Page | ||||
INDEPENDENT AUDITORS REPORT |
1 | |||
FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL
YEAR ENDED MARCH 31, 2007: |
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Balance Sheet |
2 | |||
Statement of Income |
3 | |||
Statement of Members Capital |
4 | |||
Statement of Cash Flows |
5 | |||
Notes to Financial Statements |
612 |
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 54,634 | ||
Accounts receivable |
2,715 | |||
Inventory |
21,324 | |||
Other current assets |
73 | |||
Total current assets |
78,746 | |||
PROPERTY AND EQUIPMENT Net |
893 | |||
TOTAL |
$ | 79,639 | ||
LIABILITIES AND MEMBERS CAPITAL |
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CURRENT LIABILITIES: |
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Accounts payable and accrued expenses |
$ | 10,749 | ||
Related-party payables |
8,159 | |||
Total current liabilities |
18,908 | |||
MEMBERS CAPITAL |
60,731 | |||
TOTAL |
$ | 79,639 | ||
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NET REVENUES |
$ | 116,655 | ||
COST OF GOODS SOLD |
36,946 | |||
Gross profit |
79,709 | |||
OPERATING EXPENSES Selling, general and administrative |
57,402 | |||
INCOME FROM OPERATIONS |
22,307 | |||
INTEREST INCOME |
2,380 | |||
INCOME BEFORE INCOME TAXES |
24,687 | |||
PROVISION FOR STATE INCOME TAXES |
523 | |||
NET INCOME |
$ | 24,164 | ||
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National | ||||||||||||||||
Polo Ralph | Broadcasting | |||||||||||||||
Lauren | ValueVision | Company, | ||||||||||||||
Corporation | Media, Inc. | Inc. | Total | |||||||||||||
MEMBERS CAPITAL (DEFICIT) April 1, 2006 |
$ | 18,290 | $ | (5,999 | ) | $ | 25,217 | $ | 37,508 | |||||||
Contribution of services |
1,059 | 1,059 | ||||||||||||||
Distribution of capital |
(1,000 | ) | (250 | ) | (750 | ) | (2,000 | ) | ||||||||
Net income |
12,082 | 3,020 | 9,062 | 24,164 | ||||||||||||
Purchase of Members ownership interest |
30,300 | 3,229 | (33,529 | ) | | |||||||||||
MEMBERS CAPITAL March 31, 2007 |
$ | 60,731 | $ | | $ | | $ | 60,731 | ||||||||
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 24,164 | ||
Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation |
107 | |||
Services provided by Joint Venture Members |
1,059 | |||
Changes in assets and liabilities: |
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Accounts receivable |
(978 | ) | ||
Related-party receivables |
98 | |||
Inventory |
(4,531 | ) | ||
Other current assets |
(20 | ) | ||
Accounts payable and accrued expenses |
4,565 | |||
Related-party payables |
(941 | ) | ||
Net cash provided by operating activities |
23,523 | |||
CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures |
(693 | ) | ||
Cash used in investing activities |
(693 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES Distribution of capital |
(2,000 | ) | ||
Cash used in financing activities |
(2,000 | ) | ||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
20,830 | |||
CASH AND CASH EQUIVALENTS Beginning of period |
33,804 | |||
CASH AND CASH EQUIVALENTS End of period |
$ | 54,634 | ||
SUPPLEMENTAL INFORMATION Cash paid for income taxes |
$ | 622 | ||
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1. | BUSINESS AND ORGANIZATION | |
Ralph Lauren Media, LLC (the Company) was formed to bring the Polo American lifestyle experience to consumers via multiple media platforms, including the Internet, broadcast, cable and print. The Companys first initiative is the RalphLauren.com website, which opened its virtual doors in November 2000. RalphLauren.com provides entertaining format and content that promotes and sells the Polo brands. | ||
The Company, which was formed in February 2000, was a 30-year joint venture between Polo Ralph Lauren Corporation (Polo), which owned 50% of the Company, National Broadcasting Company, Inc. (NBC), which owned 37.5% of the Company, and ValueVision Media, Inc. (formerly ValueVision International, Inc.) (ValueVision), which owned 12.5% of the Company. NBC and ValueVision collectively formed the Media Members. The Companys managing board had equal representation from Polo and the Media Members. The details were presented in the Joint Venture agreement dated February 7, 2000. | ||
On March 28, 2007, Polo acquired the 50% equity interest in the Company held by NBC and its related entities (37.5%) and ValueVision and its related entities (12.5%). As a result of this transaction, the Company became a wholly owned subsidiary of Polo, and NBC and ValueVision no longer have any Members Capital in the Company. In connection with the acquisition, the Joint Venture Agreement, the Operating Agreement, the Supply Agreement, the License Agreement, the Advertising Agreement, the Promotion Agreement and the Restated Limited Liability Company Agreement were all terminated. The Services Agreement, whereby ValueVision provides telemarketing, customer support and fulfillment operations to the Company, is still in effect, as amended. The activities of the Company are expected to remain the same subsequent to the acquisition with the exception of the termination of the License Agreement and administrative services as detailed in Note 9. | ||
Polo provided marketing through its annual print advertising campaign and provides inventory to the Company through a Supply Agreement (the Supply Agreement). Polo makes its merchandise available at cost of inventory and handles excess inventory through its outlet stores. As detailed in Note 9, Polo provides the Company with accounting, legal and human resources services as well as facilities support. | ||
As detailed in Note 9, ValueVision provides the Company with telemarketing, customer support and fulfillment operations. | ||
2. | BASIS OF PRESENTATION | |
Fiscal Year The Companys fiscal year end is based on a 12-month fiscal year which ends on the Saturday nearest to March 31. All references to fiscal 2007 represent the fiscal year ending March 31, 2007. |
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3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Revenue Recognition The Company recognizes revenue from e-commerce sales upon receipt of products by customers. Sales to individuals are paid for entirely with credit cards. Shipping and handling fees billed to customers are included in net revenues and the related costs are included in operating expenses. The Company records revenue from gift cards as deferred revenue and recognizes revenue upon redemption. Gift cards sold to customers do not have expiration dates. | ||
Allowances for estimated returns are provided when sales are recorded. The Companys reserve for sales returns, which is included in accounts payable and accrued expenses, is approximately $2.1 million at March 31, 2007. Deferred revenues are reported according to the expected delivery date to the customer. It is estimated that the last three days of sales are considered deferred revenue and at March 31, 2007, was $1.9 million and classified in accounts payable and accrued expenses. | ||
Cost of Goods Sold Cost of goods sold includes the expenses incurred to acquire inventory for sale, including product costs, freight-in and import costs. Cost of goods sold also includes reserves for shrinkage, damages and inventory obsolescence. The costs of selling merchandise, including preparing the merchandise for sale, such as picking, packing, shipping, warehousing and order costs are included in selling, general and administrative (SG&A). | ||
Shipping and Handling Costs The costs associated with shipping goods to the customer are reflected as a component of SG&A. Shipping and handling costs incurred approximated $7.2 million in fiscal 2007. | ||
Advertising Costs In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 93-7, Reporting on Advertising Costs, advertising costs, including the costs to produce advertising, are expensed upon the first time that the advertisement is exhibited. Advertising expense was approximately $6.2 million for fiscal 2007. There were no deferred advertising costs recorded as of March 31, 2007. | ||
Technology and Website Development The Company develops its website through use of internal and external resources. External costs incurred in connection with development of the website, prior to technological feasibility, are expensed when incurred. Costs incurred subsequent to technological feasibility through the period of the site availability are capitalized. | ||
Comprehensive Income Comprehensive income was equal to the net income during fiscal 2007. |
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4. | RECENTLY ISSUED ACCOUNTING STANDARDS | |
In July 2006, the FASB issued Financial Accounting Standards Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes an interpretation of Statement of Financial Accounting Standards No. 109, which clarifies the accounting for uncertainty in income tax positions. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The Company first will be required to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the |
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position. A tax position that meets the more-likely-than-not recognition threshold will then be measured to determine the amount of benefit to recognize in the financial statements based upon the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN No. 48 is effective for the Company as of the beginning of fiscal 2008 (April 1, 2007). The application of FIN No. 48 is not expected to have a material effect on the Companys financial statements. |
5. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES | |
The Companys accounts payable and accrued expenses consist of the following as of March 31, 2007: |
Operating expenses |
$ | 3,624 | ||
Reserve for sales returns |
2,078 | |||
