10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 29, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
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Commission File Number:
001-13057
POLO RALPH LAUREN
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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13-2622036
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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650 Madison Avenue, New York, New York
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10022
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(Address of principal executive
offices)
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(Zip
Code)
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Registrants telephone number, including area code:
(212) 318-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each
Class
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Name of Each Exchange on
Which Registered
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Class A Common Stock, $.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
Company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants voting stock
held by nonaffiliates of the registrant was approximately
$4,508,924,339 as of September 29, 2007, the last business
day of the registrants most recently completed second
fiscal quarter.
At May 16, 2008, 56,137,762 shares of the registrants
Class A common stock, $.01 par value and
43,280,021 shares of the registrants Class B
common stock, $.01 par value were outstanding.
Part III incorporates information from certain portions of
the registrants definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days
after the fiscal year end of March 29, 2008.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this
Form 10-K
or incorporated by reference into this
Form 10-K,
in future filings by us with the Securities and Exchange
Commission (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 the future results, performance or
achievements expressed in or implied by such forward-looking
statements. Forward-looking statements include statements
regarding, among other items:
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our anticipated growth strategies;
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our plans to expand internationally;
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our plans to open new retail stores;
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our ability to make certain strategic acquisitions of certain
selected licenses held by our licensees;
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our intention to introduce new products or enter into new
alliances;
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anticipated effective tax rates in future years;
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future expenditures for capital projects;
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our ability to continue to pay dividends and repurchase
Class A common stock;
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our ability to continue to maintain our brand image and
reputation;
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our ability to continue to initiate cost cutting efforts and
improve profitability; and
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our efforts to improve the efficiency of our distribution system.
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These forward-looking statements are based largely on our
expectations and judgments and are subject to a number of risks
and uncertainties, many of which are unforeseeable and beyond
our control. A detailed discussion of significant risk factors
that have the potential to cause our actual results to differ
materially from our expectations is described in this
Form 10-K
under the heading of Risk Factors. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
WEBSITE
ACCESS TO COMPANY REPORTS
Our investor website is http://investor.ralphlauren.com. We were
incorporated in June 1997 under the laws of the State of
Delaware. Our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed with or furnished to the
SEC pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 are available at our investor
website under the caption SEC Filings promptly after
we electronically file such materials with or furnish such
materials to the SEC. Information relating to corporate
governance at Polo Ralph Lauren Corporation, including our
Corporate Governance Policies, our Code of Business Conduct and
Ethics for all directors, officers, and employees, our Code of
Ethics for Principal Executive Officers and Senior Financial
Officers, and information concerning our directors, Committees
of the Board, including Committee charters, and transactions in
Polo Ralph Lauren Corporation securities by directors and
executive officers, is available at our website under the
captions Corporate Governance and SEC
Filings. Paper copies of these filings and corporate
governance documents are available to stockholders without
charge by written request to Investor Relations, Polo Ralph
Lauren Corporation, 625 Madison Avenue, New York, New York 10022.
1
In this
Form 10-K,
references to Polo, ourselves,
we, our, us and the
Company refer to Polo Ralph Lauren Corporation and
its subsidiaries, unless the context indicates otherwise. Due to
the collaborative and ongoing nature of our relationships with
our licensees, such licensees are sometimes referred to in this
Form 10-K
as licensing alliances. Our fiscal year ends on the
Saturday nearest to March 31. All references to
Fiscal 2008 represent the
52-week
fiscal year ended March 29, 2008. All references to
Fiscal 2007 represent the 52-week fiscal year ended
March 31, 2007. All references to Fiscal 2006
represent the 52-week fiscal year ended April 1, 2006.
PART I
General
Polo Ralph Lauren Corporation, founded in 1967 by Ralph Lauren,
is a global leader in the design, marketing and distribution of
premium lifestyle products, including mens, womens
and childrens apparel, accessories, fragrances and home
furnishings. We believe that our global reach, breadth of
product and multi-channel distribution is unique among luxury
and apparel companies. We operate in three distinct but
integrated segments: Wholesale, Retail and Licensing. During the
past several years, we have continued to develop our business
model, expand our vertically integrated Retail segment,
reposition our Wholesale segment, and maintain a strong
Licensing segment despite the strategic acquisition of several
of our key licensed businesses. The following tables show our
net revenues and operating profit (excluding unallocated
corporate expenses and legal and restructuring charges) by
segment for the last three fiscal years:
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Fiscal Years Ended
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March 29,
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March 31,
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April 1,
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2008
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2007
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2006
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(millions)
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Net revenues:
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Wholesale
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$
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2,758.1
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$
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2,315.9
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$
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1,942.5
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Retail
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1,912.6
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1,743.2
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1,558.6
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Licensing
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209.4
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236.3
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245.2
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Total net revenues
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$
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4,880.1
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$
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4,295.4
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$
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3,746.3
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Fiscal Years Ended
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March 29,
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March 31,
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April 1,
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2008
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2007
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2006
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(millions)
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Operating income:
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Wholesale
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$
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565.4
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$
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477.8
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$
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398.3
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Retail
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204.2
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224.2
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140.0
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Licensing
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96.7
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141.6
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153.5
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866.3
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843.6
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691.8
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Less:
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Unallocated corporate expenses
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(217.0
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(183.4
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(159.1
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Unallocated legal and restructuring charges
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4.1
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(7.6
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(16.1
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Total operating income
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$
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653.4
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$
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652.6
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$
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516.6
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Our net revenues by geographic region for the last three fiscal
years are shown in the tables below. Note 20 to our
accompanying audited consolidated financial statements included
in this Annual Report on
Form 10-K
contains additional segment and geographic area information.
2
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Fiscal Years Ended
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March 29,
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March 31,
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April 1,
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2008
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2007
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2006
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(millions)
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Net revenues:
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United States and Canada
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$
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3,653.1
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$
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3,452.2
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$
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3,032.3
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Europe
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944.7
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767.9
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627.7
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Japan
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272.4
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64.6
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44.3
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Other regions
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9.9
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10.7
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42.0
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Total net revenues
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$
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4,880.1
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$
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4,295.4
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$
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3,746.3
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Over the past five fiscal years, our sales have grown to
$4.880 billion in Fiscal 2008 from $2.650 billion in
Fiscal 2004. This growth has been largely a result of both our
acquisitions and organic growth. We have diversified our
business by channels of distribution, price point and target
consumer, as well as by geography. Our global reach is one of
the broadest in the apparel industry, with merchandise available
at approximately 10,800 different retail locations worldwide. In
addition to our wholesale distribution, we sell directly to
customers throughout the world via 313 full-price and factory
retail stores and our
e-commerce
website, RalphLauren.com.
We continue to invest in our business. In the past five fiscal
years, we have invested approximately $1.9 billion for the
acquisition of several key licensed businesses and capital
improvements, primarily through strong operating cash flow. In
addition, during Fiscal 2008 we launched American Living,
a new lifestyle brand created exclusively in the U.S. for
distribution by J.C. Penney Company, Inc.
(JCPenney). We intend to continue to execute our
long-term strategy of expanding our accessories and other
product offerings, growing our specialty retail store base, and
expanding our presence internationally. See
Item 7 Overview Our
Objectives and Risks for further discussion of the
Companys long-term strategy.
We have been controlled by the Lauren family since the founding
of our Company. As of March 29, 2008, Mr. Ralph
Lauren, or entities controlled by Mr. Ralph Lauren, owned
approximately 87% of the voting power of the outstanding common
stock of the Company.
Seasonality
of Business
Our business is affected by seasonal trends, with greater
Wholesale segment sales in our second and fourth quarters and
greater Retail segment sales in our second and third quarters.
These trends result primarily from the timing of seasonal
wholesale shipments and key vacation travel, back-to-school and
holiday shopping periods in the Retail segment. As a result of
the growth in our retail operations and other changes in our
business, historical quarterly operating trends and working
capital requirements may not be indicative of future
performances. In addition, fluctuations in sales and operating
income in any fiscal quarter may be affected by, among other
things, the timing of seasonal wholesale shipments and other
events affecting retail sales.
Working capital requirements vary throughout the year. Working
capital increases during the first half of the fiscal year as
inventory builds to support peak shipping periods and,
accordingly, decreases during the second half of the fiscal year
as inventory is shipped. Cash provided by operating activities
is typically higher in the second half of the fiscal year due to
higher net income and reduced working capital requirements
during that period.
Recent
Developments
Japanese
Business Acquisitions
On May 29, 2007, the Company completed its previously
announced transactions to acquire control of certain of its
Japanese businesses that were formerly conducted under licensed
arrangements, consistent with the Companys long-term
strategy of international expansion. In particular, the Company
acquired approximately 77% of the outstanding shares of Impact
21 Co., Ltd. (Impact 21) that it did not previously
own in a cash tender offer (the Impact 21
Acquisition), thereby increasing its ownership in Impact
21 from approximately 20% to
3
approximately 97%. Impact 21 conducts the Companys
mens, womens and jeans apparel and accessories
business in Japan under a pre-existing, sub-license arrangement.
In addition, the Company acquired the remaining 50% interest in
Polo Ralph Lauren Japan Corporation (PRL Japan),
which holds the master license to conduct Polos business
in Japan, from Onward Kashiyama and Seibu (the PRL Japan
Minority Interest Acquisition). Collectively, the Impact
21 Acquisition and the PRL Japan Minority Interest Acquisition
are herein referred to as the Japanese Business
Acquisitions.
The purchase price initially paid in connection with the
Japanese Business Acquisitions was approximately
$360 million, including transaction costs of approximately
$12 million. In January 2008, at an Impact
21 shareholders meeting, the Company obtained the necessary
approvals to complete the process of acquiring the remaining
approximately 3% of outstanding shares not exchanged as of the
close of the tender offer period (the minority
squeeze-out). In February 2008, the Company acquired
approximately 1% of the remaining Impact 21 shares
outstanding at an aggregate cost of $5 million. The Company
expects the minority squeeze-out to be successfully concluded in
the first quarter of Fiscal 2009, at an estimated aggregate cost
of $9 million.
The Company funded the Japanese Business Acquisitions with
available cash on-hand and ¥20.5 billion of borrowings
under a one-year term loan agreement pursuant to an amendment
and restatement to the Companys existing credit facility.
The Company repaid the borrowing by its maturity date on
May 22, 2008 using approximately $200 million of
Impact 21s cash on-hand acquired as part of the
acquisition.
The results of operations for Impact 21, which were previously
accounted for using the equity method of accounting, have been
consolidated in the Companys results of operations
commencing April 1, 2007. Accordingly, the Company recorded
within minority interest expense the amount of Impact 21s
net income allocable to the holders of the approximate 80% of
the Impact 21 shares not owned by the Company prior to the
closing date of the tender offer. The results of operations for
PRL Japan have already been consolidated by the Company as
described further in Note 2 to the accompanying audited
consolidated financial statements.
American
Living
In Fiscal 2008, the Company launched American Living, a
new lifestyle brand created exclusively in the U.S. for
distribution by JCPenney through the Companys new Global
Brand Concepts (GBC) group. The Company began
shipping related product to JCPenney in December 2007 to support
the launch of this new product line. The success of American
Living and the introduction of new product categories in
both the U.S. and overseas may be negatively impacted in
Fiscal 2009 by ongoing economic uncertainty. See
Item 7 Overview Global
Economic Uncertainty for further discussion.
Other
Developments
In late Fiscal 2007, the Company formed the Ralph Lauren Watch
and Jewelry Company, S.A.R.L. (the RL Watch
Company), a joint venture with Financiere Richemont SA
(Richemont), the Swiss Luxury Goods Group. The
Company began to incur certain
start-up
costs in Fiscal 2008 to support the launch of this business,
which is expected to occur in the spring of calendar 2009.
Our
Brands and Products
Since 1967, our distinctive brand image has been consistently
developed across an expanding number of products, price tiers
and markets. Our brands, which include apparel, accessories and
fragrance collections for men and women as well as childrenswear
and home furnishings, comprise one of the worlds most
widely recognized families of consumer brands. Reflecting a
distinctive American perspective, we have been an innovator in
aspirational lifestyle branding and believe that, under the
direction of internationally renowned designer Ralph Lauren, we
have had a considerable influence on the way people dress and
the way that fashion is advertised throughout the world. We
combine consumer insight with our design, marketing and imaging
skills to offer, along with our licensing alliances, broad
lifestyle product collections with a unified vision:
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Apparel Products include extensive
collections of mens, womens and childrens
clothing;
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Accessories Products encompass a broad range,
including footwear, eyewear, jewelry, hats, belts and
leathergoods, including handbags and luggage;
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Home Coordinated products for the home
include bedding and bath products, furniture, fabric and
wallpaper, paint, tabletop and giftware; and
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Fragrance Fragrance products are sold under
our Glamourous, Romance, Polo, Lauren, Safari, Ralph and Black
Label brands, among others.
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Our lifestyle brand image is reinforced by our RalphLauren.com
internet site, which averaged 2.6 million unique visitors a
month and acquired approximately 290,000 new customers during
Fiscal 2008 resulting in 1.3 million customers in total.
Ralph
Lauren Purple Label
A contemporary take on traditional bespoke tailoring, Ralph
Lauren Purple Label is the ultimate expression of modern
elegance for men. From precisely tailored made-to-measure suits
to sophisticated sportswear, Purple Label reflects an impeccable
sense of the dashing and refined, fashioned from exclusive,
limited-edition fabrics of the highest quality and expertly
crafted in the spirit of Savile Row tailoring. Purple Label also
offers made-to-order dress furnishings, accessories, luggage and
benchmade footwear, as well as hand monogramming and custom
engraving services. Ralph Lauren Purple Label competes with the
finest mens hand-tailored clothing lines. Ralph Lauren
Purple Label is available primarily in Ralph Lauren stores, but
is also available through specialty stores, fine department
stores and online at RalphLauren.com.
Ralph
Lauren Black Label for Men
Reflecting a sharp, modern attitude, Ralph Lauren Black Label is
the essence of sophisticated dressing for men. Featuring
razor-sharp tailoring and dramatically lean silhouettes, classic
suitings and sportswear are infused with a savvier attitude for
a look that is at once modern and timeless. Iconic yet fresh,
Ralph Lauren Black Label represents a new chapter in mens
style. Black Label creates a niche among the finest contemporary
tailored clothing lines. Black Label is available in Ralph
Lauren stores, limited selection of specialty stores and better
department stores and online at RalphLauren.com.
Polo
by Ralph Lauren
Classic and authentic, Polo by Ralph Lauren is the foundation of
the world of Ralph Lauren menswear, combining the time-honored
aesthetic of East Coast Ivy League casual style with proper
English refinement. Polo is an original symbol of the preppy
lifestyle. The iconic polo player logo is recognized worldwide
as a symbol of heritage and authenticity. From classic favorites
such as oxford shirts and chino pants to modern collections that
combine heritage preppy with a chic, downtown feel, Polo sets
the standard for a well-worn look with an aspirational
sensibility, creating a comprehensive line of sportswear,
tailored clothing and accessories to fulfill a mans every
wardrobe need. Polo leads the industry of fine mens
sportswear brands. Polo is available in Ralph Lauren stores,
department stores, specialty stores and elsewhere online at
Bloomingdales.com and RalphLauren.com.
Lauren
for Men
Created to broaden the reach of the Ralph Lauren mens
statement, Lauren for Men conveys a spirit of tradition while
recalling the sophistication of Polo Ralph Lauren menswear.
Classic and perfectly polished, the Lauren mens line
includes suits, sport coats, dress pants, tuxedos, outerwear and
rental formalwear. This comprehensive line competes with other
mens designer fashion lines. Lauren for Men is available
at better department stores.
Ralph
by Ralph Lauren
The Ralph by Ralph Lauren collection features suits, sport
coats, dress trousers and suit vests designed with the classic
style and fine fabrics for which Ralph Lauren is known. Refined
construction details all hallmarks of better
mens suitings and a range of timeless patterns
and colors establish Ralph by Ralph Lauren as a strong
foundation for the modern mans wardrobe. Ralph by Ralph
Lauren is available exclusively at Dillards stores.
5
Ralph
Lauren Collection
The crown jewel of Ralph Lauren womenswear, Collection makes its
dramatic first appearance each season on the runways of New
York, providing the fashion world with the seasons
definitive Ralph Lauren style statement. Embodying glamour and
sophistication, Collections distinctive couture
sensibility is expressed though modern yet timeless
silhouettes expertly crafted from the finest luxury
fabrics reflecting the epitome of bold femininity
and rarefied chic as expressed by Ralph Lauren. Ralph Lauren
Collection competes with the finest designer collections found
in Paris, Milan and New York. Ralph Lauren Collection is sold
primarily in Ralph Lauren stores. Select pieces are also
available through specialty stores, the finest department stores
and online at RalphLauren.com.
Ralph
Lauren Black Label for Women
Sophisticated and classic with a modern edge, Black Label
translates the luxurious spirit of Ralph Lauren Collection into
a distinctive, timeless collection of icons for town, country,
day and evening. Created from the finest materials, Black Label
silhouettes elegant and striking are the
cornerstones of the Ralph Lauren womans wardrobe. Black
Label competes with the finest womens
collections the gold tier of wholesale
brands. Black Label is offered primarily in Ralph Lauren stores.
Select pieces are also available in designer boutiques, fine
specialty stores, better department stores and online at
RalphLauren.com.
Ralph
Lauren Blue Label
Fresh and eclectic with a sexy, youthful spirit, Blue Label
embodies the Ralph Lauren sensibility through heritage looks
with a chic, modern twist. Whether reflecting Ivy
League-inspired style, a modern take on proper English
refinement or a feminine translation of the rugged spirit of the
American West, Blue Label creates a mix of style that is
eclectic, timeless and unmistakably Ralph Lauren. Blue Label
occupies a niche in the womens sportswear market. Blue
Label is offered primarily through Ralph Lauren stores and
online at RalphLauren.com.
Lauren
by Ralph Lauren
Created to broaden the reach of the Ralph Lauren womens
statement, Lauren conveys a spirit of heritage and tradition
while recalling the sophisticated luxury of Black Label.
Timeless and perfectly polished, Lauren suits, sportswear and
outerwear provide ideal combinations for every occasion, while
Lauren Active infuses a country club sensibility into practical
sports apparel, creating fashionable wardrobe solutions for
golf, tennis, yoga or weekend wear. Lauren competes with other
designer fashion lines and is sold in department stores in the
U.S. and Canada and online at RalphLauren.com.
Pink
Pony
Established in 2000, Pink Pony is Polo Ralph Laurens
initiative in the fight against cancer. With a focus on breast
cancer, Pink Pony supports programs for early diagnosis,
education, treatment and research, and is dedicated to bringing
patient navigation and quality cancer care to medically
underserved communities. A portion of sales from Pink Pony
products benefits the Pink Pony Fund. Pink Pony apparel consists
of feminine, slim-fitting womens sportswear items and
accessories crafted in luxurious fabrics. Hooded sweatshirts,
cotton mesh polos, canvas tote bags and cashmere yoga pants all
feature our iconic pink Polo Player a symbol of our
commitment to the fight against cancer. Pink Pony is available
at select Ralph Lauren stores and online at RalphLauren.com. To
learn more about Pink Pony and Polo Ralph Laurens other
philanthropic efforts, please visit the PRL Foundation section
of RalphLauren.com.
RRL
Embodying the cool rugged spirit of classic Western Americana,
RRL is inspired by an authentic sensibility, providing
distinctive designs and a selection of vintage pieces for men
and women. From weathered blue jeans, distressed leather jackets
and Western shirts to one-of-a-kind belts and cowboy boots, RRL
evokes the bohemian freedom of the frontier
borderlands distinctively Ralph Lauren, distinctly
American. RRL competes with a wide range of new and vintage
clothing lines that pique the interest of collectors of unique
American style. RRL is available at select Ralph Lauren stores
and freestanding RRL stores.
6
RLX
Created to answer the demands of dedicated athletes for superior
high-performance outfitting, RLX provides gear that unites the
highest standards of quality, design and technology. The result
is a line of cutting edge athletic fashion with an unmistakable
respect for both functionality and style. Utilizing a network of
alliances among the RLX design team, world-class athletes and
makers of the most innovative fabrics available, RLX helps
athletes overcome the challenges encountered in disciplines as
varied as wintersports, tennis, golf, sailing and cycling. RLX
competes with leading providers of fashionable high-performance
activewear. The complete RLX Ski line is available at the RLX
flagship store in Aspen, Colorado. Select RLX products are
available at additional Ralph Lauren stores and online at
RalphLauren.com. The RLX Golf collection proud to
sponsor professional golfer Luke Donald is available
at select private golf clubs and resorts.
Polo
Golf and Ralph Lauren Golf
Rooted in the design heritage of Ralph Lauren, Polo Golf and
Ralph Lauren Golf feature luxury technical performance wear for
men and women that travels effortlessly between the course and
the clubhouse. Polo Golf is a proud sponsor of pro golfers Tom
Watson, Davis Love III and Jonathan Byrd. Ralph Lauren Golf
is proud to sponsor Morgan Pressel the youngest
champion in LPGA Tour history. Polo Golf and Ralph Lauren Golf
collections compete with the highest-quality providers of
mens and womens golf apparel, and are available in
the most exclusive private clubs and resorts. The Golf
collections are also available at RalphLauren.com.
Rugby
With a preppy Ivy League sensibility at the heart of Ralph
Lauren heritage, Rugby combines sporty varsity looks with city
savvy to create a youthful, energetic collection of sportswear.
From edgy, rebellious, sport-inspired looks for men to sharp,
sexy, urban campus styles for women, Rugby embraces a lasting
sense of timeless individuality. Rugby competes with brands
favored by todays college students and recent graduates.
Launched in 2004, Rugby is available exclusively at Rugby stores
throughout the United States. Store locations and information on
events at Rugby stores are online at Rugby.com.
Ralph
Lauren Childrenswear
Reflecting the signature spirit of Ralph Lauren, our
childrens collections provide classic style for kids of
all ages from Layette to Toddler to Girls size 16
and Boys size 20. Featuring seasonal looks as well as the full
range of iconic Ralph Lauren styles including
classic polos, oxford shirts, navy blazers and our luxurious
cashmere Ralph Lauren Childrenswear brings style to
everyday dressing and special occasions. Ralph Lauren
Childrenswear leads the industry in fine designer clothing for
children. Ralph Lauren Childrenswear can be found in select
Ralph Lauren stores, better department stores and online at
RalphLauren.com.
Accessories
In addition to apparel, fragrance and home collections, Ralph
Lauren has created a wide array of accessories and dress
furnishings that reflect a vision of timeless elegance. Each
Ralph Lauren womens collection features handbags, scarves,
belts, sunglasses, jewelry and footwear fashioned from the most
luxurious materials in the world with exquisitely crafted
hardware and finishing touches. Mens furnishings,
including sunglasses, neckwear, footwear, leathergoods, luggage,
cuff links and formalwear accents, are similarly refined. Ralph
Lauren Accessories compete with the finest international
designer collections. Ralph Lauren Accessories are available in
Ralph Lauren stores, select specialty stores and online at
RalphLauren.com. Eyewear is available in all domestic Ralph
Lauren stores, including the Ralph Lauren Madison Avenue Eyewear
store, select optical/sunglass retailers and online at
RalphLauren.com.
Fragrance
In 1978, Ralph Lauren expanded the lifestyle brand to encompass
the world of fragrance, launching Lauren for women and Polo for
men. Since then, Ralph Lauren Fragrance has captured the essence
of Ralph Laurens mens and womens brands, from
the timeless heritage and grace of Lauren and Polo to the
sophisticated beauty of Polo
7
Black for men and Romance for women to the modern, fresh Ralph
fragrances for her, designed to appeal to a younger audience.
Mens fragrances include Safari, Polo Sport, Polo Blue,
Romance, Romance Silver, Purple Label, Polo Black and Double
Black. Womens fragrances include Safari, Polo Sport, Ralph
Lauren Blue, Lauren, Lauren Style, Romance, Pure Turquoise,
Ralph, Ralph Cool, Ralph Hot and Ralph Rocks. Ralph Lauren
fragrances compete with better department store brands and
designer fragrances. Ralph Lauren fragrances are available in
department stores, specialty and duty free stores, perfumeries
and online at RalphLauren.com and RalphRocks.com.
Ralph
Lauren Home
As the first designer to create an all-encompassing home
collection, Ralph Lauren presents a comprehensive lifestyle
experience featuring complete, luxurious worlds for the home.
Whether inspired by timeless tradition or reflecting the utmost
in modern sophistication, each of the collections is
distinguished by the enduring style and expert craftsmanship of
Ralph Lauren. The Home collections include bed and bath linens,
china, crystal, silver, decorative accessories, gifts, garden
and beach, as well as lighting, window hardware, furniture,
fabric, trimmings and wallcovering. Ralph Lauren Home competes
with providers of the finest home design products. Ralph Lauren
Home offers exclusive luxury goods at select Ralph Lauren
stores, trade showrooms and online at RalphLauren.com. An
assortment of items is also available at select department
stores and home specialty stores. The complete world of Ralph
Lauren Home can be explored online at RalphLaurenHome.com.
Lauren
Home
In the spirit of Ralph Lauren and impeccably designed for
timeless style, Lauren Home offers a wide array of bedding,
bath, tabletop, gifts, decorative accessories, furniture,
floorcovering and lighting collections for the well-appointed
home. Lauren Home is available in department stores, select home
specialty stores and online at Bloomingdales.com and
RalphLauren.com. Lauren Spa, a refreshing collection of organic
bedding and bath launched in 2007, is available at
Bloomingdales, Bloomingdales.com and RalphLauren.com.
Ralph
Lauren Paint
Introduced in 1995, Ralph Lauren Paint offers a line of
exceptional-quality interior paint ranked high in the industry
for performance. Inspired by classic and modern lifestyles from
the world of Ralph Lauren, Ralph Lauren Paint features a
signature palette of over 500 colors and a collection of unique
finishes and innovative techniques. An extension of the Ralph
Lauren Home lifestyle, Ralph Lauren Paint is an attainable
product designed to reach a broad yet selective audience. Ralph
Lauren Paint is offered at select specialty stores and The Home
Depot. The complete color palette, paint how-tos, a guide
to professional painters and Color Testers available for
purchase are online at RalphLaurenHome.com.
Club
Monaco
Club Monaco is a dynamic, international retail concept that
designs, manufactures and markets its own Club Monaco clothing
and accessories. Each season, Club Monaco offers mens and
womens updated classics and key fashion pieces that are
the foundation of a modern wardrobe. The brands signature
clean and modern style gives classics an update through great
design and a current sensibility. Club Monaco is the lifestyle
destination for todays urban professional. Currently, Club
Monaco operates 65 stores throughout North America and, through
licensing arrangements, has recently opened stores in Hong Kong,
Seoul and Dubai.
Chaps
Rooted in the rich heritage of Polo Ralph Lauren, Chaps is a
premier lifestyle brand that translates the timeless style of
Polo into an accessible line of sportswear and accessories for
men, women, children and the home. A complete American lifestyle
collection, Chaps offers a world of classic, authentic style in
the spirit of Ralph Lauren. The Chaps mens collection is
available at select department and specialty stores. The Chaps
collections for women, children and the home are available
exclusively at Kohls and Kohls.com.
8
Global
Brand Concepts
American
Living
American Living is the first brand developed under the new
Global Brand Concepts group. American Living is a full lifestyle
brand, featuring menswear, womenswear, childrenswear,
accessories and home furnishings with a focus on timeless,
authentic American classics for every day. American Living is
available exclusively at JCPenney in the U.S. and online at
JCP.com.
Our
Wholesale Segment
Our Wholesale segment sells our products to leading upscale and
certain mid-tier department stores, specialty stores and golf
and pro shops, both domestically and internationally. We have
focused on elevating our brand and improving productivity by
reducing the number of unproductive doors within department
stores in which our products are sold, improving in-store
product assortment and presentation, and improving full-price
sell-throughs to consumers. As of March 29, 2008, the end
of Fiscal 2008, our products were sold through 10,806 doors
worldwide, and during Fiscal 2008, we invested approximately
$49 million in shop-within-shops dedicated to our products
primarily in domestic and international department stores. We
have also effected selective price increases on basic products
and introduced new fashion offerings at higher price points.
Department stores are our major wholesale customers in North
America. In Europe, our wholesale sales are a varying mix of
sales to both department stores and specialty shops, depending
on the country. Our collection brands Womens
Ralph Lauren Collection and Black Label and Mens Purple
Label Collection and Black Label are distributed
through a limited number of premier fashion retailers. In
addition, we sell excess and out-of-season products through
secondary distribution channels, including our retail factory
stores.
In Japan, our products are distributed primarily through
shop-within-shops at premiere department stores. The mix of
business is weighted to Polo Ralph Lauren in Mens and
Womens Blue Label. The distribution of Mens and
Womens Black Label is also expanding through
shop-within-shop
presentations in top tier department stores across Japan.
Worldwide
Distribution Channels
The following table presents the approximate number of doors by
geographic location, in which products distributed by our
Wholesale segment were sold to consumers as of March 29,
2008:
|
|
|
|
|
|
|
Number of
|
|
Location
|
|
Doors(a)
|
|
|
United States and Canada
|
|
|
8,611
|
|
Europe
|
|
|
2,075
|
|
Japan
|
|
|
120
|
|
|
|
|
|
|
Total
|
|
|
10,806
|
|
|
|
|
|
|
|
|
|
(a) |
|
In Asia/Pacific (excluding Japan), our products are distributed
by our licensing partners. |
The following department store chains were wholesale customers
whose purchases represented more than 10% of our worldwide
wholesale net sales for the year ended March 29, 2008:
|
|
|
|
|
Macys, Inc. (formerly known as Federated Department
Stores, Inc.), which represented approximately 24%; and
|
|
|
|
Dillard Department Stores, Inc., which represented approximately
12%.
|
Our product brands are sold primarily through their own sales
forces. Our Wholesale segment maintains their primary showrooms
in New York City. In addition, we maintain regional showrooms in
Atlanta, Chicago, Dallas, Los Angeles, Milan, Paris, London,
Munich, Madrid and Stockholm.
9
Shop-within-Shops. As a critical
element of our distribution to department stores, we and our
licensing partners utilize shop-within-shops to enhance brand
recognition, to permit more complete merchandising of our lines
by the department stores and to differentiate the presentation
of products. Shop-within-shops fixed assets primarily include
items such as customized freestanding fixtures, wall cases and
components, decorative items and flooring.
As of March 29, 2008, we had approximately 10,800
shop-within-shops dedicated to our wholesale products worldwide
and our licensing partners had over 460 shop-within-shops.
During Fiscal 2008, we added approximately 500
shop-within-shops, net. Excluding significantly larger
shop-within-shops in key department store locations, the size of
our shop-within-shops typically ranges from approximately 200 to
6,000 square feet. We share in the cost of these
shop-within-shops.
Basic Stock Replenishment
Program. Basic products such as knit shirts,
chino pants and oxford cloth shirts can be ordered at any time
through our basic stock replenishment programs. We generally
ship these products within three-to-five days of order receipt.
These products accounted for approximately 6% of our wholesale
net sales in Fiscal 2008.
Our
Retail Segment
As of March 29, 2008, our Retail segment consisted of 155
full-price retail stores and 158 factory stores worldwide,
totaling approximately 2.4 million square feet. The
expansion of our full-price retail store base is a primary
long-term strategic goal. We opened 8 new full-price stores,
net, in Fiscal 2008 and currently anticipate opening between 10
and 15 full-price stores in Fiscal 2009. Our retail operating
income as a percentage of retail net revenues increased from
4.8% in Fiscal 2004 to 10.7% in Fiscal 2008, reflecting
improvements in productivity, gross margins, and full-margin
sell-through rates. Our full-price retail stores reinforce the
luxury image and distinct sensibility of our brands and feature
exclusive lines that are not sold in domestic department stores:
Blue Label for Women and Black Label for Men. We operated the
following full-price retail stores as of March 29, 2008:
Full-Price
Retail Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Ralph Lauren
|
|
|
Club Monaco
|
|
|
Rugby
|
|
|
Total
|
|
|
United States and Canada
|
|
|
59
|
|
|
|
65
|
|
|
|
10
|
|
|
|
134
|
|
Europe
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Japan
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Latin America
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80
|
|
|
|
65
|
|
|
|
10
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ralph Lauren stores feature the full-breadth of the Ralph
Lauren apparel, accessory and home product assortments in an
atmosphere reflecting the distinctive attitude and luxury
positioning of the Ralph Lauren brand. Our nine flagship Ralph
Lauren stores showcase our upper-end luxury styles and products
and demonstrate our most refined merchandising techniques.
|
|
|
|
Club Monaco stores feature updated fashion apparel and
accessories for both men and women. The brands clean and
updated classic signature style forms the foundation of a modern
wardrobe.
|
|
|
|
Rugby is a vertical retail format featuring an
aspirational lifestyle collection of apparel and accessories for
men and women. The brand is characterized by a youthful, preppy
attitude which resonates throughout the line and the store
experience.
|
In addition to generating sales of our products, our worldwide
full-price stores set, reinforce and capitalize on the image of
our brands. Our stores range in size from approximately 600 to
over 37,500 square feet. These full-price stores are
situated in major upscale street locations and upscale regional
malls, generally in large urban markets. We generally lease our
stores for initial periods ranging from 5 to 10 years with
renewal options.
10
We extend our reach to additional consumer groups through our
158 Polo Ralph Lauren factory stores worldwide. During Fiscal
2008, we added 13 new Polo Ralph Lauren factory stores, net. Our
factory stores are generally located in outlet malls. We
operated the following factory retail stores as of
March 29, 2008:
Factory
Retail Stores
|
|
|
|
|
Location
|
|
Ralph Lauren
|
|
|
United States and Canada
|
|
|
132
|
|
Europe
|
|
|
22
|
|
Japan
|
|
|
4
|
|
|
|
|
|
|
Total
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
Polo Ralph Lauren factory stores offer selections of our
menswear, womenswear, childrens apparel, accessories, home
furnishings and fragrances. Ranging in size from approximately
2,000 to 33,000 square feet, with an average of
approximately 8,600 square feet, these stores are
principally located in major outlet centers in 36 states
and Puerto Rico.
|
|
|
|
European factory stores offer selections of our menswear,
womenswear, childrens apparel, accessories, home
furnishings and fragrances. Ranging in size from approximately
2,400 to 13,200 square feet, with an average of
approximately 6,700 square feet, these stores are located
in 7 countries, principally in major outlet centers.
|
Factory stores obtain products from our retail stores, our
product licensing partners and our suppliers.
RalphLauren.com
In addition to our stores, our Retail segment sells Ralph Lauren
products online through our
e-commerce
website, RalphLauren.com
(http://www.RalphLauren.com).
RalphLauren.com offers our customers access to the full breadth
of Ralph Lauren apparel, accessories and home products, allows
us to reach retail customers on a multi-channel basis and
reinforces the luxury image of our brands. RalphLauren.com
averaged 2.6 million unique visitors a month and acquired
approximately 290,000 new customers, resulting in
1.3 million total customers in Fiscal 2008. RalphLauren.com
is owned and operated by Ralph Lauren Media, LLC (RL
Media). We acquired the remaining 50% equity interest in
RL Media, formerly held by NBC-Lauren Media Holdings, Inc., a
subsidiary wholly owned by the National Broadcasting Company,
Inc. (37.5%) and Value Vision Media, Inc. (Value
Vision) (12.5%) (the RL Media Minority Interest
Acquisition), in late Fiscal 2007.
Our
Licensing Segment
Through licensing alliances, we combine our consumer insight,
design, and marketing skills with the specific product or
geographic competencies of our licensing partners to create and
build new businesses. We generally seek out licensing partners
who:
|
|
|
|
|
are leaders in their respective markets;
|
|
|
|
contribute the majority of the product development costs;
|
|
|
|
provide the operational infrastructure required to support the
business; and
|
|
|
|
own the inventory.
|
We grant our product licensees the right to manufacture and sell
at wholesale specified categories of products under one or more
of our trademarks. We grant our international geographic area
licensing partners exclusive rights to distribute certain brands
or classes of our products and operate retail stores in specific
international territories. These geographic area licensees
source products from us, our product licensing partners and
independent sources. Each licensing partner pays us royalties
based upon its sales of our products, generally subject to a
minimum royalty requirement for the right to use the
Companys trademarks and design services. In addition,
licensing partners may be required to allocate a portion of
their revenues to advertise our products and share in the
creative costs associated
11
with these products. Larger allocations are required in
connection with launches of new products or in new territories.
Our licenses generally have 3 to
5-year terms
and may grant the licensee conditional renewal options.
We work closely with our licensing partners to ensure that their
products are developed, marketed and distributed so as to reach
the intended market opportunity and to 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 Ralph Lauren products are subject
to our prior approval and continuing oversight. The result is a
consistent identity for Ralph Lauren products across product
categories and international markets.
Approximately 16% of our licensing revenue for Fiscal 2008 was
derived from two product licensing partners: WestPoint Home,
Inc. (8%) and Peerless, Inc. (8%).
Product
Licenses
The following table lists our principal product licensing
agreements for mens and womens sportswear,
mens tailored clothing, intimate apparel, accessories and
fragrances as of March 29, 2008. The products offered by
these licensing partners are listed below. Except as noted in
the table, these product licenses cover the U.S. or North
America only.
|
|
|
Licensing Partner
|
|
Licensed Product
Category
|
|
LOreal S.A./Cosmair, Inc. (global)
|
|
Mens and Womens Fragrances, Cosmetics, Color and
Skin Care Products
|
Peerless, Inc.
|
|
Mens, Chaps, Lauren, Ralph, and American Living Tailored
Clothing
|
Hanes Brands (formerly Sara Lee Corporation)
|
|
Mens Polo Ralph Lauren Underwear and Sleepwear
|
Luxottica Group, S.p.A
|
|
Eyewear
|
The Warnaco Group, Inc.
|
|
Mens Chaps Sportswear
|
International
Licenses
We believe that international markets offer additional
opportunities for our quintessential American designs and
lifestyle image. We work with our international licensing
partners to facilitate international growth in their respective
territories. International expansion/growth opportunities may
include:
|
|
|
|
|
the roll out of new products and brands following their launch
in the U.S.;
|
|
|
|
the introduction of additional product lines;
|
|
|
|
the entrance into new international markets;
|
|
|
|
the addition of Ralph Lauren or Polo Ralph Lauren stores in
these markets; and
|
|
|
|
the expansion and upgrade of
shop-in-shop
networks in these markets.
|
12
The following table identifies our principal international area
licensing partners (excluding Ralph Lauren Home licensees) for
Fiscal 2008:
|
|
|
Licensing Partner
|
|
Territory
|
|
Oroton Group/PRL Australia
|
|
Australia and New Zealand
|
Doosan Corporation
|
|
Korea
|
P.R.L. Enterprises, S.A.
|
|
Panama, Aruba, Curacao, The Cayman Islands, Costa Rica,
Nicaragua, Honduras, El Salvador, Guatemala, Belize, Colombia,
Ecuador, Bolivia, Peru, Antigua, Barbados, Bonaire, Dominican
Republic, St. Lucia, Trinidad and Tobago
|
Dickson Concepts/PRL Hong Kong
|
|
Hong Kong, China, Philippines, Malaysia, Singapore, Taiwan and
Thailand
|
Naigai Co., Ltd
|
|
Japan
|
Our international licensing partners acquire the right to sell,
promote, market
and/or
distribute various categories of our products in a given
geographic area. These rights may include the right to own and
operate retail stores. The economic arrangements are similar to
those of our product licensing partners. We design licensed
products either alone or in collaboration with our domestic
licensing partners. Our product licensees whose territories do
not include the international geographic area licensees
territories generally provide our international licensing
partners with product or patterns, piece goods, manufacturing
locations and other information and assistance necessary to
achieve product uniformity, for which they are often compensated.
As of March 29, 2008, our international licensing partners
operated 99 Ralph Lauren stores and 49 Club Monaco stores and
dedicated shops.
Ralph
Lauren Home
Together with our licensing partners, we offer an extensive
collection of home products that draw upon and further the
design themes of our other product lines, contributing to our
complete lifestyle concept. Products are sold under the Ralph
Lauren Home, Lauren Ralph Lauren, Chaps and
American Living brands in three primary categories:
bedding and bath, home décor and home improvement. As of
March 29, 2008, we had agreements with 10 domestic and 2
international home product licensing partners and one
international home product sublicensing partner.
We perform a broader range of services for our Ralph Lauren Home
licensing partners than we do for our other licensing partners.
These services include design, operating showrooms, marketing,
advertising and, in some cases, sales. In general, the licensing
partners manufacture and own the inventory, and ship the
products. Our Ralph Lauren Home licensing alliances generally
have 3 to
5-year terms
and may grant the licensee conditional renewal options.
Ralph Lauren Home products are positioned at the upper tiers of
their respective markets and are offered at a range of price
levels. These products are generally distributed through several
channels of distribution, including department stores, specialty
home furnishings stores, interior design showrooms, customer
direct mail catalogs, home centers and the Internet, as well as
our own stores. As with our other products, the use of
shop-within-shops is central to our department store
distribution strategy.
13
The Ralph Lauren Home, Lauren Ralph Lauren,
Chaps and American Living home products offered by
us and our product licensing partners are:
|
|
|
|
|
Category
|
|
Product
|
|
Licensing Partner
|
|
Bedding and Bath
|
|
Sheets, bedding accessories, towels and shower curtains,
blankets, down comforters, other decorative bedding and
accessories
|
|
WestPoint Home, Inc. Fremaux-Delorme, Ichida, Kohls
Department Stores, Inc., JC Penney Corp., Inc.
|
|
|
Bath rugs
|
|
Bacova Guild, Ltd.
|
Home Décor
|
|
Fabric and wallpaper
|
|
P. Kaufmann, Inc.
Designers Guild Ltd.
|
|
|
Furniture
|
|
HDM Furniture
Industries, Inc.
|
|
|
Tabletop and giftware, table linens, placemats, tablecloths and
napkins
|
|
American Commercial, Inc., JC Penney Corp., Inc.,
Town & Country Linen Corp., Kohls Department
Stores, Inc.
|
|
|
Window, luggage
|
|
JC Penney Corp., Inc.
|
Home Improvement
|
|
Interior paints and stains and broadloom carpets
|
|
The Glidden Company, Karastan, a division of Mohawk Carpet
Corporation
|
WestPoint Home, Inc. offers a basic stock replenishment program
that includes bath and bedding products, and accounted for
approximately 62% of the net sales of Ralph Lauren Home products
and approximately 43% of total Ralph Lauren Home licensing
revenue in Fiscal 2008.
Product
Design
Our products reflect a timeless and innovative interpretation of
American style with a strong international appeal. Our
consistent emphasis on new and distinctive design has been an
important contributor to the prominence, strength and reputation
of the Ralph Lauren brands.
All Ralph Lauren products are designed by, or under the
direction of, Ralph Lauren and our design staff, which is
divided into nine departments: Menswear, Womens
Collection, Womens Ready to Wear, Dresses,
Childrens, Accessories, Home, Club Monaco and Rugby. We
form design teams around our brands and product categories to
develop concepts, themes and products for each brand and
category. Through close collaboration with merchandising, sales
and production staff, these teams support all three segments of
our business Wholesale, Retail and
Licensing in order to gain market and other valuable
input.
Marketing
and Advertising
Our marketing program communicates the themes and images of our
brands and is an integral feature of our product offering.
Worldwide marketing is managed on a centralized basis through
our advertising and public relations departments in order to
ensure consistency of presentation.
We create distinctive image advertising for all of our products,
conveying the particular message of each brand within the
context of our core themes. Advertisements generally portray a
lifestyle rather than a specific item and include a variety of
products offered by ourselves and, in some cases, 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 have utilized television and outdoor media in their
marketing programs for certain product categories. Our
RalphLauren.com
e-commerce
website presents the Ralph Lauren lifestyle on the Internet
while offering the full breadth of our apparel, accessories and
home products.
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We advertise in consumer and trade publications, and participate
in cooperative advertising on a shared cost basis with major
retailers. In addition, we provide point-of-sale fixtures and
signage to our wholesale customers to enhance the presentation
of our products at retail locations. We expensed approximately
$188 million related to the advertising of our products in
Fiscal 2008, an increase of approximately 4% from Fiscal 2007.
If our domestic licensing partners are required to spend an
amount equal to a percent of their licensed product sales on
advertising, we coordinate the advertising placement on their
behalf.
We also conduct a variety of public relations activities. Each
of our spring and fall womenswear collections are presented at
major fashion shows in New York City, which typically generate
extensive domestic and international media coverage. We
introduce each of the spring and fall menswear collections at
major fashion shows in cities such as New York or Milan, Italy.
In addition, we organize in-store appearances by our models,
certain professional golfers and sponsors. We are the first
exclusive outfitter for all on-court officials at the Wimbledon
tennis tournament. We are also the official outfitter of all
on-court officials at the U.S. Open tennis tournament.
In May 2008, the Company entered into an agreement with the
U.S. Olympic Committee designating Polo Ralph Lauren as an
Official Outfitter of the 2008 U.S. Olympic and Paralympic
Teams. Under this agreement, the Company will be designing the
official Opening Ceremony and Closing Ceremony Parade Outfits
for the U.S. Olympic Teams members, in addition to an
assortment of village wear pieces to be provided to the athletes
on the U.S. Teams. Products will be available for sale in
the U.S. in June 2008 in Polo Ralph Lauren retail stores,
select department stores, and RalphLauren.com, with select items
available on the U.S. Olympic Committee website.
Sourcing,
Production and Quality
We contract for the manufacture of our products and do not own
or operate any production facilities. Over 400 different
manufacturers worldwide produce our apparel, footwear and
accessories products. We source both finished products and raw
materials. Raw materials include fabric, buttons and other trim.
Finished products consist of manufactured and fully assembled
products ready for shipment to our customers. In Fiscal 2008,
less than 2%, by dollar volume, of our products were produced in
the U.S., and over 98%, by dollar volume, were produced outside
the U.S., primarily in Asia, Europe and South America. See
Import Restrictions and other Government
Regulations and Part 1A Our
business is subject to risks associated with importing
products.
Two manufacturers engaged by us accounted for approximately 12%
and 8% of our total production during Fiscal 2008. The primary
production facilities of these two manufacturers are located in
China, Hong Kong, Indonesia, Macau, Philippines and Sri Lanka.
Our Wholesale segment 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 our primary customers demand for
a particular product, we may sell the excess in our factory
stores or sell the product through secondary distribution
channels. If we overestimate the need for a particular fabric or
yarn, that fabric or yarn may be used in garments made for
subsequent seasons or made into past seasons styles for
distribution in our factory stores.
Suppliers operate under the close supervision of our global
manufacturing division and buying agents headquartered in Asia,
the Americas and Europe. All garments are produced according to
our specifications. Production and quality control staff in the
Americas, Asia and Europe 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 and compliance programs, so that quality assurance
is focused upon as early as possible in the production process,
allowing merchandise to be received at the distribution
facilities and shipped to customers with minimal interruption.
Competition
Competition is very 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 our competitors may be significantly larger and have
15
substantially greater resources than us. We compete primarily on
the basis of fashion, quality and service, which depend on our
ability to:
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anticipate and respond to changing consumer demands in a timely
manner;
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maintain favorable brand recognition;
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develop and produce high quality products that appeal to
consumers;
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appropriately price our products;
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provide strong and effective marketing support;
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ensure product availability; and
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obtain sufficient retail floor space and effectively present our
products at retail.
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See Item 1A We face intense
competition in the worldwide apparel industry.
Distribution
To facilitate distribution domestically, Ralph Lauren mens
and womens products are shipped from manufacturers
primarily to our distribution center in Greensboro, North
Carolina for inspection, sorting, packing and shipment to retail
customers. Ralph Lauren Childrenswear products are shipped from
our manufacturers to a leased distribution center in
Martinsburg, West Virginia. In addition, we utilize third party
logistics providers to manage selected programs for specific
customers. These facilities are designed to allow for high
density cube storage and utilize bar code technology to provide
inventory management and carton controls. Product traffic
management is also coordinated from these facilities. European
distribution and warehousing has been largely consolidated into
one third party facility located in Parma, Italy. Japan
logistics have been consolidated into one third party facility
in Kawaski.
Our full-price store and factory store distribution and
warehousing are principally handled through the Greensboro
distribution center. Club Monaco products are distributed from
facilities in Ontario, Canada, Greensboro, North Carolina and
California.
RalphLauren.com customer contact functions and order fulfillment
are performed at a new 360,000 sq. ft. leased facility
in High Point, North Carolina. The facility opened and commenced
customer contact operations in November 2007, and commenced
fulfillment operations in February 2008.
Management
Information Systems
Our management information systems make the marketing,
manufacturing, importing and distribution of our products more
efficient by providing, among other things:
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comprehensive order processing;
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production information;
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accounting information; and
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an enterprise view of information for our marketing,
manufacturing, importing and distribution functions.
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The point-of-sale registers in conjunction with other systems in
our stores enable us to track inventory from store receipt to
final sale on a real-time basis. We believe our merchandising
and financial systems, coupled with our point-of-sale registers
and software programs, allow for rapid stock replenishment,
concise merchandise planning and real-time inventory accounting.
See Item 1A Certain legal proceedings
and regulatory matters could adversely impact our results of
operations.
We also utilize a sophisticated automated replenishment system,
Logility, to facilitate the processing of basic replenishment
orders from our Retail segment and wholesale customers, the
movement of goods through distribution channels, and the
collection of information for planning and forecasting. We have
a collaborative relationship with many of our suppliers that
enables us to reduce cash-to-cash cycles in the management of
our inventory. We are implementing a
16
new, global enterprise resource management system for our
Wholesale segment. See Item 1A Our
business could suffer if our computer systems and websites are
disrupted or cease to operate effectively.
Wholesale
Credit Control
We manage our own credit function. We sell our merchandise
primarily to major department stores and extend credit based on
an evaluation of the customers 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 $1.6 million in
Fiscal 2008, representing less than 1 percent of net
revenues. See Item 1A Our business
could be negatively impacted by any financial instability of our
customers.
Wholesale
Backlog
We generally receive wholesale orders for apparel products
approximately three to five months prior to the time the
products are delivered to stores. Such orders are generally
subject to broad cancellation rights. As of March 29, 2008,
our total backlog was $1.573 billion, compared to
$1.396 billion as of March 31, 2007. We expect that
substantially all of our backlog orders as of March 29,
2008 will be filled within the next fiscal year. 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.
Trademarks
We own the Polo, Ralph Lauren and the
famous polo player astride a horse trademarks in the
U.S. and approximately 100 countries worldwide. Other
trademarks that we similarly own include:
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Lauren/Ralph Lauren;
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Ralph;
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RRL;
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Club Monaco;
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Rugby;
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RLX;
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Chaps;
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American Living; and
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Various trademarks pertaining to fragrances and cosmetics.
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Mr. Ralph Lauren has 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. Any activity by these
companies has no impact on us.
Our trademarks are the subjects of registrations and pending
applications throughout the world for use on a variety of items
of apparel, apparel-related products, home furnishings and
beauty products, as well as in connection with retail services,
and we continue to expand our worldwide usage and registration
of related trademarks. In general, trademarks remain valid and
enforceable as long as the marks are used in connection with the
related products and services and the required registration
renewals are filed. We regard the license to use the trademarks
and our other proprietary rights in and to the trademarks as
extremely valuable assets in marketing our products and, on a
worldwide basis, vigorously seek to protect them against
infringement (see Item 3 Legal
Proceedings for further discussion). As a result of
the appeal of
17
our trademarks, our products have been the object of
counterfeiting. We have a broad enforcement program which has
been generally effective in controlling the sale of counterfeit
products in the U.S. and in major markets abroad.
In markets outside of the U.S., 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 who have acquired ownership rights in
certain trademarks, including Polo
and/or a
representation of a polo player astride a horse, which would
impede 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
generally successfully resolved such conflicts in the past
through both legal action and negotiated settlements with
third-party owners of the conflicting marks (see
Item 1A Our trademarks and other
intellectual property rights may not be adequately protected
outside the U.S. and Item 3
Legal Proceedings for further discussion).
Although we have not in the past suffered any material
restraints or restrictions on doing business in desirable
markets, we cannot assure that significant impediments will not
arise in the future as we expand product offerings and
additional trademarks to new markets.
We currently have an agreement with a third party which owned
conflicting registrations of the trademarks Polo and
a polo player astride a horse in the United Kingdom, Hong Kong
and South Africa. Under the agreement, the third party retains
the right to use the Polo and polo player symbol
marks in South Africa and all other countries that comprise
Sub-Saharan Africa, and we agreed to restrict use of those Polo
marks in those countries to fragrances and cosmetics solely as
part of the composite trademark Ralph Lauren and the
polo player symbol, as to which our use is unlimited, and to the
use of the polo player symbol mark on womens and
girls apparel and accessories and womens and
girls handkerchiefs. By agreeing to those restrictions, we
secured the unlimited right to use our trademarks in the United
Kingdom and Hong Kong without payment of any kind, and the third
party is prohibited from distributing products under those
trademarks in those countries.
Import
Restrictions and Other Government Regulations
Virtually all of our merchandise imported into the U.S., Canada,
and Europe is subject to duties. Until January 1, 2005, our
apparel merchandise was also subject to quotas. Quotas represent
the right, pursuant to bilateral or other international trade
arrangements, to export amounts of certain categories of
merchandise into a country or territory pursuant to a visa or
license. Pursuant to the Agreement on Textiles and Clothing,
quotas on textile and apparel products were eliminated for World
Trade Organization (WTO) member countries, including
the U.S., Canada and European countries, on January 1,
2005. Notwithstanding quota elimination, Chinas accession
agreement for membership in the WTO provides that WTO member
countries (including the U.S., Canada and European countries)
may reimpose quotas on specific categories of products in the
event it is determined that imports from China have surged and
are threatening to create a market disruption for such
categories of products (so called safeguard quota
provisions). In response to surging imports, in November
2005 the U.S. and China agreed to a new quota arrangement
which will impose quotas on certain textile products through the
end of calendar 2008. In addition, effective January 1,
2008, the European Union also agreed with China on a new textile
arrangement which imposed a double surveillance licensing scheme
which is due to terminate at the end of calendar year 2008. The
U.S. and other countries may also unilaterally impose
additional duties in response to a particular product being
imported (from China or other countries) at unfairly traded
prices that in such increased quantities as to cause (or
threaten) injury to the relevant domestic industry (generally
known as anti-dumping actions). The European Union
has imposed anti-dumping duties on imports from China and
Vietnam in certain footwear categories. On January 11,
2007, the Bush Administration imposed a Vietnam Import
Monitoring Program on five broad product groups
shirts, trousers, sweaters, underwear, and swimwear
to determine whether any of those imports might be unfairly
traded, due to dumping. The review period will last for the
remainder of the Bush Administration with six-month reviews of
data collected. If dumping is suspected, the
U.S. Government will self-initiate a dumping case on behalf
of the U.S. textile industry which could significantly
affect our costs. Furthermore, additional duties, generally
known as countervailing duties, can also be imposed by the
U.S. Government to offset subsidies provided by a foreign
government to foreign manufactures if the importation of such
subsidized merchandise injures or threatens to injure a
U.S. industry. Recent developments have now made it
possible to impose countervailing duties on products from
non-market economies, such as China, which would significantly
affect our costs.
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We are also subject to other international trade agreements and
regulations, such as the North American Free Trade Agreement,
the Central American Free Trade Agreement and the Caribbean
Basin Initiative. In addition, each of the countries in which
our products are sold has laws and regulations covering imports.
Because the U.S. and the other countries in which our
products are manufactured and sold may, from time to time,
impose new duties, tariffs, surcharges or other import controls
or restrictions, including the imposition of safeguard
quota, or adjust presently prevailing duty or tariff rates
or levels, we maintain a program of intensive monitoring of
import restrictions and opportunities. We seek to minimize our
potential exposure to import related risks through, among other
measures, adjustments in product design and fabrication, shifts
of production among countries and manufacturers, as well as
through geographical diversification of our sources of supply.
As almost all our products are manufactured by foreign
suppliers, the enactment of new legislation or the
administration of current international trade regulations,
executive action affecting textile agreements, or changes in
sourcing patterns resulting from the elimination of quota could
adversely affect our operations. Although we generally expect
that the 2005 elimination of quotas will result, over the long
term, in an overall reduction in the cost of apparel produced
abroad, the implementation of any safeguard quota
provisions or any anti-dumping or
countervailing duty actions may result, over the
near term, in cost increases for certain categories of products
and in disruption of the supply chain for certain products
categories. See Item 1A Risk
Factors below for further discussion.
Apparel and other products sold by us are also subject to
regulation in the U.S. and other countries by other
governmental agencies, including, in the U.S., the Federal Trade
Commission, U.S. Fish and Wildlife Service and the Consumer
Products Safety Commission. These regulations relate principally
to product labeling, licensing requirements, flammability
testing, and product safety particularly with respect to
products used by children. We believe that we are in substantial
compliance with those 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 in the near future. Our licensed products and
licensing partners are also subject to regulation. Our
agreements require our licensing partners to operate in
compliance with all laws and regulations, and we are not aware
of any violations which could reasonably be expected to have a
material adverse effect on our business or results of operations.
Although we have not suffered any material inhibition from doing
business in desirable markets in the past, we cannot assure that
significant impediments will not arise in the future as we
expand product offerings and introduce additional trademarks to
new markets.
Employees
As of March 29, 2008, we had approximately
15,000 employees, both full and part-time, consisting of
approximately 11,700 in the U.S. and approximately 3,300 in
foreign countries. 36 of our U.S. production and
distribution employees in the womenswear business are members of
UNITE HERE (which was previously known as the Union of
Needletrades, Industrial and Textile Employees, prior to its
merger with the Hotel Employees and Restaurant Employees
International Union) 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.
19
Executive
Officers
The following are our current executive officers and their
principal recent business experience:
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Ralph Lauren
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Age 68
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Mr. Lauren has been Chairman, Chief Executive Officer and a
director of the Company since prior to the Companys
initial public offering in 1997, and was a member of the
Advisory Board of the Board of Directors of the Companys
predecessors since their organization. He founded Polo in 1967
and has provided leadership in the design, marketing,
advertising and operational areas since such time.
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Roger N. Farah
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Age 55
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Mr. Farah has been President, Chief Operating Officer and a
director of the Company since April 2000. He was Chairman of the
Board of Venator Group, Inc. from December 1994 to April 2000,
and was Chief Executive Officer of Venator Group, Inc. from
December 1994 to August 1999. Mr. Farah is a member of the
Board of Directors of Aetna, Inc.
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Jackwyn Nemerov.
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Age 56
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Ms. Nemerov has been Executive Vice President of the
Company since September 2004 and a director of the Company since
February 2007. From 1998 to 2002, she was President and Chief
Operating Officer of Jones Apparel Group, Inc.
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Tracey T. Travis
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Age 45
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Ms. Travis has been Senior Vice President of Finance and
Chief Financial Officer of the Company since January 2005.
Ms. Travis served as Senior Vice President, Finance of
Limited Brands, Inc. from April 2002 until August 2004, and
Chief Financial Officer of Intimate Brands, Inc. from April 2001
to April 2002. Prior to that time, Ms. Travis was Chief
Financial Officer of the Beverage Can Americas group at American
National Can from 1999 to 2001, and held various finance and
operations positions at Pepsi Bottling Group from
1989-1999.
Ms. Travis is a member of the boards of directors of
Jo-Ann
Stores, Inc. and the Lincoln Center Theater.
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Mitchell A. Kosh
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Age 58
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Mr. Kosh has served as Senior Vice President of Human
Resources and Legal of the Company since July 2000. He was
Senior Vice President of Human Resources of Conseco, Inc., from
February 2000 to July 2000. Prior to that time, Mr. Kosh
held executive human resource positions with the Venator Group,
Inc. starting in 1996.
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20
There are risks associated with an investment in our securities.
The following risk factors should be read carefully in
connection with evaluating our business and the forward-looking
statements contained in this Annual Report on
Form 10-K.
Any of the following risks could materially adversely affect our
business, our prospects, our operating results, our financial
condition, the trading prices of our securities and the actual
outcome of matters as to which forward-looking statements are
made in this report. Additional risks that we do not yet know of
or that we currently think are immaterial may also affect our
business operations.
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 Laurens leadership in the design, marketing
and operational areas of our business has been a critical
element of our success since the inception of our Company. The
death or disability of Mr. Lauren or other extended or
permanent loss of his services, or any negative market or
industry perception with respect to him or arising from his
loss, could have a material adverse effect on our business. Our
other executive officers and other members of senior management
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 not protected
by a material amount of key-man or similar life insurance
covering Mr. Lauren, our other executive officers and
certain other members of senior management. We have entered into
employment agreements with Mr. Lauren and our other
executive officers, but the noncompete period with respect to
Mr. Lauren and certain other executive officers could, in
some circumstances in the event of their termination of
employment with the Company, end prior to the employment term
set forth in their employment agreements.
