SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13057 POLO RALPH LAUREN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-2622036 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 MADISON AVENUE, NEW YORK, NEW YORK 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 212-318-7000 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 registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At February 8, 2001, 31,948,651 shares of the registrant's Class A Common Stock, $.01 par value, were outstanding, 43,280,021 shares of the registrant's Class B Common Stock, $.01 par value, were outstanding and 22,720,979 shares of the registrant's Class C Common Stock, $.01 par value were outstanding.
POLO RALPH LAUREN CORPORATION INDEX TO FORM 10-Q PART 1. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of December 29, 2001 (Unaudited) and March 31, 2001................................ 3 Consolidated Statements of Operations for the three and nine months ended December 29, 2001 and December 30, 2000 (Unaudited)................................................... 4 Consolidated Statements of Cash Flows for the nine months ended December 29, 2001 and December 30, 2000 (Unaudited)..... 5-6 Notes to Consolidated Financial Statements.................... 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 15-23 Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................ 24 2
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) DECEMBER 29, MARCH 31, 2001 2001 --------------- --------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $294,569 $102,219 Accounts receivable, net of allowances of $9,187 and $12,090 245,615 269,010 Inventories 355,152 425,594 Deferred tax assets 34,276 31,244 Prepaid expenses and other 43,006 73,654 ------ ------ TOTAL CURRENT ASSETS 972,618 901,721 Property and equipment, net 334,821 328,929 Deferred tax assets 63,179 61,056 Goodwill, net 280,760 249,391 Other assets, net 90,367 84,996 ------ ------ $1,741,745 $1,626,093 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short term bank borrowings $ 73,920 $ 86,112 Accounts payable 195,255 178,293 Income taxes payable 36,940 - Accrued expenses and other 96,816 175,172 ------ ------- TOTAL CURRENT LIABILITIES 402,931 439,577 Long-term debt 298,033 296,988 Other noncurrent liabilities 93,391 80,219 Stockholders' equity Common Stock Class A, par value $.01 per share; 500,000,000 shares authorized; 35,688,098 and 34,948,730 shares issued 356 349 Class B, par value $.01 per share; 100,000,000 shares authorized; 43,280,021 shares issued and outstanding 433 433 Class C, par value $.01 per share; 70,000,000 shares authorized; 22,720,979 shares issued and outstanding 227 227 Additional paid-in-capital 479,823 463,001 Retained earnings 554,489 430,047 Treasury Stock, Class A, at cost (3,876,506 and 3,771,806 shares) (73,246) (71,179) Accumulated other comprehensive loss (12,250) (10,529) Unearned compensation (2,442) (3,040) ------ ------ TOTAL STOCKHOLDERS' EQUITY 947,390 809,309 ------- ------- $1,741,745 $1,626,093 ========== ========== See accompanying notes to consolidated financial statements. 3
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------------ ----------------------------------- DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30, 2001 2000 2001 2000 ---------------- ----------------- ----------------- ---------------- <S> <C> <C> <C> <C> Net sales $560,293 $555,650 $1,549,553 $1,508,871 Licensing revenue 56,802 58,090 181,066 178,383 ---------------- ----------------- ----------------- ---------------- NET REVENUES 617,095 613,740 1,730,619 1,687,254 Cost of goods sold 330,086 316,220 895,608 887,054 ---------------- ----------------- ----------------- ---------------- GROSS PROFIT 287,009 297,520 835,011 800,200 Selling, general and administrative expenses 212,561 208,172 620,844 633,189 Restructuring charges - - - 128,571 ---------------- ----------------- ----------------- ---------------- INCOME FROM OPERATIONS 74,448 89,348 214,167 38,440 Foreign currency (gain) (3,036) - (199) - Interest expense 4,501 5,704 15,204 18,992 ---------------- ----------------- ----------------- ---------------- INCOME BEFORE INCOME TAXES 72,983 83,644 199,162 19,448 Income tax provision 27,369 33,041 74,685 7,683 ---------------- ----------------- ----------------- ---------------- NET INCOME $45,614 $50,603 $124,477 $11,765 ================ ================= ================= ================ Net income per share - Basic $0.47 $0.52 $1.28 $0.12 ================ ================= ================= ================ Net income per share - Diluted $0.46 $0.52 $1.26 $0.12 ================ ================= ================= ================ Weighted average common shares outstanding - Basic 97,506,076 96,530,102 97,350,775 96,778,511 ================ ================= ================= ================ Weighted average common shares outstanding - Diluted 98,504,094 97,347,194 98,433,333 97,245,629 ================ ================= ================= ================ </TABLE> See accompanying notes to consolidated financial statements. 4
