandise of the Company and its
licensees both domestically and internationally.
A significant amount of the Company's products are produced in the Far
East, through arrangements with independent contractors. As a result, the
Company's operations could be adversely effected by political instability
resulting in the disruption of trade from the countries in which these
contractors are located, or by the imposition of additional duties or
regulations relating to imports or by the contractors' inability to meet
the Company's production requirements.
(f) PRO FORMA ADJUSTMENTS (UNAUDITED)
The pro forma statement of income data for the years ended March 28,
1998 and March 29, 1997 presents the effects on the historical financial
statements of certain transactions as if they had occurred at March 31,
1996. The pro forma statement of income data reflects adjustments for: (i)
income taxes based upon pro forma pre-tax income as if the Company had been
subject to additional Federal, state and local income taxes, calculated
using a pro forma effective tax rate of 40.8% for the year ended March 28,
1998 and 42.0% for the year ended March 29, 1997 (see Note 9); (ii) the
reduction of interest expense resulting from the application of a portion
of the net proceeds from the initial public offering to outstanding
indebtedness; and (iii) the PRC Acquisition, including the consolidation of
PRC's operations, the amortization of goodwill over 25 years associated
with the acquisition and the elimination of the Company's equity in net
loss of PRC for the year ended March 29, 1997.
F-11
50
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
(g) PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per share has been computed in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. Pro forma net income per share was calculated by dividing pro forma
net income by the weighted average number of shares outstanding during the
period, assuming the initial public offering had been completed on March
31, 1996. For comparison purposes only, the weighted average number of
shares outstanding immediately following the completion of the initial
public offering were considered to be outstanding in the years ended March
28, 1998 and March 29, 1997.
2 SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to March 31. All
references herein to "1998," "1997" and "1996" represent the 52 week fiscal
years ended March 28, 1998, March 29, 1997 and March 30, 1996,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS
For comparative purposes, certain prior period amounts have been
reclassified to conform to the current period's presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less.
INVENTORIES
Wholesale inventories are valued at the lower of cost (first-in,
first-out method) or market. Retail inventories are valued using the retail
method.
STORE PREOPENING COSTS
Costs associated with the opening of a new store are deferred and
amortized within one year commencing from the date of the store opening.
F-12
51
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation of furniture
and fixtures and machinery and equipment is calculated using the
straight-line method over estimated average useful lives of approximately
five years. Leasehold improvements are amortized using the straight-line
method over the lesser of the term of the related lease or the estimated
useful life. Major additions and betterments are capitalized, and repairs
and maintenance are charged to operations in the period incurred.
Additionally, the Company capitalizes its share of the cost of constructing
shop-within-shops under agreements with retailers and amortizes such costs
using the straight-line method over the lesser of their estimated useful
lives or the life of the underlying agreement.
GOODWILL
Goodwill represents the excess of purchase cost over the fair value of
net assets of businesses acquired. The Company amortizes goodwill over its
estimated useful life of 25 years on a straight-line basis.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
The Company assesses the carrying value of long-lived and intangible
assets as current facts and circumstances suggest that they may be
impaired. In evaluating the fair value and future benefits of such assets,
the Company performs an analysis of the anticipated undiscounted future net
cash flows of the individual assets over the remaining amortization period
and would recognize an impairment loss if the carrying value exceeded the
expected future cash flows. The impairment loss would be measured based
upon the fair value. The Company has determined that its long-lived and
intangible assets presented in the accompanying balance sheet at March 28,
1998 are not impaired.
OFFICERS' LIFE INSURANCE
The Company maintains key man life insurance policies on several of its
senior executives, the majority of which contain split dollar arrangements.
The key man policies are recorded at their cash surrender value, while the
policies with split dollar arrangements are recorded at the lesser of their
cash surrender value or premiums paid. Amounts recorded under these
policies aggregated $28.2 million and $25.0 million, net of loans of $0 and
$5.8 million, at March 28, 1998 and March 29, 1997, respectively, and are
included in other assets in the accompanying balance sheets.
REVENUE RECOGNITION
Sales are recognized upon shipment of products to customers and, in the
case of sales by Company-owned outlet and retail stores, when goods are
sold to customers. Allowances for estimated uncollectible accounts and
discounts are provided when sales are recorded. Licensing revenue is
recognized as earned.
F-13
52
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
CONCENTRATION OF CREDIT RISK
The Company sells its merchandise primarily to major upscale department
stores across the United States and extends credit based on an evaluation
of the customer's financial condition without requiring collateral. Credit
risk is driven by conditions or occurrences within the economy and the
retail industry and is principally dependent on each customer's financial
condition. A decision by the controlling owner of a group of stores or any
substantial customer to decrease the amount of merchandise purchased from
the Company or to cease carrying its products could have a material adverse
effect on the Company. The Company had three customers who in aggregate
constituted 53% and 48% of trade accounts receivable outstanding at March
28, 1998 and March 29, 1997, respectively.
The Company had one significant customer that accounted for
approximately 11% of net sales in fiscal 1998, 1997 and 1996. Additionally,
the Company had three significant licensees (one of which was new in fiscal
1998) who in aggregate constituted approximately 35%, 39% and 43% of
licensing revenue in fiscal 1998, 1997 and 1996, respectively.
