(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR OF THE |
For the fiscal year ended April 3, 2004
or
For the Fiscal Year Ended April 2, 2005 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-13057
POLO RALPH LAUREN CORPORATION
Delaware | 13-2622036 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
650 Madison Avenue, New York, New York | 10022 | |
(212) 318-7000 | (Zip Code) | |
(Address of principal executive offices) |
Title of Each Class | Name of Each Exchange on Which Registered | |
Class A Common Stock, $.01 par value | New York Stock Exchange |
$1,186,214,066$2,150,660,208 as of September 26, 2003,October 1, 2004, the last business day of the registrant’s most recently completed second fiscal quarter.May 21, 2004 57,356,515June 10, 2005, 2005, 58,975,253 shares of the registrant’s Class A Common Stock, $.01 par value and 43,280,021 shares of the registrant’s Class B Common Stock, $.01 par value were outstanding.
Item 1. | Business |
2003.
collections:
• | Apparel — Products include extensive collections of men’s, women’s and children’s clothing; | |
• | Home — Coordinated products for the home include bedding and bath products, furniture, fabric and wallpaper, paints, broadloom, tabletop and giftware; | |
• | Accessories — Accessories encompass a broad range of products such as footwear, eyewear, jewelry and leather goods, including handbags and luggage; and | |
• | Fragrance — Fragrance and skin care products are sold under our Glamorous, Romance, Polo, Lauren, Safari, Blue Label, Black Label and Polo Sport brands, among others. |
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The ChildrenswearFootwear Licensee and certain of its affiliates and shareholders have agreed to indemnifyentered into a transition services agreement with the Company for allto provide a variety of the liabilities of the Company related to the operation of the Childrenswear Business prior to the closing of the acquisitionoperational, financial and have also agreed that they will not compete with the Childrenswear Business forinformation systems services over a period of three years after the closing date. In addition, the Childrenswear Licensee and certain of its affiliates will provide information system and accounting servicestwelve to the Company for a transitional period following the closing.
eighteen months.
July 2005.
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The royalties that we received pursuant2
expected to have a material impact on consolidated financial position or liquidity.
Operations3
For the Year Ended | ||||||||
April 2, | April 3, | |||||||
2005 | 2004 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net revenue | $ | 3,359,168 | $ | 2,858,458 | ||||
Net income | 195,338 | 186,164 | ||||||
Net income per share — Basic | $ | 1.92 | $ | 1.88 | ||||
Net income per share — Diluted | $ | 1.88 | $ | 1.84 |
Fiscal Year Ended | ||||||||||||||||||||||||
Fiscal Year Ended | ||||||||||||||||||||||||
April 2, | April 3, | March 29, | ||||||||||||||||||||||
April 3, | March 29, | March 30, | ||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
Net Revenues by Segment | 2005 | 2004 | 2003 | |||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Wholesale sales | $ | 1,210,397 | $ | 1,187,363 | $ | 1,198,060 | $ | 1,712,040 | $ | 1,210,397 | $ | 1,187,363 | ||||||||||||
Retail sales | 1,170,447 | 1,001,958 | 924,273 | 1,348,645 | 1,170,447 | 1,001,958 | ||||||||||||||||||
Net sales | 2,380,844 | 2,189,321 | 2,122,333 | 3,060,685 | 2,380,844 | 2,189,321 | ||||||||||||||||||
Licensing revenue | 268,810 | 250,019 | 241,374 | 244,730 | 268,810 | 250,019 | ||||||||||||||||||
Net revenues | $ | 2,649,654 | $ | 2,439,340 | $ | 2,363,707 | $ | 3,305,415 | $ | 2,649,654 | $ | 2,439,340 | ||||||||||||
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Fiscal Year Ended | ||||||||||||
April 2, | April 3, | March 29, | ||||||||||
Net Revenues by Geographic Area | 2005 | 2004 | 2003 | |||||||||
(Dollars in thousands) | ||||||||||||
United States and Canada | $ | 2,587,233 | $ | 2,073,401 | $ | 1,916,096 | ||||||
Europe | 579,161 | 464,098 | 458,627 | |||||||||
Other regions | 139,021 | 112,155 | 64,617 | |||||||||
Net revenues | $ | 3,305,415 | $ | 2,649,654 | $ | 2,439,340 | ||||||
Our Polo Brands group sources,segment markets and distributes products under the following brands:
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Lauren Ralph Lauren. Our Lauren by Ralph Lauren women’s collection is a complete women’s lifestyle brand consisting of products related by theme, style, color and fabric. Lauren Ralph Lauren Women’s is generally priced at a range of price points within the women’s better ready-to-wear apparel market. We currently sell this collection through department stores withinin the United States and Canada.States.
Our Collection Brands group sources, markets and distributes products under the following brands:
Women’s Ralph Lauren Collection and Black Label. The Our Ralph Lauren Collection expresses our up-to-the-moment fashion vision for women. Ralph Lauren Black Label includes timeless versions of our most successful Collection styles as well as newly-designed classic signature styles. Collection and Black Label are offered through our ownRalph Lauren stores and limited distribution to premier fashion retailers. Price points are at the upper end toof the luxury range.
In fall 1995, we introduced our Our Purple Label collection of men’s tailored clothing and in fall 1997,sportswear bring true luxury and quality to complement the tailored clothing line, we launched our Purple Label sportswear line.American menswear. We sell the Purple Label collection through our ownRalph Lauren stores and a limited number of premier fashion retailers at price points at the upper end toof the luxury range.4Men’s Black Label Customers and Service
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Approximate Number of Doors | Approximate Number of | |||||||||||||||||||||||
as of April 3, 2004 | Doors as of April 2, 2005 | |||||||||||||||||||||||
Polo | Collection | Polo | Collection | |||||||||||||||||||||
Brands | Brands | Lauren | Brands | Brands | Lauren | |||||||||||||||||||
Department Stores | 2,298 | 144 | 850 | 3,578 | 163 | 877 | ||||||||||||||||||
Licensed Stores | 85 | 21 | — | 98 | — | — | ||||||||||||||||||
Specialty Stores | 2,913 | 44 | 113 | 4,036 | 166 | 82 | ||||||||||||||||||
Golf and Pro Shops | 2,225 | — | — | 2,210 | — | — |
• | Federated Department Stores, Inc., which represented 18.0%, | |
• | Dillard Department Stores, Inc., which represented | |
• | The May Department Stores Company, which represented |
Collection Brands, Polo Brands,
Stockholm.
During Fiscal 2004, we added approximately 984 shop-within-shops.
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Direct Retailing6
We operate
• Ralph Lauren (58 stores) | Ralph Lauren stores feature the full-breadth of the Ralph Lauren apparel, accessory and home product assortments in an atmosphere consistent with the distinctive attitude and luxury positioning of the Ralph Lauren brand. We operate 42 Ralph Lauren stores in the United States, 12 Ralph Lauren stores in Europe and 4 Ralph Lauren stores in other regions. | |
• Club Monaco (61 stores) | Club Monaco stores feature updated fashion apparel and accessories for both men and women. The brand’s clean and updated classic signature style forms the foundation of a modern wardrobe. | |
• Caban (8 stores) | Caban home concept stores offer a unique shopping experience by mixing both fashion and interior design in a dynamic retail environment. Caban stores feature a complete range of product in bath, bedding, tabletop, home accessories, furniture and apparel. |
Our 147 outlet stores are generally located in outlet malls and operate as Polo Ralph Lauren Factory stores, Polo Jeans Factory stores, Ralph Lauren Home Factory stores and Club Monaco outlet stores.
In addition to our own retail operations, as of April 3, 2004, we had granted a license to an independent party to operate one store in the United States. We receive the proceeds from the sale of our products to this store, which are included in wholesale net sales, and also receive royalties, which are included in licensing revenue, from our licensing partners sales to these stores. We generally do not receive any other compensation from this licensed store operator. See “Our Licensing Alliances.”
• Rugby (3 stores) | Rugby, the newest brand in the Ralph Lauren family, 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. | |
• Ralph Lauren Media | Our e-commerce site offers our customers access to the full breadth of Ralph Lauren apparel, accessories, and home products through the internet. Ralph Lauren Media is a 50% owned joint venture. |
We also operate 47 Ralph Lauren stores, 2 RRL stores (to be closed in Fiscal 2005) and 61 Club Monaco stores. During Fiscal 2004,2005, we added 916 full price stores, net of 34 store closings. Our stores range in size from approximately 3,5001,100 to over 27,00037,500 square feet. These full-price stores are situated in upscale regional malls and major upscale street locations, generally in large urban markets. We generally lease our stores for initial periods ranging from 5 to 10 years with renewal options.Outlet Stores
We extend our reach to additional consumer groups through our 96103 domestic Polo Ralph Lauren outlet stores, 2219 domestic Polo Jeans outlet stores, 75 Club Monaco outlet stores and 2221 European outlet stores. During Fiscal 2004,2005, we added 61 new outlet stores,store, net of 29 store closings.
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Our outlet stores are generally located in outlet malls.
• | Polo Ralph Lauren | |
• | Polo Jeans | |
• | Club Monacooutlet stores offer basic and fashion Club Monaco items. Ranging in size from |
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• | Europeanoutlet stores offer selections of our menswear, womenswear, children’s apparel | |
• | Ralph Lauren Media sells the full breadth of Ralph Lauren apparel, accessories and home products via its website at www.polo.com. |
the licensee.
• | are leaders in their respective markets, | |
• | contribute the majority of our product development costs, | |
• | provide the operational infrastructure required to support the business, and | |
• | own the inventory. |
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We1618 product 9licensing partners (excluding Ralph Lauren Home), 6 international licensing partners and 10 homeRalph Lauren Home licensing partners as of April 3, 2004.partners. We derive a substantial portion of our net income from the licensing revenue we receive from our licensing partners. Approximately 43.2%33.5% of our licensing revenue for Fiscal 20042005 was derived from three product licensing partners: West Point Stevens, Inc, Impact21 and Jones Apparel Group, Inc., Westpoint Stevens, Inc. and Impact 21 each accounted for 17.2%14.2%, 14.7%12.1% and 11.3%7.2%, respectively, of licensing revenue in Fiscal 2004.2005. (See Note 34 to our Consolidated Financial Statements.)
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Product |
3, 2004,2, 2005, we had product licensing agreements with 16 product18 licensing partners relating to our men’s and women’s sportswear, men’s tailored clothing, children’s apparel, personal wear, accessories and fragrances. The products offered by our product licensing partners are listed below.
Licensing Partner | Licensed Product Category | |
L’Oreal S.A./ Cosmair, Inc. | Men’s and Women’s Fragrances and Skin Care Products | |
Jones Apparel Group, Inc. | Men’s and Women’s Polo Jeans Casual Apparel and Sportswear | |
Carole Hochman Design | Women’s Sleepwear, | |
Corneliani S.P.A | Men’s Polo Tailored Clothing | |
Peerless, | Men’s, Chaps and Lauren Tailored Clothing | |
Sara Lee Corporation | Men’s Polo Ralph Lauren and | |
Reebok International, | Men’s, Women’s, Boy’s, Girl’s, Infants and | |
Wathne | Handbags and Luggage | |
Hot Sox, Inc. | Men’s and Boy’s Polo Ralph Lauren and Women’s Ralph Lauren and | |
New Campaign, Inc. | Chaps, Ralph Lauren and Lauren Belts and Other Small Leather Goods | |
Echo Scarves, Inc. | Men’s Polo Ralph Lauren and Polo Jeans Company and Women’s Ralph Lauren and Lauren Scarves and Gloves | |
Retail Brand Alliance, Inc. (successor to Carolee, Inc.) | Lauren Women’s Jewelry | |
Safilo USA, Inc. | Eyewear | |
The Warnaco Group, Inc. | Men’s Chaps Sportswear | |
Apparel Ventures, Inc. | Women’s | |
Philips Van-Heusen | Men’s Chaps Dress Shirts | |
Randa Corp | Men’s Chaps Ties | |
Bandanco Enterprise, Inc. (Champlain) | Men’s Chaps Luggage |
have entered into an agreement to acquireacquired certain assets and liabilities of RL Childrenswear, LLC, our former Childrenswear Licenseelicensee for North America.America, in July 2004, and we have agreed to acquire Ralph Lauren Footwear Co., our global licensee for men’s, women’s and children’s footwear.International Licensing AlliancesLicenses
• | the roll out of new products and brands following their launch in the U.S., | |
• | the introduction of additional product lines, |
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• | the entrance into new international markets, and | |
• | the addition of Ralph Lauren or Polo Ralph Lauren stores in these markets. |
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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 | |
Impact21 | Japan | |
Commercial Madison/ PRL Chile | Chile |
Impact21.
Ralph Lauren Home |
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Category | Product | Licensing Partner | ||
Bedding and Bath | Sheets, bedding accessories, towels and shower curtains, blankets, down comforters, other decorative bedding and accessories | WestPoint Stevens, Inc. Fremaux-Delorme | ||
Bath rugs | Lacey Mills | |||
Home Décor | Fabric and wallpaper | P. Kaufmann, Inc. | ||
Designers Guild Ltd. | ||||
Furniture | Henredon Furniture Industries, Inc. | |||
Tabletop and giftware | Mikasa, Inc. | |||
Table linens, placemats, tablecloths and napkins | Brownstone | |||
Home Improvement | Interior paints and stains | |||
Broadloom carpets and area rugs | ICI/Glidden Company Karastan, a division of Mohawk Carpet Corporation |
We form design teams around our brands and product categories to develop concepts, themes and products for each of our businesses. These teams work in close collaboration with merchandising, sales and production staff and licensing partners in order to gain market and other input.
We operate a research and development facility in Greensboro, North Carolina, a testing lab in Singapore and pattern rooms in New York, New Jersey and Singapore.
other input.
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2005.
• | LDP Purchasing — purchases of finished products, where the supplier is responsible for the purchasing and carrying of raw materials, including all logistics and inbound duties and arrangements (custom and broker) to selected country port of entry; | |
• | FOB Purchasing — purchases of finished products, where the supplier is responsible for the purchasing and carrying of raw materials; and | |
• | CMT Purchasing — cut, make and trim purchasing, where we are responsible for purchasing and moving raw materials to finished product assemblers located around the world. |
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• | anticipate and respond to changing consumer demands in a timely | |
• | maintain favorable brand | |
• | develop and produce high quality products that appeal to | |
• | appropriately price our | |
• | provide strong and effective marketing | |
• | ensure product | |
• | obtain sufficient retail floor space and effectively present our products at retail. |
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• | comprehensive order | |
• | production |
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• | accounting information; and | |
• | ||
enterprise view of information for our marketing, manufacturing, importing and distribution functions. |
We use
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• | “Chaps” | |
• | “Polo Sport” | |
• | “Lauren/ Ralph Lauren” | |
• | “Polo Jeans Co.” | |
• | “RRL” | |
• | “Club Monaco” | |
• | “Rugby” | |
• | “RLX” | |
• | Various trademarks pertaining to fragrances and cosmetics |
In acquiring the “RRL” trademarks, we agreed to allow Mr.
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Any activity done by these companies has no impact on the Company.
Two agreements by which we resolved conflicts with third-party owners of other trademarks currently impose restrictions or monetary obligations on us. In one, we reached an agreement with a third party which owned competing registrations in numerous European and South American countries for the trademark “Polo” and a symbol of a polo player astride a horse. By virtue of the agreement, Although we have acquirednot in the past suffered any material inhibition from doing business in desirable markets in the past, we cannot assure that third party’s portfolio of trademark registrationssignificant impediments will not arise in exchange for the payment of our royalties in Central Americafuture as we expand product offerings and South America and parts of the Caribbean solely in respect of our use ofadditional trademarks which include “Polo” and the polo player symbol, and not, for example, “Ralph Lauren” alone, “Lauren/ Ralph Lauren,” “RRL,” and others. This obligation to share royalties with respect to Central and South America and parts of
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new markets.
The secondan agreement was reached with a third party which owned conflicting registrations of the trademarks “Polo” and a polo player astride a horse in the United Kingdom, Hong Kong and South Africa. Under the agreement, the third party retains the right to use the “Polo” and polo player symbol marks in South Africa and all other countries that comprise Sub-Saharan Africa, and we agreed to restrict use of those Polo marks in those countries to fragrances and cosmetics solely as part of the composite trademark “Ralph Lauren” and the polo player symbol, as to which our use is unlimited, and to the use of the polo player symbol mark on women’s and girls’ apparel and accessories and women’s and 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.
Our import operations are currently subject
Pursuant to the WTO Agreement, effective January 1, 2005, the United States and other WTO member countries are required, with few exceptions, to removeremoved quotas on goods from WTO member countries. The complete removal of quotas should benefit the Company by allowing it to source its products without the necessity of purchasing and obtaining quotas. However, the Company’s business may be negatively affected by the limited remaining quotas toward the end of calendar year 2004 and the possibility that the United States may impose safeguard quota on products from China in early 2005. Ifmembers. In certain instances, the elimination of quota resultsaffords us greater access to foreign markets; however, as the removal of quotas resulted in an import surgessurge from certain countries,China, the possibility also exists that other trade actions may be taken by the United States to prevent importsU.S. took action in injurious quantitiesMay 2005 and imposed safeguard quotas on seven categories of goods which may adversely effect the company’sCompany’s ability to import product.
product from China in 2005. On June 10, 2005, in response to the surge of Chinese imports into the European Union (“EU”), the EU Commission signed a Memorandum of Understanding (“MOU”) with China in which 10 categories of textiles and apparel will be subject to restraints. This may also effect our ability to import product into the EU in these 10 categories during 2005.
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Foreign Sales Corporation/ Extra-Territorial Income Tax Exclusion Act.
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Ralph Lauren | Age | Mr. Lauren has been Chairman, | ||
Roger N. Farah | Age | Mr. Farah has been President, | ||
Age | ||||
Tracey T. Travis | Age 42 | Ms. Travis has been Senior Vice President of Finance and Chief Financial Officer of | ||
Mitchell A. Kosh | Age | Mr. Kosh has served as Senior Vice President of Human Resources and Legal since July 2000. He was Senior Vice President of Human Resources of Conseco, Inc., from February 2000 to July 2000. Prior to that, Mr. Kosh held executive human resource positions with the Venator Group, Inc. starting in 1996. |
F. Lance Isham, Age 59, who retired on March 31, 2004, had served as our Vice Chairman since April 2000. He served as our President from 1998 to April 2000.17
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• | our anticipated growth | |
• | our intention to introduce new products | |
• | our plans to open new retail | |
• | our ability to make strategic acquisitions of selected | |
• | anticipated effective tax rates in future | |
• | future expenditures for capital | |
• | our ability to continue to maintain our brand image and | |
• | our ability to continue to initiate cost cutting efforts and improve | |
• | our plans to expand | |
• | our efforts to improve the efficiency of our distribution system. |
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2005. The department store sector is undergoing consolidation. Two of our largest wholesale customers, Federated Department Stores, Inc. and The May Department Stores Company have entered into a merger agreement and have stated that they expect to close the merger in the third quarter of 2005.
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• | quotas imposed by bilateral textile | |
• | unilateral quotas imposed by the United States | |
• | 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 | |
• | 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; | |
• | significant fluctuations of the cost of raw | |
• | significant | |
• | institution of antidumping of countervailing duty proceedings resulting in the | |
• |
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• | obtain capital; | |
• | manage its labor relations; | |
• | maintain relationships with its suppliers; | |
• | manage its credit risk effectively; and | |
• | maintain relationships with its customers. |
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• | the burdens of complying with a variety of foreign laws and regulations; | |
• | unexpected changes in regulatory requirements; and | |
• | new tariffs or other barriers to some international |
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• | political instability and terrorist attacks; | |
• | changes in diplomatic and trade relationships; and | |
• | general economic fluctuations in specific countries or markets. |
2223
The royalties that we received pursuant to the “Lauren” license agreements and “Ralph” license agreements represented revenues of approximately $23.0 million and $3.9 million, respectively, in Fiscal 2004 and approximately $37.4 million and $5.3 million, respectively, in Fiscal 2003. We no longer receive these royalties as a resultlight of the terminationAppellate Division’s decision we recorded a reserve of $100.0 million during Fiscal 2005, which reduced Fiscal 2005 Income from operations from $399.7 million to $299.7 million. This charge represents management’s best estimate at this time of the Lauren and Ralph license agreements on December 31, 2003. We have begun to produce, market and ship the Lauren line. We expected that the loss of the Lauren and Ralph royalties from Jonesincurred. No discovery has been held, and the start up expenses associated with the Lauren line would exceed the anticipated income from our salesultimate outcome of Lauren products in the fourth quarter in Fiscal 2004. In total, royalties received from Jones, including royaltiesthis matter could differ materially from the “Polo Jeans” license agreements, accounted for 17.2% of our licensing revenue for Fiscal 2004 and 27.2% of our licensing revenue during Fiscal 2003. The “Polo Jeans” license agreements were not covered under the terms of the Cross Default and Term Extension agreement and continue in effect.
reserved amount.
• | anticipating and responding to changing consumer demands in a timely manner; | |
• | maintaining favorable brand recognition; | |
• | developing innovative, high-quality products in sizes, colors and styles that appeal to consumers; | |
• | appropriately pricing products; | |
• | providing strong and effective marketing support; | |
• | creating an acceptable value proposition for retail customers; | |
• | ensuring product availability and optimizing supply chain efficiencies with manufacturers and retailers; and | |
• | obtaining sufficient retail floor space and effective presentation of our products at retail. |
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• | general business conditions; | |
• | interest rates; | |
• | the availability of consumer credit; | |
• | taxation; and | |
• | consumer confidence in future economic conditions. |
• | consolidating their operations; | |
• | undergoing restructurings; | |
• | undergoing reorganizations; or | |
• | realigning their affiliations. |
We are dependent upon the revenue generated byA substantial portion of our licensing alliances.net sales and gross profit is derived from a small number of department store customers.”Item 2. Properties
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Approximate | Current Lease Term | ||||||||||||||||
Location | Use | Sq. Ft. | Expiration | ||||||||||||||
Greensboro, N.C. | Distribution Facility | 1,500,000 | Owned | ||||||||||||||
650 Madison Avenue, NYC | Executive, corporate office and design studio, Polo Brand showrooms | 206,000 | December 31, 2009 | ||||||||||||||
Lyndhurst, N.J. | Corporate and retail administrative offices | 162,000 | February 28, 2008 | ||||||||||||||
550 7th Avenue, NYC | Corporate office, design studio and | 70,000 | December 31, 2018 | ||||||||||||||
625 Madison Avenue, NYC | Corporate offices | 33,000 | December 31, 2019 | ||||||||||||||
Geneva, Switzerland | European corporate offices | 48,000 | March 1, 2013 |
Item 3. | Legal Proceedings |
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is not material.
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October 3, 2005.
In December 2003,2004, we receivedfiled a demand on behalffor arbitration against the United States Polo Association and United States Polo Association Polo Properties, Inc. in the United Kingdom under the auspices of the International Centre for Dispute Resolution seeking a stockholder to inspect the Company’s books and records relating to the amended and restated employment agreement dated June 23, 2003 between the Company and Ralph Lauren. The demand assertsjudgement that the purposeHorseman symbol infringes on our trademark and other rights, as well as injunctive relief. Subsequently, the United States Polo Association and United States Polo Association Properties, Inc. agreed not to distribute products bearing the Horseman symbol in the United Kingdom or any other member nation of the inspection is to determine, among other things, whether the directors of the Company breached their fiduciary duties in approving the compensation provided for in the employment agreement. WhileEuropean Community. Consequently, we have provided certain documents to the stockholder’s counsel pursuant to a confidentiality agreement, we believe that the issues asserted by thewithdrew our arbitration demand are without merit.
on December 7, 2004.