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED -------------------------------------- DECEMBER 29, DECEMBER 30, 2001 2000 ----------------- ------------------ <S> <C> <C> Cash flows from operating activities Net income $124,477 $11,765 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 63,234 60,084 Deferred income taxes (3,791) (27,924) Provision for restructuring charges - 98,836 Provision for losses on accounts receivable 1,184 1,314 Other (274) (3,924) Changes in assets and liabilities, net of acquisitions Accounts receivable, net 19,880 (15,886) Inventories 79,047 (15,963) Prepaid expenses and other 30,379 (16,263) Other assets 1,506 9,633 Accounts payable 4,649 641 Income taxes payable, accrued expenses and other (42,538) 2,983 ----------------- ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 277,753 105,296 ----------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (61,052) (67,860) Acquisition, net of cash acquired (23,702) (20,929) Cash surrender value - officers' life insurance (2,315) (3,482) ----------------- ------------------ NET CASH USED IN INVESTING ACTIVITIES (87,069) (92,271) ----------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Repurchases of common stock (2,067) (13,833) Proceeds from issuance of common stock 15,642 453 (Repayments of) Proceeds from short term bank borrowings, net (10,357) 2,944 Repayments of long-term debt (1,256) (6,496) ----------------- ------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,962 (16,932) ----------------- ------------------ Effect of exchange rate changes on cash (296) (3,336) ----------------- ------------------ Net increase (decrease) in cash and cash equivalents 192,350 (7,243) Cash and cash equivalents at beginning of period 102,219 164,571 ----------------- ------------------ Cash and cash equivalents at end of period $294,569 $157,328 ================= ================== </TABLE> See accompanying notes to consolidated financial statements. 5
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED -------------------------------------- DECEMBER 29, DECEMBER 30, 2001 2000 ----------------- ------------------ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $19,410 $26,910 ================= ================== Cash paid for income taxes $33,773 $52,870 ================= ================== See accompanying notes to consolidated financial statements. 6
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR DECEMBER 29, 2001 AND DECEMBER 30, 2000 IS UNAUDITED) (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) 1 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Polo Ralph Lauren Corporation ("PRLC") and its wholly and majority owned subsidiaries (collectively referred to as the "Company", "we", "us", and "our"). The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from this report as is permitted by such rules and regulations however, the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet data for March 31, 2001 is derived from the audited financial statements which are included in the Company's report on Form 10-K, which should be read in conjunction with these financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial condition, results of operations, and changes in cash flows of the Company for the interim periods presented. 2 ACQUISITIONS On October 31, 2001, the Company completed the acquisition of substantially all of the assets of PRL Fashions of Europe SRL ("PRL Fashions" or "Italian Licensee") which held licenses to sell our women's Ralph Lauren apparel in Europe, our men's and boys' Polo Ralph Lauren apparel in Italy and men's and women's Polo Jeans Co. collections in Italy. PRL Fashions had revenues of approximately $75.0 million for their fiscal year 2000. The purchase price of this transaction was approximately $22.0 million in cash plus the assumption of certain liabilities and earn-out payments based on achieving profitability targets over the first three years with a guaranteed minimum annual payment of $3.5 million each year. Consistent with SFAS No. 141 and SFAS No. 142, this acquisition was accounted for as a purchase and the goodwill recorded will not be amortized. The assets acquired of $15,147 and liabilities assumed of $15,106 were recorded at estimated fair values as determined by the Company's management based on information currently available. Goodwill of approximately $32.5 million has been recognized for the excess of the purchase price over the preliminary estimate of fair market value of the net assets acquired. The Company is in the process of obtaining independent appraisals of the intangible assets acquired. Accordingly, the allocation of the purchase price is subject to revision, which is not expected to be material, based on the final determination of appraised and other fair values. 7
On October 22, 2001, we acquired the Polo Brussels SA store from one of our licensees. The purchase price of this transaction was approximately $3.0 million in cash. Consistent with SFAS No. 141 and SFAS No. 142, the transaction was accounted for as a purchase and the goodwill is not being amortized. The sales and total assets were not material. The proforma effect of these two acquisitions on the historical results were not material. 3 RESTRUCTURING AND SPECIAL CHARGES (A) 2001 OPERATIONAL PLAN During the second quarter of Fiscal 2001, we completed an internal operational review and formalized our plans to enhance the growth of our worldwide luxury retail business, to better manage inventory and to increase overall profitability (the "Operational Plan"). The major initiatives of the Operational Plan included: refining our retail strategy; developing efficiencies in our supply chain; and consolidating corporate strategic business functions and internal processes. In connection with refining our retail strategy, we closed all 12 Polo Jeans Co. full-price retail stores and 11 under-performing Club Monaco retail stores. Costs associated with this aspect of the Operational Plan included lease and contract termination costs, store fixed asset write downs (primarily leasehold improvements of $21.5 million) and severance and termination benefits. Additionally, as a result of changes in market conditions combined with our change in retail strategy in certain locations in which we operate full-price retail stores, we performed an evaluation of the recoverability of the assets of certain of these stores in accordance with Statements of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF. We concluded from the results of this evaluation that a significant permanent impairment of long-lived assets had occurred. Accordingly, we recorded a write down of these assets (primarily leasehold improvements) to their estimated fair value based on discounted future cash flows. In connection with the implementation of the Operational Plan, we recorded a pretax restructuring charge of $128.6 million in the second quarter of Fiscal 2001, subsequently adjusted for a $5.0 million reduction of liabilities in the fourth quarter of Fiscal 2001. The activity for the nine months ended December 29, 2001, was as follows: LEASE AND SEVERANCE AND CONTRACT TERMINATION TERMINATION BENEFITS COSTS TOTAL Balance at March 31, 2001... $ 2,942 $ 4,951 $ 7,893 2002 activity............... (1,934) (3,931) (5,865) -------- -------- ------ Balance at December 29, 2001 $ 1,008 $ 1,020 $ 2,028 ======== ======== ======== 8