The Company monitors credit levels and the financial condition of its
customers on a continuing basis to minimize credit risk. The Company
believes that adequate provision for credit loss has been made in the
accompanying financial statements.
The Company is also subject to concentrations of credit risk with
respect to its cash and cash equivalents which it minimizes by placing
these funds with major banks and financial institutions and investing in
high-quality instruments.
ADVERTISING
The Company expenses the production costs of advertising, marketing and
public relations expenses upon the first showing of the related
advertisement. These expenses amounted to $68.5 million, $55.5 million and
$44.5 million in fiscal 1998, 1997 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are recognized based on differences
between financial statement and tax bases of assets and liabilities using
presently enacted tax rates.
The entities which comprised the Predecessor Company included
principally partnerships which were not subject to Federal or certain state
income taxes. Therefore, no provision was made in the accompanying combined
financial statements through June 9, 1997, as taxes were the liability of
the partners. However, Federal, state and local taxes have been provided on
the income of all domestic C corporations in the Predecessor Company.
Foreign income taxes have also been provided on the income of the foreign
entities in the Predecessor Company.
F-14
53
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
DEFERRED RENT OBLIGATIONS
The Company accounts for rent expense under noncancellable operating
leases with scheduled rent increases and landlord incentives on a
straight-line basis over the lease term. The excess of straight-line rent
expense over scheduled payment amounts and landlord incentives are recorded
as a deferred liability. Unamortized deferred rent obligations amounted to
$28.1 million and $22.6 million at March 28, 1998 and March 29, 1997,
respectively, and are included in accrued expenses and other, and other
noncurrent liabilities in the accompanying balance sheets.
FINANCIAL INSTRUMENTS
The Company from time to time uses derivative financial instruments to
reduce its exposure to changes in foreign exchange rates. While these
instruments are subject to risk of loss from changes in exchange rates,
those losses would generally be offset by gains on the related exposure.
The Company generally does not hold or issue financial instruments for
trading or speculative purposes.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of a foreign
subsidiary of the Company is measured using the local currency as the
functional currency. Assets and liabilities are translated at the exchange
rate in effect at each year end. Results of operations are translated at
the average rate of exchange prevailing throughout the period. Translation
adjustments arising from differences in exchange rates from period to
period are included in the cumulative translation adjustment account. Gains
and losses from foreign currency transactions are included in operating
results and were not considered by the Company to be material in fiscal
1998, 1997 and 1996.
STOCK OPTIONS
The Company uses the intrinsic value method to account for stock-based
compensation in accordance with Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees and has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. This Statement establishes
standards for reporting of comprehensive income and its components
(revenues, expenses, gains and losses) in the financial statements. SFAS
No. 130 requires an enterprise to: (i) reconcile net income to
comprehensive income; (ii) classify items of other comprehensive income
(e.g., foreign currency translation adjustments, unearned compensation,
etc.) by their nature in a financial statement; and (iii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a
statement of financial position. SFAS No.130 is effective for the Company's
first quarter of fiscal year ending April 3, 1999.
F-15
54
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement establishes
standards for reporting selected financial data and descriptive information
about an enterprise's reportable operating segments (as defined). This
Statement also requires the reconciliation of total segment information
presented to the corresponding amounts in the general purpose financial
statements. Additionally, SFAS No. 131 establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for the Company's fiscal year ending
April 3, 1999. The Company has not yet determined what additional
disclosures, if any, may be required in connection with adopting this
Statement.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued 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
organization costs and retail store openings, be expensed as incurred. SOP
98-5 is effective for the Company's fiscal year ending April 1, 2000. The
Company has not yet determined whether the application of SOP 98-5 will
have a material impact on the Company's financial position or results of
operations.
3 INVENTORIES
MARCH 28, MARCH 29,
1998 1997
Raw materials $ 26,364 $ 32,781
Work-in-process 12,406 5,788
Finished goods 259,715 183,578
-------- --------
$298,485 $222,147
======== ========
Merchandise inventories of $130.9 million and $93.9 million at March
28, 1998 and March 29, 1997, respectively, were valued utilizing the retail
method and are included in finished goods.
F-16
55
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
4 PROPERTY AND EQUIPMENT
MARCH 28, MARCH 29,
1998 1997
Land $ 656 $ 656
Furniture and fixtures 116,870 54,415
Machinery and equipment 22,189 18,567
Leasehold improvements 158,255 96,044
-------- --------
297,970 169,682
Less: accumulated
depreciation and amortization 122,622 74,427
-------- --------
$175,348 $ 95,255
======== ========
5 INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Effective March 31, 1997, the Company entered into a joint venture
agreement with a nonaffiliated partner to acquire real property in New York
City. Concurrent with the signing of the agreement, the Company made an
initial contribution for its 50% interest in the joint venture in the
amount of $5.0 million. On December 16, 1997, the Company entered into a
second 50/50 joint venture agreement with this nonaffiliated partner. The
entity formed through this joint venture entered into a long-term lease of
a building located in the Soho District of New York City. The Company
accounts for its 50% interest in these joint ventures under the equity
method commencing from the effective dates of the agreements.
At March 29, 1997, investments in and advances to joint ventures
reflect the Company's 50% interest in PRC. Sales by the Company to PRC were
$40.3 million and $38.9 million in fiscal 1997 and 1996, respectively.