Item 4. | Submission of Matters to a Vote of Security Holders |
31 2003. stores as well as Ralph Lauren Media, our 50% owned e-commerce joint venture, which sells product over the Internet. 32 management, partially offset by decreases in licensing income as a result of the acquisition of the Lauren and Childrenswear lines. 33 to vigorously contest the claims made against it and continues to explore its defenses and possible claims against others. We have established a reserve of $6.2 million on its balance sheet relating to this matter, representing management’s best estimate at this time of the loss incurred. The ultimate outcome of this matter could differ from the amounts recorded. While that difference could be material to the results of operations for any affected reporting period, it is not expected to have a material impact on consolidated financial position or liquidity. 34 On June 24, 2005, American Real Estate Properties, LP, an entity controlled by investor Carl Icahn, won the U.S. Bankruptcy Court approved bidding process for WestPoint’s assets, subject to final confirmation at a hearing to be held August 17, 2005. The Company believes that the new owners will continue the relationship on satisfactory terms. The contract with WestPoint Stevens expires in December of 2005. over the life of the lease. life of the lease. 37 38 39 to: reflects: 40 41 42 43 44 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 were to be made in the open market over a two-year stock. No repurchases have been made under this plan, which does not have a termination date. financial covenants, including: 47 These charges are recorded as components of cost of sales and royalty expense in the Consolidated statement of income. 48 49 50 Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted advertising, professional fees and other outstanding 51 52 statements. no effect on historical financial statements. 53 54 55 56 57 58 59 60 F-1 F-2 F-3 F-4 F-5 F-6 F-7 F-8 F-9 F-10 F-11 F-12 F-13 F-14 F-15 F-16 F-17 F-18 F-19 F-20 Income. Income. On February 7, 2000, we announced the formation of Ralph Lauren Media, LLC (“RL Media”), a joint venture between National Broadcasting Company, Inc. and certain affiliated companies (“NBC”) and ourselves. RL Media was created to bring our American lifestyle experience to consumers via multiple media platforms, including the Internet, broadcast, cable and print. Under the 30-year joint venture agreement, RL Media is owned 50% by us and 50% by NBC. In exchange for a 50% interest, we provide marketing through our annual print advertising campaign, make our merchandise available at initial cost of inventory and sell RL Media’s excess inventory through our outlet stores, among other things. NBC contributed $40.0 million in online distribution and promotion and a cash funding commitment up to $50.0 million. NBC also initially committed to contribute $110.0 million of television and online advertising. During Fiscal 2003, RL Media entered into an agreement to sell its unused television and advertising spots for $15.0 million. Under the terms of the joint venture agreement The carrying value of goodwill as of April 2, 2005 and April 3, 2004 F-22 F-23 accordance with contract terms. During the second quarter of Fiscal 2001, we completed an internal operational review and formalized our plans to enhance the growth of our worldwide luxury retail business, to better manage inventory and to increase our overall profitability. The major initiatives of the 2001 Operational Plan included: refining our retail strategy; developing efficiencies in our supply chain; and consolidating corporate strategic business functions and internal processes. Costs associated with this aspect of the 2001 Operational Plan included lease and contract termination costs, store fixed asset writedowns and severance and termination benefits. F-24 The Company and its U.S. subsidiaries file a consolidated Federal Income tax return. The components of the provision for income taxes were as F-25 The foreign and domestic components of income before provision for income taxes were as 3, 2004.PART II28Item 5. Market for Registrants’ Common Equity and Related Stockholders Matters NYSENew York Stock Exchange under the symbol “RL.” The following table sets forth for the periods indicated, the high and low closing prices per share for ourof 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 Market Price of Class A of Class A Common Stock High Low Common Stock First Quarter $ 37.05 $ 31.23 Second Quarter 38.57 31.01 High Low Third Quarter 42.83 33.75 Fourth Quarter 42.59 37.40 First Quarter $ 27.93 $ 21.25 First Quarter $ 27.93 $ 21.25 Second Quarter 30.10 25.06 Second Quarter 30.10 25.06 Third Quarter 31.52 25.96 Third Quarter 31.52 25.96 Fourth Quarter 35.35 27.28 Fourth Quarter 35.35 27.28 First Quarter $ 30.82 $ 20.95 Second Quarter 24.60 17.73 Third Quarter 25.18 17.20 Fourth Quarter 23.00 19.30 27$19.9$20.4 million was recorded as a reduction to retained earnings during Fiscal 20042005 in connection with these dividends.May 21, 2004,June 10, 2005, there were 1,1741,428 holders of record of our Class A common stock and four11 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 and may not be transferred to anyone other than affiliates of Mr. Lauren.Maximum Number (or Approximate Total Number of Dollar Value) of Total Number Shares (or Units) Shares (or Units) of Shares Purchased as Part of That May Yet be (or Units) Average Price Publicly Announced Purchased Under the Period Purchased Paid Per Share Plans or Programs Plans or Programs January 2, 2005 to January 29, 2005 — — — — (1) January 30, 2005 to February 26, 2005 — — — — February 27, 2005 to April 2, 2005 — — — — Total — — — — (1) The Company has two Class A stock repurchase plans. The initial plan was first publicly announced in March 1998, and the extension of this Plan thru April 1, 2006 was announced on May 26, 2004. Approximately $22.5 million in shares may yet be repurchased under this plan. The second plan was first publicly announced on February 2, 2005. This plan provides for the repurchase of up to an additional $100 million of Class A Common stock. No repurchases have been made under this plan, which does not have a termination date. 2829Item 6. Selected Financial Data 3, 20042, 2005 and the balance sheet data as of April 2, 2005 and April 3, 2004 and March 29, 2003 from our consolidated financial statements and the accompanying notes, which are included elsewhere in this Annual Report on Form 10-K, and were audited by Deloitte & Touche LLP, our independent auditors. We derived the dataregistered public accounting firm. The information for the fiscal years ended April 3, 2004, March 29, 2003, March 30, 2002 and March 31, 2001 has been restated to reflect certain lease accounting and April 1, 2000 fromother corrections as well as the auditedconsolidation of Ralph Lauren Media beginning in Fiscal 2004 (see Note 2 to our consolidated financial statements and accompanying notes of Polo Ralph Lauren Corporation and subsidiaries contained in our annual report on Form 10-K for the years ended March 31, 2001 which are not included in this Form 10-K.Annual Report). You should read this consolidated financial data together with our consolidated financial statements and the notes to those financial statements as well as the discussion in this Form 10-K under the caption Item 7 — “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS” included elsewhere. Fiscal Year Ended(1) Fiscal Year Ended(1) April 2, April 3, March 29, March 30, March 31, April 3, March 29, March 30, March 31, April 1, 2005 2004 2003 2002(2) 2001 2004 2003 2002 2001 2000 (As (As (As (As Restated)(3) Restated)(3) Restated)(4) Restated)(4) (In thousands, except per share data) (In thousands, except per share data) Net sales $ 2,380,844 $ 2,189,321 $ 2,122,333 $ 1,982,419 $ 1,719,226 $ 3,060,685 $ 2,380,844 $ 2,189,321 $ 2,122,333 $ 1,982,419 Licensing revenue 268,810 250,019 241,374 243,355 236,302 244,730 268,810 250,019 241,374 243,355 Net revenues 2,649,654 2,439,340 2,363,707 2,225,774 1,955,528 3,305,415 2,649,654 2,439,340 2,363,707 2,225,774 Cost of goods sold 1,326,335 1,231,739 1,216,904 1,162,727 1,002,390 1,620,869 1,326,335 1,231,739 1,216,904 1,162,727 Gross profit 1,323,319 1,207,601 1,146,803 1,063,047 953,138 1,684,546 1,323,319 1,207,601 1,146,803 1,063,047 Selling, general and administrative expenses 1,029,957 904,741 837,591 822,272 689,227 1,382,520 1,032,862 902,303 837,478 826,649 Restructuring charge 19,566 14,443 16,000 123,554 — 2,341 19,566 14,443 16,000 123,554 Income from operations 273,796 288,417 293,212 117,221 263,911 299,685 270,891 290,855 293,325 112,844 Foreign currency losses (gains) 1,864 529 (1,820 ) (5,846 ) — Foreign currency (gains) losses (6,072 ) 1,864 529 (1,820 ) (5,846 ) Interest expense 10,000 13,502 19,033 25,113 15,025 6,391 10,000 13,502 19,033 25,113 Income before provision for income taxes and change in accounting principle 261,932 274,386 275,999 97,954 248,886 Income before provision for income taxes 299,366 259,027 276,824 276,112 93,577 Provision for income taxes 95,055 100,151 103,499 38,692 101,422 107,336 93,875 101,141 103,545 36,913 Income after tax, before other income and change in accounting principle 166,877 174,235 172,500 59,262 147,464 Other (Income) expense, net (4,077 ) — — — — Cumulative effect of change in accounting principle, net of taxes — — — — 3,967 (2) Income after tax, before other expense (income) 192,030 165,152 175,683 172,567 56,664 Other expense (income), net 1,605 (4,077 ) — — — Net income $ 170,954 $ 174,235 $ 172,500 $ 59,262 $ 143,497 $ 190,425 $ 169,229 $ 175,683 $ 172,567 $ 56,664 Income per share before change in accounting principle — Basic $ 1.73 $ 1.77 $ 1.77 $ 0.61 $ 1.49 Cumulative effect of change in accounting principle, net per share — — — — 0.04 Net income per share — Basic $ 1.73 $ 1.77 $ 1.77 $ 0.61 $ 1.45 $ 1.88 $ 1.71 $ 1.79 $ 1.77 $ 0.59 Income per share before change in accounting principle — Diluted $ 1.69 $ 1.76 $ 1.75 $ 0.61 $ 1.49 Cumulative effect of change in accounting principle, net per share — — — — 0.04 Net income per share — Diluted $ 1.83 $ 1.68 $ 1.77 $ 1.75 $ 0.58 Net income per share — Diluted $ 1.69 $ 1.76 $ 1.75 $ 0.61 $ 1.45 Dividends declared per share $ 0.20 $ 0.20 $ — $ — $ — Weighted-average common shares outstanding — Basic 98,977 98,331 97,470 96,773 98,927 101,519 98,977 98,331 97,470 96,773 Weighted-average common shares outstanding — Diluted 100,960 99,263 98,522 97,446 99,036 104,010 100,960 99,263 98,522 97,446 2930 Fiscal Year Ended(1) Fiscal Year Ended(1) April 2, April 3, March 29, March 30, March 31, 2005 2004 2003 2002 2001 April 3, March 29, March 30, March 31, April 1, 2004 2003 2002 2001 2000 (As (As (As (As Restated) Restated) Restated) Restated) (3) (3) (4) (4) (Dollars in thousands) (Dollars in thousands) Cash and cash equivalents $ 343,477 $ 343,606 $ 244,733 $ 102,219 $ 164,571 $ 350,485 $ 352,335 $ 343,606 $ 244,733 $ 102,219 Working capital 770,189 662,202 616,286 462,144 446,663 791,353 781,951 662,386 617,465 462,144 Inventories 363,691 363,771 349,818 425,594 390,953 430,082 373,170 363,771 349,818 425,594 Total assets 2,270,241 2,038,822 1,749,497 1,626,093 1,620,562 2,726,669 2,297,552 2,052,388 1,762,743 1,635,513 Total debt 277,345 349,437 318,402 383,100 428,838 290,960 277,345 349,437 318,402 383,100 Stockholders’ equity 1,422,073 1,208,767 998,195 809,309 772,437 1,675,708 1,415,447 1,205,583 993,027 803,892 (1) All periods presented represent a 52-week year, except Fiscal 2004, which represents a 53-week year. (2) The Fiscal 2000 changeEffective December 31, 2001, for reporting purposes the Company changed the fiscal year ends of its European subsidiaries as reported in accounting principle relatesthe consolidated financial statements to the Company’s changeSaturday closest to March 31 to conform with the fiscal year end of the Company. Previously, certain of the European subsidiaries were consolidated and reported on a three-month lag with a fiscal year ending December 31. Accordingly, the net activity shown below for the three-month period ended December 29, 2001, for those European subsidiaries is reported as an adjustment to Retained earnings in accounting for start-up activities.the fourth quarter of fiscal 2002 in the accompanying financial statements: Three-Months Ended December 29, 2001 As Restated (4) (Dollars in millions) Net sales $ 49.5 Gross profit 25.5 Loss before benefit from income taxes (0.7 ) Benefit from income taxes 0.3 Net loss $ (0.4 ) Twelve-Months Ended March 30, 2002 As Restated (4) (Dollars in millions) Net revenues $ 2,286.9 Gross profit 1,105.8 Income before income taxes 255.6 Provision for income taxes (95.8 ) Net income $ 159.8 (3) See Note 2 to our consolidated financial statements included in this Form 10-K. (4) Fiscal 2002 and Fiscal 2001 have been restated to reflect the lease accounting adjustments discussed in Note 2 to the consolidated financial statements. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statementsconsolidated financial statements and relatedthe accompanying notes, thereto which are included in this Annual Report on Form 10-K. We use a 52-53 week fiscal year ending on the Saturday nearest March 31. All referencesReferences to “Fiscal 2005” represent the 52-week fiscal year ended April 2, 2005. References to “Fiscal 2004” represent the 53-week fiscal year ended April 3, 2004, whileand references to “Fiscal 2003” and “Fiscal 2002” represent the 52-week fiscal yearsyear ended March 29, 2003 and March 30, 2002, respectively.business operation segments: wholesale, retail and licensing.men’s apparel designed and marketed worldwide, which are divided primarily into three groups: Polo Brands, Lauren and Collection Brands. In each of the wholesale groups, we offer discrete brand offerings, directed by teamschildren’s apparel. Teams comprising design, merchandising, sales and production staff who work together to conceive, develop and merchandise product groupings that are organized to convey a variety of design concepts. This segment includes the core business Polo Ralph Lauren product lines as well as Lauren, Blue Label, Polo Golf, RLX Polo Sport, Women’s Ralph Lauren Collection and Black Label, and Men’s Purple Label Collection.theour product through Ralph Lauren, Club Monaco full-price and outlet stores and Club MonacoRugby full-price and outlet stores.2004,2005, overall revenue increased $210.3$655.8 million, or 8.6%24.7%, primarily as a result of strong growth in our retailthe acquisition of the Childrenswear business, and the introductionpresence of the Lauren line in our Wholesale business,wholesale segment for a full year and strong growth in our retail segment, partially offset primarily by planned sales declines in our Men’s Wholesalewholesale business due to a planned reduction in off price sales. Our licensing revenue increased $18.8decreased $24.1 million, or 7.5%9.0%, as a result of growth in the footwear business, as well as the incremental effect of the consolidation30of revenues from the Japanese master license, partially offset by the loss of licensing income from the Lauren label, previously operated by Jones Apparel Group, Inc. The inclusion of the 53rd week was responsible for an estimated $39.5 million of the sales increase.and Childrenswear labels.$115.7$361.2 million, or 9.6%27.3%, and our gross margin as a percentage of sales (gross margin rate) increased to 51.0% from 49.9% from 49.5% in the prior year.Fiscal 2004. The increasing gross profitmargin rate reflects the benefits of advertising, improved product mix and targeted marketing as well as a continued focus on inventory management.$125.2$349.7 million or 13.8%33.9%, primarily as a result of start uplitigation charges recorded in the amount of $106.2 million and the addition of expenses associated with the Childrenswear business, a full year’s expenses for the Lauren linebusiness and the increased operating expenses associated with our growth in retail sales.2004,2005, we recorded restructuring charges of $19.6$2.3 million. These charges are primarily composed of an additional $10.4 million for lease termination costs associated primarily with two Club Monaco retail properties included in our 2001 operational plan due to real estate market factors that were less favorable than originally estimated, $7.9 million for additional contract termination and severance costs related tofor the consolidation of our European business operations and $1.3 million related to our decision to close the RRL stores.business.Although ourOur cash and cash equivalents decreased $0.1to $350.5 million and our cash and cash equivalents net of debt position improved $72.0 million. Cash flow from operations decreased by $59.9$15.5 million, primarily as a result of increases in inventory and accounts receivable associated with the start uppurchase of the Lauren line. TheChildrenswear business and an increase in our debt due to the strengthening of the Euro has hadEuro. Cash flow from operations increased by $168.4 million primarily as a significant effect on certainresult of our balance sheet accounts including Accounts Receivable, Inventory, Accounts Payableincreased sales and Long Term Debt.Recent Developments On May 25, 2004,gross profits. We intend to pay the Company entered into a definitive agreement to acquire certain of the assets and to assume certain of the liabilities of RL Childrenswear Company, LLC relating to the Childrenswear Licensee’s licensed childrenswear apparel business in the United States, Canada and Mexico (the “Childrenswear Business”). Theapproximately $110 million purchase price for the acquisition of the Childrenswear Business will be $232.1 million in cash payable at closing, subject to a working capital adjustment, plus up to an additional $20 million of deferred and contingent cash payments. Payment of thepending purchase price will be funded by cash on hand and lines of credit as required. In addition, the Company will assume certain ordinary course trade payables and accrued expenses of the Childrenswear Licensee and accrued vacation obligations for the Childrenswear Licensee’s employees who will become employees of the Company following the closing of the acquisition. The assets of the Childrenswear Licensee being acquired by the Company include, among other things, the license; all inventories of the Childrenswear Licensee; certain leases; customer lists; supplier lists; and books and records. The Childrenswear Licensee and certain of its affiliates and shareholders have agreed to indemnify the Company for all of the liabilities of the Company related to the operation of the Business prior to the closing of the acquisition and have also agreed that they will not compete with the Business for a period of three years after the closing date. In addition, the Childrenswear Licensee and certain of its affiliates will provide information system and accounting services to the Company for a transitional period following the closing.31 The closing of the proposed transaction is subject to customary conditions, including the receipt of certain third party consents and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The closing of the transaction is anticipated to occur in late June 2004. Our licensing arrangements with Jones Apparel Group, Inc. (“Jones”) relating to the “Lauren” and “Ralph” lines ended on December 31, 2003 and we have begun designing, marketing and selling the Lauren line as part of our wholesale business.footwear licensee out of our cash and cash equivalents.discusseddescribed in Item 1 — “Business-RecentBUSINESS — “Recent Developments” and Item 3 — “Legal Proceedings”,“LEGAL PROCEEDINGS,” we are currentlyhave recorded a reserve of $100.0 million in connection with our litigation with Jones Apparel Group, Inc. over the termination of the Lauren licenses.product line license previously held by Jones. On March 24, 2005, the Appellate Division of the New York Supreme Court affirmed the lower Court’s orders in favor of Jones. We filed a motion with the Appellate Division for reargument and/or permission to appeal its decision to the New York Court of Appeals, and on June 23, 2005, the Appellate Division denied our request for reargument but granted our motion for leave to appeal to the Court of Appeals. If the Court of Appeals does not reverse the Appellate Division’s decision, the case will go back to the lower court for a trial on damages. Although we intend to continue to defend the case vigorously, in light of the Appellate Division’s decision we recorded a charge of $100.0 million during Fiscal 2005 to establish a reserve for this litigation. This charge represents management’s best estimate at this time of the loss incurred. No discovery has been held, and the ultimate outcome of this matter could differ materially from the reserved amount. Jones litigationis seeking compensatory damages of $550.0 million plus punitive damages relating to our alleged tortuous interference in the non-compete and confidentiality provisions of Jackwyn Nemerov’s former employment agreement with Jones. If Jones were to be determined adversely to us,awarded the full amount of damages it couldseeks, the award would have a material adverse effect on our results of operations and financial position. However, we intend to continue to defend the case vigorously and believe our position is correct on the merits.We expect that the income from our sales of Lauren products will at least replace the royalty income previously attributable to the Lauren and Ralph license agreements for Fiscal 2005. In total, royalties received from Jones including(consisting solely of royalties from the “Polo Jeans” license agreements, since the termination of the Lauren and Ralph licenses), accounted for 7.2%, 17.2% and 27.2% of our aggregate licensing revenue for Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. Our “Polo Jeans” license agreements with Jonesin effect. In February 2003, we acquired50% controlling interest indefinitive agreement with Reebok International, Ltd to acquire all the Japanese master license for the Poloissued and outstanding shares of capital stock of Ralph Lauren Footwear Co., Inc, the global licensee for men’s, women’s and jeans business in Japan. Allchildren’s footwear, as well as certain foreign assets owned by affiliates of Reebok International Ltd (collectively, the “Footwear Business”). The purchase price for the acquisition of the revenuesFootwear Business will be approximately $110 million in cash payable at closing, subject to certain closing adjustments. Payment of the purchase price will be funded by cash on hand and expenseslines of credit as required. In addition, the Footwear Licensee and certain of its affiliates have entered into a transition services agreement with us to provide a variety of operational, financial and information systems services over a period of twelve to eighteen months. The closing of the proposed transaction is subject to customary conditions, including the receipt of certain third party consents and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The closing of the transaction is anticipated to occur in July 2005.Japanese master licenseChildrenswear line for the period are included in ourthe consolidated statementsresults of operations and we record minority interest expense to reflect the share of earnings or losses allocable to the 50% minority interest holder in the Japanese master license. These amounts are included in Other (income) expense, net, in the consolidated statements of operations. We recorded minority interest expense of $1.4 millioncommencing July 2, 2004, for the year ended April 3, 2004. Also,2, 2005.February 2003, we acquired an 18% equitythousands, except per share amounts).inincome on the company that holds the sublicensescash used for the Polo Ralph Lauren men’s, women’spurchase and jeans businessthe income tax effect based upon unaudited pro forma effective tax rate of 35.5% in Japan. In May 2003, we acquired an additional 2% equity interest in this company. ForFiscal 2005 and Fiscal 2004. The unaudited pro forma information gives effect only to adjustments described above and does not reflect management’s estimate of any anticipated cost savings or other benefits as a result of the year ended April 3, 2004, weacquisition. The unaudited pro forma amounts include material non recurring charges of approximately $7.4 million that are recorded $5.5 millionwithin Cost of equity investment incomegoods sold related to this 20% investment in Other (income) expense, net in the consolidated statementswrite up to fair value of operations. Results for our 50% interest in the Japanese master license and the 20% equity interest in the holderinventory as part of the Japanese sublicenses are reported on a one-month lag.preliminary purchase price allocation (dollars in thousands, except per share amounts).Restructurings During Fiscal 2004, we determined that the two remaining RRL stores would be closed. In connection with this decision we recorded a $1.3 million restructuring charge for lease termination costs and fixed asset impairments.3235 For the Year Ended April 2, April 3, 2005 2004 (Unaudited) (Unaudited) Net revenue $ 3,359,168 $ 2,858,458 Net income 195,338 186,164 Net income per share — Basic $ 1.92 $ 1.88 Net income per share — Diluted $ 1.88 $ 1.84 a $14.4 million charge during Fiscal 2003, of which $17.1respectively. $23.3 million had been paid through April 3, 2004. It is expected that2, 2005 in connection with this plan will be completed and theimplementation. The remaining liabilitiesbalance which consists primarily of lease termination costs will be paid in Fiscal 2005.We expect to settleThe remaining balance which consists primarily of lease termination costs will be paid over the remaining liabilities in Fiscal 2005 or in accordance with contract terms. Fiscal Year Ended Fiscal Year Ended April 3, March 29, March 30, April 3, March 29, March 30, April 2, April 3, March 29, April 2, April 3, March 29, 2004 2003 2002 2004 2003 2002 2005 2004 2003 2005 2004 2003 Net sales $ 2,380.9 $ 2,189.3 $ 2,122.3 90.0 % 89.8 % 89.8 % $ 3,060.7 $ 2,380.9 $ 2,189.3 92.6 % 89.9 % 89.8 % Licensing revenue 268.8 250.0 241.4 10.0 % 10.2 % 10.2 % 244.7 268.8 250.0 7.4 % 10.1 % 10.2 % Net revenues 2,649.7 2,439.3 2,363.7 100 % 100.0 % 100.0 % 3,305.4 2,649.7 2,439.3 100.0 % 100.0 % 100.0 % Gross profit 1,323.3 1,207.6 1,146.8 49.9 % 49.5 % 48.5 % 1,684.5 1,323.3 1,207.6 51.0 % 49.9 % 49.5 % Selling, general and administrative expenses 1,030.0 904.8 837.6 38.9 % 37.1 % 35.4 % 1,382.5 1,032.9 902.4 41.8 % 39.0 % 37.0 % Restructuring charge 19.5 14.4 16.0 0.7 % 0.6 % 0.7 % 2.3 19.5 14.4 0.1 % 0.7 % 0.6 % Income from operations 273.8 288.4 293.2 10.3 % 11.8 % 12.4 % 299.7 270.9 290.8 9.1 % 10.2 % 11.9 % Foreign currency losses (gains) 1.9 0.5 (1.8 ) — — (0.1 )% Foreign currency (gains) losses (6.1 ) 1.9 0.5 (0.2 )% — — Interest expense 10.0 13.5 19.0 0.4 % 0.6 % 0.8 % 6.4 10.0 13.5 0.2 % 0.4 % 0.6 % Income before provision for income taxes and other (income) expense, net 261.9 274.4 276.0 9.9 % 11.2 % 11.7 % Income before provision for income taxes and Other expense (income) 299.4 259.0 276.8 9.1 % 9.8 % 11.3 % Provision for income taxes 95.0 100.2 103.5 3.6 % 4.1 % 4.4 % 107.4 93.9 101.1 3.3 % 3.5 % 4.1 % Other (income) expense, net (4.1 ) — — (0.2 )% — — Other expense (income), net 1.6 (4.1 ) — 0.0 % (0.1 )% — Net income $ 171.0 $ 174.2 $ 172.5 6.5 % 7.1 % 7.3 % $ 190.4 $ 169.2 $ 175.7 5.8 % 6.4 % 7.2 % Consolidation of European Entities — Change in Reporting Period Effective December 30, 2001, for reporting purposes, the Company changed the fiscal year ends of its European subsidiaries as reported in the consolidated financial statements to the Saturday closest to March 31 to conform with the fiscal year end of the Company. Previously, certain of the European subsidiaries were consolidated and reported on a three-month lag with a fiscal year ending December 31. Accordingly, the net activity shown below for the three-month period ended December 29, 2001, for those European subsidiaries is reported as an adjustment3336to retained earnings in the fourth quarter of Fiscal 2002 in the accompanying financial statements: Three-months Ended December 29, 2001: (Dollars in millions) Net sales $ 49.5 Gross profit 25.5 Loss before benefit from income taxes (0.7 ) Benefit from income taxes 0.3 Net loss $ (0.4 ) Net income for the year ended March 30, 2002, for the consolidated Company if the European subsidiaries remained on a three-month lag would have been $159.7 million.Fiscal 2005 Compared to Fiscal 2004 Fiscal Year Ended April 2, April 3, Increase 2005 2004 (Decrease) % Change Net revenues: Wholesale $ 1,712,040 $ 1,210,397 $ 501,643 41.4 % Retail 1,348,645 1,170,447 178,198 15.2 % Licensing 244,730 268,810 (24,080 ) (9.0 )% Total Net Revenue $ 3,305,415 $ 2,649,654 $ 655,761 24.7 % • incremental increase from the Lauren line of approximately $280.5 million in the current year due to the inclusion of a full year’s sales versus one quarter’s sales in the prior year; • inclusion of sales from the newly acquired Childrenswear line of $180.2 million commencing July 2, 2004; • a $51.2 million decrease in the domestic men’s wholesale business, which resulted from a planned reduction in off-price sales and a reduction in spring sales due to a planned reduction of sales to lower margin customers; and • increases in the European wholesale business of approximately $37.4 million on a constant dollar basis, as well as a $28.4 million favorable impact due to a stronger Euro in the current period. • a $21.2 million, or 5.5%, increase in comparable full price store sales and a $27.5 million, or 3.9%, increase in comparable outlet store sales. Sales increased $16.3 million, or 4.2%, in comparable full-price stores and a $21.8 million, or 3.1%, in comparable outlet stores on a constant dollar basis. Excluding the extra week in Fiscal 2004, comparable store sales increased 6.1% and 4.9% in full-price and outlet stores, respectively, on a constant dollar basis. Comparable store sales information includes both Ralph Lauren stores and Club Monaco stores. • the inclusion of $60.6 million of sales as a result of consolidation of RL Media. • worldwide store expansion. During Fiscal 2005, the Company added 30 stores and closed 13 stores. Our total store count at April 2, 2005 was 278 stores compared to 261 stores at April 3, 2004. • the stronger Euro during the current year, which accounted for approximately $14.7 million of the increase in net sales. • the elimination of $34.6 million of royalties from our domestic licensing business due to the acquisition of the Childrenswear business and a full year without royalties from the Lauren licensee. • a $13.1 million increase in international licensing. • the charge of $100.0 million recorded in connection with the Jones litigation and the charge of $6.2 million recorded in connection with the credit card matter. • higher selling salaries and related costs of $84.8 million, on a constant dollar basis, in connection with the increase in retail sales and worldwide store expansion. • approximately $19.8 million of the increase in SG&A was due to the impact of foreign currency exchange rate fluctuations, primarily as a result of the strengthening of the Euro Fiscal 2005. • expenses of $29.6 million as a result of the consolidation of Ralph Lauren Media. • incremental expenses of $22.3 million associated with a full year’s activity in the Lauren wholesale business, exclusive of additional corporate and overhead expenses incurred and reduced royalty revenues received. • expenses of $37.8 million associated with the newly acquired Childrenswear business. Fiscal Year Ended April 2, April 3, Increase 2005 2004 (Decrease) % Change Income (Loss) from operations Wholesale $ 299,710 $ 143,080 $ 156,630 109.5 % Retail 82,788 55,717 27,071 48.6 % Licensing 159,537 191,575 (32,038 ) (16.7 )% 542,035 390,372 $ 151,663 38.9 % Less: Unallocated Corporate expense (133,809 ) (99,915 ) (33,894 ) (33.9 %) Unallocated legal and restructuring charges (108,541 ) (19,566 ) Income from operations $ 299,685 $ 270,891 Fiscal 2004 Compared to Fiscal 2003 (Dollars(dollars in thousands). Fiscal Year Ended April 3, March 29, Increase 2004 2003 (Decrease) % Change Net revenues: Wholesale $ 1,210,397 $ 1,187,363 $ 23,034 1.9 % Retail 1,170,447 1,001,958 168,489 16.8 % Licensing 268,810 250,019 18,791 7.5 % Total Net Revenue $ 2,649,654 $ 2,439,340 $ 210,314 8.6 % to the addition of the Lauren line, which accounted for net sales of approximately $109.8 million in the current year partially offset by:• the addition of the Lauren line, which accounted for net sales of approximately $109.8 million in the current year, partially offset by: • a $60.4 million decrease in the domestic men’s wholesale business, which resulted from a planned reduction in off-price sales and a reduction in spring sales due to a planned reduction of sales to lower margin customers. • the elimination of the women’s Ralph Lauren Sport line, which accounted for net sales of approximately $12.3 million in the prior year. • decreases in the European wholesale business, primarily due to the soft economic conditions in Europe, of approximately $65.4 million on a constant dollar basis, offset by a $45.1 million favorable impact due to a stronger Euro in the current period. 