We cannot
assure the successful implementation of our growth
strategy.
As part of our growth strategy, we seek to extend our brands,
expand our geographic coverage and increase direct management of
our brands by opening more of our own stores, strategically
acquiring or integrating select licenses previously held by our
licensees and enhancing our operations. Implementation of our
strategy involves the continued expansion of our business in
Europe, Asia and other international areas. As discussed in
Item 1 Recent Developments,
on May 29, 2007, we acquired a controlling interest in
Impact 21, as part of the Tender Offer, and the remaining 50%
interest in PRL Japan. We also acquired our previously licensed
belts and leather goods business in April 2007 and the remaining
50% interest in RL Media in March 2007. In Fiscal 2006, we
acquired our previously licensed mens and womens
casual apparel and sportswear in the U.S. and Canada from
Jones Apparel Group, Inc. and its subsidiaries (Polo Jeans
Business). In addition, in Fiscal 2006, we acquired our
previously licensed mens, womens and childrens
footwear from Reebok International Ltd. (Footwear
Business).
We may have difficulty integrating acquired businesses into our
operations, hiring and retaining qualified key employees, or
otherwise successfully managing such expansion. Furthermore, we
may not be able to successfully integrate the business of any
licensee that we acquire into our own business or achieve any
expected cost savings or synergies from such integration.
In Fiscal 2008, we launched American Living, a new
lifestyle brand created exclusively in the U.S. for
JCPenney. The success of American Living and the
introduction of new product categories in both the U.S. and
overseas may be negatively impacted in Fiscal 2009 by ongoing
economic uncertainty. See Item 7
Overview Global Economic
Uncertainty for further discussion.
Implementation of our growth strategy involves the continuation
and expansion of our retail distribution network, both in the
U.S. and abroad, which are subject to many factors beyond
our control. We may not be able to procure, purchase or lease
desirable free-standing or department store locations, or renew
and maintain existing free-standing store leases and department
store locations on acceptable terms, or secure suitable
replacement locations. The lease negotiation as well as the
number and timing of new stores actually opened during any given
21
period, and their associated contribution to net income for the
period, depends on a number of factors including, but not
limited, to: (i) the availability of suitable financing to
us and our landlords; (ii) the timing of the delivery of
the leased premises to us from our landlords in order to
commence build-out construction activities; (iii) our
ability and our landlords ability to obtain all necessary
governmental licenses and permits to construct and operate our
stores on a timely basis; (iv) our ability to manage the
construction and development costs of new stores; (v) the
rectification of any unforeseen engineering or environmental
problems with the leased premises; (vi) adverse weather
during the construction period; and (vii) the hiring and
training of qualified operating personnel in the local market.
While we continue to explore new markets and are always
evaluating new potential, any of the above factors could have an
adverse impact on our financial operations.
In Europe we lack the large wholesale distribution channels we
have in the U.S., and we may have difficulty developing
successful distribution strategies and alliances in each of the
major European countries. In Japan, our primary mode of
distribution is via a network of shops located within the
leading department stores. We may have difficulty in
successfully retaining this network, and expanding into
alternate distribution channels. Additionally, macroeconomic
trends may not be favorable, and could limit our ability to
implement our growth strategies in select geographies where we
have foreign operations, such as Europe and Asia.
Our
business could suffer as a result of consolidations,
restructurings and other ownership changes in the retail
industry.
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. In Fiscal 2008, sales to Macys, Inc.
represented approximately 24% of our wholesale net sales and
sales to Dillard Department Stores, Inc. represented
approximately 12% of our wholesale net sales. In the aggregate,
our ten largest customers accounted for approximately 69% of our
wholesale net sales during Fiscal 2008. There can be no
assurance that consolidations, restructurings, reorganizations
or other ownership changes in the department store sector will
not have a material adverse effect on our wholesale business.
We typically do not enter into long-term agreements with our
customers. Instead, we enter into a number of purchase order
commitments with our customers for each of our lines every
season. A decision by the controlling owner of a group of stores
or any other significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to
decrease or eliminate the amount of merchandise purchased from
us or our licensing partners; to change their manner of doing
business with us or our licensing partners; or their new
strategic and operational initiatives, including their continued
focus on further development of their private label
initiatives, could have a material adverse effect on our
business or financial condition. See Item 1
Recent Developments for discussion of launch
of American Living.
Our
business could be negatively impacted by any financial
instability of our customers.
We sell our wholesale merchandise primarily to major department
stores across the U.S. and Europe and extend credit based
on an evaluation of each customers financial condition,
usually without requiring collateral. However, the financial
difficulties of a customer could cause us to curtail or
eliminate business with that customer. We may also assume more
credit risk relating to that customers receivables. Two of
our customers, Macys, Inc. and Dillard Department Stores,
Inc., in the aggregate constituted 31% of trade accounts
receivable outstanding as of March 29, 2008. 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 Item 1
Wholesale Credit Control.
Our
profitability may decline as a result of increasing pressure on
margins.
The apparel industry is subject to significant pricing pressure
caused by many factors, including intense competition,
consolidation in the retail industry, pressure from retailers to
reduce the costs of products and changes in consumer demand.
These factors may cause us to reduce our sales prices to
retailers and consumers, which could cause our gross margin to
decline if we are unable to appropriately manage inventory
levels
and/or
otherwise offset price reductions with comparable reductions in
our operating costs. If our sales prices decline and we fail to
22
sufficiently reduce our product costs or operating expenses, our
profitability will decline. This could have a material adverse
effect on our results of operations, liquidity and financial
condition.
Certain
legal proceedings and regulatory matters could adversely impact
our results of operations.
We are involved in certain legal proceedings and are subject to
various claims involving alleged breach of contract claims,
credit card fraud, security breaches in certain of our retail
store information systems, employment issues, consumer matters
and other litigations. Certain of these lawsuits and claims, if
decided adversely to us or settled by us, could result in
material liability to the Company or have a negative impact on
the Companys reputation or relations with its employees,
customers, licensees or other third parties. In addition,
regardless of the outcome of any litigation or regulatory
proceedings, such proceedings could result in substantial costs
and may require that the Company devotes substantial time and
resources to defend itself. Further, changes in governmental
regulations both in the U.S. and in other countries where
we conduct business operations could have an adverse impact on
our results of operations. See Item 3
Legal Proceedings for further discussion of
the Companys legal matters.
Our
business could suffer if our computer systems and websites are
disrupted or cease to operate effectively.
The Company relies heavily on its computer systems to record and
process transactions and manage and operate our business. We
also utilize a sophisticated automated replenishment system to
facilitate the processing of basic replenishment orders from our
wholesale customers, the movement of goods through distribution
channels, and the collection of information for planning and
forecasting. In addition, we have
e-commerce
and other Internet websites in the U.S.. Given the complexity of
our business and the significant number of transactions that we
engage in on an annual basis, it is imperative that we maintain
constant operation of our computer hardware and software
systems. Despite our preventative efforts, our systems are
vulnerable from time to time to damage or interruption from,
among other things, security breaches, computer viruses or power
outages.
Our
business is subject to risks associated with importing
products.
As of March 29, 2008, we source a significant portion of
our products outside the U.S. through arrangements with
over 400 foreign vendors in various countries. In Fiscal 2008,
over 98%, by dollar value, of our products were produced outside
the U.S., primarily in Asia, Europe and South America. Risks
inherent in importing our products include:
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quotas imposed by bilateral textile agreements with China and
non-WTO countries. These agreements limit the amount and type of
goods that may be imported annually from these countries;
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changes in social, political and economic conditions or
terrorist acts that could result in the disruption of trade from
the countries in which our manufacturers or suppliers are
located;
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the imposition of additional regulations relating to imports or
exports;
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the imposition of additional duties, taxes and other charges on
imports or exports;
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significant fluctuations of the cost of raw materials;
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significant delays in the delivery of cargo due to security
considerations;
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the imposition of antidumping or countervailing duty proceedings
resulting in the potential assessment of special antidumping or
countervailing duties; and
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the imposition of sanctions in the form of additional duties
either by the U.S. or its trading partners to remedy
perceived illegal actions by national governments.
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Any one of these factors could have a material adverse effect on
our financial condition and results of operations.
23
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:
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the burdens of complying with a variety of foreign laws and
regulations;
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unexpected changes in regulatory requirements; and
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new tariffs or other barriers in some international markets.
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We are also subject to general political and economic risks in
connection with our international operations, including:
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political instability and terrorist attacks;
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changes in diplomatic and trade relationships; and
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general economic fluctuations in specific countries or markets.
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We cannot predict whether quotas, duties, taxes, or other
similar restrictions will be imposed by the U.S., 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, social or
economic policies and other factors may have a material adverse
effect on our business in the future or may require us to
significantly modify our current business practices.
Our
trademarks and other intellectual property rights may not be
adequately protected outside the U.S.
We believe that our trademarks and other proprietary rights are
extremely important to our success and our competitive position.
We devote substantial resources to the establishment and
protection of our trademarks and anti-counterfeiting activities
worldwide. Significant counterfeiting of our products continues,
however, and in the course of our international expansion we
have experienced conflicts with various third parties that have
acquired or claimed ownership rights in some trademarks that
include Polo
and/or a
representation of a polo player astride a horse, or otherwise
have contested our rights to our trademarks. We have in the past
resolved certain of 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. We cannot guarantee that the actions we have taken
to establish and protect our trademarks and other proprietary
rights will be adequate to prevent counterfeiting or a material
adverse effect on our business or brands arising from 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, there can be no assurance
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 or at all. In addition, the laws of certain foreign
countries do not protect proprietary rights to the same extent
as do the laws of the U.S. See Item 1
Trademarks, and Item 3
Legal Proceedings.
Our
business could suffer as a result of a manufacturers
inability to produce our goods on time and to our
specifications.
We do not own or operate any manufacturing facilities and depend
exclusively on independent third parties for the manufacture of
all of our products. Our products are manufactured to our
specifications primarily by international manufacturers. During
Fiscal 2008, less than 2%, by dollar value, of our mens
and womens products were manufactured in the U.S. and
over 98%, by dollar value, of these products were manufactured
in other countries. Two of the manufacturers engaged by us
accounted for approximately 12% and 8% of our total production
during Fiscal 2008. The primary production facilities of these
two manufacturers are located in Asia. 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 substantial reduction in purchase prices, any of
which could have a material adverse effect on our financial
condition and results of operations.
24
Our
business could suffer if one of our manufacturers fails to use
acceptable labor practices.
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
used by us or one of our licensing partners, or the divergence
of an independent manufacturers or licensing
partners labor practices from those generally accepted as
ethical or appropriate in the U.S., 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.
Our
business could suffer if we need to replace
manufacturers.
We compete with other companies for the production capacity of
our manufacturers and import quota capacity. Some of these
competitors have greater financial and other resources than we
have, and thus may have an advantage in the competition for
production and import quota capacity. If we experience a
significant increase in demand, or if an existing manufacturer
of ours must be replaced, we may have to expand our third-party
manufacturing capacity. We cannot guarantee that this additional
capacity will be available when required on terms that are
acceptable to us. See Item 1 Sourcing,
Production and Quality. We enter into a number of
purchase order commitments each season specifying a time for
delivery, method of payment, design and quality specifications
and other standard industry provisions, but do not have
long-term contracts with any manufacturer. None of the
manufacturers we use produce our products exclusively.
Our
business is exposed to domestic and foreign currency
fluctuations.
We generally purchase our products in U.S. dollars.
However, we source most of our products overseas. As a result,
the cost of these products may be affected by changes in the
value of the relevant currencies. Changes in currency exchange
rates may also affect the U.S. dollar value of the foreign
currency denominated prices at which our international
businesses sell products. Furthermore, our international sales
and licensing revenue generally is derived from sales in foreign
currencies. These foreign currencies include the Japanese Yen,
the Euro and the British Pound Sterling, and this revenue could
be materially affected by currency fluctuations. Although we
hedge certain exposures to changes in foreign currency exchange
rates arising in the ordinary course of business, we cannot
assure that foreign currency fluctuations will not have a
material adverse impact on our financial condition and results
of operations. See Item 7 Market Risk
Management.
We rely
on our licensing partners to preserve the value of our
licenses.
The risks associated with our own products also apply to our
licensed products in addition to any number of possible risks
specific to a licensing partners business, including, for
example, risks associated with a particular licensing
partners ability to:
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obtain capital;
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manage its labor relations;
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maintain relationships with its suppliers;
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manage its credit and bankruptcy risks effectively; and
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maintain relationships with its customers.
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Although some of our license agreements prohibit licensing
partners from entering into licensing arrangements with our
competitors, our licensing partners generally 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.
Changes in management, reduced sales of licensed products, poor
execution or financial difficulties with respect to any of our
licensing partners could adversely affect our revenues, both
directly from reduced licensing revenue received and indirectly
from reduced sales of our other products. See
Item 1 Our Licensing Segment.
25
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
Item 1 Our Licensing Segment.
The
voting shares of the Companys stock are concentrated in
one majority stockholder.
As of March 29, 2008, Mr. Ralph Lauren, or entities
controlled by Mr. Ralph Lauren, owned approximately 87% of
the voting power of the outstanding common stock of the Company.
As a result, Mr. Lauren has the ability to exercise
significant control over our business, including, without
limitation, (i) the election of the Companys
Class B common stock directors, voting separately as a
class, and (ii) any action requiring the approval of our
stockholders, including the adoption of amendments to our
certificate of incorporation and the approval of mergers or
sales of all or substantially all of our assets.
The
trading prices of our securities periodically may rise or fall
based on the accuracy of predictions of our earnings or other
financial performance.
Our business planning process is designed to maximize our
long-term strength, growth and profitability, not to achieve an
earnings target in any particular fiscal quarter. We believe
that this longer-term focus is in the best interests of the
Company and our stockholders. At the same time, however, we
recognize that from time to time it may be helpful to provide
investors with guidance as to our quarterly and annual forecast
of net sales and earnings. While we generally expect to provide
updates to our guidance when we report our results each fiscal
quarter, we assume no responsibility to update any of our
forward-looking statements at such times or otherwise. If and
when we announce actual results that differ from those that have
been predicted by us, outside analysts or others, the market
price of our securities could be affected. Investors who rely on
the predictions when making investment decisions with respect to
our securities do so at their own risk. We take no
responsibility for any losses suffered as a result of such
changes in the prices of our securities.
Risks
Relating to the Industry in Which We Compete
A
downturn in the global 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 economic
factors outside of our control affect the level of consumer
spending in the apparel, cosmetic, fragrance and home products
industries, including, among others:
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general business conditions;
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economic downturns;
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employment levels;
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downturns in the stock market;
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interest rates;
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the housing market;
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consumer debt levels;
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the availability of consumer credit;
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increases in fuel prices;
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taxation; and
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consumer confidence in future economic conditions.
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Consumer purchases of discretionary items and luxury retail
products, including our products, may decline during
recessionary periods and at other times when disposable income
is lower. A downturn or an uncertain outlook in the economies in
which we, or our licensing partners, sell our products may
materially adversely affect our businesses and our revenues and
profits. See Item 7
Overview Our Objectives and Risks
for further discussion.
26
The domestic and international political situation also affects
consumer confidence. The threat, outbreak or escalation of
terrorism, military conflicts or other hostilities could lead to
a decrease in consumer spending.
We face
intense competition in the worldwide apparel industry.
We face a variety of intense 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:
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anticipating and responding to changing consumer demands in a
timely manner;
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maintaining favorable brand recognition;
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developing innovative, high-quality products in sizes, colors
and styles that appeal to consumers;
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appropriately pricing products;
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failure to anticipate and maintain proper inventory levels;
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providing strong and effective marketing support;
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creating an acceptable value proposition for retail customers;
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ensuring product availability and optimizing supply chain
efficiencies with manufacturers and retailers; and
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obtaining sufficient retail floor space and effective
presentation of our products at retail stores.
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We also face increasing competition from companies selling
apparel and home products through the Internet. Although RL
Media sells our products domestically through the Internet,
increased competition in the worldwide apparel, accessories and
home product industries from 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. In addition, we cannot assure you that any new products
or brands that we introduce will be successfully received by
consumers. Any failure on our part to anticipate, identify and
respond effectively to changing consumer demands and fashion
trends could adversely affect retail and consumer acceptance of
our products and leave us with a substantial amount of unsold
inventory or missed opportunities. If that occurs, we may be
forced to rely on markdowns or promotional sales to dispose of
excess, slow-moving inventory, which may harm our business and
impair the image of our brands. Conversely, if we underestimate
consumer demand for its products or if manufacturers fail to
supply quality products in a timely manner, we may experience
inventory shortages, which may result in unfilled orders,
negatively impact customer relationships, diminish brand loyalty
and result in lost revenues. See Item 1
Sourcing, Production and Quality.
We lease space for our retail and factory showrooms, and
warehouse and office space in various domestic and international
locations. We do not own any real property except for our
distribution facility in Greensboro, North Carolina and a
parcel of land adjacent to the facility, and retail stores in
Southampton, New York and Nantucket, Massachusetts.
Contemporaneous with our acquisition of the remaining 50% equity
interest in RL Media, we entered into a transition services
agreement with Value Vision to continue to provide warehousing,
order fulfillment and call center functions for RL Media through
August 2008. RL Media has begun performing warehousing, order
fulfillment and call center functions on its own in Fiscal 2008.
27
We believe that our existing facilities are well maintained, in
good operating condition and are adequate for our present level
of operations.
The following table sets forth information with respect to our
key properties:
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Approximate
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Current Lease Term
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Location
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Use
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Sq. Ft.
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Expiration
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Greensboro, N.C.
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Wholesale Distribution Facility
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1,500,000
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Owned
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High Point, N.C.
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Retail Distribution Facility
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360,000
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January 31, 2023
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Martinsburg, W.V.
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Wholesale Distribution Facility
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187,000
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December 31, 2010
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650 Madison Avenue, NYC
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Executive, corporate office and design studio, Mens
showrooms
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207,000
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December 31, 2009
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Lyndhurst, N.J.
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Corporate and retail administrative offices
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170,000
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December 31, 2019
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550 7th Avenue, NYC
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Corporate office, design studio and Womens showrooms
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105,500
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December 31, 2018
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625 Madison Avenue, NYC
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Corporate offices and home showroom
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270,000
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December 31, 2019
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Geneva, Switzerland
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European corporate offices
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48,800
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March 31, 2013
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867 Madison Avenue, NYC
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Retail Flagship Store
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27,700
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December 31, 2013
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Beverly Hills, CA
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Retail Flagship Store
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21,600
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September 30, 2023
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Chicago, IL
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Retail Flagship Store
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37,600
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November 14, 2017
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Milan, Italy
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Retail Flagship Store
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18,000
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June 30, 2015
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Tokyo, Japan
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Retail Flagship Store
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24,300
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December 31, 2020
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We have begun to occupy a 360,000 square foot leased
distribution facility in High Point, North Carolina, for our RL
Media business during Fiscal 2008. The term of the lease
commenced on August 17, 2007 and expires on
January 31, 2023.
We paid aggregate rent in Fiscal 2008 of approximately
$62 million for our non-retail facilities. We anticipate
that we will be able to extend those leases which expire in the
near future on terms satisfactory to us or relocate to
facilities timely and on acceptable terms.
As of March 29, 2008, we operated 313 retail stores,
totaling approximately 2.4 million square feet. Aggregate
annual rentals for retail space in Fiscal 2008 totaled
approximately $146 million. We anticipate that we will be
able to extend those leases which expire in the near future on
satisfactory terms or relocate to desirable locations.
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Item 3.
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Legal
Proceedings
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The Company is subject to various claims relating to allegations
of security breaches in certain of its retail store information
systems. These claims have been made by various credit card
issuers, issuing banks and credit card processors with respect
to cards issued by them pursuant to the rules imposed by certain
credit card issuers, particularly
Visa®
and
MasterCard®.
The allegations include fraudulent credit card charges, the cost
of replacing credit cards, related monitoring expenses and other
related claims.
In Fiscal 2005, the Company was subject to various claims
relating to an alleged security breach of its point-of-sale
systems that occurred at certain Polo retail stores in the
U.S. The Company had previously recorded a reserve for an
aggregate amount of $13 million to provide for its best
estimate of losses related to these claims. The Company
ultimately paid approximately $11 million in settlement of
these various claims and the eligibility period for filing any
such claims has expired.
In addition, in the third quarter of Fiscal 2007, the Company
was notified of an alleged compromise of its retail store
information systems that process its credit card data for
certain Club Monaco stores in Canada. As of the end of Fiscal
2007, the Company had recorded a total reserve of
$5.0 million for this matter based on its best estimate of
exposure at that time. While the final settlement of this matter
is pending approval by the credit card issuers, the
Companys Canadian credit card processor returned
three-quarters of the funds previously escrowed to cover
28
potential claims by the end of April 2008. Accordingly, based on
the progress in this matter and the available evidence to date,
the Company reversed $4.1 million of its original
$5.0 million reserve into income during Fiscal 2008. The
Company was also recently advised that the Quebec Privacy
Commission has ceased its investigation of Club Monaco in
connection with this matter.
The Company is cooperating with law enforcement authorities in
both the U.S. and Canada in their investigations of these
matters.
On August 19, 2005, Wathne Imports, Ltd.
(Wathne), our domestic licensee for luggage and
handbags, filed a complaint in the U.S. District Court for
the Southern District of New York against us and Ralph Lauren,
our Chairman and Chief Executive Officer, asserting, among other
things, federal trademark law violations, breach of contract,
breach of obligations of good faith and fair dealing, fraud and
negligent misrepresentation. The complaint sought, among other
relief, injunctive relief, compensatory damages in excess of
$250 million and punitive damages of not less than
$750 million. On September 13, 2005, Wathne withdrew
this complaint from the U.S. District Court and filed a
complaint in the Supreme Court of the State of New York, New
York County, making substantially the same allegations and
claims (excluding the federal trademark claims), and seeking
similar relief. On February 1, 2006, the Court granted our
motion to dismiss all of the causes of action, including the
cause of action against Mr. Lauren, except for the breach
of contract claims, and denied Wathnes motion for a
preliminary injunction. We believe this lawsuit to be without
merit, and moved for summary judgment on the remaining claims.
Wathne cross-moved for partial summary judgment. A hearing on
these motions occurred on November 1, 2007. The judge
presiding in this case provided a written ruling on the summary
judgment motion on April 11, 2008. The Court granted
Polos summary judgment motion to dismiss in large measure,
and denied Wathnes cross-motion. Wathne has appealed the
dismissal of its claims. A trial date has not yet been
established in connection with this matter. We intend to
continue to contest the few remaining claims in this lawsuit
vigorously. Accordingly, management does not expect that the
ultimate resolution of this matter will have a material adverse
effect on the Companys liquidity or financial position.
On October 1, 1999, we filed a lawsuit against the
U.S. Polo Association Inc. (USPA), Jordache,
Ltd. (Jordache) and certain other entities
affiliated with them, alleging that the defendants were
infringing on our trademarks. In connection with this lawsuit,
on July 19, 2001, the USPA and Jordache filed a lawsuit
against us in the U.S. District Court for the Southern
District of New York. This suit, which was effectively a
counterclaim by them in connection with the original trademark
action, asserted claims related to our actions in connection
with our pursuit of claims against the USPA and Jordache for
trademark infringement and other unlawful conduct. Their claims
stemmed from our contacts with the USPAs and
Jordaches retailers in which we informed these retailers
of our position in the original trademark action. All claims and
counterclaims, except for our claims that the defendants
violated our trademark rights, were settled in September 2003.
We did not pay any damages in this settlement.
On July 30, 2004, the Court denied all motions for summary
judgment, and trial began on October 3, 2005 with respect
to the four double horseman symbols that the
defendants sought to use. On October 20, 2005, the jury
rendered a verdict, finding that one of the defendants
marks violated our world famous Polo Player Symbol trademark and
enjoining its further use, but allowing the defendants to use
the remaining three marks. On November 16, 2005, we filed a
motion before the trial court to overturn the jurys
decision and hold a new trial with respect to the three marks
that the jury found not to be infringing. The USPA and Jordache
opposed our motion, but did not move to overturn the jurys
decision that the fourth double horseman logo did infringe on
our trademarks. On July 7, 2006, the judge denied our
motion to overturn the jurys decision. On August 4,
2006, we filed an appeal of the judges decision to deny
our motion for a new trial to the U.S. Court of Appeals for
the Second Circuit. On March 4, 2008, the Court of Appeals
issued a decision affirming the judgment of the
U.S. District Court for the Southern District of New York.
On March 2, 2006, a former employee at our Club Monaco
store in Los Angeles, California filed a lawsuit against us in
the San Francisco Superior Court alleging violations of
California wage and hour laws. The plaintiff purports to
represent a class of Club Monaco store employees who allegedly
have been injured by being improperly classified as exempt
employees and thereby not receiving compensation for overtime
and not receiving meal and rest breaks. The complaint seeks an
unspecified amount of compensatory damages, disgorgement of
profits,
29
attorneys fees and injunctive relief. We believe this suit
is without merit and intend to contest it vigorously.
Accordingly, management does not expect that the ultimate
resolution of this matter will have a material adverse effect on
the Companys liquidity or financial position.
On May 30, 2006, four former employees of our Ralph Lauren
stores in Palo Alto and San Francisco, California filed a
lawsuit in the San Francisco Superior Court alleging
violations of California wage and hour laws. The plaintiffs
purport to represent a class of employees who allegedly have
been injured by not properly being paid commission earnings, not
being paid overtime, not receiving rest breaks, being forced to
work off of the clock while waiting to enter or leave the store
and being falsely imprisoned while waiting to leave the store.
The complaint seeks an unspecified amount of compensatory
damages, damages for emotional distress, disgorgement of
profits, punitive damages, attorneys fees and injunctive
and declaratory relief. We have filed a cross-claim against one
of the plaintiffs for his role in allegedly assisting a former
employee misappropriate Company property. Subsequent to
answering the complaint, we had the action moved to the United
States District Court for the Northern District of California.
We believe this suit is without merit and intend to contest it
vigorously. Accordingly, management does not expect that the
ultimate resolution of this matter will have a material adverse
effect on the Companys liquidity or financial position.
On August 21, 2007, eleven former and current employees of
our Club Monaco stores in California filed a lawsuit in Los
Angeles Superior Court alleging similar claims as the Club
Monaco action in San Francisco. The complaint seeks an
unspecified amount of compensatory damages, attorneys fees
and punitive damages. We believe this suit is without merit and
intend to contest it vigorously. Accordingly, management does
not expect that the ultimate resolution of this matter will have
a material adverse effect on the Companys liquidity or
financial position.
We are otherwise involved from time to time in legal claims and
proceedings involving credit card fraud, trademark and
intellectual property, licensing, employee relations and other
matters incidental to our business. We believe that the
resolution of these other matters currently pending will not
individually or in the aggregate have a material adverse effect
on our financial condition or results of operations.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended March 29, 2008.
30
PART II
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Item 5.
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Market
for Registrants Common Equity and Related Stockholders
Matters and Issuer Purchases of Equity Securities
|
Our Class A common stock is traded on the New York Stock
Exchange (NYSE) under the symbol RL. The
following table sets forth the high and low sales prices per
share of the Class A common stock for each quarterly period
in our two most recent fiscal years, as reported on the NYSE
Composite Tape:
|
|
|
|
|
|
|
|
|
|
|
Market Price
|
|
|
|
of Class A
|
|
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
101.46
|
|
|
$
|
87.70
|
|
Second Quarter
|
|
|
102.58
|
|
|
|
71.76
|
|
Third Quarter
|
|
|
78.61
|
|
|
|
60.50
|
|
Fourth Quarter
|
|
|
68.67
|
|
|
|
50.55
|
|
Fiscal 2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
62.87
|
|
|
$
|
52.02
|
|
Second Quarter
|
|
|
66.20
|
|
|
|
45.65
|
|
Third Quarter
|
|
|
83.15
|
|
|
|
64.77
|
|
Fourth Quarter
|
|
|
90.12
|
|
|
|
77.90
|
|
On May 20, 2003, our Board of Directors initiated a regular
quarterly cash dividend program of $0.05 per share, or $0.20 per
share on an annual basis, on our Class A common stock.
Approximately $20 million was recorded as a reduction to
retained earnings during Fiscal 2008 in connection with these
dividends.
As of May 16, 2008, there were 1,144 holders of record of
our Class A common stock and 14 holders of record of our
Class B common stock. All of our outstanding shares of
Class B common stock are owned by Mr. Ralph Lauren and
related entities and are convertible at any time into shares of
Class A common stock on a one-for-one basis.
The following table sets forth the repurchases of our
Class A common stock during the fiscal quarter ended
March 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar Value) of
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Shares
|
|
|
|
Total Number
|
|
|
|
|
|
Purchased as Part of
|
|
|
That May Yet be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
|
|
Purchased(1)
|
|
|
Paid Per Share
|
|
|
Plans or
Programs(1)
|
|
|
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
December 30, 2007 to January 26, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
298
|
|
January 27, 2008 to February 23, 2008
|
|
|
1,500,000
|
|
|
|
65.93
|
|
|
|
1,500,000
|
|
|
|
199
|
|
February 24, 2008 to March 29, 2008
|
|
|
1,039,107
|
(2)
|
|
|
57.30
|
|
|
|
1,003,803
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,539,107
|
|
|
|
|
|
|
|
2,503,803
|
|
|
|
|
|
|
|
|
(1) |
|
These purchases were made on the open market under the
Companys Class A common stock repurchase program. In
August 2007, the Companys Board of Directors approved an
expansion of the Companys existing common stock repurchase
program that allowed the Company to repurchase up to an
additional $250 million of Class A common stock.
Repurchases of shares of Class A common stock are subject to
overall business and market conditions. This program does not
have a fixed termination date. |
|
(2) |
|
Includes 35,304 shares surrendered to, or withheld by, the
Company in satisfaction of withholding taxes in connection with
the vesting of an award under the Companys 1997 Long-Term
Stock Incentive Plan. |
31
The following graph compares the cumulative total stockholder
return (stock price appreciation plus dividends) on our
Class A common stock with the cumulative total return of
the Standard & Poors 500 Index, our peer group
for the preceding fiscal year (the Old Peer Group),
and a peer group index of companies that we believe are similar
to ours (the New Peer Group) for the period from
March 28, 2003, the last trading day in the Companys
2003 fiscal year, through March 28, 2008, the last trading
day in the Companys 2008 fiscal year. Our Old Peer Group
consisted of Coach, Estee Lauder, Jones Apparel, Kellwood,
Kenneth Cole, Liz Claiborne, Phillips Van Heusen,
Tiffany & Co., VF Corp., Warnaco, LVMH, Burberry,
Christian Dior, PPR SA, Hermes International, Richemont,
Luxottica and Tods Group. Our New Peer Group consists of
the same companies in our Old Peer Group with the exception of
Kellwood and Christian Dior. All calculations done for foreign
companies in our New Peer Group are made using the local foreign
issue of such companies. We believe that the companies in our
New Peer Group index, taken together, are more comparable to our
businesses. The returns are calculated by assuming an investment
in the Class A common stock and each index of $100 on
March 29, 2003, with all dividends reinvested.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Polo Ralph Lauren Corporation, The S&P 500 Index,
A New Peer Group And An Old Peer Group
|
|
|
* |
|
$100 invested on 3/28/03 in stock or 3/31/03 in index-including
reinvestment of dividends. Index calculated on month-end basis. |
|
|
|
Copyright
©
2008, Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm |
32
|
|
Item 6.
|
Selected
Financial Data
|
See the Index to Consolidated Financial Statements and
Supplementary Information, and specifically Selected
Financial Information appearing at the end of this Annual
Report on
Form 10-K.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of financial condition and
results of operations should be read together with our audited
consolidated financial statements and footnotes, which are
included elsewhere in this Annual Report on
Form 10-K
for Fiscal 2008 (Fiscal 2008
10-K).
We utilize a
52-53 week
fiscal year ending on the Saturday closest to March 31. As
such, fiscal year 2008 ended on March 29, 2008 and
reflected a 52-week period (Fiscal 2008); fiscal
year 2007 ended on March 31, 2007 and reflected a 52-week
period (Fiscal 2007); and fiscal year 2006 ended on
April 1, 2006 and also reflected a 52-week period
(Fiscal 2006).
INTRODUCTION
Managements discussion and analysis of financial condition
and results of operations (MD&A) is provided as
a supplement to the accompanying audited consolidated financial
statements and footnotes to help provide an understanding of our
financial condition, changes in financial condition and results
of our operations. MD&A is organized as follows:
|
|
|
|
|
Overview. This section provides a general
description of our business, including our objectives and risks,
and a summary of financial performance for Fiscal 2008. In
addition, this section includes a discussion of recent
developments and transactions affecting comparability that we
believe are important in understanding our results of operations
and financial condition, and in anticipating future trends.
|
|
|
|
Results of operations. This section provides
an analysis of our results of operations for Fiscal 2008, Fiscal
2007 and Fiscal 2006.
|
|
|
|
Financial condition and liquidity. This
section provides an analysis of our cash flows for Fiscal 2008,
Fiscal 2007 and Fiscal 2006, as well as a discussion of our
financial condition and liquidity as of March 29, 2008. The
discussion of our financial condition and liquidity includes
(i) our available financial capacity under our credit
facility, (ii) a summary of our key debt compliance
measures and (iii) a summary of our outstanding debt and
commitments as of March 29, 2008.
|
|
|
|
Market risk management. This section discusses
how we manage exposure to potential losses arising from adverse
changes in interest rates, foreign currency exchange rates and
fluctuations in the reported net assets of certain of our
international operations.
|
|
|
|
Critical accounting policies. This section
discusses accounting policies considered to be important to our
financial condition and results of operations, which require
significant judgment and estimation on the part of management in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Notes 3 and 4 to our accompanying audited
consolidated financial statements.
|
|
|
|
Recent accounting standards. This section
discusses the potential impact to our reported financial
condition and results of operations of accounting standards that
have been issued, but which we have not yet adopted.
|
OVERVIEW
Our
Business
Our Company is a global leader in the design, marketing and
distribution of premium lifestyle products including mens,
womens and childrens apparel, accessories,
fragrances and home furnishings. Our long-standing reputation
and distinctive image have been consistently developed across an
expanding number of products, brands and international markets.
Our brand names include Polo by Ralph Lauren, Ralph Lauren
Purple Label,
33
Ralph Lauren Collection, Black Label, Blue Label, Lauren
by Ralph Lauren, RRL, RLX, Rugby, Ralph Lauren Childrenswear,
Chaps, Club Monaco and American Living, among others.
We classify our businesses into three segments: Wholesale,
Retail and Licensing. Our wholesale business (representing 57%
of Fiscal 2008 net revenues) consists of wholesale-channel
sales made principally to major department stores, specialty
stores and golf and pro shops located throughout the U.S.,
Europe and Asia. Our retail business (representing 39% of Fiscal
2008 net revenues) consists of retail-channel sales
directly to consumers through full-price and factory retail
stores located throughout the U.S., Canada, Europe, South
America and Asia, and through our retail internet site located
at www.RalphLauren.com (formerly known as Polo.com). In
addition, our licensing business (representing 4% of Fiscal
2008 net revenues) consists of royalty-based arrangements
under which we license the right to third parties to use our
various trademarks in connection with the manufacture and sale
of designated products, such as apparel, eyewear and fragrances,
in specified geographical areas for specified periods.
Approximately 25% of our Fiscal 2008 net revenues was
earned in international regions outside of the U.S. and
Canada. See Note 20 to the accompanying audited
consolidated financial statements for a summary of net revenues
by geographic location.
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
and key vacation travel, back-to-school and holiday periods in
the Retail segment.
Our
Objectives and Risks
Our core strengths include a portfolio of global luxury
lifestyle brands, a strong and experienced management team, a
proven ability to develop and extend our brands distributed
through multiple retail channels in global markets, a
disciplined investment philosophy and a solid balance sheet.
Despite the various risks and uncertainties associated with the
current global economy as further discussed below, we believe
our core strengths will continue to allow us to execute our
strategy for long-term sustainable growth in revenue, net income
and operating cash flow.
During the course of the past five fiscal years, our revenues,
net income and operating cash flow have grown to record levels.
See Selected Financial Information included
elsewhere in this Fiscal 2008
10-K for
further discussion.
Our operating success has been driven by the Companys
focus on six key objectives:
|
|
|
|
|
Creating unique businesses primarily centered around one core
and heritage-driven brand;
|
|
|
|
Diversifying and expanding our products and prices, distribution
channels and geographic regions;
|
|
|
|
Improving brand control and positioning;
|
|
|
|
Focusing on selective strategic partnerships;
|
|
|
|
Implementing infrastructure improvements that support a
worldwide business; and
|
|
|
|
Funding our expansion through strong operating cash flow.
|
As our business has grown, our portfolio mix and brand control
has evolved from primarily that of a mono-brand
U.S. centric menswear wholesaler with a broad array of
product and geographic licenses to that of a portfolio of
lifestyle brands with a direct control model over
most of our brands, products and international territories. We
believe that this broader and better-diversified portfolio mix
positions us for ongoing growth, offering our customers a range
of products, price points and channels of distribution, and our
size and global operations favorably position us to take
advantage of synergies in design, sourcing and distribution.
In connection with our key objectives, we intend to continue to
pursue opportunities for growth during the course of Fiscal 2009
and beyond. These opportunities and continued investment
initiatives include:
|
|
|
|
|
Global expansion of our retail presence in various formats and
key markets, including Paris, France;
|
|
|
|
Ongoing integration of our newly acquired Japanese businesses,
and the transition of certain key product categories operated
under pre-existing sublicenses in Japan into our own business;
|
34
|
|
|
|
|
Further development of a wide array of luxury accessories
product offerings, including handbags, footwear, small
leathergoods and watches/jewelry; and
|
|
|
|
Further growth in our initiatives to develop new lifestyle
brands in partnership with select department and specialty
stores, such as our current American Living brand with
J.C. Penney Company, Inc. (JCPenney) and our current
Chaps brand with Kohls Department Stores, Inc.
|
Global
Economic Uncertainty
Our opportunities for long-term growth are accompanied by
significant challenges and risks, particularly in the near term.
Specifically, our business is dependent on consumer demand for
our products. We believe that significant uncertainty and a
slowdown in the U.S. macroeconomic environment negatively
impacted the level of consumer spending for discretionary items
during most of Fiscal 2008. Despite the more challenging
U.S. retail environment that affected both the
Companys wholesale customers and retail channels, we
continued to experience reported revenue growth for all quarters
during Fiscal 2008. If the U.S. macroeconomic environment
continues to be weak
and/or
spreads to significant markets outside of the U.S., these
worsening economic conditions could have a continuing negative
effect on the Companys sales and operating margin growth
rates across all segments in Fiscal 2009.
As of March 29, 2008, largely in response to the
U.S. macroeconomic environment, our traditional retail
partners in the U.S. have reduced their initial wholesale
orders for fall 2008 apparel products. This contraction in the
U.S. department and specialty store channel in Fiscal 2009
is expected to be more than offset primarily by sales in our new
American Living product line and by the continuing growth
in profitability of our businesses in Europe and Japan.
See Item 1A Risk Factors
included elsewhere in this Fiscal 2008
10-K for
further discussion.
Summary
of Financial Performance
Operating
Results
During Fiscal 2008, we reported revenues of $4.880 billion,
net income of $419.8 million and net income per diluted
share of $3.99. This compares to revenues of
$4.295 billion, net income of $400.9 million and net
income per diluted share of $3.73 during Fiscal 2007. As
discussed further below, the comparability of our operating
results has been affected by recent acquisitions and the
adoption of the provisions of Financial Accounting Standards
Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
Statement of Financial Accounting Standards (FAS)
No. 109 (FIN 48), effective as of
the beginning of Fiscal 2008.
On a reported basis, our operating performance in Fiscal 2008
was primarily driven by 13.6% revenue growth, led by our
Wholesale and Retail segments (including the effect of certain
acquisitions that occurred in the first quarter of Fiscal 2008;
see Recent Developments for further
discussion). This revenue growth was partially offset by a
decline in gross profit percentage of 30 basis points to
54.1% primarily due to the purchase accounting effects of our
recent acquisitions, as well as increases in selling, general
and administrative (SG&A) expenses and
amortization expense of intangible assets driven by these
acquisitions. The increase in SG&A expense was also
attributable to the overall growth in our business. Excluding
the effects of acquisitions, revenues increased by 8.6%, led by
our Wholesale segment (8.1% growth) and Retail segment (9.7%
growth). Excluding the effects of acquisitions, gross profit as
a percentage of net revenues increased 10 basis points as
improved performance in our European wholesale operations more
than offset increased domestic promotional activity associated
in part with the challenging U.S. retail environment.
Net income and net income per diluted share increased in Fiscal
2008 as compared to Fiscal 2007, principally due to a
$20.1 million decrease in the provision for income taxes
and an $0.8 million increase in operating income. The
decrease in the provision for income taxes was driven by a
310 basis point decline in our effective tax rate.
See Transactions Affecting Comparability of Results of
Operations and Financial Condition described below for
further discussion of the recent acquisitions and the adoption
of FIN 48.
35
Financial
Condition and Liquidity
Our financial position reflects the funding of our recent
acquisitions, our increased share repurchase activity and the
overall relative strength of our business results. Excluding
$74.3 million of short-term investments classified in our
consolidated balance sheet outside of cash and cash equivalents,
we ended Fiscal 2008 in a net debt position (total debt less
total cash and cash equivalents) of $127.7 million,
compared to a net cash position (total cash and cash equivalents
less total debt) of $165.1 million at the end of Fiscal
2007.
The decrease in our net cash position as of the end of Fiscal
2008 was primarily due to the Japanese Business Acquisitions (as
defined and discussed under Recent
Developments), net of approximately $239 million
of Impact 21s cash on-hand acquired. The decrease is also
due to an increase in our share repurchases and capital
expenditures. Our stockholders equity increased to
$2.390 billion as of March 29, 2008, compared to
$2.335 billion as of March 31, 2007. This increase was
primarily due to our net income and higher other comprehensive
income during Fiscal 2008, offset in part by our increased share
repurchase activity and a $62.5 million reduction in
retained earnings in connection with the adoption of FIN 48.
We generated $695.4 million of cash from operations in
Fiscal 2008, compared to $796.1 million in Fiscal 2007. The
decrease in operating cash flow was primarily driven by the
absence of the approximately $180 million, net of certain
tax withholdings, received under the Eyewear Licensing Agreement
(as defined in Note 22 to the accompanying audited
consolidated financial statements) in the prior fiscal year. We
used our cash availability to reinvest in our business through
capital spending and acquisitions, as well as in connection with
our common stock repurchase program. In particular, we spent
$217.1 million for capital expenditures primarily
associated with global retail store expansion, construction and
renovation of department store
shop-in-shops
and investments in our facilities and technological
infrastructure. We used $188.7 million primarily to fund
the Japanese Business Acquisitions and the Small Leathergoods
Business Acquisition, net of cash acquired (see Recent
Developments for further discussion). We also used
$475.4 million to repurchase 6.0 million shares of
Class A common stock.
Transactions
Affecting Comparability of Results of Operations and Financial
Condition
The comparability of the Companys operating results for
the three fiscal years presented herein has been affected by
certain transactions, including:
|
|
|
|
|
Acquisitions that occurred in Fiscal 2008, Fiscal 2007 and
Fiscal 2006. In particular, the Company completed the Japanese
Business Acquisitions on May 29, 2007, the Small
Leathergoods Business Acquisition on April 13, 2007, the RL
Media Minority Interest Acquisition on March 28, 2007, the
Polo Jeans Business Acquisition on February 3, 2006 and the
Footwear Business Acquisition on July 15, 2005 (each as
defined in Note 5 to the accompanying audited consolidated
financial statements).
|
|
|
|
The adoption of the provisions of FIN 48 as of the
beginning of Fiscal 2008 (April 1, 2007). Accruals required
for Fiscal 2008 under the provisions of FIN 48 were
entirely offset by the reversal of tax reserves, principally
associated with an audit settlement and the expiration of a
statute of limitations. The incremental impact of the adoption
of FIN 48 decreased the effective tax rate by 97 basis
points in Fiscal 2008. See Note 12 to the accompanying
audited consolidated financial statements for further discussion
of the Companys adoption of FIN 48.
|
|
|
|
The change in accounting for stock-based compensation effective
as of the beginning of Fiscal 2007 (April 2, 2006), as well
as certain pretax charges related to retail asset impairments
recognized during each of Fiscal 2008 and Fiscal 2006.
|
|
|
|
Certain pretax charges (reversals) related to restructurings and
the Companys credit card contingencies during the fiscal
years presented.
|
36
A summary of the effect of certain of these items on pretax
income for each applicable fiscal year presented is noted below
(references to notes are to the notes to the accompanying
audited consolidated financial statements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Stock-based compensation costs (see Note 18)
|
|
$
|
(70.7
|
)
|
|
$
|
(43.6
|
)
|
|
$
|
(26.6
|
)
|
Restructuring charges (see Note 11)
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
(9.0
|
)
|
Impairments of retail assets (see Note 7)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
(10.8
|
)
|
Credit card contingency reserve reversals (charges) (see
Note 15)
|
|
|
4.1
|
|
|
|
(3.0
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(71.6
|
)
|
|
$
|
(51.2
|
)
|
|
$
|
(53.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion of results of operations highlights, as
necessary, the significant changes in operating results arising
from these items and transactions. However, unusual items or
transactions may occur in any period. Accordingly, investors and
other financial statement users individually should consider the
types of events and transactions that have affected operating
trends.
Recent
Developments
Japanese
Business Acquisitions
On May 29, 2007, the Company completed its previously
announced transactions to acquire control of certain of its
Japanese businesses that were formerly conducted under licensed
arrangements, consistent with the Companys long-term
strategy of international expansion. In particular, the Company
acquired approximately 77% of the outstanding shares of Impact
21 Co., Ltd. (Impact 21) that it did not previously
own in a cash tender offer (the Impact 21
Acquisition), thereby increasing its ownership in Impact
21 from approximately 20% to approximately 97%. Impact 21
conducts the Companys mens, womens and jeans
apparel and accessories business in Japan under a pre-existing,
sub-license arrangement. In addition, the Company acquired the
remaining 50% interest in Polo Ralph Lauren Japan Corporation
(PRL Japan), which holds the master license to
conduct Polos business in Japan, from Onward Kashiyama and
Seibu (the PRL Japan Minority Interest Acquisition).
Collectively, the Impact 21 Acquisition and the PRL Japan
Minority Interest Acquisition are herein referred to as the
Japanese Business Acquisitions.
The purchase price initially paid in connection with the
Japanese Business Acquisitions was approximately
$360 million, including transaction costs of approximately
$12 million. In January 2008, at an Impact
21 shareholders meeting, the Company obtained the necessary
approvals to complete the process of acquiring the remaining
approximately 3% of outstanding shares not exchanged as of the
close of the tender offer period (the minority
squeeze-out). In February 2008, the Company acquired
approximately 1% of the remaining Impact 21 shares
outstanding at an aggregate cost of $5 million. The Company
expects the minority squeeze-out to be successfully concluded in
the first quarter of Fiscal 2009, at an estimated aggregate cost
of $9 million.
The Company funded the Japanese Business Acquisitions with
available cash on-hand and ¥20.5 billion of borrowings
under a one-year term loan agreement pursuant to an amendment
and restatement to the Companys existing credit facility.
The Company repaid the borrowing by its maturity date on
May 22, 2008 using approximately $200 million of
Impact 21s cash on-hand acquired as part of the
acquisition.
The results of operations for Impact 21, which were previously
accounted for using the equity method of accounting, have been
consolidated in the Companys results of operations
commencing April 1, 2007. Accordingly, the Company recorded
within minority interest expense the amount of Impact 21s
net income allocable to the holders of the approximate 80% of
the Impact 21 shares not owned by the Company prior to the
closing date of the tender offer. The results of operations for
PRL Japan have already been consolidated by the Company as
described further in Note 2 to the accompanying audited
consolidated financial statements.
37
Acquisition
of Small Leathergoods Business
On April 13, 2007, the Company acquired from Kellwood
Company (Kellwood) substantially all of the assets
of New Campaign, Inc., the Companys licensee for
mens and womens belts and other small leather goods
under the Ralph Lauren, Lauren and Chaps
brands in the U.S. (the Small Leathergoods
Business Acquisition). The assets acquired from Kellwood
are operated under the name of Polo Ralph Lauren
Leathergoods and allowed the Company to further expand its
accessories business. The acquisition cost was approximately
$10 million. Kellwood provided various transition services
to the Company for a period of up to six months from the date of
acquisition.
The results of operations for the Polo Ralph Lauren Leathergoods
business have been consolidated in the Companys results of
operations commencing April 1, 2007.
Acquisition
of RL Media Minority Interest
On March 28, 2007, the Company acquired the remaining 50%
equity interest in Ralph Lauren Media, LLC (RL
Media) formerly held by NBC-Lauren Media Holdings, Inc., a
subsidiary wholly owned by the National Broadcasting Company,
Inc. (NBC) (37.5%) and Value Vision Media, Inc.
(Value Vision) (12.5%) (the RL Media Minority
Interest Acquisition). RL Media conducts the
Companys
e-commerce
initiatives through the RalphLauren.com internet site and is
consolidated by the Company as a wholly owned subsidiary. The
acquisition cost was $175 million. In addition, Value
Vision entered into a transition services agreement with the
Company to provide order fulfillment and related services over a
period of up to seventeen months from the date of the
acquisition of the RL Media minority interest.
American
Living
In Fiscal 2008, the Company launched American Living, a
new lifestyle brand created exclusively in the U.S. for
distribution by JCPenney through the Companys new Global
Brand Concepts (GBC) group. The Company began
shipping related product to JCPenney in December 2007 to support
the launch of this new product line. The success of American
Living and the introduction of new product categories in
both the U.S. and overseas may be negatively impacted in
Fiscal 2009 by ongoing economic uncertainty. See Global
Economic Uncertainty for further discussion.
Other
Developments
In late Fiscal 2007, the Company formed the Ralph Lauren Watch
and Jewelry Company, S.A.R.L. (the RL Watch
Company), a joint venture with Financiere Richemont SA
(Richemont), the Swiss Luxury Goods Group. The
Company began to incur certain
start-up
costs in Fiscal 2008 to support the launch of this business,
which is expected to occur in the spring of calendar 2009.
See Note 5 to the accompanying audited consolidated
financial statements for further discussion of the
Companys acquisitions and joint venture formed during the
fiscal years presented.
38
RESULTS
OF OPERATIONS
Fiscal
2008 Compared to Fiscal 2007
The following table summarizes our results of operations and
expresses the percentage relationship to net revenues of certain
financial statement captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(millions, except per share data)
|
|
|
|
|
|
Net revenues
|
|
$
|
4,880.1
|
|
|
$
|
4,295.4
|
|
|
$
|
584.7
|
|
|
|
13.6
|
%
|
Cost of goods
sold(a)
|
|
|
(2,242.0
|
)
|
|
|
(1,959.2
|
)
|
|
|
(282.8
|
)
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,638.1
|
|
|
|
2,336.2
|
|
|
|
301.9
|
|
|
|
12.9
|
%
|
Gross profit as % of net revenues
|
|
|
54.1
|
%
|
|
|
54.4
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(a)
|
|
|
(1,932.5
|
)
|
|
|
(1,663.4
|
)
|
|
|
(269.1
|
)
|
|
|
16.2
|
%
|
SG&A as % of net revenues
|
|
|
39.6
|
%
|
|
|
38.7
|
%
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(47.2
|
)
|
|
|
(15.6
|
)
|
|
|
(31.6
|
)
|
|
|
202.6
|
%
|
Impairment of retail assets
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
(5.0
|
)
|
|
|
NM
|
|
Restructuring charges
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
4.6
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
653.4
|
|
|
|
652.6
|
|
|
|
0.8
|
|
|
|
0.1
|
%
|
Operating income as % of net revenues
|
|
|
13.4
|
%
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
Foreign currency gains (losses)
|
|
|
(6.4
|
)
|
|
|
(1.5
|
)
|
|
|
(4.9
|
)
|
|
|
326.7
|
%
|
Interest expense
|
|
|
(25.7
|
)
|
|
|
(21.6
|
)
|
|
|
(4.1
|
)
|
|
|
19.0
|
%
|
Interest and other income, net
|
|
|
24.7
|
|
|
|
26.1
|
|
|
|
(1.4
|
)
|
|
|
(5.4
|
)%
|
Equity in income (loss) of equity-method investees
|
|
|
(1.8
|
)
|
|
|
3.0
|
|
|
|
(4.8
|
)
|
|
|
(160.0
|
)%
|
Minority interest expense
|
|
|
(2.1
|
)
|
|
|
(15.3
|
)
|
|
|
13.2
|
|
|
|
(86.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
642.1
|
|
|
|
643.3
|
|
|
|
(1.2
|
)
|
|
|
(0.2
|
)%
|
Provision for income taxes
|
|
|
(222.3
|
)
|
|
|
(242.4
|
)
|
|
|
20.1
|
|
|
|
(8.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax
rate(b)
|
|
|
34.6
|
%
|
|
|
37.7
|
%
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
419.8
|
|
|
$
|
400.9
|
|
|
$
|
18.9
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
4.10
|
|
|
$
|
3.84
|
|
|
$
|
0.26
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$
|
3.99
|
|
|
$
|
3.73
|
|
|
$
|
0.26
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total depreciation expense of $154.1 million and
$129.1 million for Fiscal 2008 and Fiscal 2007,
respectively. |
(b) |
|
Effective tax rate is calculated by dividing the provision for
income taxes by income before provision for income taxes. |
NM Not
meaningful.
Net Revenues. Net revenues increased by
$584.7 million, or 13.6%, to $4.880 billion in Fiscal
2008 from $4.295 billion in Fiscal 2007. The increase was
driven by a combination of organic growth, acquisitions and
favorable foreign currency effects. Excluding the effect of
acquisitions, net revenues increased by $371.2 million, or
8.6%. On a reported basis, wholesale revenues increased by
$442.2 million primarily as a result of incremental
revenues from the newly acquired Impact 21 and Small
Leathergoods businesses, the inclusion of revenues from the
initial shipments of the American Living product line to
JCPenney and increased sales in our global menswear and
womenswear product lines, primarily driven by strong performance
in Europe. The increase in net revenues also was driven by an
increase of $169.4 million in our Retail segment revenues
as a result of an increase in comparable global retail store
sales, continued global store expansion and growth in
RalphLauren.com sales. The increase in net
39
revenues was partially offset by a decrease of
$26.9 million in licensing revenue, primarily due to a
decrease in international licensing royalties as a result of the
loss of licensing revenues from Impact 21, which is now
consolidated as part of the Wholesale segment. Also contributing
to the decrease in licensing revenue was a net decrease in
domestic licensing royalties, primarily due to the absence of
approximately $8 million of minimum royalty and
design-service fees received in connection with the termination
of a licensing arrangement in the prior fiscal year.
Net revenues for our three business segments are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
2,758.1
|
|
|
$
|
2,315.9
|
|
|
$
|
442.2
|
|
|
|
19.1
|
%
|
Retail
|
|
|
1,912.6
|
|
|
|
1,743.2
|
|
|
|
169.4
|
|
|
|
9.7
|
%
|
Licensing
|
|
|
209.4
|
|
|
|
236.3
|
|
|
|
(26.9
|
)
|
|
|
(11.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
4,880.1
|
|
|
$
|
4,295.4
|
|
|
$
|
584.7
|
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net revenues The net increase
primarily reflects:
|
|
|
|
|
the inclusion of $254 million of revenues from the newly
acquired Impact 21 and Small Leathergoods businesses, net of
intercompany eliminations;
|
|
|
|
an approximate $47 million increase in our European
businesses on a constant currency basis driven by increased
sales in our menswear and womenswear product lines;
|
|
|
|
an aggregate $81 million net increase in our
U.S. businesses. The net increase was primarily due to the
initial shipments of the American Living product line to
JCPenney; an increase in our menswear shipments; a net increase
in womenswear, primarily driven by Chaps, partially
offset by increased promotional activity; and an increase in
footwear attributable to increased door penetration. Offsetting
these increases were a decline in our childrenswear product
lines due to weaker sales at department stores and increased
promotional activity; and a planned reduction in our off-price
channel denim business; and
|
|
|
|
a $60 million increase in revenues due to a favorable
foreign currency effect, primarily related to the continued
strengthening of the Euro in comparison to the U.S. dollar
in Fiscal 2008.
|
Retail net revenues For purposes of the
discussion of retail operating performance below, we refer to
the measure comparable store sales. Comparable store
sales refer to the growth of sales in stores that are open for
at least one full fiscal year. Sales for stores that are closing
during a fiscal year are excluded from the calculation of
comparable store sales. Sales for stores that are either
relocated, enlarged (as defined by gross square footage
expansion of 25% or greater) or closed for 30 or more
consecutive days for renovation are also excluded from the
calculation of comparable store sales until such stores have
been in their location or in a newly renovated state for at
least one full fiscal year. Comparable store sales information
includes both Ralph Lauren and Club Monaco stores.
40
The increase in retail net revenues primarily reflects:
|
|
|
|
|
a $87 million aggregate net increase in comparable
full-price and factory store sales on a global basis, including
a net aggregate favorable $22 million foreign currency
effect. This net increase was driven by increases in comparable
store sales as provided below:
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 29,
|
|
|
|
2008
|
|
|
Increases in comparable store sales as reported:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
6.6
|
%
|
Full-price Club Monaco store sales
|
|
|
5.7
|
%
|
Factory store sales
|
|
|
5.5
|
%
|
Total increase in comparable store sales as reported
|
|
|
5.8
|
%
|
Increases in comparable store sales excluding the effect of
foreign currency:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
4.3
|
%
|
Full-price Club Monaco store sales
|
|
|
5.7
|
%
|
Factory store sales
|
|
|
4.2
|
%
|
Total increase in comparable store sales excluding the effect
of foreign currency
|
|
|
4.3
|
%
|
|
|
|
|
|
a $52 million aggregate net increase in sales from
non-comparable stores, primarily relating to new store openings
within the past fiscal year. There was a net increase in average
global store count of 9 stores, to a total of 313 stores,
compared to the prior fiscal year. The net increase in store
count was primarily due to several new domestic and
international full-price and factory store openings; and
|
|
|
|
a $30 million, or 26.4%, increase in sales at
RalphLauren.com.
|
Licensing revenue The net decrease primarily
reflects:
|
|
|
|
|
a $26 million net decrease in international licensing
royalties, primarily due to the loss of licensing revenues from
Impact 21, which is now consolidated as part of the Wholesale
segment; and
|
|
|
|
a $1 million net decrease in domestic licensing royalties,
primarily due to the absence of approximately $8 million of
minimum royalty and design-service fees received in connection
with the termination of a licensing arrangement in the prior
fiscal year. The net decrease was partially offset by an
increase in eyewear-related royalties as a result of the
licensing agreement entered into with Luxottica, which took
effect on January 1, 2007.
|
Gross Profit. Cost of goods sold includes the
expenses incurred to acquire and produce inventory for sale,
including product costs, freight-in, and import costs, as well
as changes in reserves for shrinkage and inventory obsolescence.
The costs of selling merchandise, including preparing the
merchandise for sale, such as picking, packing, warehousing and
order charges, are included in SG&A expenses.
Gross profit increased by $301.9 million, or 12.9%, to
$2.638 billion in Fiscal 2008 from $2.336 billion in
Fiscal 2007. Gross profit as a percentage of net revenues
decreased by 30 basis points to 54.1% in Fiscal 2008 from
54.4% in Fiscal 2007, primarily due to the dilutive effect of
our recent acquisitions. Excluding the effect of acquisitions,
gross profit increased by $208.6 million, or 8.9%, and
gross profit as a percentage of net revenues increased
10 basis points compared to Fiscal 2007. The increase in
gross profit as a percentage of net revenues was due to improved
performance in our European wholesale operations which generally
carry higher margins, offset in part by increased domestic
promotional activity as well as a slight change in the overall
relative sales mix between the Wholesale segment and the higher
margin Retail and Licensing segments.
Gross profit as a percentage of net revenues is dependent upon a
variety of factors, including changes in the relative sales mix
among distribution channels, changes in the mix of products
sold, the timing and level of promotional activities, foreign
currency exchange rates, and fluctuations in material costs.
These factors, among others, may cause gross profit as a
percentage of net revenues to fluctuate from year to year.
41
We anticipate that current macroeconomic challenges, including
inflationary pressures on raw material and fuel costs, could
negatively affect the cost of our products and related gross
profit percentages in Fiscal 2009. See Item 1A
Risk Factors for further discussion.
