RALPH LAUREN MEDIA, LLC
DRAFT
UNAUDITED FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 28, 2002
RALPH LAUREN MEDIA, LLC
TABLE OF CONTENTS
PAGE
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UNAUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
DECEMBER 28, 2002:
Balance Sheet 1
Statement of Operations 2
Statement of Partners' Capital 3
Statement of Cash Flows 4
Notes to Financial Statements 5-12
RALPH LAUREN MEDIA, LLC
BALANCE SHEET
DECEMBER 28, 2002
(IN THOUSANDS)
UNAUDITED
2002
------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,656
Inventory 4,565
Prepaid and other assets 33
------
Total current assets 9,254
PROPERTY AND EQUIPMENT - Net 188
------
TOTAL ASSETS $9,442
======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $2,752
Accrued expenses and other 3,870
------
Total current liabilities 6,622
PARTNERS' CAPITAL 2,820
------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $9,442
======
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 28, 2002
(IN THOUSANDS)
UNAUDITED
2002
--------
NET SALES $ 21,389
COST OF GOODS SOLD 8,493
--------
Gross profit 12,896
--------
OPERATING EXPENSES:
General and administrative 17,193
--------
Total operating expenses 17,193
--------
LOSS FROM OPERATIONS (4,297)
INTEREST INCOME 25
--------
NET LOSS $ (4,272)
========
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF PARTNERS' CAPITAL
FISCAL YEAR ENDED DECEMBER 28, 2002
(IN THOUSANDS) UNAUDITED
POLO
RALPH VALUEVISION NATIONAL
LAUREN MEDIA, BROADCASTING
CORPORATION INC. COMPANY, INC. TOTAL
----------- ---- ------------- -----
PARTNERS' CAPITAL, DECEMBER 29, 2001 $(21,153) $ 39,114 $(16,928) $ 1,033
Contribution of services 815 5,244 -- 6,059
Net loss (2,136) (534) (1,602) (4,272)
-------- -------- -------- --------
PARTNERS' CAPITAL, DECEMBER 28, 2002 $(22,474) $ 43,824 $(18,530) $ 2,820
======== ======== ======== ========
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED DECEMBER 28, 2002
(IN THOUSANDS)
UNAUDITED
2002
-------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,272)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 592
Services provided by Joint Venture Partners 6,059
Other 30
Changes in assets and liabilities:
Inventory 2,288
Other assets 1,005
Accounts payable (7,336)
Accrued expenses and other 1,186
-------
Net cash used in operating activities (448)
-------
CASH FLOWS FROM INVESTING ACTIVITIES - --
-------
Net cash used in investing activities --
-------
CASH FLOWS FROM FINANCING ACTIVITIES - --
-------
Net cash provided by financing activities --
-------
NET DECREASE IN CASH AND CASH EQUIVALENTS (448)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,104
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,656
=======
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 28, 2002
(IN THOUSANDS)
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 Company's first
initiative is the Polo.com website, which opened its virtual doors in
November 2000. Polo.com offers an interactive shopping experience while
creating a direct-to-customer upscale shopping environment online.
Polo.com provides entertaining format and content that promotes the Polo
brands.
The Company was formed in February 2000, as a joint venture between Polo
Ralph Lauren Corporation ("Polo"), National Broadcasting Company, Inc.
("NBC"), ValueVision International, Inc. (which changed its name to
ValueVision Media, Inc. in May 2002) ("ValueVision"), NBC Internet, Inc.