Total severance and termination benefits as a result of the Operational Plan related to approximately 550 employees, all of whom have been terminated. Total cash outlays related to the Operational Plan are expected to be approximately $24.7 million, $22.7 million of which have been paid to date. We completed the implementation of the Operational Plan in Fiscal 2002 and expect to settle the remaining liabilities in accordance with contract terms which extend until Fiscal 2003. (B) 1999 RESTRUCTURING PLAN During the fourth quarter of Fiscal 1999, we formalized our plans to streamline operations within our wholesale and retail operations and reduce our overall cost structure ("Restructuring Plan"). The major initiatives of the Restructuring Plan included the following: (1) an evaluation of our retail operations and site locations; (2) the realignment and operational integration of our wholesale operating units; and (3) the realignment and consolidation of corporate strategic business functions and internal processes. In connection with the implementation of the Restructuring Plan, we recorded a pretax restructuring charge of $58.6 million in our fourth quarter of Fiscal 1999. The activity for the nine months ended December 29, 2001, was as follows: LEASE AND SEVERANCE AND CONTRACT TERMINATION TERMINATION BENEFITS COSTS TOTAL Balance at March 31, 2001... $ 4,246 $ 1,747 $ 5,993 2002 activity............... (2,446) (521) (2,967) ------- ------ -------- Balance at December 29, 2001 $ 1,800 $ 1,226 $ 3,026 ======== ======= ======== Total severance and termination benefits as a result of the Restructuring Plan related to approximately 280 employees, all of whom have been terminated. Total cash outlays related to the Restructuring Plan are approximately $39.5 million, $36.5 million of which have been paid to date. We completed the implementation of the Restructuring Plan in Fiscal 2000 and expect to settle the remaining liabilities in accordance with contract terms which extend until Fiscal 2003. 9
4 INVENTORIES Inventories are valued at lower of cost (first-in, first-out, "FIFO") or market and consist of the following: DECEMBER 29, MARCH 31, 2001 2001 Raw materials $ 2,826 $ 7,024 Work-in-process 5,868 6,251 Finished goods 346,458 412,319 ---------- ---------- $ 355,152 $ 425,594 ========== ========== 5 COMPREHENSIVE INCOME For the three and nine months ended December 29, 2001 and December 30, 2000, comprehensive income was as follows: THREE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 Net Income $ 45,614 $ 50,603 Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments 105 (10,276) Unrealized losses on cash flow hedge contracts, net (4,584) - -------- -------- Comprehensive Income $ 41,135 $ 40,327 ======== ======== The income tax effect related to foreign currency translation adjustments and unrealized losses on cash flow hedge contracts, net was an expense of $2.7 million in the three months ended December 29, 2001 and a benefit of $6.7 million in the three months ended December 30, 2000. 10
NINE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 Net Income $ 124,477 $ 11,765 Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments 817 (6,802) Cumulative translation adjustment gains, net 4,028 - Unrealized losses on cash flow hedge contracts, net (6,566) - --------- --------- Comprehensive Income $ 122,756 $ 4,963 ========== ========= The income tax effect related to foreign currency translation adjustments, cumulative translation adjustment gains, net and unrealized losses on cash flow hedge contracts, net was a benefit of $1.0 million in the nine months ended December 29, 2001 and a benefit of $4.4 million in the nine months ended December 30, 2000. 6 SEGMENT REPORTING Our operations are comprised of three reportable business segments: wholesale, retail and licensing. Our reportable segments are individual business units that offer different products and services and are managed separately because each segment requires different strategic initiatives, promotional campaigns, marketing and advertising, based upon its own individual positioning in the market. Additionally, these segments reflect the reporting basis used internally by senior management to evaluate performance and the allocation of resources. The Company measures segment profit as income from operations before foreign currency gains and losses, interest, and taxes. Summarized below are our net revenues and income from operations for the three and nine months ended December 29, 2001 and December 30, 2000, by segment: THREE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 NET REVENUES: Wholesale $ 279,955 $ 269,494 Retail 280,338 286,156 Licensing 56,802 58,090 ---------- ---------- $ 617,095 $ 613,740 ========== ========== 11
