Ralph Lauren Annual Report 1998

1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K (MARK ONE)/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 28, 1998 OR/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13057 POLO RALPH LAUREN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE(State or other jurisdiction of 13-2622036 incorporation or organization) (IRS Employer Identification No.) 650 MADISON AVENUE, NEW YORK, NEW YORK 10022(Address of principal executive offices) (Zip Code) 212-318-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTEREDClass A Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONEIndicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes /x/ No / /.Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. / /The aggregate market value of the registrant's voting stock held bynonaffiliates of the registrant was approximately $915,070,414 at June 18, 1998.At June 18, 1998, 34,083,302 shares of the registrant's Class A Common Stock,$.01 par value, and 43,280,021 shares of the registrant's Class B Common Stock,$.01 par value and 22,720,979 shares of the registrant's Class C Common Stock,$.01 par value, were outstanding. 2 DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED Proxy Statement for Annual Meeting of Part III Stockholders to be held August 13, 1998 3 PART IITEM 1. BUSINESS. Unless the context requires otherwise, references to the "Company"or to "Polo" are to Polo Ralph Lauren Corporation and its subsidiaries. Due tothe collaborative and ongoing nature of the Company's relationships with itslicensees, such licensees are referred to in this Form 10-K as "licensingpartners" and the relationships between the Company and such licensees arereferred to in this Form 10-K as "licensing alliances." Notwithstanding thesereferences, however, the legal relationship between the Company and itslicensees is one of licensor and licensee, and not one of partnership. Polo is a leader in the design, marketing and distribution ofpremium lifestyle products. For more than 30 years, Polo's reputation anddistinctive image have been consistently developed across an expanding number ofproducts, brands and international markets. The Company's brand names, whichinclude "Polo," "Polo by Ralph Lauren," "Polo Sport," "Ralph Lauren," "RALPH,""Lauren," "Polo Jeans Co." and "Chaps," among others, constitute one of theworld's most widely recognized families of consumer brands. Directed by RalphLauren, the internationally renowned designer, the Company believes it hasinfluenced the manner in which people dress and live in contemporary society,reflecting an American perspective and lifestyle uniquely associated with Poloand Ralph Lauren. Polo combines its consumer insight and design, marketing and imagingskills to offer, along with its licensing partners, broad lifestyle productcollections in four categories: apparel, home, accessories and fragrance.Apparel products include extensive collections of menswear, womenswear andchildren's clothing. The Ralph Lauren Home Collection offers coordinatedproducts for the home including bedding and bath products, interior decor andtabletop and gift items. Accessories encompass a broad range of products such asfootwear, eyewear, jewelry and leather goods (including handbags and luggage).Fragrance and skin care products are sold under the Company's Polo, Lauren,Safari and Polo Sport brands, among others.OPERATIONS Polo's business consists of three integrated operations: wholesale,retail and licensing. Each is driven by the Company's guiding philosophy ofstyle, innovation and quality. Details of the Company's net revenues are shown in the table below. FISCAL YEAR PRO FORMA ----------- FISCAL 1997(3) 1998 1997 1996 (unaudited) ---------- ---------- ---------- ---------- (IN THOUSANDS) Wholesale net sales(1) $ 733,065 $ 663,358 $ 606,022 $ 623,041Retail sales ................. 570,751 379,972 303,698 508,645 ---------- ---------- ---------- ---------- Net sales .................. 1,303,816 1,043,330 909,720 1,131,686Licensing revenue(1)(2) 167,119 137,113 110,153 137,113 ---------- ---------- ---------- ---------- Net revenues ............... $1,470,935 $1,180,443 $1,019,873 $1,268,799 ========== ========== ========== ========== (1) The Company purchased certain of the assets of its former womenswear licensing partner in October 1995. The fiscal 1998, fiscal 1997 and fiscal 1996 net revenues reflect the inclusion of 1 4 womenswear wholesale net sales of $98.4 million, $98.8 million and $36.7 million, respectively, and an elimination of licensing revenue associated with the operations of the womenswear business after the acquisition. (2) Licensing revenue includes royalties received from Home Collection licensing partners. (3) In February 1993, the Company entered into a joint venture to combine certain of its retail operations with those of its joint venture partner, Perkins Shearer Venture, to form Polo Retail Corporation ("PRC"). On March 21, 1997, the Company entered into an agreement, effective April 3, 1997, to acquire the 50% interest it did not own from its joint venture partner (the "PRC Acquisition"). Prior to the PRC Acquisition, the Company accounted for its interest in PRC under the equity method. Effective April 3, 1997, the Company consolidated the operations of PRC in fiscal 1998 and accounted for the transaction under the purchase method. On a pro forma basis for fiscal 1997, wholesale net sales by the Company to PRC are eliminated and PRC net revenues are reflected as retail sales. Assuming the acquisition had taken place at March 31, 1996, pro forma wholesale net sales and retail sales in fiscal 1997 would have been $623.0 million and $508.7 million, respectively. Pro forma fiscal 1997 net revenues reflect the inclusion of womenswear wholesale net sales of $79.6 million and an elimination of licensing revenue associated with the operations of the womenswear business after the acquisition.WHOLESALE Polo's wholesale business is subdivided into two divisions: Polo RalphLauren Menswear and Ralph Lauren Womenswear. In both of its wholesale divisions,the Company offers discrete brand offerings to compete at various price levels.See "-- Domestic Wholesale and Home Collection Customers and Services."POLO RALPH LAUREN MENSWEAR The Menswear division designs, sources, markets and distributes menswearunder its Polo by Ralph Lauren, Polo Sport, Ralph Lauren/Purple Label Collectionand Polo Golf brands. Each line is directed by a team consisting of design,merchandising, sales and production staff who work together to conceive, developand merchandise product groupings organized to convey a variety of designconcepts. Generally, there are four annual seasonal presentations for each line:Fall, Cruise/Holiday, Spring and Summer. Within each line, the Company offerscore and recurring styles complemented by fashion forward items reflectingcontemporary trends. Polo is recognized worldwide as one of the premier men'sdesigner collections, and Mr. Lauren was named 1996 Menswear Designer of theYear by the Council of Fashion Designers of America ("CFDA"). POLO BY RALPH LAUREN. The Polo by Ralph Lauren menswear collection is acomplete men's wardrobe consisting of products related by theme, style, colorand fabric. Polo by Ralph Lauren menswear is generally priced at a range ofprice points within the men's premium ready-to-wear apparel market. This line iscurrently sold through approximately 1,620 department store, specialty store andPolo store doors in the United States, including approximately 1,200 departmentstore shop-within-shops. POLO SPORT. The Polo Sport line of activewear and sportswear is designed tomeet the growing consumer demand for functional sport and outdoor apparel. PoloSport is offered at a range of price points generally consistent with prices forthe Polo by Ralph Lauren line, and is distributed through the same channels asPolo by Ralph Lauren. 2 5 RALPH LAUREN/PURPLE LABEL COLLECTION. In Fall 1995, the Company introducedits Purple Label Collection of men's tailored clothing and, in Fall 1997, tocomplement the tailored clothing line, the Company launched its Purple Labelsportswear line. Purple Label Collection tailored clothing is manufactured anddistributed by a licensee, and dress shirts and ties and sportswear are sourcedand distributed by the Company. The Purple Label lines are sold through alimited number of premier fashion retailers, currently numbering 26 doors in theUnited States and eight internationally. POLO GOLF. The Polo Golf line is targeted at the golf and resort markets.Price points are similar to those charged for products in the Polo Sport line.The Polo Golf line is presently sold in the United States through approximately1,600 leading golf clubs, pro shops and resorts, in addition to department,specialty and Polo stores.RALPH LAUREN WOMENSWEAR The Womenswear division designs, sources, markets and distributeswomenswear under its Ralph Lauren Collection and Collection Classics,RALPH/Ralph Lauren and Ralph Lauren Polo Sport brands. Representatives from eachof the design, merchandising, sales and production staffs work together toconceive, develop and sell product groupings organized to convey a variety ofdesign concepts. Each of the women's apparel lines (except Ralph LaurenCollection) consists of core, recurring styles, complemented by morefashion-oriented items which reflect contemporary trends. Mr. Lauren introducedhis first womenswear products in 1971 and subsequently licensed the line in1973. In October 1995, to capitalize further on its position, both domesticallyand internationally, as a leading designer of womenswear, Polo acquired thebusiness of its former licensing partner and commenced its own womenswearwholesale operations. Since acquiring control of these operations, the Companyhas centralized control of its womenswear design, merchandising and salesactivities and focused its efforts on improving the quality, production anddelivery of its products. In addition, the Company has sought to build itswomenswear business by capitalizing on the relationships developed with itsmenswear customers and by devoting resources to creating and renovatingshop-within-shops and other exclusively fixtured areas within department stores. The womenswear industry's three basic selling seasons are Fall,Cruise/Holiday and Spring/Summer. The women's ready-to-wear apparel market inthe United States is divided into four segments defined by price levels, rangingfrom lowest to highest, as follows: moderate, better, bridge and designer. TheCompany competes directly in the bridge and designer segments of the womenswearindustry, and competes through its licensing partner for the Lauren line in thebetter segment. RALPH LAUREN COLLECTION AND COLLECTION CLASSICS. The Ralph LaurenCollection, sold under the purple label and the Custom Collection Label (the"Collection"), expresses the Company's up-to-the-moment fashion vision forwomen. Collection Classics, sold under Ralph Lauren's black label, includetimeless versions of the Company's most successful Collection styles, as well asnewly-designed classic signature styles which tend to remain in a women'swardrobe for several seasons. Collection and Collection Classics are offered forlimited distribution to premier fashion retailers and through Polo stores. Pricepoints are at the upper end or luxury ranges. The lines are currently sold bythe Company through over 86 doors in the United States by the Company and over235 international doors by the Company and its licensing partners. 3 6 RALPH/RALPH LAUREN. The RALPH/Ralph Lauren brand was established in 1994and presents a distinct and more casual fashion identity for the bridge market,while retaining a strong association with the Ralph Lauren Collection designerimage. The line is sold through approximately 145 doors in the United States andCanada. In fall 1999, this line will be renamed and the RALPH/Ralph Lauren brandwill be relaunched and used in connection with a newly licensed young women's(ages 16-24) line. RALPH LAUREN POLO SPORT. Similar to its menswear counterpart, the RalphLauren Polo Sport line for women includes activewear for a variety of sports, aswell as weekend sportswear. The Ralph Lauren Polo Sport line is currentlycarried by approximately 500 doors in the United States, including approximately185 shop-within-shops, and sells at a wide range of bridge prices.HOME COLLECTION With the introduction of the Ralph Lauren Home Collection in 1983, Polobecame one of the first major apparel designers to extend its design principlesand brands to a complete line of home furnishings. Today, in conjunction withits licensing partners, Polo offers an extensive collection of home productswhich both draw upon, and add to, the design themes of the Company's otherproduct lines, contributing to Polo's complete lifestyle concept. Products aresold under the Ralph Lauren Home Collection brands in three primary categories:bedding and bath, interior decor, and tabletop and gift. In addition to developing the Home Collection, Polo acts as sales andmarketing agent for its domestic Home Collection licensing partners. Togetherwith its eight domestic home product licensing partners, representatives of theCompany's design, merchandising, production and sales staffs collaborate toconceive, develop and merchandise the various products as a complete homefurnishing collection. Polo's personnel market and sell the products to domesticcustomers and certain international accounts. Polo's licensing partners, many ofwhich are leaders in their particular product category, manufacture, own theinventory and ship the products. As compared to its other licensing alliances,Polo performs a broader range of services for its Home Collection licensingpartners, which, in addition to sales and marketing, include operating showroomsand incurring advertising expenses. Consequently, Polo receives a higher royaltyrate from its Home Collection licensing partners, which rates typically rangefrom 15% to 25%. Home Collection licensing alliances generally have three tofive-year terms and often grant the licensee conditional renewal options. Home Collection products are positioned at the upper tiers of theirrespective markets and are offered at a range of price levels. The Company's home furnishings products generally are distributed throughdepartment stores, specialty furniture stores, interior design showrooms,customer catalogs and home centers. As with its other products, the use ofshop-within-shops is central to the Company's distribution strategy. Certainlicensing partners, including those selling furniture, wall coverings, blankets,bed pillows, tabletop, flatware, home fragrance and paint, also sell theirproducts directly through their own staffs to reach additional customer markets. The home furnishings products offered by the Company and its domesticlicensing partners are listed below. 4 7 CATEGORY Product Licensing Partner Bedding and Bath Towels, sheets, pillowcases and matching WestPoint Stevens, Inc. bedding accessories Blankets, bed pillows, comforters and Pillowtex Corporation other decorative bedding accessories, excluding those matched to sheets, and bath rugs Interior Decor Upholstered furniture and case goods Henredon Furniture Industries, Inc. Interior and exterior paints, stains and The Sherwin-Williams special finishes Company Fabric and wallpaper P. Kaufmann, Inc. Table and Giftware Sterling, silverplate and stainless Reed and Barton steel flatware and picture frames Corporation Crystal and glass tableware and RJS Scientific, Inc. giftware, ceramic dinnerware and giftware, home fragrances (potpourri, scented candles, etc.) and Polo bears Placemats, tablecloths, napkins Designers Collection, Inc. The Company's three most significant Home Collection licensing partners based on aggregate licensing revenue paid to the Company are WestPoint Stevens,Inc., Pillowtex Corporation and Henredon Furniture Industries, Inc. WestPointStevens, Inc. accounted for approximately 45% of Home Collection licensingrevenue in fiscal 1998.DOMESTIC WHOLESALE AND HOME COLLECTION CUSTOMERS AND SERVICE GENERAL. Consistent with the appeal and distinctive image of its productsand brands, the Company sells its menswear, womenswear and home furnishingsproducts primarily to leading upscale department stores, specialty stores, golfand pro shops and Polo stores located throughout the United States which havethe reputation and merchandising expertise required for the effectivepresentation of Polo products. The Company's wholesale and home furnishings products are distributedthrough the primary distribution channels listed in the table below. Inaddition, the Company also sells excess and out-of-season products throughsecondary distribution channels. Approximate Number of Doors as of March 28, 1998 Menswear Womenswear Home Collection Department Stores ................. 1,300 390 1,375Specialty Stores .................. 285 90 50Polo Stores ....................... 40 50 40Golf & Pro Shops .................. 1,600 710 -- Department stores represent the largest customer group of each wholesaledivision and of Home Collection. Major department store customers includeFederated Department Stores, Inc., Dillard Department Stores, Inc. and The MayDepartment Stores Company. During fiscal 1998, Federated Department Stores,Inc., Dillard Department Stores, Inc. and 5 8The May Department Stores Company accounted for 19.1%, 16.4% and 15.8%,respectively, of the Company's wholesale net sales. Menswear, womenswear and Home Collection wholesale products are primarilysold through their respective sales forces aggregating approximately 125salespersons employed by Polo. The Menswear division maintains its primaryshowroom at Polo's New York City executive headquarters. Regional showrooms formenswear are located in Atlanta, Chicago, Dallas and Los Angeles. An independentsales representative promotes sales to U.S. military exchanges. The Womenswearand Home Collection divisions maintain their primary showrooms in New York City.Regional sales representatives for the Home Collection are located in theCompany's showrooms in Atlanta, Chicago, Dallas and Los Angeles. The Companyalso operates a separate tabletop showroom in New York City. SHOP-WITHIN-SHOPS. As a critical element of its distribution to departmentstores, the Company and its licensing partners utilize shop-within-shops toenhance brand recognition, permit more complete merchandising of the Company'slines and differentiate the presentation of products. The Company intends to addapproximately 230 shop-within-shops and refurbish approximately 270shop-within-shops in fiscal 1999. At March 28, 1998, department store customersin the United States had installed over 1,900 shop-within-shops dedicated to theCompany's products and over 1,000 shops-within-shops dedicated to Polo'slicensed products. The size of Polo shop-within-shops (excluding significantlylarger shop-within-shops in key department store locations) typically rangesfrom approximately 1,000 to 1,500 square feet for menswear, from approximately800 to 1,200 square feet for womenswear, and from approximately 800 to 1,200square feet for home furnishings. The Company estimates that, in total,approximately 2.0 million square feet of department store space in the UnitedStates is dedicated to Polo shop-within-shops. In addition to shop-within-shops,the Company utilizes exclusively fixtured areas in department stores. BASIC STOCK REPLENISHMENT PROGRAM. The menswear and womenswear programsallow products such as knit shirts, chino pants, oxford cloth shirts and navyblazers to be ordered at any time through basic stock replenishment programs.For customers who reorder basic products, Polo generally ships these productswithin one to five days of order receipt. These products accounted forapproximately 21% of menswear and womenswear wholesale net sales in fiscal 1998.The Company has also implemented a seasonal quick response program to allowreplenishment of products which can be ordered for only a portion of each year.Certain Home Collection licensing partners also offer a basic stockreplenishment program which includes towels, bedding and tabletop products.Basic stock products accounted for approximately 75% of net sales of HomeCollection licensing partners in fiscal 1998.DIRECT RETAILING The Company operates three types of retail stores dedicated to the sale ofPolo products. Located in prime retail areas, the Company's 29 Polo storesoperate under the Polo Ralph Lauren, Polo Sport and Polo Jeans Co. names. TheCompany's 72 outlet stores are generally located in outlet malls and operateunder the Polo Ralph Lauren Factory Store name. In addition to its own retail operations, the Company has granted licensesto independent parties to operate 14 stores in the United States and 76 storesinternationally. The Company receives the proceeds from the sale of its menswearand womenswear products, which are included in wholesale net sales, to thesestores and also receives royalties, which are included 6 9in licensing revenue, from its licensing partners who sell to these stores. TheCompany generally does not receive any other compensation from these licensedstore operators. See "-- Licensing Alliances."POLO STORES In addition to generating sales of Polo Ralph Lauren products, Polo storesset, reinforce and capitalize on the image of Polo's brands. The Company's twoflagship stores located on Madison Avenue in New York City showcase Poloproducts and demonstrate Polo's most refined merchandising techniques. Inaddition to its New York flagship stores, Polo operates 27 other Polo stores.Ranging in size from approximately 2,000 to over 15,000 square feet, thenon-flagship stores are situated in upscale regional malls and major high streetlocations generally in the largest urban markets in the United States. Polo hasalso operated a Polo store on New Bond Street in London since 1983. Inaggregate, the Company operates 25 Polo Ralph Lauren stores, two Polo Sportstores, one Polo Jeans Co. store and one Polo Country store (offering primarilyleisure and weekend apparel). Stores are generally leased for initial periodsranging from five to fifteen years with renewal options. The Company plans to continue to invest in Polo stores. In fiscal 1998,Polo Ralph Lauren stores were opened in Las Vegas, Nevada and Oakbrook, Illinoisand a Polo Jeans Co. store was opened in Garden State Plaza, New Jersey. Amongother locations, new stores are planned for Palm Beach, Florida, Point Orlando,Florida and Burlingame, California, and new flagship stores are planned forChicago and London. In fiscal 1998, Polo renovated or relocated its stores inPhoenix, Arizona, Manhasset, New York and Short Hills, New Jersey. Polo plans toconvert its Polo Ralph Lauren store in Santa Clara, California to a Polo JeansCo. store in fiscal 1999. Effective March 31, 1997, the Company entered into a joint ventureagreement with a nonaffiliated partner to acquire real property in New YorkCity. The Company and its partner are discussing possible concepts for suchlocation. Concurrent with the signing of the agreement, the Company made aninitial contribution for its 50% interest in the joint venture in the amount of$5.0 million. On December 16, 1997, the Company entered into another jointventure agreement with this nonaffiliated partner. The entity formed throughthis joint venture entered into a long-term lease of a building located in theSoho District of New York City.OUTLET STORES Polo extends its reach to additional consumer groups through its 72 PoloRalph Lauren Factory Stores. Outlet stores offer selections of the Company'smenswear, womenswear, children's apparel, accessories, home furnishings andfragrances. Ranging in size from 5,000 to 13,000 square feet, with an average ofapproximately 8,000 square feet, the stores are generally located in majoroutlet centers in 30 states and Puerto Rico. Outlet stores purchase products from Polo, its licensing partners and itssuppliers and from Polo stores in the United States. Outlet stores purchaseproducts from Polo generally at cost and from Polo's domestic product licensingpartners and Polo stores at negotiated prices. Outlet stores also source basicproducts and styles directly from the Company's suppliers. In fiscal 1998, theoutlet stores purchased approximately 29%, 38% and 33% of products from theCompany, licensing partners and other suppliers, respectively. 7 10 The Company plans to add ten to twenty new outlet stores (net ofanticipated store closings) over the next three years. In addition, in fiscal1999, the Company plans to add approximately 20 factory outlet concept storeswhich will carry only certain Polo brands and products and will be smaller thantypical outlet stores.LICENSING ALLIANCES Through licensing alliances, Polo combines its consumer insight and design,marketing and imaging skills with the specific product or geographiccompetencies of its licensing partners to create and build new businesses. TheCompany's licensing partners, who are often leaders in their respective markets,generally contribute the majority of product development costs, provide theoperational infrastructure required to support the business and own theinventory. Product and international licensing partners are granted the right tomanufacture and sell at wholesale specified products under one or more of Polo'strademarks. International licensing partners produce and source productsindependently and in conjunction with the Company and its product licensingpartners. As compensation for the Company's contributions under theseagreements, each licensing partner pays royalties to the Company based upon itssales of Polo Ralph Lauren products, subject generally, to payment of a minimumroyalty. With the exception of Home Collection licenses, these paymentsgenerally range from five to eight percent of the licensing partners's sales ofthe licensed products. See "-- Home Collection" for a description of royaltyarrangements for Home Collection products. In addition, licensing partners arerequired to allocate between two and four percent of their sales to advertisePolo products. Larger allocations are required in connection with launches ofnew products or in new territories. Polo works in close collaboration with its licensing partners to ensurethat products are developed, marketed and distributed to address the intendedmarket opportunity and present consistently to consumers worldwide thedistinctive perspective and lifestyle associated with the Company's brands.Virtually all aspects of the design, production quality, packaging,merchandising, distribution, advertising and promotion of Polo products aresubject to the Company's prior approval and ongoing oversight. The result is aconsistent identity for Polo products across product categories andinternational markets. Polo has 20 product and 11 international licensing partners. A substantialportion of the Company's net income is derived from licensing revenue receivedfrom its licensing partners. The Company's three largest licensing partners bylicensing revenue, WestPoint Stevens, Inc., Seibu Department Stores, Ltd. andJones Apparel Group, Inc. accounted for 12.5%, 11.5% and 11.4%, respectively, oflicensing revenue in fiscal 1998.PRODUCT LICENSING ALLIANCES Polo has agreements with 20 product licensing partners relating to men'sand women's sportswear, men's tailored clothing, children's apparel,personalwear, accessories and fragrances. The products offered by the Company'sproduct licensing partners as of March 28, 1998 are listed below.LICENSING PARTNER LICENSED PRODUCT CATEGORYWarnaco, Inc. Men's Chaps Sportswear 8 11Sun Apparel, Inc. Men's & Women's Polo Jeans Co. Casual Apparel & SportswearJones Apparel Group, Inc. Women's Lauren Better SportswearChester Barrie, Ltd. Men's Purple Label Tailored ClothingPietrafesa Co. Men's Polo Tailored ClothingPeerless Inc. Men's Chaps Tailored ClothingOxford Industries, Inc. Children's (boys) ApparelS. Schwab Company, Inc. Infants, Toddlers & GirlsSara Lee Corporation Men's & Women's Personal Wear ApparelThe Rockport Company Men's & Women's Dress, Casual and Performance Athletic FootwearWathne, Inc. Handbags & LuggageHot Sox, Inc. Men's, Women's & Children's HosieryNew Campaign, Inc. Belts & other Small Leather GoodsEcho Scarves, Inc. Scarves for Men & WomenCarolee, Inc. JewelrySwany, Inc. Men's, Women's & Children's GlovesL'Oreal S.A./Cosmair, Inc. Men's & Women's Fragrances and skin care productsAuthentic Fitness Products, Inc. Women's & Girls' SwimwearBurton Golf, Inc. Golf bagsSafilo USA, Inc. EyewearINTERNATIONAL LICENSING ALLIANCES The Company believes that international markets offer additionalopportunities for Polo's quintessential American designs and lifestyle image andis committed to the global development of its businesses. Internationalexpansion opportunities may include the roll out of new products and brandsfollowing their launch in the U.S., the introduction of additional productlines, the entrance into new international markets and the addition of Polostores in these markets. For example, following the successful launch of PoloJeans Co. in the U.S. in Fall 1996, the Company launched the line in Canada, theU.K., Germany, Spain, Japan, Israel, Hong Kong, Singapore and Taiwan. Polo workswith its 11 international licensing partners to facilitate this internationalexpansion. International licensing partners also operate 76 Polo stores. In fiscal 1998, the Company added nine new Polo stores in internationalmarkets including a Polo Sport store, a Polo Jeans Co. store and a Polo RalphLauren store in Tel Aviv, a Polo Sport store in Kuwait City, a Polo Ralph Laurenstore in Dubai, two Polo Jeans Co. stores in Singapore and one Polo Jeans Co.store in each of Hong Kong and Taiwan. The Company is also pursuing plans forexpansion into Mexico. 9 12 International licensing partners acquire the right to source, produce,market and/or sell some or all Polo products in a given geographical area.Economic arrangements are similar to those of domestic product licensingpartners. Licensed products are designed by the Company, either alone or incollaboration with its domestic licensing partners. Domestic licensees generallyprovide international licensing partners with patterns, piece goods,manufacturing locations and other information and assistance necessary toachieve product uniformity, for which they are, in many cases, compensated. The most significant international licensing partners by royalties infiscal 1998 were Seibu Department Stores, Ltd., which oversees distribution ofvirtually all of the Company's products in Japan, L'Oreal S.A., whichdistributes fragrances and toiletries outside of the United States and Poloco,S.A., which distributes men's and boys' Polo apparel, men's and women's PoloJeans Co. apparel and certain accessories in Europe. The Company's ability tomaintain and increase royalties under foreign licenses is dependent upon certainfactors not within the Company's control, including fluctuating currency rates,currency controls, withholding requirements levied on royalty payments,governmental restrictions on royalty rates, political instability and localmarket conditions.DESIGN The Company's products reflect a timeless and innovative American styleassociated with and defined by Polo and Ralph Lauren. The Company's consistentemphasis on innovative and distinctive design has been an important contributorto the prominence, strength and reputation of the Polo Ralph Lauren brands. Forsome 30 years, the Company's designers have influenced, anticipated andresponded to evolving consumer tastes within the context of Polo's definingaesthetic principles. Mr. Lauren, supported by Polo's design staff, has wonnumerous awards for Polo's designs including the prestigious 1996 MenswearDesigner of the Year award and 1995 Womenswear Designer of the Year award, bothof which were awarded by the CFDA. In addition, Mr. Lauren was honored with theCFDA Lifetime Achievement Award in 1991 and the CFDA Award for HumanitarianLeadership in 1998, and is the only person to have won all four of these awards. Design teams are formed around the Company's brands and product categoriesto develop concepts, themes and products for each of Polo's businesses. Theseteams work in close collaboration with merchandising, sales and production staffand licensing partners in order to gain market and other input. All Polo Ralph Lauren products are designed by or under the direction ofMr. Ralph Lauren and the Company's design staff of approximately 210, which isdivided into three departments: Menswear, Womenswear and Home Collection. The Company operates a research, development and testing facility inGreensboro, North Carolina, testing labs in New Jersey and Singapore and patternrooms in New York and New Jersey.MARKETING Polo's marketing program communicates the themes and images of the PoloRalph Lauren brands and is an integral feature of its product offering.Worldwide marketing is managed on a centralized basis through the Company'sadvertising and public relations departments in order to ensure consistency ofpresentation. 10 13 The Company creates the distinctive image advertising for all Polo RalphLauren products, conveying the particular message of each brand within thecontext of Polo's core themes. Advertisements generally portray a lifestylerather than a specific item and often include a variety of Polo products offeredby both the Company and its licensing partners. Polo's primary advertisingmedium is print, with multiple page advertisements appearing regularly in arange of fashion, lifestyle and general interest magazines including Elle,Esquire, GQ, The New York Times Magazine, Town and Country, Vanity Fair andVogue. Major print advertising campaigns are conducted during the Fall andSpring retail seasons with additions throughout the year to coincide withproduct deliveries. In addition to print, certain product categories utilizetelevision and outdoor media in their marketing programs. The Company's licensing partners contribute a percentage (usually betweentwo and four percent) of their sales of Polo products for advertising. TheCompany directly coordinates advertising placement for domestic productlicensing partners. During fiscal 1998, Polo and its licensing partnerscollectively spent more than $154 million worldwide to advertise and promotePolo products. Polo conducts a variety of public relations activities. Each of the Springand Fall womenswear collections is introduced at major fashion shows in New Yorkwhich generate extensive domestic and international media coverage. Inrecognition of the increasing role menswear plays in the fashion industry, eachof the Spring and Fall menswear collections is introduced at fashionpresentations organized for the fashion press. In addition, Polo sponsorsprofessional golfers, organizes in-store appearances by its models and sponsorssports teams.SOURCING, PRODUCTION AND QUALITY The Company's apparel products are produced for the Company byapproximately 180 different manufacturers worldwide. The Company contracts forthe manufacture of its products and does not own or operate any productionfacilities. During fiscal 1998, approximately 42% (by dollar volume) of men'sand women's products were produced in the United States and its territories andapproximately 58% (by dollar volume) of such products were produced in HongKong, Malaysia and other foreign countries. Two manufacturers engaged by theCompany accounted for approximately 10% and 8%, respectively, of the Company'stotal production during fiscal 1998. The primary production facilities of thesetwo manufacturers are located in Hong Kong and Saipan, in the case of themanufacturer that accounted for approximately 10% of the Company's totalproduction during fiscal 1998 and in Malaysia, Sri Lanka, Hong Kong andMauritius, in the case of the manufacturer that accounted for approximately 8%of the Company's total production during fiscal 1998. No other manufactureraccounted for more than five percent of the Company's total production in fiscal1998. Production is divided broadly into purchases of finished products, wherethe supplier is responsible for the purchasing and carrying of raw materials,and cut, make and trim ("CMT") purchasing, where the Company is responsible forthe purchasing and movement of raw materials to finished product assemblerslocated throughout the world. CMT arrangements typically allow the Company morelatitude to incorporate unique detailing elements and to develop specialtyitems. The Company uses a variety of raw materials, principally consisting ofwoven and knitted fabrics and yarns. 11 14 The Company must commit to manufacture the majority of its garments beforeit receives customer orders. In addition, the Company must commit to purchasefabric from mills well in advance of its sales. If the Company overestimates thedemand for a particular product which it cannot sell to its primary customers,it may use the excess for distribution in its outlet stores or sell the productthrough secondary distribution channels. If the Company overestimates the needfor a particular fabric or yarn, that fabric or yarn can be used in garmentsmade for subsequent seasons or made into past season's styles for distributionin its outlet stores. The Company has been working closely with suppliers in recent years toreduce lead times to maximize fulfillment (i.e., shipment) of orders and topermit re-orders of successful programs. In particular, the Company hasincreased the number of deliveries within certain brands each season so thatmerchandise is kept fresh at the retail level. Suppliers operate under the close supervision of Polo's product managementdepartment in the United States, and in the Far East under that of a whollyowned subsidiary which performs buying agent functions for the Company and thirdparties. All garments are produced according to Polo's specifications.Production and quality control staff in the United States and in the Far Eastmonitor manufacturing at supplier facilities in order to correct problems priorto shipment of the final product to Polo. While final quality control isperformed at Polo's distribution centers, procedures have been implemented underPolo's vendor certification program, so that quality assurance is focused asearly as possible in the production process, allowing merchandise to be receivedat the distribution facilities and shipped to customers with minimalinterruption. The Company retains independent buying agents in Europe and South Americato assist the Company in selecting and overseeing independent third-partymanufacturers, sourcing fabric and other products and materials, monitoringquota and other trade regulations, as well as performing some quality controlfunctions.COMPETITION Competition is strong in the segments of the fashion and consumer productindustries in which the Company operates. The Company competes with numerousdesigners and manufacturers of apparel and accessories, fragrances and homefurnishing products, domestic and foreign, some of which may be significantlylarger and have substantially greater resources than the Company. The Companycompetes primarily on the basis of fashion, quality, and service. The Company'sbusiness depends on its ability to shape, stimulate and respond to changingconsumer tastes and demands by producing innovative, attractive, and excitingproducts, brands and marketing, as well as on its ability to remain competitivein the areas of quality and price.DISTRIBUTION To facilitate distribution, men's products are shipped from manufacturersto the Company's distribution center in Greensboro, North Carolina forinspection, sorting, packing and shipment to retail customers. The Company'sdistribution/customer service facility is designed to allow for high densitycube storage and utilizes bar code technology to provide inventory managementand carton controls. Product traffic management is coordinated from thisfacility in conjunction with the Company's product management and buying agentstaffs. During fiscal 1998, womenswear distribution was provided by a "pick andpack" facility in 12 15New Jersey under a warehousing distribution agreement with an unaffiliated thirdparty. Pursuant to a warehousing distribution agreement entered into by theCompany and another unaffiliated third party on December 1, 1997, the Companyplans to move its Womenswear warehousing distribution facility to Secaucus, NewJersey commencing on approximately April 1, 1998. This agreement provides thatthe warehouse distributor will perform storage, quality control and shippingservices for the Company. In return, the Company must pay the warehousedistributor a per unit rate and special processing charges for services such asticketing, bagging and steaming. The initial term of this agreement is throughDecember 1, 2000 and is thereafter renewable annually. Outlet store distributionand warehousing is principally handled through the Greensboro distributioncenter as well as a satellite center also located in North Carolina. Polo storedistribution is provided by a facility in Columbus, Ohio and a facility in NewJersey which services the Company's stores in New York City and East Hampton,New York. The Company's licensing partners are responsible for the distributionof licensed products, including Home Collection products. The Company iscurrently evaluating warehousing and distribution facilities for its retailstores.MANAGEMENT INFORMATION SYSTEM The Company's management information system is designed to provide, amongother things, comprehensive order processing, production, accounting andmanagement information for the marketing, manufacturing, importing anddistribution functions of the Company's business. The Company has installedsophisticated point-of-sale registers in its Polo stores and outlet stores thatenable it to track inventory from store receipt to final sale on a real-timebasis. The Company believes its merchandising and financial system, coupled withits point-of-sale registers and software programs, allow for rapid stockreplenishment, concise merchandise planning and real-time inventory accountingpractices. In addition, the Company utilizes an electronic data interchange ("EDI")system to facilitate the processing of replenishment and fashion orders from itswholesale customers, the movement of goods through distribution channels, andthe collection of information for planning and forecasting. The Company has EDIrelationships with customers who represent a significant majority of itswholesale business and is working to expand its EDI capabilities to include mostof its suppliers. See "Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operations -- Impact of the Year 2000 Issue."CREDIT CONTROL The Company manages its own credit and collection functions. The Companysells its merchandise primarily to major department stores across the UnitedStates and extends credit based on an evaluation of the customer's financialcondition, usually without requiring collateral. The Company monitors creditlevels and the financial condition of its customers on a continuing basis tominimize credit risk. The Company does not factor its accounts receivables ormaintain credit insurance to manage the risks of bad debts. The Company's baddebt write-offs were less than 1% of net revenues for fiscal 1998.BACKLOG The Company generally receives wholesale orders for apparel productsapproximately three to five months prior to the time the products are deliveredto stores. All such orders are subject to cancellation for late delivery. AtMarch 28, 1998, Summer and Fall backlog, presented on a pro forma basis toreflect the PRC Acquisition, was $340.1 million and $41.3 13 16million, as compared to $304.4 million and $28.0 million at March 29, 1997 formen's and women's apparel, respectively. The Company's backlog depends upon anumber of factors, including the timing of the market weeks for its particularlines, during which a significant percentage of the Company's orders arereceived, and the timing of shipments. As a consequence, a comparison of backlogfrom period to period is not necessarily meaningful and may not be indicative ofeventual shipments.TRADEMARKS The Company is the owner of the "Polo," "Ralph Lauren" and the famous poloplayer astride a horse trademarks in the United States. Additional trademarksowned by the Company include, among others, "Chaps," "Polo Sport," "Lauren/RalphLauren," "RALPH" and "RRL"and certain trademarks pertaining to fragrances andcosmetics. In connection with the adoption of the "RRL" trademarks by theCompany, pursuant to an agreement with the Company, Mr. Lauren retained theroyalty-free right to use as trademarks "Ralph Lauren," "Double RL" and "RRL" inperpetuity in connection with, among other things, beef and living animals. Thetrademarks "Double RL" and "RRL" are currently used by the Double RL Company, anentity wholly owned by Mr. Lauren. In addition, Mr. Lauren engages in personalprojects involving non-Company related film or theatrical productions throughRRL Productions, Inc., a Company wholly owned by Mr. Lauren. The Company's trademarks are the subject of registrations and pendingapplications throughout the world for use on a variety of items of apparel,apparel-related products, home furnishings and beauty products, as well as inconnection with retail services, and the Company continues to expand itsworldwide usage and registration of related trademarks. The Company regards thelicense to use the trademarks and its other proprietary rights in and to thetrademarks as valuable assets in the marketing of its products and, on aworldwide basis, vigorously seeks to protect them against infringement. As aresult of the appeal of its trademarks, Polo's products have been the object ofcounterfeiting. The Company has a broad enforcement program which has beengenerally effective in controlling the sale of counterfeit products in theUnited States and in major markets abroad. In markets outside of the United States, the Company's rights to some orall of its trademarks may not be clearly established. In the course of itsinternational expansion, the Company has experienced conflicts with variousthird parties which have acquired ownership rights in certain trademarks whichinclude "Polo" and/or a representation of a polo player astride a horse whichwould have impeded the Company's use and registration of its principaltrademarks. While such conflicts are common and may arise again from time totime as the Company continues its international expansion, the Company has inthe past successfully resolved such conflicts through both legal action andnegotiated settlements with third-party owners of such conflicting marks. Two agreements by which the Company resolved conflicts with third-partyowners of other trademarks impose current restrictions or monetary obligationson the Company. In one, the Company reached an agreement with a third partywhich owned competing registrations in numerous European and South Americancountries for the trademark "Polo" and a symbol of a polo player astride ahorse. By virtue of the agreement, Polo has acquired that third party'sportfolio of trademark registrations, in consideration of the payment (capped asset forth below) of 30% of the Company's European and Mexican royalties and 50%of its South American royalties (solely in respect of the Company's use oftrademarks which include "Polo" and the polo player symbol, and not, forexample, "Ralph Lauren" 14 17alone, "Lauren/Ralph Lauren," "RRL," etc.). Remittances to this third party arenot reflected in licensing revenue in the Company's financial statements andwill cease no later than 2008, or sooner, when the remittances with respect toEurope and Mexico to this third party aggregate $15.0 million. As of March 28,1998, the Company has paid approximately $8.9 million to this third party. TheCompany's obligation to share royalties with respect to Central and SouthAmerica and parts of the Caribbean expires in 2013, but the Company also has theright to terminate this obligation at any time by paying $3.0 million. Thesecond agreement was reached with a third party which owned conflictingregistrations of the trademarks "Polo" and a polo player astride a horse in theU.K., Hong Kong, and South Africa. Pursuant to the agreement, the third partyretains the right to use its "Polo" and polo player symbol marks in South Africaand certain other African countries, and the Company agreed to restrict use ofthose Polo marks in those countries to fragrances and cosmetics (as to which theCompany's use is unlimited) and to the use of the Ralph (polo player symbol)Lauren mark on women's and girls' apparel and accessories. By agreeing to thoserestrictions, the Company secured the unlimited right to use its trademarks(without payment of any kind) in the United Kingdom and Hong Kong, and the thirdparty is prohibited from distributing products under those trademarks in thosecountries.GOVERNMENT REGULATION The Company's import operations are subject to constraints imposed bybilateral textile agreements between the United States and a number of foreigncountries. These agreements, which have been negotiated bilaterally either underthe framework established by the Arrangement Regarding International Trade inTextiles, known as the Multifiber Agreement, or other applicable statutes,impose quotas on the amounts and types of merchandise which may be imported intothe United States from these countries. These agreements also allow thesignatories to adjust the quantity of imports for categories of merchandisethat, under the terms of the agreements, are not currently subject to specificlimits. The Company's imported products are also subject to United Statescustoms duties which comprise a material portion of the cost of the merchandise. Apparel products are subject to regulation by the Federal Trade Commissionin the United States. Regulations relate principally to the labeling of theCompany's products. The Company believes that it is in substantial compliancewith such regulations, as well as applicable federal, state, local, and foreignrules and regulations governing the discharge of materials hazardous to theenvironment. There are no significant capital expenditures for environmentalcontrol matters either estimated in the current year or expected in the nearfuture. The Company's licensed products and licensing partners are, in addition,subject to additional regulation. The Company's agreements require its licensingpartners to operate in compliance with all laws and regulations, and the Companyis not aware of any violations which could reasonably be expected to have amaterial adverse effect on the Company's business. Although the Company has not in the past suffered any material inhibitionfrom doing business in desirable markets, there can be no assurance thatsignificant impediments will not arise in the future as it expands productofferings and additional trademarks to new markets. 