("NBCi"), and CNBC.com LLC ("CNBC.com"). NBC, ValueVision, NBCi, and
CNBC.com collectively form the "Media Partners." Under the 30-year joint
venture agreement and the related operating agreement (together, the
"Agreement"), the initial membership interest and sharing ratio in the
Company ("Initial Interest") held by Polo, NBC, ValueVision, NBCi,
CNBC.com was 50%, 25%, 12.5%, 10% and 2.5%, respectively, of Class A
interests. In exchange for its 50% Initial Interest, Polo provides
marketing through its annual print advertising campaign and through a
Supply Agreement (the "Supply Agreement") makes its merchandise available
at initial cost of inventory and handles excess inventory through its
outlet stores. As detailed in Note 7, Polo provides the Company with
accounting, legal and human resources services as well as facilities
support. In fiscal 2000, NBC and CNBC.com agreed to contribute $100,000
and $10,000, respectively, of television and online advertising on NBC and
CNBC.com properties in exchange for their Initial Interests of 25% and
2.5%, respectively. As of December 30, 2000 NBCi agreed to contribute
$40,000 in online distribution and promotion. ValueVision agreed to
contribute up to $50,000 in the form of cash funding, goods and/or
services including a 10% profit margin on the cost of the goods and/or
services (collectively "Value Vision's Contribution") for its respective
Initial Interest. The Company's managing board has equal representation
from Polo and the Media Partners.
The membership interest's changed in fiscal year 2001, when a subsidiary
of NBC obtained NBCi's and CNBC.com's percent of ownership in exchange for
assuming both parties' commitments and responsibilities under the
Agreement. NBC, through it subsidiary, currently has 37.5% ownership, and
Value Vision International Inc. and Polo Ralph Lauren have ownership of
12.5% and 50%, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL PERIOD - The Company's fiscal period ends on the Saturday nearest
to December 31. All references to "fiscal 2002" represents the year ended
December 28, 2002.
ACCOUNTING FOR THE CAPITALIZATION OF THE COMPANY - The Company records
in-kind contributions from the partners at the partners' carrying value on
their financial statements at the time of contribution. ValueVision's cash
contributions are recorded at the time of contribution. Polo's commitment
to supply merchandise available at its initial cost and NBC's commitment
to contribute advertising have no carrying value on the partners' books,
and accordingly are recorded at zero value. (See Note 7.)
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CASH AND CASH EQUIVALENTS - Cash and cash equivalents include all highly
liquid investments with an original maturity of three months or less.
INVENTORY - Inventory, which consists entirely of finished goods, is
valued at the lower of cost or market as determined on an average cost
basis. All risks of ownership of excess inventory, as defined by the
supply agreement, are borne by Polo who reimburses the Company at cost for
all saleable inventories returned.
PROPERTY AND EQUIPMENT - Property and equipment is carried at cost, less
accumulated depreciation and amortization. Computers and equipment and
technology and website development are depreciated using the straight-line
method over their estimated useful lives of up to 3 years. The Company
uses a half year convention depreciating half a year, the year an asset is
placed in service, and half a year in the last year of its useful life.
Major additions and betterments are capitalized, and repairs and
maintenance are charged to operations in the period incurred.
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 sales and the related costs are included in cost of
goods sold. Allowances for estimated returns are provided when sales are
recorded. The Company's reserve for sales returns is approximately $585 at
December 28, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate
their fair value due to the short-term maturities of such items. Estimated
fair value disclosures have been determined by the Company, using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and estimation methodologies may have a material effect on the
estimated fair value amounts.
COMPREHENSIVE LOSS - Comprehensive loss was equal to the net loss during
fiscal 2002.
INCOME TAX - The Company is not considered a taxable entity for Federal
income tax purposes and most state income tax purposes. The members report
any taxable income or losses on their respective income tax returns. As a
result, no tax benefits have been allocated to the Company for its losses
for the period presented.
SEGMENT REPORTING - The Company operates in a single operating segment --
the operation of interactive shopping on-line. Revenues from external
customers are derived from merchandise sales. The Company does not rely on
any major customers as a source of revenue.
3. SIGNIFICANT RISKS AND UNCERTAINTIES
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. The most significant estimates in the
financial statements include inventory and reserves for uncollectible
accounts and returns.
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CONCENTRATION OF CREDIT RISKS - The Company is potentially exposed to
credit risk primarily due to cash deposits. The Company reduces this risk
by depositing all of its funds with major banks and financial institutions
and investing in high-quality instruments.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 28,
2002:
UNAUDITED
2002
------
Computers and equipment $ 532
Software 586
Technology website development 5,819
------
6,937
Less accumulated depreciation 6,749
------
Property and equipment, net $ 188
======
Depreciation and amortization expense amounted to approximately $592 for
fiscal 2002.
