Ralph Lauren Annual Report 1999

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 APRIL 3, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13057 POLO RALPH LAUREN CORPORATION (Exact name of registrant as specified in its charter) ------------------------------------------------------------------------- DELAWARE 13-2622036 (State or other jurisdiction of (IRS Employer incorporation or organization) 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ---------------------------------------------- ---------------------- Class 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 $644,680,000 at June 22, 1999.At June 22, 1999, 33,602,889 shares of the registrant's Class A Common Stock,$.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 19, 1999 2 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 to thecollaborative 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 of premiumlifestyle products. For more than 30 years, Polo's reputation and distinctiveimage have been consistently developed across an expanding number of products,brands and international markets. The Company's brand names, which include"Polo," "Polo by Ralph Lauren," "Polo Sport," "Ralph Lauren," "RALPH," "Lauren,""Polo Jeans Co.," "RL" and "Chaps," among others, constitute one of the world'smost widely recognized families of consumer brands. Directed by Ralph Lauren,the internationally renowned designer, the Company believes it has influencedthe manner in which people dress and live in contemporary society, reflecting anAmerican perspective and lifestyle uniquely associated with Polo and RalphLauren. 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 andproducts 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. On May 3, 1999, a wholly owned subsidiary of the Company completed itsacquisition, through a tender offer followed by a statutory compulsoryacquisition, of all of the outstanding shares of Club Monaco Inc., a corporationorganized under the laws of the Province of Ontario, Canada. Founded in 1985,Club Monaco Inc. is an international specialty retailer of casual apparel andother accessories for men, women and children under the brand name "Club Monaco"and a number of associated trademarks. For purposes of the following descriptionof Polo's business, the activities of Club Monaco Inc. are not included. 3 4OPERATIONS Polo's business consists of three integrated operations: wholesale, retailand licensing. Each is driven by the Company's guiding philosophy of style,innovation and quality. Details of the Company's net revenues are shown in the table below. PRO FORMA FISCAL FISCAL YEAR 1997(1) 1999 1998 1997 (UNAUDITED) ---------- ---------- ---------- ---------- (IN THOUSANDS) Wholesale sales $ 845,704 $ 733,065 $ 663,358 $ 623,041 Retail sales ...... 659,352 570,751 379,972 508,645 ---------- ---------- ---------- ---------- Net sales ......... 1,505,056 1,303,816 1,043,330 1,131,686 Licensing revenue . 208,009 167,119 137,113 137,113 Other income 13,794 9,609 7,774 7,774 ---------- ---------- ---------- ---------- Net revenues ...... $1,726,859 $1,480,544 $1,188,217 $1,276,573 ========== ========== ========== ========== (1) 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.WHOLESALE During fiscal 1999, as part of a Company-wide restructuring, Polorealigned its wholesale operations. Polo's wholesale business is now subdividedinto two new groups: Polo Brands and Collection Brands. The Company believesthis realignment will allow it to better service its customers by focusing eachbusiness on its particular channel of distribution and further developing thebrands. In both of its wholesale groups, the Company offers several discretebrand offerings. See "- Domestic Customers and Services."POLO BRANDS The Polo Brands Group sources, markets and distributes products under thePolo by Ralph Lauren and Polo Sport men's brands, the Ralph Lauren Polo Sportwomen's brand and the RLX Polo Sport and Polo Golf brands for men and women.Representatives from each of the Company's design, merchandising, sales andproduction staffs work together to conceive, develop and sell product groupingsorganized to convey a variety of design concepts. 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 4 5premium, ready-to-wear, apparel market. This line is currently sold throughapproximately 1,875 department store, specialty store and Polo store doors inthe United States, including approximately 1,300 department storeshop-within-shops. POLO SPORT. The Polo Sport line of men's activewear and sportswear isdesigned to meet the growing consumer demand for apparel for the activelifestyle. Polo Sport is offered at a range of price points generally consistentwith prices for the Polo by Ralph Lauren line, and is distributed through thesame channels as Polo by Ralph Lauren. RALPH LAUREN POLO SPORT. Similar to its menswear counterpart, the RalphLauren Polo Sport line for women includes activewear, as well as weekendsportswear. The Ralph Lauren Polo Sport line is currently carried byapproximately 365 doors in the United States, including approximately 160shop-within-shops, and sells at a wide range of bridge prices. RLX POLO SPORT. Introduced in Spring 1999, the RLX Polo Sport line ofmenswear and womenswear consists of functional sport and outdoor apparel forrunning, cross-training, skiing, snowboarding, cycling and tennis. RLX PoloSport is presently sold in the United States through approximately 470 athleticspecialty stores, in addition to limited department and Polo stores, at pricepoints competitive with those charged by other authentic sports apparelcompanies. POLO GOLF. The Polo Golf line of men's and women's golf apparel istargeted at the golf and resort markets. Price points are similar to thosecharged for products in the Polo Sport line. The Polo Golf line is presentlysold in the United States through approximately 2000 leading golf clubs, proshops and resorts, in addition to department, specialty and Polo stores.COLLECTION BRANDS The Collection Brands Group sources, markets and distributes productsunder the Women's Ralph Lauren Collection, Ralph Lauren Black Label and Ralph RLLauren brands and the Men's Ralph Lauren/Purple Label Collection Brand. Eachline is directed by teams consisting of design, merchandising, sales andproduction staff who work together to conceive, develop and merchandise productgroupings organized to convey a variety of design concepts. RALPH LAUREN COLLECTION AND RALPH LAUREN BLACK LABEL. 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. Ralph Lauren Black Label includes timeless versions of the Company's mostsuccessful Collection styles, as well as newly-designed classic signature styleswhich tend to remain in a women's wardrobe for several seasons. Collection andBlack Label are offered for limited distribution to premier fashion retailersand through Polo stores. Price points are at the upper end or luxury ranges. Thelines are currently sold through over 80 doors in the United States by theCompany and over 270 international doors by the Company and its licensingpartners. RALPH RL LAUREN. The RALPH/Ralph Lauren brand was established in 1994 topresent a distinct and more casual fashion identity for the bridge market, whileretaining 5 6a strong association with the Ralph Lauren Collection designer image. In Fall1999, this line will be renamed Ralph RL Lauren and the RALPH/Ralph Lauren brandwill be relaunched and used in connection with a newly licensed young women's(ages 16-24) line. The line is sold through approximately 150 doors in theUnited States by the Company and over 360 doors internationally by the Companyand its licensing partners. 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 47 doors in theUnited States and nine internationally.DOMESTIC 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. See " -- Licensing Alliances - Home Collection." 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 APRIL 3, 1999 ------------------------------------------ POLO COLLECTION HOME BRANDS BRANDS COLLECTION ------ ------ ---------- Department Stores . 1,550 350 1,295 Specialty Stores .. 755 70 20 Polo Stores ....... 40 60 35 Golf & Pro Shops .. 2,000 -- -- Department stores represent the largest customer group of each wholesalegroup and of Home Collection. Major department store customers include FederatedDepartment Stores, Inc., Dillard Department Stores, Inc. and The May DepartmentStores Company. During fiscal 1999, Federated Department Stores, Inc., DillardDepartment Stores, Inc. and The May Department Stores Company accounted for18.4%, 17.9% and 15.1%, respectively, of the Company's wholesale net sales. Collection and Polo Brands and Home Collection products are primarily soldthrough their respective sales forces aggregating approximately 157 salespersonsemployed by Polo. The Polo Brands Group maintains its primary showroom at Polo'sNew York City executive headquarters. Regional showrooms for Polo Brands arelocated in Atlanta, Chicago, Dallas and Los Angeles. An independent salesrepresentative promotes sales to U.S. military exchanges. The Collection BrandsGroup and Home Collection division also maintain their primary showrooms in NewYork City. Regional sales representatives for 6 7the Home Collection are located in the Company's showrooms in Atlanta, Chicago,Dallas and Los Angeles. The Company also operates a separate tabletop showroomin 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 270 shop-within-shops and refurbish approximately 150shop-within-shops in fiscal 1999. At April 3, 1999, department store customersin the United States had installed over 2,000 shop-within-shops dedicated to theCompany's products and over 1,800 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 Polo Brands, fromapproximately 800 to 1,200 square feet for Collection Brands, and fromapproximately 800 to 1,200 square feet for home furnishings. The Companyestimates that, in total, approximately 2.0 million square feet of departmentstore space in the United States is dedicated to Polo shop-within-shops. Inaddition to shop-within-shops, the Company utilizes exclusively fixtured areasin department stores. BASIC STOCK REPLENISHMENT PROGRAM. Basic products such as knit shirts,chino pants, oxford cloth shirts and navy blazers can be ordered at any timethrough Polo's basic stock replenishment programs. For customers who reorderbasic products, Polo generally ships these products within one to five days oforder receipt. These products accounted for approximately 16.0% of wholesale netsales in fiscal 1999. The Company has also implemented a seasonal quick responseprogram to allow replenishment of products which can be ordered for only aportion of each year. Certain Home Collection licensing partners also offer abasic stock replenishment program which includes towels, bedding and tabletopproducts. Basic stock products accounted for approximately 75% of net sales ofHome Collection licensing partners in fiscal 1999.DIRECT RETAILING The Company operates retail stores dedicated to the sale of Polo products.Located in prime retail areas, the Company's 33 Polo stores operate under thePolo Ralph Lauren, Polo Sport and Polo Jeans Co. names. The Company's 99 outletstores are generally located in outlet malls and operate under the Polo RalphLauren Factory Store, Polo Jeans Co. Factory Store and Lauren Ralph Lauren Factory Store names. In addition to its own retail operations, the Company has granted licensesto independent parties to operate nine stores in the United States and 83 storesinternationally. The Company receives the proceeds from the sale of its PoloBrands and Collection Brands products, which are included in wholesale netsales, to these stores and also receives royalties, which are included inlicensing 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." 7 8POLO 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 fiveflagship stores, consisting of its two flagship stores located on Madison Avenuein New York City, one flagship store located on Rodeo Drive in Beverly Hills,one flagship store located on Michigan Avenue in Chicago and one flagship storelocated on New Bond Street in London which opened on May 5, 1999, showcase Poloproducts and demonstrate Polo's most refined merchandising techniques. Inaddition to its flagship stores, Polo operates 29 other Polo stores. Ranging insize from approximately 2,000 to over 15,000 square feet, the non-flagshipstores are situated in upscale regional malls and major high street locationsgenerally in the largest urban markets in the United States. In aggregate, onApril 3, 1999 the Company operated 26 Polo Ralph Lauren stores, two Polo Sportstores, four Polo Jeans Co. stores and one Polo Country store (offeringprimarily leisure and weekend apparel). Stores are generally leased for initialperiods ranging from five to fifteen years with renewal options. In fiscal 1999, Polo Ralph Lauren stores were opened in Chicago, Illinoisand Palm Beach, Florida, and Polo Jeans Co. stores were opened in Orlando,Florida and Houston, Texas. In addition, in fiscal 1999, Polo converted its PoloRalph Lauren store in Santa Clara, California to a Polo Jeans Co. store. NewPolo Jeans Co. stores are planned for Burlingame, California, Miami, Florida,McLean, Virginia, Bellevue, Washington and Beverly Hills, California. A new PoloSport store is planned to open in fiscal 2000 in the Soho district of New YorkCity. In addition, during fiscal 2000, Polo plans to convert two Polo RalphLauren stores to new concepts that are expected to be more productive. 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, where the Polo Sport store planned to open infiscal 2000 will be located.OUTLET STORES Polo extends its reach to additional consumer groups through its 75 PoloRalph Lauren Factory Stores and its 24 factory outlet concept stores,consisting, as of April 3, 1999, of 14 Polo Jeans Co. Factory Stores and 10Lauren Ralph Lauren Factory Stores. Polo Ralph Lauren Factory Stores offerselections of the Company's menswear, womenswear, children's apparel,accessories, home furnishings and fragrances. Ranging in size from 5,000 to13,000 square feet, with an average of approximately 8,000 square feet, thestores are generally located in major outlet centers in 34 states and PuertoRico. Polo Jeans Co. Factory Stores carry all classifications within the PoloJeans Co. line, including denim, knit and woven tops, sweaters, outerwear,casual bottoms and accessories. Polo Jeans Co. Factory Stores range in size from3,000 to 4,500 square feet, with an average of 3,300 square feet, and aregenerally located in major outlet centers in 11 states. Lauren Ralph LaurenFactory Stores offer both basic key items and fashion 8 9items from the Lauren line with coordinated accessories. Ranging in size from3,200 to 4,100 square feet, with an average of 3,500 square feet, the LaurenRalph Lauren Factory Stores are generally located in major outlet centers in 10states. 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 1999, theoutlet stores purchased approximately 24%, 44% and 32% of products from theCompany, licensing partners and other suppliers, respectively. The Company plans to add approximately 50 new outlet stores (net ofanticipated store closings) over the next three years including approximately 30factory outlet concept stores (net of anticipated store closings).LICENSING ALLIANCES Through licensing alliances, Polo combines its consumer insight anddesign, 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 largest licensing partners bylicensing revenue, Jones Apparel Group, Inc., Seibu Department Stores, Ltd.,WestPoint Stevens, Inc. and Warnaco, Inc. 9 10accounted for 20%, 12.6%, 11.7% and 11.1%, respectively, of licensing revenue infiscal 1999.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 April 3, 1999 are listed below.LICENSING PARTNER LICENSED PRODUCT CATEGORY----------------- ------------------------- Warnaco, Inc. Men's Chaps SportswearSun Apparel, Inc., a subsidiary of Jones Men's & Women's Polo Jeans Co. CasualApparel Group, Inc. 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 and Lauren Tailored ClothingOxford Industries, Inc. Boys ApparelS. Schwab Company, Inc. Infants, Toddlers & Girls ApparelSara Lee Corporation Men's & Women's Personal Wear ApparelRalph Lauren Footwear, Inc., a Men's & Women's Dress,subsidiary Casual and Performance Athletic Footwearof Reebok International Ltd.Wathne, 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. EyewearPennaco, Inc. Sheer HosieryHOME 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 10 11lifestyle concept. Products are sold under the Ralph Lauren Home Collectionbrands in three primary categories: bedding and bath, interior decor, tabletopand giftware. 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, product development and sales staffscollaborate to conceive, develop and merchandise the various products as acomplete home furnishing collection. Polo's personnel market and sell theproducts to domestic customers and certain international accounts. Polo'slicensing partners, many of which are leaders in their particular productcategory, manufacture, own the inventory and ship the products. As compared toits other licensing alliances, Polo performs a broader range of services for itsHome Collection licensing partners, which, in addition to sales and marketing,include operating showrooms and incurring advertising expenses. Consequently,Polo receives a higher royalty rate from its Home Collection licensing partners,which rates typically range from 15% to 20%. Home Collection licensing alliancesgenerally have three to five-year terms and often grant the licensee conditionalrenewal 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. CATEGORY PRODUCT LICENSING PARTNER -------- ------- ----------------- Bedding and Bath Towels, sheets, pillowcases and WestPoint Stevens, matching Inc. bedding accessories Blankets, bed pillows, comforters Pillowtex Corporation and other decorative bedding accessories excluding those matched to sheets, and bath rugs Interior Decor Upholstered furniture and case Henredon Furniture goods Industries, Inc. The Sherwin-Williams Interior paints, special Company finishes, and paint applications Fabric and wallpaper P. Kaufmann, Inc. 11 12 Table and Giftware Sterling, silverplate and Reed and Barton stainless steel flatware Corporation and picture frames Crystal and glass tableware and RJS Scientific, Inc. giftware, ceramic dinnerware and giftware and home fragrances (potpourri, scented candles, etc.) Placemats, tablecloths, napkins Designers Collection, Inc. The Company's three most significant Home Collection licensing partnersbased on aggregate licensing revenue paid to the Company are WestPoint Stevens,Inc., Pillowtex Corporation and Henredon Furniture Industries, Inc. WestPointStevens, Inc. accounted for approximately 48% of Home Collection licensingrevenue in fiscal 1999.INTERNATIONAL 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 83 stores, including 70Polo Ralph Lauren stores, five Polo Sport stores and 8 Polo Jeans Co. stores. In fiscal 1999, the Company added five new Polo Ralph Lauren stores ininternational markets, including one in each of Australia, Hong Kong and Mexicoand two in Japan. In addition, in fiscal 1999, one new Polo Jeans Co. store wasadded in each of St. Martin and Hong Kong. In May 1999, the Company added onePolo Ralph Lauren store in Argentina. Additional stores are planned to open infiscal 2000 including two Polo Ralph Lauren stores in Australia and one PoloJeans Co. store in Mexico. 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 product or 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 licensing revenuein fiscal 1999 were Seibu Department Stores, Ltd., which oversees distributionof virtually all of the Company's products in Japan, Poloco, S.A., whichdistributes men's and boys' Polo apparel, men's and women's Polo Jeans Co.apparel and certain accessories in Europe and L'Oreal S.A., which distributesfragrances and toiletries outside of the United States. The Company's ability tomaintain and increase licensing revenue under foreign licenses is dependent uponcertain factors not within the Company's control, including fluctuating currency 12 13rates, 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. Formore than 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 Council of Fashion Designers of America (the"CFDA"). In addition, Mr. Lauren was honored with the CFDA Lifetime AchievementAward in 1991 and the CFDA Award for Humanitarian Leadership in 1998, and is theonly 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, which is divided into threedepartments: 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, New Jersey and Singapore.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. 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, Forbes, GQ, Harper's Bazaar, The New York Times Magazine, Town andCountry, Vanity Fair and Vogue. Major print advertising campaigns are conductedduring the Fall and Spring retail seasons with additions throughout the year tocoincide with product deliveries. In addition to print, certain productcategories utilize television and outdoor media in their marketing programs. 13 14 The Company's licensing partners contribute a percentage (usually betweenthree and four percent) of their sales of Polo products for advertising. TheCompany directly coordinates advertising placement for domestic productlicensing partners. During fiscal 1999, Polo and its licensing partnerscollectively spent more than $178.2 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 presentationsorganized for the fashion press. In addition, Polo sponsors professionalgolfers, organizes in-store appearances by its models and sponsors downhillskiers, snowboarders, triathletes and sports 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 1999, approximately 39% (by dollar volume) of men'sand women's products were produced in the United States and its territories andapproximately 61% (by dollar volume) of such products were produced in HongKong, Thailand and other foreign countries. Three manufacturers engaged by theCompany accounted for approximately 15%, 7% and 7%, respectively, of theCompany's total production during fiscal 1999. The primary production facilitiesof these three manufacturers are located in: Hong Kong and Saipan, in the caseof the manufacturer that accounted for approximately 15% of the Company's totalproduction during fiscal 1999; in Hong Kong, in the case of the manufacturerthat accounted for approximately 7% of the Company's total production duringfiscal 1999; and in Malaysia, Hong Kong and Mauritius, in the case of the othermanufacturer that accounted for approximately 7% of the Company's totalproduction during fiscal 1999. No other manufacturer accounted for more thanfive percent of the Company's total production in fiscal 1999. 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. 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. 14 15 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 1999, womenswear distribution was provided by a "pick andpack" facility under a warehousing distribution agreement with an unaffiliatedthird party. This agreement provides that the warehouse distributor will performstorage, quality control and shipping services for the Company. In return, theCompany must pay the warehouse distributor a per unit rate and specialprocessing charges for services such as ticketing, bagging and steaming. Theinitial term of this agreement is through December 1, 2000 and is thereafterrenewable annually. Outlet store distribution and warehousing is principallyhandled through the Greensboro distribution center as well as 15 16satellite facilities also located in North Carolina. Polo store distribution isprovided by a facility in Columbus, Ohio and a facility in New Jersey whichservices the Company's stores in New York City and East Hampton, New York.During fiscal 2000 the Company plans to complete a significant expansion of itsGreensboro facility to handle increased volume and reduce reliance uponsatellite facilities. The Company's licensing partners are responsible for thedistribution of licensed products, including Home Collection products. TheCompany continually evaluates the adequacy of its warehousing and distributionfacilities.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 1999.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. AtApril 3, 1999, Summer and Fall backlog was $379.4 million and $21.1 million, ascompared to $351.1 million and $20.5 million at March 28, 1998 for Polo Brandsand Collection Brands, respectively. The Company's backlog depends upon a numberof factors, including the timing of the market weeks for its particular lines,during which a significant percentage of the Company's orders are received, andthe timing of shipments. As a consequence, a comparison of backlog from 16 17period 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" alone, "Lauren/Ralph Lauren," "RRL," etc.). Remittancesto this third 17 18party are not reflected in licensing revenue in the Company's financialstatements and will cease no later than 2008, or sooner, when the remittanceswith respect to Europe and Mexico to this third party aggregate $15.0 million.As of April 3, 1999, the Company has paid approximately $12.0 million to thisthird party. The Company's obligation to share royalties with respect to Centraland South America and parts of the Caribbean expires in 2013, but the Companyalso has the right to terminate this obligation at any time by paying $3.0million. The second agreement was reached with a third party which ownedconflicting registrations of the trademarks "Polo" and a polo player astride ahorse in the U.K., Hong Kong, and South Africa. Pursuant to the agreement, thethird party retains the right to use its "Polo" and polo player symbol marks inSouth Africa and certain other African countries, and the Company agreed torestrict use of those Polo marks in those countries to fragrances and cosmetics(as to which the Company's use is unlimited) and to the use of the Ralph (poloplayer symbol) Lauren mark on women's and girls' apparel and accessories. Byagreeing to those restrictions, the Company secured the unlimited right to useits trademarks (without payment of any kind) in the United Kingdom and HongKong, and the third party is prohibited from distributing products under thosetrademarks in those countries.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. 18 19CERTAIN RISKS The Company believes that its success depends in substantial part on itsability to originate and define product and fashion trends as well as toanticipate, gauge and react to changing consumer demands in a timely manner.There can be no assurance that the Company will continue to be successful inthis regard. If the Company misjudges the market for its products, it may befaced with significant excess inventories for some products and missedopportunities with others. In addition, weak sales and resulting markdownrequests from customers could have a material adverse effect on the Company'sbusiness, results of operations and financial condition. The industries in which the Company operates are cyclical. Purchases ofapparel and related merchandise and home products tend to decline duringrecessionary periods and also may decline at other times. While the Company hasfared well in recent years in a difficult retail environment, there can be noassurance that the Company will be able to maintain its historical rate ofgrowth in revenues and earnings, or remain profitable in the future. Further,uncertainties regarding future economic prospects could affect consumer spendinghabits and have an adverse effect on the Company's results of operations. The Company is dependent on Mr. Ralph Lauren and other key personnel. Mr.Lauren's leadership in the design, marketing and operational areas has been acritical element of the Company's success. The loss of the services of Mr.Lauren and any negative market or industry perception arising from such losscould have a material adverse effect on the Company. The Company's otherexecutive officers have substantial experience and expertise in the Company'sbusiness and have made significant contributions to its growth and success. Theunexpected loss of services of one or more of these individuals could adverselyaffect the Company. The Company is not protected by a material amount of key-manor similar life insurance for Mr. Lauren or any of its other executive officers. In addition to the factors described above, the Company's business,including its revenues and profitability, is influenced by and subject to anumber of factors including, among others: risks associated with the Company'sdependence on sales to a limited number of large department store customers,including risks related to extending credit to customers; risks associated withthe Company's dependence on its licensing partners for a substantial portion ofits net income and risks associated with the Company's lack of operational andfinancial control over its licensed businesses; risks associated withconsolidations, restructurings and other ownership changes in the retailindustry; risks associated with competition in the segments of the fashion andconsumer product industries in which the Company operates, including theCompany's ability to shape, stimulate and respond to changing consumer tastesand demands by producing attractive products, brands and marketing, and itsability to remain competitive in the areas of quality and price; risksassociated with uncertainty relating to the Company's ability to implement itsgrowth strategies; risks associated with the ability of the Company's thirdparty customers and suppliers and government agencies to timely and adequatelyremedy any Year 2000 issues (for a discussion of the Company's efforts to assureYear 2000 compliance, and the risks associated with such efforts, see "Item 7.Management's Discussion and Analysis of Financial Condition and Results ofOperations - Impact of the Year 2000 Issue."; risks associated with the possibleadverse impact of the Company's unaffiliated manufacturers' inability tomanufacture in a timely manner, to meet quality 19 20standards or to use acceptable labor practices; risks associated with changes insocial, political, economic and other conditions affecting foreign operationsand sourcing and the possible adverse impact of changes in import restrictions;risks related to the Company's ability to establish and protect its trademarksand other proprietary rights; risks related to fluctuations in foreign currencyas the Company's international licensing revenue generally is derived from salesin foreign currencies including the Japanese yen and the French franc, and, inaddition, changes in currency exchange rates may also affect the relative pricesat which the Company and foreign competitors sell their products in the samemarket; and, risks associated with the Company's control by Lauren familymembers and the anti-takeover effect of multiple classes of stock. The Company from time to time reviews its possible entry into new markets,either through internal development activities or through acquisitions. Theentry into new markets (including the development and launch of new productcategories), such as the Company's entry into the technical sportswear market,and the acquisition of businesses, such as the Company's acquisition of ClubMonaco Inc., is accompanied by risks inherent in any new business venture andmay require methods of operations and market strategies different from thoseemployed in the Company's other businesses. Certain new businesses may be lowermargin businesses and may require the Company to achieve significant costefficiencies. In addition, new markets may involve buyers, store customersand/or competitors different from the Company's historical buyers, customers andcompetitors. Furthermore, the Company's acquisition of other businesses entailsthe normal risks inherent in such transactions, including without limitation,possible difficulties, delays and/or unanticipated costs in integrating thebusiness, operations, personnel, and/or systems of the acquired entity; risksthat projected or satisfactory level of sales, profits and/or return oninvestment will not be generated; risks that expenditures required for capitalitems or working capital will be higher than anticipated; risks involving theCompany's ability to retain and appropriately motivate key personnel of theacquired business; and risks associated with unanticipated events and unknown oruncertain liabilities.EMPLOYEES As of April 3, 1999, the Company had approximately 6,800 employees,including 6,500 in the United States and 300 in foreign countries. Approximately30 of the Company's United States production and distribution employees in thewomenswear business are members of the Union of Needletrades, Industrial &Textile Employees under an industry association collective bargaining agreementwhich the Company's womenswear subsidiary has adopted. This contract wasrenegotiated in fiscal 1998 and extended to May 31, 2000. The Company considersits relations with both its union and non-union employees to be good.ITEM 2. PROPERTIES The Company does not own any real property except for its distributionfacility in Greensboro, North Carolina, the parcel of land adjacent to itsGreensboro, North Carolina distribution facility (upon which the expansion ofthe distribution facility is being constructed) and a 50% joint venture interestin a 44,000 square foot building located in the Soho district of New York City.Certain information concerning the Company's 20 21principal 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 -------- --- ------- --------------- 650 Madison Avenue, NYC Executive, 206,000 December 31, 2009 corporate and design offices, men's showrooms 162,000 Lyndhurst, N.J. Corporate and February 28, 2008 retail administrative offices 115,000 Winston-Salem, N.C. Distribution June 30, 2000 202-A No. Chimney Interim warehouse 100,000 April 14, 2000 Rock Road, Greensboro, N.C. and office space 750 North Michigan Avenue, Direct retail and 36,000 November 14, 2017 Chicago, IL restaurant 27,000 867 Madison Avenue, NYC Direct retail December 31, 2004 1-5 New Bond Street, London Direct retail and 29,000 July 4, 2021 corporate and retail administrative offices 1980 Northern Boulevard, Direct retail 26,000 September 30, 2011 Manhasset, N.Y. During fiscal 1999, the Company entered into a lease agreement for aninterim distribution facility in Greensboro, North Carolina. The leases for the Company's non-retail facilities (approximately 28 inall) provide for aggregate annual rentals of $17.8 million in fiscal 1999. 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 April 3, 1999, the Company operated 33 Polo stores and 99 outletstores in leased premises. Aggregate annual rent paid for retail space by theCompany in fiscal 1999 totaled $35.7 million. Except for approximately twostores for which the Company will not seek renewal upon lease expiration, theCompany anticipates that it will be able to extend those leases which expire inthe near future on satisfactory terms or to relocate to more desirablelocations. 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 fiscal year. 21 22ITEM 3. LEGAL PROCEEDINGS. 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 answered the complaint and filed a motion forjudgment on the pleadings. At a hearing on that motion on March 5, 1999, theCourt ruled that the plaintiff must file an amended complaint within 30 days inorder to avoid dismissal. The plaintiff has filed an amended complaint,essentially containing the same allegations as the initial complaint, which theCompany has answered. The Company intends to continue to vigorously defend thislawsuit and believes that it has substantial and meritorious defenses. In January 1999, two actions were filed in California naming as defendantsmore than a dozen United States-based companies that source apparel garmentsfrom Saipan (Commonwealth of the Northern Mariana Islands) and a large number ofSaipan-based factories. The actions assert that the Saipan factories engage inunlawful practices relating to the recruitment and employment of foreign workersand that the apparel companies, by virtue of their alleged relationships withthe factories, have violated various Federal and state laws. One action, filedin California Superior Court in San Francisco by a union and three publicinterest groups, alleges unfair competition and false advertising and seeksequitable relief, unspecified amounts for restitution and disgorgement ofprofits, interest and an award of attorney's fees. The second, filed in Federalcourt for the Central District of California, is brought on behalf of apurported class consisting of the Saipan factory workers. It alleges claimsunder the Federal civil RICO statute, Federal peonage and involuntary servitudelaws, the Alien Tort Claims Act, and state tort law, and seeks equitable reliefand unspecified damages, including treble and punitive damages, interest and anaward of attorneys' fees. A third action, brought in Federal Court in Saipansolely against the garment factory defendants on behalf of a putative class oftheir workers, alleges violations of Federal and local wage and employment laws.The Company has not been named as a defendant in any of these suits, but theCompany sources products in Saipan and counsel for the plaintiffs in theseactions has informed the Company that it is a potential defendant in these orsimilar actions. The Company has denied any liability and is not at thispreliminary stage in a position to evaluate the likelihood of a favorable orunfavorable outcome if it were named in any such suit. 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. 22 23ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the quarterended April 3, 1999. 23 24 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 YorkStock Exchange under the symbol "RL." The following table sets forth the highand low closing sales prices for each quarterly period from June 11, 1997 (i.e.,the day the Class A Common Stock was priced in the initial public offering)through April 1, 1999 as reported on the New York Stock Exchange Composite Tape.The Company did not declare any cash dividends during fiscal 1998 and fiscal1999 on its Common Stock other than dividends declared in fiscal 1998 in theamount of $27.4 million and paid to holders of Class B Common Stock and Class CCommon Stock in connection with the Company's reorganization just prior to itsinitial public offering on June 11, 1997. Market Price of Class A Common Stock ----------------------------- HIGH LOW Fiscal 1999: First Quarter.................. $31 $26.9375 Second Quarter ................. 29.6875 20.1250 Third Quarter..................... 24 16 Fourth Quarter................... 24.8750 18.1250 Fiscal 1998: 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 22, 1999, there were approximately 1,215 record holders of As of June 22, 1999, there were approximately 1,215 record holders ofClass A Common Stock, four record holders of Class B Common Stock and fiverecord holders of Class C Common Stock. 24 25ITEM 6. SELECTED FINANCIAL DATA. The selected historical financial data presented below as of and for eachof the fiscal years in the five-year period ended April 3, 1999 have beenderived from the Company's audited Consolidated Financial Statements. Thefollowing table also includes unaudited pro forma statements of income forfiscal 1998 and fiscal 1997 which give effect to the Reorganization, the initialpublic offering and the PRC Acquisition as if they had occurred on March 31,1996. The financial data should be read in conjunction with "Item 7.Management's Discussion and Analysis of Financial Condition and Results ofOperations," the Consolidated Financial Statements and Notes thereto and otherfinancial data included elsewhere herein. FISCAL YEAR ENDED APRIL 3, MARCH 28, MARCH 29, MARCH 30, APRIL 1, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE DATA) STATEMENTS OF INCOME:Net sales ................... $ 1,505,056 $ 1,303,816 $ 1,043,330 $ 909,720 $ 746,595Licensing revenue ........... 208,009 167,119 137,113 110,153 100,040Other income ................ 13,794 9,609 7,774 6,210 5,446 ------------ ------------ ------------ ------------ ------------Net revenues ................ 1,726,859 1,480,544 1,188,217 1,026,083 852,081Cost of goods sold .......... 904,586 759,988 652,000 586,273 477,357 ------------ ------------ ------------ ------------ ------------Gross profit ................ 822,273 720,556 536,217 439,810 374,724Selling, general and ........ 608,128 520,801 378,854 312,690 264,594administrative expensesRestructuring charge ........ 58,560 -- -- -- -- ------------ ------------ ------------ ------------ ------------Income from operations ...... 155,585 199,755 157,363 127,120 110,130Interest expense ............ 2,759 159 13,660 16,287 16,450Equity in net loss of joint .venture ..................... -- -- 3,599 1,101 262 ------------ ------------ ------------ ------------ ------------Income before income taxes .. 152,826 199,596 140,104 109,732 93,418Provision for income taxes .. 62,276 52,025 22,804 10,925 13,244 ------------ ------------ ------------ ------------ ------------Net income .................. $ 90,550 $ 147,571 $ 117,300 $ 98,807 $ 80,174 ============ ============ ============ ============ ============Net income per share-Basicand Diluted.................. $ 0.91 ============Common shares outstanding - Basic...................... 99,813,328 ============Common shares outstanding- Diluted.................... 99,972,152 ============PRO FORMA STATEMENTS OFINCOME (UNAUDITED) (1):Net sales ................... $ 1,303,816 $ 1,131,686Licensing revenue ........... 167,119 137,113Other Income ................ 9,609 7,774 ------------ ------------Net revenues ................ 1,480,544 1,276,573Cost of goods sold .......... 759,988 690,406 ------------ ------------Gross profit ................ 720,556 586,167Selling, general andadministrative expenses ..... 520,801 433,534 ------------ ------------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 ============ ============Net income per share - Basicand Diluted ................. $ 1.20 $ 0.89 ============ ============Common shares outstanding- Basic and Diluted.......... 100,222,444 100,222,444 ============ ============ 25 26 APRIL 3, MARCH 28, MARCH 29, MARCH 30, APRIL 1, 1999 1998 1997 1996 1995 (IN THOUSANDS) BALANCE SHEET DATA:Working capital ........ $ 331,482 $ 354,206 $ 209,038 $ 262,844 $ 221,050Inventories ............ 376,860 298,485 222,147 269,113 271,220Total assets ........... 1,104,584 825,130 588,758 563,673 487,547Total debt ............. 159,717 337 140,900 199,645 186,361Stockholders' equity andpartners' capital ...... 658,905 584,326 260,685 237,653 188,579(1) The pro forma statements of income present the effects on the historical financial statements of certain transactions as if they had occurred at the beginning of the period. These statements reflect 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 approximately 40.8% and 42.0% for the year ended March 28, 1998 and March 29, 1997, respectively; (ii) the reduction of interest expense resulting from the application 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 the net loss of PRC for the year ended March 29, 1997. 26 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction withthe Company's consolidated financial statements and related notes thereto whichare included herein. The Company utilizes a 52-53 week fiscal year ending on theSaturday nearest March 31. Accordingly, fiscal years 1999, 1998, 1997, 1996 and1995 ended on April 3, 1999, March 28, 1998, March 29, 1997, March 30, 1996 andApril 1, 1995, respectively. Fiscal 1999 reflects a 53 week period. 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 authorized personnelconstitute "forward-looking statements" within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (the "Reform Act"). Suchforward-looking statements are based on current expectations and are indicatedby words or phrases such as "anticipate," "estimate," "project," "expect," "webelieve," "is or remains optimistic," "currently envisions" and similar words orphrases and involve known and unknown risks, uncertainties and other factors,which may cause the actual results, performance or achievements of the Companyto be materially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Such factors include,among others, the following: risks associated with changes in the competitivemarketplace, including the introduction of new products or pricing changes bythe Company's competitors; changes in global economic conditions; risksassociated with the Company's dependence on sales to a limited number of largedepartment store customers, including risks related to extending credit tocustomers; risks associated with the Company's dependence on its licensingpartners for a substantial portion of its net income and risks associated withthe Company's lack of operational and financial control over its licensedbusinesses; risks associated with consolidations, restructurings and otherownership changes in the retail industry; risks associated with competition inthe segments of the fashion and consumer product industries in which the Companyoperates, including the Company's ability to shape, stimulate and respond tochanging consumer tastes and demands by producing attractive products, brandsand marketing, and its ability to remain competitive in the areas of quality andprice; risks associated with uncertainty relating to the Company's ability toimplement its growth strategies; risks associated with the ability of theCompany's third party customers and suppliers and government agencies to timelyand adequately remedy any Year 2000 issues; risks associated with the possibleadverse impact of the Company's unaffiliated manufacturers' inability tomanufacture in a timely manner, to meet quality standards or to use acceptablelabor practices; risks associated with changes in social, political, economicand other conditions affecting foreign operations and sourcing and the possibleadverse impact of changes in import restrictions; risks related to the Company'sability to establish and protect its trademarks and other proprietary rights;risks related to fluctuations in foreign currency as the Company's internationallicensing revenue generally is derived from sales in foreign currenciesincluding the Japanese yen and the French franc, and, in addition, changes incurrency exchange rates may also affect the relative prices at which the Companyand foreign competitors sell their products in the same market; and, risksassociated with the Company's control by Lauren family members and theanti-takeover effect of multiple classes of stock. The Company undertakes noobligation 27 28to publicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.OVERVIEW 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 more than doubledto $1.7 billion in fiscal 1999 from $852.1 million in fiscal 1995, while incomefrom operations has grown to $214.1 million in fiscal 1999, excluding therestructuring charge, from $110.1 million in fiscal 1995. The Company's netrevenues are generated from its three integrated operations: wholesale, directretail and licensing. The following table sets forth net revenues for the lastfive fiscal years: FISCAL YEAR PRO FORMA FISCAL 1997 (3) 1999 1998 1997 1996 1995 (UNAUDITED) ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Wholesale sales(1)(2) ......................... $ 845,704 $ 733,065 $ 663,358 $ 606,022 $ 496,876 $ 623,041Retail sales (2)................ 659,352 570,751 379,972 303,698 249,719 508,645 ---------- ---------- ---------- ---------- ---------- ----------Net sales....................... 1,505,056 1,303,816 1,043,330 909,720 746,595 1,131,686Licensing revenue (1)........... 208,009 167,119 137,113 110,153 100,040 137,113Other income.................... 13,794 9,609 7,774 6,210 5,446 7,774 ---------- ---------- ---------- ---------- ---------- ----------Net revenues ................... $1,726,859 $1,480,544 $1,188,217 $1,026,083 $ 852,081 $1,276,573 ========== ========== ========== ========== ========== ========== (1) The Company purchased certain of the assets of its former womenswear licensing partner in October 1995. The fiscal 1999, fiscal 1998, fiscal 1997 and fiscal 1996 net revenues reflect the inclusion of womenswear wholesale net sales of $127.1 million, $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) 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.(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 andwomen's apparel 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 $845.7million in fiscal 1999 from $496.9 28 29million in fiscal 1995. This increase is primarily a result of growth in salesof the Company's menswear and womenswear products driven by the introduction ofnew brands and growth in sales of products under existing brands. Polo's retail sales are generated from the Polo stores and outlet storesoperated by the Company. Since the beginning of fiscal 1995, the Company hasadded 30 Polo stores (net of store closings, including 21 Polo stores acquiredin connection with the PRC Acquisition), and 52 outlet stores (net of storeclosings). At April 3, 1999, the Company operated 33 Polo stores and 99 outletstores. Retail sales have grown to $659.4 million in fiscal 1999 from $249.7million in fiscal 1995. On May 3, 1999, a wholly owned subsidiary of the Company acquired, througha tender offer and subsequent statutory compulsory acquisition, all of theoutstanding shares of Club Monaco Inc. ("Club Monaco"), a corporation organizedunder the laws of the Province of Ontario, Canada. Founded in 1985, Club Monacois an international specialty retailer of casual apparel and other accessorieswhich are sold under the "Club Monaco" brand name and associated trademarks. Asof April 3, 1999, Club Monaco operated 57 freestanding stores in Canada and 13in the United States. In addition, Club Monaco franchises three freestandingstores in Canada, four freestanding stores and 20 shop-within-shops in Japan and25 shop-within-shops in Korea and other parts of Asia. Club Monaco has alsogranted licenses for the manufacture and distribution of silver jewelry andeyewear in Canada and the United States. The Company used its new 1999 CreditFacility (as defined) to finance this acquisition. See "-- Liquidity and CapitalResources." Licensing revenue consists of royalties paid to the Company under itslicensing alliances. In fiscal 1999, Product, International and Home Collectionlicensing alliances accounted for 50.4%, 25.0% and 24.6% 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 $208.0 million in fiscal 1999 from $100.0 million in fiscal 1995. During the fourth quarter of fiscal 1999, the Company formalized its plansto streamline operations within its wholesale and retail operations and reduceits overall cost structure (the "Restructuring Plan"). The major initiatives ofthe Restructuring Plan include the following: (1) an evaluation of the Company'sretail operations and site locations; (2) the realignment and operationalintegration of the Company's wholesale operating units; and (3) the realignmentand consolidation of corporate strategic business functions and internalprocesses. In an effort to improve the overall profitability of its retailoperations, in fiscal 2000 the Company plans to close three Polo stores andthree outlet stores that were not performing at an acceptable level.Additionally, the Company will convert two Polo stores and five outlet stores tonew concepts that are expected to be more productive. Costs associated with thisaspect of the Restructuring Plan include lease and contract termination costs,store fixed asset (primarily leasehold improvements) and intangible asset writedowns and severance and termination benefits. The Company's wholesale operations were realigned into two new operatingunits: Polo Brands and Collection Brands. Aspects of this realignment included:(i) the reorganization of the sales force and retail development areas; (ii) thestreamlining of the design and development process; and (iii) the consolidationof the customer service departments. Additionally, the Company is in the processof integrating the production and sourcing of its Polo Brands, outlet store andlicensees' products into one consolidated unit. Costs associated with thewholesale realignment consist primarily of severance and termination benefitsand lease termination costs. The Company's review of its corporate business functions and internalprocesses resulted in a new management structure designed to better alignbusinesses with similar 29 30functions and the identification and elimination of duplicative processes. Costsassociated with the corporate realignment consist primarily of severance andtermination benefits and lease termination costs. In connection with the implementation of the Restructuring Plan, theCompany recorded a restructuring charge of $58.6 million on a pre-tax basis inits fourth quarter of fiscal 1999. The major components of the restructuringcharge included lease and contract termination costs of $24.7 million, assetwrite downs of $17.8 million, severance and termination benefits of $15.3million and other restructuring costs of $0.8 million. Total severance andtermination benefits as a result of the Restructuring Plan relate toapproximately 280 employees, 140 of which were terminated through May 1999. TheCompany expects to substantially complete the implementation of theRestructuring Plan during fiscal 2000. In connection with the Company's growth strategy, the Company plans tointroduce new products and brands and expand its retail operations.Implementation of these strategies may require significant investments foradvertising, furniture and fixtures, infrastructure, design and additionalinventory. Notwithstanding the Company's investment, there can be no assurancethat its growth strategies will be successful. 30 31PRO 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 fiscal 1998transactions, including the PRC Acquisition, the initial public offering and thereorganization as if they had occurred on March 31, 1996; and (iii) pro formacombined statement of income: PRO FORMA COMBINED STATEMENT OF INCOME FISCAL 1997 (IN THOUSANDS) (UNAUDITED) ACTUAL PRO FORMA PRO FORMA COMBINED ADJUSTMENTS COMBINED -------- ----------- -------- Net sales $1,043,330 $ 88,356 (1) $1,131,686 Licensing revenue 137,113 137,113 Other income 7,774 7,774 ---------- ---------- Net revenues 1,188,217 1,276,573 Cost of goods sold 652,000 38,406 (1) 690,406 ---------- ---------- Gross profit 536,217 586,167 Selling, general and administrative expenses 378,854 53,812 (1) 433,534 868 (1) --------- -------- Income from operations 157,363 152,633 Interest 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 140,104 154,262 Provision 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.RESULTS OF OPERATIONS The following discussion provides information and analysis of theCompany's results of operations for fiscal 1999 as compared to fiscal 1998 andfiscal 1998 as compared to fiscal 1997. The discussion of the Company's resultsof operations for fiscal 1997 is presented on a pro forma basis, assuming thePRC Acquisition had occurred as of March 31, 1996. As a result of the Company'sinitial public offering completed on June 17, 1997, and the use of a portion ofthe net proceeds therefrom to reduce outstanding indebtedness, historicalinterest expense is not discussed below because such information is notmeaningful. The effect of income taxes is also not discussed below because thehistoric taxation of the operations of the Company is not meaningful withrespect to periods following the reorganization. The table below sets forth the percentage relationship to net revenues ofcertain items in the Company's statements of income, which have beenreclassified for comparative 31 32purposes, for fiscal 1999, fiscal 1998 and fiscal 1997 presented on a historicaland pro forma basis, as indicated: PRO HISTORICAL FORMA -------------------------------- ------ 1999 1998 1997 1997 ------ ------ ------ ------ Net sales .................................. 87.2% 88.1% 87.8% 88.7% Licensing revenue .......................... 12.0 11.3 11.5 10.7 Other income ............................... 0.8 0.6 0.7 0.6 ------ ------ ------ ------ Net revenues ............................... 100.0 100.0 100.0 100.0 ------ ------ ------ ------ Gross profit ............................... 47.6 48.7 45.1 45.9 Selling, general and administrative expenses 35.2 35.2 31.9 33.9 Restructuring charge ....................... 3.4 -- -- -- ------ ------ ------ ------ Income from operations ..................... 9.0% 13.5% 13.2% 12.0% ====== ====== ====== ======FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES. Net sales increased 15.4% to $1.5 billion in fiscal 1999 from$1.3 billion in fiscal 1998. Wholesale net sales increased 15.4% to $845.7million in fiscal 1999 from $733.1 million in fiscal 1998. Wholesale growthprimarily reflects volume-driven sales increases in existing menswear andwomenswear brands and increased menswear and womenswear sales resulting from thetiming of shipments to retailers. These unit increases were offset by decreasesin average selling prices resulting from changes in product mix. Retail salesincreased by 15.5% to $659.4 million in fiscal 1999 from $570.8 million infiscal 1998. Of this increase, $90.7 million is attributable to the opening offour new Polo stores (net of two store closings) and 27 new outlet stores (netof three store closings) in fiscal 1999, and the benefit of a full year ofoperations for three new Polo stores and ten new outlet stores opened in fiscal1998. Additionally, retail sales were favorably impacted by the inclusion infiscal 1999 of a 53rd week as compared to 52 weeks in fiscal 1998. Comparablestore sales for fiscal 1999 decreased by 2.0%, excluding the impact of the 53rdweek in fiscal 1999, largely due to the following: (i) the effects of a morechallenging economic environment compared to fiscal 1998; (ii) lower tourism,most notably in the Company's West Coast and Hawaiian stores; (iii) issuesencountered during a conversion of the Company's retail merchandising systemsduring its second fiscal quarter; and (iv) unseasonably warm weather conditionsthroughout the United States during the fall selling season as well as otherweather issues and store closings. Comparable store sales represent net sales ofstores open in both reporting periods for the full portion of such periods. LICENSING REVENUE. Licensing revenue increased 24.5% to $208.0 million infiscal 1999 from $167.1 million in fiscal 1998. This increase is primarilyattributable to an overall increase in sales of existing licensed products,particularly Chaps, Lauren, Polo Jeans and Home Collection, and the Company'scontinued expansion and growth in international markets. 32 33 GROSS PROFIT. Gross profit as a percentage of net revenues decreased to47.6% in fiscal 1999 from 48.7% in fiscal 1998. This decrease was primarilyattributable to lower retail gross margins due to higher markdowns. Wholesalegross margins decreased slightly in fiscal 1999 in comparison to fiscal 1998.These decreases were offset by an increase in licensing revenue as a percentageof net revenues to 12.0% in fiscal 1999 from 11.3% in fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general andadministrative ("SG&A") expenses increased by $87.3 million to $608.1 million infiscal 1999 from $520.8 million in fiscal 1998. The increase in SG&A expenses isprincipally due to increased volume-related expenses to support revenue growth,increased depreciation expense associated with the Company's shop-within-shopsdevelopment program and start-up costs associated with the expansion of theCompany's retail operations. Despite these increases, SG&A expenses as apercentage of net revenues remained constant at 35.2%.FISCAL 1998 (HISTORICAL BASIS) COMPARED TO FISCAL 1997 (PRO FORMA BASIS) NET SALES. Net sales increased 15.2% to $1.30 billion in fiscal 1998 from$1.13 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. 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 to48.7% in fiscal 1998 from 45.9% 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 increased as a percentage of net revenues to 11.3% infiscal 1998 from 10.7% in fiscal 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to$520.8 million or 35.2% of net revenues in fiscal 1998 from $433.5 million or33.9% of net revenues in fiscal 1997. This increase as a percentage of netrevenues was attributable to increased depreciation expense associated with theCompany's shop-within-shops development program, increased advertising,marketing and public relations expenditures to support the Company's brands anda one-time charge under terms of a long-term contract with a former executive. 33 34LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements primarily derive from working capitalneeds, construction and renovation of shop-within-shops, retail expansion andother corporate activities. The Company's main sources of liquidity are cashflows from operations and credit facilities. Net cash provided by operating activities decreased to $38.5 million infiscal 1999 from $96.2 million in fiscal 1998. This reduction was primarilydriven by increases in inventories due to timing of shipments, the overallgrowth of the business and a build-up of excess seasonal basic productinventories. The Company believes that the excess seasonal basic productinventories are of high-quality and plans to reduce these inventory levels bydecreasing production commitments in fiscal 2000. The remaining decrease in cashflow from operations was due to the timing of payments to vendors. Net cash usedin investing activities increased to $196.2 million in fiscal 1999 from $74.9million in fiscal 1998 principally due to higher capital expenditures and theinvestment of $44.2 million in an escrow account restricted for the fiscal 2000acquisition of Club Monaco. Net cash provided by financing activities increasedto $143.4 million in fiscal 1999 from $7.8 million in fiscal 1998. This increaseprimarily reflects the utilization of borrowings for operations and the fiscal2000 acquisition of Club Monaco offset by repurchases of common stock in fiscal1999. On June 9, 1997, the Company entered into a credit facility with asyndicate of banks which provides for a $225.0 million revolving line of creditavailable for the issuance of letters of credit, acceptances and directborrowings and matures on December 31, 2002 (the "Credit Facility"). Borrowingsunder the Credit Facility bear interest, at the Company's option, at a Base Rateequal to the higher of: (i) the Federal Funds Rate, as published by the FederalReserve Bank of New York, plus 1/2 of one percent; and (ii) the prime commerciallending rate of The Chase Manhattan Bank in effect from time to time, or at theEurodollar Rate plus an interest margin. On March 30, 1999, in connection with the Company's acquisition of ClubMonaco, the Company entered into a $100.0 million senior credit facility (the"1999 Credit Facility") with a syndicate of banks consisting of a $20.0 millionrevolving line of credit and an $80.0 million term loan (the "Term Loan"). Therevolving line of credit is available for working capital needs and generalcorporate purposes and matures on June 30, 2003. The Term Loan will be used tofinance the acquisition of all of the outstanding common stock of Club Monacoand to repay indebtedness of Club Monaco, as further described below. The TermLoan is repayable on June 30, 2003. Borrowings under the 1999 Credit Facilitybear interest, at the Company's option, at a Base Rate equal to the higher of:(i) the Federal Funds Rate, as published by the Federal Reserve Bank of NewYork, plus 1/2 of one percent; and (ii) the prime commercial lending rate of TheChase Manhattan Bank in effect from time to time, or at the Eurodollar Rate plusan interest margin. In April 1999, the Company entered into interest rate swapagreements with a notional amount of $100.0 million to convert the variableinterest rate on the 1999 Credit Facility to a fixed rate of 5.5%. The Credit Facility and 1999 Credit Facility (collectively, the "CreditFacilities") contain customary representations, warranties, covenants and eventsof default, including covenants regarding maintenance of net worth and leverageratios, limitations on indebtedness, loans, investments and incurrences ofliens, and restrictions on sales of 34 35assets and transactions with affiliates. Additionally, the agreements providethat an event of default will occur if Mr. Lauren and related entities fail tomaintain a specified minimum percentage of the voting power of the Company'scommon stock. As of April 3, 1999, the Company had $115.5 million outstanding in directborrowings and $44.2 million outstanding under the Term Loan and wascontingently liable for $22.7 million in outstanding letters of credit relatedto commitments for the purchase of inventory and in connection with its leasesunder the Credit Facilities. The weighted average interest rate on amountsoutstanding under the Credit Facilities at April 3, 1999, was 6.9%. Total cash outlays related to the Restructuring Plan are expected to beapproximately $39.5 million, $3.9 million of which was paid in fiscal 1999. Capital expenditures were $141.7 million, $63.1 million and $35.3 millionin fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The increase incapital expenditures represents primarily expenditures associated with theCompany'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. Additionally, capitalexpenditure increases reflect the purchase by the Company of a distributioncenter in North Carolina for $16.0 million, which it had been previouslyleasing. The Company plans to invest approximately $130.0 million, net oflandlord incentives, over the next fiscal year for its distribution facilities,its retail concept and outlet stores, the shop-within-shops development program,its information systems and other capital projects. On April 6, 1999, PRL Acquisition Corp., a Nova Scotia unlimited liabilitycorporation and a wholly owned subsidiary of the Company, acquired, through atender offer, 98.83% of the outstanding shares of Club Monaco. On May 3, 1999,PRL Acquisition Corp. acquired the remaining outstanding 1.17% shares pursuantto a statutory compulsory acquisition. The total purchase price wasapproximately $52.0 million in cash based on current exchange rates. The Companyused funds under its 1999 Credit Facility to finance this transaction and torepay in full assumed debt of approximately $35.0 million. At April 3, 1999, inconnection with the tender offer, the Company had set aside approximately $44.2million of cash in an escrow account restricted for the acquisition of thecommon stock of Club Monaco. In March 1998, the Board of Directors authorized the repurchase, subjectto market 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 which commenced April 1, 1998. Sharesacquired under the repurchase program will be used for stock option programs andfor other corporate purposes. As of April 3, 1999, the Company had repurchased603,864 shares of its Class A Common Stock at an aggregate cost of $16.1million. 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 constitutedapproximately 58.0% and 53.0% of trade accounts receivable outstanding at April3, 1999 and March 28, 1998, respectively. Additionally, the Company had fourlicensing partners, Jones Apparel Group, Inc. ("Jones"), Seibu DepartmentStores, Ltd. ("Seibu"), WestPoint Stevens, Inc. ("WPS") and 35 36Warnaco, Inc., which in aggregate constituted approximately 55.0% of licensingrevenue in fiscal 1999. WPS, Seibu and Jones constituted, in aggregate,approximately 35.0% of licensing revenue in fiscal 1998 while WPS, Seibu andL'Oreal S.A./Cosmair Inc. constituted, in aggregate, approximately 39.0% oflicensing revenue in fiscal 1997. Accordingly, the Company may have significantexposure in collecting accounts receivable from its wholesale customers andlicensees. The Company has credit policies and procedures which it uses tomanage its credit risk. Management believes that cash from ongoing operations and funds availableunder the Credit Facilities will be sufficient to satisfy the Company's currentlevel of operations, the Restructuring Plan, capital requirements, stockrepurchase program, acquisition of Club Monaco and other corporate activitiesfor the next 12 months. The Company does not currently intend to pay dividendson its Common Stock in the next 12 months.SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business is affected by seasonal trends, with higher levelsof wholesale sales in its second and fourth quarters and higher retail sales inits second 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 growth in theCompany's retail operations and licensing revenue, historical quarterlyoperating trends and working capital requirements may not accurately reflectfuture performances. In addition, fluctuations in sales and operating income inany fiscal quarter may be affected by the timing of seasonal wholesale shipmentsand other events affecting retail.EXCHANGE RATES Inventory purchases from contract manufacturers in the Far East areprimarily denominated in U.S. dollars; however, purchase prices for theCompany's products may be affected by fluctuations in the exchange rate betweenthe U.S. dollar and the local currencies of the contract manufacturers, whichmay 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 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 store pre-opening costs,be expensed as incurred. The Company's current accounting policy is tocapitalize store pre-opening costs as prepaid expenses and amortize such costsover a twelve month period following store opening. The Company will adopt theprovisions of SOP 98-5 in its first quarter of fiscal 2000, as required, andrecord a charge of $3.9 million, after taxes, as the cumulative effect of achange in accounting principle. In June 1998, the Financial Accounting Standards Board ("FASB") issuedSFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. ThisStatement 36 37establishes accounting and reporting standards for derivative instruments andhedging activities. It requires the recognition of all derivatives as eitherassets or liabilities in the statement of financial position and measurement ofthose instruments at fair value. The accounting for changes in the fair value ofa derivative is dependent upon the intended use of the derivative. SFAS No. 133will be effective in the Company's first quarter of the fiscal year ending March31, 2001, and retroactive application is not permitted. The Company has not yetdetermined whether the application of SFAS No. 133 will have a material impacton its financial 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. In 1997, the Company, with the aid of outside consultants, initiated aprogram to assess the impact of Year 2000 issues on its information technology("IT") systems and its non-IT systems and has formulated a plan to address itsYear 2000 issues. Through its assessment, the Company has identified potential datedeficiencies in its IT systems, both hardware and software and in its non-ITsystems (including functions involving embedded chip technology), and is in theprocess of addressing these deficiencies through upgrades, replacements andother remediation. The Company expects to complete remediation of its materialIT systems no later than the summer of 1999. In connection with other equipmentwith date sensitive operating controls such as distribution center equipment,HVAC, employee time clocks, security and other similar systems, the Company isin the process of identifying those items which may require replacement or otherremediation and, in a significant majority of the cases, believes it has takensteps adequate to ensure such equipment is Year 2000 compliant. The Companyexpects to complete testing and replacement or other remediation of thisequipment no later than the summer of 1999. The Company has made inquiries of third parties with whom it has materialbusiness relationships (such as customers, suppliers, licensees, transportationcarriers, utility and other general service providers) to determine whether theywill be able to resolve in a timely manner any Year 2000 issues that willmaterially and adversely impact the Company. This process includes thesolicitation of written responses to questionnaires, followed, in some cases, bymeetings with certain of such third parties. To date, approximately 60.0% ofthose contacted have responded, none of whom have raised any Year 2000 issueswhich the Company believes would have a materially adverse affect on theCompany. The Company is in the process of sending follow-up inquiries to thirdparties and expects to complete its survey of third parties in the late summerof 1999. To date, the Company has incurred expenses of approximately $5.1 millionrelated to the assessment of its Year 2000 issues and development andimplementation of its remediation plan. The total remaining cost of theCompany's Year 2000 project is estimated at $1.0 to $2.0 million and is beingfunded through operating cash flows. Such costs do not include internalmanagement time and the deferral of other projects, the 37 38effects of which are not expected to be material to the Company's results ofoperations or financial condition. Of the total project cost, approximately $0.6million is attributable to the purchase of new software which will becapitalized. The remainder will be expensed as incurred. The costs of the Year2000 project and the dates upon which the Company plans to complete its Year2000 initiatives are based on management's best estimates, which were derived byutilizing several assumptions of future events including continued availabilityof certain resources, third party modification plans and other factors. However,there can be no guarantee that these estimates will be achieved, and actualresults could differ materially from those plans. The Company believes that it is difficult to identify its most reasonableworst case Year 2000 scenario. However, a reasonable worst case Year 2000scenario would be a failure by a significant third party in the Company's supplyand distribution chain (including, without limitation, utility or other generalservice provider, government authority or third party with whom it has amaterial business relationship) to remediate its Year 2000 deficiencies thatcontinues for several days or more. Any such failure could impair themanufacture and/or delivery of products, and/or the processing of orders, andshipments. In addition, a failure by the Company to remediate any of itsinternal inventory management systems would adversely affect its stockallocation program, resulting in mistimed shipments and potential ordercancellations. These scenarios would likely have a material adverse effect onthe Company's results of operations, and, in particular, would result in theloss of sales and revenue. The extent of lost revenue as a result of thesescenarios cannot be estimated at this time. The Company continues to develop contingency plans to limit the effect ofany Year 2000 issues on its operations and results, and intends to finalize itscontingency plans by no later than the summer of 1999. As an example, theCompany continues to explore, where possible, alternate service providers. TheCompany's Year 2000 efforts are ongoing and its overall plan, as well as itsdevelopment of contingency plans, will continue to evolve as new informationbecomes available. While the Company anticipates continuity of its businessactivities, that continuity will be dependent upon its ability, and the abilityof third parties with whom the Company relies on directly, or indirectly, to beYear 2000 compliant in a timely fashion.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item appears beginning on page F-1.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 38 39PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The other information required to be included herein by Item 10 of Form10-K will be included in the Company's Proxy Statement for the 1999 AnnualMeeting of Stockholders which will be filed within 120 days after the close ofthe Company's fiscal year ended April 3, 1999 and such information isincorporated herein 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 22, 1999. NAME AGE POSITION Ralph Lauren.................. 59 Chairman, Chief Executive Officer and Director Michael J. Newman............. 53 Vice Chairman, Chief Operating Officer and Director Richard A. Friedman........... 41 Director Frank A. Bennack, Jr.......... 66 Director Joel L. Fleishman............ 65 Director Allen Questrom............... 59 Director Terry S. Semel................ 56 Director Peter Strom................... 70 Director Victor Cohen.................. 45 Senior Vice President, General Counsel and Secretary F. Lance Isham................ 54 President Nancy A. Platoni Poli......... 43 Senior Vice President and Chief Financial Officer Karen L. Rosenbach............ 44 Senior Vice President, Human Resources and Administration Hamilton South................ 34 Group President, Chief Marketing Officer RALPH LAUREN has been a director of the Company since prior to thecommencement of the Company's initial public offering and was 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. 39 40 MICHAEL J. NEWMAN has been a director of the Company since prior to thecommencement of the Company's initial public offering and was 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. F. LANCE ISHAM has been President of the Company since November 1998,prior to which he served as Group President of the Menswear operations. Mr.Isham is responsible for the day-to-day operations of sales, merchandising,retail development, production, manufacturing services and distribution. Hejoined Polo in 1982, and has held a variety of sales positions in the Companyincluding Executive Vice President of Sales and Merchandising. RICHARD A. FRIEDMAN has been a director of the Company since prior to thecommencement of the Company's initial public offering and was 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. and Carmike Cinemas Inc. 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. JOEL L. FLEISHMAN has been a director of the Company since January 1999.He has been a Professor of Law and Public Policy, Terry Sanford Institute ofPublic Policy at Duke University since 1971 and the Director of the Samuel andRonnie Heyman Center for Ethics, Public Policy and the Professions at DukeUniversity since 1987. In addition, Mr. Fleishman has been the President of TheAtlantic Philanthropic Service Company, Inc. since 1993. Mr. Fleishman is amember of the Board of Directors of Boston Scientific Corporation. ALLEN QUESTROM has been a Director of the Company since September 1997.Mr. Questrom has been the Chairman, President and Chief Executive Officer ofBarneys New York Inc. since May 1999 and was the Chairman and Chief ExecutiveOfficer of Federated Department Stores, Inc. from February 1990 to May 1997. Heis a member of the Board of Directors of Interpublic Group of Companies, Inc.,AEA Investors, Inc. and Barneys New York 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 andwas a member of the Advisory Board of the Company's predecessor from October1994 until his retirement in April 1995. Mr. Strom was an initial officer ofPolo in 1968 and held various management positions in the Company, including, atthe time 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. 40 41 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. HAMILTON SOUTH was appointed to the corporate position of Group President,Chief Marketing Officer of the Company in March 1999. Mr. South joined Polo in1996 as Senior Vice President, Worldwide Communications. Prior to joining Polo,Mr. South was editor-at-large of Vanity Fair Magazine from 1990. Each executive officer serves for a one-year term ending at the nextannual meeting of the Company's Board of Directors, subject to his or herapplicable employment agreement and his or her earlier death, resignation orremoval.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 1999 AnnualMeeting of Stockholders, which will be filed within 120 days after the close ofthe Company's fiscal year ended April 3, 1999 and such information isincorporated herein by reference to such Proxy Statement. 41 42 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.** (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 (the "Fiscal 1998 10-K")* 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)* 42 43 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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)*+ 10.13 Deferred Compensation Agreement dated April 2, 1995 between F. Lance Isham and Polo Ralph Lauren, L.P.(filed as Exhibit 10.14 to the S-1)*+ 10.14 Amendment to Deferred Compensation Agreement made as of November 10, 1998 between F. Lance Isham and Polo Ralph Lauren Corporation 10.15 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)*+ 10.16 Amended and Restated Employment Agreement effective November 10, 1998 between F. Lance Isham and Polo Ralph Lauren Corporation+ 10.17 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)* 10.18 Form of Credit Agreement between Polo Ralph Lauren Corporation and The Chase Manhattan Bank (filed as Exhibit 10.24 to the S-1)* 10.19 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)* 10.20 Credit Agreement between Polo Ralph Lauren Corporation and the Chase Manhattan Bank dated as of March 30, 1999 10.21 Form of Indemnification Agreement between Polo Ralph Lauren Corporation and its Directors and Executive Officers (filed as Exhibit 10.26 to the S-1)* 10.22 Employment Agreement dated June 9, 1997 between Ralph Lauren and Polo Ralph Lauren Corporation (filed as exhibit 10.27 to the S-1)*+ 10.23 Amended and Restated Employment Agreement effective April 4, 1999 between Ralph Lauren and Polo Ralph Lauren Corporation+ 10.24 Employment Agreement effective November 10, 1998, between Hamilton South and Polo Ralph Lauren Corporation+ 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.** (filed as Exhibit 10.25 to the Fiscal 1998 10-K)* 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 10.24 and 10.25 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. 43 44 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 25, 1999 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 and June 25, 1999---------------------------------- Chief Executive OfficerRalph Lauren (Principal Executive Officer)/s/ Michael J. Newman Vice Chairman of the Board of Directors June 25, 1999---------------------------------- and Chief Operating OfficerMichael J. Newman/s/ Nancy A. Platoni Poli Senior Vice President and Chief Financial June 25, 1999---------------------------------- Officer (Principal Financial and AccountingNancy A. Platoni Poli Officer)/s/ Frank A. Bennack, Jr. Director June 25, 1999----------------------------------Frank A. Bennack, Jr./s/ Joel L. Fleishman Director June 25, 1999----------------------------------Joel L. Fleishman/s/ Richard A. Friedman Director June 25, 1999----------------------------------Richard A. Friedman/s/ Allen Questrom Director June 25, 1999----------------------------------Allen Questrom/s/ Terry S. Semel Director June 25, 1999----------------------------------Terry S. Semel/s/ Peter Strom Director June 25, 1999----------------------------------Peter Strom 44 45 POLO RALPH LAUREN CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS PAGE Independent Auditors' Report ........................................................................... F-2 Consolidated Balance Sheets as of April 3, 1999 and March 28, 1998 ..................................... F-3 Consolidated Statements of Income for the years ended April 3, 1999, March 28, 1998 and March 29, 1997 F-4 Consolidated Statements of Stockholders' Equity and Partners' Capital for the years ended April 3, 1999, March 28, 1998 and March 29, 1997 ...................................................................... F-5 Consolidated Statements of Cash Flows for the years ended April 3, 1999, March 28, 1998 and March 29, 1997 ................................................................................................... F-6 Notes to Consolidated Financial Statements ............................................................. F-8 FINANCIAL STATEMENT SCHEDULE: Independent Auditors' Report ........................................................................... S-1 Schedule II - Valuation and Qualifying Accounts ........................................................ S-2All other schedules are omitted because they are not applicable or the requiredinformation is shown in the consolidated financial statements or notes thereto. F-1 46 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Polo Ralph LaurenCorporation New York, New York We have audited the accompanying consolidated balance sheets as of April3, 1999 and March 28, 1998 of Polo Ralph Lauren Corporation and subsidiaries(the "Company") and the related consolidated statements of income, stockholders'equity, and cash flows for the years then ended and the combined statements ofincome, partners' capital, and cash flows for the year ended March 29, 1997.These financial statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financial statements basedon 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 financial statements present fairly, in all materialrespects, the financial position of the Company as of April 3, 1999 and March28, 1998, and the results of their operations and their cash flows for each ofthe three years in the period ended April 3, 1999 in conformity with generallyaccepted accounting principles./s/ Deloitte & Touche LLPDELOITTE & TOUCHE LLPNew York, New YorkMay 21, 1999 F-2 47 POLO RALPH LAUREN CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) APRIL 3, MARCH 28, 1999 1998 -------- --------- ASSETSCurrent assets Cash and cash equivalents $ 44,458 $ 58,755 Accounts receivable, net of allowances of $13,495 and $12,447, respectively 157,203 149,120 Inventories 376,860 298,485 Deferred tax assets 51,939 24,448 Prepaid expenses and other 48,994 25,656 ----------- ----------- TOTAL CURRENT ASSETS 679,454 556,464Property and equipment, net 261,799 175,348Deferred tax assets 12,493 14,213Restricted cash 44,217 --Other assets, net 106,621 79,105 ----------- ----------- $ 1,104,584 $ 825,130 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities Notes and acceptances payable - banks $ 115,500 $ -- Accounts payable 88,898 100,126 Income taxes payable 17,432 2,554 Accrued expenses and other 126,142 99,578 ----------- ----------- TOTAL CURRENT LIABILITIES 347,972 202,258Long-term debt 44,217 --Other noncurrent liabilities 53,490 38,546Commitments and contingencies (Note 13) -- --Stockholders' equity Common Stock Class A, par value $.01 per share; 500,000,000 shares authorized; 34,381,653 and 34,272,726 shares issued, respectively 344 343 Class B, par value $.01 per share; 100,000,000 shares authorized; 43,280,021 shares issued and outstanding 433 433 Class C, par value $.01 per share; 70,000,000 shares authorized; 22,720,979 shares issued and outstanding 227 227 Additional paid-in-capital 450,030 447,918 Retained earnings 227,288 136,738 Treasury Stock, Class A, at cost (603,864 shares) (16,084) -- Unearned compensation (3,333) (1,333) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 658,905 584,326 ----------- ----------- $ 1,104,584 $ 825,130 =========== =========== See accompanying notes to financial statements. F-3 48 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA) FISCAL YEAR ENDED -------------------------------------------- APRIL 3, MARCH 28, MARCH 29, 1999 1998 1997 -------- --------- --------- Net sales $1,505,056 $1,303,816 $1,043,330Licensing revenue 208,009 167,119 137,113Other income 13,794 9,609 7,774 ---------- ---------- ---------- Net revenues 1,726,859 1,480,544 1,188,217Cost of goods sold 904,586 759,988 652,000 ---------- ---------- ---------- Gross profit 822,273 720,556 536,217Selling, general and administrative expenses 608,128 520,801 378,854Restructuring charge 58,560 -- -- ---------- ---------- ---------- Income from operations 155,585 199,755 157,363Interest expense 2,759 159 13,660Equity in net loss of joint venture -- -- 3,599 ---------- ---------- ---------- Income before income taxes 152,826 199,596 140,104Provision for income taxes 62,276 52,025 22,804 ---------- ---------- ---------- Net income $ 90,550 $ 147,571 $ 117,300 ========== ========== ========== PRO FORMA -----------Historical income before income taxes $ 199,596Pro forma adjustments other than income taxes 3,162 -----------Pro forma income before income taxes 202,758Pro forma provision for income taxes 82,631 -----------Pro forma net income $ 120,127 ===========Net income per share - Basic and Diluted $ 0.91 $ 1.20 =========== ===========Common shares outstanding - Basic 99,813,328 100,222,444 =========== ===========Common shares outstanding - Diluted 99,972,152 100,222,444 =========== =========== See accompanying notes to financial statements. F-4 49 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (IN THOUSANDS, EXCEPT SHARE DATA) RETAINED COMMON STOCK ADDITIONAL EARNINGS AND ---------------------- PAID-IN- PARTNERS' TREASURY STOCK, AT COST SHARES AMOUNT CAPITAL CAPITAL SHARES AMOUNT ----------- -------- ---------- ------------ --------- ---------- BALANCE AT MARCH 30, 1996 -- -- -- $ 237,653 -- --Net income 117,300Distributions to partners (94,268) ---------- -------- ---------- ------------ --------- ---------- BALANCE AT MARCH 29, 1997 -- -- -- 260,685 -- --Net income 147,571Distributions to partners (45,640)Reorganization 89,000,000 890 176,537 (177,427)Dividend and Reorganization Notes paid (48,451)Common stock issued in public offering, net 11,170,000 112 268,685Common stock issued in PRC Acquisition 26,803 -- 697Restricted stock grants 76,923 1 1,999 ---------- -------- ---------- ------------ --------- ---------- BALANCE AT MARCH 28, 1998 100,273,726 1,003 447,918 136,738 -- --Net income 90,550Exercise of stock options 4,352 113Repurchases of common stock 603,864 (16,084)Restricted stock grants 104,575 1 1,999 ----------- -------- ---------- ------------ --------- ---------- BALANCE AT APRIL 3, 1999 100,382,653 $ 1,004 $ 450,030 $ 227,288 603,864 $ (16,084) =========== ======== ========== ============ ========= ========== UNEARNED COMPENSATION TOTAL ------------ -------- BALANCE AT MARCH 30, 1996 -- $237,653Net income 117,300Distributions to partners (94,268) ------- -------- BALANCE AT MARCH 29, 1997 -- 260,685Net income 147,571Distributions to partners (45,640)Reorganization --Dividend and Reorganization Notes paid (48,451)Common stock issued in public offering, net 268,797Common stock issued in PRC Acquisition 697Restricted stock grants (1,333) 667 ------- -------- BALANCE AT MARCH 28, 1998 (1,333) 584,326Net income 90,550Exercise of stock options 113Repurchases of common stock (16,084)Restricted stock grants (2,000) -- ------- -------- BALANCE AT APRIL 3, 1999 $(3,333) $658,905 ======= ======== See accompanying notes to financial statements. F-5 50 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FISCAL YEAR ENDED --------------------------------------- APRIL 3, MARCH 28, MARCH 29, 1999 1998 1997 -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIESNet income $ 90,550 $ 147,571 $ 117,300Adjustments to reconcile net income to net cash provided by operating activities: Benefit from deferred income taxes (25,771) (27,997) (938) Depreciation and amortization 46,414 27,402 13,755 Equity in net loss of joint venture -- -- 3,599 Provision for losses on accounts receivable 1,060 1,155 833 Changes in deferred liabilities (4,782) 9,584 5,067 Provision for restructuring charge 19,040 -- -- Other 2,073 3,198 (5,069) Changes in assets and liabilities, net of acquisitions Accounts receivable (9,542) (4,352) (137) Inventories (76,396) (48,942) 46,702 Prepaid expenses and other (25,526) (2,031) (9,223) Other assets (9,095) (18,922) (3,385) Accounts payable (13,452) 3,215 15,173 Income taxes payable and accrued expenses and other 43,950 6,325 19,943 --------- --------- ---------NET CASH PROVIDED BY OPERATING ACTIVITIES 38,523 96,206 203,620 --------- --------- ---------CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment, net (141,692) (63,079) (35,330) Acquisition, net of cash acquired (6,981) (8,551) -- Restricted cash for Club Monaco Acquisition (44,217) -- -- Investments in joint ventures -- (5,812) -- Cash surrender value - officers' life insurance, net (3,339) 2,569 (3,230) --------- --------- ---------NET CASH USED IN INVESTING ACTIVITIES (196,229) (74,873) (38,560) --------- --------- ---------CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net 113 268,797 -- Repurchases of common stock (16,084) -- -- Proceeds from (repayments of) short-term borrowings, net 115,500 (26,777) (46,954) Repayments of borrowings against officers' life insurance policies -- (5,757) -- Repayments of long-term debt and subordinated notes (337) (135,134) (11,791) Proceeds from long-term debt 44,217 -- -- Payment of Dividend and Reorganization Notes -- (48,451) -- Distributions paid to partners -- (44,855) (90,284) --------- --------- ---------NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 143,409 7,823 (149,029) --------- --------- ---------Net (decrease) increase in cash and cash equivalents (14,297) 29,156 16,031Cash and cash equivalents at beginning of period 58,755 29,599 13,568 --------- --------- ---------Cash and cash equivalents at end of period $ 44,458 $ 58,755 $ 29,599 ========= ========= ========= F-6 51 POLO RALPH LAUREN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FISCAL YEAR ENDED -------------------------------- APRIL 3, MARCH 28, MARCH 29, 1999 1998 1997 -------- --------- --------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 2,776 $ 4,410 $16,005 ======= ======= ======= Cash paid for income taxes $77,877 $73,873 $22,280 ======= ======= =======SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Foreign tax credits distributed to partners $ 509 $ 3,720 ======= ======= Capital obligations for completed shop-within-shops $15,102 $ 8,600 ======= ======= Fair value of assets acquired, excluding cash $14,868 $69,537 Less: Cash paid 6,981 8,551 Promissory notes issued 5,000 -- Fair market value of common stock issued for acquisition -- 697 ------- ------- Liabilities assumed $ 2,887 $60,289 ======= ======= Fair market value of restricted stock grants $ 667 ======= See accompanying notes to financial statements. F-7 52 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)1 BASIS OF PRESENTATION AND ORGANIZATION (a) BASIS OF PRESENTATION Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware in March 1997. 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 of PRLC and promissory notes (the "Reorganization"). The accompanying combined financial statements for the year ended March 29, 1997 include the accounts of Polo Ralph Lauren Enterprises, L.P. ("Enterprises"), Polo Ralph Lauren, L.P. and subsidiaries (collectively, the "Polo Partnership"), The Ralph Lauren Womenswear Company, L.P. and subsidiaries (collectively, "Womenswear") and Polo Retail Corporation and subsidiaries, a 50% joint venture with a previously nonaffiliated partner ("PRC," and together with Enterprises, Polo Partnership and Womenswear, 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, Inc., successor to The Goldman Sachs Group, L.P. (collectively, the "GS Group"). The accompanying consolidated financial statements as of and for the year ended April 3, 1999, include the results of operations of Polo. 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 have been 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 year ended March 29, 1997, in which 50% of PRC was owned by a previously nonaffiliated partner. 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. (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 F-8 53 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) as follows: (i) to repay borrowings outstanding under the Company's 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 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) ACQUISITION 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. Prior to the PRC Acquisition, the Company sold products to PRC in the amount of $40.3 million in fiscal 1997. Purchases by the Company from PRC amounted to $6.7 million in fiscal 1997. (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, and outlet stores located throughout 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 F-9 54 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) 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, by the imposition of additional duties or regulations relating to imports, by the contractors' inability to meet the Company's production requirements or by other factors.2 SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company's fiscal year ends on the Saturday nearest to March 31. All references herein to "1999," "1998" and "1997" represent the 52 or 53 week fiscal years ended April 3, 1999, March 28, 1998, and March 29, 1997, respectively. Fiscal 1999 reflects a 53-week period and fiscal 1998 and 1997 reflect a 52-week period. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. RESTRICTED CASH At April 3, 1999, the Company had $44.2 million of cash held in escrow for the acquisition of Club Monaco Inc. ("Club Monaco") (see Note 16). 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 PRE-OPENING 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-10 55 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the related assets on a straight-line basis. The range of useful lives is as follows: buildings - 39.5 years; furniture and fixtures and machinery and equipment - 3 to 8 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 on a straight-line basis over its estimated useful life, ranging from 11 to 25 years . 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 sheets at April 3, 1999 and March 28, 1998, are not impaired. See Note 3 for long-lived and intangible asset write downs recorded in connection with the Company's fiscal 1999 Restructuring Plan (as defined see Note 3). 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 $31.5 million and $28.2 million at April 3, 1999 and March 28, 1998, 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 retail and outlet stores, when goods are sold to consumers. Allowances for estimated uncollectible accounts and discounts are provided when sales are recorded. Licensing revenue is recognized as earned. F-11 56 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 generally without requiring collateral. Credit risk is driven by conditions or occurrences within the economy and the retail industry and is principally dependent on each customer's financial condition. A decision by the controlling owner of a group of stores or any substantial customer to decrease the amount of merchandise purchased from 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 approximately 58.0% and 53.0% of trade accounts receivable outstanding at April 3, 1999 and March 28, 1998, respectively. The Company had two significant customers that each accounted for approximately 10.0% of net sales in fiscal 1999 and one significant customer that accounted for approximately 11.0% of net sales in fiscal 1998 and 1997. Additionally, the Company had four significant licensees who in aggregate constituted approximately 55.0% of licensing revenue in fiscal 1999 and three who in aggregate constituted approximately 35.0% and 39.0% of licensing revenue in fiscal 1998 and 1997, 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 $76.2 million, $68.5 million and $55.5 million in fiscal 1999, 1998 and 1997, 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. A valuation allowance is recorded to reduce a deferred tax asset to that portion which is expected to more likely than not be realized. 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 of the Predecessor Company 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. F-12 57 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) Foreign income taxes have also been provided on the income of the foreign entities in the Predecessor Company. 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 $40.7 million and $28.1 million at April 3, 1999 and March 28, 1998, 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 and interest rates. While these instruments are subject to risk of loss from changes in exchange or interest rates, those losses would generally be offset by gains on the related exposure. The Company 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 are measured using the local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at each year end. Results of operations are translated at the average rate of exchange prevailing throughout the period. Translation adjustments arising from differences in exchange rates from period to period are included in 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 1999, 1998 and 1997. 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." COMPREHENSIVE INCOME Effective March 29, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting of comprehensive income and its components in the financial statements. For fiscal 1999, 1998 and 1997, comprehensive income approximated net income. F-13 58 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) RECENT ACCOUNTING PRONOUNCEMENTS 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 store pre-opening costs, be expensed as incurred. The Company's current accounting policy is to capitalize store pre-opening costs as prepaid expenses and amortize such costs over a twelve month period following store opening. The Company will adopt the provisions of SOP 98-5 in its first quarter of fiscal 2000, as required, and record a charge of $3.9 million, after taxes, as the cumulative effect of a change in accounting principle. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is dependent upon the intended use of the derivative. SFAS No. 133 will be effective in the Company's first quarter of the fiscal year ending March 31, 2001 and retroactive application is not permitted. The Company has not yet determined whether the application of SFAS No. 133 will have a material impact on its financial position or results of operations. PRO FORMA ADJUSTMENTS (UNAUDITED) The pro forma statement of income data for fiscal 1998 presents the effects on the historical financial statements of certain transactions as if they had occurred at March 30, 1997. 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% (see Note 8); and (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. NET INCOME PER SHARE Basic net income per share was calculated by dividing net income by the weighted average number of shares outstanding during the period and excluded any potential dilution. Diluted net income per share was calculated similarly but includes potential dilution from the exercise of stock options and awards. The weighted average number of shares outstanding in fiscal 1999 represents the actual number of shares outstanding during such period. 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 fiscal 1998. The difference between the basic and diluted weighted average shares outstanding is due to the dilutive effect of stock options and restricted stock awards issued under the Company's stock option plans. F-14 59 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) RECLASSIFICATIONS For comparative purposes, certain prior period amounts have been reclassified to conform to the current period's presentation.3 RESTRUCTURING CHARGE During the fourth quarter of fiscal 1999, the Company formalized its plans to streamline operations within its wholesale and retail operations and reduce its overall cost structure ("Restructuring Plan"). The major initiatives of the Restructuring Plan include the following: (1) an evaluation of the Company's retail operations and site locations; (2) the realignment and operational integration of the Company's wholesale operating units; and (3) the realignment and consolidation of corporate strategic business functions and internal processes. In an effort to improve the overall profitability of its retail operations, the Company plans to close three Polo stores and three outlet stores that were not performing at an acceptable level. Additionally, the Company will convert two Polo stores and five outlet stores to new concepts that are expected to be more productive. Costs associated with this aspect of the Restructuring Plan include lease and contract termination costs, store fixed asset (primarily leasehold improvements) and intangible asset write downs and severance and termination benefits. The Company's wholesale operations were realigned into two new operating units: Polo Brands and Collection Brands. Aspects of this realignment included: (i) the reorganization of the sales force and retail development areas; (ii) the streamlining of the design and development process; and (iii) the consolidation of the customer service departments. Additionally, the Company is in the process of integrating the production and sourcing of its Polo Brands, outlet store and licensees' products into one consolidated unit. Costs associated with the wholesale realignment consist primarily of severance and termination benefits and lease termination costs. The Company's review of its corporate business functions and internal processes resulted in a new management structure designed to better align businesses with similar functions and the identification and elimination of duplicative processes. Costs associated with the corporate realignment consist primarily of severance and termination benefits and lease termination costs. F-15 60 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) In connection with the implementation of the Restructuring Plan, the Company recorded a restructuring charge of $58.6 million on a pre-tax basis in its fourth quarter of fiscal 1999. The major components of the restructuring charge and the activity through April 3, 1999 were as follows: LEASE AND SEVERANCE AND ASSET CONTRACT TERMINATION WRITE TERMINATION OTHER BENEFITS DOWNS COSTS COSTS TOTAL 1999 provision $ 15,277 $ 17,788 $ 24,665 $ 830 $ 58,560 1999 activity (3,318) (17,788) (1,112) (105) (22,323) -------- -------- -------- -------- -------- April 3, 1999 $ 11,959 $ -- $ 23,553 $ 725 $ 36,237 ======== ======== ======== ======== ======== Total severance and termination benefits as a result of the Restructuring Plan relate to approximately 280 employees, 140 of which were terminated through May 1999. Total cash outlays related to the Restructuring Plan are expected to be approximately $39.5 million, $3.9 million of which was paid in fiscal 1999. The Company expects to substantially complete the implementation of the Restructuring Plan during fiscal 2000.4 INVENTORIES APRIL 3, MARCH 28, 1999 1998 Raw materials $ 17,675 $ 26,364 Work-in-process 8,545 12,406 Finished goods 350,640 259,715 -------- -------- $376,860 $298,485 ======== ======== Merchandise inventories of $196.1 million and $130.9 million at April 3, 1999 and March 28, 1998, respectively, were valued utilizing the retail method and are included in finished goods. F-16 61 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)5 PROPERTY AND EQUIPMENT APRIL 3, MARCH 28, 1999 1998 Land and improvements $ 3,108 $ 656 Building 10,079 -- Furniture and fixtures 150,103 116,870 Machinery and equipment 32,582 22,189 Construction in progress 30,294 -- Leasehold improvements 187,512 158,255 -------- -------- 413,678 297,970 Less: accumulated depreciation and amortization 151,879 122,622 -------- -------- $261,799 $175,348 ======== ======== 6 ACCRUED EXPENSES AND OTHER APRIL 3, MARCH 28, 1999 1998 Accrued operating expenses $ 47,094 $ 40,841 Accrued restructuring charge 36,237 -- Accrued payroll and benefits 27,466 33,898 Accrued shop-within-shops 15,345 24,839 -------- -------- $126,142 $ 99,578 ======== ========7 FINANCING AGREEMENTS On June 9, 1997, the Company entered into a credit facility with a syndicate of banks which consists of a $225.0 million revolving line of credit available for the issuance of letters of credit, acceptances and direct borrowings and matures on December 31, 2002 (the "Credit Facility"). Borrowings under the Credit Facility bear interest, at the Company's option, at a Base Rate equal to the higher of: (i) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of one percent; and (ii) the prime commercial lending rate of The Chase Manhattan Bank in effect from time to time, or at the Eurodollar Rate plus an interest margin. At April 3, 1999, the Company had $115.5 million outstanding in direct borrowings and was contingently liable for $22.7 million in outstanding letters of credit related to commitments for the purchase of inventory and in connection with its leases under the Credit Facility. There were no borrowings outstanding under the Credit Facility at March 28, 1998. F-17 62 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) On March 30, 1999, in connection with the Company's acquisition of Club Monaco (see Note 16), the Company entered into a $100.0 million senior credit facility (the "1999 Credit Facility") with a syndicate of banks consisting of a $20.0 million revolving line of credit and an $80.0 million term loan (the "Term Loan"). The revolving line of credit is available for working capital needs and general corporate purposes and matures on June 30, 2003. The Term Loan will be used to finance the acquisition of the stock of Club Monaco and to repay existing indebtedness, as further described in Note 16. The Term Loan is repayable on June 30, 2003. Borrowings under the 1999 Credit Facility bear interest, at the Company's option, at a Base Rate equal to the higher of: (i) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of one percent; and (ii) the prime commercial lending rate of The Chase Manhattan Bank in effect from time to time, or at the Eurodollar Rate plus an interest margin. On April 12, 1999, the Company entered into interest rate swap agreements with a notional amount of $100.0 million to convert the variable interest rate on the 1999 Credit Facility to a fixed rate of 5.5%. At April 3, 1999, the Company had $44.2 million outstanding under the Term Loan. The Credit Facility and 1999 Credit Facility (the "Credit Facilities") contain customary representations, warranties, covenants and events of default, including covenants regarding maintenance of net worth and leverage ratios, limitations on indebtedness, loans, investments and incurrences of liens, and restrictions on sales of assets and transactions with affiliates. Additionally, the agreements provide that an event of default will occur if Mr. Lauren and related entities fail to maintain a specified minimum percentage of the voting power of the Company's common stock. The Credit Facilities bore interest primarily at the institution's prime rate (ranging from 5.25% to 7.75% at April 3, 1999). The weighted average interest rate on borrowings was 7.4%, 8.0% and 7.7% in fiscal 1999, 1998 and 1997, respectively. On June 9, 1997 in connection with the Reorganization, borrowings under the Credit Facility were used to refinance existing debt from 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. These borrowings were repaid from the net proceeds of the initial public offering (see Note 1 (b)). F-18 63 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)8 INCOME TAXES The components of the provision for income taxes were as follows: FISCAL YEAR 1999 1998 1997 Current: Federal $ 68,012 $ 60,265 $ 16,649 State and local 15,080 15,330 6,633 Foreign 4,955 4,427 460 -------- -------- -------- 88,047 80,022 23,742 -------- -------- -------- Deferred: Federal (19,654) (22,357) (652) State and local (6,117) (5,640) (286) -------- -------- -------- (25,771) (27,997) (938) -------- -------- -------- $ 62,276 $ 52,025 $ 22,804 ======== ======== ======== The foreign and domestic components of income before income taxes were as follows: FISCAL YEAR 1999 1998 1997 Domestic $102,644 $162,529 $113,188 Foreign 50,182 37,067 26,916 -------- -------- -------- $152,826 $199,596 $140,104 ======== ======== ======== 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 tax asset reflects 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. F-19 64 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) The components of the net deferred tax assets at April 3, 1999 and March 28, 1998, were as follows: APRIL 3, MARCH 28, 1999 1998 DEFERRED TAX ASSETS: Restructuring reserves $20,249 $ -- Accounts receivable 17,533 11,230 Net operating loss carryforwards 7,475 8,275 Uniform inventory capitalization 8,306 7,215 Deferred compensation 6,546 5,685 Property and equipment -- 4,219 Accrued expenses 3,238 2,990 Other 3,406 1,368 ------- ------- 66,753 40,982 Less: Valuation allowance 2,321 2,321 ------- ------- $64,432 $38,661 ======= ======= The Company had available Federal net operating loss carryforwards of approximately $8.4 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. 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 $26.0 million of undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be reinvested. These earnings could become subject to tax if they were remitted as dividends, if foreign earnings were lent to PRLC or a subsidiary or U.S. affiliate of PRLC, or if the stock of the subsidiaries were sold. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practical. 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. F-20 65 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) The pro forma provision for income taxes represents the income tax provision 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% in fiscal 1998 and consisted of the following: FISCAL YEAR 1998 (UNAUDITED) Current: Federal $ 63,822 State and local 17,119 Foreign 4,427 -------- 85,368 -------- Deferred: Federal (1,043) State and local (1,694) -------- (2,737) -------- $ 82,631 ======== The historical provision for income taxes in fiscal 1999 and the pro forma provision for income taxes in fiscal 1998 differs from the amounts computed by applying the statutory Federal income tax rate to income before income taxes due to the following: FISCAL YEAR 1999 1998 (UNAUDITED) Provision for income taxes at statutory Federal rate $ 53,489 $ 70,965 Increase (decrease) due to: State and local income taxes, net of Federal benefit 5,825 11,280 Foreign income, net of foreign credits 1,055 (1,213) Other 1,907 1,599 -------- -------- $ 62,276 $ 82,631 ======== ======== F-21 66 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)9 FINANCIAL INSTRUMENTS 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 1999, 1998 and 1997. 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. This contract is a hedge relating to foreign licensing revenues. At March 28, 1998, the fair value of these contracts approximated carrying value due to their short-term maturities. The Company is exposed to credit losses in the event of nonperformance by the counterparties to the interest rate swap agreements and forward foreign exchange contracts, 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 April 3, 1999 and March 28, 1998, 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.10 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 $8.7 million, $6.0 million and $5.0 million in fiscal 1999, 1998 and 1997, respectively. UNION PENSION Womenswear participates in a multi-employer pension plan and is required to make contributions to the Union of Needletrades Industrial and Textile Employees (the "Union") for dues based on wages paid to union employees. A portion of such dues is 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 information with respect to the type of benefits provided, vested and nonvested benefits or assets. F-22 67 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) Under the Employee Retirement Income Security Act of 1974, as amended, an employer, upon withdrawal from or termination of a multi-employer plan, is required to continue funding its proportionate share of the plan's unfunded vested benefits. Such withdrawal liability was assumed in conjunction with the acquisition of certain assets from a nonaffiliated licensee. Womenswear has no current intention of withdrawing from the plan. 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 $15.9 million and $14.2 million at April 3, 1999 and March 28, 1998, respectively, and are reflected in other noncurrent liabilities in the accompanying balance sheets. Total compensation expense recorded was $2.7 million, $4.9 million and $3.2 million in fiscal 1999, 1998 and 1997, 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.11 COMMON STOCK All of Polo's outstanding Class B Common Stock is owned by Mr. Lauren and related entities and all of its outstanding 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."12 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) F-23 68 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) 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 April 3, 1999, the Company had an additional 4.6 million Shares reserved for issuance under this plan. Stock options were granted in fiscal 1999 and 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 historical net income and net income per share in fiscal 1999 and pro forma net income and pro forma net income per share for fiscal 1998 would have been reduced to the following pro forma amounts: FISCAL YEAR 1999 1998 Pro forma net income $ 77,953 $ 108,985 Pro forma net income per share - Basic and Diluted $ 0.78 $ 1.09 The Company used the Black-Scholes option-pricing model to determine the fair value of grants made in fiscal 1999 and 1998. The weighted average fair value of options granted was $14.02 and $12.62 per share in fiscal 1999 and 1998, respectively. The following assumptions were applied in determining the pro forma compensation cost: FISCAL YEAR 1999 1998 Risk-free interest rate 5.46% 6.45% Expected dividend yield 0% 0% Weighted average expected option life 6.0yrs 5.45yrs Expected stock price volatility 44.0% 42.0% 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 1999 and 1998, the Board of Directors granted options to purchase 28,500 and 30,000 shares, respectively, of Class A Common Stock with exercise prices equal to the stock's fair market value on the date of grant. At April 3, 1999, the Company had 441,500 options reserved for issuance under this plan. F-24 69 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) Stock option activity for the Stock Incentive Plan and Non-Employee Directors Plan in fiscal 1999 and 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 Granted 1,736 27.70 Exercised (4) 26.00 Forfeited (518) 26.24 Expired -- -- ------ ------ BALANCE AT APRIL 3, 1999 5,298 $26.53 ====== ====== At April 3, 1999, the weighted average remaining contractual life of outstanding options was 8.5 years and 1.7 million shares were exercisable at a weighted average exercise price of $26.00 per share. The price range of options granted and outstanding at April 3, 1999, was $17.13 to $29.91 per share, 95.0% of which were in the range of $26.00 to $28.22 per share. 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 which commenced April 1, 1998. Shares acquired under the repurchase program will be used for stock option programs and other corporate purposes. The repurchased shares have been accounted for as treasury stock at cost. At April 3, 1999, the Company had repurchased 603,864 shares of its Class A Common Stock at an aggregate cost of $16.1 million.13 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 market rental value or purchase the equipment at the current fair market value. The Company generally expects that leases will be renewed or replaced by other leases in the normal course of business. F-25 70 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) As of April 3, 1999, aggregate minimum annual rental payments under noncancelable operating leases with lease terms in excess of one year were payable as follows: FISCAL YEAR ENDING 2000 $ 63,987 2001 58,367 2002 46,852 2003 39,000 2004 47,318 Thereafter 245,805 -------- $501,329 ======== Rent expense charged to operations was $59.6 million, $53.9 million and $40.8 million, net of sublease income of $1.6 million, $1.5 million and $2.1 million, in fiscal 1999, 1998 and 1997, 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 $4.1 million, $3.2 million and $3.7 million in fiscal 1999, 1998 and 1997, respectively. EMPLOYMENT AGREEMENTS The Company is party to employment agreements with certain executives which provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances. LEGAL MATTERS The Company is a defendant in a purported national class action lawsuit filed in the Delaware Supreme Court in July 1997. The plaintiff has brought the action allegedly on behalf of a class of persons who purchased products at the Company's outlet stores throughout the United States at any time since July 15, 1991. The complaint alleges that advertising and marketing practices used by the Company in connection with the sales of its products at its outlet stores violate guidelines established by the Federal Trade Commission and the consumer protection statutes of Delaware and other states with statutes similar to Delaware's Consumer Fraud Act and Delaware's Consumer Contracts Act. The lawsuit seeks, on behalf of the class, compensatory and punitive damages as well as attorneys' fees. The Company answered the complaint and filed a motion for judgment on the pleadings. At a hearing on that motion on March 5, 1999, the Court ruled that the plaintiff must file an amended complaint within 30 days in order to avoid dismissal. The plaintiff has filed an amended complaint, essentially containing the same allegations as the initial complaint, which the Company has answered. The Company intends to continue to vigorously defend this lawsuit and believes that it has substantial and meritorious defenses. F-26 71 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) In January 1999, two actions were filed in California naming as defendants more than a dozen United States-based companies that source apparel garments from Saipan (Commonwealth of the Northern Mariana Islands) and a large number of Saipan-based factories. The actions assert that the Saipan factories engage in unlawful practices relating to the recruitment and employment of foreign workers and that the apparel companies, by virtue of their alleged relationships with the factories, have violated various Federal and state laws. One action, filed in California Superior Court in San Francisco by a union and three public interest groups, alleges unfair competition and false advertising and seeks equitable relief, unspecified amounts for restitution and disgorgement of profits, interest and an award of attorney's fees. The second, filed in Federal Court for the Central District of California, is brought on behalf of a purported class consisting of the Saipan factory workers. It alleges claims under the Federal civil RICO statute, Federal peonage and involuntary servitude laws, the Alien Tort Claims Act, and state tort law, and seeks equitable relief and unspecified damages, including treble and punitive damages, interest and an award of attorney's fees. A third action, brought in Federal Court in Saipan solely against the garment factory defendants on behalf of a putative class of their workers, alleges violations of Federal and local wage and employment laws. The Company has not been named as a defendant in any of these suits, but the Company sources products in Saipan and counsel for the plaintiffs in these actions has informed the Company that it is a potential defendant in these or similar actions. The Company has denied any liability and is not at this preliminary stage in a position to evaluate the likelihood of a favorable or unfavorable outcome if it were named in any such suit. The Company is from time to time involved in legal claims, involving trademark and intellectual property, licensing, employee relations and other matters incidental to its business. In the opinion of the Company's management, the resolution of any matter currently pending will not have a material effect on the financial condition or results of operations of the Company. F-27 72 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)14 QUARTERLY INFORMATION (UNAUDITED) The following is a summary of certain unaudited quarterly financial information for fiscal 1999 and 1998: JUNE 27, SEPT. 26, DEC. 26, APRIL 3, FISCAL 1999 1998 1998 1998 1999 Net revenues $ 358,776 $ 474,806 $ 447,530 $ 445,747 Gross profit 182,614 233,711 206,869 199,079 Net income (loss) 22,711 49,919 25,351 (7,431) Net income (loss) per share - Basic and Diluted $ 0.23 $ 0.50 $ 0.25 ($ .07) Shares outstanding - Basic 100,195 99,827 99,623 99,623 Shares outstanding - Diluted 100,570 99,878 99,674 99,783 JUNE 28, SEPT. 27, DEC. 27, MARCH 28, FISCAL 1998 1997 1997 1997 1998 Net revenues $289,650 $423,354 $408,297 $359,243 Gross profit 146,652 208,279 192,921 172,704 Net income 44,638 44,933 29,311 28,689 PRO 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 Shares outstanding - Basic 100,222 100,222 100,222 100,222 Shares outstanding - Basic 100,222 100,222 100,222 100,222 Shares outstanding - Diluted 100,222 100,222 100,316 100,429 Net income per share represents both the basic and diluted computation in accordance with SFAS No. 128, "Earnings per Share", as described in Note 2. The fiscal 1998 pro forma data presents the effects on the historical financial statements of the pro forma adjustments described in Note 2 as if they had occurred at March 30, 1997. 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. The actual weighted average number of shares outstanding was used for all other periods presented. F-28 73 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)15 SEGMENT REPORTING The Company has three reportable business segments: wholesale, retail and licensing. The Company's reportable segments are individual business units that offer different products and services. They are managed separately because each segment requires different strategic initiatives, promotional campaigns, marketing, and advertising, based upon its own individual positioning in the market. Additionally, these segments reflect the reporting basis used internally by senior management to evaluate performance and the allocation of resources. The Company's wholesale segment consists of two operating units: Polo Brands and Collection Brands. Each unit designs, sources, markets and distributes discrete brands. Both units primarily sell products to major department and specialty stores and to Company-owned and licensed retail stores. The retail segment operates two types of stores: outlet and Polo stores, including flagship stores. The stores sell Polo products purchased from the Company's wholesale segment, its licensees and its suppliers. The licensing segment, which consists of product, international and home collection, generates revenues from royalties through its licensing alliances. The licensing agreements grant the licensee 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 accounting policies of the segments are consistent with those described in Note 2, Significant Accounting Policies. Intersegment sales and transfers are recorded at cost and treated as a transfer of inventory. All intercompany revenues and profits or losses are eliminated in consolidation. Senior management does not review these sales when evaluating segment performance. The Company's senior management evaluates each segment's performance based upon income or loss from operations before interest, nonrecurring gains and losses and income taxes. Corporate overhead expenses are allocated to each segment based upon each segment's usage of corporate resources. The Company's net revenues, income from operations, depreciation and amortization, total assets and capital expenditures for each segment for fiscal 1999, 1998 and 1997 were as follows: FISCAL YEAR 1999 1998 1997 NET REVENUES: Wholesale $ 859,498 $ 742,674 $ 671,132 Retail 659,352 570,751 379,972 Licensing 208,009 167,119 137,113 ---------- ---------- ---------- $1,726,859 $1,480,544 $1,188,217 ========== ========== ========== F-29 74 POLO RALPH LAUREN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) INCOME FROM OPERATIONS: Wholesale $ 59,796 $ 48,889 $ 43,666 Retail 31,840 61,622 41,084 Licensing 122,509 89,244 72,613 ---------- ---------- ---------- 214,145 199,755 157,363 Less: Unallocated Restructuring Charge 58,560 -- -- ---------- ---------- ---------- $ 155,585 $ 199,755 $ 157,363 ========== ========== ========== DEPRECIATION AND AMORTIZATION: Wholesale $ 21,111 $ 13,350 $ 7,402 Retail 20,349 10,956 4,116 Licensing 4,954 3,096 2,237 ---------- ---------- ---------- $ 46,414 $ 27,402 $ 13,755 ========== ========== ========== SEGMENT ASSETS: Wholesale $ 376,154 $ 348,687 $ 293,257 Retail 424,203 286,500 169,744 Licensing 73,389 71,531 34,760 Corporate 230,838 118,412 90,997 ---------- ---------- ---------- $1,104,584 $ 825,130 $ 588,758 ========== ========== ========== CAPITAL EXPENDITURES: Wholesale $ 32,013 $ 23,470 $ 17,424 Retail 59,568 30,129 11,977 Licensing 7,817 4,178 3,660 Corporate 42,294 5,302 2,269 ---------- ---------- ---------- $ 141,692 $ 63,079 $ 35,330 ========== ========== ========== 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. F-30 75 INDEPENDENT AUDITORS' REPORTTo the Board of Directors and Stockholders of Polo Ralph Lauren CorporationNew York, New York We have audited the consolidated financial statements as of and for the yearsended April 3, 1999 and March 28, 1998 and the combined financial statements forthe year ended March 29, 1997 of Polo Ralph Lauren Corporation and subsidiaries(the "Company"), and have issued our report thereon dated May 21, 1999; 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 21, 1999 S-1 76 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 APRIL 3, 1999 Allowance for doubtful accounts $ 6,647 $ 1,060 $ 0 $ 560 (a) $ 7,147 Allowance for sales discounts 5,800 34,320 0 33,772 6,348 ------- ------- ------- ------- ------- $12,447 $35,380 $ 0 $34,332 $13,495 ======= ======= ======= ======= ======= 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 0 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 0 26,252 6,556 ------- ------- ------- ------- ------- $11,054 $28,141 $ 0 $26,350 $12,845 ======= ======= ======= ======= =======-----------------------------------(a) ACCOUNTS WRITTEN-OFF AS UNCOLLECTIBLE. S-2 77 POLO RALPH LAUREN CORPORATION INDEX TO EXHIBITS -------- ------------------------------------------------------------------ ---- EXHIBIT NUMBER DESCRIPTION PAGE 3.1 Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-24733) (the "S-1")).* 3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the S-1).* 10.1 Polo Ralph Lauren Corporation 1997 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. ** (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the Fiscal Year ended March 28, 1998 (the "Fiscal 1998 10-K")) 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)*+ 78 10.13 Deferred Compensation Agreement dated April 2, 1995 between F. Lance Isham and Polo Ralph Lauren, L.P.(filed as Exhibit 10.14 to the S-1)*+ 10.14 Amendment to Deferred Compensation Agreement made as of November 10, 1998 between F. Lance Isham and Polo Ralph Lauren Corporation+ 10.15 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)*+ 10.16 Amended and Restated Employment Agreement effective November 10, 1998 between F. Lance Isham and Polo Ralph Lauren Corporation+ 10.17 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)* 10.18 Form of Credit Agreement between Polo Ralph Lauren Corporation and The Chase Manhattan Bank (filed as Exhibit 10.24 to the S-1)* 10.19 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)* 10.20 Credit Agreement between Polo Ralph Lauren Corporation and the Chase Manhattan Bank dated as of March 30, 1999 10.21 Form of Indemnification Agreement between Polo Ralph Lauren Corporation and its Directors and Executive Officers (filed as Exhibit 10.26 to the S-1)* 10.22 Employment Agreement dated June 9, 1997 between Ralph Lauren and Polo Ralph Lauren Corporation (filed as Exhibit 10.27 to the S-1)*+ 10.23 Amended and Restated Employment Agreement effective April 4, 1999 between Ralph Lauren and Polo Ralph Lauren Corporation+ 10.24 Employment Agreement effective November 10, 1998 between Hamilton South and Polo Ralph Lauren Corporation+ 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. ** (filed as Exhibit 10.25 to the Fiscal 1998 10-K.)* 10.26 License Agreement, dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. and Jones Apparel Group, Inc.** (filed as Exhibit 10.26 to the Fiscal 1998 10-K)* 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 10.24 and 10.25 have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission. 1 EXHIBIT 10.14 AMENDMENT TO DEFERRED COMPENSATION AGREEMENT Agreement made as of the 10th day of November, 1998, by and betweenPOLO RALPH LAUREN CORPORATION, a Delaware corporation (the "Company"), and F.Lance Isham (the "Executive"). The Company (as successor to Polo Ralph Lauren, L.P.) and Executive areparties to a Deferred Compensation Agreement, made as of the 2nd day of April,1995 (the "Deferred Compensation Agreement"). Executive has been with effect from this day appointed President of theCompany and, in connection therewith and with related actions taken with respectto that certain Amended and Restated Employment, dated as of the date hereof,between the Company and Executive, the parties wish to modify the DeferredCompensation Agreement. NOW, THEREFORE, intending to be bound the parties hereby agree asfollows: 1. Capitalized terms defined in the Deferred Compensation Agreement andused herein shall have the same meaning herein. All references to the Company inthe Deferred Compensation Agreement are to Polo Ralph Lauren Corporation. 2. Section 1(a) of the Deferred Compensation Agreement is herebyamended so that no crediting to the Deferred Compensation Account shall be madewith respect to incentive or bonus payments for any period after fiscal 1999(i.e., the fiscal year ending April 3, 1999), provided that crediting withrespect to Executive's bonus for fiscal 1999, if any, under the Company'sExecutive Incentive Plan, shall be made even if such bonus is paid in fiscal2000. 3. The Deferred Compensation Agreement remains in full force and effectand unmodified except as herein provided. IN WITNESS WHEREOF, each of the undersigned has executed this Agreementas of the date first written above. POLO RALPH LAUREN CORPORATION, a Delaware corporation By: /s/ Michael J. Newman --------------------- Michael J. Newman EXECUTIVE: By: /s/ F. Lance Isham ---------------------- F. Lance Isham 1 EXHIBIT 10.16 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") madeeffective as of the 10th day of November, 1998, by and between Polo Ralph LaurenCorporation, a Delaware corporation (the "Corporation"), and F. Lance Isham (the"Executive"). WHEREAS, the Executive is currently employed by the Corporationpursuant to an employment agreement dated as of April 2, 1995, (the "PriorAgreement"); WHEREAS, the Executive has been elected to be the Corporation'sPresident by the Board of Directors (the "Board"); WHEREAS, the Corporation and the Executive wish to amend and restatethe Prior Agreement as evidenced by this Agreement effective as of the datehereof in order to provide for the modification of certain provisions of thePrior Agreement relating to the Executive's annual and incentive compensation,equity opportunities and restrictive covenants; NOW, THEREFORE, intending to be bound the parties hereby agree asfollows with effect from the date first above written. 1. Employment/Prior Agreement. The Corporation hereby agrees to employthe Executive, and the Executive hereby agrees to serve the Corporation, on theterms and conditions set forth herein. From and after the date hereof, the termsof this Agreement shall supersede in all respects the terms of the PriorAgreement which shall cease to be of any further force and effect. 2. Term. The employment of the Executive by the Corporation as providedin Section 1 pursuant to this Agreement will be effective on the date hereof.The Executive will serve at the direction and pleasure of the Board. The term ofthe Executive's employment under this Employment Agreement shall continue untilthe close of business of the fifth anniversary of the date of this Agreement,subject to earlier termination in accordance with the terms of this Agreement(the "Term"). The Term shall be automatically extended for successive one yearperiods thereafter unless either party notifies the other in writing of itsintention not to so extend the Term at least twelve (12) months prior to thecommencement of the next scheduled one year extension. 3. Position and Duties. The Executive shall serve as President of theCorporation and shall have such responsibilities, duties and authority as he mayhave as of the date hereof (or which arise from any comparable position as a keyexecutive officer to which he may be 1 2appointed after the date hereof) and as may from time to time be assigned to theExecutive by the Board that are consistent with such responsibilities, dutiesand authority. The Executive shall devote substantially all his working time andefforts to the business and affairs of the Corporation. 4. Compensation and Related Matters. (a) Salary and Incentive Bonus (i) Salary. From and after the date of this Agreement the Corporation shall pay to the Executive an annual salary of not less than $900,000. Such salary shall be paid in substantially equal installments on a basis consistent with the Corporation's payroll practices and shall be subject to such increases, if any, as may be determined in the sole discretion of the Board. (ii) Incentive Bonus. Executive shall participate in the Corporation's Executive Incentive Plan (the "EIP") and be eligible to earn an annual cash bonus for each fiscal year during the term of this Agreement (the "Bonus"). For fiscal year 1999, Executive's Bonus opportunity shall be based on his actual salary earnings for the year but otherwise shall be unchanged and calculated as if Executive had remained Group President and COO of the Corporation's men's division for the full fiscal year. Beginning for fiscal year 2000 and for each fiscal year thereafter Executive's Bonus opportunity shall range from 115% to 230% of Executive's annual salary based upon the extent to which corporate performance goals established by the Compensation Committee (the "Compensation Committee") of the Board are achieved. The Bonus, if any, payable to the Executive in respect of each fiscal year will be paid at the same time that bonuses are paid to other executives under the EIP. Notwithstanding any provision of this Agreement to the contrary, the Executive's entitlement to payment of an annual incentive bonus during any period when the compensation payable to the Executive pursuant to this Agreement is subject to the deduction limitations of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), shall be subject to shareholder approval of a plan or arrangement evidencing such annual incentive bonus opportunity that complies with the requirements of section 162(m) of the Code. (b) Expenses. During the term of the Executive"s employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable and customary expenses incurred by the Executive in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request of and in the service of the Corporation, provided that such expenses are 2 3 incurred and accounted for in accordance with the policies and procedures established by the Corporation. (c) Other Benefits. During the term of the Executive's employment hereunder, the Executive shall be entitled to participate in or receive benefits under any medical, pension, profit sharing or other employee benefit plan or arrangement generally made available by the Corporation now or in the future to its executives and key management employees (or to their family members), subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to the Executive pursuant to paragraph (a) of this Section. (d) Vacations. The Executive shall be entitled to reasonable vacations consistent with past practice. (e) Restricted Stock. Executive shall be granted a number of restricted shares of the Corporation's Class A Common Stock with a fair market value equal to $2 million as of the date hereof, based upon the mean between the high and low sales price per share for such stock on this date as reported on the Composite tape for securities traded on the New York Stock Exchange; provided that any fractional share will be paid to the Executive in cash. The restricted shares will vest with respect to one third (1/3) of the aggregate number of restricted shares so granted on each of the third, fourth and fifth anniversaries of the date of this Agreement subject to the Executive's continued employment through each vesting date. (f) Options. With respect to fiscal years 2000 and 2001, Executive shall be granted options to purchase at least 100,000 shares of the Corporation's Class A Common Stock pursuant to the terms of the Corporation's 1997 Long-Term Stock Incentive Plan. Options granted to the Executive pursuant to the foregoing will vest and become exercisable ratably over three (3) years on each of the first three anniversaries of the date of grant, subject to the Executive's continued employment through each vesting date, and will have an exercise price equal to the fair market value per shares as of the date of grant. 5. Termination. (a) Termination by Corporation. The Executive's employment hereunder may be terminated by the Board at any time with or without Cause. 3 4 (b) Termination by The Executive. The Executive may terminate his employment hereunder with or without Good Reason. For purposes of this Agreement, "Good Reason" shall mean (A) a material diminution in the Executive's duties or the assignment to the Executive of a title or duties inconsistent with his position as President of the Corporation, (B) a reduction in the Executive's salary or annual incentive bonus opportunity, (C) a failure of the Corporation to comply with any material provision of this Agreement or (D) the Executive's ceasing to be entitled to the payment of an annual incentive bonus as a result of the failure of the Corporation's shareholders to approve a plan or arrangement evidencing such annual incentive bonus in a manner that complies with the requirements of section 162(m) of the Internal Revenue Code of 1986; provided that the events described in clauses (A), (B) and (C) above shall not constitute Good Reason unless and until such diminution, reduction or failure (as applicable) has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Corporation. (c) Any termination of the Executive's employment by the Corporation or by the Executive (other than termination pursuant to Section 6(d)(i) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10 hereof. If termination is pursuant to Sections 6(d)(ii)-(iii) or 5(b) hereof, the "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 6. Compensation Upon Termination. (a) If the Corporation shall terminate the Executive's employment for any reason other than an Enumerated Reason as set forth in Section 6(d) hereof and other than due to the Corporation's election not to extend the Term of this Agreement as contemplated by Section 2, or if the Executive resigns for Good Reason pursuant to Section 5(b) hereof, then so long as the Executive complies with Section 8 hereof the Executive shall be entitled to the following: (i) an amount equal to the greater of: (A) the sum of (I) three (3) times the Executive's salary at the rate in effect on such date (unless employment is terminated by the Executive for Good Reason pursuant to Section 5(b) hereof as a result of a salary reduction, in which case, at the rate in effect prior to such reduction), plus (II) two (2) times the average annual incentive bonus paid to the Executive over the preceding two years; plus a pro rata annual incentive bonus for 4 5 the year of termination (based on the average annual incentive bonus paid to the Executive over the preceding two years and based upon the percentage of the calendar year in which such termination occurs that shall have elapsed through the date of termination (a "Pro Rata Annual Incentive Bonus")); and (B) the sum of (i) five (5) minus the number of years (including fractions thereof) that shall have elapsed from the date of this Agreement times the Executive's salary at the rate in effect on such date (unless employment is terminated by the Executive for Good Reason pursuant to Section 5(b) hereof as a result of a salary reduction, in which case, at the rate in effect prior to such reduction), plus (ii) two (2) times the average annual incentive bonus paid to the Executive over the preceding two (2) years; plus a Pro Rata Annual Incentive Bonus for the year of termination. Any amounts paid pursuant to either clause (A) or clause (B) aboveshall be paid in equal monthly installments for a period of thirty-six (36)months (the "Severance Period") from the date of termination, except that thePro Rata Annual Incentive Bonus shall be paid in a lump sum in cash withinthirty (30) days following the date of the Executive's termination ofemployment. (ii) Continued participation in the Corporation's health benefit plans during the Severance Period; provided that if the Executive is provided with similar coverage by a successor employer, any such coverage by the Corporation shall cease; (iii) Continued use of the Corporation automobile until the then existing auto lease term expires; (iv) Waiver of collateral interest securing return to the Corporation of premiums paid by the Corporation for the Executive's existing split dollar life insurance policy; (v) Any unvested restricted shares granted to the Executive pursuant to Section 4(e) will continue to vest on their scheduled vesting dates, subject to and conditioned upon the Executive's compliance with Section 8 hereof; (vi) Any unvested options granted to the Executive pursuant to Section 4(f) will continue to vest on their scheduled vesting dates, subject to and conditioned upon the Executive's compliance with Section 8 hereof and subject to and conditioned upon the Executive's compliance with Section 8, any vested options granted to the Executive pursuant to Section 4(f) (including any options 5 6 that continue to vest as described above) will remain exercisable until the latest to occur of (x) five (5) years from the date of this Agreement, (y) one (1) year from the date the Executive's termination of employment and (z) thirty (30) days from the date the option becomes vested and exercisable; (vii) If a Change of Control shall have occurred prior to the date of termination the Executive shall be entitled at his option, exercisable in writing within fifteen days of the date of termination, to receive the salary and bonus payments pursuant to subsection (i) above in an equivalent amount in two equal lump sum installments, the first payable within 30 days of the date of termination and the second on the first anniversary of the date of termination. Executive's right to receive the other benefits provided for in this Section 6(a) shall otherwise be unaffected. As used herein, the term "Change of Control" shall mean Ralph Lauren or members of his family (or trusts or entities created for their benefit) no longer control 50% or more of the voting power of the then outstanding securities of the Corporation entitled to vote for the election of the Corporation's directors; and (viii) Except as provided above, the Corporation will have no further obligations to the Executive under this Agreement following the Executive's termination of employment under the circumstances described in this Section 6(a). (b) If the Executive's employment is terminated by his death or by the Corporation due to the Executive's Disability (as defined below): (i) The Corporation shall pay any amounts due to the Executive through the date of his death or the date of his termination due to Disability, including a Pro Rata Annual Incentive Bonus for the year of termination; (ii) Any unvested restricted shares granted to the Executive pursuant to Section 4(e) shall vest immediately; (iii) Any unvested options granted to the Executive pursuant to Section 4(f) will vest and all such options held by the Executive, or his estate, will remain exercisable for three (3) years from the date of the Executive's death or termination due to disability; and (iv) Except as provided above, the Corporation will have no further obligations to the Executive under this Agreement following the Executive's termination of employment under the circumstances described in this Section 6(b). 6 7 (c) If the Executive's employment shall be terminated by the Corporation pursuant to section 6(d)(iii) for Cause or by the Executive for other than Good Reason (including due to the Executive's election not to extend the Term as contemplated by Section 2), the Corporation shall pay the Executive his full salary through the date of termination at the rate in effect prior to such termination and the Corporation shall have no further obligations to the Executive under this Agreement but the Executive shall be bound by Section 8 hereof. Following any such termination, any then unvested restricted shares granted to the Executive pursuant to Section 4(e) shall be forfeited and any options granted to the Executive pursuant to Section 4(f) that have not theretofore been exercised shall cease to be exercisable and shall terminate as of the date of such termination of employment. (d) The term "Enumerated Reason" with respect to termination by the Corporation of the Executive's employment shall mean any one of the following reasons: (i) Death. The Executive's employment hereunder shall terminate upon his death. (ii) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination is given (which may occur before or after the end of such six month period) shall not have returned to the performance of his duties hereunder on a full-time basis (a "Disability"), the Corporation may terminate the Executive's employment hereunder. (iii) Cause. The Corporation shall have "Cause" to terminate the Executive's employment hereunder upon (1) the willful and continued failure by the Executive to substantially perform his duties hereunder after demand for substantial performance is delivered by the Corporation that specifically identifies the manner in which the Corporation believes the Executive has not substantially performed his duties, or (2) Executive's conviction of, or plea of nolo contendere to, a crime (whether or not involving the Corporation) constituting any felony or (3) the willful engaging by the Executive in gross misconduct relating to the Executive's employment that is materially injurious to the Corporation, monetarily or otherwise (including, but not limited to, conduct that constitutes competitive activity, in violation of Section 8) or which subjects, or if generally known, would subject the Corporation to public ridicule or embarrassment. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good 7 8 faith and without reasonable belief that his action or omission was in the best interest of the Corporation. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (x) reasonable written notice to the Executive setting forth the reasons for the Corporation's intention to terminate for Cause, (y) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (z) delivery to the Executive of a Notice of Termination, as defined in Section 5(c) hereof, from the Board finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clauses (A) through (C) hereof, and specifying the particulars thereof in detail. (e) If the Executive's employment with the Corporation shall terminate due to the Corporation's election not to extend the Term of this Agreement as contemplated by Section 2: (i) The Executive shall be entitled to receive an amount, payable in equal monthly installments over a one year period, equal to the sum of (x) his annual salary, plus (y) his average annual incentive bonus paid over the preceding two years; (ii) Any unvested restricted shares granted to the Executive pursuant to Section 4(e) will continue to vest on their scheduled vesting dates, subject to and conditioned upon the Executive's compliance with Section 8 hereof; (iii) Any unvested options granted to the Executive pursuant to Section 4(f) will continue to vest on their scheduled vesting dates, subject to and conditioned upon the Executive's compliance with Section 8 hereof and subject to and conditioned upon the Executive's compliance with Section 8, any vested options granted to the Executive pursuant to Section 4(f) (including any options that continue to vest as described above) will remain exercisable until the latest to occur of (x) five (5) years from the date of this Agreement, (y) one (1) year from the date the Executive's termination of employment and (z) thirty (30) days from the date the option becomes vested and exercisable; and (iv) Except as provided above, the Corporation shall have no further obligations to the Executive under this Agreement following the Executive's termination of employment under the circumstances described in this Section 6(e). 7. Mitigation. The Executive shall have no duty to mitigate thepayments provided for in Sections 6(a) or 6(e) by seeking other employment orotherwise and such payment shall not be subject to reduction for anycompensation received by the Executive from employment in any 8 9capacity following the termination of the Executive's employment with theCorporation. 9 10 8. Noncompetition. (a) The Executive agrees that for the duration of his employment and for a period three (3) years from the date of termination thereof, he will not, on his own behalf or on behalf of any other person or entity, hire, solicit, or encourage to leave the employ of the Corporation or its subsidiaries, affiliates or licensees any person who is an employee of any of such companies. (b) The Executive agrees that for the duration of his employment and for a period of three (3) years from the date of termination thereof, the Executive will take no action which is intended, or would reasonably be expected, to harm (e.g. making public derogatory statements or misusing confidential Corporation information, it being acknowledged that the Executive's employment with a competitor in and of itself shall not be deemed to be harmful to the Corporation for purposes of this Section 8(b)) the Corporation or any of its subsidiaries, affiliates or licensees or their reputation. (c) The Executive agrees that during the duration of his employment and; (i) in the event of the Executive's termination of employment due to the Executive's resignation without Good Reason, until the later of (x) five (5) years from the date of this Agreement and (y) two (2) years from the date of such termination of employment; and (ii) in the event of the Executive's termination of employment by the Corporation without Cause or the Executive's resignation for Good Reason pursuant to Section 5(b), for two (2) years from the date of such termination of employment; and (iii) in the event of the Executive's termination of employment by the Corporation for Cause, at the election of the Corporation in consideration for the payment to the Executive of an amount equal to the Executive's salary and annual incentive bonus (equal to the average annual incentive bonus paid to the Executive over the preceding two years) for each year within such period, for a period of up to two (2) years from the date of such termination of employment,then, during the period specified in clause (i), (ii) or (iii) above, asapplicable, the Executive shall not, directly or indirectly, (A) engage in any"Competitive Business" (as defined below) for his own account, (B) enter intothe employ of, or render any services to, any person engaged in a CompetitiveBusiness, or (C) become interested in any entity engaged in a CompetitiveBusiness, directly or indirectly as an individual, partner, shareholder,officer, director, principal, agent, 10 11employee, trustee, consultant, or in any other relationship or capacity;provided that the Executive may own, solely as an investment, securities of anyentity which are traded on a national securities exchange if the Executive isnot a controlling person of, or a member of a group that controls such entityand does not, directly or indirectly, own 2% or more of any class of securitiesof such entity. For purposes of this Agreement the term "Competitive Business" shallmean any of the brands and companies that the Corporation and the Executive mayagree to and acknowledge in writing from time to time based upon a good faithdetermination that such brands or companies compete with the Corporation or itssubsidiaries, affiliates or licensees. The provisions of this Section 8(c) shall not apply if Executive electsto terminate his employment with the Corporation other than for Good Reasonfollowing the appointment of a person other than Ralph Lauren, Michael Newman orExecutive to the position of chief executive officer of the Corporation,provided (i) Executive has remained in his position for a period of nine monthsfollowing any such appointment, (ii) Executive has given the Corporation no lessthan 90 day's prior written notice of such termination referring to theprovisions of this Section and (iii) no more than 18 months shall have elapsedfrom the date of any such appointment prior to the giving of notice oftermination hereunder by Executive. (d) The Executive will not at any time (whether during or after his employment with the Corporation) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, entity or enterprise, other than the Corporation or any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans or the business and affairs of the Corporation generally, or any subsidiary, affiliate or licensee of the Corporation; provided that the foregoing shall not apply to information which is not unique to the Corporation or which is generally known to the industry or the public other than as a result of the Executive's breach of this covenant. The Executive agrees that upon termination of his employment with the Corporation for any reason, he will return to the Corporation immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Corporation or its subsidiaries or affiliates or licensees. (e) If the Executive breaches, or threatens to commit a breach of, any of the provisions of this Section 8 (the "Restrictive Covenants"), the Corporation shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in 11 12 addition to, and not in lieu of, any other rights and remedies available to the Corporation under law or equity: (i) The right and remedy to have the Restrictive Covenants specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Corporation and that money damages will not provide an adequate remedy to the Corporation; (ii) The right and remedy to require the Executive to account for and pay over to the Corporation all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the Restrictive Covenants, and the Executive shall account for and pay over such Benefits to the Corporation; and (iii) The right to discontinue the payment of any amounts owing to the Executive under the Agreement. (f) If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portion. In addition, if any court construes any of the Restrictive Covenants, or any part thereof, to be unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. 9. Successors; Binding Agreement. (a) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, 12 13 executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are payable to him hereunder all such amounts unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 10. Notice. For the purposes of this Agreement, notices, demands andall other communications provided for in this Agreement shall be in writing andshall be deemed to have been duly given when personally delivered with receiptacknowledged or five business days after having been mailed by United Statescertified or registered mail, return receipt requested, postage prepaid,addressed as follows: If to the Executive: Mr. F. Lance Isham 205 East 78th Street New York, New York 10021 with a copy to: Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue New York, New York 10022 Attention: Jeffrey P. Englander, Esq. If to the Corporation: Polo Ralph Lauren Corporation 650 Madison Avenue New York, New York 10022 Attention: General Counselor to such other address as any party may have furnished to the other in writingin accordance herewith, except that notices of change of address shall beeffective only upon receipt. 11. Miscellaneous. No provisions of this Agreement may be modified,waived or discharged unless such waiver, modification or discharge is agreed toin writing signed by the Executive and such officer of the Corporation as may bespecifically designated by the Board. No waiver by either party hereto at anytime of any breach by the other party hereto of, or compliance with, anycondition or provision of this Agreement to be performed by such other partyshall be deemed a waiver of similar or dissimilar provisions or conditions atthe same or at 13 14any prior or subsequent time. The validity, interpretation, construction andperformance of this Agreement shall be governed by the laws of the State of NewYork without regard to its conflicts of law principles. 12. Validity. The invalidity or unenforceability of any provision orprovisions of this Agreement shall not affect the validity or enforceability ofany other provision of this Agreement, which shall remain in full force andeffect. 13. Counterparts. This Agreement may be executed in one or morecounterparts, each of which shall be deemed to be an original but all of whichtogether will constitute one and the same instrument. 14. Arbitration. Any dispute or controversy arising under or inconnection with this Agreement shall be settled exclusively by arbitration inthe City of New York before a single arbitrator who shall be a retired federaljudge in accordance with the then obtaining employment rules of the AmericanArbitration Association. Judgment may be entered on the arbitrator's award inany court having jurisdiction; provided, however, that the Corporation shall beentitled to seek a restraining order or injunction in any court of competentjurisdiction to prevent any continuation of any violation of the provisions ofSection 8 of this Agreement and the Executive hereby consents that suchrestraining order or injunction may be granted without the necessity of theCorporation's posting any bond, and provided further that the Executive shall beentitled to seek specific performance of his right to be paid until the date oftermination during the pendency of any dispute or controversy arising under orin connection with this Agreement. Fees and expenses payable to the AmericanArbitration Association and the arbitrator shall be shared equally by theCorporation and by the Executive, but the parties shall otherwise bear their owncosts in connection with the arbitration; provided that the arbitrator shall beentitled to include as part of the award to the prevailing party the reasonablelegal fees and expenses incurred by such party in an amount not to exceed$25,000. 15. Withholding. The Corporation may withhold from any amounts payableunder this Agreement such federal, state and local taxes as may be required tobe withheld pursuant to applicable law or regulation. 16. Entire Agreement. This Agreement sets forth the entire agreement ofthe parties hereto in respect of the subject matter contained herein andsupersedes all prior agreements, promises, covenants, arrangements,communications, representations or warranties, whether oral or written, by anyofficer, employee or representative of any party hereto; and any prior agreementof the parties hereto in respect of the subject matter contained herein ishereby terminated and cancelled. 14 15 IN WITNESS WHEREOF, the Corporation has caused this Agreement to beduly executed and the Executive has hereunto set his hand, each on the date setforth below, but effective as of the 10th day of November, 1998. POLO RALPH LAUREN CORPORATION By: /s/ Ralph Lauren ---------------- Date: March 10, 1999 /s/ F. Lance Isham ----------------- Executive: F. Lance Isham Date: February 24, 1999 15 1 EXHIBIT 10.20 EXECUTION COPY================================================================================ ---------- CREDIT AGREEMENT Dated as of March 30, 1999 ---------- Among POLO RALPH LAUREN CORPORATION, as Borrower THE LENDERS AND OTHER FINANCIAL INSTITUTIONS PARTIES HERETO, THE CHASE MANHATTAN BANK, as Agent and CHASE SECURITIES INC., as Book Manager and Lead Arranger-------------------------------------------------------------------------------- 2 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS.................................................. 1 1.1 Defined Terms................................................ 1 1.2 Other Definitional Provisions................................ 21SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS............. 21 2.1 Revolving Credit Commitments................................. 21 2.2 Revolving Credit Notes....................................... 22 2.3 Procedure for Revolving Credit Borrowing..................... 22 2.4 Use of Proceeds.............................................. 22SECTION 3. AMOUNT AND TERMS OF TERM LOANS............................... 22 3.1 Term Loan Commitments........................................ 22 3.2 Term Notes................................................... 23 3.3 Procedure for Term Loan Borrowing............................ 23 3.4 Use of Proceeds.............................................. 23SECTION 4. AMOUNT AND TERMS OF LETTERS OF CREDIT........................ 24 4.1 Letters of Credit............................................ 24 4.2 Issuance of Commercial Letters of Credit..................... 24 4.3 Issuance of Standby Letters of Credit........................ 25 4.4 Participating Interests...................................... 25 4.5 Procedure for Opening Letters of Credit...................... 25 4.6 Payments..................................................... 26 4.7 Further Assurances........................................... 27 4.8 Letter of Credit Applications................................ 27 4.9 Use of Letters of Credit..................................... 27SECTION 5. ACCEPTANCES.................................................. 27 5.1 Acceptances.................................................. 27 5.2 Participating Interests...................................... 28 5.3 Payments..................................................... 28 5.4 Termination of Acceptance Commitments........................ 29 5.5 Mandatory Prepayment of Acceptance........................... 29SECTION 6. GENERAL PROVISIONS APPLICABLE TO LOANS....................... 30 6.1 Interest Rates and Payment Dates............................. 30 6.2 Commitment and Other Fees.................................... 30 6.3 Commercial Letter of Credit Fees............................. 31 6.4 Standby Letter of Credit Fees................................ 31 6.5 Acceptance Fees.............................................. 31 6.6 Computation of Interest and Fees............................. 32 6.7 Optional Prepayments......................................... 32 I-2 3 6.8 Termination or Reduction of Commitments...................... 32 6.9 Pro Rata Treatment and Payments.............................. 33 6.10 Conversion and Continuation Options.......................... 34 6.11 Minimum Amounts and Maximum Number of Tranches............... 34 6.12 Inability to Determine Interest Rate......................... 34 6.13 Illegality................................................... 35 6.14 Indemnity.................................................... 35 6.15 Change of Lending Office..................................... 36 6.16 Taxes........................................................ 36 6.17 Requirements of Law.......................................... 37 6.18 Obligations Absolute......................................... 39 6.19 Mandatory Prepayments........................................ 40 6.20 Cash Collateralization of Letter of Credit Obligations and Acceptance Obligations.................................... 40SECTION 7. CONDITIONS PRECEDENT ........................................ 41 7.1 Conditions to Initial Loans.................................. 41 7.2 Conditions to All Extensions of Credit....................... 43 7.3 Tender Offer Funding Procedures.............................. 43SECTION 8. REPRESENTATIONS AND WARRANTIES............................... 44 8.1 Financial Condition.......................................... 44 8.2 No Change.................................................... 45 8.3 Existence; Compliance with Law............................... 45 8.4 Power; Authorization; Enforceable Obligations................ 45 8.4 Power; Authorization; Enforceable Obligations................ 45 8.5 No Legal Bar................................................. 46 8.6 No Material Litigation....................................... 46 8.7 No Default................................................... 46 8.8 Ownership of Property; Liens................................. 46 8.9 No Burdensome Restrictions................................... 46 8.10 Taxes........................................................ 46 8.11 Federal Regulations.......................................... 47 8.12 ERISA........................................................ 47 8.13 Investment Company Act; Other Regulations.................... 47 8.14 Subsidiaries................................................. 47 8.15 Chief Executive Office....................................... 48 8.16 General Partners' Existence; Compliance with Law............. 48 8.17 General Partners' Power; Authorization; Enforceable Obligations................................................ 48 8.18 Certain Documents............................................ 48 8.19 Accuracy of Information...................................... 48 8.20 Environmental Matters........................................ 49 8.21 Year 2000 Matters............................................ 50 8.22 Guarantors................................................... 50SECTION 9. AFFIRMATIVE COVENANTS........................................ 50 9.1 Financial Statements and Information......................... 50 9.2 Corporate Existence; Nature of Business...................... 51 9.3 Payment of Obligations....................................... 52 9.4 Maintenance of Properties; Insurance......................... 52 I-3 4 9.5 Maintain Trademarks.......................................... 52 9.6 Inspection; Books and Records................................ 52 9.7 Notices...................................................... 53 9.8 Guarantee Agreement Supplement............................... 53 9.9 Use of Proceeds.............................................. 54 9.10 Observance of Agreements..................................... 54SECTION 10. NEGATIVE COVENANTS.......................................... 54 10.1 Consolidated Net Worth...................................... 54 10.2 Consolidated Indebtedness Ratio............................. 54 10.3 Limitation on Indebtedness.................................. 54 10.4 Limitation on Liens......................................... 55 10.5 Sale of Assets.............................................. 57 10.6 Limitation on Fundamental Changes........................... 58 10.7 Limitation on Loans, Advances and Other Investments......... 58 10.8 Compliance with ERISA....................................... 60 10.9 Transactions with Affiliates................................ 60 SECTION 11. EVENTS OF DEFAULT........................................... 61SECTION 12. THE AGENT AND ISSUING LENDER................................ 64 12.1 Appointment; Authorization.................................. 64 12.2 Delegation of Duties........................................ 64 12.3 Exculpatory Provisions...................................... 65 12.4 Reliance by Agent and Issuing Lender........................ 65 12.5 Notice of Default........................................... 65 12.6 Non-Reliance on Agent, Issuing Lender or Other Lenders...... 66 12.7 Indemnification............................................. 66 12.8 Agent in Its Individual Capacity............................ 67 12.9 Successor Agent............................................. 67 SECTION 13. MISCELLANEOUS............................................... 67 13.1 Amendments and Waivers...................................... 67 13.2 Notices..................................................... 68 13.3 No Waiver; Cumulative Remedies.............................. 69 13.4 Survival of Representations and Warranties.................. 69 13.5 Payment of Expenses and Taxes............................... 69 13.6 Successors and Assigns; Participations...................... 70 13.7 Adjustments; Set-Off........................................ 72 13.8 Confidentiality............................................. 73 13.9 Severability................................................ 73 13.10 Counterparts................................................ 74 13.11 No Third Party Beneficiaries................................ 74 13.12 SUBMISSION TO JURISDICTION; WAIVERS......................... 74 13.13 GOVERNING LAW............................................... 75 13.14 Integration................................................. 75 13.15 Acknowledgments............................................. 75 13.16 Satisfaction in Dollars..................................... 76 I-4 5SCHEDULES:Schedule 1.1 - CommitmentsSchedule 8.6 - LitigationSchedule 8.8 - Ownership of PropertySchedule 8.12 - ERISASchedule 8.14 - SubsidiariesSchedule 8.22 - GuarantorsSchedule 10.3 - Existing IndebtednessSchedule 10.4 - Existing LiensSchedule 10.7 - Existing InvestmentsSchedule 10.9 - Transactions with AffiliatesEXHIBITS:EXHIBIT A-1 - Form of Revolving Credit NoteEXHIBIT A-2 - Form of Term Loan NoteEXHIBIT B - Form of GuaranteeEXHIBIT C - Form of Standby Letter of Credit ApplicationEXHIBIT D-1 - Form of Opinion of Paul, Weiss, Rifkind, Wharton & GarrisonEXHIBIT D-2 - Form of Opinion of Senior Vice President and General Counsel of the BorrowerEXHIBIT E - Form of Borrower Officer's CertificateEXHIBIT F - Form of Guarantor Officer's CertificateEXHIBIT G - Form of Notice of Borrowing I-5 6 CREDIT AGREEMENT, dated as of March 30, 1999, among POLO RALPHLAUREN CORPORATION, a Delaware corporation (the "Borrower"), the banks andother financial institutions from time to time parties hereto (the "Lenders")and THE CHASE MANHATTAN BANK ("Chase"), a New York banking corporation, asagent for the Lenders hereunder. W I T N E S S E T H : WHEREAS, the Borrower, through PRL Acquisition Corp, a whollyowned Subsidiary organized under the laws of the Province of Nova Scotia (the"Offeror"), has made an offer (the "Tender Offer") to purchase all theoutstanding shares of common stock (the "Target Stock") of Club Monaco Inc.,a corporation organized under the laws of Ontario (the "Target") , includingall Target Stock that may be issued pursuant to the exercise of outstandingoptions, at a price of Canadian $13.00 per share pursuant to an Offer toPurchase dated March 8, 1999 (as amended, modified or otherwise supplementedfrom time to time to the extent permitted by subsection 7.1(a)(iv), the"Offer to Purchase"); WHEREAS, pursuant to the Tender Offer, and subject to the termsand conditions set forth in the Offer to Purchase, the Offeror will purchaseall of the validly tendered and not withdrawn shares of Target Stock (the"Amalgamation Voting Shares"); WHEREAS, following the completion of the Tender Offer, theOfferor will either (i) acquire the shares not tendered pursuant to theTender Offer (the "Untendered Target Stock") at a price of Canadian $13.00per share in accordance with Section 188 of the Business Corporations Act(Ontario), as amended ("OBCA") (such acquisition being referred to herein asthe "Compulsory Acquisition"), and, promptly thereafter, the Offeror willamalgamate with the Target (the "Amalgamation") such that the Borrower willbe the direct owner of all of the shares of the Capital Stock of theresulting entity (the "Amalgamated Entity"); or (ii) pursue other means ofacquiring, directly or indirectly, all the Untendered Target Stock inaccordance with applicable law, including by way of a statutory arrangement,amalgamation, capital reorganization or other transactions involving theTarget and the Offeror or an affiliate of the Offeror (a "Second-Step Transaction"); WHEREAS, to (i) finance the Tender Offer and the subsequentCompulsory Acquisition or Second-Step Transaction, (ii) refinance existingindebtedness of the Target, (iii) pay fees and expenses in connection withthe Tender Offer and the financing thereof and (iv) provide for the workingcapital and general corporate needs of the Borrower and its Subsidiariesprior to and following the completion of the foregoing, the Borrower hasrequested that the Lenders and the Agent enter into this Credit Agreement; NOW THEREFORE, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the followingterms shall have the following meanings: 7 2 "ABR": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by Chase as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by Chase in connection with extensions of credit to debtors); "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms thereof, the ABR shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "ABR Loans": Loans the rate of interest applicable to which is based upon the ABR. "Acceptance": as defined in subsection 5.1. "Acceptance Commission": as defined in subsection 6.5(a). "Acceptance Discount Rate": with respect to any Acceptance at any particular time, the bid rate in effect at the principal office of the Issuing Lender in New York City at such time for discount by the Issuing Lender of commercial drafts or bills in the same face amount, with the same maturity, and of the same type as such Acceptance. "Acceptance Documents": the collective reference to the Drafts, the Acceptances and any other documents arising out of or in connection with the creation of Acceptances hereunder. "Acceptance Obligations": at any particular time, all liabilities of the Borrower on or with respect to Acceptances, whether for reimbursement obligations due or to become due to the Issuing Lender or payments of Acceptances and whether or not such liability is contingent or unmatured, 8 3 including the sum of (a) the then outstanding Acceptance Reimbursement Loans plus (b) the aggregate face amount of all unmatured Acceptances then outstanding. "Acceptance Participating Interest": with respect to any Acceptance, (a) in the case of the Issuing Lender, its undivided interest in such Acceptance after giving effect to the granting of any participating interests therein and (b) in the case of any Participating Lender, its undivided participating interest in such Acceptance. "Acceptance Reimbursement Loan": as defined in subsection 5.3(b). "Acceptance Reimbursement Obligation": the obligation of the Borrower to pay the Issuing Lender in accordance with subsection 5.3(a) in respect of any Acceptances created by the Issuing Lender for the account of the Borrower or any of its Subsidiaries. "Accounts": as to any Person, all rights to receive payment for goods sold or leased by such Person or for services rendered in the ordinary course of business of such Person to the extent not evidenced by an instrument or chattel paper, together with all interest, finance charges and other amounts payable by an account debtor in respect thereof. "Adjustment Date": the fifth Business Day following receipt by the Agent of both (i) the financial statements required to be delivered pursuant to subsection 9.1(a) or 9.1(b), as the case may be, for the most recently completed fiscal period and (ii) the certificate required to be delivered pursuant to subsection 9.1(d) with respect to such fiscal period. "Affiliate": with respect to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of Voting Stock, by contract or otherwise), provided that, in any event, any Person which owns directly or indirectly Voting Stock having 10% or more of the ordinary voting power for the election of directors or other governing body of a Person (other than as a limited partner of such other Person) shall be deemed to control such other Person. Notwithstanding the foregoing, no individual shall be deemed to be an Affiliate of a Person solely by reason of his or her being an officer or director of such Person. "Agent": Chase, together with its affiliates, as the arranger of the Term Loan Commitments and the Revolving Credit Commitments and as the agent for the Lenders under this Agreement and the other Credit Documents. 9 4 "Aggregate Revolving Credit Extensions of Credit": on any date of determination thereof, the sum of (a) the aggregate principal amount of the Revolving Credit Loans outstanding on such date, (b) the aggregate amount of the Letter of Credit Obligations on such date and (c) the aggregate amount of the Acceptance Obligations on such date. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Amalgamated Entity": as defined in the recitals hereto. "Amalgamation": as defined in the recitals hereto. "Amalgamation Voting Shares": as defined in the recitals hereto. "Annual Increase": for any Fiscal Year, an amount equal to 50% of the Net Income of the Borrower and its Subsidiaries for such Fiscal Year less the amount of any Restricted Payments during such Fiscal Year. "Applicable Commitment Rate Percentage": .175%; provided that the Applicable Commitment Rate Percentage will be adjusted, on each Adjustment Date to occur hereafter, to the Applicable Commitment Rate Percentage set forth on Annex A opposite the column titled "Margin Level Status" of the Borrower which is in effect on such Adjustment Date and provided, further, that in the event that the financial statements required to be delivered pursuant to subsection 9.1(a) or 9.1(b), as applicable, and the related certificate required to be delivered pursuant to subsection 9.1(d), are not delivered when due, then during the period commencing five Business Days after the date upon which such financial statements were required to be delivered until five Business Days following the date upon which they are actually delivered, the Applicable Commitment Rate Percentage shall be .25%. "Applicable Margin": .75%; provided that the Applicable Margin for Eurodollar Loans, Acceptances and Standby Letters of Credit will be adjusted, on the first Adjustment Date to occur hereafter, to the Applicable Margin for Eurodollar Loans, Acceptances and Standby Letters of Credit set forth on Annex A opposite the column titled "Margin Level Status" of the Borrower which is in effect on such Adjustment Date, and provided, further, that in the event that the financial statements required to be delivered pursuant to subsection 9.1(a) or 9.1(b), as applicable, and the related certificate required to be delivered pursuant to subsection 9.1(d), are not delivered when due, then during the period commencing five Business Days after the date upon which such financial statements were required to be delivered until five Business Days following the date upon which they are actually delivered, the Applicable Margin shall be 1.25%. 10 5 "Applicable Sight Draft Fee Percentage": .10%; provided that the Applicable Sight Draft Fee Percentage shall be adjusted, on the first Adjustment Date to occur hereafter to the Applicable Sight Draft Fee Percentage set forth on Annex A opposite the column titled "Margin Level Status" of the Borrower which is in effect on such Adjustment Date, and provided, further, that in the event that the financial statements required to be delivered pursuant to subsection 9.1(a) or 9.1(b), as applicable, and the related certificate required to be delivered pursuant to subsection 9.1(d), are not delivered when due, then during the period commencing five Business Days after the date upon which such financial statements were required to be delivered until five Business Days following the date upon which they are actually delivered, the Applicable Sight Draft Fee Percentage shall be .125%. "Approved Foreign Currency": as defined in subsection 4.2(b). "Assignee": as defined in subsection 13.6(c). "Available Revolving Credit Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Revolving Credit Commitment over (b) the amount of such Lender's Aggregate Revolving Credit Extensions of Credit. "Available Term Loan Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Term Loan Commitment over (b) the aggregate principal amount of Term Loans theretofore made hereunder by such Lender. "Board": the Board of Governors of the Federal Reserve System or any successor thereof. "Borrowing Date": any Business Day specified in a notice or application pursuant to subsection 2.3, 3.3, 4.2 or 4.3 as a date on which the Borrower requests the Lenders to make Loans or requests the Issuing Lender to issue Letters of Credit hereunder. "Business": as defined in subsection 8.20(b). "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Capital Expenditures": with respect to any Person for any period, the sum of the aggregate of all expenditures (whether paid in cash or accrued as a liability) by such Person and its Subsidiaries during that period which, in accordance with GAAP, are or should be included in "additions to property, plant or equipment" or similar items reflected in the consolidated statement of cash flows of such Person. 11 6 For purposes of this definition, the purchase price of equipment which is purchased simultaneously with the trade-in of existing equipment owned by the Borrower or any Subsidiary or with insurance proceeds (as permitted hereunder) shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less any credit granted by the seller of such equipment for the equipment being traded in at such time or the amount of such proceeds, as the case may be. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Capitalized Lease": shall mean any lease which is required to be capitalized on the balance sheet of the lessee pursuant to GAAP. "Cash Equivalents": (a) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof, (b) time deposits and certificates of deposit of any of the Lenders or any domestic commercial bank having capital and surplus of at least $100,000,000, (c) commercial paper of any Person organized under the laws of the United States or any State thereof that is not a Subsidiary or an Affiliate of the Borrower rated at least A-2 by Standard & Poor's Ratings Group or at least P-2 by Moody's Investors Service, Inc., (d) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States or by any political subdivision, taxing authority or foreign government (as the case may be) that are rated at least A by Standard & Poor's Rating Group or A by Moody's Investors Service, Inc., (e) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition, (f) shares of money market mutual or similar funds having assets in excess of $250,000,000 and which invest exclusively in assets satisfying the requirements of clause (a) of this definition or (g) shares of money market mutual or similar funds having assets in excess of $500,000,000 and which invest exclusively in assets satisfying the requirements of clauses (b) through (e) of this definition. "Closing Date": the date on which the conditions precedent set forth in subsection 7.1 shall be satisfied. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Combined Loan Percentage": as to any Lender at any time, the percentage which (a) the sum of (i) such Lender's Revolving Credit Commitment (or, at any time after the Revolving Credit Commitments shall have expired or terminated, 12 7 such Lender's portion of the then Aggregate Revolving Credit Extensions of Credit) plus (ii) the sum of such Lender's then Available Term Loan Commitment and such Lender's Term Loans then outstanding, then constitutes of (b) the sum of (1) the aggregate Revolving Credit Commitments of all Lenders (or, at any time after the Revolving Credit Commitment shall have expired or terminated, the then Aggregate Revolving Credit Extensions of Credit) plus (2) the sum of the then Available Term Loan Commitments of all the Lenders and the aggregate principal amount of Term Loans of all the Lenders then outstanding. "Commercial Letter of Credit": a commercial documentary letter of credit issued by the Issuing Lender for the account of the Borrower or any of its Subsidiaries for the purchase of goods in the ordinary course of business. "Commercial Letter of Credit Application": as defined in subsection 4.2(a). "Commitments": collectively, the Term Loan Commitments and the Revolving Credit Commitments. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower or any Guarantor and which is treated as a single employer under Section 414 of the Code. "Compulsory Acquisition": as defined in the recitals hereto. "Consolidated Indebtedness": as of the date of any determination thereof, the aggregate of all Indebtedness of the Borrower and its Subsidiaries, on a consolidated basis after eliminating all inter-company items, in accordance with GAAP. "Consolidated Indebtedness Ratio": for any period, the ratio of (a) the average of Consolidated Indebtedness outstanding on the last day of each Fiscal Quarter ending during such period to (b) Net Income of the Borrower and its Subsidiaries for such period plus depreciation, amortization, federal and state income taxes and Interest Expense deducted in determining such Net Income. "Consolidated Net Worth": as of any date of determination thereof, the excess of (a) the aggregate consolidated net book value of the assets of the Borrower and its Subsidiaries (other than patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, permits, goodwill and other similar intangible assets properly classified as such in accordance with GAAP) after all appropriate adjustments in accordance with GAAP (including, without limitation, reserves for doubtful receivables, obsolescence, depreciation and amortization and excluding the amount of any write-up or revaluation of any asset) over (b) all of the aggregate liabilities of the Borrower and its Subsidiaries, including all items 13 8 which, in accordance with GAAP, would be included on the liability side of the balance sheet (other than Capital Stock, treasury stock, capital surplus and retained earnings) in each case consolidated (after eliminating all inter-company items) in accordance with GAAP. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Credit Documents": the collective reference to this Agreement, the Notes, the Letter of Credit Documents, the Guarantee and the Acceptance Documents. "Credit Parties": the collective reference to the Borrower and the Guarantors. "Default": any of the events specified in Section 11, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollar Equivalent": (a) with respect to any calculation involving the face amount of any Letter of Credit issued in an Approved Foreign Currency, the amount in Dollars into which the relevant amount in such Approved Foreign Currency would be converted based upon the relevant Exchange Rate in effect at 10:00 A.M., New York City time, on the date of issuance of such Letter of Credit and (b) with respect to any calculation involving the amount of any drawing under any Letter of Credit, the amount in Dollars into which the relevant amount in such Approved Foreign Currency would be converted based upon the relevant Exchange Rate in effect at the time the Issuing Lender makes payment under such Letter of Credit. "Dollars" and "$": dollars in lawful currency of the United States of America. "Domestic Subsidiary": any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States. "Drafts": as defined in subsection 5.1. "Environmental Laws": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. 14 9 "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. "Eurodollar Base Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum equal to the rate at which Chase is offered Dollar deposits at or about 10:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank Eurodollar market where the Eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. "Eurodollar Loans": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Event of Default": any of the events specified in Section 11, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, event or act has been satisfied. "Exchange Rate": with respect to any Approved Foreign Currency, the arithmetic mean of the spot exchange rates for the purchase of such Approved Foreign Currency with Dollars as listed on the WRLD screen of the Reuters News Service, and if the Reuters spot exchange rates are unavailable, the Telerate equivalent shall be used. "Existing Credit Agreement": the Credit Agreement, dated as of June 9, 1997, among the Borrower, the several banks and other financial institutions parties thereto and Chase, as agent for such banks and financial institutions, as 15 10 heretofore amended, supplemented or otherwise modified and in effect on the date hereof (without giving effect to any future amendments, supplements or other modifications thereto) . "Existing Closing Date": the "Closing Date", as defined in the Existing Credit Agreement. "Existing Termination Date": the "Termination Date", as defined in the Existing Credit Agreement. "Federal Funds Effective Rate": as defined in the definition of "ABR" set forth above. "Fiscal Quarter": with respect to the Borrower and its Subsidiaries, and with respect to any Fiscal Year, (a) each of the quarterly periods ending 13 calendar weeks, 26 calendar weeks, 39 calendar weeks and 52 or 53 calendar weeks, as the case may be, after the end of the prior Fiscal Year or (b) such other quarterly periods as the Borrower shall adopt after giving prior written notice thereof to the Lenders. "Fiscal Year": with respect to the Borrower and its Subsidiaries, (a) the 52- or 53-week annual period, as the case may be, ending on the Saturday nearest to March 31 of each calendar year or (b) such other fiscal year as the Borrower shall adopt with the prior written consent of the Required Lenders (which consent shall not be unreasonably withheld). Any designation of a particular Fiscal Year by reference to a calendar year shall mean the Fiscal Year ending during such calendar year. "Foreign Subsidiary": any Subsidiary of the Borrower organized under the laws of any jurisdiction outside of the United States of America. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "Gap Period": the period commencing on the date of the Existing Credit Agreement and ending on the date hereof. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee": the Guarantee to be executed and delivered by each Guarantor, substantially in the form of Exhibit B, as the same may be amended, supplemented or otherwise modified from time to time. 16 11 "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assume or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (x) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (y) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Guarantor": each Subsidiary of the Borrower (the names of which are listed on Schedule 8.22) which is a party to the Guarantee and Collateral Agreement (as defined in the Existing Credit Agreement) on the date hereof and each other Person which is or will become a guarantor under the Guarantee pursuant to the terms of this Agreement or in the sole discretion of the Borrower. "Indebtedness": with respect to any Person, as of the date of any determination thereof, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities or employment or consulting compensation incurred in the ordinary course of business and payable in accordance with customary practices), (b) all indebtedness for borrowed money secured by any Lien on any property owned by such Person to the extent of such Person's interest in such property, even though such Person has not assumed or become liable for the payment thereof, (c) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (d) all obligations of such Person as lessee under Capitalized Leases, (e) all obligations of such Person in respect of acceptances issued or 17 12 created for the account of such Person, and (f) all Guarantee Obligations of such Person in respect of Indebtedness of any other Person. For purposes of all calculations provided for in this Agreement, there shall be disregarded any Guarantee Obligations of any Person in respect of any Indebtedness of any other Person with which the accounts of such first Person are then required to be consolidated in accordance with GAAP. "Insolvency": with respect to any Multiemployer Plan the condition that such plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Interest Expense": for any period, net interest expense in respect of Indebtedness of the Borrower and its Subsidiaries (including, without duplication, all interest capitalized or to be capitalized on the books of the Borrower and its Subsidiaries properly charged or chargeable to income for such period in accordance with GAAP) for such period. "Interest Payment Date": (a) as to any ABR Loan, the last day of each March, June, September and December to occur while such Loan is outstanding, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. "Interest Period": with respect to any Eurodollar Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, or, if available, four, five or nine months or one year thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, or, if available, four, five or nine months or one year thereafter, as selected by the Borrower by irrevocable notice to the Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following: 18 13 (1) if any Interest Period pertaining to a Eurodollar Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date or the final date of maturity of the Term Loans, in the case of interest payable on the Term Loans; (3) any Interest Period pertaining to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (4) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. "Investment": as applied to any Person, any direct or indirect purchase or other acquisition by such Person of Capital Stock or other securities of, or any assets constituting a business unit of, any other Person, or any direct or indirect loan, advance or capital contribution by such Person to any other Person. In computing the amount involved in any Investment at the time outstanding, (a) undistributed earnings of, and unpaid interest accrued in respect of Indebtedness owing by, such other Person shall not be included, (b) there shall not be deducted from the amounts invested in such other Person any amounts received as earnings (in the form of dividends, interest or otherwise) on such Investment or as loans from such other Person and (c) unrealized increases or decreases in value, or write-ups, write-downs or write-offs, of Investments in such other Person shall be disregarded. "ISP98": International Standby Practices ISP98, International Chamber of Commerce Publication No. 590, as the same may be amended from time to time. "Issuing Lender": Chase, in its capacity as issuer of the Letters of Credit and as creator of Acceptances. "Lauren": Ralph Lauren, an individual. "Letter of Credit Applications": the collective reference to Commercial Letter of Credit Applications and Standby Letter of Credit Applications. 19 14 "Letter of Credit Documents": the collective reference to the Letter of Credit Applications, and the Letters of Credit and any other documents arising out of or in connection with the issuance of and participation in Letters of Credit hereunder. "Letter of Credit Obligations": at any particular time, all liabilities of the Borrower with respect to Letters of Credit, whether or not such liabilities are contingent or unmatured, including, without limitation, the sum of (a) the then outstanding Letter of Credit Reimbursement Loans plus (b) the then aggregate undrawn face amount of all then outstanding Letters of Credit. "Letter of Credit Participating Interest": with respect to any Letter of Credit, (a) in the case of the Issuing Lender, its undivided interest in such Letter of Credit, the related Letter of Credit Application, after giving effect to the granting of any participating interests therein and (b) in the case of any Participating Lender, its undivided participating interest in such Letter of Credit and the related Letter of Credit Application. "Letter of Credit Reimbursement Deficiency": as defined in subsection 4.6(b). "Letter of Credit Reimbursement Loan": as defined in subsection 4.6(b). "Letter of Credit Reimbursement Loan Account": as defined in subsection 4.6(b). "Letter of Credit Reimbursement Obligation": the obligation of the Borrower to reimburse the Issuing Lender in accordance with subsection 4.6(a) for any payment made by the Issuing Lender under any Letter of Credit issued for the account of the Borrower or any of its Subsidiaries. "Letters of Credit": the collective reference to Commercial Letters of Credit and Standby Letters of Credit. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Capitalized Lease having substantially the same economic effect as any of the foregoing). "Loans": the collective reference to the Revolving Credit Loans and the Term Loans and any other loans and extensions of credit made by the Lenders from time to time in accordance with the terms of this Agreement. 20 15 "Margin Level I Status": shall exist on an Adjustment Date if the Consolidated Indebtedness Ratio as of the last day of the period covered by the financial statements relating to such Adjustment Date is greater than or equal to 2.0 to 1. "Margin Level II Status": shall exist on an Adjustment Date if the Consolidated Indebtedness Ratio as of the last day of the period covered by the financial statements relating to such Adjustment Date is less than 2.0 to 1 but greater than or equal to 1.50 to 1. "Margin Level III Status": shall exist on an Adjustment Date if the Consolidated Indebtedness Ratio as of the last day of the period covered by the financial statements relating to such Adjustment Date is less than 1.5 to 1 but greater than or equal to 1.25 to 1. "Margin Level IV Status": shall exist on an Adjustment Date if the Consolidated Indebtedness Ratio as of the last day of the period covered by the financial statements relating to such Adjustment Date is less than 1.25 to 1. "Material Adverse Effect": a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Credit Documents or the rights or remedies of the Agent or the Lenders hereunder or thereunder. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Income" ("Net Loss"): with respect to any Person or group of Persons, as the case may be, for any fiscal period, the difference between (a) gross revenues of such Person or group of Persons and (b) all costs, expenses and other charges incurred in connection with the generation of such revenue (including, without limitation, taxes on income), determined on a consolidated or combined basis, as the case may be, and in accordance with GAAP. "Non-Excluded Taxes": as defined in subsection 6.16(a). "Notes": the collective reference to the Revolving Credit Notes and the Term Notes; each, individually, a 'Note'. 21 16 "OBCA": as defined in the recitals hereto. "Offer to Purchase": as defined in the recitals hereto. "Offeror": as defined in the recitals hereto. "Participants": as defined in subsection 13.6(b). "Participating Lender": any Lender (other than the Issuing Lender), in its capacity as an acquiror of Letter of Credit Participating Interests in Letters of Credit and as an acquiror of Acceptance Participating Interests in Acceptances. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Acquisition": any acquisition by the Borrower or any Subsidiary, on or after the Closing Date, (whether effected through a purchase of Capital Stock or assets or through a merger, consolidation or amalgamation), of (i) another Person or (ii) the assets constituting an entire business or operating business unit of another Person, provided that: (a) the assets so acquired or, as the case may be, the assets of the Person so acquired shall be in a Related Line of Business; (b) no Default or Event of Default shall have occurred and be continuing at the time thereof or would result therefrom; (c) the Borrower shall have delivered to the Agent, as soon as available but in no event later than the date of disclosure by the Borrower to the public, a copy of the executed purchase agreement with respect thereto (without exhibits, except to the extent available and requested by the Agent); and (d) such acquisition shall be effected in such manner so that the acquired Capital Stock or assets are owned either by the Borrower or a Subsidiary and, if effected by merger, consolidation or amalgamation, the Borrower or a Subsidiary shall be the continuing, surviving or resulting entity. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. 22 17 "Plan": at any particular time, any employee benefit plan other than a Multiemployer Plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Properties": as defined in subsection 8.20(a). "Register": as defined in subsection 13.6(d). "Regulation U": Regulation U of the Board as in effect from time to time. "Related Line of Business": (a) any line of business in which the Borrower or any of its Subsidiaries is engaged as of, or immediately prior to, the Closing Date, (b) any wholesale, retail or other distribution of products or services under any Trademark or any derivative thereof or (c) any similar business and any business which provides a service and/or supplies products in connection with any business described in clause (a) or (b) above. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section 2615. "Required Lenders": at a particular time, Lenders the Combined Loan Percentages of which aggregate at least 51%. "Requirement of Law": as to any Person, the Articles or Certificate of Incorporation and By-Laws or Certificate of Partnership or partnership agreement or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Reserve Determination": as defined in subsection 5.4. "Responsible Officer": with respect to the Borrower, the chief executive officer, the chief operating officer, the president or any vice president of the Borrower, and with respect to financial matters, the chief financial officer or the Vice President-Finance or the Vice President-Treasurer of the Borrower. "Restricted Payment": with respect to the Borrower and any of its Subsidiaries, (a) any declaration or payment of any dividend on, or the making of or provision for any distribution on account of, shares of any class of Capital Stock 23 18 of such Person (other than to the Borrower or another Subsidiary of the Borrower), now or hereafter outstanding, whether in cash or property or in obligations of the Borrower or any of its Subsidiaries, and (b) any purchase, redemption or other acquisition or retirement for value of any shares of any class of Capital Stock of such Person (other than from the Borrower or another Subsidiary of the Borrower), or any warrants, rights or options to acquire any such shares, now or hereafter outstanding. "Revolving Credit Commitment": at any time, with respect to each Lender, the amount set forth opposite such Lender's name on Schedule 1.1 in the section entitled "Revolving Credit Commitments", as such amount may be reduced or increased from time to time in accordance with the provisions of this Agreement. "Revolving Credit Commitment Percentage": as to any Lender at any particular time, the percentage of the aggregate Revolving Credit Commitments then constituted by such Lender's Revolving Credit Commitment (or, at any time after the Revolving Credit Commitments shall have expired or terminated, the percentage which such Lender's portion of the Aggregate Revolving Credit Extensions of Credit constitutes of the Aggregate Revolving Credit Extensions of Credit). "Revolving Credit Commitment Period": the period from and including the Closing Date to but not including the Termination Date or such earlier date as the Revolving Credit Commitments shall terminate as provided herein. "Revolving Credit Loans": as defined in subsection 2.1. "Revolving Credit Note": as defined in subsection 2.2. "SEC": the Securities and Exchange Commission. "Second-Step Transaction": as defined in the recitals hereto. "Sight Draft Letter of Credit": a Commercial Letter of Credit providing for payment of sight drafts when presented for honor thereunder in accordance with the terms thereof and when accompanied by documents complying with the terms thereof. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Standby Letter of Credit": an irrevocable letter of credit pursuant to which the Issuing Lender agrees to make payments in Dollars for the account of the Borrower or any of its Subsidiaries in respect of obligations of the Borrower or any of its Subsidiaries incurred pursuant to contracts made or performances undertaken or to be undertaken or like matters relating to contracts to which the Borrower or 24 19 any of its Subsidiaries is or proposes to become a party in the ordinary course of the Borrower's or any of its Subsidiaries' business, including, without limiting the foregoing, for insurance purposes and in connection with lease transactions. "Standby Letter of Credit Application": as defined in subsection 4.3(a). "Subordinated Indebtedness": any Indebtedness of the Borrower, provided that with respect to any such Indebtedness (i) no part of the principal of such Indebtedness is stated to be payable or is required to be paid (whether by way of mandatory sinking fund, mandatory redemption, mandatory prepayment or otherwise) prior to the Termination Date and the payment of principal of which and (subject to clause (ii) below) any other obligations of the Borrower in respect thereof are subordinated to the prior payment in full of principal of and interest (including post-petition interest) on the Notes, the Letter of Credit Obligations, the Acceptance Obligations and all other obligations and liabilities of the Borrower to the Agent and the Lenders hereunder on terms and conditions first approved in writing by the Required Lenders, (ii) no part of the interest accruing on such Indebtedness (other than interest payable solely in kind which shall be similarly subordinated) is payable after a Default or Event of Default has occurred and is continuing, and (iii) such Indebtedness otherwise contains terms, covenants and conditions in form and substance reasonably satisfactory to the Required Lenders, as evidenced by their prior written approval thereof. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries (including a wholly owned Subsidiary of such Person), or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Support Agreement": the Support Agreement, dated as of February 28, 1999, among the Offeror, the Borrower and the Target. "Target": as defined in the recitals hereto. "Target Stock": as defined in the recitals hereto. "Tender Offer": as defined in the recitals hereto. "Term Loan": as defined in subsection 3.1. "Term Loan Commitment": as to any Lender, the obligation of such Lender to make Term Loans in the aggregate amount set forth opposite such 25 20 Lender's name on Schedule 1.1 in the section entitled "Term Loan Commitments", as such amount may be reduced from time to time in accordance with the provisions of this Agreement. "Term Loan Commitment Period": the period from and including the Closing Date to but not including the Term Loan Termination Date. "Term Loan Exposure": means, with respect to any Lender at any time, the outstanding principal amount of such Lender's Term Loan at such time. "Term Loan Percentage": as to any Lender at any time, (a) in relation to any borrowing of Term Loans, the percentage of the aggregate Term Loan Commitments then constituted by such Lender's Term Loan Commitment and (b) otherwise, the percentage of the aggregate Term Loans then constituted by such Lender's Term Loan. "Term Loan Termination Date": the earlier of (a) the date which is 120 days after the Closing Date and (b) the date on which the Tender Offer lapses and is not extended by the Offeror or is withdrawn by the Offeror. "Term Note": as defined in subsection 3.2. "Termination Date": June 30, 2003. "Time Draft Letter of Credit": a Commercial Letter of Credit providing for acceptance by the Issuing Lender of time drafts when presented for honor thereunder in accordance with the terms thereof, provided that no such draft shall be payable more than 180 days after sight or later than 90 days after the Termination Date, and provided, further, that each such draft is accompanied by documents complying with the terms of such Letter of Credit. "Time Draft and Standby Fee Percentage:" at any time, a percentage equal to the Applicable Margin then in effect. "Trademarks": as defined in subsection 9.5. "Tranche": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan. "Uniform Customs": the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. 26 21 "Untendered Target Stock": as defined in the recitals hereto. "Voting Stock": stock of any class or classes (however designated), or other equity ownership interests, of any Person, the holders of which are at the time entitled, as such holders, to vote for the election of the directors or other governing body of the Person involved, whether or not the right so to vote exists by reason of the happening of a contingency. 1.2 Other Definitional Provisions. (a) Unless otherwise definedtherein, all terms defined in this Agreement shall have the defined meaningswhen used in the Notes and the other Credit Documents or any certificate orother document made or delivered pursuant hereto or in connection herewith. (b) As used herein and in the Notes, the other Credit Documents andany certificate or other document made or delivered pursuant hereto or inconnection herewith, accounting terms relating to the Borrower and itsSubsidiaries not defined in subsection 1.1, and accounting terms partly definedin subsection 1.1 to the extent not defined, shall have the respective meaningsgiven to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as awhole and not to any particular provision of this Agreement, and Section,subsection, Schedule and Exhibit references are to this Agreement unlessotherwise specified. (d) The meanings given to terms defined herein shall be equallyapplicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS 2.1 Revolving Credit Commitments. Subject to the terms andconditions hereof, each Lender severally agrees to make revolving creditloans ("Revolving Credit Loans") to the Borrower from time to time during theRevolving Credit Commitment Period in an aggregate principal amount at anyone time outstanding not to exceed the amount of such Lender's RevolvingCredit Commitment; provided, that no Revolving Credit Loan shall be made if,after giving effect thereto, the Available Revolving Credit Commitments wouldbe less than zero. During the Revolving Credit Commitment Period the Borrowermay use the Revolving Credit Commitments by borrowing, prepaying theRevolving Credit Loans in whole or in part, and reborrowing, all inaccordance with the terms and conditions hereof. The Revolving Credit Loansmay from time to time be (i) Eurodollar Loans, (ii) ABR Loans, or (iii) acombination thereof, as determined by the Borrower and notified to the Agentin accordance with subsections 2.3 and 6.10, provided that no RevolvingCredit Loan shall be made as a Eurodollar Loan after the day that is onemonth prior to the Termination Date. 27 22 2.2 Revolving Credit Notes. The Revolving Credit Loans made byeach Lender shall be evidenced by a promissory note of the Borrower,substantially in the form of Exhibit A-1 hereto, with appropriate insertionsas to payee, date and principal amount (individually, a "Revolving Credit Note"; collectively, the "Revolving Credit Notes"), payable to the order ofsuch Lender and in a principal amount equal to the lesser of (a) the amountset forth opposite each Lender's name on Schedule 1.1 in the section entitled"Revolving Credit Commitments" and (b) the aggregate unpaid principal amountof all Revolving Credit Loans made by such Lender. Each Lender is herebyauthorized to record the date and amount of each such Revolving Credit Loanmade by such Lender, each continuation thereof and the date and amount ofeach payment or prepayment of principal thereof, on the schedule annexed toand constituting a part of its Revolving Credit Note, and any suchrecordation shall constitute prima facie evidence of the accuracy of theinformation so recorded. Each Revolving Credit Note shall (i) be dated theClosing Date, (ii) be stated to mature on the Termination Date, and (iii)provide for the payment of interest in accordance with subsection 6.1. 2.3 Procedure for Revolving Credit Borrowing. The Borrower mayborrow under the Revolving Credit Commitments during the Revolving CreditCommitment Period on any Business Day, provided that the Borrower shall givethe Agent irrevocable telephonic notice (which notice must be received by theAgent prior to 11:00 A.M., New York City time, (a) three Business Days priorto the requested Borrowing Date, if all or any part of the requestedRevolving Credit Loans are to be initially Eurodollar Loans or (b) on therequested Borrowing Date, otherwise), specifying (i) the amount to beborrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing isto be of Eurodollar Loans, ABR Loans or a combination thereof and (iv) if theborrowing is to be entirely or partly of Eurodollar Loans, the amounts ofsuch Type of Loan and the lengths of the initial Interest Periods therefor.Each borrowing under the Revolving Credit Commitments shall be in an amountequal to (x) in the case of ABR Loans, $500,000 or a whole multiple thereof(or, if the then Available Revolving Credit Commitments are less than$500,000, such lesser amount) and (y) in the case of Eurodollar Loans,$5,000,000, or a whole multiple of $500,000 in excess thereof. Upon receiptof any such notice from the Borrower, the Agent shall promptly notify eachLender thereof. Each Lender will make the amount of its pro rata share ofeach borrowing available to the Agent for the account of the Borrower at theoffice of the Agent specified in subsection 13.2 prior to 1:00 P.M., New YorkCity time, on the Borrowing Date requested by the Borrower in fundsimmediately available to the Agent. Such borrowing will then be madeavailable to the Borrower by the Agent crediting the account of the Borroweron the books of such office with the aggregate of the amounts made availableto the Agent by the Lenders and in like funds as received by the Agent. 2.4 Use of Proceeds. The proceeds of the Revolving Credit Loansshall be used by the Borrower for general corporate purposes, including tofinance the operations of the Borrower and its Subsidiaries in the ordinarycourse of their businesses and to finance capital expenditures. SECTION 3. AMOUNT AND TERMS OF TERM LOANS 3.1 Term Loan Commitments. Subject to the terms and conditionshereof, each Lender severally agrees to make term loans ("Term Loans") to theBorrower from time to time 28 23during the Term Loan Commitment Period in an aggregate amount not to exceed suchLender's Term Loan Commitment. 3.2 Term Notes. The Term Loans made by each Lender shall beevidenced by a promissory note of the Borrower, substantially in the form ofExhibit A-2 hereto, with appropriate insertions as to payee, date andprincipal amount (individually, a "Term Note"; collectively, the "Term Notes"), payable to the order of such Lender and in a principal amount equalto the lesser of (a) the amount set forth opposite each Lender's name onSchedule 1.1 in the section entitled "Term Loan Commitments" and (b) theaggregate unpaid principal amount of all Term Loans made by such Lender.Each Lender is hereby authorized to record the date and amount of each suchTerm Loan made by such Lender, each continuation thereof and the date andamount of each payment or prepayment of principal thereof, on the scheduleannexed to and constituting a part of its Term Note, and any such recordationshall constitute prima facie evidence of the accuracy of the information sorecorded. Each Term Note shall (i) be dated the Closing Date, (ii) be statedto mature in one payment on June 30, 2003, and (iii) provide for the paymentof interest in accordance with subsection 6.1. 3.3 Procedure for Term Loan Borrowing. The Borrower may borrowunder the Term Loan Commitments during the Term Loan Commitment Period on anyBusiness Day, provided that the Borrower shall give the Agent irrevocabletelephonic notice (which notice must be received by the Agent prior to 11:00A.M., New York City time, (a) three Business Days prior to the requestedBorrowing Date, if all or any part of the requested Term Loans are to beinitially Eurodollar Loans or (b) on the requested Borrowing Date,otherwise), specifying (i) the aggregate amount to be borrowed, (ii) therequested Borrowing Date, (iii) whether the borrowing is to be of EurodollarLoans, ABR Loans or a combination thereof and (iv) if the borrowing is to beentirely or partly of Eurodollar Loans, the amounts of such Type of Loan andthe lengths of the initial Interest Period therefor. Each borrowing underthe Term Loan Commitments shall be in an amount equal to (x) in the case ofABR Loans, $500,000 or a whole multiple thereof (or, if the then AvailableTerm Loan Commitments are less than $500,000, such lesser amount) and (y) inthe case of Eurodollar Loans, $5,000,000, or a whole multiple of $500,000 inexcess thereof. Upon receipt of any such notice from the Borrower, the Agentshall promptly notify each Lender thereof. Each Lender will make the amountof its pro rata share of each borrowing available to the Agent for theaccount of the Borrower at the office of the Agent specified in subsection13.2 prior to 1:00 P.M., New York City time, on the Borrowing Date requestedby the Borrower in funds immediately available to the Agent. Such borrowingwill then be made available to the Borrower by the Agent crediting theaccount of the Borrower on the books of such office with the aggregate of theamounts made available to the Agent by the Lenders and in like funds asreceived by the Agent. 3.4 Use of Proceeds. The proceeds of the Term Loans shall beused by the Borrower to finance the Tender Offer and the CompulsoryAcquisition or the Second-Step Transaction (provided that the aggregateamount paid in connection therewith shall not exceed approximately Canadian$85,000,000) and the repayment of approximately Canadian $44,000,000 ofcurrently existing Indebtedness of the Target and to pay related fees andexpenses. 29 24 SECTION 4. AMOUNT AND TERMS OF LETTERS OF CREDIT 4.1 Letters of Credit. Subject to the terms and conditionshereof, the Issuing Lender and each Participating Lender agree to extendcredit by the Issuing Lender's issuing Letters of Credit in the form ofCommercial Letters of Credit or Standby Letters of Credit for the account ofthe Borrower and its Subsidiaries, and by each Participating Lender'sacquiring its Letter of Credit Participating Interest in each such Letter ofCredit issued by the Issuing Lender, from time to time during the RevolvingCredit Commitment Period in an aggregate face amount at any one timeoutstanding not to exceed in the case of Standby Letters of Credit,$15,000,000, provided, that no Letter of Credit shall be issued hereunder if,after giving effect thereto, the Available Revolving Credit Commitments wouldbe less than zero. During the Revolving Credit Commitment Period, theBorrower may use the Revolving Credit Commitments in this manner by havingthe Issuing Lender issue Letters of Credit, having such Letters of Creditexpire undrawn upon or, if drawn upon, reimbursing the Issuing Lender forsuch drawing, and having the Issuing Lender issue new Letters of Credit, allin accordance with the terms and conditions hereof. 4.2 Issuance of Commercial Letters of Credit. (a) Subject tothe terms and conditions hereof (including, without limitation, subsection4.1), the Borrower may request the Issuing Lender to issue a CommercialLetter of Credit in favor of sellers of goods to the Borrower and itsSubsidiaries on any Business Day during the Revolving Credit CommitmentPeriod by delivering to the Agent at its address specified in subsection 13.2(or such other lending office of the Agent as the Agent shall request) acommercial letter of credit application (executed by the Borrower and, in thecase of any Letter of Credit to be issued for the account of any Subsidiaryof the Borrower, such Subsidiary) by a transmission in accordance with pastpractice (a "Commercial Letter of Credit Application"), completed to thesatisfaction of the Issuing Lender, together with such other certificates,documents and other papers and information as the Issuing Lender mayreasonably request. Subject to the provisions of the last sentence ofsubsection 4.8, the Borrower hereby agrees to observe and perform itscovenants, duties and obligations under each Commercial Letter of CreditApplication. (b) Each Commercial Letter of Credit issued hereunder shall,among other things, (i) be either a Sight Draft Letter of Credit or a TimeDraft Letter of Credit, (ii) have an expiry date occurring not later than oneyear after the date of issuance of such Commercial Letter of Credit and in noevent later than 90 days after the Termination Date, and (iii) be denominatedin Dollars (except for Commercial Letters of Credit denominated in foreigncurrencies acceptable to the Issuing Lender in its sole discretion (each an"Approved Foreign Currency"; provided that the aggregate undrawn face amountof all such Commercial Letters of Credit issued in an Approved ForeignCurrency shall not exceed the Dollar Equivalent of $10,000,000 at any timeoutstanding). Each Commercial Letter of Credit Application and eachCommercial Letter of Credit shall be subject to the Uniform Customs and, tothe extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated toissue any Commercial Letter of Credit hereunder if such issuance wouldconflict with, or cause the Issuing 30 25Lender or any Participating Lender to exceed any limits imposed by, anyapplicable Requirements of Law. 4.3 Issuance of Standby Letters of Credit. (a) Subject to theterms and conditions hereof (including, without limitation, subsection 4.1),the Borrower may request the Issuing Lender to issue a Standby Letter ofCredit for the account of the Borrower or any of its Subsidiaries, on anyBusiness Day during the Revolving Credit Commitment Period by delivering tothe Agent at its address specified in subsection 13.2 (or such other lendingoffice of the Agent as the Agent shall request) a standby letter of creditapplication (executed by the Borrower and, in the case of any Letter ofCredit issued for the account of any Subsidiary of the Borrower, suchSubsidiary) substantially in the form of Exhibit D hereto (a "Standby Letter of Credit Application"), completed to the satisfaction of the Issuing Lender,together with such other certificates, documents and other papers andinformation as the Issuing Lender may reasonably request. Subject to theprovisions of the last sentence of subsection 4.8, the Borrower hereby agreesto observe and perform its covenants, duties and obligations under eachStandby Letter of Credit Application. (b) Each Standby Letter of Credit issued hereunder shall, amongother things, (i) be in such form and for such purposes requested by theBorrower as shall be acceptable to the Issuing Lender in its sole discretion,(ii) have an expiry date occurring not later than one year after the date ofissuance of such Standby Letter of Credit and in no event occurring laterthan 90 days after the Termination Date and (iii) be denominated in Dollarsand have a minimum face amount of $25,000. Each Standby Letter of CreditApplication and each Standby Letter of Credit shall be subject to ISP 98 and,to the extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated toissue any Standby Letter of Credit hereunder if such issuance would conflictwith, or cause the Issuing Lender or any Participating Lender to exceed anylimits imposed by, any applicable Requirements of Law. 4.4 Participating Interests. Effective in the case of eachLetter of Credit as of the date of the issuance thereof, the Issuing Lenderagrees to allot and does allot, to itself and each Participating Lender, andeach Participating Lender irrevocably agrees to take and does take, a Letterof Credit Participating Interest in each Letter of Credit, the related Letterof Credit Application and all obligations of the Borrower with respectthereto (other than fees payable to the Issuing Lender pursuant tosubsections 6.3(b) and 6.4(b)) in a percentage equal to such Lender'sRevolving Credit Commitment Percentage. Each Participating Lender herebyagrees that its participation obligations described in the immediatelypreceding sentence shall be irrevocable and unconditional. 4.5 Procedure for Opening Letters of Credit. Upon receipt ofany Letter of Credit Application from the Borrower, the Issuing Lender willprocess such Letter of Credit Application and the other certificates,documents and other papers delivered to the Issuing Lender in connectiontherewith, in accordance with its customary procedures and shall promptlyopen such Letter of Credit by issuing the original of such Letter of Creditto the beneficiary thereof and by furnishing a copy thereof to the Borrower.The Issuing Lender will send monthly reports to each 31 26Participating Lender and the Borrower, on the third Business Day of eachcalendar month, indicating the Letters of Credit opened during the previousmonth. 4.6 Payments. (a) The Borrower agrees to reimburse the IssuingLender in Dollars and in immediately available funds, forthwith on the datethe Issuing Lender is presented with a draft under any Letter of Credit(whether issued for the account of the Borrower or any Subsidiary of theBorrower) and otherwise in accordance with the terms of the Letter of CreditApplication relating thereto, for any payment made by the Issuing Lenderunder any Sight Draft Letter of Credit and any Standby Letter of Creditissued for its account. In the case of any Letter of Credit issued in anApproved Foreign Currency, such reimbursement obligation with respect to anypayment thereunder made in an Approved Foreign Currency shall be in an amountequal to the Dollar Equivalent of the amount of such payment. The IssuingLender is hereby authorized to charge the account(s) maintained by theBorrower at Chase for all amounts payable pursuant to this subsection 4.6(a). (b) The failure by the Borrower on any day to have sufficientaggregate Dollar funds on deposit in its account(s) maintained at Chase topay all Letter of Credit Reimbursement Obligations due on such day inaccordance with subsection 4.6(a) (such deficiency being hereinafter referredto as a "Letter of Credit Reimbursement Deficiency") shall constitute themaking by the Issuing Lender of a loan to the Borrower (a "Letter of Credit Reimbursement Loan") in a principal amount equal to the amount of the Letterof Credit Reimbursement Deficiency as of such day. Each Letter of CreditReimbursement Loan shall (i) be payable on demand, (ii) be evidenced by aloan account maintained on the books and records of the Issuing Lender (the"Letter of Credit Reimbursement Loan Account") and (iii) bear interest fromthe date of the creation of the applicable Letter of Credit ReimbursementObligation until paid in full at a rate per annum equal to (x) for theBusiness Day on which such Letter of Credit Reimbursement Loan is created,the ABR and (y) thereafter, the ABR plus 2%. Interest on each Letter ofCredit Reimbursement Loan shall be payable on demand. The entries in theLetter of Credit Reimbursement Loan Account shall constitute prima facieevidence of the accuracy of the information set forth therein. (c) In the event that the Issuing Lender makes a Letter ofCredit Reimbursement Loan in accordance with subsection 4.6(b), the IssuingLender will promptly notify each Participating Lender. Forthwith upon itsreceipt of any such notice, each Participating Lender will transfer to theIssuing Lender, in Dollars and in immediately available funds, an amountequal to such Participating Lender's Revolving Credit Commitment Percentageof such Letter of Credit Reimbursement Loan plus interest thereon calculatedfrom the date of such notice at the Federal Funds Effective Rate. (d) Whenever, at any time after the Issuing Lender has madepayment under any Sight Draft Letter of Credit or Standby Letter of Creditand has received from each Participating Lender its Revolving CreditCommitment Percentage of any Letter of Credit Reimbursement Loan inaccordance with subsection 4.6(c), the Issuing Lender receives any paymentsrelated to such Letter of Credit Reimbursement Loan (whether receiveddirectly from the Borrower or otherwise, including proceeds of collateralapplied thereto by the Issuing Lender), or any payment of interest on accountthereof, the Issuing Lender will distribute to each Participating 32 27Lender its pro rata share thereof; provided, however, that in the event that thereceipt by the Issuing Lender of such payments or such payment of interest (asthe case may be) is required to be returned, each Participating Lender willreturn to the Issuing Lender any portion thereof previously distributed by theIssuing Lender to it. (e) Within fifteen days after the end of each calendar quarter,the Issuing Lender will notify each Participating Lender (with copies to theBorrower) of (i) each payment made by the Issuing Lender during such calendarquarter under any Sight Draft Letter of Credit or Standby Letter of Creditand (ii) each payment made by the Borrower during such calendar quarter tothe Issuing Lender in reimbursement of amounts paid by the Issuing Lenderunder any such Letter of Credit. 4.7 Further Assurances. The Borrower hereby agrees to do andperform, from time to time, any and all acts and to execute any and allfurther instruments reasonably requested by the Issuing Lender more fully toeffect the purposes of this Agreement and the issuance of the Letters ofCredit opened hereunder for its account. 4.8 Letter of Credit Applications. The provisions of thisSection 4 in respect of any Letters of Credit are supplemental to, and not inderogation of, any rights and remedies of the Issuing Lender and the Lendersunder the Letter of Credit Applications related to such Letters of Credit andunder ISP98 (in the case of Standby Letters of Credit) or the Uniform Customs(in the case of other Letters of Credit) and other applicable laws. In theevent of any conflict between the terms of this Agreement and the terms ofthe Letter of Credit Applications, the terms set forth in this Agreementshall control. 4.9 Use of Letters of Credit. The Commercial Letters of Creditopened for the account of the Borrower and its Subsidiaries shall be usedsolely to finance purchases of inventory by such Persons in the ordinarycourse of their business, and the Standby Letters of Credit shall be usedsolely for the purposes described in the definition of such term insubsection 1.1. SECTION 5. ACCEPTANCES 5.1 Acceptances. The Issuing Lender and each ParticipatingLender confirm that the Issuing Lender's issuance of Time Draft Letters ofCredit and each Participating Lender's acquisition of Letter of CreditParticipating Interests therein constitutes an agreement by the IssuingLender and the Participating Lenders to extend credit by the Issuing Lender'saccepting drafts ("Drafts") for the account of the Borrower that arepresented for honor under Time Draft Letters of Credit in compliance with theterms thereof (each such accepted Draft, an "Acceptance") and eachParticipating Lender's acquiring its Acceptance Participating Interest insuch Acceptance created by the Issuing Lender, from time to time during theperiod from the Closing Date to and including the Termination Date, provided,that each Draft shall be denominated in Dollars and shall be stated to matureon a Business Day which is 30, 60, 90 or 180 days after the date thereof, atthe option of the Borrower. From and after the Closing Date, all thenoutstanding Acceptances, if any, created under, and as defined in, theExisting Credit 33 28Agreement shall be deemed for all purposes hereunder to be Acceptances createdunder this Agreement on the Closing Date. 5.2 Participating Interests. Effective in the case of eachAcceptance as of the date of the creation thereof, the Issuing Lender agreesto allot and does allot, to itself and each Participating Lender, and eachParticipating Lender irrevocably agrees to take and does take, an AcceptanceParticipating Interest in each Acceptance, the related Draft and allobligations of the Borrower with respect thereto (other than fees payable tothe Issuing Lender pursuant to subsection 6.5(b)) in a percentage equal tosuch Lender's Revolving Credit Commitment Percentage. Each ParticipatingLender hereby agrees that its participation obligations described in theimmediately preceding sentence shall be irrevocable and unconditional. 5.3 Payments. (a) The Borrower shall be obligated, and herebyunconditionally agrees, to pay to the Issuing Lender the face amount of eachAcceptance created by the Issuing Lender hereunder on the maturity thereof,or such earlier date on which the obligations of the Borrower under thisAgreement become due and payable. The Issuing Lender is hereby authorized tocharge the account(s) maintained by the Borrower at Chase for all amountspayable pursuant to this subsection 5.3(a). (b) The failure by the Borrower on any day to have sufficientaggregate Dollar funds on deposit in its account(s) maintained at Chase topay all Acceptance Reimbursement Obligations due on such day in accordancewith subsection 5.3(a) (such deficiency being hereinafter referred to as an"Acceptance Reimbursement Deficiency") shall constitute the making by theIssuing Lender of a loan to the Borrower (an "Acceptance Reimbursement Loan")in a principal amount equal to the amount of the Acceptance ReimbursementDeficiency as of such day. Each Acceptance Reimbursement Loan shall (i) bepayable on demand, (ii) be evidenced by a loan account maintained on thebooks and records of the Issuing Lender (the "Acceptance Reimbursement Loan Account"), and (iii) bear interest from the date of the creation of theapplicable Acceptance Reimbursement Obligation until paid in full at a rateper annum equal to (x) for the Business Day on which such AcceptanceReimbursement Loan is created, the ABR and (y) thereafter, the ABR plus 2%.Interest on each Acceptance Reimbursement Loan shall be payable on demand.The entries in the Acceptance Reimbursement Loan Account shall constituteprima facie evidence of the accuracy of the information set forth therein. (c) If the Issuing Lender makes an Acceptance Reimbursement Loanin accordance with subsection 5.3(b), the Issuing Lender will promptly notifyeach Participating Lender. Forthwith upon receipt of such notice, eachParticipating Lender will transfer to the Issuing Lender, in Dollars and inimmediately available funds, an amount equal to such Participating Lender'sRevolving Credit Commitment Percentage of such Acceptance Reimbursement Loanplus interest thereon calculated from the date of such notice at the FederalFunds Effective Rate. (d) Upon each Participating Lender's payment in full to theIssuing Lender of its Revolving Credit Commitment Percentage of anyAcceptance Reimbursement Loan in accordance with subsection 5.3(b), suchParticipating Lender shall acquire the Issuing Lender's claim against theBorrower in respect of such Acceptance Reimbursement Loan to the extent of 34 29the amount paid by such Participating Lender. Each Participating Lender agreesthat the Issuing Lender shall have full authority and responsibility forenforcing all claims against the Borrower with respect to Acceptances andAcceptance Reimbursement Loans and exercising all rights and remedies withrespect thereto. (e) Whenever, at any time after the Issuing Lender has receivedfrom each Participating Lender its pro rata share of any AcceptanceReimbursement Loan in accordance with subsection 5.3(c), the Issuing Lenderreceives any payments related to such Acceptance Reimbursement Loan (whetherreceived directly from the Borrower or otherwise, including proceeds ofcollateral applied thereto by the Issuing Lender), or any payment of intereston account thereof, the Issuing Lender will distribute to each ParticipatingLender its pro rata share thereof; provided, however, that in the event thatthe receipt by the Issuing Lender of such payments or such payment ofinterest (as the case may be) is required to be returned, each ParticipatingLender will return to the Issuing Lender any portion thereof previouslydistributed by the Issuing Lender to it. (f) Within fifteen days after the end of each calendar quarter,the Issuing Lender will notify each Participating Lender and the Borrower of(i) each creation of an Acceptance by the Issuing Lender during such calendarquarter and (ii) each payment made by the Borrower to the Issuing Lenderduring such calendar quarter on account of any Acceptance ReimbursementObligation. 5.4 Termination of Acceptance Commitments. In the event that(a) there is a determination made by any regulatory body or instrumentalitythereof (including, without limitation, any Federal Reserve Lender or anybank examiner), or there is a change in, or change in interpretation of, anyapplicable law, rule or regulation (such determination or such change, a"Reserve Determination"), in either case to the effect that bankers'acceptances created hereunder or in connection with a substantially similarfacility (whether or not the Borrower or any Lender is directly involved asparties) will be ineligible for reserve-free treatment (or if alreadydiscounted, should have been ineligible for reserve-free treatment) withFederal Reserve Banks, and as a result any Lender is required to maintain, ordetermines as a matter of prudent banking that it is appropriate for it tomaintain, additional reserves, or (b) any restriction is imposed on anyLender (including, without limitation, any change in acceptance limitsimposed on any Lender) which would prevent such Lender from creating orpurchasing participating interests in bankers' acceptances, as the case maybe, or otherwise performing its obligations in respect of Acceptances, then,with the consent of the Participating Lenders, the Issuing Lender may, orupon the direction of any Participating Lender, the Issuing Lender shall, bynotice to the Borrower in accordance with subsection 13.2, terminate theobligation of the Issuing Lender to issue Time Draft Letters of Credit and tocreate Acceptances in whole, effective on the date on which the IssuingLender gives such notice, and the Issuing Lender shall have no furtherobligation to issue Time Draft Letters of Credit. 5.5 Mandatory Prepayment of Acceptance. The Borrower shall,within one Business Day of its receipt of a notice of termination from theIssuing Lender pursuant to subsection 5.4, prepay the Acceptance Obligationswith respect to each Acceptance then outstanding by paying to the IssuingLender the face amount of each Acceptance less a 35 30prepayment discount calculated by the Issuing Lender based upon the thenprevailing rate for U.S. Treasury Bills maturing on or about the maturity dateof such Acceptance (and communicated to the Borrower in its notice oftermination pursuant to subsection 5.4); provided that in the event the Borrowerfails to make such prepayment as provided in this subsection 5.5, each Lender'spro rata share of the Acceptance Obligation with respect to each Acceptance thenoutstanding shall be deemed to be a Revolving Credit Loan made on the BusinessDay on which such prepayment was due in a principal amount equal to suchLender's pro rata share of the face amount of such Acceptance and subject to theterms and conditions of Section 2 and Section 6 hereof. SECTION 6. GENERAL PROVISIONS APPLICABLE TO LOANS 6.1 Interest Rates and Payment Dates. (a) Each Eurodollar Loanshall bear interest for each day during each Interest Period with respectthereto at a rate per annum equal to the Eurodollar Rate determined for suchday plus the Applicable Margin. (b) Each ABR Loan shall bear interest at a rate per annum equalto the ABR. (c) If all or a portion of (i) the principal amount of any Loan,(ii) any interest payable thereon or (iii) any commitment fee or other amountpayable hereunder shall not be paid when due (whether at the stated maturity,by acceleration or otherwise), such overdue amount shall bear interest at arate per annum which is (x) in the case of overdue principal, the rate thatwould otherwise be applicable thereto pursuant to the foregoing provisions ofthis subsection plus 2% or (y) in the case of overdue interest, commitmentfee or other amount, the rate described in paragraph (b) of this subsectionplus 2%, in each case from the date of such non-payment until such amount ispaid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each InterestPayment Date, provided that interest accruing pursuant to paragraph (c) ofthis subsection shall be payable from time to time on demand. 6.2 Commitment and Other Fees. (a) The Borrower agrees to payto the Agent, for the account of the Lenders, a commitment fee for the periodfrom and including the first day of the Term Loan Commitment Period to theTerm Loan Termination Date, computed at the rate per annum equal to theApplicable Commitment Rate Percentage on the average daily amount of theAvailable Term Loan Commitments during the period for which payment is made,payable quarterly in arrears on the last day of each March, June, Septemberand December and on the Term Loan Termination Date, commencing on the firstof such dates to occur after the date hereof. (b) The Borrower agrees to pay to the Agent, for the account ofthe Lenders, a commitment fee for the period from and including the first dayof the Revolving Credit Commitment Period to the Termination Date, computedat the rate per annum equal to the Applicable Commitment Rate Percentage onthe average daily amount of the Available Revolving Credit Commitments duringthe period for which payment is made, payable quarterly 36 31in arrears on the last day of each March, June, September and December and onthe Termination Date, commencing on the first of such dates to occur after thedate hereof. (c) The Borrower agrees to pay to the Agent, for the account ofthe Agent, the fees described in the fee letter dated February 26, 1999between the Borrower and the Agent. 6.3 Commercial Letter of Credit Fees. (a) The Borrower agreesthat on the date of each drawing under a Commercial Letter of Credit, it willpay to the Agent, for the account of the Issuing Lender, a Commercial Letterof Credit fee. In the case of a Sight Draft Letter of Credit, such feeshall be equal to the higher of (i) $50 and (ii) the Applicable Sight DraftFee Percentage then in effect of the amount of such drawing (calculated onthe basis of the Dollar Equivalent thereof in the case of any Letter ofCredit issued in an Approved Foreign Currency). In the case of a Time DraftLetter of Credit, such fee shall equal the higher of (i) $120 and (ii) apercentage of the amount of such drawing equal to the Applicable Margin thenin effect (calculated on the basis of the Dollar Equivalent thereof in thecase of any Letter of Credit issued in an Approved Foreign Currency). On thelast day of each March, June, September and December, the Issuing Lender willallocate and pay to each Participating Lender a fee equal to suchParticipating Lender's pro rata share of the amount of such fees receivedfrom the Borrower during the immediately preceding three-month periodcalculated on the basis of the Applicable Sight Draft Fee Percentage or theApplicable Margin. (b) The Borrower agrees to pay to the Issuing Lender for its ownaccount the customary fees (including, without limitation, issuing fees,amendment fees and processing fees) charged by the Issuing Lender inconnection with its issuance and administration of commercial letters ofcredit. 6.4 Standby Letter of Credit Fees. (a) The Borrower agrees topay the Agent, for the account of the Issuing Lender and the ParticipatingLenders, a Standby Letter of Credit fee calculated at the rate per annumequal to the Applicable Margin from time to time in effect of the amountavailable to be drawn under each Standby Letter of Credit issued for itsaccount (and in no event less than $500 with respect to each such StandbyLetter of Credit), payable to the Issuing Lender semi-annually in advance onthe date of issue of any Standby Letter of Credit and, thereafter, on eachsix-month anniversary of such date of issue. The Issuing Lender willpromptly pay to the Participating Lenders their pro rata shares of anyamounts received from the Borrower in respect of any such fees. (b) The Borrower agrees to pay to the Issuing Lender for its ownaccount the customary fees (including, without limitation, issuing fees andprocessing fees) charged by the Issuing Lender in connection with itsissuance and administration of standby letters of credit. 6.5 Acceptance Fees. (a) The Borrower agrees to pay theIssuing Lender an acceptance commission (an "Acceptance Commission") on theface amount of each Acceptance created by the Issuing Lender hereunder forthe period from the date of such Acceptance to the date of its maturity at arate per annum equal to the Acceptance Discount Rate in effect on the date ofcreation of such Acceptance plus the Applicable Margin, payable in full onthe date of creation of such Acceptance; provided that such AcceptanceCommission shall be an amount 37 32equal to at least $120. On the last day of each March, June, September andDecember, the Issuing Lender will allocate and pay to each Participating Lendersuch Participating Lender's pro rata share of the Applicable Margin portion ofthe Acceptance Commissions paid during the immediately preceding three-monthperiod. (b) The Borrower agrees to pay to the Issuing Lender for its ownaccount the customary fees (including, without limitation, processing fees)charged by the Issuing Lender in connection with its creation andadministration of bankers' acceptances. 6.6 Computation of Interest and Fees. (a) Interest on ABRLoans, Letter of Credit Reimbursement Loans, Acceptance Reimbursement Loans,Letter of Credit Reimbursement Obligations and Acceptance ReimbursementObligations, and per annum fees shall be calculated on the basis of a 365-(or 366, as the case may be) day year for the actual days elapsed; otherwiseinterest shall be calculated on the basis of a 360-day year for the actualdays elapsed. The Agent shall as soon as practicable notify the Borrower andthe Lenders of each determination of a Eurodollar Rate. Any change in theinterest rate on a Loan (or on any other obligation accruing interest underthe terms hereof) resulting from a change in the ABR or the EurocurrencyReserve Requirements shall become effective as of the opening of business onthe day on which such change becomes effective. The Agent shall as soon aspracticable notify the Borrower and the Lenders of the effective date and theamount of each such change in interest rate. (b) Each determination of an interest rate by the Agentpursuant to any provision of this Agreement shall be conclusive and bindingon the Borrower and the Lenders in the absence of manifest error. 6.7 Optional Prepayments. The Borrower may at any time and fromtime to time prepay the Loans, in whole or in part, without premium orpenalty, upon irrevocable notice to the Agent prior to 11:00 A.M. on suchdate of prepayment, specifying the date and amount of prepayment and whetherthe prepayment is of Eurodollar Loans, ABR Loans or a combination thereof,and, if of a combination thereof, the amount allocable to each. Upon receiptof any such notice the Agent shall promptly notify each Lender thereof. Ifany such notice is given, the amount specified in such notice shall be dueand payable on the date specified therein, together with any amounts payablepursuant to subsection 6.14 and, in the case of prepayments of the Term Loansonly, accrued interest to such date on the amount prepaid. Amounts prepaidon account of the Term Loans may not be reborrowed. Partial prepaymentsshall be in an aggregate principal amount of $500,000 or a whole multiple of$100,000 in excess thereof. In the event any prepayment pursuant to thissubsection 6.7 of Eurodollar Loans is not made on the last day of an InterestPeriod, the Borrower shall be obligated to reimburse the Lenders in respectthereof pursuant to subsection 6.14. 6.8 Termination or Reduction of Commitments. (a) The Borrowershall have the right, upon not less than five Business Days' notice to theAgent, to terminate the Term Loan Commitments or, from time to time, toreduce the amount of the Term Loan Commitments. Any such reduction shall bein an amount equal to $1,000,000 or a whole multiple of $100,000 in excessthereof and shall reduce permanently the Term Loan Commitments then in effect. 38 33 (b) The Borrower shall have the right, upon not less than fiveBusiness Days' notice to the Agent, to terminate the Revolving CreditCommitments or, from time to time, to reduce the amount of the RevolvingCredit Commitments, provided that no such termination or reduction shall bepermitted to the extent that, after giving effect thereto and to anyprepayments of the Loans made on the effective date thereof, the AggregateRevolving Credit Extensions of Credit then outstanding would exceed theRevolving Credit Commitments then in effect. Any such reduction shall be inan amount equal to $1,000,000 or a whole multiple of $100,000 in excessthereof and shall reduce permanently the Revolving Credit Commitments then ineffect. 6.9 Pro Rata Treatment and Payments. (a) Each borrowing by theBorrower from the Lenders under the Revolving Credit Commitments, eachpayment by the Borrower on account of any commitment fee hereunder in respectof the Revolving Credit Commitments and any reduction of the Revolving CreditCommitments of the Lenders shall be made pro rata according to the respectiveRevolving Credit Commitment Percentages of the Lenders. Each borrowing bythe Borrower from the Lenders under the Term Loan Commitments, each paymentby the Borrower on account of any commitment fee hereunder in respect of theTerm Loan Commitments and any reduction of the Term Loan Commitments of theLenders shall be made pro rata according to the respective Term LoanCommitment Percentages of the Lenders. Each payment (including eachprepayment) by the Borrower on account of principal of and interest on theLoans shall be made pro rata according to the respective outstandingprincipal amounts of the Loans then held by the Lenders. All payments(including prepayments) to be made by the Borrower hereunder and under theNotes, whether on account of principal, interest, fees or otherwise, shall bemade without set off or counterclaim and shall be made prior to 12:00 Noon,New York City time, on the due date thereof to the Agent at the Agent'soffice specified in subsection 13.2, in Dollars and in immediately availablefunds. The Agent shall distribute such payments to the Lenders promptly uponreceipt in like funds as received. If any payment hereunder becomes due andpayable on a day other than a Business Day, such payment shall be due on thenext succeeding Business Day, and, with respect to payments of principal,interest thereon shall be payable at the then applicable rate during suchextension. (b) Unless the Agent shall have been notified in writing by anyLender prior to a Borrowing Date that such Lender will not make the amountthat would constitute its Revolving Credit Commitment Percentage or Term LoanPercentage, as the case may be, of the borrowing on such date available tothe Agent, the Agent may assume that such Lender has made such amountavailable to the Agent on such Borrowing Date, and the Agent may, in relianceupon such assumption, make available to the Borrower a corresponding amount.If such amount is made available to the Agent on a date after such BorrowingDate, such Lender shall pay to the Agent on demand an amount equal to theproduct of (i) the daily average Federal Funds Effective Rate during suchperiod as quoted by the Agent, times (ii) the amount of such Lender'sRevolving Credit Commitment Percentage or Term Loan Percentage, as the casemay be, of such borrowing, times (iii) a fraction the numerator of which isthe number of days that have elapsed from and including such Borrowing Dateto the date on which such Lender's Revolving Credit Commitment Percentage orTerm Loan Percentage, as the case may be, of such borrowing shall have becomeimmediately available to the Agent and the denominator of which is 360. Acertificate of the Agent submitted to any Lender with respect to any amountsowing under this subsection shall be conclusive in the absence of manifesterror. If such Lender's Revolving 39 34Credit Commitment Percentage or Term Loan Percentage, as the case may be, ofsuch borrowing is not in fact made available to the Agent by such Lender withinthree Business Days of such Borrowing Date, the Agent shall be entitled torecover (without duplication) such amount with interest thereon at the rate perannum applicable to ABR Loans hereunder, on demand, from the Borrower. 6.10 Conversion and Continuation Options. (a) The Borrower mayelect from time to time to convert Eurodollar Loans to ABR Loans by givingthe Agent at least two Business Days' prior irrevocable notice of suchelection, provided that in the event any such conversion of Eurodollar Loansis not made on the last day of an Interest Period, the Borrower shall beobligated to reimburse the Lenders in respect thereof pursuant to subsection6.14. The Borrower may elect from time to time to convert ABR Loans toEurodollar Loans by giving the Agent at least three Business Days' priorirrevocable notice of such election. Any such notice of conversion toEurodollar Loans shall specify the length of the initial Interest Period orInterest Periods therefor. Upon receipt of any such notice the Agent shallpromptly notify each Lender thereof. All or any part of outstandingEurodollar Loans and ABR Loans may be converted as provided herein, providedthat (i) no Loan may be converted into a Eurodollar Loan when any Event ofDefault has occurred and is continuing and the Agent has or the RequiredLenders have determined that such a conversion is not appropriate and (ii) noLoan may be converted into a Eurodollar Loan after the date that is one monthprior to the Revolving Credit Termination Date or, as the case may be, thedate on which the Term Loans mature. (b) Any Eurodollar Loans may be continued as such upon theexpiration of the then current Interest Period with respect thereto by theBorrower giving notice to the Agent, in accordance with the applicableprovisions of the term "Interest Period" set forth in subsection 1.1, of thelength of the next Interest Period to be applicable to such Loans, providedthat no Eurodollar Loan may be continued as such (i) when any Event ofDefault has occurred and is continuing and the Agent has or the RequiredLenders have determined that such a continuation is not appropriate or (ii)after the date that is one month prior to the Termination Date or, as thecase may be, the day on which the Term Loans mature and provided, further,that if the Borrower shall fail to give such notice or if such continuationis not permitted such Loans shall be automatically converted to ABR Loans onthe last day of such then expiring Interest Period. 6.11 Minimum Amounts and Maximum Number of Tranches. Allborrowings, conversions and continuations of Loans hereunder and allselections of Interest Periods hereunder shall be in such amounts and be madepursuant to such elections so that, after giving effect thereto, theaggregate principal amount of the Loans comprising each Eurodollar Trancheshall be equal to $5,000,000 or a whole multiple of $500,000 in excessthereof. In no event shall there be more than 10 Eurodollar Tranchesoutstanding at any time. 6.12 Inability to Determine Interest Rate. If prior to thefirst day of any Interest Period: (a) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant 40 35 market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period,the Agent shall give telecopy or telephonic notice thereof to the Borrowerand the Lenders as soon as practicable thereafter. Unless the Borrower shallhave notified the Agent promptly upon receipt of such notice that if itwishes to rescind or modify its request (x) any Eurodollar Loans requested tobe made on the first day of such Interest Period shall be made as ABR Loansand (y) any Loans that were to have been converted on the first day of suchInterest Period to Eurodollar Loans shall be converted to or continued as ABRLoans. In addition, in the case any such notice is given, any outstandingEurodollar Loans shall be converted, on the first day of such InterestPeriod, to ABR Loans. Until such notice has been withdrawn by the Agent, nofurther Eurodollar Loans shall be made or continued as such, nor shall theBorrower have the right to convert Loans to Eurodollar Loans. 6.13 Illegality. Notwithstanding any other provision herein, ifthe adoption of or any change in any Requirement of Law or in theinterpretation or application thereof shall make it unlawful for any Lenderto make or maintain Eurodollar Loans as contemplated by this Agreement, (a)the commitment of such Lender hereunder to make Eurodollar Loans, continueEurodollar Loans as such and convert ABR Loans to Eurodollar Loans shallforthwith be cancelled and (b) such Lender's Loans then outstanding asEurodollar Loans, if any, shall be converted automatically to ABR Loans onthe respective last days of the then current Interest Periods with respect tosuch Loans or within such earlier period as required by law. If any suchconversion of a Eurodollar Loan occurs on a day which is not the last day ofthe then current Interest Period with respect thereto, the Borrower shall payto such Lender such amounts, if any, as may be required pursuant tosubsection 6.14. 6.14 Indemnity. The Borrower agrees to indemnify each Lenderand to hold each Lender harmless from any loss or expense which such Lendermay sustain or incur as a consequence of (a) default by the Borrower inmaking a borrowing of, conversion into or continuation of Eurodollar Loansafter the Borrower has given a notice requesting the same in accordance withthe provisions of this Agreement, (b) default by the Borrower in making anyprepayment of Eurodollar Loans after the Borrower has given notice thereof inaccordance with the provisions of this Agreement or (c) the making of aprepayment of Eurodollar Loans on a day which is not the last day of anInterest Period with respect thereto. Such indemnification may include anamount equal to the excess, if any, of (i) the amount of interest which wouldhave accrued on the amount so prepaid, or not so borrowed, converted orcontinued, for the period from the date of such prepayment or of such failureto borrow, convert or continue to the last day of such Interest Period (or,in the case of a failure to borrow, convert or continue, the Interest Periodthat would have commenced on the date of such failure) in each case at theapplicable rate of interest for such Loans provided for herein (excluding,however, the Applicable Margin included therein, if any) over (ii) the amountof interest (as reasonably determined by such 41 36Lender) which would have accrued to such Lender on such amount by placing suchamount on deposit for a comparable period with leading banks in the interbankeurodollar market. A certificate setting forth the calculations as to anyadditional amounts payable pursuant to this subsection 6.14 shall be submittedby an officer of a Lender, through the Agent, to the Borrower and shall beconclusive in the absence of manifest error. This covenant shall survive thetermination of this Agreement and the payment of the Loans, the Notes, theAcceptance Obligations, the Letter of Credit Obligations and all other amountspayable hereunder. 6.15 Change of Lending Office. Each Lender agrees that if itmakes any demand for payment under subsection 6.16 or 6.17, or if anyadoption or change of the type described in subsection 6.13 shall occur withrespect to it, it will use reasonable efforts (consistent with its internalpolicy and legal and regulatory restrictions and so long as such effortswould not be disadvantageous to it, as determined in its sole discretion) todesignate a different lending office if the making of such a designationwould reduce or obviate the need for the Borrower to make payments undersubsection 6.16 or 6.17, or would eliminate or reduce the effect of anyadoption or change described in subsection 6.13. 6.16 Taxes. (a) All payments shall be made by the Borrowerunder this Agreement and the Notes free and clear of, and without deductionor withholding for or on account of, any present or future income, stamp orother taxes, levies, imposts, duties, charges, fees, deductions orwithholdings, now or hereafter imposed, levied, collected, withheld orassessed by any Governmental Authority, excluding, in the case of the Agentand each Lender, net income and franchise taxes (imposed in lieu of netincome taxes) imposed on the Agent or such Lender, as the case may be, as aresult of a present or former connection between the Agent or such Lender andthe jurisdiction of the Governmental Authority imposing such tax, or anypolitical subdivision or taxing authority thereof or therein (other than anysuch connection arising solely from the Agent or such Lender having executed,delivered or performed its obligations or received a payment under, orenforced, this Agreement or any Note). If any such non-excluded taxes,levies, imposts, duties, charges, fees, deductions and withholdings("Non-Excluded Taxes") are required to be withheld from any amounts payableto the Agent or any Lender hereunder or under the Notes, the amounts sopayable to the Agent or such Lender shall be increased to the extentnecessary to yield to the Agent or such Lender (after payment of allNon-Excluded Taxes) interest or any such other amounts payable hereunder atthe rates or in the amounts specified in this Agreement and the Notes,provided, however, that the Borrower shall not be required to increase anysuch amounts payable to any Lender that is not organized under the laws ofthe United States of America or a state thereof (a "Non-U.S. Lender") withrespect to any taxes that are attributable to such Non-U.S. Lender's failureto comply with the requirements of paragraph (b) of this subsection.Whenever any Non-Excluded Taxes specified in the preceding sentence arepayable by the Borrower, as promptly as possible thereafter the Borrowershall send to the Agent for its own account or for the account of suchLender, as the case may be, a certified copy of an original official receiptreceived by the Borrower showing payment thereof. If the Borrower fails topay any Non-Excluded Taxes when due to the appropriate taxing authority orfails to remit to the Agent the required receipts or other requireddocumentary evidence, the Borrower shall indemnify the Agent and the Lendersfor any incremental taxes, interest or penalties that may become payable bythe Agent or any Lender as a result of any such failure. The agreements inthis subsection shall survive the termination of this Agreement and 42 37the payment of the outstanding Notes, Acceptance Obligations, Letter of CreditObligations and all other amounts payable hereunder. (b) Each Non-U.S. Lender agrees that prior to the first InterestPayment Date it will deliver to the Borrower and the Agent (i) two dulycompleted copies of United States Internal Revenue Service Form 1001 or 4224or successor applicable form, as the case may be, and (ii) an InternalRevenue Service Form W-8 or W-9 or successor applicable form. Each suchLender also agrees to deliver to the Borrower and the Agent two new, dulycompleted copies of the said Form 1001 or 4224 and Form W-8 or W-9, orsuccessor applicable forms or other manner of certification, as the case maybe, on or before the date that any such form expires or becomes obsolete orafter the occurrence of any event requiring a change in the most recent formpreviously delivered by it to the Borrower, and such extensions or renewalsthereof as may reasonably be requested by the Borrower or the Agent. SuchLender shall certify (i) in the case of a Form 1001 or 4224, that it isentitled to receive payments under the Agreement without deduction orwithholding of any United States federal income taxes, unless in any suchcase an event (including, without limitation, any change in treaty, law orregulations) has occurred after the Closing Date and prior to the date onwhich any such delivery would otherwise be required which renders all suchforms inapplicable or which would prevent such Lender from duly completingand delivering any such form with respect to it and such Lender advises theBorrower that it is not capable of so receiving payments without anydeduction or withholding, and (ii) in the case of a Form W-8 or W-9, that itis entitled to a complete exemption from United States backup withholdingtax. Each Person that shall become a Lender or a Participant pursuant tosubsection 13.6 shall, upon the effectiveness of the related transfer, berequired to provide all of the forms and statements required pursuant to thissubsection, provided that in the case of a Participant, such Participantshall furnish all such required forms and statements to the Lender from whichthe related participation shall have been purchased. (c) Each Lender agrees to use reasonable efforts (includingreasonable efforts to change the office in which it is booking its Loans)consistent with its internal policy and legal and regulatory restrictions andso long as such efforts would not be disadvantageous to it, as determined inits sole discretion, to avoid or minimize any amounts which might otherwisebe payable pursuant to this subsection 6.16. (d) If the Agent or any Lender receives a refund which in thegood faith judgment of such Lender is allocable to Non-Excluded Taxes paid bythe Borrower, it shall promptly pay such refund, together with any otheramounts paid by the Borrower in connection with such refunded Non-ExcludedTaxes, to the Borrower, net of all out-of-pocket expenses of such Lenderincurred in obtaining such refund, provided, however, that the Borroweragrees to promptly return such refund to the Agent or the applicable Lender,as the case may be, if it receives notice from the Agent or applicable Lenderthat such Agent or Lender is required to repay such refund. 6.17 Requirements of Law. (a) If the adoption of or any changein any Requirement of Law or in the interpretation or application thereof orcompliance by any Lender with any request or directive (whether or not havingthe force of law) from any central bank or other Governmental Authority madesubsequent to the dates hereof: 43 38 (i) does or shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Eurodollar Loan, any Letter of Credit Document or any Acceptance Document, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by subsection 6.16 and changes in the rate of tax on the overall net income of such Lender); (ii) does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan, assessment or similar requirement against Letters of Credit issued by the Issuing Lender or participated in by the Participating Lender or against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) does or shall impose on such Lender any other condition;and the result of any of the foregoing is to increase the cost to such Lenderof making, converting into, continuing or maintaining Eurodollar Loans,issuing, maintaining or participating in any Letter of Credit or creating orparticipating in any Acceptance, or to reduce any amount receivable hereunderin respect thereof, then, in any such case, the Borrower shall promptly paysuch Lender, upon its demand, any additional amounts necessary to compensatesuch Lender for such additional increased cost or reduced amount receivable.If any Lender becomes entitled to claim any additional amounts pursuant tothis subsection, it shall promptly notify the Borrower, through the Agent, ofthe event by reason of which it has become so entitled. A certificate as toany additional amounts payable pursuant to this paragraph, submitted by suchLender, through the Agent, to the Borrower shall be conclusive in the absenceof manifest error. (b) In the event that any Acceptance created hereunder is not,for any reason, a bankers' acceptance with respect to which no reserves arerequired to be maintained by the Issuing Lender or any Participating Lenderunder Regulation D of the Board in effect from time to time or under anyother law or regulation (an "Eligible Acceptance"), the Borrower shall, upondemand by the Agent, pay to the Agent for the account of the Lenders, suchadditional amounts as are sufficient to indemnify each Lender against anyadditional costs, as determined by the Lenders and notified in writing to theAgent, incurred by the Lenders (including, without limitation, costsresulting from any Reserve Determination, or reserve requirements, or premiumliability to the Federal Deposit Insurance Corporation, or a higher discountrate) resulting from such Acceptance not constituting an Eligible Acceptancehereunder. (c) In the event that after the date hereof, any Lender shalldetermine that the adoption of any Requirement of Law, rule, regulation orguideline regarding capital adequacy or any change in any Requirement of Law,rule, regulation or guideline regarding capital adequacy or in theinterpretation or application thereof or compliance by such Lender with anyrequest or directive regarding capital adequacy (whether or not having theforce of law) from any Governmental Authority, including, without limitation,the issuance of any final rule, regulation or guideline, does or shall havethe effect of reducing the rate of return on such Lender's capital as aconsequence of its obligations hereunder (including, without limitation, theissuance of or 44 39participation in any Letters of Credit and the creation and discount of orparticipation in Acceptances) to a level below that which such Lender could haveachieved but for such Requirement of Law, rule, regulation or guideline, changeor compliance (taking into consideration such Lender's policies with respect tocapital adequacy) by an amount deemed by such Lender to be material, then fromtime to time, after submission by such Lender to the Borrower (with a copy tothe Agent) of a written request therefor, the Borrower shall pay to such Lendersuch additional amount or amounts as will compensate such Lender for suchreduction. (d) The agreements in this subsection 6.17 shall survive thetermination of this Agreement and payment of the outstanding Notes,Acceptance Obligations, Letter of Credit Obligations and all other amountspayable hereunder. 6.18 Obligations Absolute. (a) The Borrower's paymentobligations under this Agreement shall be unconditional and irrevocable andshall be paid strictly in accordance with the terms of this Agreement underall circumstances, including, without limitation, the existence of any claim,set-off, defense or other right which the Borrower may have at any timeagainst the Issuing Lender, any Participating Lender, any Lender or theAgent, or against any beneficiary of any Letter of Credit or any holder ofany Acceptance, or any transferee from any such beneficiary or holder (or anyPerson for whom any such beneficiary, holder or transferee may be acting), oragainst any other Person, whether in connection with this Agreement, thetransactions contemplated hereby, or any unrelated transaction; provided,however, that this provision shall be deemed a waiver by the Borrower of theassertion of a compulsory counterclaim only to the extent permitted byapplicable law. The Borrower assumes all risks of the acts or omissions ofthe users of the Letters of Credit and Acceptances and all risks of themisuse of the Letters of Credit and Acceptances. Neither the Issuing Lender,nor any of its correspondents, nor any Participating Lender, nor the Agentshall be responsible: (i) for the form, validity, sufficiency, accuracy,genuineness or legal effect of any document specified in any of the Letter ofCredit Documents, even if it should in fact prove to be in any or allrespects invalid, insufficient, inaccurate, fraudulent or forged; (ii) forthe validity or sufficiency of any instrument transferring or assigning orpurporting to transfer or assign any of the Letters of Credit or any of therights or benefits thereunder or proceeds thereof in whole or in part, whichmay prove to be invalid or ineffective for any reason; (iii) for failure ofany draft to bear any reference or adequate reference to any of the Lettersof Credit, or failure of anyone to note the amount of any draft on thereverse of any of the Letters of Credit or to surrender or to take up any ofthe Letters of Credit or to send forward any such document apart from draftsas required by the terms of any of the Letters of Credit, each of whichprovisions, if contained in a Letter of Credit itself, it is agreed, may bewaived by the Issuing Lender; (iv) for errors, omissions, interruptions ordelays in transmission or delivery of any messages, by mail, cable,telegraph, telex or otherwise, whether or not they be in cipher; (v) for anyerror, neglect, default, suspension or insolvency of any correspondents ofthe Issuing Lender; (vi) for errors in translation or for errors ininterpretation of technical terms; (vii) for any loss or delay, in thetransmission or otherwise, of any such document or draft or of proceedsthereof; or (viii) for any other circumstances whatsoever in making orfailing to make payment under a Letter of Credit, except only that theBorrower shall have a claim against the Issuing Lender, and the IssuingLender shall be liable to the Borrower, to the extent, but only to theextent, of any direct, as opposed to consequential, damages suffered by theBorrower which the Borrower proves were caused by the Issuing Lender'swillful misconduct or gross negligence 45 40in determining whether documents presented under a Letter of Credit comply withthe terms of such Letter of Credit. None of the foregoing shall affect, impairor prevent the vesting of any of the rights or powers of the Issuing Lender, theAgent or any of the Participating Lenders. The Issuing Lender or the Agent shallhave the right to transmit the terms of the Letter of Credit involved withouttranslating them. (b) In furtherance and extension and not in limitation of thespecific provisions in subsection 6.18(a), (i) any action taken or omitted bythe Issuing Lender, the Agent or by any of their respective correspondentsunder or in connection with any of the Letters of Credit, if taken or omittedin good faith, shall be binding upon the Borrower and shall not put theIssuing Lender, the Agent or their respective correspondents under anyresulting liability to the Borrower and (ii) the Issuing Lender may acceptdocuments that appear on their face to be in order, without responsibilityfor further investigation, regardless of any notice or information to thecontrary; provided that if the Issuing Lender shall receive writtennotification from both the beneficiary of a Letter of Credit and the Borrowerthat sufficiently identifies (in the opinion of the Issuing Lender) documentsto be presented to the Issuing Lender which are not to be honored, theIssuing Lender agrees that it will not honor such documents. 6.19 Mandatory Prepayments. If, at any time during the RevolvingCredit Commitment Period, the Aggregate Revolving Credit Extensions of Creditexceed the aggregate Revolving Credit Commitments then in effect, theBorrower shall, without notice or demand, immediately prepay the RevolvingCredit Loans in an aggregate principal amount equal to such excess, togetherwith interest accrued to the date of such payment or prepayment and anyamounts payable under subsection 6.14. Prepayments shall be applied, firstto ABR Loans and second, to Eurodollar Loans. To the extent that aftergiving effect to any prepayment of the Revolving Credit Loans required by thefirst sentence of this paragraph, the Aggregate Revolving Credit Extensionsof Credit exceed the aggregate Revolving Credit Commitments then in effect,the Borrower shall, without notice or demand, immediately deposit in a cashcollateral account with the Agent, having terms and conditions satisfactoryto the Agent, as cash collateral security for the liability of the IssuingLender (whether direct or contingent) under any Letters of Credit orAcceptances then outstanding, an aggregate amount equal to the amount bywhich the Aggregate Revolving Credit Extensions of Credit exceed theaggregate Revolving Credit Commitments then in effect. 