Purchases by the Company from PRC amounted to $6.7 million and $5.7 million
in fiscal 1997 and 1996, respectively. At March 29, 1997, the Company had
$20.3 million due from PRC which is included in prepaid expenses and other
in the accompanying balance sheet.
6 ACCRUED EXPENSES AND OTHER
MARCH 28, MARCH 29,
1998 1997
Accrued operating expenses $ 39,941 $ 29,971
Accrued payroll and benefits 33,898 25,318
Accrued shop-within-shops 24,839 9,737
Accrued other 3,117 3,833
-------- --------
$101,795 $ 68,859
======== ========
F-17
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
7 FINANCING AGREEMENTS
Long-term debt consists of the following:
MARCH 28, MARCH 29,
1998 1997
Polo Partnership term loans $ -- $60,000
Womenswear term loan -- 9,000
Other 337 1,123
------- -------
337 70,123
Less: current portion 337 22,248
------- -------
$ -- $47,875
======= =======
On June 9, 1997, the Company entered into a new financing arrangement
(the "New Credit Facility") providing for a $375.0 million revolving line
of credit available for the issuance of letters of credit, acceptances or
direct borrowings. Upon the closing of the Company's initial public
offering, the amount available under the revolving line of credit was
reduced to $225.0 million. The New Credit Facility matures on December 31,
2002. Borrowings under the New Credit Facility were used to refinance the
Polo Partnership credit facility of $104.5 million and to repay in full
$56.7 million of aggregate borrowings outstanding under the Womenswear
credit facility and the PRC credit facility. Such borrowings were repaid
from the net proceeds of the initial public offering (see Note 1 (b)).
Borrowings under the New Credit Facility bear interest, as determined
by the Company, at either the lender's Base Rate (as defined) or at the
London Interbank Offered Rate ("LIBOR") plus an interest margin. The New
Credit Facility is collateralized by trade accounts receivable and contains
restrictive covenants relating to, among other things, net worth and
leverage ratios, limitations on indebtedness and incurrences of liens, and
restrictions on sales of assets and transactions with affiliates.
Additionally, the New Credit Facility provides 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 Polo's Common Stock (as defined
herein). At March 28, 1998, the Company had no borrowings outstanding under
the New Credit Facility.
F-18
57
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
On October 31, 1994, the Polo Partnershhip entered into a six-year
financing arrangement with commercial banks providing for a $125.0 million
revolving credit facility and $80.0 million in term loans. The revolving
credit facility was available for the issuance of letters of credit,
acceptances or direct borrowings and was limited to a borrowing base
calculated on eligible accounts receivable, inventory and letters of
credit. Any unused portion of the available credit line ($103.2 million at
March 29, 1997) was subject to a 3/8% commitment fee. Notes and acceptances
payable under this facility amounted to $4.7 million at March 29, 1997 and
bore interest based on either the prime rate or LIBOR plus 1.75%, as
permitted by the agreement (ranging from 5.5% to 6.25% at March 29, 1997).
The credit facility and term loans were collateralized by trade wholesale
accounts receivable, retail inventories and assignments of licensing
revenue and certain trademarks.
In fiscal 1996, Womenswear entered into a five-year financing
arrangement with a financial institution providing for a $30.0 million
revolving credit facility and a $10.0 million term loan. In February 1997,
Womenswear amended its credit facility to increase its revolving credit
facility to $40.0 million. The revolving credit facility was available for
the issuance of letters of credit, acceptances or direct borrowings and was
limited to a borrowing base calculated on eligible accounts receivable,
inventory and accrued royalties. Any unused portion of the available credit
line ($11.2 million at March 29, 1997) was subject to a 3/8% commitment
fee. Notes and acceptances payable under this facility amounted to $22.1
million at March 29, 1997 and bore interest at the institution's reference
rate (8.25% at March 29, 1997). The credit facility was collateralized by
substantially all of the assets of Womenswear.
The Polo Partnership term loans bore interest primarily at LIBOR plus
1.75% ranging from 6.9% to 8.25% at March 29, 1997) and the Womenswear term
loan bore interest at the institution's reference rate plus 0.5% (8.75% at
March 29, 1997). The weighted average interest rate on borrowings under
revolving credit facilities was 8.0%, 7.7% and 8.4% in fiscal 1998, 1997 and
1996, respectively.
8 SUBORDINATED NOTES
The subordinated notes were payable to Mr. Lauren in the amount of
$20.0 million and to Mr. Lauren and the GS Group in the aggregate amount of
$24.0 million. The subordinated note payable to Mr. Lauren was repaid on
April 30, 1997 and the remaining notes were repaid to Mr. Lauren and the
GS Group upon closing of the initial public offering (see Note 1 (b)).
These notes bore interest at the prime rate (8.5% at March 29, 1997) and
were subordinated to the Polo Partnership's credit facility and term notes.
Interest expense on the subordinated notes amounted to $.6 million, $3.6
million and $3.8 million in fiscal 1998, 1997 and 1996, respectively.
F-19
58
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
9 INCOME TAXES
Concurrent with the Reorganization and the termination of the Company's
partnership status, the Company became fully subject to Federal, state and
local income taxes. As a result and in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes, the Company recorded a deferred
tax asset and a corresponding tax benefit in the amount of $27.4 million in
its consolidated financial statements in the first quarter of fiscal 1998.