15 18EMPLOYEES As of March 28, 1998, the Company had approximately 5,800 employees,including 5,500 in the United States and 300 in foreign countries. Of the total,approximately 60 employees hold executive and administrative positions, 210 areengaged in design, 130 are engaged in advertising, public relations and creativeservices, 180 are engaged in production, 240 are engaged in wholesale sales andmerchandising, 3,200 are engaged in retail sales, 700 are engaged indistribution and the remaining employees are engaged in other aspects of thebusiness. Approximately 1,000 of the Company's total employees were hired inconnection with the PRC Acquisition. Approximately 30 of the Company's UnitedStates production and distribution employees in the womenswear business aremembers of the Union of Needletrades, Industrial & Textile Employees under anindustry association collective bargaining agreement which the Company'swomenswear subsidiary has adopted. This contract was renegotiated in fiscal 1998and extended to May 31, 2000. The Company considers its relations with both itsunion and non-union employees to be good.ITEM 2. PROPERTIES The Company does not own any real property except an undeveloped parcel ofland adjacent to its leased Greensboro, North Carolina distribution facility anda 50% joint venture interest in a 44,000 square foot building located in theSoho district of New York City. Certain information concerning the Company'sprincipal facilities in excess of 100,000 rentable square feet and of itsexisting flagship stores of 20,000 rentable square feet or more, all of whichare leased, is set forth below: Approximate Current Lease LOCATION Use Sq. Ft. Term Expiration -------- --- ------- --------------- Greensboro, N.C. Distribution 357,000 January 31, 2006 650 Madison Avenue, NYC Executive, December 31, 2009 corporate 206,000 and design offices, men's showrooms Lyndhurst, N.J. Corporate and 162,000 February 28, 2008 retail administrative offices Winston-Salem, N.C. Distribution 115,000 June 30, 1999 867 Madison Avenue, NYC Direct Retail 27,000 December 31, 2004 During fiscal 1998, the Company leased additional space at its two corporateheadquarters (at 650 Madison Avenue, New York City and Lyndhurst, New Jersey)and extended the terms of such leases for an additional five-year period in eachcase. The leases for the Company's non-retail facilities (approximately 22 in all)provide for aggregate annual rentals of $18.6 million in fiscal 1998. TheCompany anticipates that it will be able to extend those leases which expire inthe near future on terms satisfactory to the Company or, if necessary, locatesubstitute facilities on acceptable terms. As of March 28, 1998, the Company operated 29 Polo stores and 72 outletstores in leased premises. Aggregate annual rent paid for retail space by theCompany in fiscal 1998 totaled $29.7 million. Except for approximately twooutlet stores for which the Company will not seek renewal upon lease expiration,the Company anticipates that it will be able to extend those leases which expirein the near future on satisfactory terms or to relocate to more desirablelocations. 16 19 The Company is currently re-evaluating its warehousing and distributionneeds for its retail operations. The Company believes that its existingfacilities are well maintained and in good operating condition, and plans toexpand its warehousing and distribution capacity over the next two fiscal years.ITEM 3. LEGAL PROCEEDINGS. The Company is a defendant in a purported national class action lawsuit The Company is a defendant in a purported national class action lawsuitfiled in the Delaware Supreme Court in July 1997. The plaintiff has brought theaction allegedly on behalf of a class of persons who purchased products at theCompany's outlet stores throughout the United States at any time since July 15,1991. The complaint alleges that advertising and marketing practices used by theCompany in connection with the sales of its products at its outlet storesviolate guidelines established by the Federal Trade Commission and the consumerprotection statutes of Delaware and other states with statutes similar toDelaware's Consumer Fraud Act and Delaware's Consumer Contracts Act. The lawsuitseeks, on behalf of the class, compensatory and punitive damages as well asattorneys' fees. The Company intends to vigorously defend this lawsuit andbelieves that it has substantial and meritorious defenses. The Company is involved from time to time in legal claims involvingtrademark and intellectual property, licensing, employee relations and othermatters incidental to its business. See "Item 1. Business -- Trademarks." In theopinion of the Company's management, the resolution of any matter currentlypending will not have a material adverse effect on the Company's financialcondition or results of operations.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the quarterended March 28, 1998. 17 20 PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock is publicly traded on the New York StockExchange under the symbol "RL." The following table sets forth the high and lowsales prices for each quarterly period from June 11, 1997 (i.e., the day theClass A Common Stock was priced in the initial public offering) through March27, 1998 as reported on the New York Stock Exchange Composite Tape. The Companydid not declare any cash dividends during fiscal 1998 on its Common Stock otherthan dividends declared to holders of Class B Common Stock and Class C CommonStock in connection with the Company's Reorganization (as defined) on June 9,1997. See "Item 7. Management's Discussion and Analysis of Financial Conditionand Results of Operations -- Liquidity and Capital Resources." Market Price of Class A Common Stock -------------------------- HIGH LOW ---- --- First Quarter (since June 11, 1997) $32.375 $26 Second Quarter ................. 28.0625 23.0625 Third Quarter................... 28.75 22.3125 Fourth Quarter.................. 30.8125 21.9375 The Company anticipates that all of its earnings in the foreseeable futurewill be retained to finance the continued growth and expansion of its businessand has no current intention to pay cash dividends on its Common Stock. As of June 18, 1998, there were approximately 34,083,302 record holders ofClass A Common Stock, 43,280,021 record holders of Class B Common Stock and22,720,979 record holders of Class C Common Stock. 18 21ITEM 6. SELECTED FINANCIAL DATA. The selected historical financial data presented below as of and for each ofthe fiscal years in the five-year period ended March 28, 1998 have been derivedfrom the Company's audited Consolidated Financial Statements. The followingtable also includes unaudited pro forma statements of income for fiscal 1998 andfiscal 1997 which give effect to the Reorganization, the initial public offeringand the PRC Acquisition as if they had occurred on March 31, 1996. The financialdata should be read in conjunction with "Item 7. Management's Discussion andAnalysis of Financial Condition and Results of Operations," the ConsolidatedFinancial Statements and Notes thereto and other financial data includedelsewhere herein. FISCAL YEAR ENDED MARCH 28, MARCH 29, MARCH 30, APRIL 1, APRIL 2, 1998 1997 1996 1995 1994 ---------- ---------- ---------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Statements of Income:Net sales $1,303,816 $1,043,330 $ 909,720 $746,595 $726,568Licensing revenue 167,119 137,113 110,153 100,040 84,174 ---------- ---------- ---------- -------- --------Net revenues 1,470,935 1,180,443 1,019,873 846,635 810,742Cost of goods sold 755,654 648,597 583,546 474,999 466,525 ---------- ---------- ---------- -------- --------Gross profit 715,281 531,846 436,327 371,636 344,217Selling, general andadministrative expenses 515,526 374,483 309,207 261,506 262,825 ---------- ---------- ---------- -------- --------Income from operations 199,755 157,363 127,120 110,130 81,392Interest expense 159 13,660 16,287 16,450 15,880Equity in net loss ofjoint venture -- 3,599 1,101 262 2,837 ---------- ---------- ---------- -------- --------Income before incometaxes 199,596 140,104 109,732 93,418 62,675Provision for income taxes 52,025 22,804 10,925 13,244 8,778 ---------- ---------- ---------- -------- --------Net income $ 147,571 $ 117,300 $ 98,807 $ 80,174 $ 53,897 ========== ========== ========== ======== ========Pro Forma Statements ofIncome (Unaudited) (1): Net sales $ 1,303,816 $ 1,131,686Licensing revenue 167,119 137,113 ------------ ------------Net revenues 1,470,935 1,268,799Cost of goods sold 755,654 687,003 ------------ ------------Gross profit 715,281 581,796Selling, general andadministrative expenses 515,526 429,163 ------------ ------------Income from operations 199,755 152,633Interest income 3,003 1,629 ------------ ------------Income before income taxes 202,758 154,262Provisions for income taxes 82,631 64,790 ------------ ------------Net income $ 120,127 $ 89,472 ============ ============Pro forma net income pershare - Basic and Diluted $ 1.20 $ 0.89 ============ ============Pro forma common anddiluted shares outstanding 100,222,444 100,222,444 ============ ============ 19 22 March 28, March 29, March 30, April 1, APRIL 2, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA:Working capital .......................... $354,206 $209,038 $262,844 $221,050 $ 84,663Inventories .............................. 298,485 222,147 269,113 271,220 209,540Total assets ............................. 825,130 588,758 563,673 487,547 456,076Total debt ............................... 337 140,900 199,645 186,361 230,034Stockholders' equity and partners' capital 584,326 260,685 237,653 188,579 118,037(1) The pro forma statements of income present the effects on the historicalfinancial statements of certain transactions as if they had occurred at thebeginning of the period. These statements reflect adjustments for: (i) incometaxes based upon pro forma pre-tax income as if the Company had been subject toadditional Federal, state and local income taxes calculated using a pro formaeffective tax rate of approximately 40.8% and 42.0% for the year ended March 28,1998 and March 29, 1997, respectively; (ii) the reduction of interest expenseresulting from the application of the net proceeds from the initial publicoffering to outstanding indebtedness; and (iii) the PRC Acquisition, includingthe consolidation of PRC's operations, the amortization of goodwill over 25years associated with the acquisition and the elimination of the Company'sequity in the net loss of PRC for the year ended March 29, 1997. 20 23ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with theCompany's consolidated financial statements and related notes thereto which areincluded herein. The Company utilizes a 52-53 week fiscal year ending on theSaturday nearest March 31. Accordingly, fiscal years 1998, 1997, 1996, 1995 and1994 ended on March 28, 1998, March 29, 1997, March 30, 1996, April 1, 1995 andApril 2, 1994, respectively. Certain statements in this Form 10-K and in future filings by the Companywith the Securities and Exchange Commission, in the Company's press releases,and in oral statements made by or with the approval of an authorized executiveofficer constitute "forward-looking statements" within the meaning of thePrivate Securities Litigation Reform Act of 1995 (the "Reform Act"). Suchforward-looking statements involve known and unknown risks, uncertainties andother factors, which may cause the actual results, performance or achievementsof the Company to be materially different from any future results, performanceor achievements expressed or implied by such forward-looking statements. Suchfactors include, among others, the following: risks associated with changes inthe competitive marketplace, including the introduction of new products orpricing changes by the Company's competitors; changes in global economicconditions; risks associated with the Company's dependence on sales to a limitednumber of large department store customers and risks related to extending creditto customers; risks associated with the Company's dependence on its licensingpartners for a substantial portion of its net income and risks associated with alack of operational and financial control over licensed businesses; risksassociated with consolidations, restructurings and other ownership changes inthe retail industry; uncertainties relating to the Company's ability toimplement its growth strategy; risks associated with the possible adverse impactof the Company's unaffiliated manufacturers inability to manufacture in a timelymanner, to meet quality standards or to use acceptable labor practices; risksassociated with changes in social, political, economic and other conditionsaffecting foreign operations and sourcing; and, the possible adverse impact ofchanges in import restrictions. The Company undertakes no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise. 21 24OVERVIEW The Company began operations in 1968 as a designer and marketer of premiumquality men's clothing and sportswear. Since inception, the Company, throughinternal operations and in conjunction with its licensing partners, has grownthrough increased sales of existing product lines, the introduction of newbrands and products, expansion into international markets and development of itsretail operations. Over the last five years, net revenues have increased tonearly $1.5 billion in fiscal 1998 from $810.7 million in fiscal 1994, whileincome from operations has grown to $199.8 million in fiscal 1998 from $81.4million in fiscal 1994. The Company's net revenues are generated from its threeintegrated operations: wholesale, direct retail and licensing alliances.Licensing revenue includes royalties received from Home Collection licensingpartners. PRO FORMA FISCAL YEAR FISCAL 1997 (3) 1998 1997 1996 1995 1994 (UNAUDITED) ---------- ---------- ---------- -------- -------- ---------- (IN THOUSANDS) Wholesale net sales (1)(2) $ 733,065 $ 663,358 $ 606,022 $496,876 $508,402 $ 623,041Retail sales (2) ......... 570,751 379,972 303,698 249,719 218,166 508,645 ---------- ---------- ---------- -------- -------- ----------Net sales ................ 1,303,816 1,043,330 909,720 746,595 726,568 1,131,686Licensing revenue (1) .... 167,119 137,113 110,153 100,040 84,174 137,113 ---------- ---------- ---------- -------- -------- ----------Total net revenues ....... $1,470,935 $1,180,443 $1,019,873 $846,635 $810,742 $1,268,799 ========== ========== ========== ======== ======== ========== (1) The Company purchased certain of the assets of its former womenswear licensing partner in October 1995. The fiscal 1998, fiscal 1997 and fiscal 1996 net revenues reflect the inclusion of womenswear wholesale net sales of $98.4 million, $98.8 million and $36.7 million, respectively, and an elimination of licensing revenue associated with the operations of the womenswear business after the acquisition. (2) Prior to the PRC Acquisition, the Company accounted for its interest in PRC under the equity method. Effective April 3, 1997, the Company consolidated the operations of PRC in fiscal 1998 and accounted for the transaction under the purchase method. On a pro forma basis for fiscal 1997, wholesale net sales by the Company to PRC are eliminated and PRC net revenues are reflected as retail sales. Assuming the acquisition had taken place at March 31, 1996, pro forma wholesale net sales and retail sales in fiscal 1997 would have been $623.0 million and $508.7 million, respectively. (3) Pro forma financial information presented above gives effect to the PRC Acquisition as if it had occurred on March 31, 1996, the first day of fiscal 1997. Pro forma fiscal 1997 net revenues reflect the inclusion of womenswear wholesale net sales of $79.6 million, and an elimination of licensing revenue associated with the operations of the womenswear business after the acquisition. Wholesale net sales result from the sale by the Company of men's and women'sapparel to wholesale customers, principally to major department stores,specialty stores and non-Company operated Polo stores located throughout theUnited States. Net sales for the wholesale division have increased to $733.1million in fiscal 1998 from $508.4 million in fiscal 1994. This increase is aresult of growth in sales of the Company's menswear products driven by theintroduction of new brands such as Polo Sport and growth in sales of productsunder existing brands. 22 25 Polo's retail sales are generated from the Polo stores and outlet storesoperated by the Company. Since the beginning of fiscal 1994, the Company hasadded 26 Polo stores (net of store closings, including 21 Polo stores acquiredin connection with the PRC Acquisition), and 32 outlet stores (net of storeclosings). At March 28, 1998, the Company operated 29 Polo stores and 72 outletstores. Retail sales have grown to $570.8 million in fiscal 1998 from $218.2million in fiscal 1994. Licensing revenue consists of royalties paid to the Company under itslicensing alliances. In fiscal 1998, Product, International and Home Collectionlicensing alliances accounted for 47.0%, 24.6% and 28.4% of total licensingrevenue, respectively. Through these alliances, Polo combines its core skillswith the product or geographic competencies of its licensing partners to createand develop specific businesses. The growth of existing and development of newbusinesses under licensing alliances has resulted in an increase in licensingrevenue to $167.1 million in fiscal 1998 from $84.2 million in fiscal 1994. On June 9, 1997, the partners and certain of their affiliates contributed toPolo Ralph Lauren Corporation all of the outstanding stock of, and partnershipinterests in, the entities which comprised the predecessor group of companies inexchange for common stock and cash (the "Reorganization"). Prior to theReorganization, the Company's operations were conducted predominantly through apartnership structure. Accordingly, the earnings of the Company (other thanearnings of certain retail operations) were included in the taxable income ofthe Company's partners for Federal and certain state income tax purposes, andthe Company has generally not been subject to income tax on such earnings, otherthan certain state and local franchise and similar taxes. In connection with theReorganization, on June 9, 1997, the Company became fully subject to such taxes.As a result, the Company recorded a deferred tax asset and a corresponding taxbenefit in the amount of $27.4 million in its consolidated financial statementsin the first quarter of fiscal 1998 in accordance with the provisions ofStatement of Financial Accounting Standards ("SFAS") No. 109, Accounting forIncome Taxes. The Company's pro forma effective tax rate, excluding thenon-recurring tax benefit discussed above, for fiscal 1998 was 40.8%. The effectof taxes is not discussed in Results of Operations below because the historictaxation of the operations of the Company is not meaningful with respect toperiods following the Reorganization. In connection with the Company's growth strategy, the Company plans tointroduce new products and brands and expand its retail operations, includingthe opening of flagship stores. Implementation of these strategies may requiresignificant investments for advertising, furniture and fixtures, infrastructure,design and additional inventory. There can be no assurance, notwithstanding theCompany's investment, that its growth strategies will be successful. 23 26PRO FORMA COMBINED STATEMENT OF INCOME FOR FISCAL 1997 The following table sets forth for fiscal 1997: (i) actual combinedstatement of income; (ii) pro forma adjustments to reflect the PRC Acquisition,the initial public offering and the Reorganization as if they had occurred onMarch 31, 1996; and (iii) pro forma combined statement of income: ACTUAL PRO FORMA PRO FORMA COMBINED ADJUSTMENTS COMBINED -------- ----------- -------- (IN THOUSANDS) (UNAUDITED) Net sales $1,043,330 $ 88,356(1) $ 1,131,686Licensing revenue 137,113 137,113 ---------- -----------Net revenues 1,180,443 1,268,799Cost of goods sold 648,597 38,406(1) 687,003 ---------- -----------Gross profit 531,846 581,796Selling, general and administrative 374,483 53,812(1) 429,163expenses 868(1) ---------- ----------- Income from operations 157,363 152,633Interest expense (income) 13,660 (15,289)(1)(2) (1,629)Equity in net loss of joint venture 3,599 (3,599)(1) -- ---------- -----------Income before income taxes 140,104 154,262Provision for income taxes 22,804 41,986(3) 64,790 ---------- -----------Net income $ 117,300 $ 89,472 ========== =========== (1) Effective April 3, 1997, the Company acquired the remaining 50% interest in PRC. The adjustments above reflect the PRC Acquisition which is accounted for under the purchase method. As a result of this transaction, the Company's combined statement of income has been adjusted to reflect the consolidation of PRC's operations from March 31, 1996, the amortization of goodwill over 25 years and the elimination of the Company's equity in net loss of PRC. (2) Adjustment to reduce interest expense, assuming the application of the net proceeds from the initial public offering were used to repay outstanding indebtedness of the Company as of March 31, 1996. (3) Adjustment to reflect income taxes based upon pro forma pre-tax income as if the Company had been subject to additional Federal, state and local income taxes, calculated using a pro forma effective tax rate of 42.0% for fiscal 1997. 24 27RESULTS OF OPERATIONS The following discussion of the Company's results of operations for fiscal1998 compared to fiscal 1997 is presented on a pro forma basis for fiscal 1997,assuming the PRC Acquisition had occurred as of March 31, 1996. The discussionof the Company's results of operations for fiscal 1997 compared to fiscal 1996is presented on a historical basis. Additionally, as a result of the Company'sinitial public offering and the use of a portion of the net proceeds therefromto reduce outstanding indebtedness, historical interest expense is not discussedbelow because the results are not meaningful. The table below sets forth the percentage relationship to net revenues ofcertain items in the Company's statements of income for fiscal 1998, fiscal 1997and fiscal 1996 presented on a historical and pro forma basis, as indicated: PRO HISTORICAL FORMA --------------------------------------------- ------- 1998 1997 1996 1997 ------ ------ ------ ------ Net sales 88.6% 88.4% 89.2% 89.2%Licensing revenue 11.4 11.6 10.8 10.8 ------ ------ ------ ------Net revenues 100.0 100.0 100.0 100.0 ------ ------ ------ ------Gross profit 48.6 45.1 42.8 45.8Selling, general andadministrative expenses 35.0 31.8 30.3 33.8 ------ ------ ------ ------Income from operations 13.6% 13.3% 12.5% 12.0% ====== ====== ====== ====== FISCAL 1998 (HISTORICAL BASIS) COMPARED TO FISCAL 1997 (PRO FORMA BASIS) NET SALES. Net sales increased 15.2% to $1.304 billion in fiscal 1998 from$1.132 billion in fiscal 1997. Wholesale net sales increased 17.7% to $733.1million in fiscal 1998 from $623.0 million in fiscal 1997. Wholesale growthprimarily reflects increased menswear sales resulting from growth in theCompany's basic stock replenishment program, improved sales in existing brands,a shift in the sales mix to higher priced wholesale products and sales from theCompany's third party wholesale trading business which began operations in thefourth quarter of fiscal 1997. Wholesale growth also reflects increasedwomenswear sales due to the introduction of Polo Sport in the fourth quarter offiscal 1997. Retail sales increased 12.2% to $570.8 million in fiscal 1998 from$508.6 million in fiscal 1997. Of this increase, $60.9 million is attributableto the opening of two new Polo stores (net of one store closing) and seven newoutlet stores (net of three store closings) in fiscal 1998 and the benefit of afull year of operations for three new Polo stores and ten new outlet storesopened in fiscal 1997. 25 28 LICENSING REVENUE. Licensing revenue increased 21.9% to $167.1 million infiscal 1998 from $137.1 million in fiscal 1997. This increase reflects thebenefit of a full year of licensing revenue in fiscal 1998 from the launch ofthe Lauren women's line in the second quarter of fiscal 1997. Additionally,licensing revenue improved due to an overall increase in sales of existinglicensed products, particularly Chaps and Home Collection, both of whichintroduced new product categories. GROSS PROFIT. Gross profit as a percentage of net revenues increased to48.6% in fiscal 1998 from 45.8% in fiscal 1997. This increase was attributableto improvements in each of the Company's integrated operations. Wholesale grossmargins increased significantly in fiscal 1998 over fiscal 1997 as a directresult of increased fulfillment of customer orders, improved supply chainmanagement and a planned reduction in off-price sales. Retail gross margins alsoincreased significantly in fiscal 1998 as compared to fiscal 1997 primarily dueto the benefit of operating five new Polo stores (net of one store closing)which were opened in fiscal 1998 and fiscal 1997, and an improved initialmarkup. Licensing revenue, which has no associated cost of goods sold, increasedas a percentage of net revenues to 11.4% in fiscal 1998 from 10.8% in fiscal1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general andadministrative ("SG&A") expenses increased to $515.5 million or 35.0% of netrevenues in fiscal 1998 from $429.2 million or 33.8% of net revenues in fiscal1997. This increase as a percentage of net revenues was attributable toincreased depreciation expense associated with the Company's shop-within-shopsdevelopment program, increased advertising, marketing and public relationsexpenditures to support the Company's brands and a one-time charge under termsof a long-term contract with a former executive. FISCAL 1997 (HISTORICAL BASIS) COMPARED TO FISCAL 1996 (HISTORICAL BASIS) NET SALES. Net sales increased 14.7 % to $1.043 billion in fiscal 1997 from$909.7 million in fiscal 1996. Wholesale net sales increased 9.5 % to $663.4million in fiscal 1997 from $606.0 million in fiscal 1996. This increaseprimarily reflects the benefit of a full year of womenswear sales in fiscal 1997compared to five and one-half months in fiscal 1996. Retail sales increased by25.1% to $380.0 million in fiscal 1997 from $303.7 million in fiscal 1996. Ofthis increase, $58.8 million is attributable to the opening of three new Polostores and seven new outlet stores (net of four outlet store closings) in fiscal1997 and the benefit of a full year of operations for seven outlet stores openedin fiscal 1996. Comparable store sales in fiscal 1997 increased 6.3% or $17.5million. Comparable store sales represent net sales of stores open in bothreporting periods for the full duration of such periods. LICENSING REVENUE. Licensing revenue increased 24.4 % to $137.1 million infiscal 1997 from $110.2 million in fiscal 1996. This increase reflects thelaunch of Polo Jeans Co. in fiscal 1997 and an overall increase in sales oflicensed products, particularly Chaps, accessories and Home Collection. 26 29 GROSS PROFIT. Gross profit as a percentage of net revenues increased to45.1% in fiscal 1997 from 42.8% in fiscal 1996. The increase was primarilyattributable to the increase, as a percentage of total net revenues, in netsales of the Company's higher margin retail sales (relative to wholesale sales)and to increased licensing revenue. In fiscal 1997, wholesale gross marginsimproved slightly while retail gross margins increased significantly due to areduction in markdowns as compared to fiscal 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to$374.5 million or 31.8% of net revenues in fiscal 1997 from $309.2 million or30.3% of net revenues in fiscal 1996. This increase as a percentage of netrevenues was primarily attributable to investment in organizationalinfrastructure to support growth, increased advertising, marketing and publicrelations expenditures to support the Company's brands, and personnel andstart-up costs associated with the opening of three Polo stores in fiscal 1997.Additionally, SG&A expenses in fiscal 1997 include a full year of womenswearSG&A expenses as compared to five and one-half months in the prior period. EQUITY IN NET LOSS OF JOINT VENTURE. Equity in net loss of joint venturerepresents the Company's 50% equity interest in PRC. Such losses increased to$3.6 million in fiscal 1997 from $1.1 million in fiscal 1996, primarily as aresult of lost revenues and expenses associated with temporary store closingsfor renovations in fiscal 1997.LIQUIDITY AND CAPITAL RESOURCES The Company's main sources of liquidity historically have been cash flowsfrom operations, credit facilities and, prior to the Reorganization, partners'financing. The Company's capital requirements primarily derive from workingcapital needs, construction and renovation of shop-within-shops, retailexpansion and other corporate activities. Net cash provided by operating activities decreased to $96.2 million infiscal 1998 from $203.6 million in fiscal 1997. This decrease is primarily aresult of increases in inventory levels during fiscal 1998 due to the timing ofwholesale shipments and the overall growth of the business, and a plannedreduction in wholesale inventory levels in fiscal 1997. Net cash used ininvesting activities increased to $74.9 million in fiscal 1998 from $38.6million in fiscal 1997. This increase principally reflects an increase incapital expenditures, the use of $8.6 million in cash to acquire the operationsof PRC and investments in joint ventures with nonaffiliated partners. Net cashprovided by financing activities increased to $7.8 million in fiscal 1998 fromnet cash used in financing activities of $149.0 million in fiscal 1997. Thisincrease primarily reflects the net proceeds received from the initial publicoffering, offset by the application of a portion of the net proceeds to repayoutstanding indebtedness and an increase in scheduled debt and subordinated noterepayments. As a result of the initial public offering, the Company's cash flow needsreflect the elimination of ongoing distributions to the partners. Partiallyoffsetting these changes will be the application of funds for the payment ofadditional Federal, state and local income taxes. 27 30 Simultaneously with the closing of the Reorganization, the Company enteredinto a new financing arrangement (the "New Credit Facility") providing for a$375.0 million revolving line of credit available for the issuance of letters ofcredit, acceptances or direct borrowings. Upon the closing of the initial publicoffering, the amount available under the revolving line of credit was reduced to$225.0 million. The New Credit Facility matures on December 31, 2002. Borrowingsunder the New Credit Facility were used to refinance the Polo Ralph Lauren, L.P.and subsidiaries credit facility of $104.5 million and to repay in full $56.7million of aggregate borrowings outstanding under The Ralph Lauren Womenswear,L.P. and subsidiaries credit facility and the PRC credit facility. Borrowings under the New Credit Facility bear interest, at the Company'soption, at a Base Rate (the "Base Rate") equal to the higher of (i) the FederalFunds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 ofone percent, and (ii) the prime commercial lending rate of The Chase ManhattanBank in effect from time to time, or at the London Interbank Offered Rate plusan interest margin. The agreement contains customary representations,warranties, covenants and events of default, including covenants regardingmaintenance of net worth and leverage ratios, limitations on indebtedness andincurrences of liens, and restrictions on sales of assets and transactions withaffiliates. Additionally, the agreement provides that an event of default willoccur if Mr. Lauren and related entities fail to maintain a specified minimumpercentage of the voting power of the Company's common stock. As of March 28,1998, the Company had no direct borrowings and $19.9 million in outstandingletters of credit under the New Credit Facility. On June 17, 1997, the Company completed the sale of 11,170,000 shares of itsClass A Common Stock at $26.00 per share in its initial public offering. The netproceeds from the initial public offering, after deducting underwritingdiscounts and commissions and offering expenses, aggregated $268.8 million. Thenet proceeds from the initial public offering increased liquidity of the Companyby reducing indebtedness as follows: (i) by repayment of borrowings outstandingunder the Company's New Credit Facility in the amount of $163.5 million; (ii) bypayment of a dividend declared and reorganization notes issued by the Company inconnection with the Reorganization in the amount of $43.0 million to Mr. Laurenand related entities and certain investment funds affiliated with The GoldmanSachs Group, L.P. (collectively, the "GS Group"); and (iii) by repayment ofsubordinated notes and interest thereon in the amount of $24.3 million to Mr.Lauren and the GS Group. The remaining $38.0 million has been used for othergeneral corporate purposes. Capital expenditures were $63.1 million, $35.3 million and $5.6 million infiscal 1998, fiscal 1997 and fiscal 1996, respectively. The increase in capitalexpenditures in fiscal 1998 represents primarily expenditures associated withthe Company's shop-within-shops development program which includes new shops,renovations and expansions as well as expenditures incurred in connection withthe expansion of the Company's retail operations. The Company plans to investapproximately $120.0 million, net of landlord incentives, over the next fiscalyear for its retail stores, including flagship stores, the shop-within-shopsdevelopment program and other capital projects. In March 1998, the Board of Directors authorized the repurchase, subject tomarket conditions, of up to $100.0 million of the Company's Class A CommonStock. Share repurchases under this plan will be made from time to time in theopen market over a two-year period commencing April 1, 1998. Shares acquiredunder the repurchase program will be used for stock option programs and forother corporate purposes. 28 31 The Company extends credit to its customers, including those which haveaccounted for significant portions of its net revenues. The Company had threecustomers, Dillard Department Stores, Inc., Federated Department Stores, Inc.and The May Department Stores Company, which in aggregate constituted 53.0% and48.0% of trade accounts receivable outstanding at March 28, 1998 and March 29,1997, respectively. Additionally, the Company had three licensing partners,WestPoint Stevens, Inc. ("WPS"), Seibu Department Stores, Ltd. ("Seibu") andJones Apparel Group, Inc., which in aggregate constituted approximately 35.0% oflicensing revenue in fiscal 1998. WPS, Seibu and L'Oreal S.A./Cosmair Inc.constituted, in aggregate, 39.0% and 43.0% of licensing revenue in fiscal 1997and fiscal 1996, respectively. Accordingly, the Company may have significantexposure in collecting accounts receivable from its customers. The Company hascredit policies and procedures which it uses to manage its credit risk. Management believes that cash from ongoing operations and funds availableunder the New Credit Facility will be sufficient to satisfy the Company'scurrent level of operations, capital requirements and stock repurchase programfor the next 12 months. Additionally, the Company does not currently intend topay dividends on its Common Stock in the next 12 months.SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business is affected by seasonal trends, with higher levels ofwholesale sales in its second and fourth quarters and higher retail sales in itssecond and third quarters. These trends result primarily from the timing ofseasonal wholesale shipments to retail customers and key vacation travel andholiday shopping periods in the retail segment. As a result of the PRCAcquisition and growth in the Company's retail operations and licensing revenue,historical quarterly operating trends and working capital requirements may notaccurately reflect future performances. In addition, fluctuations in sales andoperating income in any fiscal quarter may be affected by the timing of seasonalwholesale shipments and other events affecting retail.EXCHANGE RATES Inventory purchases from contract manufacturers in the Far East areprimarily denominated in United States dollars; however, purchase prices for theCompany's products may be affected by fluctuations in the exchange rate betweenthe United States dollar and the local currencies of the contract manufacturers,which may have the effect of increasing the Company's cost of goods sold in thefuture. During the last two years, exchange rate fluctuations have not had amaterial impact on the Company's inventory cost. Additionally, certaininternational licensing revenue could be materially affected by currencyfluctuations. From time to time, the Company hedges certain exposures to foreigncurrency exchange rate changes arising in the ordinary course of business.NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFASNo. 130, Reporting Comprehensive Income. This Statement establishes standardsfor reporting of comprehensive income and its components (revenues, expenses,gains and losses) in the financial statements. SFAS No. 130 requires anenterprise to: (i) reconcile net income to comprehensive income; (ii) classifyitems of other comprehensive income (e.g., foreign currency translationadjustments, unearned compensation, etc.) by their nature in a financialstatement; and (iii) display the accumulated balance of other comprehensiveincome separately from retained earnings and additional paid-in-capital in theequity section of a statement of financial position. SFAS No.130 is effectivefor the Company's first quarter of fiscal year ending April 3, 1999. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of anEnterprise and Related Information. This Statement establishes standards forreporting selected financial data and descriptive information about anenterprise's reportable operating segments (as defined). This Statement alsorequires the reconciliation of total segment information presented to thecorresponding amounts in the general purpose financial statements. Additionally,SFAS No. 131 establishes 29 32standards for related disclosures about products and services, geographic areasand major customers. SFAS No. 131 is effective for the Company's fiscal yearending April 3, 1999. The Company has not yet determined what additionaldisclosures, if any, may be required in connection with adopting this Statement. In April 1998, the American Institute of Certified Public Accountants("AICPA") Accounting Standards Executive Committee issued Statement of PositionNo. 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP 98-5requires that costs of start-up activities, including organization costs andretail store openings, be expensed as incurred. SOP 98-5 is effective for theCompany's fiscal year ending April 1, 2000. The Company has not yet determinedwhether the application of SOP 98-5 will have a material impact on the Company'sfinancial position or results of operations.IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written usingtwo digits rather than four to define the applicable year. Certain of theCompany's computer programs have date-sensitive software which may recognize adate using "00" as the year 1900 rather than the year 2000. This situation couldresult in a system failure or miscalculations causing disruptions of operations,including, among other things, a temporary inability to process transactions,send invoices or engage in similar normal business activities. Based on an internal assessment, the Company determined that it will berequired to modify or replace portions of its software applications so that itscomputer systems will properly utilize dates beyond December 31, 1999. TheCompany presently believes that with modifications to existing software andconversions to new software, the Year 2000 Issue can be mitigated. However, ifsuch modifications and conversions are not made or are not timely completed, theYear 2000 Issue could have a material impact on the operations of the Company. The Company has initiated formal communications with its significantsuppliers, licensees, transportation carriers, general service providers andlarge customers to determine the extent to which the Company is vulnerable tothose third parties' failure to remediate their own Year 2000 Issue. Inaddition, third party vendors of hardware and packaged software have beencontacted about their products' compliance status. There can be no guaranteethat the systems of other companies on which the Company's systems rely will betimely converted, or that a failure to convert by another company, or aconversion that is incompatible with the Company's systems, would not have amaterial adverse effect on the Company. The Company will utilize both internal and external resources to reprogram,replace and test the software for Year 2000 modifications. The Company plans tocomplete the major initiatives of its Year 2000 project within the currentfiscal year. To date, the Company has incurred expenses of approximately $1.1million related to the assessment of, and preliminary efforts in connectionwith, its Year 2000 project and the development of a remediation plan. The totalremaining cost of the Year 2000 project is estimated at $5.0 to $6.0 million andis being funded through operating cash flows. Of the total project cost,approximately $0.5 million is attributable to the purchase of new software whichwill be capitalized. The remainder will be expensed as incurred. The costs of the project and the date on which the Company plans to completethe Year 2000 modifications are based on management's best estimates, which werederived utilizing numerous assumptions of future events including the continuedavailability of certain resources, third party modification plans and otherfactors. However, there can be no guarantee that these estimates will beachieved, and actual results could differ materially from those plans.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item appears beginning on page F-1. 30 33ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 31 34 PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The other information required to be included herein by Item 10 of Form 10-Kwill be included in the Company's Proxy Statement for the 1998 Annual Meeting ofStockholders which will be filed within 120 days after the close of theCompany's fiscal year ended March 28, 1998 and such information is incorporatedherein by reference to such Proxy Statement. The following table sets forth certain information with respect to thedirectors and executive officers of the Company as of June 11, 1998. NAME Age Position- ------------------------- --- ------------------------------------------ Ralph Lauren.......... 58 Chairman, Chief Executive Officer and DirectorMichael J. Newman..... 52 Vice Chairman, Chief Operating Officer and DirectorRichard A. Friedman 40 DirectorFrank A. Bennack, Jr.... 65 DirectorAllen Questrom......... 58 DirectorTerry S. Semel.......... 55 DirectorPeter Strom............. 69 DirectorVictor Cohen.......... 44 Senior Vice President, General Counsel and SecretaryNancy A. Platoni Poli 42 Senior Vice President and Chief Financial OfficerKaren L. Rosenbach 43 Senior Vice President, Human Resources and Administration RALPH LAUREN has been a director of the Company since prior to thecommencement of the Company's initial public offering and a member of theAdvisory Board or Board of Directors of the Company's predecessors since theirorganization. Mr. Lauren is the Company's Chairman and Chief Executive Officer.He founded Polo in 1968 and has provided leadership in the design, marketing andoperational areas since such time. MICHAEL J. NEWMAN has been a director of the Company since prior to thecommencement of the Company's initial public offering and a member of theAdvisory Board of the Company's predecessor since April 1995. Mr. Newman hasbeen Vice Chairman and Chief Operating Officer of the Company since 1995. He wasPresident and Chief Operating Officer of the Company's Menswear operations from1991 to 1994, and Executive Vice President from 1989 to 1991. Mr. Newman joinedPolo as Vice President of Finance and Chief Financial Officer in 1987. Prior tojoining the Company, Mr. Newman was Senior Vice President of Finance atKaiser-Roth Apparel. RICHARD A. FRIEDMAN has been a director of the Company since prior to thecommencement of the Company's initial public offering and a member of theAdvisory Board of the Company's predecessor since 1994. Mr. Friedman is aManaging Director of Goldman, Sachs & Co., and head of the Principal InvestmentArea. He joined Goldman, Sachs & Co. in 1981. Mr. Friedman is a member of theBoard of Directors of AMF Bowling, Inc., AMF Bowling Worldwide, Inc., andDiamond Cable Communications PLC. 32 35 FRANK A. BENNACK, JR. has been a director of the Company since January1998. Mr. Bennack has been the President and Chief Executive Officer of TheHearst Corporation since 1979. He is a member of the Board of Directors of TheHearst Corporation, Hearst-Argyle Television, Inc., American Home ProductsCorporation, The Chase Manhattan Corporation and The Chase Manhattan Bank. ALLEN QUESTROM who was the Chairman and Chief Executive Officer ofFederated Department Stores, Inc. from February 1990 to May 1997, has been aDirector of the Company since September 1997. He is a member of the Board ofDirectors of Interpublic Group of Companies, Inc. and AEA Investors, Inc. TERRY S. SEMEL has been a director of the Company since September 1997.Mr. Semel has been the Chairman of the Board and Co-Chief Executive Officer ofthe Warner Bros. Division of Time Warner Entertainment LP ("Warner Brothers"),since March 1994 and of Warner Music Group since November 1995. For more thanten years prior to that he was President of Warner Brothers or its predecessor,Warner Bros. Inc. Mr. Semel is a member of the Board of Directors of Revlon,Inc. PETER STROM has been a director of the Company since September 1997 and wasa member of the Advisory Board of the Company's predecessor from October 1994until his retirement in April 1995. Mr. Strom was an initial officer of Polo in1968 and held various management positions in the Company, including, at thetime of his retirement, serving as the Company's Vice Chairman and ChiefOperating Officer. VICTOR COHEN has been Senior Vice President, General Counsel and Secretaryof the Company since 1996. Mr. Cohen joined Polo in 1983 as its senior legalofficer responsible for all legal and corporate affairs. Prior to joining theCompany, he was associated with the law firm of Skadden, Arps, Slate, Meagher &Flom. NANCY A. PLATONI POLI has been Chief Financial Officer of the Companysince 1996 and Senior Vice President since 1997. Ms. Poli was Vice President andController from 1989 to 1996, and assumed responsibility for treasury functionsin addition to her controller functions in 1995. Prior to that, she wasController of Retail Finance. Ms. Poli joined the Company in 1984. KAREN L. ROSENBACH has been Senior Vice President, Human Resources andAdministration of the Company since 1996. Ms. Rosenbach joined the Company in1988 as Vice President of Human Resources. Prior to joining the Company, she wasVice President of Human Resources, Real Estate Group at Chemical Bank. Each executive officer serves for a one-year term ending at the next annualmeeting of the Company's Board of Directors, subject to his or her applicableemployment agreement and his or her earlier death, resignation or removal. ITEM 11. EXECUTIVE COMPENSATION.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required to be included herein by Items 11 through 13 ofForm 10-K will be included in the Company's Proxy Statement for the 1998 AnnualMeeting of Stockholders, which will be filed within 120 days after the close ofthe Company's fiscal year ended March 28, 1998 and such information isincorporated herein by reference to such Proxy Statement. 33 36 PART IVITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1, 2. Financial Statements and Schedules. See index on Page F-1. 3. Exhibits -- EXHIBIT NUMBER DESCRIPTION- ------------------- -------------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (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 Long-Term Stock Incentive Plan (filed as Exhibit 10.1 to the S-1)*+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 Registration Rights Agreement dated as of June 9, 1997 by and among Ralph Lauren, GS Capital Partners, L.P., GS Capital Partners PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to the S-1)*10.4 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)*10.5 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)*10.6 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)*10.7 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)*10.8 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)*10.9 License Agreement, made as of January 1, 1998, between Ralph Lauren Home Collection, Inc. and WestPoint Stevens Inc.**10.10 License Agreement, dated March 1, 1998, between The Polo/Lauren Company, L.P. and Polo Ralph Lauren Japan Co., Ltd., and undated letter agreement related thereto** (filed as Exhibit 10.10 to the S-1)*10.11 Design Services Agreement, dated March 1, 1998, between Polo Ralph Lauren Enterprises, L.P. and Polo Ralph Lauren Japan Co., Ltd.** (filed as Exhibit 10-11 to the S-1)*10.12 Deferred Compensation Agreement dated April 1, 1993, between Michael J. Newman and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph Lauren, L.P. (filed as Exhibit 10.12 to the S-1)*+10.14 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)*+ 34 37 10.15 Deferred Compensation Agreement dated April 1, 1993 between Cheryl L. Sterling Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph Lauren, L.P.(filed as Exhibit 10.15 to the S-1)*+10.16 Amended and Restated Employment Agreement dated October 26, 1993 between Michael J. Newman and Polo Ralph Lauren Corporation, as amended and assigned October 31, 1994 to Polo Ralph Lauren, L.P. and as further amended as of June 9, 1997 (filed as Exhibit 10.17 to the S-1)*+10.17 Employment Agreement dated April 2, 1995 between F. Lance Isham and Polo Ralph Lauren, L.P. (filed as Exhibit 10.19 to the S-1)*+10.18 Employment Agreement dated October 26, 1993 between Cheryl L. Sterling Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph Lauren, L.P. (filed as Exhibit 10.20 to the S-1)*+10.19 Stockholders Agreement dated as of June 9, 1997 among Polo Ralph Lauren Corporation, GS Capital Partners, L.P., GS Capital Partners PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., Mr. Ralph Lauren, RL Holding, L.P. and RL Family (filed as Exhibit 10.22 to the S-1)*10.20 Form of Reorganization Note (filed as Exhibit 10.23 to the S-1)*10.21 Form of Credit Agreement between Polo Ralph Lauren Corporation and The Chase Manhattan Bank (filed as Exhibit 10.24 to the S-1)*10.22 Form of Guarantee and Collateral Agreement by Polo Ralph Lauren Corporation in favor of The Chase Manhattan Bank (filed as Exhibit 10.25 to the S-1)*10.23 Form of Indemnification Agreement between Polo Ralph Lauren Corporation and its Directors and Executive Officers (filed as Exhibit 10.26 to the S-1)*10.24 Employment Agreement dated June 9, 1997 between Ralph Lauren and Polo Ralph Lauren Corporation (filed as Exhibit 10.27 to the S-1)*+10.25 Design Services Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.**10.26 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** 21.1 List of Significant Subsidiaries of the Company. 24.1 Powers of Attorney. 27.1 Financial Data Schedule.- ------------------------------------* Incorporated herein by reference.+ Exhibit is a management contract or compensatory plan or arrangement.** Portions of Exhibits 10.4 - 10.11 and 10.25 and 10.26 have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.(b) The Company filed no reports on Form 8-K during the last quarter of the period covered by this report. 35 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. POLO RALPH LAUREN CORPORATION (Registrant) By: /s/ Ralph Lauren -------------------------------------- Ralph Lauren Chairman of the Board of Directors and Chief Executive OfficerDate: June 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated. SIGNATURE TITLE(S) DATE- -------------------------------------- ------------------------------------------------------ ------- /s/ Ralph Lauren Chairman of the Board of Directors June 26, 1998- ------------------------------------- and Chief Executive Officer Ralph Lauren (Principal Executive Officer) /s/ Michael J. Newman Vice Chairman of the Board of Directors and Chief June 26, 1998- ------------------------------------- Operating Officer Michael J. Newman /s/ Nancy A. Platoni Poli Senior Vice President and Chief Financial Officer June 26, 1998 (Principal Financial and Accounting Officer)- ------------------------------------- Nancy A. Platoni Poli /s/ Richard A. Friedman Director June 26, 1998- ------------------------------------- Richard A. Friedman /s/ Frank A. Bennack, Jr. Director June 26, 1998- ------------------------------------- Frank A. Bennack, Jr. /s/ Allen Questrom Director June 26, 1998- ------------------------------------- Allen Questrom /s/ Terry S. Semel Director June 26, 1998- ------------------------------------- Terry S. Semel /s/ Peter Strom Director June 26, 1998- ------------------------------------- Peter Strom 36 39 POLO RALPH LAUREN CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS PAGE Independent Auditors' Report................................................ F-2Independent Auditor's Report................................................ F-3Consolidated Balance Sheets as of March 28, 1998 and March 29, 1997 F-4Consolidated Statements of Income for the Years Ended March 28, 1998, March29, 1997 and March 30, 1996................................................. F-5Consolidated Statements of Stockholders' Equity and Partners' Capital for the Years Ended March 28, 1998, March 29, 1997 and March 30, 1996 ............ F-6Consolidated Statements of Cash Flows for the Years Ended March 28, 1998,March 29, 1997 and March 30, 1996........................................... F-7Notes to Consolidated Financial Statements.................................. F-9FINANCIAL STATEMENT SCHEDULE:Independent Auditors' Report.................................................. S-1Independent Auditor's Report.................................................. S-2Schedule II - Valuation and Qualifying Accounts............................... S-3All other schedules are omitted because they are not applicable or the requiredinformation is shown in the consolidated financial statements or notes thereto. F-1 40 INDEPENDENT AUDITORS' REPORTTo the Board of Directors and Stockholders of Polo Ralph Lauren CorporationNew York, New YorkWe have audited the accompanying consolidated balance sheet as of March 28, 1998and the combined balance sheet as of March 29, 1997 of Polo Ralph LaurenCorporation and subsidiaries (the "Company") and the related consolidatedstatements of income, stockholders' equity, and cash flows for the year endedMarch 28, 1998 and the combined statements of income, partners' capital, andcash flows for the year ended March 29, 1997. These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 and combined financial statements presentfairly, in all material respects, the financial position of the Company as ofMarch 28, 1998 and March 29, 1997, and the results of their operations and theircash flows for the years then ended in conformity with generally acceptedaccounting principles./s/ Deloitte & Touche LLPDELOITTE & TOUCHE LLPNew York, New YorkMay 15, 1998 F-2 41 INDEPENDENT AUDITOR'S REPORTThe PartnersPolo Ralph Lauren Enterprises, L.P. We have audited the accompanying combined statements of income,partners' capital, and cash flows of Polo Ralph Lauren Corporation (the"Company" as defined in Note 1(a)) for the year ended March 30, 1996. Thesecombined financial statements are the responsibility of management. Ourresponsibility is to express an opinion on these combined financial statementsbased on our audit. We conducted our audit in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to abovepresent fairly, in all material respects, the results of operations and cashflows of Polo Ralph Lauren Corporation for the year ended March 30, 1996 inconformity with generally accepted accounting principles./s/ Mahoney Cohen Rashba & Pokart, CPA, PCMAHONEY COHEN RASHBA & POKART, CPA, PCNew York, New YorkJune 21, 1996except as to Note 1(a)dated March 14, 1997 F-3 42 POLO RALPH LAUREN CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) MARCH 28, MARCH 29, 1998 1997 --------- --------- ASSETSCurrent assets Cash and cash equivalents $ 58,755 $ 29,599 Accounts receivable, net of allowances of $12,447 and $12,845, respectively 149,120 144,303 Inventories 298,485 222,147 Deferred tax assets 24,448 2,669 Prepaid expenses and other 25,656 37,621 --------- --------- TOTAL CURRENT ASSETS 556,464 436,339Property and equipment, net 175,348 95,255Investments in and advances to joint ventures 5,683 17,977Deferred tax assets 14,213 84Other assets, net 73,422 39,103 --------- --------- $ 825,130 $ 588,758 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITALCurrent liabilities Notes and acceptances payable - banks -- $ 26,777 Current portion of long-term debt $ 337 22,248 Current portion of subordinated notes -- 20,000 Accounts payable 100,126 89,417 Accrued expenses and other 101,795 68,859 --------- --------- TOTAL CURRENT LIABILITIES 202,258 227,301Long-term debt -- 47,875Other noncurrent liabilities 38,546 28,897Subordinated notes -- 24,000Commitments and contingencies (Note 14) -- --Stockholders' equity and partners' capital Common Stock Class A, par value $.01 per share; 500,000,000 shares authorized; 34,272,726 shares issued and outstanding 343 -- Class B, par value $.01 per share; 100,000,000 shares authorized; 43,280,021 shares issued and outstanding 433 -- Class C, par value $.01 per share; 70,000,000 shares authorized; 22,720,979 shares issued and outstanding 227 -- Additional paid-in-capital 447,918 -- Retained earnings and partners' capital 136,738 260,837 Cumulative translation adjustment -- (152) Unearned compensation (1,333) -- --------- --------- TOTAL STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL 584,326 260,685 --------- --------- $ 825,130 $ 588,758 ========= ========= See accompanying notes to financial statements. F-4 43 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA) FISCAL YEAR ENDED -------------------------------------------------- MARCH 28, MARCH 29, MARCH 30, 1998 1997 1996 ------------ ------------ ------------ Net sales $ 1,303,816 $ 1,043,330 $ 909,720Licensing revenue 167,119 137,113 110,153 ------------ ------------ ------------ Net revenues 1,470,935 1,180,443 1,019,873Cost of goods sold 755,654 648,597 583,546 ------------ ------------ ------------ Gross profit 715,281 531,846 436,327Selling, general and administrative expenses 515,526 374,483 309,207 ------------ ------------ ------------ Income from operations 199,755 157,363 127,120Interest expense 159 13,660 16,287Equity in net loss of joint venture -- 3,599 1,101 ------------ ------------ ------------ Income before income taxes 199,596 140,104 109,732Provision for income taxes 52,025 22,804 10,925 ------------ ------------ ------------ Net income $ 147,571 $ 117,300 $ 98,807 ============ ============ ============PRO FORMA (NOTE 1) - (UNAUDITED)Historical income before income taxes $ 199,596 $ 140,104Pro forma adjustments other than income taxes 3,162 14,158 ------------ ------------Pro forma income before income taxes 202,758 154,262Pro forma provision for income taxes 82,631 64,790 ------------ ------------Pro forma net income $ 120,127 $ 89,472 ============ ============Pro forma net income per share - Basic and Diluted $ 1.20 $ 0.89 ============ ============Pro forma common shares outstanding - Basic and Diluted 100,222,444 100,222,444 ============ ============ See accompanying notes to financial statements. F-5 44 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (IN THOUSANDS, EXCEPT SHARE DATA) RETAINED COMMON STOCK ADDITIONAL EARNINGS AND CUMULATIVE -------------------------- PAID-IN- PARTNERS' TRANSLATION UNEARNED SHARES AMOUNT CAPITAL CAPITAL ADJUSTMENT COMPENSATION TOTAL ------------ --------- -------- --------- ---------- ------------ ----- BALANCE AT APRIL 1, 1995 -- -- -- $ 188,635 $ (56) -- $188,579Net income 98,807 98,807Translation adjustment 168 168Capital contributions 10,000 10,000Distributions to partners (59,901) (59,901) ------------ --------- -------- --------- ------- ------- -------- BALANCE AT MARCH 30, 1996 -- -- -- 237,541 112 -- 237,653Net income 117,300 117,300Translation adjustment (264) (264)Distributions to partners (94,004) (94,004) ------------ --------- -------- --------- ------- ------- -------- BALANCE AT MARCH 29, 1997 -- -- -- 260,837 (152) -- 260,685Net income 147,571 147,571Translation adjustment 25 25Distributions to partners (45,665) (45,665)Reorganization 89,000,000 890 176,537 (177,554) 127 --Dividend and Reorganization Notes paid (48,451) (48,451)Common stock issued in public offering, net 11,170,000 112 268,685 268,797Common stock issued in PRC Acquisition 26,803 -- 697 697Restricted stock grants 76,923 1 1,999 (1,333) 667 ------------ --------- -------- --------- ----- ------- -------- BALANCE AT MARCH 28, 1998 100,273,726 $ 1,003 $447,918 $ 136,738 -- $(1,333) $584,326 ============ ========= ======== ========= ===== ======= ======== See accompanying notes to financial statements. F-6 45 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FISCAL YEAR ENDED ------------------------------------------- MARCH 28, MARCH 29, MARCH 30, 1998 1997 1996 --------- --------- ---------CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 147,571 $ 117,300 $ 98,807Adjustments to reconcile net income to net cash provided by operating activities: Benefit from deferred income taxes (27,997) -- -- Depreciation and amortization 27,402 13,755 9,743 Equity in net loss of joint venture -- 3,599 1,101 Provision for losses on accounts receivable 1,155 833 1,122 Changes in deferred liabilities 9,584 5,067 909 Other 3,198 (5,109) (3,505) Changes in assets and liabilities, net of acquisition Accounts receivable (4,352) (137) (34,155) Inventories (48,942) 46,702 21,811 Prepaid expenses and other (2,031) (9,223) (10,428) Other assets (18,922) (4,323) (6,733) Accounts payable 3,215 15,173 9,798 Accrued expenses and other 6,325 19,943 2,855 --------- --------- ---------NET CASH PROVIDED BY OPERATING ACTIVITIES 96,206 203,580 91,325 --------- --------- ---------CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment, net (63,079) (35,330) (5,575) Acquisition, net of cash acquired (8,551) -- (39,726) Investments in joint ventures (5,812) -- -- Cash surrender value - officers' life insurance, net 2,569 (3,230) (3,685) --------- --------- ---------NET CASH USED IN INVESTING ACTIVITIES (74,873) (38,560) (48,986) --------- --------- ---------CASH FLOWS FROM FINANCING ACTIVITIES (Repayments of) proceeds from short-term borrowings, net (26,777) (46,954) 14,109 Repayments of borrowings against officers' life insurance policies (5,757) -- -- Repayments of long-term debt and subordinated notes (135,134) (11,791) (11,719) Proceeds from long-term debt -- -- 10,000 Payment of Dividend and Reorganization Notes (48,451) -- -- Proceeds from issuance of common stock, net 268,797 -- -- Distributions paid to partners (44,855) (90,284) (56,284) Capital contributions -- -- 10,000 --------- --------- ---------NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,823 (149,029) (33,894) --------- --------- ---------Net increase in cash and cash equivalents 29,156 15,991 8,445Effect of exchange rate changes on cash and cash equivalents -- 40 (26)Cash and cash equivalents at beginning of period 29,599 13,568 5,149 --------- --------- ---------Cash and cash equivalents at end of period $ 58,755 $ 29,599 $ 13,568 ========= ========= ========= F-7 46 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FISCAL YEAR ENDED ----------------------------------- MARCH 28, MARCH 29, MARCH 30, 1998 1997 1996 ------- ------- -------SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 4,410 $16,005 $17,189 ======= ======= ======= Cash paid for income taxes $73,873 $22,280 $11,602 ======= ======= =======SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Foreign tax credits distributed to partners $ 509 $ 3,720 $ 3,617 ======= ======= ======= Capital obligations for completed shop-within-shops $15,102 $ 8,600 ======= ======= Fair value of assets acquired, excluding cash $69,537 $40,260 Less: Cash paid 8,551 39,726 Fair market value of common stock issued for PRC Acquisition 697 -- ------- ------- Liabilities assumed $60,289 $ 534 ======= ======= Fair market value of restricted stock grants $ 667 ======= See accompanying notes to financial statements. F-8 471 BASIS OF PRESENTATION AND ORGANIZATION (a) BASIS OF PRESENTATION Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware in March 1997. PRLC and its subsidiaries are collectively referred to herein as "Polo." On June 9, 1997, the partners and certain of their affiliates contributed to PRLC all of the outstanding stock of, and partnership interests in, the entities which comprised the predecessor group of companies in exchange for common stock and cash (the "Reorganization"). The accompanying combined financial statements for the years ended March 29, 1997 and March 30, 1996 include the accounts of Polo Ralph Lauren Enterprises, L.P. ("Enterprises"), Polo Ralph Lauren, L.P. and subsidiaries ("Polo Partnership"), The Ralph Lauren Womenswear Company, L.P. and subsidiaries ("Womenswear") and Polo Retail Corporation and subsidiaries ("PRC"), a 50% joint venture with a previously nonaffiliated partner (collectively, the "Predecessor Company"). The controlling interests of the Predecessor Company were held by Mr. Ralph Lauren, with a 28.5% interest held by certain investment funds affiliated with The Goldman Sachs Group, L.P. (collectively, the "GS Group"). The accompanying consolidated financial statements as of and for the year ended March 28, 1998 include the combined results of operations of the Predecessor Company through June 9, 1997 and the consolidated results of operations of Polo thereafter (Polo, together with the Predecessor Company, is referred to herein as the "Company"). The financial statements of PRLC have not been included prior to the Reorganization as PRLC was a shell company with no business operations. The financial statements of the Predecessor Company are being presented on a combined basis because of their common ownership. The combined financial statements have been prepared as if the entities had operated as a single consolidated group since their respective dates of organization. All significant intercompany balances and transactions have been eliminated. The equity method of accounting was used for the Company's investment in PRC during the period in which 50% of PRC was owned by a previously nonaffiliated partner (years ended March 29, 1997 and March 30, 1996). Subsequent to the Company's acquisition of the remaining 50% interest in PRC effective April 3, 1997, as discussed further in Note 1 (d) below, the results of operations of PRC have been consolidated and the acquisition has been accounted for as a purchase. F-9 48 48 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) (b) INITIAL PUBLIC OFFERING On June 17, 1997, PRLC completed the sale of 11.17 million shares of its Class A Common Stock at $26.00 per share in connection with its initial public offering. The net proceeds from the initial public offering, after deducting underwriting discounts and commissions and offering expenses, aggregated $268.8 million. The net proceeds from the initial public offering were used as follows: (i) to repay borrowings outstanding under the Company's New Credit Facility (as defined - see Note 7) in the amount of $163.5 million; (ii) to pay the Dividend and Reorganization Notes (as defined - see Note 1 (c)) in the amount of $43.0 million to Mr. Lauren and related entities and the GS Group; and (iii) to repay subordinated notes and interest thereon (see Note 8) in the amount of $24.3 million to Mr. Lauren and the GS Group. The remaining $38.0 million was used for other general corporate purposes. (c) DIVIDEND AND REORGANIZATION NOTES On June 9, 1997, in connection with the Reorganization, the Company declared a dividend and issued reorganization notes aggregating $43.0 million to Mr. Lauren and the GS Group representing estimated undistributed earnings of the Predecessor Company through the closing of the Reorganization ("Dividend and Reorganization Notes"). The Dividend and Reorganization Notes were paid with a portion of the net proceeds of the initial public offering (see Note 1 (b)). Effective June 9, 1997, the Company declared a second dividend (the "Second Dividend") to Mr. Lauren and the GS Group in an amount representing the difference between the actual amount of undistributed earnings through the closing of the Reorganization and the estimated amount of the Dividend and Reorganization Notes. The Second Dividend amounted to $5.4 million and was paid in the fourth quarter of fiscal 1998. (d) ACQUISITIONS Simultaneously with the Reorganization, the Company acquired from a partnership of which Mr. Lauren is the sole general partner, the partnership's sole membership interest in an entity which holds the trademarks and other rights under a license agreement relating to the Company's U.S. fragrance business and the interest which the Company did not previously own in the entity that holds the trademarks relating to the Company's international licensing business in exchange for shares of Class B Common Stock. The operating results of these entities have been included in the results of operations of the Predecessor Company for all periods presented based on their common ownership. On March 21, 1997, the Company entered into purchase agreements with its joint venture partners to acquire the remaining 50% interest in PRC, effective April 3, 1997, for consideration aggregating $10.4 million in cash and Class A Common Stock of PRLC ("PRC Acquisition"). The PRC Acquisition was completed simultaneously with the Company's initial public offering. On October 16, 1995, Womenswear acquired the assets of Ralph Lauren Womenswear, Inc. ("RLW"), a nonaffiliated licensee, at book value which approximated fair value, consisting principally of inventories ($19.7 million) and accounts receivable ($18.2 million) for $40.3 million in cash. This acquisition was accounted for as a purchase. F-10 49 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) (e) BUSINESS The Company designs, licenses, contracts for the manufacture of, markets and distributes men's and women's apparel, accessories, fragrances, skin care products and home furnishings. The Company's sales are principally to major department and specialty stores located throughout the United States. Additionally, the Company also sells directly to consumers through Company-owned Polo stores, including flagship stores in New York City, and outlet stores located throughout the United States. A substantial portion of the Company's net revenues and income from operations are derived from, and identifiable assets are located in, the United States. The Company is party to licensing agreements which grant the licensee exclusive rights to use the various trademarks owned by the Company 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. Additionally, the Company has granted royalty-free licenses to independent parties to operate Polo stores to promote the sale of merchandise of the Company and its licensees both domestically and internationally. A significant amount of the Company's products are produced in the Far East, through arrangements with independent contractors. As a result, the Company's operations could be adversely effected by political instability resulting in the disruption of trade from the countries in which these contractors are located, or by the imposition of additional duties or regulations relating to imports or by the contractors' inability to meet the Company's production requirements. (f) PRO FORMA ADJUSTMENTS (UNAUDITED) The pro forma statement of income data for the years ended March 28, 1998 and March 29, 1997 presents the effects on the historical financial statements of certain transactions as if they had occurred at March 31, 1996. The pro forma statement of income data reflects adjustments for: (i) income taxes based upon pro forma pre-tax income as if the Company had been subject to additional Federal, state and local income taxes, calculated using a pro forma effective tax rate of 40.8% for the year ended March 28, 1998 and 42.0% for the year ended March 29, 1997 (see Note 9); (ii) the reduction of interest expense resulting from the application of a portion of the net proceeds from the initial public offering to outstanding indebtedness; and (iii) the PRC Acquisition, including the consolidation of PRC's operations, the amortization of goodwill over 25 years associated with the acquisition and the elimination of the Company's equity in net loss of PRC for the year ended March 29, 1997. F-11 50 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) (g) PRO FORMA NET INCOME PER SHARE (UNAUDITED) Pro forma net income per share has been computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. Pro forma net income per share was calculated by dividing pro forma net income by the weighted average number of shares outstanding during the period, assuming the initial public offering had been completed on March 31, 1996. For comparison purposes only, the weighted average number of shares outstanding immediately following the completion of the initial public offering were considered to be outstanding in the years ended March 28, 1998 and March 29, 1997.2 SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company's fiscal year ends on the Saturday nearest to March 31. All references herein to "1998," "1997" and "1996" represent the 52 week fiscal years ended March 28, 1998, March 29, 1997 and March 30, 1996, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS For comparative purposes, certain prior period amounts have been reclassified to conform to the current period's presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. INVENTORIES Wholesale inventories are valued at the lower of cost (first-in, first-out method) or market. Retail inventories are valued using the retail method. STORE PREOPENING COSTS Costs associated with the opening of a new store are deferred and amortized within one year commencing from the date of the store opening. F-12 51 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost. Depreciation of furniture and fixtures and machinery and equipment is calculated using the straight-line method over estimated average useful lives of approximately five years. Leasehold improvements are amortized using the straight-line method over the lesser of the term of the related lease or the estimated useful life. Major additions and betterments are capitalized, and repairs and maintenance are charged to operations in the period incurred. Additionally, the Company capitalizes its share of the cost of constructing shop-within-shops under agreements with retailers and amortizes such costs using the straight-line method over the lesser of their estimated useful lives or the life of the underlying agreement. GOODWILL Goodwill represents the excess of purchase cost over the fair value of net assets of businesses acquired. The Company amortizes goodwill over its estimated useful life of 25 years on a straight-line basis. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS The Company assesses the carrying value of long-lived and intangible assets as current facts and circumstances suggest that they may be impaired. In evaluating the fair value and future benefits of such assets, the Company performs 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 fair value. The Company has determined that its long-lived and intangible assets presented in the accompanying balance sheet at March 28, 1998 are not impaired. OFFICERS' LIFE INSURANCE The Company maintains key man life insurance policies on several of its senior executives, the majority of which contain split dollar arrangements. The key man policies are recorded at their cash surrender value, while the policies with split dollar arrangements are recorded at the lesser of their cash surrender value or premiums paid. Amounts recorded under these policies aggregated $28.2 million and $25.0 million, net of loans of $0 and $5.8 million, at March 28, 1998 and March 29, 1997, respectively, and are included in other assets in the accompanying balance sheets. REVENUE RECOGNITION Sales are recognized upon shipment of products to customers and, in the case of sales by Company-owned outlet and retail stores, when goods are sold to customers. Allowances for estimated uncollectible accounts and discounts are provided when sales are recorded. Licensing revenue is recognized as earned. F-13 52 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) CONCENTRATION OF CREDIT RISK The Company sells its merchandise primarily to major upscale department stores across the United States and extends credit based on an evaluation of the customer's financial condition without requiring collateral. Credit risk is driven by conditions or occurrences within the economy and the retail industry and is principally dependent on each customer's financial condition. A decision by the controlling owner of a group of stores or any substantial customer to decrease the amount of merchandise purchased from the Company or to cease carrying its products could have a material adverse effect on the Company. The Company had three customers who in aggregate constituted 53% and 48% of trade accounts receivable outstanding at March 28, 1998 and March 29, 1997, respectively. The Company had one significant customer that accounted for approximately 11% of net sales in fiscal 1998, 1997 and 1996. Additionally, the Company had three significant licensees (one of which was new in fiscal 1998) who in aggregate constituted approximately 35%, 39% and 43% of licensing revenue in fiscal 1998, 1997 and 1996, respectively. The Company monitors credit levels and the financial condition of its customers on a continuing basis to minimize credit risk. The Company believes that adequate provision for credit loss has been made in the accompanying financial statements. The Company is also subject to concentrations of credit risk with respect to its cash and cash equivalents which it minimizes by placing these funds with major banks and financial institutions and investing in high-quality instruments. ADVERTISING The Company expenses the production costs of advertising, marketing and public relations expenses upon the first showing of the related advertisement. These expenses amounted to $68.5 million, $55.5 million and $44.5 million in fiscal 1998, 1997 and 1996, respectively. INCOME TAXES The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized based on differences between financial statement and tax bases of assets and liabilities using presently enacted tax rates. The entities which comprised the Predecessor Company included principally partnerships which were not subject to Federal or certain state income taxes. Therefore, no provision was made in the accompanying combined financial statements through June 9, 1997, as taxes were the liability of the partners. However, Federal, state and local taxes have been provided on the income of all domestic C corporations in the Predecessor Company. Foreign income taxes have also been provided on the income of the foreign entities in the Predecessor Company. F-14 53 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) DEFERRED RENT OBLIGATIONS The Company accounts for rent expense under noncancellable 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 are recorded as a deferred liability. Unamortized deferred rent obligations amounted to $28.1 million and $22.6 million at March 28, 1998 and March 29, 1997, respectively, and are included in accrued expenses and other, and other noncurrent liabilities in the accompanying balance sheets. FINANCIAL INSTRUMENTS The Company from time to time uses derivative financial instruments to reduce its exposure to changes in foreign exchange rates. While these instruments are subject to risk of loss from changes in exchange rates, those losses would generally be offset by gains on the related exposure. The Company generally does not hold or issue financial instruments for trading or speculative purposes. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of a foreign subsidiary of the Company is 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 the cumulative translation adjustment account. Gains and losses from foreign currency transactions are included in operating results and were not considered by the Company to be material in fiscal 1998, 1997 and 1996. STOCK OPTIONS The Company uses 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 has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income. This Statement establishes standards for reporting of comprehensive income and its components (revenues, expenses, gains and losses) in the financial statements. SFAS No. 130 requires an enterprise to: (i) reconcile net income to comprehensive income; (ii) classify items of other comprehensive income (e.g., foreign currency translation adjustments, unearned compensation, etc.) by their nature in a financial statement; and (iii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of a statement of financial position. SFAS No.130 is effective for the Company's first quarter of fiscal year ending April 3, 1999. F-15 54 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This Statement establishes standards for reporting selected financial data and descriptive information about an enterprise's reportable operating segments (as defined). This Statement also requires the reconciliation of total segment information presented to the corresponding amounts in the general purpose financial statements. Additionally, SFAS No. 131 establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for the Company's fiscal year ending April 3, 1999. The Company has not yet determined what additional disclosures, if any, may be required in connection with adopting this Statement. In April 1998, the American Institute of Certified Public Accountants ("AICPA") Accounting Standards Executive Committee issued Statement of Position No. 