THREE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 INCOME FROM OPERATIONS: Wholesale $ 30,211 $ 32,403 Retail 13,648 24,967 Licensing 30,589 31,978 ---------- --------- $ 74,448 $ 89,348 ========== ========= NINE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 NET REVENUES: Wholesale $ 805,565 $ 758,190 Retail 743,988 750,681 Licensing 181,066 178,383 ---------- ---------- $1,730,619 $1,687,254 ========== ========== INCOME FROM OPERATIONS Wholesale $ 79,898 $ 79,691 Retail 32,582 41,531 Licensing 101,687 101,722 ---------- ---------- 214,167 222,944 Less: Unallocated restructuring and non-recurring charges - (184,504) ---------- ----------- $ 214,167 $ 38,440 ========== =========== Summarized below are our net revenues for the three and nine months ended December 29, 2001 and December 30, 2000 and our long-lived assets as of December 29, 2001 and March 31, 2001, by geographic location: THREE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 NET REVENUES: United States $ 474,742 $ 494,283 France 75,156 52,601 Other countries 67,197 66,856 ---------- ----------- $ 617,095 $ 613,740 ========== =========== 12
NINE MONTHS ENDED DECEMBER 29, DECEMBER 30, 2001 2000 NET REVENUES: United States $ 1,403,380 $ 1,412,023 France 169,554 124,235 Other countries 157,685 150,996 ----------- ----------- $ 1,730,619 $ 1,687,254 =========== =========== DECEMBER 29, MARCH 31, 2001 2001 LONG-LIVED ASSETS: United States $ 283,727 $ 286,257 Canada 32,160 $ 31,295 Other countries 18,934 11,377 ----------- ---------- $ 334,821 $ 328,929 =========== ========== 7 RECENTLY ISSUED PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for the first quarter in the Fiscal year ending April 3, 2004. The Company is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. However, this Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for the first quarter in the Fiscal year ending March 29, 2003. The Company is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. 13
In July 2001, the FASB issued (SFAS) No. 141, BUSINESS COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. In addition to requiring the use of the purchase method for all business combinations, SFAS No. 141 requires intangible assets that meet certain criteria to be recognized as assets apart from goodwill. SFAS No. 142 addresses accounting and reporting standards for acquired goodwill and other intangible assets and generally, requires that goodwill and indefinite life intangible assets no longer be amortized but be tested for impairment annually. Intangible assets that have finite lives will continue to be amortized over their useful lives. SFAS No. 141 and SFAS No. 142 are effective for our first quarter in the Fiscal year ending March 29, 2003 or for any business combinations initiated after June 30, 2001. As a result of these pronouncements, goodwill arising from the acquisitions of PRL Fashions and the Polo Brussels SA store are not being amortized. The Company is currently evaluating the impact of adopting these pronouncements on our consolidated financial position and results of operations. In April 2001, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERISTICS OF CONSIDERATION PAID TO A RESELLER OF THE VENDOR'S PRODUCTS ("EITF No. 00-25"). EITF No. 00-25 concluded that consideration from a vendor to a reseller of the vendor's products is presumed to be a reduction of the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement. That presumption is overcome and the consideration characterized as a cost incurred if a benefit is or will be received from the recipient of the consideration if certain conditions are met. This pronouncement is effective for our first quarter in the Fiscal year ending March 29, 2003. The Company is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. We adopted the provisions of SFAS No. 133 as of April 1, 2001. As of this date, we had outstanding interest rate swap agreements and forward foreign exchange contracts that qualify as cash flow hedges under SFAS No. 133. In accordance with SFAS No. 133, we recorded the fair value of these derivatives at April 1, 2001, and the resulting net unrealized gain, after taxes, of approximately $4.0 million was recorded in other comprehensive income as a cumulative transition adjustment. 8 RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year's presentation. 14
POLO RALPH LAUREN CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO WHICH ARE INCLUDED HEREIN. WE UTILIZE A 52-53 WEEK FISCAL YEAR ENDING ON THE SATURDAY NEAREST MARCH 31. FISCAL YEARS 2002 AND 2001 END ON MARCH 30, 2002 AND MARCH 31, 2001, RESPECTIVELY. DUE TO THE COLLABORATIVE AND ONGOING NATURE OF OUR RELATIONSHIPS WITH OUR LICENSEES, SUCH LICENSEES ARE REFERRED TO HEREIN AS "LICENSING PARTNERS" AND THE RELATIONSHIPS ARE REFERRED TO HEREIN AS "LICENSING ALLIANCES." NOTWITHSTANDING THESE REFERENCES, HOWEVER, THE LEGAL RELATIONSHIP BETWEEN OUR LICENSEES AND US IS ONE OF LICENSOR AND LICENSEE, AND NOT ONE OF PARTNERSHIP. CERTAIN STATEMENTS IN THIS FORM 10-Q AND IN FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, 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. SUCH 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 THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: RISKS ASSOCIATED WITH A GENERAL ECONOMIC DOWNTURN AND OTHER EVENTS LEADING TO A REDUCTION IN DISCRETIONARY CONSUMER SPENDING; RISKS ASSOCIATED WITH IMPLEMENTING OUR PLANS TO ENHANCE OUR WORLDWIDE LUXURY RETAIL BUSINESS, INVENTORY MANAGEMENT PROGRAM AND OPERATING EFFICIENCY INITIATIVES; RISKS ASSOCIATED WITH CHANGES IN THE COMPETITIVE MARKETPLACE, INCLUDING THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY OUR COMPETITORS; CHANGES IN GLOBAL ECONOMIC OR POLITICAL CONDITIONS; RISKS ASSOCIATED WITH OUR DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE CUSTOMERS, INCLUDING RISKS RELATED TO EXTENDING CREDIT TO CUSTOMERS; RISKS ASSOCIATED WITH OUR DEPENDENCE ON OUR LICENSING PARTNERS FOR A SUBSTANTIAL PORTION OF OUR NET INCOME AND RISKS ASSOCIATED WITH A LACK OF OPERATIONAL AND FINANCIAL CONTROL OVER LICENSED