5. ACCRUED EXPENSES
The Company's accrued expenses and other are made up of the following at
December 28, 2002:
UNAUDITED
2002
------
Accrued employee costs $ 754
Accrued fulfillment costs 926
Accrued operations 419
Reserve for sales returns 585
Other 1,186
------
$3,870
======
6. PARTNERS' CAPITAL
PARTNERS' CAPITAL - The Company records ValueVision's contribution at the
time the cash or goods and/or services are contributed. The Company
records contributions of services, for NBC and Polo, at the cost to the
contributing partner. (See Note 7.) As of December 28, 2002, contributions
made by NBC had no recorded value. Contributions of services by Polo had a
value of $815 in fiscal 2002. With respect to Value Vision's contribution,
the Company received goods and/or services of approximately $5,200 during
fiscal 2002.
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The Company allocates profits and losses to the joint venture partners
based upon each partner's proportionate share.
OPTION GRANTS - In connection with the hiring of key executives, Polo has
issued options for the purchase of Polo Ralph Lauren stock to certain
executives of the Company. Polo granted 10,000 options on December 28,
2001 at an exercise price of $26.125 and 20,000 options on June 7, 2002,
at an exercise price of $24.780 each of which represent the fair value of
the stock on each date of issuance. In accordance with Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation, the fair value of each award will amortize ratably into
expense over the three year vesting period and in the current year the
Company has recorded compensation expense of $83.
7. 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 specified percentages are as follows (dollars in millions):
SALES VOLUME ROYALTY PERCENTAGE
------------ ------------------
$0 - $75 0%
$75 - $200 10
$200 - $250 12
over $250 15
Royalties are due to Polo on a quarterly basis. Since the minimum
threshold was not reached during fiscal 2002, no royalty expense has been
recorded in the statement of operations.
INVENTORY - Under the terms of the Agreement and the related Supply
Agreement (as defined in Note 8), the Company has the right to purchase
its inventory from Polo, its suppliers and its licensees at Polo's cost.
In fiscal 2002, the Company purchased approximately 38% of its inventory
from Polo and its suppliers, and the remaining 62% of the Company's
inventory was purchased from Polo licensees. The Company relies on Polo
and its relationship with its suppliers to achieve favorable inventory
costs in accordance with the Agreement. If Polo were to terminate the
Supply Agreement or be unable to continue its relationships with its
suppliers there may be a material adverse effect to the Company and its
cost of doing business. At least twice a year, Polo agrees to purchase
from the Company at the Company's cost, all unsold Polo products that were
purchased in accordance with the Agreement, subject to certain exclusions.
At December 28, 2002, the Company had a payable due to Polo for inventory
and other services of $2,294. This amount has been included in accounts
payable on the balance sheet.
ADVERTISING - Under the terms of the Agreement, NBC and affiliates will
provide the Company with $110,000 of television and online advertising on
its properties over a five year period. (See Note 9.) NBCi will provide
the Company with $40,000 in online advertising over a five-year period.
During fiscal 2002, NBC provided the Company with approximately $44,328 of
discounted advertising time from the NBC property. The Company did not
receive any discounted advertising from CNBC.com or NBCi during fiscal
2002.
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FULFILLMENT - The Company entered into an agreement on February 7, 2000
with ValueVision to perform its entire warehousing and order fulfillment
and call center functions. (See Note 9.) For fiscal 2002, warehousing and
order fulfillment expenses (inclusive of system expenses) totaled
approximately $6,067 and call center expenses totaled approximately
$1,750, of which $5,244 represented a capital contribution. These amounts
were then reduced by the value of spot advertising inventory transferred
by the Company (See Note 8) and are included in general and administrative
expense in the statement of operations.
ADMINISTRATIVE SERVICES - Polo provides the Company with administrative
services in the way of payroll services, accounts payable services, office
space and utilities, IT support and legal services from Polo's in-house
legal counsel. The services Polo provided totaled approximately $815 for
fiscal 2002 and are included in general and administrative expense and as
a capital contribution in Polo's capital account. Polo pays the Company's
payroll and operating expenses and is then reimbursed for all cash
expenditures by the Company.
EMPLOYEE BENEFITS - The Company currently does not maintain any of its own
employee benefit plans, including, health, dental, short-term disability,
long-term disability and 401(k). Polo administers these benefits and the
Company's employees are permitted to participate. The Company recorded
expenses of approximately $587 for these benefits for fiscal 2002.
8. BARTER AGREEMENTS
On March 1, 2002, the Company amended its supply agreement dated February
7, 2000 (the "Supply Agreement") between Polo and the Company. Pursuant to
the amendment, the Company may assign and transfer television advertising
spots having a total spot value of up to $7,000 in payment for inventory
supplied by Polo having an equal cost to the Company under the Supply
Agreement. The transferred spots must be running no later than the earlier
of (i) 180 days after the Company uses all of its remaining spot inventory
or (ii) July 31, 2004. The Company did not assign and transfer any
television advertising spots in fiscal 2002.
Also on March 1, 2002, the Company amended its agreement dated February 7,
2000 with Value Vision covering fulfillment services from Value Vision.
The amendment called for the Company to assign and transfer a certain
portion of its advertising spot inventory having a spot value of up to
$2,100 to Value Vision in exhange for certain fulfillment services equal
to $175 per month. The Company assigned and transferred $1,750 of its
advertising spot inventory to Value Vision in fiscal 2002. Value Vision
commenced providing services under this amendment immediately upon its
execution. Under the amendment, Value Vision must use all assigned spots
no later than December 31, 2004. At that time any unusued spots will be
forfeited. All spots transferred shall promote Value Vision and/or the
Company, its site and/or Polo Ralph Lauren Products.
9. SUBSEQUENT EVENTS
In 2003, the Company entered into an agreement to sell its inventory of
unused television advertising spots to NBC for $15 million, which will be
paid in three installments during fiscal 2003.
In 2003, the Company and Value Vision agreed to terminate their previous
fulfillment arrangement at a cost to the Company of $11 million. The
Company has entered into a one-
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year agreement with Value Vision to continue providing fulfillment and call
center operations while it explores its options for future fulfillment and
call center operations.
******
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RALPH LAUREN MEDIA, LLC
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
Year Ended December 29, 2001 and
Period February 7, 2000 (Date of Inception) to
December 30, 2000
RALPH LAUREN MEDIA, LLC
TABLE OF CONTENTS
PAGE
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 29, 2001 AND PERIOD FEBRUARY 7, 2000
(DATE OF INCEPTION) TO DECEMBER 30, 2000:
Balance Sheets 2
Statements of Operations 3
Statement of Partners' Capital 4
Statements of Cash Flows 5
Notes to Financial Statements 6-12
INDEPENDENT AUDITORS' REPORT
To the Members of Ralph Lauren Media, LLC
We have audited the accompanying balance sheets of Ralph Lauren Media, LLC (the
"Company") as of December 29, 2001 and December 30, 2000, and the related
statements of operations, partners' capital, and cash flows for the year ended
December 29, 2001 and the period February 7, 2000 (date of inception) to
December 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Ralph Lauren Media, LLC as of December 29,
2001 and December 30, 2000, and the results of its operations and its cash flows
for the year ended December 29, 2001 and the period February 7, 2000 (date of
inception) to December 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
August 16, 2002
RALPH LAUREN MEDIA, LLC
BALANCE SHEETS
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(IN THOUSANDS)
2001 2000
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,104 $ 8,160
Inventory 6,853 7,286
Other assets 1,038 962
------- -------
Total current assets 12,995 16,408
PROPERTY AND EQUIPMENT - Net 810 5,108
------- -------
TOTAL ASSETS $13,805 $21,516
======= =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $10,088 $ 6,949
Accrued expenses and other 2,684 7,274
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Total current liabilities 12,772 14,223
PARTNERS' CAPITAL 1,033 7,293
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $13,805 $21,516
======= =======
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 29, 2001 AND
PERIOD FEBRUARY 7, 2000 (DATE OF INCEPTION) TO
DECEMBER 30, 2000
(IN THOUSANDS)
2001 2000
-------- --------
NET SALES $ 15,641 $ 1,991
COST OF GOODS SOLD 6,871 988
-------- --------
Gross profit 8,770 1,003