The deferred income taxes reflect the net tax effect of temporary
differences, primarily accounts receivable, uniform inventory
capitalization, depreciation and other accruals, between the carrying
amounts of assets and liabilities for financial reporting and the amounts
used for income tax purposes.
Pursuant to the PRC Acquisition, the Company acquired $7.9 million of
deferred tax assets.
The components of the provision for income taxes were as follows:
FISCAL YEAR ENDED
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
Current:
Federal $ 60,265 $ 16,649 $ 7,644
State and local 15,330 6,633 3,123
Foreign 4,427 460 392
-------- -------- --------
80,022 23,742 11,159
-------- -------- --------
Deferred:
Federal (22,357) (652) (234)
State and local (5,640) (286) --
-------- -------- --------
(27,997) (938) (234)
-------- -------- --------
$ 52,025 $ 22,804 $ 10,925
======== ======== ========
F-20
59
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
The foreign and domestic components of income before income taxes were
as follows:
FISCAL YEAR ENDED
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
Domestic $162,529 $113,188 $ 78,445
Foreign 37,067 26,916 31,287
-------- -------- --------
$199,596 $140,104 $109,732
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. The components of the net
deferred tax asset at March 28, 1998 and March 29, 1997 were as follows:
MARCH 28, MARCH 29,
1998 1997
DEFERRED TAX ASSETS:
Accounts receivable $11,230 $ 204
Net operating loss carryforwards 8,275 --
Uniform inventory capitalization 7,215 2,012
Deferred compensation 5,685 591
Property and equipment 4,219 347
Accrued expenses 2,990 143
Other 1,368 (544)
------- -------
40,982 2,753
Less: Valuation allowance 2,321 --
------- -------
$38,661 $ 2,753
======= =======
The Company had available Federal net operating loss carryforwards of
approximately $10.7 million and state net operating loss carryforwards of
approximately $35.4 million for tax purposes to offset future taxable
income. The net operating loss carryforwards expire beginning in fiscal
2007. The utilization of the Federal net operating loss carryforwards is
subject to the limitations of Internal Revenue Code Section 382 which
applies following certain changes in ownership of the entity generating the
loss carryforward. Management believes that the Company will more likely
than not generate sufficient future taxable income to realize the entire
deferred tax asset prior to expiration of any of these net operating loss
carryforwards.
F-21
60
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
Also, the Company has available additional state net operating loss
carryforwards of approximately $37.3 million for which no deferred tax
asset has been recognized. A full valuation allowance has been recorded
since management does not believe that the Company will more likely than
not be able to utilize these carryforwards to offset future taxable income.
Subsequent recognition of the deferred tax asset relating to these net
operating loss carryforwards would result in a reduction of goodwill
recorded in connection with the PRC Acquisition.
Provision has not been made for United States or additional foreign
taxes on approximately $21.0 million of undistributed earnings of foreign
subsidiaries. Those earnings have been and will continue to be reinvested.
These earnings could become subject to tax if they were remitted as
dividends, if foreign earnings were lent to a PRLC or a U.S. affiliate, or
if the stock of the subsidiaries were sold. Determination of the amount of
unrecognized deferred tax liability with respect to such earnings is not
practical. Management believes that the amount of the additional taxes that
might be payable on the earnings of foreign subsidiaries, if remitted,
would be partially offset by United States foreign tax credits.
The pro forma provision for income taxes represents the income tax
provisions that would have been reported had the Company been subject to
additional Federal, state and local income taxes for the entire fiscal
year. The pro forma effective tax rate was 40.8% and 42.0% in fiscal 1998
and fiscal 1997, respectively, which consisted of the following:
FISCAL YEAR ENDED
MARCH 28, MARCH 29,
1998 1997
(UNAUDITED)
Current:
Federal $ 63,822 $ 56,261
State and local 17,119 18,469
Foreign 4,427 512
-------- --------
85,368 75,242
-------- --------
Deferred:
Federal (1,043) (7,842)
State and local (1,694) (2,610)
-------- --------
(2,737) (10,452)
-------- --------
$ 82,631 $ 64,790
======== ========
F-22
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
The pro forma provision for income taxes differs from the amounts
computed by applying the statutory Federal income tax rate to income before
income taxes due to the following:
FISCAL YEAR ENDED
MARCH 28, MARCH 29,
1998 1997
(UNAUDITED)
Provision for income taxes
at statutory Federal rate $ 70,965 $ 53,991
Increase (decrease) due to:
State and local income taxes, net of Federal benefit 11,280 9,395
Foreign income, net of foreign credits (1,213) (766)
Other 1,599 2,170
-------- --------
$ 82,631 $ 64,790
======== ========
10 FINANCIAL INSTRUMENTS
In fiscal 1995, the Company entered into an interest rate swap
agreement with a commercial bank which expires on October 14, 1999 to
hedge against interest rate fluctuations. The swap agreement effectively
converted the outstanding balance of the Polo Partnership's term loan from
variable rate borrowings to fixed rate obligations. Under the terms of this
agreement, the Company makes payments at a fixed rate of 6.955% and
receives payments from the counterparty based on the notional amount ($40.0
million at March 28, 1998), adjusted for scheduled loan repayments, at a
variable rate based on LIBOR. The net interest paid or received on this
arrangement is included in interest expense. The fair value of this
agreement was $.5 million and $.6 million at March 28, 1998 and March 29,
1997, respectively, based upon the estimated amount that the Company would
pay to terminate the agreement, as determined by a financial institution.
