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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-13057
POLO RALPH LAUREN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2622036
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(212) 318-7000 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
CLASS A COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant was approximately $1,029,580,287 at June 19,
2002.
At June 19, 2002 44,548,394 shares of the registrant's Class A Common
Stock, $.01 par value, 43,280,021 shares of the registrant's Class B Common
Stock, $.01 par value and 10,570,979 shares of the registrant's Class C Common
Stock, $.01 par value, were outstanding.
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PART I
ITEM 1. BUSINESS.
In this Form 10-K, references to "Polo," "ourselves," "we," "our," and "us"
refer to Polo Ralph Lauren Corporation and its subsidiaries, unless the context
requires otherwise. Due to the collaborative and ongoing nature of our
relationships with our licensees, such licensees are referred to in this Form
10-K as "licensing partners" and the relationships between ourselves and these
licensees are referred to as "licensing alliances". Notwithstanding these
references, however, the legal relationship between ourselves and our licensees
is not one of partnership, but of licensor and licensee.
We are a leader in the design, marketing and distribution of premium
lifestyle products. For 35 years, our reputation and distinctive image have been
consistently developed across an expanding number of products, brands and
international markets. Our brand names, which include "Polo", "Polo by Ralph
Lauren", "Ralph Lauren Purple Label", "Polo Sport", "Ralph Lauren", "RALPH",
"Lauren", "Polo Jeans Co.", "RL", "Chaps" and "Club Monaco", among others,
constitute one of the world's most widely recognized families of consumer
brands. We believe that, under the direction of Ralph Lauren, the
internationally renowned designer, we have influenced the manner in which people
dress and live in contemporary society, reflecting an American perspective and
lifestyle uniquely associated with us and Ralph Lauren.
We combine our consumer insight and design, marketing and imaging skills to
offer, along with our licensing partners, broad lifestyle product collections in
four categories:
- Apparel -- Products include extensive collections of men's, women's and
children's clothing;
- Home -- Ralph Lauren Home offers coordinated products for the home,
including bedding and bath products, interior decor, furniture and
tabletop and gift items;
- Accessories -- Accessories encompass a broad range of products such as
footwear, eyewear, jewelry and leather goods, including handbags and
luggage; and
- Fragrance -- Fragrance and skin care products are sold under our
Glamourous, Romance, Polo, Lauren, Safari and Polo Sport brands, among
others.
RECENT DEVELOPMENTS
In October 2001, we acquired PRL Fashions of Europe S.R.L. which holds
licenses to sell our women's Ralph Lauren apparel in Europe, our men's and boy's
Polo Ralph Lauren apparel in Italy and men's and women's Polo Jeans Co.
collections in Italy. The acquisition of PRL Fashions of Europe completed our
plans to directly own all of our European operations. The purchase price for the
acquisition was approximately $22.0 million in cash, plus the assumption of
certain liabilities, and earn-out payments based on achieving profitability
targets over the first three years, with a guaranteed minimum annual payment of
$3.5 million each year. We allocated the cost of acquiring PRL Fashions to the
assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition. The excess of the purchase price over the net assets
acquired resulted in goodwill of approximately $33.5 million. Consistent with
SFAS No. 141, this goodwill amount is not being amortized.
In addition, in October 2001, we acquired the Ralph Lauren store in
Brussels from one of our licensees.
OPERATIONS
We operate in three integrated segments: wholesale, retail and licensing.
Each is driven by our guiding philosophy of style, innovation and quality.
1
Details of our net revenues are shown in the table below. See also Note 16
to our consolidated financial statements for fiscal 2002, fiscal 2001 and fiscal
2000 for further segment information.
FISCAL YEAR ENDED
--------------------------------------
MARCH 30, MARCH 31, APRIL 1,
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Wholesale sales............................ $1,198,060 $1,053,842 $ 885,246
Retail sales............................... 924,273 928,577 833,980
---------- ---------- ----------
Net sales.................................. 2,122,333 1,982,419 1,719,226
Licensing revenue.......................... 241,374 243,355 236,302
---------- ---------- ----------
Net revenues............................... $2,363,707 $2,225,774 $1,955,528
========== ========== ==========
WHOLESALE
Our wholesale business is divided into two groups: Polo Brands and
Collection Brands. In both these wholesale groups, we offer several discrete
brand offerings. Each collection 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.
POLO BRANDS
The Polo Brands group sources, markets and distributes products under the
following brands:
POLO BY RALPH LAUREN. The Polo by Ralph Lauren menswear collection is a
complete men's wardrobe consisting of products related by theme, style, color
and fabric. Polo by Ralph Lauren menswear is generally priced at a range of
price points within the men's premium ready-to-wear apparel market. We currently
sell this collection through department stores, Ralph Lauren specialty stores
and Polo Ralph Lauren store doors in the United States, including department
store shop-within-shops.
BLUE LABEL. In fall 2002, we will introduce our Blue Label collection of
womenswear, which will be modern interpretations of classic Ralph Lauren styles
with a strong weekend focus. We plan to offer the Blue Label collection
domestically through Polo Ralph Lauren stores and internationally through Polo
Ralph Lauren stores and selected wholesale accounts in Europe and Asia. In
Japan, our Blue Label line will be sold under the Ralph Lauren brand name.
POLO SPORT. The Polo Sport collection 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.
POLO GOLF. The Polo Golf collection 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. We sell the Polo Golf collection in
the United States through leading golf clubs, pro shops and resorts, in addition
to department, specialty and Polo Ralph Lauren stores.
RLX POLO SPORT. The RLX Polo Sport collection of menswear and womenswear
consists of functional sport and outdoor apparel for running, cross-training,
skiing, snowboarding and cycling. We sell RLX Polo Sport in the United States
through athletic specialty stores, in addition to Polo Ralph Lauren stores, at
price points competitive with those charged by other authentic sports apparel
companies.
2
COLLECTION BRANDS
Our Collection Brands group sources, markets and distributes products under
the Women's Ralph Lauren Collection and Ralph Lauren Black Label brands and the
Men's Ralph Lauren/Purple Label Collection brand.
RALPH LAUREN COLLECTION AND RALPH LAUREN BLACK LABEL. The Ralph Lauren
Collection expresses our up-to-the-moment fashion vision for women. Ralph Lauren
Black Label includes timeless versions of our most successful Collection styles,
as well as newly-designed classic signature styles. Collection and Black Label
are offered for limited distribution to premier fashion retailers and through
our stores. Price points are at the upper end or luxury ranges.
RALPH LAUREN/PURPLE LABEL COLLECTION. In fall 1995, we introduced our
Purple Label collection of men's tailored clothing and, in fall 1997, to
complement the tailored clothing line, we launched our Purple Label sportswear
line. We sell the Purple Label collection through a limited number of premier
fashion retailers.
DOMESTIC CUSTOMERS AND SERVICE
GENERAL. Consistent with the appeal and distinctive image of our products
and brands, we sell our menswear, womenswear and home furnishings products
primarily to leading upscale department stores, specialty stores and golf and
pro shops located throughout the United States, which have the reputation and
merchandising expertise required for the effective presentation of Polo Ralph
Lauren products. See "-- Our Licensing Alliances -- Product Licensing
Alliances".
Our wholesale and home furnishings products are distributed through the
primary distribution channels in the United States listed in the table below. In
addition, we also sell excess and out-of-season products through secondary
distribution channels.
APPROXIMATE NUMBER OF DOORS
AS OF MARCH 30, 2002
------------------------------------
POLO COLLECTION RALPH LAUREN
BRANDS BRANDS HOME
------ ---------- ------------
Department Stores.................................. 1,982 129 1,481
Specialty Stores................................... 558 38 25
Polo Ralph Lauren Stores........................... 112 31 19
Golf and Pro Shops................................. 1,993 -- --
Department stores represent the largest customer group of our wholesale
group. Major department store customers of ours (together with the percentage of
wholesale net sales that they represented in fiscal 2002) are:
- Federated Department Stores, Inc., which represented 17.3%,
- Dillard Department Stores, Inc., which represented 16.1%, and
- The May Department Stores Company, which represented 15.6%.
Collection Brands, Polo Brands and our Ralph Lauren Home products are
primarily sold through their respective sales forces, which employ an aggregate
of approximately 170 salespersons as of March 30, 2002. An independent sales
representative promotes sales to U.S. military exchanges. Our Collection Brands
group and Ralph Lauren Home division maintain their primary showrooms in New
York City. Regional showrooms for the Polo Brands and regional sales
representatives for Ralph Lauren Home are located in:
- Atlanta - Dallas
- Chicago - Los Angeles
3
SHOP-WITHIN-SHOPS. As a critical element of our distribution to department
stores, we and our licensing partners utilize shop-within-shops to enhance brand
recognition, to permit more complete merchandising of our lines by the
department stores and to differentiate the presentation of products.
Shop-within-shops fixed assets primarily include items such as customized
freestanding fixtures, moveable wallcases and components, decorative items and
flooring. We capitalize our share of the cost of these fixed assets and amortize
them using the straight-line method over their estimated useful lives of three
to five years.
During fiscal 2002, we added approximately 270 shop-within-shops and
refurbished approximately 60 shop-within-shops. At March 30, 2002, in the United
States we had approximately 2,600 shop-within-shops dedicated to our products
and more than 3,000 shop-within-shops dedicated to our licensed products.
Excluding significantly larger shop-within-shops in key department store
locations, the size of our shop-within-shops typically ranges from approximately
600 to 1,500 square feet for Polo Brands, from approximately 600 to 1,000 square
feet for our Collection Brands, and from approximately 300 to 900 square feet
for home furnishings. In total, we estimate that approximately 2.3 million
square feet of department store space in the United States is dedicated to our
shop-within-shops. In addition to shop-within-shops, we use exclusively fixtured
areas in department stores.
BASIC STOCK REPLENISHMENT PROGRAM. Basic products such as knit shirts,
chino pants and oxford cloth shirts can be ordered at any time through our basic
stock replenishment programs. For customers who reorder basic products, we
generally ship these products within one to five days of order receipt. These
products accounted for approximately 6.0% of our wholesale net sales fiscal
2002. We have also implemented a seasonal quick response program to allow
replenishment of products which can be ordered for only a portion of each year.
Some Ralph Lauren Home licensing partners also offer a basic stock replenishment
program which includes towels, bedding and tabletop products. Basic stock
products accounted for approximately 88% of our net sales of our Ralph Lauren
Home licensing partners in fiscal 2002.
DIRECT RETAILING
We operate retail stores dedicated to the sale of our products. Located in
prime retail areas, our 94 full-price stores operate under the following names:
- Ralph Lauren - Polo Ralph Lauren Children
- Polo Ralph Lauren - Club Monaco/Caban
- Polo Sport
Our 142 outlet stores are generally located in outlet malls and operate
under the Polo Ralph Lauren outlet store, Polo Jeans Co. outlet store, Ralph
Lauren Home outlet store and Club Monaco outlet names.
In addition to our own retail operations, as of March 30, 2002, we had
granted licenses to independent parties to operate two stores in the United
States and 100 stores internationally. We receive the proceeds from the sale of
our products, which are included in wholesale net sales, to these stores and
also receive royalties, which are included in licensing revenue, from our
licensing partners who sell to these stores. We generally do not receive any
other compensation from these licensed store operators. See "-- Our Licensing
Alliances".
FULL-PRICE STORES
In addition to generating sales of our products, our full-price stores set,
reinforce and capitalize on the image of our brands. We have six Ralph Lauren
stores which showcase our upper end luxury styles and products and demonstrate
our most refined merchandising techniques. We also operate 33 Polo Ralph Lauren
stores and 55 Club Monaco stores. Ranging
4
in size from approximately 2,000 to over 30,000 square feet, these full-price
stores are situated in upscale regional malls and major upscale street locations
generally in large urban markets. Our stores are generally leased for initial
periods ranging from five to 15 years with renewal options.
In fiscal 2002, we had two Polo Ralph Lauren store openings, net of
closings. We also opened four new Club Monaco Stores in Cabazon, California; San
Francisco, California; Lenox, Georgia and Valley Fair, California and closed
four Club Monaco stores in Metrotown, British Columbia; Parklane, Nova Scotia;
San Francisco, California and Yorkdale, Ontario.
OUTLET STORES
We extend our reach to additional consumer groups through our 94 Polo Ralph
Lauren outlet stores, 22 Polo Jeans Co. outlet stores, 10 Club Monaco outlet
stores and 16 European outlet stores.
- Polo Ralph Lauren outlet stores offer selections of our menswear,
womenswear, children's apparel, accessories, home furnishings and
fragrances. Ranging in size from 3,000 to 20,000 square feet, with an
average of approximately 8,900 square feet, the stores are principally
located in major outlet centers in 33 states and Puerto Rico.
- Polo Jeans Co. outlet 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 5,000 square feet, with an average of 3,750
square feet, and are principally located in major outlet centers in 12
states.
- Club Monaco outlet stores range in size from 6,000 to 18,500 square feet,
with an average of 9,500 square feet, and offer basic and fashion Club
Monaco items.
During fiscal 2002, we added four new outlet stores (net of store
closings). Outlet stores purchase products directly from us, including our
retail stores, our product licensing partners and our suppliers. Outlet stores
purchase products from us generally at cost, and from our domestic product
licensing partners and our retail stores at negotiated prices. Outlet stores
also source basic products and styles directly from our suppliers. In fiscal
2002, our domestic outlet stores purchased approximately 15.0% of their products
from us, 54.0% from our product licensing partners, and 31.0% from other
suppliers of products.
OUR LICENSING ALLIANCES
Through licensing alliances, we combine our consumer insight and design,
marketing and imaging skills with the specific product or geographic
competencies of our licensing partners to create and build new businesses. We
seek out licensing partners who typically:
- are leaders in their respective markets,
- contribute the majority of our product development costs,
- provide the operational infrastructure required to support the business,
and
- own the inventory.
We grant product and international licensing partners the right to
manufacture and sell at wholesale specified products under one or more of our
trademarks. Our international licensing partners produce and source products
independently, as well as in conjunction with us and our product licensing
partners. As compensation for our contributions under these agreements, each
licensing partner pays us royalties based upon its sales of our products,
subject generally, to payment of a minimum royalty. Other than our Ralph Lauren
Home collection licenses, these payments generally range from five to eight
percent of the licensing partners' sales of the
5
licensed products. In addition, licensing partners are required to allocate
between approximately two and four percent of their sales to advertise our
products. Larger allocations are required in connection with launches of new
products or in new territories.
We work closely with our 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 our brands. Virtually all aspects of the design,
production quality, packaging, merchandising, distribution, advertising and
promotion of Polo Ralph Lauren products are subject to our prior approval and
continuing oversight. The result is a consistent identity for Polo Ralph Lauren
products across product categories and international markets.
We had 16 product, 11 home collection and 12 international licensing
partners as of March 30, 2002. We derive a substantial portion of our net income
from the licensing revenue we receive from our licensing partners. Our largest
licensing partners in fiscal 2002 by licensing revenue were:
- Jones Apparel Group, Inc. accounting for 26.9%,
- WestPoint Stevens, Inc. accounting for 14.2%, and
- Seibu Department Stores, Ltd. accounting for 11.6%.
PRODUCT LICENSING ALLIANCES
As of March 30, 2002, we had agreements with 16 product licensing partners
relating to our men's and women's sportswear, men's tailored clothing,
children's apparel, personalwear, accessories and fragrances. The products
offered by our product licensing partners are listed below.
LICENSING PARTNER LICENSED PRODUCT CATEGORY
----------------- -------------------------
Jones Apparel Group, Inc. Women's Lauren and Ralph Sportswear
L'Oreal S.A./Cosmair, Inc. Men's and Women's Fragrances and Skin
Care Products
Sun Apparel, Inc. (a subsidiary of Jones Men's and Women's Polo Jeans Co. Casual
Apparel Group, Inc.) Apparel and Sportswear
Corneliani S.p.A. Men's Polo Tailored Clothing
Peerless Inc. Men's Chaps and Lauren Tailored Clothing
S. Schwab Company, Inc. Children's Apparel
Sara Lee Corporation Men's and Children's Personal Wear
Apparel
Ralph Lauren Footwear, Inc. (a subsidiary Men's and Women's Dress, Casual and
of Reebok International Ltd.) Performance Athletic Footwear
Wathne, Inc. Handbags and Luggage
Hot Sox, Inc. Men's, Women's and Boys' Hosiery
New Campaign, Inc. Belts and other Small Leather Goods
Echo Scarves, Inc. Scarves and Gloves for Men and Women
Carolee, Inc. Jewelry
Safilo USA, Inc. Eyewear
The Warnaco Group, Inc. Men's Chaps Sportswear
Authentic Fitness Products, Inc. (a Women's & Girls' Swimwear
subsidiary of Warnaco, Inc.)
6
RALPH LAUREN HOME
Together with our licensing partners, we offer an extensive collection of
home products which draw upon, and add to, the design themes of our other
product lines, contributing to our complete lifestyle concept. Products are sold
under the Ralph Lauren Home brands in three primary categories:
- bedding and bath,
- home decor, and
- home improvement.
In addition to designing and developing the creative concepts and products
for Ralph Lauren Home, we manage the marketing and distribution of our brands,
and in some cases, the sales of our products for our licensees. Together with
our eight domestic and three international home product licensing partners,
representatives of our design, merchandising, product development and sales
staffs collaborate to conceive, develop and merchandise the various products as
a complete home furnishing collection. Our personnel market and sell the
products to domestic customers and certain international accounts. In general,
our licensing partners manufacture, own the inventory and ship the products.
We perform a broader range of services for our Ralph Lauren Home licensing
partners, as compared to our other licensing partners, including marketing and
sales. As a result, we receive a higher royalty rate from our Ralph Lauren Home
collection licensing partners, typically ranging from 15% to 20%. Our Ralph
Lauren Home licensing alliances generally have three to five year terms and
often grant the licensee conditional renewal options. The services we perform
are:
- sales - operating showrooms
- marketing - incurring advertising expenses
Ralph Lauren Home products are positioned at the upper tiers of their
respective markets and are offered at a range of price levels. These are
generally distributed through several channels of distribution, including:
- department stores - customer direct mail catalogs
- specialty home furnishings stores - home centers
- interior design showrooms - the Internet
As with our other products, our use of shop-within-shops is central to our
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.
7
The Ralph Lauren Home products offered by us and our domestic licensing
partners are:
CATEGORY PRODUCT LICENSING PARTNER
-------- ------- -----------------
Bedding and Bath.... Sheets, bedding accessories, WestPoint Stevens, Inc.
towels and shower curtains,
blankets, down comforters,
other decorative bedding and
accessories
Bath rugs Lacey Mills
Home Decor.......... Fabric and wallpaper P. Kaufmann, Inc.
Furniture Henredon Furniture
Industries, Inc.
Flatware and frames Reed and Barton Corporation
Table linens, placemats, Brownstone
tablecloths, napkins
Home Improvement.... Interior and exterior paints ICI/Glidden Company
and stains
Broadloom carpets and area Karastan, a division of
rugs Mohawk Carpet Corporation
WestPoint Stevens, Inc. accounted for approximately 64% of Ralph Lauren
Home licensing revenue in fiscal 2002.
INTERNATIONAL LICENSING ALLIANCES
We believe that international markets offer additional opportunities for
our quintessential American designs and lifestyle image. We are committed to the
global development of our 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 Ralph Lauren or Polo Ralph Lauren stores in these
markets.
We work with our 12 international licensing partners to facilitate this
international expansion. International licensing partners also operate stores,
which at March 30, 2002, included 56 Polo Ralph Lauren stores, 3 Polo Sport
stores, 19 Polo Jeans Co. stores, 13 Polo outlet stores, 2 Children's stores and
7 Ralph Lauren stores.
Our international licensing partners acquire the right to source, produce,
market and/or sell some or all of our products in a given geographical area.
Economic arrangements are similar to those of our domestic product licensing
partners. We design licensed products either alone or in collaboration with our
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 often compensated.
Seibu Department Stores, Ltd. (which oversees distribution of virtually all
of our products in Japan), and L'Oreal S.A. (which distributes fragrances and
toiletries outside of the United States) accounted for approximately 51% and 11%
of international licensing revenue in fiscal 2002, respectively.
8
Our ability to maintain and increase royalties under foreign licenses is
dependent upon certain factors not within our control, including:
- fluctuating currency rates,
- currency controls,
- withholding requirements levied on royalty payments,
- governmental restrictions on royalty rates,
- political instability, and
- local market conditions.
See "Risk Factors -- Risks Related to Our Business -- Our business is exposed to
domestic and foreign currency fluctuations" and "Risk Factors -- Risks Related
to Our Business -- Our business is subject to risks associated with importing
products".
DESIGN
Our products reflect a timeless and innovative American style associated
with and defined by Polo and Ralph Lauren. Our consistent emphasis on innovative
and distinctive design has been an important contributor to the prominence,
strength and reputation of the Polo Ralph Lauren brands.
We form design teams around our brands and product categories to develop
concepts, themes and products for each of our 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,
Ralph Lauren and our design staff, which is divided into five departments:
- Menswear - Accessories
- Womenswear - Home
- Children's
Club Monaco's design staff is located in New York and is divided into three
teams:
- Menswear
- Womenswear
- Home
We operate a research and development facility in Greensboro, North
Carolina, a testing lab in Singapore and pattern rooms in New York, New Jersey
and Singapore.
MARKETING
Our marketing program communicates the themes and images of the Polo Ralph
Lauren brands and is an integral feature of our product offering. Worldwide
marketing is managed on a centralized basis through our advertising and public
relations departments in order to ensure consistency of presentation.
We create the distinctive image advertising for all our Polo Ralph Lauren
products, conveying the particular message of each brand within the context of
our core themes. Advertisements generally portray a lifestyle rather than a
specific item and often include a variety of Polo Ralph Lauren products offered
by both ourselves and our licensing partners. Our primary advertising
9
medium is print, with multiple page advertisements appearing regularly in a
range of fashion, lifestyle and general interest magazines. 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, some product categories utilize television and outdoor media
in their marketing programs. Specifically, RL Media has run television
commercials to promote Polo.com. We believe the commercials develop brand
awareness and provide traffic to our many businesses.