-------- --------
OPERATING EXPENSES:
General and administrative 28,706 22,712
Cost of discontinued software project 3,964 --
-------- --------
Total operating expenses 32,670 22,712
-------- --------
LOSS FROM OPERATIONS (23,900) (21,709)
INTEREST INCOME 65 400
-------- --------
NET LOSS $(23,835) $(21,309)
======== ========
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 29, 2001 AND
PERIOD FEBRUARY 7, 2000 (DATE OF INCEPTION) TO DECEMBER 30, 2000
(IN THOUSANDS)
POLO
RALPH VALUEVISION NATIONAL
LAUREN MEDIA, BROADCASTING
CORPORATION INC. COMPANY, INC. TOTAL
----------- ---- ------------- -----
PARTNERS' CAPITAL, FEBRUARY 7, 2000 $ -- $ -- $ -- $ --
Cash contributions -- 23,400 -- 23,400
Contribution of services 500 4,702 -- 5,202
Net loss (10,655) (2,664) (7,990) (21,309)
-------- -------- -------- --------
PARTNERS' CAPITAL, DECEMBER 30, 2000 (10,155) 25,438 (7,990) 7,293
Cash contributions -- 6,964 -- 6,964
Contribution of services 920 9,691 -- 10,611
Net loss (11,918) (2,979) (8,938) (23,835)
-------- -------- -------- --------
PARTNERS' CAPITAL, DECEMBER 29, 2001 $(21,153) $ 39,114 $(16,928) $ 1,033
======== ======== ======== ========
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 29, 2001 AND
PERIOD FEBRUARY 7, 2000 (DATE OF INCEPTION) TO
DECEMBER 30, 2000
(IN THOUSANDS)
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(23,835) $(21,309)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 5,118 1,524
Services provided by Joint Venture Partners 10,611 5,202
Other non-cash adjustments (62) 102
Changes in assets and liabilities:
Inventories 433 (7,286)
Other assets (14) (1,064)
Accounts payable 3,139 6,949
Accrued expenses and other (4,590) 7,274
-------- --------
Net cash used in operating activities (9,200) (8,608)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of property and equipment (820) (6,632)
-------- --------
Net cash used in investing activities (820) (6,632)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES --
Contributed capital 6,964 23,400
-------- --------
Net cash provided by financing activities 6,964 23,400
-------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (3,056) 8,160
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,160 --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,104 $ 8,160
======== ========
See notes to financial statements.
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RALPH LAUREN MEDIA, LLC
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 29, 2001 AND PERIOD FEBRUARY 7, 2000 (DATE OF INCEPTION)
TO DECEMBER 30, 2000 (IN THOUSANDS)
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 Company's first
initiative is the Polo.com website, which opened its virtual doors in
November 2000. Polo.com offers an interactive shopping experience while
creating a direct-to-customer upscale shopping environment online.
Polo.com provides entertaining format and content that promotes the Polo
brands.
The Company was formed in February 2000, as a joint venture between Polo
Ralph Lauren Corporation ("Polo"), National Broadcasting Company, Inc.
("NBC"), ValueVision International, Inc. (which changed its name to
ValueVision Media, Inc. in May 2002) ("ValueVision"), NBC Internet, Inc.
("NBCi"), and CNBC.com LLC ("CNBC.com"). NBC, ValueVision, NBCi, and
CNBC.com collectively form the "Media Partners." Under the 30-year joint
venture agreement and the related operating agreement (together, the
"Agreement"), the initial membership interest and sharing ratio in the
Company ("Initial Interest") held by Polo, NBC, ValueVision, NBCi,
CNBC.com was 50%, 25%, 12.5%, 10% and 2.5%, respectively, of Class A
interests. In exchange for its 50% Initial Interest, Polo provides
marketing through its annual print advertising campaign and through a
Supply Agreement (the "Supply Agreement") makes its merchandise available
at initial cost of inventory and handles excess inventory through its
outlet stores. As detailed in Note 7, Polo provides the Company with
accounting, legal and human resources services as well as facilities
support. In fiscal 2000, NBC and CNBC.com agreed to contribute $100,000
and $10,000, respectively, of television and online advertising on NBC and
CNBC.com properties in exchange for their Initial Interests of 25% and
2.5%, respectively. As of December 30, 2000 NBCi agreed to contribute
$40,000 in online distribution and promotion. ValueVision agreed to
contribute up to $50,000 in the form of cash funding, goods and/or
services including a 10% profit margin on the cost of the goods and/or
services (collectively "Value Vision's Contribution") for its respective
Initial Interest. The Company's managing board has equal representation
from Polo and the Media Partners.