The Company terminated this agreement and paid $.5 million, representing
the fair value of the agreement.
The Company from time to time enters into forward foreign exchange
contracts as hedges relating to identifiable currency positions to reduce
the risk from exchange rate fluctuations. Gains and losses on these
contracts are deferred and recognized as adjustments to the bases of those
assets. Such gains and losses were not material in fiscal 1998, 1997 and
1996.
At March 28, 1998, the Company had a forward foreign exchange contract
outstanding with Goldman, Sachs & Co. ("GS& Co.") to deliver 1.0 billion
yen on April 15, 1998 in exchange for $9.1 million. At March 29, 1997, the
Company had a forward foreign exchange contract outstanding with GS& Co. to
deliver 825.0 million yen on April 15, 1997 in exchange for $8.1 million.
These contracts are hedges relating to foreign licensing revenues. At March
28, 1998 and March 29, 1997, the fair value of these contracts approximated
carrying value due to their short-term maturities.
F-23
62
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
The Company is exposed to credit losses in the event of nonperformance
by the counterparties to the forward foreign exchange contract, but it does
not expect any counterparties to fail to meet their obligations.
The carrying amounts of financial instruments reported in the
accompanying balance sheets at March 28, 1998 and March 29, 1997
approximated their estimated fair values primarily due to either the
short-term maturity of the instruments or their adjustable market rate of
interest. Considerable judgment is required in interpreting certain market
data to develop estimated fair values for certain financial instruments.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
11 EMPLOYEE BENEFITS
PROFIT SHARING RETIREMENT SAVINGS PLANS
The Company sponsors two defined contribution benefit plans covering
substantially all eligible U.S. employees not covered by a collective
bargaining agreement. The plans include a savings plan feature under
Section 401(k) of the Internal Revenue Code. The Company makes
discretionary contributions to the plans and contributes an amount equal to
50% of the first 6% of an employee's contribution. Under the terms of the
plans, a participant is 100% vested in the Company's matching and
discretionary contributions after five years of credited service.
Contributions under these plans approximated $6.0 million, $5.0 million and
$4.6 million in fiscal 1998, 1997 and 1996, respectively.
UNION PENSION
Womenswear participates in a multi-employer pension plan and is
required to make contributions to the International Ladies Garment Workers'
Union (the "Union") for dues based on wages paid to union employees. A
portion of such dues are allocated by the Union to a Retirement Fund which
provides defined benefits to substantially all unionized workers.
Womenswear does not participate in the management of the plan and has not
been furnished with any information with respect to the type of benefits
provided, vested and nonvested benefits or plan assets.
Under the Employee Retirement Income Security Act of 1974, as amended,
an employer, upon withdrawal from or termination of a multi-employer plan,
is required to continue funding its proportionate share of the plan's
unfunded vested benefits. Such withdrawal liability was assumed in
conjunction with the acquisition of certain assets from RLW (see Note 1
(d)). Womenswear has no current intention of withdrawing from the plan.
F-24
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
DEFERRED COMPENSATION
The Company has deferred compensation arrangements for certain key
executives which generally provide for payments upon retirement, death or
termination of employment. The amounts accrued under these plans were $14.2
million and $10.5 million at March 28, 1998 and March 29, 1997,
respectively, and are reflected in other noncurrent liabilities in the
accompanying balance sheets. Total compensation expense recorded was $4.9
million, $3.2 million and $2.1 million in fiscal 1998, 1997 and 1996,
respectively. The Company funds a portion of these obligations through the
establishment of trust accounts on behalf of the executives participating
in the plans. The trust accounts are reflected in other assets in the
accompanying balance sheets.
12 COMMON STOCK
Polo's Class B Common Stock is owned by Mr. Lauren and related entities
and its Class C Common Stock is owned by the GS Group. Shares of Class B
Common Stock are convertible at any time into shares of Class A Common
Stock on a one-for-one basis and may not be transferred to anyone other
than affiliates of Mr. Lauren. Shares of Class C Common Stock are
convertible at any time into shares of Class A Common Stock on a
one-for-one basis and may not be transferred to anyone other than among
members of the GS Group or, until April 15, 2002, any successor of a member
of the GS Group. The holders of Class A Common Stock generally have rights
identical to holders of Class B Common Stock and Class C Common Stock,
except that holders of Class A Common Stock and Class C Common Stock are
entitled to one vote per share and holders of Class B Common Stock are
entitled to ten votes per share. Holders of all classes of Common Stock (as
hereinafter defined) entitled to vote, will vote together as a single class
on all matters presented to the stockholders for their vote or approval
except for the election and the removal of directors and as otherwise
required by applicable law. Class A Common Stock, Class B Common Stock and
Class C Common Stock are collectively referred to herein as "Common Stock."