Gift cards liability |
1,056 | |||
Accrued employee costs |
1,772 | |||
Taxes payable |
347 | |||
Deferred revenue |
1,872 | |||
$ | 10,749 | |||
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6. | MEMBERS CAPITAL | |
Contributions of services by Polo through March 28, 2007, had a value of $1.1 million in fiscal 2007 which was determined on a proportional cost allocation method. Distributions of capital amounted to $2.0 million in fiscal 2007 and were allocated in accordance with ownership percentages. | ||
The Company allocates profits and losses to the members in accordance with the LLC Agreement. The LLC Agreement provides that losses are first allocated to the members in a manner to make their members tax basis capital account balances consistent with their ownership percentages, then pro rata in accordance with their ownership percentages. Profits of the Company are allocated to the members in accordance with their ownership percentages. | ||
7. | STOCK-BASED COMPENSATION | |
In connection with the hiring of key executives, Polo has issued options for the purchase of Polo common stock and restricted stock units to certain executives of the Company. Polo granted 9,900 options on June 8, 2006, at an exercise price of $55.43 equal to fair market value at the date of grant. The options become exercisable ratably, over a three-year vesting period for employees. The stock options generally expire either seven or ten years from the date of grant. Such stock awards are managed by Polo. | ||
Polo granted 5,403 restricted stock units on June 15, 2006, which are subject to Polos satisfaction of performance goals and will vest in three equal installments on the first three anniversaries of the grant date through June 15, 2009. Performance-based restricted stock units also are payable in shares of Polos common stock and may vest over (1) a three-year period of time (cliff vesting), subject to the employees continuing employment and Polos satisfaction of certain performance goals over the three-year period; or (2) ratably over a three-year period of time (graded vesting), subject to the employees continuing employment during the applicable vesting period and the achievement by the Company of separate annual performance goals. Compensation expense for performance-based restricted stock units is recognized over the service period when attainment of the performance goals is probable. This accounted as variable arrangements. The Company is required to reimburse Polo for the expense and has recorded compensation expense of $0.3 million in fiscal 2007 related to the restricted stock units and stock options and are included in SG&A. | ||
8. | SIGNIFICANT AGREEMENT | |
In November 2003, the Company entered into an agreement with GSI for e-commerce technology services. In connection with this agreement, the Company pays a service fee to GSI equivalent to a percentage of net merchandising revenue, as defined in the agreement. GSI is also responsible for all credit card processing fees and credit risk on all sales processed through its technology platform. During fiscal 2007, the Company recorded expenses of approximately $13.1 million. | ||
9. | RELATED-PARTY TRANSACTIONS | |
Licensing The Company entered into a license agreement with a wholly owned subsidiary of Polo (the License Agreement). The terms of the License Agreement require the Company to pay a royalty on the sale of Polo products based on a specified percentage of net retail sales. The volume of net retail sales shall be reset to zero each year. The royalty calculation for fiscal 2007 is based on the calendar year ending December 30, 2006. During fiscal 2007, the Company paid royalties of $2.9 million which are included in SG&A. In connection with a change in ownership more fully described in Note 1, this agreement was terminated on March 28, 2007. |
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10. | LEASE | |
On December 18, 2006, the Company entered into a lease agreement for a 360,000 square-foot distribution center facility located in High Point, North Carolina. The lease has an initial term of fifteen years and contains four 5-year extension options. Rent payment increases by one and one-eighth percent (1.125%) over the fixed annual rent payable at the end of the prior lease year. Rent commences upon the substantial completion of the facility by the lessor, which occurred in September 2007. | ||
As of March 31, 2007, future minimum rental payments under noncancelable operating leases with lease terms in excess of one year were as follows: |
Annual Minimum | ||||
Operating Lease | ||||
Payments | ||||
Fiscal Year Ending | (Thousands) | |||
2008 |
$ | 843 | ||
2009 |
1,272 | |||
2010 |
1,287 | |||
2011 |
1,301 | |||
2012 |
1,316 | |||
2013 and thereafter |
15,233 | |||
Total |
$ | 21,252 | ||
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