The membership interest's changed in fiscal year 2001, when a subsidiary
of NBC obtained NBCi's and CNBC.com's percent of ownership in exchange for
assuming both parties' commitments and responsibilities under the
Agreement. NBC, through it subsidiary, currently has 37.5% ownership, and
Value Vision International Inc. and Polo Ralph Lauren have ownership of
12.5% and 50%, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL PERIOD - The Company's fiscal period ends on the Saturday nearest
to December 31. All references to "fiscal 2001" represents the year ended
December 29, 2001 and "fiscal 2000" represents the period from February 7,
2000 (date of inception) to December 30, 2000.
ACCOUNTING FOR THE CAPITALIZATION OF THE COMPANY - The Company records
in-kind contributions from the partners at the partners' carrying value on
their financial statements at the time of contribution. ValueVision's cash
contributions are recorded at the time of contribution. Polo's commitment
to supply
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merchandise available at its initial cost and NBC's commitment to
contribute advertising have no carrying value on the partners' books, and
accordingly are recorded at zero value. (See Note 7.)
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include all highly
liquid investments with an original maturity of three months or less.
INVENTORY - Inventory, which consists entirely of finished goods, is
valued at the lower of cost or market as determined on an average cost
basis. All risks of ownership of excess inventory, as defined by the
supply agreement, are borne by Polo who reimburses the Company at cost for
all saleable inventories returned.
PROPERTY AND EQUIPMENT - Property and equipment is carried at cost, less
accumulated depreciation and amortization. Computers and equipment are
depreciated using the straight-line method over their estimated useful
lives of 8 months to 3 years. The Company uses a half-year convention
depreciating half a year the year an asset is placed in service and half a
year in the last year of its useful life. Major additions and betterments
are capitalized, and repairs and maintenance are charged to operations in
the period incurred.
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. In fiscal 2000, development costs capitalized prior to the
launch of Polo.com were approximately $5,600 and are included in property
and equipment on the balance sheet. Approximately $5,000 of these costs
are being amortized over the expected life of the current website of eight
months. The remaining development costs are being amortized using the
straight-line method over their estimated useful life of 3 years. (See
Note 3.) During fiscal 2000, the Company agreed to reimburse Value Vision
for one-half of the cost of a software project. During fiscal 2001, based
on the revised business plan and the determination of a more
cost-effective approach, the Company discontinued its support for the
project. Its share of the total cost of the project at the time it
discontinued its support was $3,964. This amount has been expensed in
fiscal 2001 and is shown as cost of discontinued software project on the
statement of operations.
REVENUE RECOGNITION - The Company recognizes revenue from e-commerce sales
upon the customer receipt of products. Shipping and handling fees billed
to customers are included in net sales and the related costs are included
in cost of goods sold. Sales to individuals are paid for entirely with
credit cards. Allowances for estimated uncollectible accounts and returns
are provided when sales are recorded. The Company's reserve for returns
and for doubtful accounts are approximately $681 and $40 for fiscal 2001
and $300 and $102 for fiscal 2000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate
their fair value due to the short-term maturities of such items. Estimated
fair value disclosures have been determined by the Company, using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and estimation methodologies may have a material effect on the
estimated fair value amounts.
COMPREHENSIVE LOSS - Comprehensive loss was equal to the net loss during
fiscal 2001 and fiscal 2000.
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INCOME TAX - The Company is not considered a taxable entity for Federal
income tax purposes and most state income tax purposes. The members report
any taxable income or losses on their respective income tax returns. As a
result, no tax benefits have been allocated to the Company for its losses
for the period presented.