13 STOCK INCENTIVE PROGRAM
On June 9, 1997, the Board of Directors adopted the 1997 Long-Term
Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan
authorizes the grant of awards to any officer or other employee, consultant
to, or director of the Company or any of its subsidiaries with respect to a
maximum of 10.0 million shares of the Company's Class A Common Stock (the
"Shares"), subject to adjustment to avoid dilution or enlargement of
intended benefits in the event of certain significant corporate events,
which awards may be made in the form of: (i) nonqualified stock options;
(ii) stock options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code; (iii) stock appreciation rights;
(iv) restricted stock and/or restricted stock units; (v) performance
awards; and (vi) other stock-based awards. At March 28, 1998, the Company
had an additional 5.9 million Shares reserved for issuance under this plan.
F-25
64
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
Stock options were granted in fiscal 1998 under the Stock Incentive
Plan with an exercise price equal to the stock's fair market value on the
date of grant. These options vest in equal installments primarily over
three years for officers and other key employees and over two years for all
remaining employees. The options expire ten years from the date of grant.
No compensation cost has been recognized in the accompanying financial
statements in accordance with APB No. 25. If compensation cost had been
recognized for stock options granted under the Stock Incentive Plan based
on the fair value of the stock options at the grant date in accordance with
SFAS No. 123, the Company's pro forma net income and pro forma net income
per share for fiscal 1998 would have been reduced to the following pro
forma amounts:
Pro forma net income $108,985
Pro forma net income per share - Basic and Diluted $1.09
The weighted average fair value of stock options granted in fiscal 1998
was $12.62 per share. The fair value was estimated on the date of grant
using a Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 6.45%; dividend yield of 0%; volatility factor
of 42.0%; and weighted average expected lives of 5.45 years.
On June 9, 1997, the Board of Directors adopted the 1997 Stock Option
Plan for Non-Employee Directors (the "Non-Employee Directors Plan"). Under
the Non-Employee Directors Plan, grants of options to purchase shares of
Class A Common Stock of up to 500,000 shares may be granted to non-employee
directors. Stock options vest in equal installments over two years and
expire ten years from the date of grant. In fiscal 1998, the Board of
Directors granted options to purchase 30,000 shares of Class A Common Stock
with exercise prices equal to the stock's fair market value on the date of
grant. At March 28, 1998, the Company had 470,000 options reserved for
issuance under this plan.
Stock option activity for the Stock Incentive Plan and Non-Employee
Directors Plan in fiscal 1998 was as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
BALANCE AT MARCH 29, 1997 -- $ --
Granted 4,550 26.00
Exercised -- --
Forfeited (466) 26.00
Expired -- --
------ ------
BALANCE AT MARCH 28, 1998 4,084 $26.00
====== ======
F-26
65
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
At March 28, 1998, the weighted average remaining contractual life of
outstanding options was 9.2 years and .5 million shares were exercisable at
an exercise price of $26.00 per share. The price range of options granted
and outstanding at March 28, 1998 was $22.91 to $29.81.
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 commencing April 1,
1998. Shares acquired under the repurchase program will be used for stock
option programs and other corporate purposes. The shares acquired will be
accounted for as treasury stock at cost.
14 COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office, warehouse and retail space and office
equipment under operating leases which expire through 2021. These leases
typically provide the Company with the option after the initial lease term
to either renew the lease at the current fair rental value or purchase the
equipment at the current fair value. The Company generally expects that
leases will be renewed or replaced by other leases in the normal course of
business.
As of March 28, 1998, aggregate minimum annual rental payments under
noncancelable operating leases with lease terms in excess of one year were
payable as follows:
FISCAL YEAR ENDING
1999 $ 57,145
2000 52,212
2001 46,633
2002 38,545
2003 34,785
Thereafter 268,057
--------
$497,377
========
Rent expense charged to operations was $53.9 million, $40.8 million and
$34.5 million, net of sublease income of $1.5 million, $2.1 million and
$2.1 million, respectively, in fiscal 1998, 1997 and 1996, respectively.
Substantially all outlet and retail store leases provide for contingent
rentals based upon sales and require the Company to pay taxes, insurance
and occupancy costs. Certain rentals are based solely on a percentage of
sales and one significant lease requires a fair market value adjustment at
January 1, 2004. Contingent rental charges included in rent expense were
$3.2 million, $3.7 million and $3.2 million in fiscal 1998, 1997 and 1996,
respectively.
F-27
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
LETTERS OF CREDIT
At March 28, 1998, the Company is contingently liable for unexpired
bank letters of credit of $19.9 million related to commitments for the purchase
of inventories and in connection with its leases.
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with certain executives
which provide for compensation and certain other benefits. The agreements also
provide for severance payments under certain circumstances.
LEGAL MATTERS
The Company initiated an arbitration proceeding in San Francisco in
November 1996 for a declaration of rights under its license agreement with The
Magnin Company, Inc., an independent free-standing retail licensee which
operates a Polo store in Beverly Hills, California. The licensee had previously
claimed that the Company breached its license agreement when the Company refused
last year to authorize the opening of a free-standing Polo concession at Los
Angeles International Airport by the licensee. The licensee in a counterclaim
had sought compensatory and punitive damages. On September 8, 1997, the
arbitration panel determined that the Company had made its decisions in good
faith and fully in accordance with its rights and obligations under the license
agreement and awarded the declaration sought by the Company. In addition, the
panel determined that the licensee should take nothing by reason of its
counterclaim.