Selling, General and Administrative
Expenses. SG&A expenses primarily include
compensation and benefits, marketing, distribution, information
technology, facilities, legal and other costs associated with
finance and administration. SG&A expenses increased by
$269.1 million, or 16.2%, to $1.932 billion in Fiscal
2008 from $1.663 billion in Fiscal 2007. SG&A expenses
as a percent of net revenues increased to 39.6% in Fiscal 2008
from 38.7% in Fiscal 2007. The net 90 basis point
increase was primarily associated with operating expenses at the
Companys newly acquired businesses and certain
start-up
costs related to new business launches. The $269.1 million
increase in SG&A expenses was primarily driven by:
|
|
|
|
|
the inclusion of SG&A costs of approximately
$91 million for our newly acquired Impact 21 and Small
Leathergoods businesses, including costs incurred pursuant to
transition service arrangements;
|
|
|
|
higher stock-based compensation expense of approximately
$27 million primarily due to an increase in the
Companys share price as of the date of its annual equity
award grant in the second quarter of Fiscal 2008 compared to the
share price as of the comparable grant date in Fiscal 2007;
|
|
|
|
higher compensation-related expenses (excluding stock-based
compensation) of approximately $56 million, principally
relating to increased selling costs associated with higher
retail and wholesale sales and our ongoing product line
expansion, including American Living and a dedicated
dress business across multiple brands, as well as
severance-related costs;
|
|
|
|
an approximate $39 million increase in rent and utility
costs to support the ongoing global growth of our businesses,
including rent expense related to certain retail stores
scheduled to open in Fiscal 2009;
|
|
|
|
an approximate $25 million increase in depreciation expense
primarily associated with global retail store expansion,
construction and renovation of department store
shop-in-shops
and investments in our facilities and technological
infrastructure; and
|
|
|
|
an approximate $36 million increase in SG&A expenses
due to unfavorable foreign currency effects, primarily related
to the continued strengthening of the Euro in comparison to the
U.S. dollar during Fiscal 2008.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased by $31.6 million, to $47.2 million in Fiscal
2008 from $15.6 million in Fiscal 2007. The net increase
was primarily due to the amortization of intangible assets
acquired in connection with the Companys recent
acquisitions. See Recent Developments for
further discussion of the acquisitions.
Impairment of Retail Assets. A non-cash
impairment charge of $5.0 million was recognized in Fiscal
2008 to reduce the carrying value of certain long-lived assets
in the Companys Retail segment to their estimated fair
value. The impairment was primarily attributable to
lower-than-expected operating cash flow performance in certain
stores. No impairment charges were recognized in Fiscal 2007.
See Note 7 to the accompanying audited consolidated
financial statements for further discussion.
Restructuring Charges. Restructuring charges
of $4.6 million were recognized in Fiscal 2007 primarily
associated with the Club Monaco retail business. No significant
restructuring charges were recognized in Fiscal 2008. See
Note 11 to the accompanying audited consolidated financial
statements for further discussion.
Operating Income. Operating income increased
slightly by $0.8 million, or 0.1%, to $653.4 million
in Fiscal 2008 from $652.6 million in Fiscal 2007.
Operating income as a percentage of revenue decreased
180 basis points, to 13.4% in Fiscal 2008 from 15.2% in
Fiscal 2007, primarily due to the effect of purchase accounting
relating to the acquisitions. Excluding the effect of
acquisitions, operating income increased by $43.0 million,
or 6.6%, while operating income as a percentage of net revenues
decreased 30 basis points in Fiscal 2008. The decrease in
operating income as a percentage of net revenues primarily
reflected the increase in SG&A expenses due to business
expansion, partially offset by an increase in gross profit
margin as previously discussed.
42
Operating income as reported for our three business segments is
provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
565.4
|
|
|
$
|
477.8
|
|
|
$
|
87.6
|
|
|
|
18.3
|
%
|
Retail
|
|
|
204.2
|
|
|
|
224.2
|
|
|
|
(20.0
|
)
|
|
|
(8.9
|
)%
|
Licensing
|
|
|
96.7
|
|
|
|
141.6
|
|
|
|
(44.9
|
)
|
|
|
(31.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
866.3
|
|
|
|
843.6
|
|
|
|
22.7
|
|
|
|
2.7
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(217.0
|
)
|
|
|
(183.4
|
)
|
|
|
(33.6
|
)
|
|
|
18.3
|
%
|
Unallocated legal and restructuring charges
|
|
|
4.1
|
|
|
|
(7.6
|
)
|
|
|
11.7
|
|
|
|
(153.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
653.4
|
|
|
$
|
652.6
|
|
|
$
|
0.8
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale operating income increased by
$87.6 million, including the favorable effects from the
Japanese Business and Small Leathergoods Business Acquisitions.
Excluding the effects of these acquisitions, wholesale operating
income increased by $61.4 million primarily as a result of
increased net sales, including shipments of American
Living, and improved gross margin primarily in our European
wholesale operations, offset in part by increased domestic
promotional activity in certain product categories. The increase
was partially offset by higher net SG&A expenses in
support of our new product lines.
Retail operating income decreased by $20.0 million,
including the unfavorable effects from purchase accounting
related to the RL Media Minority Interest Acquisition. Excluding
the effects of the acquisition, retail operating income
decreased by $9.0 million primarily as a result of
increased markdown activity, a non-cash impairment charge of
$5.0 million, and an increase in occupancy and other
operating costs principally related to worldwide store
expansion, as we continue to develop and invest in our existing
retail concepts and formats. The decrease also reflected an
increase in selling-related salaries and associated costs, as
well as increased fulfillment costs associated with higher sales
at RalphLauren.com.
Licensing operating income decreased by
$44.9 million, including the unfavorable effects from the
Japanese Business and Small Leathergoods Business Acquisitions.
Excluding the effects of these acquisitions, licensing operating
income increased by $12.5 million primarily due to an
increase in eyewear-related royalties. This increase was
partially offset by the absence of approximately $8 million
of minimum royalty and design-service fees received in
connection with the termination of a licensing arrangement in
the prior fiscal year.
Unallocated corporate expenses increased by
$33.6 million, primarily as a result of increases in
brand-related marketing costs, including costs associated with
various events related to the Companys
40th anniversary, and compensation-related and facilities
costs to support the ongoing growth of our businesses. The
increase in compensation-related costs includes higher
stock-based compensation expense and severance-related costs, as
previously discussed under SG&A expenses.
Unallocated legal and restructuring charges were
comprised of a reversal of an excess reserve in the amount of
$4.1 million in Fiscal 2008 related to the Credit Card
Matters (as defined in Note 15 to the accompanying audited
consolidated financial statements). Unallocated legal and
restructuring charges were $7.6 million in Fiscal 2007 and
were principally associated with the Club Monaco Restructuring
Plan charges of $4.0 million (as defined in Note 11 to
the accompanying audited consolidated financial statements) and
costs of $3.0 million related to the Credit Card Matters.
No significant unallocated legal and restructuring charges were
recognized in Fiscal 2008.
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a loss
of $6.4 million in Fiscal 2008, compared to a loss of
$1.5 million in Fiscal 2007. Foreign currency losses
increased compared to the prior fiscal year primarily due to a
$2.0 million write-off of foreign currency option
contracts, entered into to manage certain foreign currency
exposures associated with the Japanese Business Acquisitions,
most of which have expired unexercised as of March 29,
2008, hedge activity associated with the return of capital from
a foreign subsidiary and intercompany royalty activity, as well
as the timing of the settlement of third party and
43
intercompany receivables and payables (that were not of a
long-term investment nature). Foreign currency gains and losses
are unrelated to the impact of changes in the value of the
U.S. dollar when operating results of our foreign
subsidiaries are translated to U.S. dollars.
Interest Expense. Interest expense includes
the borrowing costs of our outstanding debt, including
amortization of debt issuance costs. Interest expense increased
by $4.1 million to $25.7 million in Fiscal 2008 from
$21.6 million in Fiscal 2007. The increase is primarily due
to additional borrowings undertaken during the first quarter of
Fiscal 2008 in connection with the Japanese Business
Acquisitions (see Debt and Covenant Compliance
for further discussion), as well as the higher principal
amount of our outstanding Euro denominated debt. This increase
was partially offset by the absence of overlapping interest on
debt during the period between the issuance of the 2006 Euro
Debt and the repayment of approximate 227 million
principal amount of 6.125% notes outstanding that were due
on November 22, 2006, from an original issuance of
275 million in 1999 (the 1999 Euro Debt),
in the prior fiscal year.
Interest and Other Income, net. Interest and
other income, net, decreased by $1.4 million, to
$24.7 million in Fiscal 2008 from $26.1 million in
Fiscal 2007. This decrease was principally driven by lower
average interest rates, lower balances on our invested excess
cash and higher transaction-related costs.
Equity in Income (Loss) of Equity-Method
Investees. The equity in loss of equity-method
investees of $1.8 million in Fiscal 2008 related to certain
start-up
costs associated with the recently formed joint venture, RL
Watch Company, which the Company accounts for under the equity
method of accounting. The equity in income of equity-method
investees of $3.0 million in Fiscal 2007 related to Impact
21, which was previously accounted for as an equity-method
investment. The results of operations for Impact 21 have been
consolidated in the Companys results of operations
commencing April 1, 2007. Accordingly, no equity income
related to Impact 21 was recorded in Fiscal 2008. See
Recent Developments for further discussion of
the Companys Impact 21 Acquisition.
Minority Interest Expense. Minority interest
expense decreased by $13.2 million, to $2.1 million in
Fiscal 2008 from $15.3 million in Fiscal 2007. The decrease
is related to the Companys acquisition of the remaining
50% interests in RL Media and PRL Japan. This decrease was
partially offset by an increase related to the allocation of
Impact 21s net income to the holders of the approximate
80% interest not owned by the Company prior to the closing date
of the related tender offer and to the holders of the remaining
approximate 3% interest not owned by the Company as of the end
of Fiscal 2008. See Recent Developments for
further discussion of the Companys acquisitions.
Provision for Income Taxes. The provision for
income taxes represents federal, foreign, state and local income
taxes. The provision for income taxes decreased by
$20.1 million, or 8.3%, to $222.3 million in Fiscal
2008 from $242.4 million in Fiscal 2007. This decrease was
primarily due to a decrease in our reported effective tax rate
of 310 basis points, to 34.6% in Fiscal 2008 from 37.7% in
Fiscal 2007, and a decrease in pretax income in Fiscal 2008
compared to Fiscal 2007. The lower effective tax rate is
primarily due to tax reserve reductions associated with an audit
settlement and the expiration of a statute of limitations, lower
state income taxes as well as a change in the geographic mix of
earnings, partially offset by certain higher, non-deductible
expenses under § 162(m) of the Internal Revenue Code.
The effective tax rate differs from statutory rates due to the
effect of state and local taxes, tax rates in foreign
jurisdictions and certain nondeductible expenses. Our effective
tax rate will change from year-to-year based on non-recurring
factors including, but not limited to, the geographic mix of
earnings, the timing and amount of foreign dividends, enacted
tax legislation, state and local taxes, tax audit findings and
settlements, and the interaction of various global tax
strategies. See Critical Accounting Policies for a
discussion on the accounting for uncertain tax positions and the
Companys adoption of FIN 48 as of the beginning of
Fiscal 2008.
Net Income. Net income increased by
$18.9 million, or 4.7%, to $419.8 million in Fiscal
2008 from $400.9 million in Fiscal 2007. The increase in
net income principally related to the $20.1 million
decrease in provision for income taxes discussed above and the
$0.8 million increase in operating income. The increase was
partially offset by reductions in operating income primarily
related to the dilutive effect of purchase accounting, an
increase in domestic promotional activity and higher SG&A
expenses principally associated with our recent acquisitions.
The net dilutive effect related to the Companys recent
acquisitions included approximately $53 million of non-cash
amortization of intangible assets and inventory. See
Recent Developments for further discussion of
the Companys acquisitions.
44
Net Income Per Diluted Share. Net income per
diluted share increased by $0.26, or 7.0%, to $3.99 per share in
Fiscal 2008 from $3.73 per share in Fiscal 2007. The increase in
diluted per share results was primarily due to the higher level
of net income and lower weighted-average diluted shares
outstanding for Fiscal 2008 compared to the prior fiscal year.
Fiscal
2007 Compared to Fiscal 2006
The following table summarizes our results of operations and
expresses the percentage relationship to net revenues of certain
financial statement captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(millions, except per share data)
|
|
|
|
|
|
Net revenues
|
|
$
|
4,295.4
|
|
|
$
|
3,746.3
|
|
|
$
|
549.1
|
|
|
|
14.7
|
%
|
Cost of goods
sold(a)
|
|
|
(1,959.2
|
)
|
|
|
(1,723.9
|
)
|
|
|
(235.3
|
)
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,336.2
|
|
|
|
2,022.4
|
|
|
|
313.8
|
|
|
|
15.5
|
%
|
Gross profit as % of net revenues
|
|
|
54.4
|
%
|
|
|
54.0
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(a)
|
|
|
(1,663.4
|
)
|
|
|
(1,476.9
|
)
|
|
|
(186.5
|
)
|
|
|
12.6
|
%
|
SG&A as % of net revenues
|
|
|
38.7
|
%
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(15.6
|
)
|
|
|
(9.1
|
)
|
|
|
(6.5
|
)
|
|
|
71.4
|
%
|
Impairment of retail assets
|
|
|
|
|
|
|
(10.8
|
)
|
|
|
10.8
|
|
|
|
(100.0
|
)%
|
Restructuring charges
|
|
|
(4.6
|
)
|
|
|
(9.0
|
)
|
|
|
4.4
|
|
|
|
(48.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
652.6
|
|
|
|
516.6
|
|
|
|
136.0
|
|
|
|
26.3
|
%
|
Operating income as % of net revenues
|
|
|
15.2
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
Foreign currency gains (losses)
|
|
|
(1.5
|
)
|
|
|
(5.7
|
)
|
|
|
4.2
|
|
|
|
(73.7
|
)%
|
Interest expense
|
|
|
(21.6
|
)
|
|
|
(12.5
|
)
|
|
|
(9.1
|
)
|
|
|
72.8
|
%
|
Interest and other income, net
|
|
|
26.1
|
|
|
|
13.7
|
|
|
|
12.4
|
|
|
|
90.5
|
%
|
Equity in income (loss) of equity-method investees
|
|
|
3.0
|
|
|
|
4.3
|
|
|
|
(1.3
|
)
|
|
|
(30.2
|
)%
|
Minority interest expense
|
|
|
(15.3
|
)
|
|
|
(13.5
|
)
|
|
|
(1.8
|
)
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
643.3
|
|
|
|
502.9
|
|
|
|
140.4
|
|
|
|
27.9
|
%
|
Provision for income taxes
|
|
|
(242.4
|
)
|
|
|
(194.9
|
)
|
|
|
(47.5
|
)
|
|
|
24.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax
rate(b)
|
|
|
37.7
|
%
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
400.9
|
|
|
$
|
308.0
|
|
|
$
|
92.9
|
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
3.84
|
|
|
$
|
2.96
|
|
|
$
|
0.88
|
|
|
|
29.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$
|
3.73
|
|
|
$
|
2.87
|
|
|
$
|
0.86
|
|
|
|
30.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total depreciation expense of $129.1 million and
$117.9 million for Fiscal 2007 and Fiscal 2006,
respectively. |
|
(b) |
|
Effective tax rate is calculated by dividing the provision for
income taxes by income before provision for income taxes. |
45
Net Revenues. Net revenues increased by
$549.1 million, or 14.7%, to $4.295 billion in Fiscal
2007 from $3.746 billion in Fiscal 2006. The increase was
experienced in all geographic regions and was due to a
combination of organic growth and acquisitions. Wholesale
revenues increased by $373.4 million, primarily as a result
of revenues from the newly acquired Polo Jeans Business, the
successful launch of the new Chaps for women and children
product lines, and increased sales in our global menswear and
womenswear product lines. The increase in net revenues also was
driven by a revenue increase of $184.6 million in our
Retail segment as a result of improved comparable global retail
store sales, continued store expansion and growth in
RalphLauren.com sales. Licensing revenue decreased by
$8.9 million primarily due to the loss of product licensing
revenue related to the Polo Jeans and Footwear Businesses (now
included as part of the Wholesale segment). Net revenues for our
three business segments are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
2,315.9
|
|
|
$
|
1,942.5
|
|
|
$
|
373.4
|
|
|
|
19.2
|
%
|
Retail
|
|
|
1,743.2
|
|
|
|
1,558.6
|
|
|
|
184.6
|
|
|
|
11.8
|
%
|
Licensing
|
|
|
236.3
|
|
|
|
245.2
|
|
|
|
(8.9
|
)
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
4,295.4
|
|
|
$
|
3,746.3
|
|
|
$
|
549.1
|
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net revenues the net increase
primarily reflects:
|
|
|
|
|
the inclusion of $190 million of revenues from our newly
acquired Footwear and Polo Jeans Businesses;
|
|
|
|
a $156 million aggregate net increase led by our global
menswear, womenswear and childrenswear businesses, primarily
driven by strong growth in our Lauren product line, increased
full-price sell-through performance in our menswear business and
the effects from the successful domestic launch of our new Chaps
for women and children product lines. These increases were
partially offset by a decline in footwear sales (excluding the
impact from acquisition) due to our planned integration efforts
as we repositioned the related product line; and
|
|
|
|
a $27 million increase in revenues due to a favorable
foreign currency effect, primarily related to the strengthening
of the Euro in comparison to the U.S. dollar in Fiscal 2007.
|
Retail net revenues The net increase
primarily reflects:
|
|
|
|
|
a $104 million aggregate net increase in comparable
full-price and factory store sales on a global basis, including
a net aggregate favorable $9 million foreign currency
effect. This net increase was driven by increases in comparable
store sales as provided below:
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
Increases in comparable store sales as reported:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
6.6
|
%
|
Full-price Club Monaco store sales
|
|
|
10.9
|
%
|
Factory store sales
|
|
|
8.1
|
%
|
Total increase in comparable store sales as reported
|
|
|
7.6
|
%
|
Increases in comparable store sales excluding the effect of
foreign currency:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
5.7
|
%
|
Full-price Club Monaco store sales
|
|
|
10.9
|
%
|
Factory store sales
|
|
|
7.5
|
%
|
Total increase in comparable store sales excluding the effect
of foreign currency
|
|
|
6.9
|
%
|
46
|
|
|
|
|
an increase in sales from non-comparable stores, primarily
relating to new store openings within the past fiscal year.
There was a net increase in global store count of 3 stores
compared to the prior fiscal year, to a total of 292 stores. The
net increase in store count was primarily due to several new
openings of full-price stores, partially offset by the closure
of certain Club Monaco Caban Concept and factory stores and Polo
Jeans factory stores; and
|
|
|
|
a $26 million, or 28.9%, increase in sales at
RalphLauren.com.
|
Licensing revenue the net decrease primarily
reflects:
|
|
|
|
|
the loss of licensing revenues from our Polo Jeans and Footwear
Businesses now included as part of the Wholesale segment;
|
|
|
|
a decline in eyewear-related royalties due to the wind-down of
the Companys pre-existing licensing agreement prior to the
commencement of the new Eyewear Licensing Agreement which took
effect on January 1, 2007;
|
|
|
|
a decline in Home licensing royalties; and
|
|
|
|
a partially offsetting increase in international licensing
royalties and the accelerated receipt and recognition of
approximately $8 million of minimum royalty and
design-service fees in connection with the termination of a
domestic license agreement during Fiscal 2007.
|
Gross Profit. Gross profit increased by
$313.8 million, or 15.5%, to $2.336 billion in Fiscal
2007 from $2.022 billion in Fiscal 2006. Gross profit as a
percentage of net revenues also increased to 54.4% in Fiscal
2007 from 54.0% in Fiscal 2006. The increase in gross profit
reflected higher net sales and improved merchandise margins in
our wholesale and retail businesses, including the continued
emphasis on shifting the mix from off-price to full-price sales
across our wholesale product lines, as well as the focus on
improved inventory management. However, the overall improvement
in gross profit margins was partially offset by the lower gross
profit performance of our newly acquired Polo Jeans Business
associated with the liquidation of existing inventory in
anticipation of the redesign and launch of our new denim and
casual sportswear product lines during spring of calendar 2007.
Gross profit margins related to our Footwear Business have also
been negatively impacted during Fiscal 2007, primarily by
integration efforts as we repositioned the related product line.
Selling, General and Administrative
Expenses. SG&A expenses increased by
$186.5 million, or 12.6%, to $1.663 billion in Fiscal
2007 from $1.477 billion in Fiscal 2006. SG&A expenses
as a percent of net revenues decreased to 38.7% in Fiscal 2007
from 39.4% in Fiscal 2006. The 70 basis point improvement
is primarily indicative of our ability to successfully leverage
our global infrastructure as we acquire businesses and grow
product lines organically. The $186.5 million net increase
in SG&A expenses was primarily driven by:
|
|
|
|
|
higher compensation-related expenses (excluding stock-based
compensation) of approximately $69 million, principally
relating to increased selling costs associated with higher
retail sales and our ongoing worldwide retail store and product
line expansion, and higher investment in infrastructure to
support the ongoing growth of our businesses;
|
|
|
|
the inclusion of SG&A costs for our newly acquired Footwear
and Polo Jeans Businesses, including costs incurred pursuant to
transition service arrangements;
|
|
|
|
a $38 million increase in brand-related marketing and
facilities costs to support the ongoing growth of our businesses;
|
|
|
|
an approximate $10 million increase in depreciation costs
in connection with our increased capital expenditures and global
expansion;
|
|
|
|
incremental stock-based compensation expense of approximately
$17 million as a result of the adoption of FAS 123R as
of April 2, 2006 (see Note 18 to the accompanying
audited consolidated financial statements for further
discussion); and
|
|
|
|
a net reduction in credit card contingency charges of
approximately $4 million.
|
47
Amortization of Intangible
Assets. Amortization of intangible assets
increased by $6.5 million, to $15.6 million in Fiscal
2007 from $9.1 million in Fiscal 2006. The increase was due
to the amortization of intangible assets related to the Polo
Jeans Business acquired in February 2006 and the Footwear
Business acquired in July 2005.
Impairment of Retail Assets. A non-cash
impairment charge of $10.8 million was recognized during
Fiscal 2006 to reduce the carrying value of fixed assets largely
relating to our Club Monaco brand. No impairment charges were
recognized in Fiscal 2007.
Restructuring Charges. Restructuring charges
decreased by $4.4 million, to $4.6 million in Fiscal
2007 from $9.0 million in Fiscal 2006. Restructuring
charges recognized in both periods were principally associated
with the Club Monaco retail business. See Note 11 to the
accompanying audited consolidated financial statements for
further discussion.
Operating Income. Operating income increased
by $136.0 million, or 26.3%, to $652.6 million in
Fiscal 2007 from $516.6 million in Fiscal 2006. Operating
income as a percentage of revenue increased 140 basis
points, to 15.2% in Fiscal 2007 from 13.8% in Fiscal 2006,
reflecting our revenue growth, gross profit percentage expansion
and improved SG&A expense leveraging. Operating income for
our three business segments is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
477.8
|
|
|
$
|
398.3
|
|
|
$
|
79.5
|
|
|
|
20.0
|
%
|
Retail
|
|
|
224.2
|
|
|
|
140.0
|
|
|
|
84.2
|
|
|
|
60.1
|
%
|
Licensing
|
|
|
141.6
|
|
|
|
153.5
|
|
|
|
(11.9
|
)
|
|
|
(7.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
843.6
|
|
|
|
691.8
|
|
|
|
151.8
|
|
|
|
21.9
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(183.4
|
)
|
|
|
(159.1
|
)
|
|
|
(24.3
|
)
|
|
|
15.3
|
%
|
Unallocated legal and restructuring charges
|
|
|
(7.6
|
)
|
|
|
(16.1
|
)
|
|
|
8.5
|
|
|
|
(52.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
652.6
|
|
|
$
|
516.6
|
|
|
$
|
136.0
|
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale operating income increased by
$79.5 million, primarily as a result of higher net sales
and improved gross margin rates in most product lines, as well
as the incremental contribution from the newly acquired Polo
Jeans Business and the new Chaps product lines. These increases
were partially offset by increases in SG&A expenses in
support of new product lines across all geographic territories
and higher amortization expenses associated with intangible
assets recognized in acquisitions.
Retail operating income increased by $84.2 million,
primarily as a result of increased net sales and improved gross
margin rates, as well as the absence of a non-cash impairment
charge of $10.8 million recognized in Fiscal 2006. These
increases were partially offset by an increase in selling
related salaries and associated costs in connection with the
increase in retail sales, including RalphLauren.com, and
worldwide store expansion, including the new Tokyo flagship
store.
Licensing operating income decreased by
$11.9 million primarily due to the loss of royalty income
formerly collected in connection with the Footwear and Polo
Jeans Businesses, which have now been acquired. The decline in
Home royalties also contributed to the decrease along with the
decline in eyewear royalties, due to the wind-down of the
Companys pre-existing licensing agreement. These decreases
were partially offset by an increase in international royalties,
as well as the accelerated receipt and recognition of
approximately $8 million of minimum royalty and
design-service fees in connection with the termination of a
domestic license agreement during Fiscal 2007.
Unallocated corporate expenses increased by
$24.3 million, primarily as a result of increases in
brand-related marketing, payroll-related and facilities costs to
support the ongoing growth of our businesses. The increase in
compensation-related costs includes higher stock-based
compensation expense due to the adoption of FAS 123R (as
further discussed in Note 18 to the accompanying audited
consolidated financial statements).
48
Unallocated legal and restructuring charges were
$7.6 million during Fiscal 2007, compared to
$16.1 million during Fiscal 2006. Fiscal 2007 charges were
principally associated with the Club Monaco Restructuring Plan
charges of $4.0 million (as defined in Note 11 to the
accompanying audited consolidated financial statements) and
legal costs of $3.0 million related to the Credit Card
Matters (as defined in Note 15 to the accompanying audited
consolidated financial statements). Fiscal 2006 charges also
primarily included the Club Monaco Restructuring Plan charges of
$9.0 million and legal costs of $6.8 million
associated with the Credit Card Matters.
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a loss
of $1.5 million in Fiscal 2007, compared to a loss of
$5.7 million in Fiscal 2006. The decrease in foreign
currency losses compared to the prior fiscal year is due to the
timing of the settlement of intercompany receivables and
payables (that were not of a long-term investment nature)
between certain of our international and domestic subsidiaries.
Interest Expense. Interest expense increased
by $9.1 million to $21.6 million in Fiscal 2007 from
$12.5 million in Fiscal 2006. The increase is primarily due
to an increase in interest on capitalized leases due to
additional obligations in Fiscal 2007 compared to the prior
fiscal year and overlapping interest on debt during the period
between the issuance of the 2006 Euro Debt and the repayment of
the 1999 Euro Debt. In addition, prior year interest expense was
favorably impacted by the interest rate swap agreements which
were terminated at the end of Fiscal 2006.
Interest and Other Income, net. Interest and
other income, net, increased by $12.4 million, to
$26.1 million in Fiscal 2007 from $13.7 million in
Fiscal 2006. This increase is primarily driven by higher average
interest rates and higher balances on our invested excess cash.
Equity in Income (Loss) of Equity-Method
Investees. Equity in the income of equity-method
investees decreased by $1.3 million, to $3.0 million
in Fiscal 2007 from $4.3 million in Fiscal 2006. This
income relates to our 20% investment in Impact 21, a company
that holds the sublicense with PRL Japan for our mens,
womens and jeans businesses in Japan. See Recent
Developments for further discussion of the
Companys Japanese Business Acquisitions that occurred in
May 2007.
Minority Interest Expense. Minority interest
expense increased by $1.8 million, to $15.3 million in
Fiscal 2007 from $13.5 million in Fiscal 2006. The net
increase is primarily related to the improved operating
performance of RL Media compared to the prior period and the
associated allocation of income to the minority partners. As of
March 28, 2007, the Company acquired the remaining 50%
interest in RL Media held by the minority partners (see
Recent Developments for further discussion).
Provision for Income Taxes. The provision for
income taxes represents federal, foreign, state and local income
taxes. The provision for income taxes increased by
$47.5 million, or 24.4%, to $242.4 million in Fiscal
2007 from $194.9 million in Fiscal 2006. This increase is a
result of the increase in our pretax income, partially offset by
a decrease in our reported effective tax rate, to 37.7% in
Fiscal 2007 from 38.8% in Fiscal 2006. The lower effective tax
rate is primarily due to a change in the mix of earnings, which
resulted in more income being taxed at lower rates than in the
previous fiscal year. See Critical Accounting
Policies for a discussion on the accounting for uncertain
tax positions and the Companys adoption of FIN 48 in
Fiscal 2008.
Net Income. Net income increased by
$92.9 million, or 30.2%, to $400.9 million in Fiscal
2007 from $308.0 million in Fiscal 2006. The increase in
net income principally related to our $136.0 million
increase in operating income, as previously discussed, offset in
part by an increase of $47.5 million in our provision for
income taxes.
Net Income Per Diluted Share. Net income per
diluted share increased by $0.86, or 30.0%, to $3.73 per share
in Fiscal 2007 from $2.87 per share in Fiscal 2006. The increase
in diluted per share results was primarily due to the higher
level of net income, partially offset by higher weighted-average
diluted shares outstanding for Fiscal 2007.
49
FINANCIAL
CONDITION AND LIQUIDITY
Financial
Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(millions)
|
|
|
Cash and cash equivalents
|
|
$
|
551.5
|
|
|
$
|
563.9
|
|
|
$
|
(12.4
|
)
|
Current maturities of debt
|
|
|
(206.4
|
)
|
|
|
|
|
|
|
(206.4
|
)
|
Long-term debt
|
|
|
(472.8
|
)
|
|
|
(398.8
|
)
|
|
|
(74.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
(debt)(a)
|
|
$
|
(127.7
|
)
|
|
$
|
165.1
|
|
|
$
|
(292.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
74.3
|
|
|
$
|
|
|
|
$
|
74.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
$
|
2,389.7
|
|
|
$
|
2,334.9
|
|
|
$
|
54.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net cash is defined as total cash and cash
equivalents less total debt and net debt is defined
as total debt less total cash and cash equivalents. |
The decrease in our net cash position as of the end of Fiscal
2008 was primarily due to the Japanese Business Acquisitions,
net of approximately $239 million of Impact 21s cash
on-hand acquired. As part of the Japanese Business Acquisitions,
the Company borrowed ¥20.5 billion (approximately
$206 million as of March 29, 2008) under a
one-year term loan agreement pursuant to an amendment and
restatement to the Companys existing credit facility. The
Company used the proceeds from these borrowings and available
cash-on hand to fund the Japanese Business Acquisitions. In
addition, the Company spent $217.1 million for capital
expenditures and used $475.4 million to repurchase
6.0 million shares of Class A common stock.
The increase in stockholders equity was primarily due to
the Companys net income and higher other comprehensive
income during Fiscal 2008, offset in part by an increase in
treasury stock as a result of the Companys common stock
repurchase program and a reduction in retained earnings of
$62.5 million in connection with the adoption of
FIN 48.
Subsequent to year end, the Company repaid its current
maturities of debt using available cash on-hand.
Cash
Flows
Fiscal
2008 Compared to Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(millions)
|
|
|
Net cash provided by operating activities
|
|
$
|
695.4
|
|
|
$
|
796.1
|
|
|
$
|
(100.7
|
)
|
Net cash used in investing activities
|
|
|
(505.0
|
)
|
|
|
(434.6
|
)
|
|
|
(70.4
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(260.5
|
)
|
|
|
(95.2
|
)
|
|
|
(165.3
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
57.7
|
|
|
|
11.9
|
|
|
|
45.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(12.4
|
)
|
|
$
|
278.2
|
|
|
$
|
(290.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities. Net
cash provided by operating activities decreased to
$695.4 million in Fiscal 2008, compared to
$796.1 million in Fiscal 2007. This $100.7 million net
decrease in operating cash flow was primarily driven by:
|
|
|
|
|
the absence of the approximately $180 million, net of
certain tax withholdings, received under the Eyewear Licensing
Agreement in the prior fiscal year; and
|
|
|
|
an increase in other receivables primarily attributable to the
timing of estimated tax payments.
|
50
The above decreases were partially offset by:
|
|
|
|
|
an increase in net income before non-cash depreciation,
amortization and stock-based compensation expenses;
|
|
|
|
improved accounts receivable cash collections in the
Companys Wholesale segment; and
|
|
|
|
the effects of ongoing inventory management, which resulted in
lower average balance and increased inventory turns across
certain businesses.
|
Other than the items described above, the changes in operating
assets and liabilities were attributable to normal operating
fluctuations.
Net Cash Used in Investing Activities. Net
cash used in investing activities was $505.0 million in
Fiscal 2008, as compared to $434.6 million in Fiscal 2007.
The net increase in cash used in investing activities was
primarily driven by:
|
|
|
|
|
an increase in net cash used to fund the Companys
acquisitions. In Fiscal 2008, the Company used
$188.7 million principally to fund the Japanese Business
Acquisitions, net of cash acquired, and the Small Leathergoods
Business Acquisition; whereas in Fiscal 2007,
$176.1 million was used primarily to fund the RL Media
Minority Interest Acquisition;
|
|
|
|
an increase in cash used in connection with capital
expenditures. In Fiscal 2008, the Company spent
$217.1 million for capital expenditures, as compared to
$184.0 million in Fiscal 2007. The increase in capital
expenditures is primarily associated with global retail store
expansion, construction and renovation of department store
shop-in-shops
and investments in our facilities and technological
infrastructure, including showrooms related to our new
businesses;
|
|
|
|
an increase related to purchases of investments of
$96.8 million, less proceeds from sales and maturities of
investments of $12.7 million, in Fiscal 2008; and
|
|
|
|
a partially offsetting decrease in cash deposits restricted in
connection with taxes. During Fiscal 2008, $15.1 million of
cash was restricted as compared to $74.5 million during
Fiscal 2007. Restricted cash was placed in escrow with certain
banks as collateral to secure guarantees of a corresponding
amount made by the banks to certain international tax
authorities on behalf of the Company.
|
Net Cash Used in Financing Activities. Net
cash used in financing activities was $260.5 million in
Fiscal 2008, as compared to $95.2 million in Fiscal 2007.
The increase in net cash used in financing activities was
primarily driven by:
|
|
|
|
|
increased repurchases of the Companys Class A common
stock pursuant to the Companys common stock repurchase
program. Approximately 6.0 million shares of Class A
common stock at a cost of $475.4 million were repurchased
in Fiscal 2008, as compared to approximately 3.5 million
shares of Class A common stock at a cost of
$231.3 million in Fiscal 2007; and
|
|
|
|
a partially offsetting increase in proceeds from issuance of
debt. Fiscal 2008 included the receipt of proceeds from
borrowings of ¥20.5 billion (approximately
$169 million as of the borrowing date) under a one-year
term loan agreement in connection with the Japanese Business
Acquisitions. On a comparative basis, Fiscal 2007 included the
receipt of proceeds from the issuance of 300 million
principal amount ($380.0 million) of 2006 Euro Debt, offset
in part by the repayment of approximately 227 million
principal amount ($291.6 million) of 1999 Euro Debt.
|
51
Fiscal
2007 Compared to Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(millions)
|
|
|
Net cash provided by operating activities
|
|
$
|
796.1
|
|
|
$
|
449.1
|
|
|
$
|
347.0
|
|
Net cash used in investing activities
|
|
|
(434.6
|
)
|
|
|
(539.2
|
)
|
|
|
104.6
|
|
Net cash provided by (used in) financing activities
|
|
|
(95.2
|
)
|
|
|
33.5
|
|
|
|
(128.7
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
11.9
|
|
|
|
(8.2
|
)
|
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
278.2
|
|
|
$
|
(64.8
|
)
|
|
$
|
343.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities. Net
cash provided by operating activities increased to
$796.1 million during Fiscal 2007, compared to
$449.1 million for Fiscal 2006. This $347.0 million
increase in operating cash flow was driven primarily by the
increase in net income, the receipt of approximately
$180 million under the new Eyewear Licensing Agreement (net
of certain tax withholdings) and the absence of the
$100 million payment to settle the Jones-related Litigation
in Fiscal 2006, partially offset by higher tax payments made in
Fiscal 2007. Also offsetting the increase in operating cash flow
was an increase in working capital needs during Fiscal 2007,
primarily as a result of recent expansions and the overall
growth in the business. This increase in working capital needs
was partially offset by a decrease in accounts receivable days
sales outstanding as a result of improved cash collections in
the Companys Wholesale segment. On a comparative basis,
operating cash flows were reduced by $33.7 million as a
result of a change in the reporting of excess tax benefits from
stock-based compensation arrangements. That is, prior to the
adoption of FAS 123R, benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash
flows. FAS 123R requires excess tax benefits to be reported
as a financing cash inflow rather than in operating cash flows
as a reduction of taxes paid.
Net Cash Used in Investing Activities. Net
cash used in investing activities was $434.6 million for
Fiscal 2007, as compared to $539.2 million for Fiscal 2006.
The net decrease in cash used in investing activities is
primarily due to acquisition-related activities. In Fiscal 2007,
the Company used $175 million to fund the acquisition of
the remaining 50% equity interest in RL Media that it did not
previously own, whereas in Fiscal 2006, approximately
$380 million was used primarily to fund the acquisition of
the Polo Jeans and Footwear Businesses. In addition, net cash
used in investing activities for Fiscal 2007 included
$74.5 million of restricted cash placed in escrow with
certain banks as collateral to secure guarantees of a
corresponding amount made by the banks to certain international
tax authorities on behalf of the Company (see Restricted
Cash within Note 3 to the accompanying audited
consolidated financial statements for further discussion). Net
cash used in investing activities also included
$184.0 million relating to capital expenditures, as
compared to $158.6 million in the prior fiscal year.
Net Cash (Used in)/Provided by Financing
Activities. Net cash used in financing activities
was $95.2 million for Fiscal 2007, compared to net cash
provided by financing activities of $33.5 million in Fiscal
2006. The increase in net cash used in financing activities
during Fiscal 2007 principally related to the repayment of
approximately 227 million principal amount
($291.6 million) of the Companys 1999 Euro Debt and
the repurchase of 3.5 million shares of Class A common
stock pursuant to its common stock repurchase program at a cost
of $231.3 million. Partially offsetting the increase was
the receipt of proceeds from the issuance of
300 million principal amount (approximately
$380 million) of 2006 Euro Debt. This net increase in cash
used in financing activities was partially offset by the change
in the reporting of excess tax benefits from stock-based
compensation arrangements of $33.7 million.
Liquidity
The Companys primary sources of liquidity are the cash
flow generated from its operations, $450 million of
availability under its credit facility, available cash and
equivalents, investments and other financing options. These
sources of liquidity are needed to fund the Companys
ongoing cash requirements, including working capital
requirements, global retail store expansion, construction and
renovation of
shop-in-shops,
investment in technological infrastructure, acquisitions,
dividends, debt repayment, stock repurchases, contingent
liabilities (including uncertain tax positions) and other
corporate activities. Management believes that the
Companys existing resources
52
of cash will be sufficient to support its operating, capital and
debt service requirements for the foreseeable future, including
the finalization of acquisitions and plans for business
expansion.
As discussed below under the section entitled Debt and
Covenant Compliance, the Company had no revolving
credit borrowings outstanding under its credit facility as of
March 29, 2008. However, as discussed further below, the
Company may elect to draw on its credit facility or other
potential sources of financing for, among other things, a
material acquisition, settlement of a material contingency
(including uncertain tax positions) or a material adverse
business development.
In May 2007, the Company completed the Japanese Business
Acquisitions. These transactions were funded with available cash
on-hand and ¥20.5 billion of borrowings under a
one-year term loan agreement pursuant to an amendment and
restatement to the Companys existing credit facility (the
Term Loan). Borrowings under the Term Loan bore
interest at a fixed rate of 1.2%. The Company repaid the
borrowing by its maturity date on May 22, 2008 using
approximately $200 million of Impact 21s cash on-hand
acquired as part of the acquisition.
Common
Stock Repurchase Program
In August 2007, the Companys Board of Directors approved
an expansion of the Companys existing common stock
repurchase program that allowed the Company to repurchase up to
an additional $250 million of Class A common stock.
Repurchases of shares of Class A common stock are subject
to overall business and market conditions. In Fiscal 2008,
6.1 million shares of Class A common stock were
repurchased at a cost of $476.4 million under the expanded
and pre-existing programs, including $24.0 million
(0.4 million shares) that was traded prior to the end of
the fiscal year for which settlement occurred in April 2008. The
remaining availability under the common stock repurchase program
was approximately $142 million as of March 29, 2008.
In addition, during Fiscal 2008, 0.3 million shares of
Class A common stock at a cost of $23.0 million were
surrendered to, or withheld by, the Company in satisfaction of
withholding taxes in connection with the vesting of awards under
the Companys 1997 Long-Term Stock Incentive Plan.
In Fiscal 2007, share repurchases amounted to 3.5 million
shares of Class A common stock at a cost of
$231.3 million. In Fiscal 2006, the Company repurchased
69.3 thousand shares of Class A common stock at a cost of
$3.8 million.
In May 2008, the Companys Board of Directors approved a
further expansion of the Companys existing common stock
repurchase program that allowed the Company to repurchase up to
an additional $250 million of Class A common stock.
Dividends
The Company declared a quarterly dividend of $0.05 per
outstanding share in each quarter of Fiscal 2008, Fiscal 2007
and Fiscal 2006. The aggregate amount of dividend payments was
$20.5 million in Fiscal 2008, $20.9 million in Fiscal
2007 and $20.8 million in Fiscal 2006.
The Company intends to continue to pay regular quarterly
dividends on its outstanding common stock. However, any decision
to declare and pay dividends in the future will be made at the
discretion of the Companys Board of Directors and will
depend on, among other things, the Companys results of
operations, cash requirements, financial condition and other
factors that the Board of Directors may deem relevant.
Debt
and Covenant Compliance
Euro
Debt
The Company has outstanding approximately 300 million
principal amount of 4.5% notes due October 4, 2013
(the 2006 Euro Debt). The Company has the option to
redeem all of the 2006 Euro Debt at any time at a redemption
price equal to the principal amount plus a premium. The Company
also has the option to redeem all of the 2006 Euro Debt at any
time at par plus accrued interest, in the event of certain
developments involving U.S. tax law. Partial redemption of
the 2006 Euro Debt is not permitted in either instance. In the
event of a change of control
53
of the Company, each holder of the 2006 Euro Debt has the option
to require the Company to redeem the 2006 Euro Debt at its
principal amount plus accrued interest.
The carrying value of the 2006 Euro Debt was $472.8 million
and $398.8 million as of March 29, 2008 and
March 31, 2007, respectively.
Revolving
Credit Facility and Term Loan
The Company has a credit facility that provides for a
$450 million unsecured revolving line of credit through
November 2011 (the Credit Facility). The Credit
Facility also is used to support the issuance of letters of
credit. As of March 29, 2008, there were no borrowings
outstanding under the Credit Facility, but the Company was
contingently liable for $23.0 million of outstanding
letters of credit (primarily relating to inventory purchase
commitments). The Company has the ability to expand its
borrowing availability to $600 million subject to the
agreement of one or more new or existing lenders under the
facility to increase their commitments. There are no mandatory
reductions in borrowing ability throughout the term of the
Credit Facility.
Borrowings under the Credit Facility bear interest, at the
Companys option, either at (a) a base rate determined
by reference to the higher of (i) the prime commercial
lending rate of JP Morgan Chase Bank, N.A. in effect from time
to time and (ii) the weighted-average overnight Federal
funds rate (as published by the Federal Reserve Bank of New
York) plus 50 basis points or (b) a LIBOR rate in
effect from time to time, as adjusted for the Federal Reserve
Boards Euro currency liabilities maximum reserve
percentage plus a margin defined in the Credit Facility
(the applicable margin). The applicable margin of
35 basis points is subject to adjustment based on the
Companys credit ratings.
In addition to paying interest on any outstanding borrowings
under the Credit Facility, the Company is required to pay a
commitment fee to the lenders under the Credit Facility in
respect of the unutilized commitments. The commitment fee rate
of 8 basis points under the terms of the Credit Facility
also is subject to adjustment based on the Companys credit
ratings.
The Credit Facility contains a number of covenants that, among
other things, restrict the Companys ability, subject to
specified exceptions, to incur additional debt; incur liens and
contingent liabilities; sell or dispose of assets, including
equity interests; merge with or acquire other companies;
liquidate or dissolve itself; engage in businesses that are not
in a related line of business; make loans, advances or
guarantees; engage in transactions with affiliates; and make
investments. In addition, the Credit Facility requires the
Company to maintain a maximum ratio of Adjusted Debt to
Consolidated EBITDAR (the leverage ratio), as such
terms are defined in the Credit Facility. As of March 29,
2008, no Event of Default (as such term is defined pursuant to
the Credit Facility) has occurred under the Companys
Credit Facility.
Upon the occurrence of an Event of Default under the Credit
Facility, the lenders may cease making loans, terminate the
Credit Facility, and declare all amounts outstanding to be
immediately due and payable. The Credit Facility specifies a
number of events of default (many of which are subject to
applicable grace periods), including, among others, the failure
to make timely principal and interest payments or to satisfy the
covenants, including the financial covenant described above.
Additionally, the Credit Facility provides that an Event of
Default will occur if Mr. Ralph Lauren, the Companys
Chairman and Chief Executive Officer, and related entities
controlled by Mr. Lauren fail to maintain a specified
minimum percentage of the voting power of the Companys
common stock.
The Credit Facility was amended and restated as of May 22,
2007 to provide for the addition of the Term Loan made to Polo
JP Acqui B.V., a wholly owned subsidiary of the Company. The
Term Loan was guaranteed by the Company, as well as the other
subsidiaries of the Company which currently guarantee the Credit
Facility. The proceeds of the Term Loan were used to finance the
Japanese Business Acquisitions. Borrowings under the Term Loan
bore interest at a fixed rate of 1.2%. The Company repaid the
borrowing by its maturity date on May 22, 2008 using
approximately $200 million of Impact 21s cash on-hand
acquired as part of the acquisition. See Note 5 for further
discussion of the Japanese Business Acquisitions.
54
Contractual
and Other Obligations
Firm
Commitments
The following table summarizes certain of the Companys
aggregate contractual obligations as of March 29, 2008, and
the estimated timing and effect that such obligations are
expected to have on the Companys liquidity and cash flow
in future periods. The Company expects to fund the firm
commitments with operating cash flow generated in the normal
course of business and, if necessary, availability under its
$450 million credit facility or other potential sources of
financing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
2014 and
|
|
|
|
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Term Loan
|
|
$
|
206.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
206.4
|
|
Euro Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472.8
|
|
|
|
472.8
|
|
Capital leases
|
|
|
8.0
|
|
|
|
14.9
|
|
|
|
12.5
|
|
|
|
37.8
|
|
|
|
73.2
|
|
Operating leases
|
|
|
188.1
|
|
|
|
321.3
|
|
|
|
255.7
|
|
|
|
670.7
|
|
|
|
1,435.8
|
|
Inventory purchase commitments
|
|
|
697.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,099.9
|
|
|
$
|
336.2
|
|
|
$
|
268.2
|
|
|
$
|
1,181.3
|
|
|
$
|
2,885.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the Companys material,
firmly committed contractual obligations as of March 29,
2008:
|
|
|
|
|
Term Loan represents the principal amount due at maturity
of the Companys outstanding Term Loan on a
U.S. dollar-equivalent basis. The Term Loan was repaid on
May 22, 2008 using available cash on-hand;
|
|
|
|
Euro Debt represents the principal amount due at maturity
of the Companys outstanding 2006 Euro Debt on a
U.S. dollar-equivalent basis. Amounts do not include any
fair value adjustments, call premiums or interest payments;
|
|
|
|
Lease obligations represent the minimum lease rental
payments under noncancelable leases for the Companys real
estate and operating equipment in various locations around the
world. Approximately 78% of these lease obligations relates to
the Companys retail operations. Information has been
presented separately for operating and capital leases. In
addition to such amounts, the Company is normally required to
pay taxes, insurance and occupancy costs relating to its leased
real estate properties; and
|
|
|
|
Inventory purchase commitments represent the
Companys legally binding agreements to purchase fixed or
minimum quantities of goods at determinable prices.
|
Excluded from the above contractual obligations table is the
non-current liability for unrecognized tax benefits of
$155.2 million recognized as a result of the adoption of
FIN 48. This liability for unrecognized tax benefits has
been excluded because the Company cannot make a reliable
estimate of the period in which the liability will be settled,
if ever.
The above table also excludes the following: (i) amounts
included in current liabilities, other than the current
maturities of debt, in the consolidated balance sheet as of
March 29, 2008 as these items will be paid within one year;
and (ii) non-current liabilities that have no cash outflows
associated with them (e.g., deferred revenue) or the cash
outflows associated with them are uncertain or do not represent
a purchase obligation as the term is used herein
(e.g., deferred taxes and other miscellaneous items).
The Company also has certain contractual arrangements that would
require it to make payments if certain circumstances occur. See
Note 15 to the accompanying audited consolidated financial
statements for a description of the Companys contingent
commitments not included in the above table.
Off-Balance
Sheet Arrangements
The Companys off-balance sheet firm commitments, which
include outstanding letters of credit and minimum funding
commitments to investees, amounted to approximately
$29.8 million as of March 29, 2008. The Company
55
does not maintain any other off-balance sheet arrangements,
transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a
material current or future effect upon its financial condition
or results of operations.
MARKET
RISK MANAGEMENT
The Company is exposed to a variety of risks, including changes
in foreign currency exchange rates relating to certain
anticipated cash flows from its international operations and
possible declines in the fair value of reported net assets of
certain of its foreign operations, as well as changes in the
fair value of its fixed-rate debt relating to changes in
interest rates. Consequently, in the normal course of business
the Company employs established policies and procedures,
including the use of derivative financial instruments, to manage
such risks. The Company does not enter into derivative
transactions for speculative or trading purposes.
As a result of the use of derivative instruments, the Company is
exposed to the risk that counterparties to derivative contracts
will fail to meet their contractual obligations. To mitigate the
counterparty credit risk, the Company has a policy of only
entering into contracts with carefully selected financial
institutions based upon their credit ratings and other financial
factors. The Companys established policies and procedures
for mitigating credit risk on derivative transactions include
reviewing and assessing the creditworthiness of counterparties.
Foreign
Currency Risk Management
The Company manages its exposure to changes in foreign currency
exchange rates through the use of foreign currency exchange
contracts. Refer to Note 14 to the audited consolidated
financial statements for a summarization of the notional amounts
and fair values of the Companys foreign currency exchange
contracts outstanding as of March 29, 2008.
Forward
Foreign Currency Exchange Contracts
General
From time to time, the Company may enter into forward foreign
currency exchange contracts as hedges to reduce its risk from
exchange rate fluctuations on inventory purchases, intercompany
royalty payments made by certain of its international
operations, intercompany contributions made to fund certain
marketing efforts of its international operations, other foreign
currency-denominated operational obligations including payroll,
rent, insurance, and benefit payments, and foreign
currency-denominated revenues. As part of its overall strategy
to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, primarily to changes in the value of
the Euro, the Japanese Yen, the Swiss Franc, and the British
Pound Sterling, the Company hedges a portion of its foreign
currency exposures anticipated over the ensuing twelve-month to
two-year periods. In doing so, the Company uses foreign currency
exchange contracts that generally have maturities of three
months to two years to provide continuing coverage throughout
the hedging period.
The Company records the above described foreign currency
exchange contracts at fair value in its consolidated balance
sheets. Foreign currency exchange contracts designated as cash
flow hedges at hedge inception are accounted for in accordance
with FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and subsequent
amendments (collectively, FAS 133). As such, to
the extent these hedges are effective the related gains or
losses are deferred in stockholders equity as a component
of accumulated other comprehensive income. These deferred gains
and losses are then recognized in our consolidated statements of
operations as follows:
|
|
|
|
|
Inventory Purchases Recognized as part of the
cost of the inventory being hedged within cost of goods sold
when the related inventory is sold.
|
|
|
|
Intercompany Royalty Payments and Marketing Contributions
Recognized within foreign currency gains
(losses) in the period in which the related royalties or
marketing contributions being hedged are received or paid.
|
|
|
|
Operational Obligations Recognized primarily
within SG&A expenses in the period in which the hedged
forecasted transaction affects earnings.
|
The Company recognized a net loss on foreign currency exchange
contracts in earnings of approximately $8 million for
Fiscal 2008, and net gains of approximately $4 million and
$5 million for Fiscal 2007 and Fiscal 2006, respectively.
56
Forward
Foreign Currency Exchange Contracts Other
On October 10, 2007, the Company entered into a foreign
exchange contract to purchase 13.5 million at a fixed
rate. This contract hedges the foreign currency exposure related
to the annual Euro interest payment due on October 6, 2008
for Fiscal 2009 in connection with the Companys
outstanding 2006 Euro Debt. In accordance with FAS 133, the
contract has been designated as a cash flow hedge. Since neither
the terms of the hedge contract or the underlying exposure have
changed, the related gains of $0.7 million have been
reclassified from stockholders equity to foreign currency
gains (losses) within our consolidated statement of operations
to offset the related transaction loss arising from the
remeasurement of the associated foreign currency-denominated
accrued interest liability, as permitted by FAS 133, during
Fiscal 2008.
On April 2, 2007, the Company entered into a similar
foreign exchange contract to purchase 13.5 million at
a fixed rate, hedging the foreign currency exposure related to
the annual Euro interest payment made on October 4, 2007
for Fiscal 2008. This contract also was designated as a cash
flow hedge. Consistent with the accounting treatment discussed
above, the related gains of $1.1 million were reclassified
from stockholders equity to foreign currency gains
(losses) within our consolidated statement of operations during
Fiscal 2008.
During the first quarter of Fiscal 2008, the Company entered
into foreign currency option contracts with a notional value of
$159 million giving the Company the right, but not the
obligation, to purchase foreign currencies at fixed rates by
May 23, 2007. These contracts hedged the majority of the
foreign currency exposure related to the financing of the
Japanese Business Acquisitions, but did not qualify under
FAS 133 for hedge accounting treatment. The Company did not
exercise any of the contracts and recognized a loss of
$1.6 million within foreign currency gains (losses) in our
consolidated statement of operations during the first quarter of
Fiscal 2008.
In addition, during the fourth quarter of Fiscal 2008, the
Company entered into a foreign currency exchange contract with a
notional value of $5 million hedging the foreign currency
exposure related to an intercompany term loan provided by Polo
Ralph Lauren Corporation to Ralph Lauren Retail Japan
(RLRJ) in connection with the Japanese Business
Acquisitions minority squeeze-out, as discussed in Note 5.
This contract, which hedges the foreign currency exposure
related to a Yen-denominated payment to be made by RLRJ during
the first quarter of Fiscal 2009, did not qualify under
FAS 133 for hedge accounting treatment. As such, the
Company recognized a related loss of $0.4 million within
foreign currency gains (losses) in our consolidated statement of
operations during Fiscal 2008.
Sensitivity
The Company performs a sensitivity analysis to determine the
effects that market risk exposures may have on the fair values
of the Companys derivative financial instruments. To
perform the sensitivity analysis, the Company assesses the risk
of loss in fair values from the effect of hypothetical changes
in foreign currency exchange rates. This analysis assumes a like
movement by all foreign currencies in our hedge portfolio
against the U.S. dollar. Based on all foreign currency
exchange contracts outstanding as of March 29, 2008, a 10%
devaluation of the U.S. dollar as compared to the level of
foreign currency exchange rates for currencies under contract as
of March 29, 2008 would result in approximately
$2 million of net unrealized losses. Conversely, a 10%
appreciation of the U.S. dollar would result in
approximately $2 million of net unrealized gains. As the
Companys outstanding foreign currency exchange contracts
are primarily designated as cash flow hedges of forecasted
transactions, the unrealized loss or gain as a result of a 10%
devaluation or appreciation would be largely offset by changes
in the underlying hedged items.
Hedge of
a Net Investment in Certain European Subsidiaries
The Company designated the entire principal amount of its
outstanding 2006 Euro Debt as a hedge of its net investment in
certain of its European subsidiaries. As required by
FAS 133, the changes in fair value of a derivative
instrument or a non-derivative financial instrument (such as
debt) that is designated as a hedge of a net investment in a
foreign operation are reported in the same manner as a
translation adjustment under FAS No. 52, Foreign
Currency Translation, to the extent it is effective as a
hedge. As such, changes in the fair value of the 2006 Euro Debt
resulting from changes in the Euro exchange rate have been, and
continue to be, reported in stockholders equity as a
component of accumulated other comprehensive income. The Company
recorded within accumulated
57
other comprehensive income the translation effects of the 2006
Euro Debt to U.S. dollars, resulting in net losses of
$45.4 million for Fiscal 2008 and $24.5 million for
Fiscal 2007, and a net gain of $4.2 million for Fiscal 2006.
Interest
Rate Risk Management
During the first six months of Fiscal 2007, the Company entered
into three forward-starting interest rate swap contracts
aggregating 200 million notional amount of
indebtedness in anticipation of the Companys proposed
refinancing of the 1999 Euro Debt, which was completed in
October 2006. The Company designated these agreements as a cash
flow hedge of a forecasted transaction to issue new debt in
connection with the planned refinancing of its 1999 Euro Debt.
The interest rate swaps hedged a total of
200.0 million, a portion of the underlying interest
rate exposure on the anticipated refinancing. Under the terms of
the three interest swap contracts, the Company paid a
weighted-average fixed rate of interest of 4.1% and received
variable interest based upon six-month EURIBOR. The Company
terminated the swaps on September 28, 2006, which was the
date the interest rate for the 2006 Euro Debt was determined. As
a result, the Company made a payment of approximately
3.5 million ($4.4 million based on the exchange
rate in effect on that date) in settlement of the swaps. An
amount of $0.2 million was recognized as a loss for the
three months ending September 30, 2006 due to the partial
ineffectiveness of the cash flow hedge as a result of the
forecasted transaction closing on October 5, 2006 instead
of November 22, 2006 (the maturity date of the 1999 Euro
Debt). The remaining loss of $4.2 million has been deferred
as a component of comprehensive income within stockholders
equity and is being recognized in earnings as an adjustment to
interest expense over the seven-year term of the 2006 Euro Debt.
Sensitivity
As of March 29, 2008, the Company had no variable-rate debt
outstanding. As such, the Companys exposure to changes in
interest rates primarily related to its fixed rate 2006 Euro
Debt. As of March 29, 2008, the carrying value of the 2006
Euro Debt was $472.8 million and the fair value was
$423.0 million. A 25 basis point increase or decrease
in the level of interest rates would, respectively, decrease or
increase the fair value of the 2006 Euro Debt by approximately
$5 million. Such potential increases or decreases are based
on certain simplifying assumptions, including no changes in Euro
currency exchange rates and an immediate across-the-board
increase or decrease in the level of interest rates with no
other subsequent changes for the remainder of the period.
The Term Loan of ¥20.5 billion made to Polo JP Acqui,
B.V., a wholly owned subsidiary of the Company, was repaid by
the Company by its maturity date on May 22, 2008 using
approximately $200 million of Impact 21s cash on-hand
acquired as part of the Japanese Business Acquisitions.
Investment
Risk Management
The Company evaluates investments held in unrealized loss
positions for other-than-temporary impairment on a quarterly
basis. Such evaluation involves a variety of considerations,
including assessments of risks and uncertainties associated with
general economic conditions and distinct conditions affecting
specific issuers. Factors considered by the Company include
(i) the length of time and the extent to which the fair
value has been below cost, (ii) the financial condition,
credit worthiness and near-term prospects of the issuer,
(iii) the length of time to maturity, (iv) future
economic conditions and market forecasts and (v) the
Companys intent and ability to retain its investment for a
period of time sufficient to allow for recovery of market value.
As of March 29, 2008, the fair value of the Companys
available-for-sale investments was $0.4 million below their
respective par value. This gross unrealized loss has been
recorded within accumulated other comprehensive income in the
Companys consolidated balance sheet, as the Company
believes the investments are not other-than-temporarily
impaired. The Company limits its exposure by primarily investing
in highly rated investments issued by municipalities.