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP 98-5 requires that costs of start-up activities, including organization costs and retail store openings, be expensed as incurred. SOP 98-5 is effective for the Company's fiscal year ending April 1, 2000. The Company has not yet determined whether the application of SOP 98-5 will have a material impact on the Company's financial position or results of operations. 3 INVENTORIES MARCH 28, MARCH 29, 1998 1997 Raw materials $ 26,364 $ 32,781 Work-in-process 12,406 5,788 Finished goods 259,715 183,578 -------- -------- $298,485 $222,147 ======== ======== Merchandise inventories of $130.9 million and $93.9 million at March 28, 1998 and March 29, 1997, respectively, were valued utilizing the retail method and are included in finished goods. F-16 55 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)4 PROPERTY AND EQUIPMENT MARCH 28, MARCH 29, 1998 1997 Land $ 656 $ 656Furniture and fixtures 116,870 54,415Machinery and equipment 22,189 18,567Leasehold improvements 158,255 96,044 -------- -------- 297,970 169,682Less: accumulated depreciation and amortization 122,622 74,427 -------- -------- $175,348 $ 95,255 ======== ========5 INVESTMENTS IN AND ADVANCES TO JOINT VENTURES Effective March 31, 1997, the Company entered into a joint venture agreement with a nonaffiliated partner to acquire real property in New York City. Concurrent with the signing of the agreement, the Company made an initial contribution for its 50% interest in the joint venture in the amount of $5.0 million. On December 16, 1997, the Company entered into a second 50/50 joint venture agreement with this nonaffiliated partner. The entity formed through this joint venture entered into a long-term lease of a building located in the Soho District of New York City. The Company accounts for its 50% interest in these joint ventures under the equity method commencing from the effective dates of the agreements. At March 29, 1997, investments in and advances to joint ventures reflect the Company's 50% interest in PRC. Sales by the Company to PRC were $40.3 million and $38.9 million in fiscal 1997 and 1996, respectively. Purchases by the Company from PRC amounted to $6.7 million and $5.7 million in fiscal 1997 and 1996, respectively. At March 29, 1997, the Company had $20.3 million due from PRC which is included in prepaid expenses and other in the accompanying balance sheet.6 ACCRUED EXPENSES AND OTHER MARCH 28, MARCH 29, 1998 1997 Accrued operating expenses $ 39,941 $ 29,971Accrued payroll and benefits 33,898 25,318Accrued shop-within-shops 24,839 9,737Accrued other 3,117 3,833 -------- -------- $101,795 $ 68,859 ======== ======== F-17 56 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)7 FINANCING AGREEMENTS Long-term debt consists of the following: MARCH 28, MARCH 29, 1998 1997 Polo Partnership term loans $ -- $60,000Womenswear term loan -- 9,000Other 337 1,123 ------- ------- 337 70,123Less: current portion 337 22,248 ------- ------- $ -- $47,875 ======= ======= On June 9, 1997, the Company entered into a new financing arrangement (the "New Credit Facility") providing for a $375.0 million revolving line of credit available for the issuance of letters of credit, acceptances or direct borrowings. Upon the closing of the Company's initial public offering, the amount available under the revolving line of credit was reduced to $225.0 million. The New Credit Facility matures on December 31, 2002. Borrowings under the New Credit Facility were used to refinance the Polo Partnership credit facility of $104.5 million and to repay in full $56.7 million of aggregate borrowings outstanding under the Womenswear credit facility and the PRC credit facility. Such borrowings were repaid from the net proceeds of the initial public offering (see Note 1 (b)). Borrowings under the New Credit Facility bear interest, as determined by the Company, at either the lender's Base Rate (as defined) or at the London Interbank Offered Rate ("LIBOR") plus an interest margin. The New Credit Facility is collateralized by trade accounts receivable and contains restrictive covenants relating to, among other things, net worth and leverage ratios, limitations on indebtedness and incurrences of liens, and restrictions on sales of assets and transactions with affiliates. Additionally, the New Credit Facility provides that an event of default will occur if Mr. Lauren and related entities fail to maintain a specified minimum percentage of the voting power of Polo's Common Stock (as defined herein). At March 28, 1998, the Company had no borrowings outstanding under the New Credit Facility. F-18 57 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) On October 31, 1994, the Polo Partnershhip entered into a six-year financing arrangement with commercial banks providing for a $125.0 million revolving credit facility and $80.0 million in term loans. The revolving credit facility was available for the issuance of letters of credit, acceptances or direct borrowings and was limited to a borrowing base calculated on eligible accounts receivable, inventory and letters of credit. Any unused portion of the available credit line ($103.2 million at March 29, 1997) was subject to a 3/8% commitment fee. Notes and acceptances payable under this facility amounted to $4.7 million at March 29, 1997 and bore interest based on either the prime rate or LIBOR plus 1.75%, as permitted by the agreement (ranging from 5.5% to 6.25% at March 29, 1997). The credit facility and term loans were collateralized by trade wholesale accounts receivable, retail inventories and assignments of licensing revenue and certain trademarks. In fiscal 1996, Womenswear entered into a five-year financing arrangement with a financial institution providing for a $30.0 million revolving credit facility and a $10.0 million term loan. In February 1997, Womenswear amended its credit facility to increase its revolving credit facility to $40.0 million. The revolving credit facility was available for the issuance of letters of credit, acceptances or direct borrowings and was limited to a borrowing base calculated on eligible accounts receivable, inventory and accrued royalties. Any unused portion of the available credit line ($11.2 million at March 29, 1997) was subject to a 3/8% commitment fee. Notes and acceptances payable under this facility amounted to $22.1 million at March 29, 1997 and bore interest at the institution's reference rate (8.25% at March 29, 1997). The credit facility was collateralized by substantially all of the assets of Womenswear. The Polo Partnership term loans bore interest primarily at LIBOR plus 1.75% ranging from 6.9% to 8.25% at March 29, 1997) and the Womenswear term loan bore interest at the institution's reference rate plus 0.5% (8.75% at March 29, 1997). The weighted average interest rate on borrowings under revolving credit facilities was 8.0%, 7.7% and 8.4% in fiscal 1998, 1997 and 1996, respectively. 8 SUBORDINATED NOTES The subordinated notes were payable to Mr. Lauren in the amount of $20.0 million and to Mr. Lauren and the GS Group in the aggregate amount of $24.0 million. The subordinated note payable to Mr. Lauren was repaid on April 30, 1997 and the remaining notes were repaid to Mr. Lauren and the GS Group upon closing of the initial public offering (see Note 1 (b)). These notes bore interest at the prime rate (8.5% at March 29, 1997) and were subordinated to the Polo Partnership's credit facility and term notes. Interest expense on the subordinated notes amounted to $.6 million, $3.6 million and $3.8 million in fiscal 1998, 1997 and 1996, respectively. F-19 58 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)9 INCOME TAXES Concurrent with the Reorganization and the termination of the Company's partnership status, the Company became fully subject to Federal, state and local income taxes. As a result and in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, the Company recorded a deferred tax asset and a corresponding tax benefit in the amount of $27.4 million in its consolidated financial statements in the first quarter of fiscal 1998. The deferred income taxes reflect the net tax effect of temporary differences, primarily accounts receivable, uniform inventory capitalization, depreciation and other accruals, between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Pursuant to the PRC Acquisition, the Company acquired $7.9 million of deferred tax assets. The components of the provision for income taxes were as follows: FISCAL YEAR ENDED MARCH 28, MARCH 29, MARCH 30, 1998 1997 1996 Current: Federal $ 60,265 $ 16,649 $ 7,644 State and local 15,330 6,633 3,123 Foreign 4,427 460 392 -------- -------- -------- 80,022 23,742 11,159 -------- -------- --------Deferred: Federal (22,357) (652) (234) State and local (5,640) (286) -- -------- -------- -------- (27,997) (938) (234) -------- -------- -------- $ 52,025 $ 22,804 $ 10,925 ======== ======== ======== F-20 59 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) The foreign and domestic components of income before income taxes were as follows: FISCAL YEAR ENDED MARCH 28, MARCH 29, MARCH 30, 1998 1997 1996 Domestic $162,529 $113,188 $ 78,445Foreign 37,067 26,916 31,287 -------- -------- -------- $199,596 $140,104 $109,732 ======== ======== ======== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The components of the net deferred tax asset at March 28, 1998 and March 29, 1997 were as follows: MARCH 28, MARCH 29, 1998 1997 DEFERRED TAX ASSETS: Accounts receivable $11,230 $ 204 Net operating loss carryforwards 8,275 -- Uniform inventory capitalization 7,215 2,012 Deferred compensation 5,685 591 Property and equipment 4,219 347 Accrued expenses 2,990 143 Other 1,368 (544) ------- ------- 40,982 2,753Less: Valuation allowance 2,321 -- ------- ------- $38,661 $ 2,753 ======= ======= The Company had available Federal net operating loss carryforwards of approximately $10.7 million and state net operating loss carryforwards of approximately $35.4 million for tax purposes to offset future taxable income. The net operating loss carryforwards expire beginning in fiscal 2007. The utilization of the Federal net operating loss carryforwards is subject to the limitations of Internal Revenue Code Section 382 which applies following certain changes in ownership of the entity generating the loss carryforward. Management believes that the Company will more likely than not generate sufficient future taxable income to realize the entire deferred tax asset prior to expiration of any of these net operating loss carryforwards. F-21 60 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) Also, the Company has available additional state net operating loss carryforwards of approximately $37.3 million for which no deferred tax asset has been recognized. A full valuation allowance has been recorded since management does not believe that the Company will more likely than not be able to utilize these carryforwards to offset future taxable income. Subsequent recognition of the deferred tax asset relating to these net operating loss carryforwards would result in a reduction of goodwill recorded in connection with the PRC Acquisition. Provision has not been made for United States or additional foreign taxes on approximately $21.0 million of undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be reinvested. These earnings could become subject to tax if they were remitted as dividends, if foreign earnings were lent to a PRLC or a U.S. affiliate, or if the stock of the subsidiaries were sold. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practical. Management believes that the amount of the additional taxes that might be payable on the earnings of foreign subsidiaries, if remitted, would be partially offset by United States foreign tax credits. The pro forma provision for income taxes represents the income tax provisions that would have been reported had the Company been subject to additional Federal, state and local income taxes for the entire fiscal year. The pro forma effective tax rate was 40.8% and 42.0% in fiscal 1998 and fiscal 1997, respectively, which consisted of the following: FISCAL YEAR ENDED MARCH 28, MARCH 29, 1998 1997 (UNAUDITED) Current: Federal $ 63,822 $ 56,261 State and local 17,119 18,469 Foreign 4,427 512 -------- -------- 85,368 75,242 -------- --------Deferred: Federal (1,043) (7,842) State and local (1,694) (2,610) -------- -------- (2,737) (10,452) -------- -------- $ 82,631 $ 64,790 ======== ======== F-22 61 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) The pro forma provision for income taxes differs from the amounts computed by applying the statutory Federal income tax rate to income before income taxes due to the following: FISCAL YEAR ENDED MARCH 28, MARCH 29, 1998 1997 (UNAUDITED) Provision for income taxes at statutory Federal rate $ 70,965 $ 53,991Increase (decrease) due to: State and local income taxes, net of Federal benefit 11,280 9,395 Foreign income, net of foreign credits (1,213) (766) Other 1,599 2,170 -------- -------- $ 82,631 $ 64,790 ======== ========10 FINANCIAL INSTRUMENTS In fiscal 1995, the Company entered into an interest rate swap agreement with a commercial bank which expires on October 14, 1999 to hedge against interest rate fluctuations. The swap agreement effectively converted the outstanding balance of the Polo Partnership's term loan from variable rate borrowings to fixed rate obligations. Under the terms of this agreement, the Company makes payments at a fixed rate of 6.955% and receives payments from the counterparty based on the notional amount ($40.0 million at March 28, 1998), adjusted for scheduled loan repayments, at a variable rate based on LIBOR. The net interest paid or received on this arrangement is included in interest expense. The fair value of this agreement was $.5 million and $.6 million at March 28, 1998 and March 29, 1997, respectively, based upon the estimated amount that the Company would pay to terminate the agreement, as determined by a financial institution. The Company terminated this agreement and paid $.5 million, representing the fair value of the agreement. The Company from time to time enters into forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce the risk from exchange rate fluctuations. Gains and losses on these contracts are deferred and recognized as adjustments to the bases of those assets. Such gains and losses were not material in fiscal 1998, 1997 and 1996. At March 28, 1998, the Company had a forward foreign exchange contract outstanding with Goldman, Sachs & Co. ("GS& Co.") to deliver 1.0 billion yen on April 15, 1998 in exchange for $9.1 million. At March 29, 1997, the Company had a forward foreign exchange contract outstanding with GS& Co. to deliver 825.0 million yen on April 15, 1997 in exchange for $8.1 million. These contracts are hedges relating to foreign licensing revenues. At March 28, 1998 and March 29, 1997, the fair value of these contracts approximated carrying value due to their short-term maturities. F-23 62 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) The Company is exposed to credit losses in the event of nonperformance by the counterparties to the forward foreign exchange contract, but it does not expect any counterparties to fail to meet their obligations. The carrying amounts of financial instruments reported in the accompanying balance sheets at March 28, 1998 and March 29, 1997 approximated their estimated fair values primarily due to either the short-term maturity of the instruments or their adjustable market rate of interest. Considerable judgment is required in interpreting certain market data to develop estimated fair values for certain financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. 11 EMPLOYEE BENEFITS PROFIT SHARING RETIREMENT SAVINGS PLANS The Company sponsors two defined contribution benefit plans covering substantially all eligible U.S. employees not covered by a collective bargaining agreement. The plans include a savings plan feature under Section 401(k) of the Internal Revenue Code. The Company makes discretionary contributions to the plans and contributes an amount equal to 50% of the first 6% of an employee's contribution. Under the terms of the plans, a participant is 100% vested in the Company's matching and discretionary contributions after five years of credited service. Contributions under these plans approximated $6.0 million, $5.0 million and $4.6 million in fiscal 1998, 1997 and 1996, respectively. UNION PENSION Womenswear participates in a multi-employer pension plan and is required to make contributions to the International Ladies Garment Workers' Union (the "Union") for dues based on wages paid to union employees. A portion of such dues are allocated by the Union to a Retirement Fund which provides defined benefits to substantially all unionized workers. Womenswear does not participate in the management of the plan and has not been furnished with any information with respect to the type of benefits provided, vested and nonvested benefits or plan assets. Under the Employee Retirement Income Security Act of 1974, as amended, an employer, upon withdrawal from or termination of a multi-employer plan, is required to continue funding its proportionate share of the plan's unfunded vested benefits. Such withdrawal liability was assumed in conjunction with the acquisition of certain assets from RLW (see Note 1 (d)). Womenswear has no current intention of withdrawing from the plan. F-24 63 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) DEFERRED COMPENSATION The Company has deferred compensation arrangements for certain key executives which generally provide for payments upon retirement, death or termination of employment. The amounts accrued under these plans were $14.2 million and $10.5 million at March 28, 1998 and March 29, 1997, respectively, and are reflected in other noncurrent liabilities in the accompanying balance sheets. Total compensation expense recorded was $4.9 million, $3.2 million and $2.1 million in fiscal 1998, 1997 and 1996, respectively. The Company funds a portion of these obligations through the establishment of trust accounts on behalf of the executives participating in the plans. The trust accounts are reflected in other assets in the accompanying balance sheets. 12 COMMON STOCK Polo's Class B Common Stock is owned by Mr. Lauren and related entities and its Class C Common Stock is owned by the GS Group. Shares of Class B Common Stock are convertible at any time into shares of Class A Common Stock on a one-for-one basis and may not be transferred to anyone other than affiliates of Mr. Lauren. Shares of Class C Common Stock are convertible at any time into shares of Class A Common Stock on a one-for-one basis and may not be transferred to anyone other than among members of the GS Group or, until April 15, 2002, any successor of a member of the GS Group. The holders of Class A Common Stock generally have rights identical to holders of Class B Common Stock and Class C Common Stock, except that holders of Class A Common Stock and Class C Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Holders of all classes of Common Stock (as hereinafter defined) entitled to vote, will vote together as a single class on all matters presented to the stockholders for their vote or approval except for the election and the removal of directors and as otherwise required by applicable law. Class A Common Stock, Class B Common Stock and Class C Common Stock are collectively referred to herein as "Common Stock." 13 STOCK INCENTIVE PROGRAM On June 9, 1997, the Board of Directors adopted the 1997 Long-Term Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan authorizes the grant of awards to any officer or other employee, consultant to, or director of the Company or any of its subsidiaries with respect to a maximum of 10.0 million shares of the Company's Class A Common Stock (the "Shares"), subject to adjustment to avoid dilution or enlargement of intended benefits in the event of certain significant corporate events, which awards may be made in the form of: (i) nonqualified stock options; (ii) stock options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code; (iii) stock appreciation rights; (iv) restricted stock and/or restricted stock units; (v) performance awards; and (vi) other stock-based awards. At March 28, 1998, the Company had an additional 5.9 million Shares reserved for issuance under this plan. F-25 64 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) Stock options were granted in fiscal 1998 under the Stock Incentive Plan with an exercise price equal to the stock's fair market value on the date of grant. These options vest in equal installments primarily over three years for officers and other key employees and over two years for all remaining employees. The options expire ten years from the date of grant. No compensation cost has been recognized in the accompanying financial statements in accordance with APB No. 25. If compensation cost had been recognized for stock options granted under the Stock Incentive Plan based on the fair value of the stock options at the grant date in accordance with SFAS No. 123, the Company's pro forma net income and pro forma net income per share for fiscal 1998 would have been reduced to the following pro forma amounts: Pro forma net income $108,985 Pro forma net income per share - Basic and Diluted $1.09 The weighted average fair value of stock options granted in fiscal 1998 was $12.62 per share. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 6.45%; dividend yield of 0%; volatility factor of 42.0%; and weighted average expected lives of 5.45 years. On June 9, 1997, the Board of Directors adopted the 1997 Stock Option Plan for Non-Employee Directors (the "Non-Employee Directors Plan"). Under the Non-Employee Directors Plan, grants of options to purchase shares of Class A Common Stock of up to 500,000 shares may be granted to non-employee directors. Stock options vest in equal installments over two years and expire ten years from the date of grant. In fiscal 1998, the Board of Directors granted options to purchase 30,000 shares of Class A Common Stock with exercise prices equal to the stock's fair market value on the date of grant. At March 28, 1998, the Company had 470,000 options reserved for issuance under this plan. Stock option activity for the Stock Incentive Plan and Non-Employee Directors Plan in fiscal 1998 was as follows: WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE BALANCE AT MARCH 29, 1997 -- $ -- Granted 4,550 26.00 Exercised -- -- Forfeited (466) 26.00 Expired -- -- ------ ------BALANCE AT MARCH 28, 1998 4,084 $26.00 ====== ====== F-26 65 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) At March 28, 1998, the weighted average remaining contractual life of outstanding options was 9.2 years and .5 million shares were exercisable at an exercise price of $26.00 per share. The price range of options granted and outstanding at March 28, 1998 was $22.91 to $29.81. In March 1998, the Board of Directors authorized the repurchase, subject to market conditions, of up to $100.0 million of the Company's Class A Common Stock. Share repurchases under this plan will be made from time to time in the open market over a two-year period commencing April 1, 1998. Shares acquired under the repurchase program will be used for stock option programs and other corporate purposes. The shares acquired will be accounted for as treasury stock at cost. 14 COMMITMENTS AND CONTINGENCIES LEASES The Company leases office, warehouse and retail space and office equipment under operating leases which expire through 2021. These leases typically provide the Company with the option after the initial lease term to either renew the lease at the current fair rental value or purchase the equipment at the current fair value. The Company generally expects that leases will be renewed or replaced by other leases in the normal course of business. As of March 28, 1998, aggregate minimum annual rental payments under noncancelable operating leases with lease terms in excess of one year were payable as follows: FISCAL YEAR ENDING 1999 $ 57,1452000 52,2122001 46,6332002 38,5452003 34,785Thereafter 268,057 -------- $497,377 ======== Rent expense charged to operations was $53.9 million, $40.8 million and $34.5 million, net of sublease income of $1.5 million, $2.1 million and $2.1 million, respectively, in fiscal 1998, 1997 and 1996, respectively. Substantially all outlet and retail store leases provide for contingent rentals based upon sales and require the Company to pay taxes, insurance and occupancy costs. Certain rentals are based solely on a percentage of sales and one significant lease requires a fair market value adjustment at January 1, 2004. Contingent rental charges included in rent expense were $3.2 million, $3.7 million and $3.2 million in fiscal 1998, 1997 and 1996, respectively. F-27 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)LETTERS OF CREDIT At March 28, 1998, the Company is contingently liable for unexpiredbank letters of credit of $19.9 million related to commitments for the purchaseof inventories and in connection with its leases.EMPLOYMENT AGREEMENTS The Company is party to employment agreements with certain executiveswhich provide for compensation and certain other benefits. The agreements alsoprovide for severance payments under certain circumstances.LEGAL MATTERS The Company initiated an arbitration proceeding in San Francisco inNovember 1996 for a declaration of rights under its license agreement with TheMagnin Company, Inc., an independent free-standing retail licensee whichoperates a Polo store in Beverly Hills, California. The licensee had previouslyclaimed that the Company breached its license agreement when the Company refusedlast year to authorize the opening of a free-standing Polo concession at LosAngeles International Airport by the licensee. The licensee in a counterclaimhad sought compensatory and punitive damages. On September 8, 1997, thearbitration panel determined that the Company had made its decisions in goodfaith and fully in accordance with its rights and obligations under the licenseagreement and awarded the declaration sought by the Company. In addition, thepanel determined that the licensee should take nothing by reason of itscounterclaim. The Company is a defendant in a purported national class action lawsuitfiled in the Delaware Supreme Court in July 1997. The plaintiff has brought theaction allegedly on behalf of a class of persons who purchased products at theCompany's outlet stores throughout the United States at any time since July 15,1991. The complaint alleges that advertising and marketing practices used by theCompany in connection with the sales of its products at its outlet storesviolate guidelines established by the Federal Trade Commission and the consumerprotection statutes of Delaware and other states with statutes similar toDelaware's Consumer Fraud Act and Delaware's Consumer Contracts Act. The lawsuitseeks, on behalf of the class, compensatory and punitive damages as well asattorneys' fees. The Company intends to vigorously defend this lawsuit andbelieves that it has substantial and meritorious defenses. The Company is from time to time involved in legal claims, involvingtrademark and intellectual property, licensing, employee relations and othermatters incidental to its business. In the opinion of the Company's management,the resolution of any matter currently pending will not have a material effecton the financial condition or results of operations of the Company. F-28 67 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) 15 QUARTERLY INFORMATION (UNAUDITED) The following is a summary of certain unaudited quarterly financial information for fiscal 1998 and 1997: JUNE 28, SEPT. 27, DEC. 27, MARCH 28,FISCAL 1998 1997 1997 1997 1998 Net revenues $287,944 $421,146 $405,672 $356,173Gross profit 145,418 207,039 191,625 171,199Net income 44,638 44,933 29,311 28,689PRO FORMA DATA: Net income 17,194 44,933 29,311 28,689 Net income per share - Basic and Diluted $ 0.17 $ 0.45 $ 0.29 $ 0.29 JUNE 29, SEPT. 28, DEC. 28, MARCH 29,FISCAL 1997 1996 1996 1996 1997 Net revenues $223,808 $332,239 $306,459 $317,937Gross profit 103,573 147,450 137,854 142,969Net income 12,655 43,920 24,785 35,940PRO FORMA DATA: Net income 12,388 32,879 20,323 23,882 Net income per share - Basic and Diluted $ 0.12 $ 0.33 $ 0.20 $ 0.24 The pro forma data presents the effects on the historical financial statements of the adjustments described in Note 1 (f) as if they had occurred at March 31, 1996. Net income per share represents both the basic and diluted computation in accordance with SFAS No. 128, Earnings per Share. For comparison purposes only, the weighted average number of shares outstanding immediately following the completion of the initial public offering of 100.2 million were considered to be outstanding in the quarter ended June 28, 1997 and in fiscal 1997. The actual weighted average number of shares outstanding of 100.2 million was used for the computation of basic net income per share for the remainder of fiscal 1998. The weighted average number of shares outstanding used in the computation of diluted net income per share was 100.2 million, 100.3 million and 100.4 million for the quarter ended September 27, 1997, December 27, 1997 and March 28, 1998, respectively. The difference between the basic and diluted weighted average shares outstanding is due to the dilutive effect of stock options issued under the Company's stock option plans. F-29 68 INDEPENDENT AUDITORS' REPORTTo the Board of Directors and Stockholders of Polo Ralph Lauren Corporation:New York, New York We have audited the consolidated financial statements as of and for theyear ended March 28, 1998 and the combined financial statements as of and forthe year ended March 29, 1997 of Polo Ralph Lauren Corporation and subsidiaries(the "Company"), and have issued our report thereon dated May 15, 1998; suchreport is included elsewhere in this Form 10-K. Our audits also included theconsolidated and combined financial statement schedule of Polo Ralph LaurenCorporation and subsidiaries, listed in Item 14. This consolidated and combinedfinancial statement schedule is the responsibility of the Company's management.Our responsibility is to express an opinion based on our audits. In our opinion,such consolidated and combined financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, present fairly inall material respects the information set forth therein./s/ Deloitte & Touche LLPDELOITTE & TOUCHE LLPNew York, New YorkMay 15, 1998 S-1 69 INDEPENDENT AUDITOR'S REPORTThe PartnersPolo Ralph Lauren Enterprises, L.P. We have audited, in accordance with generally accepted auditingstandards, the combined statements of income, partners' capital, and cash flowsof Polo Ralph Lauren Corporation for the year ended March 30, 1996 included inPolo Ralph Lauren Corporation's Annual Report to Stockholders included in thisForm 10-K, and have issued our report thereon dated June 21, 1996. Our audit wasmade for the purpose of forming an opinion on those statements taken as a whole.The schedule listed on the index in Item 14(a) 2 of this Form 10-K is theresponsibility of the Company's management and is presented for the purposes ofcomplying with the Securities and Exchange Commission's rules and is not a partof the basic financial statements. The financial data for the fiscal year endedMarch 30, 1996 included in the schedule has been subjected to the auditingprocedures applied in the audit of the basic financial statements and, in ouropinion, fairly states in all material respects the financial data for thefiscal year ended March 30, 1996 required to be set forth therein in relation tothe basic financial statements taken as a whole./s/ Mahoney Cohen Rashba & Pokart, CPA, PCMAHONEY COHEN RASHBA & POKART, CPA, PCNew York, New YorkJune 21, 1996 S-2 70 SCHEDULE II POLO RALPH LAUREN CORPORATION VALUATION AND QUALIFYING ACCOUNTS BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR ------- ------- ------- ------- ------- YEAR ENDED MARCH 28, 1998 Allowance for doubtful accounts $ 6,289 $ 1,155 $ 0 $ 797(a) $ 6,647 Allowance for sales discounts 6,556 30,539 -- 31,295 5,800 ------- ------- ------- ------- ------- $12,845 $31,694 $ 0 $32,092 $12,447 ======= ======= ======= ======= =======YEAR ENDED MARCH 29, 1997 Allowance for doubtful accounts $ 5,554 $ 833 $ 0 $ 98(a) $ 6,289 Allowance for sales discounts 5,500 27,308 -- 26,252 6,556 ------- ------- ------- ------- ------- $11,054 $28,141 $ 0 $26,350 $12,845 ======= ======= ======= ======= =======YEAR ENDED MARCH 30, 1996 Allowance for doubtful accounts $ 4,517 $ 1,122 $ 0 $ 85(a) $ 5,554 Allowance for sales discounts 3,700 22,280 -- 20,480 5,500 ------- ------- ------- ------- ------- $ 8,217 $23,402 $ 0 $20,565 $11,054 ======= ======= ======= ======= =======- ----------------------------(a) ACCOUNTS WRITTEN-OFF AS UNCOLLECTIBLE. S-3 71 EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION- ------------------- -------------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (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 Long-Term Stock Incentive Plan (filed as Exhibit 10.1 to the S-1)*+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 Registration Rights Agreement dated as of June 9, 1997 by and among Ralph Lauren, GS Capital Partners, L.P., GS Capital Partners PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to the S-1)*10.4 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)*10.5 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)*10.6 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)*10.7 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)*10.8 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)*10.9 License Agreement, made as of January 1, 1998, between Ralph Lauren Home Collection, Inc. and WestPoint Stevens Inc.**10.10 License Agreement, dated March 1, 1998, between The Polo/Lauren Company, L.P. and Polo Ralph Lauren Japan Co., Ltd., and undated letter agreement related thereto** (filed as Exhibit 10.10 to the S-1)*10.11 Design Services Agreement, dated March 1, 1998, between Polo Ralph Lauren Enterprises, L.P. and Polo Ralph Lauren Japan Co., Ltd.** (filed as Exhibit 10-11 to the S-1)*10.12 Deferred Compensation Agreement dated April 1, 1993, between Michael J. Newman and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph Lauren, L.P. (filed as Exhibit 10.12 to the S-1)*+10.14 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)*+ 72 10.15 Deferred Compensation Agreement dated April 1, 1993 between Cheryl L. Sterling Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph Lauren, L.P.(filed as Exhibit 10.15 to the S-1)*+10.16 Amended and Restated Employment Agreement dated October 26, 1993 between Michael J. Newman and Polo Ralph Lauren Corporation, as amended and assigned October 31, 1994 to Polo Ralph Lauren, L.P. and as further amended as of June 9, 1997 (filed as Exhibit 10.17 to the S-1)*+10.17 Employment Agreement dated April 2, 1995 between F. Lance Isham and Polo Ralph Lauren, L.P. (filed as Exhibit 10.19 to the S-1)*+10.18 Employment Agreement dated October 26, 1993 between Cheryl L. Sterling Udell and Polo Ralph Lauren Corporation, assigned October 31, 1994 to Polo Ralph Lauren, L.P. (filed as Exhibit 10.20 to the S-1)*+10.19 Stockholders Agreement dated as of June 9, 1997 among Polo Ralph Lauren Corporation, GS Capital Partners, L.P., GS Capital Partners PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., Mr. Ralph Lauren, RL Holding, L.P. and RL Family (filed as Exhibit 10.22 to the S-1)*10.20 Form of Reorganization Note (filed as Exhibit 10.23 to the S-1)*10.21 Form of Credit Agreement between Polo Ralph Lauren Corporation and The Chase Manhattan Bank (filed as Exhibit 10.24 to the S-1)*10.22 Form of Guarantee and Collateral Agreement by Polo Ralph Lauren Corporation in favor of The Chase Manhattan Bank (filed as Exhibit 10.25 to the S-1)*10.23 Form of Indemnification Agreement between Polo Ralph Lauren Corporation and its Directors and Executive Officers (filed as Exhibit 10.26 to the S-1)*10.24 Employment Agreement dated June 9, 1997 between Ralph Lauren and Polo Ralph Lauren Corporation (filed as Exhibit 10.27 to the S-1)*+10.25 Design Services Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.**10.26 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** 21.1 List of Significant Subsidiaries of the Company. 24.1 Powers of Attorney. 27.1 Financial Data Schedule.- ------------------------------------* Incorporated herein by reference.+ Exhibit is a management contract or compensatory plan or arrangement.** Portions of Exhibits 10.4 - 10.11 and 10.25 and 10.26 have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission. 1EXHIBIT 10.9PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FORCONFIDENTIAL TREATMENT AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. SUCH PORTIONS ARE DESIGNATED "[ * * * ]". 2 THIS AGREEMENT made as of January 1, 1998 between RALPH LAUREN HOMECOLLECTION, INC., with offices at 103 Foulk Road, Wilmington, Delaware, 19899("RLHC"), and WESTPOINT STEVENS, INC., with a principal place of business at1185 Avenue of the Americas, New York, New York 10036 ("Company"). WITNESSETH: WHEREAS, RLHC is a subsidiary of PRL USA Holdings, Inc., a Delawarecorporation ("Polo"); and WHEREAS, Polo owns, and RLHC is the exclusive licensee of the rights touse, the "Licensed Marks", hereinafter defined, in connection with themanufacture and sale in the United States of certain items of home furnishings,including the "Licensed Products", hereinafter defined; and WHEREAS, Company desires to obtain, and RLHC is willing to grant, anexclusive sublicense, to use the Licensed Marks in connection with themanufacture and sale of Licensed Products in the United States; NOW, THEREFORE, in consideration of the premises and of the mutualcovenants and undertakings hereinafter set forth, the parties hereto agree asfollows: 1. Definitions. As used in this Agreement, the term: 1.1. "Licensed Products" shall mean those items listed on Schedule Aattached hereto, all bearing the Licensed Marks, hereinafter defined. 1.2. "Licensed Marks" shall only the trademarks "Ralph Lauren HomeCollection", "Ralph Lauren", "Ralph (Polo Player Design) Lauren", and therepresentation of the Polo Player Design, and unless the context indicatesotherwise, all of such trademarks, and only such other trademarks as RLHC may,from time to time at its sole discretion, specifically authorize for use byCompany. Polo shall have the sole right to determine which trademark shall beused in connection with each particular Licensed Product. From time to time RLHCmay authorize Company to manufacture and distribute products bearing theLicensed Marks not expressly listed in Schedule A hereto. Absent an agreementwith respect to such products signed by RLHC and Company, all such productsshall be deemed Licensed Products for all purposes hereunder; provided, however,that Company's rights with respect to such products (i) shall be non-exclusiveand (ii) may be terminated by Company upon 90 days written notice. 1.3. "Territory" shall mean the United States of America, Canada andMexico; provided, however, that (i) Company may sell Licensed Products in Mexicosolely through RLHC's exclusive distributor in Mexico or as otherwisespecifically authorized 3in advance by RLHC and (ii) Company shall have no right to sell any LicensedProducts directly, and RLHC shall be free to sell or authorize the sale ofLicensed Products, to hotels, motels and other lodging facilities for use insuch facilities (but not for retail sale at such facilities). From time to timeRLHC may authorize Company to sell certain Licensed Products to specificpurchasers outside the Territory. Absent an agreement with respect to such salessigned by RLHC and Company, all such sales shall be made on all of the terms andconditions set forth in this Agreement; provided, however, that Company's rightto make such sales shall be non-exclusive and may be terminated by RLHCimmediately upon written notice to Company. Any such termination shall not applyto orders already taken by Company in accordance with RLHC's priorauthorization. 2. Grant of License. 2.1. Subject to the terms and provisions hereof, RLHC hereby grantsCompany, and Company hereby accepts, the exclusive, non-assignable right to usethe Licensed Marks for the term of this Agreement, in connection with themanufacture and sale to the trade of Licensed Products in the Territory. 2.2. The sublicense granted herein applies solely to the use of theLicensed Marks in connection with the manufacture and sale to the trade of theLicensed Products. No use of any other trademark of RLHC, Polo or of any oftheir affiliates, and no use of the Licensed Marks in connection with themanufacture and sale of any other products, shall be authorized or permittedpursuant to this sublicense. 2.3. RLHC reserves all rights granted to it under its agreements withPolo which are not expressly and exclusively granted to Company hereunder, andRLHC may grant sublicenses to others in the Territory in connection with theitems of home furnishings designated in such agreements, except for the LicensedProducts specifically licensed hereunder. 2.4. It is understood and agreed that all right, title and interest inand to the Licensed Marks are reserved by Polo for its own use or for the use ofany other licensee, whether within or outside the Territory, in connection withany and all products and services other than the rights granted to Companyherein. Without limiting the generality of the foregoing, Company understandsand agrees that RLHC or Polo may manufacture or authorize third parties tomanufacture, in the Territory, Licensed Products for ultimate sale outside theTerritory. 2.5. Company shall not without RLHC's prior written approval sell anyLicensed Products bearing the Mark to any third party which, directly orindirectly, sells or proposes to sell such Licensed Products outside theTerritory. Company shall use its best efforts to prevent any such resale outsidethe Territory and shall, 2 4immediately upon learning or receiving notice from RLHC that a customer isselling Licensed Products outside the Territory, cease all sales and deliveriesto such customer. 2.6. RLHC shall not, without Company's consent, grant to others theright and license to use a trademark which bears the words "Polo" or "RalphLauren" in connection with the Licensed Products within the Territory. To theextent that it is legally possible to do so, no license is granted hereunder forthe manufacture, sale or distribution of Licensed Products to be used forpublicity purposes, other than publicity of Licensed Products, in combinationsales, as premiums or giveaways or to be disposed of under or in connection withsimilar methods of merchandising, such rights being specifically reserved forRLHC. 2.7. Company shall not purport to grant any right, permission orsublicense hereunder to any third party, whether at common law or otherwise. Inthe event of any attempted assignment or sublicense by Company without RLHC'sprior written consent, RLHC may at its option immediately terminate suchsublicense and this Agreement by written notice to Company to such effect; anysuch attempted assignment or sublicense shall otherwise be null, void and of noforce or effect. 2.8. Company shall not use, or permit another person or entity in itscontrol to use, the words "Polo" or "Ralph Lauren" as part of a corporate nameor trade name and Company shall not otherwise permit use of the Licensed Marksin such a way so as to give the impression that the names "Polo" or "RalphLauren", or the Licensed Marks, or any modification thereof, is the property ofCompany. 2.9. Company shall not have the right to use Company's name on theLicensed Products, except with the prior approval by RLHC of the use andplacement of Company's name. Company shall, at the option of RLHC, include onits business materials and/or the Licensed Products an indication of therelationship of the parties hereto in a form approved by RLHC. 2.10. Notwithstanding anything to the contrary herein contained, RLHChereby reserves the right from time to time to authorize others to manufactureand sell Licensed Products as part of a combination sale, or premium or giveawaywith certain products other than Licensed Products bearing the Ralph Laurenname. 