BUSINESSES; RISKS ASSOCIATED WITH FINANCIAL DISTRESS OF LICENSEES, INCLUDING THE IMPACT ON OUR NET INCOME AND BUSINESS OF ONE OR MORE LICENSEE'S REORGANIZATION; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; RISKS ASSOCIATED WITH COMPETITION IN THE SEGMENTS OF THE FASHION AND CONSUMER PRODUCT INDUSTRIES IN WHICH WE OPERATE, INCLUDING OUR ABILITY TO SHAPE, STIMULATE AND RESPOND TO CHANGING CONSUMER TASTES AND DEMANDS BY PRODUCING ATTRACTIVE PRODUCTS, BRANDS AND MARKETING, AND OUR ABILITY TO REMAIN COMPETITIVE IN THE AREAS OF QUALITY AND PRICE; RISKS ASSOCIATED WITH UNCERTAINTY RELATING TO OUR ABILITY TO IMPLEMENT OUR GROWTH STRATEGIES; RISKS ASSOCIATED WITH OUR ENTRY INTO NEW MARKETS EITHER THROUGH INTERNAL DEVELOPMENT ACTIVITIES OR THROUGH ACQUISITIONS; RISKS ASSOCIATED WITH THE POSSIBLE ADVERSE IMPACT OF OUR UNAFFILIATED MANUFACTURERS' INABILITY TO MANUFACTURE IN A TIMELY MANNER, TO MEET QUALITY STANDARDS OR TO USE ACCEPTABLE LABOR PRACTICES; RISKS ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, 15
ECONOMIC AND OTHER CONDITIONS AFFECTING FOREIGN OPERATIONS OR SOURCING AND THE POSSIBLE ADVERSE IMPACT OF CHANGES IN IMPORT RESTRICTIONS; RISKS RELATED TO OUR ABILITY TO ESTABLISH AND PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS; RISKS RELATED TO FLUCTUATIONS IN FOREIGN CURRENCY AFFECTING OUR FOREIGN SUBSIDIARIES' AND FOREIGN LICENSEES' RESULTS OF OPERATIONS AND THE RELATIVE PRICES AT WHICH WE AND OUR FOREIGN COMPETITORS SELL PRODUCTS IN THE SAME MARKET AND OUR OPERATING AND MANUFACTURING COSTS OUTSIDE OF THE UNITED STATES; AND, RISKS ASSOCIATED WITH OUR CONTROL BY LAUREN FAMILY MEMBERS AND THE ANTI-TAKEOVER EFFECT OF MULTIPLE CLASSES OF STOCK. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. OVERVIEW We began operations in 1968 as a designer and marketer of premium quality men's clothing and sportswear. Since our inception, we have grown through increased sales of existing product lines, the introduction of new brands and products, expansion into international markets, development of our retail operations and acquisitions. Our net revenues are generated from our three integrated operations: wholesale, retail and licensing. RESULTS OF OPERATIONS The table below sets forth the percentage relationship to net revenues of certain items in our statements of operations for the three and nine months ended December 29, 2001 and December 30, 2000: DECEMBER 29, 2001 DECEMBER 30, 2000 THREE NINE THREE NINE MONTHS MONTHS MONTHS MONTHS Net sales............................. 90.8% 89.5% 90.5% 89.4% Licensing revenue..................... 9.2 10.5 9.5 10.6 --- ----- --- ---- Net revenues ......................... 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Gross profit ......................... 46.5 48.2 48.5 47.4 Selling, general and administrative expenses.............................. 34.4 35.8 33.9 37.5 Restructuring charges................. - - - 7.6 ---- ---- ----- ---- Income from operations................ 12.1 12.4 14.6 2.3 Foreign currency (gain)............... (0.4) - - - Interest expense ..................... 0.7 0.9 1.0 1.1 --- --- --- --- Income before income taxes............ 11.8% 11.5% 13.6% 1.2% ==== ==== ==== === 16
THREE MONTHS ENDED DECEMBER 29, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 30, 2000 NET SALES. Net sales increased 0.8% to $560.3 million in the three months ended December 29, 2001, from $555.6 million in the three months ended December 30, 2000. Wholesale net sales increased 3.9% to $280.0 million in the three month period, from $269.5 million in the corresponding period of Fiscal 2001. Wholesale growth primarily reflects increased sales of existing products, principally in Europe. Retail sales decreased by 2.0% to $280.3 million in the three months ended December 29, 2001, from $286.2 million in the corresponding period in Fiscal 2001. This decrease is primarily driven by the 1.4% decrease in comparable store sales which were due to the effects of a promotionally driven and highly competitive retail store environment and decreased customer spending due to current economic conditions. Although the outlet business had increased sales of approximately 6.0%, it was offset by the decrease in our full price retail business. For the three month period, we had three net store openings. At December 29, 2001, we operated 234 stores, including 30 Polo brand stores, nine Polo concept stores, 54 Club Monaco full-price stores, 95 Polo full line outlet stores, 24 Polo Jeans Co. outlet stores, 12 European outlet stores and 10 Club Monaco outlet stores. LICENSING REVENUE. Licensing revenue decreased 2.2% to $56.8 million in the three months ended December 29, 2001, from $58.1 million in the corresponding period of Fiscal 2001. This decrease is primarily attributable to decreased royalty revenue from a significant product licensee and the termination of a licensing agreement with a product licensee. GROSS PROFIT. Gross profit as a percentage of net revenues decreased to 46.5% in the three months ended December 29, 2001, from 48.5% in the corresponding period of Fiscal 2001 as a result of the highly competitive wholesale and retail business being highly promotional due to the difficult economic environment and decreased customer spending. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses as a percentage of net revenues increased to 34.4% in the three months ended December 29, 2001, from 33.9% of net revenues in the corresponding period of Fiscal 2001. This was primarily due to higher selling salaries and related costs resulting from the increased outlet sales and our international retail business in Europe combined with increased corporate expenses including a corporate contribution of $1.3 million to the Ralph Lauren Foundation American Heroes Fund. 17