CRITICAL
ACCOUNTING POLICIES
The SECs Financial Reporting Release No. 60,
Cautionary Advice Regarding Disclosure About Critical
Accounting Policies (FRR 60), suggests
companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers
an accounting policy to be critical if it is important to the
Companys financial condition and results of operations and
requires significant judgment and estimation on
58
the part of management in its application. The Companys
estimates are often based on complex judgments, probabilities
and assumptions that we believe to be reasonable, but that are
inherently uncertain and unpredictable. It is also possible that
other professionals, applying reasonable judgment to the same
facts and circumstances, could develop and support a range of
alternative estimated amounts. The Company believes that the
following list represents its critical accounting policies as
contemplated by FRR 60. For a discussion of all of the
Companys significant accounting policies, see Notes 3
and 4 to the accompanying audited consolidated financial
statements.
Sales
Reserves and Uncollectible Accounts
A significant area of judgment affecting reported revenue and
net income is estimating sales reserves, which represent that
portion of gross revenues not expected to be realized. In
particular, wholesale revenue is reduced by estimates of
returns, discounts, end-of-season markdowns, operational
chargebacks and certain cooperative advertising allowances.
Retail revenue, including
e-commerce
sales, also is reduced by estimates of returns.
In determining estimates of returns, discounts, end-of-season
markdowns and operational chargebacks, management analyzes
historical trends, seasonal results, current economic and market
conditions and retailer performance. The Company reviews and
refines these estimates on a quarterly basis. The Companys
historical estimates of these costs have not differed materially
from actual results.
Similarly, management evaluates accounts receivables to
determine if they will ultimately be collected. Significant
judgments and estimates are involved in this evaluation,
including an analysis of specific risks on a
customer-by-customer
basis for larger accounts and customers, and a receivables aging
analysis that determines the percentage of receivables that has
historically been uncollected by aged category. Based on this
information, management provides a reserve for the estimated
amounts believed to be uncollectible. Although management
believes that the Companys major customers are sound and
creditworthy, a severe adverse impact on their business
operations could have a corresponding material adverse effect on
the Companys net sales, cash flows
and/or
financial condition.
See Accounts Receivable in Note 3 to the
accompanying audited consolidated financial statements for an
analysis of the activity in the Companys sales reserves
and allowance for doubtful accounts for each of the three fiscal
years presented.
Inventories
The Company holds inventory that is sold through wholesale
distribution channels to major department stores and specialty
retail stores, including its own retail stores. The Company also
holds retail inventory that is sold in its own stores directly
to consumers. Wholesale and retail inventories are stated at the
lower of cost or estimated realizable value. Cost for wholesale
inventories is determined using the
first-in,
first-out (FIFO) method and cost for retail
inventories is determined on a moving-average cost basis.
The Company continually evaluates the composition of its
inventories, assessing slow-turning product and fashion product.
Estimated realizable value of distressed inventory is determined
based on an analysis of historical sales trends of the
Companys individual product lines for this category of
inventory, the impact of market trends and economic conditions,
and the value of current orders in-house relating to the future
sales of this category of inventory. Estimates may differ from
actual results due to quantity, quality and mix of products in
inventory, consumer and retailer preferences and market
conditions. The Companys historical estimates of these
costs and its provisions have not differed materially from
actual results.
Reserves for inventory shrinkage, representing the risk over
physical loss of inventory, are estimated based on historical
experience and are adjusted based upon physical inventory counts.
Purchase
Accounting
The Company accounts for its business acquisitions under the
purchase method of accounting. As such, the total cost of
acquisitions is allocated to the underlying net assets based on
their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. Determining the fair value of
assets acquired and liabilities assumed requires
managements judgment and often
59
involves the use of significant estimates and assumptions,
including assumptions with respect to future cash inflows and
outflows, discount rates, asset lives and market multiples,
among other items.
In addition, in connection with its recent business
acquisitions, the Company has settled certain pre-existing
relationships. These pre-existing relationships include
licensing agreements and litigation in the case of the
acquisition of the Polo Jeans Business. In accordance with the
Emerging Issues Task Force (EITF) Issue
No. 04-1,
Accounting for Pre-existing Relationships between the
Parties to a Business Combination, the Company is required
to allocate the aggregate consideration exchanged in these
transactions between the value of the business acquired and the
value of the settlement of any pre-existing relationships in
proportion to estimates of their respective fair values. If the
terms of the pre-existing relationships were determined to not
be reflective of market, a settlement gain or loss would be
recognized in earnings. Accordingly, significant judgment is
required to determine the respective fair values of the business
acquired and the value of the settlement of the pre-existing
relationship. The Company has historically utilized independent
valuation firms to assist in the determination of fair value.
Impairment
of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are accounted for in
accordance with the provisions of FAS No. 142,
Goodwill and Other Intangible Assets
(FAS 142). Under FAS 142, goodwill,
including any goodwill included in the carrying value of
investments accounted for using the equity method of accounting,
and certain other intangible assets deemed to have indefinite
useful lives, are not amortized. Rather, goodwill and such
indefinite-lived intangible assets are assessed for impairment
at least annually based on comparisons of their respective fair
values to their carrying values. Finite-lived intangible assets
are amortized over their respective estimated useful lives and,
along with other long-lived assets, are evaluated for impairment
periodically whenever events or changes in circumstances
indicate that their related carrying amounts may not be
recoverable in accordance with FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144).
In accordance with FAS 142, goodwill impairment is
determined using a two-step process. The first step of the
goodwill impairment test is to identify potential impairment by
comparing the fair value of a reporting unit with its net book
value (or carrying amount), including goodwill. If the fair
value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not to be impaired and
performance of the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the
implied fair value of the reporting units goodwill with
the carrying amount of that goodwill. If the carrying amount of
the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill
is determined in the same manner as the amount of goodwill
recognized in a business combination. That is, the fair value of
the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business
combination and the fair value was the purchase price paid to
acquire the reporting unit.
Determining the fair value of a reporting unit under the first
step of the goodwill impairment test and determining the fair
value of individual assets and liabilities of a reporting unit
(including unrecognized intangible assets) under the second step
of the goodwill impairment test is judgmental in nature and
often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the
fair value of other intangible assets. These estimates and
assumptions could have a significant impact on whether or not an
impairment charge is recognized and the magnitude of any such
charge. To assist management in the process of determining
goodwill impairment, the Company obtains appraisals from
independent valuation firms. Estimates of fair value are
primarily determined using discounted cash flows, market
comparisons and recent transactions. These approaches use
significant estimates and assumptions, including projected
future cash flows (including timing), discount rates reflecting
the risks inherent in future cash flows, perpetual growth rates
and determination of appropriate market comparables.
The impairment test for other indefinite-lived intangible assets
consists of a comparison of the fair value of the intangible
asset with its carrying value. If the carrying value of the
indefinite-lived intangible asset exceeds its fair value, an
impairment loss is recognized equal to the excess. In addition,
in evaluating finite-lived intangible assets for recoverability,
the Company uses its best estimate of future cash flows expected
to result from the use of the asset
60
and eventual disposition in accordance with FAS 144. To the
extent the estimated future, undiscounted cash inflows
attributable to the asset, less estimated future, undiscounted
cash outflows, are less than the carrying amount, an impairment
loss is recognized equal to the difference.
There have been no impairment losses recorded in connection with
the assessment of the recoverability of goodwill or other
intangible assets during any of the three fiscal years presented.
Impairment
of Other Long-Lived Assets
Property and equipment, along with other long-lived assets, are
evaluated for impairment periodically whenever events or changes
in circumstances indicate that their related carrying amounts
may not be recoverable in accordance with FAS 144. In
evaluating long-lived assets for recoverability, the Company
uses its best estimate of future cash flows expected to result
from the use of the asset and its eventual disposition. To the
extent that estimated future undiscounted net cash flows
attributable to the asset are less than the carrying amount, an
impairment loss is recognized equal to the difference between
the carrying value of such asset and its fair value. Assets to
be disposed of and for which there is a committed plan of
disposal are reported at the lower of carrying value or fair
value less costs to sell.
In determining future cash flows, the Company takes various
factors into account, including changes in merchandising
strategy, the emphasis on retail store cost controls, and the
impacts of more experienced retail store managers and increased
local advertising. Since the determination of future cash flows
is an estimate of future performance, there may be future
impairments in the event that future cash flows do not meet
expectations.
During Fiscal 2008, the Company recorded impairment charges of
$5.0 million to reduce the carrying value of certain
long-lived assets in its Retail segment to their estimated fair
value. No impairment charges were recorded in Fiscal 2007.
During Fiscal 2006, the Company recorded impairment charges of
$10.8 million to reduce the carrying value of certain
retail fixed assets to their estimated fair value.
Income
Taxes
Income taxes are provided using the asset and liability method
prescribed by FAS No. 109, Accounting for Income
Taxes (FAS 109). Under this method,
income taxes (i.e., deferred tax assets and liabilities, current
taxes payable/refunds receivable and tax expense) are recorded
based on amounts refundable or payable in the current year and
include the results of any difference between US GAAP and tax
reporting. Deferred income taxes reflect the tax effect of
certain net operating loss, capital loss and general business
credit carryforwards and the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as
determined under enacted tax laws and rates. The Company
accounts for the financial effect of changes in tax laws or
rates in the period of enactment.
In addition, valuation allowances are established when
management determines that it is more-likely-than-not that some
portion or all of a deferred tax asset will not be realized. Tax
valuation allowances are analyzed periodically and adjusted as
events occur, or circumstances change, that warrant adjustments
to those balances.
Effective April 1, 2007, the Company adopted FIN 48.
Upon the adoption of the provisions of FIN 48, the Company
changed its policy related to the accounting for income tax
uncertainties. If the Company considers that a tax position is
more-likely-than-not of being sustained upon audit,
based solely on the technical merits of the position, it
recognizes the tax benefit. The Company measures the tax benefit
by determining the largest amount that is greater than 50%
likely of being realized upon settlement, presuming that the tax
position is examined by the appropriate taxing authority that
has full knowledge of all relevant information. These
assessments can be complex and require significant judgment, and
the Company often obtains assistance from external advisors. To
the extent that the Companys estimates change or the final
tax outcome of these matters is different than the amounts
recorded, such differences will impact the income tax provision
in the period in which such determinations are made. If the
initial assessment fails to result in the recognition of a tax
benefit, the Company regularly monitors its position and
subsequently recognizes the tax benefit if (i) there are
changes in tax law or analogous case law that sufficiently raise
the likelihood of prevailing on the technical merits of the
position to more-likely-than-not, (ii) the statute of
limitations expires, or (iii) there is a completion of an
audit resulting in a settlement of that tax year with the
appropriate agency. Uncertain tax positions are classified as
current only when the Company expects to pay cash
61
within the next twelve months. Interest and penalties, if any,
are recorded within the provision for income taxes in the
Companys consolidated statements of operations and are
classified on the consolidated balance sheets with the related
liability for unrecognized tax benefits.
See Note 12 to the accompanying audited consolidated
financial statements for further discussion of the
Companys income taxes and the adoption of FIN 48.
Contingencies
The Company periodically is exposed to various contingencies in
the ordinary course of conducting its business, including
certain litigations, alleged information system security breach
matters, contractual disputes, employee relation matters,
various tax audits, and trademark and intellectual property
matters and disputes. In accordance with FAS No. 5,
Accounting for Contingencies
(FAS 5), the Company records a liability for
such contingencies to the extent that it concludes their
occurrence is probable and the related losses are estimable. In
addition, if it is reasonably possible that an unfavorable
settlement of a contingency could exceed the established
liability, the Company discloses the estimated impact on its
liquidity, financial condition and results of operations.
Management considers many factors in making these assessments.
As the ultimate resolution of contingencies is inherently
unpredictable, these assessments can involve a series of complex
judgments about future events including, but not limited to,
court rulings, negotiations between affected parties and
governmental actions. As a result, the accounting for loss
contingencies relies heavily on estimates and assumptions.
Stock-based
Compensation
Effective April 2, 2006, the Company adopted
FAS No. 123R, Share-Based Payment
(FAS 123R or the Statement), using
the modified prospective application transition method. Under
this transition method, the compensation expense recognized in
the consolidated statements of operations beginning
April 2, 2006 includes compensation expense for
(a) all stock-based payments granted prior to, but not yet
vested as of April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
FAS No. 123, Accounting for Stock-Based
Compensation, as amended by FAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure (FAS 123) and
(b) all stock-based payments granted subsequent to
April 1, 2006 based on the grant-date fair value estimated
in accordance with the provisions of FAS 123R.
Prior to April 2, 2006, the Company accounted for
stock-based compensation plans under the intrinsic value method
in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and adopted the
disclosure-only provisions of FAS 123. Accordingly, the
Company did not recognize compensation expense for the issuance
of stock options with an exercise price equal to or greater than
the market price at the date of grant. However, as required, the
Company disclosed, in the notes to the consolidated financial
statements, the pro forma expense impact of the stock option
grants as if the fair-value-based recognition provisions of
FAS 123 were applied. Compensation expense was previously
recognized for restricted stock and restricted stock units. The
effect of forfeitures on restricted stock and restricted stock
units was recognized when such forfeitures occurred.
Stock
Options
Stock options are granted to employees and non-employee
directors with exercise prices equal to fair market value at the
date of grant. The Company uses the Black-Scholes option-pricing
model to estimate the fair value of stock options granted, which
requires the input of subjective assumptions. Certain key
assumptions involve estimating future uncertain events. The key
factors influencing the estimation process include the expected
term of the option, the expected stock price volatility factor,
the expected dividend yield and risk-free interest rate, among
others. Generally, once stock option values are determined,
current accounting practices do not permit them to be changed,
even if the estimates used are different from the actuals.
Determining the fair value of stock-based compensation at the
date of grant requires significant judgment by management,
including estimates of the above Black-Scholes assumptions. In
addition, judgment is required in estimating the number of
stock-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, if management
changes its assumptions for future stock-based award grants, or
if there are
62
changes in market conditions, stock-based compensation expense
and the Companys results of operations could be materially
impacted.
Restricted
Stock and Restricted Stock Units (RSUs)
The Company grants restricted shares of Class A common
stock and service-based RSUs to certain of its senior executives
and non-employee directors. In addition, the Company grants
performance-based RSUs to such senior executives and other key
executives, and certain other employees of the Company. The fair
values of restricted stock shares and RSUs are based on the fair
value of unrestricted Class A common stock, as adjusted to
reflect the absence of dividends for those restricted securities
that are not entitled to dividend equivalents. Compensation
expense for performance-based RSUs is recognized over the
related service period when attainment of the performance goals
is deemed probable, which involves judgment on the part of
management.
RECENT
ACCOUNTING STANDARDS
Refer to Note 4 to the accompanying audited consolidated
financial statements for a discussion of certain accounting
standards the Company is not yet required to adopt which may
impact its results of operations
and/or
financial condition in future reporting periods.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
For a discussion of the Companys exposure to market risk,
see Market Risk Management in Item 7 included
elsewhere in this Annual Report on
Form 10-K.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See the Index to Consolidated Financial Statements
appearing at the end of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other
procedures of an issuer that are designed to provide reasonable
assurance that information required to be disclosed by the
issuer in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the
Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that material
information required to be disclosed by an issuer in the reports
that it files or submits under the Securities Exchange Act of
1934 is accumulated and communicated to the issuers
management, including its principal executive and principal
financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
We have evaluated, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934, as of the end of the fiscal
year covered by this annual report. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and
procedures were effective, as of the fiscal year end covered by
this Annual Report on
Form 10-K,
in timely making known to them material information relating to
the Company and the Companys consolidated subsidiaries
required to be disclosed in the Companys reports filed or
submitted under the Exchange Act.
63
(b) Managements Report of Internal Control Over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Securities Exchange Act
Rule 13a-15(f).
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and preparation of financial statements for external
purposes in accordance with U.S. Generally Accepted
Accounting Principles. Internal control over financial reporting
includes maintaining records that in reasonable detail
accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of our financial statements; providing
reasonable assurance that receipts and expenditures of the
Companys assets are made in accordance with management
authorization; and providing reasonable assurance that
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on our
financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control
over financial reporting is not intended to provide absolute
assurance that a misstatement of our financial statements would
be prevented or detected. Further, the evaluation of the
effectiveness of internal control over financial reporting was
made as of a specific date, and continued effectiveness in
future periods is subject to the risks that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies and procedures may decline.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of the end of the fiscal year covered by this report based on
the framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on this
evaluation, management concluded that the Companys
internal controls over financial reporting were effective as of
the fiscal year end covered by this Annual Report on
Form 10-K.
During the first quarter of Fiscal 2008, the Company acquired
control of certain of its Japanese businesses that were formerly
conducted under pre-existing licensed arrangements. In
particular, the Company acquired approximately 77% of the
outstanding shares of Impact 21 that it did not previously own
in a cash tender offer (as further defined and discussed in
Note 5 to the accompanying audited consolidated financial
statements). The Company is in the process of evaluating Impact
21s internal controls. However, as permitted by related
SEC Staff interpretive guidance for newly acquired businesses,
the Company excluded Impact 21 from managements annual
assessment of the effectiveness of the Companys internal
control over financial reporting as of March 29, 2008. In
the aggregate, Impact 21 represented 14.2% of the total
consolidated assets (including purchase accounting allocations),
5.2% of total consolidated revenues and 4.6% of total
consolidated operating income of the Company as of and for the
fiscal year ended March 29, 2008.
(c) Changes in Internal Controls Over Financial
Reporting
Except as discussed below, there has been no change in the
Companys internal control over financial reporting during
the fourth quarter of Fiscal 2008, that has materially affected,
or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
The Company is in the process of evaluating the internal control
structure of Impact 21 and determining how best to integrate and
improve the various processes, systems, resources and controls
supporting that business. In the interim, the Company has
designed and implemented various transitional controls over
financial reporting to supplement the existing internal controls
at Impact 21.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information relating to our directors and corporate governance
will be set forth in the Companys proxy statement for its
2008 annual meeting of stockholders to be filed within
120 days after March 29, 2008 (the Proxy
64
Statement) and is incorporated by reference herein.
Information relating to our executive officers is set forth in
Item I of this Annual Report on
Form 10-K
under the caption Executive Officers.
The Company has a Code of Ethics for Principal Executive
Officers and Senior Financial Officers that applies to our
principal executive officer, our principal operating officer,
our principal financial officer, our controller, and our
principal accounting officer. You can find our Code of Ethics
for Principal Executive Officers and Senior Financial Officers
on our internet site, http://investor.ralphlauren.com. We will
post any amendments to the Code of Ethics for Principal
Executive Officers and Senior Financial Officers and any waivers
that are required to be disclosed by the rules of either the SEC
or the NYSE on our internet site.
|
|
Item 11.
|
Executive
Compensation
|
Information relating to executive and director compensation will
be set forth in the Proxy Statement and such information is
incorporated by reference herein.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Equity
Compensation Plan Information as of March 29,
2008
The following table sets forth information as of March 29,
2008 regarding compensation plans under which the Companys
equity securities are authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
Numbers of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued upon
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Exercise of
|
|
|
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
Plans (Excluding
|
|
|
|
Options, Warrants
|
|
|
Exercise Price of
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
Outstanding Options ($)
|
|
|
Column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
8,036,728(1
|
)
|
|
$
|
39.93(2
|
)
|
|
|
5,040,839(3
|
)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,036,728
|
|
|
$
|
39.93
|
|
|
|
5,040,839
|
|
|
|
|
(1) |
|
Consists of 6,010,622 options to purchase shares of our
Class A common stock and 2,026,106 restricted stock units
that are payable solely in shares of Class A common stock.
Does not include 33,738 outstanding restricted shares that are
subject to forfeiture. |
|
(2) |
|
Represents the weighted average exercise price of the
outstanding stock options. No exercise price is payable with
respect to the outstanding restricted stock units. |
|
(3) |
|
All of the securities remaining available for future issuance
set forth in column (c) may be in the form of options,
stock appreciation rights, restricted stock, restricted stock
units, performance awards or other stock-based awards under the
Companys Amended and Restated 1997 Long-Term Stock
Incentive Plan. An additional 33,738 outstanding shares of
restricted stock granted under the Companys Amended and
Restated 1997 Long-Term Stock Incentive Plan that remain subject
to forfeiture are not reflected in column (c). |
Other information relating to security ownership of certain
beneficial owners and management will be set forth in the Proxy
Statement and such information is incorporated by reference
herein.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required to be included by Item 13 of
Form 10-K
will be included in the Proxy Statement and such information is
incorporated by reference herein.
65
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required to be included by Item 14 of
Form 10-K
will be included in the Proxy Statement and such information is
incorporated by reference herein.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
(a) 1.,
|
2. Financial Statements and Schedules. See index on
Page F-1.
|
3. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Companys Registration
Statement on
Form S-1
(File
No. 333-24733)
(the
S-1))*
|
|
3
|
.2
|
|
Second Amended and Restated By-laws of the Company (filed as
Exhibit 10.2 to the
Form 10-Q
for the quarterly period ended September 29, 2007)*
|
|
10
|
.1
|
|
Registration Rights Agreement dated as of June 9, 1997 by
and among Ralph Lauren, GS Capital Partners, L.P., GS Capital
Partner PRL Holding I, L.P., GS Capital Partners PRL
Holding II, L.P., Stone Street Fund 1994, L.P., Stone
Street 1994 Subsidiary Corp., Bridge Street Fund 1994,
L.P., and Polo Ralph Lauren Corporation (filed as
Exhibit 10.3 to the
S-1)*
|
|
10
|
.2
|
|
U.S.A. Design and Consulting Agreement, dated January 1,
1985, between Ralph Lauren, individually and d/b/a Ralph Lauren
Design Studio, and Cosmair, Inc., and letter Agreement related
thereto dated January 1, 1985** (filed as Exhibit 10.4
to the S-1)*
|
|
10
|
.3
|
|
Restated U.S.A. License Agreement, dated January 1, 1985,
between Ricky Lauren and Mark N. Kaplan, as Licensor, and
Cosmair, Inc., as Licensee, and letter Agreement related thereto
dated January 1, 1985** (filed as Exhibit 10.5 to the
S-1)*
|
|
10
|
.4
|
|
Foreign Design and Consulting Agreement, dated January 1,
1985, between Ralph Lauren, individually and d/b/a Ralph Lauren
Design Studio, as Licensor, and LOreal S.A., as Licensee,
and letter Agreements related thereto dated January 1,
1985, September 16, 1994 and October 25, 1994** (filed
as Exhibit 10.6 to the
S-1)*
|
|
10
|
.5
|
|
Restated Foreign License Agreement, dated January 1, 1985,
between The Polo/Lauren Company, as Licensor, and LOreal
S.A., as Licensee, Letter Agreement related thereto dated
January 1, 1985, and Supplementary Agreement thereto, dated
October 1, 1991** (filed as Exhibit 10.7 to the
S-1)*
|
|
10
|
.6
|
|
Amendment, dated November 27, 1992, to Foreign Design and
Consulting Agreement and Restated Foreign License Agreement**
(filed as Exhibit 10.8 to the
S-1)*
|
|
10
|
.7
|
|
Agency Agreement dated October 5, 2006, between Polo Ralph
Lauren Corporation and Deutsche Bank AG, London Branch and
Deutsche Bank Luxemburg S.A., as fiscal and principal paying
agent (filed as Exhibit 10.2 to the
Form 10-Q
for the quarterly period ended December 30, 2006)*
|
|
10
|
.8
|
|
Form of Indemnification Agreement between Polo Ralph Lauren
Corporation and its Directors and Executive Officers (filed as
Exhibit 10.26 to the
S-1)*
|
|
10
|
.9
|
|
Amended and Restated Employment Agreement, effective as of
July 23, 2002, between Polo Ralph Lauren Corporation and
Roger N. Farah (filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended June 29, 2002)*
|
|
10
|
.10
|
|
Amended and Restated Employment Agreement, dated as of
June 17, 2003, between Polo Ralph Lauren Corporation and
Ralph Lauren (filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended June 28, 2003)*
|
|
10
|
.11
|
|
Non-Qualified Stock Option Agreement, dated as of June 8,
2004, between Polo Ralph Lauren Corporation and Ralph Lauren
(filed as Exhibit 10.14 to the Companys Annual Report
on
Form 10-K
for the fiscal year ended April 2, 2005 (the Fiscal
2006
10-K))*
|
|
10
|
.12
|
|
Restricted Stock Unit Award Agreement, dated as of June 8,
2004, between Polo Ralph Lauren Corporation and Ralph Lauren
(filed as Exhibit 10.15 to the Fiscal 2006
10-K)*
|
|
10
|
.13
|
|
Polo Ralph Lauren Corporation Executive Officer Annual Incentive
Plan, as amended as of August 9, 2007 (filed as
Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended December 29, 2007)*
|
66
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.14
|
|
Amendment No. 1, dated July 1, 2004, to the Amended
and Restated Employment Agreement between Polo Ralph Lauren
Corporation and Roger N. Farah (filed as Exhibit 10.1 to
the
Form 10-Q
for the quarterly period ended October 2, 2004)*
|
|
10
|
.15
|
|
Amendment No. 2, dated September 5, 2007, to the
Amended and Restated Employment Agreement between Polo Ralph
Lauren Corporation and Roger N. Farah (filed as
Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended September 29, 2007)*
|
|
10
|
.16
|
|
Restricted Stock Unit Award Agreement, dated as of July 1,
2004, between Polo Ralph Lauren Corporation and Roger N. Farah
(filed as Exhibit 10.18 to the Fiscal 2006
10-K)*
|
|
10
|
.17
|
|
Restricted Stock Award Agreement, dated as of July 23,
2002, between Polo Ralph Lauren Corporation and Roger N. Farah
(filed as Exhibit 10.19 to the Fiscal 2006
10-K)*
|
|
10
|
.18
|
|
Non-Qualified Stock Option Agreement, dated as of July 23,
2002, between Polo Ralph Lauren Corporation and Roger N. Farah
(filed as Exhibit 10.20 to the Fiscal 2006
10-K)*
|
|
10
|
.19
|
|
Deferred Compensation Agreement, dated as of September 19,
2002, between Polo Ralph Lauren Corporation and Roger N. Farah
(filed as Exhibit 10.21 to the Fiscal 2006
10-K)*
|
|
10
|
.20
|
|
Asset Purchase Agreement by and among Polo Ralph Lauren
Corporation, RL Childrenswear Company, LLC and The Seller
Affiliate Group (as defined therein) dated March 25, 2004
(filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended July 3, 2004)*
|
|
10
|
.21
|
|
Amendment No. 1, dated as of July 2, 2004, to Asset
Purchase Agreement by and among Polo Ralph Lauren Corporation,
RL Childrenswear Company, LLC and The Seller Affiliate Group (as
defined therein) (filed as Exhibit 10.2 to the
Form 10-Q
for the quarterly period ended July 3, 2004)*
|
|
10
|
.22
|
|
Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive
Plan, as Amended and Restated as of August 12, 2004 (filed
as Exhibit 99.1 to the
Form 8-K
dated August 12, 2004)*
|
|
10
|
.23
|
|
Amendment, dated as of June 30, 2006, to the Polo Ralph
Lauren Corporation 1997 Long-Term Stock Incentive Plan, as
Amended and Restated as of August 12, 2004 (filed as
Exhibit 10.4 to the
Form 10-Q
for the quarterly period ended July 1, 2006)*
|
|
10
|
.24
|
|
Cliff Restricted Performance Share Unit Award Overview
containing the standard terms of restricted performance share
awards under the Stock Incentive Plan (filed as
Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended July 1, 2006)*
|
|
10
|
.25
|
|
Pro-Rata Restricted Performance Share Unit Award Overview
containing the standard terms of restriction performance share
awards under the Stock Incentive Plan (filed as
Exhibit 10.3 to the
Form 10-Q
for the quarterly period ended July 1, 2006)*
|
|
10
|
.26
|
|
Stock Option Award Overview U.S. containing the
standard terms of stock option award under the Stock Incentive
Plan (filed as Exhibit 10.2 to the
Form 10-Q
for the quarterly period ended July 1, 2006)*
|
|
10
|
.27
|
|
Definitive Agreement, dated April 13, 2007, among Polo
Ralph Lauren Corporation, PRL Japan Kabushiki Kaisha, Onward
Kashiyama Co., Ltd and Impact 21 Co., Ltd.
|
|
10
|
.28
|
|
Amended and Restated Credit Agreement as of May 22, 2007 to
the Credit Agreement, dated as of November 28, 2006, among
Polo Ralph Lauren Corporation, Polo JP Acqui B.V., the lenders
party thereto, and JPMorgan Chase Bank, N.A., as administrative
agent (filed as Exhibit 10.1 to the Companys
Form 10-Q
for the quarterly period ended June 30, 2007)*
|
|
10
|
.29
|
|
Amendment and Restatement Agreement, dated as of May 22,
2007, among Polo Ralph Lauren Corporation, Polo JP Acqui B.V.,
the lenders party thereto, The Bank of New York, Citibank, N.A.,
Bank of America, N.A. and Wachovia Bank National Association, as
syndication agents, Sumitomo Mitsui Banking Corporation and
Deutsche Bank Securities, s co-agents and JPMorgan Chase Bank,
N.A., as administrative agent under the Credit Agreement dated
as of November 28, 2006 among Polo Ralph Lauren
Corporation, the lenders from time to time party thereto and the
agents party thereto (filed as Exhibit 10.2 to the
Companys
Form 10-Q
for the quarterly period ended June 30, 2007)*
|
|
10
|
.30
|
|
Employment Agreement, dated as of September 4, 2004,
between Polo Ralph Lauren Corporation and Jackwyn Nemerov (filed
as Exhibit 10.3 to the
Form 10-Q
for the quarterly period ended October 2, 2004)*
|
|
10
|
.31
|
|
Employment Agreement, dated as of March 26, 2007, between
Polo Ralph Lauren Corporation and Tracey T. Travis (filed as
Exhibit 10.28 to the Fiscal 2007 10-K)*
|
|
10
|
.32
|
|
Employment Agreement, dated as of April 30, 2007, between
Polo Ralph Lauren Corporation and Mitchell A. Kosh (filed as
Exhibit 10.3 to the Companys
Form 10-Q
for the quarterly period ended June 30, 2007)*
|
67
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.33
|
|
Cross Default and Term Extension Agreement, dated May 11,
1998, among PRL USA, Inc., The Polo/Lauren Company, L.P., Polo
Ralph Lauren Corporation, Jones Apparel Group, Inc. and Jones
Investment Co., Inc. (filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended December 28, 2002)*
|
|
10
|
.34
|
|
Amended and Restated Polo Ralph Lauren Supplemental Executive
Retirement Plan (filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarterly period ended December 31, 2005)*
|
|
14
|
.1
|
|
Code of Ethics for Principal Executive Officers and Senior
Financial Officers (filed as Exhibit 14.1 to the Fiscal
2003
Form 10-K)*
|
|
21
|
.1
|
|
List of Significant Subsidiaries of the Company
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
31
|
.1
|
|
Certification of Ralph Lauren required by 17 CFR
240.13a-14(a)
|
|
31
|
.2
|
|
Certification of Tracey T. Travis required by 17 CFR
240.13a-14(a)
|
|
32
|
.1
|
|
Certification of Ralph Lauren Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of Tracey T. Travis Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
Exhibits 32.1 and 32.2 shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the
liability of that Section. Such exhibits shall not be deemed
incorporated by reference into any filing under the Securities
Act of 1933 or Securities Exchange Act of 1934.
|
|
|
* |
|
Incorporated herein by reference. |
|
|
|
Management contract or compensatory plan or arrangement. |
|
** |
|
Portions of
Exhibits 10.3-10.9
have been omitted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission. |
68
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d)
Securities Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized, on May 28, 2008.
POLO RALPH LAUREN CORPORATION
Tracey T. Travis
Senior Vice President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ RALPH
LAUREN
Ralph
Lauren
|
|
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
|
|
May 28, 2008
|
|
|
|
|
|
/s/ ROGER
N. FARAH
Roger
N. Farah
|
|
President, Chief Operating Officer
and Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ JACKWYN
L. NEMEROV
Jackwyn
L. Nemerov
|
|
Executive Vice President and Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ TRACEY
T. TRAVIS
Tracey
T. Travis
|
|
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
|
|
May 28, 2008
|
|
|
|
|
|
/s/ ARNOLD
H. ARONSON
Arnold
H. Aronson
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ JOHN
R. ALCHIN
John
R. Alchin
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ FRANK
A. BENNACK, JR.
Frank
A. Bennack, Jr.
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ DR. JOYCE
F. BROWN
Dr. Joyce
F. Brown
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ JOEL
L. FLEISHMAN
Joel
L. Fleishman
|
|
Director
|
|
May 28, 2008
|
69
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ JUDITH
A. MCHALE
Judith
A. McHale
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ STEVEN
P. MURPHY
Steven
P. Murphy
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ TERRY
S. SEMEL
Terry
S. Semel
|
|
Director
|
|
May 28, 2008
|
|
|
|
|
|
/s/ ROBERT
C. WRIGHT
Robert
C. Wright
|
|
Director
|
|
May 28, 2008
|
70
POLO
RALPH LAUREN CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
INFORMATION
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
F-1
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
551.5
|
|
|
$
|
563.9
|
|
Short-term investments
|
|
|
74.3
|
|
|
|
|
|
Accounts receivable, net of allowances of $172.0 and
$138.1 million
|
|
|
508.4
|
|
|
|
467.5
|
|
Inventories
|
|
|
514.9
|
|
|
|
526.9
|
|
Deferred tax assets
|
|
|
76.6
|
|
|
|
44.4
|
|
Prepaid expenses and other
|
|
|
167.8
|
|
|
|
83.2
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,893.5
|
|
|
|
1,685.9
|
|
Property and equipment, net
|
|
|
709.9
|
|
|
|
629.8
|
|
Deferred tax assets
|
|
|
116.9
|
|
|
|
56.9
|
|
Goodwill
|
|
|
975.1
|
|
|
|
790.5
|
|
Intangible assets, net
|
|
|
349.3
|
|
|
|
297.7
|
|
Other assets
|
|
|
320.8
|
|
|
|
297.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,365.5
|
|
|
$
|
3,758.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
205.7
|
|
|
$
|
174.7
|
|
Income tax payable
|
|
|
28.8
|
|
|
|
74.6
|
|
Accrued expenses and other
|
|
|
467.7
|
|
|
|
391.0
|
|
Current maturities of debt
|
|
|
206.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
908.6
|
|
|
|
640.3
|
|
Long-term debt
|
|
|
472.8
|
|
|
|
398.8
|
|
Non-current liability for unrecognized tax benefits
|
|
|
155.2
|
|
|
|
|
|
Other non-current liabilities
|
|
|
439.2
|
|
|
|
384.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,975.8
|
|
|
|
1,423.1
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A common stock, par value $.01 per share;
70.5 million and 68.6 million shares issued;
56.2 million and 60.7 million shares outstanding
|
|
|
0.7
|
|
|
|
0.7
|
|
Class B common stock, par value $.01 per share;
43.3 million shares issued and outstanding
|
|
|
0.4
|
|
|
|
0.4
|
|
Additional
paid-in-capital
|
|
|
1,017.6
|
|
|
|
872.5
|
|
Retained earnings
|
|
|
2,079.3
|
|
|
|
1,742.3
|
|
Treasury stock, Class A, at cost (14.3 million and
7.9 million shares)
|
|
|
(820.9
|
)
|
|
|
(321.5
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
112.6
|
|
|
|
40.5
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,389.7
|
|
|
|
2,334.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,365.5
|
|
|
$
|
3,758.0
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-2
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions, except per share data)
|
|
|
Net sales
|
|
$
|
4,670.7
|
|
|
$
|
4,059.1
|
|
|
$
|
3,501.1
|
|
Licensing revenue
|
|
|
209.4
|
|
|
|
236.3
|
|
|
|
245.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
4,880.1
|
|
|
|
4,295.4
|
|
|
|
3,746.3
|
|
Cost of goods
sold(a)
|
|
|
(2,242.0
|
)
|
|
|
(1,959.2
|
)
|
|
|
(1,723.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,638.1
|
|
|
|
2,336.2
|
|
|
|
2,022.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(a)
|
|
|
(1,932.5
|
)
|
|
|
(1,663.4
|
)
|
|
|
(1,476.9
|
)
|
Amortization of intangible assets
|
|
|
(47.2
|
)
|
|
|
(15.6
|
)
|
|
|
(9.1
|
)
|
Impairments of retail assets
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
(10.8
|
)
|
Restructuring charges
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other costs and expenses
|
|
|
(1,984.7
|
)
|
|
|
(1,683.6
|
)
|
|
|
(1,505.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
653.4
|
|
|
|
652.6
|
|
|
|
516.6
|
|
Foreign currency gains (losses)
|
|
|
(6.4
|
)
|
|
|
(1.5
|
)
|
|
|
(5.7
|
)
|
Interest expense
|
|
|
(25.7
|
)
|
|
|
(21.6
|
)
|
|
|
(12.5
|
)
|
Interest and other income, net
|
|
|
24.7
|
|
|
|
26.1
|
|
|
|
13.7
|
|
Equity in income (loss) of equity-method investees
|
|
|
(1.8
|
)
|
|
|
3.0
|
|
|
|
4.3
|
|
Minority interest expense
|
|
|
(2.1
|
)
|
|
|
(15.3
|
)
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
642.1
|
|
|
|
643.3
|
|
|
|
502.9
|
|
Provision for income taxes
|
|
|
(222.3
|
)
|
|
|
(242.4
|
)
|
|
|
(194.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
419.8
|
|
|
$
|
400.9
|
|
|
$
|
308.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.10
|
|
|
$
|
3.84
|
|
|
$
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.99
|
|
|
$
|
3.73
|
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102.3
|
|
|
|
104.4
|
|
|
|
104.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
105.2
|
|
|
|
107.6
|
|
|
|
107.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Includes total depreciation expense of:
|
|
$
|
(154.1
|
)
|
|
$
|
(129.1
|
)
|
|
$
|
(117.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
419.8
|
|
|
$
|
400.9
|
|
|
$
|
308.0
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
201.3
|
|
|
|
144.7
|
|
|
|
127.0
|
|
Deferred income tax expense (benefit)
|
|
|
(7.7
|
)
|
|
|
(112.4
|
)
|
|
|
35.6
|
|
Minority interest expense
|
|
|
2.1
|
|
|
|
15.3
|
|
|
|
13.5
|
|
Equity in (income) loss of equity-method investees, net of
dividends received
|
|
|
1.8
|
|
|
|
(1.0
|
)
|
|
|
(4.3
|
)
|
Non-cash stock compensation expense
|
|
|
70.7
|
|
|
|
43.6
|
|
|
|
26.6
|
|
Non-cash impairments of retail assets
|
|
|
5.0
|
|
|
|
|
|
|
|
10.8
|
|
Non-cash provision for bad debt expense
|
|
|
2.6
|
|
|
|
1.9
|
|
|
|
1.2
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
3.3
|
|
|
|
5.7
|
|
Non-cash foreign currency losses (gains)
|
|
|
(1.3
|
)
|
|
|
6.2
|
|
|
|
5.3
|
|
Non-cash restructuring charges
|
|
|
|
|
|
|
1.1
|
|
|
|
4.5
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
10.0
|
|
|
|
26.4
|
|
|
|
(19.2
|
)
|
Inventories
|
|
|
81.8
|
|
|
|
(32.2
|
)
|
|
|
3.8
|
|
Accounts payable and accrued liabilities
|
|
|
(14.9
|
)
|
|
|
41.7
|
|
|
|
39.1
|
|
Deferred income liabilities, primarily proceeds received from
Luxottica in Fiscal 2007 (Note 22)
|
|
|
(2.7
|
)
|
|
|
202.6
|
|
|
|
5.1
|
|
Settlement of Jones-related Litigation
|
|
|
|
|
|
|
|
|
|
|
(100.0
|
)
|
Other balance sheet changes
|
|
|
(73.1
|
)
|
|
|
54.0
|
|
|
|
(13.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
695.4
|
|
|
|
796.1
|
|
|
|
449.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and ventures, net of cash acquired and purchase
price settlements
|
|
|
(188.7
|
)
|
|
|
(176.1
|
)
|
|
|
(380.6
|
)
|
Purchases of investments
|
|
|
(96.8
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of investments
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(217.1
|
)
|
|
|
(184.0
|
)
|
|
|
(158.6
|
)
|
Cash deposits restricted in connection with taxes (Note 3)
|
|
|
(15.1
|
)
|
|
|
(74.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(505.0
|
)
|
|
|
(434.6
|
)
|
|
|
(539.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
168.9
|
|
|
|
380.0
|
|
|
|
|
|
Repayment of debt
|
|
|
|
|
|
|
(291.6
|
)
|
|
|
|
|
Debt issuance costs
|
|
|
(0.3
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
Payments of capital lease obligations
|
|
|
(7.7
|
)
|
|
|
(5.0
|
)
|
|
|
(2.2
|
)
|
Payments of dividends
|
|
|
(20.5
|
)
|
|
|
(20.9
|
)
|
|
|
(20.8
|
)
|
Distributions to minority interest holders
|
|
|
|
|
|
|
(4.5
|
)
|
|
|
|
|
Repurchases of common stock, including shares surrendered for
tax withholdings
|
|
|
(475.4
|
)
|
|
|
(231.3
|
)
|
|
|
(3.8
|
)
|
Proceeds from exercise of stock options
|
|
|
40.1
|
|
|
|
51.4
|
|
|
|
55.2
|
|
Termination of interest rate swap agreements
|
|
|
|
|
|
|
(4.4
|
)
|
|
|
5.1
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
34.4
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(260.5
|
)
|
|
|
(95.2
|
)
|
|
|
33.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
57.7
|
|
|
|
11.9
|
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(12.4
|
)
|
|
|
278.2
|
|
|
|
(64.8
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
563.9
|
|
|
|
285.7
|
|
|
|
350.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
551.5
|
|
|
$
|
563.9
|
|
|
$
|
285.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
at cost
|
|
|
Comprehensive
|
|
|
Unearned
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Compensation
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Balance at April 2, 2005
|
|
|
107.3
|
|
|
$
|
1.1
|
|
|
$
|
664.3
|
|
|
$
|
1,090.3
|
|
|
|
4.2
|
|
|
$
|
(80.0
|
)
|
|
$
|
29.9
|
|
|
$
|
(29.9
|
)
|
|
$
|
1,675.7
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains on derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293.6
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.6
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(3.8
|
)
|
Shares issued and equity grants made pursuant to stock
compensation
plans(a)
|
|
|
2.4
|
|
|
|
|
|
|
|
119.3
|
|
|
|
|
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(12.8
|
)
|
|
|
103.2
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2006
|
|
|
109.7
|
|
|
$
|
1.1
|
|
|
$
|
783.6
|
|
|
$
|
1,379.2
|
|
|
|
4.3
|
|
|
$
|
(87.1
|
)
|
|
$
|
15.5
|
|
|
$
|
(42.7
|
)
|
|
$
|
2,049.6
|
|
Cumulative effect of adopting
SAB 108(b)
(Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
Cumulative effect of adopting FAS 123R (Note 18)
|
|
|
|
|
|
|
|
|
|
|
(42.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.7
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.3
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses on derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29.3
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425.9
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.9
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
|
|
(231.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(231.3
|
)
|
Shares issued and equity grants made pursuant to stock
compensation
plans(a)
|
|
|
2.2
|
|
|
|
|
|
|
|
131.6
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
128.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
111.9
|
|
|
$
|
1.1
|
|
|
$
|
872.5
|
|
|
$
|
1,742.3
|
|
|
|
7.9
|
|
|
$
|
(321.5
|
)
|
|
$
|
40.5
|
|
|
$
|
|
|
|
$
|
2,334.9
|
|
Cumulative effect of adopting FIN 48 (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62.5
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
419.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135.8
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses on derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63.3
|
)
|
|
|
|
|
|
|
|
|
Net unrealized losses on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Net unrealized losses on defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491.9
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.3
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
|
|
(499.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(499.4
|
)
|
Shares issued and equity grants made pursuant to stock
compensation
plans(a)
|
|
|
1.9
|
|
|
|
|
|
|
$
|
145.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2008
|
|
|
113.8
|
|
|
$
|
1.1
|
|
|
$
|
1,017.6
|
|
|
$
|
2,079.3
|
|
|
|
14.3
|
|
|
$
|
(820.9
|
)
|
|
$
|
112.6
|
|
|
$
|
|
|
|
$
|
2,389.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes income tax benefits
relating to the exercise of employee stock options of
approximately $34 million in Fiscal 2008, $33 million
in Fiscal 2007 and $22 million in Fiscal 2006.
|
|
(b) |
|
Net of $3.6 million tax effect.
|
See accompanying notes.
F-5
POLO
RALPH LAUREN CORPORATION
|
|
1.
|
Description
of Business
|
Polo Ralph Lauren Corporation (PRLC) is a global
leader in the design, marketing and distribution of premium
lifestyle products, including mens, womens and
childrens apparel, accessories, fragrances and home
furnishings. PRLCs long-standing reputation and
distinctive image have been consistently developed across an
expanding number of products, brands and international markets.
PRLCs brand names include Polo by Ralph Lauren, Ralph
Lauren Purple Label, Ralph Lauren Collection, Black Label, Blue
Label, Lauren by Ralph Lauren, RRL, RLX, Rugby, Ralph Lauren
Childrenswear, Chaps, Club Monaco and American
Living, among others. PRLC and its subsidiaries are
collectively referred to herein as the Company,
we, us, our and
ourselves, unless the context indicates otherwise.
The Company classifies its businesses into three segments:
Wholesale, Retail and Licensing. The Companys wholesale
sales are made principally to major department and specialty
stores located throughout the U.S., Europe and Asia. The Company
also sells directly to consumers through full-price and factory
retail stores located throughout the U.S., Canada, Europe, South
America and Asia, and through its retail internet site located
at www.RalphLauren.com (formerly known as Polo.com). In
addition, the Company often licenses the right to unrelated
third parties to use its various trademarks in connection with
the manufacture and sale of designated products, such as
apparel, eyewear and fragrances, in specified geographical areas
for specified periods.
Basis
of Consolidation
The consolidated financial statements present the financial
position, results of operations and cash flows of the Company
and all entities in which the Company has a controlling voting
interest. The consolidated financial statements also include the
accounts of any variable interest entities in which the Company
is considered to be the primary beneficiary and such entities
are required to be consolidated in accordance with accounting
principles generally accepted in the U.S. (US
GAAP).
Prior to the Companys acquisition of the minority
ownership interest in Polo Ralph Lauren Japan Corporation
(PRL Japan) in May 2007, the Company consolidated
PRL Japan, formerly a 50%-owned venture with Onward Kashiyama
Co. Ltd and its affiliates (Onward Kashiyama) and
The Seibu Department Stores, Ltd (Seibu), pursuant
to the provisions of Financial Accounting Standards Board
(FASB) Interpretation (FIN)
No. 46R, Consolidation of Variable Interest
Entities (FIN 46R). PRL Japan holds the
master license to conduct the Companys business in Japan.
Additionally, prior to the acquisition of the minority ownership
interests in Ralph Lauren Media, LLC (RL Media) in
March 2007, the Company consolidated RL Media, formerly a
50%-owned venture with NBC-Lauren Media Holdings, Inc., a
subsidiary wholly owned by the National Broadcasting Company,
Inc. (NBC) and Value Vision Media, Inc. (Value
Vision), pursuant to FIN 46R. RL Media conducts the
Companys
e-commerce
initiatives through an internet site known as RalphLauren.com.
See Note 5 for further discussion of the acquisitions
referred to above, including their respective bases of
consolidation in the fiscal years presented.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Fiscal
Year
The Company utilizes a
52-53 week
fiscal year ending on the Saturday closest to March 31. As
such, fiscal year 2008 ended on March 29, 2008 and
reflected a 52-week period (Fiscal 2008); fiscal
year 2007 ended on March 31, 2007 and reflected a 52-week
period (Fiscal 2007); and fiscal year 2006 ended on
April 1, 2006 and also reflected a 52-week period
(Fiscal 2006).
The financial position and operating results of the
Companys consolidated PRL Japan and Impact 21 Co., Ltd.
(Impact 21) entities located in Japan are reported
on a one-month lag. The net effect of this reporting lag is not
F-6
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
material to the consolidated financial statements. Similarly,
prior to the fourth quarter of Fiscal 2006, the financial
position and operating results of RL Media were reported on a
three-month lag. During the fourth quarter of Fiscal 2006, RL
Media changed its fiscal year, which was formerly on a
calendar-year basis, to conform with the Companys
fiscal-year basis. In connection with this change, the
three-month reporting lag for RL Media was eliminated for the
fiscal years presented. The net effect from this change in RL
Medias fiscal year was not material to the consolidated
financial statements for Fiscal 2006 and was reflected in
retained earnings as a component of stockholders equity.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ materially from
those estimates.
Significant estimates inherent in the preparation of the
consolidated financial statements include reserves for customer
returns, discounts, end-of-season markdowns and operational
chargebacks; reserves for the realizability of inventory;
reserves for litigation and other contingencies; useful lives
and impairments of long-lived tangible and intangible assets;
accounting for income taxes and related uncertain tax positions;
the valuation of stock-based compensation and related expected
forfeiture rates; and accounting for business combinations.
Reclassifications
Certain reclassifications have been made to the prior
periods financial information in order to conform to the
current periods presentation, including a reclassification
of $175 million of assets related to the RL Media Minority
Interest Acquisition (as defined in Note 5) that were
pushed down from Corporate to the Retail segment in Fiscal 2008
that should have been reported as part of the Retail segment in
Fiscal 2007. See Note 20.
|
|
3.
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
Revenue is recognized across all segments of the business when
there is persuasive evidence of an arrangement, delivery has
occurred, price has been fixed or is determinable, and
collectibility is reasonably assured.
Revenue within the Companys Wholesale segment is
recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of
estimates of returns, discounts, end-of-season markdowns,
operational chargebacks and certain cooperative advertising
allowances. Returns and allowances require pre-approval from
management and discounts are based on trade terms. Estimates for
end-of-season markdown reserves are based on historical trends,
seasonal results, an evaluation of current economic and market
conditions and retailer performance. Estimates for operational
chargebacks are based on actual notifications of order
fulfillment discrepancies and historical trends. The Company
reviews and refines these estimates on a quarterly basis. The
Companys historical estimates of these costs have not
differed materially from actual results.
Retail store revenue is recognized net of estimated returns at
the time of sale to consumers.
E-commerce
revenue from sales of products ordered through the
Companys retail internet site known as RalphLauren.com is
recognized upon delivery and receipt of the shipment by its
customers. Such revenue also is reduced by an estimate of
returns.
Gift cards issued by the Company are recorded as a liability
until they are redeemed, at which point revenue is recognized.
The Company recognizes income for unredeemed gift cards when the
likelihood of a gift card being redeemed by a customer is remote
and the Company determines that it does not have a legal
obligation to remit the value of the unredeemed gift card to the
relevant jurisdiction as unclaimed or abandoned property.
F-7
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue from licensing arrangements is recognized when earned in
accordance with the terms of the underlying agreements,
generally based upon the higher of (a) contractually
guaranteed minimum royalty levels or (b) estimates of sales
and royalty data received from the Companys licensees.
The Company accounts for sales and other related taxes on a net
basis, excluding such taxes from revenue.
Cost
of Goods Sold and Selling Expenses
Cost of goods sold includes the expenses incurred to acquire and
produce inventory for sale, including product costs, freight-in,
and import costs, as well as changes in reserves for shrinkage
and inventory obsolescence. Gains and losses associated with
foreign currency exchange contracts related to the hedging of
inventory purchases also are recognized within cost of goods
sold when the inventory being hedged is sold. The costs of
selling merchandise, including preparing the merchandise for
sale, such as picking, packing, warehousing and order charges,
are included in selling, general and administrative
(SG&A) expenses.
Shipping
and Handling Costs
The costs associated with shipping goods to customers are
reflected as a component of SG&A expenses in the
consolidated statements of operations. Shipping and handling
costs incurred approximated $108 million in Fiscal 2008,
$92 million in Fiscal 2007 and $77 million in Fiscal
2006. Shipping and handling charges billed to customers are
included in revenue.
Advertising
Costs
In accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position
(SOP)
No. 93-7,
Reporting on Advertising Costs, advertising costs,
including the costs to produce advertising, are expensed when
the advertisement is first exhibited. In accordance with
Emerging Issues Task Force (EITF) Issue
No. 01-09,
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products,
costs of out-of-store advertising paid to wholesale customers
under cooperative advertising programs are expensed as an
advertising cost if both the identified advertising benefit is
sufficiently separable from the purchase of the Companys
products by customers and the fair value of such benefit is
measurable. Otherwise, such costs are reflected as a reduction
of revenue. Costs of in-store advertising paid to wholesale
customers under cooperative advertising programs are not
included in advertising costs, but are reflected as a reduction
of revenues since the benefits are not sufficiently separable
from the purchases of the Companys products by customers.
Advertising expense amounted to approximately $188 million
for Fiscal 2008, $181 million for Fiscal 2007 and
$166 million for Fiscal 2006. Deferred advertising costs,
which principally relate to advertisements that have not yet
been exhibited or services that have not yet been received, were
approximately $8 million and $3 million at the end of
Fiscal 2008 and Fiscal 2007, respectively.
Foreign
Currency Translation and Transactions
The financial position and operating results of foreign
operations are primarily consolidated using the local currency
as the functional currency. Local currency assets and
liabilities are translated at the rates of exchange on the
balance sheet date, and local currency revenue and expenses are
translated at average rates of exchange during the period.
Resulting translation gains or losses are included in the
consolidated statements of stockholders equity as a
component of accumulated other comprehensive income (loss).
Gains and losses on translation of intercompany loans with
foreign subsidiaries of a long-term investment nature also are
included within this component of stockholders equity.
The Company also recognizes gains and losses on transactions
that are denominated in a currency other than the respective
entitys functional currency. Foreign currency transaction
gains and losses also include amounts realized on the settlement
of intercompany loans with foreign subsidiaries that are either
of a short-term investment nature or were previously of a
long-term investment nature and deferred as a component of
stockholders equity.
F-8
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign currency transaction gains and losses are recognized in
earnings and separately disclosed in the consolidated statements
of operations.
Comprehensive
Income (Loss)
Comprehensive income (loss), which is reported in the
consolidated statements of stockholders equity, consists
of net income (loss) and other gains and losses affecting equity
that, under US GAAP, are excluded from net income (loss). The
components of other comprehensive income (loss) for the Company
primarily consist of foreign currency translation gains and
losses; unrealized gains and losses on available-for-sale
investments; unrealized gains and losses related to the
accounting for defined benefit plans; and deferred gains and
losses on hedging instruments, such as forward foreign currency
exchange contracts designated as cash flow hedges and changes in
the fair value of the Companys Euro-denominated debt
designated as a hedge of changes in the fair value of the
Companys net investment in certain of its European
subsidiaries.
Net
Income Per Common Share
Net income per common share is determined in accordance with
Statement of Financial Accounting Standards (FAS)
No. 128, Earnings per Share
(FAS 128). Under the provisions of
FAS 128, basic net income per common share is computed by
dividing the net income applicable to common shares after
preferred dividend requirements, if any, by the weighted-average
number of common shares outstanding during the period.
Weighted-average common shares include shares of the
Companys Class A and Class B common stock.
Diluted net income per common share adjusts basic net income per
common share for the effects of outstanding stock options,
restricted stock, restricted stock units and any other
potentially dilutive financial instruments, only in the periods
in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to
calculate basic net income per common share is reconciled to
those shares used in calculating diluted net income per common
share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Basic
|
|
|
102.3
|
|
|
|
104.4
|
|
|
|
104.2
|
|
Dilutive effect of stock options, restricted stock and
restricted stock units
|
|
|
2.9
|
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
105.2
|
|
|
|
107.6
|
|
|
|
107.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock at an exercise price
greater than the average market price of the common stock during
the reporting period are anti-dilutive and therefore not
included in the computation of diluted net income per common
share. In addition, the Company has outstanding
performance-based restricted stock units that are issuable only
upon the satisfaction of certain performance goals. Such units
only are included in the computation of diluted shares to the
extent the underlying performance conditions (a) are
satisfied prior to the end of the reporting period or
(b) would be satisfied if the end of the reporting period
were the end of the related contingency period and the result
would be dilutive. As of the end of Fiscal 2008, Fiscal 2007 and
Fiscal 2006, there was an aggregate of approximately
1.5 million, 1.0 million and 0.8 million,
respectively, of additional shares issuable upon the exercise of
anti-dilutive options
and/or the
contingent vesting of performance-based restricted stock units
that were excluded from the diluted share calculations.
Stock-based
Compensation
Effective April 2, 2006, the Company adopted
FAS No. 123R, Share-Based Payment
(FAS 123R or the Statement). The
Statement requires all share-based payments to employees and
non-employee directors to be
F-9
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expensed based on the grant date fair value of the awards over
the requisite service period. The Company applied the
requirements of FAS 123R using the modified prospective
application transition method and therefore prior periods were
not restated. Under the modified prospective method, the Company
records compensation expense for (1) the unvested portion
of previously issued awards that remained outstanding at the
initial date of adoption and (2) for any awards issued,
modified or settled after the effective date of the Statement.
The Company uses the Black-Scholes valuation method to determine
the grant date fair value of its stock option awards.
Prior to the adoption of FAS 123R, the Companys
stock-based compensation was recognized using the intrinsic
value method, which measures stock-based compensation expense as
the amount at which the market price of the stock at the date of
grant exceeds the exercise price. Accordingly, no compensation
expense was recognized for the Companys stock option
awards. Prior to the adoption of FAS 123R, the
Companys stock-based compensation expense consisted of
restricted stock and service-based restricted stock unit and
performance-based restricted stock unit awards, which were
accounted for in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25).
The effect of forfeitures on restricted stock and restricted
stock units was recognized when such forfeitures occurred.
See Note 18 for further discussion of the Companys
stock-based compensation and the adoption of FAS 123R.
Cash
and Cash Equivalents
Cash and cash equivalents include all highly liquid investments
with original maturities of three months or less, including
investments in debt securities. Investments in debt securities
are diversified among high-credit quality securities in
accordance with the Companys risk-management policies, and
primarily include commercial paper and money market funds.
Restricted
Cash
The Company has placed 69.5 million
($109.8 million) of cash in escrow with certain banks,
primarily in Fiscal 2007, as collateral to secure guarantees of
a corresponding amount made by the banks to certain
international tax authorities on behalf of the Company. Of the
69.5 million of cash in escrow,
39.7 million ($62.8 million) was placed as
collateral to secure guarantees made to the French tax
authorities for the payment of an asserted excess royalties tax
matter and 29.8 million ($47.0 million) was
placed as collateral to secure refunds of value-added tax
payments in certain international tax jurisdictions. Such cash
has been classified as restricted cash and reported as a
component of other non-current assets in the Companys
consolidated balance sheets.
Short-term
Investments
Short-term investments consist of investments which the Company
expects to convert into cash within one year, including time
deposits which have a maturity greater than three months.
Short-term investments are reported at cost, which approximates
market value. Cash inflows and outflows related to the sale and
purchase of short-term investments are classified as investing
activities within proceeds from sales and maturities of
investments and purchases of investments, respectively, in the
Companys consolidated statements of cash flows.
Accounts
Receivable
In the normal course of business, the Company extends credit to
customers that satisfy defined credit criteria. Accounts
receivable, net, as shown in the Companys consolidated
balance sheets, is net of certain reserves and allowances. These
reserves and allowances consist of (a) reserves for
returns, discounts, end-of-season markdowns and operational
chargebacks and (b) allowances for doubtful accounts. These
reserves and allowances are discussed in further detail below.
A reserve for sales returns is determined based on an evaluation
of current market conditions and historical returns experience.
Charges to increase the reserve are treated as reductions of
revenue.
F-10
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reserve for trade discounts is determined based on open
invoices where trade discounts have been extended to customers,
and charges to increase the reserve are treated as reductions of
revenue.
Estimated end-of-season markdown charges are included as
reductions of revenue. The related markdown provisions are based
on retail sales performance, seasonal negotiations with
customers, historical deduction trends and an evaluation of
current market conditions.
A reserve for operational chargebacks represents various
deductions by customers relating to individual shipments.
Charges to increase this reserve, net of expected recoveries,
are included as reductions of revenue. The reserve is based on
actual notifications of order fulfillment discrepancies and past
experience.