2.11. Company shall not without RLHC's prior written approval, directlyor indirectly, manufacture, distribute, sell or advertise, during the term ofthis Agreement, any items which bear or are associated with any of the followingtrademarks: [ * * * ], or any other fashion apparel or home furnishings designerwhose products are sold primarily through department store distribution. In theevent that during the term hereof Company shall desire, directly or indirectly,to manufacture, distribute, sell 3 5or advertise any items which bear the name or are associated with the name ofany fashion apparel or home furnishings designer other than those specificallynamed above in markets outside of department store distribution, Company shallnotify RLHC in writing of the identity of the designer and the nature of theproposed transaction not less than sixty (60) days prior to concluding anagreement with respect to such transaction, and during such period shall discusswith RLHC in good faith any reasonable concerns RLHC may have with respectthereto. The provisions of this paragraph 2.11 shall not be deemed to prohibitCompany from acquiring or merging with any other entity, or engaging in anyother transaction, which results in Company directly or indirectly acquiringownership of any trademark set forth in this paragraph 2.11 or acquiring theright to use any such trademark in connection in connection with products in thesame categories as Licensed Products; provided, however, that Company shallpromptly notify RLHC in writing of any such transaction and RLHC shall, forsixty (60) days after its receipt of such notice, have the right to terminatethis Agreement by written notice to Company, such termination to becomeeffective thirty (30) days after the date notice of termination is received byCompany. 2.12. RLHC represents and warrants to Company that it has full legalright, power and authority to grant the sublicense hereby granted by RLHC toCompany, to enter into this Agreement, to perform all of its obligationshereunder, and to consummate all of the transactions contemplated herein. 2.13. Company represents and warrants to RLHC that it has full legalright, power and authority to enter into this Agreement, to perform all of itsobligations hereunder and to consummate all of the transactions contemplatedherein. Company further represents and covenants that it is now and at timesshall be adequately capitalized so as to be able to conduct its operationscontemplated hereunder and to meet the requirements of its suppliers inconnection therewith. 2.14. Company recognizes that there are many uncertainties in thebusiness contemplated by this Agreement. Company agrees and acknowledges thatother than those representations explicitly contained in this Agreement, if any,no representations, warranties or guarantees of any kind have been made toCompany, either by RLHC, Polo or the "Design Company" (as hereinafter defined),or by anyone acting on their behalf. Without limitation, no representationsconcerning the value of the Licensed Products or the prospects for the level oftheir sales or profits have been made and Company has made its own independentbusiness evaluation in deciding to manufacture and distribute the LicensedProducts on the terms set forth herein. 3. Design Standards and Prestige of Licensed Products. 3.1. Ralph Lauren ("Lauren") is an internationally famous designer whohas been twice inducted into the Coty Hall of Fame for his creation and designof men's 4 6and women's fashions and is a creator of original designs for cosmetics, jewelryand other products. The value of the Licensed Marks is largely derived from thereputation, skill and design talents of Lauren, and Lauren, directly and throughhis designees, provides design services through Polo Ralph Lauren Corporation(the "Design Company"). 3.2. RLHC agrees to provide Company with the benefit of the services ofPRLC in connection with the creation and design of Licensed Products, subject tothe terms and provisions hereof, in order to enable Company to exploit therights granted to it under this Sublicense Agreement and to manufacture LicensedProducts in conformity with the established prestige and good will of theLicensed Marks. In the event Ralph Lauren dies or becomes incapacitated, RLHCshall continue to provide the design services of PRLC and the Company shallaccept the services of PRLC. All Licensed Products manufactured or caused to bemanufactured and sold by Company shall be made in accordance with the design andother information approved under this Agreement, and in all other respects inconformity with the terms hereof. In addition, RLHC shall provide the servicesof PRLC's sales force as set forth in paragraph 4.1 hereof. 3.3. Company acknowledges that the Licensed Marks has establishedprestige and good will and is well recognized in the trade and the public, andthat it is of great importance to RLHC that in the manufacture and sale of thevarious lines of products bearing the Licensed Marks, including the LicensedProducts, the high standards and reputation Polo and Lauren have established bemaintained. Accordingly, all items of Licensed Products manufactured by Companyhereunder shall be of high quality workmanship with adherence to all details andcharacteristics embodied in the designs furnished pursuant to the provisions ofthis Agreement. Company shall, upon RLHC's request, supply RLHC with samples ofLicensed Products (including samples of labeling and packaging used inconnection therewith) prior to production and from time to time duringproduction, and shall, at all times during the term hereof, upon RLHC's request,make its manufacturing facilities available to RLHC, Polo and/or PRLC, and shalluse its best efforts to make available each subcontractor's manufacturingfacilities, for inspection by representatives of RLHC, Polo and/or PRLC duringusual working hours. No sales of Licensed Products as miscuts, damaged ordefective merchandise shall contain any labels or other identification bearingthe Licensed Marks without Polo's prior written approval. 5 7 4. Marketing; Advertising. 4.1. Except as may otherwise be agreed by RLHC and Company in writing,Licensed Products shall be marketed and sold only by RLHC or PRLC and the PRLChome collection sales group. No commission or other compensation shall be due toRLHC or PRLC in connection with such marketing and sales services, other thanthe royalty payments set forth herein. Company shall not offer for sale orpromote the sale of Licensed Products in any manner without RLHC's priorapproval. Company shall have no marketing or selling responsibility for LicensedProducts, but shall be the manufacturer of all Licensed Products sold in theTerritory. At Company's request, RLHC will provide Company with a list of allapproved accounts it plans to sell for that season. RLHC will notify Company ofany additions or deletions to the list. Company shall reserve the right torefuse to ship any customer if they do not meet Company's normal creditcriteria; provided however that Company shall first notify RLHC of its decisionand Company shall give RLHC the opportunity to assist in rectifying the creditsituation. 4.2. Company shall maintain the high standards of the Licensed Marks asapplied to Licensed Products, in all packaging and, to the extent permitted byRLHC, promotion of the Licensed Products. Company shall not employ or otherwiserelease any of such packaging or other business materials relating to anyLicensed Products and bearing the Licensed Marks unless and until Company shallhave made a request to RLHC in writing for approval. Approval or disapproval ofany such proposed use shall be given by RLHC as promptly as reasonablypracticable after receipt of Company's request in connection therewith, but inall cases within twenty-one (21) business days after receipt by RLHC ofCompany's request; if neither approval nor disapproval has been given withinsuch time, approval shall be deemed to have been given. Any such approval shallbe effective until revoked by RLHC; provided, however, to the extent RLHC'sapproval relates only to a seasonal collection of Licensed Products, Companyshall not thereafter use said packaging or business materials without RLHC'sfurther approval. 4.3. Provided approval to use the Licensed Marks as part of a specificpiece of packaging or business material remains effective, it shall not benecessary to obtain prior approval for each separate, substantially similar useof the Licensed Marks containing immaterial changes from the use of the LicensedMarks so approved. Notwithstanding the foregoing, Company shall, as soon as isreasonably possible, either prior to publication, release or other publicshowing or immediately thereafter, deliver to RLHC a tear sheet, proof or"mock-up" of any such changed use of the Licensed Marks, which shall be subjectto disapproval by RLHC; if such disapproval shall be expressed, the same shallnot be used at any later time unless approval thereof shall be later obtained. 6 8 4.4. Anything in this Agreement to the contrary notwithstanding, asbetween RLHC and Company, RLHC shall have sole and exclusive right to prepare orplace any and all advertising of any nature with respect to the LicensedProducts. Any and all cooperative advertising campaigns supported or approved byCompany shall be subject to the prior approval of RLHC. In the event RLHC duringthe term hereof authorizes Company to prepare and place any advertising withrespect to the Licensed Products, Company shall not place any such advertisingunless and until Company shall have made a request in writing to RLHC forapproval of such advertising detailing the use to be made of the advertisingmaterial (e.g. TV, print, radio), and RLHC shall have approved the same inwriting. Any approval granted hereunder shall be limited to use during theseasonal collection of Licensed Products to which such advertising relates andshall be further limited to the use (e.g. TV, print, radio) for which approvalby RLHC was granted. 4.5. Company shall maintain the highest quality and standards of theLicensed Products and shall exercise its best efforts to safeguard theestablished prestige and good will of the name Ralph Lauren and the Lauren imageat least at the same level of prestige and good will as heretofore maintained."Image", as used herein, refers primarily to quality and style of packaging,shipping, customer service, promotion, selling tools, creation and introductionof new products and types of outlets (with reference to quality of serviceprovided by retail outlets and quality of presentation of Lauren merchandise inretail outlets). Company shall take all necessary steps, and all stepsreasonably requested by RLHC, to prevent or avoid any misuse of the LicensedMarks by any of its customers, contractors or other resources. 4.6. To the extent permitted by applicable law, RLHC may from time totime, and in writing, promulgate uniform rules and regulations to Companyrelating to the manner of use of the Licensed Marks. Company shall comply withsuch rules and regulations. 4.7. Company agrees to make available for purchase, and to sell on itscustomary price, credit and payment terms, all lines and styles of LicensedProducts to retail stores in the Territory bearing any trademark of Polo or itsaffiliates pursuant to a license from Polo or any of its affiliates and to anystores or facilities operated or owned by Polo and/or its affiliates, which areauthorized to sell Licensed Products within such retail stores. Notwithstandinganything to the contrary contained herein, in the event that any such LicensedProducts are not so made available by Company to such stores or facilities, andin addition to any other remedy available to RLHC hereunder, such LicensedProducts may be made available to such stores by RLHC (or its affiliates orother licensees). 4.8. Company shall offer Licensed Products for sale to employees ofPolo and its licensees for the personal use of such employees at Company'sregular invoice 7 9price to unaffiliated retail accounts. 4.9. Company shall make a non-refundable contribution toward RLHC'sadvertising expenses on the first day of each year during the term hereof, asfollows: January 1, 1998 $ [ * * * ] January 1, 1999 $ [ * * * ] January 1, 2000 $ [ * * * ]Except as otherwise agreed, Company's contributions shall be used for consumeradvertising which features Licensed Products, although such advertising may alsoinclude products of other RLHC licensees in order to reflect RLHC designconcepts and lifestyles. 5. Trademark and Copyright Protection. 5.1. All uses of the Licensed Marks by Company, including, withoutlimitation, use in any business documents, invoices, stationery, advertising,promotions, labels, packaging and otherwise, shall be subject to paragraph 4hereof and shall require RLHC's prior written consent, and all uses of theLicensed Marks by Company in advertising, promotions, labels and packaging shallbear the notation, "Ralph (Polo Player design) Lauren", the representation ofthe Polo Player Design, or "Ralph Lauren". Company acknowledges and agrees thatits use of the Licensed Marks shall at all times be as sublicensee of RLHC forthe account and benefit of RLHC, Polo and PRLC. All uses of the Licensed Markspursuant to this Agreement shall be for the sole benefit of Polo and shall notvest in Company any title to or right or presumptive right to continue such use.For the purposes of trademark registrations, sales by Company or RLHC shall bedeemed to have been made by Polo. 5.2. Company will cooperate fully and in good faith with RLHC for thepurpose of securing and preserving RLHC's and Polo's rights in and to theLicensed Marks. Nothing contained in this Agreement shall be construed as anassignment or grant to Company of any right, title or interest in or to theLicensed Marks or any of RLHC's or Polo's other trademarks, and all rightsrelating thereto are reserved by RLHC and Polo, relative to their respectiveinterests therein, except for the sublicense hereunder to Company of the rightto use the Licensed Marks only as specifically and expressly provided herein.Company acknowledges that only Polo may file and prosecute a trademarkapplication or applications to register the Licensed Marks for LicensedProducts. 5.3. Company will not, during the term of this Agreement or thereafter,(a) attack Polo's title or rights, or RLHC's rights, in and to the LicensedMarks in any jurisdiction, or attack the validity of this Sublicense or of theLicensed Marks, or (b) 8 10contest the fact that Company's rights under this Agreement (i) are solely thoseof a manufacturer or distributor, and (ii) subject to the provisions ofparagraph 14 hereof, terminate upon termination of this Agreement. Theprovisions of this paragraph 5.3 shall survive the termination or expiration ofthis Agreement. 5.4. All right, title and interest in and to all samples, sketches,designs, art work, logos and other materials furnished by or to PRLC or RLHC,whether created by PRLC, RLHC or Company, are hereby assigned in perpetuity to,and shall be the sole property of, Polo, RLHC and/or PRLC, as the case may be;provided, however, that all rights (including copyrights and design patentrights) in designs, and all sketches, artwork and other materials embodying suchdesigns, first proposed by the Company to RLHC which are rejected by RLHC andwhich are not substantially similar to designs (i) first proposed by RLHC orPRLC or (ii) proposed by Company and accepted by RLHC in whole or in part foruse in connection with Licensed Products, shall be owned exclusively by Company.Company will assist RLHC, Polo and PRLC, at RLHC's, Polo's or PRLC's expense, asthe case may be, (provided that RLHC, Polo and/or PRLC shall not be responsiblefor the cost of the time and effort expended by Company's officers and employeesin connection with furnishing such assistance) to the extent necessary in theprotection of or the procurement of any protection of the rights of Polo orPRLC, as the case may be, to the Licensed Marks or the designs, design patentsor copyrights furnished hereunder, as well as to the rights of RLHC to the same.RLHC, Polo and PRLC, as their interests may appear, may commence or prosecuteany claims or suits in their own names and may join Company as a party thereto.Company shall promptly notify RLHC and Polo in writing of any uses which may beinfringements or imitations by others of the Licensed Marks on articles similarto those covered by this Agreement, and of any uses which may be infringementsor imitations by others of the designs, design patents and copyrights furnishedhereunder, which may come to the attention of Company. As between Company andRLHC, RLHC shall have the sole right with respect to the Licensed Marks,designs, design patents and copyrights furnished hereunder, to determine whetheror not any action shall be taken on account of such infringements or imitations.Company shall not institute any suit or take any action without first obtainingRLHC's written consent to do so. 6. Designs. 6.1. At any time or from time to time Company shall provide RLHC with alist or lists setting forth those Licensed Products for which Company shallrequire designing by PRLC. 6.2. At any time or from time to time within a reasonable periodfollowing receipt by RLHC of the aforesaid lists or lists, RLHC shall provideCompany, directly or through PRLC, with PRLC's program of suggested, broaddesign themes and 9 11concepts with respect to the design of the Licensed Products ("Design Concepts")which shall be embodied in verbal and/or written descriptions of design themesand concepts and such other detailed designs and sketches therefor, as PRLCdeems appropriate. PRLC shall have full discretion with respect to the manner inwhich the Design Concepts shall be formulated and presented to Company but mayundertake to prepare and provide finished artwork with respect to the design ofLicensed Products. RLHC shall make PRLC available for consultation with Companyon Design Concepts for the purpose of making such modifications to the DesignConcepts as are required to meet PRLC's approval. 6.3. PRLC may engage such employees, agents, and consultants operatingunder PRLC's supervision and control as it may deem necessary and appropriate. 6.4. From time to time while this Agreement is in effect, PRLC may (a)develop or modify and implement designs from PRLC, or (b) develop and implementnew designs. 6.5. If Company wishes to prepare a design for each of its lines ofLicensed Products, it shall submit to RLHC for PRLC's approval Company'sproposed design therefor. PRLC may, in its sole discretion, by written notice,approve any of the designs so furnished, with such modifications as it shalldeem appropriate, or it may disapprove any or all of the designs. 6.6. All patents and copyrights on designs, and all art work, sketches,logos and other materials depicting the designs or Design Concepts shall only beapplied for by PRLC, at its discretion and expense, and shall designate PRLC asthe patent or copyright owner, as the case may be, thereof. 6.7. Company shall include within its collection of Licensed Productseach design designated by PRLC for inclusion therein. The foregoingnotwithstanding, in the event Company is unable, in good faith and due only tophysical impossibility or economic impracticability, to include within acollection of Licensed Products a particular Licensed Product which PRLC hasdesigned or designated for inclusion in such collection, RLHC shall be entitledto authorize third parties to manufacture and sell such Licensed Products withinthe Territory and Company shall display and present such Licensed Products inits showroom for Licensed Products. 7. Design Legends: Copyright Notice and Grant. 7.1. All designs, and all art work, sketches, logos and other materialsdepicting the designs or Design Concepts created by PRLC, or created by or forCompany and reviewed and approved by PRLC or developed by or for Company fromDesign Concepts or subsequent design concepts furnished or approved by PRLC,shall be 10 12subject to the provisions of this paragraph 7 and shall be owned exclusively byPRLC. 7.2. Company shall cause to be placed on all Licensed Products, whennecessary, appropriate notices designating PRLC as the copyright or designpatent owner thereof, as the case may be. Prior to use thereof by Company, themanner of presentation of said notices must be reviewed and approved in writingby PRLC. 7.3. RLHC hereby grants to Company the exclusive right, sublicense andprivilege in connection with Licensed Products in the Territory to use thedesigns furnished hereunder and all copyrights, if any, therein, and herebysublicenses to Company the right to use all patents on such designs, and shallexecute and deliver to Company all documents and instruments necessary toperfect or evidence such sublicense; provided, however, that all such right,title and interest therein shall revert to PRLC upon termination of thisAgreement for any reason whatsoever, and Company shall thereupon execute anddeliver to PRLC all documents and instruments necessary to perfect or evidencesuch reversions and, provided, further, that such sublicense is limited to usein connection with Licensed Products authorized to be manufactured and sold fromtime to time pursuant to this Sublicense Agreement. Such sublicense shallcontinue only during the term of this Agreement. 8. Licensed Products. 8.1. Company shall, through RLHC, obtain the written approval of PRLCof all Licensed Products, by submitting a Prototype, as hereinafter defined, ofeach different design or model of a Licensed Product, including, but not limitedto, the type and quality of materials, colors and workmanship to be used inconnection therewith, prior to any commercial production thereof. In the eventthat PRLC rejects a particular Prototype or Prototypes, Company shall benotified of the reasons for rejection and Company may be provided withsuggestions for modifying the particular Prototype or Prototypes which PRLC isrejecting. Company shall promptly correct said Prototype or Prototypes andresubmit said Prototype or Prototypes for PRLC's approval under the same termsand conditions as set forth herein with respect to the first submission ofPrototypes. As used herein, the term "Prototype" shall mean any and all models,or actual samples, of Licensed Products; and the term "Final Prototype" shallmean the actual final sample of a Licensed Product from which the firstcommercial production thereof will be made and which has been approved by PRLCprior to the first commercial production thereof pursuant to paragraphs 8 and 9hereof. 8.2. The written approval of PRLC of the Prototypes for each seasonalcollection shall be evidenced by a written list, signed on behalf of PRLC,setting forth those Prototypes that have been approved for inclusion in suchcollection. Prototypes so approved shall be deemed Final Prototypes in respectof such collection. Approval 11 13of any and all Prototypes as Final Prototypes shall be in the sole discretion ofPRLC. Company shall present for sale, through the showing of each seasonalcollection to the trade, all Final Prototypes so approved in respect of suchcollection. 8.3. The Licensed Products thereafter manufactured and sold by Companyshall strictly adhere, in all respects, including without limitation, withrespect to materials, colors, workmanship dimensions, styling, detail andquality, to the Prototypes approved by PRLC. 8.4. Company shall comply with all laws, rules, regulations andrequirements of any governmental body which may be applicable to themanufacture, distribution, sale or promotion of Licensed Products. Company shalladvise RLHC to the extent any Final Prototype does not comply with any such law,rule, regulation or requirement. 8.5. Company shall make its personnel, and shall use its best effortsto make the personnel of any of its contractors, suppliers and other resources,available by appointment during normal business hours for consultation withPRLC. Company shall make available to RLHC, upon reasonable notice, marketingplans, reports and information which Company may have with respect to LicensedProducts. In addition, when requested by PRLC, Company shall arrange meetingsbetween PRLC and senior executive personnel of Company to discuss and pursue ingood faith the resolution of problems encountered by PRLC in connection withthis Agreement during the term hereof. 9. Quality of Licensed Products. 9.1. PRLC shall have the right of approval of the styles, designs,colors, materials, workmanship and quality of all Licensed Products to insurethat all Licensed Products manufactured, sold or distributed are of the highestquality and are consistent with the highest standards and reputation andestablished prestige and good will connected with the name "Ralph Lauren". Inconnection with the production of each item of Licensed Products, Company shalluse only such materials as PRLC shall have previously approved pursuant to theFinal Prototype with respect to such item of Licensed Products. 9.2. In the event that any Licensed Product is, in the judgment ofPRLC, not being manufactured or sold in adherence to the materials, colors,workmanship, design, dimensions, styling, detail and quality embodied in theFinal Prototypes, or is otherwise not in accordance with the Final Prototypes,RLHC shall notify Company thereof in writing and Company shall promptly repairor change such Licensed Product to conform strictly thereto. If an item ofLicensed Product as repaired or changed does not strictly conform to the FinalPrototypes and such strict conformity 12 14cannot be obtained after at least one (1) resubmission, the Licensed Marks shallbe promptly removed from the item, at the option of PRLC, in which event theitem may be sold by Company, subject to the royalty provisions of Paragraph 10hereof, provided it is in no way identified as a Licensed Product. 9.3. RLHC and PRLC and their duly authorized representatives shall havethe right, upon reasonable notice during normal business hours, to inspect allfacilities utilized by Company (and its contractors and suppliers) in connectionwith the preparation of Prototypes and the manufacture, sale, storage ordistribution of Licensed Products pursuant hereto and to examine LicensedProducts in the process of manufacture and when offered for sale withinCompany's operations. Company hereby consents to examination by RLHC and PRLC ofLicensed Products held by Company's customers for resale provided Company hassuch right of examination. Company shall take all necessary steps, and all stepsreasonably requested by RLHC and PRLC, to prevent or avoid any misuse of thelicensed designs by any of its customers, contractors or other resources. 10. Royalties. 10.1. Company shall pay to RLHC minimum royalties each year during theterm of this Sublicense Agreement. The minimum royalty a. for the first year (as hereinafter defined) shall be $ [ * * * ]; and b. for the second year shall be $ [ * * * ]; and c. for the third year shall be $ [ * * * ].Minimum royalties for each year shall be paid on a quarterly basis, beginningwith the minimum royalty payment to be made for the first calendar quarter of1998, in the manner set forth in paragraph 10.2 below. No credit shall bepermitted against minimum royalties payable in any year on account of earned orminimum royalties paid in any other year and minimum royalties shall not bereturnable. For the purposes of this Agreement, a "year" shall mean a period oftwelve (12) months commencing on each January 1 during the term hereof. 10.2. Company shall pay to RLHC earned royalties based on the Net SalesPrice, as hereinafter defined, of all Licensed Products sold hereunder. Earnedroyalties shall equal [ * * * ] percent ([***]%) of the Net Sales Price of allLicensed Products sold under this Agreement, including without limitation anysales made pursuant to the terms of paragraphs 3.3, 9.2 and 14 hereof; provided,however, that no royalties shall be due with respect to sales of LicensedProducts sold at a price equal to or less than [ * * * ] percent ([***]%) offthe regular wholesale price (although 13 15all such discounted sales shall be separately reflected in Company's accountingstatements). Company shall prepare or cause to be prepared statements ofoperations for each month during the term hereof, which statements shall befurnished to RLHC together with the earned royalties due for each such month onthe last day of the following month. The statement and royalty payment providedon the last day of each April (for the month of March), July (for the month ofJune), October (for the month of September) and January (for the month ofDecember) during the term shall also include Licensee's minimum royaltyobligation for the preceding calendar quarter, less the aggregate earnedroyalties paid for such calendar quarter; provided, however, that any payment ofminimum royalties required hereunder may be set off against any excess of earnedroyalties over minimum royalties in any subsequent quarter of the same year, itbeing the parties intent that at the end of each year during the term hereofCompany shall have paid RLHC an amount equal to the greater of (i) the aggregateearned royalties for the year or (ii) the minimum royalty obligation set forthin paragraph 10.1 above. The term "Net Sales Price" shall mean the gross salesprice to retailers or, with respect to Licensed Products that are not solddirectly or indirectly to retailers, other ultimate consumers (as in the case ofaccommodation sales by Company to its employees), of all sales of LicensedProducts sold under this Agreement, less trade discounts actually taken andmerchandise returns. The Net Sales Price of any Licensed Products sold byCompany to affiliates of Company shall, for purposes of this Agreement, bedeemed to be the higher of (a) the actual gross sales price, or (b) Company'sregular selling price for such Licensed Products sold to unaffiliated partiesfor sale at retail. Merchandise returns shall be credited in the quarterlyperiod in which the returns are actually made. 10.3. Company shall make a non-refundable contribution each year duringthe term hereof toward RLHC's travel expenses incurred with respect to designdevelopment and approval pursuant to this Agreement (including travel to millsfor strike off approvals), in the amount of $40,000, which amount shall be paidtogether with Company's first royalty payment for each year during the termhereof as set forth in paragraph 10.2 hereof. 10.4. If the payment of any installment of royalties is delayed for anyreason, interest shall accrue on the unpaid principal amount of such installmentfrom and after the date on which the same became due pursuant to paragraphs 10.1and 10.2 hereof at the lower of the highest rate permitted by law in New Yorkand 2% per annum above the rate of interest published from time to time byChemical Bank, New York, New York (or any successor bank) as its reference rate,or, if such rate is not published, then the nearest equivalent rate thereto thenpublished by Chemical Bank. 10.5. The obligation of Company to pay royalties hereunder shall beabsolute notwithstanding any claim Company may assert against RLHC, Polo, Laurenor 14 16PRLC. Company shall not have the right to set off, compensate or make anydeduction from such royalty payments for any reason whatsoever. 10.6. In consideration of the rights granted herein, Company shall selland timely ship to "New Stores" (as hereinafter defined) such Licensed Productsas they may wish to purchase, at a discount of at least thirty-five percent(35%) off the regular wholesale price with respect to all Bedroom Products otherthan solid color sheets and bedding accessories with a 250 thread count ("250sheets") and at least thirty percent (30%) off the regular wholesale price withrespect to 250 Sheets and all Bathroom Products. As used herein, the term "NewStores", including the one in Oakbrook, Illinois, shall mean all full pricefree-standing stores operating under any service mark or tradename associatedwith Ralph Lauren which is opened or relocated on or after May 1, 1997,regardless of the product mix, size, location or configuration of such storesand "free-standing stores" shall mean stores which are operating as separateunits not a department or sub-unit of a larger store. No royalty shall be duepursuant to paragraph 10.2 hereof with respect to any sales by Company to NewStores pursuant to this paragraph 10.6, but Company shall separately report allsuch sales in the accounting statements required hereunder. Also inconsideration of the rights granted herein, Company shall sell and timely shipLicensed Products to "Polo Outlet Stores" (as each such term is hereinafterdefined), to the extent of their requirements on a priority basis in relation toany other secondary distribution of Licensed Products, at a discount which,unless otherwise agreed by Company and RLHC, shall be equal to 25% off theregular wholesale price therefore based on a weighted average, it beingunderstood that (i) larger discounts may be negotiated on a case-by-case basisin respect of excess and irregular inventory taking into account the age,condition and quantity of merchandise to be disposed of and (ii) smallerdiscounts may be negotiated in exceptional cases for products currently sold indepartment stores which have been merchandised to hit critical price points. Allsuch sales shall be separately reported by Company in its accounting statementspursuant to paragraph 10.2 hereof, and such sales shall be subject to theroyalty obligations set forth herein unless otherwise agreed by RLHC andCompany. "Polo Outlet Stores", as used herein, shall mean all "outlet" or"factory" stores doing business under any Polo/Ralph Lauren service mark ortradename. 11. Accounting; Records. 11.1. Company shall at all times keep an accurate account of alloperations within the scope of this Agreement and shall prepare and furnish toRLHC full statements of operations with respect to each month in each yearduring the term of this Agreement within thirty (30) days of the end of suchperiod. Such statements shall include, on a country-by-country basis, allaggregate gross sales, trade discounts, merchandise returns and the Net SalesPrice of all sales of License Products for the previous month. Such statementsshall be in sufficient detail to be 15 17audited from the books of Company and shall be certified by a financial officerof Company. Once each year, which may be in connection with the regular annualaudit of Company's books, Company shall furnish an annual statement of theaggregate gross sales, trade discounts, merchandise returns and Net Sales Priceof all sales of Licensed Products made by Company certified by the independentpublic accountant of Company. 11.2 RLHC and its duly authorized representatives, on reasonablenotice, shall have the right, no more than once in each year during regularbusiness hours, for the duration of the term of this Agreement and for three (3)years thereafter, to examine the books of account and records and all otherdocuments, materials and inventory in the possession or under the control ofCompany and its successors with respect to the subject matter of this Agreement.All such books of account, records and documents shall be maintained and keptavailable by Company for at least the duration of this Agreement and for three(3) years thereafter. RLHC shall have free and full access thereto in the mannerset forth above and shall have the right to make copies and/or extractstherefrom. If as a result of any examination of Company's books and records itis shown that Company's payments to RLHC hereunder with respect to any twelve(12) month period were less than or greater than the amount which should havebeen paid to RLHC by an amount equal to two percent (2%) of the amount whichshould have been paid during such twelve (12) month period, Company will, inaddition to reimbursement of any underpayment, with interest from the date onwhich each payment was due at the rate set forth in paragraph 6.3 hereof,promptly reimburse RLHC for the cost of such examination. 11.3. Company shall provide to RLHC in the form requested suchinformation as RLHC may reasonably request with respect to the manufacture,distribution and sale of Licensed Products. 12. Term. The initial term of this Agreement shall commence on the date hereofand shall terminate on December 31, 2000, unless earlier terminated inaccordance with the terms hereof. It is expressly understood that only thecompany (which may be Company) whose licensed term covers the period subsequentto the expiration of this Agreement shall be entitled to receive designs forLicensed Products intended to be sold after the expiration of this Agreement,and to make presentations of such Licensed Products during the marketpresentation weeks that relate to such subsequent period, even if such marketpresentation occurs prior to the termination of this Agreement. Without limitingthe generality of the foregoing, in the event the term hereof is not renewed orextended, the last season for which the Company shall be entitled to receivedesigns and, during the term hereof, to manufacture and sell Licensed Productsshall be the [Fall 2000] season, and RLHC shall be entitled to 16 18undertake, directly or through a successor licensee, all activities associatedwith the design, manufacture and sale Licensed Products commencing with the[Spring 2001] season. 13. Default; Change of Business. 13.1. Each of the following shall constitute an event of default("Event of Default") hereunder; (i) Royalty payments are not paid when due and such default continues for more than ten (10) days after notice thereof; (ii) Company shall fail to timely present for sale to the trade a broadly representative and fair collection of each seasonal collection of Licensed Products designed by PRLC or Company shall fail to timely ship to its customers a material portion of the orders of Licensed Products it has accepted; (iii) Company fails within ten (10) days after written notice from RLHC that payment is overdue to pay for any Licensed Products or materials, trim, fabrics, packaging or services relating to Licensed Products purchased by Company from RLHC or Polo or any agent or licensee of RLHC or Polo or any other supplier of such items unless Company is in good faith contesting the amount or liability for such payment; (iv) If Company shall, after achieving distribution and sale of the Licensed Products throughout the Territory, thereafter fail for a consecutive period in excess of two (2) months to continue the bona fide manufacture, distribution and sale of the Licensed Product; or (v) If a deliberate deficiency in reported Net Sales occurs or if any other deliberate misstatements are made in reports required or requested hereunder; or (vi) If the quality of the Licensed Products should become lower than that in the approved Prototypes referred to in paragraph 8 hereof; or (vii) If Company shall use the Licensed Marks in an unauthorized or improper manner and/or if Company shall make an unauthorized disclosure of confidential information or materials given or 17 19 loaned to Company by Polo, PRLC and or RLHC; or (viii) Company defaults in performing any of the terms of this Agreement and continue in default for a period of thirty (30) days after notice thereof (unless the default cannot be totally cured within the initial thirty (30) day period after notice and Company diligently and continuously proceeds to cure and does in fact cure such default, but within no later than ninety (90) days following such initial period); or (ix) Company institutes proceedings seeking relief under the Bankruptcy Code or any similar law, or consents to entry of an order for relief against it in any bankruptcy or insolvency proceeding or similar proceeding, or files a petition or answer or consents for reorganization or other relief under any bankruptcy act or other similar law, or consents to the filing against it of any petition for the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of it or of any substantial part of its property, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due, or takes any action in furtherance of the foregoing; or (x) Company transfers or agrees to transfer a substantial part of its property (except as provided in paragraph 13.3 below); or (xi) The calling of a meeting of creditors, appointment of a committee of creditors or liquidating agents, or offering of a composition or extension to creditors by, for, or of Company; or (xii) Company shall have failed to perform any material term, covenant or agreement on its part to be performed under any agreement or instrument (other than this Agreement) evidencing or securing or relating to any indebtedness owing by Company, if the effect of such failure is to accelerate the maturity of such indebtedness, or to permit the holder or holders of such indebtedness to cause such indebtedness to become due prior to the stated maturity thereof, regardless of whether or not such failure to perform will be waived by the holder or holders of such indebtedness. 13.2. If any Event of Default shall occur, RLHC, Polo or PRLC, or anyof them, shall have the right, exercisable in its discretion, immediately toterminate this 18 20Agreement and the sublicense upon ten (10) days written notice to Company of itsintention to do so, and upon the expiration of such ten (10) day period, thisAgreement and the sublicense, including, without limitation, all rights ofCompany in and to the Licensed Marks, and in and to the designs furnished orused hereunder and all copyrights therein and design patents thereon, shallterminate and come to an end without prejudice to any remedy of RLHC for therecovery of any monies (including attorneys' fees for collection) then due itunder this Agreement or in respect of any antecedent breach of this Agreement,and without prejudice to any other right of RLHC, including without limitation,damages for breach to the extent that the same may be recoverable. No assigneefor the benefit of creditors, receiver, liquidator, sequestrator, trustee inbankruptcy, sheriff or any other officer of the court or official charged withtaking over custody of Company's assets or business shall have any right tocontinue the performance of this Agreement. 13.3. During the term of this Agreement, Company shall not dissolve,liquidate or wind-up its business. In addition, Company shall not, without priorwritten notice to RLHC, (i) merge or consolidate with or into any othercorporation, or (ii) directly or indirectly sell or otherwise dispose of all ora substantial portion of its business or assets. In the event Company sells ortransfers, or suffers a sale or transfer of, by operation of law or otherwise,directly or indirectly, control of either its Sheets & Bedroom AccessoriesDivision or its Terry Bath & Kitchen Products Division (or such other divisionsas may at any time be responsible for any Licensed Products) to a third party,Company shall advise RLHC thereof in writing within ten (10) days of such saleor transfer. Such notice shall identify the name and address of the third party.Within sixty (60) days of its receipt of such notice, RLHC shall have the rightto terminate this Agreement, such termination to become effective thirty (30)days after the date of notice of termination is received by Company. Subject tothe next following sentence, the transfer of both the aforementioned divisionsto a direct or indirect wholly-owned subsidiary of Company will not constitute asale or transfer to a "third party" under this subparagraph. The parties agreethat the acquisition of a controlling interest in Company or its direct orindirect parents by a third party shall be deemed a transfer of control of theaforesaid divisions pursuant to the first sentence of this paragraph 13.3. Inaddition to, and not in substitution of, its right to terminate this Agreementupon receipt of notice of any such sale or transfer of control, RLHC shall havethe option to require Company to offer to the landlord of the premises at 1185Avenue of the Americas a five-year sublease of the ninth floor on the same termsas contained in the lease therefor between the Company and the landlord, for thepurpose of permitting RLHC to sublease the space from the landlord for suchperiod and on such terms. 19 21 14. Disposal of Stock upon Termination or Expiration. 