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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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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 APRIL 3, 1999
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)
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DELAWARE 13-2622036
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
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Class A Common Stock, $.01 par value New York Stock
Exchange
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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 $644,680,000 at June 22, 1999.
At June 22, 1999, 33,602,889 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
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Proxy Statement for Annual Meeting of Part III
Stockholders to be held August 19, 1999
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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.," "RL" 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.
On May 3, 1999, a wholly owned subsidiary of the Company completed its
acquisition, through a tender offer followed by a statutory compulsory
acquisition, of all of the outstanding shares of Club Monaco Inc., a corporation
organized under the laws of the Province of Ontario, Canada. Founded in 1985,
Club Monaco Inc. is an international specialty retailer of casual apparel and
other accessories for men, women and children under the brand name "Club Monaco"
and a number of associated trademarks. For purposes of the following description
of Polo's business, the activities of Club Monaco Inc. are not included.
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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.
PRO FORMA
FISCAL
FISCAL YEAR 1997(1)
1999 1998 1997 (UNAUDITED)
---------- ---------- ---------- ----------
(IN THOUSANDS)
Wholesale sales $ 845,704 $ 733,065 $ 663,358 $ 623,041
Retail sales ...... 659,352 570,751 379,972 508,645
---------- ---------- ---------- ----------
Net sales ......... 1,505,056 1,303,816 1,043,330 1,131,686
Licensing revenue . 208,009 167,119 137,113 137,113
Other income 13,794 9,609 7,774 7,774
---------- ---------- ---------- ----------
Net revenues ...... $1,726,859 $1,480,544 $1,188,217 $1,276,573
========== ========== ========== ==========
(1) 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.
WHOLESALE
During fiscal 1999, as part of a Company-wide restructuring, Polo
realigned its wholesale operations. Polo's wholesale business is now subdivided
into two new groups: Polo Brands and Collection Brands. The Company believes
this realignment will allow it to better service its customers by focusing each
business on its particular channel of distribution and further developing the
brands. In both of its wholesale groups, the Company offers several discrete
brand offerings. See "- Domestic Customers and Services."
POLO BRANDS
The Polo Brands Group sources, markets and distributes products under the
Polo by Ralph Lauren and Polo Sport men's brands, the Ralph Lauren Polo Sport
women's brand and the RLX Polo Sport and Polo Golf brands for men and women.
Representatives from each of the Company's design, merchandising, sales and
production staffs work together to conceive, develop and sell product groupings
organized to convey a variety of design concepts.
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
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premium, ready-to-wear, apparel market. This line is currently sold through
approximately 1,875 department store, specialty store and Polo store doors in
the United States, including approximately 1,300 department store
shop-within-shops.
POLO SPORT. The Polo Sport line of men's activewear and sportswear is
designed to meet the growing consumer demand for apparel for the active
lifestyle. 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.
RALPH LAUREN POLO SPORT. Similar to its menswear counterpart, the Ralph
Lauren Polo Sport line for women includes activewear, as well as weekend
sportswear. The Ralph Lauren Polo Sport line is currently carried by
approximately 365 doors in the United States, including approximately 160
shop-within-shops, and sells at a wide range of bridge prices.
RLX POLO SPORT. Introduced in Spring 1999, the RLX Polo Sport line of
menswear and womenswear consists of functional sport and outdoor apparel for
running, cross-training, skiing, snowboarding, cycling and tennis. RLX Polo
Sport is presently sold in the United States through approximately 470 athletic
specialty stores, in addition to limited department and Polo stores, at price
points competitive with those charged by other authentic sports apparel
companies.
POLO GOLF. The Polo Golf line of men's and women's golf apparel 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 2000 leading golf clubs, pro
shops and resorts, in addition to department, specialty and Polo stores.
COLLECTION BRANDS
The Collection Brands Group sources, markets and distributes products
under the Women's Ralph Lauren Collection, Ralph Lauren Black Label and Ralph RL
Lauren brands and the Men's Ralph Lauren/Purple Label Collection Brand. Each
line is directed by teams 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.
RALPH LAUREN COLLECTION AND RALPH LAUREN BLACK LABEL. 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. Ralph Lauren Black Label includes 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
Black Label 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 through over 80 doors in the United States by the
Company and over 270 international doors by the Company and its licensing
partners.
RALPH RL LAUREN. The RALPH/Ralph Lauren brand was established in 1994 to
present a distinct and more casual fashion identity for the bridge market, while
retaining
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a strong association with the Ralph Lauren Collection designer image. In Fall
1999, this line will be renamed Ralph RL Lauren and the RALPH/Ralph Lauren brand
will be relaunched and used in connection with a newly licensed young women's
(ages 16-24) line. The line is sold through approximately 150 doors in the
United States by the Company and over 360 doors internationally by the Company
and its licensing partners.
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 47 doors in the
United States and nine internationally.
DOMESTIC 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. See " -- Licensing Alliances - Home Collection."
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 APRIL 3, 1999
------------------------------------------
POLO COLLECTION HOME
BRANDS BRANDS COLLECTION
------ ------ ----------
Department Stores . 1,550 350 1,295
Specialty Stores .. 755 70 20
Polo Stores ....... 40 60 35
Golf & Pro Shops .. 2,000 -- --
Department stores represent the largest customer group of each wholesale
group 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 1999, Federated Department Stores, Inc., Dillard
Department Stores, Inc. and The May Department Stores Company accounted for
18.4%, 17.9% and 15.1%, respectively, of the Company's wholesale net sales.
Collection and Polo Brands and Home Collection products are primarily sold
through their respective sales forces aggregating approximately 157 salespersons
employed by Polo. The Polo Brands Group maintains its primary showroom at Polo's
New York City executive headquarters. Regional showrooms for Polo Brands are
located in Atlanta, Chicago, Dallas and Los Angeles. An independent sales
representative promotes sales to U.S. military exchanges. The Collection Brands
Group and Home Collection division also maintain their primary showrooms in New
York City. Regional sales representatives for
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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 270 shop-within-shops and refurbish approximately 150
shop-within-shops in fiscal 1999. At April 3, 1999, department store customers
in the United States had installed over 2,000 shop-within-shops dedicated to the
Company's products and over 1,800 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 Polo Brands, from
approximately 800 to 1,200 square feet for Collection Brands, 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. Basic products such as knit shirts,
chino pants, oxford cloth shirts and navy blazers can be ordered at any time
through Polo's 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 16.0% of wholesale net
sales in fiscal 1999. 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 1999.
DIRECT RETAILING
The Company operates retail stores dedicated to the sale of Polo products.
Located in prime retail areas, the Company's 33 Polo stores operate under the
Polo Ralph Lauren, Polo Sport and Polo Jeans Co. names. The Company's 99 outlet
stores are generally located in outlet malls and operate under the Polo Ralph
Lauren Factory Store, Polo Jeans Co. Factory Store and Lauren Ralph Lauren
Factory Store names.
In addition to its own retail operations, the Company has granted licenses
to independent parties to operate nine stores in the United States and 83 stores
internationally. The Company receives the proceeds from the sale of its Polo
Brands and Collection Brands products, which are included in wholesale net
sales, to these stores and also receives royalties, which are included 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."
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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 five
flagship stores, consisting of its two flagship stores located on Madison Avenue
in New York City, one flagship store located on Rodeo Drive in Beverly Hills,
one flagship store located on Michigan Avenue in Chicago and one flagship store
located on New Bond Street in London which opened on May 5, 1999, showcase Polo
products and demonstrate Polo's most refined merchandising techniques. In
addition to its flagship stores, Polo operates 29 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. In aggregate, on
April 3, 1999 the Company operated 26 Polo Ralph Lauren stores, two Polo Sport
stores, four Polo Jeans Co. stores 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.
In fiscal 1999, Polo Ralph Lauren stores were opened in Chicago, Illinois
and Palm Beach, Florida, and Polo Jeans Co. stores were opened in Orlando,
Florida and Houston, Texas. In addition, in fiscal 1999, Polo converted its Polo
Ralph Lauren store in Santa Clara, California to a Polo Jeans Co. store. New
Polo Jeans Co. stores are planned for Burlingame, California, Miami, Florida,
McLean, Virginia, Bellevue, Washington and Beverly Hills, California. A new Polo
Sport store is planned to open in fiscal 2000 in the Soho district of New York
City. In addition, during fiscal 2000, Polo plans to convert two Polo Ralph
Lauren stores to new concepts that are expected to be more productive.
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, where the Polo Sport store planned to open in
fiscal 2000 will be located.
OUTLET STORES
Polo extends its reach to additional consumer groups through its 75 Polo
Ralph Lauren Factory Stores and its 24 factory outlet concept stores,
consisting, as of April 3, 1999, of 14 Polo Jeans Co. Factory Stores and 10
Lauren Ralph Lauren Factory Stores. Polo Ralph Lauren Factory 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 34 states and Puerto
Rico. Polo Jeans Co. Factory Stores carry all classifications within the Polo
Jeans Co. line, including denim, knit and woven tops, sweaters, outerwear,
casual bottoms and accessories. Polo Jeans Co. Factory Stores range in size from
3,000 to 4,500 square feet, with an average of 3,300 square feet, and are
generally located in major outlet centers in 11 states. Lauren Ralph Lauren
Factory Stores offer both basic key items and fashion
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items from the Lauren line with coordinated accessories. Ranging in size from
3,200 to 4,100 square feet, with an average of 3,500 square feet, the Lauren
Ralph Lauren Factory Stores are generally located in major outlet centers in 10
states.
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 1999, the
outlet stores purchased approximately 24%, 44% and 32% of products from the
Company, licensing partners and other suppliers, respectively.
The Company plans to add approximately 50 new outlet stores (net of
anticipated store closings) over the next three years including approximately 30
factory outlet concept stores (net of anticipated store closings).
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 largest licensing partners by
licensing revenue, Jones Apparel Group, Inc., Seibu Department Stores, Ltd.,
WestPoint Stevens, Inc. and Warnaco, Inc.
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accounted for 20%, 12.6%, 11.7% and 11.1%, respectively, of licensing revenue in
fiscal 1999.
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 April 3, 1999 are listed below.
LICENSING PARTNER LICENSED PRODUCT CATEGORY
- ----------------- -------------------------
Warnaco, Inc. Men's Chaps Sportswear
Sun Apparel, Inc., a subsidiary of Jones Men's & Women's Polo Jeans Co. Casual
Apparel Group, Inc. 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 and Lauren Tailored Clothing
Oxford Industries, Inc. Boys Apparel
S. Schwab Company, Inc. Infants, Toddlers & Girls Apparel
Sara Lee Corporation Men's & Women's Personal Wear Apparel
Ralph Lauren Footwear, Inc., a Men's & Women's Dress,
subsidiary Casual and Performance Athletic Footwear
of Reebok International Ltd.
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
Pennaco, Inc. Sheer Hosiery
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
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lifestyle concept. Products are sold under the Ralph Lauren Home Collection
brands in three primary categories: bedding and bath, interior decor, tabletop
and giftware.
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, product development 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 20%. 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.
CATEGORY PRODUCT LICENSING PARTNER
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Bedding and Bath Towels, sheets, pillowcases and WestPoint Stevens,
matching Inc.
bedding accessories
Blankets, bed pillows, comforters Pillowtex Corporation
and other decorative bedding
accessories excluding those
matched to sheets, and bath rugs
Interior Decor Upholstered furniture and case Henredon Furniture
goods Industries, Inc.
The Sherwin-Williams
Interior paints, special Company
finishes, and paint applications
Fabric and wallpaper P. Kaufmann, Inc.
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Table and Giftware Sterling, silverplate and Reed and Barton
stainless steel flatware Corporation
and picture frames
Crystal and glass tableware and RJS Scientific, Inc.
giftware, ceramic dinnerware and
giftware and home fragrances
(potpourri,
scented candles, etc.)
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 48% of Home Collection licensing
revenue in fiscal 1999.
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 83 stores, including 70
Polo Ralph Lauren stores, five Polo Sport stores and 8 Polo Jeans Co. stores.
In fiscal 1999, the Company added five new Polo Ralph Lauren stores in
international markets, including one in each of Australia, Hong Kong and Mexico
and two in Japan. In addition, in fiscal 1999, one new Polo Jeans Co. store was
added in each of St. Martin and Hong Kong. In May 1999, the Company added one
Polo Ralph Lauren store in Argentina. Additional stores are planned to open in
fiscal 2000 including two Polo Ralph Lauren stores in Australia and one Polo
Jeans Co. store in Mexico.
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 product or 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 licensing revenue
in fiscal 1999 were Seibu Department Stores, Ltd., which oversees distribution
of virtually all of the Company's products in Japan, 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 and L'Oreal S.A., which distributes
fragrances and toiletries outside of the United States. The Company's ability to
maintain and increase licensing revenue under foreign licenses is dependent upon
certain factors not within the Company's control, including fluctuating currency
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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
more than 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 Council of Fashion Designers of America (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, 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, New Jersey and Singapore.
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.
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, Forbes, GQ, Harper's Bazaar, 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.
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The Company's licensing partners contribute a percentage (usually between
three and four percent) of their sales of Polo products for advertising. The
Company directly coordinates advertising placement for domestic product
licensing partners. During fiscal 1999, Polo and its licensing partners
collectively spent more than $178.2 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 presentations
organized for the fashion press. In addition, Polo sponsors professional
golfers, organizes in-store appearances by its models and sponsors downhill
skiers, snowboarders, triathletes and 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 1999, approximately 39% (by dollar volume) of men's
and women's products were produced in the United States and its territories and
approximately 61% (by dollar volume) of such products were produced in Hong
Kong, Thailand and other foreign countries. Three manufacturers engaged by the
Company accounted for approximately 15%, 7% and 7%, respectively, of the
Company's total production during fiscal 1999. The primary production facilities
of these three manufacturers are located in: Hong Kong and Saipan, in the case
of the manufacturer that accounted for approximately 15% of the Company's total
production during fiscal 1999; in Hong Kong, in the case of the manufacturer
that accounted for approximately 7% of the Company's total production during
fiscal 1999; and in Malaysia, Hong Kong and Mauritius, in the case of the other
manufacturer that accounted for approximately 7% of the Company's total
production during fiscal 1999. No other manufacturer accounted for more than
five percent of the Company's total production in fiscal 1999.
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.
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.
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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 1999, womenswear distribution was provided by a "pick and
pack" facility under a warehousing distribution agreement with an unaffiliated
third party. 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
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satellite facilities 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.
During fiscal 2000 the Company plans to complete a significant expansion of its
Greensboro facility to handle increased volume and reduce reliance upon
satellite facilities. The Company's licensing partners are responsible for the
distribution of licensed products, including Home Collection products. The
Company continually evaluates the adequacy of its warehousing and distribution
facilities.
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 1999.
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
April 3, 1999, Summer and Fall backlog was $379.4 million and $21.1 million, as
compared to $351.1 million and $20.5 million at March 28, 1998 for Polo Brands
and Collection Brands, 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
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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" alone, "Lauren/Ralph Lauren," "RRL," etc.). Remittances
to this third
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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 April 3, 1999, the Company has paid approximately $12.0 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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CERTAIN RISKS
The Company believes that its success depends in substantial part on its
ability to originate and define product and fashion trends as well as to
anticipate, gauge and react to changing consumer demands in a timely manner.
There can be no assurance that the Company will continue to be successful in
this regard. If the Company misjudges the market for its products, it may be
faced with significant excess inventories for some products and missed
opportunities with others. In addition, weak sales and resulting markdown
requests from customers could have a material adverse effect on the Company's
business, results of operations and financial condition.
The industries in which the Company operates are cyclical. Purchases of
apparel and related merchandise and home products tend to decline during
recessionary periods and also may decline at other times. While the Company has
fared well in recent years in a difficult retail environment, there can be no
assurance that the Company will be able to maintain its historical rate of
growth in revenues and earnings, or remain profitable in the future. Further,
uncertainties regarding future economic prospects could affect consumer spending
habits and have an adverse effect on the Company's results of operations.
The Company is dependent on Mr. Ralph Lauren and other key personnel. Mr.
Lauren's leadership in the design, marketing and operational areas has been a
critical element of the Company's success. The loss of the services of Mr.
Lauren and any negative market or industry perception arising from such loss
could have a material adverse effect on the Company. The Company's other
executive officers have substantial experience and expertise in the Company's
business and have made significant contributions to its growth and success. The
unexpected loss of services of one or more of these individuals could adversely
affect the Company. The Company is not protected by a material amount of key-man
or similar life insurance for Mr. Lauren or any of its other executive officers.
In addition to the factors described above, the Company's business,
including its revenues and profitability, is influenced by and subject to a
number of factors including, among others: risks associated with the Company's
dependence on sales to a limited number of large department store customers,
including risks related to extending credit to customers; risks associated with
the Company's dependence on its licensing partners for a substantial portion of
its net income and risks associated with the Company's lack of operational and
financial control over its licensed businesses; risks associated with
consolidations, restructurings and other ownership changes in the retail
industry; risks associated with competition in the segments of the fashion and
consumer product industries in which the Company operates, including the
Company's ability to shape, stimulate and respond to changing consumer tastes
and demands by producing attractive products, brands and marketing, and its
ability to remain competitive in the areas of quality and price; risks
associated with uncertainty relating to the Company's ability to implement its
growth strategies; risks associated with the ability of the Company's third
party customers and suppliers and government agencies to timely and adequately
remedy any Year 2000 issues (for a discussion of the Company's efforts to assure
Year 2000 compliance, and the risks associated with such efforts, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Impact of the Year 2000 Issue."; risks associated with the possible
adverse impact of the Company's unaffiliated manufacturers' inability to
manufacture in a timely manner, to meet quality
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standards or to use acceptable labor practices; risks associated with changes in
social, political, economic and other conditions affecting foreign operations
and sourcing and the possible adverse impact of changes in import restrictions;
risks related to the Company's ability to establish and protect its trademarks
and other proprietary rights; risks related to fluctuations in foreign currency
as the Company's international licensing revenue generally is derived from sales
in foreign currencies including the Japanese yen and the French franc, and, in
addition, changes in currency exchange rates may also affect the relative prices
at which the Company and foreign competitors sell their products in the same
market; and, risks associated with the Company's control by Lauren family
members and the anti-takeover effect of multiple classes of stock.
The Company from time to time reviews its possible entry into new markets,
either through internal development activities or through acquisitions. The
entry into new markets (including the development and launch of new product
categories), such as the Company's entry into the technical sportswear market,
and the acquisition of businesses, such as the Company's acquisition of Club
Monaco Inc., is accompanied by risks inherent in any new business venture and
may require methods of operations and market strategies different from those
employed in the Company's other businesses. Certain new businesses may be lower
margin businesses and may require the Company to achieve significant cost
efficiencies. In addition, new markets may involve buyers, store customers
and/or competitors different from the Company's historical buyers, customers and
competitors. Furthermore, the Company's acquisition of other businesses entails
the normal risks inherent in such transactions, including without limitation,
possible difficulties, delays and/or unanticipated costs in integrating the
business, operations, personnel, and/or systems of the acquired entity; risks
that projected or satisfactory level of sales, profits and/or return on
investment will not be generated; risks that expenditures required for capital
items or working capital will be higher than anticipated; risks involving the
Company's ability to retain and appropriately motivate key personnel of the
acquired business; and risks associated with unanticipated events and unknown or
uncertain liabilities.
EMPLOYEES
As of April 3, 1999, the Company had approximately 6,800 employees,
including 6,500 in the United States and 300 in foreign countries. 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 for its distribution
facility in Greensboro, North Carolina, the parcel of land adjacent to its
Greensboro, North Carolina distribution facility (upon which the expansion of
the distribution facility is being constructed) 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
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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
-------- --- ------- ---------------
650 Madison Avenue, NYC Executive, 206,000 December 31, 2009
corporate
and design
offices,
men's showrooms
162,000
Lyndhurst, N.J. Corporate and February 28, 2008
retail
administrative
offices
115,000
Winston-Salem, N.C. Distribution June 30, 2000
202-A No. Chimney Interim warehouse 100,000 April 14, 2000
Rock Road, Greensboro, N.C. and office space
750 North Michigan Avenue, Direct retail and 36,000 November 14, 2017
Chicago, IL restaurant
27,000
867 Madison Avenue, NYC Direct retail December 31, 2004
1-5 New Bond Street, London Direct retail and 29,000 July 4, 2021
corporate and
retail
administrative
offices
1980 Northern Boulevard, Direct retail 26,000 September 30, 2011
Manhasset, N.Y.
During fiscal 1999, the Company entered into a lease agreement for an
interim distribution facility in Greensboro, North Carolina.
The leases for the Company's non-retail facilities (approximately 28 in
all) provide for aggregate annual rentals of $17.8 million in fiscal 1999. 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 April 3, 1999, the Company operated 33 Polo stores and 99 outlet
stores in leased premises. Aggregate annual rent paid for retail space by the
Company in fiscal 1999 totaled $35.7 million. Except for approximately two
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.
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 fiscal year.
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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 answered the complaint and filed a motion for
judgment on the pleadings. At a hearing on that motion on March 5, 1999, the
Court ruled that the plaintiff must file an amended complaint within 30 days in
order to avoid dismissal. The plaintiff has filed an amended complaint,
essentially containing the same allegations as the initial complaint, which the
Company has answered. The Company intends to continue to vigorously defend this
lawsuit and believes that it has substantial and meritorious defenses.
In January 1999, two actions were filed in California naming as defendants
more than a dozen United States-based companies that source apparel garments
from Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based factories. The actions assert that the Saipan factories engage in
unlawful practices relating to the recruitment and employment of foreign workers
and that the apparel companies, by virtue of their alleged relationships with
the factories, have violated various Federal and state laws. One action, filed
in California Superior Court in San Francisco by a union and three public
interest groups, alleges unfair competition and false advertising and seeks
equitable relief, unspecified amounts for restitution and disgorgement of
profits, interest and an award of attorney's fees. The second, filed in Federal
court for the Central District of California, is brought on behalf of a
purported class consisting of the Saipan factory workers. It alleges claims
under the Federal civil RICO statute, Federal peonage and involuntary servitude
laws, the Alien Tort Claims Act, and state tort law, and seeks equitable relief
and unspecified damages, including treble and punitive damages, interest and an
award of attorneys' fees. A third action, brought in Federal Court in Saipan
solely against the garment factory defendants on behalf of a putative class of
their workers, alleges violations of Federal and local wage and employment laws.
The Company has not been named as a defendant in any of these suits, but the
Company sources products in Saipan and counsel for the plaintiffs in these
actions has informed the Company that it is a potential defendant in these or
similar actions. The Company has denied any liability and is not at this
preliminary stage in a position to evaluate the likelihood of a favorable or
unfavorable outcome if it were named in any such suit.
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.
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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 April 3, 1999.
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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 closing 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 April 1, 1999 as reported on the New York Stock Exchange Composite Tape.
The Company did not declare any cash dividends during fiscal 1998 and fiscal
1999 on its Common Stock other than dividends declared in fiscal 1998 in the
amount of $27.4 million and paid to holders of Class B Common Stock and Class C
Common Stock in connection with the Company's reorganization just prior to its
initial public offering on June 11, 1997.
Market Price of Class A
Common Stock
-----------------------------
HIGH LOW
Fiscal 1999:
First Quarter.................. $31 $26.9375
Second Quarter ................. 29.6875 20.1250
Third Quarter..................... 24 16
Fourth Quarter................... 24.8750 18.1250
Fiscal 1998:
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 22, 1999, there were approximately 1,215 record holders of
Class A Common Stock, four record holders of Class B Common Stock and five
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 April 3, 1999 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
APRIL 3, MARCH 28, MARCH 29, MARCH 30, APRIL 1,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENTS OF INCOME:
Net sales ................... $ 1,505,056 $ 1,303,816 $ 1,043,330 $ 909,720 $ 746,595
Licensing revenue ........... 208,009 167,119 137,113 110,153 100,040
Other income ................ 13,794 9,609 7,774 6,210 5,446
------------ ------------ ------------ ------------ ------------
Net revenues ................ 1,726,859 1,480,544 1,188,217 1,026,083 852,081
Cost of goods sold .......... 904,586 759,988 652,000 586,273 477,357
------------ ------------ ------------ ------------ ------------
Gross profit ................ 822,273 720,556 536,217 439,810 374,724
Selling, general and ........ 608,128 520,801 378,854 312,690 264,594
administrative expenses
Restructuring charge ........ 58,560 -- -- -- --
------------ ------------ ------------ ------------ ------------
Income from operations ...... 155,585 199,755 157,363 127,120 110,130
Interest expense ............ 2,759 159 13,660 16,287 16,450
Equity in net loss of joint .
venture ..................... -- -- 3,599 1,101 262
------------ ------------ ------------ ------------ ------------
Income before income taxes .. 152,826 199,596 140,104 109,732 93,418
Provision for income taxes .. 62,276 52,025 22,804 10,925 13,244
------------ ------------ ------------ ------------ ------------
Net income .................. $ 90,550 $ 147,571 $ 117,300 $ 98,807 $ 80,174
============ ============ ============ ============ ============
Net income per share-Basic
and Diluted.................. $ 0.91
============
Common shares outstanding
- - Basic...................... 99,813,328
============
Common shares outstanding
- - Diluted.................... 99,972,152
============
PRO FORMA STATEMENTS OF
INCOME (UNAUDITED) (1):
Net sales ................... $ 1,303,816 $ 1,131,686
Licensing revenue ........... 167,119 137,113
Other Income ................ 9,609 7,774
------------ ------------
Net revenues ................ 1,480,544 1,276,573
Cost of goods sold .......... 759,988 690,406
------------ ------------
Gross profit ................ 720,556 586,167
Selling, general and
administrative expenses ..... 520,801 433,534
------------ ------------
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
============ ============
Net income per share - Basic
and Diluted ................. $ 1.20 $ 0.89
============ ============
Common shares outstanding
- - Basic and Diluted.......... 100,222,444 100,222,444
============ ============
25
26
APRIL 3, MARCH 28, MARCH 29, MARCH 30, APRIL 1,
1999 1998 1997 1996 1995
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ........ $ 331,482 $ 354,206 $ 209,038 $ 262,844 $ 221,050
Inventories ............ 376,860 298,485 222,147 269,113 271,220
Total assets ........... 1,104,584 825,130 588,758 563,673 487,547
Total debt ............. 159,717 337 140,900 199,645 186,361
Stockholders' equity and
partners' capital ...... 658,905 584,326 260,685 237,653 188,579
(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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27
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 1999, 1998, 1997, 1996 and
1995 ended on April 3, 1999, March 28, 1998, March 29, 1997, March 30, 1996 and
April 1, 1995, respectively. Fiscal 1999 reflects a 53 week period.
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 authorized personnel
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements are based on current expectations and are indicated
by words or phrases such as "anticipate," "estimate," "project," "expect," "we
believe," "is or remains optimistic," "currently envisions" and similar words or
phrases and involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: risks associated with changes in the competitive
marketplace, including the introduction of new products or pricing changes by
the Company's competitors; changes in global economic conditions; risks
associated with the Company's dependence on sales to a limited number of large
department store customers, including risks related to extending credit to
customers; risks associated with the Company's dependence on its licensing
partners for a substantial portion of its net income and risks associated with
the Company's lack of operational and financial control over its licensed
businesses; risks associated with consolidations, restructurings and other
ownership changes in the retail industry; risks associated with competition in
the segments of the fashion and consumer product industries in which the Company
operates, including the Company's ability to shape, stimulate and respond to
changing consumer tastes and demands by producing attractive products, brands
and marketing, and its ability to remain competitive in the areas of quality and
price; risks associated with uncertainty relating to the Company's ability to
implement its growth strategies; risks associated with the ability of the
Company's third party customers and suppliers and government agencies to timely
and adequately remedy any Year 2000 issues; risks associated with the possible
adverse impact of the Company's unaffiliated manufacturers' inability to
manufacture in a timely manner, to meet quality standards or to use acceptable
labor practices; risks associated with changes in social, political, economic
and other conditions affecting foreign operations and sourcing and the possible
adverse impact of changes in import restrictions; risks related to the Company's
ability to establish and protect its trademarks and other proprietary rights;
risks related to fluctuations in foreign currency as the Company's international
licensing revenue generally is derived from sales in foreign currencies
including the Japanese yen and the French franc, and, in addition, changes in
currency exchange rates may also affect the relative prices at which the Company
and foreign competitors sell their products in the same market; and, risks
associated with the Company's control by Lauren family members and the
anti-takeover effect of multiple classes of stock. The Company undertakes no
obligation
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to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
OVERVIEW
The Company began operations in 1968 as a designer and marketer of premium
quality men's clothing and sportswear. Since inception, the Company, through
internal operations and in conjunction with its licensing partners, has grown
through increased sales of existing product lines, the introduction of new
brands and products, expansion into international markets and development of its
retail operations. Over the last five years, net revenues have more than doubled
to $1.7 billion in fiscal 1999 from $852.1 million in fiscal 1995, while income
from operations has grown to $214.1 million in fiscal 1999, excluding the
restructuring charge, from $110.1 million in fiscal 1995. The Company's net
revenues are generated from its three integrated operations: wholesale, direct
retail and licensing. The following table sets forth net revenues for the last
five fiscal years:
FISCAL YEAR
PRO FORMA
FISCAL 1997 (3)
1999 1998 1997 1996 1995 (UNAUDITED)
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Wholesale sales
(1)(2) ......................... $ 845,704 $ 733,065 $ 663,358 $ 606,022 $ 496,876 $ 623,041
Retail sales (2)................ 659,352 570,751 379,972 303,698 249,719 508,645
---------- ---------- ---------- ---------- ---------- ----------
Net sales....................... 1,505,056 1,303,816 1,043,330 909,720 746,595 1,131,686
Licensing revenue (1)........... 208,009 167,119 137,113 110,153 100,040 137,113
Other income.................... 13,794 9,609 7,774 6,210 5,446 7,774
---------- ---------- ---------- ---------- ---------- ----------
Net revenues ................... $1,726,859 $1,480,544 $1,188,217 $1,026,083 $ 852,081 $1,276,573
========== ========== ========== ========== ========== ==========
(1) The Company purchased certain of the assets of its former womenswear
licensing partner in October 1995. The fiscal 1999, fiscal 1998, fiscal
1997 and fiscal 1996 net revenues reflect the inclusion of womenswear
wholesale net sales of $127.1 million, $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) 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.
(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 $845.7
million in fiscal 1999 from $496.9
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29
million in fiscal 1995. This increase is primarily a result of growth in sales
of the Company's menswear and womenswear products driven by the introduction of
new brands and growth in sales of products under existing brands.
Polo's retail sales are generated from the Polo stores and outlet stores
operated by the Company. Since the beginning of fiscal 1995, the Company has
added 30 Polo stores (net of store closings, including 21 Polo stores acquired
in connection with the PRC Acquisition), and 52 outlet stores (net of store
closings). At April 3, 1999, the Company operated 33 Polo stores and 99 outlet
stores. Retail sales have grown to $659.4 million in fiscal 1999 from $249.7
million in fiscal 1995.
On May 3, 1999, a wholly owned subsidiary of the Company acquired, through
a tender offer and subsequent statutory compulsory acquisition, all of the
outstanding shares of Club Monaco Inc. ("Club Monaco"), a corporation organized
under the laws of the Province of Ontario, Canada. Founded in 1985, Club Monaco
is an international specialty retailer of casual apparel and other accessories
which are sold under the "Club Monaco" brand name and associated trademarks. As
of April 3, 1999, Club Monaco operated 57 freestanding stores in Canada and 13
in the United States. In addition, Club Monaco franchises three freestanding
stores in Canada, four freestanding stores and 20 shop-within-shops in Japan and
25 shop-within-shops in Korea and other parts of Asia. Club Monaco has also
granted licenses for the manufacture and distribution of silver jewelry and
eyewear in Canada and the United States. The Company used its new 1999 Credit
Facility (as defined) to finance this acquisition. See "-- Liquidity and Capital
Resources."
Licensing revenue consists of royalties paid to the Company under its
licensing alliances. In fiscal 1999, Product, International and Home Collection
licensing alliances accounted for 50.4%, 25.0% and 24.6% 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 $208.0 million in fiscal 1999 from $100.0 million in fiscal 1995.
During the fourth quarter of fiscal 1999, the Company formalized its plans
to streamline operations within its wholesale and retail operations and reduce
its overall cost structure (the "Restructuring Plan"). The major initiatives of
the Restructuring Plan include the following: (1) an evaluation of the Company's
retail operations and site locations; (2) the realignment and operational
integration of the Company's wholesale operating units; and (3) the realignment
and consolidation of corporate strategic business functions and internal
processes.
In an effort to improve the overall profitability of its retail
operations, in fiscal 2000 the Company plans to close three Polo stores and
three outlet stores that were not performing at an acceptable level.
Additionally, the Company will convert two Polo stores and five outlet stores to
new concepts that are expected to be more productive. Costs associated with this
aspect of the Restructuring Plan include lease and contract termination costs,
store fixed asset (primarily leasehold improvements) and intangible asset write
downs and severance and termination benefits.
The Company's wholesale operations were realigned into two new operating
units: Polo Brands and Collection Brands. Aspects of this realignment included:
(i) the reorganization of the sales force and retail development areas; (ii) the
streamlining of the design and development process; and (iii) the consolidation
of the customer service departments. Additionally, the Company is in the process
of integrating the production and sourcing of its Polo Brands, outlet store and
licensees' products into one consolidated unit. Costs associated with the
wholesale realignment consist primarily of severance and termination benefits
and lease termination costs.
The Company's review of its corporate business functions and internal
processes resulted in a new management structure designed to better align
businesses with similar
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30
functions and the identification and elimination of duplicative processes. Costs
associated with the corporate realignment consist primarily of severance and
termination benefits and lease termination costs.
In connection with the implementation of the Restructuring Plan, the
Company recorded a restructuring charge of $58.6 million on a pre-tax basis in
its fourth quarter of fiscal 1999. The major components of the restructuring
charge included lease and contract termination costs of $24.7 million, asset
write downs of $17.8 million, severance and termination benefits of $15.3
million and other restructuring costs of $0.8 million. Total severance and
termination benefits as a result of the Restructuring Plan relate to
approximately 280 employees, 140 of which were terminated through May 1999. The
Company expects to substantially complete the implementation of the
Restructuring Plan during fiscal 2000.
In connection with the Company's growth strategy, the Company plans to
introduce new products and brands and expand its retail operations.
Implementation of these strategies may require significant investments for
advertising, furniture and fixtures, infrastructure, design and additional
inventory. Notwithstanding the Company's investment, there can be no assurance
that its growth strategies will be successful.
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31
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 fiscal 1998
transactions, including 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:
PRO FORMA COMBINED STATEMENT OF INCOME
FISCAL 1997
(IN THOUSANDS)
(UNAUDITED)
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
Net sales $1,043,330 $ 88,356 (1) $1,131,686
Licensing revenue 137,113 137,113
Other income 7,774 7,774
---------- ----------
Net revenues 1,188,217 1,276,573
Cost of goods sold 652,000 38,406 (1) 690,406
---------- ----------
Gross profit 536,217 586,167
Selling, general and
administrative expenses 378,854 53,812 (1) 433,534
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.
RESULTS OF OPERATIONS
The following discussion provides information and analysis of the
Company's results of operations for fiscal 1999 as compared to fiscal 1998 and
fiscal 1998 as compared to fiscal 1997. The discussion of the Company's results
of operations for fiscal 1997 is presented on a pro forma basis, assuming the
PRC Acquisition had occurred as of March 31, 1996. As a result of the Company's
initial public offering completed on June 17, 1997, and the use of a portion of
the net proceeds therefrom to reduce outstanding indebtedness, historical
interest expense is not discussed below because such information is not
meaningful. The effect of income taxes is also not discussed below because the
historic taxation of the operations of the Company is not meaningful with
respect to periods following the reorganization.
The table below sets forth the percentage relationship to net revenues of
certain items in the Company's statements of income, which have been
reclassified for comparative
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32
purposes, for fiscal 1999, fiscal 1998 and fiscal 1997 presented on a historical
and pro forma basis, as indicated:
PRO
HISTORICAL FORMA
-------------------------------- ------
1999 1998 1997 1997
------ ------ ------ ------
Net sales .................................. 87.2% 88.1% 87.8% 88.7%
Licensing revenue .......................... 12.0 11.3 11.5 10.7
Other income ............................... 0.8 0.6 0.7 0.6
------ ------ ------ ------
Net revenues ............................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Gross profit ............................... 47.6 48.7 45.1 45.9
Selling, general and administrative expenses 35.2 35.2 31.9 33.9
Restructuring charge ....................... 3.4 -- -- --
------ ------ ------ ------
Income from operations ..................... 9.0% 13.5% 13.2% 12.0%
====== ====== ====== ======
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales increased 15.4% to $1.5 billion in fiscal 1999 from
$1.3 billion in fiscal 1998. Wholesale net sales increased 15.4% to $845.7
million in fiscal 1999 from $733.1 million in fiscal 1998. Wholesale growth
primarily reflects volume-driven sales increases in existing menswear and
womenswear brands and increased menswear and womenswear sales resulting from the
timing of shipments to retailers. These unit increases were offset by decreases
in average selling prices resulting from changes in product mix. Retail sales
increased by 15.5% to $659.4 million in fiscal 1999 from $570.8 million in
fiscal 1998. Of this increase, $90.7 million is attributable to the opening of
four new Polo stores (net of two store closings) and 27 new outlet stores (net
of three store closings) in fiscal 1999, and the benefit of a full year of
operations for three new Polo stores and ten new outlet stores opened in fiscal
1998. Additionally, retail sales were favorably impacted by the inclusion in
fiscal 1999 of a 53rd week as compared to 52 weeks in fiscal 1998. Comparable
store sales for fiscal 1999 decreased by 2.0%, excluding the impact of the 53rd
week in fiscal 1999, largely due to the following: (i) the effects of a more
challenging economic environment compared to fiscal 1998; (ii) lower tourism,
most notably in the Company's West Coast and Hawaiian stores; (iii) issues
encountered during a conversion of the Company's retail merchandising systems
during its second fiscal quarter; and (iv) unseasonably warm weather conditions
throughout the United States during the fall selling season as well as other
weather issues and store closings. Comparable store sales represent net sales of
stores open in both reporting periods for the full portion of such periods.
LICENSING REVENUE. Licensing revenue increased 24.5% to $208.0 million in
fiscal 1999 from $167.1 million in fiscal 1998. This increase is primarily
attributable to an overall increase in sales of existing licensed products,
particularly Chaps, Lauren, Polo Jeans and Home Collection, and the Company's
continued expansion and growth in international markets.
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33
GROSS PROFIT. Gross profit as a percentage of net revenues decreased to
47.6% in fiscal 1999 from 48.7% in fiscal 1998. This decrease was primarily
attributable to lower retail gross margins due to higher markdowns. Wholesale
gross margins decreased slightly in fiscal 1999 in comparison to fiscal 1998.
These decreases were offset by an increase in licensing revenue as a percentage
of net revenues to 12.0% in fiscal 1999 from 11.3% in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased by $87.3 million to $608.1 million in
fiscal 1999 from $520.8 million in fiscal 1998. The increase in SG&A expenses is
principally due to increased volume-related expenses to support revenue growth,
increased depreciation expense associated with the Company's shop-within-shops
development program and start-up costs associated with the expansion of the
Company's retail operations. Despite these increases, SG&A expenses as a
percentage of net revenues remained constant at 35.2%.
FISCAL 1998 (HISTORICAL BASIS) COMPARED TO FISCAL 1997 (PRO FORMA BASIS)
NET SALES. Net sales increased 15.2% to $1.30 billion in fiscal 1998 from
$1.13 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.
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
48.7% in fiscal 1998 from 45.9% 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 increased as a percentage of net revenues to 11.3% in
fiscal 1998 from 10.7% in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to
$520.8 million or 35.2% of net revenues in fiscal 1998 from $433.5 million or
33.9% 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.
33
34
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements primarily derive from working capital
needs, construction and renovation of shop-within-shops, retail expansion and
other corporate activities. The Company's main sources of liquidity are cash
flows from operations and credit facilities.
Net cash provided by operating activities decreased to $38.5 million in
fiscal 1999 from $96.2 million in fiscal 1998. This reduction was primarily
driven by increases in inventories due to timing of shipments, the overall
growth of the business and a build-up of excess seasonal basic product
inventories. The Company believes that the excess seasonal basic product
inventories are of high-quality and plans to reduce these inventory levels by
decreasing production commitments in fiscal 2000. The remaining decrease in cash
flow from operations was due to the timing of payments to vendors. Net cash used
in investing activities increased to $196.2 million in fiscal 1999 from $74.9
million in fiscal 1998 principally due to higher capital expenditures and the
investment of $44.2 million in an escrow account restricted for the fiscal 2000
acquisition of Club Monaco. Net cash provided by financing activities increased
to $143.4 million in fiscal 1999 from $7.8 million in fiscal 1998. This increase
primarily reflects the utilization of borrowings for operations and the fiscal
2000 acquisition of Club Monaco offset by repurchases of common stock in fiscal
1999.
On June 9, 1997, the Company entered into a credit facility with a
syndicate of banks which provides for a $225.0 million revolving line of credit
available for the issuance of letters of credit, acceptances and direct
borrowings and matures on December 31, 2002 (the "Credit Facility"). Borrowings
under the Credit Facility bear interest, at the Company's option, at a Base Rate
equal to the higher of: (i) the Federal Funds Rate, as published by the Federal
Reserve Bank of New York, plus 1/2 of one percent; and (ii) the prime commercial
lending rate of The Chase Manhattan Bank in effect from time to time, or at the
Eurodollar Rate plus an interest margin.
On March 30, 1999, in connection with the Company's acquisition of Club
Monaco, the Company entered into a $100.0 million senior credit facility (the
"1999 Credit Facility") with a syndicate of banks consisting of a $20.0 million
revolving line of credit and an $80.0 million term loan (the "Term Loan"). The
revolving line of credit is available for working capital needs and general
corporate purposes and matures on June 30, 2003. The Term Loan will be used to
finance the acquisition of all of the outstanding common stock of Club Monaco
and to repay indebtedness of Club Monaco, as further described below. The Term
Loan is repayable on June 30, 2003. Borrowings under the 1999 Credit Facility
bear interest, at the Company's option, at a Base Rate equal to the higher of:
(i) the Federal Funds Rate, as published by the Federal Reserve Bank of New
York, plus 1/2 of one percent; and (ii) the prime commercial lending rate of The
Chase Manhattan Bank in effect from time to time, or at the Eurodollar Rate plus
an interest margin. In April 1999, the Company entered into interest rate swap
agreements with a notional amount of $100.0 million to convert the variable
interest rate on the 1999 Credit Facility to a fixed rate of 5.5%.
The Credit Facility and 1999 Credit Facility (collectively, the "Credit
Facilities") contain customary representations, warranties, covenants and events
of default, including covenants regarding maintenance of net worth and leverage
ratios, limitations on indebtedness, loans, investments and incurrences of
liens, and restrictions on sales of
34
35
assets and transactions with affiliates. Additionally, the agreements provide
that an event of default will occur if Mr. Lauren and related entities fail to
maintain a specified minimum percentage of the voting power of the Company's
common stock.
As of April 3, 1999, the Company had $115.5 million outstanding in direct
borrowings and $44.2 million outstanding under the Term Loan and was
contingently liable for $22.7 million in outstanding letters of credit related
to commitments for the purchase of inventory and in connection with its leases
under the Credit Facilities. The weighted average interest rate on amounts
outstanding under the Credit Facilities at April 3, 1999, was 6.9%.
Total cash outlays related to the Restructuring Plan are expected to be
approximately $39.5 million, $3.9 million of which was paid in fiscal 1999.
Capital expenditures were $141.7 million, $63.1 million and $35.3 million
in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The increase in
capital expenditures 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. Additionally, capital
expenditure increases reflect the purchase by the Company of a distribution
center in North Carolina for $16.0 million, which it had been previously
leasing. The Company plans to invest approximately $130.0 million, net of
landlord incentives, over the next fiscal year for its distribution facilities,
its retail concept and outlet stores, the shop-within-shops development program,
its information systems and other capital projects.
On April 6, 1999, PRL Acquisition Corp., a Nova Scotia unlimited liability
corporation and a wholly owned subsidiary of the Company, acquired, through a
tender offer, 98.83% of the outstanding shares of Club Monaco. On May 3, 1999,
PRL Acquisition Corp. acquired the remaining outstanding 1.17% shares pursuant
to a statutory compulsory acquisition. The total purchase price was
approximately $52.0 million in cash based on current exchange rates. The Company
used funds under its 1999 Credit Facility to finance this transaction and to
repay in full assumed debt of approximately $35.0 million. At April 3, 1999, in
connection with the tender offer, the Company had set aside approximately $44.2
million of cash in an escrow account restricted for the acquisition of the
common stock of Club Monaco.
In March 1998, the Board of Directors authorized the repurchase, subject
to market conditions, of up to $100.0 million of the Company's Class A Common
Stock. Share repurchases under this plan will be made from time to time in the
open market over a two-year period which commenced April 1, 1998. Shares
acquired under the repurchase program will be used for stock option programs and
for other corporate purposes. As of April 3, 1999, the Company had repurchased
603,864 shares of its Class A Common Stock at an aggregate cost of $16.1
million.
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
approximately 58.0% and 53.0% of trade accounts receivable outstanding at April
3, 1999 and March 28, 1998, respectively. Additionally, the Company had four
licensing partners, Jones Apparel Group, Inc. ("Jones"), Seibu Department
Stores, Ltd. ("Seibu"), WestPoint Stevens, Inc. ("WPS") and
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36
Warnaco, Inc., which in aggregate constituted approximately 55.0% of licensing
revenue in fiscal 1999. WPS, Seibu and Jones constituted, in aggregate,
approximately 35.0% of licensing revenue in fiscal 1998 while WPS, Seibu and
L'Oreal S.A./Cosmair Inc. constituted, in aggregate, approximately 39.0% of
licensing revenue in fiscal 1997. Accordingly, the Company may have significant
exposure in collecting accounts receivable from its wholesale customers and
licensees. 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 Credit Facilities will be sufficient to satisfy the Company's current
level of operations, the Restructuring Plan, capital requirements, stock
repurchase program, acquisition of Club Monaco and other corporate activities
for the next 12 months. 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 growth in the
Company's retail operations and licensing revenue, historical quarterly
operating trends and working capital requirements may not accurately reflect
future performances. In addition, fluctuations in sales and operating income in
any fiscal quarter may be affected by the timing of seasonal wholesale shipments
and other events affecting retail.
EXCHANGE RATES
Inventory purchases from contract manufacturers in the Far East are
primarily denominated in U.S. dollars; however, purchase prices for the
Company's products may be affected by fluctuations in the exchange rate between
the U.S. dollar and the local currencies of the contract manufacturers, which
may have the effect of increasing the Company's cost of goods sold in the
future. During the last two years, exchange rate fluctuations have not had a
material impact on the Company's inventory cost. Additionally, certain
international licensing revenue 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 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 store pre-opening costs,
be expensed as incurred. The Company's current accounting policy is to
capitalize store pre-opening costs as prepaid expenses and amortize such costs
over a twelve month period following store opening. The Company will adopt the
provisions of SOP 98-5 in its first quarter of fiscal 2000, as required, and
record a charge of $3.9 million, after taxes, as the cumulative effect of a
change in accounting principle.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This
Statement
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establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position and measurement of
those instruments at fair value. The accounting for changes in the fair value of
a derivative is dependent upon the intended use of the derivative. SFAS No. 133
will be effective in the Company's first quarter of the fiscal year ending March
31, 2001, and retroactive application is not permitted. The Company has not yet
determined whether the application of SFAS No. 133 will have a material impact
on its financial position or results of operations.
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.
In 1997, the Company, with the aid of outside consultants, initiated a
program to assess the impact of Year 2000 issues on its information technology
("IT") systems and its non-IT systems and has formulated a plan to address its
Year 2000 issues.
Through its assessment, the Company has identified potential date
deficiencies in its IT systems, both hardware and software and in its non-IT
systems (including functions involving embedded chip technology), and is in the
process of addressing these deficiencies through upgrades, replacements and
other remediation. The Company expects to complete remediation of its material
IT systems no later than the summer of 1999. In connection with other equipment
with date sensitive operating controls such as distribution center equipment,
HVAC, employee time clocks, security and other similar systems, the Company is
in the process of identifying those items which may require replacement or other
remediation and, in a significant majority of the cases, believes it has taken
steps adequate to ensure such equipment is Year 2000 compliant. The Company
expects to complete testing and replacement or other remediation of this
equipment no later than the summer of 1999.
The Company has made inquiries of third parties with whom it has material
business relationships (such as customers, suppliers, licensees, transportation
carriers, utility and other general service providers) to determine whether they
will be able to resolve in a timely manner any Year 2000 issues that will
materially and adversely impact the Company. This process includes the
solicitation of written responses to questionnaires, followed, in some cases, by
meetings with certain of such third parties. To date, approximately 60.0% of
those contacted have responded, none of whom have raised any Year 2000 issues
which the Company believes would have a materially adverse affect on the
Company. The Company is in the process of sending follow-up inquiries to third
parties and expects to complete its survey of third parties in the late summer
of 1999.
To date, the Company has incurred expenses of approximately $5.1 million
related to the assessment of its Year 2000 issues and development and
implementation of its remediation plan. The total remaining cost of the
Company's Year 2000 project is estimated at $1.0 to $2.0 million and is being
funded through operating cash flows. Such costs do not include internal
management time and the deferral of other projects, the
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effects of which are not expected to be material to the Company's results of
operations or financial condition. Of the total project cost, approximately $0.6
million is attributable to the purchase of new software which will be
capitalized. The remainder will be expensed as incurred. The costs of the Year
2000 project and the dates upon which the Company plans to complete its Year
2000 initiatives are based on management's best estimates, which were derived by
utilizing several assumptions of future events including 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.
The Company believes that it is difficult to identify its most reasonable
worst case Year 2000 scenario. However, a reasonable worst case Year 2000
scenario would be a failure by a significant third party in the Company's supply
and distribution chain (including, without limitation, utility or other general
service provider, government authority or third party with whom it has a
material business relationship) to remediate its Year 2000 deficiencies that
continues for several days or more. Any such failure could impair the
manufacture and/or delivery of products, and/or the processing of orders, and
shipments. In addition, a failure by the Company to remediate any of its
internal inventory management systems would adversely affect its stock
allocation program, resulting in mistimed shipments and potential order
cancellations. These scenarios would likely have a material adverse effect on
the Company's results of operations, and, in particular, would result in the
loss of sales and revenue. The extent of lost revenue as a result of these
scenarios cannot be estimated at this time.
The Company continues to develop contingency plans to limit the effect of
any Year 2000 issues on its operations and results, and intends to finalize its
contingency plans by no later than the summer of 1999. As an example, the
Company continues to explore, where possible, alternate service providers. The
Company's Year 2000 efforts are ongoing and its overall plan, as well as its
development of contingency plans, will continue to evolve as new information
becomes available. While the Company anticipates continuity of its business
activities, that continuity will be dependent upon its ability, and the ability
of third parties with whom the Company relies on directly, or indirectly, to be
Year 2000 compliant in a timely fashion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item appears beginning on page F-1.
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 1999 Annual
Meeting of Stockholders which will be filed within 120 days after the close of
the Company's fiscal year ended April 3, 1999 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 22, 1999.
NAME AGE POSITION
Ralph Lauren.................. 59 Chairman, Chief Executive Officer and
Director
Michael J. Newman............. 53 Vice Chairman, Chief Operating Officer and
Director
Richard A. Friedman........... 41 Director
Frank A. Bennack, Jr.......... 66 Director
Joel L. Fleishman............ 65 Director
Allen Questrom............... 59 Director
Terry S. Semel................ 56 Director
Peter Strom................... 70 Director
Victor Cohen.................. 45 Senior Vice President, General Counsel and
Secretary
F. Lance Isham................ 54 President
Nancy A. Platoni Poli......... 43 Senior Vice President and Chief Financial Officer
Karen L. Rosenbach............ 44 Senior Vice President, Human Resources and
Administration
Hamilton South................ 34 Group President, Chief Marketing Officer
RALPH LAUREN has been a director of the Company since prior to the
commencement of the Company's initial public offering and was 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.
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MICHAEL J. NEWMAN has been a director of the Company since prior to the
commencement of the Company's initial public offering and was 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.
F. LANCE ISHAM has been President of the Company since November 1998,
prior to which he served as Group President of the Menswear operations. Mr.
Isham is responsible for the day-to-day operations of sales, merchandising,
retail development, production, manufacturing services and distribution. He
joined Polo in 1982, and has held a variety of sales positions in the Company
including Executive Vice President of Sales and Merchandising.
RICHARD A. FRIEDMAN has been a director of the Company since prior to the
commencement of the Company's initial public offering and was 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. and Carmike Cinemas Inc.
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.
JOEL L. FLEISHMAN has been a director of the Company since January 1999.
He has been a Professor of Law and Public Policy, Terry Sanford Institute of
Public Policy at Duke University since 1971 and the Director of the Samuel and
Ronnie Heyman Center for Ethics, Public Policy and the Professions at Duke
University since 1987. In addition, Mr. Fleishman has been the President of The
Atlantic Philanthropic Service Company, Inc. since 1993. Mr. Fleishman is a
member of the Board of Directors of Boston Scientific Corporation.
ALLEN QUESTROM has been a Director of the Company since September 1997.
Mr. Questrom has been the Chairman, President and Chief Executive Officer of
Barneys New York Inc. since May 1999 and was the Chairman and Chief Executive
Officer of Federated Department Stores, Inc. from February 1990 to May 1997. He
is a member of the Board of Directors of Interpublic Group of Companies, Inc.,
AEA Investors, Inc. and Barneys New York 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.
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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.
HAMILTON SOUTH was appointed to the corporate position of Group President,
Chief Marketing Officer of the Company in March 1999. Mr. South joined Polo in
1996 as Senior Vice President, Worldwide Communications. Prior to joining Polo,
Mr. South was editor-at-large of Vanity Fair Magazine from 1990.
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 1999 Annual
Meeting of Stockholders, which will be filed within 120 days after the close of
the Company's fiscal year ended April 3, 1999 and such information is
incorporated herein by reference to such Proxy Statement.
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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.**
(filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K for the fiscal year ended March 28, 1998 (the "Fiscal
1998 10-K")*
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)*
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EXHIBIT
NUMBER DESCRIPTION
------ -----------
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)*+
10.13 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)*+
10.14 Amendment to Deferred Compensation Agreement made as of
November 10, 1998 between F. Lance Isham and Polo Ralph Lauren
Corporation
10.15 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)*+
10.16 Amended and Restated Employment Agreement effective November
10, 1998 between F. Lance Isham and Polo Ralph Lauren
Corporation+
10.17 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)*
10.18 Form of Credit Agreement between Polo Ralph Lauren Corporation
and The Chase Manhattan Bank (filed as Exhibit 10.24 to the
S-1)*
10.19 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)*
10.20 Credit Agreement between Polo Ralph Lauren Corporation and the
Chase Manhattan Bank dated as of March 30, 1999
10.21 Form of Indemnification Agreement between Polo Ralph Lauren
Corporation and its Directors and Executive Officers (filed as
Exhibit 10.26 to the S-1)*
10.22 Employment Agreement dated June 9, 1997 between Ralph Lauren
and Polo Ralph Lauren Corporation (filed as exhibit 10.27 to
the S-1)*+
10.23 Amended and Restated Employment Agreement effective April 4,
1999 between Ralph Lauren and Polo Ralph Lauren Corporation+
10.24 Employment Agreement effective November 10, 1998, between
Hamilton South and Polo Ralph Lauren Corporation+
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.** (filed as Exhibit 10.25 to the Fiscal
1998 10-K)*
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 10.24 and 10.25 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.
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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 25, 1999
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 and June 25, 1999
- ---------------------------------- Chief Executive Officer
Ralph Lauren (Principal Executive Officer)
/s/ Michael J. Newman Vice Chairman of the Board of Directors June 25, 1999
- ---------------------------------- and Chief Operating Officer
Michael J. Newman
/s/ Nancy A. Platoni Poli Senior Vice President and Chief Financial June 25, 1999
- ---------------------------------- Officer (Principal Financial and Accounting
Nancy A. Platoni Poli Officer)
/s/ Frank A. Bennack, Jr. Director June 25, 1999
- ----------------------------------
Frank A. Bennack, Jr.
/s/ Joel L. Fleishman Director June 25, 1999
- ----------------------------------
Joel L. Fleishman
/s/ Richard A. Friedman Director June 25, 1999
- ----------------------------------
Richard A. Friedman
/s/ Allen Questrom Director June 25, 1999
- ----------------------------------
Allen Questrom
/s/ Terry S. Semel Director June 25, 1999
- ----------------------------------
Terry S. Semel
/s/ Peter Strom Director June 25, 1999
- ----------------------------------
Peter Strom
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45
POLO RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE
Independent Auditors' Report ........................................................................... F-2
Consolidated Balance Sheets as of April 3, 1999 and March 28, 1998 ..................................... F-3
Consolidated Statements of Income for the years ended April 3, 1999, March 28, 1998 and March 29, 1997 F-4
Consolidated Statements of Stockholders' Equity and Partners' Capital for the years ended April 3, 1999,
March 28, 1998 and March 29, 1997 ...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended April 3, 1999, March 28, 1998 and March 29,
1997 ................................................................................................... F-6
Notes to Consolidated Financial Statements ............................................................. F-8
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report ........................................................................... S-1
Schedule II - Valuation and Qualifying Accounts ........................................................ S-2
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
46
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 sheets as of April
3, 1999 and March 28, 1998 of Polo Ralph Lauren Corporation and subsidiaries
(the "Company") and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended 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 financial statements present fairly, in all material
respects, the financial position of the Company as of April 3, 1999 and March
28, 1998, and the results of their operations and their cash flows for each of
the three years in the period ended April 3, 1999 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 21, 1999
F-2
47
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 3, MARCH 28,
1999 1998
-------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 44,458 $ 58,755
Accounts receivable, net of allowances of
$13,495 and $12,447, respectively 157,203 149,120
Inventories 376,860 298,485
Deferred tax assets 51,939 24,448
Prepaid expenses and other 48,994 25,656
----------- -----------
TOTAL CURRENT ASSETS 679,454 556,464
Property and equipment, net 261,799 175,348
Deferred tax assets 12,493 14,213
Restricted cash 44,217 --
Other assets, net 106,621 79,105
----------- -----------
$ 1,104,584 $ 825,130
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $ 115,500 $ --
Accounts payable 88,898 100,126
Income taxes payable 17,432 2,554
Accrued expenses and other 126,142 99,578
----------- -----------
TOTAL CURRENT LIABILITIES 347,972 202,258
Long-term debt 44,217 --
Other noncurrent liabilities 53,490 38,546
Commitments and contingencies (Note 13) -- --
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,381,653 and 34,272,726 shares issued, respectively 344 343
Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 433
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 227
Additional paid-in-capital 450,030 447,918
Retained earnings 227,288 136,738
Treasury Stock, Class A, at cost (603,864 shares) (16,084) --
Unearned compensation (3,333) (1,333)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 658,905 584,326
----------- -----------
$ 1,104,584 $ 825,130
=========== ===========
See accompanying notes to financial statements.
F-3
48
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEAR ENDED
--------------------------------------------
APRIL 3, MARCH 28, MARCH 29,
1999 1998 1997
-------- --------- ---------
Net sales $1,505,056 $1,303,816 $1,043,330
Licensing revenue 208,009 167,119 137,113
Other income 13,794 9,609 7,774
---------- ---------- ----------
Net revenues 1,726,859 1,480,544 1,188,217
Cost of goods sold 904,586 759,988 652,000
---------- ---------- ----------
Gross profit 822,273 720,556 536,217
Selling, general and administrative expenses 608,128 520,801 378,854
Restructuring charge 58,560 -- --
---------- ---------- ----------
Income from operations 155,585 199,755 157,363
Interest expense 2,759 159 13,660
Equity in net loss of joint venture -- -- 3,599
---------- ---------- ----------
Income before income taxes 152,826 199,596 140,104
Provision for income taxes 62,276 52,025 22,804
---------- ---------- ----------
Net income $ 90,550 $ 147,571 $ 117,300
========== ========== ==========
PRO FORMA
-----------
Historical income before income taxes $ 199,596
Pro forma adjustments other than income taxes 3,162
-----------
Pro forma income before income taxes 202,758
Pro forma provision for income taxes 82,631
-----------
Pro forma net income $ 120,127
===========
Net income per share - Basic and Diluted $ 0.91 $ 1.20
=========== ===========
Common shares outstanding - Basic 99,813,328 100,222,444
=========== ===========
Common shares outstanding - Diluted 99,972,152 100,222,444
=========== ===========
See accompanying notes to financial statements.
F-4
49
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS AND
---------------------- PAID-IN- PARTNERS' TREASURY STOCK, AT COST
SHARES AMOUNT CAPITAL CAPITAL SHARES AMOUNT
----------- -------- ---------- ------------ --------- ----------
BALANCE AT MARCH 30, 1996 -- -- -- $ 237,653 -- --
Net income 117,300
Distributions to partners (94,268)
---------- -------- ---------- ------------ --------- ----------
BALANCE AT MARCH 29, 1997 -- -- -- 260,685 -- --
Net income 147,571
Distributions to partners (45,640)
Reorganization 89,000,000 890 176,537 (177,427)
Dividend and Reorganization Notes paid (48,451)
Common stock issued in public offering, net 11,170,000 112 268,685
Common stock issued in PRC Acquisition 26,803 -- 697
Restricted stock grants 76,923 1 1,999
---------- -------- ---------- ------------ --------- ----------
BALANCE AT MARCH 28, 1998 100,273,726 1,003 447,918 136,738 -- --
Net income 90,550
Exercise of stock options 4,352 113
Repurchases of common stock 603,864 (16,084)
Restricted stock grants 104,575 1 1,999
----------- -------- ---------- ------------ --------- ----------
BALANCE AT APRIL 3, 1999 100,382,653 $ 1,004 $ 450,030 $ 227,288 603,864 $ (16,084)
=========== ======== ========== ============ ========= ==========
UNEARNED
COMPENSATION TOTAL
------------ --------
BALANCE AT MARCH 30, 1996 -- $237,653
Net income 117,300
Distributions to partners (94,268)
------- --------
BALANCE AT MARCH 29, 1997 -- 260,685
Net income 147,571
Distributions to partners (45,640)
Reorganization --
Dividend and Reorganization Notes paid (48,451)
Common stock issued in public offering, net 268,797
Common stock issued in PRC Acquisition 697
Restricted stock grants (1,333) 667
------- --------
BALANCE AT MARCH 28, 1998 (1,333) 584,326
Net income 90,550
Exercise of stock options 113
Repurchases of common stock (16,084)
Restricted stock grants (2,000) --
------- --------
BALANCE AT APRIL 3, 1999 $(3,333) $658,905
======= ========
See accompanying notes to financial statements.
F-5
50
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
---------------------------------------
APRIL 3, MARCH 28, MARCH 29,
1999 1998 1997
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 90,550 $ 147,571 $ 117,300
Adjustments to reconcile net income to net cash provided by
operating activities:
Benefit from deferred income taxes (25,771) (27,997) (938)
Depreciation and amortization 46,414 27,402 13,755
Equity in net loss of joint venture -- -- 3,599
Provision for losses on accounts receivable 1,060 1,155 833
Changes in deferred liabilities (4,782) 9,584 5,067
Provision for restructuring charge 19,040 -- --
Other 2,073 3,198 (5,069)
Changes in assets and liabilities, net of acquisitions
Accounts receivable (9,542) (4,352) (137)
Inventories (76,396) (48,942) 46,702
Prepaid expenses and other (25,526) (2,031) (9,223)
Other assets (9,095) (18,922) (3,385)
Accounts payable (13,452) 3,215 15,173
Income taxes payable and accrued expenses and other 43,950 6,325 19,943
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,523 96,206 203,620
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (141,692) (63,079) (35,330)
Acquisition, net of cash acquired (6,981) (8,551) --
Restricted cash for Club Monaco Acquisition (44,217) -- --
Investments in joint ventures -- (5,812) --
Cash surrender value - officers' life insurance, net (3,339) 2,569 (3,230)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (196,229) (74,873) (38,560)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 113 268,797 --
Repurchases of common stock (16,084) -- --
Proceeds from (repayments of) short-term borrowings, net 115,500 (26,777) (46,954)
Repayments of borrowings against officers' life insurance policies -- (5,757) --
Repayments of long-term debt and subordinated notes (337) (135,134) (11,791)
Proceeds from long-term debt 44,217 -- --
Payment of Dividend and Reorganization Notes -- (48,451) --
Distributions paid to partners -- (44,855) (90,284)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 143,409 7,823 (149,029)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (14,297) 29,156 16,031
Cash and cash equivalents at beginning of period 58,755 29,599 13,568
--------- --------- ---------
Cash and cash equivalents at end of period $ 44,458 $ 58,755 $ 29,599
========= ========= =========
F-6
51
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
--------------------------------
APRIL 3, MARCH 28, MARCH 29,
1999 1998 1997
-------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 2,776 $ 4,410 $16,005
======= ======= =======
Cash paid for income taxes $77,877 $73,873 $22,280
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreign tax credits distributed to partners $ 509 $ 3,720
======= =======
Capital obligations for completed shop-within-shops $15,102 $ 8,600
======= =======
Fair value of assets acquired, excluding cash $14,868 $69,537
Less:
Cash paid 6,981 8,551
Promissory notes issued 5,000 --
Fair market value of common stock issued for acquisition -- 697
------- -------
Liabilities assumed $ 2,887 $60,289
======= =======
Fair market value of restricted stock grants $ 667
=======
See accompanying notes to financial statements.
F-7
52
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
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 of PRLC and promissory notes (the
"Reorganization"). The accompanying combined financial statements for the
year ended March 29, 1997 include the accounts of Polo Ralph Lauren
Enterprises, L.P. ("Enterprises"), Polo Ralph Lauren, L.P. and subsidiaries
(collectively, the "Polo Partnership"), The Ralph Lauren Womenswear
Company, L.P. and subsidiaries (collectively, "Womenswear") and Polo Retail
Corporation and subsidiaries, a 50% joint venture with a previously
nonaffiliated partner ("PRC," and together with Enterprises, Polo
Partnership and Womenswear, 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, Inc., successor to The Goldman Sachs Group, L.P.
(collectively, the "GS Group").
The accompanying consolidated financial statements as of and for the
year ended April 3, 1999, include the results of operations of Polo. 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 have been 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 year ended March 29, 1997, in which 50% of PRC
was owned by a previously nonaffiliated partner. 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.
(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
F-8
53
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
as follows: (i) to repay borrowings outstanding under the Company's 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 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) ACQUISITION
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. Prior to the PRC Acquisition, the Company sold products to PRC in
the amount of $40.3 million in fiscal 1997. Purchases by the Company from
PRC amounted to $6.7 million in fiscal 1997.
(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, and outlet
stores located throughout 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
F-9
54
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
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, by the imposition of additional duties or
regulations relating to imports, by the contractors' inability to meet the
Company's production requirements or by other factors.
2 SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to March 31. All
references herein to "1999," "1998" and "1997" represent the 52 or 53 week
fiscal years ended April 3, 1999, March 28, 1998, and March 29, 1997,
respectively. Fiscal 1999 reflects a 53-week period and fiscal 1998 and
1997 reflect a 52-week period.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less.
RESTRICTED CASH
At April 3, 1999, the Company had $44.2 million of cash held in escrow
for the acquisition of Club Monaco Inc. ("Club Monaco") (see Note 16).
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 PRE-OPENING 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-10
55
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over the estimated useful lives of
the related assets on a straight-line basis. The range of useful lives is
as follows: buildings - 39.5 years; furniture and fixtures and machinery
and equipment - 3 to 8 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 on a
straight-line basis over its estimated useful life, ranging from 11 to 25
years .
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 sheets at April 3,
1999 and March 28, 1998, are not impaired. See Note 3 for long-lived and
intangible asset write downs recorded in connection with the Company's
fiscal 1999 Restructuring Plan (as defined see Note 3).
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 $31.5 million and $28.2 million at April 3, 1999 and
March 28, 1998, 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 retail and outlet stores, when goods are
sold to consumers. Allowances for estimated uncollectible accounts and
discounts are provided when sales are recorded. Licensing revenue is
recognized as earned.
F-11
56
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 generally 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 approximately 58.0% and 53.0% of
trade accounts receivable outstanding at April 3, 1999 and March 28, 1998,
respectively.
The Company had two significant customers that each accounted for
approximately 10.0% of net sales in fiscal 1999 and one significant
customer that accounted for approximately 11.0% of net sales in fiscal 1998
and 1997. Additionally, the Company had four significant licensees who in
aggregate constituted approximately 55.0% of licensing revenue in fiscal
1999 and three who in aggregate constituted approximately 35.0% and 39.0%
of licensing revenue in fiscal 1998 and 1997, 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 $76.2 million, $68.5 million and
$55.5 million in fiscal 1999, 1998 and 1997, 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. A valuation allowance is recorded to reduce a
deferred tax asset to that portion which is expected to more likely than
not be realized.
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 of the Predecessor Company 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.
F-12
57
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
Foreign income taxes have also been provided on the income of the foreign
entities in the Predecessor Company.
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
$40.7 million and $28.1 million at April 3, 1999 and March 28, 1998,
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 and interest rates.
While these instruments are subject to risk of loss from changes in
exchange or interest rates, those losses would generally be offset by gains
on the related exposure. The Company 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 are 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
1999, 1998 and 1997.
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."
COMPREHENSIVE INCOME
Effective March 29, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting
of comprehensive income and its components in the financial statements. For
fiscal 1999, 1998 and 1997, comprehensive income approximated net income.
F-13
58
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
RECENT ACCOUNTING PRONOUNCEMENTS
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
store pre-opening costs, be expensed as incurred. The Company's current
accounting policy is to capitalize store pre-opening costs as prepaid
expenses and amortize such costs over a twelve month period following store
opening. The Company will adopt the provisions of SOP 98-5 in its first
quarter of fiscal 2000, as required, and record a charge of $3.9 million,
after taxes, as the cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires the
recognition of all derivatives as either assets or liabilities in the
statement of financial position and measurement of those instruments at
fair value. The accounting for changes in the fair value of a derivative is
dependent upon the intended use of the derivative. SFAS No. 133 will be
effective in the Company's first quarter of the fiscal year ending March
31, 2001 and retroactive application is not permitted. The Company has not
yet determined whether the application of SFAS No. 133 will have a material
impact on its financial position or results of operations.
PRO FORMA ADJUSTMENTS (UNAUDITED)
The pro forma statement of income data for fiscal 1998 presents the
effects on the historical financial statements of certain transactions as
if they had occurred at March 30, 1997. 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% (see Note 8); and (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.
NET INCOME PER SHARE
Basic net income per share was calculated by dividing net income by the
weighted average number of shares outstanding during the period and
excluded any potential dilution. Diluted net income per share was
calculated similarly but includes potential dilution from the exercise of
stock options and awards. The weighted average number of shares outstanding
in fiscal 1999 represents the actual number of shares outstanding during
such period. 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 fiscal 1998. The
difference between the basic and diluted weighted average shares
outstanding is due to the dilutive effect of stock options and restricted
stock awards issued under the Company's stock option plans.
F-14
59
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
RECLASSIFICATIONS
For comparative purposes, certain prior period amounts have been
reclassified to conform to the current period's presentation.