INTEREST AND OTHER EXPENSE. Interest expense decreased to $4.5 million in the three months ended December 29, 2001, from $5.7 million in the comparable period in Fiscal 2001. This decrease was due to lower levels of borrowings during the current quarter primarily as a result of repurchases of a portion of our outstanding Euro debt in Fiscal 2001 and the repayment of short term borrowings during the current quarter. INCOME TAXES. The effective tax rate decreased to 37.5% in the three months ended December 29, 2001, from 39.5% in the corresponding period in Fiscal 2001. This decline is primarily a result of the benefit of tax strategies implemented. NINE MONTHS ENDED DECEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED DECEMBER 30, 2000 NET SALES. Net sales increased 2.7% to $1,549.6 million in the nine months ended December 29, 2001, from $1,508.9 million in the nine months ended December 30, 2000. Wholesale net sales increased 6.3% to $805.6 million in the nine months ended December 29, 2001, from $758.2 million in the corresponding period of Fiscal 2001. Wholesale growth primarily reflects increased unit sales of existing products, principally from our international wholesale business in Europe and our domestic women's business. Retail sales decreased by 0.9% to $744.0 million in the nine months ended December 29, 2001, from $750.7 million in the corresponding period in Fiscal 2001. This decrease is primarily attributable to the closing of our Polo Jeans Co. full-price retail stores during the second quarter of Fiscal 2001 in connection with our Operational Plan and the decrease in our full price retail store sales due to the current difficult economic environment. Comparable store sales, which represent net sales of stores open in both reporting periods for the full portion of such periods, decreased 3.5%. The comparable store declines were due to the effects of a promotionally driven and highly competitive retail store environment. At December 29, 2001, we operated 234 stores, 30 Polo brand stores, nine Polo concept stores, 54 Club Monaco full-price stores, 95 Polo full line outlet stores, 24 Polo Jeans Co. outlet stores, 12 European outlet stores and ten Club Monaco outlet stores. LICENSING REVENUE. Licensing revenue increased 1.5% to $181.1 million in the nine months ended December 29, 2001, from $178.4 million in the corresponding period of Fiscal 2001. This increase is primarily due to strong results from our international businesses, particularly in Asia and one license within our home collection licensing business, offset by decreased royalty revenue from a significant product licensee and the termination of a product license. 18
GROSS PROFIT. Gross profit as a percentage of net revenues increased to 48.2% in the nine months ended December 29, 2001, from 47.4% in the corresponding period of Fiscal 2001. Wholesale gross margins increased approximately 3.0% primarily due to an increase in margins from our international wholesale business in Europe. Retail gross margins decreased 4.5% in comparison to last year's corresponding nine month period due to higher levels of markdowns due to the current economic environment and decreased customer spending. Additionally, the prior year gross margin was negatively impacted by $37.9 million of inventory write-downs recorded in the second quarter of fiscal 2001 in connection with the implementation of the Operational Plan. These fluctuations in gross margins were also effected by increases in licensing revenue that has no associated cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of net revenues decreased to 35.8% in the nine months ended December 29, 2001, from 37.5% of net revenues in the corresponding period of Fiscal 2001. This decrease was primarily due to expense reduction initiatives across all business segments and the closing of our Polo Jeans Co. full price retail stores during Fiscal 2001. Additionally, in Fiscal 2001, we recorded a charge of $18.1 million relating to non-recurring charges associated with targeted opportunities for improvement and other employee-related costs. INTEREST AND OTHER EXPENSE. Interest expense decreased to $15.2 million in the nine months ended December 29, 2001, from $19.0 million in the comparable period in Fiscal 2001. This decrease was due to lower levels of borrowings during the period primarily as a result of repurchases of a portion of our outstanding Euro debt in Fiscal 2001 and the repayment of short term borrowings during the period. INCOME TAXES. The effective tax rate decreased to 37.5% in the nine months ended December 29, 2001, from 39.5% in the corresponding period in Fiscal 2001. This decline is primarily a result of the benefit of tax strategies implemented. Additionally, the nine months ended December 30, 2000 included a tax benefit of $72.9 million resulting from charges recorded in connection with the Operational Plan. LIQUIDITY AND CAPITAL RESOURCES Our cash requirements primarily derive from working capital needs, construction and renovation of shop-within-shops, retail expansion, acquisitions, and other corporate activities. Our main sources of liquidity are cash flows from operations, credit facilities and other borrowings. Net cash provided by operating activities increased to $277.3 million in the nine months ended December 29, 2001, from $105.3 million in the comparable period in Fiscal 2001. This increase was primarily due to a significant decrease in inventory levels and decreased accounts receivable due to seasonality. Net cash used in investing activities decreased to $87.1 million in the nine months ended December 29, 2001 as compared to $92.3 million in the comparable period in Fiscal 2001 due to the decrease in capital expenditures of approximately $6.7 million compared to the same period in the prior year offset by the funds used to complete the acquisition of the Italian Licensee and the 19