6.20 Cash Collateralization of Letter of Credit Obligations and Acceptance Obligations. With respect to all Letters of Credit andAcceptances that shall not have matured or been paid or with respect to whichpresentment for honor shall not have occurred on or prior to the TerminationDate, the Borrower shall, on the Termination Date, deposit in a cashcollateral account maintained by the Agent (and under the exclusive dominionand control of the Agent) an amount equal to the aggregate amount of theLetter of Credit Obligations plus the aggregate amount of AcceptanceObligations for application to payments of drafts drawn under Letters ofCredit and to payment of Acceptances at maturity, and the unused portionthereof after such application, if any, shall be applied to repay otherobligations of the Borrower hereunder or under the Notes or any of the otherCredit Documents, and after all Letters of Credit have expired, all draftsand Acceptances have matured and been repaid and all other obligations of theBorrower 46 41hereunder or any of the other Credit Documents are paid in full, the balance, ifany, shall be returned to the Borrower. SECTION 7. CONDITIONS PRECEDENT 7.1 Conditions to Initial Loans. The agreement of each Lenderto make the initial Loan requested to be made by it is subject to thesatisfaction, immediately prior to or concurrently with the making of suchLoan, on the Closing Date of the following conditions precedent (provided,that such conditions shall have been satisfied on or before May 1, 1999): (a) Minimum Amount of Shares; Completion of Tender Offer; etc. Each of the statements set forth in clauses (i) through (v) below shall be true and correct, and the Agent shall have received a certificate of a Responsible Officer of the Borrower to such effect: (i) the Borrower shall have accepted for payment prior to or concurrently with the making of such Loans (A) at least 66-2/3% of the Amalgamation Voting Shares (on a fully diluted basis) and (B) not less than 50.1% of the outstanding Amalgamation Voting Shares (on a fully diluted basis) excluding any of such Amalgamation Voting Shares that may not be included as part of the minority approval of the Amalgamation; (ii) the aggregate purchase price of the Target Stock pursuant to the Tender Offer, plus the aggregate amount required to be paid in connection with the Compulsory Acquisition or the Second-Step Transaction shall be approximately Canadian $85,000,000; (iii) the Tender Offer shall have been completed in all material respects in accordance with all applicable United States federal and state laws and regulations, and all applicable Canadian federal and provincial laws and regulations; (iv) the Tender Offer shall have been consummated without modification, waiver or amendment of any of the conditions precedent set forth in the Offer to Purchase or of any other terms without the approval of the Agent, except for extensions of the period for the deposit of shares of Target Stock, at any time and from time to time, so long as such period ends on a date no later than 120 days after the Closing Date; and (v) after the consummation of the Tender Offer, the Target shall have no material Indebtedness except the approximately Canadian $44,000,000 of Indebtedness to be repaid at the time of Amalgamation or the completion of the Second-Step Transaction. (b) Depositary Certificate. The Agent shall have received a copy of a report from Montreal Trust Company of Canada (the "Depositary") to the effect that as of the Closing Date, (i) not less than 66-2/3% of the Amalgamation Voting Shares (on a fully diluted basis) and (ii) not less than 50.1% of the outstanding Amalgamation Voting Shares (on a fully diluted basis) excluding any of such Amalgamation Voting Shares that may not be included as part of the minority approval of the Amalgamation, have been properly tendered and not withdrawn pursuant to the Tender Offer. (c) Governmental Approval. All governmental and third party approvals necessary in connection with the Tender Offer, the financing contemplated hereby and the continuing operations of the Borrower and its Subsidiaries shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without 47 42 any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose adverse conditions on the Tender Offer, the Amalgamation or the financing thereof. (d) Notes. The Agent shall have received a Revolving Credit Note and/or a Term Note, as applicable, for each Lender, each conforming to the requirements hereof and executed by a duly authorized officer of the Borrower. (e) Legal Opinions. The Agent shall have received, with a counterpart for each Lender, an opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Borrower and the Guarantors, substantially in the form of Exhibit D-1 and an opinion of the Senior Vice President and General Counsel of the Borrower substantially in the form of Exhibit D-2, and covering, in each case, such other matters incident to the transactions contemplated by this Agreement, the Notes and the other Credit Documents as the Agent or any Lender may reasonably request. (f) Guarantee. The Agent shall have received, with a counterpart for each Lender, the Guarantee, satisfactory to the Agent, duly executed and delivered by the parties thereto and which shall be in full force and effect. (g) Closing Certificates. The Agent shall have received, with a counterpart for each Lender, (i) a closing certificate of the Borrower, dated the Closing Date, substantially in the form of Exhibit E, executed by a duly authorized officer of the Borrower and (ii) a closing certificate of each Guarantor, dated the Closing Date, substantially in the form of Exhibit F, executed by a duly authorized officer of such Guarantor, in each case with appropriate attachments thereto. (h) Other Documents. The Agent shall have received, with a copy for each Lender, such other certificates, opinions, documents and instruments relating to the transactions contemplated hereby as may have been reasonably requested by any Lender. (i) Corporate Proceedings of the Borrower. The Agent shall have received a copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors of the Borrower authorizing the execution, delivery and performance of the Credit Documents to which the Borrower is a party, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate shall be in form and substance satisfactory to the Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (j) Corporate Documents. The Agent shall have received true and complete copies of the certificate of incorporation and by-laws of the Borrower, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (k) Additional Matters. All corporate and other proceedings and all other documents (including, without limitation, all documents referred to herein and not 48 43 appearing as exhibits hereto) and legal matters in connection with the transactions contemplated by this Agreement, the Notes and the other Credit Documents shall be satisfactory in form and substance to the Agent. (l) Fees. The Agent shall have received the fees required to be paid on the Closing Date pursuant to the fee letter referred to in subsection 6.2 hereof and the fees and disbursements of Simpson Thacher & Bartlett, counsel to the Agent. 7.2 Conditions to All Extensions of Credit. The obligation ofeach Lender to make any Loan and the obligation of the Issuing Lender toissue any Letter of Credit or create any Acceptance (including the RevolvingCredit Loan made or initial Letter of Credit or Acceptance issued hereunder)is subject to the satisfaction of the following conditions precedent on thedate such Loan is made or such Letter of Credit or Acceptance is issued orcreated: (a) Payments. All applicable fees and commissions and any other amounts payable pursuant to this Agreement shall have been paid in full. (b) Representations and Warranties. The respective representations and warranties made by each of the Borrower and the other Credit Parties in the Credit Documents to which each is a party or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith shall be true and correct in all material respects on and as of such date as if made on and as of such date (other than (i) such representations as are made as of a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date and (ii) as previously notified to the Agent and waived by the Required Lenders). (c) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans to be made, the Letters of Credit to be issued or the Acceptances to be created and discounted, on such date. (d) Delivery of Documents. All documents required or otherwise requested in connection with the issuance of any Letters of Credit or the creation of any Acceptances hereunder shall have been delivered to the Issuing Lender, the Participating Lenders, the Lenders or the Agent, as the case may be, completed in a manner in form and substance satisfactory to the party to whom such documents are delivered. Each borrowing by the Borrower hereunder and each issuance of aLetter of Credit or creation of an Acceptance shall constitute arepresentation and warranty by the Borrower as of the date of such borrowingor issuance that the conditions in clauses (b) and (c) of this subsection 7.2have been satisfied. 7.3 Tender Offer Funding Procedures. Anything in this Agreementto the contrary notwithstanding and to accommodate the funding needs of theBorrower related to the 49 44March 30, 1999 expiry date of the Tender Offer, the Borrower shall request thatthe initial Loans be made hereunder on March 30, 1999 as ABR Loans by means of anotice of borrowing in substantially the form of Exhibit G, duly executed by theBorrower and the Depositary. If the condition set forth in Section 7.1(a)(i)shall not be satisfied on March 30, 1999, (a) the Depositary shall be obligatedin accordance with its agreements set forth in such notice of borrowing toreturn to the Agent on March 31, 1999 all funds made available to it by theLenders (through the Agent) as a consequence of such notice of borrowing, (b)the Borrower shall be obligated to repay to the Lenders on March 31, 1999 allfunds made available to the Borrower hereunder on March 30, 1999 (whichobligation may be satisfied, to the extent of any such funds made available tothe Depositary, by the return of such funds by the Depositary pursuant to clause(a) above), together with interest thereon at the rate specified in subsection6.1(b), (c) the closing documents delivered to the Agent pursuant to subsections7.1(a) and (b) shall be returned to the Borrower and deemed never to have beendelivered and (d) no Loans shall be deemed to have been made on March 30, 1999for purposes of subsections 2.1 and 3.1 of this Agreement. SECTION 8. REPRESENTATIONS AND WARRANTIES To induce the Agent, the Issuing Lender and the Lenders to enterinto this Agreement and to make the Loans, issue and participate in theLetters of Credit and create and participate in the Acceptances as hereinprovided, the Borrower hereby represents and warrants to the Agent, theIssuing Lender and to each Lender that: 8.1 Financial Condition. (a) The consolidated balance sheet ofthe Borrower and its Subsidiaries as at March 28, 1998 and the relatedconsolidated statements of income and retained earnings and of changes infinancial position for the fiscal year ended on such date, reported on byDeloitte & Touche LLP, copies of which have heretofore been furnished to eachLender, are complete and correct and present fairly the consolidatedfinancial condition of the Borrower and its Subsidiaries as at such date, andthe results of their operations and changes in financial position for thefiscal year then ended. The unaudited consolidated balance sheet of theBorrower and its Subsidiaries as at December 26, 1998 and the relatedconsolidated statements of income and retained earnings and of changes infinancial position for the nine-month period ended on such date, certified bya Responsible Officer, copies of which have heretofore been furnished to eachLender, are complete and correct and present fairly the financial conditionof the Borrower and its Subsidiaries as at such date, and the results oftheir operations and changes in financial position for such period. All suchfinancial statements, including the related schedules and notes to all suchfinancial statements, have been prepared in accordance with GAAP appliedconsistently throughout the periods involved (except as concurred in by suchaccountants or Responsible Officers, as the case may be, and as disclosedtherein). Neither the Borrower nor any of its Subsidiaries had, at the dateof the most recent balance sheet referred to above, any material GuaranteeObligation, contingent liabilities or liability for taxes, long-term lease orunusual forward or long-term commitment, which is not reflected in theforegoing statements or in the notes thereto (and, in the case of such leaseor commitment, which is required in accordance with GAAP to be reflected insuch statements or notes) or which has not otherwise been disclosed to theLenders in writing. 50 45 (b) The consolidated projected pro forma balance sheet of theBorrower and its Subsidiaries as at April 3, 1999, adjusted to give effect tothe Tender Offer and the Compulsory Acquisition or the Second-StepTransaction, as the case may be, presents fairly on a pro forma basis thefinancial condition of the Borrower and its Subsidiaries as at such dateafter giving effect to the Tender Offer and the Compulsory Acquisition or theSecond-Step Transaction, as the case may be and was prepared in good faith onassumptions deemed reasonable at the time made. 8.2 No Change. Since March 28, 1998 (a) there has been nodevelopment or event which has had or could reasonably be expected to have aMaterial Adverse Effect and (until the Closing Date) there has been nomaterial adverse change in the business, operations, property or financial orother condition of the Borrower and its Subsidiaries, taken as a whole; and(b) prior to the Closing Date, no dividends or other distributions have beendeclared, paid or made upon any shares of Capital Stock of the Borrower orany of its Subsidiaries and neither the Borrower nor any of its Subsidiarieshas redeemed, retired, purchased or otherwise acquired for value any of itsown Capital Stock, except such shares as may have been acquired pursuant tothe Borrower's stock repurchase plan. 8.3 Existence; Compliance with Law. Each Credit Party (a) isduly organized, validly existing and in good standing under the laws of thejurisdiction of its organization, (b) has the corporate or partnership, asthe case may be, power and authority and the legal right to own and operateits property, to lease the property it operates as lessee and to conduct thebusiness in which it is currently engaged and in which it proposes to beengaged after the Closing Date, (c) is duly qualified as a foreigncorporation or partnership, as the case may be, and in good standing underthe laws of each jurisdiction where its ownership, lease or operation ofproperty or the conduct of its business requires such qualification, exceptwhere the failure to so qualify could not have a Material Adverse Effect and(d) is in compliance with all Requirements of Law, except to the extent thatthe failure to comply therewith could not, in the aggregate, have a MaterialAdverse Effect. 8.4 Power; Authorization; Enforceable Obligations. (a) TheBorrower has the corporate power and authority and the legal right toexecute, deliver and perform the Credit Documents to which it is a party andto borrow hereunder and has taken all necessary action to authorize theborrowings on the terms and conditions of this Agreement and the Notes and toauthorize the execution, delivery and performance of the Credit Documents towhich it is a party. Each other Credit Party has the power and authority andthe legal right to execute, deliver and perform the Credit Documents to whichit is a party and has taken all necessary action to authorize the execution,delivery and performance of the Credit Documents to which it is a party. (b) No consent or authorization of, filing with or other act byor in respect of any Governmental Authority or any other Person is requiredin connection with the borrowings hereunder or with the execution, delivery,performance, validity or enforceability of the Credit Documents, except forthose which have been duly obtained or made and are in full force and effect. 51 46 (c) This Agreement has been and each other Credit Document hasbeen or will be (as the case may be) duly executed and delivered on behalf ofeach Credit Party thereto, and each constitutes or will constitute (as thecase may be) a legal, valid and binding obligation of such Credit Partyenforceable against such Credit Party in accordance with its terms, except asenforceability may be limited by applicable bankruptcy, insolvency,reorganization, moratorium or similar laws affecting the enforcement ofcreditors' rights generally. 8.5 No Legal Bar. The execution, delivery and performance ofthe Credit Documents, the borrowings hereunder and the use of the proceedsthereof will not violate any applicable usury laws or any other Requirementof Law applicable to, or any Contractual Obligation of, any Credit Party, andwill not result in, or require, the creation or imposition of any Lien on anyof its or their respective properties or revenues pursuant to any suchRequirement of Law or Contractual Obligation. 8.6 No Material Litigation. No litigation, investigation orproceeding of or before any arbitrator or Governmental Authority is pendingor, to the best knowledge of the Borrower, threatened by or against anyCredit Party or any of its Subsidiaries or against any of its or theirrespective properties or revenues (i) with respect to any of the CreditDocuments to which any of them is a party or any of the transactionscontemplated hereby or thereby, or (ii) which could reasonably be expected tohave a Material Adverse Effect. Schedule 8.6 lists all litigation pending onthe date hereof against the Borrower or any of its Subsidiaries in which theamount in controversy or potential liability of the Borrower or any of itsSubsidiaries exceeds $5,000,000 and is not covered by insurance. 8.7 No Default. Neither the Borrower nor any other Credit Partyis in default under or with respect to any Contractual Obligation or anyorder, award or decree of any Governmental Authority or arbitrator bindingupon it or its properties in any respect which could reasonably be expectedto have a Material Adverse Effect. No Default or Event of Default hasoccurred and is continuing. 8.8 Ownership of Property; Liens. Except as set forth in Schedule8.8, each Credit Party has good record and marketable title in fee simple toor valid leasehold interests in all its real property that is material to theoperation of its business, and good title to all its other property, and noneof such property is subject to any Lien, except as permitted by subsection10.4. 8.9 No Burdensome Restrictions. No Contractual Obligation ofthe Borrower or any other Credit Party and no Requirement of Law couldreasonably be expected to have a Material Adverse Effect. 8.10 Taxes. Each Credit Party has filed or caused to be filedall material tax returns which to the knowledge of the Borrower are requiredto be filed and has paid all taxes shown to be due and payable on saidreturns or on any assessments made against it or any of its property and allother material taxes, fees or other charges imposed on it or any of itsproperty by any Governmental Authority (other than those the amount orvalidity of which is currently being contested in good faith by appropriateproceedings and with respect to which reserves in 52 47conformity with GAAP have been provided on the books of such Credit Party), andno material tax Liens have been filed and, to the knowledge of the Borrower, nomaterial claims are being asserted with respect to any such taxes, fees or othercharges. 8.11 Federal Regulations. No part of the proceeds of any Loanshereunder will be used, directly or indirectly, for "purchasing" or"carrying" any "margin stock" within the respective meanings of each of thequoted terms under Regulation U of the Board as now and from time to timehereafter in effect or for any purpose which violates, or which would beinconsistent with, the provisions of the Regulations of such Board. Ifrequested by the Agent or any Lender, the Borrower will furnish to the Agentand each Lender a statement to the foregoing effect in conformity with therequirements of FR Form U-1 referred to in said Regulation U, as the case maybe. 8.12 ERISA. Neither a Reportable Event nor an "accumulatedfunding deficiency" (within the meaning of Section 412 of the Code or Section302 or ERISA) has occurred during the five-year period prior to the date onwhich this representation is made or deemed made with respect to any SingleEmployer Plan, and each Plan and, to the Borrower's knowledge, MultiemployerPlan, has complied, and has been administered in compliance, in all materialrespects with the applicable provisions of ERISA and the Code. Notermination of a Single Employer Plan has occurred, and no Lien in favor ofthe PBGC or a Plan has arisen, during such five-year period. The presentvalue of all accrued benefits under each Single Employer Plan maintained bythe Borrower or any Commonly Controlled Entity (based on those assumptionsused to fund such Plan) did not, as of the last annual valuation dateapplicable thereto, exceed the value of the assets of such Plan allocable tosuch accrued benefits. Except as disclosed on Schedule 8.12, neither theBorrower nor any Commonly Controlled Entity has had a complete or partialwithdrawal from any Multiemployer Plan, and the liability to which theBorrower or any Commonly Controlled Entity would become subject under ERISAif the Borrower or any such Commonly Controlled Entity were to withdrawcompletely from all Multiemployer Plans as of the valuation date most closelypreceding the date on which this representation is made or deemed made is notin excess of $5,000,000. To the knowledge of the Borrower, no suchMultiemployer Plan is in Reorganization or Insolvent. The present value(determined using actuarial and other assumptions which are reasonable inrespect of the benefits provided and the employees participating) of theliability of the Borrower and each Commonly Controlled Entity for postretirement benefits to be provided to their current and former employeesunder Plans which are welfare benefit plans (as defined in Section 3(1) ofERISA) does not in the aggregate, exceed the assets under all such Plansallocable to such benefits by an amount in excess of $5,000,000. 8.13 Investment Company Act; Other Regulations. No Credit Partyis an "investment company", or a company "controlled" by an "investmentcompany", within the meaning of the Investment Company Act of 1940, asamended. The Borrower is not subject to regulation under any Federal orstate statute or regulation (other than Regulation X of the Board) whichlimits its ability to incur Indebtedness. 8.14 Subsidiaries. Schedule 8.14 sets forth as of the datehereof the name, and, where applicable, the jurisdiction of organization,number of authorized and issued shares and 53 48ownership of each Subsidiary of the Borrower and each general partner of eachCredit Party which is a partnership. 8.15 Chief Executive Office. The Borrower's chief executiveoffice on the date hereof is located at 650 Madison Avenue, New York, NewYork 10022. 8.16 General Partners' Existence; Compliance with Law. Thecorporate general partner of each Credit Party that is a partnership (a) isduly organized, validly existing and in good standing under the laws of thejurisdiction of its incorporation, (b) has the power and authority and thelegal right to own and operate its property, to lease the property itoperates and to conduct the business in which it is currently engaged and inwhich it proposes to be engaged after the Closing Date, (c) is duly qualifiedas a foreign corporation or partnership, as the case may be, and in goodstanding under the laws of each jurisdiction where its ownership, lease oroperation of property or the conduct of its business requires suchqualification, except where the failure to so qualify could not have aMaterial Adverse Effect, and (d) is in compliance with all Requirements ofLaw except to the extent that the failure to comply therewith could not, inthe aggregate, reasonably be expected to have a Material Adverse Effect. 8.17 General Partners' Power; Authorization; Enforceable Obligations. The general partner of any Credit Party that is a partnershiphas the power and authority and the legal right to make, deliver and performon behalf of the Credit Party of which it is a general partner, and therebylegally bind such Credit Party to perform, (a) in the case of the Borrower,this Agreement, and has taken all necessary action to authorize theborrowings by the Borrower on the terms and conditions of this Agreement andany Notes and (b) in the case of each such Credit Party (including theBorrower), the Credit Documents to which it is a party and has taken allnecessary action to authorize the execution and delivery on behalf of suchCredit Party of, and thereby legally bind such Credit Party to perform, thisAgreement, the Notes and the other Credit Documents to which such CreditParty is a party. This Agreement has been, and each of the other CreditDocuments has been or will be (as the case may be), duly executed anddelivered by each such general partner on behalf of each Credit Party whichis a party thereto. 8.18 Certain Documents. The Borrower has delivered to the Agent acomplete and correct copy of (a) the Support Agreement, and (b) the Offer toPurchase and all other Tender Offer Documents (including all exhibits,schedules and disclosure letters referred to therein or delivered pursuantthereto, if any). The Support Agreement has not been amended or otherwisemodified in any material respect and is in full force and effect, and theBoard of Directors of the Target has not withdrawn its recommendation of theTender Offer. The representations and warranties of the Borrower and theOfferor and, to the best of the knowledge of the Borrower, the Target setforth in the Support Agreement are true and correct in all material respectson the date hereof. 8.19 Accuracy of Information. All factual informationheretofore or contemporaneously furnished by or on behalf of any Credit Partyor any of its Affiliates to the Agent or any Lender for purposes of or inconnection with this Agreement or any transaction contemplated hereby is, andall other such factual information hereafter furnished by or on behalf of anyCredit Party or any of its Affiliates to the Agent or any Lender will be,true and accurate 54 49in all material respects, taken as a whole, on the date as of which suchinformation is dated or certified and not incomplete by omitting to state anymaterial fact necessary to make such information not misleading at such time. 8.20 Environmental Matters. (a) To the best knowledge of the Borrower, the facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "Properties") do not contain any Materials of Environmental Concern in amounts or concentrations which (i) constitute a violation of, or (ii) could reasonably be expected to give rise to liability to the Borrower or any of its Subsidiaries under, any Environmental Law which would have a Material Adverse Effect. (b) To the best knowledge of the Borrower, the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties. (c) To the best knowledge of the Borrower, neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that could reasonably be expected to have a Material Adverse Effect. (d) To the best knowledge of the Borrower, Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. (e) To the best knowledge of the Borrower, no judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law 55 50 with respect to the Properties or the Business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. (f) To the best knowledge of the Borrower, there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Borrower or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably give rise to liability under Environmental Laws except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. 8.21 Year 2000 Matters. Any reprogramming, modification orreplacement required to permit the proper functioning (but only to the extentthat such proper functioning would otherwise be impaired by the occurrence ofthe year 2000) in and following the year 2000 of computer systems and otherequipment containing embedded microchips, in either case owned or operated bythe Borrower or any of its Subsidiaries or, to the Borrower's knowledge, usedor relied upon in the conduct of their business (including any such systemsand other equipment supplied by others), and the testing of all such systemsand other equipment as so reprogrammed, modified or replaced is expected tobe completed in all material respects by June 30, 1999. The costs to theBorrower and its Subsidiaries that have not been incurred as of the datehereof for such reprogramming, modification and/or replacement and testingand for the other reasonably foreseeable consequences to them of any improperfunctioning of other computer systems and equipment containing embeddedmicrochips due to the occurrence of the year 2000 could not reasonably beexpected to have a Material Adverse Effect. 8.22 Guarantors. Set forth on Schedule 8.22 is a complete andcorrect list of all the Subsidiaries which are parties to the Guarantee andCollateral Agreement (as defined in the Existing Credit Agreement) on thedate hereof. SECTION 9. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Revolving CreditCommitments remain in effect, any Note, any Letter of Credit Obligation orany Acceptance Obligation remains outstanding and unpaid or any other amountis owing to any Lender or the Agent hereunder, the Borrower shall and shallcause each of its Subsidiaries to: 9.1 Financial Statements and Information. Deliver to eachLender: (a) as soon as available and, in any event, within 90 days following the end of each Fiscal Year, the Annual Report of the Borrower on Form 10-K for such Fiscal Year signed by a Responsible Officer of the Borrower; 56 51 (b) as soon as available and, in any event, within 75 days after the end of each Fiscal Quarter of the Borrower, the Quarterly Report of the Borrower on Form 10-Q for the relevant Fiscal Quarter signed by a Responsible Officer of the Borrower; (c) concurrently with the delivery of each set of the financial statements referred to in paragraph (a) above, a certificate of the Accountants certifying such financial statements, stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default (except as specified in such certificate); (d) concurrently with the delivery of each set of the financial statements referred to in paragraphs (a) and (b) above, a certificate of a Responsible Officer of the Borrower (i) stating that such Officer has obtained no knowledge of any Default or Event of Default (except as specified in such certificate) and (ii) showing in reasonable detail the calculations supporting such statement in respect of subsections 10.1, 10.2, 10.3, 10.4, 10.7 and 10.9; (e) forthwith upon the occurrence of any Default or Event of Default, a certificate of a Responsible Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) immediately upon any authorized officer of the Borrower or any Guarantor or of any Commonly Controlled Entity obtaining knowledge of the occurrence of any (i) "reportable event", as such term is defined in Section 4043 of ERISA, or (ii) "prohibited transaction", as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Borrower or such Guarantor has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto, provided that, with respect to the occurrence of any "reportable event" as to which the PBGC has waived the 30-day reporting requirement, such written notice need be given only at the time notice is given to the PBGC; (g) from time to time, such additional information regarding the business, affairs or financial or other position of the Borrower, any Guarantor and any other Credit Party as any Lender may reasonably request, such information to be provided as soon as practicable after such request; and (h) within five days after the same are sent, copies of all financial statements and reports which the Borrower and/or its Subsidiaries sends to its public holders of Capital Stock or debtholders, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the SEC or any successor or analogous Governmental Authority. 9.2 Corporate Existence; Nature of Business. Except asotherwise permitted under this Agreement, preserve and maintain itspartnership or corporate or other (as the case may be) existence and all ofits material rights, privileges and franchises; comply with all 57 52Requirements of Law, except to the extent that failure to comply therewith couldnot, in the aggregate, reasonably be expected to have a Material Adverse Effect;and pay and discharge all taxes, assessments and governmental charges or leviesimposed on it or on its income or profits or on any of its property prior to thedate on which penalties attach thereto, unless the failure to pay and dischargeany such taxes, assessments or governmental charges or levies could not,individually or in the aggregate, reasonably be expected to have a MaterialAdverse Effect, except for any such tax, assessment, charge or levy the paymentof which is being contested in good faith and by proper proceedings and againstwhich adequate reserves are being maintained; not discontinue, and will activelyengage in and continue to pursue, the current business of the Borrower and itsSubsidiaries, taken as a whole, and no other business which is not a RelatedLine of Business, provided that nothing in this subsection shall be deemed toprevent the Borrower or any Subsidiary from making an Investment permitted bysubsection 10.7(g) in the Capital Stock of, or any assets constituting abusiness unit of, any other Person (including the Borrower or any of itsSubsidiaries) which is engaged in a business that is not a Related Line ofBusiness. 9.3 Payment of Obligations. Pay, discharge or otherwise satisfywhen the same shall become due, all its obligations of whatever nature,except when the amount or validity thereof is currently being contested ingood faith by appropriate proceedings and adequate reserves with respectthereto are maintained on the books of the Borrower or the appropriateSubsidiary, as the case may be, in accordance with GAAP and, except to theextent that failure to comply with this subsection 9.3 results from a goodfaith error (which shall be corrected promptly following the Borrowerbecoming aware of such error) and such failure could not, in the aggregate,reasonably be expected to have a Material Adverse Effect. 9.4 Maintenance of Properties; Insurance. Maintain or cause tobe maintained in good working order and condition, ordinary wear and tearexcepted, all material properties used in the businesses of the Borrower andits Subsidiaries, provided that the Borrower and its Subsidiaries, may inaccordance with good business practices, make determinations with respect tothe timeliness of necessary repairs. The Borrower and its Subsidiaries willmaintain or cause to be maintained such insurance with respect to theirrespective properties and businesses as a prudent Person engaged in the sameor similar business of a similar size and otherwise similarly situated wouldmaintain. 9.5 Maintain Trademarks. Take all action reasonably necessary ordesirable in accordance with good business practices to (a) maintain in fullforce and effect such domestic and foreign patents, trademarks, service marks,trade names, copyrights and licenses and such material rights with respect tothe foregoing, in each case necessary for the conduct of its business as nowconducted (collectively, the "Trademarks") and (b) protect all domestic andforeign Trademarks against infringement by third parties. 9.6 Inspection; Books and Records. Keep proper books of recordsand accounts in which full, true and correct entries in conformity with GAAPand all Requirements of Law shall be made of all dealings and transactions inrelation to its business and activities. The Borrower and each other CreditParty will permit on an annual basis at the request of the Agent (or at anytime and from time to time after the occurrence and during the continuance of a 58 53Default or Event of Default) any authorized representatives designated by theLenders to visit and inspect any of the properties of the Borrower and suchCredit Party, all during reasonable business hours, including their respectivebooks of accounts, and to make copies and take extracts therefrom, and toanalyze such data of the Borrower and such Credit Party, and to discuss theirrespective affairs, finances and accounts with their respective officers and theAccountants (and by this provision the Borrower and each Credit Party authorizethe Accountants to discuss with such representatives the affairs, finances andaccounts of the Borrower and any such Credit Party, whether or not arepresentative of the Borrower or such Credit Party is present). The Borrowershall reimburse the Lenders for all reasonable costs and expenses incurred bysuch Lenders in connection with the audit and verification activitiescontemplated by the immediately preceding sentence. So long as no Default orEvent of Default shall have occurred and be continuing, the Agent shall, priorto commencing any such verification activities, provide an estimate to theBorrower of the costs thereof, but any failure to give such an estimate shallnot impair any of the rights of the Agent and the Lenders under this subsection. 9.7 Notices. Promptly give notice to the Agent and each Lender: (a) of the occurrence of any Default or Event of Default (including, without limitation, any event referred to in Section 11(j)); (b) of any (i) default or event of default under any Contractual Obligation of the Borrower or any other Credit Party or (ii) litigation, investigation (known to the Borrower) or proceeding which may exist at any time between the Borrower or any other Credit Party and any Governmental Authority or Person, which in either case, if not cured or if adversely determined, as the case may be, would have a Material Adverse Effect; (c) as soon as possible and in any event within five days after the Borrower knows or has reason to know of the following events: (i) the occurrence of any Reportable Event with respect to any Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by PBGC, the Borrower or any Commonly Controlled Entity, or any Multiemployer Plan with respect to the withdrawal from, Reorganization or Insolvency of, any Multiemployer Plan, or the terminating of any Plan; and (d) of a material adverse change in the business, operations, property or financial or other condition of the Borrower and its Subsidiaries taken as a whole.Each notice pursuant to this subsection 9.7 shall be accompanied by astatement of a Responsible Officer setting forth details of the occurrencereferred to therein and stating what action the Borrower proposes to takewith respect thereto. 9.8 Guarantee Agreement Supplement. Each Domestic Subsidiarythat is or becomes a "significant subsidiary" (as that term is defined inRegulation S-X (part 210 of the Code of Federal Regulations) shall promptlyexecute and deliver to the Agent (with a counterpart 59 54for each Lender) a supplement to the Guarantee pursuant to which such Subsidiaryshall become a party thereto as a Guarantor, together with such other documentsand opinions as the Lenders shall reasonably request. 9.9 Use of Proceeds. The proceeds of the Loans shall be used bythe Borrower solely for the purposes set forth in subsections 2.4 and 3.4.No portion of the proceeds of any Loan shall be used by the Borrower in anymanner which might cause the borrowing or the application of such proceeds toviolate Regulation T, U or X of the Board or any other regulation of suchBoard. 9.10 Observance of Agreements. Observe and perform all theterms and conditions of all material agreements to which any of them or anyother Credit Party is party and shall diligently protect and enforce theirrespective rights under all such agreements in a manner consistent withprudent business judgment. SECTION 10. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Revolving CreditCommitments remain in effect, any Note, any Letter of Credit Obligation orany Acceptance Obligation remains outstanding and unpaid or any other amountis owing hereunder to any Lender or the Agent: 10.1 Consolidated Net Worth. The Borrower will not permitConsolidated Net Worth as at the end of any Fiscal Quarter ending after theClosing Date to be less than $300,000,000. 10.2 Consolidated Indebtedness Ratio. The Borrower will notpermit, for any period of four consecutive Fiscal Quarters ending after theClosing Date, the Consolidated Indebtedness Ratio to be greater than 2.25 : 1. 10.3 Limitation on Indebtedness. The Borrower will not, norwill it permit any of its Subsidiaries to, create, incur, assume or suffer toexist any Indebtedness except: (a) Indebtedness not secured by any Lien (including the Indebtedness incurred hereunder) in an aggregate principal amount (when added to the aggregate amount of such Indebtedness incurred during the Gap Period) not to exceed $200,000,000, provided that (i) no part of the principal of such Indebtedness (except in the case of any such Indebtedness in an aggregate principal amount, when added to the aggregate principal amount of Indebtedness then outstanding as permitted by subsections 10.3(g) and (h), not greater than $50,000,000) is stated to be payable or is required to be paid (whether by way of mandatory sinking fund, mandatory redemption, mandatory prepayment or otherwise) prior to the Termination Date, (ii) the material terms, conditions and restrictive covenants contained in the instrument governing such Indebtedness, taken as a whole, are no less favorable to the Borrower or any of its Subsidiaries, as the case may be, than the terms, conditions and restrictive covenants contained in this Agreement and (iii) no Default or Event of Default shall have occurred after giving effect to the incurrence of such Indebtedness; 60 55 (b) Indebtedness secured by Liens permitted by subsection 10.4(g) in an aggregate amount at any one time outstanding not in excess of the amount set forth in said subsection; (c) Indebtedness existing on the Existing Closing Date, not otherwise permitted under this Agreement, described in Schedule 10.3 hereto, Indebtedness incurred under the Existing Credit Agreement, and any refinancings, refundings, renewals or extensions thereof on terms no less favorable (taken as a whole) to the Borrower or such Subsidiary, as the case may be, provided that the principal amount of such Indebtedness is not increased; (d) Subordinated Indebtedness; (e) Indebtedness incurred under this Agreement; (f) Indebtedness of the Borrower to its Subsidiaries or Indebtedness of any Subsidiary of the Borrower to the Borrower or any of its Subsidiaries; (g) Indebtedness of any Person which became a Subsidiary after the date of the Existing Credit Agreement or which becomes a Subsidiary of the Borrower after the date hereof (provided that (i) such Indebtedness was in existence on the date such Person became a Subsidiary, (ii) such Indebtedness was not created, incurred or assumed in anticipation thereof, and (iii) the aggregate principal amount of such Indebtedness at any one time outstanding, when added to the aggregate principal amount of Indebtedness then outstanding as permitted by the parenthetical phrase included in clause (i) of the proviso to subsection 10.3(a), shall not be in excess of $50,000,000) and any Indebtedness resulting from the refinancing of any such Indebtedness; and (h) Indebtedness secured by Liens permitted by subsection 10.4(k) provided that the aggregate principal amount of such Indebtedness at any one time outstanding, when added to the aggregate principal amount of Indebtedness then outstanding as permitted by the parenthetical phrase included in clause (i) of the proviso to subsection 10.3(a), shall not be in excess of $50,000,000. For purposes of this subsection 10.3, any Person becoming aSubsidiary of the Borrower after the date of this Agreement or, in the caseof subsection 10.3(g), after the date of the Existing Credit Agreement shallbe deemed to have incurred all of its then outstanding Indebtedness at thetime it becomes or, in the case of such subsection 10.3(g), became aSubsidiary. 10.4 Limitation on Liens. The Borrower will not, nor will itpermit any of its Subsidiaries to, create, incur, assume or suffer to existany Lien upon any of its property or assets, whether now owned or hereafteracquired, or upon any income or profits therefrom, or acquire any propertypursuant to any conditional sale, lease purchase or other title retentionagreement, except: 61 56 (a) Liens created pursuant to the Security Documents or securingthe Notes, the Letter of Credit Obligations, the Acceptance Obligations (aseach such term is defined in the Existing Credit Agreement) and allamendments, extensions, renewals and substitutions thereof; (b) Liens existing on the Existing Closing Date, not otherwisepermitted under this Agreement, described in Schedule 10.4 hereto, securingthe Indebtedness described in such Schedule, and extensions, renewals andsubstitutions thereof, provided that the principal amount so secured is notincreased and the Lien is not extended to any other property; (c) Liens for taxes and duties, assessments, governmentalcharges or levies not yet due or which are being contested in good faith andby appropriate proceedings promptly initiated and diligently conducted, ifadequate reserves with respect thereto are maintained on the books of theCompany and its Subsidiaries in accordance with GAAP; (d) Liens incurred in the ordinary course of and incidental tothe conduct of the business of the Borrower and its Subsidiaries or theownership of its property, including, without limitation, Liens incurred inconnection with the sale, lease, transfer or other disposition of any creditcard receivable of the Borrower or any of its Subsidiaries and Liens forworkmen's compensation, bids, tenders, lessors, vendors, bank deposits, tradeletters of credit and trust receipts, which were not incurred in connectionwith the borrowing of money and which do not in the aggregate materiallydetract from the value of the property of the Borrower and its Subsidiaries,taken as a whole, or materially impair the use thereof in the operation ofthe business of the Borrower and its Subsidiaries; (e) Liens imposed by law in favor of mechanics, repairmen,carriers or warehousemen for sums not yet due or which are being contested ingood faith and by appropriate proceedings promptly initiated and diligentlyconducted, if adequate reserves with respect thereto are maintained on thebooks of the Borrower and its Subsidiaries in accordance with GAAP; (f) Liens existing on property or assets of a Person immediatelyprior to its becoming a Subsidiary of the Borrower and which Lien was notcreated, incurred or assumed in anticipation thereof, provided that such Lienshall at all times be confined solely to the property subject thereto at thetime such Person becomes a Subsidiary of the Borrower; (g) Liens securing Indebtedness of the Borrower and itsSubsidiaries (and any refinancings, refundings, renewals or extensionsthereof on terms no less favorable (taken as a whole) to the Borrower or suchSubsidiary, as the case may be, provided that the principal amount of suchIndebtedness is not increased) incurred after the Existing Closing Datesolely for the purpose of financing the acquisition by the Borrower or any ofits Subsidiaries of real or personal property or solely for the purpose offinancing the cost of construction or improvements to or on real or personalproperty, or Liens existing on such property so acquired at the time ofacquisition thereof, provided that: (i) each such Lien shall at all times be confined solely to the property so acquired; 62 57 (ii) the principal amount of Indebtedness secured by each such Lien shall at no time exceed the lesser of (A) the cost to such Person of the property subject thereto or (B) the fair value of such property (as determined in good faith by the Board of Directors of such Person) at the time of the acquisition thereof or completion of construction thereon. (h) Liens solely constituting the right of any other Person to ashare of any licensing royalties (pursuant to a licensing agreement or otherrelated agreement entered into by the Borrower or any of its Subsidiarieswith such Person in the ordinary course of the Borrower's or suchSubsidiary's business) otherwise payable to the Borrower or any of itsSubsidiaries, provided that such right shall have been conveyed to suchPerson for consideration received by the Borrower or such Subsidiary on anarm's-length basis; (i) in the case of real property owned by the Borrower or any ofits Subsidiaries, easements, rights of way, restrictive covenants,encroachments and other non-monetary Liens which Liens would not have,individually or in the aggregate, a Material Adverse Effect; (j) Liens arising from precautionary Uniform Commercial Codefinancing statement filings with respect to operating leases entered into bythe Borrower or any of its Subsidiaries in the ordinary course of business;and (k) additional Liens on property or assets (other thanreceivables, Trademarks, inventory and/or licensing revenues) of the Borrowerand its Subsidiaries securing Indebtedness permitted under subsection 10.3(h). For purposes of this subsection 10.4, any Person becoming aSubsidiary of the Borrower after the date hereof shall be deemed to haveincurred all of its then outstanding Liens at the time it becomes aSubsidiary of the Borrower, and any Person extending, renewing or refundingany Indebtedness secured by any Lien shall be deemed to have incurred suchLien at the time of such extension, renewal or refunding. 10.5 Sale of Assets. Except in the ordinary course of business(including the sale, lease, transfer or other disposition of any credit cardreceivable of the Borrower or any of its Subsidiaries), the Borrower willnot, nor will it permit any of its Subsidiaries to, sell, lease, transfer orotherwise dispose of any of its assets or sell, transfer or otherwise disposeof any of the Capital Stock of any of its Subsidiaries, provided that, solong as no Default or Event of Default shall have occurred and be continuingor would result therefrom, no such disposition of assets or Capital Stock outof the ordinary course of business shall constitute a violation of thissubsection 10.5 so long as (i) the aggregate fair market value of the assetsor Capital Stock so disposed of during any Fiscal Year of the Borrower shallnot exceed 10% of Consolidated Net Worth as at the end of the precedingFiscal Year, or (ii) the net cash proceeds are used within 180 days after thereceipt thereof to purchase assets to be utilized by the Borrower in anyRelated Line of Business and if not so used within such time period or usedwithin such time period to prepay Term Loans or reduce Revolving CreditCommitments (as each such term in this sentence is defined in the ExistingCredit Agreement), such proceeds shall be applied to the prepayment ofprincipal of any outstanding Term Loans in inverse order of maturity andthereafter, 50% of such proceeds shall, if Margin Level I Status then exists,be applied to the mandatory reduction of the 63 58Revolving Credit Commitments. Notwithstanding anything contained in thissubsection 10.5 to the contrary, neither the Borrower nor any of itsSubsidiaries shall dispose of any of its right, title or interest in anyCollateral (as defined in the Existing Credit Agreement) or any materialTrademark or any receivables arising out of licensings of Trademarks, except for(i) licensing of Trademarks and sales of inventory in the ordinary course ofbusiness and (ii) sales, leases, transfers or other dispositions of Trademarksby the Borrower to any of its Subsidiaries which is a Guarantor or by anySubsidiary to any other Subsidiary which is a Guarantor or to the Borrower. 10.6 Limitation on Fundamental Changes. The Borrower will not,nor will it permit any of its Subsidiaries to, enter into any merger,consolidation or amalgamation, or liquidate, wind up or dissolve itself (orsuffer any liquidation or dissolution), or convey, sell, lease, assign,transfer or otherwise dispose of, all or substantially all of its property,business or assets, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving entity) or with or into any one or more wholly owned Subsidiaries of the Borrower (provided that the wholly owned Subsidiary or Subsidiaries shall be the continuing or surviving entity); (b) any wholly owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any other wholly owned Subsidiary of the Borrower; (c) the Borrower or any Subsidiary may effect any Investment permitted by subsections 10.7(h), (i) or (j) by means of a merger of the Person that is the subject of such acquisition with the Borrower or any of its Subsidiaries (provided that, in the case of a merger with the Borrower, the Borrower is the survivor); and (d) the Borrower may, and may permit any of its Subsidiaries to, enter into any transaction otherwise permitted pursuant to subsection 10.5. 10.7 Limitation on Loans, Advances and Other Investments. TheBorrower will not, nor will it permit any of its Subsidiaries to, make anyInvestment other than: (a) advances or loans made in the ordinary course of business to employees of the Borrower or any of its Subsidiaries; (b) Investments in Cash Equivalents; (c) Investments by the Borrower in and to its Domestic Subsidiaries and any Foreign Subsidiary that becomes a party to the Guarantee as a Guarantor or of which 66% of such Foreign Subsidiary's Capital Stock is pledged to the Lenders and the lenders under the Existing Credit Agreement pursuant to a pledge agreement in form and substance reasonably satisfactory to the Agent; 64 59 (d) Investments by any Subsidiaries of the Borrower in and to the Borrower and any of its Domestic Subsidiaries; (e) Investments in Foreign Subsidiaries in an aggregate amount (when added to the aggregate amount of such Investments made during the Gap Period) not in excess of $150,000,000, provided, however, that the unused amount of such $150,000,000 basket at any time shall be subject to reduction (by an aggregate amount not to exceed $75,000,000) by the amount of each Investment in a Foreign Subsidiary made subsequent to the date hereof pursuant to subsection 10.7(c); (f) existing Investments not otherwise permitted under this Agreement and described in Schedule 10.7 hereto; (g) Investments received in connection with the bona fide settlement of any defaulted Indebtedness or other liability owed to the Borrower or any Subsidiary; (h) Investments in Permitted Acquisitions provided that if, as a result of Permitted Acquisition, a new Domestic Subsidiary shall be created and such Domestic Subsidiary is a "Significant Subsidiary" (as that term is defined in Regulation S-X (part 210 of the Code of Federal Regulations)), such Domestic Subsidiary shall become a party to the Guarantee as a Guarantor; (i) Investments in Permitted Acquisitions in Persons organized under the laws of a jurisdiction outside of the United States in an aggregate amount (when added to the aggregate amount of such Investments made during the Gap Period) not in excess of the sum of (x) $200,000,000 plus (y) the Annual Increase for each full Fiscal Year which shall have been completed and for which financial statements and the related compliance certificate shall have been delivered pursuant to subsections 9.1(a) and (d) hereof, during the period from the Existing Closing Date through the date at which compliance with this paragraph is being determined (as reflected in such financial statements and compliance certificate) less an amount equal to the aggregate amount of Investments, if any, made pursuant to clause (j) of this subsection 10.7 in excess of $100,000,000; and (j) additional Investments in an amount (when added to the aggregate amount of such Investments made during the Gap Period) not in excess of an amount equal to the sum of (x) $100,000,000, and (y) the Annual Increase for each full Fiscal Year which shall have been completed, and for which financial statements and the related compliance certificate shall have been delivered pursuant to subsections 9.1(a) and (d) hereof, during the period from the Existing Closing Date through the date as at which compliance with this paragraph is being determined (as reflected in such financial statements and compliance certificate) less an amount equal to the aggregate amount of Investments, if any, made pursuant to clause (i) of this subsection 10.7 in excess of $200,000,000; provided that the Investments under this subsection 10.7(j) (when added to the aggregate amount of such Investments made during the Gap Period) shall in no event exceed $175,000,000. 65 60 10.8 Compliance with ERISA. The Borrower and its Subsidiarieswill not: (a) knowingly engage in any transaction in connection with which the Borrower or any Subsidiary might reasonably be likely to be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, terminate any Plan in a manner, or take any other action with respect to any such Plan, which is likely to result in any liability of the Borrower or any Subsidiary to the PBGC, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Borrower or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, would have a Material Adverse Effect; or (b) permit at any time the aggregate complete or partial withdrawal liability of the Borrower and its Subsidiaries under Title IV of ERISA with respect to Multiemployer Plans to exceed 5% of Consolidated Net Worth as at the end of the then most recently ended Fiscal Quarter.For purposes of subdivision (b) of this subsection 10.8, the amount of thewithdrawal liability of the Borrower or its Subsidiaries at any date shall bethe aggregate present value of the amount claimed to have been incurred lessany portion thereof as to which the Borrower or its Subsidiaries reasonablybelieves, after appropriate consideration of possible adjustments arisingunder Sections 4219 and 4221 of ERISA, it and its Subsidiaries will have noliability, provided that the Borrower and its Subsidiaries shall obtainprompt written advice from independent actuarial consultants supporting suchdetermination. The Borrower and its Subsidiaries shall, promptly uponrequest by any Lender, transmit a copy of any current statement of withdrawalliability from each Multiemployer Plan, if and when available, after theBorrower or any Subsidiary receives the same. As used in this subsection10.8, the term "accumulated funding deficiency" has the meaning specified inSection 301 of ERISA and Section 412 of the Code, and the terms "accruedbenefit" and "current value" have the meanings specified in Section 3 ofERISA. 10.9 Transactions with Affiliates. The Borrower will not, andwill not permit any of its Subsidiaries to, directly or indirectly, enterinto any transactions, including, without limitation, the purchase, sale orexchange of property, the making of any Investment or the rendering of anyservice, with any Affiliate of the Borrower or a spouse or any relative (byblood, adoption or marriage) within the third degree of any such Affiliate orany other Person which is an Affiliate of any such spouse or relative, except(a) in the ordinary course of business and pursuant to the reasonablerequirements of the Borrower's or such Subsidiary's business and uponreasonable terms no less favorable to the Borrower or such Subsidiary thanwould obtain in a comparable arm's-length transaction with a Person which isnot an Affiliate of the Borrower, (b) any transaction listed in Schedule 10.9hereto and (c) any transaction between the Borrower and any Subsidiary of theBorrower or between any Subsidiary and any other Subsidiary. 66 61 SECTION 11. EVENTS OF DEFAULT Upon the occurrence of any of the following events: (a) (i) The Borrower shall fail to pay any principal of any Note, any Letter of Credit Obligation or any Acceptance Obligation, in each case within two days after such principal or Obligation becomes due or (ii) the Borrower shall fail to pay any interest on any Note, any Letter of Credit Obligation or any Acceptance Obligation, or any fee, commission or other amount owing hereunder, in each case within five days after such interest, fee or other amount is due; or (b) Any representation or warranty made or deemed made by the Borrower herein or by the Borrower or any other Credit Party in any other Credit Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower shall default in the observance or performance of any covenant or agreement contained in Section 10 or subsection 6.19; or (d) The Borrower shall default in the observance or performance of any covenant or agreement contained in this Agreement (other than in Section 10 or subsection 6.19 hereof); or any other Credit Party shall default in the observance or performance of any covenant or agreement contained in any Credit Document to which it is a party, and, in each case, such default is not remediable or, if remediable, continues unremedied for a period of 30 days after the earlier to occur of (i) the date on which such default is known or reasonably should have become known to any officer of the Borrower or such other Credit Party and (ii) the date on which the Agent or any Lender shall have notified the Borrower or such other Credit Party of such default; or (e) The Guarantee shall cease, for any reason, to be in full force and effect, or (f) The Borrower, any other Credit Party or any Foreign Subsidiary shall (A) default in any payment of principal of or interest on any Indebtedness (other than the Notes, the Acceptance Obligations or the Letter of Credit Obligations) or in the payment of any Guarantee Obligation in respect of Indebtedness (other than the Guarantee), the aggregate principal amount of which exceeds $5,000,000 in the case of the Borrower or any Subsidiary, beyond the period (without giving effect to any extensions, waivers, amendments or other modifications of or to such period) of grace, if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (B) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder 67 62 or holders or beneficiary or beneficiaries) to cause, with the giving of notice or the lapse of time, or both, if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (g) (i) The Borrower, any other Credit Party or any Foreign Subsidiary shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower, any other Credit Party or any Foreign Subsidiary shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower, any other Credit Party or any Foreign Subsidiary any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 45 days; or (iii) there shall be commenced against the Borrower, any other Credit Party or any Foreign Subsidiary any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 45 days from the entry thereof; or (iv) the Borrower, any other Credit Party or any Foreign Subsidiary shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) the Borrower, any other Credit Party or any Foreign Subsidiary shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; provided, however, that the occurrence of any of the events specified in this paragraph (g) with respect to any Person other than the Borrower shall not be deemed to be an Event of Default unless (x) the net assets of such Person, determined in accordance with GAAP, shall have exceeded $3,000,000 as of the date of the most recent audited financial statements delivered to the Lenders pursuant to subsection 9.1 or on the date of occurrence of any such event and/or (y) the aggregate net assets of all Credit Parties and Foreign Subsidiaries in respect of which any of the events specified in this paragraph (g) shall have occurred shall have exceeded $5,000,000 as of the date of the most recent audited financial statements delivered to the Lenders pursuant to subsection 9.1 or on the date of occurrence of any such event; or (h) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or 68 63 appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability (except as set forth in Schedule 8.12) in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Borrower or any other Credit Party to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Borrower and its Subsidiaries taken as a whole; or (i) One or more judgments or decrees shall be entered against the Borrower, any other Credit Party or any Foreign Subsidiary involving in the aggregate a liability (not paid or fully covered by insurance) of $5,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (j) Lauren, his estate or Persons related to him by blood, adoption or marriage and/or trusts or other entities principally for the benefit of any of the foregoing (the "Lauren Interests") shall cease to own in the aggregate, directly or indirectly either (x) Voting Stock of the Borrower having the voting power to elect a majority of the Board of Directors of the Borrower or (y) Voting Stock representing more than 25% of the voting power of the Borrower's Capital Stock;then, and in any such event, (A) if such event is an Event of Default inrespect of the Borrower specified in clause (i) or (ii) of paragraph (g)above, automatically the Revolving Credit Commitments shall immediatelyterminate and the Loans hereunder (with accrued interest thereon) and allother amounts owing under this Agreement (including, without limitation, allamounts of Letter of Credit Obligations whether or not the beneficiariesthereof shall have presented the documents required thereunder and allamounts of Acceptance Obligations whether or not matured) and the Notes shallimmediately become due and payable, and (B) if such event is any other Eventof Default, any or all of the following actions may be taken: the Agent may,or upon the direction of the Required Lenders, the Agent shall, (i) declarethe Revolving Credit Commitments to be terminated forthwith, whereupon theRevolving Credit Commitments shall immediately terminate; (ii) declare theLoans hereunder (with accrued interest thereon) and all other amounts owingunder this Agreement (including, without limitation, all amounts of Letter ofCredit Obligations whether or not the beneficiaries thereof shall havepresented the documents required thereunder and all amounts of AcceptanceObligations whether or not matured) and the Notes to be due and payableforthwith, whereupon the same shall immediately become due and payable; and(iii) exercise any and all remedies and other rights provided pursuant tothis Agreement and/or the other Credit Documents. With respect to all Letters of Credit and Acceptances that shallnot have matured or been paid or with respect to which presentment for honorshall not have occurred, upon the 69 64occurrence of an Event of Default, the Borrower shall deposit in an interestbearing cash collateral account opened by the Agent (and under the exclusivedominion and control of the Agent) an amount equal to the aggregate amount ofthe Letter of Credit Obligations plus the aggregate outstanding amount ofAcceptance Obligations for application to payments of drafts drawn under Lettersof Credit and to payment of Acceptances at maturity, and the unused portionthereof after such application, if any, shall be applied to repay otherobligations of the Borrower hereunder or under the Notes or any of the otherCredit Documents, and after all Letters of Credit have expired, all drafts andAcceptances have matured and been repaid and all other obligations of theBorrower hereunder or any of the other Credit Documents are paid in full, thebalance, if any, shall be returned to the Borrower. Except as expressly provided above in this Section 11,presentment, demand, protest and all other notices of any kind are herebyexpressly waived. SECTION 12. THE AGENT AND ISSUING LENDER 12.1 Appointment; Authorization. Each Lender hereby irrevocablydesignates and appoints Chase as the Agent of such Lender under thisAgreement and each of the other Credit Documents, and each such Lenderirrevocably authorizes (a) Chase, as the Agent for such Lender, to take suchaction on its behalf under the provisions of this Agreement and each of theother Credit Documents and to exercise such powers and perform such duties asare expressly delegated to the Agent by the terms of this Agreement and theother Credit Documents, together with such other powers as are reasonablyincidental thereto and (b) Chase, in its capacity as Issuing Lender, to issuethe Letters of Credit, subject to the terms and conditions hereof, to pay theamount of any draft presented under any Letter of Credit upon presentation ofdocuments which, upon their face, conform to the terms of such Letter ofCredit, to create Acceptances, to receive from the Borrower reimbursement forthe amount of each draft paid under each Letter of Credit and each Acceptanceand payment of all commissions, charges and interest in respect of theLetters of Credit and the Acceptances, and to take such action on behalf ofsuch Lender under this Agreement, the Letter of Credit Documents and theAcceptance Documents and to exercise such powers and to perform such dutieshereunder and thereunder as are specifically delegated to or required of theIssuing Lender by the terms hereof and thereof, together with such powers asare reasonably incidental thereto. Notwithstanding any provision to thecontrary elsewhere in this Agreement, neither the Agent nor the IssuingLender shall have any duties or responsibilities, except those expressly setforth herein, or any fiduciary relationship with any Lender, and no impliedcovenants, functions, responsibilities, duties, obligations or liabilitiesshall be read into this Agreement or the other Credit Documents or otherwiseexist against the Agent or the Issuing Lender. 12.2 Delegation of Duties. Each of the Agent and the IssuingLender may execute any of its duties under this Agreement or the other CreditDocuments by or through agents or attorneys-in-fact and shall be entitled toadvice of counsel concerning all matters pertaining to such duties. Neitherthe Agent nor the Issuing Lender shall be responsible for the negligence ormisconduct of any agents or attorneys-in-fact selected by it with reasonablecare. 70 65 12.3 Exculpatory Provisions. Neither the Agent nor the IssuingLender nor any of their respective officers, directors, employees, agents,attorneys-in-fact or Affiliates shall be (i) liable for any action lawfullytaken or omitted to be taken by it or such Person under or in connection withthis Agreement or any Credit Document (except for its or such Person's owngross negligence or willful misconduct), or (ii) responsible in any manner toany of the Lenders for any recitals, statements, representations orwarranties made by the Borrower, any other Credit Party or any officerthereof contained in this Agreement or any other Credit Document or in anycertificate, report, statement or other document referred to or provided forin, or received by the Agent or the Issuing Lender under or in connectionwith, this Agreement or any other Credit Document or for the value, validity,effectiveness, genuineness, enforceability or sufficiency of this Agreement,any other Credit Document or the Notes or for any failure of the Borrower orany other Credit Party to perform its or his obligations hereunder orthereunder. Neither the Agent nor the Issuing Lender shall be under anyobligation to any Lender to ascertain or to inquire as to the observance orperformance of any of the agreements contained in, or conditions of, thisAgreement or any other Credit Document, or to inspect the properties, booksor records of the Borrower or any other Credit Party. 12.4 Reliance by Agent and Issuing Lender. Each of the Agentand the Issuing Lender shall be entitled to rely, and shall be fullyprotected in relying, upon any Note, writing, resolution, notice, consent,certificate, affidavit, letter, cablegram, telegram, telecopy, telex orteletype message, statement, order or other document or conversation believedby it to be genuine and correct and to have been signed, sent or made by theproper Person or Persons and upon advice and statements of legal counsel(including, without limitation, counsel to the Borrower), independentaccountants and other experts selected by the Agent or the Issuing Lender, asthe case may be. The Agent may deem and treat the payee of any Note as theowner thereof for all purposes unless a written notice of assignment,negotiation or transfer thereof shall have been filed with the Agent. Eachof the Agent and the Issuing Lender shall be fully justified in failing orrefusing to take any action under this Agreement or any other Credit Documentunless it shall first receive such advice or concurrence of the RequiredLenders as it deems appropriate or it shall first be indemnified to itssatisfaction by the Lenders against any and all liability and expense whichmay be incurred by it by reason of taking or continuing to take any suchaction. Each of the Agent and the Issuing Lender shall in all cases be fullyprotected in acting, or in refraining from acting, under this Agreement, theCredit Documents and the Notes in accordance with a request of the RequiredLenders, and such request and any action taken or failure to act pursuantthereto shall be binding upon all the Lenders and all future holders of theNotes. 12.5 Notice of Default. Neither the Agent nor the IssuingLender shall be deemed to have knowledge or notice of the occurrence of anyDefault or Event of Default hereunder unless the Agent has received writtennotice from a Lender or the Borrower referring to this Agreement, describingsuch Default or Event of Default and stating that such notice is a "notice ofdefault". In the event that the Agent receives such a notice, the Agentshall give notice thereof to the Lenders. The Agent shall take such actionwith respect to any Default or Event of Default as shall be reasonablydirected by the Required Lenders, provided that unless and until the Agentshall have received such directions, the Agent may (but shall not beobligated to) take 71 66such action, or refrain from taking such action, with respect to such Default orEvent of Default as it shall deem advisable in the best interests of theLenders. 12.6 Non-Reliance on Agent, Issuing Lender or Other Lenders.Each Lender expressly acknowledges that neither the Agent nor the IssuingLender nor any of their respective officers, directors, employees, agents,attorneys-in-fact or Affiliates has made any representations or warranties toit and that no act by the Agent or the Issuing Lender hereinafter taken,including any review of the affairs of the Borrower or any other CreditParty, shall be deemed to constitute any representation or warranty by theAgent or the Issuing Lender to any Lender. Each Lender represents to theAgent and the Issuing Lender that it has, independently and without relianceupon the Agent, the Issuing Lender or any other Lender, and based on suchdocuments and information as it has deemed appropriate, made its ownappraisal of and investigation into the business, operations, property,financial and other condition and creditworthiness of the Borrower and theother Credit Parties and made its own decision to make its Loans, to purchaseAcceptance Participating Interests, to purchase Letter of CreditParticipating Interests and to enter into this Agreement. Each Lender alsorepresents that it will, independently and without reliance upon the Agent,the Issuing Lender or any other Lender, and based on such documents andinformation as it shall deem appropriate at the time, continue to make itsown credit analysis, appraisals and decisions in taking or not taking actionunder this Agreement, and to make such investigation as it deems necessary toinform itself as to the business, operations, property, financial and othercondition and creditworthiness of the Borrower and the other Credit Parties.Except for notices, reports and other documents expressly required to befurnished to the Lenders by the Agent or the Issuing Lender hereunder,neither the Agent nor the Issuing Lender shall have any duty orresponsibility to provide any Lender with any credit or other informationconcerning the business, operations, property, financial and other conditionor creditworthiness of the Borrower or any other Credit Party, which may comeinto the possession of the Agent or any of its officers, directors,employees, agents, attorneys-in-fact or Affiliates. 12.7 Indemnification. The Lenders agree to indemnify the Agentand the Issuing Lender in their capacities as such (to the extent notreimbursed by the Borrower and without limiting the obligation of theBorrower to do so), ratably according to their respective Combined LoanPercentages in effect on the date on which indemnification is sought underthis subsection (or, if indemnification is sought after the date upon whichthe Revolving Credit Commitments shall have terminated and the Loans shallhave been paid in full, ratably in accordance with their Combined LoanPercentages immediately prior to such date), from and against any and allliabilities, obligations, losses, damages, penalties, actions, judgments,suits, costs, expenses or disbursements of any kind whatsoever which may atany time (including, without limitation, at any time following the payment ofthe Notes and all other amounts payable hereunder) be imposed on, incurred byor asserted against the Agent or the Issuing Lender, as the case may be, inany way relating to or arising out of this Agreement, the Notes, the otherCredit Documents or any documents contemplated by or referred to herein ortherein or the transactions contemplated hereby or thereby or any actiontaken or omitted by the Agent or the Issuing Lender, as the case may be,under or in connection with any of the foregoing; provided that no Lendershall be liable for the payment of any portion of such liabilities,obligations, losses, damages, penalties, actions, judgments, suits, costs,expenses or disbursements resulting solely from the Agent's or Issuing 72 67Lender's gross negligence or willful misconduct. The agreements in thissubsection shall survive the payment of the Notes and all other amountspayable hereunder. 12.8 Agent in Its Individual Capacity. The Agent and itsAffiliates may make loans to, accept deposits from and generally engage inany kind of business with the Borrower and the other Credit Parties as thoughthe Agent were not the Agent hereunder. With respect to Loans made orrenewed by it, Acceptances created by it, Letters of Credit issued by it, andany Note issued to it, Chase shall have the same rights and powers under thisAgreement as any Lender (as well as those of the Issuing Lender) and mayexercise the same as though it were not the Agent, and the terms "Lender" and"Lenders" shall include Chase in its individual capacity. 12.9 Successor Agent. The Agent may resign as Agent upon 10days' notice to the Lenders. If the Agent shall resign as Agent under thisAgreement and the other Credit Documents, then the Required Lenders shallappoint a successor agent for the Lenders (and if no successor agent shallhave been so appointed within 10 days of the retiring Agent's having givennotice of its resignation, then the retiring Agent shall, on behalf of theLenders, appoint a successor agent), which successor agent shall be approvedby the Borrower (which approval shall not be unreasonably withheld),whereupon such successor agent shall succeed to the rights, powers and dutiesof the Agent, and the term "Agent" shall mean such successor agent effectiveupon its appointment, and the former Agent's rights, powers and duties asAgent shall be terminated, without any other or further act or deed on thepart of such former Agent or any of the parties to this Agreement or anyholders of the Notes. After any retiring Agent's resignation hereunder asAgent, the provisions of this Section 12 shall inure to its benefit as to anyactions taken or omitted to be taken by it while it was Agent under thisAgreement. SECTION 13. MISCELLANEOUS 13.1 Amendments and Waivers. Neither this Agreement, any Note,any other Credit Document nor any terms hereof or thereof may be amended,supplemented or modified except in accordance with the provisions of thissubsection 13.1. Upon the written consent of the Required Lenders, the Agent(or, in the case of the Letter of Credit Documents and the AcceptanceDocuments, the Issuing Lender) and the Borrower may, from time to time, enterinto written amendments, supplements or modifications for the purpose ofadding, deleting or changing any provisions to this Agreement, the Notes orthe other Credit Documents or changing in any manner the rights of theLenders or of the Borrower hereunder or thereunder or waiving, on such termsand conditions as the Agent (or the Issuing Lender, as the case may be) mayspecify in such instrument, any of the requirements of this Agreement or theNotes or the other Credit Documents or any Default or Event of Default andits consequences; provided, however, that no such waiver and no suchamendment, supplement or modification shall (a) extend the Termination Date,the Term Loan Termination Date or the maturity of any Note or any installmentthereof, or reduce the rate or extend the time of payment of interestthereon, or reduce any fee payable to the Lenders hereunder, or reduce theprincipal amount of any Note, or increase the amount of any Lender'sRevolving Credit Commitment or Term Loan Commitment, or amend, modify orwaive any provision of this subsection 13.1, or amend or modify thepercentage included in the definition of Required Lenders, or consent to therelease of all or 73 68substantially all of the Guarantors, or consent to the assignment or transfer bythe Borrower of any of its rights and obligations under this Agreement, in eachcase without the written consent of all the Lenders, or (b) amend, modify orwaive any provision of Section 12 without the written consent of the then Agentand Issuing Lender. Any such waiver and any such amendment, supplement ormodification shall apply to each of the Lenders equally and shall be bindingupon the Borrower, the Lenders, the Issuing Lender, the Agent and all futureholders of the Notes. In the case of any waiver, the Borrower, the Lenders andthe Agent shall be restored to their former position and rights hereunder andunder the outstanding Notes, and any Default or Event of Default waived shall bedeemed to be cured and not continuing; but no such waiver shall extend to anysubsequent or other Default or Event of Default, or impair any right consequentthereon. 13.2 Notices. All notices, requests and demands to or upon therespective parties hereto to be effective shall be in writing (including bytelegraph or facsimile), and, unless otherwise expressly provided herein,shall be deemed to have been duly given or made when delivered by hand, orfive days after being deposited in the United States mail, postage prepaidand return receipt requested, or, in the case of telegraphic notice, whendelivered to the telegraph Borrower, or, in the case of facsimile, when sent,telephonic confirmation received, addressed as follows, or to such otheraddress as may be hereafter notified by the respective parties hereto and anyfuture holders of the Notes: The Borrower: Polo Ralph Lauren Corporation 650 Madison Avenue New York, New York 10022 Attention: Michael Newman, Vice Chairman and C.O.O. and Victor Cohen, Esq., Senior Vice President, General Counsel and Secretary Telecopier: (212) 318-7183 Telephonic Confirmation: (212) 318-7351 with a copy to: Polo Ralph Lauren Corporation 9 Polito Avenue Lyndhurst, New Jersey 07071 Attention: Nancy Platoni Poli Senior Vice President-Chief Financial Officer Facsimile No: (201) 896-9628 Telephonic Confirmation: (201) 531-6250 74 69 The Agent and the Issuing Lender: The Chase Manhattan Bank 111 West 40th Street, 10th Floor New York, New York 10018 Attention: John Mulvey Vice President Facsimile: (212) 403-5081 Telephonic Confirmation: (212) 403-5112 with a copy to: The Chase Manhattan Bank One Chase Manhattan Plaza, 8th Floor New York, New York 10081 Attention: Janet Belden Loan Agency Service Group Facsimile No: (212) 552-5658 Telephonic Confirmation: (212) 552-7277 The Lenders: To the addresses set forth on Schedule 1.1 heretoprovided that any notice, request or demand to or upon the Agent, the IssuingLender or the Lenders pursuant to subsections 2.3, 3.3, 4.2, 4.3, 6.7 and 6.8shall not be effective until received. 13.3 No Waiver; Cumulative Remedies. No failure to exercise andno delay in exercising, on the part of the Agent or any Lender, any right,remedy, power or privilege hereunder or under the other Credit Documents,shall operate as a waiver thereof; nor shall any single or partial exerciseof any right, remedy, power or privilege hereunder or thereunder preclude anyother or further exercise thereof or the exercise of any other right, remedy,power or privilege. The rights, remedies, powers and privileges hereinprovided or provided in the other Credit Documents are cumulative and notexclusive of any rights, remedies, powers and privileges provided by law. 13.4 Survival of Representations and Warranties. Allrepresentations and warranties made hereunder, in the other Credit Documentsand in any document, certificate or statement delivered pursuant hereto or inconnection herewith shall survive the execution and delivery of thisAgreement and the Notes. 13.5 Payment of Expenses and Taxes. The Borrower agrees (a) topay or reimburse the Agent for all its reasonable out-of-pocket costs andexpenses incurred in connection with the negotiation, preparation andexecution of, and any amendment, supplement or modification to, thisAgreement, the Notes, the other Credit Documents and any other 75 70documents prepared in connection herewith or therewith, and the consummation ofthe transactions contemplated hereby and thereby, including, without limitation,the disbursements and reasonable fees of counsel to the Agent, (b) to pay orreimburse each Lender and the Agent for all their costs and expenses incurred inconnection with the enforcement or preservation of any rights under thisAgreement, the Notes, the other Credit Documents and any such other documents,including, without limitation, disbursements and reasonable fees of counsel tothe Agent and to the several Lenders, (c) to pay, indemnify, and hold eachLender and the Agent harmless from, any and all recording and filing fees, andany and all liabilities with respect to, or resulting from any delay in paying,stamp, excise and other taxes, if any, which may be payable or determined to bepayable in connection with the execution and delivery of, or consummation of anyof the transactions contemplated by, or any amendment, supplement ormodification of, or any waiver or consent under or in respect of, thisAgreement, the Notes, the other Credit Documents and any such other documentsand (d) to pay, indemnify, and hold each Lender and the Agent harmless from andagainst any and all other liabilities, obligations, losses, damages, penalties,actions, judgments, suits, costs, expenses or disbursements of any kind ornature whatsoever with respect to the execution, delivery, enforcement,performance and administration of this Agreement, the Notes, the other CreditDocuments and any such other documents (all the foregoing, collectively, the"indemnified liabilities"), provided that the Borrower shall have no obligationhereunder to the Agent or any Lender with respect to indemnified liabilitiesarising from (i) the gross negligence or willful misconduct of the Agent or anysuch Lender, or (ii) legal proceedings commenced against the Agent or any suchLender by any other Lender or by any Participant. The agreements in thissubsection 13.5 shall survive repayment of the Notes and all other amountspayable hereunder. 13.6 Successors and Assigns; Participations. (a) ThisAgreement shall be binding upon and inure to the benefit of the Borrower, theLenders, the Agent, all future holders of the Notes and their respectivesuccessors and assigns, except that the Borrower may not assign or transferany of its rights or obligations under this Agreement without the priorwritten consent of each Lender. Assignments by any Lender of its rights andobligations hereunder may be either in whole or in part. (b) Any Lender may, in the ordinary course of its commercialbanking business and in accordance with applicable law, at any time sell toone or more banks or other entities ("Participants") participating interestsin any Loan owing to such Lender, any Note held by such Lender, the RevolvingCredit Commitment of such Lender, any Acceptance Participating Interest, anyLetter of Credit Participating Interest or any other interest of such Lenderhereunder. In the event of any such sale by a Lender of participatinginterests to a Participant, such Lender's obligations under this Agreementshall remain unchanged, such Lender shall remain solely responsible for theperformance thereof, such Lender shall remain the holder of any such Note forall purposes under this Agreement, and the Borrower, the Agent and theIssuing Lender shall continue to deal solely and directly with such Lender inconnection with such Lender's rights and obligations under this Agreement.Each participation agreement entered into between any Lender and anyParticipant shall provide that such Lender shall not be required to seek theconsent of such Participant before agreeing to amend, waive or otherwisemodify any Credit Document or taking any other action with respect thereto,except that such participation agreement may provide that the selling Lenderthereunder must obtain the prior written consent 76 71of the Participant thereunder to extend the Termination Date or the maturity ofany Note or any installment thereof or reduce the rate or extend the time ofpayment of interest thereon, or reduce the principal amount of any Note. TheBorrower agrees that if amounts outstanding under this Agreement and the Notesare due or unpaid, or shall have been declared or shall have become due andpayable upon the occurrence of an Event of Default, each Participant shall bedeemed to have the right of setoff in respect of its participating interest inamounts owing under this Agreement and any Note to the same extent as if theamount of its participating interest were owing directly to it as a Lender underthis Agreement or any Note, provided that such right of setoff shall be subjectto the obligation of such Participant to share with the Lenders, and the Lendersagree to share with such Participant, as provided in subsection 13.7. TheBorrower also agrees that each Participant shall be entitled to the benefits ofsubsections 6.14, 6.16 and 6.17 with respect to its participation in theCommitments, the Acceptances, the Letters of Credit and the Loans outstandingfrom time to time; provided that no Participant shall be entitled to receive anygreater amount pursuant to such subsections than the transferor Lender wouldhave been entitled to receive in respect of the amount of the participationtransferred by such transferor Lender to such Participant had no such transferoccurred. (c) Any Lender may, in the ordinary course of its commerciallending business and in accordance with applicable law, at any time and fromtime to time assign to any Lender or any affiliate thereof or, with theconsent of the Borrower and the Agent (which in each case shall not beunreasonably withheld), to any additional bank, financial institution orother lending entity (each an "Assignee"), all or any part of its rights andobligations under this Agreement and the Notes pursuant to an Assignment andAcceptance Agreement, in form and substance satisfactory to the Agent (eachan "Assignment and Acceptance"), executed by such Assignee, such assigningLender (and, in the case of an Assignee that is not then a Lender or anaffiliate thereof, by the Agent and the Borrower) and delivered to the Agentfor its acceptance and recording in the Register (as defined in paragraph (d)below); provided that any such assignment (in the case of any assignment toan Assignee that is not then a Lender or an affiliate thereof) shall be in anamount at least equal to $5,000,000 and that, in the event of an assignmentof less than all of such rights and obligations of any Lender, such assigningLender after such assignment shall retain Commitments and/or Loansaggregating at least $5,000,000; provided, further, that any such assignmentby the Agent shall be in an amount or amounts in the sole and absolutediscretion of the Agent. Upon such execution, delivery, acceptance andrecording, from and after the effective date determined pursuant to suchAssignment and Acceptance, (x) the Assignee thereunder shall be a partyhereto and, to the extent provided in such Assignment and Acceptance, havethe rights and obligations of a Lender hereunder with a Revolving CreditCommitment and Term Loans as set forth therein, and (y) the assigning Lenderthereunder shall, to the extent provided in such Assignment and Acceptance,be released from its obligations under this Agreement (and, in the case of anAssignment and Acceptance covering all or the remaining portion of anassigning Lender's rights and obligations under this Agreement, suchassigning Lender shall cease to be a party hereto). (d) The Agent shall maintain at its address referred to insubsection 13.2 a copy of each Assignment and Acceptance delivered to it anda register (the "Register") for the recordation of the names and addresses ofthe Lenders and the Revolving Credit Commitment and Term Loans of, andprincipal amount of the Loans owing to, each Lender from time to time. 77 72The entries in the Register shall be conclusive, in the absence of manifesterror, and the Borrower, the Agent and the Lenders may treat each Person whosename is recorded in the Register as the owner of the Loan recorded therein forall purposes of this Agreement. The Register shall be available for inspectionby the Borrower or any Lender at any reasonable time and from time to time uponreasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed byan assigning Lender and an Assignee (and, in the case of an Assignee that isnot then a Lender or an affiliate thereof, by the Agent and the Borrower)together with payment to the Agent of a registration and processing fee of$4,000 (or $1,500 in the case of an Assignment to a Lender or affiliatethereof), the Agent shall (i) promptly accept such Assignment and Acceptanceand (ii) on the effective date determined pursuant thereto record theinformation contained therein in the Register and give notice of suchacceptance and recordation to the Lenders and the Borrower. On or prior tosuch effective date, the Borrower, at its own expense, shall execute anddeliver to the Agent (in exchange for the Notes of the assigning Lender) newNotes to the order of such Assignee in an amount equal to the RevolvingCredit Commitment and Term Loan assumed by it pursuant to such Assignment andAcceptance and, if the assigning Lender has retained a Revolving CreditCommitment and a Term Loan hereunder, new Notes to the order of the assigningLender in an amount equal to the Revolving Credit Commitment and Term Loanretained by it hereunder. Such new Notes shall be dated the Closing Date andshall otherwise be in the form of the Notes replaced thereby. (f) The Borrower authorizes each Lender to disclose to anyParticipant, Assignee and any prospective Participant or Assignee any and allfinancial information in such Lender's possession concerning the Borrower andits affiliates which has been delivered to such Lender by or on behalf of theBorrower pursuant to this Agreement or which has been delivered to suchLender by or on behalf of the Borrower in connection with such Lender'scredit evaluation of the Borrower and its affiliates prior to becoming aparty to this Agreement; provided that any prospective Participant orAssignee shall have acknowledged in writing that it is receiving suchinformation subject to the provisions of subsection 13.8. (g) For avoidance of doubt, the parties to this Agreementacknowledge that the provisions of this subsection concerning assignments ofLoans and Notes relate only to absolute assignments and that such provisionsdo not prohibit assignments creating security interests, including, withoutlimitation, any pledge or assignment by a Lender of any Loan or Note to anyFederal Reserve Bank in accordance with applicable law. 13.7 Adjustments; Set-Off. (a) If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its Loans,or interest thereon, or any other amount payable to it hereunder, or receiveany collateral in respect thereof or any amount under any guarantee inrespect thereof (whether voluntarily or involuntarily, by set-off, pursuantto events or proceedings of the nature referred to in paragraph (g) ofSection 11, or otherwise) in a greater proportion than any such payment toand collateral received by any other Lender, if any, in respect of such otherLender's Loans, or interest thereon, or any other amount payable to ithereunder, such Benefitted Lender shall purchase for cash from the otherLender such portion of such other Lender's Loans, or shall provide such otherLender with the benefits of any such 78 73collateral, or the proceeds thereof, as shall be necessary to cause suchBenefitted Lender to share the excess payment or benefits of such collateral orproceeds ratably with each of the Lenders; provided, however, that if all or anyportion of such excess payment or benefits is thereafter recovered from suchBenefitted Lender, such purchase shall be rescinded, and the purchase price andbenefits returned, to the extent of such recovery, but without interest. TheBorrower agrees that each Lender so purchasing a portion of another Lender'sLoans may exercise all rights of payment (including, without limitation, rightsof set-off) with respect to such portion as fully as if such Lender were thedirect holder of such portion. (b) In addition to any rights and remedies of the Lendersprovided by law, upon the occurrence of an Event of Default and accelerationof the obligations owing in connection with this Agreement, each Lender shallhave the right, without prior notice to the Borrower, any such notice beingexpressly waived by the Borrower to the extent permitted by applicable law,to set-off and apply against any indebtedness, whether matured or unmatured,of the Borrower to such Lender, any amount owing from such Lender to theBorrower, at or at any time after, the happening of any of theabove-mentioned events, and the aforesaid right of set-off may be exercisedby such Lender against the Borrower or against any trustee in bankruptcy,debtor in possession, assignee for the benefit of creditors, receiver orexecutor, judgment or attachment creditor of the Borrower, or against anyoneelse claiming through or against the Borrower or such trustee in bankruptcy,debtor in possession, assignee for the benefit of creditors, receiver orexecutor, judgment or attachment creditor, notwithstanding the fact that suchright of set-off shall not have been exercised by such Lender prior to themaking, filing or issuance, or service upon such Lender of, or of notice of,any such petition, assignment for the benefit of creditors, appointment orapplication for the appointment of a receiver, or issuance of execution,subpoena, order or warrant. Each Lender agrees promptly to notify theBorrower and the Agent after any such set-off and application made by suchLender, provided that the failure to give such notice shall not affect thevalidity of such set-off and application. 13.8 Confidentiality. Each Lender agrees that it will notdisclose Confidential Information (as hereinafter defined) to any Personother than (a) as may be consented to by the Borrower, (b) as may be requiredby law or pursuant to legal process and (c) to prospective Participants andAssignees and those of such Lender's directors, officers, employees,examiners and professional advisors who have a need to know the ConfidentialInformation in accordance with customary banking practices and who receivethe Confidential Information having been made aware of the restrictions ofthis subsection 13.8. As used herein, the term "Confidential Information"means all information contained in materials relating to the Borrower and itsSubsidiaries provided to the Lenders by the Borrower or its representativesor agents other than (i) information which is at the time so provided orthereafter becomes generally available to the public other than as a resultof a disclosure by one or more Lenders, (ii) information which was availableto any Lender prior to its disclosure to the Lenders by the Borrower, itsrepresentatives or agents and (iii) information which becomes available toone or more Lenders from a source other than the Borrower, itsrepresentatives or agents. 13.9 Severability. Any provision of this Agreement which isprohibited or unenforceable in any jurisdiction shall, as to suchjurisdiction, be ineffective to the extent of such prohibition orunenforceability without invalidating the remaining provisions hereof, andany 79 74such prohibition or unenforceability in any jurisdiction shall not invalidate orrender unenforceable such provisions in any other jurisdiction. 13.10 Counterparts. This Agreement may be executed by one ormore of the parties to this Agreement on any number of separate counterpartsand all of said counterparts taken together shall be deemed to constitute oneand the same instrument. A set of the copies of this Agreement signed by allthe parties shall be lodged with the Borrower and the Agent. 13.11 No Third Party Beneficiaries. This Agreement is solelyfor the benefit of the Agent, the Lenders (and Participants and Assignees tothe extent provided in subsection 13.6) and the Borrower, and nothingexpressed in, or to be implied from, this Agreement shall or shall be deemedto confer upon anyone other than the Borrower, the Agent and the Lenders (andsuch Participants and Assignees) any benefit, or legal or equitable right,remedy or claim under or by virtue of this Agreement or any provision hereof,including, without limitation, the right to insist upon or to enforce theperformance or observance of any of the obligations contained herein. Allconditions to the obligations of the Lenders to make the Loans, the IssuingLender and the Participating Lenders to issue and participate in the Lettersof Credit and the Lenders to create and participate in the Acceptances areimposed solely and exclusively for the benefit of the Lenders, and no otherPerson shall have standing to require satisfaction of such conditions inaccordance with their terms or be entitled to assume that the Lenders willnot refuse to make such extensions of credit in the absence of strictcompliance with any or all thereof and no other Person shall under anycircumstances be deemed to be a beneficiary of such conditions, any or all ofwhich may be freely waived in whole or in part by the Lenders at any time if,in their sole discretion, the Lenders deem it advisable or desirable to do so. 13.12 SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH OF THEBORROWER, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; 80 75 (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT ITS ADDRESS SET FORTH IN SUBSECTION 13.2 OR AT SUCH OTHER ADDRESS OF WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; AND (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. (b) EACH OF THE BORROWER, THE AGENT AND THE LENDERS HEREBYIRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION ORPROCEEDING REFERRED TO IN PARAGRAPH (a) ABOVE. 13.13 GOVERNING LAW. THIS AGREEMENT, THE NOTES AND THE OTHERCREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THISAGREEMENT, THE NOTES AND THE OTHER CREDIT DOCUMENTS SHALL BE GOVERNED BY, ANDCONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEWYORK. 13.14 Integration. This Agreement and the other CreditDocuments represent the agreement of the Borrower, the Agent and the Lenderswith respect to the subject matter hereof, and there are no promises,undertakings, representations or warranties by the Agent or any Lenderrelative to the subject matter hereof not expressly set forth herein or inthe other Credit Documents. 13.15 Acknowledgments. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Notes and the other Credit Documents; (b) neither the Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Credit Documents, and the relationship between the Agent and the Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Credit Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 81 76 13.16 Satisfaction in Dollars. The obligation of the Borrowerhereunder, under the Notes and in respect of Letter of Credit Obligations andAcceptance Obligations to make payments in Dollars shall not be discharged orsatisfied by any tender or recovery pursuant to any judgment expressed in orconverted into any currency other than Dollars or any other realization insuch currency, whether as proceeds of set-off, security, guarantee,distributions, or otherwise, except to the extent to which such tender,recovery or realization shall result in the effective receipt by the Agentand the Lenders of the full amount of Dollars expressed to be payablehereunder, under the Notes and in respect of Letter of Credit Obligations andAcceptance Obligations and the Borrower shall indemnify the Agent and eachLender (as an alternative or additional cause of action) for the amount (ifany) by which such effective receipt shall fall short of the full amount ofDollars expressed to be payable hereunder, under the Notes and in respect ofLetter of Credit Obligations and Acceptance Obligations and such obligationto indemnify shall not be affected by judgment being obtained for any othersums due under this Agreement, the Notes and in respect of Letter of CreditObligations and Acceptance Obligations. IN WITNESS WHEREOF, each of the undersigned has caused thisAgreement to be duly executed and delivered as of the date first abovewritten. POLO RALPH LAUREN CORPORATION By: /s/ Michael J. Newman ----------------------------- Name: MICHAEL J. NEWMAN Title: VICE CHAIRMAN AND CHIEF OPERATING OFFICER THE CHASE MANHATTAN BANK, as Agent, Issuing Lender and a Lender By: /s/ John Mulvey ----------------------------- Name: John Mulvey Title: VP 82 77 FLEET BANK, as a Lender By: /s/ Steven R. Navarro ----------------------------- Name: Steven R. Navarro Title: Senior Vice President THE BANK OF NEW YORK, as a Lender By: /s/ Joanne M. Collett ----------------------------- Name: Joanne M. Collett Title: Vice President EUROPEAN AMERICAN BANK, as a Lender By: /s/ George L. Stirling ----------------------------- Name: George L. Stirling Title: Vice President ISRAEL DISCOUNT BANK OF NEW YORK, as a Lender By: /s/ Scott Fishbein ----------------------------- Name: Scott Fishbein Title: Vice President By: /s/ Ron Bongiovanni ----------------------------- Name: Rob Bongiovanni Title: Vice President 83 78 SUNTRUST BANKS, INC., as a Lender By: /s/ Laura Kahn ----------------------------- Name: Laura Kahn Title: Senior Vice President UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ Terry Rocha ----------------------------- Name: Terry Rocha Title: Vice President NATIONSBANK, N.A., as a Lender By: /s/ Leesa C. Sluder ----------------------------- Name: Leesa C. Sluder Title: Senior Vice President CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender By: /s/ Mario Biscardi ----------------------------- Name: Mario Biscardi Title: Commercial Lending Specialist 84 79 COMERICA BANK, as a Lender By: /s/ David W. Shirey ----------------------------- Name: David W. Shirey Title: Assistant Vice President FIRST UNION NATIONAL BANK, as a Lender By: /s/ Christopher M. McLaughlin -------------------------------- Name: Christopher M. McLaughlin Title: Vice President MERCANTILE BANK OF ST. LOUIS, as a Lender By: /s/ Timothy W. Hassler -------------------------------- Name: Timothy W. Hassler Title: Vice President 1 EXHIBIT 10.23 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT made effective as of the 4th day of April, 1999, betweenPolo Ralph Lauren Corporation, a Delaware corporation (the "Company"), and RalphLauren (the "Executive"). The Executive is the founder of the predecessor entities of theCompany and has acted as Chief Executive Officer of such entities for more thanthirty-one years. The Executive has heretofore been employed by the Company pursuantto an employment agreement made effective as of June 9, 1997 (the "PriorAgreement"); The Company recognizes that the Executive's talents and abilitiesare unique and have been integral to the success of the Company. The Companywishes to retain the services of the Executive and recognizes that theExecutive's contribution to the growth and success of the Company will besubstantial. The Company desires to provide for the continued employment of theExecutive and to make employment arrangements that which will reinforce andencourage the attention and dedication to the Company of the Executive as amember of the Company's senior management, in the best interest of the Company.The Executive is willing to commit himself to serve the Company, on the termsand conditions herein provided. The Company and the Executive wish to amend and restate the PriorAgreement as evidenced by this Agreement effective as of the date hereof inorder to provide for the modification of certain provisions of the PriorAgreement; In order to effect the foregoing, the Company and the Executive wishto enter into an Agreement on the terms and conditions set forth below.Accordingly, in consideration of the premises and the respective covenants andagreements of the parties herein contained, and intending to be legally boundhereby, the parties hereto agree as follows: 1. Employment. Effective as of April 4, 1999, the Executive's employmentwith the Company shall be governed by this Agreement, which restates andsupercedes the Prior Agreement. 2. Term. The term of the Executive's employment hereunder shall commenceas of the date hereof and shall continue until the close of business on June 17,2002, subject to earlier termination in accordance with the terms of thisAgreement (the "Term"). The Term shall be automatically extended for successiveone year periods thereafter unless either party notifies the other in writing ofits intention not to so extend the Term at least ninety (90) days prior to thecommencement of the next scheduled one year extension. 2 3. Position and Duties. (a) Title and Duties. The Executive shall serve as Chief Executive Officerof the Company and Chairman of the Board of Directors of the Company (the"Board"), and shall have such duties, authority and responsibilities as arenormally associated with and appropriate for such positions. The Executive shallreport directly to the Board. The Executive shall devote substantially all ofhis working time and efforts to the business and affairs of the Company. (b) Office and Facilities. The Executive shall be provided withappropriate office and secretarial facilities in each of the Company's principalexecutive offices in New York City and any other location that the Executivereasonably deems necessary to have an office and support services in order forthe Executive to perform his duties to the Company. In addition, the Executiveshall continue to be entitled to have certain employees of the Company performservices for the Executive which are non-Company related in a manner consistentwith past practice; provided that the Executive reimburses the Company for thefull amount of salary, benefits and other expenses relating to such employees. 4. Compensation. (a) Base Salary. During the Term, the Company shall pay to the Executivean annual base salary of $1,000,000. The Executive's base salary shall be paidin substantially equal installments on a basis consistent with the Company'spayroll practices and shall be subject to such increases, if any, as may bedetermined in the sole discretion of the Board. The Executive's base salary, asin effect at any time, is hereinafter referred to as the "Base Salary." (b) Annual Bonus. For each fiscal year of the Company that occurs duringthe Term (including the fiscal year beginning on April 4, 1999 and ending April1, 2000), the Executive shall be eligible to earn an annual cash bonus (the"Bonus") based upon the achievement by the Company and its subsidiaries ofperformance goals for each such fiscal year established by the CompensationCommittee of the Board of Directors (the "Compensation Committee"). TheCompensation Committee shall establish objective criteria to be used todetermine the extent to which such performance goals have been satisfied. Therange of the Bonus opportunity for each fiscal year will be $0 to $8,000,000based upon the extent to which such performance goals are achieved. The Bonus,if any, payable to the Executive in respect of each such fiscal year will bepaid at the same time that bonuses are paid to other executives of the Company,but in any event within seventy-five days after the conclusion of eachapplicable fiscal year. Notwithstanding any provision of this Agreement to thecontrary, the Executive's entitlement to payment of a Bonus during any periodwhen the compensation payable to the Executive pursuant to this Agreement issubject to the deduction limitations of section 162(m) of the Internal RevenueCode of 1986, as amended (the "Code"), shall be subject to shareholder approvalof a plan or arrangement evidencing such Bonus opportunity that complies withthe requirements of section 162(m) of the Code. 2 3 5. Stock Options. (a) For at least each of the fiscal year ending April 1, 2000 and thefiscal year ending March 31, 2001, as of a date no later than June 11 of eachfiscal year (or the first business day thereafter if June 11 falls on aholiday), the Executive will be granted options (the "Annual Options") topurchase 250,000 shares of the Class A Common Stock of the Company (the "CommonShares") pursuant to the terms of the Company's 1997 Long-Term Stock IncentivePlan (the "Option Plan"). The Annual Options will have a term of ten (10) years(subject to earlier termination as described below and in Section 7) and will betransferable by the Executive to family members (or trusts for their benefit)pursuant to the terms of the Option Plan. (b) The Annual Options will vest and become exercisable ratably over three(3) years on each of the first three anniversaries of the date of grant, subjectto the Executive's continued employment through each vesting date and subject tothe provisions of Section 7, and will have an exercise price per Common Shareequal to the fair market value per Common Share as of the date of grant. 6. Employee Benefits. (a) Benefit Plans. The Executive shall continue to participate in allexisting employee benefit plans, perquisite and fringe benefit arrangements ofthe Company or its affiliates in which he is currently participating and shallbe entitled to participate in any future employee benefit plans, perquisite andfringe benefit arrangements of the Company or its affiliates that are providedto other officers of the Company on terms no less favorable than are provided toany other senior executive of the Company. (b) Life Insurance. The Company shall, until fully funded in accordancewith applicable insurance projections, continue to maintain, and make premiumcontributions with respect to, those certain split dollar and other lifeinsurance arrangements between the Company and the Executive, his family membersand/or life insurance trusts for the benefit of any of them, that are currentlymaintained or contributed to by the Company or its affiliates or predecessorentities. (c) Expenses. The Executive shall be entitled to receive promptreimbursement for all reasonable and customary expenses incurred by theExecutive in performing services hereunder, including all expenses of travel andliving expenses while away from home on business or at the request of and in theservice of the Company (including hotel, travel and meal expenses for theExecutive's spouse should the Executive's spouse elect to travel withExecutive), provided that such expenses are incurred and accounted for inaccordance with the policies and procedures established by the Company. 3 4 (d) Perquisites. The Company shall (i) provide the Executive with a carand driver for his use during the term of his employment with the Company and(ii) reimburse the Executive for club dues and initiation fees at a social clubor country club of the Executive's choosing. (e) Corporate Aircraft. For security purposes, the Executive and hisfamily members shall be required to use the Company's or other acceptableprivate aircraft for any travel; provided that in connection with any use whichis solely for personal non-business reasons, the Executive shall reimburse theCompany at swap rates charged to owners of airplanes, which rates are set by anindependent management company. (f) Vacations. The Executive shall be entitled to vacations and holidayson a basis consistent with that offered to other senior executive officers ofthe Company. (g) Indemnification. The Company shall indemnify the Executive to thefullest extent permitted by applicable law against damages and expenses(including fees and disbursements of counsel) in connection with his status orperformance of duties as an officer or director of the Company and itsaffiliates (including any predecessor entities) and shall use reasonablecommercial efforts to maintain customary and appropriate directors and officersliability insurance for the benefit of the Executive's protection. The Company'sobligations under this Section 6(g) shall survive any termination of theExecutive's employment hereunder. 7. Termination of Employment. The Company and the Executive may eachterminate the Executive's employment hereunder and the Term for any reason. (a) Termination by the Company without Cause, Non-Extension of Term or bythe Executive for Good Reason. If the Company shall terminate the Executive'semployment without "Cause" (as defined in Section 7(e)), if the Company electsnot to extend the Term, or if the Executive resigns for Good Reason (as definedin Section 7(e)) then, the Executive shall be entitled to the following: (i) A lump sum cash payment equal to the sum of: (1) The Executive's Base Salary that would be payable through the later of (A) June 11, 2002, or (B) three years from the date of the Executive's termination of employment (the "Severance Period"); (2) Any accrued but unpaid compensation as of the date of termination of employment; and (3) A Bonus for each full or partial fiscal year that occurs during the Severance Period equal to the average annual bonus paid to the 4 5 Executive in each of the immediately preceding two fiscal years prior to the Executive's termination of employment, provided, however, that the amount of the Bonus for any partial fiscal year beyond the third fiscal year following the date of the Executive's termination of employment will be prorated; and (ii) During the Severance Period, the Company shall (A) continue to provide the Executive with office facilities and secretarial assistance in New York City and any other location that the Executive maintained an office during the term of his employment that the Executive reasonably deems necessary, (B) permit the Executive to continue to participate in all welfare and medical plans on the same terms as active officers of the Company, and (C) continue to provide the Executive with the use of a car and driver; and (iii) Any unvested options granted pursuant to Section 5 will of this Agreement and Section 5 of the Prior Agreement continue to vest on their scheduled vesting dates, subject to and conditioned upon the Executive's compliance with Section 9 hereof. In addition, subject to, and conditioned upon, the Executive's compliance with Section 9 hereof, any vested options (and any options that continue to vest as described above) will remain exercisable until the latest to occur of (A) June 11, 2002, (B) one (1) year from the date of the Executive's termination of employment and (C) thirty (30) days from the date the option becomes vested and exercisable. (iv) Except as expressly provided above and for the Company's obligations under Sections 6(b) and (6)g hereof, the Company will have no further obligations to the Executive hereunder following the Executive's termination of employment under the circumstances described in this Section 7(a). (b) Termination due to Death or Disability. If the Executive's employmentis terminated due to his death or "Disability" (as defined in Section 7(e)), theExecutive (or his estate) shall be entitled to the following: (i) A lump sum cash payment equal to the sum of: (1) the Executive's Base Salary through the date on which his termination due to death or Disability occurred; (2) any accrued and unpaid compensation for any prior fiscal year; and (3) a pro-rata portion of the Bonus he would otherwise have received for the fiscal year in which his termination due to death or Disability occurred; and 5 6 (ii) Any unvested options granted pursuant to Section 5 of this Agreement and Section 5 of the Prior Agreement will vest immediately and options held by the Executive, or his estate, will remain exercisable for three (3) years from the date of the Executive's death or termination due to Disability. (iii) Except as expressly provided above and for the Company's obligations under Sections 6(b) and 6(g) hereof, the Company will have no further obligations to the Executive hereunder following the Executive's termination of employment under the circumstances described in this Section 7(b). (c) Termination by the Company for Cause, by Executive Other than for GoodReason or Due To The Executive's Election Not To Extend The Term. If theExecutive's employment is terminated by the Company for Cause, by the Executiveother than for Good Reason or due to the Executive's election not to extend theTerm, the Executive shall be entitled to: (i) an immediate lump sum cash payment equal to the sum of: (1) his Base Salary through the date of termination; and any accrued but unpaid compensation for any prior fiscal year; and (2) a pro-rata portion of his Bonus for the fiscal year in which the termination occurred, to be paid when bonuses are paid to other executives of the Company; and (ii) Any options granted pursuant to Section 5 of this Agreement and Section 5 of the Prior Agreement that have not previously been exercised shall be forfeited. (iii) Except as expressly provided above and for the Company's obligations under Sections 6(b) and 6(g) hereof, the Company will have no further obligations to the Executive hereunder following the Executive's termination of employment under the circumstances described in this Section 7(c). (d) Notice of Termination. Any termination of the Executive's employmentby the Company or by the Executive (other than termination pursuant to theExecutive's death) shall be communicated by written Notice of Termination to theother party hereto in accordance with Section 11 hereof. If the Companyterminates the Executive's employment for Cause or due to Disability or if theExecutive resigns for Good Reason, the "Notice of Termination" shall mean anotice which shall indicate the specific termination provision in this Agreementrelied upon and shall set forth in reasonable detail the facts and circumstancesclaimed to provide a basis for termination of the Executive's employment underthe provision so indicated. 6 7 (e) Definitions. For purpose of this Agreement: (i) "Cause" shall mean (A) the willful and continued failure by the Executive to substantially perform his duties hereunder after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (B) the Executive's conviction of, or plea of nolo contendre to, a crime (whether or not involving the Company) constituting a felony; or (C) willful engaging by the Executive in gross misconduct relating to the Executive's employment that is materially injurious to the Company or subjects the Company, monetarily or otherwise (including, but not limited to, conduct that constitutes competitive activity, in violation of Section 9) or which subjects, or if generally known, would subject the Company to public ridicule or embarrassment. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the forgoing, the Executive shall not be deemed to have been terminated for Cause without (x) reasonable written notice to the Executive setting forth the reasons for the Company's intention to terminate for Cause, (y) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (z) delivery to the Executive of a Notice of Termination, as defined in Section 7(d) hereof, from the Board finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clauses (A) through (C) hereof, and specifying the particulars thereof in detail. (ii) "Good Reason" shall mean (A) a material diminution in the Executive's duties or the assignment to the Executive of a title or duties inconsistent with his position as Chairman of the Board and Chief Executive Officer of the Company, (B) a reduction in the Executive's salary or annual incentive bonus opportunity, (C) a failure of the Company to comply with any material provision of this Agreement or (D) the Executive's ceasing to be entitled to the payment of an annual incentive bonus as a result of the failure of the Company's shareholders to approve a plan or arrangement evidencing such annual incentive bonus in a manner that complies with the requirements of section 162(m) of the Internal Revenue Code of 1986; provided that the events described in clauses (A), (B) and (C) above shall not constitute Good Reason unless and until such diminution, reduction or failure (as applicable) has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company. (iii) For purposes of this Agreement, "Disability" shall mean that as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination is given by the Company (which may occur before or after the end of such six month 7 8 period) the Executive shall not have returned to the performance of his duties hereunder on a full-time basis. 8. No Mitigation. The Executive shall have no duty to mitigate thepayments provided for hereunder by seeking other employment or otherwise andsuch payment shall not be subject to reduction for any compensation received bythe Executive from employment in any capacity following the termination of theExecutive's employment with the Company. 9. Non-Solicitation/Non-Competition. (a) The Executive agrees that for the duration of his employment and for aperiod of three (3) years from the date of termination thereof, he will not, onhis own behalf or on behalf of any other person or entity, hire, solicit, orencourage to leave the employ of the Company or its subsidiaries or affiliatesany person who is an employee of any of such companies. (b) The Executive agrees that for the duration of his employment and for aperiod of three (3) years from the date of termination thereof, the Executivewill take no action which is intended, or would reasonably be expected, to harm(e.g., making public derogatory statements or misusing confidential Companyinformation, it being acknowledged that the Executive's employment with acompetitor in and of itself shall not be deemed to be harmful to the Company forpurposes of this Section 9(b)) the Company or any of its subsidiaries oraffiliates of their reputation. (c) The Executive agrees that during the duration of his employment and; (i) in the event of the Executive's termination of employment due to the Executive's resignation without Good Reason, until the later of (x) June 11, 2002 and (y) two (2) years from the date of such termination of employment; and (ii) in the event of the Executive's termination of employment by the Company without Cause or the Executive's resignation for Good Reason pursuant to Section 7(a), for two (2) years from the date of such termination of employment; and (iii) in the event of the Executive's termination of employment by the Company for Cause, at the election of the Company in consideration for the payment to the Executive of an amount equal to the Executive's salary and Bonus (equal to the average Bonus paid to the Executive over the preceding two years) for each year within such period, for a period of up to two (2) years from the date of such termination of employment, 8 9 then, during the period specified in clause (i), (ii) or (iii) above, as applicable, the Executive shall not, directly or indirectly, (A) engage in any "Competitive Business" (as defined below) for his own account, (B) enter into the employ of, or render any services to, any person engaged in a Competitive Business, or (C) become interested in any entity engaged in a Competitive Business, directly or indirectly as an individual, partner, shareholder, officer, director, principal, agent, employee, trustee, consultant, or in any other relationship or capacity; provided that the Executive may own, solely as an investment, securities of any entity which are traded on a national securities exchange if the Executive is not a controlling person of, or a member of a group that controls such entity and does not, directly or indirectly, own 2% or more of any class of securities of such entity. (iv) For purposes of this Agreement the term "Competitive Business" shall include the design, manufacture, sale, marketing or distribution of branded or designer apparel and other products in the categories of products sold by, or under license from, the Company or its affiliates within the United States. (d) The Executive will not at any time (whether during or after hisemployment with the Company) disclose or use for his own benefit or purposes orthe benefit or purposes of any other person, entity or enterprise, other thanthe Company or any of its affiliates, any trade secrets, information, data, orother confidential information relating to customers, development programs,costs, marketing, trading, investment, sales activities, promotion, credit andfinancial data, manufacturing processes, financing methods, plans or thebusiness and affairs of the Company generally, or any affiliate of the Company;provided that the foregoing shall not apply to information which is not uniqueto the Company or which is generally known to the industry or the public otherthan as a result of the Executive's breach of this covenant. The Executiveagrees that upon termination of his employment with the Company for any reason,he will return to the Company immediately all memoranda, books, papers, plans,information, letters and other data, and all copies thereof or therefrom, in anyway relating to the business of the Company and its affiliates. (e) If the Executive breaches, or threatens to commit a breach of, any ofthe provisions of this Section 9 (the "Restrictive Covenants"), the Companyshall have the following rights and remedies, each of which rights and remediesshall be independent of the other and severally enforceable, and all of whichrights and remedies shall be in addition to, and not in lieu of, any otherrights and remedies available to the Company under law or equity: (i) The right and remedy to have the Restrictive Covenants specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; 9 10 (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the Restrictive Covenants, and the Executive shall account for and pay over such Benefits to the Company; and (iii) The right to discontinue the payment of any amounts owing to the Executive under the Agreement. (f) If any court determines that any of the Restrictive Covenants, or anypart thereof, is invalid or unenforceable, the remainder of the RestrictiveCovenants shall not thereby be affected and shall be given full effect, withoutregard to the invalid portion. In addition, if any court construes any of theRestrictive Covenants, or any part thereof, to be unenforceable because of theduration of such provision or the area covered thereby, such court shall havethe power to reduce the duration or area of such provision and, in its reducedform, such provision shall then be enforceable and shall be enforced. 10. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, bypurchase, merger, consolidation or otherwise) to all or substantially all of thebusiness and/or assets of the Company to expressly assume and agree to performthis Agreement in the same manner and to the same extent that the Company wouldbe required to perform it if no such succession had taken place. As used in thisAgreement, "Company" shall mean the Company as herein defined and any successorto its business and/or assets as aforesaid which executes and delivers theagreement provided for in this Section 10 or which otherwise becomes bound byall the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inureto the benefit of and be enforceable by the Executive's personal or legalrepresentatives, executors, administrators, successors, heirs, distributees,devisees and legatees. If the Executive should die while any amounts are payableto him hereunder all such amounts unless otherwise provided herein, shall bepaid in accordance with the terms of this Agreement to the Executive's devisee,legatee, or other designee or, if there be no such designee, to the Executive'sestate. 11. Notice. For the purposes of this Agreement, notices, demands and allother communications provided for in this Agreement shall be in writing andshall be deemed to have been duly given when personally delivered with receiptacknowledged or five business days after having been mailed by United Statescertified or registered mail, return receipt requested, postage prepaid,addressed as follows: 10 11 If to the Executive: Mr. Ralph Lauren c/o Polo Ralph Lauren Corporation 650 Madison Avenue New York, New York 10022 If to the Company: Polo Ralph Lauren Corporation 650 Madison Avenue New York, New York 10022 Attention: General Counselor to such other address as any party may have furnished to the other in writingin accordance herewith, except that notices of change of address shall beeffective only upon receipt. 12. Miscellaneous. No provisions of this Agreement may be modified, waivedor discharged unless such waiver, modification or discharge is agreed to inwriting signed by the Executive and such officer of the Company as may bespecifically designated by the Board. No waiver by either party hereto at anytime of any breach by the other party hereto of, or compliance with, anycondition or provision of this Agreement to be performed by such other partyshall be deemed a waiver of similar or dissimilar provisions or conditions atthe same or at any prior or subsequent time. The validity, interpretation,construction and performance of this Agreement shall be governed by the laws ofthe State of New York without regard to its conflicts of law principles. 13. Validity. The invalidity or unenforceability of any provision orprovisions of this Agreement shall not affect the validity or enforceability ofany other provision of this Agreement, which shall remain in full force andeffect. 14. Counterparts. This Agreement may be executed in one or morecounterparts, each of which shall be deemed to be an original but all of whichtogether will constitute one and the same instrument. 15. Arbitration. Any dispute or controversy arising under or in connectionwith this Agreement shall be settled exclusively by arbitration in the City ofNew York in accordance with the rules of the American Arbitration Associationthen in effect. Judgment may be entered on the arbitrator's award in any courthaving jurisdiction; provided, however, that the Company shall be entitled toseek a restraining order or injunction in any court of competent jurisdiction toprevent 11 12any continuation of any violation of the provisions of Section 9 of thisAgreement and the Executive hereby consents that such restraining order orinjunction may be granted without the necessity of the Company's posting anybond, and provided further that the Executive shall be entitled to seek specificperformance of his right to be paid until the date of termination during thependency of any dispute or controversy arising under or in connection with thisAgreement. 16. Withholding. The Company may withhold from any amounts payable underthis Agreement such federal, state and local taxes as may be required to bewithheld pursuant to applicable law or regulation. 17. Prior Agreements; Entire Agreement. This Agreement sets forth theentire agreement of the parties hereto in respect of the subject mattercontained herein and supersedes all prior agreements, promises, covenants,arrangements, communications, representations or warranties, whether oral orwritten, by any officer, employee or representative of any party hereto; and anyprior agreement of the parties hereto in respect of the subject matter containedherein is hereby terminated and canceled. IN WITNESS WHEREOF, the Company has caused this Agreement to be dulyexecuted and the Executive has hereunto set his hand, effective as of the 4thday of April, 1999. POLO RALPH LAUREN CORPORATION By: /s/ Michael J. Newman -------------------------------- /s/ Ralph Lauren ------------------------------------ Executive: Ralph Lauren 1 EXHIBIT 10.24 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the "Agreement") made effective as of the 10thday of November, 1998, by and between Polo Ralph Lauren Corporation, a Delawarecorporation (the "Corporation"), and Hamilton South (the "Executive"). WHEREAS, the Executive is currently employed by the Corporation as itsSenior Vice President of Worldwide Communications and Special Projects; WHEREAS, the Corporation has appointed Executive, effective as of thisdate, to be its Group President and Chief Marketing Officer; WHEREAS, the Corporation and the Executive wish to enter into anemployment agreement effective as of the date hereof and intend this Agreementto supersede all prior agreements between the Corporation and Executive; NOW, THEREFORE, intending to be bound the parties hereby agree asfollows with effect from the date first above written. 1. Employment/Prior Agreement. The Corporation hereby agrees to employthe Executive, and the Executive hereby agrees to serve the Corporation, on theterms and conditions set forth herein. From and after the date hereof, the termsof this Agreement shall supersede in all respects the terms of any priorarrangement or agreement, if any, dealing with the matters herein. 2. Term. The employment of the Executive by the Corporation as providedin Section 1 pursuant to this Agreement will be effective on the date hereof.The term of the Executive's employment under this Employment Agreement shallcontinue until the close of business of the third anniversary of the date ofthis Agreement, subject to earlier termination in accordance with the terms ofthis Agreement (the "Term"). The Term shall be automatically extended forsuccessive one year periods thereafter unless either party notifies the other inwriting of its intention not to so extend the Term at least twelve (12) monthsprior to the commencement of the next scheduled one year extension. 3. Position and Duties. The Executive shall serve as a Group Presidentand Chief Marketing Officer of the Corporation with responsibilities for theCorporation's advertising, public and investor relations and marketingactivities and such other related responsibilities and duties as may be assignedto him from time to time by the Chairman and Chief Executive Officer or the ViceChairman and Chief Operating Officer (who comprise the Office of the Chairman)of 2the Corporation, to whom Executive shall report jointly. The Executive shalldevote substantially all his working time and efforts to the business andaffairs of the Corporation. 4. Compensation and Related Matters. (a) Salary and Incentive Bonus (i) Salary. From and after the date of this Agreement the Corporation shall pay to the Executive an annual salary of not less than $500,000. Such salary shall be paid in substantially equal installments on a basis consistent with the Corporation's payroll practices and shall be subject to annual increases, if any, as may be determined in the sole discretion of the Corporation. (ii) Incentive Bonus. Executive shall participate in the Corporation's Executive Incentive Plan (the "EIP"), and any substitute therefor, and be eligible to earn an annual cash bonus for each fiscal year during the term of this Agreement (the "Bonus"). For fiscal year 1999, Executive's Bonus opportunity shall be prorated, with the applicable Bonus opportunity percentages referred to in the following sentence multiplied against base salary earned during the period from the date of this Agreement to the end of the fiscal year. Beginning with fiscal year 2000 and for each fiscal year thereafter Executive's Bonus opportunity shall range from 50% to 100% of Executive's annual salary based upon the extent to which corporate performance goals established by the Compensation Committee (the "Compensation Committee") of the Corporation's Board of Directors (the "Board") are achieved. The Bonus, if any, payable to the Executive in respect of each fiscal year will be paid at the same time that bonuses are paid to other executives under the EIP. Notwithstanding any provision of this Agreement to the contrary, the Executive's entitlement to payment of an annual incentive bonus during any period when the compensation payable to the Executive pursuant to this Agreement is subject to the deduction limitations of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), shall be subject to shareholder approval of a plan or arrangement evidencing such annual incentive bonus opportunity that complies with the requirements of section 162(m) of the Code. (b) Expenses. During the term of the Executive's employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable and customary expenses incurred by the Executive in performing services hereunder, including all expenses of travel (at the standard established from time to time for Group Presidents) and living expenses while away from home on business or at the request of and in the service of the Corporation, provided that such expenses are incurred and 2 3 accounted for in accordance with the policies and procedures established by the Corporation. (c) Other Benefits. During the term of the Executive's employment hereunder, the Executive shall be entitled to participate in or receive benefits under any medical, pension, profit sharing or other employee benefit plan or arrangement generally made available by the Corporation now or in the future to its executives and key management employees (or to their family members), subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to the Executive pursuant to paragraph (a) of this Section. (d) Vacations. The Executive shall be entitled to reasonable vacations consistent with past practice. (e) Options. Effective on or prior to the end of the third quarter of fiscal 1999, Executive shall be granted options to purchase 25,000 shares of the Corporation's Class A Common Stock pursuant to the terms of the Corporation's 1997 Long-Term Stock Incentive Plan. Executive shall thereafter, during at least fiscal years 2000 and 2001, be eligible to receive grants of additional options at the level of a Group President, the determination whether to make such grants, individually and/or as a group, and the amount thereof being in the sole discretion of the Compensation Committee. Options granted to the Executive pursuant to the foregoing will vest and become exercisable ratably over three (3) years on each of the first three anniversaries of the date of grant, subject to the Executive's continued employment through each vesting date, and will have an exercise price equal to the fair market value per shares as of the date of grant. Options hereinafter granted to Executive shall provide that, to the extent vested at or prior to the termination of Executive's employment with the Corporation and unless they expire sooner, they shall remain exercisable for a period of no less than 120 days from the date of such termination; provided that if Executive's employment is terminated by the Corporation pursuant to Section 6(d)(iii) for Cause or by the Executive for other than Good Reason (excluding a Permitted Resignation pursuant to Section 8(c) hereof) then such options shall only be exercisable prior to the date of termination. 5. Termination. (a) Termination by Corporation. The Executive's employment hereunder may be terminated at any time with or without Cause. 3 4 (b) Termination by The Executive. The Executive may terminate his employment hereunder with or without Good Reason. For purposes of this Agreement, "Good Reason" shall mean (A) a material diminution in the Executive's duties or the assignment to the Executive of a title or duties inconsistent with his position as a Group President and Chief Marketing Officer of the Corporation, (B) a material change in Executive's reporting line (as hereinafter defined), (C) a reduction in the Executive's salary or annual incentive bonus opportunity or the Corporation's electing to eliminate the EIP without substituting therefor a plan which provides for a reasonably comparable annual incentive bonus opportunity or the Executive's ceasing to be entitled to the payment of an annual incentive bonus as a result of the failure of the Corporation's shareholders to approve a plan or arrangement evidencing such annual incentive bonus in a manner that complies with the requirements of Section 162(m) of the Code, or (D) a failure of the Corporation to comply with any material provision of this Agreement provided that the events described in clauses (A), (B), (C) and (D) above shall not constitute Good Reason unless and until such diminution, change, reduction or failure (as applicable) has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Corporation. A material change in Executive's reporting line shall mean Executive no longer reports to the Office of the Chairman (as defined in Section 3 hereof), provided that if such office no longer exists or no longer comprises the primary functions of the Corporation's chief executive officer then a material change in Executive's reporting function shall exist if Executive does not report to the chief executive officer or to the chief executive officer and chief operating officer jointly. (c) Any termination of the Executive's employment by the Corporation or by the Executive (other than termination pursuant to Section 6(d)(i) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10 hereof. If termination is pursuant to Sections 6(d)(ii)-(iii) or 5(b) hereof, the "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 6. Compensation Upon Termination. (a) If the Corporation shall terminate the Executive's employment for any reason other than an Enumerated Reason as set forth in Section 6(d) hereof and other than due to the Corporation's election not to extend the Term of this Agreement as contemplated by Section 2, or if the Executive resigns for Good Reason pursuant to Section 5(b) hereof, then so long as the Executive complies with Section 8 hereof the Executive shall be entitled to the following: 4 5 (i) an amount equal to the greater of: (A) the sum of (I) two (2) times the Executive's salary at the rate in effect on such date (unless employment is terminated by the Executive for Good Reason pursuant to Section 5(b) hereof as a result of a salary reduction, in which case, at the rate in effect prior to such reduction), plus (II) one and one-half (1-1/2) times the average annual incentive bonus paid to the Executive over the preceding two years; plus a pro rata annual incentive bonus for the year of termination (based on the average annual incentive bonus paid to the Executive over the preceding two years and based upon the percentage of the calendar year in which such termination occurs that shall have elapsed through the date of termination (a "Pro Rata Annual Incentive Bonus")); and (B) the sum of (I) (three (3) minus the number of years (including fractions thereof) that shall have elapsed from the date of this Agreement times the Executive's salary at the rate in effect on such date (unless employment is terminated by the Executive for Good Reason pursuant to Section 5(b) hereof as a result of a salary reduction, in which case, at the rate in effect prior to such reduction), plus (II) one and one-half (1-1/2) times the average annual incentive bonus paid to the Executive over the preceding two (2) years; plus a Pro Rata Annual Incentive Bonus for the year of termination. Any amounts paid pursuant to either clause (A) or clause (B) aboveshall be paid in equal monthly installments from the date of termination for aperiod two (2) years in the case of clause (A) above and for a period of up tothree (3) years less the fraction of a year which shall have elapsed from thedate of this Agreement in the case of clause (B) above (such periods, whicheveris applicable, hereinafter referred to as the "Severance Period"), except thatthe Pro Rata Annual Incentive Bonus shall be paid in a lump sum in cash withinthirty (30) days following the date of the Executive's termination ofemployment. (ii) Continued participation in the Corporation's health benefit plans during the Severance Period; provided that if the Executive is provided with similar coverage by a successor employer, any such coverage by the Corporation shall cease; (iii) Continued use of the Corporation automobile during the Severance Period or until the then existing auto lease term expires, whichever is shorter; 5 6 (iv) Waiver of collateral interest securing return to the Corporation of premiums paid by the Corporation for the Executive's existing split dollar life insurance policy; (v) If a Change of Control shall have occurred prior to the date of termination, the Executive shall be entitled at his option, exercisable in writing within fifteen days of the date of termination, to receive the equivalent of the salary and bonus payments pursuant to subsection (i) above in two equal lump sum installments, the first payable within 30 days of the date of termination and the second on the first anniversary of the date of termination. As used herein, the term "Change of Control" shall mean Ralph Lauren or members of his family (or trusts or entities created for their benefit) no longer control 50% or more of the voting power of the then outstanding securities of the Corporation entitled to vote for the election of the Corporation's directors; and (vi) Except as provided above, the Corporation will have no further obligations to the Executive under this Agreement following the Executive's termination of employment under the circumstances described in this Section 6(a). (b) If the Executive's employment is terminated by his death or by the Corporation due to the Executive's Disability (as defined below), the Corporation shall pay any amounts due to the Executive through the date of his death or the date of his termination due to Disability, including a Pro Rata Annual Incentive Bonus for the year of termination. The Corporation will have no further obligations to the Executive under this Agreement. (c) If the Executive's employment shall be terminated by the Corporation pursuant to Section 6(d) (iii) for Cause or by the Executive for other than Good Reason, the Corporation shall pay the Executive his full salary through the date of termination at the rate in effect prior to such termination and the Corporation shall have no further obligations to the Executive under Section 6 of this Agreement or otherwise but the Executive shall be bound by Section 8 hereof as applicable. (d) The term "Enumerated Reason" with respect to termination by the Corporation of the Executive's employment shall mean any one of the following reasons: (i) Death. The Executive's employment hereunder shall terminate upon his death. (ii) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties 6 7 hereunder on a full-time basis for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination is given (which may occur before or after the end of such six month period) shall not have returned to the performance of his duties hereunder on a full-time basis (a "Disability"), the Corporation may terminate the Executive's employment hereunder. (iii) Cause. The Corporation shall have "Cause" to terminate the Executive's employment hereunder upon (1) the willful and continued failure by the Executive to substantially perform his duties hereunder after demand for substantial performance is delivered by the Corporation that specifically identifies the manner in which the Corporation believes the Executive has not substantially performed his duties, or (2) Executive's conviction of, or plea of nolo contendere to, a crime (whether or not involving the Corporation) constituting any felony or (3) the willful engaging by the Executive in gross misconduct relating to the Executive's employment that is materially injurious to the Corporation, monetarily or otherwise (including, but not limited to, conduct that constitutes competitive activity, in violation of Section 8) or which subjects, or if generally known, would subject the Corporation to public ridicule or embarrassment. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Corporation. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (x) reasonable written notice to the Executive setting forth the reasons for the Corporation's intention to terminate for Cause, (y) the opportunity to cure (if curable) within 10 days of such written notice the event(s) giving rise to such notice, and (z) an opportunity for the Executive, together with his counsel, to be heard. (e) If the Executive's employment with the Corporation shall terminate due to the Corporation's election not to extend the Term of this Agreement as contemplated by Section 2, Executive shall be entitled to receive an amount, payable in equal monthly installments over a one year period, equal to the sum of (x) his annual salary, plus (y) his average annual incentive bonus paid over the two years preceding the date of termination. Except as provided in the foregoing sentence and in Section 6(f), the Corporation shall have no further obligations to the Executive under this Agreement following the Executive's termination of employment under the circumstances described in this Section 6(e). (f) If the Executive's employment with the Corporation shall terminate due to either the Corporation's or Executive's election not to extend the Term of this Agreement as contemplated by Section 2, Executive shall be entitled to receive his full salary through 7 8 the date of termination plus the Bonus, if any, that Executive would have been entitled to receive had he remained in the Corporation's employment through the end of its fiscal year, prorated to the date of termination. Such prorated Bonus shall be payable at the same time as the Corporation pays bonuses to other executives under the EIP. 7. Mitigation. The Executive shall have no duty to mitigate thepayments provided for in Sections 6(a) or 6(e) by seeking other employment orotherwise and such payment shall not be subject to reduction for anycompensation received by the Executive from employment in any capacity followingthe termination of the Executive's employment with the Corporation. 8. Noncompetition. (a) The Executive agrees that for the duration of his employment and for a period two (2) years from the date of termination thereof, he will not, on his own behalf or on behalf of any other person or entity, hire, solicit, or encourage to leave the employ of the Corporation or its subsidiaries, affiliates or licensees any person who is an employee of any of such companies. (b) The Executive agrees that for the duration of his employment and for a period of two (2) years from the date of termination thereof, the Executive will take no action which is intended, or would reasonably be expected, to harm (e.g. making public derogatory statements or misusing confidential Corporation information, it being acknowledged that the Executive's employment with a competitor in and of itself shall not be deemed to be harmful to the Corporation for purposes of this Section 8(b)) the Corporation or any of its subsidiaries, affiliates or licensees or their reputation. (c) The Executive agrees that during the duration of his employment and; (i) in the event of the Executive's termination of employment due to the Executive's resignation without Good Reason, until the later of (x) three (3) years from the date of this Agreement and (y) twelve (12) months from the date of such termination of employment; and (ii) in the event of the Executive's termination of employment by the Corporation without Cause or the Executive's resignation for Good Reason pursuant to Section 5(b), for twelve (12) months from the date of such termination of employment; and (iii) in the event of the Executive's termination of employment by the Corporation for Cause, at the election of the Corporation in consideration for the payment to the Executive of an amount equal to the Executive's salary and annual 8 9 incentive bonus (equal to the average annual incentive bonus paid to the Executive over the preceding two years) for each year within such period, for a period of up to twelve (12) months from the date of such termination of employment, then, during the period specified in clause (i), (ii) or (iii) above, asapplicable, the Executive shall not, directly or indirectly, (A) engage in any"Competitive Business" (as defined below) for his own account, (B) enter intothe employ of, or render any services to, any person engaged in a CompetitiveBusiness, or (C) become interested in any entity engaged in a CompetitiveBusiness, directly or indirectly as an individual, partner, shareholder,officer, director, principal, agent, employee, trustee, consultant, or in anyother relationship or capacity; provided that the Executive may own, solely asan investment, securities of any entity which are traded on a nationalsecurities exchange if the Executive is not a controlling person of, or a memberof a group that controls such entity and does not, directly or indirectly, own2% or more of any class of securities of such entity. For purposes of this Agreement the term "Competitive Business" shallmean any of the brands and companies that the Corporation and the Executive havejointly designated in writing as being in competition with the Corporation orits subsidiaries, affiliates or licensees, and any modification thereto whichthe parties may agree to in writing from time to time. The provisions of this Section 8(c) shall not apply if Executive electsto terminate his employment with the Corporation other than for Good Reasonafter the date Ralph Lauren ceases to be chief executive officer of theCorporation, provided (i) Executive has remained in his position for a period ofnine months following such date, (ii) Executive has given the Corporation noless than 90 days' prior written notice of such termination referring to theprovisions of this section and (iii) no more than 18 months shall have elapsedfrom the date of Ralph Lauren's ceasing to be the chief executive officer of theCorporation, prior to the giving of notice of termination hereunder by Executive(a "Permitted Resignation"). (d) The Executive will not at any time (whether during or after his employment with the Corporation) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, entity or enterprise, other than the Corporation or any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans or the business and affairs of the Corporation generally, or any subsidiary, affiliate or licensee of the Corporation; provided that the foregoing shall not apply to information which is not unique to the Corporation or which is generally known to the industry or the public other than as a result of the Executive's breach of this covenant or to disclosure which is required by law or to enforce the terms 9 10 of this Agreement upon reasonable notice to the Corporation and further provided Executive may disclose to his attorneys and accountants confidential information reasonably required in connection with their services to Executive provided they sign and agree to be bound to the terms of a confidentiality agreement with the Corporation. The Executive agrees that upon termination of his employment with the Corporation for any reason, he will return to the Corporation immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Corporation or its subsidiaries or affiliates or licensees. (e) If the Executive breaches, or threatens to commit a breach of, any of the provisions of this Section 8 (the "Restrictive Covenants"), the Corporation shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Corporation under law or equity: (i) The right and remedy to have the Restrictive Covenants specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Corporation and that money damages will not provide an adequate remedy to the Corporation; (ii) The right and remedy to require the Executive to account for and pay over to the Corporation all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the Restrictive Covenants, and the Executive shall account for and pay over such Benefits to the Corporation; and (iii) The right to discontinue the payment of any amounts owing to the Executive under the Agreement. (f) If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portion. In addition, if any court construes any of the Restrictive Covenants, or any part thereof, to be unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. 10 11 9. Successors; Binding Agreement. (a) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are payable to him hereunder all such amounts unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 10. Notice. For the purposes of this Agreement, notices, demands andall other communications provided for in this Agreement shall be in writing andshall be deemed to have been duly given when personally delivered with receiptacknowledged or five business days after having been mailed by United Statescertified or registered mail, return receipt requested, postage prepaid,addressed as follows: If to the Executive: Mr. Hamilton South 458 Greenwich Street, Apt. 3 New York, New York 10013 If to the Corporation: Polo Ralph Lauren Corporation 650 Madison Avenue New York, New York 10022 Attention: General Counsel 11 12or to such other address as any party may have furnished to the other in writingin accordance herewith, except that notices of change of address shall beeffective only upon receipt. 11. Miscellaneous. No provisions of this Agreement may be modified,waived or discharged unless such waiver, modification or discharge is agreed toin writing signed by the Executive and such officer of the Corporation as may bespecifically designated by the Board. No waiver by either party hereto at anytime of any breach by the other party hereto of, or compliance with, anycondition or provision of this Agreement to be performed by such other partyshall be deemed a waiver of similar or dissimilar provisions or conditions atthe same or at any prior or subsequent time. The validity, interpretation,construction and performance of this Agreement shall be governed by the laws ofthe State of New York without regard to its conflicts of law principles. 12. Validity. The invalidity or unenforceability of any provision orprovisions of this Agreement shall not affect the validity or enforceability ofany other provision of this Agreement, which shall remain in full force andeffect. 13. Counterparts. This Agreement may be executed in one or morecounterparts, each of which shall be deemed to be an original but all of whichtogether will constitute one and the same instrument. 14. Arbitration. Any dispute or controversy arising under or inconnection with this Agreement shall be settled exclusively by arbitration inthe City of New York before a single arbitrator in accordance with the rules ofthe American Arbitration Association then in effect. Judgment may be entered onthe arbitrator's award in any court having jurisdiction; provided, however, thatthe Corporation shall be entitled to seek a restraining order or injunction inany court of competent jurisdiction to prevent any continuation of any violationof the provisions of Section 8 of this Agreement and the Executive herebyconsents that such restraining order or injunction may be granted without thenecessity of the Corporation's posting any bond, and provided further that theExecutive shall be entitled to seek specific performance of his right to be paiduntil the date of termination during the pendency of any dispute or controversyarising under or in connection with this Agreement. Fees and expenses payable tothe American Arbitration Association and the arbitrator shall be shared equallyby the Corporation and by the Executive, but the parties shall otherwise beartheir own costs in connection with the arbitration; provided that the arbitratorshall be entitled to include as part of the award to the prevailing party thereasonable legal fees and expenses incurred by such party in an amount not toexceed $25,000. 12 13 15. Withholding. The Corporation may withhold from any amounts payableunder this Agreement such federal, state and local taxes as may be required tobe withheld pursuant to applicable law or regulation. 16. Entire Agreement. This Agreement sets forth the entire agreement ofthe parties hereto in respect of the subject matter contained herein andsupersedes all prior agreements, promises, covenants, arrangements,communications, representations or warranties, whether oral or written, by anyofficer, employee or representative of any party hereto; and any prior agreementof the parties hereto in respect of the subject matter contained herein ishereby terminated and cancelled. IN WITNESS WHEREOF, the Corporation has caused this Agreement to beduly executed and the Executive has hereunto set his hand, each on the date setforth below, but effective as of the 10th day of November, 1998. POLO RALPH LAUREN CORPORATION By: /s/ Michael J. Newman ---------------------- Date: March 29, 1999 /s/ Hamilton South ---------------------- Executive: Hamilton South Date: March 25, 1999 13 1 EXHIBIT 21.1 POLO RALPH LAUREN CORPORATION SIGNIFICANT SUBSIDIARIES All the significant subsidiaries are wholly-owned by Polo Ralph Lauren Corporation and/or one or more of its wholly-owned subsidiaries. Jurisdiction in Name which Organized ---- --------------- Fashions Outlet of America, Inc. Delaware PRL USA Holdings, Inc. Delaware PRL International, Inc. Delaware 1 Exhibit 24.1 POWER-OF-ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appearsbelow constitutes and appoints Ralph Lauren, Michael Newman and Nancy A. PlatoniPoli, and each of them, such person's true and lawful attorneys-in-fact andagents, with full power of substitution and revocation, for such person and insuch person's name, place and stead, in any and all capacities to sign any andall amendments to the Annual Report on Form 10-K for the fiscal year ended April3, 1999 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 25, 1999---------------------------------- Chief Executive OfficerRalph Lauren (Principal Executive Officer)/s/ Michael J. Newman Vice Chairman of the Board of Directors June 25, 1999---------------------------------- and Chief Operating OfficerMichael J. Newman/s/ Nancy A. Platoni Poli Senior Vice President and Chief Financial June 25, 1999---------------------------------- Officer (Principal Financial and AccountingNancy A. Platoni Poli Officer)/s/ Frank A. Bennack, Jr. Director June 25, 1999----------------------------------Frank A. Bennack, Jr./s/ Joel L. Fleishman Director June 25, 1999----------------------------------Joel L. Fleishman/s/ Richard A. Friedman Director June 25, 1999----------------------------------Richard A. Friedman/s/ Allen Questrom Director June 25, 1999----------------------------------Allen Questrom/s/ Terry S. Semel Director June 25, 1999----------------------------------Terry S. Semel/s/ Peter Strom Director June 25, 1999----------------------------------Peter Strom

5 12-MOS APR-03-1999 APR-03-1999 44,458 0 170,698 13,495 376,860 679,454 413,678 151,879 1,104,584 347,972 0 0 0 1,004 657,901 1,104,584 1,505,056 1,726,859 904,586 904,586 666,688 0 2,759 152,826 62,276 90,550 0 0 0 90,550 $0.91 $0.91

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Ralph Lauren Annual Report 1999

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Ralph Lauren
Annual Report 1999