34 • a $43.7 million, or 14.4%, increase in comparable full-price store sales and a $48.8 million, or 7.6%, increase in comparable outlet store sales on a constant dollar basis. Excluding the extra week in Fiscal 2004, comparable store sales increased 12.2% and 5.7% in full-price and outlet stores, respectively, on a constant dollar basis. Comparable store sales for the 53 weeks increased 18.0% and 8.8% for the full price stores and the outlet stores, respectively, while comparable store sales on a on a 52 week basis increased 15.8% for full price stores and 6.9% for outlet stores. Comparable store sales information includes both Ralph Lauren stores and Club Monaco stores. • worldwide store expansion. During Fiscal 2004, the Company added 15 stores and closed 7 stores. Our total store count at April 3, 2004 was 263261 stores compared to 255253 stores at March 29, 2003. • the stronger Euro and Canadian dollar in the current period, accounted for approximately $27.0 million of the increase in net sales. increased — the increase primarily as a result of: • a $27.5 million increase in international licensing primarily due to the incremental effect of the consolidation of revenues from the Japanese master license. • $3.5 million increase in domestic licensing due to improvements in the footwear business. • partially offset by the loss of $15.8 million of Lauren and Ralph royalties from Jones compared to the prior year.3, 20042, 2005 is approximately the same as it was at March 29, 2003,April 3, 2004, this primarily reflects the appreciation of the Euro, inventories related to our Lauren wholesale business and increased levels of inventory related to our retail growth offset by decreases in inventory in other lines of business.$125.2$130.6 million, or 13.8%14.5%, to $1.030$1.033 billion during Fiscal 2004 from $904.8$902.3 million during Fiscal 2003. SG&A as a percent of net revenues increased to 38.9%39.0% from 37.1%37.0%. The increase in SG&A was primarily driven by: • Higher selling salaries and related costs of $43.4$48.7 million, exclusive of the effect of foreign currency exchange rate fluctuations in connection with the increase in retail sales and worldwide store expansion. • Approximately $30.4 million of the increase in SG&A was due to the impact of foreign currency exchange rate fluctuations, primarily as a result of the strengthening of the Euro and Canadian dollar in Fiscal 2004. • Expenses of $28.1 million associated with the Lauren wholesale business, exclusive of additional corporate and overhead expenses incurred and reduced royalty revenues received. 35 • $19.0 million of increased international licensing SG&A primarily due to the consolidation of incremental expenses in connection withrelating to the Japanese master license.$14.6$20.0 million, or 5.1%6.9%, in Fiscal 2004 compared to Fiscal 2003. This decrease was primarily driven by a decrease in wholesale operating profits, restructuring charges, the decrease in Lauren and Ralph royalties from Jones following the license termination in December 2003 and the start up expenses associated with the Lauren line. These decreases were partially offset by an increase in the retail segment’s profits. Income from operations was not significantly impacted by the stronger Euro and Canadian dollar periodin Fiscal 2004 because the increased sales resulting from exchange rate fluctuations were substantially offset by a comparable increase in expenses. Income from operations for our business segments are provided below (Dollars in thousands). Fiscal Year Ended Fiscal Year Ended April 3, March 29, Increase April 3, March 29, Increase 2004 2003 (Decrease) % Change 2004 2003 (Decrease) % Change Income (Loss) from operations Income (Loss) from operations Income (Loss) from operations Wholesale $ 93,128 $ 124,476 $ (31,348 ) (25.2 %) Wholesale $ 143,080 $ 166,016 $ (22,936 ) (13.8 )% Retail 72,915 40,366 32,549 80.6 % Retail 55,717 30,707 25,010 81.4 % Licensing 127,319 138,018 (10,699 ) (7.8 %) Licensing 191,575 200,189 (8,614 ) (4.3 )% 293,362 302,860 $ (9,498 ) (3.1 %) 390,372 396,912 $ (6,540 ) (1.6 )% Less: Restructuring Charge (19,566 ) (14,443 ) Less: Unallocated Corporate expense Less: Unallocated Corporate expense (99,915 ) (91,614 ) (8,301 ) (9.1 )% Unallocated restructuring charge Unallocated restructuring charge (19,566 ) (14,443 ) Income from operations Income from operations $ 273,796 $ 288,417 Income from operations $ 270,891 $ 290,855 3636.3%36.2% for Fiscal 2004 compared to 36.5% for Fiscal 2003.$171.0$169.2 million from $174.2$175.7 million for Fiscal 2003, or 6.5%6.4% and 7.1%7.2% of net revenues, respectively. Earnings per share on a fully diluted basis decreased by $0.07$0.09 to $1.69$1.68 per share as a result of the decrease in net income for the reasons previously discussed and an increase in diluted shares outstanding of 1.7 million due to the exercise of stock options, a higher average stock price and the award of restricted stock units to executives.Fiscal 2003 Compared to Fiscal 2002Net Sales.Net sales for Fiscal 2003 were $2.189 billion, an increase of $67.0 million, or 3.2%, over net sales for Fiscal 2002. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year ended March 30, 2002, net sales would have been $2.094 billion resulting in a current fiscal year increase of 4.6%. Net sales results by segment were as follows (Dollars in thousands): Fiscal Year Ended March 29, March 30, Increase 2003 2002 (Decrease) % Change Net revenues: Wholesale $ 1,187,363 $ 1,198,060 $ (10,697 ) (0.9 %) Retail 1,001,958 924,273 77,685 8.4 % Licensing 250,019 241,374 8,645 3.6 % Total Net Revenue $ 2,439,340 $ 2,363,707 $ 75,633 3.2 % Wholesale net salesdecreased $10.7 million, or 0.9%, to $1.187 billion for Fiscal 2003 from $1.198 billion in Fiscal 2002. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year ended March 30, 2002, wholesale net sales would have37been $1.164 billion and the increase would have been 2.0%. The increase primarily resulted from the following:• Increases in the European wholesale business of $66.4 million, exclusive of foreign currency exchange rate fluctuations, which resulted primarily from continued European expansion and the inclusion of PRL Fashions’ operations for the full year, as well as;• $38.9 million from the favorable impact of Euro currency fluctuation, partially offset by a strategic streamlining of the amount of product sold to the department stores and:• the elimination of the women’s Ralph Lauren Sport and the Lauren for Men lines which contributed a decrease of $70.2 million.Retail net salesincreased $77.7 million, or 8.4%, to $1.002 billion for Fiscal 2003 from $924.3 million in Fiscal 2002. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year ended March 30, 2002, retail net sales would have been $929.4 million, resulting in a $72.5 million increase. This increase was primarily driven by the following:• a $49.4 million, or 8.4%, increase in comparable outlet store sales, partially offset by $7.1 million, or 2.3%, decrease in our total full-price stores (comparable store sales information includes both Polo Ralph Lauren stores and Club Monaco stores).• a $9.9 million increase as a result of the favorable impact of Euro currency fluctuation.• $30 million of the increase was due to worldwide store expansion. The Company opened 19 stores, net of closings during the year, ending the period with 255 stores as compared to 236 stores in the prior year. Included in these openings were 11 Polo Ralph Lauren stores, seven Club Monaco stores (including two Club Monaco Caban Home stores), and seven outlet stores (including one full line outlet store, one Polo Jeans outlet store and five European outlet stores). Offsetting these openings were the closings of three outlet stores (including two full line outlet stores and one Polo Jeans outlet store), two Club Monaco stores and one Club Monaco outlet store.Licensing Revenue.Licensing revenue increased approximately $8.6 million, or 3.6%, to $250.0 million in Fiscal 2003. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year ended March 30, 2002, licensing revenue would have been $237.4 million, resulting in a 5.3%, or $12.6 million, increase primarily driven by increased revenues from our international and product licensing partners of approximately $4.2 million and $8.5 million, respectively.Gross Profit. Gross profit dollars increased $60.8 million, or 5.3%, in Fiscal 2003 over Fiscal 2002. Gross profits as a percent of net sales increased to 49.5% in 2003 from 48.5% in 2002. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year ended March 30, 2002, gross profit percentage would have been 48.2%. The increase in gross profit rate reflected improved product performance and merchandise margins in the domestic retail businesses, partially offset by a small reduction in wholesale margins.Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) increased $67.2 million, or 8.0%, to $904.8 million in Fiscal 2003 from $837.6 million, as compared to Fiscal 2002. These expenses as a percent of net sales increased to 37.1% in 2003 from 35.4% in 2002. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year ended March 30, 2002, SG&A expenses would have been $845.0 million, or 36.3% of net revenues. The increase in Fiscal 2003 was primarily due to higher selling salaries and related costs in connection with the incremental increase in retail sales and worldwide store expansion, the expansion of the European wholesale business, the inclusion of PRL Fashions’ operations, which was acquired in October 2002, as well as the impact of foreign currency exchange rate fluctuations, primarily the strengthening of the Euro. These increases were offset by the elimination of goodwill amortization of $9.1 million as a result of the38implementation of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and the recording of a gain of approximately $5.0 million related to an assignment of the sub-lease for one store location.Restructuring Charge.During Fiscal 2003, we completed a strategic review of our European businesses and formalized our plans to centralize and more efficiently consolidate our operations. The major initiatives of our plan included the following: consolidation of our headquarters from five cities in three countries to one location; the consolidation of our European logistics operations to Italy; and the migration of all European information systems to a standard global system. We have completed the consultation process for consolidation of the headquarters and anticipate completion of the consolidation and migration during Fiscal 2004. In connection with the implementation of this plan, the Company recorded a total $14.4 million restructuring charge (approximately $12.3 million for the wholesale business and $2.1 million for the retail business). During Fiscal 2002, the Company recorded a $16.0 million restructuring charge for additional lease termination costs associated with the closure of our retail stores.Operating Income. Operating income decreased $6.4 million or 2.1% from fiscal 2002 as follows (Dollars in thousands): For the Year Ended March 29, March 30, Increase 2003 2002 (Decrease) % Change Income (Loss) from operations: Wholesale $ 124,476 $ 158,401 $ (33,925 ) (21.4 %) Retail 40,366 18,799 21,567 114.7 % Licensing 138,018 132,012 6,006 4.6 % 302,860 309,212 $ (6,352 ) (2.1 %) Less: Restructuring Charge (14,443 ) (16,000 ) Income from operations $ 288,417 $ 293,212 Wholesale operating incomedecreased $33.9 million or 21.4% from fiscal 2002. Had certain of the European subsidiaries been reported on a consistent fiscal year basis for the year end March 30, 2002, wholesale operating income would have increased as a result of the increases in sales as previously discussed and lower operating expenses.Retail operating incomeincreased $21.6 million or 114.7% primarily as a result of the sales increases discussed earlier as well as improved gross margin rates.Licensing incomeincreased $6.0 million or 4.6% primarily as a result of the sales increases discussed previously.Foreign Currency Losses (Gains). The effect of foreign currency decreased to a loss of $0.5 million in Fiscal 2003, compared to a $1.8 million gain in Fiscal 2002. These gains are unrelated to the impact of changes in the value of the dollar when operating results of our foreign subsidiaries are converted to U.S. dollars. In Fiscal 2003, these losses primarily related to approximately $3.2 million of transaction losses on the unhedged portion of our Euro debt in the first quarter of the fiscal year, which resulted from increases in the Eurodollar rate until we entered into the cross currency swap in June 2002. These losses were partially offset by $2.4 million of gains realized on the Japanese forward contracts, which we further describe in the “Liquidity and Capital Resources” section. In Fiscal 2002, the gains were derived from transaction gains on the unhedged portion of our Euro debt, which resulted from decreases in the Eurodollar rate.39Interest Expense, Net. Interest expense decreased to $13.5 million in Fiscal 2003 from $19.0 million in Fiscal 2002. This decrease was primarily due to decreased short term borrowings and long term Euro borrowings during Fiscal 2003. Approximately $2.9 million of the decrease resulted from reduced interest rates as a result of the cross currency swap, which was entered into in connection with our Euro debt in June 2002 and is further described in the “Liquidity and Capital Resources” section. The remaining decrease was primarily due to lower interest rates, during the fiscal year ended March 29, 2003. These decreases were partially offset by higher Eurodollar exchange rates, which affect the Euro denominated interest payments on the portion of the Euro debt not covered by the cross currency swap.Provision for Income Taxes.Our tax provision for Fiscal 2003 was $100.2 million as compared to $103.5 million in Fiscal 2002, a 36.5% and 37.5% effective tax rate, respectively. This decline is the result of the implementation of tax strategies.Net Income.Net income increased in Fiscal 2003 to $174.2 million from $172.5 million in Fiscal 2002, or 7.1% and 7.3% of net revenues, respectively. Diluted earnings per common share was $1.76 and $1.75 for Fiscal 2003 and Fiscal 2002, respectively. The change in diluted earnings per share resulted from the $1.7 million increase in Net income partially offset by a 0.7 million increase in the number of shares outstanding primarily as a result of the exercise of stock options and additional restricted shares.Liquidity and Capital Resources activities, including the start-up costs of bringing the “Lauren” and “Ralph” lines in house.activities. Sources of liquidity to fund ongoing and future cash requirements include cash flows from operations, cash and cash equivalents, credit facilities and other borrowings. We anticipate funding the approximately $110 million purchase price of the pending Footwear Business through the use of our cash and cash equivalents.Fiscal 2005 Compared to Fiscal 2004 Fiscal 2004 Compared to Fiscal 2003 $343.5$352.3 million in cash and cash equivalents and $277.3 million of debt outstanding compared to $343.6 million and $349.4 million of cash and cash equivalents and debt outstanding, respectively, at March 29, 2003. This represents a $72.0$80.8 million increase in our cash net of debt position over the last twelve months which is primarily attributable to the following factors: (i) reduced spending on acquisitions and investments, (ii) increased proceeds received from the exercise of stock options, (iii) partially offset by reduced cash flows from operations and an increase in Euro debt of $28.9 million as a result of the strengthening of the Euro. Additionally, capital expenditures were $123.0$126.3 million for Fiscal 2004 compared to $98.7$102.4 million in Fiscal 2003.3, 20042, 2005 was 3.8%.40$0.1$9.4 million in Fiscal 2004. The inception of the Lauren line was responsible for a $34.1 million increase and the strengthening of the Euro caused a $14.3 million increase in inventory. These increases were more than offset by reductions in inventory in our Retailretail and Men’s wholesale business as a result of improvements in our supply chain forecasting and management and reduced inventory requirements in our men’s business as a result of planned reductions in sales.$37.2$34.7 million from Fiscal 2003 primarily as a result of increases in European Value Added Tax receivables and the effect of the timing of the Fiscalfiscal year end on prepaid items.$6.0$7.5 million compared to Fiscal 2003 primarily as result of the addition of the Lauren line partially offset by reductions in our men’s line due to a decrease in inventory purchases and reductions in Europe due to the timing of year end invoice receipts.$71.7$80.6 million primarily as a result of the addition of the Lauren label,line, increases in the European Value Added Tax payable, and increases in Europe due to the timing of year end invoice receipts.$210.6$213.6 million during Fiscal 2004, compared to $269.0$286.2 million in Fiscal 2003. This $58.4$72.6 million decrease in cash flow was driven primarily by the year-over-year changes in working capital described above and the decrease in net income of $3.2$6.5 million. It is expected that the remaining liabilities of both plans will be paid throughout Fiscal 2005.$132.7$134.5 million in Fiscal 2004, as compared to $166.3$183.5 million in Fiscal 2003. Both the Fiscal 2004 and Fiscal 2003 net cash used primarily reflected capital expenditures related to retail expansion and upgrading our systems and facilities, as well as shop-within-shop expenditures. The Fiscal 2004 net cash used also reflects $5.4 million for an additional 2% equity interest in Impact21, the company that holds the sublicenses for the Polo Ralph Lauren men’s, women’s and jeans business in Japan, and an additional $3.5 million primarily for additional transaction costs to acquire a 50% interest in the Japanese master license, offset by $8.9 million of cash resulting from thetrademarks in November 2003.trademarks. Fiscal 2003 net cash used, reflects $78 million primarily for the acquisition of a 50% interest in the Japanese Master license and an 18% equity interest in Impact21, the company holding the sublicenses for the Polo Ralph Lauren men’s, women’s, and jeans business in Japan. Our anticipated capital expenditures for Fiscal 2005 approximate $143.0 million.41Fiscal 2003 compared to Fiscal 2002Credit Facilities and Other We ended Fiscal 2003 with $343.6 million in cash and equivalents and $349.4 million of debt outstanding compared to $244.7 million and $318.4 million of cash and cash equivalents and debt outstanding, respectively, at March 30, 2002. This represents a $67.8 million improvement in our debt net of cash position and was primarily attributable to changes in working capital due to the factors discussed below, partially offset by approximately $73.0 million of purchase price payments connected with our acquisition of a 50% interest in the Japanese master license and an 18% equity interest in the company which holds the sublicenses for the Polo Ralph Lauren men’s, women’s and jeans business in Japan. Capital expenditures were $98.7 million for Fiscal 2003, compared to $88.0 million in Fiscal 2002. We acquired several retail locations from certain of our licensees in Belgium, Germany and Argentina for a total purchase price of approximately $4.6 million. As of March 29, 2003, we had $100.9 million outstanding in short-term bank borrowings, of which $50.0 million was repaid in April 2003 with the remainder repaid in June 2003. Additionally, we had $248.5 million outstanding in long-term Euro debt based on the quarter-end Euro exchange rate. We were also contingently liable for $19.1 million in outstanding letters of credit primarily related to commitments for the purchase of inventory. The weighted-average interest rate on our borrowings at March 29, 2003 was 5.4%. Accounts receivable increased to $375.8 million, or 6.3% at March 29, 2003 compared to $353.6 million at March 30, 2002 due to the timing of shipments. Approximately $23.0 million of the increase resulted from currency exchange rate fluctuations, primarily the strengthening of the Euro. Improvements were made in our days sales outstanding, however, the incremental effect of these improvements was offset by the additional royalty receivables recorded in Fiscal 2003 compared to Fiscal 2002. Inventories increased $14.0 million, or 4.0%, at the end of Fiscal 2003 compared to the end of Fiscal 2002. This increase reflects the build up of certain inventory for European retail stores as part of our continued expansion. Additionally an increase of $23.7 million resulted from currency exchange rate fluctuations, primarily the strengthening of the Euro. These increases were partially offset by decreases in other business lines.Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased to $269.0 million during 2003 compared to $299.7 million in 2002. This $30.7 million decrease in cash flow was driven primarily by year-over-year changes in accounts receivable, inventories, prepaid expenses and accounts payable. During Fiscal 2003, we completed a strategic review of our European business and formalized our plans to centralize and more efficiently consolidate its business operations. In connection with the implementation of this plan, we recorded a restructuring charge of $14.4 million and had total cash outlays of approximately $3.8 million during the year ended March 29, 2003. During Fiscal 2001 and 1999 we implemented two plans: the 2001 Operational Plan and 1999 Restructuring Plan. Total cash outlays related to the 2001 Operational Plan and 1999 Restructuring Plan were $9.8 million and $2.7 million, respectively for, Fiscal 2003. As of March 29, 2003, we settled all remaining liabilities related to the 1999 Restructuring Plan. In May 2003, we settled $4.6 million of the remaining $5.2 million in liabilities related to the 2001 Operational Plan, the remaining $0.6 million was settled in Fiscal 2004.Net Cash Used in Investing Activities. Net cash used in investing activities increased to $166.3 million in Fiscal 2003, as compared to $116.0 million in Fiscal 2002. Both the Fiscal 2003 and Fiscal 2002 net cash used primarily reflected shop-within-shops and other capital expenditures related to retail expansion and upgrading our systems and facilities. The fiscal 2003 net cash used also reflects $78.0 million primarily for our acquisition of a 50% interest in the42Japanese master license and an 18% equity interest in the company which holds the sublicense for the Polo Ralph Lauren men’s, women’s, and jeans business in Japan. Fiscal 2002 net cash used reflects $23.7 million for the acquisition of PRL Fashions.Net Cash Used in Financing Activities. Net cash used in financing activities was $16.7 million in Fiscal 2003 compared to $40.3 million in Fiscal 2002. This change is primarily due to the net repayment of short-term debt of $12.0 million, the repurchase of $7.7 million of our Euro debt and the repurchase of our common stock of $4.7 million, offset by the proceeds from the issuance of common stock of $7.7 million for Fiscal 2003; compared to $52.2 million of short-term debt repayment, $10.6 million of Euro debt repurchases, $2.1 million of common stock repurchases offset by the proceeds from the issuance of common stock of $24.5 million in Fiscal 2002.period, which commenced April 1, 1998.period. The Board of Directors has extended the stock repurchase program through April 1, 2006. Shares acquired under the repurchase program will beare used for stock option programs and for other corporate purposes. As of April 3, 2004,2, 2005, we had repurchased 4.1 million shares of our Class A common stock at an aggregate cost of $77.5 million. AsOn February 1, 2005, our Board of April 3, 2004, we had approximately $21.0Directors approved an additional stock repurchase plan which allows for the repurchase of up to an additional $100 million remaining in our stock repurchase program.