RECLASSIFICATIONS -- For comparative purposes, certain prior period
amounts have been reclassified to conform to the current period's
presentation.
SEGMENT REPORTING -- The Company operates in a single operating segment --
the operation of interactive shopping on-line. Revenues from external
customers are derived from merchandise sales. The Company does not rely on
any major customers as a source of revenue.
NEW ACCOUNTING STANDARDS - In July 2001, the Financial Accounting
Standards Board, or "FASB", issued Statement of Financial Accounting
Standards, or SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. In addition to requiring the use of
the purchase method for all business combinations, SFAS No. 141 requires
intangible assets that meet certain criteria to be recognized as assets
apart from goodwill. SFAS No. 142 addresses accounting and reporting
standards for acquired goodwill and other intangible assets and generally,
requires that goodwill and indefinite life intangible assets no longer be
amortized but be tested for impairment annually. Intangible assets that
have finite lives will continue to be amortized over their useful lives.
The Company has determined that the adoption of these Statements will not
have an impact on the financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Statement
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective in fiscal year 2003. The
Company has determined that the adoption of this Statement will not have
an impact on the financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement addresses
financial accounting and reporting for the impairment of long-lived assets
and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. However, this Statement retains
the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by sale. SFAS No.
144 is effective in fiscal year 2002. The Company has determined that the
adoption of this Statement will not have an impact on the financial
statements.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. In addition to amending and rescinding other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions, SFAS No. 145 precludes companies from recording gains and
losses from the extinguishment of debt as an extraordinary item. SFAS No.
145 is effective in fiscal 2003. The Company does not expect the adoption
of this Statement to have a material impact on the results of operations
or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of
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costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal
activity. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company does not expect
the adoption of this Statement to have a material effect on the results
of operations or financial position.
3. SIGNIFICANT RISKS AND UNCERTAINTIES
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. The most significant estimates in the
financial statements include inventory and reserves for uncollectible
accounts and returns.
CONCENTRATION OF CREDIT RISKS - The Company is potentially exposed to
credit risk primarily due to cash deposits. The Company reduces this risk
by depositing all of its funds with major banks and financial institutions
and investing in high-quality instruments.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 29,
2001 and December 30, 2000, respectively:
2001 2000
------ ------
Computers and equipment $1,047 $ 839
Software 586 186
Technology website development 5,819 5,607
------ ------
7,452 6,632
Less accumulated depreciation 6,642 1,524
------ ------
Property and equipment, net $ 810 $5,108
====== ======
In fiscal 2000, website development costs of $5,000 are being amortized
over their expected useful life of eight months (November 2000 to June
2001). Depreciation and amortization expense amounted to approximately
$5,118 and $1,524 for fiscal 2001 and fiscal 2000, respectively.
5. ACCRUED EXPENSES
The Company's accrued expenses and other are made up of the following at
December 29, 2001 and December 30, 2000, respectively:
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2001 2000
------ ------
Accrued employee costs $ 905 $1,136
Accrued website maintenance 98 1,998
Accrued product shoots 400 1,048
Accrued website marketing 97 1,455
Reserve for sales returns 681 300
Other 503 1,337
------ ------
$2,684 $7,274
====== ======
6. PARTNERS' CAPITAL
PARTNERS' CAPITAL - The Company records ValueVision's contribution at the
time the cash or goods and/or services are contributed. The Company
records contributions of services, for NBC and Polo, at the cost to the
contributing partner. (See Note 7.) As of December 29, 2001 and December
30, 2000, contributions made by NBC had no recorded value. Contributions
of services by Polo had a value of $920 in fiscal 2001 and $500 in fiscal
2000. With respect to Value Vision's contribution, the Company received
cash and goods and/or services of approximately $7,000 and $9,700 during
fiscal 2001 and $23,400 and $4,700 during fiscal 2000.
The Company allocates profits and losses to the joint venture partners
based upon each partner's proportionate share.