14.1. Within ten (10) days following the termination of this Agreementfor any reason whatsoever including the expiration of the term hereof, and onthe last day of each month during the disposal period set forth in paragraph14.2 hereof, Company shall furnish to RLHC a certificate of Company listing itsinventories of Licensed Products (which defined term for purposes of thisparagraph 14.1 shall include all materials, trim and packaging which are used inthe manufacture and marketing of Licensed Products) on hand or in processwherever situated. RLHC shall have the right to conduct a physical inventory ofLicensed Products in Company's possession or under Company's control. RLHC orRLHC's designee shall have the option (but not the obligation) to purchase fromCompany all or any part of Company's then existing inventory of LicensedProducts upon the following terms and conditions: (i) RLHC shall notify Company of its or its designee's intention to exercise the foregoing option within thirty (30) days of delivery of the certificate referred to above and shall specify the items of Licensed Products to be purchased. (ii) The price for Licensed Products manufactured by Company or its affiliates on hand or in process shall be Company's standard cost (the actual manufacturing cost) for each such Licensed Product. The price for all other Licensed Products which are not manufactured by Company or its affiliates shall be Company's landed costs therefor. Landed costs for the purposes hereof means the F.O.B. price of the Licensed Products together with customs, duties, brokerage, freight and insurance costs. (iii) Company shall deliver the Licensed Products purchased within fifteen (15) days of receipt of the notice referred to in clause (i) above. Payment of the purchase price for the Licensed Products so purchased by RLHC or its designee shall be payable upon delivery thereof, provided, that RLHC shall be entitled to deduct from such purchase price any amounts owed it by Company (and/or to direct payment of any part of such merchandise to any supplier of Licensed Products in order to reduce an outstanding balance due to such supplier from Company). 14.2. In the event RLHC chooses not to exercise the option referred toin paragraph 14.1 hereof with respect to all or any portion of LicensedProducts, for a period of ninety (90) days after termination of this Agreementfor any reason 20 22whatsoever, except on account of breach of the provisions of paragraphs 3, 4 or10 hereof, Company may dispose of Licensed Products which are on hand or in theprocess of being manufactured at the time of termination of this Agreement,provided Company fully complies with the provisions of this Agreement, includingspecifically those contained in paragraphs 3, 4 or 10 hereof in connection withsuch disposal. Such sales shall be subject to the payment of earned royaltiespursuant to paragraph 10.2. Failure by Company to timely submit the certificatesof inventory as set forth in paragraph 14.1 hereof shall deprive Company of itsright of disposal of stock pursuant to this paragraph 14. 14.3. Notwithstanding anything to the contrary contained herein, in theevent that upon the expiration or termination of the term hereof for any reasonCompany has not rendered to RLHC all accounting statements then due, and paid(i) all royalties and other amounts then due to RLHC and (ii) all amounts thendue to any affiliate of or supplier to RLHC or its affiliates (collectively,"Payments"), Company shall have no right whatsoever to dispose of any inventoryof Licensed Products in any manner. In addition, if during any disposal periodCompany fails timely to render any accounting statements or to make all Paymentswhen due, Company's disposal rights hereunder shall immediately terminatewithout notice. 15. Effect of Termination. 15.1. Except for the sublicense to use the Licensed Marks and thedesigns furnished hereunder only as specifically provided in this Agreement,Company shall have no right, title or interest in or to the Licensed Marks, thedesigns furnished hereunder and design patents thereon, and all copyrightslicensed hereby. Upon and after the termination of this sublicense, all rightsgranted to Company hereunder, including without limitation all right, title andinterest in or with respect to all designs, art works, sketches and othermaterials depicting or relating to the Licensed Products, together with anyinterest in and to the Licensed Marks Company may acquire, shall forthwithautomatically and without further action or instrument be assigned to and revertto Polo, PRLC and RLHC, as their interests may appear. Company will execute anyinstruments requested by RLHC to accomplish or confirm the foregoing. Any suchassignment, transfer or conveyance shall be without consideration other than themutual agreements contained herein. RLHC shall thereafter be free to license toothers the use of the Licensed Marks in connection with the manufacture and saleof the Licensed Products covered hereby, and Company will, except asspecifically provided in paragraph 14 hereof, (i) refrain from any further useof the Licensed Marks or any reference to it, direct or indirect, or anythingdeemed by RLHC or Polo to be similar to the Licensed Marks, (ii) refrain fromfurther use of any of the Design Concepts, and (iii) refrain from manufacturing,selling or distributing any products (whether or not they bear the LicensedMarks) which are confusingly similar to, or derived from, the Licensed Productsor Design Concepts, in connection with the 21 23manufacture, sale or distribution of Company's products. Upon termination ofthis Agreement, Company shall forthwith cease the use of the words "RalphLauren" and/or the Polo Player Design in any and all respects. It is expresslyunderstood that under no circumstances shall Company be entitled, directly orindirectly, to any form of compensation or indemnity from RLHC, Lauren, Polo,PRLC or their affiliates, as a consequence to the termination of this Agreement,whether as a result of the passage of time, or as the result of any other causeof termination referred to in this Agreement. Without limiting the generality ofthe foregoing, by its execution of the present Agreement, Company hereby waivesany claim which it has or which it may have in the future against RLHC, Polo,PRLC, Lauren or their affiliates, arising from any alleged goodwill created byCompany for the benefit of any or all of the said parties or from the allegedcreation or increase of a market for Licensed Products. 15.2. Notwithstanding any termination or expiration of this Agreement(whether by reason of the expiration of the stated term of this Agreement, byearlier termination of this Agreement pursuant to paragraph 13 hereof, orotherwise) (a) RLHC shall have and hereby reserves all rights and remedies whichit may have, at law or in equity, with respect to the collection of royalties orother funds payable by Company pursuant to this Agreement and the enforcement ofall rights relating to the establishment, maintenance or protection of theLicensed Marks and the designs furnished hereunder, and (b) Company and RLHCshall continue to have rights and remedies with respect to damages for breach ofthis Agreement on the part of the other. 16. Remedies. Company acknowledges and admits that there would be no adequate remedyat law for its failure (except as otherwise provided in paragraph 14 hereof) tocease the use of the Licensed Marks, or the designs, or the manufacture and saleof the Licensed Products covered by this Agreement at the termination orexpiration hereof, and Company agrees that in the event of such failure RLHC,Polo and PRLC, or any of them, shall be entitled to equitable relief by way oftemporary and permanent injunction and such other and further relief as anycourt with jurisdiction may deem just and proper. Such relief shall be inaddition to and not in substitution of any other remedies available to RLHC,Polo and PRLC, or any of them, pursuant to this Agreement or otherwise. 17. Certain Employees. 17.1 At all time during the term of this Agreement, Company shallemploy seven individuals, each of which shall be approved in advance by RLHC,and who shall be subject to RLHC's continuing approval through the term hereof,whose sole responsibility shall be for the following aspects of the businesscontemplated 22 24hereunder: a. Vice President -- oversees entire RLHC-related operation b. Business Manager -- for Bedroom Products c. Business Manager -- for Bathroom Products d. Marketing Manager -- for all Licensed Products e. Sourcing Manager -- for all Licensed Products f. Planner -- for Bedroom Products g. Planner -- for Bathroom Products 17.2. During at least the first year of the term hereof, Company shallemploy a CADCAM operator approved in advance by RLHC who shall be entirelydedicated to the development of Licensed Products and shall be located in theRLHC design department. Upon the expiration of the first year of the termhereof, Company and RLHC shall consult with each other in good faith regardingwhether or not the position for such CADCAM operator should be continued. 18. Indemnity. 18.1. RLHC shall indemnify and hold harmless Company from and againstany and all liability, claims, causes of action, suits, damages and expenses(including reasonable attorneys' fees and expenses in actions involving thirdparties or between the parties hereto) which Company is or becomes liable for,or may incur solely by reason of its use within the Territory, in strictaccordance with the terms and conditions of this Agreement, of the LicensedMarks or the designs furnished to Company by RLHC or PRLC, to the extent thatsuch liability arises through infringement of another's design patent,trademark, copyright or other proprietary rights; provided that Company givesRLHC prompt notice of, and full cooperation in the defense against, such claim.If any action or proceeding shall be brought or asserted against Company inrespect of which indemnity may be sought from RLHC under this paragraph 18.1,Company shall promptly notify RLHC thereof in writing, and RLHC shall assume anddirect the defense thereof. Company may thereafter, at its own expense, berepresented by its own counsel in such action or proceeding. RLHC's liabilitypursuant to this paragraph 18.1 shall be limited to and offset against theaggregate of all royalties (whether minimum or earned) heretofore paid byCompany to RLHC hereunder. 18.2. To the extent not inconsistent with paragraph 18.1 hereof,Company shall indemnify and save and hold RLHC, Polo, PRLC and Lauren,individually, harmless from and against any and all liability, claims, causes ofaction, suits, damages and expenses (including reasonable attorneys' fees andexpenses in actions involving third parties or between the parties hereto),which they, or any of them, are or become liable for, or may incur, or becompelled to pay by reason of any 23 25acts, whether of omission or commission, that may be committed or suffered byCompany or any of its servants, agents or employees in connection with Company'sperformance of this Agreement, including Company's use of Company's own designs,in connection with Licensed Products manufactured by or on behalf of Company orotherwise in connection with Company's business. 18.3. Company shall carry product liability insurance with limits ofliability in the minimum amount, in addition to defense costs, of $3,000,000 peroccurrence and $3,000,000 per person and RLHC, Polo, PRLC and Ralph Lauren,individually, shall be named therein as insureds, as their interests may appear.Company shall, promptly after the signing of this Agreement, deliver to RLHC acertificate of such insurance from the insurance carrier, setting forth thescope of coverage and the limits of liability and providing that the policy maynot be canceled or amended without at least thirty (30) days prior writtennotice to RLHC, Polo, PRLC and Lauren. 19. Disclosure. RLHC and Company, and their affiliates, employees, attorneys andaccountants, shall hold in confidence and not use or disclose, except aspermitted by this Agreement, (i) confidential information of the other, or (ii)the terms of this Agreement, except upon consent of the other or pursuant to oras may be required by law, or in connection with regulatory or administrativeproceedings and only then with reasonable advance notice of such disclosure tothe other. Company shall take all reasonable precautions to protect the secrecyof the designs, art work, sketches and other materials used pursuant to thisAgreement prior to the commercial distribution or the showing of samples forsale, and shall not sell any merchandise employing, or adapted from or resultingfrom the use of any such designs, art work, sketches or other material, exceptunder the Licensed Marks. All press releases and other public announcementsshall be subject to the prior approval of RLHC. Every request for a statement,release or other inquiry shall be sent in writing whenever practicable to theadvertising/publicity director of RLHC for handling. 20. Brokers. Each of RLHC and Company hereby represents and warrants to the otherthat it has not employed or dealt with any broker or finder in connection withthis Agreement or the transactions contemplated hereby, and agrees to indemnifythe other and hold it harmless from any and all liabilities (including, withoutlimitation, reasonable attorneys' fees and disbursements paid or incurred inconnection with any such liabilities) for any brokerage commissions or finders'fees in connection with this Agreement or the transactions contemplated hereby,insofar as such liabilities shall be based on the arrangements or agreementsmade by it or on its behalf. 24 26 21. Manufacture; Distribution; Sale. Consistent with the high quality and prestige of the Licensed Marks andproducts manufactured by, or under license from, Polo and its affiliates,Company undertakes, during the term hereof, diligently to manufacture and selleach and every Licensed Product listed in Schedule A, to use its best efforts tocreate a demand therefor, supply such demand, and maintain adequate arrangementsand facilities for the distribution of Licensed Products throughout theTerritory. As an essential part of its distribution program, Company agrees tomaintain adequate inventories (consistent with good industry practice) of allsuch Licensed Products at distribution points adequate to satisfy therequirements of its customers for a full line of such Licensed Products and toexpedite the delivery thereof. 22. Showroom; Samples. 22.1 Company shall display its Licensed Products at the showroom to bejointly operated and maintained by RLHC and Company on the ninth floor at 1185Avenue of the Americas (hereinafter referred to as the "Home CollectionShowroom" or "Showroom"). Company shall also display at the Home CollectionShowroom products other than Licensed Products which comprise the Ralph LaurenHome Collection and which are manufactured by other sublicensees of RLHC. Theparties acknowledge that it is of substantial benefit to the Company that the"Collection" be displayed and sold as an entirety in order to create thegreatest demand for all Collection products, including Licensed Products, and topromote the image of the Collection as a complete Ralph Lauren lifestyle ofproducts. 22.2 Notwithstanding the provisions of paragraph 10.5 of thisAgreement, Company shall be entitled to deduct from earned royalties due eachmonth pursuant to paragraph 10.2 hereof one-twelfth (1/12) of the annual"Qualified Showroom Expenses" (as hereinafter defined) for providing space andmaintaining the Home Collection Showroom referred to in paragraph 22.1 hereof.The term "Qualified Showroom Expenses" shall mean the proportionate share (basedon the square feet of space actually occupied by RLHC) for rent and leaseholdoperating expenses (i.e. building, utilities, water, taxes and cleaning, etc.)computed on a basis consistent with current practices as of the execution ofthis Agreement with respect to such Showroom. The term "Qualified ShowroomExpenses" shall exclude, however, any allocable cost of 600 square feet ofstorage space which Company shall make available without charge at 1185 Avenueof the Americas for storage of samples and stock, and exclude all other basementspace which RLCH may occupy from time-to-time pursuant to a separate agreementwith Company. In addition to the foregoing, Company shall be entitled to deductfrom monthly earned royalties $2,000 for office services provided by WestPointStevens Inc. to the Home Collection Showroom. Company shall, upon request, makeavailable for inspection by RLHC records 25 27substantiating the charges for rent, leasehold operating expenses and officeservices. 22.3 Together with each quarterly royalty remittance, the Company shallsubmit to RLHC a separate statement, certified by a financial officer of theCompany, setting forth the computation of the Qualified Showroom Expenses andcharges for office services for the then-ended quarter. Within sixty (60) daysof the end of each year, Company shall submit to RLHC a statement setting forthin reasonable detail the total Qualified Showroom Expenses for the year thenended. If during the year Company shall have deducted in excess of the actualtotal Qualified Showroom Expenses, Company's statement shall be accompanied by acheck in the amount of such excess. If there shall have been a shortage of theaggregate deductions in relation to the total Qualified Showroom Expenses andoffice service charges, RLHC shall, within fifteen (15) days of its receipt ofCompany's statement, remit a check in the amount of the shortage. 22.4 Upon the expiration of this Agreement, at RLHC's option,exercisable by notice in writing to Company given no later than 90 days prior tosuch expiration, Company shall, subject to the approval of, and under the termsand conditions required by, Company's landlord, continue to maintain and operatethe Home Collection Showroom with RLHC for a period not to exceed three (3)months following such expiration, during which time RLHC may show and sell theRalph Lauren Home Collection in such showroom. In the event this Agreement isterminated by RLHC as a result of an Event of Default on the part of theCompany, RLHC shall be entitled to request in writing, given simultaneously withits notice of termination to Company, that Company continue to maintain andoperate the Home Collection Showroom with RLHC for a period of up to twelve (12)months after such termination. To the extent that RLHC requests an extensionhereunder, Company shall request approval therefor from its landlord. RLHC shallon the first of each month of any such extension remit to Company one-twelfth ofthe annual Qualified Showroom Expenses for maintaining and operating suchshowroom, adjusted according to the terms and conditions required by thelandlord, if any, and the parties shall at the end of each three-month periodreconcile the aggregate amount actually paid by RLHC in relation to the total ofthe actual Qualified Showroom Expenses, as adjusted. 22.5 Company shall provide, at no charge, samples for the HomeCollection Showroom and for advertising and editorials relating to LicensedProducts. All normal expenses with respect to shipping shall be theresponsibility of Company and Company may, at its option, insure the samples forrisk of damage or loss (including by theft) during shipment and while at theRLHC showroom, but RLHC shall have no liability with respect thereto. All itemswill be inventoried by RLHC and, at RLHC's discretion, (i) held in storage forfuture use, (ii) sold at sample sales, or (iii) returned to Company at Company'sexpense. In the event of a sale at a sample sale, RLHC shall remit to Company,within forty-five (45) days thereof, fifty percent (50%) of the 26 28profits therefrom. In addition, Company shall supply at its own expense, suchsamples as may be reasonably necessary for RLHC salesmen. 23. Miscellaneous. 23.1. All notices, requests, consents and other communicationshereunder shall be in writing and shall be deemed to have been properly given orsent (i) on the date when such notice, request, consent or communication ispersonally delivered and acknowledged, or (ii) five (5) days after the same wassent, if sent by certified or registered mail, or (iii) one (1) day after thesame was sent, if sent by overnight courier delivery or confirmed telecopier asfollows: (a) If to RLHC addressed as follows: Ralph Lauren Home Collection, Inc. 103 Foulk Road Wilmington, Delaware, 19899 Attention: President Telecopier: 302.652.8667 (b) With a courtesy copy to: Victor Cohen, Esq. 650 Madison Avenue New York, New York 10022 Telecopier: 212.318.7183 (c) If to Company, addressed as follows: WestPoint Stevens, Inc. 1185 Avenue of the Americas New York, New York 10036 Attention: Mr. Thomas Ward Telecopier: 212.930.3876 27 29 (d) With a courtesy copy to: WestPoint Stevens, Inc. 1185 Avenue of the Americas New York, New York 10036 Attention: Assistant General Counsel Telecopier: 212.930.3898Anyone entitled to notice hereunder may change the address to which notices orother communications are to be sent to it by notice given in the mannercontemplated hereby. 23.2. Nothing herein contained shall be construed to place Company,RLHC, Polo and/or PRLC in the relationship of partners or joint venturers, andneither Company, RLHC, Polo nor PRLC shall have the power to obligate or bindany other party in any manner whatsoever, except as expressly provided herein. 23.3. None of the terms hereof can be waived or modified except by anexpress agreement in writing signed by the party to be charged. The failure ofeither party hereto to enforce, or the delay by either party in enforcing, anyof its rights hereunder shall not be deemed a continuing waiver, modificationhereof, or a waiver of any other right or remedy hereunder, and either partymay, within the time provided by applicable law, commence appropriate legalproceedings to enforce any and all such rights. All rights and remedies providedfor herein shall be cumulative and in addition to any other rights or remediessuch parties may have at law or in equity. Either party hereto may employ any ofthe remedies available to it with respect to any of its rights hereunder withoutprejudice to the use by it in the future of any other remedy with respect to anysuch rights. Except as provided herein, no person, firm or corporation, otherthan the parties hereto, shall be deemed to have acquired any rights by reasonof anything contained in this Agreement. 23.4. RLHC may assign all or any portion of the royalties payable to ithereunder, as designated by RLHC, and in addition, RLHC may assign all of itsrights, duties and obligations hereunder to any entity to which the LicensedMarks, or the right to use the Licensed Marks, has been transferred, or to anaffiliate of any such entity. The rights granted to Company are personal innature, and neither this Agreement nor the sublicense may be assigned by Companywithout the prior written consent of RLHC, Polo and PRLC. Company may employsubcontractors for the manufacture of the Licensed Products with the priorapproval of RLHC, provided, however, that (i) Company shall not employ anysubcontractor for the manufacture of Licensed Products until such subcontractorhas executed a Trademark and Design Protection Agreement for the benefit of RLHCin such form as RLHC may require, (ii) Company shall maintain appropriatequality controls and such subcontractors shall 28 30comply with the quality requirements of this Agreement and (iii) Company shallnot itself sell or otherwise dispose of, and shall be responsible for preventingall subcontractors from selling or otherwise disposing of, any seconds,irregulars or rejected merchandise except with RLHC's prior written consent. 23.5. This Agreement shall be binding upon and inure to the benefit ofthe successors and permitted assigns of the parties hereto. 23.6. Company shall comply with all laws, rules, regulations andrequirements of any governmental body which may be applicable to the operationsof Company contemplated hereby, including, without limitation, as they relate tothe manufacture, distribution, sale or promotion of Licensed Products,notwithstanding the fact that RLHC may have approved such item or conduct. 23.7. This Agreement shall be construed in accordance with the laws ofthe State of New York applicable to contracts made and performed therein withoutregard to principles of conflict of laws. 23.8 The parties hereby consent to the jurisdiction of the UnitedStates District Court for the Southern District of New York and of any of thecourts of the Southern District of New York and of any of the courts of theState of New York located within the Southern District in any dispute arisingunder this Agreement and agree further that service of process or notice in anysuch action, suit or proceeding shall be effective if in writing and deliveredas provided in paragraph 23.1 hereof. 23.9. Provisions of this Agreement are severable, and if any provisionshall be held invalid or unenforceable in whole or in part in any jurisdiction,then such invalidity or unenforceability shall affect only such provision, orpart thereof, in such jurisdiction and shall not in any manner affect suchprovision in this Agreement in any other jurisdiction. 23.10. The paragraph headings contained in this Agreement are forreference purposes only and shall not affect in any way the meaning orinterpretation of this Agreement. 23.11. This Agreement may be executed in one or more counterparts, eachof which shall be deemed an original, but all of which together shall constituteone and the same instrument. 29 31 IN WITNESS WHEREOF, the parties hereto have executed this Agreement orcaused the same to be executed by a duly authorized officer on the day and yearfirst set forth above. RALPH LAUREN HOME COLLECTION, INC. By: /s/ David C. Eppes Title: Vice President WESTPOINT STEVENS, INC. By: /s/ Thomas J. Ward Title: President 30 32 SCHEDULE A "LICENSED PRODUCTS" (pursuant to paragraph 1.1) 1. Bathroom Products consisting of: (a) bath towels (non-embellished) (b) bath sheets (non-embellished) (c) fingertip towels (non-embellished) (d) hand towels (non-embellished) (e) face cloths (non-embellished) (f) tub mats (g) men's and women's robes made from towels, it being understood that Company's rights with respect to robes shall be non-exclusive and shall be limited to the sale of robes in the same departments of stores in which other Licensed Products are sold. 2. Bedroom Products consisting of: (a) sheets (b) pillow cases (but not pillows) (c) The following bedroom products to the extent they match sheets that are made under license from Polo: (1) shams (2) ruffles (3) comforters (4) bedspreads (5) bed skirts (6) night spreads (7) comforter and blanket covers (8) European squares (9) valances and draperies (10) flocked blankets 31 1EXHIBIT 10.25PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FORCONFIDENTIAL TREATMENT AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. SUCH PORTIONS ARE DESIGNATED "[ * * * ]". 2 DESIGN SERVICES AGREEMENT dated as of October 18, 1995, by and betweenPolo Ralph Lauren Enterprises, L.P. (the "Design Partnership"), with a place ofbusiness at 650 Madison Avenue, New York, New York 10022 and Jones ApparelGroup, Inc. (the "Company") with a place of business at 250 Rittenhouse Circle,Bristol, Pennsylvania 19007. Ralph Lauren ("Lauren") is an internationally famous designer who has beentwice inducted into the Coty Hall of Fame for his design of men's and women'sfashions, is the recipient of the CFDA Lifetime Achievement Award, and is acreator of original designs for cosmetics, jewelry, home furnishings and otherproducts. Polo Ralph Lauren, L.P., a Delaware limited partnership ("Polo"), holdsthe right and interest in and to certain trademarks and trade names, as same maybe used in connection with the manufacture and sale of Licensed Products, ashereinafter defined, and on even date herewith, the Company has obtained theright to use a specified trademark (the "Trademark") in connection with theLicensed Products, pursuant to a license agreement ("License Agreement") of evendate herewith by and between the Company and Polo. The value of the Trademark is largely derived from the reputation, skilland design talents of Lauren, and Lauren, directly and through his designees,provides design services through the Design Partnership. The Company desires to obtain the services of the Design Partnership inconnection with the creation and design of the Licensed Products. The Company desires, in order to exploit the rights granted to it underthe License Agreement, to engage and retain the Design Partnership to create andprovide to the Company the designs for its line of Licensed Products. The DesignPartnership is willing to furnish such designs and render such services on thebasis hereinafter set forth. As used herein, the term "Licensed Products" shallhave the meaning set forth in the License Agreement. In consideration of the foregoing premises and of the mutual promises andcovenants herein contained, the parties hereto, intending to be legally bound,hereby agree as follows: 1. Designs; Assistance. 1.1 The parties understand and agree that the Company will be principallyresponsible for the development and presentation 1 3to the Design Partnership of designs for Licensed Products, which designs willbe reviewed by the Design Partnership and which the Design Partnership mayapprove, disapprove or modify in its sole discretion, in accordance with theterms and conditions set forth herein. 1.2 The Design Partnership and the Company shall create each season, fromthe Design Partnership's ideas, a program of design themes and concepts withrespect to the design of the Licensed Products ("Design Concepts"), which shallbe embodied in written descriptions of design themes and concepts, designs andsketches of all looks for the season, and samples of trim and fabrics in thedesired qualities and colors. The Company and the Design Partnership shallconfer on Design Concepts and shall make such modifications as are required tomeet the Design Partnership's final approval, which final approval may begranted or withheld in the Design Partnership's sole discretion. 1.3 The Design Partnership may engage such employees, agents, andconsultants operating under the Design Partnership's creative supervision andcontrol as it may deem necessary and appropriate. 1.4 From time to time while this Agreement is in effect, the DesignPartnership may (a) develop or modify and implement designs from the DesignConcepts or other designs furnished by the Design Partnership or (b) develop andimplement new designs. 1.5 The Company shall be principally responsible for creating designs foreach season consistent in all respects with the approved Design Concepts forthat season, and shall consult with the Design Partnership in good faith withrespect to all such designs. 1.6 The Company understands that all or portions of the Design Conceptsmay be furnished to the Company through or in cooperation with other entities towhich the Design Partnership has provided design services. The Company upon itsprior written authorization shall pay all costs, including shipping and handlingcharges, for fabric swatches or mill chips, sketches, specifications, papersample patterns and product samples furnished to the Company by the DesignPartnership or such other entities. 1.7 All patents and copyrights on designs of the Licensed Products createdor supplied by the Design Partnership shall be owned exclusively, and appliedfor, by the Design Partnership or its designee, at the Design Partnership'sdiscretion and expense, and shall designate the Design Partnership or itsdesignee as the patent or copyright owner, as the case may be, therefor. Allpatents and copyrights on designs of the Licensed Products created or suppliedby the Company shall be owned exclusively, 2 4and applied for, by the Company or its designee, at the Company's discretion andexpense, and shall designate the Company or its designee as the patent orcopyright owner, as the case may be, therefor. 1.8 Company acknowledges that the Licensed Products contain elements whichin concept, execution and/or presentation are unique. Company agrees that itwill not, during the term of the Agreement, use any designs submitted ormodified by the Design Partnership or any designs which are comparable and/orcompetitive with Licensed Products and which may be identified as DesignPartnership designs. 2. Design Legends; Copyright Notice and License. 2.1 All designs, patterns, sketches, artwork, logos and other materials ofLicensed Products and the use of such designs, artwork, sketches, logos andother materials created by the Design Partnership or the Design Studio, or,subject to paragraph 2.7 hereof, created by or for the Company and reviewed andapproved by the Design Partnership, or developed by or for the Company fromDesign Concepts or subsequent design concepts furnished or approved by theDesign Partnership (all of which shall hereinafter constitute Design Concepts),shall be the property of the Design Partnership and shall be subject to theprovisions of this paragraph 2. 2.2 All right, title and interest in and to the samples, sketches, design,artwork, logos and other materials furnished to Company by the DesignPartnership, and in all logos or crests which become associated with theTrademark, regardless of whether such logos or crests are created or furnishedby the Company or the Design Partnership, are hereby assigned to and shall bethe sole property of the Design Partnership. The Company shall cause to beplaced on all Licensed Products appropriate notice designating the DesignPartnership as the copyright or design patent owner thereof, as the case may be.The manner of presentation of said notices shall be reviewed and approved by theDesign Partnership prior to use thereof by the Company. 3 5 2.3. The Design Partnership hereby grants to the Company the exclusiveright, license and privilege ("License") to use the designs furnished hereunderand all copyrights, if any, and patents, if any therein; provided, however, thatthe License is limited to use in connection with Licensed Products manufacturedand sold, or imported and sold, pursuant to the License Agreement and only forthe seasonal collection for which such Design Concepts are approved. All otherrights in and to the designs furnished hereunder, including without limitationall rights to use such designs in connection with products other than LicensedProducts (as defined in the License Agreement) and in territories other than theTerritory (as defined in the License Agreement) are expressly reserved by theDesign Partnership. The License shall continue only for such period as thisAgreement shall be effective. The Design Partnership shall execute and deliverto the Company all documents and instruments necessary to perfect or evidencethe License. Upon termination of this Agreement, for any reason whatsoever, anyand all of the Company's right, title and interest in and to the License shallforthwith and without further act or instrument be assigned to, revert to and bethe sole and exclusive property of the Design Partnership, and the Company shallhave no further or continuing right or interest therein, except the limitedright to complete the manufacture of and sell Licensed Products during anyDisposal Period, as set forth in paragraph 6.3 hereof. In addition, the Companyshall thereupon (i) execute and deliver to the Design Partnership all documentsand instruments necessary to perfect or evidence such reversion, (ii) refrainfrom further use of any of the Design Concepts and (iii) refrain frommanufacturing, selling or distributing any products (whether or not they bearthe Trademark) which are confusingly similar to or derived from the LicensedProducts or Design Concepts. 2.4 Company shall not sublicense any of the rights granted hereunderwithout first obtaining the Design Partnership's prior written consent inconnection therewith, which consent may be withheld by the Design Partnership inits sole discretion. 2.5 The Design Partnership represents and warrants to the Company that ithas full right, power and authority to enter into this Agreement, to perform allof its obligations hereunder and to consummate all of the transactionscontemplated herein. 2.6 The Company represents and warrants to the Design Partnership that theCompany has full right, power and authority to enter into this Agreement, toperform all of its obligations hereunder and to consummate all the transactionscontemplated herein. 3. Licensed Products. 3.1 All aspects of the design of Licensed Products for each 4 6season, including, but not limited to, the type and quality of materials,colors, workmanship, styling, detail, dimensions and construction to be used inconnection therewith, shall strictly adhere to the Design Concepts approved bythe Design Partnership for such season. In addition, all Licensed Products shallbe at least of the same quality as comparable products in the Jones New Yorkline as of the date of this Agreement. 3.2 In the event that any Licensed Product is, in the judgment of theDesign Partnership, not designed, manufactured or sold in strict adherence tothe approved Design Concepts, or if the quality is below the standards requiredhereunder, the Design Partnership shall notify the Company thereof in writingand the Company shall promptly repair or change such Licensed Product to conformstrictly thereto. If an item of Licensed Product as repaired or changed does notstrictly conform to the Final Prototypes and such strict conformity orimprovement in quality cannot be obtained after at least one (1) resubmission,the Trademark shall be promptly removed from the item, at the option of theDesign Partnership, in which event the item may be sold by the Company withoutpayment or compensation hereunder. 3.3 The Design Partnership and its duly authorized representative shallhave the right, upon reasonable notice during normal business hours, to inspectall facilities utilized by the Company (and its contractors and suppliers) inconnection with the preparation of Prototypes and the manufacture, sale, storageor distribution of Licensed Products pursuant hereto and to examine LicensedProducts in process of manufacture and when offered for sale within theCompany's operations. The Company hereby consents to the Design Partnership'sexamination of Licensed Products held by its customers for resale provided theCompany has such right of examination. The Company shall take all necessarysteps, and all steps reasonably requested by the Design Partnership, to preventor avoid any misuse of the licensed designs by any of its customers, contractorsor other resources. 3.4 The Company shall comply with all laws, rules regulations andrequirements of any governmental body which may be applicable to themanufacture, distribution, sale or promotion of Licensed Products. The Companyshall advise the Design Partnership to the extent any Final Prototype does notcomply with any such law, rule, regulation or requirement. 5 7 3.5 The Company shall upon request make its personnel, and shall use itsbest efforts to make the personnel of any of its contractors, suppliers andother resources, available by appointment during normal business hours forconsultation with the Design Partnership. The Company shall make available tothe Design Partnership, upon reasonable notice, marketing plans, reports andinformation which the Company may have with respect to Licensed Products. 3.6 The Company may employ subcontractors for the manufacture of LicensedProducts solely on the terms set forth in paragraph 16.4 of the LicenseAgreement. 4. Compensation; Accounting. 4.1 As compensation for the designs and services rendered hereunder, theCompany shall pay minimum compensation to the Design Partnership each yearduring the term of this Agreement. The minimum compensation to the DesignPartnership in connection with the manufacture and sale and importation and saleof Licensed Products for each year shall be as follows: Year 1 (1997) $ [ * * * ] Year 2 $ [ * * * ] Year 3 $ [ * * * ] Year 4 $ [ * * * ] Year 5 $ [ * * * ]Minimum compensation for each year shall be paid on a quarterly basis, beginningwith the minimum compensation payment to be made for the [ * * * ], in themanner set forth in paragraph 6.2 below. No credit shall be permitted againstminimum compensation payable in any year on account of actual or minimumcompensation paid in any other year, and minimum compensation shall not bereturnable. Minimum Compensation for each year of the "Renewal Term" (as definedin paragraph 8 of the Licensee Agreement) shall be an amount equal to [ * * * ]percent ([***]%) of the actual earned compensation due to the Design Partnershipfor sales of Licensed Products in 2001. For the purposes of this Agreement, theterm "year" shall mean a period of twelve (12) months commencing on each January1 during the term of this Agreement; provided, however, that the "first year",or "Year 1" shall mean the period commencing on the date hereof and expiring onDecember 31, 1997 [ * * * ]. 4.2 The Company shall pay to the Design Partnership earned compensationbased on the net sales price of Licensed Products manufactured or imported andsold by the Company hereunder. Earned compensation shall equal [ * * * ] percent([***]%) of the net sales price of all Licensed Products sold under thisAgreement, including, without limitation, sales made pursuant to paragraph 6.3hereof; provided, however, that Licensor hereby 6 8waives earned royalties with respect to Licensed Products sold and shipped priorto December 31, 1996 for the Fall 1996 and Cruise/Holiday 1996 seasons, butLicensor does not waive earned royalties in respect of Licensed Products for theSpring 1996 season, even if such Licensed Products are are sold and shippedprior to December 31, 1996. The Company shall prepare or cause to be preparedstatements of operations for the first month in which Licensed Products areoffered for sale to the trade, and for each month thereafter for so long as theCompany is offering Licensed Products for sale hereunder, which statements shallbe furnished to the Design Partnership together with the earned compensation duefor each such month on the last day of the following month. The statement andcompensation payment provided on the last day of each April (for the month ofMarch), July (for the month of June), October (for the month of September) andJanuary (for the month of December) during the term shall also include theCompany's minimum compensation obligation for the preceding calendar quarter,less the aggregate earned compensation paid for such calendar quarter. The term"net sales price" shall mean the gross sales price of all Licensed Products soldunder this Agreement to retailers or, with respect to Licensed Products that arenot sold directly or indirectly to retailers, other ultimate consumers (as inthe case of accommodation sales by Company to its employees or sales by Companyin its own stores), less trade discounts, merchandise returns, sales tax (ifseparately identified and charged) and markdowns and/or chargebacks which, inaccordance with generally accepted accounting principles, would normally betreated as deductions from gross sales, and which, in any event, do not includeany chargebacks or the like for advertising, fixture or retail shop costs orcontributions, or contributions for in-store personnel. No other deductionsshall be taken. Any merchandise returns shall be credited in the month in whichthe returns are actually made. For purposes of this Agreement, affiliates of theCompany shall mean all persons and business entities, whether corporations,partnerships, joint ventures or otherwise, which now or hereafter control, orare owned or controlled, directly or indirectly by the Company, or are undercommon control with the Company. It is the intention of the parties thatcompensation will be based on the bona fide wholesale prices at which theCompany sells Licensed Products to independent retailers in arms' lengthtransactions. In the event the Company shall sell Licensed Products to itsaffiliates, compensation shall be calculated on the basis of such a bona fidewholesale price irrespective of the Company's internal accounting treatment ofsuch sale unless such products are sold by its affiliates directly to theend-user consumer, in which case compensation shall be calculated on the basisof the price paid by the end-user consumer, less applicable taxes; provided,however, that compensation on sales to Licensee Outlet Stores (as defined inparagraph 3.3 of the License Agreement) shall be calculated on the basis of theactual invoice price to such Licensee Outlet Stores, but in no event less than 7 9an amount equal to twenty-five percent (25%) less than the regular wholesaleprice of such Licensed Products. The Company shall identify separately in thestatements of operations provided to the Design Partnership pursuant toparagraph 7 hereof, all sales to affiliates. 