(our (our principal European subsidiary), and the remaining net proceeds were retained for general corporate purposes. Through Fiscal 2004,2005, we had repurchased Euro 47.7 million, or $43.6 million, based on Euro exchange rates at the time of repurchase of our outstanding Euro debt. In November 2002,terminated both our 1997 bankhad a credit facility and our 1999 senior bank credit facility and entered into a new credit facility. The 1997 bank credit facility provided for a $225.0 million revolving line of credit and matured on December 31, 2002, while the 1999 senior bank credit facility consisted of a $20.0 million revolving line of credit and an $80.0 million term loan, both of which were scheduled to mature on June 30, 2003. The new credit facility is with a syndicate of banks and consistsconsisting of a $300.0 million revolving line of credit, subject to increase to $375.0 million, which was available for direct borrowings and the issuance of letters of credit. It was scheduled to mature on November 18, 2005. On October 6, 2004, we, in substance, expanded and extended this bank credit facility by entering into a new credit agreement, dated as of that date, with JPMorgan Chase Bank, as Administrative Agent, The Bank of New York, Fleet National Bank, SunTrust Bank and Wachovia Bank National Association, as Syndication Agents, J.P. Morgan Securities Inc., as sole Bookrunner and Sole Lead Arranger, and a syndicate of lending banks that included each of the lending banks under the prior credit agreement (the “New Credit Facility”).November 18, 2005.October 6, 2009. As of April 3, 2004,2, 2005, we had no debtdirect borrowings outstanding under the new facility. BorrowingsNew Credit Facility but were contingently liable for $29.8 million in outstanding letters of credit related primarily to commitments for the purchase of inventory. We incur a financing charge of ten basis points per month on the average monthly balance of these outstanding letters of credit. Direct borrowings under this facilitythe New Credit Facility bear interest, at our option, at a rate equal to (i) the higher of (x) the weighted average overnight Federal Funds Effective Rate,funds rate, as published by the Federal Reserve Bank of New York, plus 1/2one-half of one percent, and (y) the prime commercial lending rate of JP MorganJPMorgan Chase Bank in effect from time to time, or (ii) the LIBO Rate (as defined)defined in the New Credit Facility) in effect from time to time, as adjusted for the Federal Reserve Board’s Eurocurrency Liabilities maximum reserve percentages,percentage, and a margin based on our then current credit ratings. Our 2002 bank credit facility45that weus to maintain certain covenants: • a minimum ratio of consolidated tangible net worth,Earnings Before Interest, Taxes, Depreciation, Amortization and Rent (“EBITDAR”) to Consolidated Interest Expense (as such terms are described in the New Credit Facility); and • a maximum ratio of Adjusted Debt to EBITDAR (as such terms are defined in the credit facility) ratio.New Credit Facility) to EBITDAR.credit facilityNew Credit Facility also contains covenants that, subject to specified exceptions, restrict our ability to: • incur additional debt; • incur liens and contingent liabilities; 43 • sell or dispose of our assets, including equity interests; • merge with or acquire other companies, liquidate or dissolve; • engage in businesses that are not a related line of business; • make loans, advances or guarantees; • engage in transactions with affiliates; and • make investments. credit facility,New Credit Facility, the lenders may cease making loans, terminate the credit facility,New Credit Facility, and declare all amounts outstanding to be immediately due and payable. The credit facilityNew Credit Facility specifies a number of events of default many(many of which are subject to applicable grace or cure periods,periods), including, among others, the failure to make timely principal and interest payments or to satisfy the covenants, or to maintainincluding the required financial performance requirementscovenants described above. Additionally, the agreementNew Credit Facility provides 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. As of April 3, 2004,2, 2005, the Company was in compliance with all financial and non-financial debt covenants.June 27, 2003, September 26, 2003,July 2, 2004, October 1, 2004, December 26, 200320, 2004 and April 2, 20041, 2005 were paid on July 11, 2003,16, 2004, October 10, 2003,15, 2004, January 9, 200314, 2005 and April 16, 2004,15, 2005, respectively.believeexpect that cash flow from ongoing operations and funds available under our credit facility will continue to be sufficient to fund our current level of operations, capital requirements, the stock repurchase program, cash dividends and our stock repurchase plan. However, in the event of a material acquisition, material contingencies or material adverse business developments, we may need to draw on our credit facility or other corporate activities forpotential sources of borrowing.next twelve months.credit facility and were in compliance with our covenants.Commitments463, 2004:2, 2005: Less than 1 year 1-3 years 4-5 years Thereafter Total Less than 1 Year 1-3 Years 4-5 Years Thereafter Total (Dollars in thousands) (Dollars in thousands) Inventory purchase commitments $ 250,622 $ — $ — $ — $ 250,622 $ 466,964 $ — $ — $ — $ 466,964 Long-term Euro debt — 277,345 — — 277,345 17,821 308,781 — — 326,602 Capitalized leases 1,843 2,367 — — 4,210 1,046 1,314 — — 2,360 Operating leases 107,736 195,100 168,282 419,361 890,479 121,992 235,803 200,945 580,696 1,139,436 Additional acquisition purchase price payments 7,000 — — — 7,000 15,000 — — — 15,000 Other 2,150 3,700 1,250 — 7,100 Total $ 367,201 $ 474,812 $ 168,282 $ 419,361 $ 1,429,656 $ 624,973 $ 549,598 $ 202,195 $ 580,696 $ 1,957,462 442004.2005. In addition, we have designated the entire principal of the Euro debt as a hedge of our net investment in a foreign subsidiary. As a result, changes in the fair value of the Euro debt resulting from changes in the Euro rate are reported net of income taxes in Accumulated other comprehensive income in the consolidated financial statements as an unrealized gain or loss on foreign currency hedges. On April 6, 2004 and October 4, 2004, we executed anadditional interest rate swapswaps to convert the fixed interest rate on an additional Euro 50100 million of the Eurobonds to a floating rate (EURIBOR based). After the execution of this swap,these swaps, approximately Euro 7722 million of the Eurobonds remained at a fixed interest rate.3, 2004,2, 2005, we had the following foreign exchange contracts outstanding: (i) to deliver Euro 67.194.3 million in exchange for $73.9$124.3 million through Fiscal 2005 and (ii) to deliver 8,24811,389 million Japanese Yen in exchange for $71.0$99.6 million through Fiscal 2008. At April 3, 2004,2, 2005, thelosses,gain and loss, net of taxes of $6.6$1.8 million and $6.3$8.2 million, for the Euro forward contracts and Japanese Yen forward contracts, respectively.dodid not qualify for hedge accounting under SFAS No. 133, we entered into these forward contracts to minimize the impact of foreign exchange fluctuations on the Japanese Yen denominated purchase price described in the agreements related to the purchase of a 50% interest in the Japanese master license and an 18% equity interest in the company which holds the sublicenses for the Polo Ralph Lauren men’s, women’s and jeans business in Japan, which were consummated during the fourth quarter of Fiscal 2003. We recognized $2.4 million of foreign currency gains on this transaction, which are recorded in foreign currency losses(gains)(gains) losses in the Consolidated Statements of Income. foreign currency gains or losses in connection with our Euro debt and certain short-term foreign currency contracts based on fluctuationswhen the cash flows they hedge take place. We recognized $10.9 million in foreign exchange rates. In connection with recording these contracts at fair market value, we recognizedforward losses in Fiscal 2005, and $1.9 million in foreign currency losses in Fiscal 2004 and $0.5 million in Fiscal 2003 included as a component of foreign currency losses (gains) in the Consolidated Statements of Income. The Company does We do not have any off-balance sheet financing arrangements or unconsolidated special purpose entities.45licensing revenue,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 the timing of seasonal wholesale shipments and other events affecting retail sales. Fiscal 2002 reflects the change in the fiscal year end of certain of our European subsidiaries as reported in our consolidated financial statements. See “Consolidation of European Entities — Change in Reporting Period.” In connection with our acquisition of a 50% interest in the Japanese master license and the 18% (later increased to 20%) equity interest in the company which holds the sublicenses for the Polo Ralph Lauren men’s, women’s and jeans business in Japan, results for these operations are reflected in our consolidated financial statements for Fiscal 2004.ofon Form 10-K.judgmentsjudgements as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s most critical accounting policies, discussed below, pertain to revenue recognition, accounts receivable, inventories, goodwill, other long-lived intangible assets, income taxes, accrued expenses and derivative instruments. In applying such policies, management must use some amounts that are based upon its informed judgmentsjudgements and best estimates. Estimates, by their nature, are based on judgements and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgmentjudgement of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations.Revenue Recognition Wholesale sales arewhenat the time title passes and risk of loss passesis transferred to the customer and arecustomers. Wholesale revenue is recorded net of returns, discounts, allowances and allowances.operational chargebacks. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end of seasonend-of-season allowances are based on historic trends, seasonal results, an evaluation of current economic conditions and retailer performance. The Company’sSales by our retail and outlet stores areRetail store revenue is recognized when46goods are sold to consumers, net of returns.estimated returns at the time of sale to consumers. Licensing revenue is recognizedinitially recorded based upon shipmentcontractually guaranteed minimum levels and adjusted as actual sales data is received from licensees. During the year ending April 2, 2005 and April 3, 2004, we reduced revenues and credited customer accounts for end of licensed products sold by our licensees, netseason customer allowances, operational chargebacks and returns as follows: Year Ended April 2, April 3, 2005 2004 Beginning reserve balance $ 90,269 $ 48,432 Amount expensed 265,340 213,645 Amount credited against customer accounts (256,730 ) (171,808 ) Foreign currency translation 1,122 — Ending reserve balance $ 100,001 $ 90,269 allowances.same store sales change. Stores that are closed during the fiscal year are excluded. Stores that are relocated or enlarged are also excluded until they have been in their new location for a full fiscal year.Income Taxes Accounts Receivable, Net whothat satisfy pre-defined credit criteria. Accounts receivable, net, as shown on the Consolidated Balance Sheets, is net of the following allowances and anticipated discounts.reserves.ourthe Company’s customers, and an evaluation of theas well as allowable customer markdowns and operational chargebacks, net of the expected recoveries, are included as a reduction to net sales andof sales. These reserves are part of the provision for allowances included in accounts receivable, net. These provisions result from divisional seasonal negotiations, as well as historic deduction trends net of expected recoveriesbased on current information regarding retail performance, historical experience and an evaluation of current market conditions. Should circumstances change or economic or distribution channel conditions deteriorate significantly, we may need to increaseOur historical estimates of these provisions.costs have not differed materially from actual results. (See Revenue Recognition above)Inventories The Company’sOur historical estimates of these costs have not differed materially from actual results.Goodwill, Other Intangibles, Net and Long-Lived Assets Effective March 31, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)Assets”. SFAS No. 142Assets,” requires that goodwill and intangible assets with indefinite lives no longer are to be amortized, but rather be tested, at least annually, for impairment. This pronouncement also requires that intangible assets with definitefinite lives continue to be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Goodwill represents the excess of purchase cost over the fair value of net assets of businesses acquired. Before adopting the provisions of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life, ranging from 11 to 40 years. Beginning in Fiscal 2003, consistent with the requirements of SFAS No. 142, we no longer amortize goodwill. The Company reviews goodwill annually for impairment. In addition, trademarks that are owned, that During fiscal 2005, there have been deemed to have indefinite lives, are reviewed at least annually for potential value impairment. Trademarks that are licensed by the Company from third parties are amortized over the individual terms of the respective license agreement, which approximates 10 years. Goodwill amortization expense was $9.1 million in Fiscal 2002. Accumulated goodwill amortization was $23.7 million at March 30, 2002.47We assess the carrying value of long-lived and intangible assets, with finite lives, as current facts and circumstances indicate that they may be impaired. In evaluating the fair value and future benefits of all intangible assets, we perform an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period and would recognize an impairment loss if the carrying value exceeded the expected future cash flows. The impairment loss would be measured based upon the difference between the fair value of the asset and its recorded carrying value. See Note 9 of the Notes to Consolidated Financial Statements for long-lived and intangible asset writedowns recorded in connection with our Fiscal 2001 Operational Plan and Fiscal 1999 Restructuring Plan. During Fiscal 2004, there were no material impairment losses recorded in connection with this analysis.the assessment of the carrying value of long-lived and intangible assets.Income TaxesAccrued ExpensesIncome taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” In accordance with this statement, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be settled or realized. Significant judgment is required in determining the worldwide provisions for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. It is our policy to establish provisions for taxes that may become payable in future years as a result of an examination by tax authorities. We establish the provisions based upon management’s assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax provisions are analyzed periodically (at least annually) and adjustments are made as events occur that warrant adjustments to those provisions.Accrued Expenses Company obligations are assessed based on claims experience and statistical trends, open contractual obligations, and estimates based on projections and current requirements. If these trends change significantly, then actual results would likely be impacted. Our historical estimates of these costs and our provisions have not differed materially from actual results.Derivative Instruments 48Inflation Alternative Accounting Methods The Company’sOur significant policies that involve the selection of alternative methods are accounting for stock options and inventories. • Two alternative methods for accounting for stock options are available, the intrinsic value method and the fair value method. The Company usesWe use the intrinsic value method of accounting for stock options, andaccordingly, no compensation expense has been recognized. Beginning in Fiscal 2007, we will be required to expense the fair value of stock options granted to employees (see discussion below). Under the fair value method, the determination of the pro forma amounts involves several assumptions including option life and future volatility. If the fair value method were used, diluted earnings per share for Fiscal 2004 would decrease approximately 10%. See Note 1 to the Consolidated Financial Statements. • Two alternative methods for accounting for wholesale inventories are the First-In, First-Out (“FIFO”) method and the Last-in, First-out (“LIFO”) method. The Company accountsWe account for all wholesale inventories under the FIFO method. Two alternative methods for accounting for retail inventories are the retail method and the cost method. The Company accountsWe account for all retail inventories under the cost method.The Company doesWe do not expect the issuance of SAB 104 to have a material effect on the consolidated results of operations or financial position.49May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement requires that certain financial instruments that, under previous guidance, could be accounted for as equity be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the consolidated results of operations or financial position. In April 2003,December 2004, the FASB issued SFASStaff Position (“FSP”) No. 149, “Amendment of Statement 133 on Derivative Instruments109-2, “Accounting and Hedging Activities.” This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, except asDisclosure Guidance for the provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be applied in accordance with their respective effective dates. The adoption of this pronouncement did not have a material effect onForeign Earnings Repatriation Provision within the consolidated results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements for SFAS No. 123, “Accounting for Stock-Based Compensation,” to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS No. 148 is effective for fiscal years ending after December 31, 2002. The Company does not intend to expense stock options; therefore the adoption of this statement did not have any impact on the consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement required companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company has adopted the provisions of SFAS No. 146. In January 2003, the FASB issued Financial Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities” which was amended by FIN46R in December, 2003. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46R changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest entity is called the “primary beneficiary” of that entity. FIN 46R also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46R apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46R apply to existing entities in the first fiscal year or interim period beginning after December 15, 2003. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity50was established. The adoption of FIN 46R did not have a material impact on the consolidated results of operations or financial position of the company. See Note 3 to our Consolidated Financial Statements regarding our interest in Ralph Lauren Media, LLC.In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an obligation agreement; indemnification agreements that contingently require the guarantor to make payments to an indemnified party based on changes in an underlying that is related to an asset, liability or an equity security of the indemnified party; or indirect guarantees of the indebtedness of others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements ending after December 15, 2002, and are applicable to all guarantees issued by the guarantor subject under FIN 45’s scope, including guarantees issued prior to FIN 45. The adoption of FIN 45 did not have a material effect on the consolidated results of operations or financial position.Item 7A.Quantitative and Qualitative Disclosures About Market Risk The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. We manage these exposures through operating and financing activities and, when appropriate, through the use of derivative financial instruments. Our policy allows for the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations.During Fiscal 2004, there were significant fluctuations in the value of the Euro to Dollar exchange rate. In June 2002, we entered into a cross currency rate swap to minimize the impact of foreign exchange fluctuations on the long-term Euro debt and the impact of fluctuations in the interest rate on the fair value of the long-term Euro debt. In May 2003, we terminated the cross currency rate swap, and entered into an interest rate swap, to minimize the impact of changes in the fair value of the Euro debt due to changes in EURIBOR, the benchmark interest rate. The following quantitative disclosures are based on quoted market prices and theoretical pricing models obtained through independent pricing sources for the same or similar types of financial instruments, taking into consideration the underlying terms and maturities. These quantitative disclosures do not represent the maximum possible loss or any expected loss that may occur, since actual results may differ from those estimates.Foreign Currency Exchange Rates We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies related to international subsidiaries. At April 3, 2004, we had outstanding foreign exchange contracts in Europe and Japan to purchase $144.9 million U.S. dollars through March 2004. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. We are exposed to credit-related losses if the counterparty to the financial instruments fails to perform its obligations. However, we do not expect the counterparty, which presently has high credit ratings, to fail to meet its obligations.51Our primary foreign currency exposure relates to our Euro debt. As of April 3, 2004, the fair value of our fixed Euro debt was $292.6 million, based on its quoted market price as listed on the London Stock exchange and translated using Euro exchange rates in effect as of April 3, 2004. The potential increase in fair value of our fixed rate Euro debt resulting from a hypothetical 10% adverse change in exchange rates would have been approximately $29.3 million at April 3, 2004. As of April 3, 2004, a hypothetical immediate 10% adverse change in exchange rates would have had a $1.8 million unfavorable impact over a one-year period on our earnings and cash flows.Interest RatesOur primary interest rate exposure relates to our fixed rate debt. The potential increase in fair value of our fixed rate Euro debt resulting from a hypothetical 10% adverse change in interest rates would have been approximately $4.1 million at April 3, 2004. We employ a fair value hedging strategy utilizing interest rate swaps to effectively float a portion of our interest rate exposure on our fixed rate Euro debt. On April 6, 2004, the company executed an interest rate swap to convert the fixed interest rate on €50 million of the Eurobonds to a floating rate. After the execution of this swap, approximately €77 million of Eurobonds remained at fixed interest rate.Item 8.Financial Statements and Supplementary DataSee the “Index to Consolidated Financial Statements” appearing at the end of this report on Form 10-K.Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A.Controls and Procedures Based on an evaluation as of the end of the fiscal year covered by this report under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities ExchangeAmerican Jobs Creation Act of 1934) are effective to provide reasonable assurance that information relating to the company and its subsidiaries that we are required to disclose in the reports that we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. During the last fiscal quarter covered by this annual report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.PART IIIItem 10.Directors and Executive Officers of the RegistrantInformation relating to our directors will be set forth under the captions “(Proposal 1) ELECTION OF DIRECTORSCORPORATE GOVERNANCE — Independent Committees of the Board” and “SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Company’s proxy statement for it’s 2004 annual meeting of stockholders (to be filed within 120 days after April 3, 20042004” (“the Proxy Statement”FSP No. 109-2”) and is incorporated by reference herein. Information relating to our executive officers is set forth in Item I of this report on Form 10-K under the caption “Executive Officers”.52The 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.polo.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 CompensationInformation relating to executive compensation will be set forth under the caption “EXECUTIVE COMPENSATION” in the Proxy Statement and such information is incorporated by reference herein.Item 12.Security Ownership of Certain Beneficial Owners and ManagementEquity Compensation Plan Information at April 3, 2004.The following table sets forth information as of April 3, 2004 regarding compensation plans under which the Company’s equity securities are authorized for issuance. (a) (b) (c) Number of Securities Remaining Available for Future Issuance Under Numbers of Securities to Equity Compensation be Issued upon Exercise of Plans (Excluding Outstanding Options, Weighted-Average Exercise Securities Reflected in Plan Category Warrants and Rights Price of Outstanding Options ($) Column (a)) Equity compensation plans approved by security holders 10,823,180 (1) 23.44 (2) 5,172,342 (3) Equity compensation plans not approved by security holders — — — Total 10,823,180 23.44 5,172,342 (1) Consists of 10,722,639 options to purchase shares of our Class A Common Stock and 100,541 restricted stock units that are payable solely in shares of Class A Common Stock.(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 Company’s 1997 Long-Term Stock Incentive Plan. An additional 299,149 outstanding shares of restricted stock granted under the Company’s 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 under the caption “SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT” in the Proxy Statement and such information is incorporated by reference herein.Item 13.Certain Relationships and Related Transactions The information required to be included by Item 13 of Form 10-K will be included under the caption “CERTAIN RELATIONSHIPS AND TRANSACTIONS” in the proxy statement and such information is incorporated by reference herein.53Item 14.Principal Accounting Fees and Services The information required to be included by Item 14 of Form 10-K will be included under the caption “(Proposal 2) RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS — Independent Auditor’s Fees” in the Proxy Statement and such information is incorporated by reference herein.PART IVItem 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K(a) 1, 2. Financial Statements and Schedules. See index on Page F-1. 3. Exhibits Exhibit Number Description 3 .1 Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-24733) (the “S-1”))* 3 .2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the S-1)* 10 .1(a) Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan (filed as Exhibit 10.1 to the S-1)*† 10 .1(b) Amendment to Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan (filed as Exhibit A to the Company’s DEF 14A Proxy Statement, filed June 27, 2000)*† 10 .2 Polo Ralph Lauren Corporation 1997 Stock Option Plan for Non-Employee Directors (filed as Exhibit 10.2 to the
S-1)*† 10 .3 Polo Ralph Lauren Corporation Executive Officer Annual Incentive Plan (filed as Exhibit 10.3 to the Fiscal 2000
10-K)† 10 .4 Registration Rights Agreement dated as of June 9, 1997 by and among Ralph Lauren, GS Capital Partners, L.P., GS Capital Partner PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to the S-1)* 10 .5 U.S.A. Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, and Cosmair, Inc., and letter Agreement related thereto dated January 1, 1985** (filed as Exhibit 10.4 to the S-1)* 10 .6 Restated U.S.A. License Agreement, dated January 1, 1985, between Ricky Lauren and Mark N. Kaplan, as Licensor, and Cosmair, Inc., as Licensee, and letter Agreement related thereto dated January 1, 1985** (filed as Exhibit 10.5 to the S-1)* 10 .7 Foreign Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, as Licensor, and L’Oreal S.A., as Licensee, and letter Agreements related thereto dated January 1, 1985, September 16, 1994 and October 25, 1994** (filed as Exhibit 10.6 to the S-1)* 10 .8 Restated Foreign License Agreement, dated January 1, 1985, between The Polo/ Lauren Company, as Licensor, and L’Oreal S.A., as Licensee, Letter Agreement related thereto dated January 1, 1985, and Supplementary Agreement thereto, dated October 1, 1991** (filed as Exhibit 10.7 to the S-1)* 10 .9 Amendment, dated November 27, 1992, to Foreign Design and Consulting Agreement and Restated Foreign License Agreement** (filed as Exhibit 10.8 to the S-1)* 54 Exhibit Number Description 10 .10 Design Services Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** (filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the Fiscal Year ended March 28, 1998 (the “Fiscal 1998 10-K”))* 10 .11 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** (filed as Exhibit 10-26 to the Fiscal 1998 10-K)* 10 .12 Fiscal and Paying Agency Agreement dated November 22, 1999, among Polo Ralph Lauren Corporation, its subsidiary guarantors and The Bank of New York, as fiscal and principal paying agent (filed as Exhibit 10.1 to the Form 10-Q for the quarterly period ended January 1, 2000)* 10 .13 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 .14 Amended and Restated Employment Agreement, effective April 4, 1999 between Ralph Lauren and Polo Ralph Lauren Corporation (filed as Exhibit 10.23 to the Fiscal 1999 Form 10-K)*† 10 .15 Deferred Compensation Agreement dated April 2, 1995, between F. Lance Isham and Polo Ralph Lauren, L.P. (filed as Exhibit 10.14 to the S-1)*† 10 .16 Amendment to Deferred Compensation Agreement made as of November 10, 1998, between F. Lance Isham and Polo Ralph Lauren Corporation (filed as Exhibit 10.14 to the Fiscal 1999 10-K)*† 10 .17 Amended and Restated Employment Agreement effective November 10, 1998, between F. Lance Isham and Polo Ralph Lauren Corporation (filed as Exhibit 10.16 to the Fiscal 1999 10-K)*† 10 .18 Amendment No. 1 to Amended and Restated Employment Agreement between Polo Ralph Lauren Corporation and F. Lance Isham, dated as of December 21, 2000 (filed as Exhibit 10.1 to the Form 10-Q for the quarterly period ended December 30, 2000)*† 10 .19 Employment Agreement effective April 12, 2000, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.27 to the Fiscal 2000 10-K)*† 10 .20 Employment Agreement, dated July 1, 2001, between Polo Ralph Lauren Corporation and Gerald M. Chaney (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 (File No. 333-83500))*† 10 .21 Amended and Restated Employment Agreement, dated as of September 8, 2003, between Polo Ralph Lauren Corporation and Mitchell A. Kosh (filed as Exhibit 10.2 to the Form 10-Q for the quarterly period ended September 27, 2003)*† 10 .22 Polo Ralph Lauren Corporation Profit Sharing Retirement Savings Plan as Amended and Restated Generally Effective as of March 31, 2002 (filed as Exhibit 10.32 to the Fiscal 2002 10-K)*† 10 .23 Polo Ralph Lauren Corporation Profit Sharing Retirement Savings Plan (For Hourly Employees of Fashions Outlet of America, Inc., and Subsidiaries and Polo Clothing Co., Inc.) as Amended and Restated Generally Effective as of March 31, 2002 (filed as Exhibit 10.33 to the Fiscal 2002 10-K)*† 10 .24 Consulting Agreement, dated as of March 25, 2002, between Polo Ralph Lauren Corporation and Arnold H. Aronson (filed as Exhibit 10.34 to the Fiscal 2002 10-K)*† 10 .25 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)*† 55 Exhibit Number Description 10 .26 Polo Ralph Lauren Corporation Executive Officer Annual Incentive Plan as Amended as of August 15, 2002 (filed as Exhibit 10.1 to the Form 10-Q for the quarterly period ended September 28, 2002)*† 10 .27 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 .28 Form of Credit Agreement, dated as of November 18, 2002, among Polo Ralph Lauren, as Borrower, The Lenders Party Thereto, and JP Morgan Chase Bank, as Administrative Agent, The Bank of New York, Fleet National Bank, SunTrust Bank, Wachovia Bank, N.A., as Syndication Agents, and J.P. Morgan Securities, Inc. as Sole Bookrunner and Sole Lead Arranger (filed as Exhibit 10-2 to the Form 10-Q for the quarterly period ended December 28, 2002)* 10 .29 Amendment generally effective as of March 31, 2002, to the Polo Ralph Lauren Corporation Profit Sharing Retirement Savings Plan as Amended and Restated Generally Effective as of March 31, 2002 (filed as Exhibit 10.39 to the Fiscal 2003 Form 10-K)†* 10 .30 Amendment generally effective as of March 31, 2002, to the Polo Ralph Lauren Corporation Profit Sharing Retirement Savings Plan (For Hourly Employees of Fashions Outlet of America, Inc., and Subsidiaries and Polo Clothing Co., Inc.) as Amended and Restated Generally Effective as of March 31, 2002 (filed as Exhibit 10.40 to the Fiscal 2003 Form 10-K)†* 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 Gerald M. Chaney 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 Gerald M. Chaney 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. † Exhibit is a management contract or compensatory plan or arrangement.