A rollforward of the activity in the Companys reserves for
returns, discounts, end-of-season markdowns and operational
chargebacks is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
129.4
|
|
|
$
|
107.5
|
|
|
$
|
100.0
|
|
Amount charged against revenue to increase reserve
|
|
|
496.7
|
|
|
|
388.4
|
|
|
|
302.6
|
|
Amount credited against customer accounts to decrease reserve
|
|
|
(473.4
|
)
|
|
|
(369.2
|
)
|
|
|
(294.1
|
)
|
Foreign currency translation
|
|
|
8.4
|
|
|
|
2.7
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
161.1
|
|
|
$
|
129.4
|
|
|
$
|
107.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An allowance for doubtful accounts is determined through
analysis of periodic aging of accounts receivable, assessments
of collectibility based on an evaluation of historic and
anticipated trends, the financial condition of the
Companys customers, and an evaluation of the impact of
economic conditions. A rollforward of the activity in the
Companys allowance for doubtful accounts is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
8.7
|
|
|
$
|
7.5
|
|
|
$
|
11.0
|
|
Amount charged to expense to increase reserve
|
|
|
2.6
|
|
|
|
1.9
|
|
|
|
1.2
|
|
Amount written off against customer accounts to decrease reserve
|
|
|
(1.6
|
)
|
|
|
(1.2
|
)
|
|
|
(4.3
|
)
|
Foreign currency translation
|
|
|
1.2
|
|
|
|
0.5
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
10.9
|
|
|
$
|
8.7
|
|
|
$
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
of Credit Risk
In its wholesale business, the Company has two key
department-store customers that generate significant sales
volume. For Fiscal 2008, these two customers contributed
approximately 24% and 12% of all wholesale revenues.
Inventories
The Company holds inventory that is sold through wholesale
distribution channels to major department stores and specialty
retail stores, including its own retail stores. The Company also
holds retail inventory that is sold in its own stores directly
to consumers. Wholesale and retail inventories are stated at the
lower of cost or estimated realizable value. Cost for wholesale
inventories is determined using the
first-in,
first-out (FIFO) method and cost for retail
inventories is determined on a moving-average cost basis.
F-11
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company continually evaluates the composition of its
inventories, assessing slow-turning product and all fashion
product. Estimated realizable value of distressed inventory is
determined based on an analysis of historical sales trends of
the Companys individual product lines for this category of
inventory, the impact of market trends and economic conditions,
and the value of current orders in-house relating to the future
sales of this category of inventory. Estimates may differ from
actual results due to quantity, quality and mix of products in
inventory, consumer and retailer preferences and market
conditions. The Companys historical estimates of these
costs and its provisions have not differed materially from
actual results.
Reserves for inventory shrinkage, representing the risk over
physical loss of inventory, are estimated based on historical
experience and are adjusted based upon physical inventory counts.
Investments
Investments in companies in which the Company has significant
influence, but less than a controlling voting interest, are
accounted for using the equity method. This is generally
presumed to exist when the Company owns between 20% and 50% of
the investee. However, as a matter of policy, if the Company had
a greater than 50% ownership interest in an investee and the
minority shareholders held certain rights that allowed them to
participate in the day-to-day operations of the business, the
Company would also generally use the equity method of accounting.
Under the equity method, only the Companys investment in
and amounts due to and from the equity investee are included in
the consolidated balance sheets; only the Companys share
of the investees earnings (losses) is included in the
consolidated operating results; and only the dividends, cash
distributions, loans or other cash received from the investee
and additional cash investments, loan repayments or other cash
paid to the investee are included in the consolidated cash flows.
Investments in companies in which the Company does not have a
controlling interest, or is unable to exert significant
influence, are accounted for as available-for-sale investments
and, if the investments are publicly traded and there are no
resale restrictions greater than one year, recorded at market
value. If resale restrictions greater than one year exist, or if
the investment is not publicly traded, the investment is
accounted for at cost.
The Company evaluates investments held in unrealized loss
positions for other-than-temporary impairment on a quarterly
basis. Such evaluation involves a variety of considerations,
including assessments of risks and uncertainties associated with
general economic conditions and distinct conditions affecting
specific issuers. Factors considered by the Company include
(i) the length of time and the extent to which the fair
value has been below cost, (ii) the financial condition,
credit worthiness and near-term prospects of the issuer,
(iii) the length of time to maturity, (iv) future
economic conditions and market forecasts and (v) the
Companys intent and ability to retain its investment for a
period of time sufficient to allow for recovery of market value.
The Company has not recognized any other-than-temporary
impairment charges in any of the fiscal years presented.
Equity-method
Investments
As of March 29, 2008, the Companys investments
include a joint venture named the Ralph Lauren Watch and Jewelry
Company, S.A.R.L. (the RL Watch Company), formed
with Financiere Richemont SA (Richemont), the Swiss
Luxury Goods Group, in March 2007. The joint venture is a Swiss
corporation, whose purpose is to design, develop, manufacture,
sell and distribute luxury watches and fine jewelry through
Ralph Lauren boutiques, as well as through fine independent
jewelry and luxury watch retailers throughout the world. The
Company accounts for its 50% interest in the RL Watch Company
under the equity method of accounting, and such investment is
classified in other non-current assets in the consolidated
balance sheet as of March 29, 2008. Royalty payments due to
the Company under the related license agreement for use of
certain of the Companys trademarks are reflected as
licensing revenue within the consolidated statement of
operations. The RL Watch Company commenced operations during the
first quarter of Fiscal 2008 and it is currently expected that
products will be launched in the spring of calendar 2009.
F-12
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2007, the Companys only significant
investment was an approximate 20% equity interest in Impact 21.
Impact 21 was a public company that held the sublicenses for the
Companys mens, womens and jeans businesses in
Japan. The Company accounted for its interest in Impact 21 using
the equity method of accounting, and such investment was
classified in other non-current assets in the consolidated
balance sheet as of March 31, 2007. See Note 5 for
further discussion of the Companys Japanese Business
Acquisitions, including Impact 21, that occurred in May 2007.
Available-for-sale
Investments
As of March 29, 2008, investments also consisted of auction
rate securities at a fair value of $14.5 million with reset
periods generally ranging from 7 to 49 days. Auction rate
securities have characteristics similar to short-term
investments because, at pre-determined short-term intervals,
there is a new auction process at which the interest rates for
these securities are reset to current interest rates. At the end
of such periods, the Company chooses to either roll over its
holdings or seeks to redeem the investments for cash.
Notwithstanding these short-term characteristics, the Company
has classified these securities as non-current within other
assets in its consolidated balance sheet as current market
conditions call into question its ability to redeem these
investments for cash within the next twelve months. Auction rate
securities are categorized as available-for-sale investments and
are stated at market value. Unrealized gains or losses are
classified as a component of accumulated other comprehensive
income in the Companys consolidated balance sheet, and
related realized gains or losses are classified as a component
of interest and other income, net, in the Companys
consolidated statement of operations. Cash inflows and outflows
related to the sale and purchase of investments are classified
as investing activities within proceeds from sales and
maturities of investments and purchases of investments,
respectively, in the Companys consolidated statement of
cash flows.
Property
and Equipment, Net
Property and equipment, net, is stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line
method based upon the estimated useful lives of depreciable
assets, which range from three to seven years for furniture,
fixtures, computer software and computer equipment; from three
to ten years for machinery and equipment; and from ten to forty
years for buildings and improvements. Leasehold improvements are
depreciated over the shorter of the estimated useful lives of
the respective assets or the life of the lease.
Property and equipment, along with other long-lived assets, are
evaluated for impairment periodically whenever events or changes
in circumstances indicate that their related carrying amounts
may not be recoverable in accordance with FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144). In evaluating
long-lived assets for recoverability, including finite-lived
intangibles as described below, the Company uses its best
estimate of future cash flows expected to result from the use of
the asset and its eventual disposition. To the extent that
estimated future undiscounted net cash flows attributable to the
asset are less than the carrying amount, an impairment loss is
recognized equal to the difference between the carrying value of
such asset and its fair value. Assets to be disposed of and for
which there is a committed plan of disposal are reported at the
lower of carrying value or fair value less costs to sell.
Goodwill
and Other Intangible Assets
Goodwill and other intangible assets are accounted for in
accordance with the provisions of FAS No. 142,
Goodwill and Other Intangible Assets
(FAS 142). At acquisition, the Company
estimates and records the fair value of purchased intangible
assets, which primarily consists of license agreements, customer
relationships, non-compete agreements and order backlog. The
fair value of these intangible assets is estimated based on
managements assessment, as well as independent third party
appraisals, when necessary. The excess of the purchase
consideration over the fair value of net assets acquired is
recorded as goodwill. Under FAS 142, goodwill, including
any goodwill included in the carrying value of investments
accounted for using the equity method of accounting, and certain
other intangible assets deemed to have indefinite useful lives
are not amortized. Rather,
F-13
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
goodwill and such indefinite-lived intangible assets are
assessed for impairment at least annually based on comparisons
of their respective fair values to their carrying values.
Finite-lived intangible assets are amortized over their
respective estimated useful lives and, along with other
long-lived assets as noted above, are evaluated for impairment
periodically whenever events or changes in circumstances
indicate that their related carrying amounts may not be
recoverable in accordance with FAS 144. See discussion of
the Companys accounting policy for long-lived asset
impairment as described earlier under the caption
Property and Equipment, Net.
Officers
Life Insurance Policies
The Company maintains several whole-life and certain
split-dollar life insurance policies for select senior
executives. Whole-life policies are recorded at their
cash-surrender value, and split-dollar policies are recorded at
the lesser of their cash-surrender value or aggregate premiums
paid-to-date in the consolidated balance sheets. As of the end
of Fiscal 2008 and Fiscal 2007, amounts of approximately
$48 million and $53 million, respectively, relating to
officers life insurance policies held by the Company were
classified within other non-current assets in the consolidated
balance sheets.
Income
Taxes
Income taxes are provided using the asset and liability method
prescribed by FAS No. 109, Accounting for Income
Taxes (FAS 109). Under this method,
income taxes (i.e., deferred tax assets and liabilities, current
taxes payable/refunds receivable and tax expense) are recorded
based on amounts refundable or payable in the current year and
include the results of any difference between US GAAP and tax
reporting. Deferred income taxes reflect the tax effect of
certain net operating loss, capital loss and general business
credit carryforwards and the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as
determined under enacted tax laws and rates. The Company
accounts for the financial effect of changes in tax laws or
rates in the period of enactment.
In addition, valuation allowances are established when
management determines that it is more-likely-than-not that some
portion or all of a deferred tax asset will not be realized. Tax
valuation allowances are analyzed periodically and adjusted as
events occur, or circumstances change, that warrant adjustments
to those balances.
Effective April 1, 2007, the Company adopted
FIN No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of
FAS No. 109 (FIN 48). Upon the
adoption of the provisions of FIN 48, the Company changed
its policy related to the accounting for income tax
uncertainties. If the Company considers that a tax position is
more-likely-than-not of being sustained upon audit,
based solely on the technical merits of the position, it
recognizes the tax benefit. The Company measures the tax benefit
by determining the largest amount that is greater than 50%
likely of being realized upon settlement, presuming that the tax
position is examined by the appropriate taxing authority that
has full knowledge of all relevant information. These
assessments can be complex and the Company often obtains
assistance from external advisors. To the extent that the
Companys estimates change or the final tax outcome of
these matters is different than the amounts recorded, such
differences will impact the income tax provision in the period
in which such determinations are made. If the initial assessment
fails to result in the recognition of a tax benefit, the Company
regularly monitors its position and subsequently recognizes the
tax benefit if (i) there are changes in tax law or
analogous case law that sufficiently raise the likelihood of
prevailing on the technical merits of the position to
more-likely-than-not, (ii) the statute of limitations
expires, or (iii) there is a completion of an audit
resulting in a settlement of that tax year with the appropriate
agency. Uncertain tax positions are classified as current only
when the Company expects to pay cash within the next twelve
months. Interest and penalties, if any, are recorded within the
provision for income taxes in the Companys consolidated
statements of operations and are classified on the consolidated
balance sheets with the related liability for unrecognized tax
benefits.
See Note 12 for further discussion of the Companys
income taxes and the adoption of FIN 48.
F-14
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Leases
The Company leases certain facilities and equipment, including
its retail stores. Such leasing arrangements are accounted for
under the provisions of FAS No. 13, Accounting
for Leases and other related authoritative accounting
literature (FAS 13). Certain of the
Companys leases contain renewal options, rent escalation
clauses
and/or
landlord incentives. Rent expense for noncancelable operating
leases with scheduled rent increases
and/or
landlord incentives is recognized on a straight-line basis over
the lease term, beginning with the effective lease commencement
date. The excess of straight-line rent expense over scheduled
payment amounts and landlord incentives is recorded as a
deferred rent liability. As of the end of Fiscal 2008 and Fiscal
2007, deferred rent obligations of approximately
$112 million and $96 million, respectively, were
classified within other non-current liabilities in the
Companys consolidated balance sheets.
For leases in which the Company is involved with the
construction of the building (generally on land owned by the
landlord), the Company accounts for the lease during the
construction period under the provisions of EITF
No. 97-10,
The Effect of Lessee Involvement in Asset
Construction
(EITF 97-10).
If the Company concludes that it has substantively all of the
risks of ownership during construction of a leased property and
therefore is deemed the owner of the project for accounting
purposes, it records an asset and related financing obligation
for the amount of total project costs related to
construction-in-progress
and the pre-existing building. Once construction is complete,
the Company considers the requirements under
FAS No. 98, Accounting for Leases:
Sale-Leaseback Transactions Involving Real Estate, Sales-Type
Leases of Real Estate, Definition of Lease Term, and Initial
Direct Costs of Direct Financing Leases, for
sale-leaseback treatment. If the arrangement does not qualify
for sale-leaseback treatment, the Company continues to amortize
the financing obligation and depreciate the building over the
lease term.
Derivatives
and Financial Instruments
The Company accounts for derivative instruments in accordance
with FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and subsequent
amendments (collectively, FAS 133).
FAS 133 requires that all derivative instruments be
recognized on the balance sheet at fair value. In addition,
FAS 133 provides that, for derivative instruments that
qualify for hedge accounting, the effective portion of changes
in the fair value are either (a) offset against the changes
in fair value of the hedged assets, liabilities, or firm
commitments through earnings or (b) recognized in
stockholders equity until the hedged item is recognized in
earnings, depending on whether the derivative is being used to
hedge changes in fair value or cash flows, respectively.
Each derivative instrument entered into by the Company which
qualifies for hedge accounting is considered highly effective at
reducing the risk associated with the exposure being hedged. For
each derivative designated as a hedge, the Company formally
documents the risk management objective and strategy, including
the identification of the hedging instrument, the hedged item
and the risk exposure, as well as how effectiveness is to be
assessed prospectively and retrospectively. To assess
effectiveness, the Company uses non-statistical methods,
including the dollar-offset method, that compare the change in
the fair value of the derivative to the change in the fair value
or cash flows of the hedged item. The extent to which a hedging
instrument has been and is expected to continue to be effective
at achieving offsetting changes in fair value or cash flows is
assessed and documented by the Company at least on a quarterly
basis. Any ineffectiveness in hedging relationships is
recognized immediately in earnings. If it is determined that a
derivative has not been highly effective, and will continue not
to be highly effective at hedging the designated exposure, hedge
accounting is discontinued.
All undesignated hedges of the Company are entered into to hedge
specific economic risks. The Company does not enter into
derivative transactions for speculative or trading purposes.
Changes in fair value relating to undesignated derivative
instruments are immediately recognized in earnings.
As a result of the use of derivative instruments, the Company is
exposed to the risk that counterparties to derivative contracts
will fail to meet their contractual obligations. To mitigate the
counterparty credit risk, the
F-15
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company has a policy of only entering into contracts with
carefully selected financial institutions based upon their
credit ratings and certain other financial factors. The
Companys established policies and procedures for
mitigating credit risk on derivative transactions include
reviewing and assessing the creditworthiness of counterparties.
For cash flow reporting purposes, the Company classifies
proceeds received or amounts paid upon the settlement of a
derivative instrument in the same manner as the related item
being hedged.
The carrying value of the Companys financial instruments
approximates fair value, except for certain differences relating
to fixed-rate debt, investments in other entities accounted for
using the equity method of accounting and other financial
instruments. However, other than differences in the fair value
of fixed-rate debt as disclosed in Note 13, these
differences were not significant as of March 29, 2008 or
March 31, 2007. The fair value of financial instruments
generally is determined by reference to market values resulting
from the trading of the instruments on a national securities
exchange or an over-the-counter market. In cases where quoted
market prices are not available, fair value is based on
estimates derived through the use of present value or other
valuation techniques.
|
|
4.
|
Recently
Issued Accounting Standards
|
Accounting
for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN 48, which clarifies the
accounting for uncertainty in income tax positions. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company adopted the
provisions of FIN 48 as of the beginning of Fiscal 2008
(April 1, 2007). See Note 12 for further discussion of
the Companys income taxes and the adoption of FIN 48.
Financial
Statement Misstatements
In September 2006, the U.S. Securities and Exchange
Commission (SEC) staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 was issued in order to
eliminate the diversity in practice surrounding how public
companies quantify and evaluate financial statement
misstatements.
Traditionally, there have been two widely-recognized methods for
quantifying and evaluating the effects of financial statement
misstatements: (i) the balance sheet (iron
curtain) method and (ii) the income statement
(rollover) method. The iron curtain method
quantifies a misstatement based on the effects of correcting the
misstatement existing in the balance sheet at the end of the
reporting period. The rollover method quantifies a misstatement
based on the amount of the error originating in the current
period income statement, including the reversing effect of prior
year misstatements. The use of the rollover method can lead to
the accumulation of misstatements in the balance sheet. Prior to
the adoption of SAB 108, the Company historically used the
rollover method for quantifying and evaluating identified
financial statement misstatements.
By issuing SAB 108, the SEC staff established an approach
that requires quantification and evaluation of financial
statement misstatements based on the effects of the
misstatements under both the iron curtain and rollover methods.
This model is commonly referred to as a dual
approach.
SAB 108 required companies to initially apply its
provisions either by (i) restating prior financial
statements as if the dual approach had always been applied or
(ii) recording the cumulative effect of initially applying
the dual approach as adjustments to the carrying values of
assets and liabilities as of the beginning of the current fiscal
year, with an offsetting adjustment recorded to the opening
balance of retained earnings. The Company adopted the provisions
of SAB 108 in Fiscal 2007 and elected to record the effects
of applying SAB 108 using the cumulative effect transition
method and, as such, recorded a $16.9 million reduction in
retained earnings as of April 2, 2006.
F-16
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the effects of applying
SAB 108 for each period in which the identified
misstatement originated through April 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period in which
|
|
|
|
|
|
|
Misstatement
Originated(a)
|
|
|
|
|
|
|
Cumulative
|
|
|
Fiscal Year
|
|
|
Adjustment
|
|
|
|
Prior to
|
|
|
Ended
|
|
|
Recorded as of
|
|
|
|
April 2,
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
Inventory(b)
|
|
$
|
(9.3
|
)
|
|
$
|
|
|
|
$
|
(9.3
|
)
|
Other non-current liabilities accrued
rent(c)
|
|
|
(3.5
|
)
|
|
|
0.3
|
|
|
|
(3.2
|
)
|
Other non-current assets equity method
investments(d)
|
|
|
(2.1
|
)
|
|
|
0.2
|
|
|
|
(1.9
|
)
|
Other non-current liabilities minority
interest(d)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
(1.0
|
)
|
Deferred income
taxes(e)
|
|
|
1.9
|
|
|
|
(3.4
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on net income and retained earnings
|
|
$
|
(14.0
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company previously quantified
these errors under the rollover method and concluded that they
were immaterial, individually and in the aggregate, to the
Companys consolidated financial statements.
|
|
(b) |
|
The Company historically did not
eliminate certain intercompany profits on the transfer of
inventory, which resulted in a cumulative overstatement of its
inventory by $5.0 million in years prior to Fiscal 2006. In
addition, the Company included $4.3 million of certain
product development costs in its inventory in years prior to
Fiscal 2006 that, in hindsight, were not considered to be
capitalizable. To correct these misstatements, the Company
reduced inventory by $9.3 million as of April 2, 2006,
with a corresponding pretax reduction in retained earnings.
|
|
(c) |
|
In connection with a specialized
retail store construction project in one of its international
locations, the Company did not recognize rent expense upon
taking possession of the leased property and commencing
construction in Fiscal 2005. To correct these misstatements, the
Company recorded a $3.2 million net increase in its
liability for accrued rent as of April 2, 2006, with a
corresponding pretax reduction in retained earnings.
|
|
(d) |
|
The Company historically did not
properly account for differences between its investment bases in
certain consolidated and unconsolidated investees and its share
of the underlying equity of such investees. To correct these
misstatements, the Company reduced the carrying value of its
equity method investment by $1.9 million and increased its
minority interest liability by $1.0 million as of
April 2, 2006, with a corresponding pretax reduction of
$2.9 million in total to retained earnings.
|
|
(e) |
|
As a result of the misstatements
described above and $5.1 million of deferred tax balances
that were not supportable based on a subsequent analysis of
underlying book-tax basis differences, the Companys
provision for income taxes was cumulatively overstated by
$1.9 million in years prior to Fiscal 2006 and understated
by $3.4 million in Fiscal 2006. To correct these
misstatements, the Company increased its net deferred income tax
liability by a total of $1.5 million as of April 2,
2006, with a corresponding decrease in retained earnings.
|
Stock-Based
Compensation
In December 2004, the FASB issued FAS 123R and, in March
2005, the SEC issued Staff Accounting Bulletin No. 107
(SAB 107). SAB 107 provides implementation
guidance for companies to use in their adoption of
FAS 123R. FAS 123R supersedes both APB 25, which
permitted the use of the intrinsic-value method in accounting
for stock-based compensation, and FAS No. 123,
Accounting for Stock-Based Compensation, as amended
by FAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(FAS 123), which allowed companies applying APB
25 to just disclose in their financial statements the pro forma
effect on net income from applying the fair-value method of
accounting for stock-based compensation. The Company adopted
FAS 123R as of April 2, 2006. See Note 18 for
further discussion of the Companys stock-based
compensation and the adoption of FAS 123R.
F-17
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Recently Issued Accounting Standards
In March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (FAS 161). FAS 161 amends
FAS 133 to provide enhanced disclosure requirements
surrounding how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are
accounted for under FAS 133 and how derivative instruments
and related hedged items affect an entitys financial
position, financial performance and cash flows. FAS 161 is
effective for the Company as of the beginning of Fiscal 2010,
including interim periods thereafter. The implementation of
FAS 161 is not expected to have a material impact on the
Companys consolidated financial statements.
In December 2007, the FASB issued FAS No. 141R,
Business Combinations (FAS 141R),
which replaces FAS No. 141. FAS 141R was issued
to create greater consistency in the accounting and financial
reporting of business combinations, resulting in more complete,
comparable and relevant information for investors and other
users of financial statements. FAS 141R establishes
principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements
the identifiable assets acquired, liabilities assumed, and any
noncontrolling interests in the acquiree, as well as the
goodwill acquired. Significant changes from current practice
resulting from FAS 141R include the need for the acquirer
to record 100% of all assets and liabilities of the acquired
business, including goodwill, generally at their fair values for
all business combinations (whether partial, full or step
acquisitions); the need to recognize contingent consideration at
its fair value on the acquisition date and, for certain
arrangements, to recognize changes in fair value in earnings
until settlement; and the need to expense acquisition-related
transaction and restructuring costs rather than to treat them as
part of the cost of the acquisition. FAS 141R also
establishes disclosure requirements to enable users to evaluate
the nature and financial effects of the business combination.
FAS 141R is effective for the Company as of the beginning
of Fiscal 2010 and will be applied prospectively to business
combinations that close on or after March 29, 2009.
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an Amendment of ARB No. 51
(FAS 160). FAS 160 establishes accounting
and reporting standards for noncontrolling interests (previously
referred to as minority interests) in a subsidiary
and for the deconsolidation of a subsidiary, to ensure
consistency with the requirements of FAS 141R.
FAS 160 states that noncontrolling interests should be
classified as a separate component of equity, and establishes
reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners.
FAS 160 is effective for the Company as of the beginning of
Fiscal 2010 and will be applied prospectively to business
combinations that close on or after March 29, 2009. The
application of FAS 160 is not expected to have a material
effect on the Companys consolidated financial statements.
In February 2007, the FASB issued FAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
FAS No. 115 (FAS 159 or the
Standard). FAS 159 permits companies to choose
to measure, on an
instrument-by-instrument
basis, financial instruments and certain other items at fair
value that are not currently required to be measured at fair
value. Unrealized gains and losses on items for which the fair
value option is elected will be recognized in earnings at each
subsequent reporting date. The Company does not expect to elect
the fair value option for any of its financial assets or
financial liabilities upon adoption of the Standard in the
beginning of Fiscal 2009. Therefore, the initial application of
FAS 159 is not expected to have a material effect on the
Companys consolidated financial statements.
In September 2006, the FASB issued FAS No. 157,
Fair Value Measurements (FAS 157).
FAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. FAS 157 establishes a framework for
measuring fair value in accordance with US GAAP and expands
disclosures regarding fair value measurements. FAS 157 is
effective for all financial assets and liabilities of the
Company as of the beginning of Fiscal 2009, and is effective for
all non-financial assets and liabilities of the Company as of
the beginning of Fiscal 2010. The Company does not expect that
the provisions of FAS 157 to be adopted in Fiscal 2009 will
have a material effect on its consolidated financial
F-18
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements. The Company is in the process of evaluating the
impact of the provisions of FAS 157 to be adopted in Fiscal
2010.
|
|
5.
|
Acquisitions
and Joint Ventures
|
Fiscal
2008 Transactions
Japanese
Business Acquisitions
On May 29, 2007, the Company completed its previously
announced transactions to acquire control of certain of its
Japanese businesses that were formerly conducted under licensed
arrangements, consistent with the Companys long-term
strategy of international expansion. In particular, the Company
acquired approximately 77% of the outstanding shares of Impact
21 that it did not previously own in a cash tender offer (the
Impact 21 Acquisition), thereby increasing its
ownership in Impact 21 from approximately 20% to approximately
97%. Impact 21 conducts the Companys mens,
womens and jeans apparel and accessories business in Japan
under a pre-existing, sub-license arrangement. In addition, the
Company acquired the remaining 50% interest in PRL Japan, which
holds the master license to conduct Polos business in
Japan, from Onward Kashiyama and Seibu (the PRL Japan
Minority Interest Acquisition). Collectively, the Impact
21 Acquisition and the PRL Japan Minority Interest Acquisition
are herein referred to as the Japanese Business
Acquisitions.
The purchase price initially paid in connection with the
Japanese Business Acquisitions was approximately
$360 million, including transaction costs of approximately
$12 million. In January 2008, at an Impact
21 shareholders meeting, the Company obtained the necessary
approvals to complete the process of acquiring the remaining
approximately 3% of outstanding shares not exchanged as of the
close of the tender offer period (the minority
squeeze-out). In February 2008, the Company acquired
approximately 1% of the remaining Impact 21 shares
outstanding at an aggregate cost of $5 million. The Company
expects the minority squeeze-out to be successfully concluded in
the first quarter of Fiscal 2009, at an estimated aggregate cost
of $9 million.
The Company funded the Japanese Business Acquisitions with
available cash on-hand and ¥20.5 billion of borrowings
under a one-year term loan agreement pursuant to an amendment
and restatement to the Companys existing credit facility.
The Company repaid the borrowing by its maturity date on
May 22, 2008 using approximately $200 million of
Impact 21s cash on-hand acquired as part of the
acquisition.
Based on the nature of the successful public tender offer
process for substantially all of the Impact 21 common stock
previously not owned by the Company and the Companys
determination that the terms of the pre-existing licensing
relationships were reflective of market, no settlement gain or
loss was recognized in connection with the transaction. As such,
based on valuation analyses prepared by an independent valuation
firm, the Company allocated all of the consideration exchanged
to the purchase of the Japanese businesses. The acquisition cost
of approximately $365 million has been allocated on a
preliminary basis to the net assets acquired based on their
respective fair values as follows: cash of $189 million;
trade receivables of $26 million; inventory of
$38 million; finite-lived intangible assets of
$74 million (consisting of the re-acquired licenses of
$21 million and customer relationships of
$53 million); non-tax-deductible goodwill of
$138 million; assumed pension liabilities of
$5 million; net deferred tax liabilities of
$31 million; and other net liabilities of $64 million.
The Company is in the process of completing its assessment of
the fair value of assets acquired and liabilities assumed for
the allocation of the purchase price, including its assessment
and formulation of plans associated with integrating the
Japanese businesses into the Companys current operations.
As a result, the estimated purchase price allocation is subject
to change.
The results of operations for Impact 21, which were previously
accounted for using the equity method of accounting, have been
consolidated in the Companys results of operations
commencing April 1, 2007. Accordingly, the Company recorded
within minority interest expense the amount of Impact 21s
net income allocable to the holders of the approximate 80% of
the Impact 21 shares not owned by the Company prior to the
closing date of the
F-19
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tender offer. The results of operations for PRL Japan have
already been consolidated by the Company as described further in
Note 2 to the consolidated financial statements.
The Company also entered into a transition services agreement
with Onward Kashiyama which, along with its affiliates, was a
former approximate 41% shareholder of Impact 21, to provide a
variety of operational, human resources and information
systems-related services over a period of up to two years from
the date of acquisition.
Acquisition
of Small Leathergoods Business
On April 13, 2007, the Company acquired from Kellwood
Company (Kellwood) substantially all of the assets
of New Campaign, Inc., the Companys licensee for
mens and womens belts and other small leather goods
under the Ralph Lauren, Lauren and Chaps
brands in the U.S. (the Small Leathergoods
Business Acquisition). The assets acquired from Kellwood
are operated under the name of Polo Ralph Lauren
Leathergoods and allowed the Company to further expand its
accessories business. The acquisition cost was
$10.4 million. Kellwood provided various transition
services to the Company for a period of up to six months from
the date of acquisition.
The Company determined that the terms of the pre-existing
licensing relationship were reflective of market. As such, the
Company allocated all of the consideration exchanged to the
Small Leathergoods Business Acquisition and no settlement gain
or loss was recognized in connection with the transaction. The
results of operations for the Polo Ralph Lauren Leathergoods
business have been consolidated in the Companys results of
operations commencing April 1, 2007. In addition, the
acquisition cost has been allocated as follows: inventory of
$7.0 million; finite-lived intangible assets of
$2.1 million (consisting of the re-acquired license of
$1.3 million, customer relationships of $0.7 million
and order backlog of $0.1 million); other net assets of
$0.7 million; and tax-deductible goodwill of
$0.6 million.
Formation
of Ralph Lauren Watch and Jewelry Joint Venture
In March 2007, the Company formed a joint venture with Richemont
to design, develop, manufacture, sell and distribute luxury
watches and fine jewelry. See Note 3 for further discussion
of the Companys joint venture.
Fiscal
2007 Transactions
Acquisition
of RL Media Minority Interest
On March 28, 2007, the Company acquired the remaining 50%
equity interest in RL Media formerly held by NBC (37.5%) and
Value Vision (12.5%) (the RL Media Minority Interest
Acquisition). RL Media conducts the Companys
e-commerce
initiatives through the RalphLauren.com internet site. The
results of operations for RL Media have already been
consolidated by the Company as described further in Note 2
to the consolidated financial statements. The acquisition cost
was $175 million. In addition, Value Vision entered into a
transition services agreement with the Company to provide order
fulfillment and related services over a period of up to
seventeen months from the date of the acquisition of the RL
Media minority interest.
The Company evaluated the terms of all significant pre-existing
relationships between itself and RL Media to determine if a
settlement of the pre-existing relationships existed. In
addition, the Company obtained valuation analyses of RL Media
prepared by an independent valuation firm. Based on these
analyses, as well as the rights and obligations of the parties
under the RL Media partnership agreement, the Company determined
that all of the consideration exchanged should be allocated to
the acquisition of the RL Media minority interest. Accordingly,
no settlement gain or loss was recognized in connection with
this transaction.
The excess of the acquisition cost over the pre-existing
minority interest liability of $33 million has been
allocated as follows: inventory of $8 million; finite-lived
intangible assets of $58 million (consisting of the
re-acquired license of $56 million and customer list of
$2 million); and tax-deductible goodwill of
$76 million.
F-20
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Pro Forma Information
The following unaudited condensed pro forma information (herein
referred to as the pro forma information) assumes
the Japanese Business Acquisitions, the RL Media Minority
Interest Acquisition and the Small Leathergoods Business
Acquisition had occurred as of the beginning of Fiscal 2008 and
Fiscal 2007 for the applicable fiscal years presented. The pro
forma information has been prepared for comparative purposes
only and is not necessarily indicative of the actual results
that would have been attained had the acquisitions occurred as
of the beginning of the fiscal years presented, nor is it
indicative of the Companys future results. Furthermore,
the unaudited pro forma information does not reflect
managements estimate of any revenue-enhancing
opportunities nor anticipated cost savings that may occur as a
result of the integration and consolidation of the acquisitions.
The pro forma information set forth below reflects nonrecurring
charges related to (a) the amortization of the
write-ups to
fair value of inventory included within cost of goods sold as
part of the preliminary purchase price allocations, which were
fully recognized within six months of each respective
acquisition date; (b) the amortization of the
write-up to
fair value of the acquired licenses as part of the preliminary
purchase price allocation for the Japanese Business
Acquisitions, which was fully amortized within nine months of
the acquisition date; and (c) the write-off of foreign
currency option contracts entered into to manage certain foreign
currency exposures associated with the Japanese Business
Acquisitions which expired unexercised during the first quarter
of Fiscal 2008. These charges included in the Companys pro
forma results were approximately $47 million for Fiscal
2008 and Fiscal 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma (unaudited)
|
|
|
|
Fiscal Years Ended
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions, except per share data)
|
|
|
Net revenues
|
|
$
|
4,880.1
|
|
|
$
|
4,295.4
|
|
|
$
|
4,880.1
|
|
|
$
|
4,582.0
|
|
Gross profit
|
|
|
2,638.1
|
|
|
|
2,336.2
|
|
|
|
2,638.1
|
|
|
|
2,413.4
|
|
Amortization of intangible assets
|
|
|
(47.2
|
)
|
|
|
(15.6
|
)
|
|
|
(47.8
|
)
|
|
|
(50.5
|
)
|
Operating income
|
|
|
653.4
|
|
|
|
652.6
|
|
|
|
652.8
|
|
|
|
636.5
|
|
Net income
|
|
|
419.8
|
|
|
|
400.9
|
|
|
|
419.8
|
|
|
|
383.7
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.10
|
|
|
$
|
3.84
|
|
|
$
|
4.10
|
|
|
$
|
3.68
|
|
Diluted
|
|
$
|
3.99
|
|
|
$
|
3.73
|
|
|
$
|
3.99
|
|
|
$
|
3.57
|
|
Fiscal
2006 Transactions
Acquisition
of Polo Jeans Business
On February 3, 2006, the Company acquired from Jones
Apparel Group, Inc. and its subsidiaries (Jones) all
of the issued and outstanding shares of capital stock of Sun
Apparel, Inc., the Companys licensee for mens and
womens casual apparel and sportswear in the U.S. and
Canada (the Polo Jeans Business). The acquisition
cost was approximately $260 million, including transaction
costs. In addition, simultaneous with the transaction, the
Company settled all claims under its litigation with Jones for a
cost of $100 million.
The Company determined that the terms of the pre-existing
licensing relationship were reflective of market. However,
because the Company simultaneously purchased a business and
settled all pre-existing litigation, the aggregate consideration
exchanged was required to be allocated for accounting purposes
in proportion to the underlying fair values of the legal
settlement and the Polo Jeans Business acquired. Based on the
arms-length negotiation with Jones, the Company determined
that the fair value of the legal settlement was
$100 million, which equaled the amount of a litigation
reserve initially established by the Company during Fiscal 2005.
The remaining
F-21
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$255 million of consideration exchanged was allocated to
the Polo Jeans Business based on valuation analyses prepared by
an independent valuation firm.
The results of operations for the Polo Jeans Business have been
consolidated in the Companys results of operations
commencing February 4, 2006. In addition, the consolidated
financial statements include the following allocation of the
acquisition cost to the net assets acquired based on their
respective fair values: inventory of $36 million;
finite-lived intangible assets of $159 million (consisting
of the re-acquired license of $97 million, customer
relationships of $57 million and order backlog of
$5 million); non-tax-deductible goodwill of
$126 million; and deferred tax and other liabilities, net,
of $61 million. Other than inventory, Jones retained the
right to all working capital balances on the date of closing.
The Company also entered into a transition services agreement
with Jones to provide a variety of operational, financial and
information systems services over a period of six to twelve
months from the date of the acquisition of the Polo Jeans
Business.
Acquisition
of Footwear Business
On July 15, 2005, the Company acquired from Reebok
International, Ltd. (Reebok) all of the issued and
outstanding shares of capital stock of Ralph Lauren Footwear
Co., Inc., the Companys global licensee for mens,
womens and childrens footwear, as well as certain
foreign assets owned by affiliates of Reebok (collectively, the
Footwear Business). The acquisition cost was
approximately $112 million in cash, including
$2 million of transaction costs. In addition, Reebok and
certain of its affiliates entered into a transition services
agreement with the Company to provide a variety of operational,
financial and information systems services over a period of
twelve to eighteen months from the date of the acquisition of
the Footwear Business.
The Company determined that the terms of the pre-existing
licensing relationship were reflective of market. As such, based
on valuation analyses prepared by an independent valuation firm,
the Company allocated all of the consideration exchanged to the
purchase of the Footwear Business and no settlement gain or loss
was recognized in connection with the transaction.
The results of operations for the Footwear Business for the
period have been consolidated in the Companys results of
operations commencing July 16, 2005. In addition, the
consolidated financial statements include the following
allocation of the acquisition cost to the net assets acquired
based on their respective fair values: trade receivables of
$17 million; inventory of $26 million; finite-lived
intangible assets of $62 million (consisting of the
footwear license at $38 million, customer relationships at
$23 million and order backlog at $1 million);
tax-deductible goodwill of $20 million; other assets of
$1 million; and liabilities of $14 million.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Raw materials
|
|
$
|
6.7
|
|
|
$
|
8.4
|
|
Work-in-process
|
|
|
1.7
|
|
|
|
1.1
|
|
Finished goods
|
|
|
506.5
|
|
|
|
517.4
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
514.9
|
|
|
$
|
526.9
|
|
|
|
|
|
|
|
|
|
|
F-22
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Property
and Equipment
|
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Land and improvements
|
|
$
|
9.9
|
|
|
$
|
9.9
|
|
Buildings and improvements
|
|
|
97.4
|
|
|
|
63.4
|
|
Furniture and fixtures
|
|
|
464.0
|
|
|
|
484.9
|
|
Machinery and equipment
|
|
|
276.9
|
|
|
|
295.8
|
|
Leasehold improvements
|
|
|
604.6
|
|
|
|
563.8
|
|
Construction in progress
|
|
|
56.7
|
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509.5
|
|
|
|
1,458.0
|
|
Less: accumulated depreciation
|
|
|
(799.6
|
)
|
|
|
(828.2
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
709.9
|
|
|
$
|
629.8
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 3, the Company periodically evaluates
the recoverability of the carrying value of fixed assets
whenever events or changes in circumstances indicate that the
assets values may be impaired. During Fiscal 2008, the
Company recorded impairment charges of $5.0 million to
reduce the carrying value of certain long-lived assets in its
Retail segment to their estimated fair value. These impairment
charges were primarily recorded as a result of
lower-than-expected
operating cash flow performance for certain stores that, along
with projections of future performance, indicated that the
carrying values of the related fixed assets were not
recoverable. No impairment charges were recorded in Fiscal 2007.
During Fiscal 2006, the Company recorded impairment charges of
$10.8 million to reduce the carrying value of fixed assets
to their estimated fair value, largely related to its Club
Monaco retail business that included its Caban Concept and Club
Monaco factory stores. This impairment charge primarily related
to lower-than-expected store performance and preceded the
Companys implementation of a plan to restructure these
operations in February 2006. In measuring the amount of these
impairments, fair value was determined based on discounted
expected cash flows. See Note 11 for further discussion of
the Club Monaco restructuring plan and related charges.
|
|
8.
|
Goodwill
and Other Intangible Assets
|
As discussed in Note 3, the Company accounts for goodwill
and other intangible assets in accordance with FAS 142.
Under FAS 142, goodwill and certain other intangible assets
deemed to have indefinite useful lives are not amortized.
Rather, goodwill and such indefinite-lived intangible assets are
subject to annual impairment testing. Finite-lived intangible
assets continue to be amortized over their respective estimated
useful lives. Based on the results of the Companys annual
impairment testing of goodwill and indefinite-lived intangible
assets in Fiscal 2008, Fiscal 2007 and Fiscal 2006, no
impairment charges were deemed necessary.
F-23
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
The following analysis details the changes in goodwill for each
reportable segment during Fiscal 2008 and Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Licensing
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Balance at April 1, 2006
|
|
$
|
507.8
|
|
|
$
|
75.4
|
|
|
$
|
116.5
|
|
|
$
|
699.7
|
|
Acquisition-related
activity(a)
|
|
|
(3.0
|
)
|
|
|
79.0
|
|
|
|
|
|
|
|
76.0
|
|
Other
adjustments(b)
|
|
|
14.1
|
|
|
|
0.7
|
|
|
|
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
518.9
|
|
|
$
|
155.1
|
|
|
$
|
116.5
|
|
|
$
|
790.5
|
|
Acquisition-related
activity(a)
|
|
|
122.5
|
|
|
|
(3.9
|
)
|
|
|
16.8
|
|
|
|
135.4
|
|
Other
adjustments(b)
|
|
|
43.4
|
|
|
|
0.9
|
|
|
|
4.9
|
|
|
|
49.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2008
|
|
$
|
684.8
|
|
|
$
|
152.1
|
|
|
$
|
138.2
|
|
|
$
|
975.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Acquisition-related activity
primarily includes the RL Media Minority Interest Acquisition in
Fiscal 2007, and the Japanese Business Acquisitions and the
Small Leathergoods Business Acquisition as well as other
adjustments related to revisions in the estimated purchase price
allocation of the RL Media Minority Interest Acquisition in
Fiscal 2008. See Note 5 for further discussion of the
Companys acquisitions.
|
|
(b) |
|
Other adjustments principally
include changes in foreign currency exchange rates.
|
Other
Intangible Assets
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008
|
|
|
March 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accum.
|
|
|
|
|
|
Carrying
|
|
|
Accum.
|
|
|
|
|
|
|
Amount
|
|
|
Amort.
|
|
|
Net
|
|
|
Amount
|
|
|
Amort.
|
|
|
Net
|
|
|
|
(millions)
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-acquired licensed trademarks
|
|
$
|
223.5
|
|
|
$
|
(47.5
|
)
|
|
$
|
176.0
|
|
|
$
|
194.3
|
|
|
$
|
(11.8
|
)
|
|
$
|
182.5
|
|
Customer relationships/lists
|
|
|
186.7
|
|
|
|
(22.4
|
)
|
|
|
164.3
|
|
|
|
115.2
|
|
|
|
(8.4
|
)
|
|
|
106.8
|
|
Other
|
|
|
7.4
|
|
|
|
(7.1
|
)
|
|
|
0.3
|
|
|
|
7.4
|
|
|
|
(6.9
|
)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
|
417.6
|
|
|
|
(77.0
|
)
|
|
|
340.6
|
|
|
|
316.9
|
|
|
|
(27.1
|
)
|
|
|
289.8
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brands
|
|
|
8.7
|
|
|
|
|
|
|
|
8.7
|
|
|
|
7.9
|
|
|
|
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
426.3
|
|
|
$
|
(77.0
|
)
|
|
$
|
349.3
|
|
|
$
|
324.8
|
|
|
$
|
(27.1
|
)
|
|
$
|
297.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization
Based on the amount of intangible assets subject to amortization
as of March 29, 2008, the expected amortization for each of
the next five fiscal years and thereafter is as follows:
|
|
|
|
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
|
(millions)
|
|
|
Fiscal 2009
|
|
$
|
19.1
|
|
Fiscal 2010
|
|
|
19.1
|
|
Fiscal 2011
|
|
|
18.7
|
|
Fiscal 2012
|
|
|
18.2
|
|
Fiscal 2013
|
|
|
17.7
|
|
Fiscal 2014 and thereafter
|
|
|
247.8
|
|
|
|
|
|
|
Total
|
|
$
|
340.6
|
|
|
|
|
|
|
The expected future amortization expense above reflects
weighted-average estimated useful lives of 21.4 years for
re-acquired licensed trademarks, 18.0 years for customer
relationships/lists and 19.7 years for the Companys
finite-lived intangible assets in total.
|
|
9.
|
Other
Non-Current Assets
|
Other non-current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Equity-method investments
|
|
$
|
2.4
|
|
|
$
|
62.2
|
|
Officers life insurance policies
|
|
|
48.3
|
|
|
|
52.6
|
|
Restricted cash and other non-current
investments(a)
|
|
|
138.6
|
|
|
|
77.2
|
|
Other non-current assets
|
|
|
131.5
|
|
|
|
105.2
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
$
|
320.8
|
|
|
$
|
297.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $14.5 million of
investments in auction rate securities as of March 29,
2008, reflected at fair value. Total gross unrealized losses on
the Companys auction rate security portfolio were
$0.4 million as of March 29, 2008.
|
|
|
10.
|
Other
Current and Non-Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Accrued operating expenses
|
|
$
|
243.8
|
|
|
$
|
226.2
|
|
Accrued payroll and benefits
|
|
|
88.2
|
|
|
|
69.4
|
|
Accrued inventory
|
|
|
42.0
|
|
|
|
51.1
|
|
Deferred income
|
|
|
50.1
|
|
|
|
40.0
|
|
Other
|
|
|
43.6
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
467.7
|
|
|
$
|
391.0
|
|
|
|
|
|
|
|
|
|
|
F-25
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Capital lease obligations
|
|
$
|
73.2
|
|
|
$
|
47.1
|
|
Deferred rent obligations
|
|
|
112.3
|
|
|
|
95.8
|
|
Deferred income
|
|
|
168.8
|
|
|
|
181.6
|
|
Minority interest
|
|
|
5.5
|
|
|
|
4.0
|
|
Other
|
|
|
79.4
|
|
|
|
55.5
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
$
|
439.2
|
|
|
$
|
384.0
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded restructuring liabilities in recent
years relating to various cost-savings initiatives, as well as
certain of its acquisitions. In accordance with US GAAP,
restructuring costs incurred in connection with an acquisition
are capitalized as part of the purchase accounting for the
transaction. Such acquisition-related restructuring costs were
not material in any period. Liabilities for costs associated
with non-acquisition-related restructuring initiatives are
expensed and initially measured at fair value when incurred in
accordance with US GAAP. A description of the nature of
significant non-acquisition-related restructuring activities and
related costs is presented below.
Fiscal
2007 Restructuring
In connection with the Club Monaco Restructuring Plan described
below, during Fiscal 2007 the Company ultimately decided to
close all of Club Monacos Caban Concept Stores (the
Caban Stores) and recognized $4.0 million of
associated restructuring charges, primarily relating to lease
termination costs. The remaining liability under the plan was
$0.9 million as of March 29, 2008.
Additionally, the Company recognized $0.6 million of other
restructuring charges primarily related to severance costs
associated with the transition of certain sourcing and
production functions from Colombia to the U.S. during
Fiscal 2007.
Fiscal
2006 Restructuring
During the fourth quarter of Fiscal 2006, the Company committed
to a plan to restructure its Club Monaco retail business. In
particular, this plan consisted of the closure of all five Club
Monaco factory stores and the intention to dispose of by sale or
closure all eight of the Caban Stores (collectively, the
Club Monaco Restructuring Plan). In connection with
this plan, an aggregate restructuring-related charge of
$12 million was recognized in Fiscal 2006. This charge
consisted of (a) a $3 million writedown of inventory
to estimated net realizable value, which has been classified as
a component of cost of goods sold in the consolidated statements
of operations, (b) a $5 million writedown of fixed and
other net assets, which has been classified as a component of
restructuring charges in the consolidated statements of
operations and (c) the recognition of a $4 million
liability relating to lease termination costs, which has been
classified as a component of restructuring charges in the
consolidated statements of operations.
There were no significant restructuring charges recognized by
the Company during Fiscal 2008.
F-26
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Taxes
on Income
Domestic and foreign pretax income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Domestic
|
|
$
|
473.7
|
|
|
$
|
508.6
|
|
|
$
|
396.9
|
|
Foreign
|
|
|
168.4
|
|
|
|
134.7
|
|
|
|
106.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before provision for income taxes
|
|
$
|
642.1
|
|
|
$
|
643.3
|
|
|
$
|
502.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and deferred income taxes (tax benefits) provided are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal(a)
|
|
$
|
157.5
|
|
|
$
|
250.7
|
|
|
$
|
118.0
|
|
State and
local(a)
|
|
|
15.4
|
|
|
|
50.2
|
|
|
|
14.9
|
|
Foreign
|
|
|
57.1
|
|
|
|
53.9
|
|
|
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230.0
|
|
|
|
354.8
|
|
|
|
159.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10.0
|
|
|
|
(99.2
|
)
|
|
|
24.3
|
|
State and local
|
|
|
3.9
|
|
|
|
(12.8
|
)
|
|
|
11.8
|
|
Foreign
|
|
|
(21.6
|
)
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.7
|
)
|
|
|
(112.4
|
)
|
|
|
35.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
222.3
|
|
|
$
|
242.4
|
|
|
$
|
194.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes federal, state and local
tax benefits of approximately $34 million in Fiscal 2008,
$33 million in Fiscal 2007 and $22 million in Fiscal
2006 resulting from the exercise of employee stock options. In
addition, excludes federal, state and local tax benefits of
$31 million for Fiscal 2007 primarily related to the
repayment of the approximate 227 million principal
amount of 6.125% notes outstanding that were due on
November 22, 2006, from an original issuance of
275 million in 1999 (the 1999 Euro Debt).
Such amounts were credited to stockholders equity.
|
F-27
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tax
Rate Reconciliation
The differences between income taxes expected at the
U.S. federal statutory income tax rate of 35% and income
taxes provided are as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Provision for income taxes at the U.S. federal statutory rate
|
|
$
|
224.7
|
|
|
$
|
225.1
|
|
|
$
|
176.0
|
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
|
|
12.2
|
|
|
|
25.7
|
|
|
|
17.4
|
|
Foreign income taxed at different rates, net of U.S. foreign tax
credits
|
|
|
(22.3
|
)
|
|
|
(11.2
|
)
|
|
|
(5.6
|
)
|
Other
|
|
|
7.7
|
|
|
|
2.8
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
222.3
|
|
|
$
|
242.4
|
|
|
$
|
194.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Taxes
Significant components of the Companys net deferred tax
assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Receivable allowances and reserves
|
|
$
|
30.2
|
|
|
$
|
26.9
|
|
Inventory basis difference
|
|
|
19.0
|
|
|
|
9.9
|
|
Other
|
|
|
25.6
|
|
|
|
7.5
|
|
Net operating losses and other tax attributed carryforwards
|
|
|
2.1
|
|
|
|
0.1
|
|
Valuation allowance
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets (liabilities)
|
|
|
76.6
|
|
|
|
44.4
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
42.5
|
|
|
|
36.2
|
|
Goodwill and other intangible assets
|
|
|
(142.0
|
)
|
|
|
(96.3
|
)
|
Net operating losses carryforwards
|
|
|
3.2
|
|
|
|
5.4
|
|
Cumulative translation adjustment and hedges
|
|
|
20.4
|
|
|
|
2.0
|
|
Deferred compensation
|
|
|
61.0
|
|
|
|
35.2
|
|
Deferred income
|
|
|
58.4
|
|
|
|
72.5
|
|
Unrecogized tax
benefits(a)
|
|
|
39.1
|
|
|
|
|
|
Other
|
|
|
10.2
|
|
|
|
3.5
|
|
Valuation allowance
|
|
|
(0.8
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
(liabilities)(b)
|
|
|
92.0
|
|
|
|
56.9
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
168.6
|
|
|
$
|
101.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Associated with the adoption of
FIN 48. See related discussion below.
|
|
(b) |
|
Net non-current deferred tax
balance as of March 29, 2008 is comprised of non-current
deferred tax assets of $116.9 million included within
deferred tax assets and non-current deferred tax liabilities of
$24.9 million included within other non-current liabilities
in the consolidated balance sheet.
|
F-28
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has available federal, state and foreign net
operating loss carryforwards of $0.9 million,
$5.4 million and $11.6 million, respectively, for tax
purposes to offset future taxable income. The net operating loss
carryforwards expire beginning in Fiscal 2009. 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.
Also, the Company has available state and foreign net operating
loss carryforwards of $7.9 million and $1.2 million,
respectively, for which no net deferred tax asset has been
recognized. A full valuation allowance has been recorded since
management does not believe that the Company will more likely
than not be able to utilize these carryforwards to offset future
taxable income. Subsequent recognition of these deferred tax
assets would result in an income tax benefit in the year of such
recognition.
Provision has not been made for U.S. or additional foreign
taxes on $418.0 million of undistributed earnings of
foreign subsidiaries. Those earnings have been and are expected
to continue to be reinvested. These earnings could become
subject to tax if they were remitted as dividends, if foreign
earnings were lent to Polo Ralph Lauren Corporation
(PRLC), a subsidiary or a U.S. affiliate of
PRLC, or if the stock of the subsidiaries were sold.
Determination of the amount of unrecognized deferred tax
liability with respect to such earnings is not practical.
Management believes that the amount of the additional taxes that
might be payable on the earnings of foreign subsidiaries, if
remitted, would be partially offset by U.S. foreign tax
credits.
Uncertain
Income Tax Benefits
Impact of
FIN 48 Adoption
As a result of the adoption of FIN 48, the Company
recognized a $62.5 million reduction in retained earnings
as the cumulative effect to adjust its net liability for
unrecognized tax benefits as of April 1, 2007. This
adjustment consisted of a $99.9 million increase to the
Companys liabilities for unrecognized tax benefits, offset
in part by a $37.4 million increase to the Companys
deferred tax assets principally representing the value of future
tax benefits that could be realized at the U.S. federal
level if the related liabilities for unrecognized tax benefits
at the state and local levels ultimately are required to be
settled. The total balance of unrecognized tax benefits,
including interest and penalties, was $173.8 million as of
April 1, 2007. The total amount of unrecognized tax
benefits that, if recognized, would affect the Companys
effective tax rate was $123.4 million as of April 1,
2007.
The Company classifies interest and penalties related to
unrecognized tax benefits as part of its provision for income
taxes. Accordingly, included in the liability for unrecognized
tax benefits is a liability for interest and penalties in the
amount of $45.7 million as of April 1, 2007.
Fiscal
2008 Activity
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits, excluding interest and penalties, for
Fiscal 2008 is presented below:
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 29,
|
|
|
|
2008
|
|
|
Unrecognized tax benefits beginning balance
|
|
$
|
128.1
|
|
Additions related to current period tax positions
|
|
|
11.5
|
|
Additions related to prior periods tax positions
|
|
|
15.5
|
|
Reductions related to prior periods tax positions
|
|
|
(22.2
|
)
|
Reductions related to settlements with taxing authorities
|
|
|
(10.2
|
)
|
Reductions related to expiration of statutes of limitations
|
|
|
(5.2
|
)
|
|
|
|
|
|
Unrecognized tax benefits ending balance
|
|
$
|
117.5
|
|
|
|
|
|
|
F-29
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amounts of accrued
interest and penalties related to unrecognized tax benefits for
Fiscal 2008 is presented below:
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 29,
|
|
|
|
2008
|
|
|
Accrued interest and penalties beginning balance
|
|
$
|
45.7
|
|
Additions/reductions charged to expense
|
|
|
7.6
|
|
Reductions related to expiration of statutes of limitations
|
|
|
(1.4
|
)
|
Reductions related to settlements with taxing authorities
|
|
|
(5.1
|
)
|
Additions/reductions charged to cumulative translation adjustment
|
|
|
1.2
|
|
|
|
|
|
|
Accrued interest and penalties ending balance
|
|
$
|
48.0
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits, including
interest and penalties, was $165.5 million as of
March 29, 2008, comprised of $10.3 million included
within accrued expenses and other and $155.2 million
included within non-current liability for unrecognized tax
benefits in the consolidated balance sheet. The total amount of
unrecognized tax benefits that, if recognized, would affect the
Companys effective tax rate was $123.6 million as of
March 29, 2008.
Future
Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the
Companys tax positions is subject to change based on
future events including, but not limited to, the settlements of
ongoing audits
and/or the
expiration of applicable statutes of limitations. Although the
outcomes and timing of such events are highly uncertain, it is
reasonably possible that the balance of gross unrecognized tax
benefits, excluding interest and penalties, could potentially be
reduced by up to approximately $40 million during the next
12 months. However, changes in the occurrence, expected
outcomes and timing of those events could cause the
Companys current estimate to change materially in the
future.
The Company files tax returns in the U.S. federal and
various state, local and foreign jurisdictions. With few
exceptions for those tax returns, the Company is no longer
subject to examinations by the relevant tax authorities for
years prior to Fiscal 2000.
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
1.2% Yen-denominated term loan due May 2008
|
|
|
206.4
|
|
|
|
|
|
|
|
|
|
4.5% Euro-denominated notes due October 2013
|
|
|
472.8
|
|
|
|
398.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
679.2
|
|
|
|
398.8
|
|
|
|
|
|
Less: current maturities of debt
|
|
|
(206.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
472.8
|
|
|
$
|
398.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
Debt
The Company has outstanding approximately 300 million
principal amount of 4.5% notes due October 4, 2013
(the 2006 Euro Debt). The Company has the option to
redeem all of the 2006 Euro Debt at any time at a redemption
price equal to the principal amount plus a premium. The Company
also has the option to redeem all of the 2006 Euro Debt at any
time at par plus accrued interest in the event of certain
developments involving U.S. tax
F-30
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
law. Partial redemption of the 2006 Euro Debt is not permitted
in either instance. In the event of a change of control of the
Company, each holder of the 2006 Euro Debt has the option to
require the Company to redeem the 2006 Euro Debt at its
principal amount plus accrued interest.
Refer to Note 14 for discussion of the designation of the
Companys 2006 Euro Debt as a hedge of its net investment
in certain of its European subsidiaries.
Revolving
Credit Facility and Term Loan
The Company has a credit facility that provides for a
$450 million unsecured revolving line of credit through
November 2011 (the Credit Facility). The Credit
Facility also is used to support the issuance of letters of
credit. As of March 29, 2008, there were no borrowings
outstanding under the Credit Facility, but the Company was
contingently liable for $23.0 million of outstanding
letters of credit (primarily relating to inventory purchase
commitments). The Company has the ability to expand its
borrowing availability to $600 million subject to the
agreement of one or more new or existing lenders under the
facility to increase their commitments. There are no mandatory
reductions in borrowing ability throughout the term of the
Credit Facility.
Borrowings under the Credit Facility bear interest, at the
Companys option, either at (a) a base rate determined
by reference to the higher of (i) the prime commercial
lending rate of JP Morgan Chase Bank, N.A. in effect from time
to time and (ii) the weighted-average overnight Federal
funds rate (as published by the Federal Reserve Bank of New
York) plus 50 basis points or (b) a LIBOR rate in
effect from time to time, as adjusted for the Federal Reserve
Boards Euro currency liabilities maximum reserve
percentage plus a margin defined in the Credit Facility
(the applicable margin). The applicable margin of
35 basis points is subject to adjustment based on the
Companys credit ratings.
In addition to paying interest on any outstanding borrowings
under the Credit Facility, the Company is required to pay a
commitment fee to the lenders under the Credit Facility in
respect of the unutilized commitments. The commitment fee rate
of 8 basis points under the terms of the Credit Facility
also is subject to adjustment based on the Companys credit
ratings.
The Credit Facility contains a number of covenants that, among
other things, restrict the Companys ability, subject to
specified exceptions, to incur additional debt; incur liens and
contingent liabilities; sell or dispose of assets, including
equity interests; merge with or acquire other companies;
liquidate or dissolve itself; engage in businesses that are not
in a related line of business; make loans, advances or
guarantees; engage in transactions with affiliates; and make
investments. In addition, the Credit Facility requires the
Company to maintain a maximum ratio of Adjusted Debt to
Consolidated EBITDAR (the leverage ratio), as such
terms are defined in the Credit Facility. As of March 29,
2008, no Event of Default (as such term is defined pursuant to
the Credit Facility) has occurred under the Companys
Credit Facility.
Upon the occurrence of an Event of Default under the Credit
Facility, the lenders may cease making loans, terminate the
Credit Facility and declare all amounts outstanding to be
immediately due and payable. The Credit Facility specifies a
number of events of default (many of which are subject to
applicable grace periods), including, among others, the failure
to make timely principal and interest payments or to satisfy the
covenants, including the financial covenant described above.
Additionally, the Credit Facility provides that an Event of
Default will occur if Mr. Ralph Lauren, the Companys
Chairman and Chief Executive Officer, and related entities fail
to maintain a specified minimum percentage of the voting power
of the Companys common stock.