4.3 The Company shall reimburse the Design Partnership for all its traveland promotion expenses incurred by the Design Partnership or Polo in theperformance of the Design Partnership's duties under this Agreement with theprior written approval of the Company. Amounts payable to the Design Partnershippursuant to this paragraph shall become due and payable monthly within thirty(30) days of the date of mailing of the invoices, accompanied by correspondingreceipts, for such costs incurred during the preceding month. 4.4 If the payment of any installment of compensation is delayed for anyreason, interest shall accrue on the unpaid principal amount of such installmentfrom and after the date on which the same became due pursuant to paragraphs 4.1or 4.2 hereof at the lower of the highest rate permitted by law in New York andtwo percent (2%) per annum above the prime rate of interest in effect from timeto time at Chemical Bank, New York, New York or its successor. 4.5 The Company shall at all times keep an accurate account of alloperations within the scope of this Agreement and shall render a full statementof such operations in writing to the Design Partnership in accordance withparagraph 4.1 hereof. Such statements shall account separately for eachdifferent product category and shall include all aggregate gross sales, tradediscounts, merchandise returns, sales of miscuts and damaged merchandise and netsales price of all sales for the preceding three (3) month period. Suchstatements shall be in sufficient detail to be audited from the books of theCompany. Once annually, which may be in connection with the regular annual auditof the Company's books, the Company shall furnish an annual statement of theaggregate gross sales, trade and prompt payment discounts, merchandise returnsand net sales price of all Licensed Products made or sold by the Company,certified by Company's independent accountant or chief financial officer. Eachquarterly financial statement furnished by Company shall be certified by thechief financial officer of the Company or a certified public accountant who maybe in the employ of the Company. The Design Partnership and its duly authorizedrepresentatives, on reasonable notice, shall have the right, no more than oncein each year during regular business hours, for the duration of the term of thisAgreement and for three (3) years thereafter, to examine the books of accountand records and all other documents, materials and inventory in the possessionor under the control of the Company and its successors with respect to thesubject matter of this Agreement. All such books of 8 10account, records and documents shall be maintained and kept available by theCompany for at least the duration of this Agreement and for three (3) yearsthereafter. The Design Partnership shall have free and full access thereto inthe manner set forth above and shall have the right to make copies and/orextracts therefrom. If as a result of any examination of the Company's books andrecords it is shown that the Company's payments to the Design Partnershiphereunder with respect to any twelve (12) month period were less than or greaterthan the amount which should have been paid to the Design Partnership by anamount equal to three and one-half percent (3 1/2%) of the amount which shouldhave been paid during such twelve (12) month period, the Company will, inaddition to reimbursement of any underpayment, with interest from the date onwhich each payment was due at the rate set forth in paragraph 4.4 hereof,promptly reimburse the Design Partnership for the cost of such examination. 4.6 The obligation of the Company to pay compensation hereunder shall beabsolute notwithstanding any claim which the Company may assert against Polo orthe Design Partnership. The Company shall not have the right to set-off,compensate or make any deduction from such compensation payments for any reasonwhatsoever. 5. Death or Incapacity of Lauren. The Design Partnership shall perform its obligations hereundernotwithstanding any death or incapacity of Lauren and the Company shall acceptthe services of the Design Partnership. 6. Term and Termination. 6.1 Unless sooner terminated in accordance with the terms and provisionshereof, this Agreement shall continue in effect for so long as the LicenseAgreement is in effect and shall terminate upon the termination of the LicenseAgreement. 9 11 6.2 Each of the following shall constitute an event of default ("Event ofDefault") hereunder: (i) any compensation is not paid when due and such defaultcontinues for more than ten (10) days after notice thereof; (ii) the Companyshall fail to timely present for sale to the trade a broadly representative andfair collection of each seasonal collection of Licensed Products designed by theDesign Partnership or the Company shall fail to timely ship a material portionof the orders of Licensed Products it has accepted; (iii) the Company shall usethe designs in an unauthorized or improper manner and/or Company shall make anunauthorized disclosure of confidential information or materials given or loanedto Company by the Design Partnership or Polo; or (iv) the Company defaults inperforming any of the other terms of this Agreement and continues in suchdefault for a period of thirty (30) days after notice thereof (unless thedefault cannot be cured within such thirty (30) day period and the Company shallhave commenced to cure the default and proceeds diligently thereafter to curewithin an additional fifteen (15) day period); (v) an event of default shalloccur under the License Agreement or any other design agreement entered intobetween the Company and the Design Partnership or license agreement between theCompany and Polo; or (vi) the License Agreement shall be terminated for anyreason whatsoever. If any Event of Default other than that described inparagraph 6.2(vi) shall occur, the Design Partnership shall have the right,exercisable in its sole discretion, to terminate this Agreement upon ten (10)days' written notice to the Company of its intention to do so. Upon theexpiration of such ten (10) day period, this Agreement shall terminate and cometo an end and, subject to paragraph 6.3 hereof, all rights of the Company in andto the designs furnished or used hereunder and all copyrights and designspatents therein and their contemplated use shall terminate. If the Event ofDefault described in paragraph 6.2(vi) shall occur, this Agreement and theLicense shall thereupon forthwith terminate and come to an end without any needfor notice to the Company. Termination of this Agreement shall be withoutprejudice to any remedy of the Design Partnership for the recovery of any moniesthen due to it under this Agreement or in respect of any antecedent breach ofthis Agreement, and without prejudice to any other right of the DesignPartnership, including without limitation, damages for breach to the extent thatthe same may be recoverable. 6.3 In the event Polo chooses not to exercise the option referred to inparagraph 10.1 of the License Agreement with respect to all or any portion ofthe Licensed Products (as therein defined), the Company may dispose of LicensedProducts, to the extent permitted by and in the manner set forth in paragraph10.2 of the License Agreement. Such sales shall be subject to the payment ofearned compensation pursuant to paragraph 4.2 hereof. Upon the conclusion of thedisposal period all rights and interests in and to the designs furnished or used 10 12hereunder and design patents therein and all copyrights licensed hereby shallbelong to and be the property of the Design Partnership and the Company shallhave no further or continuing right or interest therein. 6.4 The Company acknowledges and admits that there would be no adequateremedy at law for its failure to cease the manufacture or sale of LicensedProducts at the termination of this Agreement, by expiration or otherwise, andthe Company agrees that in the event of such failure, the Design Partnershipshall be entitled to relief by way of temporary or permanent injunction and suchother and further relief as any court with jurisdiction may deem proper. 6.5 It is expressly understood that under no circumstances shall theCompany be entitled, directly or indirectly, to any form of compensation orindemnity from the Design Partnership, Lauren, Polo or their affiliates as aconsequence to the termination of this Agreement, whether as a result of thepassage of time, or as the result of any other cause of termination referred toin this Agreement. Without limiting the generality of the foregoing, by itsexecution of the present Agreement, the Company hereby waives any claim which ithas or which it may have in the future against the Design Partnership, Lauren,Polo, Polo Ralph Lauren Corporation or their affiliates, arising from anyalleged goodwill created by the Company for the benefit of any or all of thesaid parties or from the alleged creation or increase of a market for LicensedProducts. 7. Indemnity. 7.1 The Company shall indemnify and save and hold the Design Partnership,Lauren, Polo and Polo Ralph Lauren Corporation, and their directors, officers,servants, agents and employees, harmless from and against any and all liability,claims, causes of action, suits, damages and expenses (including reasonableattorney's fees and expenses in actions involving third parties or between theparties hereto), which they, or any of them, are or become liable for, or mayincur, or be compelled to pay by reason of any acts, whether of omission orcommission, that may be committed or suffered by the Company or any of itsdirectors, officers, servants, agents or employees in connection with theCompany's performance of this Agreement, in connection with Licensed Productsmanufactured by or on behalf of the Company or otherwise in connection with theCompany's business; provided, however, that the Company shall not be responsiblefor any liability, claims, causes of action, suits, damages or expenses incurredor suffered by the Design Partnership, Lauren, Polo or Polo Ralph LaurenCorporation, or their directors, officers, servants, agents and employees inconnection with any suit or proceeding for infringement of another's designpatent, trademark, copyright or other proprietary rights brought against 11 13them as a result of the Company's use of the Trademark, or the Design Conceptsfurnished by the Design Partnership hereunder, in strict accordance with theterms and conditions of this Agreement and the License Agreement. 8. Disclosure. The Design Partnership and the Company, and their affiliates, employees,attorneys, bankers and accountants, shall hold in confidence and not use ordisclose, except as permitted by this Agreement, (i) confidential information ofthe other or (ii) the terms of this Agreement, except upon consent of the otheror pursuant to, or as may be required by law, or in connection with regulatoryor administrative proceedings and only then with reasonable advance notice ofsuch disclosure to the other. The Company shall take all reasonable precautionsto protect the secrecy of the materials, samples, sketches, designs, artwork,logos and other materials used pursuant to this Agreement prior to thecommercial distribution or the showing of samples for sale and shall not sellany merchandise employing or adapted from any of said designs, sketches,artwork, logos, and other materials or their use except under the Trademark. 9. Miscellaneous. 9.1 All notices, requests, consents and other communications hereundershall be in writing and shall be deemed to have been properly given or sent (i)on the date when such notice, request, consent or communication is personallydelivered, or (ii) five (5) days after the same was sent, if sent by certifiedor registered mail or (iii) two (2) days after the same was sent, if sent byovernight courier delivery or confirmed telecopier, as follows: (a) if to the Company, addressed as follows: Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 Attention: Mr. Sidney Kimmel Telecopier: (215) 785-1795 12 14 with a copy to: Jones Apparel Group, Inc. 1411 Broadway New York, New York 10018 Attention: Mr. Herbert Goodfriend Telecopier: (212) 921-5370 (b) if to the Design Partnership addressed as follows: Polo Ralph Lauren Enterprises, L.P. 650 Madison Avenue New York, New York 10022 Attention: President Telecopier: 212.318.7186 with a copy to: Victor Cohen, Esq. Eighth Floor 650 Madison Avenue New York, New York 10022 Telecopier: 212.318.7183Anyone entitled to notice hereunder may change the address to which notices orother communications are to be sent to it by notice given in the mannercontemplated hereby. 9.2 Nothing herein contained shall be construed to place the parties inthe relationship of partners or joint venturers, and neither the DesignPartnership nor the Company shall have any power to obligate or bind the otherin any manner whatsoever, except as otherwise provided for herein. 9.3 None of the terms hereof can be waived or modified except by anexpress agreement in writing signed by the party to be charged. The failure ofany party hereto to enforce, or the delay by any party in enforcing, any of itsrights hereunder shall not be deemed a continuing waiver or a modificationthereof and any party may, within the time provided by applicable law, commenceappropriate legal proceedings to enforce any and all of such rights. All rightsand remedies provided for herein shall be cumulative and in addition to anyother rights or remedies such parties may have at law or in equity. Any partyhereto may employ any of the remedies available to it with respect to any of itsrights hereunder without prejudice to the use by it in the future of any otherremedy with respect to any of such rights. No person, firm or corporation, otherthan the parties hereto and 13 15Polo, shall be deemed to have acquired any rights by reason of anythingcontained in this Agreement. 9.4 The Design Partnership may assign its right to receive all or anyportion of its compensation under this Agreement and, in addition, thisAgreement and all of the Design Partnership's rights, duties and obligationshereunder may be assigned by the Design Partnership to any entity to which theright to own or use the Trademark has been assigned, or to an affiliate of anysuch entity. The Company may not assign its rights and obligations under thisAgreement without the prior written consent of the Design Partnership, which maybe withheld in the Design Partnership's sole discretion. 9.5 The Company will comply with all laws, rules, regulations andrequirements of any governmental body which may be applicable to the operationsof the Company contemplated hereby, including, without limitation, as theyrelate to the manufacture, distribution, sale or promotion of Licensed Products,notwithstanding the fact that the Design Partnership may have approved such itemor conduct. 9.6 This Agreement shall be binding upon and inure to the benefit of thesuccessors, heirs and permitted assigns of the parties hereto. 9.7 This Agreement shall be construed in accordance with and governed bythe laws of the State of New York, applicable to contracts made and to be whollyperformed therein without regard to its conflicts of law rules. 9.8 If any dispute between the parties leads to litigation, the partiesagree that the courts of the State of New York in the City of New York, or thefederal courts in that City, shall have the exclusive jurisdiction and venueover such litigation. All parties consent to personal jurisdiction in the Stateof New York, and agree to accept service of process outside of the State of NewYork as if service had been made in that state. Notwithstanding anything to thecontrary set forth herein, neither Polo Ralph Lauren Corporation nor any othergeneral or limited partner of the Design Partnership shall be liable for anyclaim based on, arising out of, or otherwise in respect of, this Agreement, andthe Company shall not have nor claim to have any recourse for any such claimagainst any general or limited partner of the Design Partnership. 9.9 In the event of a breach or threatened breach of this Agreement by theCompany, the Design Partnership shall have the right, without the necessity ofproving any actual damages, to obtain temporary or permanent injunctive ormandatory relief in a court of competent jurisdiction, it being the intention ofthe parties that this Agreement be specifically enforced to the maximum extentpermitted by law. 14 16 9.10 Provisions of this Agreement are severable, and if any provisionshall be held invalid or unenforceable in whole or in part in any jurisdiction,then such invalidity or unenforceability shall affect only such provision, orpart thereof, in such jurisdiction and shall not in any manner affect suchprovision in any other jurisdiction, or any other provision in this Agreement inany jurisdiction. To the extent legally permissible, an arrangement whichreflects the original intent of the parties shall be substituted for suchinvalid or unenforceable provision. 9.11 The paragraph headings contained in this Agreement are for referencepurposes only and shall not affect in any way the meaning or interpretation ofthis Agreement. Any ambiguity in this Agreement shall not be construed againstthe party who prepared this Agreement. 9.12 This Agreement may be executed in one or more counterparts, each ofwhich shall be deemed an original, but all of which together shall constituteone and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement orcaused the same to be executed by a duly authorized officer as of the day andyear first above written. POLO RALPH LAUREN ENTERPRISES, L.P. By: Polo Ralph Lauren Corporation, General Partner By: /s/Michael Newman ------------------------------- JONES APPAREL GROUP, INC. By: /s/ Sidney Kimmel ------------------------------- 15 1EXHIBIT 10.26Portions of this Exhibit have been omitted pursuant to a request forconfidential treatment and have been filed separately with the Securities andExchange Commission. Such portions are designated "[ * * * ]". 2 LICENSE AGREEMENT, dated as of October 18, 1995 by and between Polo RalphLauren, L.P. ("Licensor"), with a place of business at 650 Madison Avenue, NewYork, New York 10022, and Jones Apparel Group, Inc. ("Licensee"), a Pennsylvaniacorporation with a place of business at 250 Rittenhouse Circle, Bristol,Pennsylvania 19007. WHEREAS, Licensor is engaged in the business of manufacturing, selling andpromoting, and licensing others the right to manufacture, sell and promote, highquality apparel and related merchandise under certain Polo/Ralph Laurentrademarks and trade names; and WHEREAS, Licensee desires to obtain, and Licensor is willing to grant, alicense pursuant to which Licensee shall have the right to use the Trademark (ashereinafter defined) on the terms set forth herein; 1. Definitions. As used herein, the term: 1.1. "License" shall mean the exclusive, non-assignable right to use theTrademark in connection with the manufacture and/or importation and sale ofLicensed Products in the Territory. 1.2. "Licensed Products" shall mean those items set forth on Schedule Aattached hereto and made a part hereof, and all bearing the Trademark. From timeto time Licensor may authorize Licensee to manufacture and distribute productsbearing the Trademark not expressly listed in Schedule A hereto. Absent anagreement with respect to such products signed by Licensor and Licensee, allsuch products shall be deemed Licensed Products for all purposes hereunder;provided, however, that Licensee's rights with respect to such products (i)shall be non-exclusive and (ii) may be terminated by Licensor upon 90 dayswritten notice. 1.3. "Licensor" shall mean Polo Ralph Lauren, L.P., a limited partnershiporganized under the laws of the State of Delaware. 1.4. "Licensee" shall mean Jones Apparel Group, Inc., a corporationorganized under the laws of Pennsylvania. 1.5. "Territory" the United States of America, its territories andpossessions. From time to time Licensor may authorize Licensee to sell certainLicensed Products to specific purchasers outside the Territory. Absent anagreement with respect to such sales signed by Licensor and Licensee, all suchsales shall be made on all of the terms and conditions set forth in thisAgreement; provided, however, that Licensee's right to make such sales shall benon-exclusive and may be terminated by Licensor immediately upon written noticeto Licensee. Any such termination 1 3shall not apply to orders already taken by Licensee in accordance withLicensor's prior authorization. In the event that Licensor wishes to use orlicense a third party to use the Trademark on Licensed Products sold in Canadaduring the term hereof, Licensor shall grant to Licensee a right of firstrefusal to act as the Licensee therefor. In the implementation of said firstrefusal rights, Licensor shall give Licensee notice of the Offer Terms uponwhich it proposes to grant a license ("Licensor's Offer") for such products.Licensee shall have a period of forty-five (45) days after the date ofLicensor's notice of the Offer Terms to accept or reject Licensor's Offer inwriting. If Licensee rejects Licensor's Offer or if Licensee initially acceptsLicensor's Offer but thereafter is unable to satisfy the Offer Terms, thenLicensor shall be free to make a substantially similar Licensor's Offer to anythird party. If Licensor shall substantially (as determined in Licensor'sreasonable discretion) change the Offer Terms then, during the term hereof,Licensee's right of first refusal as provided hereinabove shall apply to suchchanged Offer Terms. 1.6. "Trademark" shall mean the trademark set forth on Schedule B hereto,and no other trademark, regardless of whether such trademark is or includes anyreference to "Ralph Lauren" or any other trademark owned by Licensor or itsaffiliates. Licensor shall have the sole right to determine the manner and useeach of the Trademark in connection with each particular Licensed Product. 2. Grant of License. 2.1. Subject to the terms and provisions hereof, Licensor hereby grantsLicensee and Licensee hereby accepts the License. Licensor shall neither use norauthorize third parties to use the Trademark in connection with the manufacture,sale and/or importation of Licensed Products in the Territory during the term ofthis Agreement without Licensee's prior approval. To the extent it is legallypermissible to do so, no license is granted hereunder for the manufacture, saleor distribution of Licensed Products to be used for publicity purposes, otherthan publicity of Licensed Products, in combination sales, as premiums orgiveaways, or to be disposed of under or in connection with similar methods ofmerchandising, such license being specifically reserved for Licensor. 2.2. It is understood and agreed that the License applies solely to theuse of the Trademark on the Licensed Products, and that (i) no use of any othertrademark of Licensor or of any of Licensor's affiliates (including anytrademark that uses the name "Ralph Lauren"), and (ii) no use of the Trademarkon any other products, is authorized or permitted. Licensor reserves the rightto use, and to grant to any other licensee the right to use, the Trademark,whether within or outside the Territory, in connection with any and all productsand services, other than Licensed Products within the Territory. Licenseeunderstands and agrees that 2 4Licensor may itself manufacture or authorize third parties to manufacture in theTerritory, Licensed Products for ultimate sale outside of the Territory. Subjectto the terms of paragraph 17.4 hereof, Licensee may manufacture or cause to bemanufactured the Licensed Products outside of the Territory, but solely forpurposes of sale within the Territory pursuant to the terms of this Agreement. 2.3. Licensee shall not have the right to use Licensee's name on or inconnection with the Licensed Products, except with the prior approval byLicensor of the use and placement of Licensee's name. Licensee shall, at theoption of Licensor, include on its business materials and/or the LicensedProducts an indication of the relationship of the parties hereto in a formapproved by Licensor. 2.4. Licensee shall not use or permit or authorize another person orentity in its control to use the words "Polo" or "Ralph Lauren" as part of acorporate name or tradename without the express written consent of Licensor andLicensee shall not permit or authorize use of the Trademark in such a way so asto give the impression that the name "Ralph Lauren," or the Trademark, or anymodifications thereof, are the property of Licensee. 2.5. In the event that (i) Sidney Kimmel is no longer the Chairman ofLicensee and the owner of a controlling interest in Licensee, and (ii) Licensee,directly or indirectly, agrees to manufacture, distribute, sell or advertiseduring the term of this Agreement any items which bear the name or areassociated with the name of any person or entity listed on Schedule C hereto,Licensor shall have the right to terminate the term of this Agreement upon sixty(60) days written notice. 2.6. Licensor represents and warrants that it has full right, power andauthority to enter into this Agreement, to perform all of its obligationshereunder, and to consummate all of the transactions contemplated herein. In theevent that Licensee or Licensor is charged with infringement on account ofLicensee's use of any of the Trademark or, if in connection with the developmentof Licensor's program in the Territory, Licensor determines that the use byLicensee of the trademark should be discontinued upon reasonable written noticeto Licensee, this license under the Trademark shall be converted to a licenseunder other mutually agreeable "Ralph Lauren" trademark(s) or label(s); in suchevent Licensee hereby accepts the exclusive license to use such "Ralph Lauren"trademark(s) in connection with the manufacture and sale of Licensed Products inthe Territory subject to all other terms of this License Agreement. In suchevent, Licensee shall immediately advise Licensor of its inventory of LicensedProducts labelled with the Trademark(s) and of its stock of business materialsbearing the Trademark(s) and Licensor shall, in its reasonable discretion andjudgment, determine whether and to what extent such inventory and 3 5materials of Licensee may continue to be used by Licensee. 2.7. Licensee shall not purport to grant any right, permission or licensehereunder to any third party, whether at common law or otherwise. Licensee shallnot without Licensor's prior written approval sell any Licensed Products bearingthe Mark to any third party which, directly or indirectly, sells or proposes tosell such Licensed Products outside the Territory. Licensee shall use its bestefforts to prevent any such resale outside the Territory and shall, immediatelyupon learning or receiving notice from Licensor that a customer is sellingLicensed Products outside the Territory, cease all sales and deliveries to suchcustomer. 2.8. Licensee recognizes that there are many uncertainties in the businesscontemplated by this Agreement. Licensee agrees and acknowledges that other thanthose representations explicitly contained in this Agreement, if any, norepresentations, warranties or guarantees of any kind have been made toLicensee, either by Licensor or its affiliates, or by anyone acting on theirbehalf. Without limitation, no representations concerning the value of theLicensed Products or the prospects for the level of their sales or profits havebeen made and Licensee has made its own independent business evaluation indeciding to manufacture and distribute the Licensed Products on the terms setforth herein. 3. Design Standards and Prestige of Licensed Products. 3.1. Licensee acknowledges that it has entered into a design servicesagreement ("Design Agreement"), of even date herewith, with Polo Ralph LaurenEnterprises, L.P. (the "Design Partnership"), which provides for the furnishingto Licensee by the Design Partnership of design concepts and other professionalservices so as to enable Licensee to manufacture or cause to be manufactured theLicensed Products in conformity with the established prestige and goodwill ofthe Trademark. Licensee shall manufacture, or cause to be manufactured, and sellonly such Licensed Products as are made in accordance with the design and 4 6other information approved under, and in all other respects in strict conformitywith the terms of, the Design Agreement. 3.2. Licensee acknowledges that the Trademark has established prestige andgoodwill and are well recognized in the minds of the public, and that it is ofgreat importance to each party that in the manufacture and sale of various linesof Licensor's products, including the Licensed Products, the high standards andreputation that Licensor and Ralph Lauren have established be maintained.Accordingly, all items of Licensed Products manufactured or caused to bemanufactured by Licensee hereunder shall be of high quality workmanship withstrict adherence to all details and characteristics embodied in the designsfurnished pursuant to the Design Agreement. Licensee shall supply Licensor withsamples of the Licensed Products (including, if Licensor so requests, samples oflabeling and packaging used in connection therewith) prior to production andfrom time to time during production, and shall, at all times during the termhereof, upon Licensor's request, make its manufacturing facilities available toLicensor, and shall use its best efforts to make available each subcontractor'smanufacturing facilities for inspection by Licensor's representatives duringusual working hours. No sales of miscuts or damaged merchandise shall containany labels or other identification bearing the Trademark without Licensor'sprior written approval, but sales of all products of Licensor or the DesignPartnership's design shall nonetheless be subject to royalty payments pursuantto paragraph 6 hereof. 3.3. In the event that any Licensed Product is, in the judgment ofLicensor, not being manufactured, distributed or sold with first qualityworkmanship or in strict adherence to all details and characteristics furnishedpursuant to the Design Agreement, Licensor shall notify Licensee thereof inwriting and Licensee shall promptly repair or change such Licensed Product toconform thereto. If a Licensed Product as repaired or changed does not strictlyconform after Licensor's request and such strict conformity cannot be obtainedafter at least one (1) resubmission, the Trademark shall be promptly removedfrom the item, at the option of Licensor, in which event the item may be sold byLicensee without payment of any royalty hereunder, provided such miscut ordamaged item does not contain any labels or other identification bearing theTrademark. Notwithstanding anything in this paragraph 3.3 to the contrary, salesof all products of Licensor's or the Design Partnership's design, whether or notbearing the Trademark, shall nonetheless be subject to royalty payments pursuantto paragraph 6 hereof. Licensor hereby approves Licensee's sale of excessinventory, cutups and clearly marked seconds or irregular merchandise, on allthe terms set forth herein: (i) first, upon request to Licensor's factory outletstores to the extent of their requirements (subject to a reasonable assortmentbeing purchased), at a price equal to thirty-two percent (32%) off the regularwholesale price of such products (but Licensee shall not be 5 7responsible for any royalty payments hereunder or for any compensation paymentsunder the Design Agreement with respect to such sales) and (ii) second, atfactory outlet stores owned by Licensee or its affiliates ("Licensee OutletStores") and (iii) at such other locations as Licensor may hereafter approve.Licensor and Licensee shall separately agree to the terms of license agreementsfor Licensee Outlet Stores, which shall bear the Trademark as a service mark,("Store License Agreements"), it being understood that such Store LicenseAgreements shall (i) not require Licensee to pay Licensor any separate royaltyor other compensation for the right to use such service mark herein and in theDesign Agreement; (ii) Licensor shall have a right to approve each location foreach Licensee Outlet Store in its reasonable business judgment, it beingunderstood that Licensor does not presently intend to approve more than oneLicensee Outlet Store in each center and (iii) such Store License Agreementsshall be consistent with other similar agreements Licensor has entered into withthird parties and shall provide for Licensor's right to approve various aspectsof the design, decoration, accessorization and operation of all Licensee OutletStores. 3.4. At the request of Licensor, Licensee shall cause to be placed on allLicensed Products appropriate notice designating Licensor or the DesignPartnership as the copyright or design patent owner thereof, as the case may be.The manner of presentation of said notices shall be determined by Licensor. 4. Marketing. 4.1. The distribution of the Licensed Products in the Territory shall beperformed by Licensee exclusively. The Licensed Products shall be sold byLicensee only to those specialty shops, department stores and other retailoutlets which deal in products similar in quality and prestige to LicensedProducts, and whose operations will enhance the quality and prestige of theTrademark, and only to those customers listed on Schedule D hereto and othercustomers of similar quality and prestige. Licensor shall have the right toobject by notice to Licensee to any customer not listed on Schedule D hereto,and Licensee shall not thereafter accept orders from such customer, (butLicensee may fulfill orders accepted prior to Licensee's receipt of suchnotice). In the event Licensor reasonably determines that the unauthorizedresale of Licensed Products through unauthorized distribution channels iscausing a negative impact on the reputation and desirability of Licensor'sproducts, Licensee shall consult with Licensor in good faith regarding whatsteps, including the possibility of implementing an inventory marking system,may be taken to remedy such negative impact. Licensee shall not market orpromote or seek customers for the Licensed Products outside of the Territory andLicensee shall not establish a branch, wholly owned subsidiary, distribution orwarehouse with inventories of Licensed Products outside of the Territory. 6 8 4.2. Licensee acknowledges that in order to preserve the good willattached to the Ralph Lauren trademarks, the Licensed Products are to be sold atprices and terms reflecting the prestigious nature of such trademarks, it beingunderstood, however, that Licensor is not empowered to fix or regulate theprices at which the Licensed Products are to be sold, either at the wholesale orretail level. 4.3. Licensee shall maintain the high standards of the Trademark and theLicensed Products, in all advertising, packaging and promotion of the LicensedProducts. Licensee shall not employ or otherwise release any of such advertisingor packaging or other business materials relating to any Licensed Products orbearing the Trademark, unless and until Licensee shall have made a request, inwriting, for approval by Licensor. Licensor may, with respect to anyadvertising, packaging or business materials submitted by Licensee, make suchsuggestions as Licensor deems necessary or appropriate, or disapprove, in eitherevent by notice to Licensee. Any approval granted hereunder shall be limited touse during the seasonal collection of Licensed Products to which suchadvertising relates and shall be further limited to the use (e.g. TV or print)for which approval by Licensor was granted. Licensee shall, at the option ofLicensor, include on its business materials an indication of the relationship ofthe parties hereto in a form approved by Licensor. 4.4. Licensee shall use its best efforts to assure that all cooperativeadvertising, whereby Licensee provides a customer with a contribution toward thecost of an advertisement for Licensed Products, whether Licensee's contributionbe in the form of an actual monetary contribution, a credit or otherwise, shallbe subject to prior approval of Licensor under the same terms and conditions asapply to advertising and promotional materials prepared by or to be used byLicensee pursuant to paragraph 4.5 hereof; provided, however, that in the eventthat Licensee is not as a matter of practice given an opportunity to review thecooperative advertising due to time constraints, then Licensee shall notifyLicensor, in advance, of those customers with whom it does cooperative LicensedProduct advertising and/or promotion, and Licensee at Licensor's request shallnotify the named customer of the terms of this Agreement which pertain to thesaid advertising or promotional materials. 4.5. Licensee shall exercise its best efforts to safeguard the establishedprestige and goodwill of the name "Ralph Lauren" and the trademarks associatedtherewith at the same level of prestige and goodwill as heretofore maintained."Image" as used herein refers primarily to quality and style of packaging,advertising and promotion, creation and introduction of new products, type ofoutlets with reference to quality of service provided by retail outlets andquality of presentation of Licensed Products in retail outlets. Licensee shalltake all necessary 7 9steps, and all steps reasonably requested by Licensor, to prevent or avoid anymisuse of the Trademark by any of its customers, contractors or other resources. 4.6. During each year of this Agreement, Licensee shall expend for theadvertising of Licensed Products, which advertising may consist of cooperativeadvertising, an amount that is not less than the "Annual AdvertisingObligation", as hereinafter defined, for such year. Licensor and Licensee shallconsult with each other regarding the creation, production and placement of alladvertising of Licensed Products, but all final decisions with respect theretoshall be made by Licensor in its sole discretion. The "Annual AdvertisingObligation" for each year during the term hereof shall be [ * * * ] percent([***]%) of the aggregate net sales price (as defined in paragraph 6.2 hereof)of Licensed Products sold during such year. Licensee shall deliver to Licensorwithin sixty (60) days after the end of each year hereof an accounting statementin respect of amounts expended by Licensee on advertising for the prior year.Each such accounting statement shall be signed, and certified as correct, by aduly authorized officer of Licensee. Prior to each year hereof, Licensee shallsubmit Licensee's advertising budget for the upcoming year, based on theaggregate net sales price of Licensed Products during the year then ending andon sales projected for the upcoming year. The Annual Advertising Obligation forsuch upcoming year will initially be calculated and expended based upon suchbudget. If in any year during the term hereof an amount less than the AnnualAdvertising Obligation is expended on advertising for any reason whatsoever(including an underestimate of the actual net sales for such year or because theactual cost of Institutional Advertising, if any, produced and placed duringsuch year is less than the Annual Advertising Obligation), the entire amount notexpended shall be added to the Annual Advertising Obligation for the followingyear. 4.7. During the term of this Agreement, Licensee shall, in consultationwith Licensor, provide a budget for the design, construction, re-fits andseasonal changeovers of in-store shops and fixtures to be used exclusively forthe presentation of Licensed Products, the design of which shall be subject toLicensor's prior approval. Licensee's budget for such purposes shall be adequateto present Licensed Products in a manner consistent with the high quality andprestige associated with Licensor's trademarks and the price structure of theLicensed Products. 4.8. To the extent permitted by applicable law Licensor may from time totime, and in writing, promulgate reasonable rules and regulations to Licenseerelating to the manner of use of the Trademark. Licensee shall comply with suchrules and regulations. Any such rules or regulations shall not be inconsistentwith or derogate from the terms of this Agreement. 8 10 4.9. Licensee agrees to make available for purchase and to sell on itscustomary price, credit and payment terms all lines and styles of LicensedProducts to retail stores in the Territory bearing a trademark of Licensor orits affiliates and to any stores or facilities operated or owned by Licensor andits affiliates, which are authorized to sell the Licensed Products within suchretail stores. 4.10. In consideration of the License granted herein, in the eventLicensor elects to offer Licensed Products for sale in mail-order catalogs,Licensee shall sell and timely ship Licensed Products to Licensor or itsaffiliate for such purposes at a price equal to 30% less than the regularwholesale price therefor. All such sales shall be separately reported byLicensee in its accounting statements pursuant to paragraph 6.2 hereof, and suchsales shall not be subject to the royalty or advertising obligations set forthherein, or to the compensation obligations set forth in the Design Agreement. 4.11. Licensor shall respond to any requests for approvals or consentsfrom Licensee hereunder as promptly as reasonably practicable consistent withthe level of review required. 5. Trademark Protection. 5.1. All uses of the Trademark by Licensee, including, without limitation,use in any business documents, invoices, stationery, advertising, promotions,labels, packaging and otherwise shall require Licensor's prior written consentin accordance with paragraph 4 hereof. 5.2. All uses of the Trademark by Licensee in advertising, promotions,labels and packaging shall bear the notation "Ralph (Polo Player Design) Lauren"or the representation of the Polo Player, as the case may be, and shall includeat Licensor's option, a notice to the effect that each Trademark is used byLicensee for the account and benefit of Licensor or that Licensee is aregistered user thereof or both such statements. The use of the Trademarkpursuant to this Agreement shall be for the benefit of Polo and shall not vestin Licensee any title to or right or presumptive right to continue such use. Forthe purposes of trademark registration, sales by Licensee shall be deemed tohave been made by Licensor. 5.3. Licensee shall cooperate fully and in good faith with Licensor forthe purpose of securing and preserving Licensor's rights in and to theTrademark. Nothing contained in this Agreement shall be construed as anassignment or grant to Licensee of any right, title or interest in or to theTrademark, or any of Licensor's other trademarks, it being understood that allrights relating thereto are reserved by Licensor, except for the Licensehereunder to Licensee of the right to use the Trademark only as 9 11specifically and expressly provided herein. Licensee shall not file or prosecutea trademark or service mark application or applications to register theTrademark, for Licensed Products or otherwise. 5.4. Licensee shall not, during the term of this Agreement or thereafter,(a) attack Licensor's title or rights in and to Licensor's trademarks in anyjurisdiction or attack the validity of this License or Licensor's trademarks or(b) contest the fact that Licensee's rights under this Agreement (i) are solelythose of a licensee, manufacturer and distributor and (ii) subject to theprovisions of paragraph 10 hereof, cease upon termination of this Agreement. Theprovisions of this paragraph 5.4 shall survive the termination of thisAgreement. 5.5. All right, title and interest in and to all samples, patterns,sketches, designs, artwork, logos and other materials furnished by Licensor orthe Design Partnership, whether created by Licensor or the Design Partnership,and any logo or crest associated with the Trademark, even if such logo or crestwas designed or furnished by Licensee, shall be the sole property of Licensorand/or the Design Partnership, as the case may be. Licensee shall assistLicensor to the extent necessary in the protection of or the procurement of anyprotection of Licensor's rights to the Trademark, designs, design patents andcopyrights hereunder and Licensor, if Licensor so desires, may commence orprosecute any claims or suits in Licensor's own name or in the name of Licenseeor join Licensee as a party thereto. Licensee shall promptly notify Licensor inwriting of any uses which may be infringements or imitations by others of theTrademark on articles similar to those covered by this Agreement which may cometo Licensee's attention. Licensor shall have the sole right to determine whetheror not any action shall be taken on account of any such infringements orimitations. Licensor shall bear one hundred percent (100%) of the costs of allactions or proceedings it undertakes, and shall be entitled to all recoveries insuch actions. If Licensor declines to take action with respect to a particularinfringer Licensee is not obligated to but may, with Licensor's prior writtenconsent, undertake such action at Licensee's expense, in which case Licenseeshall be entitled to all recoveries in such action. 6. Royalties. 6.1. Licensee shall pay to Licensor minimum royalties for each year duringthe term of this Agreement as compensation for the License granted hereunder forthe use of the Trademark in the manufacture and sale, and/or importation andsale, of Licensed Products in the Territory. The minimum royalty for each yearduring the term hereof shall be as follows: 10 12 Year 1 (1997) $ [ * * * ] Year 2 $ [ * * * ] Year 3 $ [ * * * ] Year 4 $ [ * * * ] Year 5 $ [ * * * ]Minimum royalties for each year shall be paid on a quarterly basis, beginningwith the minimum royalty payment to be made for the first calendar quarter of [ * * * ], in the manner set forth in paragraph 6.2 below. No credit shall bepermitted against minimum royalties payable in any year on account of actual orminimum royalties paid in any other year, and minimum royalties shall not bereturnable. Minimum royalties for each year of the "Renewal Term" (as defined inparagraph 8 hereof) shall be an amount equal to [ * * * ] percent ([***]%) ofthe actual earned royalty due to Licensor for sales of Licensed Products in2001. For the purposes of this Agreement, the term "year" shall mean a period oftwelve (12) months commencing on each January 1 during the term of thisAgreement; provided, however, that the "first year", or "Year 1" shall mean theperiod commencing on the date hereof and expiring on December 31, 1997[ * * * ]. 6.2. Licensee shall pay to Licensor earned royalties based on the netsales price of all Licensed Products manufactured or imported and sold byLicensee hereunder. Earned royalties shall equal [ * * * ] percent ([***]%) ofthe net sales price of all Licensed Products sold under this Agreement,including, without limitation, any sales made pursuant to the terms of paragraph10.2 hereof; provided, however, that Licensor hereby waives earned royaltieswith respect to Licensed Products sold and shipped prior to December 31, 1996for the Fall 1996 and Cruise/Holiday 1996 seasons, but Licensor does not waiveearned royalties in respect of Licensed Products for the Spring 1996 season,even if such Licensed Products are sold and shipped prior to December 31,1996. Licensee shall prepare or cause to be prepared statements of operationsfor the first month in which Licensed Products are offered for sale to thetrade, and for each month thereafter for so long as Licensee is offeringLicensed Products for sale hereunder, which statements shall be furnished toLicensor together with the earned royalties due for each such month on the lastday of the following month. The statement and royalty payment provided on thelast day of each April (for the month of March), July (for the month of June),October (for the month of September) and January (for the month of December)during the term shall also include Licensee's minimum royalty obligation for thepreceding calendar quarter, less the aggregate earned royalties paid for suchcalendar quarter. The term "net sales price" shall mean the gross sales price toretailers of all Licensed Products sold under this Agreement or, with respect toLicensed Products that are not sold directly or indirectly to retailers, otherultimate consumers (as in the case of accommodation sales by Licensee to itsemployees or sales by Licensee in its own shops), less trade discounts, 11 13merchandise returns, sales tax (if separately identified and charged) andmarkdowns and/or chargebacks which, in accordance with generally acceptedaccounting principles, would normally be treated as deductions from gross sales,and which, in any event, do not include any chargebacks or the like foradvertising, fixture or retail shop costs or contributions, or contributions forin-store personnel. No other deductions shall be taken. Any merchandise returnsshall be credited in the month in which the returns are actually made. Forpurposes of this Agreement, affiliates of Licensee shall mean all persons andbusiness entities, whether corporations, partnerships, joint ventures orotherwise, which now or hereafter control, or are owned or controlled, directlyor indirectly by Licensee, or are under common control with Licensee. It is theintention of the parties that royalties will be based on the bona fide wholesaleprices at which Licensee sells Licensed Products to independent retailers inarms' length transactions. In the event Licensee shall sell Licensed Products toits affiliates, royalties shall be calculated on the basis of such a bona fidewholesale price irrespective of Licensee's internal accounting treatment of suchsale; provided, however, that royalties on sales to Licensee Outlet Stores (asdefined in paragraph 3.3 hereof) shall be calculated on the basis of the actualinvoice price to such Licensee Outlet Stores, but in no event less than anamount equal to twenty-five (25%) percent less than the regular wholesale priceof such Licensed Products. Licensee shall identify separately in the statementsof operations provided to Licensor pursuant to paragraph 7 hereof, all sales toaffiliates and through Licensee Outlet Stores. Notwithstanding anything to thecontrary contained herein or in the Design Agreement, Licensee may sell to itsown employees involved in the business contemplated hereunder, for theirpersonal use, Licensed Products at a discount of thirty-five (35%) percent ormore off the regular wholesale price thereof, without payment of royalties orcompensation to Licensor; provided that such sales do not exceed $1,000,000 inany year. 6.3. If the payment of any installment of royalties is delayed for anyreason, interest shall accrue on the unpaid principal amount of such installmentfrom and after the date which is 10 days after the date the same became duepursuant to paragraphs 6.1 or 6.2 hereof at the lower of the highest ratepermitted by law in New York and 2% per annum above the prime rate of interestin effect from time to time at Chemical Bank, New York, New York or anysuccessor bank. 6.4. The obligation of Licensee to pay royalties hereunder shall beabsolute notwithstanding any claim which Licensee may assert against Licensor orthe Design Partnership. Licensee shall not have the right to set-off, compensateor make any deduction from such royalty payments for any reason whatsoever. 7. Accounting. 12 14 7.1. Licensee shall at all times keep an accurate account of alloperations within the scope of this Agreement and shall render a full statementof such operations in writing to Licensor in accordance with paragraph 6.2hereof. Such statements shall account separately for each different productcategory and shall include all aggregate gross sales, trade discounts,merchandise returns, sales of miscuts and damaged merchandise and net salesprice of all sales for the previous month. Such statements shall be insufficient detail to be audited from the books of Licensee. Once annually, whichmay be in connection with the regular annual audit of Licensee's books, Licenseeshall furnish an annual statement of the aggregate gross sales, trade discounts,merchandise returns and net sales price of all Licensed Products made or sold byLicensee certified by Licensee's independent accountant. Each monthly financialstatement furnished by Licensee shall be certified by the chief financialofficer or controller of Licensee. 7.2 Licensor and its duly authorized representatives, on reasonablenotice, shall have the right, no more than once in each year during regularbusiness hours, for the duration of the term of this Agreement and for three (3)years thereafter, to examine the books of account and records and all otherdocuments, materials and inventory in the possession or under the control ofLicensee and its successors with respect to the subject matter of thisAgreement. All such books of account, records and documents shall be maintainedand kept available by Licensee for at least the duration of this Agreement andfor three (3) years thereafter. Licensor shall have free and full access theretoin the manner set forth above and shall have the right to make copies and/orextracts therefrom. If as a result of any examination of Licensee's books andrecords it is shown that Licensee's payments to Licensor hereunder with respectto any twelve (12) month period were less than or greater than the amount whichshould have been paid to Licensor by an amount equal to three and one-halfpercent (3 1/2%) of the amount which should have been paid during such twelve(12) month period, Licensee will, in addition to reimbursement of anyunderpayment, with interest from the date on which each payment was due at therate set forth in paragraph 6.3 hereof, promptly reimburse Licensor for the costof such examination. Licensee shall provide Licensor each year with a copy ofits annual report, as soon as it is made available to Licensee's Shareholders. 8. Term. 8.1 The term of this Agreement shall commence as of the date hereof andshall terminate on December 31, 2001; provided, however, that if no Event ofDefault shall have occurred and not been cured or waived, and Licensee hasachieved the Minimum Renewal Volume (as such term is hereinafter defined) forthe period January 1, 2000 through December 31, 2000, Licensee shall have theoption, upon providing notice to Licensor on or before April 1, 2001, to renewthis Agreement for an additional three (3) year period (the 13 15"Renewal Term") so as to expire on December 31, 2004, on the terms andconditions herein except that there will be no further right to renewal. Theminimum aggregate net sales price which Licensee must achieve in connection withsales of Licensed Products during the period from January 1, 2000 to December31, 2000 to (the "Minimum Renewal Volume") in order to be entitled to renew thisAgreement for a second term as hereinabove provided shall be $ [ * * * ] (the"Renewal Volume"). In the event Licensee exercises its option for a RenewalTerm, each of Licensor and Licensee shall give the other notice, on or beforeJanuary 1, 2004, of its desire to extend the term hereof beyond December 31,2004. In the event Licensee does not achieve the Renewal Volume as hereinaboveprovided, Licensee may nevertheless request an extension of the term beyondDecember 31, 2001, and Licensor shall respond to such request (which responseshall be in Licensor's sole discretion) within thirty (30) days after itsreceipt thereof. It is expressly understood that only the company (which may beLicensee) whose licensed term covers the period subsequent to the expiration ofthis Agreement shall be entitled to receive designs for Licensed Productsintended to be sold after the expiration of this Agreement, and to makepresentations of such Licensed Products during the market presentation weeksthat relate to such subsequent period, even if such market presentation occursprior to the termination of this Agreement. Without limiting the generality ofthe foregoing, in the event the term hereof is not renewed or extended at theend of the initial or any renewal term, the last season for which Licensee shallbe entitled to receive designs and, during the term hereof, to manufacture andsell Licensed Products shall be the Cruise/Holiday season for the last year ofthe relevant period, and Licensor shall be entitled to undertake, directly orthrough a successor licensee, all activities associated with the design,manufacture and sale Licensed Products commencing with the immediately followingSpring season. 8.2 Notwithstanding the terms of paragraph 8.1 hereof or anything to thecontrary contained herein or in the Design Agreement, in the event that theaggregate net sales price of Licensed Products sold during the period January 1,1999 through December 31, 1999 is less than $ [ * * * ], Licensee shall sonotify Licensor immediately upon becoming aware of such event and in no eventlater than February 1, 2000 and, in such event, each of Licensor and Licenseeshall have the right, in its sole discretion, by notice to the other on orbefore March 1, 2000, to terminate the term of this Agreement and the DesignServices Agreement effective as of December 31, 2000. In the event either partygives notice of such termination, the effect for all purposes shall be the sameas if the term of this Agreement and the Design Services Agreement expired onDecember 31, 2000; provided, however, that Licensee shall not be responsible forthe minimum royalties which would otherwise be due pursuant to paragraph 6.1hereof or for the minimum compensation payments which would otherwise be duepursuant to paragraph 4.1 of the Design Agreement, but shall be responsible 14 16for all earned royalty and other payments due hereunder and for all earnedcompensation and other payments due under the Design Agreement. 9. Default; Change of Control. 9.1. Each of the following shall constitute an event of default ("Event ofDefault") hereunder: (i) Any installment of royalty payments is not paid when due and such default continues for more than fifteen (15) days after written notice thereof to Licensee; (ii) Licensee shall fail to timely present for sale to the trade a broadly representative and fair collection of each seasonal collection of Licensed Products designed by the Design Partnership under the Design Agreement or Licensee shall fail to timely ship to its customers a material portion of the orders of Licensed Products it has accepted; (iii) Licensee defaults in performing any of the other terms of this Agreement and continues in such default for a period of thirty (30) days after notice thereof (unless the default cannot be cured within such thirty (30) day period and Licensee shall have commenced to cure the default and proceeds diligently thereafter to cure within an additional fifteen (15) day period); (iv) Licensee fails within fifteen (15) days after written notice that payment is overdue to pay for any Licensed Products or materials, trim, fabrics, packaging or services relating to Licensed Products purchased by Licensee from Licensor or, unless Licensee is contesting in good faith the amount due, any agent or licensee of Licensor or any other supplier of such items; (v) If Licensee shall use the Trademark in an unauthorized or improper manner and/or if Licensee shall make an unauthorized disclosure of confidential information or materials given or loaned to Licensee by Licensor and/or the Design Partnership; (vi) Licensee institutes proceedings seeking relief under a bankruptcy act or any similar law, or consents to entry of any order for relief against it in any bankruptcy or insolvency proceeding or similar proceeding, or files a petition for or consent or answer consenting to reorganization or other relief under any bankruptcy act or other similar law, or consents to the filing against it of any petition for the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of it or of any substantial part of its property, or a proceeding 15 17 seeking such an appointment shall have been commenced without Licensee's consent and shall continue undismissed for sixty (60) days or an order providing for such an appointment shall have been entered, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due or fails to pay its debts as they become due, or takes any action in furtherance of the foregoing; (vii) Licensee transfers or agrees to transfer substantially all of its property in a transaction which results in ownership inconsistent with the terms of paragraph 9.3 hereof; (viii) The calling of a meeting of creditors, appointment of a committee of creditors or liquidating agents, or offering a composition or extension to creditors by, for or of Licensee; (ix) There shall be a direct or indirect change in control of the company which results in ownership inconsistent with the terms of paragraph 9.3 hereof; (x) An event of default occurs under the Design, or any other license agreement entered into between Licensor (or its predecessor-in-interest) and Licensee or design agreement between Licensee and the Design Partnership (or its predecessor-in-interest); (xi) Licensee shall have failed to perform any material term, covenant or agreement on its part to be performed under any agreement or instrument (other than this Agreement) evidencing or securing or relating to any indebtedness owing by Licensee, if the effect of such failure is to accelerate the maturity of such indebtedness, or to permit the holder or holders of such indebtedness to cause such indebtedness to become due prior to the stated maturity thereof. 9.2. If any Event of Default described in paragraphs 9.1 (i), (ii), (iii),(iv), (v), (ix), (x) or (xi) shall occur, Licensor shall have the right,exercisable in its sole discretion, to terminate this Agreement and the Licenseupon ten (10) days' written notice to Licensee of its intention to do so, andupon the expiration of such ten (10) day period, this Agreement and the Licenseshall terminate and come to an end. If the Event of Default described inparagraphs 9.1 (vi), (vii) or (viii) shall occur, this Agreement and the Licenseshall thereupon forthwith terminate and come to an end without any need fornotice to Licensee. This Agreement will terminate automatically upon theexpiration or termination for any reason whatsoever of the Design Agreement. Anytermination of this Agreement shall be without prejudice to any remedy ofLicensor for the recovery of any monies then due it under 16 18this Agreement or in respect to any antecedent breach of this Agreement, andwithout prejudice to any other right of Licensor including, without limitation,damages for breach to the extent that the same may be recoverable and Licenseeagrees to reimburse Licensor for any costs and expenses (including attorneys'fees) incurred by Licensor in enforcing its rights hereunder. No assignee forthe benefit of creditors, receiver, liquidator, sequestrator, trustee inbankruptcy, sheriff or any other officer of the court or official charged withtaking over custody of Licensee's assets or business shall have any right tocontinue the performance of this Agreement. 9.3. During the term of this Agreement, Licensee shall not dissolve,liquidate or wind-up its business. In addition, in the event Licensee sells ortransfers, or suffers a sale or a transfer of, by operation of law or otherwise,directly or indirectly, a controlling interest in Licensee (including, withoutlimitation, in any direct or indirect parent of Licensee), Licensee shallpromptly advise Licensor thereof in writing. If such sale or transfer results insuch controlling interest being owned by an entity which, directly orindirectly, owns any trademark or tradename listed on Schedule C hereto, or theexclusive right to use any of such trademarks or tradenames, in connection withproducts similar to or competitive with Licensed Products, Licensee shall sonotify Licensor, and within sixty (60) days of its receipt of notice, Licensorshall have the right to terminate this Agreement, such termination to becomeeffective thirty (30) days after the date notice of termination is received bythe Licensee. 10. Disposal of Stock Upon Termination or Expiration. 10.1. Within ten (10) days following the termination of this Agreement forany reason whatsoever including the expiration of the term hereof, and on thelast day of each month during the disposal period set forth in paragraph 10.2hereof, Licensee shall furnish to Licensor a certificate of Licensee listing itsinventories of Licensed Products (which defined term for purposes of thisparagraph 10.1 shall include, but shall not be limited to, all fabrics, trim andpackaging which are used in the manufacture and marketing of Licensed Products)on hand or in process wherever situated. Licensor shall have the right toconduct a physical inventory of Licensed Products in Licensee's possession orunder Licensee's control. Licensor or Licensor's designee shall have the option(but not the obligation) to purchase from Licensee all or any part of Licensee'sthen existing inventory of Licensed Products upon the following terms andconditions: (i) Licensor shall notify Licensee of its or its designee's intention to exercise the foregoing option within fifteen (15) days of delivery of the certificate referred to above and shall specify the items of Licensed Products to be purchased. 17 19 (ii) The price for Licensed Products manufactured by or on behalf of Licensee on hand or in process shall be Licensee's standard cost (the actual manufacturing cost) for each such Licensed Product. The price for all other Licensed Products which are not manufactured by Licensee shall be Licensee's landed costs therefor. Landed costs for the purposes hereof means the F.O.B. price of the Licensed Products together with customs, duties, and brokerage, freight and insurance. 18 20 (iii) Licensee shall deliver the Licensed Products purchased within fifteen (15) days of receipt of the notice referred to in clause (i) above. Payment of the purchase price for the Licensed Products so purchased by Licensor or its designee shall be payable upon delivery thereof, provided that Licensor shall be entitled to deduct from such purchase price any amounts owed it by Licensee (and/or to direct payment of any part of such merchandise to any supplier of Licensed Products in order to reduce an outstanding balance due to such supplier from Licensee). 10.2. In the event Licensee that, pursuant to paragraph 10.1 hereof,Licensee timely provides the certificate of inventory and Licensor chooses notto exercise its option with respect to all or any portion of Licensed Products,for a period of ninety (90) days after termination of this Agreement for anyreason whatsoever, except on account of breach of the provisions of paragraph 3,4 or 6 hereof, Licensee may dispose of Licensed Products which are on hand or inthe process of being manufactured at the time of termination of this Agreement,provided that (i) Licensee fully complies with the provisions of this Agreement,including specifically those contained in paragraphs 3, 4 and 6 hereof inconnection with such disposal, and (ii) said disposal takes place within ninety(90) days after notice of termination is given or the expiration of the term ofthis Agreement, as the case may be. 10.3. Notwithstanding anything to the contrary contained herein, in theevent that upon the expiration or termination of the term hereof for any reasonLicensee has not rendered to Licensor all accounting statements then due, andpaid (i) all royalties and other amounts then due to Licensor, (ii) allcompensation then due to Lauren under the Design Agreement and (iii) all amountsthen due to any affiliate of or supplier to Licensor or its affiliates(collectively, "Payments"), Licensee shall have no right whatsoever to disposeof any inventory of Licensed Products in any manner. In addition, if during anydisposal period Licensee fails timely to render any accounting statements, orcertificates of inventory required pursuant to paragraph 10.1 hereof, or to makeall Payments when due, Licensee's disposal rights hereunder shall immediatelyterminate without notice. 11. Effect of Termination. 11.1. It is understood and agreed that except for the License to use theTrademark only as specifically provided for in this Agreement, Licensee shallhave no right, title or interest in or to the Trademark. Upon and after thetermination of this License, all rights granted to Licensee hereunder, togetherwith any interest in and to the Trademark which Licensee may acquire, shallforthwith and without further act or instrument be assigned to and revert toLicensor. In addition, Licensee will execute any instruments requested byLicensor which are necessary to accomplish or confirm 19 21the foregoing. Any such assignment, transfer or conveyance shall be withoutconsideration other than the mutual agreements contained herein. Licensor shallthereafter be free to license to others the right to use the Trademark inconnection with the manufacture and sale of the Licensed Products coveredhereby, and Licensee will refrain from further use of the Trademark or anyfurther reference to them, direct or indirect, or any other trademark, tradename or logo that is confusingly similar to the Trademark, or associated withthe Trademark in any way, in connection with the manufacture, sale ordistribution of Licensee's products, except as specifically provided inparagraph 10 hereof. It is expressly understood that under no circumstancesshall Licensee be entitled, directly or indirectly, to any form of compensationor indemnity from Licensor, the Design Partnership or their affiliates, as aconsequence to the termination of this Agreement, whether as a result of thepassage of time, or as the result of any other cause of termination referred toin this Agreement. Without limiting the generality of the foregoing, by itsexecution of the present Agreement, Licensee hereby waives any claim which ithas or which it may have in the future against Licensor, the Design Partnershipor their affiliates, arising from any alleged goodwill created by Licensee forthe benefit of any or all of the said parties or from the alleged creation orincrease of a market for Licensed Products. 11.2. Licensee acknowledges and admits that there would be no adequateremedy at law for its failure (except as otherwise provided in paragraph 10hereof) to cease the manufacture or sale of the Licensed Products covered bythis Agreement at the termination of the License, and Licensee agrees that inthe event of such failure Licensor shall be entitled to equitable relief by theway of temporary and permanent injunction and such other and further relief asany court with jurisdiction may deem just and proper. 12. Showroom. Licensee represents that a separate showroom for the presentation and saleof the Licensed Products will be established and staffed and Licensee agrees tomaintain, operate, decorate and staff the showroom in a manner consistent withthat of the showrooms established for the presentation and sale of Licensor'sother products. Licensor shall have a right of approval with respect to thedesign, layout, decoration and staffing of the showroom and all expensesincurred with respect to the design, construction, operation and maintenance ofsuch showroom shall be borne by Licensee. Licensee shall admit Licensor'semployees to its showroom and shall sell to such employees for their personaluse (and not for resale) such Licensed Products as any such employee mayreasonably request, at prices equal to the regular wholesale price less adiscount equal to not less than thirty percent (30%) of such regular wholesaleprice. Licensee and Licensor shall mutually agree upon a policy in respect ofsuch 20 22sales that will address reciprocity and avoid interference with Licensee'snormal operations. 13. Indemnity. 13.1. Licensor shall indemnify and hold harmless Licensee from and againstany and all liability, claims, causes of action, suits, damages and expenses(including reasonable attorneys' fees and expenses in actions involving thirdparties or between the parties hereto) which Licensee is or becomes liable for,or may incur solely by reason of its use within the Territory, in strictaccordance with the terms and conditions of this Agreement and the DesignAgreement, of the Licensed Mark or the designs furnished to Licensee by Licensoror Lauren, to the extent that such liability arises through infringement ofanother's design patent, trademark, copyright or other proprietary rights;provided, however, that Licensee gives Licensor prompt notice of, and fullcooperation in the defense against, such claim. If any action or proceedingshall be brought or asserted against Licensee in respect of which indemnity maybe sought from Licensor under this paragraph 13.1, Licensee shall promptlynotify Licensor thereof in writing, and Licensor shall assume and direct thedefense thereof. Licensee may thereafter, at its own expense, be represented byits own counsel in such action or proceeding. 13.2. To the extent not inconsistent with paragraph 13.1 hereof, Licenseeshall indemnify and save and hold Licensor, the Design Partnership, Polo RalphLauren Corporation and Ralph Lauren, individually, and their assignees,directors, officers, servants, agents and employees, harmless from and againstany and all liability, claims, causes of action, suits, damages and expenses(including reasonable attorneys' fees and expenses in actions involving thirdparties or between the parties hereto), which they, or any of them, are orbecome liable for, or may incur, or be compelled to pay by reason of any acts,whether of omission or commission, that may be committed or suffered by Licenseeor any of its servants, agents or employees in connection with Licensee'sperformance of this Agreement, including Licensee's use of Licensee's owndesigns, in connection with Licensed Products manufactured by or on behalf ofLicensee or otherwise in connection with Licensee's business. 21 23 14. Insurance. Licensee shall carry product liability insurance with limits of liabilityin the minimum amount, in addition to defense costs, of $3,000,000 peroccurrence and $3,000,000 per person and Licensor, the Design Partnership, PoloRalph Lauren Corporation and Ralph Lauren, individually, shall be named thereinas insureds, as their interests may appear. The maximum deductible with respectto such insurance shall be $100,000. Licensee shall, promptly after the signingof this Agreement, deliver to Licensor a certificate of such insurance from theinsurance carrier, setting forth the scope of coverage and the limits ofliability and providing that the policy may not be canceled or amended withoutat least thirty (30) days prior written notice to Licensor, the DesignPartnership, Polo Ralph Lauren Corporation and Ralph Lauren, individually. 15. Disclosure. 15.1. Licensor and Licensee, and their affiliates, employees, attorneys,accountants and bankers shall hold in confidence and not use or disclose, exceptas permitted by this Agreement, (i) confidential information of the other or(ii) the terms of this Agreement, except upon consent of the other or pursuantto, or as may be required by law, or in connection with regulatory oradministrative proceedings and only then with reasonable advance notice of suchdisclosure to the other. Licensee shall take all reasonable precautions toprotect the secrecy of the material used pursuant to this Agreement prior to thecommercial distribution or the showing of samples for sale, and shall not sellany merchandise employing or adapted from any of said designs sketches, artwork,logos, and other materials or their use except under the Trademark. 15.2. Licensee agrees that all press releases and other publicannouncements related to Licensor's operations hereunder, shall be subject toapproval by Licensor, and that each request for a statement, release or otherinquiry shall be sent in writing to the advertising/publicity director ofLicensor for response. 16. Key Personnel. 16.1. At all times during the term hereof, Licensee shall employ a seniorexecutive, approved in advance by Licensor (such approval not to be unreasonablywithheld), whose primary responsibility shall be to manage all of Licensee'soperations pursuant to this Agreement. 16.2. At all times during the term hereof, Licensee shall employ a DesignDirector, approved in advance by Licensor (such approval not to be unreasonablywithheld), whose primary responsibility shall be to work with Licensor and theDesign Partnership on the creation and implementation of designs for theLicensed Products and related activities under this Agreement. 22 24 17. Miscellaneous. 17.1. All notices, requests, consents and other communications hereundershall be in writing and shall be deemed to have been properly given or sent (i)on the date when such notice, request, consent or communication is personallydelivered or (ii) five (5) days after the same was sent, if sent by certified orregistered mail or (iii) two (2) days after the same was sent, if sent byovernight courier delivery or confirmed telecopier, as follows: (a) if to Licensee, addressed as follows: Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 Attention: Mr. Sidney Kimmel Telecopier: (215) 785-1795 with a copy to: Jones Apparel Group, Inc. 1411 Broadway New York, New York 10018 Attention: Mr. Herbert Goodfriend Telecopier: (212) 921-5370 (b) if to Licensor, addressed as follows: Polo Ralph Lauren, L.P. 650 Madison Avenue New York, New York 10022 Attention: President Telecopier: 212.318.7186 with a copy to: Victor Cohen, Esq. Eighth Floor 650 Madison Avenue New York, New York 10022 Telecopier: 212.318.7183 23 25Anyone entitled to notice hereunder may change the address to which notices orother communications are to be sent to it by notice given in the mannercontemplated hereby. 17.2. Nothing herein contained shall be construed to place the parties inthe relationship of partners or joint venturers, and no party hereto shall haveany power to obligate or bind any other party hereto in any manner whatsoever,except as otherwise provided for herein. 17.3. None of the terms hereof can be waived or modified except by anexpress agreement in writing signed by the party to be charged. The failure ofany party hereto to enforce, or the delay by any party in enforcing, any of itsrights hereunder shall not be deemed a continuing waiver or a modificationthereof and any party may, within the time provided by applicable law, commenceappropriate legal proceedings to enforce any and all of such rights. All rightsand remedies provided for herein shall be cumulative and in addition to anyother rights or remedies such parties may have at law or in equity. Any partyhereto may employ any of the remedies available to it with respect to any of itsrights hereunder without prejudice to the use by it in the future of any otherremedy with respect to any of such rights. No person, firm or corporation, otherthan the parties hereto and the Design Partnership (and, to the extent set forthin paragraphs 13.1 and 13.2 hereof, Polo Ralph Lauren Corporation and RalphLauren, individually), shall be deemed to have acquired any rights by reason ofanything contained in this Agreement. 17.4. This Agreement shall be binding upon and inure to the benefit of thesuccessors and permitted assigns of the parties hereto. Licensor may assign allor any portion of the royalties payable to Licensor hereunder, as designated byLicensor, and in addition, Licensor may assign all of its rights, duties andobligations hereunder to any entity to which the Trademark, or the right to usethe Trademark, has been transferred, or to an affiliate of any such entity. Therights granted to Licensee hereunder are unique and personal in nature, andneither this Agreement nor the License may be assigned by Licensee withoutLicensor's prior written consent, which may be withheld in Licensor's solediscretion. Any attempt by Licensee to transfer any of its rights or obligationsunder this Agreement, whether by assignment, sublicense or otherwise, withouthaving received the prior written consent of Licensor shall constitute an Eventof Default, but shall otherwise be null and void. Licensee may employsubcontractors subject to the prior written approval of Licensor for themanufacture of the Licensed Products; provided, however, that in any event, (i)the supervision of production of Licensed Products shall remain under thecontrol of Licensee, (ii) Licensee shall maintain appropriate quality controls,(iii) such subcontractors shall comply with the quality and (iv) suchsubcontractors shall comply with other requirements of Licensor 24 26consistent with the terms of this Agreement, including, but not limited to, theexecution by subcontractor of the Trademark and Design Protection Agreementattached hereto and made a part hereof. 17.5. Licensee shall comply with all laws, rules, regulations andrequirements of any governmental body which may be applicable to the operationsof Licensee contemplated hereby, including, without limitation, as they relateto the manufacture, distribution, sale or promotion of Licensed Products,notwithstanding the fact that Licensor may have approved such item or conduct.Licensee shall advise Licensor in the event any Final Prototype does not complywith any such law, rule, regulation or requirement. 17.6. This Agreement shall be construed in accordance with and governed bythe laws of the State of New York, applicable to contracts made and to be whollyperformed therein without regard to its conflicts of law rules. 17.7. The parties hereby consent to the jurisdiction of the United StatesDistrict Court for the Southern District of New York and of any of the courts ofthe Southern District of New York and of any of the courts of the State of NewYork located within the Southern District in any dispute arising under thisAgreement and agree further that service of process or notice in any suchaction, suit or proceeding shall be effective if in writing and delivered asprovided in paragraph 17.1 hereof. Notwithstanding anything to the contrary setforth herein, neither Polo Ralph Lauren Corporation nor any other general orlimited partner of Licensor shall be liable for any claim based on, arising outof, or otherwise in respect of, this Agreement, and Licensee shall not have norclaim to have any recourse for any such claim against any general or limitedpartner of Licensor. 17.8. The provisions hereof are severable, and if any provision shall beheld invalid or unenforceable in whole or in part in any jurisdiction, then suchinvalidity or unenforceability shall affect only such provision, or part thereofin such jurisdiction and shall not in any manner affect such provision in anyother jurisdiction, or any other provision in this Agreement in anyjurisdiction. To the extent legally permissible, an arrangement which reflectsthe original intent of the parties shall be substituted for such invalid orunenforceable provision. 25 27 17.9. The paragraph headings contained in this Agreement are for referencepurposes only and shall not affect in any way the meaning or interpretation ofthis Agreement. 17.10. This Agreement may be executed in one or more counterparts, each ofwhich shall be deemed an original, but all of which together shall constituteone and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement orcaused the same to be executed by a duly authorized officer as of the day andyear first above written. POLO RALPH LAUREN, L.P. By: Polo Ralph Lauren Corporation, General Partner By: /s/ Michael Newman ----------------------------------- JONES APPAREL GROUP, INC. By: /s/ Sidney Kimmel ----------------------------------- 26 28 Schedule A LICENSED PRODUCTSLicensed Products shall mean the following women's "better" apparel productsbearing the Trademark: shirts, blouses, skirts, jackets, suits, sweaters, pants,vests, coats, outerwear, hats. Licensed Products shall also include such otherarticles of women's apparel as Licensor shall, from time to time, designate inits sole discretion.Licensed products shall not include denim pants or shorts, and Licensee's rightshereunder shall not be violated by virtue of the manufacture or sale by Licensoror any of its affiliates or licensees of any jeanswear apparel sold as part of ajeanswear line, notwithstanding the similarity of any such products to LicensedProducts.Except as provided below, this Agreement does not cover any other trademark ofLicensor or in any way limit Licensor's right to engage in business with suchtrademarks as it deems appropriate in its sole discretion. However, Licensoragrees not to sell or license another complete line of women's apparel with a"Ralph Lauren" trademark intended to be sold in the "better" area of women'sdepartments in direct competition with Licensed Products (a "Competing Line").The foregoing restriction is intended to limit Licensor's ability to market anequivalent line of "better" women's apparel under another name, and the partiesagree that any womenswear sold as part of any other line (and not individuallyto be sold with "better" products) bearing any other trademark owned by Licensoror its affiliates, so long as such line is not a Competing Line, shall notviolate the foregoing restriction, notwithstanding the similarity of particularproducts and/or their price points to Licensed Products.Licensee shall not sell or market Licensed Products in "bridge" or "collection"areas. 27 29 Schedule B TRADEMARK LAUREN/RALPH LAUREN and/or LAUREN BY RALPH LAUREN Replacement Schedule B received and filed: JONES APPAREL GROUP, INC. By: /s/ Sidney Kimmel ----------------------------- Dated: 10/19/95 28 30 Schedule C Restricted Individuals and Entities[ * * *] 29 1 EXHIBIT 21.1 POLO RALPH LAUREN CORPORATION SIGNIFICANT SUBSIDIARIESAll the significant subsidiaries are wholly-owned by Polo Ralph LaurenCorporation and/or one or more of its wholly-owned subsidiaries. Jurisdiction Name in which OrganizedFashions Outlet of America, Inc. DelawarePRL USA Holdings, Inc. DelawarePRL International, Inc. DelawareThe Ralph Lauren Womenswear Company, L.P. Delaware 1 POWER-OF-ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Ralph Lauren, Michael Newman and Nancy A. Platoni Poli,and each of them, such person's true and lawful attorneys-in-fact and agents,with full power of substitution and revocation, for such person and in suchperson's name, place and stead, in any and all capacities to sign any and allamendments to the Annual Report on Form 10-K for the fiscal year ended March 28,1998 of Polo Ralph Lauren Corporation, and to file the same with all exhibitsthereto, and the other documents in connection therewith, with the Securitiesand Exchange Commission, granting unto said attorneys-in-fact and agents, andeach of them, full power and authority to do and perform each and every act andthings requisite and necessary to be done, as fully to all intents and purposesas such person might or could do in person, hereby ratifying and confirming allthat said attorneys-in-fact and agents, or any of them, or their or hissubstitute or substitutes, may lawfully do or cause to be done by virtue hereof. SIGNATURE TITLE(S) DATE /s/ Ralph Lauren Chairman of the Board of Directors and June 26, 1998- ------------------------------- Chief Executive Officer (PrincipalRalph Lauren Executive Officer)/s/ Michael J. Newman Vice Chairman of the Board of June 26, 1998- ------------------------------- Directors and Chief OperatingMichael J. Newman Officer/s/ Nancy A. Platoni Poli Senior Vice President and Chief June 26, 1998- ------------------------------- Financial Officer (PrincipalNancy A. Platoni Poli Financial and Accounting Officer)/s/ Frank A. Bennack, Jr. Director June 26, 1998- -------------------------------Frank A. Bennack, Jr./s/ Richard A. Friedman Director June 26, 1998- -------------------------------Richard A. Friedman/s/ Allen Questrom Director June 26, 1998- -------------------------------Allen Questrom/s/ Terry S. Semel Director June 26, 1998- -------------------------------Terry S. Semel/s/ Peter Strom Director June 26, 1998- -------------------------------Peter Strom

5 12-MOS MAR-28-1998 MAR-28-1998 58,755 0 161,567 12,447 298,485 556,464 297,970 122,622 825,130 202,258 0 0 0 1,003 583,323 825,130 1,303,816 1,470,935 755,654 755,654 515,526 0 159 199,596 52,025 147,571 0 0 0 147,571 1.20

1.20EPS is presented on a pro forma basis. See Notes 1.f. and 1.g. to theconsolidated financial statements for the fiscal year ended March 28, 1998 onForm 10-K for basis of presentation.

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Ralph Lauren Annual Report 1998

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Ralph Lauren
Annual Report 1998