** Portions of Exhibits 10.5-10.11 have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.56 (b) Reports on Form 8-K (i) Report on Form 8-K dated February 4, 2004, reporting the release of our results of operations for the fiscal quarter ended December 27, 2003 and attaching a copy of the press release reporting such results. The information contained in this Form 8-K, including the accompanying exhibit, was furnished under Item 12 of Form 8-K and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. (ii) Report on Form 8-K dated March 19, 2004, attaching a copy of the press release announcing rulings on motions in the Company’s litigations with Jones Apparel Group, Inc.57SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 4, 2004.POLO RALPH LAUREN CORPORATIONBy: /s/GERALD M. CHANEYGerald M. ChaneySenior Vice President of Financeand Chief Financial Officer(Principal Financial andAccounting Officer)Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.SignatureTitleDate/s/ RALPH LAURENRalph LaurenChairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)June 4, 2004/s/ ROGER N. FARAHRoger N. FarahPresident, Chief Operating Officer and DirectorJune 4, 2004/s/ GERALD M. CHANEYGerald M. ChaneySenior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)June 4, 2004/s/ ARNOLD H. ARONSONArnold H. AronsonDirectorJune 4, 2004/s/ FRANK A. BENNACK, JR.Frank A. Bennack, Jr.DirectorJune 4, 2004/s/ DR. JOYCE F. BROWNDr. Joyce F. BrownDirectorJune 4, 2004/s/ JOEL L. FLEISHMANJoel L. FleishmanDirectorJune 4, 2004/s/ RICHARD A. FRIEDMANRichard A. FriedmanDirectorJune 4, 2004/s/ F. LANCE ISHAMF. Lance IshamVice Chairman of the Board of DirectorsJune 4, 200458SignatureTitleDate/s/ JUDITH A. MCHALEJudith A. McHaleDirectorJune 4, 2004/s/ TERRY S. SEMELTerry S. SemelDirectorJune 4, 2004/s/ MYRON E. ULLMAN, IIIMyron E. Ullman, IIIDirectorJune 4, 200459POLO RALPH LAUREN CORPORATIONINDEX TO CONSOLIDATED FINANCIAL STATEMENTSPageFINANCIAL STATEMENTSReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of April 3, 2004 and March 29, 2003F-3Consolidated Statements of Income for the years ended April 3, 2004, March 29, 2003 and March 30, 2002F-4Consolidated Statements of Stockholders’ Equity for the years ended April 3, 2004, March 29, 2003 and March 30, 2002F-5Consolidated Statements of Cash Flows for the years ended April 3, 2004, March 29, 2003 and March 30, 2002F-6Notes to Consolidated Financial StatementsF-8Schedule II — Valuation and Qualifying AccountsS-1 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.F-1REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofPolo Ralph Lauren CorporationNew York, New York We have audited the accompanying consolidated balance sheets of Polo Ralph Lauren Corporation and subsidiaries (the “Company”) as of April 3, 2004 and March 29, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended April 3, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 April 3, 2004 and March 29, 2003, and the results of their operations and their cash flows for each of the three years in the period ended April 3, 2004, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Notes 1 and 6 to the consolidated financial statements, effective March 31, 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting StandardsFSP No. 142. As discussed in Note 1 to the consolidated financial statements, the Company eliminated the 90-day reporting lag for certain of its European subsidiaries. The results of operations of these subsidiaries for the period October 1, 2001 through December 29, 2001 are reflected as an adjustment to retained earnings in the consolidated financial statements for the year ended March 30, 2002./s/ DELOITTE & TOUCHE LLPNew York, New YorkJune 4, 2004F-2POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS April 3, March 29, 2004 2003 (Dollars in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 343,477 $ 343,606 Accounts receivable, net of allowances of $30,536 and $17,631 441,724 375,823 Inventories 363,691 363,771 Deferred tax assets 21,565 15,735 Prepaid expenses and other 100,862 63,615 Total current assets 1,271,319 1,162,550 Property and equipment, net 397,328 354,996 Deferred tax assets 61,579 54,386 Goodwill, net 341,603 315,559 Intangibles, net 17,640 11,400 Other assets 180,772 139,931 Total assets $ 2,270,241 $ 2,038,822 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Short-term bank borrowings $ — $ 100,943 Accounts payable 187,355 181,392 Income tax payable 77,736 55,501 Deferred tax liabilities 1,821 — Accrued expenses and other 234,218 162,511 Total current liabilities 501,130 500,347 Long-term debt 277,345 248,494 Other noncurrent liabilities 69,693 81,214 Commitments and contingencies (Note 13) Stockholders’ equity: Common Stock Class A, par value $0.01 per share; 500,000,000 shares authorized; 61,498,183 and 48,977,119 shares issued and outstanding 620 489 Class B, par value $0.01 per share; 100,000,000 shares authorized; 43,280,021 shares issued and outstanding 433 433 Class C, par value $0.01 per share; 70,000,000 shares authorized; 0 and 10,570,979 shares issued and outstanding — 106 Additional paid-in-capital 563,457 504,700 Retained earnings 927,390 776,359 Treasury Stock, Class A, at cost (4,145,800 and 4,105,932 shares) (78,975 ) (77,928 ) Accumulated other comprehensive income 23,942 10,787 Unearned compensation (14,794 ) (6,179 ) Total stockholders’ equity 1,422,073 1,208,767 Total liabilities and stockholders’ equity $ 2,270,241 $ 2,038,822 See accompanying notes to consolidated financial statements.F-3POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME Fiscal Year Ended April 3, March 29, March 30, 2004 2003 2002 (Dollars in thousands, except per share data) Net sales $ 2,380,844 $ 2,189,321 $ 2,122,333 Licensing revenue 268,810 250,019 241,374 Net revenues 2,649,654 2,439,340 2,363,707 Cost of goods sold 1,326,335 1,231,739 1,216,904 Gross profit 1,323,319 1,207,601 1,146,803 Selling, general and administrative expenses 1,029,957 904,741 837,591 Restructuring charge 19,566 14,443 16,000 Total expenses 1,049,523 919,184 853,591 Income from operations 273,796 288,417 293,212 Foreign currency losses (gains) 1,864 529 (1,820 ) Interest expense 10,000 13,502 19,033 Income before provision for income taxes and other (income) expense, net 261,932 274,386 275,999 Provision for income taxes 95,055 100,151 103,499 Other (income) expense, net (4,077 ) — — Net income $ 170,954 $ 174,235 $ 172,500 Net income per share — Basic $ 1.73 $ 1.77 $ 1.77 Net income per share — Diluted $ 1.69 $ 1.76 $ 1.75 Weighted-average common shares outstanding — Basic 98,977 98,331 97,470 Weighted-average common shares outstanding — Diluted 100,960 99,263 98,523 Dividends declared per share $ 0.20 $ — $ — See accompanying notes to consolidated financial statements.F-4POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Treasury Stock, Accumulated Common Stock Additional at cost Other Paid-In Retained Comprehensive Unearned Shares Amount Capital Earnings Shares Amount Income (Loss) Compensation Total (Dollars in thousands, except share data) 100,949,730 $ 1,009 $ 463,001 $ 430,047 3,771,806 $ (71,179 ) $ (10,529 ) $ (3,040 ) $ 809,309 Comprehensive income: Net income 172,500 �� Foreign currency translation adjustments, net of income tax benefit of $4.6 million (7,652 ) Cumulative transition adjustment, Net 4,028 Net unrealized gains and losses on hedges reclassified into earnings, net (4,875 ) Unrealized loss on hedges, net (771 ) Total comprehensive Income 163,230 Repurchases of common stock 104,700 (2,067 ) (2,067 ) Exercise of stock options 1,154,709 12 24,474 24,486 Income tax benefit from stock option exercises 2,862 2,862 Net loss of certain European subsidiaries (10/1/01 — 12/29/01) (423 ) (423 ) Restricted stock amortization 798 798 102,104,439 $ 1,021 $ 490,337 $ 602,124 3,876,506 $ (73,246 ) $ (19,799 ) $ (2,242 ) $ 998,195 Comprehensive income: Net income 174,235 Foreign currency translation adjustments, net of income tax provision of $7.5 million 47,015 Net unrealized gains and losses on hedges reclassified into earnings, net 794 Unrealized loss on hedges, net (17,223 ) Total comprehensive Income 204,821 Repurchases of common stock 229,426 (4,682 ) (4,682 ) Exercise of stock options 423,680 4 7,714 7,718 Income tax benefit from stock option exercises 1,189 1,189 Restricted stock grants 300,000 3 5,460 (5,463 ) — Restricted stock amortization 1,526 1,526 102,828,119 $ 1,028 $ 504,700 $ 776,359 4,105,932 $ (77,928 ) $ 10,787 $ (6,179 ) $ 1,208,767 Comprehensive income: Net income 170,954 Foreign currency translation adjustments, net of income tax provision of $1.8 million 45,526 Unrealized loss on hedges, net (32,371 ) Total comprehensive Income 184,109 Cash Dividend (19,923 ) (19,923 ) Repurchases of common stock 39,868 (1,047 ) (1,047 ) Exercise of stock options 1,950,085 20 40,394 40,414 Income tax benefit from stock option exercises 5,703 5,703 Restricted stock grants 5 12,660 (12,665 ) — Restricted stock amortization 4,050 4,050 104,778,204 $ 1,053 $ 563,457 $ 927,390 4,145,800 $ (78,975 ) $ 23,942 $ (14,794 ) $ 1,422,073 See accompanying notes to consolidated financial statements.F-5POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended April 3, March 29, March 30, 2004 2003 2002 (Dollars in thousands) Net income $ 170,954 $ 174,235 $ 172,500 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes (4,233 ) 8,901 21,216 Depreciation and amortization 83,189 78,645 83,919 Provision for losses on accounts receivable 2,623 1,760 2,920 Changes in other non-current liabilities (18,930 ) 3,087 (15,628 ) Provision for restructuring 19,566 14,443 16,000 Foreign currency losses (gains) 1,864 529 (1,820 ) Other 5,565 (1,152 ) 9,173 Changes in assets and liabilities, net of acquisitions: Accounts receivable (55,032 ) (7,798 ) (92,314 ) Inventories 17,227 6,365 82,721 Prepaid expenses and other (32,439 ) (19,149 ) 30,102 Other assets (37,163 ) 2,868 6,142 Accounts payable (2,296 ) (5,080 ) (11,001 ) Income taxes payable 27,658 — — Accrued expenses and other 32,053 11,320 (4,213 ) Net cash provided by operating activities 210,606 268,974 299,717 Purchases of property and equipment, net (123,026 ) (98,664 ) (88,008 ) Acquisitions, net of cash acquired (5,019 ) (30,326 ) (23,702 ) Equity interest investments (4,548 ) (47,631 ) — Purchase of trademark (7,500 ) — — Disposal of property and equipment 7,391 13,452 — Cash surrender value — officers’ life insurance — (3,100 ) (4,242 ) Net cash used in investing activities (132,702 ) (166,269 ) (115,952 ) Payment of dividends (14,847 ) — — Repurchases of common stock (1,047 ) (4,682 ) (2,067 ) Proceeds from exercise of stock options 40,414 7,718 24,486 Proceeds from (repayments of) short-term borrowings, net — 68,000 (52,166 ) Repayments of long-term debt — (7,700 ) (10,576 ) Net payments of short-term debt (100,943 ) (80,000 ) — Net cash used in financing activities (76,423 ) (16,664 ) (40,323 ) Effect of exchange rate changes on cash and cash equivalents and net investments in foreign subsidies (1,610 ) 12,832 (928 ) Net (decrease) increase in cash and cash equivalents (129 ) 98,873 142,514 Cash and cash equivalents at beginning of period 343,606 244,733 102,219 Cash and cash equivalents at end of period $ 343,477 $ 343,606 $ 244,733 See accompanying notes to consolidated financial statements.F-6POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended April 3, March 29, March 30, 2004 2003 2002 (Dollars in thousands) Cash paid for interest $ 9,396 $ 19,654 $ 20,193 Cash paid for income taxes $ 60,810 $ 65,163 $ 58,328 Fair value of assets acquired, excluding cash $ — $ 38,832 $ 49,431 Less: Cash paid — 30,326 23,702 Acquisition obligation — — 10,500 Liabilities assumed $ — $ 8,506 $ 15,229 See accompanying notes to consolidated financial statements.F-7POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except where otherwise indicated)1.Significant Accounting PoliciesPrinciples of ConsolidationThe consolidated financial statements include the accounts of Polo Ralph Lauren Corporation (“PRLC”) and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated. PRLC and its subsidiaries are collectively referred to as the “the Company”, “we,” “us,” “our” and “ourselves,” unless the content requires otherwise.Business We design, license, contract for the manufacture of, market and distribute men’s and women’s apparel, accessories, fragrances, skin care products and home furnishings. Our sales are principally to major department and specialty stores located throughout the United States and Europe. We also sell directly to consumers through full-price and outlet Polo Ralph Lauren, Ralph Lauren and Club Monaco stores located throughout the United States, Canada, Europe, South America and Asia.We are party to licensing agreements which grant the licensee exclusive rights to use our various trademarks in connection with the manufacture and sale of designated products in specified geographical areas. The license agreements typically provide for designated terms with renewal options based on achievement of specified sales targets. The agreements also require that certain minimum amounts be spent on advertising for licensed products. Additionally, as part of the licensing arrangements, each licensee is typically required to enter into a design services agreement pursuant to which design and other creative services are provided. The license and design services agreements provide for payments based on specified percentages of net sales of licensed products. Additionally, we have granted royalty-free licenses to independent parties to operate Polo stores to promote the sale of our merchandise and our licensees’ merchandise both domestically and internationally.Fiscal YearOur fiscal year ends on the Saturday nearest to March 31. All references to “Fiscal 2004” represent the 53-week fiscal year ended April 3, 2004 and references to “Fiscal 2003” and “Fiscal 2002” represent the 52-week fiscal years ended March 29, 2003 and March 30, 2002, respectively.Consolidation of European Entities — Change in Reporting Period Effective December 30, 2001, for reporting purposes the Company changed the fiscal year ends of its European subsidiaries as reported in the consolidated financial statements to the Saturday closest to March 31 to conform with the fiscal year end of the Company. Previously, certain of the European subsidiaries were consolidated and reported on a three-month lag with a fiscal year ending December 31. Accordingly, the net activity shown below for the three-month period ended December 29, 2001, for those European subsidiaries, is reported as an adjustmentF-8POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)to retained earnings in the fourth quarter of Fiscal 2002 in the accompanying financial statements. Three-months Ended December 29, 2001: (Dollars in millions) Net sales $ 49.5 Gross profit 25.5 Pre-tax loss (0.7 ) Income tax benefit 0.3 Net loss $ (0.4 ) Net income for the year ended March 30, 2002, for the consolidated Company as if the European subsidiaries remained on a three-month lag would have been $159.7 million.Use of Estimates and Critical Accounting PoliciesCritical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.Use of EstimatesCritical accounting policies are those that are most important to the portrayal of the Company’s financial condition and the results of operations, and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s most critical accounting policies, discussed below, pertain to revenue recognition, accounts receivable, inventories, goodwill, other long-lived intangible assets, income taxes, accrued expenses and derivative instruments. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Estimates by their nature are based on judgements and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods. We are not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect our financial condition or results of operations.Revenue Recognition Wholesale sales are recognized when the title and risk of loss passes to the customer and are recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end of season allowances are based on historic trends, seasonal results, an evaluation of current economic conditions and retailer performance. The Company’s historical estimates of these costs have not differed materially from actual results. Sales by our retail and outlet stores are recognized whenF-9POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)goods are sold to consumers, net of returns. Licensing revenue is recognized based upon shipment of licensed products sold by our licensees, net of allowances.Accounts Receivable, NetIn the normal course of business, we extend credit to customers, who satisfy pre-defined credit criteria. Accounts receivable, net, as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on historic trends, the financial condition of our customers and an evaluation of the economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational chargebacks, net of the expected recoveries, are included as a reduction to net sales and are part of the provision for allowances included in accounts receivable, net. These provisions result from divisional seasonal negotiations, as well as historic deduction trends net of expected recoveries, and the evaluation of current market conditions. Should circumstances change or economic or distribution channel conditions deteriorate significantly, we may need to increase these provisions.InventoriesInventories are valued at the lower of cost First-in, First-out, (“FIFO”), method, or market. We continually evaluate the composition of our inventories assessing slow-turning, ongoing product as well as prior seasons’ fashion product. Market value of distressed inventory is determined based on historical sales trends for the category of inventory involved, the impact of market trends and economic conditions. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. We review our inventory reserve position at least quarterly and adjust our estimates based on revised projections and current market conditions. If economic conditions worsen, we incorrectly anticipate trends or unexpected events occur, our estimates could be proven overly optimistic, and required adjustments could materially adversely affect future results of operations. The Company’s historical estimates of these costs have not differed materially from actual results.Goodwill, Other Intangibles and Long-Lived Assets Effective March 31, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer are to be amortized, but rather be tested at least annually for impairment. This pronouncement also requires that intangible assets with definite lives continue to be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Goodwill represents the excess of purchase cost over the fair value of net assets of businesses acquired. Before adopting the provisions of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life, ranging from 11 to 40 years. Beginning in Fiscal 2003, consistent with the requirements of SFAS No. 142, we no longer amortize goodwill. The Company reviews goodwill annually for impairment. In addition, trademarks that are owned that have been deemed to have indefinite lives are reviewed at least annually for potential impairment. Trademarks that are licensed by the Company from third parties are amortized overF-10POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the individual terms of the respective license agreement, which approximates 10 years. Goodwill amortization expense was $9.1 million in Fiscal 2002. Accumulated goodwill amortization was $23.7 million at March 30, 2002.We assess the carrying value of long-lived and intangible assets, with finite lives, as current facts and circumstances indicate that they may be impaired. In evaluating the fair value and future benefits of all intangible assets, we perform an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period and would recognize an impairment loss if the carrying value exceeded the expected future cash flows. The impairment loss would be measured based upon the difference between the fair value of the asset and its recorded carrying value. See Note 9 for long-lived and intangible asset writedowns recorded in connection with our Fiscal 2001 Operational Plan and Fiscal 1999 Restructuring Plan. During Fiscal 2004, there were no material impairment losses recorded in connection with this analysis.Income TaxesIncome taxes are accounted for109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes.Taxes,” In accordance with this statement,respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences betweenliability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial statement carrying amountsreporting period of existing assetsenactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. We are currently evaluating the impact of FSP No. 109-2 on our consolidated financial statements.liabilities and their respective tax basis, as measured by enacted tax rates that are expected to be in effectrecognized in the periods when the deferred tax assets and liabilities are expected toincome statement. This proposed statement would be effective for awards granted, modified or settled or realized. Significant judgment is required in determining the worldwide provisions for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. It is our policy to establish provisions for taxes that may become payable in futurefiscal years as a result of an examination by tax authorities.beginning after June 15, 2005. We establish the provisions based upon management’s assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax provisions are analyzed periodically (at least annually) and adjustments are made as events occur that warrant adjustments to those provisions.Accrued ExpensesAccrued expenses for employee insurance, workers’ compensation, profit sharing, contracted advertising, professional fees, and other outstanding Company obligations are assessed based on claims experience and statistical trends, open contractual obligations, and estimates based on projections and current requirements. If these trends change significantly, then actual results would likely be impacted. Our historical estimates of these costs and our provisions have not differed materially from actual results.Derivative Instruments SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, requires that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability and measured at its fair value. The statement also requires that changes in the derivative’s fair value be recognized currently in earnings in either income from continuing operations or Accumulated other comprehensive income (loss), depending on whether the derivative qualifies for hedge accounting treatment.F-11POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We use foreign currency forward contracts for the specific purpose of hedging the exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by our European entity, royalty, payments from our Japanese entity, and other specific activities. These instruments are designated as cash flow hedges and, in accordance with SFAS No. 133, to the extent the hedges are highly effective, the changes in fair value are included in Accumulated other comprehensive income (loss), net of related tax effects, with the corresponding asset or liability recorded in the balance sheet. The ineffective portion of the cash flow hedge, if any, is recognized in current-period earnings. Amounts recorded in Accumulated other comprehensive income (loss) are reflected in current-period earnings when the hedged transaction affects earnings. If fluctuations in the relative value of the currencies involved in the hedging activities were to move dramatically, such movement could have a significant impact on our results of operations. We are not aware of any reasonably likely events or circumstances, which would result in different amounts being reported that would materially affect our financial condition or results of operations. Hedge accounting requires that at the beginning of each hedge period, we justify an expectation that the hedge will be highly effective. This effectiveness assessment involves an estimation of the probability of the occurrence of transactions for cash flow hedges. The use of different assumptions and changing market conditions may impact the results of the effectiveness assessment and ultimately the timing of when changes in derivative fair values and underlying hedged items are recorded in earnings.We hedge our net investment position in Euro functional subsidiaries by borrowing directly in foreign currency and designating a portion of foreign currency debt as a hedge of net investments. Under SFAS No. 133, changes in the fair value of these instruments are immediately recognized in foreign currency translation, a component of Accumulated other comprehensive income (loss), to offset the change in the value of the net investment being hedged.InflationThe rate of inflation over the past few years has not had a significant impact on our sales or profitability.Alternative Accounting Methods In certain instances, accounting principles generally accepted in the United States allow for the selection of alternative accounting methods. The Company’s significant policies that involve the selection of alternative methods are accountingaccount for stock options and inventories.• Two alternative methods for accounting for stock options are available, the intrinsic value method and the fair value method. The Company uses the intrinsic value method of accounting for stock options, and accordingly, no compensation expense has been recognized. Under the fair value method, the determination of the pro forma amounts involves several assumptions including option life and future volatility. If the fair value method were used, diluted earnings per share for 2004 would decrease approximately 10%.• Two alternative methods for accounting for inventories are the First-in, First out (“FIFO”) method and the last-in, first-out (“LIFO”) method. The Company accounts for all inventories under the FIFO method. Two alternative methods for accounting for retail inventories are the retail method and the cost method. The Company accounts for all retail inventories under the cost method.F-12POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Other Significant Accounting PoliciesCash and Cash EquivalentsCash and cash equivalents include all highly liquid investments with an original maturityunder APB No. 25. The pro forma impact of three months or less, including investments in debt securities. Our investments in debt securities are diversified among high-credit quality securities in accordance with our risk management policy and primarily include commercial paper and money market funds.Property, Equipment, Depreciation and AmortizationProperty and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the related assets on a straight-line basis. The range of useful lives is as follows: buildings — 37.5 years; furniture and fixtures and machinery and equipment — 3 to 10 years. Leasehold improvements are amortizedexpensing options, valued using the straight-line method overBlack Scholes valuation model, is disclosed in Note 1 of Notes to Consolidated Financial Statements. The Company is currently researching the lesser ofappropriate valuation model to use for stock options. In connection with the term of the related lease or the estimated useful life. Major additions and betterments are capitalized, and repairs and maintenance are charged to operations in the period incurred. We capitalize our share of the cost of outfitting shop-within-shop fixed assets within furniture and fixtures. These assets are amortized using the straight-line method over their estimated useful lives of 3 to 5 years.Officers’ Life Insurance We maintain whole life insurance policies on several of our senior executives. These policies are recorded at their cash surrender value. Additionally we have policies with split dollar arrangements which are recorded at the lesser of their cash surrender value or premiums paid. Amounts recorded under both types of policies aggregated $50.2 million and $48.8 million at April 3, 2004 and March 29, 2003, respectively and are included in other assets in the accompanying consolidated balance sheets.During Fiscal 2003, the Company ceased paying premiums on split dollar life insurance policies related to officers and terminated certain split dollar arrangements. As of April 3, 2004, $2.1 million of split dollar policies had either been surrendered to the insurance company for cash or bought out by the related employee.Deferred Rent ObligationsWe account for rent expense under noncancelable operating leases with scheduled rent increases and landlord incentives on a straight-line basis over the lease term. The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred liability. Unamortized deferred rent obligations amounted to $45.4 million and $47.2 million at April 3, 2004 and March 29, 2003, respectively and are included in Accrued expenses and Other, and other noncurrent liabilities in the accompanying consolidated balance sheets.Other Comprehensive Income Other comprehensive income is recorded net of taxes and is reflected in the consolidated statements of stockholders’ equity. Other comprehensive income consists of unrealized gains or losses on hedges and foreign currency translation adjustments.F-13POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Financial Instruments From time to time, we use derivative financial instruments to reduce our exposure to changes in foreign exchange and interest rates. While these instruments are subject to risk of loss from changes in exchange or interest rates, those losses generally would be offset by gains on the related exposure. The accounting for changes in the fair value of a derivative is dependent upon the intended use of the derivative. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as Amended and Interpreted,” requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative’s fair value be recognized currently in earnings in either income (loss) from continuing operations or accumulated other comprehensive income (loss), depending on the timing and designated purpose of the derivative.Note 12 further describes the derivative instruments we are party to and the related accounting treatment. Historically, we have entered into interest rate swap agreements and forward foreign exchange contracts, which qualify as cash flow hedges under SFAS No. 133. In accordance with SFAS No. 133, we have recorded the fair value of these derivatives at April 1, 2001, and the resulting net unrealized gain, after taxes, of approximately $4.0 million in other comprehensive income as a cumulative transition adjustment. We have also designated our Euro debt as a hedge of our net investment in a foreign subsidiary. During Fiscal 2004, we have entered into various forward exchange contracts that qualified as hedges on inventory purchases and royalty payments.Foreign Currency Transactions and TranslationsThe financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at each year end. Results of operations are translated at the average rate of exchange prevailing throughout the period. Translation adjustments arising from differences in exchange rates from period to period are included in other comprehensive income, net of taxes, except for certain foreign-denominated debt. Gains and losses on translation of intercompany loans with foreign subsidiaries of a long-term investment nature are also included in this component of stockholders’ equity. We have designated our Euro debt as a hedge of our net investment in a foreign subsidiary. Prior to fully designating our Euro debt as a hedge, transaction gains or losses resulting from changes in the Eurodollar rate were recorded in income and amounted to $3.2 million in Fiscal 2003. The gain of the Japanese Yen forward contracts, that did not qualify for hedge accounting, amounted to $2.4 million in Fiscal 2003. Gains and losses from other foreign currency transactions are included in operating results and were not material.Cost of Goods Sold and Selling Expenses Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, import costs, as well as reserves for shrinkage. The costs of selling the merchandise, including preparing the merchandise for sale, such as picking, packing, warehousing and order charges, are included in selling, general and administrative expenses (“SG&A”).F-14POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Shipping and Handling CostsWe reflect shipping and handling costs as a component of SG&A expenses in the consolidated statements of income. The shipping and handling costs approximated $61.0 million, $59.9 million and $57.4 million in Fiscal 2004, 2003 and 2002, respectively. As a percent of revenues, they represented 2.6%, 2.7% and 2.7% in Fiscal 2004, 2003 and 2002, respectively. We bill our wholesale customers for shipping and handling costs and record such revenues in net sales upon shipment.AdvertisingWe expense the production costs of advertising, marketing and public relations expenses upon the first showing of the related advertisement. We expense the costs of advertising paid to customers under cooperative advertising programs when the related advertisements are run. Total advertising expenses, including cooperative advertising, included within SG&A expenses amounted to $112.3 million, $92.8 million and $79.8 million in Fiscal 2004, 2003 and 2002, respectively.Net Income Per ShareBasic net income per share was calculated by dividing net income by the weighted-average number of shares outstanding during the period, excluding any potential dilution. Diluted net income per share was calculated similarly but includes potential dilution from the exercise of stock options and awards. The difference between the basic and diluted weighted-average shares outstanding is due to the dilutive effect of stock options, restricted stock units and restricted stock awards issued under our stock option plans, which were 857,266 and 932,428, and 1,052,376 shares for Fiscal 2004, 2003 and 2002, respectively.Stock Options We use the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and have adopted the disclosure-only provisionsissuance of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition123R, the Securities and Disclosure.” Accordingly, no compensation cost has been recognized for fixed stock option grants. Had compensation costs for the Company’s stock option grants been determined based on the fair value at the grant dates for awards under these plans in accordance with SFAS No. 123, the Company’s net income and earnings per shareF-15POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)would have been reduced to the proforma amounts as follows (Dollars in thousands, except per share data): Fiscal Year Ended April 3, March 29, March 30, 2004 2003 2002 Net income as reported $ 170,954 $ 174,235 $ 172,500 Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax 16,576 16,988 17,009 Pro forma net income $ 154,378 $ 157,247 $ 155,491 Net income per share as reported — Basic $ 1.73 $ 1.77 $ 1.77 Diluted $ 1.69 $ 1.76 $ 1.75 Pro forma net income per share — Basic $ 1.56 $ 1.60 $ 1.60 Diluted $ 1.53 $ 1.58 $ 1.58 For this purpose, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in Fiscal 2004, 2003 and 2002, respectively: expected volatility of 40.4%, 47.2% and 47.0%; risk-free interest rates of 2.56%, 3.69% and 4.65%; expected lives of 7.5 years, 5.2 years and 6.0 years; and a dividend of $0.20, $0.00 and $0.00.ReclassificationsFor comparative purposes, certain prior period amounts have been reclassified to conform to the current period’s presentation.2.Recent Accounting Pronouncements In December 2003, The Securities Exchange Commission issued Staff Accounting Bulletin No. 104number 107 (“SAB 104”107”), “Revenue Recognition”. in March of 2005. SAB 104 expands previously107 provides implementation guidance for companies to use in their adoption of SFAS 123R. We are currently evaluating the effect of SFAS 123R and SAB 107 on our financial statements with the intent of implementing this standard in Fiscal 2007.guidanceSFAS 153, “Exchanges of Nonmonetary Assets.” SFAS 153 is an amendment of Accounting Principles Board Opinion 29, “Accounting for Nonmonetary Transactions,” and eliminates certain narrow differences between APB 29 and international accounting standards. SFAS 153 is effective for fiscal periods beginning on the subjector after June 15, 2005. The adoption of Revenue Recognition and provides specific criteria which must be fulfilled to permit the recognition of revenue from transactions. The Company doesSFAS 153 is not expect the issuance of SAB 104expected to have a material effectimpact on our financial statements.consolidated results of operations or financial position. In May 2003, the Financial Accounting Standards Board (“FASB”)FASB issued SFAS No. 150,152, “Accounting for Certain Financial Instruments with CharacteristicsReal Estate Time Sharing Transactions.” SFAS 152 is an amendment of both LiabilitiesSFAS 66 and Equity.” This statement67 and generally requires that certain financial instruments that, under previous guidance, couldreal estate time sharing transactions be accounted for as equity be classified as liabilities in statements of financial position. Most of the guidance innon retail land sales. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the consolidated results of operations or financial position. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, except as for the provisions that relate to SFAS No. 133F-16POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be applied in accordance with their respective effective dates. The adoption of this pronouncement did not have a material effect on the consolidated results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements for SFAS No. 123, “Accounting for Stock-Based Compensation,” to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS No. 148152 is effective for fiscal years endingbeginning on or after December 31, 2002.June 15, 2005. The Company does not intend to expense stock options; therefore the adoption of this statement didSFAS 152 is not expected to have anya material impact on the consolidatedour financial position or results of operations.June 2002,November 2004, the FASB issued SFAS 151, “Inventory costs.” SFAS 151 is an amendment of Accounting Research Board Opinion number 43 and sets standards for the treatment of abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS 151 is effective for fiscal years beginning after June 15, 2004. We are currently evaluating the impact of SFAS 151 on our financial statements.146,04-01 (“EITF 04-01”) “Accounting for Costs Associated with Exit or Disposal Activities.Pre-existing Relationships between the Parties to a Business Combination.” This statement required companiesEITF 04-01 addresses the appropriate accounting treatment for portions of the acquisition costs of an entity which may be deemed to recognize costs associated with exit or disposal activities when they are incurred rather than at the dateapply to Elements of a commitmentpre-existing business relationship between the acquiring company and the target company. EITF 04-01 is effective for combinations consummated after October 2004. It is therefore applicable to an exit or disposal plan. Examplesthe pending Footwear acquisition discussed in Note 23. Historically, we had not assigned any value to pre-existing business relationships reacquired in purchase transactions. The adoption of costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The CompanyEITF 04-01 has adopted the provisions of SFAS No. 146.Item 7A. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Rates Interest Rates Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Equity Compensation Plan Information at April 2, 2005. (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 10,503,190 (1) $ 25.68 (2) 8,772,226 (3) Equity compensation plans not approved by security holders — — — Total 10,503,190 $ 25.68 8,772,226 (1) Consists of 9,626,000 options to purchase shares of our Class A Common Stock and 877,190 restricted stock units that are payable solely in shares of Class A Common Stock. Does not include 284,574 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 Company’s Amended and Restated 1997 Long-Term Stock Incentive Plan or 1997 stock option plan for non-employee directors. An additional 284,574 outstanding shares of restricted stock granted under the Company’s Amended and Restated 1997 Long-Term Stock Incentive Plan that remain subject to forfeiture are not reflected in column (c). Item 13. Certain Relationships and Related Transactions Item 14. Principal Accounting Fees and Services Item 15. Exhibits and Financial Statement Schedules (a) 1, 2. Financial Statements and Schedules. See index on Page F-1. Exhibit Number Description 3 .1 Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-24733) (the “S-1”))* 3 .2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the S-1)* 10 .1 Polo Ralph Lauren Corporation 1997 Stock Option Plan for Non-Employee Directors (filed as Exhibit 10.2 to the S-1)*† 10 .2 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 .3 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 .4 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 .5 Foreign Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, as Licensor, and L’Oreal S.A., as Licensee, and letter Agreements related thereto dated January 1, 1985, September 16, 1994 and October 25, 1994** (filed as Exhibit 10.6 to the S-1)* 10 .6 Restated Foreign License Agreement, dated January 1, 1985, between The Polo/Lauren Company, as Licensor, and L’Oreal S.A., as Licensee, Letter Agreement related thereto dated January 1, 1985, and Supplementary Agreement thereto, dated October 1, 1991** (filed as Exhibit 10.7 to the S-1)* 10 .7 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 .8 Design Services Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** (filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the Fiscal Year ended March 28, 1998 (the “Fiscal 1998 10-K”))* 10 .9 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** (filed as Exhibit 10-26 to the Fiscal 1998 10-K)* Exhibit Number Description 10 .10 Fiscal and Paying Agency Agreement dated November 22, 1999, among Polo Ralph Lauren Corporation, its subsidiary guarantors and The Bank of New York, as fiscal and principal paying agent (filed as Exhibit 10.1 to the Form 10-Q for the quarterly period ended January 1, 2000)* 10 .11 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 .12 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 .13 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 .14 Non-Qualified Stock Option Agreement, dated as of June 8, 2004, between Polo Ralph Lauren Corporation and Ralph Lauren† 10 .15 Restricted Stock Unit Award Agreement, dated as of June 8, 2004, between Polo Ralph Lauren Corporation and Ralph Lauren† 10 .16 Polo Ralph Lauren Corporation Executive Officer Annual Incentive Plan as Amended as of August 14, 2003 (filed as Exhibit 10.1 to the Form 10-Q for the quarterly period ended September 27, 2003)*† 10 .17 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 .18 Restricted Stock Unit Award Agreement, dated as of July 1, 2004, between Polo Ralph Lauren Corporation and Roger N. Farah† 10 .19 Restricted Stock Award Agreement, dated as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah† 10 .20 Non-Qualified Stock Option Agreement, dated as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah† 10 .21 Deferred Compensation Agreement, dated as of September 19, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah† 10 .22 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 .23 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 .24 Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004 (the “Stock Incentive Plan”) (filed as Exhibit 99.1 to the Form 8-K dated August 12, 2004)*† 10 .25 Restricted Performance Share Unit Award Overview containing the standard terms of restricted performance share awards under the Stock Incentive Plan† 10 .26 Stock Option Award Overview — U.S. containing the standard terms of stock option award under the Stock Incentive Plan† 10 .27 Credit Agreement, dated as of October 6, 2004, by and among the Company, JP Morgan Chase Bank, as Administrative Agent, The Bank of New York, Fleet National Bank, SunTrust Bank and Wachovia Bank National Association, as Syndication Agents, J.P.Morgan Securities Inc., as Sole Bookrunner and Sole Lead Arranger, and a Syndicate of Lending Banks (filed as Exhibit 99.1 to the Form 8-K dated October 6, 2004)*† 10 .28 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)*† Exhibit Number Description 10 .29 Employment Agreement, dated January 3, 2005, between Polo Ralph Lauren Corporation and Tracey T. Travis (filed as Exhibit 10.1 to the Company’s 10-Q for the quarter ended January 1, 2005))*† 10 .30 Amended and Restated Employment Agreement, dated as of September 8, 2003, between Polo Ralph Lauren Corporation and Mitchell A. Kosh (filed as Exhibit 10.2 to the Form 10-Q for the quarterly period ended September 27, 2003)*† 10 .31 Consulting Agreement, dated as of March 25, 2002, between Polo Ralph Lauren Corporation and Arnold H. Aronson (filed as Exhibit 10.34 to the Fiscal 2002 10-K)*† 10 .32 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)* 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 * Incorporated herein by reference. † is a 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. POLO RALPH LAUREN CORPORATION By: /s/TRACEY T. TRAVIS Tracey T. Travis Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Signature Title Date /s/RALPH LAUREN
Ralph LaurenChairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)June 30, 2005 /s/ROGER N. FARAH
Roger N. FarahPresident, Chief Operating Officer
and DirectorJune 30, 2005 /s/TRACEY T. TRAVIS
Tracey T. TravisSenior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)June 30, 2005 /s/ARNOLD H. ARONSON
Arnold H. AronsonDirector June 30, 2005 /s/FRANK A. BENNACK, JR.
Frank A. Bennack, Jr.Director June 30, 2005 /s/DR. JOYCE F. BROWN
Dr. Joyce F. BrownDirector June 30, 2005 /s/JUDITH A. MCHALE
Judith A. McHaleDirector June 30, 2005 /s/MYRON E. ULLMAN, III
Myron E. Ullman, IIIDirector June 30, 2005 Page Management’s Report on Responsibility for Financial Statements F-2 Reports of Independent Registered Public Accounting Firm F-3 Consolidated Balance Sheets as of April 2, 2005 and April 3, 2004 (as restated) F-6 Consolidated Statements of Income for the year ended April 2, 2005 and for the years ended April 3, 2004 and March 29, 2003 (as restated) F-7 Consolidated Statements of Stockholders’ Equity for the year ended April 2, 2005 and for the years ended April 3, 2004 and March 29, 2003 (as restated) F-8 Consolidated Statements of Cash Flows for the year ended April 2, 2005 and for the years ended April 3, 2004 and March 29, 2003 (as restated) F-9 Notes to Consolidated Financial Statements F-10 Schedule II — Valuation and Qualifying Accounts F-44 /s/ RALPH LAUREN /s/ TRACEY T. TRAVIS Ralph Lauren Tracey T. Travis Chairman and Chief Executive Officer Senior Vice President and Chief Financial Officer April 2, April 3, 2005 2004 (As Restated See Note 2) (Dollars in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 350,485 $ 352,335 Accounts receivable, net of allowances of $111,042 and $97,292 455,682 441,724 Inventories 430,082 373,170 Deferred tax assets 74,821 21,565 Prepaid expenses and other 102,693 98,357 Total current assets 1,413,763 1,287,151 Property and equipment, net 487,894 408,741 Deferred tax assets 35,973 65,542 Goodwill, net 558,858 341,603 Intangibles, net 46,991 17,640 Other assets 183,190 176,875 Total assets $ 2,726,669 $ 2,297,552 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 184,394 $ 188,919 Income tax payable 72,148 77,736 Deferred tax liabilities — 1,821 Accrued expenses and other 365,868 236,724 Total current liabilities 622,410 505,200 Long-term debt 290,960 277,345 Other noncurrent liabilities 137,591 99,560 Commitments and contingencies (Note 14) Stockholders’ equity: Common Stock Class A, par value $0.01 per share; 500,000,000 shares authorized; 64,016,034 and 61,498,183 shares issued and outstanding 652 620 Class B, par value $0.01 per share; 100,000,000 shares authorized; 43,280,021 shares issued and outstanding 433 433 Additional paid-in-capital 664,279 563,457 Retained earnings 1,090,310 921,602 Treasury Stock, Class A, at cost (4,177,600 and 4,145,800 shares) (80,027 ) (78,975 ) Accumulated other comprehensive income 29,973 23,104 Unearned compensation (29,912 ) (14,794 ) Total stockholders’ equity 1,675,708 1,415,447 Total liabilities and stockholders’ equity $ 2,726,669 $ 2,297,552 Fiscal Year Ended April 2, April 3, March 29, 2005 2004 2003 (As Restated (As Restated See Note 2) See Note 2) (Dollars in thousands, except per share data) Net sales $ 3,060,685 $ 2,380,844 $ 2,189,321 Licensing revenue 244,730 268,810 250,019 Net revenues 3,305,415 2,649,654 2,439,340 Cost of goods sold 1,620,869 1,326,335 1,231,739 Gross profit 1,684,546 1,323,319 1,207,601 Selling, general and administrative expenses 1,382,520 1,032,862 902,303 Restructuring charge 2,341 19,566 14,443 Total expenses 1,384,861 1,052,428 916,746 Income from operations 299,685 270,891 290,855 Foreign currency (gains) losses (6,072 ) 1,864 529 Interest expense 10,964 12,693 19,075 Interest income (4,573 ) (2,693 ) (5,573 ) Income before provision for income taxes and other expense (income), net 299,366 259,027 276,824 Provision for income taxes 107,336 93,875 101,141 Other expense (income), net 1,605 (4,077 ) — Net income $ 190,425 $ 169,229 $ 175,683 Net income per share — Basic $ 1.88 $ 1.71 $ 1.79 Net income per share — Diluted $ 1.83 $ 1.68 $ 1.77 Weighted-average common shares outstanding — Basic 101,519 98,977 98,331 Weighted-average common shares outstanding — Diluted 104,010 100,960 99,263 Dividends declared per share $ 0.20 $ 0.20 $ — Accumulated Other Common Stock Additional Treasury Stock at Cost Comprehensive Paid-In Retained Income Unearned Shares Amount Capital Earnings Shares Amount (Loss) Compensation Total (Dollars in thousands, except share data) 102,104,439 $ 1,021 $ 490,337 $ 602,124 3,876,506 $ (73,246 ) $ (19,799 ) $ (2,242 ) $ 998,195 Prior period adjustments — — — (5,507 ) — — 343 — (5,164 ) 102,104,439 $ 1,021 $ 490,337 $ 596,617 3,876,506 $ (73,246 ) $ (19,456 ) $ (2,242 ) $ 993,031 Comprehensive income: 175,683 47,551 Net unrealized gains and losses on hedges reclassified into earnings, net 794 Unrealized loss on hedges, net (17,223 ) Total comprehensive income 206,805 Repurchases of common stock 229,426 (4,682 ) (4,682 ) Exercise of stock options 423,680 4 7,714 7,718 Income tax benefit from stock option exercises 1,189 1,189 Restricted stock grants 300,000 3 5,460 (5,463 ) — Restricted stock amortization 1,526 1,526 102,828,119 $ 1,028 $ 504,700 $ 772,300 4,105,932 $ (77,928 ) $ 11,666 $ (6,179 ) $ 1,205,587 Comprehensive income: 169,225 43,809 Unrealized loss on hedges, net (32,371 ) Total comprehensive income 180,663 Cash Dividend (19,923 ) (19,923 ) Repurchases of common stock 39,868 (1,047 ) (1,047 ) Exercise of stock options 1,950,085 20 40,394 40,414 Income tax benefit from stock option exercises 5,703 5,703 Restricted stock grants 5 12,660 (12,665 ) — Restricted stock amortization 4,050 4,050 104,778,204 $ 1,053 $ 563,457 $ 921,602 4,145,800 $ (78,975 ) $ 23,104 $ (14,794 ) $ 1,415,447 Comprehensive income: Net income 190,425 Foreign currency translation adjustments, net of income tax provision of $8.7 million 11,322 Unrealized loss on hedges, net (4,453 ) Total comprehensive income 197,294 Cash Dividend (21,717 ) (21,717 ) Repurchases of common stock 31,800 (1,052 ) (1,052 ) Exercise of stock options 2,443,076 25 54,256 54,281 Income tax benefit from stock option exercises 18,604 18,604 Restricted stock grants 75,000 7 27,962 (27,969 ) — Restricted stock amortization 12,851 12,851 107,296,280 $ 1,085 $ 664,279 $ 1,090,310 4,177,600 $ (80,027 ) $ 29,973 $ (29,912 ) $ 1,675,708 Fiscal Year Ended April 2, April 3, March 29, 2005 2004 2003 (As Restated (As Restated See Note 2) See Note 2) (Dollars in thousands) Net income $ 190,425 $ 169,229 $ 175,683 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 10,103 (5,095 ) 9,891 Depreciation and amortization 103,633 85,635 80,618 Provision for losses on accounts receivable 6,020 2,623 1,760 Stock compensation expenses 12,851 4,050 1,526 Tax benefit from stock option exercises 18,604 5,703 1,189 Changes in other non-current liabilities 26,239 (15,524 ) 1,445 Loss on disposal of property and equipment 7,700 7,391 13,452 Provision for restructuring — 19,566 14,443 Foreign currency (gains) losses (11,637 ) (4,398 ) 529 Changes in assets and liabilities, net of acquisitions: Accounts receivable (16,096 ) (56,581 ) (7,798 ) Inventories (23,530 ) 14,118 6,365 Prepaid expenses and other 10,470 (30,741 ) (21,347 ) Other assets (8,352 ) (29,515 ) 2,868 Accounts payable (6,632 ) 1,382 (5,080 ) Income taxes payable (40,641 ) 22,275 — Accrued expenses and other 102,815 23,490 10,644 Net cash provided by operating activities 381,972 213,608 286,188 Purchases of property and equipment, net (174,138 ) (126,250 ) (102,426 ) Acquisitions and consolidation of RL Media, net of cash acquired (243,248 ) 3,839 (30,326 ) Equity interest investments — (4,548 ) (47,631 ) Purchase of trademark — (7,500 ) — Cash surrender value — officers’ life insurance — — (3,100 ) Net cash used in investing activities (417,386 ) (134,459 ) (183,483 ) Payment of dividends (21,718 ) (14,847 ) — Repurchases of common stock (1,052 ) (1,047 ) (4,682 ) Proceeds from exercise of stock options 54,281 40,414 7,718 Proceeds from short-term borrowings, net — — 68,000 Repayments of long-term debt — — (7,700 ) Net payments of short-term debt — (100,943 ) (80,000 ) Net cash provided by (used in) financing activities 31,511 (76,423 ) (16,664 ) Effect of exchange rate changes on cash and cash equivalents 2,053 6,003 12,832 Net (decrease) increase in cash and cash equivalents (1,850 ) 8,729 98,873 Cash and cash equivalents at beginning of period 352,335 343,606 244,733 Cash and cash equivalents at end of period $ 350,485 $ 352,335 $ 343,606 Cash paid for interest $ 10,125 $ 10,164 $ 19,654 Cash paid for income taxes $ 107,745 $ 60,810 $ 65,163 Fair value of assets acquired, excluding cash $ 273,915 $ — $ 38,832 Less: Cash paid 241,890 — 30,326 Acquisition obligation 20,000 — — Liabilities assumed $ 12,025 $ — $ 8,506 1. Significant Accounting Policies Principles of Consolidation Business Fiscal Year Use of Estimates Revenue Recognition Year Ending April 2, April 3, 2005 2004 Beginning reserve balance $ 90,269 $ 48,432 Amount expensed 265,340 213,645 Amount credited against customer accounts (256,730 ) (171,808 ) Foreign currency translation 1,122 — Ending reserve balance $ 100,001 $ 90,269 Income Taxes Accounts Receivable, Net Inventories Goodwill, Other Intangibles, Net and Long-Lived Assets Inflation Cash and Cash Equivalents Property and Equipment, Net Officers’ Life Insurance Deferred Rent Obligations Other Comprehensive Income Financial Instruments Foreign Currency Transactions and Translations Cost of Goods Sold and Selling Expenses Shipping and Handling Costs Advertising Net Income Per Share Stock Options Fiscal Year Ended April 2, April 3, March 29, 2005 2004 2003 Net income as reported $ 190,425 $ 169,229 $ 175,683 Add: Stock-based compensation expense included in net income, net of tax 8,160 2,580 969 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax 21,821 19,156 17,957 Pro forma net income $ 176,764 $ 152,653 $ 158,695 Net income per share as reported — Basic $ 1.88 $ 1.71 $ 1.79 Diluted $ 1.83 $ 1.68 $ 1.77 Pro forma net income per share — Basic $ 1.74 $ 1.54 $ 1.61 Diluted $ 1.70 $ 1.51 $ 1.60 Reclassifications 2. Restatement of Previously Issued Financial Statements April 3, 2004 As Lease Previously Accounting RL Media Reported Adjustments Consolidation As Restated Cash and cash equivalents $ 343,477 $ — $ 8,858 $ 352,335 Inventories 363,691 — 9,479 373,170 Prepaid expenses and other 100,862 16 (2,521 ) 98,357 Total current assets 1,271,319 16 15,816 1,287,151 Property and equipment, net 397,328 11,379 34 408,741 Deferred tax assets 61,579 3,963 — 65,542 Other assets 180,772 (3,897 ) — 176,875 Total assets 2,270,241 11,461 15,850 2,297,552 Accounts payable 187,355 — 1,564 188,919 Accrued expense and other 234,218 (2,472 ) 4,978 236,724 Other noncurrent liabilities 69,693 20,559 9,308 99,560 Total stockholders’ equity 1,422,073 (6,626 ) — 1,415,447 Total liabilities and stockholders’ equity 2,270,241 11,461 15,850 2,297,552 Fiscal Year Ended April 3, 2004 As Lease Previously Accounting Reported Adjustments As Restated Selling, general and administrative expenses $ 1,029,957 $ 2,905 $ 1,032,862 Income from operations 273,796 (2,905 ) 270,891 Provision for income taxes 95,055 (1,180 ) 93,875 Net income 170,954 (1,725 ) 169,229 Net income per share — Diluted 1.69 (0.01 ) 1.68 Fiscal Year Ended March 29, 2003 As Lease Previously Accounting As Reported Adjustments Restated Selling, general and administrative expenses $ 904,741 $ (2,438 ) $ 902,303 Income from operations 288,417 2,438 290,855 Provision for income taxes 100,151 990 101,141 Net income 174,235 1,448 175,683 Net income per share — Diluted 1.76 0.01 1.77 As Lease Other Cash Previously Accounting RL Media Flow As Reported Adjustments Consolidation Adjustments Restated For the fiscal year ended April 3, 2004: Net cash provided by operating activities $ 210,606 $ 3,224 $ — �� $ (222 ) $ 213,608 Net cash used in investing activities 132,702 3,224 (8,858 ) 7,391 134,459 Effect of exchange rate changes on cash and cash equivalents (1,610 ) — — 7,613 6,003 Net (decrease) increase in cash and cash equivalents (129 ) — 8,858 — 8,729 For the fiscal year ended March 29, 2003: Net cash provided by operating activities 268,974 3,762 — 13,452 286,188 Net cash used in investing activities 166,269 3,762 — 13,452 183,483 Net increase in cash and cash equivalents 98,873 — — — 98,873 3. Recent Accounting Pronouncements impacteffect on the consolidated results of operations or financial positionposition.34 regarding our interest in Ralph Lauren Media, LLC. In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an obligation agreement; indemnification agreements that contingently require the guarantor to make payments to an indemnified party based on changesF-17POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)in an underlying that is related to an asset, liability or an equity security of the indemnified party; or indirect guarantees of the indebtedness of others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements ending after December 15, 2002, and are applicable to all guarantees issued by the guarantor subject under FIN 45’s scope, including guarantees issued prior to FIN 45. The company adopted FIN 45 in its December 28, 2002 financial statement.3.4.Acquisitions and Joint Venture For the Year Ended April 2, 2005 April 3, 2004 Actual Net revenue $ 3,359,168 $ 2,858,458 Net income 195,338 186,164 Net income per share — Basic $ 1.92 $ 1.88 Net income per