The Credit Facility was amended and restated as of May 22,
2007 to provide for the addition of a ¥20.5 billion
loan (the Term Loan). The Term Loan was made to Polo
JP Acqui B.V., a wholly owned subsidiary of the Company, and was
guaranteed by the Company, as well as the other subsidiaries of
the Company which currently guarantee the Credit Facility. The
proceeds of the Term Loan were used to finance the Japanese
Business Acquisitions. Borrowings under the Term Loan bore
interest at a fixed rate of 1.2%. The Company repaid the
F-31
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
borrowing by its maturity date on May 22, 2008 using
approximately $200 million of Impact 21s cash on-hand
acquired as part of the acquisition. See Note 5 for further
discussion of the Japanese Business Acquisitions.
Fair
Value of Debt
Based on the prevailing level of market interest rates as of
March 29, 2008 and March 31, 2007, the carrying value
of the Companys 2006 Euro Debt exceeded its fair value by
approximately $50 million and $4 million,
respectively. As of March 31, 2008, the carrying value of
the Companys Term Loan approximated its fair value.
Unrealized gains or losses on debt do not result in the
realization or expenditure of cash, unless the debt is retired
prior to its maturity.
|
|
14.
|
Derivative
Financial Instruments
|
The Company primarily has exposure to changes in foreign
currency exchange rates relating to certain anticipated cash
flows from its international operations and possible declines in
the fair value of reported net assets of certain of its foreign
operations, as well as changes in the fair value of its
fixed-rate debt relating to changes in interest rates.
Consequently, the Company periodically uses derivative financial
instruments to manage such risks.
The following table summarizes the Companys outstanding
derivative instruments as of March 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Asset
|
|
|
Balance
|
|
|
(Liability)
|
|
|
|
Hedge
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Sheet
|
|
|
Carrying
|
|
|
Sheet
|
|
|
Carrying
|
|
Instrument(a)
|
|
Type(b)
|
|
Hedged Item
|
|
Amount
|
|
|
Value
|
|
|
Location(c)
|
|
|
Value
|
|
|
Location(c)
|
|
|
Value
|
|
|
|
|
|
|
|
(millions)
|
|
|
Forward Sale Contracts
|
|
CF
|
|
USD inventory purchases by euro-functional sub
|
|
$
|
220.0
|
|
|
$
|
(21.9
|
)
|
|
|
|
|
|
$
|
|
|
|
|
AE
|
|
|
$
|
(21.9
|
)
|
Forward Sale Contracts
|
|
CF
|
|
Euro royalty payments
|
|
|
14.2
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
AE
|
|
|
|
(1.0
|
)
|
Forward Sale Contracts
|
|
UN
|
|
USD inventory purchases by yen-functional sub
|
|
|
11.7
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
AE
|
|
|
|
(0.3
|
)
|
Forward Sale Contracts
|
|
UN
|
|
Yen loan receivable
|
|
|
5.0
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
AE
|
|
|
|
(0.4
|
)
|
Forward Sale Contracts
|
|
UN
|
|
GBP-denominated revenues
|
|
|
48.2
|
|
|
|
1.7
|
|
|
|
PP
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Forward Purchase Contracts
|
|
CF
|
|
Euro interest payment
|
|
|
19.2
|
|
|
|
1.9
|
|
|
|
PP
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Forward Purchase Contracts
|
|
CF
|
|
Euro marketing contributions
|
|
|
1.9
|
|
|
|
0.1
|
|
|
|
PP
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Forward Purchase Contracts
|
|
CF
|
|
Euro inventory purchases
|
|
|
37.0
|
|
|
|
1.4
|
|
|
|
PP
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
Forward Purchase Contracts
|
|
CF
|
|
Swiss franc obligations
|
|
|
30.2
|
|
|
|
0.5
|
|
|
|
PP
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Euro Debt
|
|
NI
|
|
Euro net investment
|
|
|
381.2
|
|
|
|
(423.0
|
)
|
|
|
|
|
|
|
|
|
|
|
LTD
|
|
|
|
(472.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
768.6
|
|
|
$
|
(441.0
|
)
|
|
|
|
|
|
$
|
5.6
|
|
|
|
|
|
|
$
|
(496.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys outstanding
derivative instruments as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Asset
|
|
|
Balance
|
|
|
(Liability)
|
|
|
|
Hedge
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Sheet
|
|
|
Carrying
|
|
|
Sheet
|
|
|
Carrying
|
|
Instrument(a)
|
|
Type(b)
|
|
Hedged Item
|
|
Amount
|
|
|
Value
|
|
|
Location(c)
|
|
|
Value
|
|
|
Location(c)
|
|
|
Value
|
|
|
|
|
|
|
|
(millions)
|
|
|
Forward Sale Contracts
|
|
CF
|
|
USD inventory purchases by euro-functional sub
|
|
$
|
160.0
|
|
|
$
|
(1.8
|
)
|
|
|
|
|
|
$
|
|
|
|
|
AE
|
|
|
$
|
(1.8
|
)
|
Forward Sale Contracts
|
|
CF
|
|
USD royalty payments by yen-functional sub
|
|
|
34.2
|
|
|
|
0.2
|
|
|
|
PP
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Forward Sale Contracts
|
|
CF
|
|
Euro marketing contributions
|
|
|
19.6
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
AE
|
|
|
|
(0.3
|
)
|
Euro Debt
|
|
NI
|
|
Euro net investment
|
|
|
381.2
|
|
|
|
(394.8
|
)
|
|
|
|
|
|
|
|
|
|
|
LTD
|
|
|
|
(398.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
595.0
|
|
|
$
|
(396.7
|
)
|
|
|
|
|
|
$
|
0.2
|
|
|
|
|
|
|
$
|
(400.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Forward Sale Contracts = Forward
exchange contracts for sale of foreign currencies; Forward
Purchase Contracts = Forward exchange contracts for purchase of
foreign currencies; Euro Debt = 300 million principal
notes due October 2013.
|
|
(b) |
|
CF = Cash flow hedge; UN =
Undesignated hedge; NI = Net investment hedge.
|
|
(c) |
|
PP = Prepaid expenses and other; AE
= Accrued expenses and other; LTD = Long-term debt.
|
The following is a summary of the Companys risk management
strategies and the effect of those strategies on the
Companys consolidated financial statements.
Foreign
Currency Risk Management
Forward
Foreign Currency Exchange Contracts
General
The Company enters into forward foreign currency exchange
contracts as hedges to reduce its risk from exchange rate
fluctuations on inventory purchases, intercompany royalty
payments made by certain of its international operations,
intercompany contributions made to fund certain marketing
efforts of its international operations, other foreign
currency-denominated operational obligations including payroll,
rent, insurance, and benefit payments, and foreign
currency-denominated revenues. As part of its overall strategy
to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, primarily to changes in the value of
the Euro, the Japanese Yen, the Swiss Franc, and the British
Pound Sterling, the Company hedges a portion of its foreign
currency exposures anticipated over the ensuing twelve-month to
two-year periods. In doing so, the Company uses foreign currency
exchange contracts that generally have maturities of three
months to two years to provide continuing coverage throughout
the hedging period.
The Company records the above described foreign currency
exchange contracts at fair value in its consolidated balance
sheets. Foreign currency exchange contracts designated as cash
flow hedges at hedge inception are accounted for in accordance
with FAS 133. As such, to the extent these hedges are
effective the related gains or losses are deferred in
stockholders equity as a component of accumulated other
comprehensive income. These deferred gains and losses are then
recognized in our consolidated statements of operations as
follows:
|
|
|
|
|
Inventory Purchases Recognized as part of the
cost of the inventory being hedged within cost of goods sold
when the related inventory is sold.
|
|
|
|
Intercompany Royalty Payments and Marketing
Contributions Recognized within foreign currency
gains (losses) in the period in which the related royalties or
marketing contributions being hedged are received or paid.
|
|
|
|
Operational Obligations Recognized primarily
within SG&A expenses in the period in which the hedged
forecasted transaction affects earnings.
|
To the extent that any of these foreign currency exchange
contracts are not considered to be perfectly effective in
offsetting the change in the value of the hedged item, any
changes in fair value relating to the ineffective portion are
immediately recognized in earnings. If a hedge relationship is
terminated, the change in fair value of the derivative recorded
in accumulated other comprehensive income is recognized in
earnings when the hedged cash flows are expended or received,
consistent with the original hedging strategy. In addition,
changes in fair value relating to undesignated foreign currency
exchange contracts are immediately recognized in earnings.
Over the next twelve months, it is expected that
$17.9 million of net losses deferred in accumulated other
comprehensive income related to general foreign currency
exchange contracts outstanding as of March 29, 2008 will be
recognized in earnings. The Company recognized a net loss on
foreign currency exchange contracts in earnings of approximately
$8 million for Fiscal 2008, and net gains of approximately
$4 million and $5 million for Fiscal 2007 and Fiscal
2006, respectively.
F-33
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Forward
Foreign Currency Exchange Contracts Other
On October 10, 2007, the Company entered into a foreign
exchange contract to purchase 13.5 million at a fixed
rate. This contract hedges the foreign currency exposure related
to the annual Euro interest payment due on October 6, 2008
for Fiscal 2009 in connection with the Companys
outstanding 2006 Euro Debt. In accordance with FAS 133, the
contract has been designated as a cash flow hedge. Since neither
the terms of the hedge contract or the underlying exposure have
changed, the related gains of $0.7 million have been
reclassified from stockholders equity to foreign currency
gains (losses) within our consolidated statement of operations
to offset the related transaction loss arising from the
remeasurement of the associated foreign currency-denominated
accrued interest liability, as permitted by FAS 133, during
Fiscal 2008.
On April 2, 2007, the Company entered into a similar
foreign exchange contract to purchase 13.5 million at
a fixed rate, hedging the foreign currency exposure related to
the annual Euro interest payment made on October 4, 2007
for Fiscal 2008. This contract also was designated as a cash
flow hedge. Consistent with the accounting treatment discussed
above, the related gains of $1.1 million were reclassified
from stockholders equity to foreign currency gains
(losses) within our consolidated statement of operations during
Fiscal 2008.
During the first quarter of Fiscal 2008, the Company entered
into foreign currency option contracts with a notional value of
$159 million giving the Company the right, but not the
obligation, to purchase foreign currencies at fixed rates by
May 23, 2007. These contracts hedged the majority of the
foreign currency exposure related to the financing of the
Japanese Business Acquisitions, but did not qualify under
FAS 133 for hedge accounting treatment. The Company did not
exercise any of the contracts and recognized a loss of
$1.6 million within foreign currency gains (losses) in our
consolidated statement of operations during the first quarter of
Fiscal 2008.
In addition, during the fourth quarter of Fiscal 2008, the
Company entered into a foreign currency exchange contract with a
notional value of $5 million hedging the foreign currency
exposure related to an intercompany term loan provided by PRLC
to Ralph Lauren Retail Japan (RLRJ) in connection
with the Japanese Business Acquisitions minority squeeze-out, as
discussed in Note 5. This contract, which hedges the
foreign currency exposure related to a Yen-denominated payment
to be made by RLRJ during the first quarter of Fiscal 2009, did
not qualify under FAS 133 for hedge accounting treatment.
As such, the Company recognized a related loss of
$0.4 million within foreign currency gains (losses) in our
consolidated statement of operations during Fiscal 2008.
Over the next twelve months, it is expected that
$0.7 million of net gains deferred in accumulated other
comprehensive income related to the October 10, 2007 fixed
rate foreign exchange contract outstanding as of March 29,
2008 will be recognized in earnings. A total of
$1.8 million has been reclassified from stockholders
equity to foreign currency gains (losses) in Fiscal 2008. No
related gains (losses) were recognized by the Company in Fiscal
2007 or Fiscal 2006.
Hedge of
a Net Investment in Certain European Subsidiaries
The Company designated the entire principal amount of its
outstanding 2006 Euro Debt as a hedge of its net investment in
certain of its European subsidiaries. As required by
FAS 133, the changes in fair value of a derivative
instrument or a non-derivative financial instrument (such as
debt) that is designated as a hedge of a net investment in a
foreign operation are reported in the same manner as a
translation adjustment under FAS No. 52, Foreign
Currency Translation, to the extent it is effective as a
hedge. As such, changes in the fair value of the 2006 Euro Debt
resulting from changes in the Euro exchange rate have been, and
continue to be, reported in stockholders equity as a
component of accumulated other comprehensive income. The Company
recorded within accumulated other comprehensive income the
translation effects of the 2006 Euro Debt to U.S. dollars,
resulting in aggregate net losses of $45.4 million for
Fiscal 2008 and $24.5 million for Fiscal 2007, and an
aggregate net gain of $4.2 million for Fiscal 2006.
F-34
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest
Rate Risk Management
Historically, the Company has used floating-rate interest rate
swap agreements to hedge changes in the fair value of its
fixed-rate 1999 Euro Debt. These interest swap agreements, which
effectively converted fixed interest rate payments on the
Companys 1999 Euro Debt to a floating-rate basis, were
designated as a fair value hedge in accordance with
FAS 133. All interest rate swap agreements were terminated
in late Fiscal 2006 and there were no outstanding agreements at
the end of any fiscal year presented.
During the first six months of Fiscal 2007, the Company entered
into three forward-starting interest rate swap contracts
aggregating 200 million notional amount of
indebtedness in anticipation of the Companys proposed
refinancing of the 1999 Euro Debt, which was completed in
October 2006. The Company designated these agreements as a cash
flow hedge of a forecasted transaction to issue new debt in
connection with the planned refinancing of its 1999 Euro Debt.
The interest rate swaps hedged a total of
200.0 million, a portion of the underlying interest
rate exposure on the anticipated refinancing. Under the terms of
the three interest swap contracts, the Company paid a
weighted-average fixed rate of interest of 4.1% and received
variable interest based upon six-month EURIBOR. The Company
terminated the swaps on September 28, 2006, which was the
date the interest rate for the 2006 Euro Debt was determined. As
a result, the Company made a payment of approximately
3.5 million ($4.4 million based on the exchange
rate in effect on that date) in settlement of the swaps. An
amount of $0.2 million was recognized as a loss for the
three months ending September 30, 2006 due to the partial
ineffectiveness of the cash flow hedge as a result of the
forecasted transaction closing on October 5, 2006 instead
of November 22, 2006 (the maturity date of the 1999 Euro
Debt). The remaining loss of $4.2 million has been deferred
as a component of comprehensive income within stockholders
equity and is being recognized in earnings as an adjustment to
interest expense over the seven-year term of the 2006 Euro Debt.
|
|
15.
|
Commitments
and Contingencies
|
Leases
The Company operates its retail stores under various leasing
arrangements. The Company also occupies various office and
warehouse facilities and uses certain equipment under numerous
lease agreements. Such leasing arrangements are accounted for
under the provisions of FAS 13 as either operating leases
or capital leases. In this context, capital leases include
leases whereby the Company is considered to have the substantive
risks of ownership during construction of a leased property
pursuant to the provisions of
EITF 97-10.
Information on the Companys operating and capital leasing
activities is set forth below.
Operating
Leases
The Company is typically required to make minimum rental
payments, and often contingent rental payments, under its
operating leases. Substantially all factory and full-price
retail store leases provide for contingent rentals based upon
sales, and certain rental agreements require payment based
solely on a percentage of sales. Terms of the Companys
leases generally contain renewal options, rent escalation
clauses and landlord incentives. Rent expense, net of sublease
income which was not significant, was approximately
$208 million in Fiscal 2008, $172 million in Fiscal
2007 and $137 million in Fiscal 2006. Such amounts include
contingent rental charges of approximately $14 million for
Fiscal 2008, and approximately $12 million for both Fiscal
2007 and Fiscal 2006. In addition to such amounts, the Company
is normally required to pay taxes, insurance and occupancy costs
relating to the leased real estate properties.
F-35
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 29, 2008, future minimum rental payments under
noncancelable operating leases with lease terms in excess of one
year were as follows:
|
|
|
|
|
|
|
Annual Minimum
|
|
|
|
Operating Lease
|
|
|
|
Payments(a)
|
|
|
|
(millions)
|
|
|
Fiscal 2009
|
|
$
|
188.1
|
|
Fiscal 2010
|
|
|
174.0
|
|
Fiscal 2011
|
|
|
147.3
|
|
Fiscal 2012
|
|
|
132.5
|
|
Fiscal 2013
|
|
|
123.2
|
|
Fiscal 2014 and thereafter
|
|
|
670.7
|
|
|
|
|
|
|
Total
|
|
$
|
1,435.8
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net of sublease income, which is
not significant in any period.
|
Capital
Leases
Assets under capital leases amounted to $38 million at the
end of Fiscal 2008 and $56 million at the end of Fiscal
2007. Such assets are classified within property and equipment
in the consolidated balance sheets. As of March 29, 2008,
future minimum rental payments under noncancelable capital
leases with lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
Annual Minimum
|
|
|
|
Capital Lease
|
|
|
|
Payments(a)
|
|
|
|
(millions)
|
|
|
Fiscal 2009
|
|
$
|
8.0
|
|
Fiscal 2010
|
|
|
7.5
|
|
Fiscal 2011
|
|
|
7.4
|
|
Fiscal 2012
|
|
|
7.4
|
|
Fiscal 2013
|
|
|
5.1
|
|
Fiscal 2014 and thereafter
|
|
|
37.8
|
|
|
|
|
|
|
Total
|
|
$
|
73.2
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net of sublease income, which is
not significant in any period.
|
Employment
Agreements
The Company has employment agreements with certain executives in
the normal course of business which provide for compensation and
certain other benefits. These agreements also provide for
severance payments under certain circumstances.
Other
Commitments
Other off-balance sheet firm commitments, which include
inventory purchase commitments, outstanding letters of credit
and minimum funding commitments to investees, amounted to
approximately $727 million as of March 29, 2008.
F-36
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Litigation
Credit
Card Matters
The Company is subject to various claims relating to allegations
of security breaches in certain of its retail store information
systems. These claims have been made by various credit card
issuers, issuing banks and credit card processors with respect
to cards issued by them pursuant to the rules imposed by certain
credit card issuers, particularly
Visa®
and
MasterCard®.
The allegations include fraudulent credit card charges, the cost
of replacing credit cards, related monitoring expenses and other
related claims.
In Fiscal 2005, the Company was subject to various claims
relating to an alleged security breach of its point-of-sale
systems that occurred at certain Polo retail stores in the
U.S. The Company had previously recorded a reserve for an
aggregate amount of $13 million to provide for its best
estimate of losses related to these claims. The Company
ultimately paid approximately $11 million in settlement of
these various claims and the eligibility period for filing any
such claims has expired.
In addition, in the third quarter of Fiscal 2007, the Company
was notified of an alleged compromise of its retail store
information systems that process its credit card data for
certain Club Monaco stores in Canada. As of the end of Fiscal
2007, the Company had recorded a total reserve of
$5.0 million for this matter based on its best estimate of
exposure at that time. While the final settlement of this matter
is pending approval by the credit card issuers, the
Companys Canadian credit card processor returned
three-quarters of the funds previously escrowed to cover
potential claims by the end of April 2008. Accordingly, based on
the progress in this matter and the available evidence to date,
the Company reversed $4.1 million of its original
$5.0 million reserve into income during Fiscal 2008. The
Company was also recently advised that the Quebec Privacy
Commission has ceased its investigation of Club Monaco in
connection with this matter.
The Company is cooperating with law enforcement authorities in
both the U.S. and Canada in their investigations of these
matters.
Wathne
Imports Litigation
On August 19, 2005, Wathne Imports, Ltd.
(Wathne), our domestic licensee for luggage and
handbags, filed a complaint in the U.S. District Court in
the Southern District of New York against us and Ralph Lauren,
our Chairman and Chief Executive Officer, asserting, among other
things, federal trademark law violations, breach of contract,
breach of obligations of good faith and fair dealing, fraud and
negligent misrepresentation. The complaint sought, among other
relief, injunctive relief, compensatory damages in excess of
$250 million and punitive damages of not less than
$750 million. On September 13, 2005, Wathne withdrew
this complaint from the U.S. District Court and filed a
complaint in the Supreme Court of the State of New York, New
York County, making substantially the same allegations and
claims (excluding the federal trademark claims), and seeking
similar relief. On February 1, 2006, the court granted our
motion to dismiss all of the causes of action, including the
cause of action against Mr. Lauren, except for the breach
of contract claims, and denied Wathnes motion for a
preliminary injunction. We believe this lawsuit to be without
merit, and moved for summary judgment on the remaining claims.
Wathne cross-moved for partial summary judgment. A hearing on
these motions occurred on November 1, 2007. The judge
presiding in this case provided a written ruling on the summary
judgment motion on April 11, 2008. The Court granted
Polos summary judgment motion to dismiss in large measure,
and denied Wathnes cross-motion. Wathne has appealed the
dismissal of its claims. A trial date has not yet been
established in connection with this matter. We intend to
continue to contest the few remaining claims in this lawsuit
vigorously. Accordingly, management does not expect that the
ultimate resolution of this matter will have a material adverse
effect on the Companys liquidity or financial position.
F-37
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Polo
Trademark Litigation
On October 1, 1999, we filed a lawsuit against the
U.S. Polo Association Inc. (USPA), Jordache,
Ltd. (Jordache) and certain other entities
affiliated with them, alleging that the defendants were
infringing on our trademarks. In connection with this lawsuit,
on July 19, 2001, the USPA and Jordache filed a lawsuit
against us in the U.S. District Court for the Southern
District of New York. This suit, which was effectively a
counterclaim by them in connection with the original trademark
action, asserted claims related to our actions in connection
with our pursuit of claims against the USPA and Jordache for
trademark infringement and other unlawful conduct. Their claims
stemmed from our contacts with the USPAs and
Jordaches retailers in which we informed these retailers
of our position in the original trademark action. All claims and
counterclaims, except for our claims that the defendants
violated the Companys trademark rights, were settled in
September 2003. We did not pay any damages in this settlement.
On July 30, 2004, the Court denied all motions for summary
judgment, and trial began on October 3, 2005 with respect
to the four double horseman symbols that the
defendants sought to use. On October 20, 2005, the jury
rendered a verdict, finding that one of the defendants
marks violated our world famous Polo Player Symbol trademark and
enjoining its further use, but allowing the defendants to use
the remaining three marks. On November 16, 2005, we filed a
motion before the trial court to overturn the jurys
decision and hold a new trial with respect to the three marks
that the jury found not to be infringing. The USPA and Jordache
opposed our motion, but did not move to overturn the jurys
decision that the fourth double horseman logo did infringe on
our trademarks. On July 7, 2006, the judge denied our
motion to overturn the jurys decision. On August 4,
2006, the Company filed an appeal of the judges decision
to deny the Companys motion for a new trial to the
U.S. Court of Appeals for the Second Circuit. On
March 4, 2008, the Court of Appeals issued a decision
affirming the judgment of the U.S. District Court for the
Southern District of New York.
California
Labor Law Litigation
On March 2, 2006, a former employee at our Club Monaco
store in Los Angeles, California filed a lawsuit against us in
the San Francisco Superior Court alleging violations of
California wage and hour laws. The plaintiff purports to
represent a class of Club Monaco store employees who allegedly
have been injured by being improperly classified as exempt
employees and thereby not receiving compensation for overtime
and not receiving meal and rest breaks. The complaint seeks an
unspecified amount of compensatory damages, disgorgement of
profits, attorneys fees and injunctive relief. We believe
this suit is without merit and intend to contest it vigorously.
Accordingly, management does not expect that the ultimate
resolution of this matter will have a material adverse effect on
the Companys liquidity or financial position.
On May 30, 2006, four former employees of our Ralph Lauren
stores in Palo Alto and San Francisco, California filed a
lawsuit in the San Francisco Superior Court alleging
violations of California wage and hour laws. The plaintiffs
purport to represent a class of employees who allegedly have
been injured by not properly being paid commission earnings, not
being paid overtime, not receiving rest breaks, being forced to
work off of the clock while waiting to enter or leave the store
and being falsely imprisoned while waiting to leave the store.
The complaint seeks an unspecified amount of compensatory
damages, damages for emotional distress, disgorgement of
profits, punitive damages, attorneys fees and injunctive
and declaratory relief. We have filed a cross-claim against one
of the plaintiffs for his role in allegedly assisting a former
employee misappropriate Company property. Subsequent to
answering the complaint, we had the action moved to the United
States District Court for the Northern District of California.
We believe this suit is without merit and intend to contest it
vigorously. Accordingly, management does not expect that the
ultimate resolution of this matter will have a material adverse
effect on the Companys liquidity or financial position.
On August 21, 2007, eleven former and current employees of
our Club Monaco stores in California filed a lawsuit in Los
Angeles Superior Court alleging similar claims as the Club
Monaco action in San Francisco. The complaint seeks an
unspecified amount of compensatory damages, attorneys fees
and punitive damages. We
F-38
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
believe this suit is without merit and intend to contest it
vigorously. Accordingly, management does not expect that the
ultimate resolution of this matter will have a material adverse
effect on the Companys liquidity or financial position.
Other
Matters
We are otherwise involved from time to time in legal claims and
proceedings involving credit card fraud, trademark and
intellectual property, licensing, employee relations and other
matters incidental to our business. We believe that the
resolution of these other matters currently pending will not
individually or in the aggregate have a material adverse effect
on our financial condition or results of operations.
Capital
Stock
The Companys capital stock consists of two classes of
common stock. There are 500 million shares of Class A
common stock and 100 million shares of Class B common
stock authorized to be issued. Shares of Class A and
Class B common stock have substantially identical rights,
except with respect to voting rights. Holders of Class A
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 both classes of stock vote together as a single class
on all matters presented to the stockholders for their approval,
except with respect to the election and removal of directors or
as otherwise required by applicable law. All outstanding shares
of Class B common stock are owned by Mr. Ralph Lauren,
Chairman and Chief Executive Officer, and related entities.
Common
Stock Repurchase Program
In August 2007, the Companys Board of Directors approved
an expansion of the Companys existing common stock
repurchase program that allowed the Company to repurchase up to
an additional $250 million of Class A common stock.
Repurchases of shares of Class A common stock are subject
to overall business and market conditions. In Fiscal 2008,
6.1 million shares of Class A common stock were
repurchased at a cost of $476.4 million under the expanded
and pre-existing programs, including $24.0 million
(0.4 million shares) that was traded prior to the end of
the fiscal year for which settlement occurred in April 2008. The
remaining availability under the common stock repurchase program
was approximately $142 million as of March 29, 2008.
In addition, during Fiscal 2008, 0.3 million shares of
Class A common stock at a cost of $23.0 million were
surrendered to, or withheld by, the Company in satisfaction of
withholding taxes in connection with the vesting of awards under
the Companys 1997 Long-Term Stock Incentive Plan.
In Fiscal 2007, share repurchases amounted to 3.5 million
shares of Class A common stock at a cost of
$231.3 million. In Fiscal 2006, the Company repurchased
69.3 thousand shares of Class A common stock at a cost of
$3.8 million.
Repurchased shares are accounted for as treasury stock at cost
and will be held in treasury for future use.
In May 2008, the Companys Board of Directors approved a
further expansion of the Companys existing common stock
repurchase program that allowed the Company to repurchase up to
an additional $250 million of Class A common stock.
Dividends
Since 2003, the Company has maintained a regular quarterly cash
dividend of $0.05 per share, or $0.20 per share on an annual
basis, on its common stock. Dividends paid amounted to
$20.5 million in Fiscal 2008, $20.9 million in Fiscal
2007 and $20.8 million in Fiscal 2006.
F-39
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Accumulated
Other Comprehensive Income
|
The following summary sets forth the components of other
comprehensive income (loss), net of tax, accumulated in
stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Foreign
|
|
|
Net Unrealized
|
|
|
Net Unrealized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
Currency
|
|
|
Gains (Losses)
|
|
|
Gains (Losses)
|
|
|
Gains
|
|
|
Accumulated
|
|
|
|
Translation
|
|
|
on Derivative
|
|
|
on Available-
|
|
|
(Losses) on
|
|
|
Other
|
|
|
|
Gains
|
|
|
Financial
|
|
|
for-Sale
|
|
|
Defined
|
|
|
Comprehensive
|
|
|
|
(Losses)
|
|
|
Instruments(a)
|
|
|
Investments
|
|
|
Benefit Plans
|
|
|
Income (Loss)
|
|
|
|
(millions)
|
|
|
Balance at April 2, 2005
|
|
$
|
85.1
|
|
|
$
|
(55.2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29.9
|
|
Fiscal 2006 pretax
activity(b)
|
|
|
(28.0
|
)
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
(12.8
|
)
|
Fiscal 2006 tax benefit
(provision)(b)
|
|
|
3.9
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2006
|
|
|
61.0
|
|
|
|
(45.5
|
)
|
|
|
|
|
|
|
|
|
|
|
15.5
|
|
Fiscal 2007 pretax
activity(c)
|
|
|
53.1
|
|
|
|
(34.8
|
)
|
|
|
|
|
|
|
|
|
|
|
18.3
|
|
Fiscal 2007 tax benefit
(provision)(c)
|
|
|
1.2
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
115.3
|
|
|
|
(74.8
|
)
|
|
|
|
|
|
|
|
|
|
|
40.5
|
|
Fiscal 2008 pretax
activity(d)
|
|
|
144.7
|
|
|
|
(90.8
|
)
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
53.3
|
|
Fiscal 2008 tax benefit
(provision)(d)
|
|
|
(8.9
|
)
|
|
|
27.5
|
|
|
|
0.2
|
|
|
|
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2008
|
|
$
|
251.1
|
|
|
$
|
(138.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
112.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes deferred gains and losses
on hedging instruments, such as foreign currency exchange
contracts designated as cash flow hedges and changes in the fair
value of the Companys Euro-denominated debt designated as
a hedge of changes in the fair value of the Companys net
investment in certain of its European subsidiaries.
|
|
(b) |
|
Includes a net reclassification
adjustment of $4.6 million (net of $0.2 million tax
effect) for realized derivative financial instrument gains in
the current period that were included as an unrealized gain in
comprehensive income in a prior period.
|
|
(c) |
|
Includes a net reclassification
adjustment of $3.1 million (net of $0.5 million tax
effect) for realized derivative financial instrument gains in
the current period that were included as an unrealized gain in
comprehensive income in a prior period.
|
|
(d) |
|
Includes a net reclassification
adjustment of $6.6 million (net of $1.2 million tax
effect) for realized derivative financial instrument losses in
the current period that were included as an unrealized loss in
comprehensive income in a prior period.
|
|
|
18.
|
Stock-based
Compensation
|
Effective April 2, 2006, the Company adopted FAS 123R
using the modified prospective application transition method.
Under this transition method, the compensation expense
recognized in the consolidated statements of operations
beginning April 2, 2006 includes compensation expense for
(a) all stock-based payments granted prior to, but not yet
vested as of, April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
FAS 123 and (b) all stock-based payments granted
subsequent to April 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of
FAS 123R.
F-40
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact
on Results
A summary of the total compensation expense and associated
income tax benefits recognized related to stock-based
compensation arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
March 29,
|
|
March 31,
|
|
April 1,
|
|
|
2008
|
|
2007
|
|
2006(a)
|
|
|
(millions)
|
|
Compensation expense
|
|
$
|
(70.7
|
)
|
|
$
|
(43.6
|
)
|
|
$
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
20.2
|
|
|
$
|
17.5
|
|
|
$
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Prior to the adoption of
FAS 123R and in accordance with existing accounting
principles, the Company recognized stock-based compensation
expense in connection with both service-based and
performance-based restricted stock units (RSUs), as
well as for shares of restricted stock.
|
Transition
Information
Prior to April 2, 2006, the Company accounted for
stock-based compensation plans under the intrinsic value method
in accordance with APB 25 and adopted the disclosure-only
provisions of FAS 123. Under this standard, the Company did
not recognize compensation expense for the issuance of stock
options with an exercise price equal to or greater than the
market price at the date of grant. However, as required, the
Company disclosed, in the notes to the consolidated financial
statements, the pro forma expense impact of the stock option
grants as if the fair-value-based recognition provisions of
FAS 123 were applied. Compensation expense was previously
recognized for restricted stock and RSUs. The effect of
forfeitures on restricted stock and RSUs was recognized when
such forfeitures occurred.
In accordance with the modified prospective application
transition method, prior period financial statements have not
been restated to reflect the effects of implementing
FAS 123R. The following table presents the Companys
pro forma net income and net income per share if compensation
expense for fixed stock option grants had been determined based
on the fair value at the grant dates of such awards as defined
by FAS 123 for Fiscal 2006:
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 1, 2006
|
|
|
|
(millions, except
|
|
|
|
per share data)
|
|
|
Net income as reported
|
|
$
|
308.0
|
|
Add: stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
16.2
|
|
Deduct: total stock-based employee compensation expense
determined under fair value-based method for all awards, net of
tax
|
|
|
(29.3
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
294.9
|
|
|
|
|
|
|
Net income per share as reported:
|
|
|
|
|
Basic
|
|
$
|
2.96
|
|
Diluted
|
|
$
|
2.87
|
|
Pro forma net income per share:
|
|
|
|
|
Basic
|
|
$
|
2.83
|
|
Diluted
|
|
$
|
2.76
|
|
F-41
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term
Stock Incentive Plan
The Companys 1997 Long-Term Stock Incentive Plan, as
amended (the 1997 Plan), authorizes the grant of
awards to participants with respect to a maximum of
26.0 million shares of the Companys Class A
common stock; however, there are limits as to the number of
shares available for certain awards and to any one participant.
Equity awards that may be made under the 1997 Plan include
(a) stock options, (b) restricted stock and
(c) RSUs. The Company also granted awards under the 1997
Non-Employee Director Option Plan prior to that plans
expiration on December 31, 2006. No future awards will be
made under the 1997 Non-Employee Director Option Plan.
Stock
Options
Stock options are granted to employees and non-employee
directors with exercise prices equal to fair market value at the
date of grant. Generally, the options become exercisable ratably
(a graded-vesting schedule), over a three-year vesting period.
Stock options generally expire either seven or ten years from
the date of grant. The Company recognizes compensation expense
for share-based awards that have graded vesting and no
performance conditions on an accelerated basis.
The Company uses the Black-Scholes option-pricing model to
estimate the fair value of stock options granted, which requires
the input of subjective assumptions. The Company develops its
assumptions primarily by analyzing the historical exercise
behavior of employees and non-employee directors. The
Companys assumptions used for the fiscal years presented
were as follows:
Expected Term The estimate of expected term
is based on the historical exercise behavior of employees and
non-employee directors, as well as the contractual life of the
option grants.
Expected Volatility The expected volatility
factor is based on the historical volatility of the
Companys common stock for a period equal to the stock
options expected term.
Expected Dividend Yield The expected dividend
yield is based on the regular quarterly cash dividend of $0.05
per share.
Risk-free Interest Rate The risk-free
interest rate is determined using the implied yield for a traded
zero-coupon U.S. Treasury bond with a term equal to the
options expected term.
The Companys weighted-average assumptions used to estimate
the fair value of stock options granted during the fiscal years
presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected term (years)
|
|
|
4.8
|
|
|
|
4.5
|
|
|
|
5.2
|
|
Expected volatility
|
|
|
29.9
|
%
|
|
|
33.2
|
%
|
|
|
29.1
|
%
|
Expected dividend yield
|
|
|
0.26
|
%
|
|
|
0.39
|
%
|
|
|
0.45
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
Weighted-average option grant date fair value
|
|
$
|
32.65
|
|
|
$
|
19.40
|
|
|
$
|
14.50
|
|
F-42
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the stock option activity under all plans during
Fiscal 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value(a)
|
|
|
|
(thousands)
|
|
|
|
|
|
(in years)
|
|
|
(millions)
|
|
|
Options outstanding at April 1, 2007
|
|
|
6,885
|
|
|
$
|
32.79
|
|
|
|
5.8
|
|
|
$
|
379.2
|
|
Granted
|
|
|
611
|
|
|
|
98.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,386
|
)
|
|
|
28.98
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(99
|
)
|
|
|
57.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 29, 2008
|
|
|
6,011
|
|
|
$
|
39.93
|
|
|
|
5.3
|
|
|
$
|
132.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to
vest(b)
at March 29, 2008
|
|
|
5,911
|
|
|
$
|
39.28
|
|
|
|
5.3
|
|
|
$
|
132.6
|
|
Options exercisable at March 29, 2008
|
|
|
4,476
|
|
|
$
|
29.81
|
|
|
|
4.9
|
|
|
$
|
125.8
|
|
|
|
|
(a) |
|
The intrinsic value is the amount
by which the market price at the end of the period of the
underlying share of stock exceeds the exercise price of the
stock option.
|
|
(b) |
|
The number of options expected to
vest takes into consideration estimated expected forfeitures.
|
Additional information pertaining to the Companys stock
option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Aggregate intrinsic value of stock options
exercised(a)
|
|
$
|
67.0
|
|
|
$
|
88.7
|
|
|
$
|
58.5
|
|
Cash received from the exercise of stock options
|
|
|
40.1
|
|
|
|
51.4
|
|
|
|
55.2
|
|
Tax benefits realized on exercise
|
|
|
34.4
|
|
|
|
33.2
|
|
|
|
22.0
|
|
|
|
|
(a) |
|
The intrinsic value is the amount
by which the average market price during the period exceeded the
exercise price of the stock option exercised.
|
As of March 29, 2008, there was $13.1 million of total
unrecognized compensation expense related to nonvested stock
options granted, expected to be recognized over a
weighted-average period of 1.1 years.
Restricted
Stock and RSUs
The Company grants restricted shares of Class A common
stock and service-based RSUs to certain of its senior executives
and non-employee directors. In addition, the Company grants
performance-based RSUs to such senior executives and other key
executives, and certain other employees of the Company.
Restricted shares of Class A common stock, which entitle
the holder to receive a specified number of shares of
Class A common stock at the end of a vesting period, are
accounted for at fair value at the date of grant. In addition,
holders of restricted shares are entitled to receive cash
dividends in connection with the payments of dividends on the
Companys Class A common stock. Generally, restricted
stock grants vest over a five-year period of time, subject to
the executives continuing employment. Restricted stock
shares granted to non-employee directors vest over a three-year
period of time.
RSUs entitle the grantee to receive shares of Class A
common stock at the end of a vesting period. Service-based RSUs
are payable in shares of Class A common stock and generally
vest over a five-year period of time, subject to the
executives continuing employment. Performance-based RSUs
also are payable in shares of Class A common stock and
generally vest (a) upon the completion of a three-year
period of time (cliff vesting), subject to the
F-43
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees continuing employment and the Companys
achievement of certain performance goals over the three-year
period or (b) ratably, over a three-year period of time
(graded vesting), subject to the employees continuing
employment during the applicable vesting period and the
achievement by the Company of certain performance goals either
(i) in each year of the vesting period for grants made
prior to Fiscal 2008 or (ii) solely in the initial year of
the vesting period for grants made in Fiscal 2008. In addition,
holders of certain RSUs are entitled to receive dividend
equivalents in the form of additional RSUs in connection with
the payment of dividends on the Companys Class A
common stock. RSUs, including shares resulting from dividend
equivalents paid on such units, are accounted for at fair value
at the date of grant. The fair value of a restricted security is
based on the fair value of unrestricted Class A common
stock, as adjusted to reflect the absence of dividends for those
restricted securities that are not entitled to dividend
equivalents. Compensation expense for performance-based RSUs is
recognized over the related service period when attainment of
the performance goals is deemed probable.
A summary of the restricted stock and restricted stock unit
activity during Fiscal 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Service-based
|
|
|
Performance-based
|
|
|
|
Stock
|
|
|
RSUs
|
|
|
RSUs
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(thousands)
|
|
|
|
|
|
(thousands)
|
|
|
|
|
|
(thousands)
|
|
|
|
|
|
Nonvested at April 1, 2007
|
|
|
105
|
|
|
$
|
26.25
|
|
|
|
650
|
|
|
$
|
37.69
|
|
|
|
1,297
|
|
|
$
|
46.43
|
|
Granted
|
|
|
4
|
|
|
|
87.85
|
|
|
|
100
|
|
|
|
100.56
|
|
|
|
552
|
|
|
|
86.98
|
|
Vested
|
|
|
(75
|
)
|
|
|
21.97
|
|
|
|
(83
|
)
|
|
|
34.23
|
|
|
|
(458
|
)
|
|
|
37.22
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
73.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 29, 2008
|
|
|
34
|
|
|
$
|
42.60
|
|
|
|
667
|
|
|
$
|
47.55
|
|
|
|
1,354
|
|
|
$
|
65.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Service-based
|
|
|
Performance-based
|
|
|
|
Stock
|
|
|
RSUs
|
|
|
RSUs
|
|
|
Total unrecognized compensation at March 29, 2008 (millions)
|
|
$
|
1.1
|
|
|
$
|
3.0
|
|
|
$
|
43.5
|
|
Weighted-average years expected to be recognized over (in years)
|
|
|
1.6
|
|
|
|
2.0
|
|
|
|
1.6
|
|
Additional information pertaining to the restricted stock and
restricted stock unit activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of awards granted
|
|
$
|
87.85
|
|
|
$
|
|
|
|
$
|
|
|
Total fair value of awards vested (millions)
|
|
|
7.1
|
|
|
|
4.2
|
|
|
|
4.9
|
|
Service-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of awards granted
|
|
$
|
100.56
|
|
|
$
|
55.43
|
|
|
$
|
43.20
|
|
Total fair value of awards vested (millions)
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
Performance-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of awards granted
|
|
$
|
86.98
|
|
|
$
|
55.17
|
|
|
$
|
43.14
|
|
Total fair value of awards vested (millions)
|
|
|
43.4
|
|
|
|
3.4
|
|
|
|
2.7
|
|
F-44
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
19.
|
Employee
Benefit Plans
|
Profit
Sharing Retirement Savings Plans
The Company sponsors two defined contribution benefit plans
covering substantially all eligible U.S. employees not
covered by a collective bargaining agreement. The plans include
a savings plan feature under Section 401(k) of the Internal
Revenue Code. The Company makes discretionary contributions to
the plans and contributes an amount equal to 50% of the first 6%
of salary contributed by an employee.
Under the terms of the plans, a participant is 100% vested in
Company matching and discretionary contributions after five
years of credited service. Contributions made by the Company
under these plans approximated $6 million, $4 million
and $5 million in Fiscal 2008, Fiscal 2007 and Fiscal 2006,
respectively.
Supplemental
Retirement Plan
The Company has a non-qualified supplemental retirement plan for
certain highly compensated employees whose benefits under the
401(k) profit sharing retirement savings plans are expected to
be constrained by the operation of certain Internal Revenue Code
limitations. These supplemental benefits vest over time and the
related compensation expense is recognized over the vesting
period. Amounts of $29 million and $26 million were
accrued under these plans as of March 29, 2008 and
March 31, 2007, respectively, and are reflected within
other non-current liabilities in the consolidated balance
sheets. Total compensation expense recognized related to these
benefits was $4 million, $3 million and
$5 million in Fiscal 2008, Fiscal 2007 and Fiscal 2006,
respectively.
Deferred
Compensation Plans
The Company has deferred compensation arrangements for certain
key executives which generally provide for payments upon
retirement, death or termination of employment. The amounts
accrued under these plans were approximately $2 million as
of both March 29, 2008 and March 31, 2007, and are
reflected within other non-current liabilities in the
consolidated balance sheets. Total compensation expense related
to these compensation arrangements was $0.3 million in each
of the three fiscal years presented. The Company funds a portion
of these obligations through the establishment of trust accounts
on behalf of the executives participating in the plans. The
trust accounts are reflected within other assets in the
consolidated balance sheets.
Union
Pension Plan
The Company participates in a multi-employer pension plan and is
required to make contributions to the UNITE HERE (which was
previously known as the Union of Needletrades, Industrial and
Textile Employees, prior to its merger with the Hotel Employees
and Restaurant Employees International Union)
(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. The Company does not
participate in the management of the plan and has not been
furnished with information with respect to the type of benefits
provided, vested and non-vested 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 plans unfunded vested benefits.
Such withdrawal liability was assumed in conjunction with the
acquisition of certain assets from a non-affiliated licensee.
The Company has no current intention of withdrawing from the
plan.
International
Defined Benefit Plans
The Company sponsors certain single-employer defined benefit
plans and participates in certain multi-employer defined benefit
plans at international locations, which are not considered to be
material individually or in the aggregate as of March 29,
2008. Pension benefits under these plans are based on formulas
that reflect the
F-45
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees years of service and compensation levels during
their employment period. The aggregate funded status of the
single-employer defined benefit plans was a net liability of
$6.6 million as of March 29, 2008, primarily recorded
within other non-current liabilities in the Companys
consolidated balance sheet. These single-employer defined
benefit plans had aggregate projected benefit obligations of
$21.3 million and an aggregate fair value of plan assets of
$18.8 million as of March 29, 2008. Pension expense
for these plans, recorded within SG&A expenses in the
Companys consolidated statement of operations, was
$3.6 million in Fiscal 2008, $2.2 million in Fiscal
2007 and $1.8 million in Fiscal 2006.
It is the Companys intention to withdraw from the
multi-employer defined benefit plans assumed in the Japanese
Business Acquisitions during Fiscal 2009. Accordingly, the
Company has recorded a withdrawal liability within other
non-current liabilities in its consolidated balance sheet of
$4.4 million as of March 29, 2008. Total contributions
to these multi-employer plans were $0.5 million in Fiscal
2008. The Company did not participate in any multi-employer
defined benefit plans in Fiscal 2007 or Fiscal 2006.
The Company has three reportable segments based on its business
activities and organization: Wholesale, Retail and Licensing.
Such segments offer a variety of products through different
channels of distribution. The Wholesale segment consists of
womens, mens and childrens apparel,
accessories and related products which are sold to major
department stores, specialty stores, golf and pro shops and the
Companys owned and licensed retail stores in the
U.S. and overseas. The Retail segment consists of the
Companys worldwide retail operations, which sell products
through its full-price and factory stores, as well as
RalphLauren.com, its
e-commerce
website. The stores and website sell products purchased from the
Companys licensees, suppliers and Wholesale segment. The
Licensing segment generates revenues from royalties earned on
the sale of the Companys apparel, home and other products
internationally and domestically through licensing alliances.
The licensing agreements grant the licensees rights to use the
Companys various trademarks in connection with the
manufacture and sale of designated products in specified
geographical areas for specified periods.
The accounting policies of the Companys segments are
consistent with those described in Note 3. Sales and
transfers between segments generally are recorded at cost and
treated as transfers of inventory. All intercompany revenues are
eliminated in consolidation and are not reviewed when evaluating
segment performance. Each segments performance is
evaluated based upon operating income before restructuring
charges and certain one-time items, such as legal charges, if
any. Corporate overhead expenses (exclusive of certain expenses
for senior management, overall branding-related expenses and
certain other corporate-related expenses) are allocated to the
segments based upon specific usage or other allocation methods.
Net revenues and operating income for each segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
2,758.1
|
|
|
$
|
2,315.9
|
|
|
$
|
1,942.5
|
|
Retail
|
|
|
1,912.6
|
|
|
|
1,743.2
|
|
|
|
1,558.6
|
|
Licensing
|
|
|
209.4
|
|
|
|
236.3
|
|
|
|
245.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
4,880.1
|
|
|
$
|
4,295.4
|
|
|
$
|
3,746.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
565.4
|
|
|
$
|
477.8
|
|
|
$
|
398.3
|
|
Retail
|
|
|
204.2
|
|
|
|
224.2
|
|
|
|
140.0
|
|
Licensing
|
|
|
96.7
|
|
|
|
141.6
|
|
|
|
153.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
866.3
|
|
|
|
843.6
|
|
|
|
691.8
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(217.0
|
)
|
|
|
(183.4
|
)
|
|
|
(159.1
|
)
|
Unallocated legal and restructuring
charges(a)
|
|
|
4.1
|
|
|
|
(7.6
|
)
|
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
653.4
|
|
|
$
|
652.6
|
|
|
$
|
516.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Fiscal 2008 consists of the
reversal of an excess reserve in the amount of $4.1 million
related to the Companys credit card matters (see Note 15
for further discussion). Restructuring charges of
$4.6 million for Fiscal 2007 and $9.0 million for
Fiscal 2006 are primarily related to the Retail segment (see
Note 11 for further discussion).
|
Depreciation and amortization expense and capital expenditures
for each segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
63.9
|
|
|
$
|
47.0
|
|
|
$
|
39.4
|
|
Retail
|
|
|
73.4
|
|
|
|
59.0
|
|
|
|
53.0
|
|
Licensing
|
|
|
19.7
|
|
|
|
4.4
|
|
|
|
5.2
|
|
Unallocated corporate expenses
|
|
|
44.3
|
|
|
|
34.3
|
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
201.3
|
|
|
$
|
144.7
|
|
|
$
|
127.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
46.0
|
|
|
$
|
44.6
|
|
|
$
|
28.7
|
|
Retail
|
|
|
116.1
|
|
|
|
83.1
|
|
|
|
87.8
|
|
Licensing
|
|
|
2.4
|
|
|
|
3.0
|
|
|
|
3.3
|
|
Corporate
|
|
|
52.6
|
|
|
|
53.3
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
217.1
|
|
|
$
|
184.0
|
|
|
$
|
158.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total assets for each segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
2,434.2
|
|
|
$
|
1,756.0
|
|
Retail
|
|
|
1,084.9
|
|
|
|
1,084.7
|
|
Licensing
|
|
|
216.4
|
|
|
|
190.2
|
|
Corporate
|
|
|
630.0
|
|
|
|
727.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,365.5
|
|
|
$
|
3,758.0
|
|
|
|
|
|
|
|
|
|
|
Net revenues and long-lived assets by geographic location of the
reporting subsidiary are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
3,653.1
|
|
|
$
|
3,452.2
|
|
|
$
|
3,032.3
|
|
Europe
|
|
|
944.7
|
|
|
|
767.9
|
|
|
|
627.7
|
|
Japan
|
|
|
272.4
|
|
|
|
64.6
|
|
|
|
44.3
|
|
Other regions
|
|
|
9.9
|
|
|
|
10.7
|
|
|
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
4,880.1
|
|
|
$
|
4,295.4
|
|
|
$
|
3,746.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(millions)
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
517.1
|
|
|
$
|
474.5
|
|
Europe
|
|
|
131.1
|
|
|
|
107.5
|
|
Japan
|
|
|
57.3
|
|
|
|
43.9
|
|
Other regions
|
|
|
4.4
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
709.9
|
|
|
$
|
629.8
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
|
Related
Party Transactions
|
In the ordinary course of conducting its business, the Company
periodically enters into transactions with other entities or
people that are considered related parties.
Prior to the Japanese Business Acquisitions that occurred in May
2007, the Company received royalty payments pursuant to a
licensing agreement with Impact 21 that allowed Impact 21 to
sell high quality apparel and related merchandise in Japan using
certain of the Companys trademarks. The Company had an
approximately 20% interest in Impact 21, which was accounted for
under the equity method of accounting. Royalty payments received
under this arrangement were approximately $34 million in
Fiscal 2007 and approximately $34 million in Fiscal 2006.
See Note 5 for further discussion of the Companys
Japanese Business Acquisitions.
In addition, Mr. Ralph Lauren, the Companys Chairman
and Chief Executive Officer, sometimes uses the services of
certain employees of the Company for non-Company related
purposes. Mr. Lauren reimburses the Company for the direct
expenses incurred in connection with those services, including
an allocation of such
F-48
POLO
RALPH LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees salaries and benefits. Such aggregate costs and
related reimbursements were less than $1 million in each of
the three fiscal years presented.
|
|
22.
|
Additional
Financial Information
|
Cash
Interest and Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Cash paid for interest
|
|
$
|
22.9
|
|
|
$
|
20.9
|
|
|
$
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
248.8
|
|
|
$
|
244.6
|
|
|
$
|
165.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
Transactions
Significant non-cash investing activities included the
capitalization of fixed assets and recognition of related
obligations in the net amount of $39.8 million for Fiscal
2008 and $45.2 million for Fiscal 2007. Significant
non-cash investing activities also included the non-cash
allocation of the fair value of the net assets acquired in
connection with the Japanese Business Acquisitions and the Small
Leathergoods Business Acquisition in Fiscal 2008, the RL Media
Minority Interest Acquisition in Fiscal 2007 and the
acquisitions of the Polo Jeans and Footwear Businesses in Fiscal
2006. See Note 5 for further discussion of the
Companys acquisitions.
Significant non-cash financing activities included the
repurchase of 0.4 million shares of Class A common
stock at a cost of $24.0 million that was traded prior to
the end of Fiscal 2008 for which settlement occurred in April
2008. In addition, as a result of the adoption of FIN 48,
the Company recognized a non-cash reduction in retained earnings
of $62.5 million as the cumulative effect to adjust its net
liability for unrecognized tax benefits as of April 1,
2007. See Note 12 for further discussion of the
Companys adoption of FIN 48.
There were no other significant non-cash investing or financing
activities for the three fiscal years presented.
Licensing-related
Transactions
Eyewear
Licensing Agreement
In February 2006, the Company announced that it had entered into
a ten-year exclusive licensing agreement with Luxottica Group,
S.p.A. and affiliates (Luxottica) for the design,
production, sale and distribution of prescription frames and
sunglasses under the Polo Ralph Lauren brand (the
Eyewear Licensing Agreement).
The Eyewear Licensing Agreement took effect on January 1,
2007 after the Companys pre-existing licensing agreement
with another licensee expired. In early January, the Company
received a prepayment of approximately $180 million, net of
certain tax withholdings, in consideration of the annual minimum
royalty and design-services fees to be earned over the life of
the contract. The prepayment is non-refundable, except with
respect to certain breaches of the agreement by the Company, in
which case only the unearned portion of the prepayment as
determined based on the specific terms of the agreement would be
required to be repaid. The prepayment was recorded by the
Company as deferred income and is being recognized in earnings
as earned in accordance with the terms of the agreement based
upon the higher of (a) contractually guaranteed minimum
royalty levels or (b) estimates of sales and royalty data
received from the licensee.
Underwear
Licensing Agreement
The Company licensed the right to manufacture and sell
Chaps-branded underwear under a long-term license agreement,
which was scheduled to expire in December 2009. During Fiscal
2007, the Company and the licensee agreed to terminate the
licensing and related design-services agreements. In connection
with this agreement, the Company received a portion of the
minimum royalty and design-service fees due to it under the
underlying agreements on an accelerated basis. The approximate
$8 million of proceeds received by the Company has been
recognized as licensing revenue in the consolidated financial
statements for Fiscal 2007.
F-49
MANAGEMENTS
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Polo Ralph Lauren Corporation is responsible
for the preparation, objectivity and integrity of the
consolidated financial statements and other information
contained in this Annual Report. The consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States and include
some amounts that are based on managements informed
judgments and best estimates.
Deloitte & Touche LLP, an independent registered
public accounting firm, has audited these consolidated financial
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and have
expressed herein their unqualified opinion on those financial
statements.
The Audit Committee of the Board of Directors, which oversees
all of the Companys financial reporting process on behalf
of the Board of Directors, consists solely of independent
directors, meets with the independent registered accountants,
internal auditors and management periodically to review their
respective activities and the discharge of their respective
responsibilities. Both the independent registered public
accountants and the internal auditors have unrestricted access
to the Audit Committee, with or without management, to discuss
the scope and results of their audits and any recommendations
regarding the system of internal controls.
May 28, 2008
|
|
|
/S/ RALPH LAUREN
|
|
/S/ TRACEY T. TRAVIS
|
|
|
|
Ralph Lauren
|
|
Tracey T. Travis
|
Chairman and Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer
|
F-50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 29, 2008 and
March 31, 2007, and the related consolidated statements of
operations, stockholders equity, and cash flows for each
of the three fiscal years in the period ended March 29,
2008. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 the
Company as of March 29, 2008 and March 31, 2007, and
the results of its operations and its cash flows for each of the
three fiscal years in the period ended March 29, 2008, in
conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 3 to the notes to consolidated
financial statements, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, effective April 1, 2007.
Also, as discussed in Note 4 to the notes to consolidated
financial statements, the Company elected application of Staff
Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,
effective April 2, 2006. As discussed in Note 3 to the
notes to consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, effective April 2, 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
March 29, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated May 28, 2008 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE
LLP
New York, New York
May 28, 2008
F-51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Polo Ralph Lauren Corporation
New York, New York
We have audited the internal control over financial reporting of
Polo Ralph Lauren Corporation and subsidiaries (the
Company) as of March 29, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in
Managements Report of Internal Control Over Financial
Reporting, management excluded from its assessment the internal
control over financial reporting at Impact 21, which was
acquired on May 29, 2007, and whose financial statements
constitute 14.2% of total consolidated assets, 5.2% of total
consolidated revenues, and 4.6% of total consolidated operating
income of the consolidated financial statement amounts as of and
for the year ended March 29, 2008. Accordingly, our audit
did not include the internal control over financial reporting at
Impact 21. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report of Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of March 29, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
March 29, 2008, of the Company and our report dated
May 28, 2008, expressed an unqualified opinion on those
financial statements and includes an explanatory paragraph
relating to the Companys adoption of Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, effective April 1, 2007.
/s/ DELOITTE &
TOUCHE
LLP
New York, New York
May 28, 2008
F-52
POLO
RALPH LAUREN CORPORATION
The following table sets forth selected historical financial
information as of the dates and for the periods indicated.
The consolidated statement of operations data for each of the
three fiscal years in the period ended March 29, 2008 as
well as the consolidated balance sheet data as of March 29,
2008 and March 31, 2007 has been derived from, and should
be read in conjunction with, the audited financial statements
and other financial information presented elsewhere herein. The
consolidated statement of operations data for each of the two
fiscal years in the period ended April 2, 2005 and the
consolidated balance sheet data at April 1, 2006,
April 2, 2005 and April 3, 2004 has been derived from
audited financial statements not included herein. Capitalized
terms are as defined and described in the consolidated financial
statements or elsewhere herein. The historical results are not
necessarily indicative of the results to be expected in any
future period.