Our licensing partners typically spend between two and four percent of
their sales of our products for advertising. We directly coordinate advertising
placement for domestic product licensing partners. Together with our licensing
partners we collectively spent more than $209 million worldwide to advertise and
promote Polo Ralph Lauren products in fiscal 2002.
We conduct a variety of public relations activities. Each of our spring and
fall womenswear collections are presented at major fashion shows in New York,
which typically generate extensive domestic and international media coverage. We
introduce each of the spring and fall menswear collections at presentations
organized for the fashion press. In addition, we organize in-store appearances
by our models and sponsors, professional golfers, snowboarders, triathletes and
sports teams.
SOURCING, PRODUCTION AND QUALITY
Over 360 different manufacturers worldwide produce our apparel products. We
source finished products and piece goods. Piece goods include fabric, buttons
and similar raw materials and are sourced primarily with respect to our
Collection Brands. Finished products consist of manufactured and fully assembled
products ready for shipment to our customers. We contract for the manufacture of
our products and do not own or operate any production facilities of our own. As
part of our efforts to reduce costs and enhance the efficiency of our sourcing
process, we have shifted a substantial portion of our sourcing to foreign
suppliers. In fiscal 2002, approximately 11%, by dollar volume, of our products
were produced in the U.S. and its territories; and approximately 89% by dollar
volume were produced in Hong Kong, Canada and other foreign countries. See "Risk
Factors -- Risks Related to Our Business -- Our business is subject to risks
associated with importing products".
Two manufacturers engaged by us each accounted for approximately 11% and 8%
of our total production during fiscal 2002. The primary production facilities of
these two manufacturers are located in Asia. Two other manufacturers each
accounted for approximately 6% and 4% of our total production in fiscal 2002.
Production is divided broadly into two segments:
- FOB Purchasing -- purchases of finished products, where the supplier is
responsible for the purchasing and carrying of raw materials, and
- CMT Purchasing -- cut, make and trim, purchasing, where we are
responsible for purchasing and moving raw materials to finished product
assemblers located around the world.
We must commit to manufacture the majority of our garments before we
receive customer orders. We also must commit to purchase fabric from mills well
in advance of our sales. If we overestimate the demand for a particular product
which we cannot sell to our primary customers, we may use the excess for
distribution in our outlet stores or sell the product through secondary
distribution channels. If we overestimate 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 our outlet stores.
10
We have been working closely with suppliers in recent years to reduce lead
times to maximize fulfillment (e.g., shipment) of orders and to permit re-orders
of successful programs. In particular, we have 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 our product management
department in the United States. In the Far East, our suppliers are supervised
by our wholly owned subsidiary, which performs buying agent functions for us and
third parties. All garments are produced according to our 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. Procedures have been implemented under our
vendor certification program, so that quality assurance is focused upon as early
as possible in the production process, allowing merchandise to be received at
the distribution facilities and shipped to customers with minimal interruption.
We retain independent buying agents in Europe and South America to assist
us 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 we operate. We compete with numerous designers and
manufacturers of apparel and accessories, fragrances and home furnishing
products, domestic and foreign, including Liz Claiborne, Inc., Nautica
Enterprises, Inc., Jones Apparel Group, Inc., Tommy Hilfiger Corporation, Calvin
Klein, Inc. and Giorgio Armani Spa in the branded apparel market sector, and
Gucci Group N.V. and LVMH Moet Hennessy Louis Vuitton. Some of our competitors
may be significantly larger and have substantially greater resources than us. We
compete primarily on the basis of fashion, quality, and service, which depend on
our ability to:
- shape and stimulate consumer tastes and preferences by producing
innovative, attractive and exciting products, brands and marketing,
- anticipate and respond to changing consumer demands in a timely manner,
- maintain favorable brand recognition,
- develop and produce high quality products that appeal to consumers,
- appropriately price our products,
- provide strong and effective marketing support,
- ensure product availability, and
- obtain sufficient retail floor space and effectively present our products
at retail.
See "Risk Factors -- Risks Relating to the Industry in Which we
Compete -- We face intense competition in the worldwide apparel industry".
DISTRIBUTION
To facilitate distribution, men's products are shipped from manufacturers
to our distribution center in Greensboro, North Carolina for inspection,
sorting, packing and shipment to retail customers. Our 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.
Distribution of our women's product was provided by a "pick and pack" facility
under a warehousing distribution agreement with an
11
unaffiliated third party. This agreement provides that the warehouse distributor
will perform storage, quality control and shipping services for us. In return,
we 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 was through December 1, 2001 and since has been renewed.
Outlet store distribution and warehousing is principally handled through
the Greensboro distribution center. Our full-price store distribution is
provided by the facility in Greensboro, North Carolina and a facility in New
Jersey which services our stores in New York City and East Hampton, New York.
Club Monaco utilizes third party distribution facilities in Mississauga,
Ontario and Los Angeles, California. Our licensing partners are responsible for
the distribution of licensed products.
We continually evaluate the adequacy of our warehousing and distribution
facilities.
MANAGEMENT INFORMATION SYSTEM
We design our management information systems to make the marketing,
manufacturing, importing and distribution functions of our business operate more
efficient by providing, among other things:
- comprehensive order processing,
- production information,
- accounting information, and
- management information, for the marketing, manufacturing, importing and
distribution functions of our business.
We have installed sophisticated point-of-sale registers in our stores and
outlet stores that enable us to track inventory from store receipt to final sale
on a real-time basis. We believe our merchandising and financial system, coupled
with our point-of-sale registers and software programs, allow for rapid stock
replenishment, concise merchandise planning and real-time inventory accounting
practices.
We also utilize an electronic data interchange, or EDI, system to
facilitate the processing of replenishment and fashion orders from our wholesale
customers, the movement of goods through distribution channels, and the
collection of information for planning and forecasting. We have EDI
relationships with customers who represent a significant majority of our
wholesale business, and we are working to expand our EDI capabilities to include
most of our suppliers.
CREDIT CONTROL
We manage our own credit and collection functions. We sell our merchandise
primarily to major department stores across the United States and extend credit
based on an evaluation of the customer's financial condition, usually without
requiring collateral. We monitor credit levels and the financial condition of
our customers on a continuing basis to minimize credit risk. We do not factor
our accounts receivables or maintain credit insurance to manage the risks of bad
debts. Our bad debt write-offs were $2.5 million in fiscal 2002, representing 1%
of net revenues. See "Risk Factors -- Risks Related to Our Business -- Our
business could be negatively impacted by the financial stability of our
customers".
BACKLOG
We generally receive 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
12
cancellation for late delivery. As of March 30, 2002, our summer and fall
backlog was $147.8 million and $285.1 million respectively, as compared to
$164.9 million and $355.6 million, respectively for summer and fall at March 31,
2001. Our backlog depends upon a number of factors, including the timing of the
market weeks for our particular lines, during which a significant percentage of
our orders are received, and the timing of shipments. As a consequence, a
comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of eventual shipments. Aside from the above factors, the
backlog for spring and summer 2002 was less than the backlog for the same
periods of 2001, primarily due to the discontinuance of the women's Polo Sport
line, effective summer 2002, and the elimination of the men's Lauren collection
for all items other than ties, partially offset by an overall increase in summer
orders in Europe. In addition, fiscal 2002 reflects the change in the fiscal
year end of certain of our European subsidiaries as reported in our consolidated
financial statements. See Consolidation of European Entities -- Change in
Reporting Period.
TRADEMARKS
We own the "Polo", "Ralph Lauren" and the famous polo player astride a
horse trademarks in the United States. Other trademarks we own include, among
others:
- "Chaps" - "RRL"
- "Polo Sport" - "Club Monaco"
- "Lauren/Ralph Lauren" - various trademarks pertaining to
- "RALPH" fragrances and cosmetics
In acquiring the "RRL" trademarks, we agreed to allow Mr. Lauren to retain
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 has
the right to engage in personal projects involving film or theatrical
productions (not including or relating to our business) through RRL Productions,
Inc., a company wholly owned by Mr. Lauren.
Our trademarks are the subjects 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 we continue to expand our worldwide usage and registration
of related trademarks. In general, trademarks remain valid and enforceable as
long as the marks are used in connection with the products and services and the
required registration renewals are filed. We regard the license to use the
trademarks and our other proprietary rights in and to the trademarks as valuable
assets in marketing our products and, on a worldwide basis, vigorously seek to
protect them against infringement. See "-- Legal Proceedings". As a result of
the appeal of our trademarks, our products have been the object of
counterfeiting. We have 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, our rights to some or all of our
trademarks may not be clearly established. In the course of our international
expansion, we have experienced conflicts with various third parties which have
acquired ownership rights in certain trademarks, including "Polo" and/or a
representation of a polo player astride a horse, which would have impeded our
use and registration of our principal trademarks. While such conflicts are
common and may arise again from time to time as we continue our international
expansion, we have successfully resolved such conflicts in the past through both
legal action and negotiated settlements with third-party owners of the
conflicting marks. See "Risk Factors -- Risks Related
13
to Our Business -- Our trademarks and other intellectual property rights may not
be adequately protected outside the United States."
Two agreements by which we resolved conflicts with third-party owners of
other trademarks currently impose restrictions or monetary obligations on us. In
one, we 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, we have acquired that third party's portfolio of trademark
registrations in exchange for the payment of our royalties in Central America
and South America and parts of the Caribbean solely in respect of our use of
trademarks which include "Polo" and the polo player symbol, and not, for
example, "Ralph Lauren" alone, "Lauren/Ralph Lauren", "RRL", and others. This
obligation to share royalties with respect to Central and South America and
parts of the Caribbean expires in 2013, but we also have 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
United Kingdom, Hong Kong and South Africa. Under the agreement, the third party
retains the right to use the "Polo" and polo player symbol marks in South Africa
and all other countries that comprise Sub-Saharan Africa, and we agreed to
restrict use of those Polo marks in those countries to fragrances and cosmetics
solely as part of the composite trademark "Ralph Lauren" and the polo player
symbol, as to which our use is unlimited, and to the use of the polo player
symbol mark on women's and girls' apparel and accessories and women's and girl's
handkerchiefs. By agreeing to those restrictions, we secured the unlimited right
to use our trademarks in the United Kingdom and Hong Kong without payment of any
kind, and the third party is prohibited from distributing products under those
trademarks in those countries.
GOVERNMENT REGULATION
Our 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. Our imported products are also subject to U.S. customs duties which
comprise a material portion of the cost of the merchandise. See "Risk
Factors -- Risks Related To Our Business -- Our business is subject to risks
associated with importing products".
Apparel products are subject to regulation by the Federal Trade Commission
in the United States. Regulations relate principally to the labeling of our
products. We believe that we are in substantial compliance with these
regulations, as well as applicable federal, state, local, and foreign rules and
regulations governing the discharge of materials hazardous to the environment.
We do not estimate any significant capital expenditures for environmental
control matters either in the current year or expected in the near future. Our
licensed products and licensing partners are also subject to regulation. Our
agreements require our licensing partners to operate in compliance with all laws
and regulations, and we are not aware of any violations which could reasonably
be expected to have a material adverse effect on our business.
Although we have not in the past suffered any material inhibition from
doing business in desirable markets in the past, we cannot assure you that
significant impediments will not arise in the future as we expand product
offerings and additional trademarks to new markets.
14
EMPLOYEES
As of March 30, 2002, we had approximately 10,100 employees, consisting of
approximately 7,500 in the United States and approximately 2,600 in foreign
countries. Approximately 34 of our 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 our womenswear subsidiary has adopted. We consider
our relations with both our union and non-union employees to be good.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this Form 10-K or incorporated by reference into this
Form 10-K, in future filings by us with the SEC, in our 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. Forward-looking statements are based on current
expectations and are indicated by words or phrases such as "anticipate",
"estimate", "expect", "project", "we believe", "is or remains optimistic",
"currently envisions" and similar words or phrases and involve known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Some of the factors that could affect our financial performance or
cause actual results to differ from our estimates in, or underlying, such
forward-looking statements are set forth under the heading of "Risk Factors".
Forward-looking statements include statements regarding, among other items:
- our anticipated growth strategies,
- our intention to introduce new products and enter into new licensing
alliances,
- our plans to open new retail stores,
- anticipated effective tax rates in future years,
- future expenditures for capital projects,
- our ability to continue to maintain our brand image and reputation,
- our ability to continue to initiate cost cutting efforts and improve
profitability,
- our plans to expand internationally, and
- our efforts to improve the efficiency of our distribution system.
These forward-looking statements are based largely on our expectations and
are subject to a number of risks and uncertainties, many of which are beyond our
control. Actual results could differ materially from these forward-looking
statements as a result of the facts described in "Risk Factors" including, among
others, changes in the competitive marketplace, including the introduction of
new products or pricing changes by our competitors, changes in the economy, and
other events leading to a reduction in discretionary consumer spending. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, we cannot assure you that the
forward-looking information contained in this Form 10-K will in fact transpire.
RISK FACTORS
The following risk factors should be read carefully in connection with
evaluating our business and the forward-looking statements contained in this
Annual Report. Any of the following risks
15
could materially adversely affect our business, our operating results, our
financial condition and the actual outcome of matters as to which
forward-looking statements are made in this Report.
RISKS RELATED TO OUR BUSINESS
THE LOSS OF THE SERVICES OF MR. RALPH LAUREN OR OTHER KEY PERSONNEL COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Mr. Ralph Lauren's leadership in the design, marketing and operational
areas has been a critical element of our success. The loss of his services, or
any negative market or industry perception arising from his loss, could have a
material adverse effect on our business. Our other executive officers have
substantial experience and expertise in our business and have made significant
contributions to our growth and success. The unexpected loss of services of one
or more of these individuals could also adversely affect us. We are currently
not protected by a material amount of key-man or similar life insurance covering
Mr. Lauren or any of our other executive officers. We have entered into
employment agreements with Mr. Lauren and several other of our executive
officers.
A SUBSTANTIAL PORTION OF OUR NET SALES AND GROSS PROFIT IS DERIVED FROM A SMALL
NUMBER OF LARGE CUSTOMERS.
Several of our department store customers, including some under common
ownership, account for significant portions of our wholesale net sales. We
believe that a substantial portion of sales of our licensed products by our
domestic licensing partners, including sales made by our sales force of Ralph
Lauren Home products, are also made to our largest department store customers.
Our ten largest customers accounted for approximately 77.7% of our wholesale net
sales during fiscal 2002.
We do not enter into long-term agreements with any of our customers.
Instead, we enter into a number of purchase order commitments with our customers
for each of our lines every season. A decision by the controlling owner of a
group of stores or any other significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to decrease the
amount of merchandise purchased from us or our licensing partners, or to change
their manner of doing business with us or our licensing partners, could have a
material adverse effect on our financial condition and results of operations.
See "Business -- Operations -- Domestic Customers and Service".
OUR BUSINESS COULD BE NEGATIVELY IMPACTED BY THE FINANCIAL INSTABILITY OF OUR
CUSTOMERS.
We sell our merchandise primarily to major department stores across the
United States and extend credit based on an evaluation of each customer's
financial condition, usually without requiring collateral. However, the
financial difficulties of a customer could cause us to curtail business with
that customer. We may also assume more credit risk relating to that customer's
receivables. We had three customers, Dillard Department Stores, Inc., Federated
Department Stores, Inc. and The May Department Stores Company, which in
aggregate constituted 35% of trade accounts receivable outstanding at March 30,
2002 and 52.0% at March 31, 2001. Our inability to collect on our trade accounts
receivable from any one of these customers could have a material adverse effect
on our business or financial condition. See "Business -- Credit Control".
OUR BUSINESS COULD SUFFER AS A RESULT OF A MANUFACTURER'S INABILITY TO PRODUCE
OUR GOODS ON TIME AND TO OUR SPECIFICATIONS.
We do not own or operate any manufacturing facilities and therefore depend
upon independent third parties for the manufacture of all of our products. Our
products are
16
manufactured to our specifications by both domestic and international
manufacturers. During fiscal 2002, approximately 11%, by dollar value, of our
men's and women's products were manufactured in the United States and
approximately 89%, by dollar value, of these products were manufactured in Hong
Kong and other foreign countries. The inability of a manufacturer to ship orders
of our products in a timely manner or to meet our quality standards could cause
us to miss the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on our financial condition and results of operations.
OUR BUSINESS COULD SUFFER IF WE NEED TO REPLACE MANUFACTURERS.
We compete with other companies for the production capacity of our
manufacturers and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we experience a
significant increase in demand, or if an existing manufacturer of ours must be
replaced, we may have to expand our third-party manufacturing capacity. We
cannot assure you that this additional capacity will be available when required
on terms that are acceptable to us. See "Business -- Sourcing, Production and
Quality". We enter into a number of purchase order commitments each season
specifying a time for delivery, method of payment, design and quality
specifications and other standard industry provisions, but do not have long-
term contracts with any manufacturer. None of the manufacturers we use produces
our products exclusively.
IF A MANUFACTURER OF OURS FAILS TO USE ACCEPTABLE LABOR PRACTICES, OUR BUSINESS
COULD SUFFER.
Two of the manufacturers engaged by us accounted for approximately 11% and
8% of our total production during fiscal 2002. The primary production facilities
of these two manufacturers are located in Asia. Two other manufacturers each
accounted for 6% and 4% in fiscal 2002. We require our licensing partners and
independent manufacturers to operate in compliance with applicable laws and
regulations. While our internal and vendor operating guidelines promote ethical
business practices and our staff periodically visits and monitors the operations
of our independent manufacturers, we do not control these manufacturers or their
labor practices. The violation of labor or other laws by an independent
manufacturer of ours, or by one of our licensing partners, or the divergence of
an independent manufacturer's or licensing partner's labor practices from those
generally accepted as ethical in the United States, could interrupt, or
otherwise disrupt the shipment of finished products to us or damage our
reputation. Any of these, in turn, could have a material adverse effect on our
financial condition and results of operations.
WE ARE DEPENDENT UPON THE REVENUE GENERATED BY OUR LICENSING ALLIANCES.
Approximately 42.7% of our income from operations for fiscal 2002 was
derived from licensing revenue received from our licensing partners.
Approximately 52.8% of our licensing revenue for fiscal 2002 was derived from
three licensing partners:
- Jones Apparel Group, Inc. accounted for 26.9%,
- Westpoint Steven's, Inc. accounted for 14.2%, and
- Seibu Department Stores, Ltd. accounted for 11.6%.
We had no other licensing partner which accounted for more than 10.0% of our
licensing revenue in fiscal 2002 or fiscal 2001. The interruption of the
business of any one of our material licensing partners due to any of the factors
discussed immediately below could also adversely affect our licensing revenues
and net income.
17
WE RELY ON OUR LICENSING PARTNERS TO PRESERVE THE VALUE OF OUR LICENSES.
The risks associated with our own products also apply to our licensed
products in addition to any number of possible risks specific to a licensing
partner's business, including, for example, risks associated with a particular
licensing partner's ability to:
- obtain capital,
- manage its labor relations,
- maintain relationships with its suppliers,
- manage its credit risk effectively, and
- maintain relationships with its customers.
Although some of our license agreements prohibit licensing partners from
entering into licensing arrangements with our competitors, generally our
licensing partners are not precluded from offering, under other brands, the
types of products covered by their license agreements with us. A substantial
portion of sales of our products by our domestic licensing partners are also
made to our largest customers. While we have significant control over our
licensing partners' products and advertising, we rely on our licensing partners
for, among other things, operational and financial control over their
businesses.
FAILURE TO MAINTAIN LICENSING PARTNERS COULD HARM OUR BUSINESS.
Although we believe in most circumstances we could replace existing
licensing partners if necessary, our inability to do so for any period of time
could adversely affect our revenues, both directly from reduced licensing
revenue received and indirectly from reduced sales of our other products. See
"Business -- Operations -- Our Licensing Alliances".
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.
As of March 30, 2002, we source a significant portion of our products
outside the United States through arrangements with 288 foreign manufacturers in
35 different countries. Approximately 89%, by dollar volume, of our products
were produced in Hong Kong, Canada and other foreign countries in fiscal 2002.
Risks inherent in importing our products include:
- quotas imposed by bilateral textile agreements,
- changes in social, political and economic conditions which could result
in the disruption of trade from the countries in which our manufacturers
or suppliers are located,
- the imposition of additional regulations relating to imports,
- the imposition of additional duties, taxes and other charges on imports,
- significant fluctuations of the value of the dollar against foreign
currencies, and
- restrictions on the transfer of funds.
Any one of these factors could have a material adverse effect on our financial
condition and results of operations. See "Business -- Sourcing, Production and
Quality".
OUR TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY
PROTECTED OUTSIDE THE UNITED STATES.
We believe that our trademarks and other proprietary rights are important
to our success and our competitive position. We devote substantial resources to
the establishment and protection of our trademarks on a worldwide basis. In the
course of our international expansion, we have, however, experienced conflict
with various third parties that have acquired or claimed
18
ownership rights in certain trademarks that include Polo and/or a representation
of a polo player astride a horse, or otherwise have contested our rights to our
trademarks. We have in the past successfully resolved these conflicts through
both legal action and negotiated settlements, none of which, we believe, has had
a material impact on our financial condition and results of operations.
Nevertheless, we cannot assure you that the actions we have taken to establish
and protect our trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent as do the laws of the United States. See
"Business -- Trademarks".
WE CANNOT ASSURE THE SUCCESSFUL IMPLEMENTATION OF OUR GROWTH STRATEGY.
As part of our growth strategy, we seek to extend our brands, expand our
geographic coverage, increase direct management of Polo Ralph Lauren brands by
opening more of our own stores, strategically acquiring select licensees and
enhancing our operations. Implementation of our strategy involves the continued
expansion of our business in Europe and other international areas. We may have
difficulty hiring and retaining qualified key employees or otherwise
successfully managing the required expansion of our infrastructure in Europe. In
addition, Europe, as a whole, lacks the large wholesale distribution channels
found in the United States, and we may have difficulty developing successful
distribution strategies and alliances in each of the major European countries.
Implementation of our strategy also involves the continued expansion of our
network of retail stores, both in the United States and abroad. There can be no
assurance that we will be able to purchase or lease desirable store locations or
renew existing store leases on acceptable terms. Furthermore, we cannot assure
you that we will be able to successfully integrate the business of any licensee
that we acquire into our own business or achieve any expected cost savings or
synergies from such integration.