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 intends to vigorously defend this lawsuit and
believes that it has substantial and meritorious defenses.
The Company is from time to time involved in legal claims, involving
trademark and intellectual property, licensing, employee relations and other
matters incidental to its business. In the opinion of the Company's management,
the resolution of any matter currently pending will not have a material effect
on the financial condition or results of operations of the Company.
F-28
67
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
15 QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of certain unaudited quarterly financial
information for fiscal 1998 and 1997:
JUNE 28, SEPT. 27, DEC. 27, MARCH 28,
FISCAL 1998 1997 1997 1997 1998
Net revenues $287,944 $421,146 $405,672 $356,173
Gross profit 145,418 207,039 191,625 171,199
Net income 44,638 44,933 29,311 28,689
PRO FORMA DATA:
Net income 17,194 44,933 29,311 28,689
Net income per share - Basic and
Diluted $ 0.17 $ 0.45 $ 0.29 $ 0.29
JUNE 29, SEPT. 28, DEC. 28, MARCH 29,
FISCAL 1997 1996 1996 1996 1997
Net revenues $223,808 $332,239 $306,459 $317,937
Gross profit 103,573 147,450 137,854 142,969
Net income 12,655 43,920 24,785 35,940
PRO FORMA DATA:
Net income 12,388 32,879 20,323 23,882
Net income per share - Basic and
Diluted $ 0.12 $ 0.33 $ 0.20 $ 0.24
The pro forma data presents the effects on the historical financial
statements of the adjustments described in Note 1 (f) as if they had
occurred at March 31, 1996. Net income per share represents both the basic
and diluted computation in accordance with SFAS No. 128, Earnings per
Share. For comparison purposes only, the weighted average number of shares
outstanding immediately following the completion of the initial public
offering of 100.2 million were considered to be outstanding in the quarter
ended June 28, 1997 and in fiscal 1997. The actual weighted average number
of shares outstanding of 100.2 million was used for the computation of
basic net income per share for the remainder of fiscal 1998. The weighted
average number of shares outstanding used in the computation of diluted net
income per share was 100.2 million, 100.3 million and 100.4 million for the
quarter ended September 27, 1997, December 27, 1997 and March 28, 1998,
respectively. The difference between the basic and diluted weighted average
shares outstanding is due to the dilutive effect of stock options issued
under the Company's stock option plans.
F-29
68
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Polo Ralph Lauren Corporation:
New York, New York
We have audited the consolidated financial statements as of and for the
year ended March 28, 1998 and the combined financial statements as of and for
the year ended March 29, 1997 of Polo Ralph Lauren Corporation and subsidiaries
(the "Company"), and have issued our report thereon dated May 15, 1998; such
report is included elsewhere in this Form 10-K. Our audits also included the
consolidated and combined financial statement schedule of Polo Ralph Lauren
Corporation and subsidiaries, listed in Item 14. This consolidated and combined
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated and combined financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 15, 1998
S-1
69
INDEPENDENT AUDITOR'S REPORT
The Partners
Polo Ralph Lauren Enterprises, L.P.
We have audited, in accordance with generally accepted auditing
standards, the combined statements of income, partners' capital, and cash flows
of Polo Ralph Lauren Corporation for the year ended March 30, 1996 included in
Polo Ralph Lauren Corporation's Annual Report to Stockholders included in this
Form 10-K, and have issued our report thereon dated June 21, 1996. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
The schedule listed on the index in Item 14(a) 2 of this Form 10-K is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic financial statements. The financial data for the fiscal year ended
March 30, 1996 included in the schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data for the
fiscal year ended March 30, 1996 required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Mahoney Cohen Rashba & Pokart, CPA, PC
MAHONEY COHEN RASHBA & POKART, CPA, PC
New York, New York
June 21, 1996
S-2
70
SCHEDULE II
POLO RALPH LAUREN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
------- ------- ------- ------- -------
YEAR ENDED MARCH 28, 1998
Allowance for doubtful accounts $ 6,289 $ 1,155 $ 0 $ 797(a) $ 6,647
Allowance for sales discounts 6,556 30,539 -- 31,295 5,800
------- ------- ------- ------- -------
$12,845 $31,694 $ 0 $32,092 $12,447
======= ======= ======= ======= =======
YEAR ENDED MARCH 29, 1997
Allowance for doubtful accounts $ 5,554 $ 833 $ 0 $ 98(a) $ 6,289
Allowance for sales discounts 5,500 27,308 -- 26,252 6,556
------- ------- ------- ------- -------
$11,054 $28,141 $ 0 $26,350 $12,845
======= ======= ======= ======= =======
YEAR ENDED MARCH 30, 1996
Allowance for doubtful accounts $ 4,517 $ 1,122 $ 0 $ 85(a) $ 5,554
Allowance for sales discounts 3,700 22,280 -- 20,480 5,500
------- ------- ------- ------- -------
$ 8,217 $23,402 $ 0 $20,565 $11,054
======= ======= ======= ======= =======
- ----------------------------
(a) ACCOUNTS WRITTEN-OFF AS UNCOLLECTIBLE.