The selected financial information for the fiscal year ended
March 29, 2008 reflects the acquisition of the Small
Leathergoods Business effective in April 2007, the Japanese
Business Acquisitions effective in May 2007, and the adoption of
FIN 48. The selected financial information for the fiscal
year ended March 31, 2007 reflects the acquisition of the
remaining 50% equity interest of RL Media effective in March
2007 and the adoption of FAS 123R. The selected financial
information for the fiscal year ended April 1, 2006
reflects the acquisition of the Polo Jeans Business effective in
February 2006 and the acquisition of the Footwear Business
effective in July 2005. The selected financial information for
the fiscal year ended April 2, 2005 reflects the
acquisition of the Childrenswear Business effective in July
2004. The selected financial information reflects the
consolidation of RL Media effective as of the end of Fiscal
2004(a).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004(b)
|
|
|
|
(millions, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,670.7
|
|
|
$
|
4,059.1
|
|
|
$
|
3,501.1
|
|
|
$
|
3,060.7
|
|
|
$
|
2,380.9
|
|
Licensing revenues
|
|
|
209.4
|
|
|
|
236.3
|
|
|
|
245.2
|
|
|
|
244.7
|
|
|
|
268.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
4,880.1
|
|
|
|
4,295.4
|
|
|
|
3,746.3
|
|
|
|
3,305.4
|
|
|
|
2,649.7
|
|
Gross profit
|
|
|
2,638.1
|
|
|
|
2,336.2
|
|
|
|
2,022.4
|
|
|
|
1,684.5
|
|
|
|
1,323.3
|
|
Depreciation and amortization expense
|
|
|
(201.3
|
)
|
|
|
(144.7
|
)
|
|
|
(127.0
|
)
|
|
|
(102.1
|
)
|
|
|
(85.6
|
)
|
Restructuring charges
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
(9.0
|
)
|
|
|
(2.3
|
)
|
|
|
(19.6
|
)
|
Operating
income(c)
|
|
|
653.4
|
|
|
|
652.6
|
|
|
|
516.6
|
|
|
|
299.7
|
|
|
|
270.9
|
|
Interest income/(expense), net
|
|
|
(1.0
|
)
|
|
|
4.5
|
|
|
|
1.2
|
|
|
|
(6.4
|
)
|
|
|
(10.0
|
)
|
Net income
|
|
$
|
419.8
|
|
|
$
|
400.9
|
|
|
$
|
308.0
|
|
|
$
|
190.4
|
|
|
$
|
169.2
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.10
|
|
|
$
|
3.84
|
|
|
$
|
2.96
|
|
|
$
|
1.88
|
|
|
$
|
1.71
|
|
Diluted
|
|
$
|
3.99
|
|
|
$
|
3.73
|
|
|
$
|
2.87
|
|
|
$
|
1.83
|
|
|
$
|
1.68
|
|
Average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102.3
|
|
|
|
104.4
|
|
|
|
104.2
|
|
|
|
101.5
|
|
|
|
99.0
|
|
Diluted
|
|
|
105.2
|
|
|
|
107.6
|
|
|
|
107.2
|
|
|
|
104.1
|
|
|
|
101.0
|
|
Dividends declared per common share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
|
(a) |
|
The Companys operating
results for Fiscal 2008, Fiscal 2007 and Fiscal 2006 include the
operating results of RL Media for the twelve-month periods ended
March 29, 2008, March 31, 2007 and April 1, 2006,
respectively, whereas Fiscal 2005 and Fiscal 2004 include the
operating results of RL Media for the twelve-month period ended
December 31, 2004 and December 31, 2003, respectively.
|
|
(b) |
|
Fiscal year consists of
53 weeks.
|
|
(c) |
|
Operating income included a
reversal of an excess reserve in the amount of approximately
$4 million related to credit card matters in the fiscal
year ended March 29, 2008, and litigation and credit card
contingency-related charges of approximately $3 million in
the fiscal year ended March 31, 2007, $7 million in
the fiscal year ended April 1, 2006 and $106 million
in the fiscal year ended April 2, 2005. Impairment charges
related to retail assets reduced operating income by
approximately $5 million in the fiscal year ended
March 29, 2008 and $11 million in the fiscal year
ended April 1, 2006.
|
F-53
POLO
RALPH LAUREN CORPORATION SELECTED FINANCIAL
INFORMATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
551.5
|
|
|
$
|
563.9
|
|
|
$
|
285.7
|
|
|
$
|
350.5
|
|
|
$
|
352.3
|
|
Working capital
|
|
|
984.9
|
|
|
|
1,045.6
|
|
|
|
535.0
|
|
|
|
791.4
|
|
|
|
782.0
|
|
Total assets
|
|
|
4,365.5
|
|
|
|
3,758.0
|
|
|
|
3,088.7
|
|
|
|
2,726.7
|
|
|
|
2,297.6
|
|
Total debt (including current maturities of debt)
|
|
|
679.2
|
|
|
|
398.8
|
|
|
|
280.4
|
|
|
|
291.0
|
|
|
|
277.3
|
|
Stockholders equity
|
|
|
2,389.7
|
|
|
|
2,334.9
|
|
|
|
2,049.6
|
|
|
|
1,675.7
|
|
|
|
1,415.4
|
|
F-54
POLO
RALPH LAUREN CORPORATION
The following table sets forth the quarterly financial
information of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Periods Ended
|
|
|
|
June 30,
|
|
|
September 29,
|
|
|
December 29,
|
|
|
March 29,
|
|
Fiscal 2008
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(millions, except per share data)
|
|
|
Net revenues
|
|
$
|
1,070.3
|
|
|
$
|
1,299.1
|
|
|
$
|
1,269.8
|
|
|
$
|
1,240.9
|
|
Gross profit
|
|
|
592.0
|
|
|
|
695.2
|
|
|
|
676.5
|
|
|
|
674.4
|
|
Net income
|
|
|
88.3
|
|
|
|
115.3
|
|
|
|
112.7
|
|
|
|
103.5
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.85
|
|
|
$
|
1.12
|
|
|
$
|
1.11
|
|
|
$
|
1.03
|
|
Diluted
|
|
$
|
0.82
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
1.00
|
|
Dividends declared per common share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Periods Ended
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
December 30,
|
|
|
March 31,
|
|
Fiscal 2007
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(millions, except per share data)
|
|
|
Net revenues
|
|
$
|
953.6
|
|
|
$
|
1,166.8
|
|
|
$
|
1,143.7
|
|
|
$
|
1,031.3
|
|
Gross profit
|
|
|
531.5
|
|
|
|
632.6
|
|
|
|
614.0
|
|
|
|
558.1
|
|
Net income
|
|
|
80.2
|
|
|
|
137.0
|
|
|
|
110.5
|
|
|
|
73.2
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.76
|
|
|
$
|
1.31
|
|
|
$
|
1.06
|
|
|
$
|
0.70
|
|
Diluted
|
|
$
|
0.74
|
|
|
$
|
1.28
|
|
|
$
|
1.03
|
|
|
$
|
0.68
|
|
Dividends declared per common share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
F-55
EX-10.27
EXECUTION COPY
DEFINITIVE AGREEMENT
by and among
POLO RALPH LAUREN CORPORATION,
PRL JAPAN KABUSHIKI KAISHA,
ONWARD KASHIYAMA CO., LTD.,
and
Dated: April 13, 2007
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
ARTICLE I. DEFINITIONS |
|
|
1 |
|
1.1. Definitions |
|
|
1 |
|
1.2. Other Definitions |
|
|
5 |
|
|
|
|
|
|
ARTICLE II. THE TOB |
|
|
6 |
|
2.1. The TOB |
|
|
6 |
|
2.2. Conditions in the TOB |
|
|
7 |
|
2.3. Conditions to the Commencement of the TOB |
|
|
7 |
|
2.4. Conditions to OK and OK Group Companies Tender of Shares |
|
|
8 |
|
2.5. Public Announcements |
|
|
8 |
|
2.6. Offer Documents |
|
|
8 |
|
2.7. Change in Circumstances |
|
|
9 |
|
|
|
|
|
|
ARTICLE III. BOARD REPRESENTATION |
|
|
9 |
|
3.1. 2007 AGM |
|
|
9 |
|
|
|
|
|
|
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF OK |
|
|
10 |
|
4.1. Organization and Authorization of Agreement of OK and each of the OK
Group Companies |
|
|
10 |
|
4.2. Title to the Shares of Impact 21 |
|
|
11 |
|
4.3. Brokers Finders or Similar Fees of OK or any OK Group Company |
|
|
11 |
|
4.4. Organization and Authorization of Agreement of Impact 21 |
|
|
12 |
|
4.5. Subsidiaries and Other Investments of Impact 21 |
|
|
12 |
|
4.6. Outstanding Capital Stock of Impact 21 |
|
|
12 |
|
4.7. Options or Other Rights of Impact 21 |
|
|
13 |
|
4.8. Charter Documents and Corporate Records of Impact 21 |
|
|
13 |
|
4.9. Impact 21 Public Reports; Impact 21 Financial Statements |
|
|
13 |
|
4.10. No Material Adverse Change relating to Impact 21 |
|
|
14 |
|
4.11. Compliance with Laws by Impact 21 |
|
|
14 |
|
4.12. Impact 21 Permits |
|
|
15 |
|
4.13. Claims and Proceedings of Impact 21 |
|
|
15 |
|
4.14. Contracts of Impact 21 |
|
|
15 |
|
4.15. Full Disclosure regarding Impact 21 |
|
|
16 |
|
4.16. Taxes of Impact 21 |
|
|
16 |
|
4.17. Properties |
|
|
17 |
|
4.18. Liabilities |
|
|
18 |
|
4.19. Suppliers and Customers |
|
|
18 |
|
4.20. Outstanding Indebtedness |
|
|
18 |
|
4.21. Benefit Plans |
|
|
18 |
|
4.22. Insurance |
|
|
19 |
|
4.23. Long-Term Deposits |
|
|
20 |
|
4.24. Brokers Finders or Similar Fees |
|
|
20 |
|
-i-
|
|
|
|
|
|
|
Page |
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF IMPACT 21 |
|
|
20 |
|
5.1. Organization and Authorization of Agreement |
|
|
20 |
|
5.2. Subsidiaries and Other Investments |
|
|
21 |
|
5.3. Impact 21 Company Action |
|
|
21 |
|
5.4. Outstanding Capital Stock |
|
|
21 |
|
5.5. Options or Other Rights |
|
|
21 |
|
5.6. Charter Documents and Corporate Records |
|
|
22 |
|
5.7. Public Reports; Financial Statements |
|
|
22 |
|
5.8. No Material Adverse Change |
|
|
23 |
|
5.9. Compliance with Laws |
|
|
23 |
|
5.10. Permits |
|
|
23 |
|
5.11. Claims and Proceedings |
|
|
23 |
|
5.12. Contracts |
|
|
23 |
|
5.13. Full Disclosure |
|
|
24 |
|
5.14. Taxes |
|
|
24 |
|
5.15. Properties |
|
|
25 |
|
5.16. Liabilities |
|
|
26 |
|
5.17. Suppliers and Customers |
|
|
26 |
|
5.18. Outstanding Indebtedness |
|
|
26 |
|
5.19. Benefit Plans |
|
|
26 |
|
5.20. Insurance |
|
|
27 |
|
5.21. Long-Term Deposits |
|
|
28 |
|
5.22. Brokers Finders or Similar Fees |
|
|
28 |
|
|
|
|
|
|
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF PRL AND THE BIDDER |
|
|
28 |
|
6.1. Organization and Authorization of Agreement |
|
|
28 |
|
6.2. Brokers Finders or Similar Fees of PRL and the Bidder |
|
|
29 |
|
|
|
|
|
|
ARTICLE VII. COVENANTS AND AGREEMENTS |
|
|
29 |
|
7.1. Reasonable Commercial Efforts |
|
|
29 |
|
7.2. Conduct of Business |
|
|
30 |
|
7.3. Notice of Certain Events |
|
|
32 |
|
7.4. Access and Information |
|
|
33 |
|
7.5. No Solicitation |
|
|
33 |
|
7.6. Compliance with Securities Laws |
|
|
34 |
|
7.7. Transition Services Agreement |
|
|
34 |
|
7.8. Consents |
|
|
34 |
|
7.9. NonSolicitation of Persons |
|
|
34 |
|
7.10. Tax Matters |
|
|
35 |
|
7.11. Shareholders List |
|
|
35 |
|
7.12. Monthly Financial Statements |
|
|
35 |
|
7.13. Other Matters |
|
|
36 |
|
|
|
|
|
|
ARTICLE VIII. INDEMNIFICATION |
|
|
36 |
|
8.1. Obligation of OK to Indemnify |
|
|
36 |
|
8.2. Obligation of PRL to Indemnify |
|
|
37 |
|
-ii-
|
|
|
|
|
|
|
Page |
8.3. Notice of Claim |
|
|
37 |
|
8.4.
Defenses of Third-Party Claims |
|
|
37 |
|
8.5. Survival of Covenants, Agreements, Representations and Warranties |
|
|
38 |
|
8.6. Judgment Currency |
|
|
38 |
|
|
|
|
|
|
ARTICLE IX. TERMINATION |
|
|
39 |
|
9.1. Termination of Agreement |
|
|
39 |
|
9.2. Survival |
|
|
39 |
|
|
|
|
|
|
ARTICLE X. MISCELLANEOUS |
|
|
39 |
|
10.1. Amendment; Waiver |
|
|
39 |
|
10.2. Integration |
|
|
40 |
|
10.3. Binding Effect; Parties in Interest; Assignment |
|
|
40 |
|
10.4. No
Third-Party Beneficiaries |
|
|
40 |
|
10.5. Governing Law |
|
|
40 |
|
10.6. Consultation; Arbitration |
|
|
40 |
|
10.7. Severability |
|
|
40 |
|
10.8. Notice |
|
|
40 |
|
10.9. Expenses |
|
|
42 |
|
10.10. Confidentiality |
|
|
42 |
|
10.11. Public Statements |
|
|
42 |
|
10.12. Further Assurances |
|
|
42 |
|
10.13. Specific Performance |
|
|
43 |
|
10.14. English |
|
|
43 |
|
10.15. Counterparts |
|
|
43 |
|
EXHIBITS
Exhibit A: TOB Conditions
Exhibit B-1: Press Statement
Exhibit B-2: Press Statement
Exhibit B-3: Press Statement
Exhibit C-1: PRL-Nominated Directors
Exhibit C-2: Directors
Exhibit C-3: Statutory Auditors
Exhibit D: Power of Attorney
Exhibit E: Fair and Impartial Arbitration
SCHEDULES
Schedule 4.1(b)
Schedule 4.2(a)
Schedule 4.3
Schedule 4.4(b)
Schedule 4.5
Schedule 4.6(a)
-iii-
Page
Schedule 4.13
Schedule 4.14(a)
Schedule 4.14(b)
Schedule 4.14(c)
Schedule 4.17(b)
Schedule 4.20
Schedule 4.21(a)
Schedule 4.21(d)
Schedule 4.21(g)
Schedule 4.23
Schedule 5.1(b)
Schedule 5.2
Schedule 5.4(a)
Schedule 5.11
Schedule 5.12(a)
Schedule 5.12(b)
Schedule 5.12(c)
Schedule 5.15(b)
Schedule 5.18
Schedule 5.19(a)
Schedule 5.19(d)
Schedule 5.19(g)
Schedule 5.21
Schedule 6.1(b)
Schedule 7.13
-iv-
DEFINITIVE AGREEMENT
THIS DEFINITIVE AGREEMENT, dated as of April 13, 2007 (this Agreement), has been
entered into by and among POLO RALPH LAUREN CORPORATION, a Delaware corporation (PRL),
PRL JAPAN KABUSHIKI KAISHA, a Japanese joint stock company and a wholly-owned subsidiary of PRL
(the Bidder), ONWARD KASHIYAMA CO., LTD., a Japanese joint stock company (OK)
and IMPACT 21 CO., LTD., a Japanese joint stock company and a consolidated subsidiary of OK
(Impact 21).
RECITALS
WHEREAS, as of the date of this Agreement, Impact 21 has 19,774,178 shares of common stock
issued and outstanding (Shares), of which (i) OK directly owns 5,243,950 Shares,
representing 26.52% of the total outstanding Shares, (ii) each Affiliate of OK listed in
Schedule 4.2(a) (together, the OK Group Companies) owns the respective number of
Shares listed next to its name, which, in the aggregate represents 14.49% of the total outstanding
Shares, and (iii) PRL directly owns 3,947,000 Shares, representing approximately 19.96% of the
total outstanding Shares.
WHEREAS, PRL desires to purchase all Shares held by OK and the OK Group Companies through the
TOB (as hereinafter defined), and OK and each OK Group Company desires to dispose of the Shares
held by it by tendering such shares in the TOB.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and
for good and valuable consideration, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1. Definitions. As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:
Affiliate or Affiliates means, with respect to any Person, at any time,
any other Person that, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such Person. For the purpose of this definition,
control (including the terms controlling, controlled by and
under common control with), as used with respect to any Person shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the management or policies
of such person, whether through the ownership of voting securities, by contract, agency or
otherwise.
AGM means the annual general meeting of shareholders of Impact 21.
Assumption Date means the date on which the PRL-Nominated Directors duly and validly
assume office as Directors.
Benefit Plan means, in respect of Impact 21, any employee benefit plan, arrangement,
policy or commitment for directors, statutory auditors, officers or employees, including any
employment, consulting or deferred compensation agreement, executive compensation, bonus,
incentive, pension, profit-sharing, savings, retirement, stock option, stock purchase or severance
pay plan, any life, health, disability or accident insurance plan or any holiday or vacation
practice, as to which Impact 21 has or in the future could have any Liability.
Board means the board of directors of Impact 21.
Business Day means any day other than a Saturday, Sunday or other day on which
commercial banks in Tokyo, Japan or the City of New York are authorized or required by law or
executive order to close.
Closing Date means the first day of the TOB settlement period.
Company Law means Kaisha-ho, Law No. 86 of 2005.
Condition means the properties, assets, business, prospects, cash flow, results of
operations or condition (financial or otherwise).
Contracts means any oral or written contract, understanding, agreement, indenture,
note, bond, loan, instrument, lease, conditional sale contract, mortgage, license, franchise,
commitment or other binding arrangement.
Contingent Obligation means, as applied to any Person, any direct or indirect
liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of
credit or other obligation, contractual or otherwise (the primary obligation) of another
Person (the primary obligor), whether or not contingent, (a) to purchase, repurchase or
otherwise acquire such primary obligations or any property constituting direct or indirect security
therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary
obligation, or (ii) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency or any balance sheet item, level of income or
financial condition of the primary obligor, (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold
harmless the owner of any such primary obligation against loss or failure or inability to perform
in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determinable amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the reasonably anticipated liability in
respect thereof.
Director means a member of the Board.
2
FSA means the Financial Services Agency of Japan.
Governmental Authority means the government of any nation, state, city, locality or
other political subdivision thereof, any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, and any body exercising
regulatory or supervisory authority or functions (whether governmental, quasi-governmental or
self-regulatory), including but not limited to, stock exchanges.
Inconsistent Proposal means any proposal or offer relating to (i) a tender or
exchange offer for any of the Shares by, or issuance of any Shares by Impact 21 to, any Person or
group of Persons acting in concert other than by or to PRL or an Affiliate of PRL, (ii) a merger,
consolidation, share exchange or business combination involving Impact 21, (iii) a sale, lease,
exchange, mortgage, transfer or other disposition, in a single transaction or series of related
transactions, of the assets of Impact 21, or (iv) a reorganization, recapitalization, liquidation
or dissolution of Impact 21, in each case other than the transactions contemplated by this
Agreement.
Indebtedness means, with respect to any Person, (a) all obligations of such Person
for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments and all reimbursement or other obligations of such Person in respect of
surety bonds, letters of credit, bankers acceptances (whether or not matured), interest rate and
currency swaps, caps, collars and similar agreements or hedging devices under which payments are
obligated to be made by such Person, whether periodically or upon the happening of a contingency,
(c) all obligations of such Person under any lease that is required to be capitalized for financial
reporting purposes in accordance with Japanese GAAP, (d) all obligations or other Liabilities of
others secured by a Lien on any asset of such Person, irrespective of whether such obligation or
other Liability is assumed by that Person or is non-recourse to the credit of that Person, (e) all
obligations of such Person for the deferred purchase price of assets, property or services (other
than trade debt incurred in the ordinary course of business consistent with past practice and
repayable in accordance with customary trade practices), (f) any obligation of such Person
guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed,
co-made, discounted, or sold with recourse to such Person) any obligation of any other Person and
(g) any Contingent Obligation of such Person.
Japanese GAAP means Japanese generally accepted accounting principles as in effect
from time to time and as applied in the preparation of the Financial Statements.
Knowledge means the knowledge of responsible officers (including shikkoyakuin) and
directors of PRL, the Bidder, OK or Impact 21, as the case may be, after reasonable inquiry.
Liabilities means any direct or indirect Indebtedness, liability, Claim, loss,
damage, deficiency, obligation or responsibility, known or unknown, fixed or
3
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise.
Liens means any and all liens (statutory or otherwise, including Tax liens),
pledges, rights of retention (ryuchi-ken), security interests (including joto-tampo), mortgages,
deeds of trust, pledges, hypothecations, assignments, encumbrances, licenses, rights of first
refusal, claims, judgments, charges, options, preferences, priorities, rights, easements, transfer
restrictions, servitudes or other liens or other encumbrances or restrictions of any kind.
Person means any individual, corporation, limited or general partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company, limited liability
company, Governmental Authority or other juridical entity of any kind, and shall include any
successor (by merger or otherwise) of such entity.
Representatives means in relation to any Person, such Persons directors, officers,
employees, financial advisors, legal advisors, representatives, investment bankers and other
agents.
Requirements of Law means, any obligations, conditions or other requirements of any
law, statute, treaty, rule, regulation, ministerial order or order, judgment, award or other
determination of an arbitrator or a court or other Governmental Authority (including Japanese
administrative guidance) or stock exchange.
SEL means the Securities and Exchange Law (shoken torihiki-ho), Law No. 25 of 1948.
Subsidiary means, with respect to any Person, (i) any juridical Person of which 50%
or more of the voting power of the outstanding voting securities or 50% or more of the outstanding
economic equity interest is held, directly or indirectly, by such Person, (ii) any Person that is
included in the consolidated financial statements of such Person, and (iii) in addition to the
foregoing, any other Person treated as a subsidiary under applicable Requirements of Law.
Tax or Taxes means any national, provincial, territorial, state,
municipal, local, foreign or other taxes, including, without limitation, all income, franchise,
capital gains, real property, occupancy, transfer, withholding, employment, payroll related, value
added, gross receipts, severance, ad valorem, personal property, production, sales, consumption,
use, license, stamp, documentary stamp, registration, mortgage recording and excise taxes, import
duties and other governmental charges and assessments, whether or not measured in whole or in part
by net income, and including deficiencies, interest, additions to tax or interest, and penalties
with respect to any thereof.
TOB Commencement Date means the date on which the TOB Commencement Notice (kokai
kaitsuke kaishi kokoku) of the Bidder is published in accordance with the SEL.
4
TSE means the Tokyo Stock Exchange.
1.2. Other Definitions. The following other capitalized terms are defined elsewhere
in this Agreement:
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Defined Term |
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Section Defined |
Agreement |
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Preamble
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Audited Financial Statements |
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4.9(b) |
Balance Sheet |
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4.9(b) |
Balance Sheet Date |
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4.9(b) |
Bidder |
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Preamble
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Changes in Law |
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8.1 |
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Claims |
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4.1(e) |
Determination Date |
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2.3 |
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Dispute |
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10.6 |
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Financial Statements |
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4.9(b) |
Impact 21 |
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Preamble
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Impact 21 Required Consents |
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4.4(b) |
Indemnitee |
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8.3 |
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Indemnitor |
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8.3 |
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Interim Financial Statements |
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4.9(b) |
Judgment Currency |
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8.6 |
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Liabilities |
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4.18 |
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Losses |
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8.1 |
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Material Contracts |
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4.14(a) |
Material Information |
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7.6 |
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Minimum Tender Conditions |
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2.2 |
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Notice of Claim |
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8.3 |
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Offer Documents |
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2.6 |
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OK |
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Preamble
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OK Group Companies |
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Recitals
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OK Indemnified Parties |
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8.2 |
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OK Parties Required Consents |
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4.1(b) |
Orders |
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4.1(b) |
Permits |
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4.12 |
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Plan |
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7.2(b)(xiii)
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PRL |
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Preamble
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PRL-Nominated Directors |
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3.1(a)(i) |
PRL Indemnified Parties |
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8.1 |
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PRL Parties Required Consents
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6.1(b) |
Public Reports |
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4.9(a) |
Shares |
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Recitals
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Tax Returns |
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4.16(b) |
Threshold Amount |
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8.1 |
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TOB |
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2.1(a) |
TOB Conditions |
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2.2 |
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TOB Price |
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2.1(a) |
5
ARTICLE II.
THE TOB
2.1. The TOB.
(a) The Bidder shall publicly announce and use reasonable commercial efforts to commence a
tender offer for cash to purchase all outstanding Shares (the TOB) on April 17, 2007,
subject to the timely satisfaction of the conditions set forth in Section 2.3 and all Japanese
(and, if and to the extent applicable, United States) Requirements of Law; provided, however, that
if the TOB could not be commenced on April 17, 2007, it shall be commenced as soon as reasonably
practicable thereafter, and in any event within five Business Days following the execution of this
Agreement, with notice of such new commencement date to OK and Impact 21, subject to the timely
satisfaction of the conditions set forth in Section 2.3 and all Japanese (and, if and to the extent
applicable, United States) Requirements of Law. The Bidder will in the TOB offer to pay tendering
shareholders a price per Share in cash of not less than ¥2,600 (the TOB Price).
(b) In the event that the Bidder commences the TOB pursuant to Section 2.1(a), OK shall, and
shall cause each OK Group Company to tender the Shares set forth in Schedule 4.2(a) in the
TOB on the TOB Commencement Date. OK shall not sell, or cause any OK Group Company not to sell,
any of the Shares set forth in Schedule 4.2(a) except to tender such Shares in the TOB. OK
shall, and shall cause each OK Group Company to, tender in the TOB any additional Shares obtained
by OK or any OK Group Company which are not set forth in Schedule 4.2(a) by the end of the
TOB offer period (kokai kaitsuke kikan). OK shall not, and shall cause the OK Group Companies
not to, cancel or withdraw the tender of their respective Shares.
(c) OK shall not and shall cause each of the OK Group Companies and its and their
Representatives not to, directly or indirectly:
(i) solicit, initiate, encourage or facilitate any inquiries, offers or proposals relating to
an Inconsistent Proposal;
(ii) engage in discussions or negotiations with, or furnish or disclose any non public
information relating to Impact 21 or PRL to, any third party that has made or indicated an
intention to make an Inconsistent Proposal;
(iii) tender or offer to tender any of the Shares owned by OK or OK Group Companies in a
tender offer made by any third party other than PRL or an Affiliate of PRL; or
6
(iv) solicit, initiate, encourage or facilitate the tendering of Shares by shareholders of
Impact 21 to a tender offer made by any third party other than PRL or an Affiliate of PRL.
(d) Each of Impact 21 and OK shall and OK shall cause each of the OK Group Companies to, use
its reasonable commercial efforts so that other shareholders of Impact 21 will tender their Shares
in the TOB and such tender by other shareholders will not be cancelled or withdrawn.
(e) Without prejudice to any and all rights and remedies available for PRL or the Bidder under
this Agreement or at law, in the event that OK or any of the OK Group Companies fails to tender
their Shares pursuant to Section 2.1(b), or cancels the tender of their Shares during the TOB offer
period, or otherwise violates any of the foregoing provisions of Section 2.1(b), OK shall pay all
of the fees and expenses incurred by PRL and the Bidder (including, without limitation, those of
legal counsel, financial advisors, experts and consultants) in connection with this Agreement and
the transactions contemplated hereby.
2.2. Conditions in the TOB. The obligation of the Bidder to purchase the Shares
pursuant to the TOB will be subject to the following conditions: that a number of Shares have been
validly tendered (and not withdrawn) that, when added to the Shares already owned by PRL, would
bring the aggregate beneficial ownership of Shares of PRL and the Bidder to 13,182,800 Shares, or
approximately 66.67% of all Shares on a fully-diluted basis (excluding treasury shares) (the
Minimum Tender Condition), and that the tender offer has not been withdrawn due to the
occurrence of any of the conditions listed on Exhibit A (including the Minimum Tender
Condition, the TOB Conditions).
2.3. Conditions to the Commencement of the TOB. The Bidders obligation to commence
the TOB shall be subject to the satisfaction of the following conditions by noon on the Business
Day immediately preceding the TOB Commencement Date (the Determination Date) (any and all
of which may be waived by the Bidder in its discretion):
(a) PRL and the Bidder shall have received confirmation of no objection to the terms of the
TOB and the related Offer Documents from the Kanto Local Finance Bureau;
(b) No material adverse change shall have occurred in the Condition of Impact 21 since the
date of this Agreement;
(c) There shall not have been any breach of the representations and warranties in Articles IV
and V, and such representations and warranties remain accurate as of the Determination Date as if
restated on and as of such date;
(d) Each of OK and Impact 21 shall have performed and complied with its covenants and
obligations hereunder which are to be performed or complied prior to the Determination Date;
7
(e) PRL and the Bidder shall have received a written certificate from Impact 21 verifying that
there is no Material Information relating to Impact 21 or its business, results of operations or
financial condition that has not been made public in accordance with the method prescribed under
Section 4 of Article 166 of the SEL as of the Determination Date;
(f) PRL shall have received written confirmation from Impact 21 that the Board will publicly
endorse the TOB and propose the agenda set forth in Section 3.1(a) at the 2007 AGM; and
(g) PRL shall have received written confirmation from OK that the board of directors of OK
will publicly endorse the TOB.
2.4. Conditions to OK and OK Group Companies Tender of Shares. OKs and OK Group
Companies obligation to tender their Shares in the TOB shall be subject to the satisfaction of the
following conditions by noon on the Determination Date (any and all of which may be waived by OK in
its discretion):
(a) There shall not have been any breach of the representations and warranties in Article VI,
and such representations and warranties remain accurate as of the Determination Date as if restated
on and as of such date; and
(b) Each of PRL and the Bidder shall have performed and complied with its covenants and
obligations hereunder which are to be performed or complied prior to the Determination Date.
2.5. Public Announcements. Promptly following the signing of this Agreement, each of
PRL, OK and Impact 21 will release a press statement in both Japanese and English in the forms
attached as Exhibits B-1, B-2 and B-3. PRL, OK and Impact 21 will coordinate and agree on
any further public statements or announcements relating to the matters contemplated by this
Agreement, except to the extent that an announcement is a Requirement of Law (including any filings
with the United States Securities and Exchange Commission and any earnings release calls held by
any party) and there is insufficient time to permit such prior consultation and agreement.
Promptly after the commencement of the TOB, Impact 21 will file the statement of opinion of its
Board to the effect that the Board endorses the TOB with the Kanto Local Finance Bureau pursuant to
Article 27-10 of the SEL; provided, however, that Impact 21 shall not exercise its rights as
provided in Article 27-10, Section 2 of the SEL to make inquiries to the Bidder and to request the
Bidder to extend the period of the TOB.
2.6. Offer Documents. The Bidder will prepare, file with the relevant Government
Authorities, and disseminate publicly and/or send to relevant Impact 21 shareholders all documents
relating to the TOB required by all applicable Requirements of Law containing all relevant and
appropriate disclosure therein (the Offer Documents). The Offer Documents will contain
terms and conditions consistent with those set forth in this Agreement, and such other reasonable
or customary terms as may be included in documents of this nature. Impact 21 and OK will assist
the Bidder in this
8
process by promptly providing and permitting disclosure in the Offer Documents all information
pertaining to Impact 21 reasonably available to OK and Impact 21 that the Bidder is required by, or
that is otherwise appropriate under, Japanese Requirements of Law to include in the Offer
Documents. Impact 21 will promptly post all public statements and announcements relating to
matters contemplated by this Agreement in Japanese and English on its website.
2.7. Change in Circumstances. Nothing in this Agreement will limit PRLs and the
Bidders rights:
(a) to terminate the TOB if any of the TOB Conditions are not satisfied; or
(b) to waive or change any of the conditions to the TOB in accordance with the SEL.
ARTICLE III.
BOARD REPRESENTATION
3.1. 2007 AGM. The parties agree to the following arrangements in relation to the
2007 AGM:
(a) Impact 21 shall approve at the meeting of the Board to be held on April 27, 2007, to
propose the following agenda items at the 2007 AGM:
(i) to elect (x) the persons listed on Exhibit C-1 (collectively, the
PRL-Nominated Directors) as directors of Impact 21, which appointment shall become
effective on the date on which the Bidder submits to the Kanto Local Financial Bureau a Report
regarding Tender Offer (kokai kaitsuke hokokusho; as defined in Section 2, Article 27-13 of the
SEL) with respect to the TOB stating that the total number of Shares offered in the TOB exceeds 13,
182, 800 Shares and the Bidder will purchase all tendered Shares and (y) the persons listed on
Exhibit C-2 as directors of Impact 21, which appointment shall become effective upon the
conclusion of the 2007 AGM.
(ii) to elect the persons listed on Exhibit C-3 as statutory auditors of Impact 21,
which appointment shall become effective upon the conclusion of the 2007 AGM.
(iii) to amend Article 17 of Impact 21s articles of incorporation to remove the upper limit
on the number of directors.
(iv) to pay 30 yen per Share as the dividend payment to shareholders of record as of February
28, 2007.
9
(b) Impact 21 shall not make any proposals other than those set forth in Section 3.1(a) at the
2007 AGM or amend the proposals set forth in Section 3.1(a), in each case without the prior written
consent of PRL.
(c) Impact 21 shall send the convocation notice for the 2007 AGM setting forth the agenda
items in Section 3.1(a) to shareholders in accordance with the Japanese Requirements of Law.
(d) PRL-Nominated Directors. Impact 21 agrees to use its best efforts to cause the election
of all the PRL-Nominated Directors and the persons listed on Exhibit C-2 to the Board at
the 2007 AGM.
(e) OKs Exercise of Voting Rights. OK shall, and shall cause the OK Group Companies to, (i)
exercise the voting rights of the Shares held by itself and the OK Group Companies as of February
28, 2007 in accordance with the instruction of PRL, and (ii) upon the request of PRL, duly execute
and deliver a power of attorney in the form attached hereto as Exhibit D, which authorizes
PRL to exercise the voting rights of the Shares held by OK and the OK Group Companies, as the case
may be, at the 2007 AGM at the discretion of PRL.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF OK
OK represents and warrants as to each of itself and the OK Group Companies and Impact 21, to
PRL and the Bidder as of the date of this Agreement, the Determination Date and the Closing Date,
as follows:
4.1. Organization and Authorization of Agreement of OK and each of the OK Group
Companies.
(a) Each of OK and the OK Group Companies is a corporation duly organized and validly existing
under the laws of Japan, and has all necessary power and lawful authority to own, lease and operate
its assets and properties and to carry on its business as presently and heretofore conducted. Each
of the OK Group Companies is a wholly-owned subsidiary of OK.
(b) OK has all necessary power and authority to execute and deliver this Agreement, to
consummate and cause each of the OK Group Companies to consummate the transactions contemplated by
this Agreement, and to perform all of its obligations hereunder. The execution and delivery of
this Agreement by OK, the performance of the obligations of OK and each OK Group Company under this
Agreement and the consummation of the transactions contemplated hereby do not (i) violate any
provision of the articles of incorporation or any other internal rules or regulations of OK or any
OK Group Company, (ii) except as set forth on Schedule 4.1(b) (collectively, the OK
Parties Required Consents), require OK or any OK Group
10
Company to obtain any consent, approval or authorization of, or make any submission or filing
with or give any notice to, any Governmental Authority or any other Person, or (iii) violate any
order, judgment, injunction, writ, award, decree or ruling of any arbitrator or court or any other
Governmental Authority (collectively, Orders) or any Requirements of Law applicable to OK
or any OK Group Company, or violate, conflict with or result in the termination or default or
require the delivery of notice under the terms or provisions of any Contracts to which OK or any OK
Group Company is a party or is bound or by which its assets or properties are bound.
(c) The execution and delivery by OK of this Agreement, the performance of the obligations of
OK and each OK Group Company hereunder and the consummation of the transactions contemplated
hereby on the part of OK and each OK Group Company have been duly approved by all necessary
corporate actions of OK and each OK Group Company, respectively.
(d) This Agreement has been duly executed and delivered by OK, and constitutes the valid and
legally binding obligation of OK enforceable against OK in accordance with its terms, except as may
be limited by bankruptcy, insolvency and other laws of general applicability relating to, or
affecting, creditors rights generally.
(e) There are no actions, suits, proceedings, claims, complaints, disputes, arbitrations or
investigations (collectively, Claims) pending or, to the Knowledge of OK, threatened,
before or by any Governmental Authority purporting to enjoin or restrain the execution, delivery or
performance by OK of this Agreement or the consummation by OK and each OK Group Company of the
transactions contemplated hereby.
4.2. Title to the Shares of Impact 21.
(a) OK and each OK Group Company owns beneficially and of record the number of Shares set
forth next to its name on Schedule 4.2(a) and has good and valid title to such Shares, free
and clear of all Liens. Following the consummation of the TOB, the Bidder will have title to such
Shares free and clear of all Liens. None of OK or any OK Group Company has any other equity
interests or rights to acquire equity interests in Impact 21. The Shares are not subject to any
contract restricting or otherwise relating to the voting, dividend rights or disposition of such
Shares.
(b) The stock certificates tendered and delivered by OK and the OK Group Companies to the
tender offer agent pursuant to Section 2.1(b) will have been duly and validly issued and will
represent all of the Shares to be sold by OK and each OK Group Company, as set forth on
Schedule 4.2(a).
4.3. Brokers Finders or Similar Fees of OK or any OK Group Company. There are no
brokerage commissions, finders fees or similar fees or commissions payable by OK or any OK Group
Company in connection with the transactions contemplated hereby based on any agreement, arrangement
or understanding with OK or any OK Group Company or any action taken by it, other than as set forth
in
11
Schedule 4.3, which shall be paid by OK and the OK Group Companies, as applicable,
pursuant to Section 10.9.
4.4. Organization and Authorization of Agreement of Impact 21.
(a) Impact 21 is a corporation duly organized and validly existing under the laws of Japan,
and has all necessary power and lawful authority to own, lease and operate its assets and
properties and to carry on its business as presently and heretofore conducted.
(b) Impact 21 has all necessary power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated by this Agreement, and to perform all of its obligations
hereunder. The execution and delivery of this Agreement by Impact 21, the performance of the
obligations of Impact 21 under this Agreement and the consummation of the transactions contemplated
hereby do not (i) violate any provision of Impact 21s articles of incorporation or any other
internal rules or regulations of Impact 21, (ii) except as set forth on Schedule 4.4(b)
(collectively, the Impact 21 Required Consents), require Impact 21 to obtain any consent,
approval or authorization of, or make any submission or filing with or give any notice to, any
Governmental Authority or any other Person under any material Contracts, (iii) violate any Orders
or any Requirements of Law applicable to Impact 21, or (iv) to the Knowledge of OK, violate,
conflict with or result in the termination or default or require the delivery of notice under the
terms or provisions of any Contract to which Impact 21 is a party or is bound or by which its
assets or properties are bound.
(c) The execution and delivery by Impact 21 of this Agreement, the performance of the
obligations of Impact 21 hereunder and the consummation of the transactions contemplated hereby on
the part of Impact 21 have been duly approved by all necessary corporate actions of Impact 21.
(d) This Agreement has been duly executed and delivered by Impact 21, and constitutes the
valid and legally binding obligation of Impact 21 enforceable against Impact 21 in accordance with
its terms, except as may be limited by bankruptcy, insolvency and other laws of general
applicability relating to, or affecting, creditors rights generally.
(e) To the Knowledge of OK, there are no Claims pending or threatened before or by any
Governmental Authority purporting to enjoin or restrain the execution, delivery or performance by
Impact 21 of this Agreement or the consummation by Impact 21 of the transactions contemplated
hereby.
4.5. Subsidiaries and Other Investments of Impact 21. Impact 21 does not have any
Subsidiaries. Except as set forth on Schedule 4.5, Impact 21 does not directly or
indirectly own any interest in any other Person.
4.6. Outstanding Capital Stock of Impact 21.
12
(a) Impact 21 is authorized to issue the number of shares of common stock set forth in
Schedule 4.6(a), of which the number of shares set forth on Schedule 4.6(a) are
issued and outstanding. Except as set forth on Schedule 4.6(a), Impact 21 holds no shares
as treasury stock. No other class of capital stock or other ownership interests of Impact 21 are
authorized or outstanding. All of the outstanding shares of capital stock of Impact 21 have been
duly authorized and are validly issued, fully paid and non-assessable, and were issued in
compliance with all applicable Requirements of Law and its articles of incorporation, free and
clear of any Liens.
(b) All of the issued shares of Impact 21are duly listed on the first section of the TSE.
4.7. Options or Other Rights of Impact 21. There is no outstanding right,
subscription, warrant, stock purchase right (shinkabu yoyakuken), call, unsatisfied preemptive
right, option or other agreement of any kind to purchase or otherwise to receive from Impact 21,
any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital
stock or any other security of Impact 21, and there is no outstanding security of any kind of
Impact 21 convertible into or exchangeable or exercisable for any such capital stock or other
security.
4.8. Charter Documents and Corporate Records of Impact 21. To the Knowledge of OK,
Impact 21 has heretofore delivered to PRL true, correct and complete copies of its articles of
incorporation and regulations of the board of directors of Impact 21 as are in effect on the date
hereof. To the Knowledge of OK, the stockholders registry of Impact 21, which has been made
available to PRL for inspection, is true, correct and complete. To the Knowledge of OK, the minute
books of Impact 21 have been made available to PRL for inspection and the information contained
therein is true and correct in all material respects. To the Knowledge of OK, the minute books
contain true and correct records of all meetings of the Board of Directors (and any committee
thereof) and stockholders of Impact 21 since March 1, 2004.
4.9. Impact 21 Public Reports; Impact 21 Financial Statements.
(a) Impact 21 has duly filed all reports, registration statements and other documents required
to be filed by it pursuant to applicable Requirements of Law with any Governmental Authority. As
of the respective dates of their filing, all reports, registration statements and other filings
(including, without limitation, all exhibits and schedules thereto and all documents incorporated
by reference therein), together with any amendments thereto, publicly filed by Impact 21 with any
Governmental Authority since March 1, 2004 (the Public Reports), complied, and all such
reports, registration statements and other filings to be publicly filed by Impact 21 with any
Governmental Authority prior to the Assumption Date will comply, in all material respects, with the
applicable Requirements of Law applicable to Impact 21 or to its securities, properties or
business. The Public Reports did not at the time they were filed with the applicable Governmental
Authority, or will not at the time they are filed with the applicable Governmental Authority,
contain any untrue statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to
13
make the statements therein, in the light of the circumstances under which they are made, not
misleading.
(b) The balance sheets of Impact 21 as of February 28, 2006 and August 31, 2006 and the
related income statements for the year and the six-month period then ended, including the footnotes
thereto, audited by ChuoAoyama Audit Co., Ltd., independent certified public accountants, and Ernst
& Young ShinNihon, independent certified public accountants, respectively, which have been
delivered to PRL (collectively, the Audited Financial Statements), fairly present the
financial position of Impact 21 as at such dates and the results of operations of Impact 21 for
such respective periods, in each case in accordance with Japanese GAAP consistently applied for the
periods covered thereby. The unaudited balance sheet of Impact 21 as of February 28, 2007, and the
related income statements for the year then ended, which have been delivered to PRL (the
Unaudited Financial Statements and, together with the Audited Financial Statements, the
Financial Statements), fairly present the financial position of Impact 21 as at such date
and the results of operations of Impact 21 for the year then ended, in each case in conformity with
Japanese GAAP applied on a basis consistent with that of the Audited Financial Statements (subject
to the normal year-end audit adjustments) and with all interim financial statements heretofore
delivered to PRL by or on behalf of Impact 21. The balance sheet included in the Audited Financial
Statements of Impact 21 is sometimes herein called the Balance Sheet and February 28,
2006 is sometimes herein called the Balance Sheet Date.
(c) The monthly financial statement of Impact 21 as of, and for the month ended, March 31,
2007 (the March 31, 2007 Statement), which has been delivered to PRL, has been prepared
in accordance with Impact 21s managerial accounting standards, consistent with past practice, and
fairly present the financial position of Impact 21 as at such dates and the results of operations
for the month and period then ended. Since March 31, 2007 to April 12, 2007 there have been no
fluctuations to any of the line items set forth on the March 31, 2007 Statement out of the ordinary
course of business.
4.10. No Material Adverse Change relating to Impact 21. Except as set forth in the
Public Reports which have been filed prior to August 31, 2006, since the Balance Sheet Date, with
respect to Impact 21, (a) there has not been any material adverse change in the Condition of Impact
21 and to the Knowledge of OK none is threatened, (b) Impact 21 has not participated in any
transaction material to the Condition of Impact 21 which is outside the ordinary course of business
and inconsistent with past practice, (c) Impact 21 has not created or assumed any Lien on any of
its material assets, and (d) there has not occurred a material change in Impact 21s accounting
principles or practice except as required solely by reason of a change in Japanese GAAP.
4.11. Compliance with Laws by Impact 21. To the Knowledge of OK, Impact 21 is not in
violation of any applicable Orders or any Requirement of Law, except for violations that,
individually or in the aggregate, could not or could not reasonably be expected to have a material
adverse effect on the Condition of Impact 21, and Impact 21
14
has not received notice that such violation is being or may be alleged. To the Knowledge of
OK, there is no Order or any Requirement of Law that could or could reasonably be expected to
prohibit or restrict Impact 21 from, or otherwise materially adversely affect Impact 21 in,
conducting its business in any jurisdiction in which it now operates.
4.12. Impact 21 Permits. To the Knowledge of OK, Impact 21 has all licenses, permits,
exemptions, consents, waivers, authorizations, rights, franchises, orders or approvals of, and has
made all required registrations with, any Governmental Authority that are material to the conduct
of the business of, or the intended use of any of its properties (collectively, Permits).
To the Knowledge of OK, all Permits are in full force and effect; no violations are or have been
recorded in respect of any Permit; and no proceeding is pending or threatened, to revoke, limit,
cancel, rescind, materially modify or refuse to renew in the ordinary course of business, any
Permit. To the Knowledge of OK, no action by Impact 21 is required in order that all Permits will
remain in full force and effect following the consummation of the transactions contemplated by this
Agreement. To the Knowledge of OK, at any time on or before the Closing Date, Impact 21 has never
conducted any business or other operations other than its business currently conducted and Impact
21 has no liabilities or obligations that are not related to or did not arise from the operation of
such business.
4.13. Claims and Proceedings of Impact 21. Impact 21 and its assets are not subject
to any outstanding Orders. Except as set forth in Schedule 4.13, there is no Claim in
excess of ¥12,000,000 pending or, to the Knowledge of OK threatened, against or involving Impact
21, and there are no Claims that, in any case, could or could reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the Condition of Impact 21.
4.14. Contracts of Impact 21.
(a) With respect to Impact 21, all Contracts filed as exhibits or described in the Public
Reports or which are otherwise material to the Condition of Impact 21 (collectively, the
Material Contracts) are valid and binding and enforceable against it and, to the
Knowledge of OK, against the other parties thereto and are in full force and effect. Except as set
forth on Schedule 4.14(a), Impact 21 is not in default in any material respect under any of the
Material Contracts nor, to the Knowledge of OK, does any condition exist that with notice or lapse
of time or both would constitute such a material default thereunder. To the Knowledge of OK, no
other party to any of the Material Contracts is in default thereunder in any material respect nor
to the Knowledge of OK, does any condition exist that with notice or lapse of time or both would
constitute such a material default thereunder.
(b) Other than as set forth on Schedule 4.14(b), there are no material Contracts
between Impact 21 on the one hand and OK or any Affiliate of OK or directors or statutory auditors
of OK or Impact 21 on the other hand. To the Knowledge of OK, a true, correct and complete copy of
each Contract listed on Schedule 4.14(b) has been delivered to PRL.
15
(c) Other than as set forth in Schedule 4.14(c), to the Knowledge of OK, Impact 21 is
not subject to any (i) non-compete agreement that after the consummation of the transactions
contemplated by this Agreement would provide any Person (other than Impact 21) any right to
restrict the business or activities of Impact 21 or PRL and its Affiliates, or any such contract
that would impose restrictions on the ability of Impact 21 to compete in any geographical or
product area or (ii) any material Contract that would be terminable or subject to prepayment or
give rise to other third party rights upon the consummation of or otherwise in connection with the
TOB contemplated by this Agreement.
4.15. Full Disclosure regarding Impact 21. None of the information or documents
furnished by or on behalf of Impact 21 to PRL pursuant to this Agreement, or in connection with the
transactions contemplated hereby, contains an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the statements made, in the
context in which made, not materially false or misleading. There is no fact that Impact 21 has not
disclosed to PRL in writing that materially adversely affects or, so far as Impact 21 can now
foresee, will materially adversely affect, the Condition of Impact 21 or the ability of OK or any
OK Group Company to perform this Agreement and consummate the transactions contemplated hereby.
4.16. Taxes of Impact 21.
(a) All Taxes of Impact 21 which are due and payable on or prior to the Closing Date, or which
are due and payable after the Closing Date with respect to periods ending on or prior to the
Closing Date, have been paid or will be paid by Impact 21 in full, on a timely basis.
(b) All Tax Returns, forms or information statements, including any related or supporting
information (collectively, Tax Returns) required to be filed with any Governmental
Authority with respect to any Taxes relating to the Impact 21s business or properties due for any
period ending, or due on any date or in respect of any transaction occurring, on or prior to the
Closing Date have been or will be duly and timely filed and all such tax returns are or will be
true, complete and accurate.
(c) Impact 21 will not be required to pay any Taxes attributable to any other member of any
group of affiliated corporations that file consolidated returns for income tax purposes of which
Impact 21 was a member before the Closing Date by reason of any provision of Law that provides for
joint or several liability, in whole or in part.
(d) No material penalties or other charges are due or anticipated to become due with respect
to the late filing of any Tax Return of Impact 21, or payment of any Tax of Impact 21 required to
be filed or paid on or before the Closing Date.
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(e) The statute of limitations for the assessment of Taxes in respect of Impact 21 has expired
with respect to all periods ending on or before February 28, 1999. No audit is in progress with
respect to any Tax Return of or relating to Impact 21 for which the statute of limitations has not
expired, and no deficiencies or additions to Tax, interest or penalties have been proposed or to
OKs Knowledge, threatened. Each Tax Return filed by or with respect to Impact 21 for which the
statute of limitations has not expired accurately reflects the amount of its liability for Taxes
thereunder and makes all disclosures required by applicable provisions of Law.
(f) Reserves and provisions for Taxes accrued but not yet due on or before the Closing Date
reflected in Impact 21s Financial Statements are and will be as of the Closing Date, adequate in
accordance with Japanese GAAP.
(g) Impact 21 will not have any liability on or after the Closing Date under any Tax sharing
agreement to which it has been a party, and all such Tax sharing agreements in effect before the
Closing Date shall terminate and be of no further force and effect as of the Closing Date.
(h) There are no pending or, to the Knowledge of OK, threatened Claims for the assessment or
collection of Taxes against Impact 21.
4.17. Properties.
(a) To the Knowledge of OK, Impact 21 owns outright and has good title to all of its
properties, including all of the assets reflected on the Balance Sheet of Impact 21, in each case
free and clear of any Liens, except for (i) Liens specifically described in the notes to the
Financial Statements of Impact 21; (ii) properties disposed of, or subject to purchase or sales
orders, in the ordinary course of business since the Balance Sheet Date; (iii) Liens securing
Taxes, assessments, governmental charges or levies, all of which are not yet due and payable or are
being contested in good faith, so long as such contest does not involve any substantial danger of
the sale, forfeiture or loss of any assets; (iv) statutory Liens created by operation of law in the
ordinary course of business; and (v) Liens not known to Impact 21 and that do not, individually or
in the aggregate, materially detract from the value of, or materially interfere with, any present
or intended use of such property or asset. The properties and assets of Impact 21, including the
Contracts set forth on Schedules 4.14(b) and 4.14(c), are sufficient to operate the
business of Impact 21 in substantially the same manner as it is currently conducted by Impact 21.
(b) Impact 21 does not own any real property. Impact 21 holds all of the right, title and
interest of the tenant under all real property leases material to the Condition of Impact 21 and
set forth on Schedule 4.17(b) (collectively, the Material Leases), free and clear
of all Liens, and enjoys peaceful possession thereunder. The leased real properties covered by the
Material Leases are used and operated in compliance and conformity with all contractual obligations
and Laws.
17
4.18. Liabilities. Impact 21 does not have any direct or indirect Indebtedness,
liability, Claim, loss, damage, deficiency, obligation or responsibility, known or unknown, fixed
or unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise, whether or not of a kind required by Japanese GAAP to be set
forth on a financial statement or on any schedule or in the notes thereto (Liabilities)
other than (a) Liabilities reflected or reserved against on the Balance Sheet of Impact 21 or
described on any schedule or in the notes to the Audited Financial Statements of Impact 21,
(b) Liabilities accruing after the Balance Sheet Date in the ordinary course of business consistent
with past practice or in accordance with this Agreement, and (c) other Liabilities that have not
had and could not reasonably be expected to have a material adverse effect on the Condition of
Impact 21.
4.19. Suppliers and Customers. There exists no actual or, to the Knowledge of OK,
threatened termination, cancellation or limitation of, or any adverse change in, the business
relationship of Impact 21 with any customer, distributor, department store or supplier (including
manufacturers of products distributed by Impact 21) or any group of customers or suppliers whose
purchases of products or services from, or supply of inventories to, the Impact 21s business are
individually or in the aggregate material to the Condition of Impact 21.
4.20. Outstanding Indebtedness. Schedule 4.20 sets forth the amount of all
Indebtedness with an outstanding principal amount in excess of ¥1,000,000 individually, and
¥2,500,000 in the aggregate, of Impact 21 as of August 31, 2006, the Liens that relate to such
Indebtedness and the name of each lender or other obligee thereof. There have been no material
changes to such Indebtedness since August 31, 2006 other than changes in Impact 21s accounts
payable that have occurred in the ordinary course of its business, consistent with past practices.
No Person, by virtue of its position as a lender or other obligee under any Indebtedness of Impact
21 is entitled to any voting rights in any matters voted upon by the holders of the common stock of
Impact 21.
4.21. Benefit Plans.
(a) Schedule 4.21(a) lists all material Benefit Plans.
(b) With respect to each Benefit Plan, no event has occurred, and there exists no condition or
set of circumstances, in connection with which Impact 21 could reasonably be expected to be subject
to any liability under any applicable Law, except liability for benefits claims and funding
obligations payable in the ordinary course.
(c) Each Benefit Plan conforms to all applicable Law, and its administration complies in all
material respects with its terms and all applicable Law.
(d) Except as disclosed in Schedule 4.21(d), with respect to each Benefit Plan, there
are no benefit obligations for which contributions have not been made or properly accrued and there
are no unfunded benefit obligations in addition to
18
¥836,693,997 that has been accrued on the Unaudited Financial Statements that have not been
properly accrued or accounted for by reserves, or otherwise properly footnoted in accordance with
Japanese GAAP, on the Unaudited Financial Statements of Impact 21.
(e) There are no Claims or Liens pending or, to the Knowledge of OK, threatened (other than
routine claims for benefits) with respect to any Benefit Plan or against the assets of any Benefit
Plan, other than Claims or Liens that would not, individually or in the aggregate, have a material
adverse effect on the ability of Impact 21 to perform its obligations in respect of any such
Benefit Plan.
(f) The consummation of the transactions contemplated by this Agreement will not entitle any
current or former employee to severance pay, unemployment compensation or any similar payment or
accelerate the time of payment or vesting, or increase the amount of any compensation due to, or in
respect of, any current or former employee.
(g) Except as set forth on Schedule 4.21(g), no current or former employee of Impact
21 is covered by or entitled to benefits under any benefit plan maintained by, or contributed to
by, OK.
(h) Impact 21 does not maintain or contribute to, and has not within the preceding six (6)
years maintained or contributed to, or has had during such period the obligation to maintain or
contribute to, or may have any Liability with respect to any Benefit Plan maintained for Persons
other than current or former employees of Impact 21.
(i) Impact 21 does not have any obligation or have any direct or indirect Liability with
respect to the provision of health or death benefits to or in respect of former employees.
(j) Impact 21 does not have any direct or indirect Liability with respect to accrued vacation
days of current or former employees.
(k) Impact 21 has no agreements, arrangements, obligations or other conventions with, or to,
its employees other than those that are as set forth in Impact 21s written work rules and the
agreements relating to overtime (saburoku kyote).
4.22. Insurance. To the Knowledge of OK, all policies or binders of fire, liability,
product liability, workers compensation, vehicular and other insurance held by or on behalf of
Impact 21 are valid and binding in accordance with their terms, are in full force and effect and
except for the expiration on May 19, 2007 of Impact 21s director and officer liability insurance,
shall remain in full force and effect until the Closing Date, and insure against risks and
liabilities to an extent and in a manner customary in the industries in which Impact 21 operates.
To the Knowledge of OK, Impact 21 is not in default with respect to any provision contained in any
such policy or binder or has failed to give any notice or present any claim under any such policy
or binder in due and timely fashion. To the Knowledge of OK, there are no outstanding unpaid
claims under any
19
such policy or binder, and Impact 21 has not received any notice of cancellation or
non-renewal of any such policy or binder.
4.23. Long-Term Deposits Schedule 4.23 sets forth a true and complete list of
Impact 21s long-term deposits and the amount of principal and the terms of the deposit in each
case (the Long-Term Deposits). Impact 21 has all right, title and interest in the
Long-Term Deposits free and clear of any Liens.
4.24. Brokers Finders or Similar Fees. There are no brokerage commissions, finders
fees or similar fees or commissions payable by Impact 21in connection with the transactions
contemplated hereby based on any agreement, arrangement or understanding with Impact 21 or any
action taken by it, other than any fees, commissions or other compensation payable by Impact 21 to
Daiwa Securities SMBC Co., Ltd., which shall be paid by Impact 21 pursuant to Section 10.9.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF IMPACT 21
Impact 21 represents and warrants to PRL and the Bidder, as of the date of this Agreement, the
Determination Date and the Closing Date, as follows:
5.1. Organization and Authorization of Agreement.
(a) Impact 21 is a corporation duly organized and validly existing under the laws of Japan,
and has all necessary power and lawful authority to own, lease and operate its assets and
properties and to carry on its business as presently and heretofore conducted.
(b) Impact 21 has all necessary power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated by this Agreement, and to perform all of its obligations
hereunder. The execution and delivery of this Agreement by Impact 21, the performance of the
obligations of Impact 21 under this Agreement and the consummation of the transactions contemplated
hereby do not (i) violate any provision of Impact 21s articles of incorporation or any other
internal rules or regulations of Impact 21, (ii) except as the Impact 21 Required Consents set
forth on Schedule 5.1(b), require Impact 21 to obtain any consent, approval or
authorization of, or make any submission or filing with or give any notice to, any Governmental
Authority or any other Person under any material Contract, (iii) violate any Orders or any
Requirements of Law applicable to Impact 21, or (iv) violate, conflict with or result in the
termination or default or require the delivery of notice under the terms or provisions of any
Contract to which Impact 21 is a party or is bound or by which its assets or properties are bound.
(c) The execution and delivery by Impact 21 of this Agreement, the performance of the
obligations of Impact 21 hereunder and the
20
consummation of the transactions contemplated hereby on the part of Impact 21 have been duly
approved by all necessary corporate actions of Impact 21.
(d) This Agreement has been duly executed and delivered by Impact 21, and constitutes the
valid and legally binding obligation of Impact 21 enforceable against Impact 21 in accordance with
its terms, except as may be limited by bankruptcy, insolvency and other laws of general
applicability relating to, or affecting, creditors rights generally.
(e) There are no Claims pending or, to the Knowledge of Impact 21, threatened, before or by
any Governmental Authority purporting to enjoin or restrain the execution, delivery or performance
by Impact 21 of this Agreement or the consummation by Impact 21 of the transactions contemplated
hereby.
5.2. Subsidiaries and Other Investments. Impact 21 does not have any Subsidiaries.
Except as set forth on Schedule 5.2, Impact 21 does not directly or indirectly own any
interest in any other Person.
5.3. Impact 21 Company Action.
(a) The Board has considered the terms and conditions of the TOB and has determined that as of
the date of such consideration, the TOB is fair to and in the best interests of the shareholders of
Impact 21 (excluding PRL and its Affiliates) and on such date approved this Agreement and the TOB.
For the avoidance of doubt, nothing in this clause (a) is intended to restrict the future exercise
by the Board of its discretion in performing its obligations pursuant to Article 27-10 of the SEL
based on the facts and circumstances at such future time.
(b) The Board has received a written report on the valuation of Impact 21 from PwC Advisory
Co., Ltd.
5.4. Outstanding Capital Stock.
(a) Impact 21 is authorized to issue the number of shares of common stock set forth in
Schedule 5.4(a), of which the number of shares set forth on Schedule 5.4(a) are
issued and outstanding. Except as set forth on Schedule 5.4(a), Impact 21 holds no shares
as treasury stock. No other class of capital stock or other ownership interests of Impact 21 are
authorized or outstanding. All of the outstanding shares of capital stock of Impact 21 have been
duly authorized and are validly issued, fully paid and non-assessable, and were issued in
compliance with all applicable Requirements of Law and its articles of incorporation, free and
clear of any Liens.
(b) All of the issued shares of Impact 21 are duly listed on the first section of the TSE.
5.5. Options or Other Rights. There is no outstanding right, subscription, warrant,
stock purchase right (shinkabu yoyakuken), call, unsatisfied preemptive right,
21
option or other agreement of any kind to purchase or otherwise to receive from Impact 21, any
of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock
or any other security of Impact 21, and there is no outstanding security of any kind of Impact 21
convertible into or exchangeable or exercisable for any such capital stock or other security.
5.6. Charter Documents and Corporate Records. Impact 21 has heretofore delivered to
PRL true, correct and complete copies of its articles of incorporation and regulations of the board
of directors of Impact 21 as are in effect on the date hereof. The stockholders registry of
Impact 21, which has been made available to PRL for inspection, is true, correct and complete. The
minute books of Impact 21 have been made available to PRL for inspection and the information
contained therein is true and correct in all material respects. The minute books contain true and
correct records of all meetings of the Board of Directors (and any committee thereof) and
stockholders of Impact 21 since March 1, 2004.
5.7. Public Reports; Financial Statements.
(a) Impact 21 has duly filed all reports, registration statements and other documents required
to be filed by it pursuant to applicable Requirements of Law with any Governmental Authority. As
of the respective dates of their filing, all Public Reports since March 1, 2004, complied, and all
such reports, registration statements and other filings to be publicly filed by Impact 21 with any
Governmental Authority prior to the Assumption Date will comply, in all material respects, with the
applicable Requirements of Law applicable to Impact 21 or to its securities, properties or
business. The Public Reports did not at the time they were filed with the applicable Governmental
Authority, or will not at the time they are filed with the applicable Governmental Authority,
contain any untrue statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
(b) The Audited Financial Statements of Impact 21 as of February 28, 2006 and August 31, 2006,
which have been delivered to PRL, fairly present the financial position of Impact 21 as at such
dates and the results of operations of Impact 21 for such respective periods, in each case in
accordance with Japanese GAAP consistently applied for the periods covered thereby. The Unaudited
Financial Statements of Impact 21 as of February 28, 2007, which have been delivered to PRL, fairly
present the financial position of Impact 21 as at such date and the results of operations of Impact
21 for the year then ended, in each case in conformity with Japanese GAAP applied on a basis
consistent with that of the Audited Financial Statements (subject to the normal year-end audit
adjustments) and with all interim financial statements heretofore delivered to PRL by or on behalf
of Impact 21.
(c) The March 31, 2007 Statement of Impact 21, which has been delivered to PRL, has been
prepared in accordance with Impact 21s managerial accounting standards, consistent with past
practice, and fairly present the financial position of Impact 21 as at such dates and the results
of operations for the month and
22
period then ended. Since March 31, 2007 to April 12, 2007 there have been no fluctuations to
any of the line items set forth on the March 31, 2007 Statement out of the ordinary course of
business.
5.8. No Material Adverse Change. Except as set forth in the Public Reports which have
been filed prior to August 31, 2006, since the Balance Sheet Date, with respect to Impact 21, (a)
there has not been any material adverse change in the Condition of Impact 21 and to the Knowledge
of Impact 21 none is threatened, (b) Impact 21 has not participated in any transaction material to
the Condition of Impact 21 which is outside the ordinary course of business and inconsistent with
past practice, (c) Impact 21 has not created or assumed any Lien on any of its material assets, and
(d) there has not occurred a material change in Impact 21s accounting principles or practice
except as required solely by reason of a change in Japanese GAAP.
5.9. Compliance with Laws. Impact 21 is not in violation of any applicable Orders or
any Requirement of Law, except for violations that, individually or in the aggregate, could not or
could not reasonably be expected to have a material adverse effect on the Condition of Impact 21,
and Impact 21 has not received notice that such violation is being or may be alleged. To the
Knowledge of Impact 21, there is no Order or any Requirement of Law that could or could reasonably
be expected to prohibit or restrict Impact 21 from, or otherwise materially adversely affect Impact
21 in, conducting its business in any jurisdiction in which it now operates.
5.10. Permits. Impact 21 has all Permits. All Permits are in full force and effect;
no violations are or have been recorded in respect of any Permit; and no proceeding is pending or,
to the Knowledge of Impact 21 threatened, to revoke, limit, cancel, rescind, materially modify or
refuse to renew in the ordinary course of business, any Permit. No action by Impact 21 is required
in order that all Permits will remain in full force and effect following the consummation of the
transactions contemplated by this Agreement. At any time on or before the Closing Date, Impact 21
has never conducted any business or other operations other than its business currently conducted
and Impact 21 has no liabilities or obligations that are not related to or did not arise from the
operation of such business.
5.11. Claims and Proceedings. Impact 21 and its assets are not subject to any
outstanding Orders. Except as set forth in Schedule 5.11, there is no Claim in excess of
¥12,000,000 pending or, to the Knowledge of Impact 21 threatened, against or involving Impact 21,
and there are no Claims that, in any case, could or could reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the Condition of Impact 21.
5.12. Contracts.
(a) With respect to Impact 21, all Material Contracts are valid and binding and enforceable
against it and, to the Knowledge of Impact 21, against the other parties thereto and are in full
force and effect. Except as set forth on Schedule 5.12(a), Impact 21 is not in default in any
material respect under any of the Material
23
Contracts nor, to the Knowledge of Impact 21, does any condition exist that with notice or
lapse of time or both would constitute such a material default thereunder. To the Knowledge of
Impact 21, no other party to any of the Material Contracts is in default thereunder in any material
respect nor does any condition exist that with notice or lapse of time or both would constitute
such a material default thereunder.
(b) Other than as set forth on Schedule 5.12(b), there are no material Contracts
between Impact 21 on the one hand and OK or any Affiliate of OK or directors or statutory auditors
of OK or Impact 21 on the other hand. A true, correct and complete copy of each Contract listed on
Schedule 5.12(b) has been delivered to PRL.
(c) Other than as set forth in Schedule 5.12(c), to the Knowledge of Impact 21, Impact
21 is not subject to any (i) non-compete agreement that after the consummation of the transactions
contemplated by this Agreement would provide any Person (other than Impact 21) any right to
restrict the business or activities of Impact 21 or PRL and its Affiliates, or any such contract
that would impose restrictions on the ability of Impact 21 to compete in any geographical or
product area or (ii) any material Contract that would be terminable or subject to prepayment or
give rise to other third party rights upon the consummation of or otherwise in connection with the
TOB contemplated by this Agreement.
5.13. Full Disclosure. None of the information or documents furnished by or on behalf
of Impact 21 to PRL pursuant to this Agreement, or in connection with the transactions contemplated
hereby, contains an untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements made, in the context in which made, not
materially false or misleading. There is no fact that Impact 21 has not disclosed to PRL in
writing that materially adversely affects or, so far as Impact 21 can now foresee, will materially
adversely affect, the Condition of Impact 21 or the ability of OK or any OK Group Company to
perform this Agreement and consummate the transactions contemplated hereby.
5.14. Taxes.
(a) All Taxes of Impact 21 which are due and payable on or prior to the Closing Date, or which
are due and payable after the Closing Date with respect to periods ending on or prior to the
Closing Date, have been paid or will be paid by Impact 21 in full, on a timely basis.
(b) All Tax Returns required to be filed with any Governmental Authority with respect to any
Taxes relating to the Impact 21s business or properties due for any period ending, or due on any
date or in respect of any transaction occurring, on or prior to the Closing Date have been or will
be duly and timely filed and all such tax returns are or will be true, complete and accurate.
(c) Impact 21 will not be required to pay any Taxes attributable to any other member of any
group of affiliated corporations that file consolidated returns for income tax purposes of which
Impact 21 was a member before the Closing Date by
24
reason of any provision of Law that provides for joint or several liability, in whole or in
part.
(d) No material penalties or other charges are due or anticipated to become due with respect
to the late filing of any Tax Return of Impact 21, or payment of any Tax of Impact 21 required to
be filed or paid on or before the Closing Date.
(e) The statute of limitations for the assessment of Taxes in respect of Impact 21 has expired
with respect to all periods ending on or before February 28, 1999. No audit is in progress with
respect to any Tax Return of or relating to Impact 21 for which the statute of limitations has not
expired, and no deficiencies or additions to Tax, interest or penalties have been proposed or to
Impact 21s Knowledge, threatened. Each Tax Return filed by or with respect to Impact 21 for which
the statute of limitations has not expired accurately reflects the amount of its liability for
Taxes thereunder and makes all disclosures required by applicable provisions of Law.
(f) Reserves and provisions for Taxes accrued but not yet due on or before the Closing Date
reflected in Impact 21s Financial Statements are and will be as of the Closing Date, adequate in
accordance with Japanese GAAP.
(g) Impact 21 will not have any liability on or after the Closing Date under any Tax sharing
agreement to which it has been a party, and all such Tax sharing agreements in effect before the
Closing Date shall terminate and be of no further force and effect as of the Closing Date.
(h) There are no pending or, to the Knowledge of Impact 21, threatened Claims for the
assessment or collection of Taxes against Impact 21.
5.15. Properties.
(a) Impact 21 owns outright and has good title to all of its properties, including all of the
assets reflected on the Balance Sheet of Impact 21, in each case free and clear of any Liens,
except for (i) Liens specifically described in the notes to the Financial Statements of Impact 21;
(ii) properties disposed of, or subject to purchase or sales orders, in the ordinary course of
business since the Balance Sheet Date; (iii) Liens securing Taxes, assessments, governmental
charges or levies, all of which are not yet due and payable or are being contested in good faith,
so long as such contest does not involve any substantial danger of the sale, forfeiture or loss of
any assets; (iv) statutory Liens created by operation of law in the ordinary course of business;
and (v) Liens not known to Impact 21 and that do not, individually or in the aggregate, materially
detract from the value of, or materially interfere with, any present or intended use of such
property or asset. The properties and assets of Impact 21, including the Contracts set forth on
Schedules 5.12(b) and 5.12(c), are sufficient to operate the business of Impact 21
in substantially the same manner as it is currently conducted by Impact 21.
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(b) Impact 21 does not own any real property. Impact 21 holds all of the right, title and
interest of the tenant under all Material Leases set forth on Schedule 5.15(b), free and
clear of all Liens, and enjoys peaceful possession thereunder. The leased real properties covered
by the Material Leases are used and operated in compliance and conformity with all contractual
obligations and Laws.
5.16. Liabilities. Impact 21 does not have any Liabilities other than (a) Liabilities
reflected or reserved against on the Balance Sheet of Impact 21 or described on any schedule or in
the notes to the Audited Financial Statements of Impact 21, (b) Liabilities accruing after the
Balance Sheet Date in the ordinary course of business consistent with past practice or in
accordance with this Agreement, and (c) other Liabilities that have not had and could not
reasonably be expected to have a material adverse effect on the Condition of Impact 21.
5.17. Suppliers and Customers. There exists no actual or, to the Knowledge of Impact
21, threatened termination, cancellation or limitation of, or any adverse change in, the business
relationship of Impact 21 with any customer, distributor, department store or supplier (including
manufacturers of products distributed by Impact 21) or any group of customers or suppliers whose
purchases of products or services from, or supply of inventories to, the Impact 21s business are
individually or in the aggregate material to the Condition of Impact 21.
5.18. Outstanding Indebtedness. Schedule 5.18 sets forth the amount of all
Indebtedness with an outstanding principal amount in excess of ¥1,000,000 individually, and
¥2,500,000 in the aggregate, of Impact 21 as of August 31, 2006, the Liens that relate to such
Indebtedness and the name of each lender or other obligee thereof. There have been no material
changes to such Indebtedness since August 31, 2006 other than changes in Impact 21s accounts
payable that have occurred in the ordinary course of its business, consistent with past practices.
No Person, by virtue of its position as a lender or other obligee under any Indebtedness of Impact
21 is entitled to any voting rights in any matters voted upon by the holders of the common stock of
Impact 21.
5.19. Benefit Plans.
(a) Schedule 5.19(a) lists all material Benefit Plans.
(b) With respect to each Benefit Plan, no event has occurred, and there exists no condition or
set of circumstances, in connection with which Impact 21 could reasonably be expected to be subject
to any liability under any applicable Law, except liability for benefits claims and funding
obligations payable in the ordinary course.
(c) Each Benefit Plan conforms to all applicable Law, and its administration complies in all
material respects with its terms and all applicable Law.
26
(d) Except as disclosed in Schedule 5.19(d), with respect to each Benefit Plan, there
are no benefit obligations for which contributions have not been made or properly accrued and there
are no unfunded benefit obligations in addition to ¥836,693,997 that has been accrued on the
Unaudited Financial Statements that have not been properly accrued or accounted for by reserves, or
otherwise properly footnoted in accordance with Japanese GAAP, on the Unaudited Financial
Statements of Impact 21.
(e) There are no Claims or Liens pending or, to the Knowledge of Impact 21, threatened (other
than routine claims for benefits) with respect to any Benefit Plan or against the assets of any
Benefit Plan, other than Claims or Liens that would not, individually or in the aggregate, have a
material adverse effect on the ability of Impact 21 to perform its obligations in respect of any
such Benefit Plan.
(f) The consummation of the transactions contemplated by this Agreement will not entitle any
current or former employee to severance pay, unemployment compensation or any similar payment or
accelerate the time of payment or vesting, or increase the amount of any compensation due to, or in
respect of, any current or former employee.
(g) Except as set forth on Schedule 5.19(g), no current or former employee of Impact
21 is covered by or entitled to benefits under any benefit plan maintained by, or contributed to
by, OK.
(h) Impact 21 does not maintain or contribute to, and has not within the preceding six (6)
years maintained or contributed to, or has had during such period the obligation to maintain or
contribute to, or may have any Liability with respect to any Benefit Plan maintained for Persons
other than current or former employees of Impact 21.
(i) Impact 21 does not have any obligation or have any direct or indirect Liability with
respect to the provision of health or death benefits to or in respect of former employees.
(j) Impact 21 does not have any direct or indirect Liability with respect to accrued vacation
days of current or former employees.
(k) Impact 21 has no agreements, arrangements, obligations or other conventions with, or to,
its employees other than those that are as set forth in Impact 21s written work rules and the
agreements relating to overtime (saburoku kyotei).
5.20. Insurance. All policies or binders of fire, liability, product liability,
workers compensation, vehicular and other insurance held by or on behalf of Impact 21 are valid
and binding in accordance with their terms, are in full force and effect and except for the
expiration on May 19, 2007 of Impact 21s director and officer liability insurance, shall remain in
full force and effect until the Closing Date, and insure against risks and liabilities to an extent
and in a manner customary in the industries in which Impact 21 operates. Impact 21 is not in
default with respect to any provision contained in
27
any such policy or binder or has failed to give any notice or present any claim under any such
policy or binder in due and timely fashion. There are no outstanding unpaid claims under any such
policy or binder, and Impact 21 has not received any notice of cancellation or non-renewal of any
such policy or binder.
5.21. Long-Term Deposits. Schedule 5.21 sets forth a true and complete list
of Impact 21s Long-Term Deposits and the amount of principal and the terms of the deposit in each
case. Impact 21 has all right, title and interest in the Long-Term Deposits free and clear of any
Liens.
5.22. Brokers Finders or Similar Fees. There are no brokerage commissions, finders
fees or similar fees or commissions payable by Impact 21in connection with the transactions
contemplated hereby based on any agreement, arrangement or understanding with Impact 21 or any
action taken by it, other than any fees, commissions or other compensation payable by Impact 21 to
Daiwa Securities SMBC Co., Ltd., which shall be paid by Impact 21 pursuant to Section 10.9.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF PRL AND THE BIDDER
PRL and the Bidder represents and warrants to OK, the OK Group Companies and Impact 21 as of
the date of this Agreement, the Determination Date and the Closing Date, as follows:
6.1. Organization and Authorization of Agreement.
(a) PRL is a corporation duly organized and validly existing under the laws of the State of
Delaware, United States of America, and the Bidder is a corporation duly organized and validly
existing under the laws of Japan. Each of PRL and the Bidder has all necessary power and lawful
authority to own, lease and operate its assets and properties and to carry on its business as
presently conducted.
(b) Each of PRL and the Bidder has all necessary power and authority to execute and deliver
this Agreement, to consummate the transactions contemplated by this Agreement, and to perform its
obligations hereunder. The execution and delivery of this Agreement by each of PRL and the Bidder,
the performance of the obligations of each of PRL and the Bidder under this Agreement and the
consummation of the transactions contemplated hereby do not (i) violate any provision of the
certificate of incorporation, articles of incorporation, bylaws or any other internal rules or
regulations of PRL or the Bidder, (ii) except as set forth on Schedule 6.1(b)
(collectively, the PRL Parties Required Consents), require PRL or the Bidder to obtain
any consent, approval or authorization of, or make any submission or filing with or give any notice
to, any Governmental Authority or any other Person or (iii) violate any Order or any Requirements
of Law applicable to either PRL or the Bidder, or violate, conflict with or result in the
termination or default or require the
28
delivery of notice under the terms or provisions of any material Contracts to which PRL or the
Bidder is a party or is bound or by which its assets or properties are bound.
(c) The execution and delivery of this Agreement, the performance of the obligations of each
of PRL and the Bidder hereunder and the consummation of the transactions contemplated hereby on the
part of PRL and the Bidder have been duly approved by all necessary corporate actions of PRL and
the Bidder, respectively.
(d) This Agreement has been duly executed and delivered by PRL and the Bidder, and constitutes
the valid and legally binding obligation of PRL and the Bidder enforceable against PRL and the
Bidder in accordance with the terms of this Agreement, except as may be limited by bankruptcy,
insolvency and other laws of general applicability relating to, or affecting, creditors rights
generally.
(e) There are no Claims pending or, to the Knowledge of PRL or the Bidder, threatened before
or by any Governmental Authority purporting to enjoin or restrain the execution, delivery or
performance by PRL or the Bidder of this Agreement or the consummation by PRL or the Bidder of the
transactions contemplated hereby.
6.2. Brokers Finders or Similar Fees of PRL and the Bidder. Except for fees payable
to Morgan Stanley Japan Securities Co., Ltd., which shall be paid by PRL or the Bidder, as
applicable, pursuant to Section 10.9, there are no brokerage commissions, finders fees or similar
fees or commissions payable by PRL or the Bidder in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with PRL or the Bidder or any action
taken by it.
ARTICLE VII.
COVENANTS AND AGREEMENTS
PRL, the Bidder, OK and each OK Group Company covenant and agree as follows:
7.1. Reasonable Commercial Efforts. Each of the parties to this Agreement agrees to
use reasonable commercial efforts to cause the completion of all transactions and the performance
of all agreements set forth in this Agreement. Without limiting the foregoing, each party agrees
to make all filings, seek all approvals and consents required or appropriate to be made by such
party and take all such other actions as are reasonably necessary or appropriate in connection with
the foregoing. Without limiting the foregoing, each of the parties to this Agreement shall use all
reasonable best efforts to obtain from and to file with Governmental Authorities any consents,
licenses, permits, waivers, authorizations notices, applications or other approvals required in
connection with the transactions contemplated by this Agreement, including, without limitation,
with respect to the Kanto Local Finance Bureau, the FSA and the TSE.
29
7.2. Conduct of Business.
(a) From the date of this Agreement through the Assumption Date, Impact 21 shall (i) preserve
and maintain in full force and effect its existence under the laws of its jurisdiction of formation
or organization, (ii) preserve and maintain in full force and effect all material rights,
privileges, qualifications, applications, licenses and franchises necessary in the normal conduct
of its business consistent with past practice, (iii) use reasonable commercial efforts to preserve
its business organization, its existing relations and goodwill with its suppliers, distributors,
department stores and customers and the services of the key employees of its business, (iv) conduct
its business in the ordinary course in accordance with sound business practices, policies and
procedures, and (v) comply with all applicable Requirements of Law and with any other requirements
of any Governmental Authority having jurisdiction over Impact 21 or its business. From the date
hereof, OK and Impact 21 shall not, and OK shall cause its Subsidiaries not to, disparage PRL, its
Affiliates or Impact 21s business, customers, employees, suppliers, distributors and other
existing relationships.
(b) Without limiting the provisions of Section 7.2(a), from the date of this Agreement through
the Assumption Date, Impact 21 shall not undertake any of the following actions without the prior
written approval of PRL in its sole discretion, except in accordance with the ordinary course of
business consistent with past practice, to but only to the extent that such action is not material
or could not reasonably be expected to have a material impact on Impact 21, and except to the
extent expressly permitted by the terms of this Agreement:
(i) except as set forth in Section 3.1(a), declare or pay any dividends or declare or make any
other distributions of any kind to its stockholders, or make any direct or indirect redemption,
retirement, purchase or other acquisition of any shares of its capital stock;
(ii) amend its articles of incorporation or other organizational instruments or merge with or
into or consolidate with any other Person, reclassify any shares of its capital stock, reduce its
capital or change or agree to change in any manner the rights of its authorized or outstanding
capital stock;
(iii) issue any shares of capital stock (including treasury stock), or securities convertible
into, or exercisable or exchangeable for, shares of capital stock of Impact 21, grant any option
with respect to its capital stock or enter into any agreement obligating itself to do any of the
foregoing;
(iv) buy back or redeem any shares of capital stock of Impact 21;
(v) enter into any new transactions (or amend, supplement or modify any existing agreement or
arrangement) with OK or its Affiliates;
30
(vi) incur any Indebtedness (including any capital leases) except intercompany Indebtedness in
the ordinary course of business consistent with past practice;
(vii) sell, lease or otherwise dispose of any assets (except for sales or other dispositions
of inventory or excess equipment in the ordinary course of business consistent with past practice);
(viii) enter into any lease involving annual payments;
(ix) mortgage, pledge or otherwise subject to a Lien any property or assets other than
conditional sales or similar security interests granted in connection with the lease or purchase of
equipment or supplies in the ordinary course of business consistent with past practice;
(x) engage in any other extraordinary transaction that, individually or in the aggregate, has
or could reasonably be expected to have, a material adverse effect on the Condition of Impact 21 or
the ability of OK or any OK Group Company or Impact 21 to perform their respective obligations
under this Agreement, or that materially impairs, or is reasonably likely materially to impair the
economic benefits PRL expects to derive from its investment in Impact 21;
(xi) make any change to its operating practice or distribution systems with department stores,
suppliers or customers;
(xii) make or commit to make any capital expenditure, investment, loan or acquisition of
securities or assets of any other Person, except in the ordinary course of business consistent with
past practice;
(xiii) (1) increase the salary, wages, benefits, bonuses or other compensation payable or to
become payable to its current or former directors, officers or employees, except for increases
required under employment agreements or collective bargaining agreements existing on the date
hereof and disclosed to PRL, or increases made in the ordinary course of business consistent with
past practice, (2) enter into or amend or otherwise alter any employment, change of control or
severance agreement with, or establish, adopt, enter into or amend any bonus, profit sharing,
thrift, stock option, restricted stock, pension, retirement, welfare, deferred compensation,
employment, change of control, termination, severance or other benefit plan, agreement, policy or
arrangement (Plan) for the benefit of, any current or former director, officer or
employee, except as required by law or in the ordinary course of business and consistent with past
practice (3) exercise any discretion to accelerate the vesting or payment of any compensation or
benefit under any Plan;
(xiv) make any change to its methods of accounting in effect as of August 31, 2006, except as
required by changes in Japanese GAAP;
(xv) make or change any tax election, settle or compromise any tax liability, change in any
respect any accounting method in respect of
31
taxes, file any amendment to, an income or other tax return, enter into any closing agreement
with respect to, or settle, any claim or assessment in respect of taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or assessment in respect of
taxes, except, in each case, in the ordinary course of business consistent with past practice;
(xvi) write up, write down or write off the book value of any of its assets, other than (1) in
the ordinary course of business and consistent with past practice or (2) as may be required by
Japanese GAAP;
(xvii) waive, settle, satisfy or compromise any Claim in excess of ¥12,000,000 (which shall in
any event include, but not be limited to, any pending or threatened Claim and any legal proceedings
arising out of or related to this Agreement or the transactions contemplated thereby);
(xviii) enter into any agreement that restricts the ability of Impact 21 to engage or compete
in any line of business or any market or geographic area;
(xix) other than in the ordinary course of business consistent with past practice and on terms
not adverse to Impact 21, enter into, amend, modify, cancel or consent to the termination of any
Contract if in effect on the date of this Agreement;
(xx) take any action that, individually or in the aggregate, could or could reasonably be
expected to have, a material adverse effect on the Condition of Impact 21;
(xxi) take any action or omit to take any action that would or would reasonably be likely to
result in the breach of or inaccuracy in any material respect of any of the representations and
warranties set forth in Article V;
(xxii) except in the ordinary course of business consistent with past practice and as,
individually or in the aggregate, could not, or could not reasonably be expected to, have a
material adverse effect on the Condition of Impact 21, cancel, surrender, allow to expire or fail
to renew, any Permits;
(xxiii) fail to use reasonable best efforts to prevent any insurance policy naming it as a
beneficiary or loss-payable payee to be cancelled or terminated, except for ordinary course
terminations and cancellations of such policies that are being replaced with policies providing for
substantially equivalent coverage; or
(xxiv) enter into any Contracts to do any of the actions referred to in this Section 7.2(b)
or commit to do any of the foregoing.
7.3. Notice of Certain Events. Each of Impact 21 and OK shall give PRL and the Bidder
prompt notice of any event, condition or circumstance occurring from the date of this Agreement
through the Assumption Date, including a reasonably detailed
32
description of such event, condition or circumstance, that constitutes, or could reasonably
be expected to result in, a violation or breach of any representation or warranty of OK or Impact
21, as the case may be, contained in this Agreement or any covenant of OK or Impact 21, as the case
may be, contained in this Agreement.
7.4. Access and Information.
(a) Impact 21 and OK shall permit representatives of the PRL to examine Impact 21s corporate,
financial and operating records, and to discuss affairs, finances and accounts with Impact 21s
directors, officers and independent public accountants, at reasonable times during normal business
hours and upon reasonable advance notice to Impact 21, all as reasonably requested by PRL for the
purpose of confirming any aspect of the transactions contemplated hereby. Without limiting the
foregoing, prior to the Assumption Date, Impact 21 promptly shall deliver to PRL copies of any
monthly and/or quarterly management reports normally prepared by Impact 21. None of PRLs rights
under this Agreement shall in any way be limited or impaired by any investigation or examination of
Impact 21 or its business.
(b) Impact 21 make reasonable commercial efforts to cooperate in preparing and/or making
available such financial and other information as PRL may reasonably require in order to comply in
a timely manner with applicable U.S. accounting, tax, regulatory or stock exchange requirements,
and
(c) if and to the extent necessary to comply with Requirements of Law, Impact 21 will
cooperate with PRL in good faith to meet, and comply with, any requirements for information,
access, conduct of activities or otherwise that may become applicable to PRL and Impact 21.
7.5. No Solicitation.
(a) From the date of this Agreement, Impact 21 shall not, and shall cause each of its
Representatives not to, directly or indirectly:
(i) solicit, initiate, encourage or facilitate any inquiries, offers or proposals relating to
an Inconsistent Proposal;
(ii) engage in discussions or negotiations with, or furnish or disclose any non public
information relating to Impact 21 to, any Person that has made or indicated an intention to make an
Inconsistent Proposal;
(iii) withdraw, modify or amend the Boards recommendation of the TOB and this Agreement in
any manner adverse to the PRL Parties;
(iv) approve, endorse or recommend any Inconsistent Proposal;
33
(v) enter into any agreement in principle, arrangement, understanding or contract relating to
an Inconsistent Proposal; or
(vi) propose to do any of the foregoing.
(b) From the date of this Agreement, Impact 21 shall notify PRL promptly upon receipt of (i)
any Inconsistent Proposal or reliable information that any Person is considering making an
Inconsistent Proposal or (ii) any request for non-public information relating to Impact 21. Impact
21 shall provide PRL and the Bidder promptly with a description of (x) the material terms of such
Inconsistent Proposal, and (y) any material changes thereto. Impact 21 need not disclose to PRL
the identity of such Person if and to the extent such Person has specifically requested
confidentiality, unless the Board believes such Inconsistent Proposal may become a Superior
Proposal that it might wish to support.
7.6. Compliance with Securities Laws. Impact 21 shall make public disclosure, in
accordance with the methods set forth in Article 166 of the SEL or any successor statute, of any
and all material information (juyo jijitsu) set forth in Article 166 of the SEL or any successor
statute (Material Information), on a timely basis. Upon request of PRL at any time and
from time to time, Impact 21 shall issue a written certificate to PRL verifying that there is no
Material Information relating Impact 21 or its business, results of operations or financial
condition that has not been made public in accordance with the method prescribed under Section 4 of
Article 166 of the SEL or any successor statute.
7.7. Transition Services Agreement. Concurrently with the execution of this
Agreement, the parties shall have entered into a transition services agreement, which shall come
into effect as of the Closing Date.
7.8. Consents. Prior to the Closing Date, OK and Impact 21 shall use commercially
reasonable efforts to, at their own expense, obtain the Impact 21 Required Consents set forth on
Schedule 4.4(b). PRL agrees to reasonably cooperate with OK and Impact 21 in obtaining
such consents; provided, however that PRL or its Affiliates shall in no event be obligated to agree
to any terms that PRL deems unreasonable or inappropriate in its sole discretion or to make (or
agree to make) any payment, guarantee or other undertaking in obtaining any of the Impact 21
Required Consents.
7.9. Non-Solicitation of Persons.
(a) During the period of this Agreement and the Transition Services Agreement and for a period
of three (3) years following the date of completion of this Agreement or the Transition Services
Agreement, whichever is later, except as otherwise mutually agreed upon by OK and PRL, OK shall not
and shall cause its Affiliates not to, directly or indirectly, (a) induce or solicit, aid or assist
any person or entity to induce or solicit or accept unsolicited services of any person known by OK
or its Affiliates to be then employed by Impact 21 to terminate his or her employment with Impact
21 (the value of the services of such employees being acknowledged as valuable
34
assets of Impact 21), (b) induce or solicit or aid or assist any person or entity to induce or
solicit any person or entity that then has a business relationship with Impact 21 to (i) terminate
or curtail its relationship with Impact 21 or (ii) conduct with any other person or entity any
business or activity if the effect thereof would be to terminate or to adversely affect any
business or activity that such person or entity conducts with Impact 21, or (c) in any other manner
interfere with the business relationship between Impact 21 and any other person or entity.
Notwithstanding the foregoing, general solicitations of employment published in a newspaper or in
another publication of general circulation and not specifically directed towards any person known
by OK or its Affiliates to be then employed by Impact 21 shall not be deemed to constitute
solicitation for purposes of this Section 7.9.
(b) OK and Impact 21 undertake to PRL that each will not and will make commercially reasonable
best efforts to ensure that its Affiliates, shareholders, officers, employees or agents will not,
do any act or thing that would reasonably be expected to damage the reputation of PRL or its
Affiliates and will not make or publish or cause disparaging remarks concerning PRL or its
Affiliates.
7.10. Tax Matters.
(a) During the period from the date of this Agreement to the Assumption Date, Impact 21 shall
promptly notify the Bidder if Impact 21 has received written notice from a Governmental Authority
of any suit, claim, action, investigation, proceeding or audit pending against or threatened with
respect to Impact 21 in respect of any Taxes of Impact 21.
(b) Impact 21 shall prepare (or cause to be prepared) in the ordinary course of business and
consistent with past practice (except as otherwise required by law), and timely (taking into
account all extensions) file all Tax Returns of or with respect to Impact 21 with respect to any
taxable period that ends on or prior to the Assumption Date, and shall fully and timely pay (or
cause to be paid) any Taxes due in respect of such Tax Returns. Impact 21 shall deliver a copy of
such Tax Return to the Bidder no more than ten (10) days after the date on which such Tax Return is
filed.
7.11. Shareholders List. As soon as practicable after the Closing Date, Impact 21
shall provide a current shareholders list to PRL reflecting the shareholdings and identities of
such shareholders after the completion of the TOB. Impact 21 shall also cooperate with PRL in any
investigations into the shareholder base of Impact 21.
7.12. Monthly Financial Statements. During the period from the date of this Agreement
to the Assumption Date, Impact 21 shall promptly, but in any event within 5 Business Days after the
end of the month, deliver to PRL monthly financial statements as of, and for the months ended,
April 30, 2007 and if the TOB is not consummated May 31, 2007, which will be prepared in accordance
with Impact 21s managerial accounting standards, consistent with past practice, and which will
fairly present the financial position of Impact 21 as at such dates and the results of operations
for the respective months then ended.
35
7.13. Other Matters. PRL on its own behalf and on behalf of its Affiliates hereby
waives any Claims and rights it may have against OK and its Affiliates with respect to the alleged
breach of contract claim described on Schedule 4.14(a) to this Agreement and any other
Claims that PRL may have against Impact 21 or OK arising out of such alleged breach of contract
claim. OK agrees to cause the transfer of employment back to OK or one of its Affiliates (other
than Impact 21) from Impact 21 of the two employees listed on Schedule 7.13. OK shall
further ensure that neither Impact 21 nor any of its Affiliates shall be liable for any Losses (as
defined below) for any severance or retirement benefits for any employee transferred by OK or any
of its Affiliates to Impact 21 in the preceding 24 months and OK shall indemnify and hold harmless
PRL, Impact 21 and their Affiliates for all such Losses.
ARTICLE VIII.
INDEMNIFICATION
8.1. Obligation of OK to Indemnify. OK shall indemnify, defend and hold harmless PRL, the
Bidder and their respective Representatives, and the successors and assigns of any of the foregoing
Persons (collectively, the PRL Indemnified Parties), from and against all Claims,
demands, judgments, damages (excluding consequential and punitive damages), losses, Liabilities,
costs or expenses (including interest, penalties and fees, costs of investigation, collection and
defense and reasonable fees, disbursements and charges of legal counsel, experts and consultants)
(Losses) which may be made or brought against the PRL Indemnified Parties or any of them
or which they may suffer or incur as a result of, arising out of or otherwise relating to any
inaccuracy in or any violation or breach of any representation, warranty, covenant or agreement of
OK, OK Group Companies or Impact 21 contained in this Agreement or in any certificate or instrument
delivered pursuant to this Agreement. Notwithstanding anything to the contrary set forth herein,
from and after the Closing Date, neither OK nor any of its Affiliates may make any claim or assert
any Loss arising out of any breach or alleged breach by Impact 21 of any representation, warranty,
covenant or other agreement of Impact 21 set forth in this Agreement. OKs liability for any
Losses under this Article 8 arising solely from claims of an inaccuracy, violation or breach of a
representation and warranty (but not a covenant or other agreement set forth herein) shall be
subject to the following limitations: (i) OK shall have no liability for any Losses (other than
those arising out of, or resulting from, the breach by OK or Impact 21 of its representations and
warranties in Sections 4.2, 5.4, 5.7 and 5.14 or any Losses arising out of fraud or intentional
misrepresentation) unless and until the aggregate amount of the Losses for which OK is obligated to
indemnify shall exceed ¥50,000,000 (the Threshold Amount) in which case OK shall be
liable only to the extent that the aggregate amount of such Losses, as finally determined, shall
exceed the Threshold Amount; (ii) the aggregate liability of OK for all Losses (other than those
arising out of, or resulting from, the breach by OK of its representations and warranties in
Section 4.2, 5.4, 5.7 and 5.14 or any Losses arising out of fraud or intentional misrepresentation)
shall not exceed ¥3 billion in the aggregate; and (iii) OK shall have no liability to the extent
that any Losses
36
arise solely out of changes in Japanese law that have not been proposed or initiated on or prior to
the execution date of this Agreement and are enacted into law subsequent to the execution date of
this Agreement (Changes in Law).
8.2. Obligation of PRL to Indemnify. PRL shall indemnify, defend and hold harmless OK
and the OK Group Companies and their respective Representatives, and the successors and assigns of
any of the foregoing Persons thereof (collectively, the OK Indemnified Parties), from and
against all Losses which may be made or brought against the OK Indemnified Parties or any of them
or which they may suffer or incur as a result of, arising out of or otherwise relating to any
inaccuracy in or any violation or breach of any representation, warranty, covenant or agreement of
PRL contained in this Agreement or contained in any certificate delivered pursuant to this
Agreement. PRLs liability for any Losses under this Article 8 from claims for breaches or
violations of any representation or warranty shall be subject to the following limitations: (i)
PRL shall have no liability for any Losses unless and until the aggregate amount of the Losses for
which PRL is obligated to indemnify shall exceed the Threshold Amount in which case PRL shall be
liable only to the extent that the aggregate amount of such Losses, as finally determined, shall
exceed the Threshold Amount; (ii) the aggregate liability of PRL for all Losses shall not exceed ¥3
billion in the aggregate; and (iii) PRL shall have no liability to the extent that any Losses arise
solely out of Changes in Law.
8.3. Notice of Claim. Upon obtaining Knowledge thereof, the Person claiming
indemnification hereunder (the Indemnitee) shall promptly notify the party against which
indemnification is sought (the Indemnitor) in writing of any Claims, judgments, damages,
losses, Liabilities, costs or expenses which the Indemnitee has determined has given or could give
rise to a Loss under Section 8.1 or 8.2 (a Notice of Claim). A Notice of Claim shall
specify, in reasonable detail, the nature, basis and estimated amount of any claim giving rise to a
right of indemnification prior to the applicable date of expiry set forth in Section 8.5 below.
The omission to so notify the Indemnitor shall not relieve the Indemnitor from any duty to
indemnify and hold harmless which otherwise might exist with respect to such claim unless (and only
to that extent) the omission to notify materially prejudices the ability of the Indemnitor to
exercise its right to defend provided in this Article VIII and results in a direct loss being
incurred by the Indemnitor.
8.4. Defenses of Third-Party Claims. The Indemnitor may elect to defend, in good
faith and at its expense, with counsel satisfactory to the Indemnitee in its reasonable judgment,
any claim set forth in a Notice of Claim that relates to a Claim or demand brought by a third
party, in which case the Indemnitee shall have the right to participate in the defense of such
Claim at its expense. If the Indemnitor elects to defend any third-party claim as provided in this
Section 8.4, the Indemnitee shall reasonably cooperate with the Indemnitor in the defense thereof
so long as the Indemnitee is not materially prejudiced thereby. So long as the Indemnitor is
conducting the defense of such Claim actively and diligently, the Indemnitee may retain separate
co-counsel at its sole cost and expense and may participate in the defense of such Claim, and
neither the Indemnitor or the Indemnitee will consent to the entry of any judgment or settle or
37
compromise or permit to be settled or compromised any such third party claim without the prior
written consent of the other, which consent shall not be unreasonably withheld or delayed (provided
that such consent shall be granted in connection with any settlement (i) containing a full release
of the party from whom such consent is so requested, and (ii) in the case of a consent from the
Indemnitee, involving only monetary damages). In the event (i) the Indemnitor does not or ceases
to conduct the defense of such Claim actively and diligently, or (ii) if the Indemnitee shall have
determined in good faith that an actual or potential conflict of interest makes representation by
the same counsel or the counsel selected by the Indemnitor inappropriate or inadvisable, (x) the
Indemnitee may defend against, and, with the prior written consent of the Indemnitor (which consent
shall not be unreasonably withheld or delayed), consent to the entry of any judgment or enter into
any settlement with respect to, such Claim, (y) the Indemnitor will reimburse the Indemnitee
promptly and periodically for the costs of defending against such Claim, including reasonable
attorneys fees and expenses and (z) the Indemnitor will remain responsible for any Losses the
Indemnitee may suffer as a result of such Claim to the full extent provided in this Article VIII.
Regardless of which party shall assume the defense of such Claim, each party shall promptly provide
to the other party on request all information and documentation reasonably necessary to support and
verify any Losses which give rise to such Claim for indemnification and shall provide reasonable
access to all books, records and personnel in their possession or under their control which would
have a bearing on such Claim. If the Indemnitor elects not to defend any third-party claim, the
Indemnitee may do so and the Indemnitor shall bear the entire cost and risk thereof to the extent
of its indemnification obligations under this Article VIII.
8.5. Survival of Covenants, Agreements, Representations and Warranties. All covenants
and agreements of the parties contained in this Agreement to the extent not performed fully at or
prior to the Assumption Date shall survive such Assumption Date and continue in full force and
effect in accordance with the terms hereof. All representations and warranties contained in this
Agreement shall terminate and expire on September 15, 2007, except for (i) the representations and
warranties of OK contained in Section 4.2 (Title to the Shares), and the representations and
warranties of Impact 21 contained in Sections 5.4 (Outstanding Capital Stock) and 5.5 (Options or
Other Rights) which shall survive indefinitely and (ii) the representations and warranties of
Impact 21 contained in Section 5.14 (Taxes), which shall survive until six (6) months after the
expiration of the statute of limitations applicable to the matters covered thereby (giving effect
to any waiver or extension thereof and taking into account any judicial or other proceedings). If
a claim for breach of any representation or warranty is made in writing on or prior to the date of
expiry thereof, such representation or warranty will survive until final resolution or
determination of such claim.
8.6. Judgment Currency. In respect of any judgment or order given or made for any
amount due hereunder that is expressed and paid in a currency (the Judgment Currency)
other than Japanese Yen, the Indemnitor will indemnify the Indemnitee against any loss incurred by
the Indemnitee as a result of any variation between (i) the rate of exchange at which the Japanese
Yen amount is converted into the Judgment Currency for the purpose of such judgment or order and
(ii) the rate of
38
exchange at which the Indemnitee is able to purchase Japanese Yen with the amount of the
Judgment Currency actually received by such Indemnitee, as the case may be. The foregoing
indemnity shall constitute a separate and independent obligation of the Indemnitor and shall
continue in full force and effect notwithstanding any such judgment or order as aforesaid. The
term rate of exchange shall include any premiums and costs of exchange payable in connection with
the purchase of or conversion into Japanese Yen.
TERMINATION
9.1. Termination of Agreement. This Agreement (except in relation to rights and
obligations accrued prior to the date of termination) may be terminated in the following
circumstances: By PRL or the Bidder by notice to Impact 21 if the TOB is not commenced within
five Business Days of the execution of this Agreement due to the failure of the conditions
specified in Section 2.3 to be satisfied by the Determination Date.
(b) By any party if the Bidder withdraws from the TOB as a result of the fact that the TOB
Conditions have not been satisfied; provided, however, that neither OK nor Impact 21 may terminate
this Agreement pursuant to this clause (b) if the TOB Conditions are not satisfied due to a breach
of any covenant or other obligation of either OK or Impact 21 set forth in this Agreement.
(c) By any party if the TOB is not consummated due to the Minimum Tender Condition not being
satisfied; provided, however, that neither OK nor Impact 21 may terminate this Agreement pursuant
to this clause (c) if the Minimum Tender Condition is not satisfied due to a breach of a covenant
or other obligation of either OK or Impact 21 set forth in this Agreement.
(d) If OK, Impact 21, PRL and the Bidder terminate this Agreement by a written instrument
signed by all parties.
If this Agreement so terminates, it shall become null and void and have no further force or
effect, except as provided in Section 9.2.
9.2. Survival. If this Agreement is terminated, this Agreement shall become of no further
force and effect, except for the provisions of Articles VIII and IX and X and except for any
rights for breach of contract that may have accrued prior to such termination.
ARTICLE X.
MISCELLANEOUS
10.1. Amendment; Waiver. This Agreement may be amended, supplemented or modified, and
the terms and conditions hereof may be waived at any time only by a written instrument duly
executed by the parties hereto.
39
10.2. Integration. This Agreement and the Exhibits and Schedules hereto contain the
entire agreement among the parties with respect to the sale and purchase and other transactions
contemplated hereby, and supersede all prior and contemporaneous agreements, writings, statements
and understandings among the parties with respect thereto.
10.3. Binding Effect; Parties in Interest; Assignment. The terms and conditions of
this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties
respective successors and assigns. No party may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other parties in their sole
discretion. Any purported assignment in violation of this Section 10.3 shall be null and void.
10.4. No Third-Party Beneficiaries. This Agreement shall not be interpreted as a
third-party beneficiary contract.
10.5. Governing Law. This Agreement and the legal relations among the parties
relating to this Agreement shall be governed by and construed and enforced in accordance with the
laws of Japan.
10.6. Consultation; Arbitration. Any dispute, controversy or claim arising out of or
in connection with this Agreement or any agreement or transaction contemplated hereby or thereby (a
Dispute) shall be resolved as set forth in this Section 10.6. Each party shall give
written notice to each other party of any Dispute claimed by it. Promptly following delivery of
such notice, a director, senior officer or executive of each party shall meet in Tokyo, Japan and
shall be obligated to attempt in good faith to resolve the Dispute. If within thirty (30) days
following the date on which notice of a Dispute is given the Dispute has not been resolved, such
Dispute shall be referred at the request of any party, upon written notice to the other parties, to
and finally resolved by arbitration in accordance with the procedures set forth on Exhibit
E. Nothing in this Section 10.6 shall in any way limit the right of any party to seek
preliminary injunctive relief from any court of competent jurisdiction pending the final decision
or award of the arbitration tribunal.
10.7. Severability. If any portion of this Agreement shall be declared by any court
of competent jurisdiction to be invalid, illegal or unenforceable, such portion shall be deemed
severed from this Agreement and the remaining parts hereof shall remain in full force and effect as
fully as if those such invalid, illegal or unenforceable portions had never been a part of this
Agreement.
10.8. Notice. Any notice that a party is required or permitted to give pursuant to
this Agreement shall be in writing (in either English or Japanese) and shall be effective upon
receipt. Such notices shall be sent by facsimile to the facsimile numbers specified below, unless
notice of a change of facsimile number is given in writing, and shall be confirmed in writing,
hand-delivered or sent by public mail, with evidence of receipt in each instance, to the addresses
specified below unless notice of a change of address is given in writing:
40
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If to PRL or the Bidder: |
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With copies to: |
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Polo Ralph Lauren Corporation |
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Paul, Weiss, Rifkind, Wharton & Garrison LLP |
625 Madison Avenue, 8th Fl. |
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1285 Avenue of the Americas |
New York, NY 10022 |
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New York, NY 10019-6064 |
USA |
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USA |
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Attention: |
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Tracey T. Travis
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Attention: |
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Douglas A. Cifu, Esq. |
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Senior Vice President
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Telephone:
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+1-212-373-3436 |
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Chief Financial Officer
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Facsimile:
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+212-373-0436 |
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Jonathan D. Drucker, Esq. |
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Senior Vice President |
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and General Counsel |
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Telephone:
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+1-212-705-8325 |
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Facsimile:
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+1-212-705-8385 |
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Paul, Weiss, Rifkind, Wharton & Garrison LLP |
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Fukoku Seimei Bldg. 2nd Floor |
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2-2-2 Uchisaiwaicho |
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Chiyoda-ku, Tokyo 100-0011 |
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Japan |
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Attention: |
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Kaye N. Yoshino, Esq. |
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Telephone:
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+81-3-3597-8101 |
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Facsimile:
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+81-3-3597-8120 |
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Nishimura & Partners |
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Ark Mori Bldg. 29th Floor |
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1-12-32, Akasaka |
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Minato-ku, Tokyo 107-6029 |
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Japan |
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Attention: |
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Hiroyuki Tezuka, Esq. |
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Telephone:
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+81-3-5562-8500 |
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Facsimile:
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+81-3-5561-9711 |
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If to OK or OK Group Companies: |
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With a copy to: |
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Onward Kashiyama Co., Ltd. |
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Hibiya Park Law Offices |
3-10-5 Nihonbashi |
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Hibiya Marine Bldg. |
Chuo-ku, Tokyo 103-8239 |
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1-5-1 Yurakucho |
Japan |
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Chiyoda-ku, Tokyo 100-0006 |
Attention: |
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Kazuya Baba
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Japan |
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Senior Managing and
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Attention: |
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Akihiko Hara, Esq. |
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Representative Director |
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Telephone:
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+81-3-5532-8177 |
Telephone:
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+81-3-3272-2323
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Facsimile:
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+81-3-5532-8087 |
Facsimile:
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+81-3-3272-2333
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41
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if to Impact 21: |
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with a copy to: |
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Impact 21 Co, Ltd. |
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Abe, Ikubo & Katayama |
3-10-5 Nihonbashi |
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Fukuoka Bldg. |
Chuo-ku, Tokyo 103-8239 |
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2-8-7 Yaesu |
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Japan |
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Chuo-ku, Tokyo 104-0028 |
Attention:
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Tadao Enomoto
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Japan |
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President & CEO
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Attention:
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Hideto Sasaki, Esq. |
Telephone:
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+81-3-3274-9868
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Telephone:
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+81-3-3273-1860 |
Facsimile:
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+81-3-3274-9854
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Facsimile:
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+81-3-3273-2033 |
10.9. Expenses. Except as provided in Section 10.6, each of the parties hereto shall
pay its own costs and expenses in the negotiation, preparation and carrying out of this Agreement,
including, without limitation, costs, expenses and fees of their respective investment bankers,
legal counsel, accountants, financial advisors, and other consultants and agents.
10.10. Confidentiality. Each of the parties hereto shall keep confidential, and shall
use reasonable best efforts to cause its employees, agents and other representatives to keep
confidential, and shall not disclose to any Person, the contents of this Agreement and all
confidential and proprietary information of the other party. OK shall and shall cause the OK Group
Companies to maintain confidentiality of all information concerning Impact 21 and PRL,
respectively, and to use any such information solely for the purpose of furthering the transactions
contemplated herein. The obligations of the parties under this Section 10.10 shall not apply to
information that (i) is or becomes publicly available other than by disclosure by the party seeking
to rely on this exception or any agent thereof or (ii) any party is required to disclose by law or
regulation, as advised by legal counsel to such party, or pursuant to order or request of any
Governmental Authority or in order to enforce the terms of this Agreement. In the event of
disclosure required by legal process, the disclosing party will give the other parties adequate
advance notice, if practicable in the circumstances, so that the other parties may take reasonable
actions to preserve the confidentiality of such information.
10.11. Public Statements. None of the parties hereto shall issue any press release or
otherwise make public statements with respect to the transactions contemplated by this Agreement without
the prior approval of the other parties (which approval shall not be
unreasonably withheld or delayed), except in accordance with the Requirements of Law, such as the
requirements of any stock exchange, securities market or securities market regulator (including any
filings with the United States Securities and Exchange Commission and any earning release calls
held by either party).
10.12. Further Assurances. Each of the parties hereby agrees to execute such
documents and do all other acts as may be reasonably necessary and within such
42
partys control to perfect, protect and maintain OKs and each OK Group Companys interest in the Shares and otherwise
to carry out the purposes and intent of this Agreement.
10.13. Specific Performance. The parties agree that irreparable damage would occur in
the event any of the provision of this Agreement were not to be performed in accordance with the
terms hereof and that the parties shall be entitled to specific performance of the terms hereof in
addition to any other remedies at law or in equity.
10.14. English. This Agreement has been executed in the English language. Should a
translation of this Agreement into any other language be made for any reason, all matters involving
interpretation shall be governed by the English text.
10.15. Counterparts. This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which shall be considered one and the same
agreement.
[Remainder of page intentionally left blank]
43
IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this
Agreement on the date first written above.
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POLO RALPH LAUREN CORPORATION
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By: |
/s/ Roger N. Farah
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Name: |
Roger N. Farah |
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Title: |
President & Chief Operating Officer |
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PRL JAPAN KABUSHIKI KAISHA
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By: |
/s/ Toshio Hoyama
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Name: |
Toshio Hoyama |
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Title: |
Representative Director |
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ONWARD KASHIYAMA CO., LTD.
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By: |
/s/ Takeshi Hirouchi
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Name: |
Takeshi Hirouchi |
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Title: |
Chairman & Representative Director |
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IMPACT 21, CO., LTD.
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By: |
/s/ Tadao Enomoto
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Name: |
Tadao Enomoto |
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Title: |
President & Chief Executive Officer |
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EX-21.1
EXHIBIT 21.1
SUBSIDIARIES
OF THE COMPANY
(Excludes inactive subsidiaries)
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Entity Name
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Jurisdiction of Formation
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379 West Broadway Retail, LLC
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New York
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41 Jobs Lane, LLC
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Delaware
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Acqui Polo CV
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Netherlands
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Acqui Polo Espana
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Spain
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Acqui Polo GP, LLC
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Delaware
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Acqui Polo SAS
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France
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Club Monaco (Hong Kong) Limited
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Hong Kong
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Club Monaco Corp.
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Nova Scotia
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Club Monaco S.A.M.
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Principality of Monaco
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Club Monaco U.S., LLC
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Delaware
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Consolidated Polo Retailers, Inc.
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Delaware
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Fashion Development Corp.
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Delaware
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Fashions Outlet of America, Inc.
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Delaware
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Fashions Outlet of Florida, LLC
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Delaware
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FOA Management Ltd.
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Delaware
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Impact 21 Co. Ltd.
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Japan
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L&S UK Ltd.
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United Kingdom
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Mountain Rose (USA), LLC.
|
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Delaware
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National Polo Retailers, Inc.
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Delaware
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PFO Retail Management SAS
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France
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Polo Apparel, LLC (f/k/a Polo Apparel of Texas, Ltd.)
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Delaware
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Polo California, LLC
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Delaware
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Polo Colorado, LLC
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Delaware
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Polo DC, LLC
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Delaware
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Polo Fin BV
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Netherlands
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Polo Florida, LLC
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Delaware
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Polo Georgia, LLC
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Delaware
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Polo Hawaii, LLC
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Delaware
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Polo Hold BV
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Netherlands
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Polo Illinois, LLC
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Delaware
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Polo International Assignments Service Corp.
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Delaware
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Polo Jeans Co. (Europe) Ltd.
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United Kingdom
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Polo Jeans Company, LLC (f/k/a Polo Jeans Company of Texas, Inc.)
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Delaware
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Polo JP Acqui B.V.
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Netherlands
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Polo Management Services, LLC (f/k/a Polo Management Services,
Inc.)
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Delaware
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Polo Moden Gmbh
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Germany
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Polo Nevada LLC
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Delaware
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Polo New York, LLC
|
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Delaware
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Polo Pennsylvania, LLC
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Delaware
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Polo Players Palo Alto Company GP
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Delaware
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Polo Players, Ltd GP
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Delaware
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Polo Ralph Lauren Aviation, LLC
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Delaware
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|
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Entity Name
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Jurisdiction of Formation
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Polo Ralph Lauren Colombia Ltda.
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Colombia
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Polo Ralph Lauren Europe Sàrl
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Switzerland
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Polo Ralph Lauren Denmark ApS
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Denmark
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Polo Ralph Lauren Home Collection Showroom, LLC
|
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Delaware
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Polo Ralph Lauren Japan Corporation
|
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Japan
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Polo Ralph Lauren Korea, Ltd.
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Korea
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Polo Ralph Lauren Milan S.r.l.
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Italy
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Polo Ralph Lauren SAS (St. Barthelemy)
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France
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Polo Ralph Lauren Sourcing Americas, LLC
|
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Delaware
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Polo Ralph Lauren Sourcing Company, Ltd.
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Hong Kong
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Polo Ralph Lauren Sourcing Italy S.r.l.
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Italy
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Polo Ralph Lauren Sourcing PTE, Ltd.
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Singapore
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Polo Ralph Lauren Sweden AB
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Sweden
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Polo Ralph Lauren UK Limited
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United Kingdom
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Polo Ralph Lauren Womenswear, LLC
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Delaware
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Polo Retail Europe Limited (f/k/a Acqui Polo UK)
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United Kingdom
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Polo Retail, LLC
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Delaware
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Polo Rodeo Inc.
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California
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Polo Shirts Limited
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United Kingdom
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Polo Soho, LLC
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Delaware
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Polo UK Ltd. (f/k/a Polo Factory Outlet Ltd.)
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United Kingdom
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Polo Wings II, Inc.
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Delaware
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Poloco Belgium S.p.r.l.
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Belgium
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Poloco Espana SL
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Spain
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Poloco Ltd.
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United Kingdom
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Poloco Netherlands BV
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Netherlands
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Poloco SAS
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France
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Poloco Scandinavia AB
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Sweden
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PRL Australia Pty Ltd.
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Australia
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PRL CMI, LLC
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Delaware
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PRL Fashions of Europe S.r.l.
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Italy
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PRL Fashions, Inc.
|
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Delaware
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PRL Financial Corporation
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Delaware
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PRL France SAS
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France
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PRL International, Inc.
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Delaware
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PRL Japan Kabushiki Kaisha
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Japan
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PRL Japan Partnership NK
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Japan
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PRL Michigan, LLC
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Delaware
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PRL Netherlands Limited, LLC (f/k/a Acqui Polo Limited, LLC)
|
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Delaware
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PRL Restaurant Concepts of Illinois, LLC
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Delaware
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PRL S.R.L.
|
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Argentina
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PRL Textil Gmbh
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Austria
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PRL USA Holdings, Inc.
|
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Delaware
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PRL USA, Inc.
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Delaware
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R.L. Fashions of Alabama, LLC
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Delaware
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R.L. Fashions of Arizona, LLC
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Delaware
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|
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Entity Name
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Jurisdiction of Formation
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R.L. Fashions of Cabazon CA, LLC
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Delaware
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R.L. Fashions of Connecticut, LLC
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|
Delaware
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R.L. Fashions of Delaware, LLC
|
|
Delaware
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R.L. Fashions of Indiana, LLC
|
|
Delaware
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R.L. Fashions of Iowa, LLC
|
|
Delaware
|
R.L. Fashions of Maine, LLC
|
|
Delaware
|
R.L. Fashions of Maryland, LLC
|
|
Delaware
|
R.L. Fashions of Massachusetts, LLC
|
|
Delaware
|
R.L. Fashions of Minnesota, LLC
|
|
Delaware
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R.L. Fashions of Mississippi, LLC
|
|
Delaware
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R.L. Fashions of Missouri, LLC
|
|
Delaware
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R.L. Fashions of Naples, LLC
|
|
Delaware
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R.L. Fashions of New Hampshire, LLC
|
|
Delaware
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R.L. Fashions of New Mexico, LLC
|
|
Delaware
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R.L. Fashions of New York, LLC
|
|
Delaware
|
R.L. Fashions of North Carolina, LLC
|
|
Delaware
|
R.L. Fashions of Ohio, LLC
|
|
Delaware
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R.L. Fashions of Oregon, LLC
|
|
Delaware
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R.L. Fashions of South Carolina, LLC
|
|
Delaware
|
R.L. Fashions of Tennessee, LLC
|
|
Delaware
|
R.L. Fashions of Texas, Inc.
|
|
Delaware
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R.L. Fashions of Utah, LLC
|
|
Delaware
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R.L. Fashions of Vermont, LLC
|
|
Delaware
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R.L. Fashions of Virginia, LLC
|
|
Delaware
|
R.L. Fashions of Washington, LLC
|
|
Delaware
|
R.L. Fashions of West Virginia, LLC
|
|
Delaware
|
R.L. Fashions of Wisconsin, LLC
|
|
Delaware
|
Ralph Lauren Footwear Co., Inc.
|
|
Massachusetts
|
Ralph Lauren Home Collection, Inc.
|
|
Delaware
|
Ralph Lauren Ireland Limited
|
|
Ireland
|
Ralph Lauren Italy S.r.L.
|
|
Italy
|
Ralph Lauren Limited
|
|
United Kingdom
|
Ralph Lauren Media, LLC
|
|
Delaware
|
Ralph Lauren Retail Japan YK
|
|
Japan
|
Ralph Lauren Spain SL
|
|
Spain
|
Ralph Lauren Switzerland Sagl
|
|
Switzerland
|
Ralph Lauren Watch & Jewelry Sàrl (50% ownership)
|
|
Switzerland
|
RL Fragrances, LLC
|
|
Delaware
|
RLPR, Inc.
|
|
Delaware
|
RLWW, LLC (f/k/a RLWW, Inc.)
|
|
Delaware
|
Sun Apparel, LLC (f/k/a Sun Apparel, Inc.)
|
|
Delaware
|
The Polo/Lauren Company L.P.
|
|
New York
|
The Ralph Lauren Womenswear Company, L.P.
|
|
Delaware
|
Western Polo Retailers, LLC
|
|
Delaware
|
EX-23.1
EXHIBIT 23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration
Statement
No. 333-24733,
No. 333-46808
and
No. 333-29023
on
Form S-8
of our report dated May 28, 2008, relating to the
consolidated financial statements of Polo Ralph Lauren
Corporation and subsidiaries (the Company), (which
expresses an unqualified opinion and includes an explanatory
paragraph relating to the Companys adoption of Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
effective April 1, 2007, the Companys elected
application of Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements, effective April 2, 2006, and the
Companys adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, as
revised, effective April 2, 2006) and our report dated
May 28, 2008, relating to the effectiveness of the
Companys internal control over financial reporting,
appearing in this Annual Report on
Form 10-K
of Polo Ralph Lauren Corporation and subsidiaries for the year
ended March 29, 2008.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 28, 2008
EX-31.1
EXHIBIT 31.1
CERTIFICATION
I, Ralph Lauren, certify that:
1. I have reviewed this annual report on
Form 10-K
of Polo Ralph Lauren Corporation;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting.
5. The registrants other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Ralph Lauren
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 28, 2008
EX-31.2
EXHIBIT 31.2
CERTIFICATION
I, Tracey T. Travis, certify that:
1. I have reviewed this annual report on
Form 10-K
of Polo Ralph Lauren Corporation;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting.
5. The registrants other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Tracey T. Travis
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 28, 2008
EX-32.1
EXHIBIT 32.1
Certification
of Ralph Lauren Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
In connection with the Annual Report of Polo Ralph Lauren
Corporation (the Company) on
Form 10-K
for the period ended March 29, 2008 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Ralph Lauren, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and result of
operations of the Company.
Ralph Lauren
May 28, 2008
A signed original of this written statement required by
Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written
statement required by Section 906, has been provided to
Polo Ralph Lauren Corporation and will be retained by Polo Ralph
Lauren Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
EX-32.2
EXHIBIT 32.2
Certification
of Tracey T. Travis Pursuant to 18 U.S.C.
Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
In connection with the Annual Report of Polo Ralph Lauren
Corporation (the Company) on
Form 10-K
for the period ended March 29, 2008 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Tracey T. Travis, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and result of
operations of the Company.
Tracey T. Travis
May 28, 2008
A signed original of this written statement required by
Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written
statement required by Section 906, has been provided to
Polo Ralph Lauren Corporation and will be retained by Polo Ralph
Lauren Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.