OUR BUSINESS IS EXPOSED TO DOMESTIC AND FOREIGN CURRENCY FLUCTUATIONS.
We generally purchase our products in U.S. dollars. However, we source most
of our products overseas and, as such, the cost of these products may be
affected by changes in the value of the relevant currencies. Furthermore, our
international licensing revenue generally is derived from sales in foreign
currencies, including the Japanese yen and the Euro, and this revenue could be
materially affected by currency fluctuations. Approximately 22.9% of our
licensing revenue was received from international licensing partners in fiscal
2002. Changes in currency exchange rates may also affect the relative prices at
which we and our foreign competitors sell products in the same market. Although
we hedge some exposures to changes in foreign currency exchange rates arising in
the ordinary course of business, we cannot assure you that foreign currency
fluctuations will not have a material adverse impact on our financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
19
OUR ABILITY TO CONDUCT BUSINESS IN INTERNATIONAL MARKETS MAY BE AFFECTED BY
LEGAL, REGULATORY, POLITICAL AND ECONOMIC RISKS.
Our ability to capitalize on growth in new international markets and to
maintain the current level of operations in our existing international markets
is subject to risks associated with international operations. These include:
- the burdens of complying with a variety of foreign laws and regulations,
- unexpected changes in regulatory requirements, and
- new tariffs or other barriers to some international markets.
We are also subject to general political and economic risks in connection
with our international operations, including:
- political instability,
- changes in diplomatic and trade relationships, and
- general economic fluctuations in specific countries or markets.
We cannot predict whether quotas, duties, taxes, or other similar
restrictions will be imposed by the United States, the European Union, Japan, or
other countries upon the import or export of our products in the future, or what
effect any of these actions would have on our business, financial condition or
results of operations. Changes in regulatory, geopolitical policies and other
factors may adversely affect our business in the future or may require us to
modify our current business practices.
RISKS RELATING TO THE INDUSTRY IN WHICH WE COMPETE
WE FACE INTENSE COMPETITION IN THE WORLDWIDE APPAREL INDUSTRY.
We face a variety of competitive challenges from other domestic and foreign
fashion-oriented apparel and casual apparel producers, some of which may be
significantly larger and more diversified and have greater financial and
marketing resources than we have. We compete with these companies primarily on
the basis of:
- anticipating and responding to changing consumer demands in a timely
manner,
- maintaining favorable brand recognition,
- developing innovative, high-quality products in sizes, colors and styles
that appeal to consumers,
- appropriately pricing products,
- providing strong and effective marketing support,
- creating an acceptable value proposition for retail customers,
- ensuring product availability and optimizing supply chain efficiencies
with manufacturers and retailers, and
- obtaining sufficient retail floor space and effective presentation of our
products at retail.
We also face competition from companies selling apparel and home products
through the Internet. Increased competition in the worldwide apparel,
accessories and home product industries, including Internet-based competitors,
could reduce our sales, prices, and margins and adversely affect our results of
operations.
20
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO RESPOND TO CONSTANTLY
CHANGING FASHION TRENDS AND CONSUMER DEMANDS.
Our success depends in large part on our ability to originate and define
fashion product and home product trends, as well as to anticipate, gauge and
react to changing consumer demands in a timely manner. Our products must appeal
to a broad range of consumers whose preferences cannot be predicted with
certainty and are subject to rapid change. We cannot assure you that we will be
able to continue to develop appealing styles or successfully meet constantly
changing consumer demands in the future. In addition, we cannot assure you that
any new products or brands that we introduce will be successfully received by
consumers. Any failure on our part to anticipate, identify and respond
effectively to changing consumer demands and fashion trends could adversely
affect retail and consumer acceptance of our products and leave us with a
substantial amount of unsold inventory or missed opportunities. If that occurs,
we may be forced to rely on markdowns or promotional sales to dispose of excess,
slow-moving inventory, which may harm our business. At the same time, our focus
on tight management of inventory may result, from time to time, in our not
having an adequate supply of products to meet consumer demand and cause us to
lose sales. See "Business -- Sourcing, Production and Quality".
A DOWNTURN IN THE ECONOMY MAY AFFECT CONSUMER PURCHASES OF DISCRETIONARY ITEMS
AND LUXURY RETAIL PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR SALES.
The industries in which we operate are cyclical. Many factors affect the
level of consumer spending in the apparel, cosmetic, fragrance and home products
industries, including, among others:
- general business conditions,
- interest rates,
- the availability of consumer credit,
- taxation, and
- consumer confidence in future economic conditions.
Consumer purchases of discretionary items and luxury retail products, including
our products, may decline during recessionary periods and also may decline at
other times when disposable income is lower. A downturn in the economies in
which we, or our licensing partners, sell our products, whether in the United
States or abroad, may adversely affect our sales. The terrorist attacks of
September 11, 2001, together with already weakening economic conditions, have
and may continue to adversely affect consumer spending and sales of our
products.
OUR BUSINESS COULD SUFFER AS A RESULT OF CONSOLIDATIONS, RESTRUCTURINGS AND
OTHER OWNERSHIP CHANGES IN THE RETAIL INDUSTRY.
In recent years, the retail industry has experienced consolidation and
other ownership changes. Some of our customers have operated under the
protection of the federal bankruptcy laws. In June 2001, one of our licensing
partners, The Warnaco Group, Inc., filed for bankruptcy protection under the
federal bankruptcy laws. We cannot determine what impact, if any, this filing
will have on our financial condition, results of operations or cash flows. In
the future, retailers in the United States and in foreign markets may undergo
changes that could decrease the number
21
of stores that carry our products or increase the ownership concentration within
the retail industry, including:
- consolidating their operations,
- undergoing restructurings,
- undergoing reorganizations, or
- realigning their affiliations.
While to date these changes in the retail industry have not had a material
adverse effect on our business or financial condition, our business could be
materially affected by these changes in the future.
ITEM 2. PROPERTIES
We do not own any real property except for our distribution facility in
Greensboro, North Carolina, and a parcel of land adjacent to the facility, and a
Polo Ralph Lauren store in Southhampton, New York. Certain information
concerning our principal facilities in excess of 100,000 rentable square feet
and of our existing retail stores of 20,000 rentable square feet or more, all of
which are leased, is as follows:
APPROXIMATE CURRENT LEASE TERM
LOCATION USE SQ. FT. EXPIRATION
-------- --- ----------- ------------------
650 Madison Avenue, NYC...... Executive, corporate office 206,000 December 31, 2009
and design studio, Polo Brand
showrooms
Lyndhurst, N.J............... Corporate and retail 162,000 February 28, 2008
administrative offices
750 North Michigan Avenue,
Chicago, IL................ Direct retail and restaurant 36,000 November 15, 2017
867 Madison Avenue, NYC...... Direct retail 27,000 December 31, 2004
1-5 New Bond Street,
London..................... Direct retail and corporate 29,000 July 4, 2021
and retail administrative
offices
1950 Northern Boulevard,
Manhasset, NY.............. Direct retail 27,000 January 31, 2009
1970 Northern Boulevard,
Manhasset, NY.............. Direct retail 21,000 September 30, 2011
160 Fifth Avenue, NYC........ Direct retail 27,080 July 31, 2009
2604 Sawgrass Mills Circle,
Sawgrass, FL............... Direct retail 20,000 August 31, 2005
777 Saint Catherine Street
West Montreal, P.Q. ....... Direct retail 20,969 January 31, 2016
Prior to its expiration, we expect to renew our lease at 867 Madison Avenue
for an additional 10 years. The leases for our non-retail facilities
(approximately 56 in all) provide for aggregate annual rentals of approximately
$20.8 million in fiscal 2002. We anticipate that we will be able to extend those
leases which expire in the near future on terms satisfactory to us or, if
necessary, locate substitute facilities on acceptable terms.
As of March 30, 2002, we operated 39 Polo Ralph Lauren stores, 94 Polo
Ralph Lauren outlet stores, 22 Polo Jeans Co. outlet stores and 55 Club Monaco
full price stores, 10 Club Monaco outlet stores and 16 European outlet stores on
leased premises. Aggregate annual rentals for retail space in fiscal 2002
totaled approximately $62.4 million. We anticipate that we
22
will be able to extend those leases which expire in the near future on
satisfactory terms, or relocate to more desirable locations.
In March, 2002, the Company recorded $2.9 million of gain on the sale of
our 50% joint venture interest in a 44,000 square foot building located in the
SoHo district of New York City.
ITEM 3. LEGAL PROCEEDINGS
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 attorneys' fees. The second,
filed in Federal court for the Central District of California and subsequently
transferred first to the United States District Court for the District of Hawaii
and then to the United States District Court in Saipan, was 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.
Although we were not named as a defendant in these suits, we source
products in Saipan, and counsel for the plaintiffs in these actions informed us
that we are a potential defendant in these or similar actions. Together with
some other potential defendants, we entered into an agreement to settle any
claims for nonmaterial consideration. The settlement agreement is subject to
court approval.
As part of the settlement, we were named as a defendant, along with certain
other apparel companies, in a State Court action in California styled Union of
Needletrades Industrial and Textile Employees, et al. v. Brylane, L.P., et al.,
in the San Francisco County Superior Court, and in a Federal Court action styled
Doe I. et al. v. Brylane, L.P., et al. in the United States District Court for
the District of Hawaii, that mirrors portions of the larger State and Federal
Court actions but does not include RICO and certain of the other claims alleged
in those actions. The California action was subsequently dismissed as part of
the settlement, and the federal court action was transferred to the United
States District Court in Saipan. The newly filed federal action against us is
expected to remain inactive unless settlement is not finally approved by the
Federal Court. On May 10, 2002, the Federal Court in Saipan certified the
plaintiff class and granted preliminary approval of the settlement agreement. A
hearing on final approval is expected to be held after notice of the settlement
is sent to potential settlement class members. Certain non-settling defendants
have filed a petition with the United States Court of Appeals for the Ninth
Circuit for permission to appeal the class certification. We have denied any
liability and are not in a position to evaluate the likelihood of a favorable or
unfavorable outcome if the final approval of the settlement is not received and
litigation proceeds.
On October 1, 1999, we filed a lawsuit against the United States Polo
Association Inc., Jordache, Ltd. and certain other entities affiliated with
them, alleging that the defendants were infringing on our famous trademarks.
This lawsuit continues to proceed as both sides are awaiting the court's
decision on various motions. In connection with this lawsuit, on July 19, 2001,
the United States Polo Association and Jordache filed a lawsuit against us in
the United States District Court for the Southern District of New York. This
suit, which is effectively a counterclaim by them in connection with the
original trademark action, asserts claims related to
23
our actions in connection with our pursuit of claims against the United States
Polo Association and Jordache for trademark infringement and other unlawful
conduct. Their claims stem from our contacts with the United States Polo
Association's and Jordache's retailers in which we informed these retailers of
our position in the original trademark action. The United States Polo
Association and Jordache seek $50 million in compensatory damages and $50
million in punitive damages from us. This new suit has been consolidated with
the original trademark action for purposes of discovery and trial. We believe
that the United States Polo Association's and Jordache's claims are
substantially without merit and intend to pursue our claims and defend against
those of the United States Polo Association and Jordache vigorously.
We are otherwise involved from time to time in legal claims involving
trademark and intellectual property, licensing, employee relations and other
matters incidental to our business. We believe that the resolution of any such
matter currently pending will not have a material adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 30, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our Class A common stock commenced trading on the NYSE under the symbol
"RL" on June 11, 1997. Prior to that date, there was no public market for our
Class A common stock. The following table sets forth, for the periods indicated,
the high and low closing prices per share for our Class A common stock for each
quarterly period indicated through March 30, 2002 as reported on the NYSE
Composite Tape. Since our initial public offering, we have not declared any cash
dividends on our common stock other than dividends declared in fiscal 1998 of
$27.4 million that were paid to holders of Class B common stock and Class C
common stock in connection with our reorganization and the initial public
offering.
MARKET PRICE
OF CLASS A
COMMON STOCK
----------------
HIGH LOW
---- ---
FISCAL 2002:
First Quarter............................................. $30.98 $22.95
Second Quarter............................................ 26.44 18.41
Third Quarter............................................. 27.94 18.56
Fourth Quarter............................................ 29.66 25.59
FISCAL 2001:
First Quarter............................................. $20.31 $13.25
Second Quarter............................................ 19.94 15.56
Third Quarter............................................. 23.19 16.13
Fourth Quarter............................................ 30.45 22.44
We anticipate that all of our earnings in the foreseeable future will be
retained to finance the continued growth and expansion of our business and we
have no current intention to pay cash dividends on our common stock.
24
As of June 19, 2002, there were 1,270 holders of record of our Class A
common stock, five holders of record of our Class B common stock and five
holders of record of our Class C common stock.
The following table sets forth certain information as of March 30, 2002
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance:
NUMBER OF WEIGHTED-AVERAGE NUMBER OF SECURITIES
SECURITIES TO BE ISSUED EXERCISE PRICE REMAINING AVAILABLE FOR
UPON THE EXERCISE OF OF OUTSTANDING FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS AND RIGHTS (EXCLUDING SECURITIES
PLAN CATEGORY (A) (B) REFLECTED IN COLUMN(A))
------------- ----------------------- ----------------- -------------------------
Equity Compensation Plans Approved by
Security Holders:
1997 Long-Term Stock Incentive Plan.. 9,348,573 $22.13 8,824,798(1)
1997 Non-Employee Director Stock
Option Plan........................ 105,666 $24.01 390,250
Equity Compensation Plans Not Approved
by Security Holders:
-- -- -- --
---------------
(1) Excludes 170,587 outstanding shares of restricted stock granted under our
1997 Long-Term Stock Incentive Plan that remain subject to forfeiture.
25
ITEM 6. SELECTED FINANCIAL DATA
The table below provides selected consolidated financial data for the five
fiscal years in the period ended March 30, 2002. We derived the income statement
data for the three fiscal years in the period ended March 30, 2002 and the
balance sheet data as of March 30, 2002 and March 31, 2001 from our consolidated
financial statements and accompanying notes, included elsewhere in this Form
10-K, which were audited by Deloitte & Touche LLP, independent auditors. We
derived the data for the two fiscal years in the period ended April 3, 1999 from
the audited consolidated financial statements and accompanying notes of Polo
Ralph Lauren Corporation and subsidiaries contained in our annual report on Form
10-K for the years ended April 3, 1999 and March 28, 1998 which are not included
in this Form 10-K. You should read this selected consolidated financial data
together with our consolidated financial statements and the notes to those
financial statements as well as the discussion under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
FISCAL YEAR ENDED
------------------------------------------------------------------
MARCH 30, MARCH 31, APRIL 1, APRIL 3, MARCH 28,
2002 2001 2000 1999 1998
--------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF INCOME:
Net sales............................ $ 2,122,333 $ 1,982,419 $ 1,719,226 $ 1,518,850 $1,313,425
Licensing revenue.................... 241,374 243,355 236,302 208,009 167,119
----------- ----------- ----------- ----------- ----------
Net revenues......................... 2,363,707 2,225,774 1,955,528 1,726,859 1,480,544
Cost of goods sold................... 1,216,904 1,162,727 1,002,390 904,586 759,988
----------- ----------- ----------- ----------- ----------
Gross profit......................... 1,146,803 1,063,047 953,138 822,273 720,556
Selling, general and administrative
expenses........................... 837,591 822,272 689,227 608,128 520,801
Restructuring charge................. 16,000 123,554 -- 58,560 --
----------- ----------- ----------- ----------- ----------
Income from operations............... 293,212 117,221 263,911 155,585 199,755
Foreign currency gains............... 1,820 5,846 --
Interest expense..................... (19,033) (25,113) (15,025) (2,759) (159)
----------- ----------- ----------- ----------- ----------
Income before income taxes and change
in accounting principle............ 275,999 97,954 248,886 152,826 199,596
Provision for income taxes........... 103,499 38,692 101,422 62,276 52,025
----------- ----------- ----------- ----------- ----------
Income before change in accounting
principle.......................... 172,500 59,262 147,464 90,550 147,571
Cumulative effect of change in
Accounting principle, net of
taxes.............................. -- -- 3,967 -- --
----------- ----------- ----------- ----------- ----------
Net income........................... $ 172,500 $ 59,262 $ 143,497 $ 90,550 $ 147,571
=========== =========== =========== =========== ==========
Income per share before change in
accounting principle -- Basic...... $ 1.77 $ 0.61 $ 1.49 $ 0.91
Cumulative effect of change in
accounting principle, net per
share.............................. -- -- 0.04 --
----------- ----------- ----------- -----------
Net income per share -- Basic........ $ 1.77 $ 0.61 $ 1.45 $ 0.91
=========== =========== =========== ===========
Income per share before change in
accounting principle -- Diluted.... $ 1.75 $ 0.61 $ 1.49 $ 0.91
Cumulative effect of change in
accounting principle, net per
share.............................. -- -- 0.04 --
----------- ----------- ----------- -----------
Net income per share -- Diluted...... $ 1.75 $ 0.61 $ 1.45 $ 0.91
=========== =========== =========== ===========
Weighted-average common shares
outstanding -- Basic............... 97,470,342 96,773,282 98,926,993 99,813,328
=========== =========== =========== ===========
Weighted-average common shares
outstanding -- Diluted............. 98,522,718 97,446,482 99,035,781 99,972,152
=========== =========== =========== ===========
26
FISCAL YEAR ENDED
-----------------------------------------------------------------
MARCH 30, MARCH 31, APRIL 1, APRIL 3, MARCH 28,
2002 2001 2000 1999 1998
--------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 238,774 $ 102,219 $ 164,571 $ 44,458 $ 58,755
Working capital............... 616,286 462,144 446,663 331,482 354,206
Inventories................... 349,818 425,594 390,953 376,860 298,485
Total assets.................. 1,749,497 1,626,093 1,620,562 1,104,584 825,130
Total debt.................... 318,402 383,100 428,838 159,717 337
Stockholders' equity.......... 998,195 809,309 772,437 658,905 584,326
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is a summary and should be read
together with our consolidated financial statements and related notes which are
included in this Annual Report and the information under the caption "Risk
Factors". We use a 52-53 week fiscal year ending on the Saturday nearest March
31. Fiscal 2002, fiscal 2001 and fiscal 2000 each reflect a 52-week period.
OVERVIEW
We began operations in 1968 as a designer and marketer of premium quality
men's clothing and sportswear. Since our inception, we have grown through
increased sales of existing product lines, the introduction of new brands and
products, expansion into international markets, development of our retail
operations, and acquisitions. Over the last five full fiscal years, our net
revenues have grown to approximately $2.4 billion in fiscal 2002, from
approximately $1.5 billion in fiscal 1998, while income from operations,
excluding restructuring charges, has grown to approximately $309.2 million in
fiscal 2002, from approximately $199.8 million in fiscal 1998. Our net revenues
are generated from our three integrated operations: wholesale, retail and
licensing. The following table sets forth net revenues for the last five fiscal
years. Fiscal 2002 reflects the change in the fiscal year end of certain of our
European subsidiaries as reported in our consolidated financial statements. See
Consolidation of European Entities -- Change in Reporting Period.
FISCAL YEAR ENDED
------------------------------------------------------------------
MARCH 30, MARCH 31, APRIL 1, APRIL 3, MARCH 28,
2002 2001 2000 1999 1998
--------- --------- -------- -------- ---------
(IN THOUSANDS)
Wholesale sales........ $1,198,060 $1,053,842 $ 885,246 $ 859,498 $ 742,674
Retail sales........... 924,273 928,577 833,980 659,352 570,751
---------- ---------- ---------- ---------- ----------
Net sales.............. 2,122,333 1,982,419 1,719,226 1,518,850 1,313,425
Licensing revenue...... 241,374 243,355 236,302 208,009 167,119
---------- ---------- ---------- ---------- ----------
Net revenues........... $2,363,707 $2,225,774 $1,955,528 $1,726,859 $1,480,544
========== ========== ========== ========== ==========
Wholesale net sales result from the sale of our men's and women's apparel
to wholesale customers, principally to major department stores, specialty stores
and non-company operated Polo Ralph Lauren stores located primarily in Europe
and Asia. Net sales for the wholesale division increased to $1.2 billion in
fiscal 2002 from $742.7 million in fiscal 1998. This increase was primarily a
result of growth in sales of our existing Polo Brands' and Collection Brands'
products and the introduction of new brands. The increase also reflects the
acquisition of the wholesale operations of Poloco S.A.S., including some of its
affiliates, and PRL Fashions of Europe S.R.L. in January 2000 and October 2001,
respectively.
We generate retail sales from our full-price Polo Ralph Lauren stores,
outlet stores and Club Monaco stores. Net sales for the retail division grew to
$924.3 million in fiscal 2002 from
27
$570.8 million in fiscal 1998. This increase was primarily a result of our
expansion of our existing retail operations and growth through acquisitions,
including the Poloco transaction and our acquisition of Club Monaco in fiscal
2000. Retail sales were essentially flat from fiscal 2001 to fiscal 2002 due to
the highly competitive and promotionally driven retail store environment. At
March 30, 2002, we operated 236 stores: six Ralph Lauren stores, 33 Polo Ralph
Lauren stores, 55 Club Monaco full-price stores, 94 Polo outlet stores, 22 Polo
Jeans Co. outlet stores, 16 European outlet stores and ten Club Monaco outlet
stores.
Licensing revenue consists of royalties paid to us under our agreements
with our licensing partners. Product, international and Ralph Lauren Home
licensing alliances accounted for 51.9%, 25.9% and 22.2% of total licensing
revenue in fiscal 2002 and 56.0%, 24.2% and 19.8% of total licensing revenue in
fiscal 2001. Through these alliances, we combine our core skills with the
product or geographic competencies of our licensing partners to create and
develop specific businesses. The growth of existing and development of new
businesses under licensing alliances have resulted in an increase in licensing
revenue to $241.4 million in fiscal 2002 from $167.1 million in fiscal 1998.
Beginning in fiscal 2000, we have undertaken the following:
- In October 2001, we acquired PRL Fashions of Europe S.R.L., which holds
licenses to sell our women's Ralph Lauren apparel in Europe, as well as
our men's and boys' Polo Ralph Lauren and our Polo Jeans Co. apparel in
Italy.
- In October 2001, we acquired the Ralph Lauren store in Brussels from one
of our licensees.
- In February 2000, we announced the formation of Ralph Lauren Media, LLC,
a joint venture between ourselves and National Broadcasting Company, Inc.
and certain of its affiliated companies. RL Media, in which we have a 50%
interest, operates the Polo.com website, which sells Polo Ralph Lauren
products. NBC has provided television commercial spots promoting
Polo.com, and we provide inventory to RL Media at cost.
- In January 2000, we completed the acquisition of stock and selected
assets of Poloco S.A.S. and some of its affiliates, which hold licenses
to sell our men's and boys' Polo apparel, our men's and women's Polo
Jeans apparel, and some of our accessories in Europe. In addition to
acquiring Poloco's wholesale business, we acquired one Polo Ralph Lauren
store in Paris and six outlet stores located in France, the United
Kingdom and Austria.
- In 1999, we acquired Club Monaco, Inc. 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.
In connection with our growth strategies, we plan to introduce new products
and brands and expand our retail operations. Implementation of these strategies
may require significant investments for advertising, furniture and fixtures,
infrastructure, design and additional inventory. Notwithstanding our investment,
we cannot assure you that our growth strategies will be successful.
28
RESTRUCTURINGS AND SPECIAL CHARGES
FISCAL 2001 RESTRUCTURING AND SPECIAL CHARGES
During fiscal 2001, we completed an internal operational review and
formalized our plans to enhance the growth of our worldwide luxury retail
business, to better manage inventory and increase our overall profitability. The
major initiatives of the operational review included:
- refining our retail strategy;
- developing efficiencies in our supply chain; and
- consolidating corporate business functions and internal processes.
We will continue to refine our retail strategy by, among other things,
expanding the presence of our full-line luxury stores, both in North America and
abroad. In connection with this initiative, we closed all 12 Polo Jeans Co.
full-price retail stores, which were underperforming, and 11 underperforming
Club Monaco retail stores.
Additionally, as a result of changes in market conditions combined with our
change in retail strategy in selected locations in which we operate full-price
retail stores, we performed an evaluation of the recoverability of the assets of
certain of these stores. We concluded from the results of this evaluation that a
significant permanent impairment of long-lived assets had occurred. Accordingly,
we recorded a write down of these assets (primarily leasehold improvements) to
their estimated fair value based on discounted future cash flows.
In connection with the implementation of the operational review discussed
above, we recorded a pre-tax restructuring charge of $128.6 million in our
second quarter of fiscal 2001, subsequently adjusted for a $5.0 million
reduction of liabilities in the fourth quarter of fiscal 2001. The major
components of the charge were asset write downs of $98.8 million, lease and
contract termination costs of $15.7 million, severance and termination benefits
of $8.0 million and other restructuring costs of $1.1 million. In the fourth
quarter of fiscal 2002, we recorded an additional $16.0 million of lease
termination costs associated with the closure of our retail stores due to market
factors that were less favorable than originally estimated.
The development of operating efficiencies in our worldwide logistics and
supply chain management will better support our growing and increasingly global
operations. In connection with initiating this aspect of the Operational Plan,
we recorded $37.9 million of inventory write downs in our second quarter of
fiscal year 2001 associated with our planned acceleration in the reduction of
aged inventory, subsequently adjusted for additional write downs of inventory of
$3.6 million in the fourth quarter of fiscal 2001.
The implementation of our operational review also included the
consolidation of some corporate strategic business functions and internal
processes. Costs associated with this aspect of the plan included the
termination of operating contracts, streamlining of some corporate and operating
functions, and employee-related matters. These costs aggregated $18.1 million
and were recorded in selling, general and administrative expenses in fiscal
2001.
Total severance and termination benefits resulting from the Operational
Plan related to approximately 550 employees, all of whom have been terminated.
Total cash outlays related to the operational review are expected to be
approximately $40.7 million, $25.7 million of which had been paid through March
30, 2002. We completed the implementation of our operational review in fiscal
2002 and expect to settle the remaining liabilities in fiscal 2003.
29
FISCAL 1999 RESTRUCTURING
During the fourth quarter of fiscal 1999, we formalized our plans to
streamline operations within our wholesale and retail operations and reduce our
overall cost structure. The major initiatives of our restructuring plan
included:
- an evaluation of our retail operations and site locations;
- the realignment and operational integration of our wholesale operating
units; and
- the realignment and consolidation of corporate strategic business
functions and internal processes.
Costs associated with our restructuring plan included lease and contract
termination costs, store fixed assets (primarily leasehold improvements) and
intangible asset write downs and severance and termination benefits. In fiscal
2000, we closed three Polo Ralph Lauren stores and three outlet stores that were
not performing at an acceptable level and converted two Polo Ralph Lauren stores
and five outlet stores to new concepts expected to be more productive.
Our wholesale operations were realigned into two new operating units: Polo
Brands and Collection Brands. Aspects of this realignment included:
- the reorganization of the sales force and retail development areas;
- the streamlining of the design and development process; and
- the consolidation of the customer service departments.
We also integrated the sourcing and production of our Polo Brands, outlet
store and licensees' products into one consolidated unit. Costs associated with
the wholesale realignment consisted primarily of severance and termination
benefits and lease and contract termination costs.
Our review of our corporate business functions and internal processes
resulted in a new management structure designed to better align businesses with
similar functions and to identify and eliminate duplicative processes. Costs
associated with the corporate realignment consisted primarily of severance and
termination benefits and lease and contract termination costs.
We recorded a restructuring charge of $58.6 million on a pre-tax basis in
our 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 our restructuring plan related to
approximately 280 employees, all of whom have been terminated. Total cash
outlays related to the Restructuring Plan are approximately $39.5 million, $36.8
million of which have been paid through March 30, 2002. We completed the
implementation of the Restructuring Plan in fiscal 2000 and expect to settle the
remaining liabilities in accordance with contract terms which extend until
fiscal 2003.
30
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to net revenues of
certain items in our consolidated statements of income for our last three fiscal
years:
FISCAL YEAR ENDED
----------------------------------
MARCH 30, MARCH 31, APRIL 1,
2002 2001 2000
--------- --------- --------
Net sales............................................ 89.8% 89.1% 87.9%
Licensing revenue.................................... 10.2 10.9 12.1
----- ----- -----
Net revenues......................................... 100.0 100.0 100.0
----- ----- -----
Gross profit......................................... 48.5 47.8 48.7
Selling, general and administrative expenses......... 35.4 36.9 35.2
Restructuring and special charges.................... 0.7 5.6 --
----- ----- -----
Income from operations............................... 12.4 5.3 13.5
Foreign currency gains............................... 0.1 0.2 --
Interest expense..................................... (0.8) (1.1) (0.8)
----- ----- -----
Income before income taxes........................... 11.7% 4.4% 12.7%
===== ===== =====
CONSOLIDATION OF EUROPEAN ENTITIES -- CHANGE IN REPORTING PERIOD
Effective December 30, 2001, for reporting purposes the Company changed the
fiscal year ends of certain of its European subsidiaries as reported in the
consolidated financial statements to the Saturday closest to March 31 to conform
with the fiscal year end of the Company. Previously, certain of the European
subsidiaries were consolidated and reported on a three-month lag with a fiscal
year ending December 31. Accordingly, the net activity for the three-month
period ended December 29, 2001, for the European subsidiaries that were reported
on a three-month lag is reflected as an adjustment to retained earnings in the
accompanying financial statements. The following represents summarized results
for those European operations for the three-month period ended December 29, 2001
(in millions):
THREE-MONTHS ENDED DECEMBER 29, 2001:
-------------------------------------
Net sales................................................... $49.5
Gross profit................................................ 25.5
Pre-tax loss................................................ (0.7)
Income tax benefit.......................................... 0.3
Net loss.................................................... (0.4)
The following represents summarized consolidated results for the year ended
March 30, 2002 as if the European subsidiaries continued reporting on a
three-month lag basis:
FISCAL YEAR ENDED MARCH 30, 2002:
---------------------------------
Wholesale net sales......................................... $1,118.5
Retail net sales............................................ 927.4
Net sales................................................... 2,045.9
Licensing revenue........................................... 241.0
Net revenues................................................ 2,286.9
Gross profit................................................ 1,105.8
Pre-tax income.............................................. 255.5
Income tax provision........................................ 95.8
Net income.................................................. $ 159.7
31
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES. Net sales increased 7.1% to $2.1 billion in fiscal 2002 from
$2.0 billion in fiscal 2001. Wholesale net sales increased 13.7% to $1.2 billion
in fiscal 2002 from $1.1 billion in fiscal 2001. Wholesale growth primarily
reflects the benefit from the inclusion of two strong quarters for the periods
January through March 2002 and 2001 for certain of the European entities. See
Consolidation of European Entities -- Change in Reporting Period. The impact of
consolidating the European subsidiaries on a March 30 fiscal year resulted in an
increase in Wholesale revenues of approximately $80.0 million, 7.1%.
Retail sales decreased by less than 1.0 % to $924.3 million in fiscal 2002
from $928.6 million in fiscal 2001. Our Polo Ralph Lauren full-price stores
decreased $14.3 million and our Club Monaco stores decreased $8.4 million due to
the effects of a promotionally driven and highly competitive retail store
environment and the current economic conditions exacerbated by the events of
September 11th. Also contributing to the decrease was the closing, in connection
with our Operational Plan, of our Polo Jeans Co. full-price retail stores during
fiscal 2001, which had sales of $18.0 million during fiscal 2001. These
decreases were offset by significant increases in our outlet business of
approximately $29.8 million. The impact of consolidating the European
subsidiaries on a March 30 fiscal year resulted in a decrease in retail revenues
of approximately $3.0 million, less than 1%. See Consolidation of European
Entities -- Change in Reporting Period.
Comparable store sales, which represent net sales of stores open in both
reporting periods for the full portion of such periods, decreased 3.0%. The
comparable store declines were due to the effects of a promotionally driven and
highly competitive retail environment. At March 30, 2002, we operated 236
stores: six Ralph Lauren stores, 33 Polo Ralph Lauren stores, 55 Club Monaco
full-price stores, 94 Polo outlet stores, 22 Polo Jeans Co. outlet stores, 16
European outlet stores and ten Club Monaco outlet stores.
LICENSING REVENUE. Licensing revenue decreased approximately $2.0 million,
representing less than a 1% decrease, to $241.4 million in fiscal 2002 to $243.4
million in fiscal 2001. Increases from one licensee within our home collection
business and from our international licensed business, particularly in Asia,
were offset by decreased royalty revenue from a significant product licensee and
decreased royalties from our Italian licensee, the business and certain assets
of which we acquired in October 2001. The impact of consolidating the European
subsidiaries on a March 30 fiscal year increased licensing revenues by
approximately $0.4 million, less than 1%. See Consolidation of European
Entities -- Change in Reporting Period.
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
48.5% in fiscal 2002 from 47.8% in fiscal 2002. This increase was mainly
attributable to wholesale gross margins in that $41.5 million of inventory write
downs were recorded in fiscal 2001 in connection with the implementation of our
operational review and our decision to accelerate the disposition of aged
inventory. In addition, retail gross margins decreased 1.4% due to the effects
of a promotionally driven and highly competitive retail store environment,
resulting in higher markdowns taken. The impact of consolidating the European
subsidiaries on a March 30 fiscal year increased gross profit by approximately
$41 million, representing less than 4% of total gross profit and less than 0.2
gross percentage points. See Consolidation of European Entities -- Change in
Reporting Period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net revenues decreased to 35.4% in
fiscal 2002 from 36.9% in fiscal 2001. This decrease in selling, general and
administrative expenses as a percentage of net revenues was primarily due to a
charge of $18.1 million recorded in the second quarter of fiscal 2001 relating
to nonrecurring charges associated with targeted opportunities for improvement,
including the termination of operating contracts, streamlining of certain
corporate and operating functions, and employee-related matters. In addition,
the Company has recorded $2.9 million of gain on the sale of our 50% joint
venture interest in a 44,000 square foot building located in the
32
SoHo district of New York City. The impact of consolidating the European
subsidiaries on a March 30 fiscal year increased selling, general and
administrative expenses by approximately $20 million, less than 3%. See
Consolidation of European Entities -- Change in Reporting Period.
INTEREST EXPENSE. Interest expense decreased to $19.0 million in fiscal
2002 from $25.1 million in fiscal 2001. This decrease was due to lower levels of
borrowings and the repayment of approximately $53 million of short-term
borrowings during the fiscal year. In addition, we repurchased $10.6 million of
our outstanding Euro debt in fiscal 2002.
INCOME TAXES. The effective tax rate decreased to 37.5% in fiscal 2002
from 39.5% in fiscal 2001, resulting from the implementation of tax strategies.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES. Net sales increased 15.3% to $2.0 billion in fiscal 2001 from
$1.7 billion in fiscal 2000. Wholesale net sales increased 19.0% to $1.1 billion
in fiscal 2001 from $885.2 million in fiscal 2000. Wholesale growth primarily
reflected the benefit of one year of operations for Poloco's wholesale division
included in operating results for the first time in fiscal 2001, resulting in an
additional $153.0 million in sales and an approximately 100% increase in unit
sales of our luxury products.
Retail sales increased by 11.3% to $928.6 million in fiscal 2001 from
$834.0 million in fiscal 2000. This increase was primarily attributable to a
$131.7 million benefit from the following:
- new stores opened in fiscal 2001 (37 stores, prior to 34 store closures
in late fiscal 2001) with additional sales of $52.4 million;
- a full year of revenues from new stores opened in fiscal 2000 of $40.7
million; and
- the inclusion of the results of one Ralph Lauren and six outlet stores
purchased in connection with the acquisition of Poloco with sales of
$38.6 million.
Although our stores remained highly productive, comparable store sales decreased
by 5.3%. The decline was due to a mature and promotionally driven outlet
environment and lower sales in Club Monaco's Canadian stores.
LICENSING REVENUE. Licensing revenue increased 3.0% to $243.4 million in
fiscal 2001 from $236.3 million in fiscal 2000. This increase is primarily
attributable to increases in sales of existing men's, women's, and children's
apparel, accessories and fragrance products. These gains, which resulted in
$12.0 million in additional revenue, were partially offset by decreases in sales
of Ralph Lauren Home collection products, which resulted in $5.0 million less
revenue.
GROSS PROFIT. Gross profit as a percentage of net revenues decreased to
47.8% in fiscal 2001 from 48.7% in fiscal 2000. This decrease was mainly
attributable to $41.5 million of inventory write downs recorded in fiscal 2001
in connection with the implementation of our operational review and our decision
to accelerate the disposition of aged inventory. Excluding these special
charges, gross profit as a percentage of net revenues was 49.6%. This
improvement reflects increased wholesale gross margins as a result of the
acquisition of Poloco, which generates more than 30% higher margins than our
domestic wholesale operations. Additionally, gross profit was favorably impacted
by the increase in licensing revenue in fiscal 2001 of $7.1 million, which has
no associated cost of goods sold. These improvements were offset by declines in
our retail gross margins of 1.5 percentage points as we incurred higher
markdowns in fiscal 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net revenues increased to 36.9% in
fiscal 2001 from 35.2% in fiscal 2000. This increase in selling, general and
administrative expenses as a percentage of net revenues was partially due to a
charge of $18.1 million recorded in the second quarter of fiscal 2001 relating
to
33
nonrecurring charges associated with targeted opportunities for improvement,
including the termination of operating contracts, streamlining of certain
corporate and operating functions, and employee-related matters. Additionally,
selling, general and administrative expenses as a percentage of net revenues
increased due to an increase in depreciation and amortization expense of $12.0
million, start-up costs associated with the expansion of the Club Monaco retail
operations of $8.6 million and expenses of $2.3 million relating to Poloco,
which was acquired in the fourth quarter of fiscal 2000.
INTEREST EXPENSE. Interest expense increased to $25.1 million in fiscal
2001 from $15.0 million in fiscal 2000. This increase was due to a higher level
of borrowings during the period attributable to the additional financing used
for the acquisition of Poloco.
INCOME TAXES. The effective tax rate decreased to 39.5% in fiscal 2001
from 40.8% in fiscal 2000. This decline is primarily a result of the benefit of
tax strategies implemented by us.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements primarily derive from working capital needs,
construction and renovation of shop-within-shops, retail expansion and other
corporate activities. Our main sources of liquidity are cash flows from
operations, credit facilities and other borrowings.
Net cash provided by operating activities increased to $293.8 million in
fiscal 2002 from $100.3 million in fiscal 2001. Net cash provided by operations
was positively impacted in fiscal 2002 by increased net income, decreased
inventory levels and the collection of the income tax receivable related to
fiscal 2001 and negatively impacted by increased accounts receivable.
Net cash used in investing activities decreased to $116.0 million in fiscal
2002 from $131.3 million in fiscal 2001. The decrease primarily resulted from
decreased capital expenditures during the year.
Net cash used by financing activities was $40.3 million in fiscal 2002 as
compared to $25.9 million in fiscal 2001. This change is primarily due to the
repayment of short-term borrowings offset, in part, by the proceeds received in
connection with the exercise of stock options.
In June 1997, we 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. Borrowings under the syndicated bank credit facility bear
interest, at our option, at a base rate equal to the higher of the Federal Funds
Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of one
percent, and the prime commercial lending rate of The Chase Manhattan Bank in
effect from time to time, or at the Eurodollar Rate (LIBOR) plus an interest
margin based on the Federal Reserve Board's "Eurocurrency Liabilities" reserve
requirements. The margin was 0.875% as of March 30, 2002.
In March 1999, in connection with our acquisition of Club Monaco, we
entered into a $100.0 million senior 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 revolving line of credit is available for working capital needs and
general corporate purposes and matures on June 30, 2003. The term loan was used
to finance the acquisition of all of the outstanding common stock of Club Monaco
and to repay indebtedness of Club Monaco. The term loan is also repayable on
June 30, 2003. Borrowings under the 1999 syndicated bank credit facility bear
interest, at our option, at a base rate equal to the higher of the Federal Funds
Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of one
percent, and the prime commercial lending rate of The Chase Manhattan Bank in
effect from time to time, or at the Eurodollar Rate (LIBOR) plus an interest
margin based on the Federal Reserve Board's "Eurocurrency Liabilities" reserve
requirements. The margin was 0.875% as of March 30, 2002. In April 1999, we
entered into interest rate swap agreements with a notional amount of $100.0
million to convert the variable interest rate on our 1999 senior credit facility
to a fixed rate of 5.5%.
34
Our 1997 bank credit facility and our 1999 senior bank credit facility
require that we maintain:
- a minimum consolidated net worth, and
- a maximum consolidated indebtedness ratio.
Each of these credit facilities also contain covenants that, subject to
specified exceptions, restrict our ability to:
- make capital expenditures,
- sell or dispose of our assets,
- incur additional debt,
- incur contingent liabilities and liens,
- merge with or acquire other companies or be subject to a change of
control,
- make loans or advances or stock repurchases,
- engage in transactions with affiliates, and
- make investments.
Upon the occurrence of an event of default under each of these credit
facilities, the lenders may cease making loans, terminate the credit facility,
and declare all amounts outstanding to be immediately due and payable. The
credit facilities specify a number of events of default, many of which are
subject to applicable grace or cure periods, including, among others, the
failure to make timely principal and interest payments, to satisfy the
covenants, or to maintain the required financial performance requirements
described above.
Additionally, the agreements provide that an event of default will occur if
Mr. Ralph Lauren and related entities fail to maintain a specified minimum
percentage of the voting power of our common stock.
In November 1999, we issued Euro 275.0 million of 6.125% notes due November
2006. Our Euro debt is listed on the London Stock Exchange. The net proceeds
from the Euro offering were $281.5 million, based on the Euro exchange rate on
the issuance date. Interest on the Euro debt is payable annually. A portion of
the net proceeds from the issuance was used to acquire Poloco while the
remaining net proceeds were retained for general corporate purposes. We acquired
Poloco for an aggregate cash consideration of $209.7 million, plus the
assumption of $10.0 million in short-term debt.
During fiscal 2002 and 2001, we repurchased Euro 11.9 million and 27.5
million, or approximately $10.6 million and $25.3 million based on Euro exchange
rates at the time of repurchase, of our outstanding Euro debt.
As of March 30, 2002, we had $33 million outstanding in direct borrowings,
$80 million outstanding under the term loan and $205 million outstanding in Euro
debt, based on the year-end Euro exchange rate. We were also contingently liable
for $17.2 million in outstanding letters of credit related primarily to
commitments for the purchase of inventory. The weighted-average interest rate on
our borrowings at March 30, 2002 was 5.9%.
We recognize foreign currency gains or losses in connection with our Euro
debt based on fluctuations in foreign exchange rates. We recorded $1.8 million
in foreign currency gains in fiscal 2002 and $5.8 million in foreign currency
gains in fiscal 2001.
During the second quarter of fiscal 2001, we completed an internal
operational review and formalized our plans to enhance the growth of our
international luxury retail business, to better manage inventory and to increase
our overall profitability. In connection with the implementation of the
operational review, we recorded a pretax restructuring charge of $128.6 million
in our
35
second quarter of fiscal 2001, subsequently adjusted for a $5.0 million
reduction of liabilities in the fourth quarter of fiscal 2001. In the fourth
quarter of fiscal 2002, we recorded an additional $16.0 million of lease
termination costs associated with the closure of our retail stores due to market
factors that were less favorable than originally estimated. On October 18, 2000,
we received consent from our lenders under the credit facilities permitting us
to incur the charges we recorded in connection with the operational review up to
specified thresholds. See Note 3 to our consolidated financial statements.
Total cash outlays related to the operational plan are expected to be
approximately $40.7 million, $25.7 million of which have been paid through March
30, 2002. We completed the implementation of the operational plan in fiscal 2002
and expect to settle the remaining liabilities in fiscal 2003.
During the fourth quarter of fiscal 1999, we formalized our plans to
streamline operations within our wholesale and retail operations and reduce our
overall cost structure. Total cash outlays resulting from the 1999 restructuring
plan are approximately $39.5 million, $36.8 million of which have been paid
through March 30, 2002. We completed the implementation of the Restructuring
Plan in fiscal 2000 and expect to settle the remaining liabilities in accordance
with contract terms which extend until fiscal 2003. See Note 3 to our
consolidated financial statements.
From time to time, we make contributions to various charitable
organizations. In the quarter ended March 30, 2002, we made a contribution of
approximately $8 million to the Polo Ralph Lauren Foundation, which provides
philanthropic and volunteer support to organizations focused on health,
educational and cultural initiatives.
Capital expenditures were $88.0 million in fiscal 2002, $105.2 million in
fiscal 2001 and, $122.0 million in fiscal 2000. Capital expenditures primarily
reflect costs associated with the following:
- the expansion of our distribution facilities;
- the shop-within-shops development program which includes new shops,
renovations and expansions;
- the expansion of our retail operations;
- our information systems; and
- other capital projects.
On October 31, 2001, we completed the acquisition of substantially all of
the assets of PRL Fashions of Europe S.R.L., which holds licenses to sell our
women's Ralph Lauren apparel in Europe, our men's and boys' Polo Ralph Lauren
apparel in Italy, and our men's and women's Polo Jeans Co. collections in Italy.
The purchase price was approximately $22.0 million in cash, plus the assumption
of certain liabilities and earn-out payments based on achieving profitability
targets over the first three years, with a guaranteed minimum annual payment of
$3.5 million each year.
In March 1998, our Board of Directors authorized the repurchase, subject to
market conditions, of up to $100.0 million of our Class A common stock. Share
repurchases were made in the open market over the two-year period which
commenced April 1, 1998. The Board of Directors has extended the stock
repurchase program through March 31, 2004. Shares acquired under the repurchase
program will be used for stock option programs and for other corporate purposes.
As of March 30, 2002, we repurchased 3,876,506 shares of our Class A common
stock at an aggregate cost of $73.2 million.
We extend credit to our customers, including those who have accounted for
significant portions of our net revenues. We had three customers, Dillard
Department Stores, Inc.,
36
Federated Department Stores, Inc. and The May Department Stores Company, who in
aggregate constituted approximately 35% of trade accounts receivable outstanding
at March 30, 2002, 52.0% at March 31, 2001 and 54.0% at April 1, 2000. The
concentration of our trade accounts receivable has declined in recent periods,
and is expected to continue to decline, as we have diversified our distribution
channels and the proportion of department stores in our customer mix has
declined as a result of our expansion in Europe. Additionally, we had four
licensing partners, Jones Apparel Group, Inc., WestPoint Stevens, Inc., Seibu
Department Stores, Ltd. and Warnaco, Inc., who in aggregate constituted
approximately 55.0%, 53.0%, and 58.0% of licensing revenue in fiscal 2002,
fiscal 2001, and fiscal 2000. Accordingly, we may have significant exposure in
collecting accounts receivable from our wholesale customers and licensees. We
have credit policies and procedures which we use to manage our credit risk.
We believe that cash from ongoing operations and funds available under our
credit facilities and from our Euro offering will be sufficient to satisfy our
current level of operations, capital requirements, the stock repurchase program
and other corporate activities for the next 12 months. We do not currently
intend to pay dividends on our common stock in the next 12 months.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our business is affected by seasonal trends, with higher levels of
wholesale sales in our second and fourth quarters and higher retail sales in our
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 our
retail operations and licensing revenue, historical quarterly operating trends
and working capital requirements may not be indicative of 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 sales.
Effective December 30, 2001, the Company changed the fiscal year ends of
its European subsidiaries as reported in the consolidated financial statements
to the Saturday closest to March 31 to conform with the fiscal year end of the
Company. Previously, certain of the European subsidiaries were consolidated and
reported on the basis of a fiscal year ending December 31. Accordingly, the net
activity for the three-month period ended December 29, 2001, for the European
subsidiaries that were reported on a three-month lag is reflected as an
adjustment to retained earnings in the accompanying financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements. Certain of our accounting policies
require the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on our historical experience, our observations of trends in
the industry, information provided by our customers and information available
from other outside sources, as appropriate. Our significant accounting policies
include:
Revenue Recognition -- We recognize sales, including sales made to our
customers in connection with our shop-within-shops, upon shipment of products to
customers, since title passes upon shipment and, in the case of sales by our
retail and outlet stores, when goods are sold to consumers. Allowances for
estimated uncollectible accounts, discounts, returns and allowances are provided
when sales are recorded based upon historical experience and current trends. We
evaluate the adequacy of the allowances quarterly. While such allowances have
been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience the same allowance rate we have in the past.
37
Inventories -- Inventory is valued at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving and
aged merchandise are provided based on historical experience and current product
demand. We evaluate the adequacy of the reserves quarterly. While such markdowns
have been within our expectations and the provisions established, we cannot
guarantee that we will continue to experience the same level of markdowns we
have in the past.
Valuation of Long-Lived Assets -- We assess the carrying value of
long-lived and intangible assets, including unamortized goodwill, as current
facts and circumstances indicate that they may be impaired. In evaluating the
fair value and future benefits of such assets, we perform 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 difference between the fair value of the asset
and its recorded carrying value.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board, or "FASB," issued
Statement of Financial Accounting Standards, or "SFAS," No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. In addition
to requiring the use of the purchase method for all business combinations, SFAS
No. 141 requires intangible assets that meet certain criteria to be recognized
as assets apart from goodwill. SFAS No. 142 addresses accounting and reporting
standards for acquired goodwill and other intangible assets and generally
requires that goodwill and indefinite life intangible assets no longer be
amortized but be tested for impairment annually. Intangible assets that have
finite lives will continue to be amortized over their useful lives. SFAS No. 141
and SFAS No. 142 are effective for our first quarter in the fiscal year ending
March 29, 2003, or for any business combinations initiated after June 30, 2001.
As a result of these pronouncements, goodwill arising from the acquisitions of
PRL Fashions and the Polo Brussels SA store are not being amortized. We are
currently evaluating the impact of adopting these pronouncements on our
consolidated financial position and results of operations. We expect a reduction
in amortization expense of approximately $9.0 million for fiscal 2003.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective for the first
quarter in the fiscal year ending April 3, 2004. The Company does not expect the
adoption of this pronouncement to have a material impact on our consolidated
results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. However, SFAS No. 144 retains the fundamental
provisions of Statement 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is effective for the
first quarter in the fiscal year ending March 29, 2003. We are currently
evaluating the impact of adopting this pronouncement on our consolidated results
of operations.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. In addition to amending and rescinding other existing authoritative
pronouncements to make various technical corrections,
38
clarify meanings, or describe their applicability under changed conditions, SFAS
No. 145 precludes companies from recording gains and losses from the
extinguishment of debt as an extraordinary item. SFAS No. 145 is effective for
our first quarter in the fiscal year ending April 3, 2004. The Company does not
expect the adoption of this pronouncement to have a material impact on our
consolidated results of operations or financial position.
In April 2001, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 00-25, Vendor Income Statement Characteristics of Consideration Paid
to a Reseller of the Vendor's Products. In November 2001, EITF No. 00-25 was
codified by the Emerging Issues Task Force in EITF Issue No. 01-09, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products). EITF No. 01-09 concluded that consideration from a vendor to
a reseller of the vendor's products is presumed to be a reduction of the selling
prices of the vendor's products and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement. That
presumption is overcome and the consideration characterized as a cost incurred
if a benefit is or will be received from the recipient of the consideration if
certain conditions are met. The Company adopted this pronouncement in our fourth
quarter of the fiscal year ended March 30, 2002, and there was no impact on our
consolidated results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the
potential loss in fair value, earnings or cash flows arising from adverse
changes in interest rates or foreign currency exchange rates. We manage these
exposures through operating and financing activities and, when appropriate,
through the use of derivative financial instruments. Our policy allows for the
use of derivative financial instruments for identifiable market risk exposures,
including interest rate and foreign currency fluctuations. The following
quantitative disclosures are based on quoted market prices and theoretical
pricing models obtained through independent pricing sources for the same or
similar types of financial instruments, taking into consideration the underlying
terms and maturities. These quantitative disclosures do not represent the
maximum possible loss or any expected loss that may occur, since actual results
may differ from those estimates.
FOREIGN CURRENCY EXCHANGE RATES
Foreign currency exposures arise from transactions, including firm
commitments and anticipated contracts, denominated in a currency other than an
entity's functional currency, and from foreign-denominated revenues translated
into U.S. dollars. From time to time, we hedge exposures to foreign currency
exchange rate fluctuations with forward foreign exchange contracts. With respect
to foreign operations, substantially all of our foreign subsidiaries operate in
their respective functional currencies. Our primary foreign currency exposures
relate to our Euro debt and Euro investments. The potential loss in value on our
Euro debt and Euro investments based on a hypothetical immediate 10.0% adverse
change in the Euro rate would have been $20.5 million and $1.7 million at March
30, 2002, as compared to $21.7 million and $4.5 million at March 31, 2001. As of
March 30, 2002, a hypothetical immediate 10.0% adverse change in the Euro rate
on the Euro debt and Euro investments would have a $1.3 million and $0.1 million
unfavorable impact on our earnings and cash flows in fiscal 2003.
INTEREST RATES
Our primary interest rate exposure relates to our fixed and variable rate
debt. The fair value of our fixed Euro debt was $199.6 million based on its
quoted market price as listed on the London Stock Exchange and using Euro
exchange rates in effect as of March 30, 2002. The potential loss in value at
March 30, 2002 on our fixed Euro debt based on a hypothetical immediate 10.0%
adverse change in the interest rate would have been $1.3 million. At March 30,
2002, the carrying value of amounts outstanding of $113.0 million under our
variable debt
39
borrowing arrangements under our bank credit facilities approximated their fair
value. We employ an interest rate hedging strategy utilizing swaps to
effectively fix a portion of our interest rate exposure on our floating rate
financing arrangements. At March 30, 2002, we had interest rate swap agreements
with a notional amount of $100.0 million which fixed the interest rate on our
variable rate debt at 5.5%. As of March 30, 2002, a hypothetical immediate 10.0%
adverse change in interest rates relating to our unhedged portion of our
variable rate debt would have a $0.1 million unfavorable impact on our earnings
and cash flows in fiscal 2003.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 13.
ITEM 11. EXECUTIVE COMPENSATION
See Item 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be included by Item 10 through 13 of Form 10-K
will be included in our proxy statement for the 2002 Annual Meeting of
Stockholders, which will be filed within 120 days after the close of our fiscal
year ended March 30, 2002, and that information is incorporated herein by
reference to that proxy statement.
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 (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(a) Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive
Plan (filed as Exhibit 10.1 to the S-1)*+
10.1(b) Amendment to Polo Ralph Lauren Corporation 1997 Long-Term
Stock Incentive Plan (filed as Exhibit A to the Company's
DEF 14A Proxy Statement, filed June 27, 2000)*+
40
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 Polo Ralph Lauren Corporation Executive Officer Annual
Incentive Plan (filed as Exhibit 10.3 to the Fiscal 2000
10-K)+
10.4 Registration Rights Agreement dated as of June 9, 1997 by
and among Ralph Lauren, GS Capital Partners, L.P., GS
Capital Partner 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)*
10.5 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)*
10.6 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)*
10.7 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)*
10.8 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)*
10.9 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)*
10.10 License Agreement, dated as of July 1, 2000, between Ralph
Lauren Home Collection, Inc. and WestPoint Stevens Inc.**
(filed herewith)
10.11 License Agreement, dated March 1, 1998, between The
Polo/Ralph 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)*
10.12 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)*
10.13 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
Company's Annual Report on Form 10-K for the Fiscal Year
ended March 28, 1998 (the "Fiscal 1998 10-K"))*
10.14 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)*
10.15 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)*
41
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16 Form of Credit Agreement by Polo Ralph Lauren Corporation
and The Chase Manhattan Bank (filed as Exhibit 10.24 to the
S-1)*
10.17 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)*
10.18 Credit Agreement between Polo Ralph Lauren Corporation and
the Chase Manhattan Bank dated as of March 30, 1999 (filed
as Exhibit 10.20 to the Fiscal 1999 10-K)
10.19 Fiscal and Paying Agency Agreement dated November 22, 1999
among Polo Ralph Lauren Corporation, its subsidiary
guarantors and The Bank of New York, as fiscal and principal
paying agent (filed as Exhibit 10.1 to the Form 10-Q for the
quarterly period ended January 1, 2000)*
10.20 Stock and Asset Puchase Agreement between Polo Ralph Lauren
Corporation and S.A. Louis Dreyfus, dated November 23, 1999
(filed as Exhibit 2.1 to the Form 10-K filed January 10,
2000)*
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 Amended and Restated Employment Agreement effective April 4,
1999 between Ralph Lauren and Polo Ralph Lauren Corporation
(filed as Exhibit 10.23 to the Fiscal 1999 Form 10-K)*+
10.23 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)*+
10.24 Amendment to Deferred Compensation Agreement made as of
November 10, 1998 between F. Lance Isham and Polo Ralph
Lauren Corporation (filed as Exhibit 10.14 to the Fiscal
1999 10-K)*+
10.26 Amended and Restated Employment Agreement effective November
10, 1998, between F. Lance Isham and Polo Ralph Lauren
Corporation (filed as Exhibit 10.16 to the Fiscal 1999
10-K)*+
10.27 Amendment No. 1 to Amended and Restated Employment Agreement
between Polo Ralph Lauren Corporation and F. Lance Isham,
dated as of December 21, 2000 (filed as Exhibit 10.1 to the
Form 10-Q for the quarterly period ended December 30,
2000).*+
10.28 Employment Agreement effective April 12, 2000 between Polo
Ralph Lauren Corporation and Roger N. Farah (filed as
Exhibit 10.27 to the Fiscal 2000 10-K)*+
10.29 Employment Agreement effective January 1, 2000 between Polo
Ralph Lauren Corporation and Douglas L. Williams (filed as
Exhibit 10.29 to the Fiscal 2000 10-K)*+
10.30 Employment Agreement, dated July 1, 2001, between Polo Ralph
Lauren Corporation and Gerald M. Chaney (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-3
(File No. 333-83500)).*+
10.31 Employment Agreement, dated July 1, 2002, between Polo Ralph
Lauren Corporation and Mitchell A. Kosh (filed as Exhibit
10.2 to the Company's Registration Statement on Form S-3
(File No. 333-83500)).*+
10.32 Polo Ralph Lauren Corporation Profit Sharing Retirement
Savings Plan as Amended and Restated Generally Effective as
of March 31, 2002.+
10.33 Polo Ralph Lauren Corporation Profit Sharing Retirement
Savings Plan (For Hourly Employees of Fashions Outlet of
America, Inc., and Subsidiaries and Polo Clothing Co., Inc.)
as Amended and Restated Generally Effective as of March 31,
2002.+
42
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.34 Consulting Agreement, dated as of March 25, 2002, between
Polo Ralph Lauren Corporation and Arnold H. Aronson+
21.1 List of Significant Subsidiaries of the Company (filed as
Exhibit 21.1 to the Fiscal 2001 10-K)
23.1 Consents of Deloitte & Touche LLP
---------------
* Incorporated herein by reference.
+ Exhibits is a management contract or compensatory plan or arrangement.
** Portions of Exhibits 10.5-10.14 have been omitted pursuant to a request for
confidential treatment and have been filed separately with the Securities and
Exchange Commission.
(b) No current report on Form 8-K was filed by us with the Securities and
Exchange Commission during the last quarter of fiscal 2002.
43
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on June 25, 2002.
POLO RALPH LAUREN CORPORATION
By: /s/ RALPH LAUREN
------------------------------------
Ralph Lauren
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RALPH LAUREN Chairman of the Board, Chief June 25, 2002
--------------------------------------------------- Executive Officer and Director
Ralph Lauren (Principal Executive Officer)
/s/ F. LANCE ISHAM Vice Chairman of the Board of June 25, 2002
--------------------------------------------------- Directors
F. Lance Isham
/s/ ROGER N. FARAH President, Chief Operating Officer June 25, 2002
--------------------------------------------------- and Director
Roger N. Farah
/s/ GERALD M. CHANEY Senior Vice President and Chief June 25, 2002
--------------------------------------------------- Financial Officer (Principal
Gerald M. Chaney Financial and Accounting
Officer)
/s/ FRANK A. BENNACK, JR. Director June 25, 2002
---------------------------------------------------
Frank A. Bennack, Jr.
/s/ JOEL L. FLEISHMAN Director June 25, 2002
---------------------------------------------------
Joel L. Fleishman
/s/ RICHARD FRIEDMAN Director June 25, 2002
---------------------------------------------------
Richard Friedman
/s/ ARNOLD H. ARONSON Director June 25, 2002
---------------------------------------------------
Arnold H. Aronson
/s/ TERRY S. SEMEL Director June 25, 2002
---------------------------------------------------
Terry S. Semel
/s/ JUDITH A. MCHALE Director June 25, 2002
---------------------------------------------------
Judith A. McHale
/s/ DR. JOYCE F. BROWN Director June 25, 2002
---------------------------------------------------
Dr. Joyce F. Brown
44
POLO RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 30, 2002 and March
31, 2001.................................................. F-3
Consolidated Statements of Income for the years ended March
30, 2002, March 31, 2001 and April 1, 2000................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 30, 2002, March 31, 2001 and April 1,
2000...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
March 30, 2002, March 31, 2001 and April 1, 2000.......... 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
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 of Polo Ralph
Lauren Corporation and subsidiaries (the "Company") as of March 30, 2002 and
March 31, 2001, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended March 30,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Polo Ralph Lauren Corporation
and subsidiaries as of March 30, 2002 and March 31, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended March 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company eliminated the 90-day reporting lag for certain of its European
subsidiaries. The results of operations of these subsidiaries for the period
October 1, 2001 through December 29, 2001 are reflected as an adjustment to
retained earnings in the consolidated financial statements for the year ended
March 30, 2002.
As discussed in Note 2 to the consolidated financial statements, effective
April 4, 1999, the Company changed its method of accounting for the costs of
start-up activities.
DELOITTE & TOUCHE LLP
New York, New York
May 21, 2002
F-2
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 30, MARCH 31,
2002 2001
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets
Cash and cash equivalents................................. $ 238,774 $ 102,219
Accounts receivable, net of allowances of $13,175 and
$12,090................................................ 353,608 269,010
Inventories............................................... 349,818 425,594
Deferred tax assets....................................... 17,897 31,244
Prepaid expenses and other................................ 47,960 73,654
---------- ----------
Total current assets.............................. 1,008,057 901,721
Property and equipment, net................................. 343,836 347,757
Deferred tax assets......................................... 58,127 61,056
Goodwill, net............................................... 273,348 249,391
Other assets................................................ 66,129 66,168
---------- ----------
Total assets...................................... $1,749,497 $1,626,093
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable -- banks.................... $ 32,988 $ 86,112
Accounts payable.......................................... 177,472 178,293
Income tax payable........................................ 52,819 --
Accrued expenses and other................................ 128,492 175,172
---------- ----------
Total current liabilities......................... 391,771 439,577
Long-term debt.............................................. 285,414 296,988
Other noncurrent liabilities................................ 74,117 80,219
Commitments and contingencies (Note 14)
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 36,103,439 and 34,948,730 shares issued.... 361 349
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................................ 490,337 463,001
Retained earnings......................................... 602,124 430,047
Treasury Stock, Class A, at cost (3,876,506 and 3,771,806
shares)................................................ (73,246) (71,179)
Accumulated other comprehensive loss...................... (19,799) (10,529)
Unearned compensation..................................... (2,242) (3,040)
---------- ----------
Total stockholders' equity........................ 998,195 809,309
---------- ----------
Total liabilities and stockholders' equity........ $1,749,497 $1,626,093
========== ==========
See accompanying notes to consolidated financial statements.
F-3
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED
-----------------------------------------
MARCH 30, MARCH 31, APRIL 1,
2002 2001 2000
--------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales....................................... $ 2,122,333 $ 1,982,419 $ 1,719,226
Licensing revenue............................... 241,374 243,355 236,302
----------- ----------- -----------
Net revenues.................................. 2,363,707 2,225,774 1,955,528
Cost of goods sold.............................. 1,216,904 1,162,727 1,002,390
----------- ----------- -----------
Gross profit.................................. 1,146,803 1,063,047 953,138
Selling, general and administrative expenses.... 837,591 822,272 689,227
Restructuring charge............................ 16,000 123,554 --
----------- ----------- -----------
Total expenses................................ 853,591 945,826 689,227
----------- ----------- -----------
Income from operations........................ 293,212 117,221 263,911
Foreign currency gains.......................... 1,820 5,846 --
Interest expense................................ (19,033) (25,113) (15,025)
----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle... 275,999 97,954 248,886
Provision for income taxes...................... 103,499 38,692 101,422
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle....................... 172,500 59,262 147,464
Cumulative effect of change in accounting
principle, net of taxes....................... -- -- 3,967
----------- ----------- -----------
Net income.................................... $ 172,500 $ 59,262 $ 143,497
=========== =========== ===========
Income per share before cumulative effect of
change in accounting principle -- Basic....... $ 1.77 $ 0.61 $ 1.49
Cumulative effect of change in accounting
principle, net of taxes, per share -- Basic... -- -- 0.04
----------- ----------- -----------
Net income per share -- Basic................... $ 1.77 $ 0.61 $ 1.45
=========== =========== ===========
Income per share before cumulative effect of
change in accounting principle -- Diluted..... $ 1.75 $ 0.61 $ 1.49
Cumulative effect of change in accounting
principle, net of taxes, per
share -- Diluted.............................. -- -- 0.04
----------- ----------- -----------
Net income per share -- Diluted................. $ 1.75 $ 0.61 $ 1.45
=========== =========== ===========
Weighted-average common shares outstanding --
Basic......................................... 97,470,342 96,773,282 98,926,993
=========== =========== ===========
Weighted-average common shares outstanding --
Diluted....................................... 98,522,718 97,446,482 99,035,781
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TREASURY STOCK,
COMMON STOCK ADDITIONAL AT COST
-------------------- PAID-IN RETAINED --------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
------ ------ ---------- -------- ------ ------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT APRIL 3, 1999..... 100,382,653 $1,004 $450,030 $227,288 603,864 $(16,084)
Comprehensive income:
Net income................. 143,497
Foreign currency
translation adjustments,
net of income taxes of
$6.2 million.............
Total comprehensive
income.............
Repurchases of common stock.. 2,348,813 (41,262)
Restricted stock
amortization...............
----------- ------ -------- -------- --------- --------
BALANCE AT APRIL 1, 2000..... 100,382,653 1,004 450,030 370,785 2,952,677 (57,346)
Comprehensive income:
Net income................. 59,262
Foreign currency
translation adjustments,
net of income tax benefit
of $13.2 million.........
Total comprehensive
income.............
Repurchases of common
stock...................... 819,129 (13,833)
Exercise of stock options.... 448,778 4 10,293
Income tax benefit from stock
option exercises........... 679
Restricted stock grants...... 118,299 1 1,999
Restricted stock
amortization...............
----------- ------ -------- -------- --------- --------
BALANCE AT MARCH 31, 2001.... 100,949,730 1,009 463,001 430,047 3,771,806 (71,179)
Comprehensive income:
Net income................. 172,500
Foreign currency
translation adjustments,
net of income tax benefit
of $4.6 million..........
Cumulative transition
adjustment, net............
Net unrealized gains and
losses on hedges
reclassified into earnings,
net........................
Unrealized loss on hedges,
net........................
Total comprehensive
Income.............
Repurchases of common
stock...................... 104,700 (2,067)
Exercise of stock options.... 1,154,709 12 24,474
Income tax benefit from stock
option exercises........... 2,862
Net loss of certain European
subsidiaries (10/1/01 -
12/29/01).................. (423)
Restricted stock
amortization...............
----------- ------ -------- -------- --------- --------
BALANCE AT MARCH 30, 2002.... 102,104,439 $1,021 $490,337 $602,124 3,876,506 $(73,246)
=========== ====== ======== ======== ========= ========
ACCUMULATED
OTHER
COMPREHENSIVE UNEARNED
INCOME (LOSS) COMPENSATION TOTAL
------------- ------------ -----
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT APRIL 3, 1999..... $ -- $(3,333) $658,905
Comprehensive income:
Net income.................
Foreign currency
translation adjustments,
net of income taxes of
$6.2 million............. 9,655
Total comprehensive
income............. 153,152
Repurchases of common stock.. (41,262)
Restricted stock
amortization............... 1,642 1,642
-------- ------- --------
BALANCE AT APRIL 1, 2000..... 9,655 (1,691) 772,437
Comprehensive income:
Net income.................
Foreign currency
translation adjustments,
net of income tax benefit
of $13.2 million......... (20,184)
Total comprehensive
income............. 39,078
Repurchases of common
stock...................... (13,833)
Exercise of stock options.... 10,297
Income tax benefit from stock
option exercises........... 679
Restricted stock grants...... (2,000) --
Restricted stock
amortization............... 651 651
-------- ------- --------
BALANCE AT MARCH 31, 2001.... (10,529) (3,040) 809,309
Comprehensive income:
Net income.................
Foreign currency
translation adjustments,
net of income tax benefit
of $4.6 million.......... (7,652)
Cumulative transition
adjustment, net............ 4,028
Net unrealized gains and
losses on hedges
reclassified into earnings,
net........................ (4,875)
Unrealized loss on hedges,
net........................ (771)
Total comprehensive
Income............. 163,230
Repurchases of common
stock...................... (2,067)
Exercise of stock options.... 24,486
Income tax benefit from stock
option exercises........... 2,862
Net loss of certain European
subsidiaries (10/1/01 -
12/29/01).................. (423)
Restricted stock
amortization............... 798 798
-------- ------- --------
BALANCE AT MARCH 30, 2002.... $(19,799) $(2,242) $998,195
======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-----------------------------------
MARCH 30, MARCH 31, APRIL 1,
2002 2001 2000
--------- --------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 172,500 $ 59,262 $ 143,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (benefit from) deferred income
taxes............................................ 21,216 (23,430) 6,761
Depreciation and amortization....................... 83,919 78,599 66,280
Cumulative effect of change in accounting
principle........................................ -- -- 3,967
Provision for losses on accounts receivable......... 2,920 547 2,734
Changes in deferred liabilities..................... (15,628) (27,989) 3,155
Provision for restructuring......................... 16,000 98,836 --
Foreign currency gains.............................. (1,820) (5,846) --
Other............................................... 9,173 (9,885) 4,770
Changes in assets and liabilities, net of
acquisitions
Accounts receivable.............................. (92,314) (68,968) (32,746)
Inventories...................................... 82,721 (44,626) 53,325
Prepaid expenses and other....................... 24,143 (22,967) 1,216
Other assets..................................... 6,142 8,042 (9,801)
Accounts payable................................. (11,001) 30,683 31,281
Accrued expenses and other....................... (4,213) 28,028 (31,750)
--------- --------- ---------
Net cash provided by operating activities...... 293,758 100,286 242,689
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net............ (88,008) (105,170) (122,010)
Acquisitions, net of cash acquired.................. (23,702) (20,929) (235,144)
Proceeds from restricted cash for Club Monaco
acquisition...................................... -- -- 44,217
Cash surrender value -- officers' life insurance.... (4,242) (5,152) (5,385)
--------- --------- ---------
Net cash used in investing activities.......... (115,952) (131,251) (318,322)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchases of common stock......................... (2,067) (13,833) (41,262)
Proceeds from exercise of stock options............. 24,486 10,297 --
(Repayments of) proceeds from short-term borrowings,
net.............................................. (52,166) 2,939 (39,400)
Repayments of long-term debt........................ (10,576) (25,289) (37,358)
Proceeds from long-term debt........................ -- -- 319,610
--------- --------- ---------
Net cash (used in) provided by financing
activities.................................. (40,323) (25,886) 201,590
--------- --------- ---------
Effect of exchange rate changes on cash............... (928) (5,501) (5,844)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents......................................... 136,555 (62,352) 120,113
Cash and cash equivalents at beginning of period...... 102,219 164,571 44,458
--------- --------- ---------
Cash and cash equivalents at end of period............ $ 238,774 $ 102,219 $ 164,571
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-----------------------------------
MARCH 30, MARCH 31, APRIL 1,
2002 2001 2000
--------- --------- --------
(IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................. $ 20,193 $ 25,318 $ 7,713
========= ========= =========
Cash paid for income taxes.......................... $ 58,328 $ 72,599 $ 112,202
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Fair value of assets acquired, excluding cash....... $ 49,431 $ -- $ 398,737
Less:
Cash paid........................................ 23,702 -- 235,144
Acquisition obligation........................... 10,500 -- 21,637
--------- --------- ---------
Liabilities assumed................................. $ 15,229 $ -- $ 141,956
========= ========= =========
See accompanying notes to consolidated financial statements.
F-7
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
1. BASIS OF PRESENTATION AND ORGANIZATION
(A) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Polo Ralph
Lauren Corporation ("PRLC") and its wholly and majority owned subsidiaries. All
intercompany balances and transactions have been eliminated. PRLC and its
subsidiaries are collectively referred to herein as "we," "us," "our" and
"ourselves."
We have included the March 30, 2002 and December 31, 2000 balance sheets of
our wholly owned European subsidiaries in the accompanying March 30, 2002 and
March 31, 2001, consolidated balance sheets. We also have consolidated the
results of operations of our wholly owned European subsidiaries for the years
ended March 30, 2002 and December 31, 2000, in the March 30, 2002 and March 31,
2001 consolidated statements of income, stockholders' equity and cash flows.
(B) CONSOLIDATION OF EUROPEAN ENTITIES -- CHANGE IN REPORTING PERIOD
Effective December 30, 2001, for reporting purposes the Company changed the
fiscal year ends of its European subsidiaries as reported in the consolidated
financial statements to the Saturday closest to March 31 to conform with the
fiscal year end of the Company. Previously, certain of the European subsidiaries
were consolidated and reported on a three-month lag with a fiscal year ending
December 31. Accordingly, the net activity shown below for the three-month
period ended December 29, 2001, for those European subsidiaries is reported as
an adjustment to retained earnings in the accompanying financial statements (in
millions):
THREE-MONTHS ENDED DECEMBER 29, 2001:
-------------------------------------
Net sales................................................... $49.5
Gross profit................................................ 25.5
Pre-tax loss................................................ (0.7)
Income tax benefit.......................................... 0.3
Net loss.................................................... $(0.4)
Net income for the year ended March 30, 2002, for the consolidated Company as if
the European subsidiaries remained on a three-month lag would have been $159.7
million.
(C) ACQUISITIONS AND JOINT VENTURE
On October 31, 2001, the Company completed the acquisition of substantially
all of the assets of PRL Fashions of Europe S.R.L. ("PRL Fashions" or "Italian
Licensee") which held licenses to sell our women's Ralph Lauren apparel in
Europe, our men's and boys' Polo Ralph Lauren apparel in Italy and men's and
women's Polo Jeans Co. collections in Italy. The purchase price of this
transaction was approximately $22.0 million in cash plus the assumption of
certain liabilities and earn-out payments based on achieving profitability
targets over the first three years with a guaranteed minimum annual payment of
$3.5 million each year.
The assets acquired of $15.1 million and liabilities assumed of $15.1
million were recorded at estimated fair values as determined by the Company's
management based on information currently available. Goodwill of approximately
$33.5 million has been recognized for the excess of the purchase price over the
preliminary estimate of fair market value of the net assets acquired.
F-8
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is in the process of obtaining independent appraisals of the
intangible assets acquired. Accordingly, the allocation of the purchase price is
subject to revision, which is not expected to be material, based on the final
determination of appraised and other fair values.
On October 22, 2001, we acquired the Polo Brussels SA store from one of our
licensees. The purchase price of this transaction was approximately $3.0 million
in cash, which was primarily allocated to goodwill. The sales and total assets
were not material. The pro forma effect of these two acquisitions on the
historical results were not material.
Consistent with Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets, these acquisitions were accounted for as purchases and the goodwill
recorded is not being amortized.
On February 7, 2000, we announced the formation of Ralph Lauren Media, LLC
("RL Media"), a joint venture between National Broadcasting Company, Inc. and
certain affiliated companies ("NBC") and ourselves. RL Media was created to
bring our American lifestyle experience to consumers via multiple media
platforms, including the Internet, broadcast, cable and print. Under the 30-year
joint venture agreement, RL Media is owned 50% by us and 50% by NBC. In exchange
for a 50% interest, we provide marketing through our annual print advertising
campaign, make our merchandise available at initial cost of inventory and sell
RL Media's excess inventory through our outlet stores, among other things. NBC
will contribute $110.0 million of television and online advertising. NBC will
also contribute $40.0 million in online distribution and promotion and a cash
funding commitment up to $50.0 million. Under the terms of the joint venture
agreement, for tax purposes, we will not absorb any losses from the joint
venture up to the first $50.0 million incurred and will share proportionately in
the net income or losses thereafter. Additionally, we will receive a royalty on
the sale of our products by RL Media based on specified percentages of net sales
over a predetermined threshold, subject to certain limitations; to date, no such
royalty income has been recognized. RL Media's managing board has equal
representation from NBC and us. The joint venture has been accounted for under
the equity method from the effective date of its formation. Our financial basis
in RL Media is zero. Our equity in the net assets of RL Media is less than our
financial basis. We have not recognized any losses in excess of our financial
basis since there are no financial guarantees, commitments or obligations to
fund the operations of RL Media.
On January 6, 2000, we completed the acquisition of stock and certain
assets of Poloco S.A.S. and certain of its affiliates ("Poloco"), which hold
licenses to sell our men's and boys' apparel, our men's and women's Polo Jeans
apparel, and certain of our accessories in Europe. In addition to acquiring
Poloco's wholesale business, we acquired one flagship store in Paris and six
outlet stores located in France, the United Kingdom and Austria. We acquired
Poloco for an aggregate cash consideration of $209.7 million, plus the
assumption of $10.0 million in short-term debt. We used a portion of the net
proceeds from the Eurobond Offering (as defined) to finance this acquisition.
During the quarter ended July 1, 2000, the final 10% of the acquisition price
for Poloco in the amount of $20.9 million was distributed in accordance with the
terms of the agreement. This acquisition has been accounted for as a purchase.
The purchase price has been allocated based upon the fair values of the net
assets acquired at the date of acquisition. This allocation resulted in an
excess of purchase price over the estimated fair value of net assets acquired of
$198.3 million, which has been recorded as goodwill and, until the adoption of
SFAS No. 142, is being amortized on a straight-line basis over an estimated
useful life of 40 years.
F-9
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth unaudited pro forma combined statement of
income information for fiscal 2000 had the acquisition of Poloco occurred at the
beginning of the period:
FISCAL YEAR
2000
-----------
(UNAUDITED)
Pro forma net revenues...................................... $2,135,736
Pro forma net income........................................ 162,398
Pro forma net income per share -- Basic and Diluted......... $ 1.64
The unaudited pro forma information above has been prepared for comparative
purposes only and includes certain adjustments to our historical statements of
income, such as additional amortization as a result of goodwill and increased
interest expense on acquisition debt. The results do not purport to be
indicative of the results of operations that would have resulted had the
acquisition occurred at the beginning of the period, or of future results of
operations of the consolidated entities.
On April 6, 1999, PRL Acquisition Corp., a Nova Scotia unlimited liability
corporation and our wholly owned subsidiary, acquired, through a tender offer,
98.83% of the outstanding shares of Club Monaco Inc. ("Club Monaco"), a
corporation organized under the laws of the Province of Ontario, Canada. On May
3, 1999, PRL Acquisition Corp. acquired the remaining outstanding 1.17% shares
pursuant to a statutory compulsory acquisition. The total purchase price was
$51.0 million in cash based on foreign exchange rates in effect on the dates
indicated. We used funds from our credit facility to finance this acquisition
and to repay in full assumed debt of Club Monaco of $35.0 million. We have
accounted for this acquisition as a purchase and have consolidated the
operations of Club Monaco in the accompanying financial statements from the
effective date of the transaction. The purchase price has been allocated based
upon the fair values of the net assets acquired at the date of the acquisition.
This allocation resulted in an excess of purchase price over the estimated fair
value of net assets acquired of $44.5 million, which has been recorded as
goodwill and, until the adoption of SFAS No. 142, is being amortized on a
straight-line basis over an estimated useful life of 40 years.
(D) BUSINESS
We design, license, contract for the manufacture of, market and distribute
men's and women's apparel, accessories, fragrances, skin care products and home
furnishings. Our sales are principally to major department and specialty stores
located throughout the United States and Europe. We also sell directly to
consumers through full-price, flagship, outlet and Club Monaco stores located
throughout the United States, Canada, Europe, Great Britain and Asia.
We are party to licensing agreements which grant the licensee exclusive
rights to use our various trademarks in connection with the manufacture and sale
of designated products in specified geographical areas. The license agreements
typically provide for designated terms with renewal options based on achievement
of specified sales targets. The agreements also require that certain minimum
amounts be spent on advertising for licensed products. Additionally, as part of
the licensing arrangements, each licensee is typically required to enter into a
design services agreement pursuant to which design and other creative services
are provided. The license and design services agreements provide for payments
based on specified percentages of net sales of licensed products. Additionally,
we have granted royalty-free licenses to independent parties to operate Polo
stores to promote the sale of our merchandise and our licensees' merchandise
both domestically and internationally.
F-10
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A significant amount of our products are produced in the Far East, through
arrangements with independent contractors. As a result, our operations could be
adversely affected 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 our production requirements or by other factors.
2. SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Our fiscal year ends on the Saturday nearest to March 31. All references to
"2002", "2001," and "2000" represent the 52-week fiscal years ended March 30,
2002, March 31, 2001, and April 1, 2000. Fiscal 2002, 2001 and 2000 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. The most
significant estimates embodied in the consolidated financial statements include
reserves for accounts receivable, inventories, taxes, restructuring, and the
accrual for licensing income received.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less, including investments in debt
securities. Our investments in debt securities are diversified among high-credit
quality securities in accordance with our risk management policy and include
corporate debt securities, commercial paper and money market funds.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out, "FIFO",
method), or market.
STORE PRE-OPENING COSTS
Effective April 4, 1999, we adopted the provisions of Statement of Position
No. 98-5 ("SOP No. 98-5"), Reporting on the Costs of Start-up Activities. SOP
No. 98-5 requires that costs of start-up activities, including store pre-opening
costs, be expensed as incurred. Prior to the adoption of SOP No. 98-5, our
accounting policy was to capitalize store pre-opening costs as prepaid expenses
and amortize such costs over a 12-month period following store opening. As a
result of adopting SOP No. 98-5, we recorded a charge of $4.0 million, after
taxes, in fiscal 2000 as the cumulative effect of a change in accounting
principle in the accompanying consolidated financial statements.
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 -- 37.5 years; furniture and fixtures and machinery and equipment -- 3
to 10 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
(up to
F-11
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
28 years). Major additions and betterments are capitalized, and repairs and
maintenance are charged to operations in the period incurred. We capitalize our
share of the cost of outfitting shop-within-shops fixed assets within furniture
and fixtures. These assets are amortized using the straight-line method over
their estimated useful lives of 3 to 5 years.
GOODWILL
Goodwill represents the excess of purchase cost over the fair value of net
assets of businesses acquired. We amortized goodwill on a straight-line basis
over its estimated useful life, ranging from 11 to 40 years. Amortization
expense was $9.0 million, $8.0 million, and $3.7 million in fiscal 2002, 2001
and 2000. Accumulated amortization was $23.7 million and $13.9 million at March
30, 2002 and March 31, 2001. For fiscal years going forward, consistent with the
requirements of SFAS No. 142, goodwill will no longer be amortized but will be
tested for impairment annually.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the carrying value of long-lived and intangible assets, including
unamortized goodwill, as current facts and circumstances indicate that they may
be impaired. In evaluating the fair value and future benefits of such assets, we
perform 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 difference between the fair
value of the asset and its recorded carrying value. See Note 3 for long-lived
and intangible asset write downs recorded in connection with our fiscal 2001
Operational Plan (as defined -- see Note 3) and fiscal 1999 Restructuring Plan
(as defined -- see Note 3).
OFFICERS' LIFE INSURANCE
We maintain key man life insurance policies on several of our 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 $46.3
million and $42.0 million at March 30, 2002, and March 31, 2001, and are
included in other assets in the accompanying consolidated balance sheets.
REVENUE RECOGNITION
Sales, including sales made to customers in connection with our
shop-within-shops, are recognized upon shipment of products to customers since
title passes upon shipment and, in the case of sales by our retail and outlet
stores, when goods are sold to consumers. Allowances for estimated uncollectible
accounts, discounts, returns and allowances are provided when sales are
recorded. Licensing revenue is recognized based upon shipment of licensed
products sold by our licensees, net of allowances.
ADVERTISING
We expense the production costs of advertising, marketing and public
relations expenses upon the first showing of the related advertisement. We
expense the costs of advertising paid to customers under cooperative advertising
programs when the related advertisements are run. Total advertising expenses,
including cooperative advertising, included within selling, general and
F-12
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative expenses amounted to $79.8 million, $88.8 million and $73.6
million in fiscal 2002, 2001, and 2000.
INCOME TAXES
We account 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.
DEFERRED RENT OBLIGATIONS
We account for rent expense under noncancelable 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 is recorded as a deferred liability. Unamortized
deferred rent obligations amounted to $43.1 million and $46.8 million at March
30, 2002 and March 31, 2001, and are included in accrued expenses and other, and
other noncurrent liabilities in the accompanying consolidated balance sheets.
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATIONS
The financial position and results of operations of our foreign
subsidiaries 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 other
comprehensive income, net of taxes, except for certain foreign-denominated debt.
We have designated a portion of our Eurobond (as defined -- see Note 7) debt as
a hedge of our net investment in a foreign subsidiary. Transaction gains or
losses on the unhedged portion resulting from changes in the Eurodollar Rate are
recorded in income and amounted to $1.8 million and $5.8 million in fiscal 2002
and 2001. Gains and losses from other foreign currency transactions are included
in operating results and were not material.
FINANCIAL INSTRUMENTS
We, from time to time, use derivative financial instruments to reduce our
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 generally would be offset by gains on the related exposure.
The accounting for changes in the fair value of a derivative is dependent upon
the intended use of the derivative. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133") defines new requirements for
designation and documentation of hedging relationships as well as ongoing
effectiveness assessments in order to use hedge accounting. For a derivative
that does not qualify as a hedge, changes in fair value will be recognized in
earnings.
As described further in Note 9, we have entered into interest rate swap
agreements and forward foreign exchange contracts which qualify as cash flow
hedges under SFAS No. 133. In accordance with SFAS No. 133, we have recorded the
fair value of these derivatives at April 1, 2001 and the resulting net
unrealized gain, after taxes, of approximately $4.0 million in other
comprehensive income as a cumulative transition adjustment. Also, as described
above, we have designated a portion of our Eurobond (as defined -- see Note 7)
debt as a hedge of our net investment in a foreign subsidiary. Changes in the
fair value of the Eurobonds resulting from
F-13
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
changes in the Eurodollar Rate, which are attributable to the hedged portion of
the debt, are reported net of income taxes in other comprehensive income as an
unrealized foreign currency translation adjustment.
STOCK OPTIONS
We use 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 have adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
COMPREHENSIVE INCOME
Other comprehensive income consists of foreign currency translation
adjustments, net of taxes, and is reflected in the consolidated statements of
stockholders' equity.
COST OF GOODS SOLD AND SELLING EXPENSES
Cost of goods sold includes the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs, as well
as reserves for shrinkage. The costs of selling the merchandise, including
preparing the merchandise for sale, such as picking, packing, warehousing and
order charges, are included in selling, general and administrative expenses.
SHIPPING AND HANDLING COSTS
We reflect shipping and handling costs as a component of selling, general
and administrative expenses in the consolidated statements of income. The
shipping and handling costs approximated $57.4 million, $46.2 million, and $33.5
million, in fiscal years 2002, 2001, and 2000, respectively. As a percent of
revenues, they represented 2.7%, 2.3%, and 1.9% in 2002, 2001, and 2000,
respectively. We bill our wholesale customers for shipping and handling costs
and record such revenues in net sales upon shipment.
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, excluding any
potential dilution. Diluted net income per share was calculated similarly but
includes potential dilution from the exercise of stock options and awards. 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 our stock option plans, which were 1,052,376; 673,200; and 108,788 shares
for fiscal 2002, 2001, and 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or "FASB", issued
Statement of Financial Accounting Standards, or SFAS No. 141 and SFAS No. 142.
In addition to requiring the use of the purchase method for all business
combinations, SFAS No. 141 requires intangible assets that meet certain criteria
to be recognized as assets apart from goodwill. SFAS No. 142 addresses
accounting and reporting standards for acquired goodwill and other intangible
assets and generally, requires that goodwill and indefinite life intangible
assets no longer be amortized but be tested for impairment annually. Intangible
assets that have finite lives will continue to be
F-14
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over their useful lives. SFAS No. 141 and SFAS No. 142 are effective
for the Company's first quarter in the fiscal year ending March 29, 2003 or for
any business combinations initiated after June 30, 2001. As a result of these
pronouncements, goodwill arising from the acquisitions of PRL Fashions and the
Polo Brussels SA store are not being amortized. The Company is currently
evaluating the impact of adopting these pronouncements on its consolidated
financial position and results of operations. The Company expects a reduction in
amortization expense of approximately $9.0 million for fiscal 2003.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective for the first
quarter in the fiscal year ending April 3, 2004. The Company does not expect the
adoption of this pronouncement to have a material impact on our consolidated
results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. However, this Statement retains the fundamental
provisions of Statement 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is effective for the
first quarter in the fiscal year ending March 29, 2003. The Company is currently
evaluating the impact of adopting this pronouncement on our consolidated results
of operations.
In April 2002, the FASB, issued SFAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. In addition to amending and rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. SFAS No. 145 is effective for our first quarter in the
fiscal year ending April 3, 2004. The Company does not expect the adoption of
this pronouncement to have a material impact on our consolidated results of
operations or financial position.
In April 2001, the FASB's Emerging Issues Task Force (EITF") reached a
consensus on Issue No. 00-25, Vendor Income Statement Characteristics of
Consideration Paid to a Reseller of the Vendor's Products ("EITF No. 00-25"). In
November 2001, EITF No. 00-25 was codified in EITF Issue No. 01-09, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products). EITF No. 01-09 concluded that consideration from a vendor to
a reseller of the vendor's products is presumed to be a reduction of the selling
prices of the vendor's products and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement. That
presumption is overcome and the consideration characterized as a cost incurred
if a benefit is or will be received from the recipient of the consideration if
certain conditions are met. The Company adopted this pronouncement in our fourth
quarter in the fiscal year ended March 30, 2002 and there was no impact on our
consolidated results of operations.
F-15
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
For comparative purposes, certain prior period amounts have been
reclassified to conform to the current period's presentation.
3. RESTRUCTURING AND SPECIAL CHARGES
(a) 2001 OPERATIONAL PLAN
During the second quarter of fiscal 2001, we completed an internal
operational review and formalized our plans to enhance the growth of our
worldwide luxury retail business, to better manage inventory and to increase our
overall profitability (the "Operational Plan"). The major initiatives of the
Operational Plan included: refining our retail strategy; developing efficiencies
in our supply chain; and consolidating corporate strategic business functions
and internal processes.
In connection with refining our retail strategy, we closed all 12 Polo
Jeans Co. full-price retail stores and 11 underperforming Club Monaco retail
stores. Costs associated with this aspect of the Operational Plan included lease
and contract termination costs, store fixed asset write downs (primarily
leasehold improvements of $21.5 million) and severance and termination benefits.
Additionally, as a result of changes in market conditions combined with our
change in retail strategy in certain locations in which we operate full-price
retail stores, we performed an evaluation of the recoverability of the assets of
certain of these stores in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. We
concluded from the results of this evaluation that a significant permanent
impairment of long-lived assets had occurred. Accordingly, we recorded a write
down of these assets (primarily leasehold improvements) to their estimated fair
value based on discounted future cash flows.
In connection with the implementation of the Operational Plan, we recorded
a pretax restructuring charge of $128.6 million in our second quarter of fiscal
2001, subsequently adjusted for a $5.0 million reduction of liabilities in the
fourth quarter of fiscal 2001. After extensive review of the Operational Plan,
and changes in business conditions in certain markets in which we operate, we
made adjustments to the Operational Plan in the fourth quarter of fiscal 2002.
We recorded an additional $16.0 million of lease termination costs associated
with the closure of our retail stores due to market factors that were less
favorable than originally estimated. The major components of the charge and the
activity through March 30, 2002, were as follows:
LEASE AND
SEVERANCE AND ASSET CONTRACT
TERMINATION WRITE TERMINATION OTHER
BENEFITS DOWNS COSTS COSTS TOTAL
------------- ----- ----------- ----- -----
2001 provision............... $ 7,947 $ 98,835 $ 15,638 $1,134 $ 123,554
2001 activity................ (5,005) (98,835) (11,469) (352) (115,661)
------- -------- -------- ------ ---------
Balance at March 31, 2001.... 2,942 -- 4,169 782 7,893
2002 activity................ (2,150) -- (6,014) (767) (8,931)
Additional provision......... -- -- 16,000 -- 16,000
------- -------- -------- ------ ---------
Balance at March 30, 2002.... $ 792 $ -- $ 14,155 $ 15 $ 14,962
======= ======== ======== ====== =========
Our operational review also targeted our supply chain management as one of
the most important areas for improvement. In connection with initiating this
aspect of the Operational Plan, we recorded $37.9 million of inventory write
downs in our second quarter of fiscal year 2001
F-16
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
associated with our planned acceleration in the reduction of aged inventory. In
the fourth quarter of fiscal 2001, we determined that the original provision was
not sufficient and recorded additional inventory write downs of $3.6 million.
These charges are reflected in cost of goods sold in the accompanying
consolidated statement of income.
Our Operational Plan also included the consolidation of certain corporate
strategic business functions and internal processes. Costs associated with this
aspect of the plan included the termination of operating contracts, streamlining
of certain corporate and operating functions, and employee-related matters.
These costs aggregated $18.1 million and are included in selling, general and
administrative expenses in the accompanying consolidated statement of income.
Total severance and termination benefits as a result of the Operational
Plan related to approximately 550 employees, all of whom have been terminated.
Total cash outlays related to the Operational Plan are expected to be
approximately $40.7 million, $25.7 million of which have been paid through March
30, 2002. We completed the implementation of the Operational Plan in fiscal 2002
and expect to settle the remaining liabilities in fiscal 2003.
(B) 1999 RESTRUCTURING PLAN
During the fourth quarter of fiscal 1999, we formalized our plans to
streamline operations within our wholesale and retail operations and reduce our
overall cost structure (the "Restructuring Plan"). The major initiatives of the
Restructuring Plan included the following: an evaluation of our retail
operations and site locations; the realignment and operational integration of
our wholesale operating units; and the realignment and consolidation of
corporate strategic business functions and internal processes.
In an effort to improve the overall profitability of our retail operations,
we closed three Polo stores and three outlet stores that were not performing at
an acceptable level. Additionally, we converted two Polo stores and five outlet
stores to new concepts expected to be more productive. Costs associated with
this aspect of the Restructuring Plan included lease and contract termination
costs, store fixed asset (primarily leasehold improvements) and intangible asset
write downs and severance and termination benefits.
Our 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, we integrated the sourcing
and production of our Polo Brands, outlet store and licensees' products into one
consolidated unit. Costs associated with the wholesale realignment consisted
primarily of severance and termination benefits and lease termination costs. Our
review of our corporate business functions and internal processes resulted in a
new management structure designed to better align businesses with similar
functions and to identify and eliminate duplicative processes. Costs associated
with the corporate realignment consisted primarily of severance and termination
benefits and lease and contract termination costs.
F-17
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the implementation of the Restructuring Plan, we
recorded a pretax restructuring charge of $58.6 million in our fourth quarter of
fiscal 1999. The major components of the restructuring charge and the activity
through March 30, 2002, 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)
------- -------- -------- ----- --------
Balance at April 3, 1999....... 11,959 -- 23,553 725 36,237
2000 activity.................. (4,694) -- (18,675) (585) (23,954)
------- -------- -------- ----- --------
Balance at April 1, 2000....... 7,265 -- 4,878 140 12,283
2001 activity.................. (3,019) -- (3,131) (140) (6,290)
------- -------- -------- ----- --------
Balance at March 31, 2001...... 4,246 -- 1,747 -- 5,993
2002 activity.................. (2,790) -- (521) -- (3,311)
------- -------- -------- ----- --------
Balance at March 30, 2002...... $ 1,456 $ -- $ 1,226 $ -- $ 2,682
======= ======== ======== ===== ========
After extensive review of the Restructuring Plan, and changes in business
conditions in certain markets in which we operate, we made adjustments to the
Restructuring Plan and incurred other restructuring-related costs in fiscal
2000. These adjustments included the following: (i) a $0.9 million reduction of
the liability for lease and contract termination costs resulting from the
overestimation of costs associated with the closure and conversion of our retail
stores due to improved market conditions; and (ii) a $0.9 million charge for the
underestimation of severance and termination benefits recorded in the
Restructuring Plan. The above adjustments had no net impact.
Total severance and termination benefits as a result of the Restructuring
Plan related to 280 employees, all of whom have been terminated. Total cash
outlays related to the Restructuring Plan are approximately $39.5 million, $36.8
million of which have been paid through March 30, 2002. We completed the
implementation of the Restructuring Plan in fiscal 2000 and expect to settle the
remaining liabilities in accordance with contract terms which extend until
fiscal 2003.
4. INVENTORIES
MARCH 30, MARCH 31,
2002 2001
--------- ---------
Raw materials............................................... $ 3,874 $ 7,024
Work-in-process............................................. 5,469 6,251
Finished goods.............................................. 340,475 412,319
-------- --------
$349,818 $425,594
======== ========
F-18
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
MARCH 30, MARCH 31,
2002 2001
--------- ---------
Land and improvements....................................... $ 3,720 $ 3,408
Buildings................................................... 17,250 17,249
Furniture and fixtures...................................... 258,816 229,824
Machinery and equipment..................................... 105,136 92,289
Leasehold improvements...................................... 318,734 298,033
-------- --------
703,656 640,803
Less: accumulated depreciation and amortization............. 359,820 293,046
-------- --------
$343,836 $347,757
======== ========
6. ACCRUED EXPENSES AND OTHER
MARCH 30, MARCH 31,
2002 2001
--------- ---------
Accrued operating expenses.................................. $ 74,537 $108,441
Accrued payroll and benefits................................ 25,124 37,760
Accrued restructuring charges............................... 17,644 13,886
Accrued shop-within-shops................................... 11,187 15,085
-------- --------
$128,492 $175,172
======== ========
7. FINANCING AGREEMENTS
On June 9, 1997, we 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 our option, at a Base Rate equal to the higher of the
Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus
1/2 of one percent, and the prime commercial lending rate of The Chase
Manhattan Bank in effect from time to time, or at the Eurodollar Rate (LIBOR)
plus an interest margin.
On March 30, 1999, in connection with our acquisition of Club Monaco, we
entered into a $100.0 million senior credit facility (the "1999 Credit
Facility") with a syndicate of banks consisting of a $20.0 million revolving
line of credit and an $80.0 million term loan (the "Term Loan"). The revolving
line of credit is available for working capital needs and general corporate
purposes and matures on June 30, 2003. The Term Loan was used to finance the
acquisition of the stock of Club Monaco and to repay existing indebtedness of
Club Monaco. The Term Loan is repayable on June 30, 2003. Borrowings under the
1999 Credit Facility bear interest, at our option, at a Base Rate equal to the
higher of the Federal Funds Rate, as published by the Federal Reserve Bank of
New York, plus 1/2 of one percent, and the prime commercial lending rate of The
Chase Manhattan Bank in effect from time to time, or at the Eurodollar Rate
(LIBOR) plus an interest margin. In April 1999, we 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% (see Note 9).
The Credit Facility and 1999 Credit Facility (the "Credit Facilities")
contain customary representations, warranties, covenants and events of default,
including covenants regarding
F-19
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 our common stock. On
October 18, 2000, we received consent from our lenders under the Credit
Facilities permitting us to incur the charges we recorded in connection with the
Operational Plan (see Note 3) up to specified thresholds.
On November 22, 1999, we issued Euro 275.0 million of 6.125% Notes (the
"Eurobonds") due November 2006 (the "Eurobond Offering"). The Eurobonds are
listed on the London Stock Exchange. The net proceeds from the Eurobond Offering
were $281.5 million based on the Euro exchange rate on the issuance date. A
portion of the net proceeds from the issuance was used to finance the
acquisition of stock and certain assets of Poloco while the remaining net
proceeds were retained for general corporate purposes. Interest on the Eurobonds
is payable annually. During fiscal 2002 and 2001, we repurchased Euro 11.9
million and Euro 27.5 million of our outstanding Eurobonds, or $10.6 million and
$25.3 million, respectively, based on Euro exchange rates. The loss on this
early extinguishment of debt was not material.
In connection with the Poloco acquisition, we assumed borrowings under
short-term facilities which represent overdraft positions on bank accounts.
These borrowings bore interest at 0.5% to 1.0% over the Euro Overnight Indexed
Average which was 3.39%, 5.16% and 3.75% at March 30, 2002, March 31, 2001 and
April 1, 2000, respectively.
At March 30, 2002, we had $33.0 million outstanding in direct borrowings,
$80.0 million outstanding under the Term Loan and $205.0 million outstanding in
Eurobonds based on the year-end Euro exchange rate. We were also contingently
liable for $17.2 million in outstanding letters of credit related primarily to
commitments for the purchase of inventory. At March 31, 2001, we had $86.1
million outstanding in direct borrowings, $80.0 million outstanding under the
Term Loan and $217.0 million outstanding in Eurobonds based on the year-end Euro
exchange rate. The Credit Facilities bore interest primarily at the
institution's prime rate. The weighted average interest rate on borrowings was
5.9%, 6.3%, and 6.1% in fiscal 2002, 2001, and 2000, respectively.
F-20
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The components of the provision for income taxes were as follows:
FISCAL YEAR
--------------------------------
2002 2001 2000
---- ---- ----
Current:
Federal....................................... $ 58,529 $ 27,984 $ 71,565
State and local............................... 6,457 21,605 17,398
Foreign....................................... 17,297 12,533 5,698
-------- -------- --------
82,283 62,122 94,661
-------- -------- --------
Deferred:
Federal....................................... 15,835 (11,689) 4,527
State and local............................... 4,672 (12,367) 2,234
Foreign....................................... 709 626 --
-------- -------- --------
21,216 (23,430) 6,761
-------- -------- --------
$103,499 $ 38,692 $101,422
======== ======== ========
The foreign and domestic components of income (loss) before income taxes
were as follows:
FISCAL YEAR
--------------------------------
2002 2001 2000
---- ---- ----
Domestic........................................ $287,291 $127,071 $215,270
Foreign......................................... (11,292) (29,117) 33,616
-------- -------- --------
$275,999 $ 97,954 $248,886
======== ======== ========
The deferred tax assets reflect the net tax effect of temporary
differences, primarily net operating loss carryforwards, property and equipment
and accounts receivable, between the carrying amounts of assets and liabilities
for financial reporting and the amounts used for income
F-21
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax purposes. The components of the net deferred tax assets at March 30, 2002
and March 31, 2001 were as follows:
MARCH 30, MARCH 31,
2002 2001
--------- ---------
DEFERRED TAX ASSETS:
Net operating loss carryforwards............................ $33,390 $ 30,651
Property and equipment...................................... 24,530 27,622
Accounts receivable......................................... 5,233 14,785
Uniform inventory capitalization............................ 6,219 8,217
Deferred compensation....................................... 9,206 6,628
Restructuring reserves...................................... 8,134 5,106
Trademark expenses.......................................... 116 4,473
Accrued expenses............................................ 1,900 2,057
Accrued royalty income...................................... -- 1,941
Other....................................................... 11,057 13,246
------- --------
99,785 114,726
Less: Valuation allowance................................... 23,761 22,426
------- --------
$76,024 $ 92,300
======= ========
We have available Federal net operating loss carryforwards of approximately
$13.1 million and state net operating loss carryforwards of approximately $148.0
million for tax purposes to offset future taxable income. The net operating loss
carryforwards expire beginning in fiscal 2004. 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. As a result of the limitation of
Section 382, we believe that approximately $3.3 million of the Federal net
operating loss carryforwards will expire and not be utilized. A valuation
allowance has been recorded against such net operating losses.
Also, we have available additional state and foreign net operating loss
carryforwards of approximately $10.8 million and $62.9 million for which no net
deferred tax asset has been recognized. A full valuation allowance has been
recorded since we do not believe that we will more likely than not be able to
utilize these carryforwards to offset future taxable income. Subsequent
recognition of a substantial portion of the deferred tax asset relating to these
Federal, state and foreign net operating loss carryforwards would result in a
reduction of goodwill recorded in connection with acquisitions. Additionally, we
have recorded a valuation allowance against certain other deferred tax assets
relating to our Canadian operations. Subsequent recognition of these deferred
tax assets, as well as a portion of the foreign net operating loss
carryforwards, would result in an income tax benefit in the year of such
recognition.
Provision has not been made for United States or additional foreign taxes
on approximately $68 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. We
believe 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-22
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The historical provision for income taxes in fiscal 2002, 2001 and 2000
differs from the amounts computed by applying the statutory Federal income tax
rate to income before income taxes due to the following:
FISCAL YEAR
-------------------------------
2002 2001 2000
---- ---- ----
Provision for income taxes at statutory Federal
rate............................................ $ 96,600 $34,284 $ 87,110
Increase (decrease) due to:
State and local income taxes, net of Federal
Benefit...................................... 7,233 6,005 12,761
Foreign income taxes, net....................... (7,308) (2,499) 753
Other........................................... 6,974 902 798
-------- ------- --------
$103,499 $38,692 $101,422
======== ======= ========
9. FINANCIAL INSTRUMENTS
In April 1999, we entered into interest rate swap agreements with
commercial banks which expire in 2003 to hedge against interest rate
fluctuations. The swap agreements effectively convert borrowings under the 1999
Credit Facility from variable rate to fixed rate obligations. Under the terms of
these agreements, we make payments at a fixed rate of 5.5% and receive payments
from the counterparty based on the notional amount of $100.0 million at a
variable rate based on the London Inter-Bank Offer Rate ("LIBOR"). The net
interest paid or received on this arrangement is included in interest expense.
The fair value of these agreements was based upon the estimated amount that we
would have to pay to terminate the agreements, as determined by the financial
institutions. The fair value of these agreements was an unrealized loss of $2.6
million at March 30, 2002, of which, approximately $2.3 million is expected to
be reclassified into earnings during fiscal 2003; and an unrealized loss of $1.4
million at March 31, 2001.
We enter into forward foreign exchange contracts as hedges relating to
identifiable currency positions to reduce our risk from exchange rate
fluctuations on inventory purchases. Gains and losses on these contracts are
deferred and recognized as adjustments to the basis of those assets. At March
30, 2002 we had foreign exchange contracts outstanding as follows: (i) to
deliver Euro 39.3 million in fiscal 2003 in exchange for $34.6 million; and (ii)
to deliver 12.7 million British Pounds in fiscal 2003 in exchange for $18.0
million. The fair value of these contracts resulted in an unrealized gain of
approximately $0.4 million at March 30, 2002. At March 31, 2001, we had foreign
exchange contracts outstanding as follows: (i) to receive 60 million French
Francs in fiscal 2001 in exchange for 5.6 million British Pounds; (ii) to
deliver 279 million French Francs in fiscal 2001 in exchange for $50.0 million;
(iii) to deliver 1.5 million British Pounds in fiscal 2001 in exchange for Euro
2.5 million; and (iv) to deliver $1.3 million in fiscal 2001 in exchange for
Euro 1.5 million. The fair value of these contracts resulted in an unrealized
gain of approximately $10.0 million at March 31, 2001.
The carrying amounts of financial instruments reported in the accompanying
consolidated balance sheets at March 30, 2002, and March 31, 2001, approximated
their estimated fair values, except for the Eurobonds, primarily due to either
the short-term maturity of the instruments or their adjustable market rate of
interest. The fair value of the Eurobonds, net of discounts, was $205.4 million
and $217.1 million as of March 30, 2002 and March 31, 2001, based on its quoted
market price as listed on the London Stock Exchange. In addition, because we
have designated a portion of our Eurobond (as defined -- see Note 7) debt as a
hedge of our net investment in a foreign subsidiary, changes in the fair value
of the Eurobonds resulting from changes in the
F-23
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Eurodollar Rate, which are attributable to the hedged portion of the debt, are
reported net of income taxes in other comprehensive income as an unrealized
foreign currency translation adjustment.
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 we could realize in a current market exchange.
10. CONCENTRATION OF CREDIT RISK
We sell our merchandise primarily to major upscale department stores across
the United States and extend 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 us or to cease carrying our
products could have a material adverse effect. We had three customers who in
aggregate constituted approximately 35% and 52% of trade accounts receivable
outstanding at March 30, 2002 and March 31, 2001.
We had three significant customers who accounted for approximately 10%, 9%
and 9% each of net sales, in fiscal 2002. We had three significant customers who
accounted for approximately 11%, 10% and 10% each of net sales in fiscal 2001,
and for approximately 12%, 11% and 10% each of net sales in fiscal 2000.
Additionally, we had four significant licensees who in aggregate constituted
approximately 55%, 53% and 58% of licensing revenue in fiscal 2002, 2001 and
2000.
We monitor credit levels and the financial condition of our customers on a
continuing basis to minimize credit risk. We believe that adequate provision for
credit loss has been made in the accompanying consolidated financial statements.
We are also subject to concentrations of credit risk with respect to our
cash and cash equivalents, marketable securities, interest rate swap agreements
and forward foreign exchange contracts which we attempt to minimize by entering
into these arrangements with major banks and financial institutions and
investing in high-quality instruments. We do not expect any counterparties to
fail to meet their obligations.
11. EMPLOYEE BENEFITS
PROFIT SHARING RETIREMENT SAVINGS PLANS
We sponsor 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. We make discretionary contributions to the plans and contribute 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 our matching and
discretionary contributions after five years of credited service. Contributions
under these plans approximated $6.0 million, $7.4 million and $4.3 million in
fiscal 2002, 2001 and 2000.
UNION PENSION
We participate in a multi-employer pension plan and are 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 these
dues is allocated by the Union to a retirement fund which provides defined
benefits to substantially all unionized workers. We do not participate
F-24
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the management of the plan and have not been furnished with information with
respect to the type of benefits provided, vested and nonvested benefits or
assets.
Under the Employee Retirement Income Security Act of 1974, as amended, an
employer, upon withdrawal from or termination of a multi-employer plan, is
required to continue funding its proportionate share of the plan's unfunded
vested benefits. Such withdrawal liability was assumed in conjunction with the
acquisition of certain assets from a nonaffiliated licensee. We have no current
intention of withdrawing from the plan.
DEFERRED COMPENSATION
We have 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 $20.3 million and $18.1
million at March 30, 2002, and March 31, 2001, and are reflected in other
noncurrent liabilities in the accompanying consolidated balance sheets. Total
compensation expense related to these compensation arrangements was $3.6
million, $3.2 million and $2.6 million in fiscal 2002, 2001, and 2000. We fund 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 consolidated balance sheets.
12. COMMON STOCK
All of our outstanding Class B common stock is owned by Mr. Ralph Lauren
and related entities and all of our outstanding Class C common stock is owned by
certain investment funds affiliated with The Goldman Sachs Group, Inc.
(collectively, 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
members 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 entitled to vote
will vote together as a single class on all matters presented to the
stockholders for their vote or approval except for the election and the removal
of directors and as otherwise required by applicable law. Class A common stock,
Class B common stock and Class C common stock are collectively referred to
herein as "Common Stock."
13. STOCK INCENTIVE PLANS
On June 9, 1997, our 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
with respect to a maximum of 10.0 million shares of our Class A common stock
(the "Shares"), subject to adjustment to avoid dilution or enlargement of
intended benefits in the event of certain significant corporate events, which
awards may be made in the form of: (i) nonqualified stock options; (ii) stock
options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code; (iii) stock appreciation rights; (iv) restricted stock
and/or restricted stock units; (v) performance awards; and (vi) other
stock-based awards. On June 13, 2000, our Board of Directors increased the
maximum number of Shares that can be granted under the Stock Incentive Plan to
20.0 million
F-25
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares, which was approved by the stockholders on August 17, 2000. At March 30,
2002, we had 8.8 million Shares reserved for issuance under this plan.
On June 9, 1997, our 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 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 2002, 2001 and 2000, our Board of Directors granted options to purchase
19,500, 12,250, and 12,000 Shares with exercise prices equal to the stock's fair
market value on the date of grant. At March 30, 2002, we had 390,250 options
reserved for issuance under this plan.
Stock options were granted in fiscal 2002, 2001, and 2000 under the plans
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
and non-employee directors. The options expire ten years from the date of grant.
No compensation cost has been recognized in the accompanying consolidated
financial statements in accordance with APB No. 25. If compensation cost had
been recognized for stock options granted under the plans based on the fair
value of the stock options at the grant date in accordance with SFAS No. 123,
our historical net income and net income per share in fiscal 2002, 2001, and
2000 would have been reduced to the following pro forma amounts:
FISCAL YEAR
-------------------------------
2002 2001 2000
---- ---- ----
Pro forma net income.............................. $151,313 $43,120 $128,000
Pro forma net income per share --
Basic........................................... 1.55 0.45 1.29
Diluted......................................... 1.54 0.44 1.29
We used the Black-Scholes option-pricing model to determine the fair value
of grants made. The weighted-average fair value of options granted was $22.03,
$11.14, and $12.33 per share in fiscal 2002, 2001 and 2000. The following
assumptions were applied in determining the fair value of options granted:
FISCAL YEAR
-----------------------------
2002 2001 2000
---- ---- ----
Risk-free interest rate................................ 4.65% 6.35% 5.81%
Expected dividend yield................................ 0% 0% 0%
Weighted-average expected option life.................. 6.0yrs 6.0yrs 6.0yrs
Expected stock price volatility........................ 105% 85.0% 65.0%
F-26
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the Stock Incentive Plan and Non-Employee
Directors Plan in fiscal 2002, 2001 and 2000 was as follows:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
BALANCE AT APRIL 3, 1999.................................... 5,298 $26.53
Granted................................................... 2,767 19.07
Exercised................................................. -- --
Forfeited................................................. (815) 25.64
------ ------
BALANCE AT APRIL 1, 2000.................................... 7,250 $23.77
Granted................................................... 2,831 14.73
Exercised................................................. (449) 22.95
Forfeited................................................. (764) 22.00
------ ------
BALANCE AT MARCH 31, 2001................................... 8,868 $20.79
Granted................................................... 2,450 26.59
Exercised................................................. (1,155) 21.20
Forfeited................................................. (709) 21.75
------ ------
BALANCE AT MARCH 30, 2002................................... 9,454 $22.16
====== ======
Additional information relating to options outstanding as of March 30,
2002, was as follows:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING EXERCISE PRICE OF NUMBER EXERCISE PRICE OF
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE OPTIONS OUTSTANDING EXERCISABLE EXERCISABLE OPTIONS
--------------- ----------- ---------------- ------------------- ----------- -------------------
$13.94 - $17.06 2,130 8.2 $14.33 711 $14.34
$17.13 - $19.56 1,666 7.2 19.01 1,121 19.02
$20.19 - $25.69 299 7.9 21.86 157 21.51
$26.00 - $29.91 5,359 7.1 26.74 3,054 26.77
----- --- ------ ----- ------
9,454 7.4 $22.16 5,044 $23.13
===== === ====== ===== ======
In March 1998, our Board of Directors authorized the repurchase, subject to
market conditions, of up to $100.0 million of our Shares. Share repurchases were
made in the open market over the two-year period which commenced April 1, 1998.
The Board of Directors authorized the extension of the stock repurchase program
through March 31, 2004. Shares acquired under the repurchase program will be
used for stock option programs and for other corporate purposes. The repurchased
shares have been accounted for as treasury stock at cost. As of March 30, 2002,
we had repurchased 3,876,506 shares of our Class A common stock at an aggregate
cost of $73.2 million.
14. COMMITMENTS AND CONTINGENCIES
LEASES
We lease office, warehouse and retail space and office equipment under
operating leases which expire through 2029. As of March 30, 2002, aggregate
minimum annual rental payments
F-27
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under noncancelable operating leases with lease terms in excess of one year were
payable as follows:
FISCAL YEAR ENDING
------------------
2003........................................................ $ 83,218
2004........................................................ 77,090
2005........................................................ 71,122
2006........................................................ 62,270
2007........................................................ 52,395
--------
Thereafter.................................................. 306,952
--------
$653,047
========
Rent expense charged to operations was $83.2 million, $75.6 million and
$66.7 million, net of sublease income of $0.4 million, $2.2 million, and $1.7
million, in fiscal 2002, 2001 and 2000. Substantially all outlet and retail
store leases provide for contingent rentals based upon sales and require us 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 $6.2 million, $6.1 million, and $5.3 million in fiscal 2002, 2001
and 2000.
EMPLOYMENT AGREEMENTS
We are 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.
TAXES
The predecessor of Poloco, which we acquired in January 2000, has been
subject to a tax audit in France for the years 1996, 1997 and 1998. In late
December 1999, the French tax authorities issued a notification preliminarily
advising that additional taxes, penalties and interest would be due for the
years in question. Poloco and its former parent, S.A. Louis Dreyfus ("Dreyfus")
are contesting the assessment. We are indemnified by Dreyfus under the purchase
agreement.
LEGAL MATTERS
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 and subsequently transferred to the
United States District Court for the District of Hawaii and then to the United
States District Court in Saipan, was 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
F-28
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Although we were not named as a defendant in these
suits, we source products in Saipan, and counsel for the plaintiffs in these
actions informed us that we are a potential defendant in these or similar
actions. We have since entered into an agreement, together with other potential
defendants, to settle any claims for nonmaterial consideration. The settlement
is subject to court approval. On May 10, 2002, the Federal Court certified the
plaintiff class and granted preliminary approval of the settlement agreement. A
hearing on final approval is expected to be held after notice of the settlement
is sent to potential settlement class members. Certain non-settling defendants
have filed a petition with the United States Court of Appeals for the Ninth
Circuit for permission to appeal the class certification. We have denied any
liability and are not in a position to evaluate the likelihood of a favorable or
unfavorable outcome if the final approval of the settlement is not received and
litigation proceeds.
As part of the settlement, we were named as a defendant, along with certain
other apparel companies, in a State Court action in California styled Union of
Needletrades Industrial and Textile Employees, et al. v. Brylane, L.P., et al.,
in the San Francisco County Superior Court, and in a Federal Court action styled
Doe I et. al. V. Brylane, L.P. et. al. In the United States District Court for
the District of Hawaii, that mirrors portions of the larger State and Federal
Court actions but does not include RICO and certain of the other claims alleged
in those actions. The California action was subsequently dismissed as part of
the settlement, and the federal action was transferred to the United States
District Court of Saipan. The federal action is expected to remain inactive
unless settlement is not finally approved by the Federal Court.
On October 1, 1999, we filed a lawsuit against the United States Polo
Association Inc., Jordache, Ltd. and certain other entities affiliated with
them, alleging that the defendants were infringing on our famous trademarks.
This lawsuit continues to proceed as both sides are awaiting the court's
decision on various motions. In connection with this lawsuit, on July 19, 2001,
the United States Polo Association and Jordache filed a lawsuit against us in
the United States District Court for the Southern District of New York. This
suit, which is effectively a counterclaim by them in connection with the
original trademark action, asserts claims related to our actions in connection
with our pursuit of claims against the United States Polo Association and
Jordache for trademark infringement and other unlawful conduct. Their claims
stem from our contacts with the United States Polo Association's and Jordache's
retailers in which we informed these retailers of our position in the original
trademark action. The United States Polo Association and Jordache seek $50
million in compensatory damages and $50 million in punitive damages from us.
This new suit has been consolidated with the original trademark action for
purposes of discovery and trial. We believe that the United States Polo
Association's and Jordache's claims are substantially without merit and intend
to pursue our claims and defend against those of the United States Polo
Association and Jordache vigorously.
We are from time to time involved in legal claims, involving trademark and
intellectual property, licensing, employee relations and other matters
incidental to our business. In our opinion, the resolution of any matter
currently pending will not have a material adverse effect on our consolidated
financial condition or results of operations.
F-29
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of certain unaudited quarterly financial
information for fiscal 2002 and 2001 (see Basis of Presentation and
Organization -- (b) Consolidation of European Entities -- Change in Reporting
Period and Note 3):
JUNE 30, SEPT. 29, DEC. 29, MARCH 30,
FISCAL 2002 2001 2001 2001 2002
----------- -------- --------- -------- ---------
Net revenues........................ $517,829 $595,695 $617,095 $633,088
Gross profit........................ 262,361 285,640 287,009 311,793
Net income.......................... 31,051 47,810 45,614 48,025
Net income per share --
Basic............................. $ 0.32 $ 0.49 $ 0.47 $ 0.49
Diluted........................... 0.32 0.49 0.46 0.48
Shares outstanding -- Basic......... 97,109 97,437 97,506 97,814
Shares outstanding -- Diluted....... 98,493 98,483 98,504 99,146
JULY 1, SEPT. 30, DEC. 30, MARCH 31,
FISCAL 2001 2000 2000 2000 2001
----------- ------- --------- -------- ---------
Net revenues........................ $487,297 $586,217 $613,740 $538,520
Gross profit........................ 252,547 250,133 297,520 262,847
Net income (loss)................... 23,983 (62,821) 50,603 47,497
Net income (loss) per share --
Basic............................. $ 0.25 $ (0.65) $ 0.52 $ 0.49
Diluted........................... 0.25 (0.65) 0.52 0.48
Shares outstanding -- Basic......... 97,092 96,713 96,530 96,740
Shares outstanding -- Diluted....... 97,350 97,256 97,347 98,164
16. SEGMENT REPORTING
We have three reportable business segments: wholesale, retail and
licensing. Our reportable segments are individual business units that offer
different products and services. The segments 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.
Our 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 our owned and licensed retail stores.
The retail segment operates two types of stores: outlet and full-price
stores, including flagship stores. The stores sell our products purchased from
our wholesale segment, our licensees and our suppliers.
The licensing segment, which consists of product, international and Ralph
Lauren Home, generates revenues from royalties through its licensing alliances.
The licensing agreements grant the licensee rights to use our various trademarks
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
F-30
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as a transfer of inventory. All intercompany revenues and profits or losses are
eliminated in consolidation. We do not review these sales when evaluating
segment performance. We evaluate 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.
Our net revenues, income from operations, depreciation and amortization
expense and capital expenditures for fiscal 2002, 2001, and 2000 , and total
assets as of March 30, 2002, March 31, 2001 and April 1, 2000, for each segment
were as follows:
FISCAL YEAR
--------------------------------------
2002 2001 2000
---- ---- ----
NET REVENUES:
Wholesale................................ $1,198,060 $1,053,842 $ 885,246
Retail................................... 924,273 928,577 833,980
Licensing................................ 241,374 243,355 236,302
---------- ---------- ----------
$2,363,707 $2,225,774 $1,955,528
========== ========== ==========
INCOME FROM OPERATIONS:
Wholesale................................ $ 158,401 $ 127,040 $ 81,139
Retail................................... 18,799 27,710 26,176
Licensing................................ 132,012 145,598 149,900
---------- ---------- ----------
309,212 300,348 257,215
Less: Unallocated restructuring and
special charges....................... 16,000 183,127 --
Add: Cumulative effect of pre-tax
accounting change..................... -- -- 6,696
---------- ---------- ----------
$ 293,212 $ 117,221 $ 263,911
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Wholesale................................ $ 33,246 $ 31,642 $ 23,004
Retail................................... 37,877 35,896 36,393
Licensing................................ 12,796 11,061 6,883
---------- ---------- ----------
$ 83,919 $ 78,599 $ 66,280
========== ========== ==========
CAPITAL EXPENDITURES:
Wholesale................................ $ 48,829 $ 20,957 $ 16,219
Retail................................... 19,182 57,836 60,778
Licensing................................ 4,571 6,217 3,813
Corporate................................ 15,426 20,160 41,200
---------- ---------- ----------
$ 88,008 $ 105,170 $ 122,010
========== ========== ==========
F-31
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 30, MARCH 31, APRIL 1,
2002 2001 2000
--------- --------- --------
TOTAL ASSETS:
Wholesale................................ $ 591,680 $ 604,834 $ 524,223
Retail................................... 534,036 528,836 596,989
Licensing................................ 161,912 154,714 202,090
Corporate................................ 461,869 337,709 297,260
---------- ---------- ----------
$1,749,497 $1,626,093 $1,620,562
========== ========== ==========
Our net revenues for fiscal 2002, 2001, and 2000, and our long-lived assets
as of March 30, 2002, and March 31, 2001, by geographic location were as
follows:
FISCAL YEAR
--------------------------------------
2002 2001 2000
---- ---- ----
NET REVENUES:
United States............................ $1,895,320 $1,875,223 $1,802,246
Foreign countries........................ 468,387 350,551 153,282
---------- ---------- ----------
$2,363,707 $2,225,774 $1,955,528
========== ========== ==========
MARCH 30, MARCH 31,
2002 2001
--------- ---------
LONG-LIVED ASSETS:
United States............................ $ 269,550 $ 305,085
Foreign countries........................ 74,286 42,672
---------- ----------
$ 343,836 $ 347,757
========== ==========
F-32
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 of Polo Ralph Lauren
Corporation and subsidiaries (the "Company"), as of March 30, 2002 and March 31,
2001, and for each of the three years in the period ended March 30, 2002, and
have issued our report thereon dated May 21, 2002 (which report expresses an
unqualified opinion and includes explanatory paragraphs relating to the
elimination of a reporting lag and a change in a method of accounting); such
financial statements and report are included elsewhere in this Form 10-K. Our
audits also included the consolidated financial statement schedule of Polo Ralph
Lauren Corporation and subsidiaries, listed in Item 14. This consolidated
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 financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth herein.
/s/ DELOITTE & TOUCHE LLP
------------------------------------------------
DELOITTE & TOUCHE LLP
New York, New York
May 21, 2002
S-1
POLO RALPH LAUREN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGE TO CHARGE BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- --------- -------- ---------- -------
YEAR ENDED MARCH 30, 2002
Allowance for doubtful accounts......... $ 4,667 $ 2,920 $ 0 $ 2,496(a) $ 5,091
Allowance for sales discounts........... 7,423 29,606 0 28,945 8,084
------- ------- ----- ------- -------
$12,090 $32,526 $ -- $31,441 $13,175
======= ======= ===== ======= =======
YEAR ENDED MARCH 31, 2001
Allowance for doubtful accounts......... $ 9,760 $ 547 $ 0 $ 5,640(a) $ 4,667
Allowance for sales discounts........... 6,871 35,521 0 34,969 7,423
------- ------- ----- ------- -------
$16,631 $36,068 $ -- $40,609 $12,090
======= ======= ===== ======= =======
YEAR ENDED APRIL 1, 2000
Allowance for doubtful accounts......... $ 7,147 $ 2,734 $ 0 $ 121(a) $ 9,760
Allowance for sales discounts........... 6,348 34,098 0 33,575 6,871
------- ------- ----- ------- -------
$13,495 $36,832 $ -- $33,696 $16,631
======= ======= ===== ======= =======
---------------
(a) Accounts written-off as uncollectible.
S-2
POLO RALPH LAUREN CORPORATION
INDEX TO 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 (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(a) Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive
Plan (filed as Exhibit 10.1 to the S-1)*+
10.1(b) Amendment to Polo Ralph Lauren Corporation 1997 Long-Term
Stock Incentive Plan (filed as Exhibit A to the Company's
DEF 14A Proxy Statement, filed June 27, 2000)*+
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 Polo Ralph Lauren Corporation Executive Officer Annual
Incentive Plan (filed as Exhibit 10.3 to the Fiscal 2000
10-K)+
10.4 Registration Rights Agreement dated as of June 9, 1997 by
and among Ralph Lauren, GS Capital Partners, L.P., GS
Capital Partner 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)*
10.5 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)*
10.6 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)*
10.7 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)*
10.8 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)*
10.9 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)*
10.10 License Agreement, dated as of July 1, 2000, between Ralph
Lauren Home Collection, Inc. and WestPoint Stevens Inc.*
(filed as Exhibit 10.10 to the fiscal 2001 10-k)
10.11 License Agreement, dated March 1, 1998, between The
Polo/Ralph Lauren Company, L.P. and Polo Ralph Lauren Japan
Co., Ltd., and undated letter agreement related thereto**
(field as Exhibit 10.10 to the S-1)*
10.12 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)*
S-3
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.13 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
Company's Annual Report on Form 10-K for the Fiscal Year
ended March 28, 1998 (the "Fiscal 1998 10-K"))*
10.14 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)*
10.15 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)*
10.16 Form of Credit Agreement by Polo Ralph Lauren Corporation
and The Chase Manhattan Bank (filed as Exhibit 10.24 to the
S-1)*
10.17 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)*
10.18 Credit Agreement between Polo Ralph Lauren Corporation and
the Chase Manhattan Bank dated as of March 30, 1999 (filed
as Exhibit 10.20 to the Fiscal 1999 10-K)
10.19 Fiscal and Paying Agency Agreement dated November 22, 1999
among Polo Ralph Lauren Corporation, its subsidiary
guarantors and The Bank of New York, as fiscal and principal
paying agent (filed as Exhibit 10.1 to the Form 10-Q for the
quarterly period ended January 1, 2000)*
10.20 Stock and Asset Purchase Agreement between Polo Ralph Lauren
Corporation and S.A. Louis Dreyfus, dated November 23, 1999
(filed as Exhibit 2.1 to the Form 10-K filed January 10,
2000)*
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 Amended and Restated Employment Agreement effective April 4,
1999 between Ralph Lauren and Polo Ralph Lauren Corporation
(filed as Exhibit 10.23 to the Fiscal 1999 Form 10-K)*+
10.23 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)*+
10.24 Amendment to Deferred Compensation Agreement made as of
November 10, 1998 between F. Lance Isham and Polo Ralph
Lauren Corporation (filed as Exhibit 10.14 to the Fiscal
1999 10-K)*+
10.26 Amended and Restated Employment Agreement effective November
10, 1998, between F. Lance Isham and Polo Ralph Lauren
Corporation (filed as Exhibit 10.16 to the Fiscal 1999
10-K)*+
10.27 Amendment No. 1 to Amended and Restated Employment Agreement
between Polo Ralph Lauren Corporation and F. Lance Isham,
dated as of December 21, 2000 (filed as Exhibit 10.1 to the
Form 10-Q for the quarterly period ended December 30,
2000).*+
10.28 Employment Agreement effective April 12, 2000 between Polo
Ralph Lauren Corporation and Roger N. Farah (filed as
Exhibit 10.27 to the Fiscal 2000 10-K)*+
10.29 Employment Agreement effective January 1, 2000 between Polo
Ralph Lauren Corporation and Douglas L. Williams (filed as
Exhibit 10.29 to the Fiscal 2000 10-K)*+
S-4
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.30 Employment Agreement, dated July 1, 2001, between Polo Ralph
Lauren Corporation and Gerald M. Chaney (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-3
(File No. 333-83500)*+
10.31 Employment Agreement, dated July 1, 2002, between Polo Ralph
Lauren Corporation and Mitchell A. Kosh (filed as Exhibit
10.2 to the Company's Registration Statement on Form S-3
(File No. 333-83500)*+
10.32 Polo Ralph Lauren Corporation Profit Sharing Retirement
Savings Plan as Amended and Restated Generally Effective as
of March 31, 2002.+
10.33 Polo Ralph Lauren Corporation Profit Sharing Retirement
Savings Plan (For Hourly Employees of Fashions Outlet of
America, Inc., and Subsidiaries and Polo Clothing Co., Inc.)
as Amended and Restated Generally Effective as of March 31,
2002.+
10.34 Consulting Agreement, dated as of March 25, 2002, between
Polo Ralph Lauren Corporation and Arnold H. Aronson.+
21.1 List of Significant Subsidiaries of the Company (filed as
Exhibit 21.1 to the Fiscal 2001 10-K)
23.1 Consents of Deloitte & Touche LLP
---------------
* Incorporated herein by reference.
+ Exhibits is a management contract or compensatory plan or arrangement.
** Portions of Exhibits 10.5-10.14 have been omitted pursuant to a request for
confidential treatment and have been filed separately with the Securities and
Exchange Commission.
S-5