Brussels store. Net cash provided by financing activities was $2.0 million in the nine months ended December 29, 2001, as compared to net cash used in financing activities of $16.9 million, in the comparable period in Fiscal 2001. This change is primarily due to the proceeds from the issuance of common stock of $15.6 million and a decrease in the repurchase of common stock offset by the repayment of approximately $10.4 of short term bank borrowings during the nine months ended December 29. 2001. In June 1997, we entered into a credit facility with a syndicate of banks which provides for a $225.0 million revolving line of credit available for the issuance of letters of credit, acceptances and direct borrowings and matures on December 31, 2002. Borrowings under the credit facility bear interest, at our option, (i) at a Base Rate equal to the higher of the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of one percent; and the prime commercial lending rate of The Chase Manhattan Bank in effect from time to time, or (ii) at the Eurodollar Rate plus an interest margin. In March 1999, we entered into a $100.0 million senior credit facility with a syndicate of banks consisting of a $20.0 million revolving line of credit and an $80.0 million term loan. The revolving line of credit is available for working capital needs and general corporate purposes and matures on June 30, 2003. The term loan was used to finance the acquisition of all of the outstanding common stock of Club Monaco Inc. and to repay their indebtedness. The term loan is also repayable on June 30, 2003. Borrowings under the 1999 senior credit facility bear interest, at our option, at a Base Rate equal to the higher of: (i) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of one percent; and (ii) the prime commercial lending rate of The Chase Manhattan Bank in effect from time to time, or at the Eurodollar Rate plus an interest margin. In April 1999, we entered into interest rate swap agreements with an aggregate notional amount of $100.0 million to convert the variable interest rate on the 1999 senior credit facility to a fixed rate of 5.5%. The syndicated bank credit facility and 1999 senior credit facility contain customary representations, warranties, covenants and events of default, including covenants regarding maintenance of net worth and leverage ratios, limitations on indebtedness, loans, investments and incurrences of liens, and restrictions on sales of assets and transactions with affiliates. Additionally, the agreements provide that an event of default will occur if Mr. Ralph Lauren and related entities fail to maintain a specified minimum percentage of the voting power of our common stock. In November 1999, we issued Euro 275.0 million of 6.125% notes due November 2006. Our Euro debt is listed on the London Stock Exchange. The net proceeds from the Euro offering were $281.5 million based on the Euro exchange rate on the issuance date. Interest on the Euro debt is payable annually. A portion of the net proceeds from the issuance was used to acquire our European license while the remaining net proceeds were retained for general corporate purposes. In Fiscal 2001, we repurchased Euro 27.5 million, or $25.3 million based on Euro exchange rates, of our outstanding Euro debt. In Fiscal 2002, we repurchased an additional Euro 1.4 million, or $1.3 million based on Euro exchange rates, of our outstanding debt. As of December 29, 2001, we had $74 million outstanding in direct borrowings, $80.0 million outstanding under the term loan and $218 million outstanding in Euro debt based on the quarter end exchange rate. We were also contingently liable for $18.2 million in outstanding letters of credit 20
related to commitments for the purchase of inventory. The weighted average interest rate on outstanding borrowings at December 29, 2001, was 5.9%. Total cash outlays related to the Fiscal 2001 Operational Plan are expected to be approximately $24.7 million, $22.7 million of which has been paid through December 29, 2001. The remaining obligations of approximately $2.0 million at December 29, 2001 relate to severance and lease contract and termination agreements which extend until Fiscal 2003. Total cash outlays related to the 1999 Restructuring Plan are approximately $39.5 million, $36.5 million of which has been paid through December 29, 2001. The remaining obligations of approximately $3.0 million at December 29, 2001 relate to severance and lease contract and termination agreements which extend until Fiscal 2003. Capital expenditures were $61.1 million and $67.9 million in the nine months ended December 29, 2001 and December 30, 2000, respectively. Capital expenditures primarily reflect costs associated with the following: o our retail stores; o the expansion of our European operations; o the shop-within-shops development program which includes new shops, renovations and expansions; o our information systems; and o other capital projects. In March 1998, the Board of Directors authorized the repurchase, subject to market conditions, of up to $100.0 million of our Class A common stock. Share repurchases under this plan were made in the open market over a two-year period which commenced April 1, 1998. On March 2, 2000, the Board of Directors authorized a two-year extension to the stock repurchase program, and on February 5, 2002, the Board of Directors authorized a further extension of the program through March 2004. Shares acquired under the repurchase program will be used for stock option programs and for other corporate purposes. As of December 29, 2001, we had repurchased 3,876,506 shares of our Class A common stock at an aggregate cost of $73.2 million. On October 31, 2001, the Company completed the acquisition of substantially all of the assets of PRL Fashions of Europe SRL ("PRL Fashions" or "Italian Licensee") which held licenses to sell our women's Ralph Lauren apparel in Europe, our men's and boys' Polo Ralph Lauren apparel in Italy and men's and women's Polo Jeans Co. collections in Italy. PRL Fashions had revenues of approximately $75.0 million for their fiscal year 2000. The purchase price of this transaction was approximately $22.0 million in cash plus the assumption of certain liabilities and earn-out payments based on achieving profitability targets over the first three years 21