S-3
71
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------------------- --------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 333-24733)) (the "S-1").*
3.2 Amended and Restated By-laws of the Company (filed as Exhibit
3.2 to the S-1).*
10.1 Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan
(filed as Exhibit 10.1 to the S-1)*+
10.2 Polo Ralph Lauren Corporation 1997 Stock Option Plan for Non-Employee
Directors (filed as Exhibit 10.2 to the S-1)*+
10.3 Registration Rights Agreement dated as of June 9, 1997 by and among
Ralph Lauren, GS Capital Partners, L.P., GS Capital Partners PRL Holding
I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund
1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994,
L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to the S-1)*
10.4 U.S.A. Design and Consulting Agreement, dated January 1, 1985, between
Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, and
Cosmair, Inc., and letter agreement related thereto dated January 1,
1985** (filed as Exhibit 10.4 to the S-1)*
10.5 Restated U.S.A. License Agreement, dated January 1, 1985, between Ricky
Lauren and Mark N. Kaplan, as Licensor, and Cosmair, Inc., as Licensee,
and letter agreement related thereto dated January 1, 1985** (filed as Exhibit 10.5 to the
S-1)*
10.6 Foreign Design and Consulting Agreement, dated January 1, 1985, between
Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, as
Licensor, and L'Oreal S.A., as Licensee, and letter agreements related
thereto dated January 1, 1985, September 16, 1994 and October 25, 1994** (filed as
Exhibit 10.6 to the S-1)*
10.7 Restated Foreign License Agreement, dated January 1, 1985, between The
Polo/Lauren Company, as Licensor, and L'Oreal S.A., as Licensee, letter
agreement related thereto dated January 1, 1985, and Supplementary
Agreement thereto, dated October 1, 1991** (filed as Exhibit 10.7 to the S-1)*
10.8 Amendment, dated November 27, 1992, to Foreign Design And Consulting
Agreement and Restated Foreign License Agreement** (filed as Exhibit 10.8 to the S-1)*
10.9 License Agreement, made as of January 1, 1998, between Ralph Lauren
Home Collection, Inc. and WestPoint Stevens Inc.**
10.10 License Agreement, dated March 1, 1998, between The Polo/Lauren Company, L.P. and
Polo Ralph Lauren Japan Co., Ltd., and undated letter agreement related thereto** (filed
as Exhibit 10.10 to the S-1)*
10.11 Design Services Agreement, dated March 1, 1998, between Polo Ralph
Lauren Enterprises, L.P. and Polo Ralph Lauren Japan Co., Ltd.** (filed as Exhibit 10-11
to the S-1)*
10.12 Deferred Compensation Agreement dated April 1, 1993, between Michael J.
Newman and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph
Lauren, L.P. (filed as Exhibit 10.12 to the S-1)*+
10.14 Deferred Compensation Agreement dated April 2, 1995 between F. Lance Isham and Polo
Ralph Lauren, L.P.(filed as Exhibit 10.14 to the S-1)*+
72
10.15 Deferred Compensation Agreement dated April 1, 1993 between Cheryl L.
Sterling Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo
Ralph Lauren, L.P.(filed as Exhibit 10.15 to the S-1)*+
10.16 Amended and Restated Employment Agreement dated October 26, 1993 between
Michael J. Newman and Polo Ralph Lauren Corporation, as amended and
assigned October 31, 1994 to Polo Ralph Lauren, L.P. and as further amended as of June
9, 1997 (filed as Exhibit 10.17 to the S-1)*+
10.17 Employment Agreement dated April 2, 1995 between F. Lance Isham and Polo Ralph
Lauren, L.P. (filed as Exhibit 10.19 to the S-1)*+
10.18 Employment Agreement dated October 26, 1993 between Cheryl L. Sterling
Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph
Lauren, L.P. (filed as Exhibit 10.20 to the S-1)*+
10.19 Stockholders Agreement dated as of June 9, 1997 among Polo Ralph Lauren
Corporation, GS Capital Partners, L.P., GS Capital Partners PRL Holding
I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund
1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., Mr. Ralph
Lauren, RL Holding, L.P. and RL Family (filed as Exhibit 10.22 to the S-1)*
10.20 Form of Reorganization Note (filed as Exhibit 10.23 to the S-1)*
10.21 Form of Credit Agreement between Polo Ralph Lauren Corporation and The Chase
Manhattan Bank (filed as Exhibit 10.24 to the S-1)*
10.22 Form of Guarantee and Collateral Agreement by Polo Ralph
Lauren Corporation in favor of The Chase Manhattan Bank
(filed as Exhibit 10.25 to the S-1)*
10.23 Form of Indemnification Agreement between Polo Ralph Lauren
Corporation and its Directors and Executive Officers (filed
as Exhibit 10.26 to the S-1)*
10.24 Employment Agreement dated June 9, 1997 between Ralph Lauren and Polo Ralph Lauren
Corporation (filed as Exhibit 10.27 to the S-1)*+
10.25 Design Services Agreement, dated as of October 18, 1995, by and between Polo Ralph
Lauren Enterprises, L.P. and Jones Apparel Group, Inc.**
10.26 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren
Enterprises, L.P. and Jones Apparel Group, Inc.**
21.1 List of Significant Subsidiaries of the Company.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
- ------------------------------------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
** Portions of Exhibits 10.4 - 10.11 and 10.25 and 10.26 have been omitted
pursuant to a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission.