AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 2002. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ POLO RALPH LAUREN CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED FEBRUARY 27, 2002. 11,000,000 Shares [POLO RALPH LAUREN LOGO] Class A Common Stock ------------------------ All of the shares of Class A common stock in the offering are being sold by the selling stockholders identified in this prospectus. We will not receive any of the proceeds from the sale of the shares. The Class A common stock is listed on the New York Stock Exchange under the symbol "RL". The last reported sale price of the Class A common stock on February 26, 2002 was $28.15 per share. See "Risk Factors" on page 8 to read about factors you should consider before buying shares of the Class A common stock. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
[PHOTOS OF MODELS, PRODUCTS AND STORES.]
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and the documents incorporated by reference. This summary does not contain all of the information that you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, especially the risks of investing in the Class A common stock discussed under "Risk Factors" on pages 8 - 15. Fiscal 2001, fiscal 2000, fiscal 1998 and fiscal 1997 reflect a 52-week period and fiscal 1999 reflects a 53-week period. In this prospectus, 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, these licensees are referred to in this prospectus 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. POLO RALPH LAUREN CORPORATION We are a leader in the design, marketing and distribution of premium apparel and lifestyle products. Our brand names, which include "Polo", "Polo by Ralph Lauren", "Polo Sport", "Ralph Lauren", "RALPH", "Lauren" and "Polo Jeans Co.", 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, Polo has influenced the manner in which people dress and live in contemporary society, reflecting an American perspective and lifestyle uniquely associated with Polo and Ralph Lauren. Global wholesale net sales of Ralph Lauren products, including licensee sales, were $4.8 billion for the year ended March 31, 2001 and $3.4 billion for the nine months ended December 29, 2001. We nearly doubled our net revenues from $1.2 billion in the fiscal year ended March 29, 1997, to $2.2 billion in the fiscal year ended March 31, 2001, for a 17% compound annual growth rate, or "CAGR". Over this same period, income from operations, excluding restructuring and special charges, grew from $157.4 million to $300.3 million. Net income per diluted share for the year ended March 31, 2001 was $.61, which includes the impact of $1.14 per share for restructuring and special charges and the impact of foreign currency gains of $.04 per share. For the nine months ended December 29, 2001, net revenues were $1.7 billion, income from operations was $214.2 million and net income per diluted share was $1.26. FISCAL 2001 GLOBAL WHOLESALE NET SALES OF RALPH LAUREN PRODUCTS(1) [PIE CHART] (IN MILLIONS)
Polo began 34 years ago with a single tie and a vision of style and elegance. While our operations today span 65 countries, 20 labels and more than 10,000 employees, the vision has remained unchanged. Our now famous polo player astride a horse logo and Ralph Lauren womenswear products were introduced in 1971. In that same year, the first in-store area dedicated exclusively to Polo Ralph Lauren products, or "shop-within-shop boutique", opened in Bloomingdale's flagship store in New York City and the first Polo store was opened by an independent third party. From these beginnings, the Polo and Ralph Lauren brands grew to be among the most recognized luxury brands in the world and have served as the foundation upon which we have based our growth. We combine our design, marketing and imaging skills and consumer insight to offer, along with our licensing partners, broad lifestyle collections in our four product categories. We believe our products reflect a timeless and innovative American style desired by our customers. Our product categories are: - apparel, which represents the largest segment of our business and includes extensive collections of menswear, womenswear and children's clothing, - home collection, which offers coordinated products for bed and bath, interior decor and tabletop, and gift items, - accessories, which encompass a broad range of products such as footwear, eyewear, jewelry and leather goods, including handbags and luggage, and - fragrance and skin care products, which are sold under our Glamourous, Romance, Polo, Lauren, Safari and Polo Sport brands, among others. Our distinctive advertising builds our brand names and image season after season. We and our licensing partners collectively spent over $159 million in the nine months ended December 29, 2001 and $179 million in fiscal 2001 to advertise and promote our brands worldwide through a variety of channels. We operate in three integrated segments: wholesale, retail and licensing. - Wholesale operations primarily consist of the design, sourcing, marketing and distribution of menswear and womenswear under the following brands: Menswear - Ralph Lauren Purple Label - Polo Ralph Lauren - Polo Sport - Polo Golf - RLX Polo Sport - Lauren Womenswear - Ralph Lauren Collection - Ralph Lauren Black Label - Ralph Lauren Blue Label (beginning fall 2002) - Polo Golf - RLX Polo Sport - Our retail sales are generated by our 30 Polo Ralph Lauren stores, nine Polo concept stores and 54 Club Monaco stores. In addition, we operate 95 Polo outlet stores, 24 Polo Jeans Co. outlet stores, ten Club Monaco outlet stores and 12 European outlet stores. These stores give us a broad, yet targeted, exposure to customers. The concept stores provide us with a platform for experimenting with local trends and consumer tastes in key fashion markets such as New York City and Los Angeles. - Our licensing operations reflect our efforts to conceptualize, design and market a broad range of products. Licensing provides us with further penetration of the brand and image consistent with the Polo lifestyle. We license over 30 products to 34 licensing partners, including Jones Apparel Group, Inc. and L'Oreal S.A. 2
Details of our net revenues are shown in the table below.
By increasing the direct management of our brands and our products, we expect to enhance our brand image, as well as expand sales and profits more significantly. - Enhance Polo's Operations. We have spent the last 18 months focusing on the operations of our retail and wholesale businesses, as well as on improving efficiency at the corporate level. Although we have seen progress reflected in our financial results, we believe potential still exists for further significant margin expansion. 4
THE OFFERING Class A common stock offered by selling stockholders....... 11,000,000 shares Common stock to be outstanding after the offering: Class A Common Stock..... 42,948,651 shares Class B Common Stock..... 43,280,021 shares Class C Common Stock..... 11,720,979 shares Total............... 97,949,651 shares -------------------------------------------- --------------------------------------------- Use of proceeds............... We will not receive any of the proceeds of this offering. Risk factors.................. For a discussion of factors you should consider before buying shares of Class A common stock, see "Risk Factors." Voting rights................. 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 generally 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 Delaware law. NYSE symbol................... RL Unless we specifically state otherwise, the information in this prospectus does not take into account the purchase of up to 1,650,000 shares of Class A common stock from the selling stockholders that the underwriters have the option to purchase solely to cover over-allotments. The number of shares of Class A common stock to be outstanding immediately after this offering is based upon our shares outstanding as of February 8, 2002 and does not take into account 9,757,306 shares of Class A common stock issuable upon exercise of options outstanding pursuant to our 1997 Long-Term Stock Incentive Plan and 9,423,122 shares of Class A common stock available for future grants under our 1997 Non-Employee Director Option Plan. ------------------------ Our principal offices are located at 650 Madison Avenue, New York, New York 10022, and our telephone number is (212) 318-7000. We maintain a web site at "www.polo.com." Information presented on our web site does not constitute part of this prospectus. 5
SUMMARY CONSOLIDATED FINANCIAL DATA The table below provides a summary of our consolidated financial data for the five fiscal years in the period ended March 31, 2001 and for the nine month periods ended December 29, 2001 and December 30, 2000. The summary historical operating data and the balance sheet data as of and for the years ended March 31, 2001 and April 1, 2000 and the summary historical operating data for the year ended April 3, 1999 are derived from the consolidated financial statements and notes thereto audited by Deloitte & Touche LLP, independent auditors, whose report is contained elsewhere in this prospectus and should be read with those financial statements and the related notes. The balance sheet data for the year ended April 3, 1999 and the summary historical operating data and the balance sheet data as of and for the years ended March 28, 1998 and March 27, 1997 are derived from the audited consolidated financial statements of Polo Ralph Lauren Corporation and subsidiaries contained in its annual reports on Form 10-K for the years ended March 28, 1998 and April 3, 1999 and are not included in this prospectus. The summary historical operating data and the balance sheet data as of and for the nine month periods ended December 29, 2001 and December 30, 2000 are derived from our unaudited consolidated financial statements which are contained in our quarterly report on Form 10-Q for the nine month periods ended December 29, 2001 and December 30, 2000 and included in this prospectus. In the opinion of management, these unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations and cash flows. You should read this summary 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 prospectus. Income from operations, as adjusted, and earnings before interest, taxes, depreciation, amortization, equity in net loss of joint venture and restructuring and special charges, referred to as "adjusted EBITDA", are presented in order to allow for greater comparability between periods as well as an indication of our results on an ongoing basis. We calculate adjusted EBITDA as income from operations plus depreciation, amortization, equity in net loss of joint venture and restructuring and special charges. Because all companies do not calculate income from operations, as adjusted, and adjusted EBITDA or other similarly titled financial measures in the same manner, those disclosures may not be comparable with income from operations, adjusted EBITDA or similarly titled financial measures as calculated by us. You should not think of income from operations, as adjusted and adjusted EBITDA as an alternative to net income or net income per share (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations). Income from operations, as adjusted and adjusted EBITDA are not measures of performance or financial condition under generally accepted accounting principles. 6
RISK FACTORS You should carefully consider the following risk factors and all of the other information contained in, or incorporated by reference into, this prospectus before purchasing our Class A common stock. Investing in our Class A common stock involves a high degree of risk. Any of the following risks could materially harm our business and could result in a complete loss of your investment. 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, and 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 10 largest customers accounted for: - approximately 76.8% of our wholesale net sales during the nine months ended December 29, 2001, of which Federated Department Stores, Inc. accounted for 19.2%, Dillard Department Stores, Inc., accounted for 19.1% and The May Department Stores Company accounted for 17.6%, and - approximately 82.7% of our wholesale net sales during fiscal 2001, of which Federated Department Stores, Inc. accounted for 20.4%, Dillard Department Stores, Inc. accounted for 19.4% and The May Department Stores Company accounted for 18.5%. We do not enter into long-term agreements with any of our customers but 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 partner's 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, 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 8
receivables. We had three customers, Dillard Department Stores, Inc., Federated Department Stores, Inc. and The May Department Stores Company, which in aggregate constituted 48.7% of trade accounts receivable outstanding at December 29, 2001, 52.0% at March 31, 2001 and 54.0% at April 1, 2000. 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 manufactured to our specifications by both domestic and international manufacturers. During the nine months ended December 29, 2001, approximately 5% (by dollar value) of our men's and women's products were manufactured in the United States and approximately 95% (by dollar value) of these products were manufactured in Hong Kong and other foreign countries. During fiscal 2001, approximately 24% (by dollar value) of our men's and women's 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 needs to 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 acceptable to us. See "Business -- Sourcing, Production and Quality". Although 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, we 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 12% and 11% of our total production during fiscal 2001 and 11.0% and 10.6% for the nine months ended December 29, 2001. The primary production facilities of these two manufacturers are located in Hong Kong. Two other manufacturers each accounted for 6% of our total production in fiscal 2001 and 7.4% and 4.9% for the nine months ended December 29, 2001. 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. 9
WE ARE DEPENDENT UPON THE REVENUE GENERATED BY OUR LICENSING ALLIANCES. A substantial portion of our net income is derived from licensing revenue received from our licensing partners. Approximately 51.2% of our licensing revenue for the nine months ended December 29, 2001 and 47.3% in fiscal 2001 was derived from three licensing partners: - Jones Apparel Group, Inc., which accounted for 26.6% for the nine months ended December 29, 2001 and 26.9% of licensing revenue in fiscal 2001, - Westpoint Steven's, Inc., which accounted for 13.1% for the nine months ended December 29, 2001 and 10.3% of licensing revenue in fiscal 2001, and - Seibu Department Stores, Ltd., which accounted for 11.5% for the nine months ended December 29, 2001 and 10.1% of licensing revenue in fiscal 2001. We had no other licensing partner which accounted for more than 10% of our licensing revenue for the nine months ended December 29, 2001 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. WE RELY ON OUR LICENSING PARTNERS TO PRESERVE THE VALUE OF OUR LICENSES. The risks associated with our own products apply to our licensed products as well, 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 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. We currently source a significant portion of our products outside the United States through arrangements with over 215 foreign manufacturers in 26 different countries. During the nine months ended December 29, 2001, we purchased approximately 59.2% of our piece goods from sources outside the United States, including Italy, England, Hong Kong and other foreign countries and 84% in fiscal 2001. Approximately 5.0%, by dollar volume, of our products were produced in the United States and its territories in the nine month period ended December 29, 2001 and 24%, by dollar volume, in fiscal 2001 and approximately 95.0%, by dollar volume, were 10
produced in Hong Kong, Canada and other foreign countries in the nine month period ended December 29, 2001 and 76%, by dollar volume, in fiscal 2001. Risks inherent in importing 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 ownership rights in certain trademarks which 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 Polo's brands, expand Polo's geographic coverage, increase direct management of Polo Ralph Lauren brands by opening more of our own stores and strategically acquiring select licensees and enhance Polo operations. We cannot assure you that our growth strategies will be successful or that our revenues or profitability will increase as a result of the implementation of our expected strategies. OUR BUSINESS IS EXPOSED TO DOMESTIC AND FOREIGN CURRENCY FLUCTUATIONS. We generally purchase our products in U.S. dollars. However, we source a significant amount 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 27.2% of our licensing revenue was received from international licensing partners in the nine months ended December 29, 2001 and 24.2% in fiscal 2001. Changes in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same 11
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". 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. 12
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. 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. 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. Recently, one of our licensing partners, Warnaco, Inc., filed for bankruptcy protection under the federal bankruptcy laws; however, 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 of 13
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. RISKS RELATED TO OUR CLASS A COMMON STOCK AND THE OFFERING PRICE VOLATILITY COULD AFFECT THE MARKET PRICE OF OUR STOCK. Upon completion of the offering and assuming full exercise of the underwriters' over-allotment option, we expect that approximately 44,598,651 shares of Class A common stock will be outstanding. We cannot predict whether the market for our Class A common stock will be more or less active following the offering. The market price of our Class A common stock could be subject to significant fluctuations in response to: - the offering, - our operating results, - investor perceptions of us and comparable public companies, - changes in conditions or trends in the industries in which we operate, - the industries of our significant customers, - developments relating to us or our competitors, - general economic conditions, and - other external factors. In addition, in recent years the stock market in general has experienced extreme price and volume fluctuations, which have often been unrelated or disproportionate to the operating performance of companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of our Class A common stock. Factors such as quarter-to-quarter variations in our revenues and earnings could also cause the market price of the Class A common stock to fluctuate significantly. SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE A POTENTIAL ADVERSE EFFECT ON OUR STOCK PRICE. Upon completion of this offering, we expect that 43,280,021 shares of Class B common stock will be beneficially owned by Ralph Lauren and his family. Assuming the underwriters exercise their over-allotment option in full, 10,070,979 shares of Class C common stock will be beneficially owned by GS Capital Partners, L.P. and related funds. Immediately after giving effect to this offering, we expect that the shares of Class B common stock and Class C common stock outstanding and convertible at any time into shares of Class A common stock will be 55,001,000, or 53,351,000 if the underwriters exercise their over-allotment option in full. To the extent a stockholder is and remains one of our affiliates, any shares of Class A common stock, including any shares issued upon conversion of the Class B common stock or Class C common stock, will be available for public sale only if the shares are registered under the Securities Act or sold in 14
compliance with the limitations of Rule 144 under the Securities Act. In addition, some of our stockholders are entitled to registration rights with respect to their shares of Class A common stock issuable upon conversion of their shares of Class B common stock or Class C common stock. We, our executive officers, directors, members of the Lauren family and the selling stockholders have agreed with the underwriters not to dispose of or hedge any shares of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock (other than, in the case of the selling stockholders, as a part of this offering) for a period ending 90 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. We are not able to predict the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Class A common stock in the public market, or the perception that these sales may occur, may adversely affect prevailing market prices. See "Shares Eligible for Future Sale". CONTROL BY MEMBERS OF THE LAUREN FAMILY AND THE ANTI-TAKEOVER EFFECT OF MULTIPLE CLASSES OF STOCK COULD DISCOURAGE ATTEMPTS TO ACQUIRE US. Holders of our Class A common stock and Class C common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Members of the Lauren family beneficially own all 43,280,021 shares of our outstanding Class B common stock, representing 88.8% of the voting power of our common stock and the right to elect seven of our ten directors. Accordingly, members of the Lauren family, until they in the aggregate sell substantially all of their Class B common stock, will be able to elect a majority of our directors and, if they vote in the same manner, determine the disposition of practically all matters submitted to a vote of our stockholders, including mergers, going private transactions and other extraordinary corporate transactions and their terms. See "Management," "Principal and Selling Stockholders" and "Description of Capital Stock". Members of the Lauren family will, until they sell substantially all of their Class B common stock, have the ability, by virtue of their stock ownership, to prevent or cause a change in control of us. In addition, various provisions of our amended and restated certificate of incorporation and material agreements may be deemed to have the effect of discouraging a third party from pursuing a non-negotiated takeover of us and preventing changes in control of us. Furthermore, our 1997 Long-Term Stock Incentive Plan provides for accelerated vesting of stock options upon a "change in control" of us. See "Description of Capital Stock". 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Various statements in this prospectus or incorporated by reference into this prospectus and 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 would 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 prospectus will in fact transpire. 16
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDENDS Our Class A common stock commenced trading on the NYSE under the symbol "RL" on June 11, 1997. Prior to that date, there had been 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 from April 4, 1999 through February 26, 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.
USE OF PROCEEDS We will not receive any of the proceeds of shares of Class A common stock sold by the selling stockholders in this offering. CAPITALIZATION The table below describes our capitalization at December 29, 2001. We will not receive any of the proceeds of the shares of Class A common stock sold by the selling stockholders.
SELECTED CONSOLIDATED FINANCIAL DATA The table below provides selected consolidated financial data for the five fiscal years in the period ended March 31, 2001 and the nine months ended December 29, 2001 and December 30, 2000. We derived the data for the three fiscal years in the period ended March 31, 2001 from our consolidated financial statements and accompanying notes, which were audited by Deloitte & Touche LLP, independent auditors, whose report is contained elsewhere in this prospectus. We derived the data for the two fiscal years in the period ended March 28, 1998 from our 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 year ended March 28, 1998, which is not included in this prospectus. We derived the data for the nine months ended December 29, 2001 and December 30, 2000 from our unaudited consolidated financial statements and accompanying notes contained elsewhere in this prospectus. 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 prospectus.
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 prospectus and the information under the caption "Risk Factors." We use a 52-53 week fiscal year ending on the Saturday nearest March 31. Fiscal 2001, fiscal 2000, fiscal 1998 and fiscal 1997 reflect a 52-week period and fiscal 1999 reflects a 53-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 $2.2 billion in fiscal 2001 from approximately $1.2 billion in fiscal 1997, while income from operations, excluding restructuring and special charges, has grown to approximately $300.3 million in fiscal 2001 from approximately $157.4 million in fiscal 1997. For the nine months ended December 29, 2001, our net revenues were approximately $1.7 billion and our income from operations was $214.2 million. 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 and for the nine months ended December 31, 2001 and 2000:
54 Club Monaco full-price stores, 95 Polo outlet stores, 24 Polo Jeans Co. outlet stores, 12 European outlet stores and 10 Club Monaco outlet stores. Licensing revenue consists of royalties paid to us under our agreements with our licensing partners. Product, international and Home Collection licensing alliances accounted for 51.3%, 27.2% and 21.5% of total licensing revenue in the nine months ended December 29, 2001 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 has resulted in an increase in licensing revenue to $243.4 million in fiscal 2001 from $137.1 million in fiscal 1997. Licensing revenue for the nine months ended December 29, 2001 was $181.1 million, as compared to $178.4 million in the same period of fiscal 2001. Beginning in fiscal 2000, we have undertaken the following: - In October 2001 we acquired PRL Fashions of Europe S.R.L., which hold licenses to sell our women's Ralph Lauren apparel in Europe, as well as our men's and boys' Polo Ralph Lauren and Polo Jeans Co. apparel in Italy. - In October 2001, we acquired the Polo Brussels store from one of our licensees. - In October 2001, we began an internal reorganization of our global marketing, advertising and corporate communications divisions in order to better support our global business development strategies, as well as integrate our international marketing and communications platforms. - 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. - 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 flagship 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 addition, Club Monaco franchises three freestanding stores in Canada, one freestanding store in Israel, four freestanding stores and 15 shop-within-shops in Japan and two freestanding stores and 16 shop-within-shops in Korea and other parts of Asia. 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. 21
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 and 11 under-performing 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 pretax restructuring charge of $123.6 million. The major components of the charge included 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. Our operational review also targeted our supply chain management as one of the most important areas for improvement. 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 $41.5 million of inventory write downs in fiscal 2001 associated with our planned acceleration in the reduction of aged inventory. 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 review related to approximately 550 employees, all of whom have been terminated. Total cash outlays related to the operational review are expected to be approximately $24.7 million, $22.7 million of which have been paid to date. We completed the implementation of our operational review in fiscal 2002 and expect to settle the remaining liabilities in accordance with contract terms which extend until fiscal 2003. 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 22
- the realignment and consolidation of corporate strategic business functions and internal processes. In fiscal 2000, we closed three Polo stores and three outlet stores that were not performing at an acceptable level and converted two Polo stores and five outlet stores to new concepts expected to be more productive. Costs associated with this aspect of our 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: - 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 pretax 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. We completed the implementation of our restructuring plan in fiscal 2000 and expect to settle the remaining liabilities in accordance with contract terms which extend until fiscal 2003. 23
RESULTS OF OPERATIONS The table below sets forth the percentage relationship to net revenues of certain items in our statements of income for our last three fiscal years and for the nine months ended December 29, 2001 and December 30, 2000:
from our international wholesale business in Europe. Retail gross margins decreased 4.5% in comparison to last year's corresponding nine month period due to higher levels of markdowns due to the difficult economic environment and decreased customer spending. Additionally, the prior year gross margin was negatively impacted by $37.9 million of inventory write-downs recorded in the second quarter of fiscal 2001 in connection with the implementation of our operational review. These fluctuations in gross margins were also affected by the increase in licensing revenue, which has no associated cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net revenues decreased to 35.8% in the nine months ended December 29, 2001, from 37.5% of net revenues in the same period of fiscal 2001. This decrease was primarily due to expense reduction initiatives across all business segments and the closing of our Polo Jeans Co. full price retail stores during fiscal 2001. Additionally, in fiscal 2001, we recorded a charge of $18.1 million relating to non-recurring charges associated with targeted opportunities for improvement and other employee-related costs. INTEREST AND OTHER EXPENSE. Interest expense decreased to $15.2 million in the nine months ended December 29, 2001, from $19.0 million in the same period in fiscal 2001. This decrease was due to lower levels of borrowings, primarily as a result of repurchases of a portion of our outstanding Euro debt in fiscal 2001 and the repayment of short-term borrowings during the period. INCOME TAXES. The effective tax rate decreased to 37.5% in the nine months ended December 29, 2001, from 39.5% in the same period in fiscal 2001. This decline was primarily a result of the benefit of tax strategies implemented. Additionally, the nine months ended December 30, 2000 included a tax benefit of $72.9 million resulting from charges recorded in connection with the implementation and completion of our operational review. 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 and increased 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 in fiscal 2001 (37 stores, prior to 34 store closures in late fiscal 2001); - a full year of revenues from new stores opened in fiscal 2000; and - the inclusion of the results of one flagship and six outlet stores purchased in connection with the acquisition of Poloco. 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 were partially offset by decreases in sales of Home Collection products. 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 25
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 higher margins than our domestic wholesale operations. Additionally, gross profit was favorably impacted by the increase in licensing revenue in fiscal 2001. These improvements were offset by declines in our retail gross margins 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 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. Additionally, selling, general and administrative expenses as a percentage of net revenues increased due to an increase in depreciation and amortization expense, start-up costs associated with the expansion of our retail operations and the acquisition of Poloco. 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 current 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. We expect to lower our effective tax rate to 38.5% in fiscal 2002 as a result of tax strategies implemented. FISCAL 2000 COMPARED TO FISCAL 1999 NET SALES. Net sales increased 13.2% to $1.7 billion in fiscal 2000 from $1.5 billion in fiscal 1999. Wholesale net sales increased 3.0% to $885.2 million in fiscal 2000 from $859.5 million in fiscal 1999. Wholesale growth primarily reflected increased unit sales of our existing brands and luxury products. These unit increases were partially offset by a decline in average selling prices resulting from changes in product mix. Retail sales increased by 26.5% to $834.0 million in fiscal 2000 from $659.4 million in fiscal 1999. This increase was primarily attributable to a $209.9 million benefit from the following: - new store openings in fiscal 2000 (23 stores, net of closures); - a full year impact of new stores opened in fiscal 1999; and - the acquisition of 70 Club Monaco stores in the quarter ended July 3, 1999. Although our stores remained highly productive, comparable store sales decreased by 4.6%, excluding the unfavorable impact of a 53rd week in fiscal 1999. The decline was due to a promotionally driven retail environment, an inadequate inventory of leading products and the effects of a mature and challenging outlet store environment. LICENSING REVENUE. Licensing revenue increased 13.6% to $236.3 million in fiscal 2000 from $208.0 million in fiscal 1999. This increase is primarily attributable to increases in sales of existing licensed products, particularly Lauren, Polo Jeans and Home Collection. GROSS PROFIT. Gross profit as a percentage of net revenues increased to 48.7% in fiscal 2000 from 47.6% in fiscal 1999. This increase was attributable to an increase in retail gross margins as retail sales accounted for a higher portion of net revenues in fiscal 2000 as a result of the acquisition of Club Monaco in fiscal 2000, and lower markdowns taken in fiscal 2000. 26
Retail gross margins were negatively impacted by higher markdowns in fiscal 1999 as we implemented a strategic initiative in our fourth fiscal quarter of 1999 to reduce inventory levels and move excess product. Additionally, gross profit was favorably impacted by the increase in licensing revenue in fiscal 2000. Wholesale gross margins were consistent with prior years. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net revenues was 35.2% in fiscal 2000 and fiscal 1999. Despite increases in depreciation expense from the shop-within-shops development program and start-up costs incurred with the expansion of our retail operations, these expenses, as a percentage of net revenues, were consistent with the prior year period as we were able to achieve expense leveraging from revenue growth in fiscal 2000. INTEREST EXPENSE. Interest expense increased to $15.0 million in fiscal 2000 from $2.8 million in fiscal 1999. This increase was due to a higher level of borrowings incurred during the current period to fund the acquisitions of Club Monaco and Poloco. LIQUIDITY AND CAPITAL RESOURCES 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 $277.3 million in the nine months ended December 29, 2001, from $105.3 million in the same period in fiscal 2001. This increase was primarily due to a significant decrease in inventory levels and decreased accounts receivable due to seasonality. Net cash provided by operating activities decreased to $100.3 million in fiscal 2001 from $242.7 million in fiscal 2000. Net cash provided by operations was negatively impacted in fiscal 2001 by the cash portion of charges recorded in our second quarter of fiscal 2001 in connection with the implementation of our operational review and increases in inventories and accounts receivable due to timing of shipments. Net cash used in investing activities decreased to $87.1 million in the nine months ended December 29, 2001 from $92.3 million in the same period in fiscal 2001. This decrease was primarily due to a decrease in capital expenditures of approximately $6.7 million compared to the same period in the prior year, partially offset by an increase in net cash used in acquisitions in connection with our acquisition of PRL Fashions and Polo Brussels S.A. Net cash provided by financing activities was $2.0 million in the nine months ended December 29, 2001, as compared to net cash used in financing activities of $16.9 million in the same period in fiscal 2001. This change is primarily due to the proceeds from the issuance of common stock upon the exercise of stock options of $15.6 million and a decrease in the repurchase of common stock, offset by the repayment of approximately $10.4 of short-term bank borrowings during the nine months ended December 29, 2001. Net cash used in investing activities decreased to $182.0 million in fiscal 2001 from $318.3 million in fiscal 2000. The decrease principally reflects the use of funds to acquire Poloco in fiscal 2000. Net cash used by financing activities was $25.9 million in fiscal 2001 as compared to cash provided of $201.6 million in fiscal 2000. This change is primarily due to proceeds received from the Euro offering in fiscal 2000. 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 plus an interest margin. 27
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 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 our 1999 senior credit facility to a fixed rate of 5.5%. The syndicated bank credit facility and our 1999 senior bank credit facility contain customary representations, warranties, covenants and events of default, including covenants regarding maintenance of net worth and leverage ratios, limitations on indebtedness, loans, investments and incurrences of liens, and restrictions on sales of assets and transactions with affiliates. Additionally, the agreements provide that an event of default will occur if Mr. 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 2001, we repurchased Euro 27.5 million, or $25.3 million based on Euro exchange rates, of our outstanding Euro debt. As of December 29, 2001, we had $74 million outstanding in direct borrowings, $80.0 million outstanding under the term loan and $218 million outstanding in Euro debt based on the year-end Euro exchange rate. We were also contingently liable for $18.2 million in outstanding letters of credit related primarily to commitments for the purchase of inventory. The weighted average interest rate on borrowings at December 29, 2001 was 5.9%. 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. Total cash outlays related to the operational review are expected to be approximately $24.7 million, $22.7 million of which has been paid through December 29, 2001. The remaining obligations of approximately $2.0 million at December 29, 2001 relate to severance and lease contract and termination agreements with contract terms which extend until fiscal 2003. 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 (see Note 3 to our consolidated financial statements) up to specified thresholds. Total cash outlays related to the 1999 restructuring plan are approximately $39.5 million, $36.5 million of which has been paid through December 29, 2001. The remaining obligations of approximately $3.0 million at December 29, 2001 primarily relate to severance and lease termination agreements, which extend until fiscal 2003. Capital expenditures were $61.1 million for the nine months ended December 29, 2001, compared to $67.9 million in the same period in fiscal 2001, and were $105.2 million in fiscal 28
2001, $122.0 million in fiscal 2000 and $141.7 million in fiscal 1999. Capital expenditures are expected to be approximately $31 million for the three months ending March 30, 2002. 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. PRL Fashions had revenues of approximately $75.0 million for their fiscal year 2000. The purchase price was approximately $22.0 million in cash, plus the assumption of some 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 under this plan 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 through two-year extensions on March 2, 2000 and February 6, 2002. Shares acquired under the repurchase program are used for stock option programs and for other corporate purposes. As of December 29, 2001, we had 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., Federated Department Stores, Inc. and The May Department Stores Company, who in aggregate constituted approximately 52.0% and 54.0% of trade accounts receivable outstanding at March 31, 2001 and April 1, 2000, and 48.7% as at December 29, 2001. 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 53.0%, 58.0% and 55.0% of licensing revenue in fiscal 2001, fiscal 2000 and fiscal 1999. 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, the operational review, the restructuring plan, 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 accurately reflect future performances. In addition, fluctuations in sales 29
and operating income in any fiscal quarter may be affected by the timing of seasonal wholesale shipments and other events affecting retail sales. 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 judgement 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 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. 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. Inventories -- Inventory is stated 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 periodically review the carrying value of our long-lived assets for continued appropriateness. This review is based upon our projections of anticipated future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. NEW ACCOUNTING STANDARDS In October 2001, the Financial Accounting Standards Board, or "FASB", issued Statement of Financial Accounting Standards, or "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 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. We are currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. 30
In July 2001, the FASB issued 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. We are currently evaluating the impact of adopting these statements on our consolidated financial statements. 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. EITF No. 00-25 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. This pronouncement is effective for our 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 June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including some derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivatives, whether designated in hedging relationships or not, as either assets or liabilities in the statement of financial position, and measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is dependent upon the intended use of the derivative. SFAS No. 133 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. We adopted the provisions of SFAS No. 133 as of April 1, 2001. As of that date, we had outstanding interest rate swap agreements and forward foreign exchange contracts that qualify as cash flow hedges under SFAS No. 133. In accordance with SFAS No. 133, we recorded the fair value of these derivatives at April 1, 2001, and the resulting net unrealized gain, after taxes, of approximately $4.0 million was recorded in other comprehensive income as a cumulative transition adjustment. 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. 31
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 $21.8 million and $1.8 million at December 29, 2001, as compared to $21.7 million and $4.5 million at March 31, 2001. As of December 29, 2001, a hypothetical immediate 10.0% adverse change in the Euro rate on the Euro debt and Euro investments would have a $21.8 million and $1.8 million unfavorable impact on our earnings and cash flows in fiscal 2002. INTEREST RATES Our primary interest rate exposure relates to our fixed and variable rate debt. The fair value of our fixed Euro debt was $217.1 million based on its quoted market price as listed on the London Stock Exchange and using Euro exchange rates in effect as of December 29, 2001. The potential loss in value at December 29, 2001 on our fixed Euro debt based on a hypothetical immediate 10.0% adverse change in the interest rate would have been $1.4 million. At December 29, 2001, the carrying value of amounts outstanding of $53.9 million under our variable debt 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 December 29, 2001, 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 December 29, 2001, a hypothetical immediate 10.0% adverse change in interest rates relating to our unhedged portion of our variable rate debt would have a $0.4 million unfavorable impact on our earnings and cash flows in fiscal 2002. 32
BUSINESS We are a leader in the design, marketing and distribution of premium lifestyle products. For 34 years, Polo's 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 Polo 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 -- 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. OUR CORE STRENGTHS Our steady growth in revenues and profitability has resulted from several core strengths, which we believe distinguish us from our peers. - World-Recognized Polo Ralph Lauren Brand -- Polo is one of the strongest consumer lifestyle brands, providing us with a solid base of existing customers as well as an attractive platform to launch new products. - Successful Track Record of Product Development -- For 34 years, we have demonstrated the ability to create new products and labels that meet the lifestyle needs of a growing customer base and to shape the image of American style. - Well-Developed Multi-Channel Presence -- Our strategy of maintaining our own retail stores complements our long-term relationships with major department stores. Together with long-term partnerships formed through licensing arrangements, we are well positioned to meet the needs of our customers in a variety of formats and venues. - Strong Cash Flows and Balance Sheet -- We have consistently generated strong cash flows and solid margins to fund geographic expansion and product development. Similarly, our balance sheet positions us well for continued expansion. - The Leadership of Mr. Ralph Lauren -- Ralph Lauren's personal vision created not only a company, but also, we believe, a lifestyle concept that many branded companies have sought to replicate. Ralph Lauren continues to provide a unifying vision throughout all aspects of our business. - Experienced Management Team -- Our world-class management team, led by Roger Farah, Lance Isham, Douglas Williams and Gerald Chaney, averages over 25 years of related experience. We also have one of the largest and most skilled design staffs in the fashion world with more than 150 full-time designers. 33
OUR STRATEGY We have maintained a consistent operating strategy that has translated new products into growth in both sales and profitability. The key elements of this core strategy are to: - Extend Polo's Brands. While maintaining a consistent global image for our brands that portrays core lifestyle themes, we will seek both to extend existing brands and to create new brands to address new and emerging markets and customer groups. - Luxury goods offer what we believe is a significant opportunity to further elevate the Ralph Lauren brand while capturing potentially higher gross margins. We intend to continue our successful expansion into luxury goods. - Womenswear, we believe, offers significant opportunities for increased market penetration. We will seek to solidify our position as a leading womenswear designer and continue to develop this growing market. Since our initial public offering, we have continued to focus on expanding our womenswear lines both internally and through licensing partners. - We continue to tailor our product assortments for a range of customers, while retaining the quality and fashion image of Polo Ralph Lauren products. We are expanding our product offerings to existing customer groups. - Club Monaco, acquired in 1999, is an international specialty retailer of casual apparel and other accessories for men and women under the "Club Monaco" brand name and a number of associated trademarks. We believe that Club Monaco extends our customer base among young fashion-forward consumers. - Our licensing alliances have been a key factor not only in our efforts to offer an extensive array of products, but also in our efforts to maintain brand consistency. Through these alliances, we join our design, marketing, and imaging skills with the specific product or geographic competencies of our licensing partners to create and build new businesses. Our alliances include those with industry leaders such as Jones Apparel Group, Inc. and L'Oreal S.A. - Expand Polo's Geographic Coverage. In addition to our growth prospects in the U.S., we believe that international markets, specifically Europe and Japan, are under-penetrated and offer growth opportunities for our quintessentially American designs and lifestyle image. - Although the European apparel market is similar in size and demographics to the U.S. market, Europeans spend a higher portion of their annual income on apparel than U.S. consumers do. However, our market share in Europe is less than that in the U.S. For example, in the high-end menswear segment, we command a 13% market share in the U.S., but only a 3% market share in Europe. We view this as an important growth opportunity. In order to more aggressively expand the brand and more fully develop the Polo image, Polo will continue to open new stores throughout Europe. In addition, we acquired Poloco and PRL Fashions of Europe, our former European licensees. - While we currently generate the majority of our sales in the U.S., we believe there continue to be opportunities in key U.S. cities for growth. We will continue to develop our retail presence in cities such as Beverly Hills, California, Boston, Massachusetts, Dallas, Texas, and New York, New York. - Increase Direct Management of Polo Ralph Lauren Brands. We believe that enhancing our brand image is crucial to sustaining our growth and increasing our profit margins, and accordingly, we have recently been increasing our ability to directly control our brands. - We believe that operating our own specialty stores offers significant opportunities to more effectively merchandise our products and improve our brand image among 34
consumers. In order to achieve these objectives we opened or acquired six new specialty stores during fiscal 2002 and improved the merchandising in many of our existing speciality stores. - We have made and will continue to make strategic acquisitions of select licensees in order to gain better control over our core product lines. By increasing control over the products and brands, we believe we will be able to increase our profit margins. For example, we acquired PRL Fashions of Europe S.R.L. in October 2001, and Poloco in January 2000. See "Business -- Recent Developments". - Enhance Polo's Operations. We have spent the past year focusing on the operations of our retail and wholesale businesses and on improving efficiency at the corporate level. Although we have seen progress reflected in our financial results, we believe potential still exists for further margin expansion. - We believe we can significantly improve retail store profitability. Major initiatives for our 234 stores include adopting a corporate supply chain and inventory management program. We also intend to implement shared services across brands and stores, including an integrated information technology system linking store-level point-of-sale and inventory information with corporate inventory and financial management modules. - With our products being distributed in company-owned stores and in leading department and specialty stores around the world, we require an efficient global distribution network. We are implementing initiatives to streamline the time it takes for our products to move from design to stores. We are seeking to reduce order-lead times and improve in-stock levels, while ensuring a consistent and timely delivery of products. We also encourage accountability among our buyers to ensure accuracy of orders to the stores. - As we seek to grow the profitability of our operations, we will continue to focus on reducing costs and on more effectively using assets in all areas of our business. We will seek to improve working capital management, work with suppliers to reduce costs throughout the sourcing process and establish rigorous financial targets and long-term budgets. We will seek to build on our recent successes to increase our margins in the near-term. 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. In addition, in October 2001, we acquired the Polo Brussels store 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. 35
Details of our net revenues are shown in the table below.
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 Polo stores. Price points are at the upper end or luxury ranges. The lines are currently sold by us through 155 doors in the United States and over 210 international doors by us and our licensing partners. 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. Purple Label collection tailored clothing is manufactured and distributed by a licensee, and dress shirts and ties and sportswear are sourced and distributed by us. We sell the Purple Label collection through a limited number of premier fashion retailers, currently through approximately 113 doors in the United States and 18 internationally. 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 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.
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:
FULL-PRICE STORES In addition to generating sales of our products, full-price stores set, reinforce and capitalize on the image of our brands. We have 14 Ralph Lauren stores which showcase our upper end luxury styles and products and demonstrate our most refined merchandising techniques. We also operate 16 Polo Ralph Lauren stores and 63 other full-price stores, including:
outlet stores purchased approximately 26% of their products from us in the nine month period ended December 29, 2001 and 21% in fiscal 2001, 48% in the nine month period ended December 29, 2001 from our licensing partners and 44% in fiscal 2001 and 26% from other suppliers of products in the nine month period ended December 29, 2001 and 35% in fiscal 2001. In addition, during fiscal 2001, we added 16 new outlet stores (net of store closings). 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 Home Collection licenses, these payments generally range from five to eight percent of the licensing partners' sales of the licensed products. In addition, licensing partners are required to allocate between 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 products are subject to our prior approval and continuing oversight. The result is a consistent identity for Polo products across product categories and international markets. We had 16 product and eight international licensing partners as of December 29, 2001 and 16 product and 10 international licensing partners as of March 31, 2001. We derive a substantial portion of our net income from licensing revenue we receive from our licensing partners. Our largest licensing partners in the nine month period ended December 29, 2001 and fiscal 2001 by licensing revenue were: - Jones Apparel Group, Inc. (accounting for 26.6% of licensing revenue for the nine months ended December 29, 2001 and 26.9% of licensing revenue for fiscal 2001), - WestPoint Stevens, Inc. (accounting for 13.1% of licensing revenue for the nine months ended December 29, 2001 and 10.3% of licensing revenue for fiscal 2001), and - Seibu Department Stores, Ltd. (accounting for 11.5% of licensing revenue for the nine months ended December 29, 2001 and 10.1% of licensing revenue for fiscal 2001). PRODUCT LICENSING ALLIANCES As of December 29, 2001 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, 40
accessories and fragrances. The products offered by our product licensing partners are listed below.
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 two 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. One exception to the licensing structure of the Ralph Lauren Home lines is that during fiscal 2001 we took direct control of all aspects of the design, manufacturing and sale of Ralph Lauren Home crystal, glass and ceramic tableware, dinnerware and giftware, as well as new lines of lighting, window and bath hardware and decorative accessories. We perform a broader range of services for our Ralph Lauren Home licensing partners, as compared to our other licensing partners, including design, marketing and sales. As a result, we receive a higher royalty rate from our Home Collection licensing partners, typically ranging from 15% to 20%. Our Home licensing alliances generally have three to five year terms and often grant the licensee conditional renewal options. The services we perform are: - sales - marketing - operating showrooms - 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 - specialty home furnishings stores - interior design showrooms - customer direct mail catalogs - home centers - 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. 42
The Ralph Lauren Home products offered by us and our domestic licensing partners are:
and other information and assistance necessary to achieve product uniformity, for which they are often compensated. Our most significant international licensing partnerships by royalties for the nine month period ended December 29, 2001 and in fiscal 2001 were: - 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). 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 - Womenswear - Children's - Accessories - Home Collection Club Monaco's design staff is located in New York and is divided into three teams: - Menswear - Womenswear - Home We operate a research, development and testing 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. 44
We create the distinctive image advertising for all our Polo Ralph Lauren products, conveying the particular message of each brand within the context of Polo's core themes. Advertisements generally portray a lifestyle rather than a specific item and often include a variety of Polo products offered by both ourselves and our licensing partners. Our primary advertising 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. RL Media has run television commercials to promote Polo.com. We believe the commercials developed brand awareness and provided traffic to our many businesses. Our licensing partners typically contribute 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 $159.8 million worldwide to advertise and promote Polo products in the nine month period ended December 29, 2001 and $179 million in fiscal 2001. Polo conducts 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 330 different manufacturers worldwide produce our apparel products. We contract for the manufacture of our products and do not own or operate any production facilities of our own. Approximately 5.0%, by dollar volume, of our products were produced in the United States and its territories in the nine month period ended December 29, 2001 and 24%, by dollar volume, in fiscal 2001 and approximately 95.0%, by dollar volume, were produced in Hong Kong, Canada and other foreign countries in the nine month period ended December 29, 2001 and 76%, by dollar volume, in fiscal 2001. Two manufacturers engaged by us each accounted for approximately 11.0% and 10.6% of our total production during the nine month period ended December 29, 2001 and approximately 12% and 11% in fiscal 2001. The primary production facilities of these two manufacturers are located in Hong Kong. Two other manufacturers each accounted for approximately 7.4% and 4.9% of our total production in the nine month period ended December 29, 2001 and six percent in fiscal 2001. Production is divided broadly into two segments: - purchases of finished products (FOB), where the supplier is responsible for the purchasing and carrying of raw materials, and - cut, make and trim, or "CMT", 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. 45
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 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, some of which may be significantly larger and have substantially greater resources than us. We compete primarily on the basis of fashion, quality, and service. Our business depends on our ability to shape, stimulate and respond to changing consumer tastes and demands by producing innovative, attractive, and exciting products, brands and marketing, as well as on our ability to remain competitive in the areas of quality and price. See "Risk Factors -- Risks Relating to the Industry in Which we Compete." 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. During fiscal 2001, distribution of our women's product was provided by a "pick and pack" facility under a warehousing distribution agreement with an unaffiliated third party. This agreement provides that the warehouse distributor will perform storage, quality control and shipping services for us. In return, we must pay the warehouse distributor a per unit rate and special processing charges for services such as ticketing, bagging and steaming. The initial term of this agreement was through December 1, 2001 and has been renewed. Outlet store distribution and warehousing is principally handled through the Greensboro distribution center. Our 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. During fiscal 2001 we completed a significant expansion of our Greensboro facility to handle increased volume and reduce reliance upon satellite facilities. 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. 46
We continually evaluate the adequacy of our warehousing and distribution facilities. MANAGEMENT INFORMATION SYSTEM We design our management information system 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 $0.6 million in the nine month period ended December 29, 2001, and less than one percent of net revenues for fiscal 2001. 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 cancellation for late delivery. As of December 29, 2001, spring and summer backlog was $182.1 million and $147.1 million for Polo Brands and Collection Brands, as compared to $210.5 million and $243.1 million at December 30, 2000. 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. 47
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" - "Polo Sport" - "Lauren/Ralph Lauren" - "RALPH" - "RRL" - "Club Monaco" - various trademarks pertaining to 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. 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. As a result of the appeal of our trademarks, Polo's 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 markets. See -- "Risk Factors -- Risks Related to Our Business -- Our trademarks and other intellectual property rights may not be adequately protected outside the U.S." Two agreements by which we resolved conflicts with third-party owners of other trademarks impose current 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 U.K., 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 certain other African countries, and we agreed to restrict use 48
of those Polo marks in those countries to fragrances and cosmetics, 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. 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 United States customs duties which comprise a material portion of the cost of the merchandise. See "Risk Factors -- 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 additional 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. EMPLOYEES As of December 29, 2001, we had approximately 9,900 employees, including approximately 7,500 in the United States and approximately 2,400 in foreign countries. Approximately 33 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. 49
PROPERTIES We do not own any real property except for our distribution facility in Greensboro, North Carolina, the parcel of land adjacent to the facility, and a 50% joint venture interest in a 44,000 square foot building located in the SoHo district of New York City. Certain information concerning our principal facilities in excess of 100,000 rentable square feet and of our existing Ralph Lauren stores of 20,000 rentable square feet or more, all of which are leased, is as follows:
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. The court in Saipan held a preliminary approval hearing on the settlement on February 23, 2002, and reserved decision. Some of the non-settling defendants opposed the settlement. We have denied any liability and are not at this preliminary stage in a position to evaluate the likelihood of a favorable or unfavorable outcome if the settlement is not approved and litigation proceeds against us. 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 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 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 matter currently pending will not have a material adverse effect on our financial condition or results of operations. 51
MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information with respect to our directors and executive officers as of February [26], 2002.
JOEL L. FLEISHMAN has been a director of Polo since January 1999. Mr. Fleishman has been a Professor of Law and Public Policy, Terry Sanford Institute of Public Policy at Duke University since 1971 and the Director of the Samuel and Ronnie Heyman Center for Ethics, Public Policy and the Professions at Duke University since 1987. Mr. Fleishman is also a member of the Board of Directors of Boston Scientific Corporation. JUDITH A. MCHALE has been a director of Polo since February 2001. Ms. McHale has been President and Chief Operating Officer of Discovery Communications, Inc., parent company of cable television's Discovery channel, since 1995. From 1989 to 1995 she served as Executive Vice President and General Counsel for Discovery Communications. Ms. McHale is also a member of the Board of Directors of the John Hancock Financial Services, Inc. and the Potomac Electric Company. ARNOLD H. ARONSON has been a director since November 2001. Mr. Aronson was chairman and chief executive officer of the Batus Retail Group, then the parent entity of Saks Fifth Avenue, Marshall Fields, Kohls, Gimbels, Ivey's, Fredrick & Nelson, Crescent and Breuners, from 1983 to 1986. Prior to that he was chairman and chief executive officer at Saks Fifth Avenue. He also served as chairman and chief executive officer of Woodward & Lothrop/John Wanamaker, after which he went into management consulting. Since 1997, Mr. Aronson has been a senior advisor at Kurt Salmon Associates, a global management consulting firm specializing in services to retail and consumer products companies. Mr. Aronson serves as chairman of the Board of Governors of the Parson School of Design and as vice chairman of the Board of Trustees at New School University in New York City. TERRY S. SEMEL has been a director of Polo since September 1997. Mr. Semel has been Chairman and Chief Executive Officer of Yahoo! Inc. since May 2001. He was Chairman of Windsor Media, Inc., Los Angeles, a diversified media company, from October 1999 to April 2001. Mr. Semel was Chairman of the Board and Co-Chief Executive Officer of the Warner Bros. division of Time Warner Entertainment LP, Los Angeles, from March 1994 until October 1999 and of Warner Music Group, Los Angeles, from November 1995 until October 1999. For more than ten years prior to that he was President of Warner Brothers or its predecessor, Warner Bros. Inc. Mr. Semel is also a member of the Board of Directors of Revlon, Inc. and Yahoo! Inc. GERALD M. CHANEY has been our Senior Vice President of Finance and Chief Financial Officer since November 2000. Mr. Chaney was Vice President of Finance and Chief Financial Officer of Kellwood Company, a publicly held apparel manufacturing, marketer and merchandiser, from December 1998 to November 2000. From April to December 1998, Mr. Chaney was Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Petrie Retail, Inc. MITCHELL A. KOSH has been our Senior Vice President of Human Resources since July 2000. Mr. Kosh was Senior Vice President and Chief Human Resources Officer of Conseco, an insurance and financial services company in Carmel, Indiana, from February 2000 to July 2000. Prior to that he was with the Venator Group, Inc. where since 1996 he held executive human resource positions including serving as Senior Vice President of Human Resources for Foot Locker Worldwide. DOUGLAS L. WILLIAMS has been our Corporate Group President since February 2001. From April 2000 to February 2001 Mr. Williams was corporate Group President, Global Business Development. Mr. Williams began his career with us in 1988 as a retail analyst. He has held various sales and merchandising positions with us, including Vice President of men's sales from 1993 to 1997 and Senior Vice President of men's sales from 1997 to 1998. Mr. Williams was promoted to Divisional President of product licensing in 1998 and in 1999 was further promoted to President of global licensing and new business development. Each executive officer serves a one-year term ending at the next annual meeting of our board of directors, subject to his or her applicable employment agreement and his or her earlier death, resignation or removal. 53
PRINCIPAL AND SELLING STOCKHOLDERS GS Capital Partners, L.P., Stone Street Fund 1994, L.P. and Bridge Street Fund 1994, L.P. are the selling stockholders in this offering. Goldman, Sachs & Co., and The Goldman Sachs Group, Inc. may be deemed to own beneficially and indirectly the 22,720,979 shares of Class A common stock, including the shares of Class A common stock issuable upon the conversion of Class C common stock, beneficially owned by GS Capital Partners, Stone Street Fund and Bridge Street Fund because affiliates of Goldman, Sachs & Co. are the general partner or the managing general partner of GS Capital Partners, Stone Street Fund and Bridge Street Fund. GS Capital Partners, Stone Street Fund and Bridge Street Fund will convert the shares of Class C common stock into an equivalent number of shares of Class A common stock immediately prior to the offering. The following table sets forth certain information as of February 8, 2002 as to the number of shares of common stock beneficially owned and the percentage of outstanding shares held by - each person known by us to own beneficially more than 5% of our Class A common stock, - each person who is a named executive officer and director of our company, and - all persons as a group who are directors and executive officers of our company. Unless otherwise indicated, each such beneficial owner holds the sole voting and investment power with respect to shares of Class A common stock.
Goldman Sachs Group, Inc. ("GS Inc.") may be deemed to own beneficially and indirectly the 22,720,979 shares of Class A common stock (including shares issuable upon the conversion of Class C common stock) beneficially owned by GS Capital Partners, Stone Street Fund and Bridge Street Fund because affiliates of Goldman, Sachs & Co. and GS Inc. are the general partner or the managing general partner of GS Capital Partners, Stone Street Fund and Bridge Street Fund and Goldman, Sachs & Co. is the investment manager of each of the limited partnerships. Excludes (i) shares of Class A Common Stock beneficially owned by Goldman, Sachs & Co. and its affiliates that were acquired in the ordinary course of broker-dealer transactions and (ii) shares of Class A Common Stock held in client accounts for which Goldman, Sachs & Co. or its affiliates exercise voting or investment authority, or both and are referred to as, "managed accounts". Each of GS Inc. and Goldman, Sachs & Co. disclaims beneficial ownership of the shares (a) beneficially owned by the limited partnerships, except to the extent attributable to partnership interests in the limited partnerships held by GS. Inc. and its affiliates, and (b) held in managed accounts. Each of the limited partnerships shares voting and dispositive power with respect to its shares with GS Inc. and Goldman, Sachs & Co. GS Capital Partners, L.P., The Goldman Sachs Group, Inc., Goldman, Sachs & Co., Stone Street Fund and Bridge Street Fund are collectively referred to as the "GS Group". The address of each of the persons is 85 Broad Street, New York, New York 10004. (6) Includes vested options representing the right to acquire 275,334 shares of Class A common stock. Does not include 266,666 unvested options. Includes 104,575 restricted shares which vest ratably over four years on the second, third, fourth and fifth anniversaries of November 10, 1998, the effective date of Mr. Isham's Amended and Restated Employment Agreement. (7) Includes vested options representing the right to acquire 116,668 shares of Class A common stock. Does not include 233,332 unvested options. Includes 118,299 restricted shares which vest ratably over four years on the second, third, fourth and fifth anniversaries of April 12, 2000, the effective date of Mr. Farah's employment agreement. (8) Mr. Friedman, who is a Managing Director of Goldman, Sachs & Co., may be deemed to own beneficially and indirectly the shares owned beneficially by Goldman, Sachs & Co. and GS Group. Mr. Friedman disclaims beneficial ownership of those shares, except to the extent of his pecuniary interest in those shares, if any. (9) Includes vested options granted to each of Messrs. Bennack, Fleishman and Semel under the 1997 Non-Employee Director Option Plan representing the right to acquire 12,000, 9,000 and 15,000 shares of Class A common stock, respectively. Does not include unvested options granted to Messrs. Aronson, Bennack, Fleishman, Semel, Dr. Brown and Ms. McHale under the 1997 Non-Employee Director Option Plan representing the right to acquire 7,500, 4,500, 4,500, 4,500, 7,500 and 7,500 shares of Class A common stock, respectively. (10) Includes vested options representing the right to acquire 8,334 shares of Class A common stock. Does not include 36,666 unvested options. (11) Includes vested options representing the right to acquire 188,334 shares of Class A common stock. Does not include 149,666 unvested options. (12) According to a Schedule 13D/A filed on January 25, 2002: (i) BAMCO, Inc. ("BAMCO") beneficially owns 7,790,000 shares of Class A common stock; (ii) Baron Asset Fund ("BAF"), an investment advisory client of BAMCO, beneficially owns 7,300,000 shares of Class A common stock; (iii) Baron Capital Management, Inc. ("BCM") beneficially owns 1,335,125 shares of Class A common stock; (iv) Baron Capital Group, Inc. ("BCG"), the parent holding company of BAMCO and BCM, beneficially owns 9,575,125 shares of Class A common stock; and (v) Ronald Baron, who holds a controlling interest in BCG, beneficially owns 9,575,125 shares of Class A common stock. BCG and Ronald Baron 56
disclaims beneficial ownership of shares held by their controlled entities (or the investment advisory clients thereof) to the extent such shares are held by persons other than BCG and Ronald Baron. BAMCO and BCM disclaim beneficial ownership of shares held by their investment advisory clients to the extent such shares are held by persons other than BAMCO, BCM and their affiliates. Each of the persons shares voting and dispositive powers with respect to its or his shares. The address of each of the persons is 767 Fifth Avenue, 49th Floor, New York, New York 10153. (13) According to a Schedule 13G/A filed on February 14, 2002: (i) each of FMR Corp. and Fidelity Management & Research Company ("Fidelity"), a wholly-owned subsidiary of FMR Corp., may be deemed to own beneficially 3,450,050 shares of Class A common stock, as a result of Fidelity acting as investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940 (the "Fidelity Funds"), and as a result of Fidelity International Limited (which has a historical relationship with FMR Corp. and Fidelity) acting as investment advisor to various non-U.S. investment companies (the "International Funds"); (ii) each of Edward C. Johnson 3d, Chairman of FMR Corp., and Abigail P. Johnson, a Director of FMR Corp., may be deemed to beneficially own 3,450,050 shares of Class A common stock as a result of their voting control over FMR Corp.; and (iii) Fidelity Magellan Fund, one of the Fidelity Funds, owns beneficially 2,133,700 shares of Class A common stock. Each of Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the Fidelity Funds, has sole power to dispose of the 3,450,050 shares of Class A common stock owned by the Fidelity Funds. Each of Edward C. Johnson 3d and FMR Corp., through its control of an investment advisory company, Fidelity Management Trust Company, has the sole power to dispose of the 3,450,050 shares of Class A common stock owned by institutional accounts managed by Fidelity management Trust Company. Neither FMR Corp. nor Edward C. Johnson has the sole power to vote or direct the voting of the shares of Class A common stock owned directly by the Fidelity Funds, the institutional accounts managed by Fidelity Management Trust Company and the International Funds. The address of each of the persons is 82 Devonshire Street, Boston, Massachusetts 02109. (14) According to a Schedule 13G filed on December 19, 2001 Chilton Investment Company, Inc. beneficially owns, and has sole power to vote and dispose of, 1,617,700 shares of Class A common stock. The address of Chilton Investment Company, Inc. is 1266 East Main Street, 7th Floor, Stamford CT 06902. (15) Includes vested options granted to all directors and executive officers under our 1997 Long-Term Stock Incentive Plan and our 1997 Non-Employee Director Option Plan representing the right to acquire 580,336 shares of Class A common stock. Does not include unvested options granted to all directors and executive officers under our 1997 Long-Term Stock Incentive Plan and our 1997 Non-Employee Director Option Plan representing the right to acquire 649,664 shares of Class A common stock. 57
If the underwriters exercise in full their option to purchase additional shares to cover over-allotments, the number of shares sold by the selling stockholders, the number and percentage of shares of Class A common stock beneficially owned by the selling stockholders after the offering and the impact of the full exercise of the over allotment option, are as follows:
DESCRIPTION OF CAPITAL STOCK The following description is merely a summary, and is subject to and qualified in its entirety by reference to the terms of our certificate of incorporation. It is our certificate of incorporation, and not this summary, which defines the rights and privileges of our common stock. At February 8, 2002, our capital stock consists of the following, each having a par value of $.01 per share: - 500,000,000 authorized shares of Class A common stock, of which 31,948,651 are outstanding, - 100,000,000 authorized shares of Class B common stock, of which 43,280,021 are outstanding, - 70,000,000 authorized shares of Class C common stock, of which 22,720,979 are outstanding, and - 30,000,000 authorized shares of preferred stock, none of which are outstanding. The shares of Class B common stock outstanding are held of record by the members of the Lauren family, and the shares of Class C common stock outstanding are held by the GS Group, in each case as described under the heading "Principal and Selling Stockholders". COMMON STOCK The shares of Class A common stock, Class B common stock and Class C common stock are identical in all respects, except for: - voting rights, - certain conversion rights, and - transfer restrictions of the Class B common stock and Class C common stock. The number of authorized shares of any class of our capital stock may be increased or decreased by the vote of a majority of the holders of the voting power of that class of capital stock who are entitled to vote generally in the election of directors, despite the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware (the "Delaware Law") or any equivalent provision enacted. Voting Rights. The holders of Class A common stock and Class C common stock are entitled to one vote per share. Holders of Class B common stock are entitled to ten votes per share. Holders of all classes of common stock entitled to vote are treated as voting 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 as discussed below, or otherwise as required by applicable law. Our certificate of incorporation provides that our board of directors will have between six and 20 members, plus any directors who are entitled to be elected by any series of preferred stock (these directors are referred to as the "Preferred Directors"). We currently have ten directors on our board. Composition of our Board. We have 10 directors on our board of directors. Of the 10 directors, holders of Class A common stock have the right to elect two directors, holders of Class B common stock have the right to elect seven of our directors and holders of Class C common stock have the right to elect one of our directors. If on the record date of any stockholders meeting: - any shares of Class A common stock, Class B common stock and Class C common stock are outstanding, 59
- the number of outstanding shares of Class B common stock is 10% or more of the number of shares of all classes of common stock which were outstanding on the date of our initial public offering, and - the size of the board (not counting Preferred Directors) is increased, then any additional members entitled to be elected by the holders of common stock will be Class B directors unless: - the size or our board is increased to ten or 19 members (not counting Preferred Directors), in which case, and in each case, an additional Class A director will be added, and - the size of our board is increased to 13 members (not counting Preferred Directors), in which case an additional Class C director will be added. If on the record date of any stockholders meeting the number of outstanding shares of Class C common stock is: - 10% or more of the aggregate number of shares of common stock which were outstanding on the date of our initial public offering, then the holders of the Class C common stock, voting as a separate class, may: - elect one Class C director if the board (not counting Preferred Directors) consists of less than 13 directors, and - two Class C directors if the board (not counting Preferred Directors) consists of 13 directors or more. - less than 10% of the aggregate number of shares of common stock outstanding on the date of our initial public offering, then the Class C common stock will automatically convert into Class A common stock and the director or directors that would have been elected by the Class C Common Stock, will instead be elected by the holders of Class A common stock, voting as a separate class. If on the record date of any stockholders meeting the number of outstanding shares of Class B common stock is: - 10% or more of the aggregate number of shares of common stock which were outstanding on the date of our initial public offering, then the holders of Class B common stock may elect two-thirds or more of the members of the board of directors entitled to be elected by all of the holders of common stock, and - less than 10% of the aggregate number of shares of common stock outstanding as on the date of our initial public offering, then the directors that would have been elected by - a separate vote of that class, and - a separate vote of the holders of Class C common stock, will instead be elected by the holders of Class A common stock and the holders of Class B common stock, voting together, with holders of Class A common stock having one vote per share and holders of Class B common stock having ten votes per share. Because of the disproportionate voting rights of the Class B common stock, in certain instances holders of Class B common stock will still be able to elect a majority of the board of directors entitled to be elected by the holders of common stock, even though the number of outstanding shares of Class B common stock is less than 10% of the number of shares of all classes of common stock that were outstanding on the date of our initial public offering. 60
Removal of Directors and Vacancies. Directors may be removed with or without cause and only by those holders of the class or classes of common stock or series of preferred stock that, as of the date the removal is effected, would be entitled to elect that director at the next annual meeting of stockholders. Vacancies in a directorship may be filled only by: - the remaining directors who were elected by the holders of each class of common stock or series of preferred stock that: - elected the director creating the vacancy, and - on the date that vacancy is filled, would be entitled to elect that director at the next annual meeting of the stockholders, unless there are no remaining directors, in which case vacancies in a directorship will be filled by: - the vote of the holders of the class or classes of common stock or series of preferred stock who, voting as a separate class on the date that vacancy is filled, would be entitled to elect that director at the next annual meeting of stockholders, or at a meeting of the holders of common stock of that class or classes or series of preferred stock. As used in this prospectus, the term "members of the Lauren family" includes only: - Ralph Lauren and his estate, guardian, conservator or committee, - the spouse of Ralph Lauren and her estate, guardian, conservator or committee, - each descendant of Ralph Lauren and their respective estates, guardians, conservators or committees, - each "family controlled entity", and - the trustees of each "Lauren family trust". The term "family controlled entity" means: - any not-for-profit corporation where a majority of its board of directors is composed of Ralph Lauren, Mr. Lauren's spouse and/or descendants of Ralph Lauren, - any other corporation where a majority of the value of its outstanding equity is owned by members of the Lauren family, - any partnership where a majority of the economic interest of its partnership interests are owned by members of the Lauren family, and - any limited liability or similar company where a majority of its economic interests is owned by members of the Lauren family. The term "Lauren family trust" includes trusts whose primary beneficiaries are Mr. Lauren, Mr. Lauren's spouse, Lauren descendants, Mr. Lauren's siblings, spouses of descendants of Ralph Lauren and each of their respective estates, guardians, conservators or committees and/or charitable organizations, and any wholly charitable trust, where a majority of its trustees includes Mr. Lauren, the spouse of Mr. Lauren and/or members of the Lauren family. Dividends. Holders of common stock are entitled to receive dividends at the same rate whenever dividends are declared by the board out of assets legally available for their payment, after payment of any dividends required to be paid on shares of preferred stock outstanding. We may not make any dividend or distribution to any holder of any class of common stock unless we, simultaneously, make the same dividend or distribution to each other outstanding share of common stock regardless of class. 61
Whenever a dividend or other distribution is payable in shares of a class of common stock, including stock splits or divisions of common stock: - only shares of Class A common stock may be distributed to Class A stockholders, - only shares of Class B common stock may be distributed to Class B stockholders, - only shares of Class C common stock may be distributed to Class C stockholders, and - the number of shares of each class of common stock payable per share of that class of common stock will be equal in number. Whenever dividends or other distributions consist of other voting securities of ours or the voting securities of any corporation which is a wholly owned subsidiary of ours, we will declare and pay those dividends in three separate classes of those voting securities, identical in all respects except that: - the voting rights of each security issued to the holders of Class A common stock and Class C common stock will have one-tenth of the voting rights of each security issued to holders of Class B common stock, - the security issued to holders of Class B common stock will convert into the security issued to the holders of Class A common stock upon the same terms and conditions which would apply to the conversion of Class B common stock into Class A common stock, including having the same restrictions that apply to the transfer and ownership of the Class B common stock, - the security issued to the holders of Class C common stock will convert into the security issued to holders of Class A common stock upon the same terms and conditions which would apply to the conversion of Class C common stock into Class A common stock, including having the same restrictions that apply to the transfer and ownership of the Class C common stock, and - if the securities consist of voting securities of any corporation which is a wholly owned subsidiary of ours, the voting rights which apply to each security issued to holders of Class A common stock, Class B common stock and Class C common stock, relating to election of directors, will otherwise be as comparable as is practicable to those of, in each case, the Class A common stock, Class B common stock and Class C common stock. In the case of dividends or other distributions consisting of securities convertible into, or exchangeable for, our voting securities or of a wholly owned subsidiary of ours, we will provide that those convertible or exchangeable securities and the underlying securities, be identical in all respects (including the conversion or exchange rate), except that the underlying securities may have the same differences as they would have if we issued our voting securities, or those of a wholly owned subsidiary of ours, rather than issuing securities that convert into, or may be exchanged for, our voting securities. Restrictions on Additional Issuances and Transfer. We may not issue or sell any shares of: - Class B common stock, or any securities which may be converted into, or exchanged or exercised for shares of Class B common stock, to any person who is not a member of the Lauren family, and - Class C common stock, or any securities which may be converted into, or exchanged or exercised for shares of Class C common stock, to any person who is not a member of the GS Group and, until April 15, 2002, any successor of the GS Group. The term "securities" includes, but is not limited to, any rights, options, warrants or other securities. 62
Shares of Class B common stock may not be transferred, whether by sale, assignment, gift, bequest, appointment or otherwise, to a person who is not a member of the Lauren family. Similarly, shares of Class C common stock may not be transferred to a person who is not a member of the GS Group or, until April 15, 2002, any of their successors. Despite these restriction on transfer: - any member of the Lauren family may pledge its shares of Class B common stock to a financial institution pursuant to a bona fide pledge of the shares as collateral for indebtedness due to the pledgee so long as: - the shares remain subject to the transfer restrictions, and - if the pledgee seeks to foreclose on the indebtedness or other similar action, the pledged shares of Class B common stock may only be transferred to a member of the Lauren Family or converted into shares of Class A common stock, as the pledgee may elect, and - the transfer restrictions described immediately above do not apply in the case of a merger, consolidation or business combination of us with or into another corporation in which all of the outstanding shares of our common stock and preferred stock regardless of class are purchased by the acquirer. Conversion. Class A common stock has no conversion rights. Shares of Class B common stock and Class C common stock are convertible into Class A common stock, in whole or in part, at any time and from time to time at the option of the holder, on the basis of one share of Class A common stock for each share of Class B common stock or Class C common stock converted. Also, each share of Class C common stock will automatically convert into one share of Class A common stock if, on the record date for any stockholders meeting, the number of shares of Class C common stock then outstanding is less than 10% of the aggregate number of shares of common stock which were outstanding on the date of our initial public offering. Whenever a person is no longer a member of the Lauren family, any share of Class B common stock held by that person at that time will automatically convert into a share of Class A common stock. Similarly, if a person ceases to be a member of the GS Group (or, until April 15, 2002, any successor to them), any share of Class C common stock held by that person at that time will automatically convert into a share of Class A common stock. Reclassification and Merger. If a reclassification or other similar transaction occurs, and as a result the shares of Class A common stock are converted into another security, then each holder of Class B common stock and Class C common stock will be entitled to receive upon conversion the amount of the other security that the holder would have received if the conversion had occurred immediately before the record date of the reclassification or other similar transaction. No adjustments for dividends will be made upon the conversion of any share of Class B common stock or Class C common stock, unless - a share is for payment of a dividend or other distribution, and - the share is converted after the record date. In that case, the registered holder of that share at the close of business on that record date will be entitled to receive the dividend or other distribution which was payable on that record date regardless of the fact that the share has been converted or that we are in default in paying it. If we enter into any consolidation, merger, combination or other transaction in which shares of common stock are exchanged for, or changed into, other stock or securities, cash and/or any 63
other property, then the shares of each class of common stock will be exchanged for, or changed into, either: - the same amount of stock, securities, cash and/or any other property into or for which each share of any other class of common stock is exchanged or changed; unless, the shares of common stock are exchanged for, or changed into, shares of capital stock. In that case, the shares exchanged for, or changed into, may differ, but only to the extent that the Class A common stock, the Class B common stock and the Class C common stock differ as provided in our certificate of incorporation, or - if holders of each class of common stock are to receive different distributions of stock, securities, cash and/or any other property, then an amount of stock, securities, cash and/or property having a value equal to the value per share of any other class of our common stock that was exchanged or changed as determined by an independent investment banking firm of national reputation selected by the board of directors. Liquidation. If we liquidate, any assets remaining after: - payment of our debts and other liabilities, and - setting aside sufficient amounts for any payment due to any holders of preferred stock, will be distributable ratably among the holders of the Class A common stock, Class B common stock and Class C common stock treated as a single class. Other Provisions. Except as described below, the holders of common stock are not entitled to preemptive rights. None of the Class A common stock, Class B common stock or Class C common stock may be subdivided or combined in any way unless the other classes are subdivided or combined in the same proportion. We may not make any offering of options, rights or warrants to subscribe for shares of Class B common stock or Class C common stock. If we make an offering of options, rights or warrants to subscribe for shares of any other class or classes of capital stock to all holders of a class of common stock, then we must simultaneously make an identical offering to all holders of the other classes of common stock, unless any class of holders, voting as a separate class, agree that the offering need not be made to their class. Accordingly, all of the options, rights or warrants offerings described in this paragraph will offer the respective holders of Class A common stock, Class B common stock and Class C common stock the right to subscribe at the same rate per share. Transfer Agent and Registrar. The Transfer Agent and Registrar for the Class A common stock is The Bank of New York. PREFERRED STOCK Subject to any limitations under Delaware Law, the rules of the NYSE or other organizations on whose systems our capital stock may be quoted or listed and without any act or vote by our stockholders, our board of directors is authorized to: - issue shares of preferred stock in one or more series, - establish from time to time the number of shares to be included in each series, - fix the rights, powers, preferences and privileges of the shares of each wholly unissued series, - fix any qualifications, limitations or restrictions on that series, and - increase or decrease the number of shares of the series; 64
unless the shares of preferred stock would have the right to - vote for the election of directors under ordinary circumstances, or - elect 50% or more of the directors under any circumstances, in which case, the approval of the holders of at least 75% of the outstanding shares of Class B common stock is required. No series of our preferred stock may be entitled to vote together with any class of our common stock for the election of directors who are entitled to be elected by that class of common stock. However, upon the terms of any series of preferred stock established by our board, any or all series of preferred stock could have preference over the common stock relating to dividends and other distributions, upon our liquidation or could have voting or conversion rights that could adversely affect the holders of our outstanding common stock. In addition, our ability to issue preferred stock could delay, defer or prevent a change of control of us. OTHER CHARTER AND BYLAW PROVISIONS Special meetings of our stockholders may be called by the board, the Chairman of the Board or our Chief Executive Officer. Except as otherwise required by law, stockholders are not entitled to request or call a special meeting of our stockholders, except where stockholders holding a majority of the shares of a class of common stock request a meeting in order to vote on a matter which that class, voting as a separate class, is entitled to vote on. In addition, our stockholders may not take any action on any matter by written consent unless they are entitled to vote on the action as a separate class. Various provisions of our certificate of incorporation relating to: - the issuance of preferred stock, - action by stockholders, - calling of special stockholder meetings, and - the procedure for amending our certificate of incorporation and the provisions described in the above three bullet points may be amended only with the approval of 75% of the outstanding voting power of the common stock voting as a single class, in addition to any voting requirements under Delaware law. In addition, the provisions of our certificate of incorporation relating to terms of the common stock and the provision prohibiting preferred stockholders from voting together with any class of common stock for the election of directors entitled to be elected by that class of common stock, may not be amended in any respect without the approval of the affected class of common stock, voting as a separate class. The board may from time to time adopt, amend or repeal the bylaws. However, any bylaws adopted or amended by the board may be further amended or repealed, and any bylaws may be adopted, by our stockholders by vote of a majority of the holders of shares of our stock entitled to vote in the election of our directors. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW We are subject to the provisions of Section 203 of Delaware Law. Under Section 203, certain "business combinations" between a Delaware corporation whose stock generally is publicly traded or held of record by more than 2,000 stockholders and an "interested stockholder" are 65
prohibited for a three-year period following the date that such a stockholder became an interested stockholder, unless - the corporation has elected in its original certificate of incorporation not to be governed by Section 203 (we did not make such an election), - the business combination was approved by the board of directors of the corporation before the other party to the business combination became an interested stockholder, - upon completion of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction, excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan, or - the business combination was approved by the board of directors of the corporation and then ratified by the holders of at least two-thirds of the voting stock which the interested stockholder did not own. The three-year prohibition also does not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of the majority of the corporation's directors. The term "business combination" is defined generally to include mergers or consolidations between a Delaware corporation and an "interested stockholder", transactions with an "interested stockholder" involving the assets or stock of the corporation or its majority-owned subsidiaries and transactions which increase an interested stockholder's percentage ownership of stock. The term "interested stockholder" is defined generally as a stockholder who, together with affiliates and associates, owns (or, within three years prior, did own) 15% or more of a Delaware corporation's voting stock. Section 203 could prohibit or delay a merger, takeover or other change in control of us and therefore could discourage attempts to acquire us. 66
SHARES ELIGIBLE FOR FUTURE SALE We are not able to predict the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of our Class A common stock in the public market, or the perception that such sales may occur, may adversely affect prevailing market prices. See "Risk Factors -- Risks Related to Our Class A Common Stock and this Offering -- Shares eligible for future sale may have a potential adverse effect on our stock price". Upon completion of the offering, we expect to have outstanding a total of 42,948,651 shares of Class A common stock (or 44,598,651 shares if the underwriters exercise their over-allotment option in full), 43,280,021 shares of Class B common stock and 11,720,979 shares of Class C common stock (or 10,070,979 shares if the underwriters' exercise their over-allotment option in full). Of such shares, the 42,540,998 shares of Class A common stock including the 11,000,000 shares of Class A common stock being sold in the offering (together with any shares sold upon exercise of the underwriters' over-allotment options), will be immediately eligible for sale in the public market without restriction, except for shares purchased or held by any of our "affiliates" as that term is defined in Rule 144 under the Securities Act. All 43,280,021 shares of Class B common stock (which may be converted into Class A common stock at any time) will be owned by the members of the Lauren family and assuming the underwriters' exercise their over-allotment option in full, all 10,070,979 shares of Class C common stock (which may be converted into Class A common stock at any time) will be owned by the GS Group. Subject to any contractual restrictions, while any stockholder remains one of our affiliates, any shares of Class A common stock (including any shares issued upon conversion of other classes of common stock) held by the stockholder will only be available for public sale if the shares are registered under the Securities Act or sold in compliance with limitations of Rule 144. LOCK-UP AGREEMENTS We, our executive officers, directors, members of the Lauren family and the selling stockholders have agreed with the underwriters not to dispose of or hedge any shares of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock (other than, in the case of the selling stockholders, as part of this offering) for a period ending 90 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. REGISTRATION RIGHTS The members of the Lauren family and the GS Group are entitled to registration rights with respect to their shares of common stock pursuant to a registration rights agreement with us. The GS Group may only make one demand for registration of its common stock once every nine months for only so long as the GS Group collectively owns at least 10% of the common stock outstanding. This offering constitutes a demand registration by the GS Group under the registration rights agreement. As a result, following the lapse of the 90 day lock-up, the GS Group will be unable to make another demand for the six months following the 90 day lock-up period. Once its ownership of the common stock is less than 10% of the outstanding shares of common stock, the GS Group may make one additional demand. The members of the Lauren family may make a demand for registration of their common stock once every nine months. In the case of each demand registration, at least $20 million of Class A common stock must be requested to be registered. The members of the Lauren family and the GS Group also have an unlimited number of piggyback registration rights in respect of their shares. The piggyback registration rights allow the holders to include all or a portion of the shares of Class A common stock issuable upon 67
conversion of their shares of Class B common stock and Class C common stock, as the case may be, under any registration statement filed by us, subject to specified limitations. Registration of the shares subject to the registration rights agreement under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the registration. RULE 144 Affiliates who wish to sell shares in the market other than in a registered offering would rely on Rule 144, provided they are not subject to a contractual lock-up. In general, under Rule 144 as currently in effect, an affiliate of ours, or a person who has beneficially owned restricted securities for at least one year, would be entitled to sell during any 90 day period a number of shares that does not exceed the greater of: - 1% of the number of shares of Class A common stock then outstanding following the offering, or approximately 429,486 shares (approximately 445,986 shares if the underwriters' over-allotment option is exercised in full); and - the average weekly trading volume of the Class A common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are generally subject to restrictions relating to manner of sale, notice and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell these shares without having to comply with the manner of sale, public information, volume limitation or notice filing provisions of Rule 144. 68
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following discussion sets forth the opinion of Paul, Weiss, Rifkind, Wharton & Garrison with respect to the material United States federal income and estate tax consequences of the acquisition, ownership and disposition of our Class A common stock by a non-U.S. holder. As used in this discussion, the term "non-U.S. holder" means a beneficial owner of our Class A common stock that is not, for U.S. federal income tax purposes: - an individual who is a citizen or resident of the United States, - a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision of the United States, other than a partnership treated as foreign under U.S. Treasury regulations, - an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source, or - a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or if the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. An individual may be treated as a resident of the United States in any calendar year for U.S. federal income tax purposes, instead of a nonresident, by, among other ways, being present in the United States on at least 31 days in that calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For purposes of this calculation, you would count all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year. Residents are taxed for U.S. federal income purposes as if they were U.S. citizens. This discussion does not consider: - U.S. state and local or non-U.S. tax consequences, - specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position, including, if the non-U.S. holder is a partnership or trust, that the U.S. tax consequences of holding and disposing of our Class A common stock may be affected by certain determinations made at the partner or beneficiary level, - the tax consequences for the shareholders, partners or beneficiaries of a non-U.S. holder, - special tax rules that may apply to particular non-U.S. holders, such as financial institutions, insurance companies, tax-exempt organizations, U.S. expatriates, broker-dealers, and traders in securities, or - special tax rules that may apply to a non-U.S. holder that holds our Class A common stock as part of a "straddle", "hedge", "conversion transaction", "synthetic security" or other integrated investment. The following discussion is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and administrative and judicial interpretations, all as in effect on the date of this prospectus, and all of which are subject to change, retroactively or prospectively. The following summary assumes that a non-U.S. holder holds our Class A common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR CLASS A COMMON STOCK. 69
DIVIDENDS We do not anticipate paying cash dividends on our Class A common stock in the foreseeable future. See "Price Range of Class A Common Stock and Dividends." In the event, however, that we pay dividends on our Class A common stock, we will have to withhold a U.S. federal withholding tax at a rate of 30%, or a lower rate under an applicable income tax treaty, from the gross amount of the dividends paid to a non-U.S. holder. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. Dividends that are effectively connected with a non-U.S. holder's conduct of a trade or business in the United States and, if an income tax treaty applies, attributable to a permanent establishment in the United States, are taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons. In that case, we will not have to withhold U.S. federal withholding tax if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a "branch profits tax" may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States. In order to claim the benefit of an applicable income tax treaty rate, a non-U.S. holder will be required to satisfy applicable certification and other requirements. However, - in the case of Class A common stock held by a foreign partnership, the certification requirement will generally be applied to the partners of the partnership and the partnership will be required to provide certain information, - in the case of Class A common stock held by a foreign trust, the certification requirement will generally be applied to the trust or the beneficial owners of the trust depending on whether the trust is a "foreign complex trust", "foreign simple trust", or "foreign grantor trust" as defined in the U.S. Treasury regulations, and - look-through rules will apply for tiered partnerships, foreign simple trusts and foreign grantor trusts. A non-U.S. holder that is a foreign partnership or a foreign trust is urged to consult its own tax advisor regarding its status under these U.S. Treasury regulations and the certification requirements applicable to it. A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the U.S. Internal Revenue Service. GAIN ON DISPOSITION OF CLASS A COMMON STOCK A non-U.S. holder generally will not be taxed on gain recognized on a disposition of our Class A common stock unless: - the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the gain will be taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons (unless an applicable income tax treaty provides otherwise) and, if the non-U.S. holder is a foreign corporation, the "branch profits tax" described above may also apply, - the non-U.S. holder is an individual who holds our Class A common stock as a capital asset, is present in the United States for more than 182 days in the taxable year of the disposition and meets other requirements, or 70
- we are or have been a "U.S. real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held our Class A common stock. Generally, a corporation is a "U.S. real property holding corporation" if the fair market value of its "U.S. real property interests" equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. The tax relating to stock in a U.S. real property holding corporation generally will not apply to a non-U.S. holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our Class A common stock, provided that our Class A common stock was regularly traded on an established securities market. We believe that we are not currently, and we do not anticipate becoming in the future, a U.S. real property holding corporation. However, even if we are or have been a U.S. real property holding corporation, a non-U.S. holder which did not beneficially own, directly or indirectly, more than 5% of the total fair market value of our Class A common stock at any time during the shorter of the five-year period ending on the date of disposition or the period that our Class A common stock was held by the non-U.S. holder (a "non-5% holder") and which is not otherwise taxed under any other circumstances described above, generally will not be taxed on any gain realized on the disposition of our Class A common stock if, at any time during the calendar year of the disposition, our Class A common stock was regularly traded on an established securities market within the meaning of the applicable U.S. Treasury regulations. Our Class A common stock will be considered to be regularly traded on an established securities market for any calendar quarter during which it is regularly quoted on New York Stock Exchange by brokers or dealers that hold themselves out to buy or sell our Class A common stock at the quoted price. FEDERAL ESTATE TAX Class A common stock owned or treated as owned by an individual who is a non-U.S. holder (as specially defined for U.S. federal estate tax purposes) at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Any dividends paid to you will be subject to information reporting and may be subject to U.S. backup withholding tax. If you are a non-U.S. holder, you will be exempt from the backup withholding tax if you provide a Form W-8BEN or otherwise meet documentary evidence requirements for establishing that you are a non-U.S. holder or otherwise establish an exemption. The gross proceeds from the disposition of our Class A common stock may be subject to information reporting and backup withholding tax. If you sell your Class A common stock outside the U.S. through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the U.S., then the U.S. backup withholding and information reporting requirements generally will not apply to that payment. However, U.S. information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the U.S., if you sell your Class A common stock though a non-U.S. office of a broker that: - is a U.S. person, - derives 50% or more of its gross income in specific periods from the conduct of a trade or business in the U.S., - is a "controlled foreign corporation" for U.S. tax purposes, or 71
- is a foreign partnership, if at any time during its tax year. - one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership, or - the foreign partnership is engaged in a U.S. trade or business, unless the broker has documentary evidence in its files that you are a non-U.S. person and certain other conditions are met or you otherwise establish an exemption. If you receive payments of the proceeds of a sale of our Class A common stock to or through a U.S. office of a broker, the payment is subject to both U.S. backup withholding and information reporting unless you provide a Form W-8BEN certifying that you are a non-U.S. person or you otherwise establish an exemption. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the U.S. Internal Revenue Service. 72
UNDERWRITING We, the selling stockholders and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation and UBS Warburg LLC are the representative of the underwriters.
available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional securities. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the Class A common stock. As a result, the price of the Class A common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise. Each Underwriter represents, warrants and agrees that: (i) it has not offered or sold and, prior to the expiry of a period of six months from the Closing Date, will not offer or sell any shares of Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act of 2000 (the "FSMA") received by it in connection with the issue or sale of any shares in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom. The securities may not be offered, sold, transferred or delivered in or from The Netherlands, as part of their initial distribution or as part of any re-offering, and neither this prospectus nor any other document in respect of the offering may be distributed or circulated in The Netherlands, other than to individuals or legal entities which include, but are not limited to, banks, brokers, dealers, institutional investors and undertakings with a treasury department, who or which trade or invest in securities in the conduct of a business or profession. Goldman, Sachs & Co. and its affiliates and associated persons are the beneficial owners of more than 10% of the Class A Common Stock being offered. Since more than 10% of the net proceeds of the offering will be received by an NASD member participating in the offering or affiliates or associated persons of such NASD member, the offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8). Mr. Richard A. Friedman, a Managing Director of Goldman, Sachs & Co., is one of our directors. We will bear all expenses for the offering, excluding underwriting discounts and commissions payable by the selling stockholders. We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act. 74
LEGAL MATTERS Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York will pass upon legal matters related to the offering for us. Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York will pass upon legal matters related to the offering for the underwriters. EXPERTS The financial statements as of March 31, 2001 and April 1, 2000, and for each of the three years in the period ended March 31, 2001, included in and incorporated by reference in this prospectus and the related financial statement schedules incorporated by reference elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports (which reports express an unqualified opinion and include an explanatory paragraph relating to a change in a method of accounting) appearing herein and incorporated by reference elsewhere in the Registration Statement, and have been so included and incorporated by reference in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements and other information with the SEC. You can read and copy these reports, proxy statements and other information at the SEC's Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549. Call (800) SEC-0330 for more information on the Public Reference Room. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding us and other issuers that file electronically with the SEC. The site's address is "www.sec.gov". We have filed a registration statement on Form S-3 under the Securities Act with respect to the shares of Class A common stock covered by this prospectus. This prospectus is part of the registration statement and does not contain all of the information in the registration statement. Whenever a reference is made in this prospectus to a contract or other document of Polo Ralph Lauren Corporation, please be aware that the reference is only a summary and that you should refer to the exhibits that are a part of the registration statement for a copy of the contract or other document. You may review a copy of the registration statement at the SEC's public reference room in Washington, D.C., as well as through the SEC's Internet site. INCORPORATION BY REFERENCE The SEC's rules allow us to "incorporate by reference" into this prospectus the information in other documents that we file with them. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information in documents that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below: - our Annual Report on Form 10-K for the fiscal year ended March 31, 2001, - our Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2001, September 29, 2001 and December 29, 2001, - our Definitive Proxy Statement on Schedule 14A filed on June 26, 2001, and 75
- the description of our common stock contained in our Form 8-A, which incorporates by reference the description of our common stock contained in our registration statement on Form S-1 (No. 333-24733). We also incorporate by reference into this prospectus all documents that we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus and prior to the termination of this offering. We also incorporate by reference into this prospectus all documents that we file pursuant to the Securities Exchange Act after the date of the initial filing of the registration statement of which this prospectus is a part, but before the effectiveness of the registration statement. We will provide a copy of any or all of these documents (other than exhibits unless the exhibits are specifically incorporated by reference into the document), without charge, upon written or oral request to: Polo Ralph Lauren Corporation, 650 Madison Avenue, New York, NY 10022, Attention: Secretary, telephone (212) 318-7000. Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed to be modified or superseded for the purposes of this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference modifies or supersedes that statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. 76
POLO RALPH LAUREN CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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 31, 2001 and April 1, 2000 and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended March 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Polo Ralph Lauren Corporation and subsidiaries as of March 31, 2001 and April 1, 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP New York, New York May 23, 2001 F-2
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
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 Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware in March 1997. The consolidated financial statements include the accounts of 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 December 31, 2000 consolidated balance sheet and January 6, 2000 combined balance sheet of Poloco (as defined), our wholly owned subsidiary, in the accompanying March 31, 2001 and April 1, 2000, consolidated balance sheets. We also have consolidated the results of operations of Poloco for the year ended December 31, 2000, in the March 31, 2001 consolidated statements of income, stockholders' equity and cash flows. (b) ACQUISITIONS AND JOINT VENTURE 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 will be owned 50% by us and 50% by NBC. In exchange for a 50% interest, we will 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 will have equal representation from NBC and us. The joint venture has been accounted for under the equity method from the effective date of its formation. We have not recognized any losses in excess of our financial basis. 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 is being amortized on a straight-line basis over an estimated useful life of 40 years. F-8
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:
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 "2001," "2000" and "1999" represent the 52- or 53-week fiscal years ended March 31, 2001, April 1, 2000 and April 3, 1999. Fiscal 2001 and 2000 reflect a 52-week period and fiscal 1999 reflects a 53-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 and restructuring. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. MARKETABLE SECURITIES We determine the appropriate classification of our investments in debt securities at the time of purchase and reevaluate such determinations at each balance sheet date. At March 31, 2001, we had invested in debt securities which we do not intend to hold to maturity. Accordingly, these investments are classified as available-for-sale securities and are carried at fair value, with the unrealized gains and losses, net of income taxes, reported in stockholders' equity. The amortized cost of available-for-sale securities approximated their fair value at March 31, 2001. Gross realized gains and losses on sales of available-for-sale securities were not material. Our investments in debt securities are diversified among high-credit quality securities in accordance with our risk management policy. The following is a summary of our investments in available-for-sale marketable securities at March 31, 2001:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The contractual maturities of debt securities at March 31, 2001, are as follows: $44.6 million due in one year or less and $6.1 million due between one and two years. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out ("FIFO") method) or market. Effective April 4, 1999, we changed our method of valuing our retail inventories from the retail method to the FIFO method. The impact of this change was not material. 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 28 years). Major additions and betterments are capitalized, and repairs and maintenance are charged to operations in the period incurred. Additionally, we capitalize our share of the cost of constructing shop-within-shops under agreements with retailers and amortize such costs 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 amortize goodwill on a straight-line basis over its estimated useful life, ranging from 11 to 40 years. Amortization expense was $8.0 million, $3.7 million and $1.6 million in fiscal 2001, 2000 and 1999. Accumulated amortization was $13.9 million and $5.9 million at March 31, 2001 and April 1, 2000. 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 F-11
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $42.0 million and $36.9 million at March 31, 2001 and April 1, 2000, and are included in other assets in the accompanying consolidated balance sheets. REVENUE RECOGNITION Sales 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 and discounts 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. Total advertising expenses, including cooperative advertising, amounted to $88.8 million, $73.6 million and $76.2 million in fiscal 2001, 2000 and 1999. 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 $46.8 million and $52.9 million at March 31, 2001 and April 1, 2000, 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. F-12
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Transaction gains or losses on the unhedged portion resulting from changes in the euro rate are recorded in income and amounted to $5.8 million in fiscal 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. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). This Statement, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivatives, whether designated in hedging relationships or not, as either assets or liabilities in the statement of financial position, and measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is dependent upon the intended use of the derivative. SFAS No. 133 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. SFAS No. 133 is effective for our first quarter of our fiscal year ending March 30, 2002. 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 will record the fair value of these derivatives at April 1, 2001 and the resulting net unrealized gain, after taxes, of approximately $4.2 million will be recorded in other comprehensive income as a cumulative transition 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. 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. These costs approximated 2.0% of net sales in each of the fiscal years presented. We bill our wholesale customers for shipping and handling costs and record such revenues in net sales upon shipment. F-13
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. RECENT ACCOUNTING PRONOUNCEMENTS 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 ("EITF No. 00-25"). EITF No. 00-25 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. This pronouncement is effective for our first quarter in the year ending March 29, 2003. We have not yet determined the impact of adopting this pronouncement on our consolidated results of operations. 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 under-performing 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. F-14
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. After extensive review of the Operational Plan, and changes in business conditions in certain markets in which we operate, we made an adjustment to the Operational Plan in our fourth quarter of fiscal 2001. We recorded a $5.0 million reduction of the liability for lease and contract termination costs resulting from the overestimation of costs associated with the closure of our retail stores due to market conditions that were more favorable than originally estimated. The major components of the charge and the activity through March 31, 2001, were as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 31, 2001, were as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVENTORIES
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 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 percent Notes (the "Eurobonds") due November 2006 (the "Eurobond Offering"). The Eurobonds are listed on the London Stock Exchange. The net proceeds from the Eurobond Offering were $281.5 million based on the 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 2001, we repurchased 27.5 million of our outstanding Eurobonds, or $25.3 million 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 .5% to 1.0% over the Euro Overnight Indexed Average which was 5.16% and 3.75% at March 31, 2001 and April 1, 2000. 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. We were also contingently liable for $34.2 million in outstanding letters of credit related primarily to commitments for the purchase of inventory. At April 1, 2000, we had $86.1 million outstanding in direct borrowings, $80.0 million outstanding under the Term Loan and $262.7 million outstanding in Eurobonds based on the year-end Euro exchange rate. The Credit Facilities bore interest primarily at the institution's prime rate (ranging from 5.9% to 8.5% at March 31, 2001 and 6.9% to 9.0% at April 1, 2000). The weighted average interest rate on borrowings was 6.3%, 6.1% and 7.4% in fiscal 2001, 2000 and 1999. F-18
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:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We have available Federal net operating loss carryforwards of approximately $17.2 million and state net operating loss carryforwards of approximately $202.2 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 $3.2 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 $15.0 million and $20.4 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 $49.0 million of undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be reinvested. These earnings could become subject to tax if they were remitted as dividends, if foreign earnings were lent to PRLC or a subsidiary or U.S. affiliate of PRLC, or if the stock of the subsidiaries were sold. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practical. 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. The historical provision for income taxes in fiscal 2001, 2000 and 1999 differs from the amounts computed by applying the statutory Federal income tax rate to income before income taxes due to the following:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 an unrealized loss of $1.4 million and an unrealized gain of $4.4 million at March 31, 2001 and April 1, 2000, based upon the estimated amount that we would have to pay or would receive to terminate the agreements, as determined by the financial institutions. We entered into forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce our risk from exchange rate fluctuations. Gains and losses on these contracts are deferred and recognized as adjustments to the basis of those assets. These gains and losses were not material. 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 31, 2001 and April 1, 2000, 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 $217.1 million and $258.6 million as of March 31, 2001 and April 1, 2000, based on its quoted market price as listed on the London Stock Exchange. 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 52.0% and 54.0% of trade accounts receivable outstanding at March 31, 2001 and April 1, 2000. We had three significant customers who accounted for approximately 11.0%, 10.0% and 10.0% each of net sales in fiscal 2001, and for approximately 12.0%, 11.0% and 10.0% each of net sales in fiscal 2000. We had two significant customers who accounted for approximately 10.0% each of net sales in fiscal 1999. Additionally, we had four significant licensees who in aggregate constituted approximately 53.0%, 58.0% and 55.0% of licensing revenue in fiscal 2001, 2000 and 1999. 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 F-21
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $7.4 million, $4.3 million and $8.7 million in fiscal 2001, 2000 and 1999. 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 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 $18.1 million and $16.7 million at March 31, 2001 and April 1, 2000, and are reflected in other noncurrent liabilities in the accompanying consolidated balance sheets. Total compensation expense recorded was $3.2 million, $2.6 million and $2.7 million in fiscal 2001, 2000 and 1999. 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 among members of the GS Group or, until April 15, 2002, any successor of a member of the GS Group. The holders of Class A Common Stock generally have rights identical to holders of Class B Common Stock and F-22
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 shares. At March 31, 2001, we had an additional 11.0 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 2001, 2000 and 1999, our Board of Directors granted options to purchase 12,250, 12,000 and 28,500 Shares with exercise prices equal to the stock's fair market value on the date of grant. At March 31, 2001, we had 417,250 options reserved for issuance under this plan. Stock options were granted in fiscal 2001, 2000 and 1999 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 2001, 2000 and 1999 would have been reduced to the following pro forma amounts:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fiscal 2001, 2000 and 1999. The following assumptions were applied in determining the fair value of options granted:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purposes. The repurchased Shares have been accounted for as treasury stock at cost. At March 31, 2001, we had repurchased 3,771,806 Shares at an aggregate cost of $71.2 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 31, 2001, aggregate minimum annual rental payments under noncancelable operating leases with lease terms in excess of one year were payable as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, is brought on behalf of a purported class consisting of the Saipan factory workers. It alleges claims under the Federal civil RICO statute, Federal peonage and involuntary servitude laws, the Alien Tort Claims Act, and state tort law, and seeks equitable relief and unspecified damages, including treble and punitive damages, interest and an award of attorney's fees. 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 to settle any claims for nonmaterial consideration. The settlement agreement is subject to court approval. We have denied any liability and are not in a position to evaluate the likelihood of a favorable or unfavorable outcome if the settlement is not approved and litigation proceeds. As part of the settlement, we have since been 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 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 newly filed actions are expected to remain inactive unless settlement is not finally approved by the Federal Court. 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. 15. QUARTERLY INFORMATION (UNAUDITED) The following is a summary of certain unaudited quarterly financial information for fiscal 2001 and 2000:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Our net revenues, income from operations, depreciation and amortization expense and capital expenditures for fiscal 2001, 2000 and 1999, and total assets as of March 31, 2001, April 1, 2000 and April 3, 1999, for each segment were as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Our net revenues for fiscal 2001, 2000 and 1999, and our long-lived assets as of March 31, 2001 and April 1, 2000, by geographic location were as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (INFORMATION FOR DECEMBER 29, 2001 AND DECEMBER 30, 2000 IS UNAUDITED) (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) 1 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Polo Ralph Lauren Corporation ("PRLC") and its wholly and majority owned subsidiaries (collectively referred to as the "Company", "we", "us", and "our"). The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from this report as is permitted by such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet data for March 31, 2001 is derived from the audited financial statements which are included in the Company's report on Form 10-K, which should be read in conjunction with these financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial condition, results of operations, and changes in cash flows of the Company for the interim periods presented. 2 ACQUISITIONS On October 31, 2001, the Company completed the acquisition of substantially all of the assets of PRL Fashions of Europe SRL ("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. PRL Fashions had revenues of approximately $75.0 million for their fiscal year 2000. 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. Consistent with SFAS No. 141 and SFAS No. 142, this acquisition was accounted for as a purchase and the goodwill recorded will not be amortized. The assets acquired of $15,147 and liabilities assumed of $15,106 were recorded at estimated fair values as determined by the Company's management based on information currently available. Goodwill of approximately $32.5 million has been recognized for the excess of the purchase price over the preliminary estimate of fair market value of the net assets acquired. 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. Consistent with SFAS No. 141 and SFAS No. 142, the transaction was accounted for as a purchase and the goodwill is not being amortized. The sales and total assets were not material. The pro forma effect of these two acquisitions on the historical results were not material. F-33
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 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 under-performing 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 Statements of Financial Accounting Standards ("SFAS") No. 121, Accounting For The Impairment of 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 the second quarter of Fiscal 2001, subsequently adjusted for a $5.0 million reduction of liabilities in the fourth quarter of Fiscal 2001. The activity for the nine months ended December 29, 2001, was as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (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 activity for the nine months ended December 29, 2001, was as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 6 ACCRUED EXPENSES AND OTHER
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Eurobonds, or $25.3 million 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 .5% to 1.0% over the Euro Overnight Indexed Average which was 5.16% and 3.75% at March 31, 2001 and April 1, 2000. At December 29, 2001, we had $74.0 million outstanding in direct borrowings, $80.0 million outstanding under the Term Loan and $218.0 million outstanding in Euro based on the quarter end exchange rate. We were also contingently liable for $18.2 million in outstanding letters of credit related primarily to commitments for the purchase of inventory. At December 30, 2000, we had $84.7 million outstanding in direct borrowings, $80.0 million outstanding under the Term Loan and $248.9 million outstanding in Eurobonds based on the quarter end exchange rate. In December 2000, we retired Euro 7.3 million, or $6.5 million, of the outstanding Eurobonds. We were also contingently liable for $50.2 million in outstanding letters of credit related to commitments for the purchase of inventory and in connection with its leases. The Credit Facilities bore interest primarily at the Institution's prime rate (ranging from 2.8% to 4.8% at December 30, 2001 and 7.3% to 9.5% at December 30, 2000). The weighted average interest rate on outstanding borrowings was 5.9% and 6.1% at December 29, 2001 and December 30, 2000, respectively. 8 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 an unrealized loss of $4.1 million and $1.4 million at December 29, 2001 and March 31, 2001 respectively, based upon the estimated amount that we would have to pay or would receive to terminate the agreements, as determined by the financial institutions. We entered into forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce our risk from exchange rate fluctuations. Gains and losses on these contracts are deferred and recognized as adjustments to the basis of those assets. These gains and losses were not material. 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 December 29, 2001 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 $218.0 and $217.1 million as of December 29, 2001 and March 31, 2001, based on its quoted market price as listed on the London Stock Exchange. Considerable judgment is F-37
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. 9 COMPREHENSIVE INCOME For the three and nine months ended December 29, 2001 and December 30, 2000, comprehensive income was as follows:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) operations for the three and nine months ended December 29, 2001 and December 30, 2000, by segment:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Summarized below are our net revenues for the three and nine months ended December 29, 2001 and December 30, 2000 and our long-lived assets as of December 29, 2001 and March 31, 2001, by geographic location:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. 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 among members of the GS Group or, until April 15, 2002, any successor of a member of the GS Group. The holders of Class A Common Stock generally have rights identical to holders of Class B Common Stock and Class C Common Stock, except that holders of Class A Common Stock and Class C Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Holders of all classes of Common Stock 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 RECENTLY ISSUED PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("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 is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. 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. F-41
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) In July 2001, the FASB issued (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 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. 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 ("EITF No. 00-25"). EITF No. 00-25 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. This pronouncement is effective for the Company's 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. The Company adopted the provisions of SFAS No. 133 as of April 1, 2001. As of this date, the Company had outstanding interest rate swap agreements and forward foreign exchange contracts that qualify as cash flow hedges under SFAS No. 133. In accordance with SFAS No. 133, the Company recorded the fair value of these derivatives at April 1, 2001, and the resulting net unrealized gain, after taxes, of approximately $4.0 million was recorded in other comprehensive income as a cumulative transition adjustment. 14 RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year's presentation. 15 QUARTERLY INFORMATION (UNAUDITED) The following is a summary of certain unaudited quarterly financial information for fiscal 2002 and 2001:
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- ---------------------------------------------------------- - ---------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------ TABLE OF CONTENTS
PART II ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses in connection with the offering described in this Registration Statement. The Company has agreed to pay all of the costs and expenses of this offering. Except for the SEC registration fee and National Association of Securities Dealers, Inc. filing fee, all of these amounts are estimates.
To the extent that a director, officer, employee, or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in the preceding two paragraphs, Section 145 requires that such person be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 145 provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in Section 145. Article Six of the Company's Amended and Restated Certificate of Incorporation eliminates the personal liability of the directors of the Company to the Company or its stockholders for monetary damages for breach of fiduciary duty as directors, with certain exceptions. Article Seven requires indemnification of directors and officers of the Company, and for advancement of litigation expenses to the fullest extent permitted by Section 145. The Underwriting Agreement filed herewith as Exhibit 1.1 provides for indemnification of the selling stockholders and directors, certain officers, and controlling persons of the Company by the underwriters against certain civil liabilities, including liabilities under the Securities Act. ITEM 16. EXHIBITS.
reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on February 27, 2002. POLO RALPH LAUREN CORPORATION By: /s/ RALPH LAUREN ------------------------------------ Ralph Lauren Chairman of the Board of Directors and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Ralph Lauren, F. Lance Isham, Roger N. Farah and Gerald M. Chaney, and each of them, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities (until revoked in writing), to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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.
EXHIBIT INDEX
EXHIBIT 5.1 PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 Avenue of the Americas New York, New York 10019 February 27, 2002 Polo Ralph Lauren Corporation 650 Madison Avenue New York, N.Y. 10022 Polo Ralph Lauren Corporation. Registration Statement on Form S-3 (Registration No. 333 - ) Ladies and Gentlemen: In connection with the above referenced Registration Statement on Form S-3 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), and the rules and regulations under the Act (the "Rules"), you have asked us to furnish our opinion as to the legality of 11,000,000 shares of the Company's Class A common stock, par value $0.01 per share (the "Common Stock"), and an additional 1,650,000 shares of the Common Stock (subject to the exercise of the underwriters' over-allotment option) to be sold for the account of certain selling shareholders (the "Selling Shareholders") described in the Registration Statement. The Common Stock to be sold (the "Shareholder Shares") in the offering contemplated by the Registration Statement (the "Offering") will consist of
shares which will be issued upon conversion from Class C common stock of the Company, par value $0.01 per share (the "Class C Shares"), immediately prior to the Offering. In connection with furnishing this opinion, we have reviewed the Registration Statement, the form of the Underwriting Agreement to be included as Exhibit 1.1 to the Registration Statement (the "Underwriting Agreement"), and originals or copies certified or otherwise identified to our satisfaction, of (i) the Company's Amended and Restated Certificate of Incorporation, (ii) the Company's Amended and Restated By-laws (each of items (i) and (ii) as in effect today), (iii) the Stockholders Agreement, dated June 9, 1997, among the Company, each of the Selling Shareholders and the other signatories thereto and (iv) the records of certain of the Company's corporate proceedings. We also have examined and relied upon representations as to factual matters both expressed and implied contained in certificates of officers of the Company and the Selling Shareholders, and have made those other investigations of fact and law and have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of those documents, records, certificates or other instruments, and upon factual information otherwise supplied to us, as in our judgment are necessary or appropriate to render the opinions expressed below. In addition, we have assumed, without independent investigation, the proper conversion of the Common Stock from Class C Shares into Common Stock by the Selling Shareholders for sale pursuant to the Registration Statement, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the
conformity of original documents to all documents submitted to us as certified, photostatic, reproduced or conformed copies, the authenticity of all the latter documents reviewed by us and the legal capacity of all individuals who have executed any of the documents reviewed by us. Based upon the above, and subject to the stated assumptions, exceptions and qualifications, we are of the opinion that the Shareholders Shares when delivered and paid for as contemplated in the Registration Statement and the Underwriting Agreement, will be validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the General Corporation Law of the State of Delaware. Our opinion is rendered only with respect to laws, and the rules, regulations and orders under them, which are currently in effect. We consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" contained in the prospectus and incorporated into the Registration Statement. In giving this consent, we do not admit that we come within the category of persons whose consent is required by the Act or the Rules. Very truly yours, /S/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON ---------------------------------------------- PAUL, WEISS, RIFKIND, WHARTON & GARRISON
EXHIBIT 8.1 PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 Avenue of the Americas New York, New York 10019 February 27, 2002 Polo Ralph Lauren Corporation 650 Madison Avenue New York, N.Y. 10022 Polo Ralph Lauren Corporation. Registration Statement on Form S-3 (Registration No. 333 - ) Ladies and Gentlemen: In connection with the above captioned Registration Statement on Form S-3 (the "Registration Statement") filed by Polo Ralph Lauren Corporation, a Delaware corporation (the "Company"), with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder (the "Rules"), we have been requested to render our opinion as to the matters hereinafter set forth. Capitalized terms used and not otherwise defined herein have the meanings given them in the Registration Statement. For purposes of our opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such agreements and other documents, records, certificates or other instruments as we have deemed relevant and necessary and we have made such investigations of law as we have deemed appropriate as a basis for the opinion expressed below. The opinion set forth below is limited to the Internal Revenue Code of 1986, as amended, administrative rulings, judicial decisions, treasury regulations and other applicable authorities, all as in effect on the date hereof. The statutory provisions, regulations and interpretations upon which our opinion is based are subject to change, and such changes could apply retroactively. Any such change could affect the continuing validity of the opinion set forth below. Based upon and subject to the foregoing, and subject to the qualifications set forth herein, we are of the opinion that the discussion set forth in the Registration
2 Statement under the heading "UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS" is an accurate general description, under currently applicable law, of the principal United States federal income tax considerations that apply to the Company's Class A common stock. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading "UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS" in the prospectus included in the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required by the Act or the Rules. Very truly yours, /S/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON PAUL, WEISS, RIFKIND, WHARTON & GARRISON
Exhibit 23.2 [Deloitte & Touche Letterhead] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Polo Ralph Lauren Corporation and subsidiaries on Form S-3 of our reports dated May 23, 2001 (which reports express an unqualified opinion and include an explanatory paragraph relating to a change in a method of accounting), included in the Annual Report on Form 10-K of Polo Ralph Lauren Corporation and subsidiaries for the year ended March 31, 2001, and to the use of our report dated May 23, 2001 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to a change in a method of accounting), appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Summary Consolidated Financial Data", "Selected Consolidated Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP New York, New York February 27, 2001