3 RESTRUCTURING CHARGE
During the fourth quarter of fiscal 1999, the Company formalized its
plans to streamline operations within its wholesale and retail operations
and reduce its overall cost structure ("Restructuring Plan"). The major
initiatives of the Restructuring Plan include the following: (1) an
evaluation of the Company's retail operations and site locations; (2) the
realignment and operational integration of the Company's wholesale
operating units; and (3) the realignment and consolidation of corporate
strategic business functions and internal processes.
In an effort to improve the overall profitability of its retail
operations, the Company plans to close three Polo stores and three outlet
stores that were not performing at an acceptable level. Additionally, the
Company will convert two Polo stores and five outlet stores to new concepts
that are expected to be more productive. Costs associated with this aspect
of the Restructuring Plan include lease and contract termination costs,
store fixed asset (primarily leasehold improvements) and intangible asset
write downs and severance and termination benefits.
The Company's wholesale operations were realigned into two new
operating units: Polo Brands and Collection Brands. Aspects of this
realignment included: (i) the reorganization of the sales force and retail
development areas; (ii) the streamlining of the design and development
process; and (iii) the consolidation of the customer service departments.
Additionally, the Company is in the process of integrating the production
and sourcing of its Polo Brands, outlet store and licensees' products into
one consolidated unit. Costs associated with the wholesale realignment
consist primarily of severance and termination benefits and lease
termination costs.
The Company's review of its corporate business functions and internal
processes resulted in a new management structure designed to better align
businesses with similar functions and the identification and elimination of
duplicative processes. Costs associated with the corporate realignment
consist primarily of severance and termination benefits and lease
termination costs.
F-15
60
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
In connection with the implementation of the Restructuring Plan, the
Company recorded a restructuring charge of $58.6 million on a pre-tax basis
in its fourth quarter of fiscal 1999. The major components of the
restructuring charge and the activity through April 3, 1999 were as
follows:
LEASE AND
SEVERANCE AND ASSET CONTRACT
TERMINATION WRITE TERMINATION OTHER
BENEFITS DOWNS COSTS COSTS TOTAL
1999 provision $ 15,277 $ 17,788 $ 24,665 $ 830 $ 58,560
1999 activity (3,318) (17,788) (1,112) (105) (22,323)
-------- -------- -------- -------- --------
April 3, 1999 $ 11,959 $ -- $ 23,553 $ 725 $ 36,237
======== ======== ======== ======== ========
Total severance and termination benefits as a result of the
Restructuring Plan relate to approximately 280 employees, 140 of which were
terminated through May 1999. Total cash outlays related to the
Restructuring Plan are expected to be approximately $39.5 million, $3.9
million of which was paid in fiscal 1999. The Company expects to
substantially complete the implementation of the Restructuring Plan during
fiscal 2000.
4 INVENTORIES
APRIL 3, MARCH 28,
1999 1998
Raw materials $ 17,675 $ 26,364
Work-in-process 8,545 12,406
Finished goods 350,640 259,715
-------- --------
$376,860 $298,485
======== ========
Merchandise inventories of $196.1 million and $130.9 million at April
3, 1999 and March 28, 1998, respectively, were valued utilizing the retail
method and are included in finished goods.
F-16
61
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
5 PROPERTY AND EQUIPMENT
APRIL 3, MARCH 28,
1999 1998
Land and improvements $ 3,108 $ 656
Building 10,079 --
Furniture and fixtures 150,103 116,870
Machinery and equipment 32,582 22,189
Construction in progress 30,294 --
Leasehold improvements 187,512 158,255
-------- --------
413,678 297,970
Less: accumulated
depreciation and amortization 151,879 122,622
-------- --------
$261,799 $175,348
======== ========
6 ACCRUED EXPENSES AND OTHER
APRIL 3, MARCH 28,
1999 1998
Accrued operating expenses $ 47,094 $ 40,841
Accrued restructuring charge 36,237 --
Accrued payroll and benefits 27,466 33,898
Accrued shop-within-shops 15,345 24,839
-------- --------
$126,142 $ 99,578
======== ========
7 FINANCING AGREEMENTS
On June 9, 1997, the Company entered into a credit facility with a
syndicate of banks which consists of a $225.0 million revolving line of
credit available for the issuance of letters of credit, acceptances and
direct borrowings and matures on December 31, 2002 (the "Credit Facility").
Borrowings under the Credit Facility bear interest, at the Company's
option, at a Base Rate equal to the higher of: (i) the Federal Funds Rate,
as published by the Federal Reserve Bank of New York, plus 1/2 of one
percent; and (ii) the prime commercial lending rate of The Chase Manhattan
Bank in effect from time to time, or at the Eurodollar Rate plus an
interest margin. At April 3, 1999, the Company had $115.5 million
outstanding in direct borrowings and was contingently liable for $22.7
million in outstanding letters of credit related to commitments for the
purchase of inventory and in connection with its leases under the Credit
Facility. There were no borrowings outstanding under the Credit Facility at
March 28, 1998.
F-17
62
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
On March 30, 1999, in connection with the Company's acquisition of Club
Monaco (see Note 16), the Company entered into a $100.0 million senior
credit facility (the "1999 Credit Facility") with a syndicate of banks
consisting of a $20.0 million revolving line of credit and an $80.0 million
term loan (the "Term Loan"). The revolving line of credit is available for
working capital needs and general corporate purposes and matures on June
30, 2003. The Term Loan will be used to finance the acquisition of the
stock of Club Monaco and to repay existing indebtedness, as further
described in Note 16. The Term Loan is repayable on June 30, 2003.
Borrowings under the 1999 Credit Facility bear interest, at the Company's
option, at a Base Rate equal to the higher of: (i) the Federal Funds Rate,
as published by the Federal Reserve Bank of New York, plus 1/2 of one
percent; and (ii) the prime commercial lending rate of The Chase Manhattan
Bank in effect from time to time, or at the Eurodollar Rate plus an
interest margin. On April 12, 1999, the Company entered into interest rate
swap agreements with a notional amount of $100.0 million to convert the
variable interest rate on the 1999 Credit Facility to a fixed rate of 5.5%.
At April 3, 1999, the Company had $44.2 million outstanding under the Term
Loan.
The Credit Facility and 1999 Credit Facility (the "Credit Facilities")
contain customary representations, warranties, covenants and events of
default, including covenants regarding maintenance of net worth and
leverage ratios, limitations on indebtedness, loans, investments and
incurrences of liens, and restrictions on sales of assets and transactions
with affiliates. Additionally, the agreements provide that an event of
default will occur if Mr. Lauren and related entities fail to maintain a
specified minimum percentage of the voting power of the Company's common
stock.
The Credit Facilities bore interest primarily at the institution's
prime rate (ranging from 5.25% to 7.75% at April 3, 1999). The weighted
average interest rate on borrowings was 7.4%, 8.0% and 7.7% in fiscal 1999,
1998 and 1997, respectively.
On June 9, 1997 in connection with the Reorganization, borrowings under
the Credit Facility were used to refinance existing debt from 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. These borrowings were repaid from the
net proceeds of the initial public offering (see Note 1 (b)).
F-18
63
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
8 INCOME TAXES
The components of the provision for income taxes were as follows:
FISCAL YEAR
1999 1998 1997
Current:
Federal $ 68,012 $ 60,265 $ 16,649
State and local 15,080 15,330 6,633
Foreign 4,955 4,427 460
-------- -------- --------
88,047 80,022 23,742
-------- -------- --------
Deferred:
Federal (19,654) (22,357) (652)
State and local (6,117) (5,640) (286)
-------- -------- --------
(25,771) (27,997) (938)
-------- -------- --------
$ 62,276 $ 52,025 $ 22,804
======== ======== ========
The foreign and domestic components of income before income taxes were
as follows:
FISCAL YEAR
1999 1998 1997
Domestic $102,644 $162,529 $113,188
Foreign 50,182 37,067 26,916
-------- -------- --------
$152,826 $199,596 $140,104
======== ======== ========
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 tax asset reflects 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.
F-19
64
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
The components of the net deferred tax assets at April 3, 1999 and
March 28, 1998, were as follows:
APRIL 3, MARCH 28,
1999 1998
DEFERRED TAX ASSETS:
Restructuring reserves $20,249 $ --
Accounts receivable 17,533 11,230
Net operating loss carryforwards 7,475 8,275
Uniform inventory capitalization 8,306 7,215
Deferred compensation 6,546 5,685
Property and equipment -- 4,219
Accrued expenses 3,238 2,990
Other 3,406 1,368
------- -------
66,753 40,982
Less: Valuation allowance 2,321 2,321
------- -------
$64,432 $38,661
======= =======
The Company had available Federal net operating loss carryforwards of
approximately $8.4 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.
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 $26.0 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 PRLC or a subsidiary or U.S.
affiliate of PRLC, 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.
F-20
65
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
The pro forma provision for income taxes represents the income tax
provision 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% in fiscal 1998 and consisted of
the following:
FISCAL YEAR
1998
(UNAUDITED)
Current:
Federal $ 63,822
State and local 17,119
Foreign 4,427
--------
85,368
--------
Deferred:
Federal (1,043)
State and local (1,694)
--------
(2,737)
--------
$ 82,631
========
The historical provision for income taxes in fiscal 1999 and the pro
forma provision for income taxes in fiscal 1998 differs from the amounts
computed by applying the statutory Federal income tax rate to income before
income taxes due to the following:
FISCAL YEAR
1999 1998
(UNAUDITED)
Provision for income taxes
at statutory Federal rate $ 53,489 $ 70,965
Increase (decrease) due to:
State and local income taxes, net of Federal benefit 5,825 11,280
Foreign income, net of foreign credits 1,055 (1,213)
Other 1,907 1,599
-------- --------
$ 62,276 $ 82,631
======== ========
F-21
66
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
9 FINANCIAL INSTRUMENTS
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 1999, 1998 and
1997.
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. This contract is a
hedge relating to foreign licensing revenues. At March 28, 1998, the fair
value of these contracts approximated carrying value due to their
short-term maturities.
The Company is exposed to credit losses in the event of nonperformance
by the counterparties to the interest rate swap agreements and forward
foreign exchange contracts, 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 April 3, 1999 and March 28, 1998,
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.
10 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 $8.7 million, $6.0 million and
$5.0 million in fiscal 1999, 1998 and 1997, respectively.
UNION PENSION
Womenswear participates in a multi-employer pension plan and is
required to make contributions to the Union of Needletrades Industrial and
Textile Employees (the "Union") for dues based on wages paid to union
employees. A portion of such dues is 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 information with respect to the type of
benefits provided, vested and nonvested benefits or assets.
F-22
67
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
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 a nonaffiliated licensee. Womenswear
has no current intention of withdrawing from the plan.
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 $15.9
million and $14.2 million at April 3, 1999 and March 28, 1998,
respectively, and are reflected in other noncurrent liabilities in the
accompanying balance sheets. Total compensation expense recorded was $2.7
million, $4.9 million and $3.2 million in fiscal 1999, 1998 and 1997,
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.
11 COMMON STOCK
All of Polo's outstanding Class B Common Stock is owned by Mr. Lauren
and related entities and all of its outstanding 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."
12 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)
F-23
68
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
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 April 3,
1999, the Company had an additional 4.6 million Shares reserved for issuance
under this plan.
Stock options were granted in fiscal 1999 and 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 historical net income and net income per share in
fiscal 1999 and pro forma net income and pro forma net income per share for
fiscal 1998 would have been reduced to the following pro forma amounts:
FISCAL YEAR
1999 1998
Pro forma net income $ 77,953 $ 108,985
Pro forma net income per share -
Basic and Diluted $ 0.78 $ 1.09
The Company used the Black-Scholes option-pricing model to determine
the fair value of grants made in fiscal 1999 and 1998. The weighted average
fair value of options granted was $14.02 and $12.62 per share in fiscal 1999
and 1998, respectively. The following assumptions were applied in determining
the pro forma compensation cost:
FISCAL YEAR
1999 1998
Risk-free interest rate 5.46% 6.45%
Expected dividend yield 0% 0%
Weighted average expected option life 6.0yrs 5.45yrs
Expected stock price volatility 44.0% 42.0%
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 1999 and 1998, the Board of
Directors granted options to purchase 28,500 and 30,000 shares, respectively,
of Class A Common Stock with exercise prices equal to the stock's fair market
value on the date of grant. At April 3, 1999, the Company had 441,500 options
reserved for issuance under this plan.
F-24
69
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
Stock option activity for the Stock Incentive Plan and Non-Employee
Directors Plan in fiscal 1999 and 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
Granted 1,736 27.70
Exercised (4) 26.00
Forfeited (518) 26.24
Expired -- --
------ ------
BALANCE AT APRIL 3, 1999 5,298 $26.53
====== ======
At April 3, 1999, the weighted average remaining contractual life of
outstanding options was 8.5 years and 1.7 million shares were exercisable
at a weighted average exercise price of $26.00 per share. The price range
of options granted and outstanding at April 3, 1999, was $17.13 to $29.91
per share, 95.0% of which were in the range of $26.00 to $28.22 per share.
In March 1998, the Board of Directors authorized the repurchase,
subject to market conditions, of up to $100.0 million of the Company's
Class A Common Stock. Share repurchases under this plan will be made from
time to time in the open market over a two-year period which commenced
April 1, 1998. Shares acquired under the repurchase program will be used
for stock option programs and other corporate purposes. The repurchased
shares have been accounted for as treasury stock at cost. At April 3, 1999,
the Company had repurchased 603,864 shares of its Class A Common Stock at
an aggregate cost of $16.1 million.
13 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 market rental value or
purchase the equipment at the current fair market value. The Company
generally expects that leases will be renewed or replaced by other leases
in the normal course of business.
F-25
70
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
As of April 3, 1999, aggregate minimum annual rental payments under
noncancelable operating leases with lease terms in excess of one year were
payable as follows:
FISCAL YEAR ENDING
2000 $ 63,987
2001 58,367
2002 46,852
2003 39,000
2004 47,318
Thereafter 245,805
--------
$501,329
========
Rent expense charged to operations was $59.6 million, $53.9 million
and $40.8 million, net of sublease income of $1.6 million, $1.5 million and
$2.1 million, in fiscal 1999, 1998 and 1997, 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 $4.1 million,
$3.2 million and $3.7 million in fiscal 1999, 1998 and 1997, respectively.
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 is a defendant in a purported national class action
lawsuit filed in the Delaware Supreme Court in July 1997. The plaintiff has
brought the action allegedly on behalf of a class of persons who purchased
products at the Company's outlet stores throughout the United States at any
time since July 15, 1991. The complaint alleges that advertising and
marketing practices used by the Company in connection with the sales of its
products at its outlet stores violate guidelines established by the Federal
Trade Commission and the consumer protection statutes of Delaware and other
states with statutes similar to Delaware's Consumer Fraud Act and
Delaware's Consumer Contracts Act. The lawsuit seeks, on behalf of the
class, compensatory and punitive damages as well as attorneys' fees. The
Company answered the complaint and filed a motion for judgment on the
pleadings. At a hearing on that motion on March 5, 1999, the Court ruled
that the plaintiff must file an amended complaint within 30 days in order
to avoid dismissal. The plaintiff has filed an amended complaint,
essentially containing the same allegations as the initial complaint, which
the Company has answered. The Company intends to continue to vigorously
defend this lawsuit and believes that it has substantial and meritorious
defenses.
F-26
71
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
In January 1999, two actions were filed in California naming as
defendants more than a dozen United States-based companies that source
apparel garments from Saipan (Commonwealth of the Northern Mariana Islands)
and a large number of Saipan-based factories. The actions assert that the
Saipan factories engage in unlawful practices relating to the recruitment
and employment of foreign workers and that the apparel companies, by virtue
of their alleged relationships with the factories, have violated various
Federal and state laws. One action, filed in California Superior Court in
San Francisco by a union and three public interest groups, alleges unfair
competition and false advertising and seeks equitable relief, unspecified
amounts for restitution and disgorgement of profits, interest and an award
of attorney's fees. The second, filed in Federal Court for the Central
District of California, is brought on behalf of a purported class
consisting of the Saipan factory workers. It alleges claims under the
Federal civil RICO statute, Federal peonage and involuntary servitude laws,
the Alien Tort Claims Act, and state tort law, and seeks equitable relief
and unspecified damages, including treble and punitive damages, interest
and an award of attorney's fees. A third action, brought in Federal Court
in Saipan solely against the garment factory defendants on behalf of a
putative class of their workers, alleges violations of Federal and local
wage and employment laws. The Company has not been named as a defendant in
any of these suits, but the Company sources products in Saipan and counsel
for the plaintiffs in these actions has informed the Company that it is a
potential defendant in these or similar actions. The Company has denied any
liability and is not at this preliminary stage in a position to evaluate
the likelihood of a favorable or unfavorable outcome if it were named in
any such suit.
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-27
72
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
14 QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of certain unaudited quarterly financial
information for fiscal 1999 and 1998:
JUNE 27, SEPT. 26, DEC. 26, APRIL 3,
FISCAL 1999 1998 1998 1998 1999
Net revenues $ 358,776 $ 474,806 $ 447,530 $ 445,747
Gross profit 182,614 233,711 206,869 199,079
Net income (loss) 22,711 49,919 25,351 (7,431)
Net income (loss) per share -
Basic and Diluted $ 0.23 $ 0.50 $ 0.25 ($ .07)
Shares outstanding - Basic 100,195 99,827 99,623 99,623
Shares outstanding - Diluted 100,570 99,878 99,674 99,783
JUNE 28, SEPT. 27, DEC. 27, MARCH 28,
FISCAL 1998 1997 1997 1997 1998
Net revenues $289,650 $423,354 $408,297 $359,243
Gross profit 146,652 208,279 192,921 172,704
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
Shares outstanding - Basic 100,222 100,222 100,222 100,222
Shares outstanding - Diluted 100,222 100,222 100,316 100,429
Net income per share represents both the basic and diluted computation
in accordance with SFAS No. 128, "Earnings per Share", as described in Note
2. The fiscal 1998 pro forma data presents the effects on the historical
financial statements of the pro forma adjustments described in Note 2 as if
they had occurred at March 30, 1997. 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. The actual weighted
average number of shares outstanding was used for all other periods
presented.
F-28
73
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
15 SEGMENT REPORTING
The Company has three reportable business segments: wholesale, retail
and licensing. The Company's reportable segments are individual business
units that offer different products and services. They are managed
separately because each segment requires different strategic initiatives,
promotional campaigns, marketing, and advertising, based upon its own
individual positioning in the market. Additionally, these segments reflect
the reporting basis used internally by senior management to evaluate
performance and the allocation of resources.
The Company's wholesale segment consists of two operating units: Polo
Brands and Collection Brands. Each unit designs, sources, markets and
distributes discrete brands. Both units primarily sell products to major
department and specialty stores and to Company-owned and licensed retail
stores.
The retail segment operates two types of stores: outlet and Polo
stores, including flagship stores. The stores sell Polo products purchased
from the Company's wholesale segment, its licensees and its suppliers.
The licensing segment, which consists of product, international and
home collection, generates revenues from royalties through its licensing
alliances. The licensing agreements grant the licensee 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 accounting policies of the segments are consistent with those
described in Note 2, Significant Accounting Policies. Intersegment sales
and transfers are recorded at cost and treated as a transfer of inventory.
All intercompany revenues and profits or losses are eliminated in
consolidation. Senior management does not review these sales when
evaluating segment performance. The Company's senior management evaluates
each segment's performance based upon income or loss from operations before
interest, nonrecurring gains and losses and income taxes. Corporate
overhead expenses are allocated to each segment based upon each segment's
usage of corporate resources.
The Company's net revenues, income from operations, depreciation and
amortization, total assets and capital expenditures for each segment for
fiscal 1999, 1998 and 1997 were as follows:
FISCAL YEAR
1999 1998 1997
NET REVENUES:
Wholesale $ 859,498 $ 742,674 $ 671,132
Retail 659,352 570,751 379,972
Licensing 208,009 167,119 137,113
---------- ---------- ----------
$1,726,859 $1,480,544 $1,188,217
========== ========== ==========
F-29
74
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
INCOME FROM OPERATIONS:
Wholesale $ 59,796 $ 48,889 $ 43,666
Retail 31,840 61,622 41,084
Licensing 122,509 89,244 72,613
---------- ---------- ----------
214,145 199,755 157,363
Less: Unallocated Restructuring
Charge 58,560 -- --
---------- ---------- ----------
$ 155,585 $ 199,755 $ 157,363
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Wholesale $ 21,111 $ 13,350 $ 7,402
Retail 20,349 10,956 4,116
Licensing 4,954 3,096 2,237
---------- ---------- ----------
$ 46,414 $ 27,402 $ 13,755
========== ========== ==========
SEGMENT ASSETS:
Wholesale $ 376,154 $ 348,687 $ 293,257
Retail 424,203 286,500 169,744
Licensing 73,389 71,531 34,760
Corporate 230,838 118,412 90,997
---------- ---------- ----------
$1,104,584 $ 825,130 $ 588,758
========== ========== ==========
CAPITAL EXPENDITURES:
Wholesale $ 32,013 $ 23,470 $ 17,424
Retail 59,568 30,129 11,977
Licensing 7,817 4,178 3,660
Corporate 42,294 5,302 2,269
---------- ---------- ----------
$ 141,692 $ 63,079 $ 35,330
========== ========== ==========
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.
F-30
75
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 years
ended April 3, 1999 and March 28, 1998 and the combined financial statements for
the year ended March 29, 1997 of Polo Ralph Lauren Corporation and subsidiaries
(the "Company"), and have issued our report thereon dated May 21, 1999; 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 21, 1999
S-1
76
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 APRIL 3, 1999
Allowance for doubtful accounts $ 6,647 $ 1,060 $ 0 $ 560 (a) $ 7,147
Allowance for sales discounts 5,800 34,320 0 33,772 6,348
------- ------- ------- ------- -------
$12,447 $35,380 $ 0 $34,332 $13,495
======= ======= ======= ======= =======
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 0 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 0 26,252 6,556
------- ------- ------- ------- -------
$11,054 $28,141 $ 0 $26,350 $12,845
======= ======= ======= ======= =======
- -----------------------------------
(a) ACCOUNTS WRITTEN-OFF AS UNCOLLECTIBLE.
S-2
77
POLO RALPH LAUREN CORPORATION
INDEX TO EXHIBITS
-------- ------------------------------------------------------------------ ----
EXHIBIT
NUMBER DESCRIPTION PAGE
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (File 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. ** (filed
as Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the Fiscal Year ended March 28, 1998 (the "Fiscal 1998 10-K"))
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)*+
78
10.13 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)*+
10.14 Amendment to Deferred Compensation Agreement made as of
November 10, 1998 between F. Lance Isham and Polo Ralph
Lauren Corporation+
10.15 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)*+
10.16 Amended and Restated Employment Agreement effective November 10,
1998 between F. Lance Isham and Polo Ralph Lauren Corporation+
10.17 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)*
10.18 Form of Credit Agreement between Polo Ralph Lauren Corporation and
The Chase Manhattan Bank (filed as Exhibit 10.24 to the S-1)*
10.19 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)*
10.20 Credit Agreement between Polo Ralph Lauren Corporation and the
Chase Manhattan Bank dated as of March 30, 1999
10.21 Form of Indemnification Agreement between Polo Ralph Lauren
Corporation and its Directors and Executive Officers (filed as
Exhibit 10.26 to the S-1)*
10.22 Employment Agreement dated June 9, 1997 between Ralph Lauren and
Polo Ralph Lauren Corporation (filed as Exhibit 10.27 to the
S-1)*+
10.23 Amended and Restated Employment Agreement effective April 4, 1999
between Ralph Lauren and Polo Ralph Lauren Corporation+
10.24 Employment Agreement effective November 10, 1998 between Hamilton
South and Polo Ralph Lauren Corporation+
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. ** (filed as Exhibit 10.25 to
the Fiscal 1998 10-K.)*
10.26 License Agreement, dated as of October 18, 1995, by and between
Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group,
Inc.** (filed as Exhibit 10.26 to the Fiscal 1998 10-K)*
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 10.24 and 10.25 have been
omitted pursuant to a request for confidential treatment and have
been filed separately with the Securities and Exchange Commission.