share — Diluted $ 1.88 $ 1.84 licenselicensee for the Polo Ralph Laurenour men’s, women’s, kids, home and jeans business in Japan for approximately $24.1 million. In connection with thethis acquisition, of the Japanese master license, we recorded tangible assets of $11.0 million, an intangible license valued at $9.9 million and liabilities assumed of $8.5 million based on estimated fair values as determined by management utilizing information available at thisthe time. At March 29, 2003, goodwill of $13.0 million was recognized for the excess 100%licenselicensee are included in the Company’s consolidated statements of operations.operations because management has concluded that certain rights granted to us in the stockholders agreement give us perpetual legal control over our Japanese master licensee. For Fiscalthe years ended April 2, 2005 and April 3, 2004, we have recorded minority interest expense of $3.8 million and $1.4 million, respectively, to reflect the share of earnings allocable to the 50% minority interest holder in the Japanese master license. This amount is included in Other (income) expense, net in the consolidated statementsConsolidated Statements of operations.consolidated statementsConsolidated Statements of operations.50% interest in the Japanese master license and the 20% equity interestinterests are reported on a one-month lag.3, 2004,2, 2005, the Company’s accounting for the Fiscal 2003 acquisitions has been finalized. Unaudited proforma information related to these acquisitions is not included since the impact of these transactions are not material to the consolidated results of the Company. On October 31, 2001, the Company completed the acquisition of substantially all of the assets of PRL Fashions of Europe S.R.L. (“PRL Fashions” or “Italian Licensee”) which held licenses to sell our women’s Ralph Lauren apparel in Europe, our men’s and boys’ Polo Ralph Lauren apparel in Italy and men’s and women’s Polo Jeans collections in Italy. The purchase price of this transaction was approximately $22.0 million in cash plus the assumption of certain liabilities and earn-out payments based on achieving profitability targets over the first three years with a guaranteed minimum annual payment of $3.5 million each year. The assets acquired ofF-18POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)$15.1 million and liabilities assumed of $15.1 million were recorded at estimated fair values as determined by the Company’s management based on information available at that time. Goodwill of approximately $33.5 million was initially recognized for the excess of the purchase price over the preliminary estimate of fair market value of the net assets acquired. During the quarter ended December 28, 2002, the Company finalized the purchase accounting for the acquisition of the assets, the result of which was an increase in goodwill of approximately $0.3 million. Also, during Fiscal 2004 an initial payment was made on the first earn-out payment calculation, resulting in an additional increase in goodwill of approximately $1.0 million. This adjustment and any other adjustments to the contingent component of the remaining earn-out payments will be accounted for as additional purchase price in future periods. Unaudited pro forma information related to this acquisition is not included since the impact of this transaction is not material to the consolidated results of the Company. On October 22, 2001, we acquired the Polo Brussels SA store from one of our licensees. The purchase price of this transaction was approximately $3.0 million in cash, which was primarily allocated to goodwill. Unaudited proforma information related to this acquisition is not included, as the impact of this transaction is not material to the consolidated results of the Company.for tax purposes, we will not absorb any losses from the joint venture up to the first $50.0 million incurredwhich were not funded with cash capital contributions and will share proportionately in the net income or losses thereafter. Additionally, we will receive a royalty on the sale of our products by RL Media based on specified percentages of net sales over a predetermined threshold, subject to certain limitations; to date, no such royalty income has been recognized. RL Media’s managing board has equal representation from NBC and us. Theusesused the equity method of accounting for this investment in which it has more than a minor equity interest and more than minor influence over the operations, but does not have a controlling interest and is not the primary beneficiary. Our financial basis ininvestment. Under FIN 46R, we now consolidate RL Media into our consolidated financial statements on a one quarter lag. For the year ended April 2, 2005 we recorded $4.2 million of minority interest expense associated with the non-controlling equity interest. This amount is zero. Our equityincluded in the net assetsConsolidated Statement of RL Media is less than our financial basis. We have not recognized any lossesIncome in excess of our financial basis since there are no financial guarantees, commitments or obligations to fund the operations of RL Media.Other (expense) income caption.F-19F-214.5.Inventories follows (Dollars in thousands):follows: April 3, March 29, April 2, April 3, 2004 2003 2005 2004 Raw materials $ 5,516 $ 4,214 $ 5,276 $ 5,516 Work-in-process 4,669 4,536 8,283 4,669 Finished goods 353,506 355,021 416,523 362,985 $ 363,691 $ 363,771 $ 430,082 $ 373,170 5.Property and Equipment, Netfollowing (Dollars in thousands):following: April 3, March 29, April 2, April 3, 2004 2003 2005 2004 Land and improvements $ 3,725 $ 3,725 $ 9,925 $ 3,725 Buildings 18,540 18,490 19,006 18,540 Furniture and fixtures 345,668 308,300 402,711 345,668 Machinery and equipment 180,138 133,835 211,408 187,073 Leasehold improvements 329,186 298,449 409,916 352,413 877,257 762,799 1,052,966 907,419 Less: accumulated depreciation and amortization 479,929 407,803 565,072 498,678 $ 397,328 $ 354,996 $ 487,894 $ 408,741 $81.9$99.9 million, $78.6$84.4 million and $74.8$80.6 million for Fiscal 2005, Fiscal 2004 and Fiscal 2003, and 2002, respectively.6.7.Goodwill and Other Intangible Assets 2004.2005. As a result of this test, no impairment was recognized. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective March 31, 2002, and prior period amounts were not restated. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusionF-20POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)of goodwill amortization, net of the related income tax effect, is as follows (Dollars in thousands, except per share data): Fiscal Year Ended April 3, March 29, March 30, 2004 2003 2002 Reported net income $ 170,954 $ 174,235 $ 172,500 Goodwill amortization, net of tax — — 5,712 Adjusted net income $ 170,954 $ 174,235 $ 178,212 Adjusted net income per share — Basic $ 1.73 $ 1.77 $ 1.83 Adjusted net income per share — Diluted $ 1.69 $ 1.76 $ 1.81 and March 29, 2003 by operating segment is as follows (Dollars in millions): Wholesale Retail Licensing Total Wholesale Retail Licensing Total Balance at March 29, 2003 $ 133.7 $ 69.4 $ 112.5 $ 315.6 Balance at April 3, 2004 $ 151.1 $ 74.0 $ 116.5 $ 341.6 Purchases 1.0 — 4.0 5.0 209.6 — — 209.6 Effect of foreign exchange and other adjustments 16.4 4.6 — 21.0 7.2 0.5 — 7.7 Balance at April 3, 2004 $ 151.1 $ 74.0 $ 116.5 $ 341.6 Balance at April 2, 2005 $ 367.9 $ 74.5 $ 116.5 $ 558.9 3, 20042, 2005 was $1.5 million and relates to the Company’s owned trademark. Finite life intangible assets as of April 2, 2005 and April 3, 2004, and March 29, 2003, subject to amortization, are comprised of the following (Dollars in thousands):following: April 3, 2004 March 29, 2003 Gross Gross Carrying Accum. Carrying Accum. Estimated Amount Amort. Net Amount Amort. Net Lives Licensed trademarks $ 17,400 (1,260 ) $ 16,140 9,900 — 9,900 10 years �� April 2, 2005 April 3, 2004 Gross Gross Carrying Accum. Carrying Accum. Estimated Amount Amort. Net Amount Amort. Net Lives Licensed trademarks $ 17,400 $ (3,125 ) $ 14,275 $ 17,400 $ (1,260 ) $ 16,140 10 years Non-compete agreements 2,500 (625 ) 1,875 — — — 3 years Customer relationships 29,900 (897 ) 29,003 — — — 25 years Rugby.com 353 (12 ) 341 — — — 15 years No intangiblerecorded during 2002.$3.4 million for the year ended April 2, 2005. The estimated intangible amortization expense for each of the nextfollowing five years is expected to be approximately $1.7$3.8 million per year.7.8.Other Assets following (Dollars in thousands):following: April 3, March 29, April 2, April 3, 2004 2003 2005 2004 Equity interest investment $ 57,766 $ 47,631 $ 61,970 $ 57,766 Officers’ life insurance 50,250 48,826 51,169 50,250 Other long-term assets 72,756 43,474 70,051 68,859 $ 180,772 $ 139,931 $ 183,190 $ 176,875 F-21POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)8.9.Accrued Expenses and Other following (Dollars in thousands):following: April 3, March 29, April 2, April 3, 2004 2003 2005 2004 Accrued operating expenses $ 174,574 $ 103,670 $ 192,196 $ 185,069 Accrued litigation and claims reserves 106,200 — Accrued payroll and benefits 38,217 33,630 61,660 38,820 Accrued restructuring charge 12,835 15,817 5,812 12,835 Deferred rent obligation 8,592 9,394 $ 234,218 $ 162,511 $ 365,868 $ 236,724 9.10.Restructuring Charge costs.costs during Fiscal 2005 and Fiscal 2004, respectively. The remaining reserve balance of $0.6 million is expected to be paid during Fiscal 2006.2003 Restructuring Plan and $14.4 million during Fiscal 2003 for severance and contract termination costs. The $7.9$2.1 million represents the additional liability for employees notified of their termination and properties we ceased using during Fiscal 2004.2005. The major components of the charge and the activity through April 3, 20042, 2005 were as follows (Dollars in thousands):follows: Lease and Lease and Severance and Other Contract Severance and Other Contract Termination Termination Termination Termination Benefits Costs Total Benefits Costs Total Fiscal 2003 provision $ 11,876 $ 2,567 $ 14,443 $ 11,876 $ 2,567 $ 14,443 Fiscal 2003 spending (3,777 ) — (3,777 ) (3,777 ) — (3,777 ) Balance at March 29, 2003 8,099 2,567 10,666 8,099 2,567 10,666 Fiscal 2004 provision $ 7,104 $ 757 $ 7,861 7,104 757 7,861 Fiscal 2004 spending (11,887 ) (1,465 ) (13,352 ) (11,887 ) (1,465 ) (13,352 ) Balance at April 3, 2004 $ 3,316 $ 1,859 $ 5,175 3,316 1,859 5,175 Fiscal 2005 provision 2,067 — 2,067 Fiscal 2005 spending (5,242 ) (968 ) (6,210 ) Balance at April 2, 2005 $ 141 $ 891 $ 1,032 $17.1$23.3 million have been paid through April 3, 2004.2, 2005. It is expected that this plan will be completed, and the remaining liabilities will be paid, in Fiscal 2005.F-22POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES2001 Operational PlanNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2001 Operational Plan3, 2004,2, 2005, were as follows (Dollars in thousands):follows: Lease and Lease and Severance and Asset Contract Severance and Contract Termination Write Termination Other Termination Termination Other Benefits Downs Costs Costs Total Benefits Costs Costs Total Balance at March 31, 2001 $ 2,942 $ — $ 4,169 $ 782 $ 7,893 $ 2,942 $ 4,169 $ 782 $ 7,893 2002 spending (2,150 ) — (6,014 ) (767 ) (8,931 ) (2,150 ) (6,014 ) (767 ) (8,931 ) Additional provision — — 16,000 — 16,000 — 16,000 — 16,000 Balance at March 30, 2002 792 — 14,155 15 14,962 792 14,155 15 14,962 2003 spending (792 ) — (9,004 ) (15 ) (9,811 ) (792 ) (9,004 ) (15 ) (9,811 ) Balance at March 29, 2003 — — 5,151 — 5,151 — 5,151 — 5,151 Fiscal 2004 provision — — 10,404 — 10,404 — 10,404 — 10,404 Fiscal 2004 spending — — (9,195 ) — (9,195 ) — (9,195 ) — (9,195 ) Balance at April 3, 2004 $ — $ — $ 6,360 $ — $ 6,360 — 6,360 — 6,360 Fiscal 2005 provision — — — — Fiscal 2005 spending — (2,294 ) — (2,294 ) Balance at April 2, 2005 $ — $ 4,066 $ — $ 4,066 $44.7$47.0 million of which have been paid through April 3, 2004.2, 2005. We completed the implementation of the 2001 Operational Plan in Fiscal 2002 and expect to settle the remaining liabilities in Fiscal 2005 or in accordance with contract terms.11. 1999 Restructuring PlanIncome Taxes During the fourth quarter of Fiscal 1999, we formalized our plans to streamline operations within our wholesale and retail operations and reduce our overall cost structure. The major initiatives of the 1999 Restructuring Plan included the following: an evaluation of our retail operations and site locations; the realignment and operational integration of our wholesale operating units; and the realignment and consolidation of corporate strategic business functions and internal processes. In connection with the implementation of the 1999 Restructuring Plan, we recorded a pre-tax restructuring charge of $58.6 million in our fourth quarter of Fiscal 1999. We completed theF-23POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)implementation of the 1999 Restructuring Plan in Fiscal 2000 and have settled the remaining liabilities during Fiscal 2004. The activity through April 3, 2004, was as follows (Dollars in thousands): Lease and Severance and Contract Termination Termination Other Benefits Costs Costs Total Balance at March 31, 2001 $ 4,246 $ 1,747 $ — $ 5,993 2002 spending (2,790 ) (521 ) — (3,311 ) Balance at March 30, 2002 1,456 1,226 — 2,682 2003 spending (1,456 ) (1,226 ) — (2,682 ) Balance at March 29, 2003 $ — $ — $ — $ — Total cash outlays related to the 1999 Restructuring Plan were approximately $39.5 million, all of which have been paid through April 3, 2004.10.Income Taxesfollows (Dollars in thousands):follows: Fiscal Year Ended Fiscal Year Ended April 3, March 29, March 30, April 2, April 3, March 29, 2004 2003 2002 2005 2004 2003 Current: Current: Current: Federal $ 81,781 $ 77,299 $ 58,529 Federal $ 102,068 $ 81,781 $ 77,299 State and local 4,135 6,550 6,457 State and local 17,265 4,135 6,550 Foreign 10,450 7,401 17,297 Foreign 16,113 10,450 7,401 96,366 91,250 82,283 135,446 96,366 91,250 Deferred: Deferred: Deferred: Federal (4,421 ) 9,039 15,835 Federal (33,704 ) (5,350 ) 9,818 State and local (831 ) (2,045 ) 4,672 State and local 2,404 (1,082 ) (1,834 ) Foreign 3,941 1,907 709 Foreign 3,190 3,941 1,907 (1,311 ) 8,901 21,216 (28,110 ) (2,491 ) 9,891 $ 95,055 $ 100,151 $ 103,499 $ 107,336 $ 93,875 $ 101,141 and $2.9 million in Fiscal 2002 arising from the tax benefits related to the exercise of nonqualified stock options. These amounts have been credited to capital in excess of par value.F-24POLO RALPH LAUREN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)follows (Dollars in thousands):follows:
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||
April 3, | March 29, | March 30, | April 2, | April 3, | March 29, | |||||||||||||||||||
2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
Domestic | $ | 198,957 | $ | 190,167 | $ | 287,291 | $ | 152,584 | $ | 196,052 | $ | 192,605 | ||||||||||||
Foreign | 62,975 | 84,219 | (11,292 | ) | 146,782 | 62,975 | 84,219 | |||||||||||||||||
$ | 261,932 | $ | 274,386 | $ | 275,999 | $ | 299,366 | $ | 259,027 | $ | 276,824 | |||||||||||||
and March 29, 2003 were as follows (Dollars in thousands):follows:
April 3, | March 29, | April 2, | April 3, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
Deferred Tax Assets: | ||||||||||||||||
Net operating loss carryforwards | $ | 83,752 | $ | 61,661 | $ | 58,973 | $ | 83,752 | ||||||||
Property and equipment | 24,964 | 21,292 | 4,416 | 24,964 | ||||||||||||
Accounts receivable | 13,792 | 6,805 | 22,838 | 13,792 | ||||||||||||
Uniform inventory capitalization | 5,117 | 4,986 | 6,633 | 5,117 | ||||||||||||
Deferred compensation | 8,597 | 8,955 | 15,356 | 8,597 | ||||||||||||
Restructuring reserves | 5,018 | 3,958 | 3,365 | 5,018 | ||||||||||||
Accrued expenses | 1,788 | 1,513 | 42,422 | 1,788 | ||||||||||||
Cumulative Translation Adjustment | 17,678 | 19,585 | ||||||||||||||
Other | 15,529 | 9,556 | 10,718 | (93 | ) | |||||||||||
Total Deferred Tax Asset | 158,557 | 118,726 | 182,399 | 162,520 | ||||||||||||
Less: Valuation allowance | 62,934 | 44,580 | 55,249 | 62,934 | ||||||||||||
Net Deferred Tax Asset | 95,623 | 74,146 | 127,150 | 99,586 | ||||||||||||
Deferred Tax Liabilities: | ||||||||||||||||
Goodwill and other intangibles | (9,854 | ) | (5,496 | ) | (17,742 | ) | (9,854 | ) | ||||||||
Foreign reorganization costs | (4,572 | ) | (2,743 | ) | 1,226 | (4,572 | ) | |||||||||
Total Deferred Tax Liability | (14,426 | ) | (8,239 | ) | (16,516 | ) | (14,426 | ) | ||||||||
Net Deferred Tax Asset | $ | 81,197 | $ | 65,907 | $ | 110,634 | $ | 85,160 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
more likely than not be able to utilize these carryforwards to offset future taxable income. Subsequent recognition of a portion of the deferred tax asset relating to these federal, state and foreign net operating loss carryforwards would result in a reduction of goodwill recorded in connection with acquisitions. Additionally, we have recorded a valuation allowance against certain other deferred tax assets relating to our foreign operations. Subsequent recognition of these deferred tax assets, as well as a portion of the foreign net operating loss carryforwards, would result in an income tax benefit in the year of such recognition.
During the year, the Company resolved audits in various foreign jurisdictions resulting in a $19 million reduction of the NOL’s which were subject to a full valuation allowance. The Company also increased the valuation allowance by $8 million relating to current year losses incurred in these foreign jurisdictions. Furthermore, changes in other deferred tax components resulted in a $3 million increase in the valuation allowance. These valuation allowances have been recorded because management has determined that it is more likely than not that such tax benefits will not be realized.
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||
April 3, | March 29, | March 30, | April 2, | April 3, | March 29, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||||
Provision for income taxes at statutory Federal rate | Provision for income taxes at statutory Federal rate | $ | 91,677 | $ | 96,035 | $ | 96,600 | Provision for income taxes at statutory Federal rate | $ | 104,778 | $ | 90,659 | $ | 96,888 | ||||||||||||
Increase (decrease) due to: | Increase (decrease) due to: | Increase (decrease) due to: | ||||||||||||||||||||||||
State and local income taxes, net of Federal Benefit | 2,148 | 2,928 | 7,233 | State and local income taxes, net of Federal Benefit | 12,785 | 1,986 | 3,065 | |||||||||||||||||||
Foreign income taxes, net | 4,803 | 623 | (7,308 | ) | Foreign income taxes, net | (13,260 | ) | 4,803 | 623 | |||||||||||||||||
Other | (3,573 | ) | 565 | 6,974 | Other | 3,033 | (3,573 | ) | 565 | |||||||||||||||||
$ | 95,055 | $ | 100,151 | $ | 103,499 | $ | 107,336 | $ | 93,875 | $ | 101,141 | |||||||||||||||
F-27
Financing Agreements |
In November 2002,
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our 2002 bank credit facility The New Credit Facility requires that weus to maintain a minimum consolidated tangible net worth, and a maximum Adjusted Debt to EBITDARcertain covenants:
• | a minimum ratio of consolidated Earnings Before Interest, Taxes, Depreciation, Amortization and Rent (“EBITDAR”) to Consolidated Interest Expense (as such terms are described in the New Credit Facility); and | |
• | a maximum ratio of Adjusted Debt (as defined in the New Credit Facility) to EBITDAR. |
The credit facilityFacility also contains covenants that, subject to specified exceptions, restrict our ability to:
• | incur additional debt; | |
• | incur liens and contingent liabilities; | |
• | sell or dispose of | |
• | merge with or acquire other companies, liquidate or dissolve; | |
• | engage in businesses that are not a related line of business; | |
• | make loans, advances or guarantees; | |
• | engage in transactions with affiliates; and | |
• | make investments. |
F-28
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments |
3, 2004,2, 2005, we had the following foreign exchange contracts outstanding: (i) to deliver€67.194.3 million in exchange for $73.9$124.3 million through Fiscal 2005 and (ii) to deliver ¥8,248¥11,389 million in exchange for $71.0$99.6 million through Fiscal 2008. At April 3, 2004,2, 2005, the fair value of these contracts resulted in unrealized gains and losses, net of taxes of $6.6$1.8 million and $6.3$8.2 million, for the Euro forward contracts and Japanese Yen forward contracts, respectively.2004.2005. In addition, we have designated the entire principal of the Euro debt as a hedge of our net investment in certain foreign subsidiaries. As a result, changes in the fair value of the Euro debt resulting from changes in the Euro rate are reported net of income taxes in accumulated other comprehensive income in the consolidated financial statements as an unrealized gain or loss on foreign currency hedges. On April 6, 2004 and October 4, 2004, the Company executed an interest rate swapswaps to convert the fixed interest rate on an additional total of€50100.0 million of the Eurobonds to a floating rate (EURIBOR based). After the execution of this swap, approximately€7722.0 million of the Eurobonds remained at a fixed interest rate.
F-29
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
converted borrowings under the 2002 bank credit facility from variable rate to fixed rate obligations. Under the terms of these agreements, we made payments at a fixed rate of 5.5% and received payments from the counterparty based on the notional amount of $100.0 million at a variable rate based on LIBOR. The net interest paid or received on this arrangement was included in interest expense. The fair value of these agreements was based upon the estimated amount that we would have to pay to terminate the agreements, as determined by the financial institutions. The fair value of these agreements was an unrealized loss of $1.3 million at March 29, 2003, all of which was reclassified into earnings during Fiscal 2004; and an unrealized loss of $2.6 million at March 30, 2002.
2004.
April 3, 2004 | March 29, 2003 | April 2, 2005 | April 3, 2004 | |||||||||||||||||||||||||||||
Notional | Fair Value | Notional | Fair Value | Notional | Fair Value | Notional | Fair Value | |||||||||||||||||||||||||
Foreign Currency Contracts | $ | 144.9 | $ | (13.0 | ) | $ | 92.5 | $ | (0.7 | ) | $ | 224.0 | $ | (7.3 | ) | $ | 144.9 | $ | (13.0 | ) | ||||||||||||
Cross Currency Swap Contracts | — | — | $ | 100.0 | $ | 16.8 | ||||||||||||||||||||||||||
Interest Rate Swap Contracts | €105.2 | $ | 14.9 | $ | 100.0 | $ | (1.3 | ) | € | 205.2 | $ | 10.9 | € | 105.2 | $ | 14.9 |
F-30
Commitments and Contingencies |
Leases |
3, 2004,2, 2005, aggregate minimum annual rental payments under noncancelable operating leases with lease terms in excess of one year were payable as follows (Dollars in thousands):follows:
Fiscal Year Ending | ||||||||
2005 | $ | 107,736 | ||||||
2006 | 101,979 | $ | 121,991 | |||||
2007 | 93,121 | 121,485 | ||||||
2008 | 88,250 | 114,319 | ||||||
2009 | 80,032 | 104,777 | ||||||
2010 | 96,169 | |||||||
Thereafter | 419,361 | 580,694 | ||||||
$ | 890,479 | $ | 1,139,435 | |||||
$107.0$127.8 million, $98.2$107.5 million and $83.2$93.8 million in Fiscal 2005, Fiscal 2004 2003 and 2002,Fiscal 2003, respectively, net of sub-lease income. Substantially all outlet and retail store leases provide for contingent rentals based upon sales and require us to pay taxes, insurance and occupancy costs. Certain rentals are based solely on a percentage of sales. Contingent rental charges included in rent expense were $9.5 million, $8.1 million $6.9 million and $6.2$6.9 million in Fiscal 2005, Fiscal 2004 2003 and 2002,Fiscal 2003, respectively. These rental amounts exclude associated costs such as real estate taxes and common area maintenance.Employment Agreements
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Acquisitions |
Concentration of Credit Risk
F-31
Declaration of |
2, 20041, 2005 and was paid on April 16, 2004.15, 2005.LicensingOther Commitments
As a result of the failure of Jones Apparel Group, including its subsidiaries (“Jones”), to meet the minimum sales volumes for the year ended December 31, 2002, under the license agreements for the sale of products under the “Ralph” trademark between us and Jones dated May 11, 1998, these license agreements terminated as of December 31, 2003. We advised Jones that the termination of these licenses automatically resulted in the termination of the licenses between us and Jones with respect to the “Lauren” trademark pursuant to the Cross Default and Term Extension Agreement, between us and Jones dated May 11, 1998. The Lauren license agreements would otherwise expire on December 31, 2006. The royalties that we received pursuant to the “Lauren” license agreements and “Ralph” license agreements represented revenues in Fiscal 2003 of approximately $37.4 million and $5.3 million, respectively. Jones has reported that net
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sales of Lauren and Ralph products for the year ended December 31, 2002 were $548.0 million and $37.0 million, respectively. See Note 20 for additional information on this matter.
The Company is not party to any off-balance sheet transactions or unconsolidated special purpose entities for any of the periods presented herein.
Earnings Per Share |
Fiscal Year Ended | ||||||||||||||||||||||||
Fiscal Year Ended | ||||||||||||||||||||||||
April 3, | March 29, | March 30, | ||||||||||||||||||||||
2004 | 2003 | 2002 | April 2, | April 3, | March 29, | |||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
(Shares in thousands) | (Shares in thousands) | |||||||||||||||||||||||
Basic | 98,977 | 98,331 | 97,470 | 101,519 | 98,977 | 98,331 | ||||||||||||||||||
Dilutive effect of stock options, restricted stock and restricted stock units | 1,983 | 932 | 1,053 | 2,491 | 1,983 | 932 | ||||||||||||||||||
Diluted shares | 100,960 | 99,263 | 98,523 | 104,010 | 100,960 | 99,263 | ||||||||||||||||||
15.16.Common Stock
F-32
F-31
stock incentive plan. These transactions are treated as stock repurchases and amounted to approximately $1.0 million in Fiscal 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Incentive Plans |
F-33
Weighted | ||||||||||||||||||
Number | Average | |||||||||||||||||
of Shares | Exercise Price | |||||||||||||||||
Balance at March 31, 2001 | 8,868 | $ | 20.79 | |||||||||||||||
Granted | 2,468 | 26.59 | Weighted | |||||||||||||||
Exercised | (1,155 | ) | 21.20 | Number | Average | |||||||||||||
Forfeited | (709 | ) | 21.75 | of Shares | Exercise Price | |||||||||||||
Balance at March 30, 2002 | Balance at March 30, 2002 | 9,472 | $ | 22.16 | Balance at March 30, 2002 | 9,472 | $ | 22.16 | ||||||||||
Granted | 2,665 | 23.72 | Granted | 2,665 | 23.72 | |||||||||||||
Exercised | (424 | ) | 18.21 | Exercised | (424 | ) | 18.21 | |||||||||||
Forfeited | (945 | ) | 23.60 | Forfeited | (945 | ) | 23.60 | |||||||||||
Balance at March 29, 2003 | Balance at March 29, 2003 | 10,768 | $ | 21.75 | Balance at March 29, 2003 | 10,768 | $ | 21.75 | ||||||||||
Granted | 2,497 | 24.30 | Granted | 2,497 | 24.30 | |||||||||||||
Exercised | (1,950 | ) | 20.72 | Exercised | (1,950 | ) | 20.72 | |||||||||||
Forfeited | (592 | ) | 23.82 | Forfeited | (592 | ) | 23.82 | |||||||||||
Balance at April 3, 2004 | Balance at April 3, 2004 | 10,723 | $ | 23.43 | Balance at April 3, 2004 | 10,723 | $ | 23.43 | ||||||||||
Granted | 1,887 | 33.97 | ||||||||||||||||
Exercised | (2,443 | ) | 22.21 | |||||||||||||||
Forfeited | (541 | ) | 25.77 | |||||||||||||||
Balance at April 2, 2005 | Balance at April 2, 2005 | 9,626 | $ | 25.68 | ||||||||||||||
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional information relating to options outstanding as of April 3, 2004,2, 2005, was as follows (Shares(shares in thousands):
Number | Weighted-Average | Weighted-Average | Number | Weighted-Average | Number of | Weighted-Average | Weighted-Average | Number of | Weighted-Average | |||||||||||||||||||||||||||||||
Range of | of Shares | Remaining | Exercise Price of | of Shares | Exercise Price of | Shares | Remaining | Exercise Price of | Shares | Exercise Price of | ||||||||||||||||||||||||||||||
Exercise Prices | Outstanding | Contractual Life | Options Outstanding | Exercisable | Exercisable Options | Outstanding | Contractual Life | Options Outstanding | Exercisable | Exercisable Options | ||||||||||||||||||||||||||||||
$13.94-$17.06 | 1,131 | 6.2 | $ | 14.69 | 1,131 | $ | 14.69 | 682 | 5.2 | $ | 14.61 | 682 | $ | 14.61 | ||||||||||||||||||||||||||
$17.13-$19.56 | 1,506 | 6.1 | 18.79 | 1,094 | 19.00 | 1,007 | 5.5 | 18.71 | 740 | 18.89 | ||||||||||||||||||||||||||||||
$20.19-$25.69 | 3,966 | 8.6 | 24.19 | 762 | 24.15 | 2,934 | 7.6 | 24.25 | 1,286 | 24.28 | ||||||||||||||||||||||||||||||
$26.00-$35.03 | 4,120 | 5.4 | 26.79 | 3,389 | 26.73 | |||||||||||||||||||||||||||||||||||
$26.00-$42.25 | 5,003 | 6.0 | 29.42 | 3,113 | 26.80 | |||||||||||||||||||||||||||||||||||
10,723 | 6.8 | $ | 23.43 | 6,376 | $ | 22.96 | 9,626 | 6.4 | $ | 25.68 | 5,821 | $ | 23.81 | |||||||||||||||||||||||||||
F-34
In March 1998, our Board of Directors authorized the repurchase, subject to market conditions, of up to $100.0 million of our Shares. Share repurchases were made in the open market over the two-year period which commenced April 1, 1998. The Board of Directors has authorized the extension of the stock repurchase program through April 1, 2006. Shares acquired under the repurchase program will be used for stock option programs and for other corporate purposes. The repurchased shares have been accounted for as treasury stock at cost. As of April 3, 2004, we had repurchased 4,087,906 Shares at an aggregate cost of $77.5 million. No shares were repurchased under the stock repurchase program during Fiscal 2004. Certain employees tendered stock in satisfaction of federal and state withholding taxes incurred due to the vesting of shares granted under our stock incentive plan. These transactions are treated as stock repurchases and amounted to approximately $1.0 million in Fiscal 2004.