with a guaranteed minimum annual payment of $3.5 million each year. Consistent with SFAS No. 141 and SFAS No. 142, this acquisition was accounted for as a purchase and the goodwill recorded will not be amortized. The assets acquired of $15,147 and liabilities assumed of $15,106 were recorded at estimated fair values as determined by the Company's management based on information currently available. Goodwill of approximately $32.5 million has been recognized for the excess of the purchase price over the preliminary estimate of fair market value of the net assets acquired. The Company is in the process of obtaining independent appraisals of the intangible assets acquired. Accordingly, the allocation of the purchase price is subject to revision, which is not expected to be material, based on the final determination of appraised and other fair values. On October 22, 2001, we acquired the Polo Brussels SA store from one of our licensees. The purchase price of this transaction was approximately $3.0 million in cash. Consistent with SFAS No. 141 and SFAS No. 142, the transaction was accounted for as a purchase and the goodwill is not being amortized. The sales and total assets were not material. The proforma effect of these two acquisitions on the historical results were not material. SEASONALITY OF BUSINESS Our business is affected by seasonal trends, with higher levels of wholesale sales in our second and fourth quarters and higher retail sales in our second and third quarters. These trends result primarily from the timing of seasonal wholesale shipments to retail customers and key vacation travel and holiday shopping periods in the retail segment. As a result of the growth in our retail operations and licensing revenue, historical quarterly operating trends and working capital requirements may not accurately reflect future performances. In addition, fluctuations in sales and operating income in any Fiscal quarter may be affected by the timing of seasonal wholesale shipments and other events affecting retail. NEW ACCOUNTING STANDARDS In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for the first quarter in the Fiscal year ending April 3, 2004. The Company is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. The Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 22
supersedes FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. However, this Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for the first quarter in the Fiscal year ending March 29, 2003. The Company is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.141 BUSINESS COMBINATIONS and SFAS No. 142 , GOODWILL AND OTHER INTANGIBLE ASSETS. In addition to requiring the use of the purchase method for all business combinations, SFAS No. 141, requires intangible assets that meet certain criteria to be recognized as assets apart from goodwill. SFAS No.142, addresses accounting and reporting standards for acquired goodwill and other intangible assets and generally, requires that goodwill and indefinite life intangible assets no longer be amortized but be tested for impairment annually. Intangible assets that have finite lives will continue to be amortized over their useful lives. SFAS No. 141 and SFAS No. 142 are effective for our first quarter in the Fiscal year ending March 29, 2003 or for any business combinations initiated after June 30, 2001. As a result of these pronouncements, goodwill arising from the acquisitions of PRL Fashions and the Polo Brussels SA store are not being amortized. The Company is currently evaluating the impact of adopting these pronouncements on our consolidated financial position and results of operations. In April 2001, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERISTICS OF CONSIDERATION PAID TO A RESELLER OF THE VENDOR PRODUCTS ("EITF No. 00-25"). EITF No. 00-25 concluded that consideration from a vendor to a reseller of the vendor's products is presumed to be a reduction of the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement. That presumption is overcome and the consideration characterized as a cost incurred if a benefit is or will be received from the recipient of the consideration if certain conditions are met. This pronouncement is effective for our first quarter in the Fiscal year ending March 29, 2003. The Company is currently evaluating the impact of adopting this pronouncement on our consolidated results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. We manage these exposures through operating and financing activities and, when appropriate, through the use of derivative financial instruments. Our policy allows for the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. Since March 31, 2001, there have been no significant changes in our interest rate and foreign currency exposures, changes in the types of derivative instruments used to hedge those exposures, or significant changes in underlying market conditions. 23
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits-- None (b) Reports on Form 8-K-- The Company filed no reports on Form 8-K in the quarter ended December 29, 2001. 24
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLO RALPH LAUREN CORPORATION Date: February 12, 2002 By: /s/ Gerald M. Chaney --------------------------------- Gerald M. Chaney Senior Vice President of Finance and Chief Financial Officer 25