F-33F-35
Employee Benefits |
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 compensation expense related to these benefits is recognized over the vesting period. The amounts accrued under these plans were $17.5$21.2 million and $16.0$17.5 million at April 2, 2005 and April 3, 2004, and March 29, 2003, and are reflected in other noncurrent liabilities in the accompanying consolidated balance sheets. Total compensation expense related to these benefits was $3.7 million, $3.8 million $1.4 million and $2.9$1.4 million in Fiscal 2005, Fiscal 2004 2003 and 2002,Fiscal 2003, respectively. This liability is partially funded through whole-life policies, which had cash surrender values of $12.5$13.3 million and $11.8$12.5 million at April 2, 2005 and April 3, 2004, and March 29, 2003, and are reflected in other assets in the accompanying consolidated balance sheets.
We have deferred compensation arrangements for certain key executives which generally provide for payments upon retirement, death or termination of employment. The amounts accrued under these plans were $4.0$2.2 million and $4.6$4.0 million at April 2, 2005 and April 3, 2004, and March 29, 2003, and are reflected in other noncurrent liabilities in the accompanying consolidated balance sheets. Total compensation expense related to these compensation arrangements was $0.4 million for Fiscal 2005 and $0.7 million each year for Fiscal 2004 2003 and 2002.Fiscal 2003. We fund a portion of these obligations through the establishment of trust accounts on behalf of the executives participating in the plans. The trust accounts are reflected in other assets in the accompanying consolidated balance sheets.
F-34F-36
Segment Reporting |
Our wholesaledistribution. The Wholesale segment consists of three operating units: Polo Brands, Lauren,women’s, men’s and Collection Brands. Each unit designs, sources, marketschildren’s apparel and distributes discrete brands. Each of the units primarily sellrelated products which are sold to major department stores and specialty stores and to our owned and licensed retail stores.
stores in the United States and overseas. The retail segment operates two typesconsists of stores:the Company’s worldwide retail operations which sells our products through our full price and outlet and full-price stores.stores as well as Polo.com, our e-commerce site. The stores and the website sell our products purchased from our licensees, our suppliers and our wholesale segment.
The licensingLicensing segment, which consists of product, international and home, generates revenues from royalties through its licensing alliances. The licensing agreements grant the licensee rights to use our various trademarks in connection with the manufacture and sale of designated products in specified geographical areas.
F-37
Fiscal Year Ended | |||||||||||||
April 3, | March 29, | March 30, | |||||||||||
2004 | 2003 | 2002 | |||||||||||
Net revenues: | |||||||||||||
Wholesale | $ | 1,210,397 | $ | 1,187,363 | $ | 1,198,060 | |||||||
Retail | 1,170,447 | 1,001,958 | 924,273 | ||||||||||
Licensing | 268,810 | 250,019 | 241,374 | ||||||||||
$ | 2,649,654 | $ | 2,439,340 | $ | 2,363,707 | ||||||||
Fiscal Year Ended | |||||||||||||
April 2, | April 3, | March 29, | |||||||||||
2005 | 2004 | 2003 | |||||||||||
Net revenues: | |||||||||||||
Wholesale | $ | 1,712,040 | $ | 1,210,397 | $ | 1,187,363 | |||||||
Retail | 1,348,645 | 1,170,447 | 1,001,958 | ||||||||||
Licensing | 244,730 | 268,810 | 250,019 | ||||||||||
$ | 3,305,415 | $ | 2,649,654 | $ | 2,439,340 | ||||||||
Income from operations: | |||||||||||||
Wholesale | $ | 299,710 | $ | 143,080 | $ | 166,016 | |||||||
Retail | 82,788 | 55,717 | 30,707 | ||||||||||
Licensing | 159,537 | 191,575 | 200,189 | ||||||||||
542,035 | 390,372 | 396,912 | |||||||||||
Less: Unallocated Corporate expense | (133,809 | ) | (99,915 | ) | (91,614 | ) | |||||||
Unallocated legal and restructuring expenses | (108,541 | ) | (19,566 | ) | (14,443 | ) | |||||||
$ | 299,685 | $ | 270,891 | $ | 290,855 | ||||||||
Depreciation and amortization: | |||||||||||||
Wholesale | $ | 28,362 | $ | 23,123 | $ | 21,163 | |||||||
Retail | 44,029 | 36,213 | 35,574 | ||||||||||
Licensing | 6,422 | 5,768 | 5,136 | ||||||||||
Unallocated Corporate expense | 24,820 | 20,531 | 18,745 | ||||||||||
$ | 103,633 | $ | 85,635 | $ | 80,618 | ||||||||
Capital expenditures: | |||||||||||||
Wholesale | $ | 50,590 | $ | 33,491 | $ | 32,020 | |||||||
Retail | 77,512 | 45,480 | 39,455 | ||||||||||
Licensing | 3,105 | 1,871 | 5,587 | ||||||||||
Corporate | 44,638 | 45,408 | 25,364 | ||||||||||
$ | 175,845 | $ | 126,250 | $ | 102,426 | ||||||||
April 2, | April 3, | ||||||||
2005 | 2004 | ||||||||
Total assets: | |||||||||
Wholesale | $ | 1,247,694 | $ | 857,721 | |||||
Retail | 605,783 | 595,185 | |||||||
Licensing | 203,306 | 200,136 | |||||||
Corporate | 669,886 | 644,510 | |||||||
$ | 2,726,669 | $ | 2,297,552 | ||||||
F-35F-38
Fiscal Year Ended | |||||||||||||
April 3, | March 29, | March 30, | |||||||||||
2004 | 2003 | 2002 | |||||||||||
Income from operations: | |||||||||||||
Wholesale | $ | 93,128 | $ | 124,476 | $ | 158,401 | |||||||
Retail | 72,915 | 40,366 | 18,799 | ||||||||||
Licensing | 127,319 | 138,018 | 132,012 | ||||||||||
293,362 | 302,860 | 309,212 | |||||||||||
Less: Restructuring charges | 19,566 | 14,443 | 16,000 | ||||||||||
$ | 273,796 | $ | 288,417 | $ | 293,212 | ||||||||
Depreciation and amortization: | |||||||||||||
Wholesale | $ | 33,280 | $ | 30,454 | $ | 33,246 | |||||||
Retail | 37,605 | 37,118 | 37,877 | ||||||||||
Licensing | 12,304 | 11,073 | 12,796 | ||||||||||
$ | 83,189 | $ | 78,645 | $ | 83,919 | ||||||||
Capital expenditures: | |||||||||||||
Wholesale | $ | 33,491 | $ | 32,020 | $ | 48,829 | |||||||
Retail | 42,256 | 35,693 | 19,182 | ||||||||||
Licensing | 1,871 | 5,587 | 4,571 | ||||||||||
Corporate | 45,408 | 25,364 | 15,426 | ||||||||||
$ | 123,026 | $ | 98,664 | $ | 88,008 | ||||||||
April 3, | March 29, | March 30, | |||||||||||
2004 | 2003 | 2002 | |||||||||||
Total assets: | |||||||||||||
Wholesale | $ | 857,721 | $ | 766,460 | $ | 591,680 | |||||||
Retail | 573,625 | 476,314 | 534,036 | ||||||||||
Licensing | 200,136 | 157,946 | 161,912 | ||||||||||
Corporate | 638,759 | 638,102 | 461,869 | ||||||||||
$ | 2,270,241 | $ | 2,038,822 | $ | 1,749,497 | ||||||||
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2003 and 2002,Fiscal 2003, and our long-lived assets as of April 2, 2005 and April 3, 2004 and March 29, 2003 by geographic location of the reporting subsidiary, were as follows (Dollars in thousands):follows:
Fiscal Year Ended | |||||||||||||
April 3, | March 29, | March 30, | |||||||||||
2004 | 2003 | 2002 | |||||||||||
Net revenues: | |||||||||||||
United States and Canada | $ | 2,073,401 | $ | 1,916,096 | $ | 1,919,587 | |||||||
Europe | 464,098 | 458,627 | 358,382 | ||||||||||
Other regions | 112,155 | 64,617 | 85,738 | ||||||||||
$ | 2,649,654 | $ | 2,439,340 | $ | 2,363,707 | ||||||||
Fiscal Year Ended | |||||||||||||
April 2, | April 3, | March 29, | |||||||||||
2005 | 2004 | 2003 | |||||||||||
Net revenues: | |||||||||||||
United States and Canada | $ | 2,587,233 | $ | 2,073,401 | $ | 1,916,096 | |||||||
Europe | 579,161 | 464,098 | 458,627 | ||||||||||
Other regions | 139,021 | 112,155 | 64,617 | ||||||||||
$ | 3,305,415 | $ | 2,649,654 | $ | 2,439,340 | ||||||||
April 3, | March 29, | ||||||||
2004 | 2003 | ||||||||
Long-lived assets: | |||||||||
United States and Canada | $ | 334,109 | $ | 312,467 | |||||
Europe | 59,871 | 41,472 | |||||||
Other regions | 3,348 | 1,057 | |||||||
$ | 397,328 | $ | 354,996 | ||||||
April 2, | April 3, | ||||||||
2005 | 2004 | ||||||||
Long-lived assets: | |||||||||
United States and Canada | $ | 402,665 | $ | 335,885 | |||||
Europe | 80,663 | 69,507 | |||||||
Other regions | 4,566 | 3,349 | |||||||
$ | 487,894 | $ | 408,741 | ||||||
Accumulated Other Comprehensive Income |
April 2, | April 3, | |||||||
2005 | 2004 | |||||||
Foreign currency translation adjustment | $ | 85,104 | $ | 73,782 | ||||
Unrealized losses on hedging derivatives | (55,131 | ) | (50,678 | ) | ||||
Accumulated other comprehensive income, net of tax | $ | 29,973 | $ | 23,104 | ||||
F-39
April 3, | March 29, | |||||||
2004 | 2003 | |||||||
Foreign currency translation adjustment | $ | 74,360 | $ | 28,834 | ||||
Unrealized losses on hedging derivatives | (50,418 | ) | (18,047 | ) | ||||
Accumulated other comprehensive income, net of tax | $ | 23,942 | $ | 10,787 | ||||
Unrealized Losses | Changes in Fair | Unrealized Losses | Unrealized Gains | |||||||||||||||
on Hedging | Value During the | on Hedges | (Losses) on Hedging | |||||||||||||||
Derivatives as of | Year Ended | Reclassified into | Derivatives as of | |||||||||||||||
April 3, 2004 | April 2, 2005 | Earnings | April 2, 2005 | |||||||||||||||
Derivatives designated as hedges of: | ||||||||||||||||||
Inventory purchases | $ | (7.2 | ) | $ | 0.1 | $ | 9.0 | $ | 1.9 | |||||||||
Intercompany royalty payments | (10.7 | ) | (5.0 | ) | 1.9 | (13.8 | ) | |||||||||||
Net investment in foreign subsidiaries | (60.2 | ) | (17.2 | ) | — | (77.4 | ) | |||||||||||
Before-tax totals | $ | (78.1 | ) | $ | (22.1 | ) | $ | 10.9 | $ | 89.3 | ||||||||
After-tax totals | $ | (50.7 | ) | $ | (13.8 | ) | $ | 9.4 | $ | (55.1 | ) | |||||||
Legal Proceedings |
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
seeking compensatory damages of $550.0 million, punitive damages and enforcement of Ms. Nemerov’s agreement. Also on June 3, 2003, we filed a lawsuit against Jones in the Supreme Court of the State of New York seeking, among other things, an injunction and a declaratory judgmentjudgement that the Lauren license agreements would terminate as of December 31, 2003 pursuant to the terms of the Cross Default and Term Extension Agreement. The two lawsuits were consolidated.
F-40
Company’s liquidity.
is not material.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
infringing on our famous trademarks. This lawsuit continues to proceed as both sides are awaiting the court’s decision on various motions. In connection with this lawsuit, on July 19, 2001, the United States Polo Association and Jordache filed a lawsuit against us in the United States District Court for the Southern District of New York. This suit, which is effectively a counterclaim by them in connection with the original trademark action, asserts claims related to our actions in connection with our pursuit of claims against the United States Polo Association and Jordache for trademark infringement and other unlawful conduct. Their claims stem from our
F-41
On July 30, 2004, the Court denied all motions for summary judgement and set a trial date for October 3, 2005.
In December, 2003 we received aarbitration demand on behalf of a stockholder to inspect the Company’s books and records relating to the amended and restated employment agreement dated June 23, 2003 between the Company and Ralph Lauren. The demand asserts that the purpose of the inspection is to determine, among other things, whether the directors of the Company breached their fiduciary duties in approving the compensation provided for in the employment agreement. While we have provided certain information, we believe that the issues asserted by the demand are without merit.
December 7, 2004.
F-39F-42
Quarterly Information (Unaudited) |
2003restated to give effect of the lease adjustments and 2002consolidation of RL Media as discussed in Note 2. Fiscal 2005 fourth quarter net income reflects a pretax charge for $98 million which was recorded to increase our reserve for the Jones litigation to $100 million for the full year as well as a $6.2 million pretax charge to establish a reserve for the alleged security breach matter as further discussed in Note 21. (in thousands, except per share data).
June 28, | Sept. 27, | Dec. 27, | April 3, | July 3, | July 3, | October 2, | October 2, | January 1, | January 1, | April 2, | ||||||||||||||||||||||||||||||||||||
Fiscal 2004 | 2003 | 2003 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||||
Fiscal 2005 | Fiscal 2005 | 2004 | 2004 | 2004 | 2004 | 2005 | 2005 | 2005 | ||||||||||||||||||||||||||||||||||||||
(As | (As Restated | (As | (As Restated | (As | (As Restated | |||||||||||||||||||||||||||||||||||||||||
Reported) | See Note 2) | Reported) | See Note 2) | Reported) | See Note 2) | |||||||||||||||||||||||||||||||||||||||||
Net revenues | Net revenues | $ | 477,731 | $ | 707,777 | $ | 645,365 | $ | 818,781 | Net revenues | $ | 592,750 | $ | 606,006 | $ | 883,680 | $ | 895,614 | $ | 887,993 | $ | 901,574 | $ | 902,222 | ||||||||||||||||||||||
Gross profit | Gross profit | 248,752 | 350,566 | 333,002 | 390,999 | Gross profit | 307,100 | 315,528 | 437,755 | 446,034 | 438,033 | 446,076 | 476,909 | |||||||||||||||||||||||||||||||||
Net income | Net income | 5,055 | 54,010 | 35,358 | 76,531 | Net income | 13,403 | 12,725 | 80,407 | 79,268 | 74,842 | 75,036 | 23,396 | |||||||||||||||||||||||||||||||||
Net income per share — | Net income per share — | Net income per share — | ||||||||||||||||||||||||||||||||||||||||||||
Basic | $ | 0.05 | $ | 0.55 | $ | 0.36 | $ | 0.77 | Basic | $ | 0.13 | $ | 0.13 | $ | 0.79 | $ | 0.78 | $ | 0.73 | $ | 0.74 | $ | 0.23 | |||||||||||||||||||||||
Diluted | 0.05 | 0.54 | 0.35 | 0.75 | Diluted | 0.13 | 0.12 | 0.78 | 0.77 | 0.72 | 0.72 | 0.22 | ||||||||||||||||||||||||||||||||||
Shares outstanding — Basic | Shares outstanding — Basic | 98,377 | 98,704 | 99,072 | 99,699 | Shares outstanding — Basic | 100,481 | 100,481 | 101,192 | 101,192 | 101,896 | 101,896 | 102,506 | |||||||||||||||||||||||||||||||||
Shares outstanding — Diluted | Shares outstanding — Diluted | 99,544 | 100,781 | 101,291 | 102,265 | Shares outstanding — Diluted | 102,802 | 102,802 | 103,571 | 103,571 | 104,325 | 104,325 | 105,341 |
June 29, | Sept. 28, | Dec. 28, | March 29, | ||||||||||||||
Fiscal 2003 | 2002 | 2002 | 2002 | 2003 | |||||||||||||
Net revenues | $ | 467,000 | $ | 640,839 | $ | 639,170 | $ | 692,331 | |||||||||
Gross profit | 232,604 | 321,266 | 307,910 | 345,821 | |||||||||||||
Net income | 6,460 | 51,744 | 42,812 | 73,219 | |||||||||||||
Net income per share — | |||||||||||||||||
Basic | $ | 0.07 | $ | 0.53 | $ | 0.44 | $ | 0.74 | |||||||||
Diluted | 0.07 | 0.52 | 0.43 | 0.74 | |||||||||||||
Shares outstanding — Basic | 98,161 | 98,301 | 98,412 | 98,450 | |||||||||||||
Shares outstanding — Diluted | 99,333 | 99,319 | 99,311 | 99,343 |
June 30, | Sept. 29, | Dec. 29, | March 30, | June 28, | June 28, | Sept. 27, | Sept. 27, | Dec. 27, | Dec. 27, | April 3, | April 3, | |||||||||||||||||||||||||||||||||||||||
Fiscal 2002 | 2001 | 2001 | 2001 | 2002 | ||||||||||||||||||||||||||||||||||||||||||||||
Fiscal 2004 | Fiscal 2004 | 2003 | 2003 | 2003 | 2003 | 2003 | 2003 | 2004 | 2004 | |||||||||||||||||||||||||||||||||||||||||
(As | (As Restated | (As | (As Restated | (As | (As Restated | (As | (As Restated | |||||||||||||||||||||||||||||||||||||||||||
Reported) | See Note 2) | Reported) | See Note 2) | Reported) | See Note 2) | Reported) | See Note 2) | |||||||||||||||||||||||||||||||||||||||||||
Net revenues | Net revenues | $ | 517,829 | $ | 595,695 | $ | 617,095 | $ | 633,088 | Net revenues | $ | 477,731 | $ | 477,731 | $ | 707,777 | $ | 707,777 | $ | 645,365 | $ | 645,365 | $ | 818,781 | $ | 818,781 | ||||||||||||||||||||||||
Gross profit | Gross profit | 262,361 | 285,640 | 287,009 | 311,793 | Gross profit | 248,752 | 248,752 | 350,566 | 350,566 | 333,002 | 333,002 | 390,999 | 390,999 | ||||||||||||||||||||||||||||||||||||
Net income | Net income | 31,051 | 47,810 | 45,614 | 48,025 | Net income | 5,055 | 5,042 | 54,010 | 53,323 | 35,358 | 34,418 | 76,531 | 76,446 | ||||||||||||||||||||||||||||||||||||
Net income per share — | Net income per share — | Net income per share — | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic | $ | 0.32 | $ | 0.49 | $ | 0.47 | $ | 0.49 | Basic | $ | 0.05 | $ | 0.05 | $ | 0.55 | $ | 0.54 | $ | 0.36 | $ | 0.35 | $ | 0.77 | $ | 0.77 | |||||||||||||||||||||||||
Diluted | 0.32 | 0.49 | 0.46 | 0.48 | Diluted | $ | 0.05 | 0.05 | 0.54 | 0.53 | 0.35 | 0.34 | 0.75 | 0.75 | ||||||||||||||||||||||||||||||||||||
Shares outstanding — Basic | Shares outstanding — Basic | 97,109 | 97,437 | 97,506 | 97,814 | Shares outstanding — Basic | 98,377 | 98,377 | 98,704 | 98,704 | 99,072 | 99,072 | 99,699 | 99,699 | ||||||||||||||||||||||||||||||||||||
Shares outstanding — Diluted | Shares outstanding — Diluted | 98,493 | 98,483 | 98,504 | 99,146 | Shares outstanding — Diluted | 99,544 | 99,544 | 100,781 | 100,781 | 101,291 | 101,291 | 102,265 | 102,265 |
Subsequent Event |
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accrued expenses of the Childrenswear Licensee and accrued vacation obligations for the Childrenswear Licensee’s employees who will become employees of the Company following the closing of the acquisition. The assets of the Childrenswear Licensee being acquired by the Company include, among other things, the license; all inventories of the Childrenswear Licensee; certain leases; customer lists; supplier lists; and books and records.
The ChildrenswearFootwear Licensee and certain of its affiliates and shareholders have agreed to indemnifyentered into a transition services agreement with the Company for allto provide a variety of the liabilities of the Company related to the operation, of the Childrenswear Business prior to the closing of the acquisitionfinancial and have also agreed that they will not compete with the Childrenswear Business forinformation systems services over a period of three years after the closing date. In addition, the Childrenswear Licensee and certain of its affiliates will provide information system and accounting servicestwelve to the Company for a transitional period following the closing.
eighteen months.
F-41F-43
Balance at | Charge to | Charge | Balance | Balance at | Charge to | Charge | Foreign | Balance | ||||||||||||||||||||||||||||||||||||
Beginning | Costs and | to Other | at End | Beginning | Costs and | to Other | Currency | at End | ||||||||||||||||||||||||||||||||||||
Description | of Year | Expenses | Accounts | Deductions | of Year | of Year | Expenses | Accounts(a) | Deductions | Translation | of Year | |||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended April 2, 2005 | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 7,023 | $ | 6,020 | $ | — | $ | 2,119 | (b) | $ | 117 | $ | 11,041 | |||||||||||||||||||||||||||||||
Allowance for sales discounts | 90,269 | — | 265,340 | 256,730 | (c) | 1,122 | 100,001 | |||||||||||||||||||||||||||||||||||||
$ | 97,292 | $ | 6,020 | $ | 265,340 | $ | 258,849 | $ | 1,239 | $ | 111,042 | |||||||||||||||||||||||||||||||||
Year Ended April 3, 2004 | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 6,394 | $ | 2,633 | $ | — | $ | 2,004 | (a) | $ | 7,023 | $ | 6,394 | $ | 2,633 | $ | — | $ | 2,004 | (b) | $ | — | $ | 7,023 | ||||||||||||||||||||
Allowance for sales discounts | 11,237 | 55,817 | — | 43,541 | 23,513 | 48,432 | — | 213,645 | 171,808 | (c) | — | 90,269 | ||||||||||||||||||||||||||||||||
$ | 17,631 | $ | 58,450 | $ | — | $ | 45,545 | $ | 30,536 | $ | 54,826 | $ | 2,633 | $ | 213,645 | $ | 173,812 | $ | — | $ | 97,292 | |||||||||||||||||||||||
Year Ended March 29, 2003 | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 5,091 | $ | 1,760 | $ | — | $ | 457 | (a) | $ | 6,394 | $ | 5,091 | $ | 1,760 | $ | — | $ | 457 | (b) | $ | — | $ | 6,394 | ||||||||||||||||||||
Allowance for sales discounts | 8,084 | 35,732 | — | 32,579 | 11,237 | 64,161 | — | 129,009 | 144,738 | (c) | — | 48,432 | ||||||||||||||||||||||||||||||||
$ | 13,175 | $ | 37,492 | $ | — | $ | 33,036 | $ | 17,631 | $ | 69,252 | $ | 1,760 | $ | 129,009 | $ | 145,195 | $ | — | $ | 54,826 | |||||||||||||||||||||||
Year Ended March 30, 2002 | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 4,667 | $ | 2,920 | $ | — | $ | 2,496 | (a) | $ | 5,091 | |||||||||||||||||||||||||||||||||
Allowance for sales discounts | 7,423 | 29,606 | — | 28,945 | 8,084 | |||||||||||||||||||||||||||||||||||||||
$ | 12,090 | $ | 32,526 | $ | — | $ | 31,441 | $ | 13,175 | |||||||||||||||||||||||||||||||||||
(a) | Reserves and allowances recorded as a reduction of net sales. |
(b) | Accounts written-off as uncollectible. | |
(c) | End of season customer allowances, operational chargebacks and returns credited against customers accounts. |
S-1F-44