EQUITY GRANTS - In connection with the Company's hiring of key executives
in fiscal 2000, the managing board authorized the grant of Class B
interests to share in 3% of the Joint Venture's profits and Class C
interests to share in 7% of the Joint Venture's profits. These interests
are subordinate to the Class A interests held by the joint venture
partners until the Company has an aggregate return greater than $400,000.
At December 30, 2000, the Class B interests have been granted in their
entirety to one key executive and no Class C interests have been issued.
The Company has recorded the issuance of the Class B interests in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The Class B interests were issued at their fair
market value so no compensation expense has been recorded by the Company.
In accordance with Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation, the Class B interests have a fair
market value of $0. Accordingly, there is no pro forma compensation
expense and no pro forma operating results are presented. During fiscal
2001 there were no grants made of Class B interests. With respect to the
interests granted in fiscal 2000, the executive to whom the grant was made
left the employ of the Company. (See Note 8) As a result, the interests
granted to the executive were forfeited and reverted back to the Company.
At December 29, 2001, there were no outstanding grants of Class B
interests.
7. RELATED PARTY TRANSACTIONS
LICENSING - In connection with the formation of the Joint Venture, 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.
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The specified percentages are as follows (dollars in millions):
SALES VOLUME ROYALTY PERCENTAGE
------------ ------------------
$0 - $75 0 %
$75 - $200 10
$200 - $250 12
over $250 15
Royalties are due to Polo on a quarterly basis. Since the minimum
threshold was not reached during fiscal 2001 and fiscal 2000, no royalty
expense has been recorded in the statement of operations for the period
ended December 29, 2001 and December 30, 2000, respectively.
INVENTORY - Under the terms of the Agreement and the related Supply
Agreement (as defined in Note 8), the Company has the right to purchase
its inventory from Polo, its suppliers and its licensees at Polo's cost.
In fiscal 2001 and fiscal 2000, the Company purchased approximately 58%
and 60%, respectively, of its inventory from Polo and its suppliers, and
the remaining 42% and 40% of the Company's inventory was purchased from
Polo licensees. The Company relies on Polo and its relationship with its
suppliers to achieve favorable inventory costs in accordance with the
Agreement. If Polo were to terminate the Supply Agreement or be unable to
continue its relationships with its suppliers there may be a material
adverse effect to the Company and its cost of doing business. At least
twice a year, Polo agrees to purchase from the Company at the Company's
cost, all unsold Polo products that were purchased in accordance with the
Agreement, subject to certain exclusions. At December 29, 2001 and
December 30, 2000, the Company had a payable due to Polo for inventory and
other services of $9,520 and $6,586, respectively. These amounts are
included in accounts payable on the balance sheet.
LOAN TO KEY EXECUTIVE - On April 3, 2000, the Company made a loan to a key
executive of $500. As of September 26, 2001, the key executive who
received the loan became an employee of Polo Ralph Lauren Corporation. The
loan was transferred to Polo Ralph Lauren Corporation effective with the
executives's employment. The Company was reimbursed for this loan by Polo
Ralph Lauren.
ADVERTISING - Under the terms of the Agreement, NBC will provide the
Company with $110,000 of television and online advertising on its
properties over a five-year period. NBCi will provide the Company with
$40,000 in online advertising over a five-year period. During fiscal 2001
and 2000, NBC provided the Company with approximately $30,900 and $12,800
of discounted advertising time from the NBC property, and approximately
$1,800 and $800 from the CNBC.com property. The Company also received
approximately $7,300 and $1,000 in advertising online from NBCi for the
year ended December 29, 2001 and December 30, 2000.
FULFILLMENT - The Company entered into an agreement on February 7, 2000
with ValueVision to perform its entire warehousing and order fulfillment
and call center functions. For fiscal 2001 and fiscal 2000, warehousing
and order fulfillment expenses (inclusive of system expenses) totaled
approximately $7,600 and $5,000 and call center expenses totaled
approximately $2,000 and $1,100. These amounts are included in fulfillment
expense in the statement of operations.
ADMINISTRATIVE SERVICES - Polo provides the Company with administrative
services in the way of payroll services, accounts payable services, office
space and utilities, IT support and legal services from Polo's in-house
legal counsel. The services Polo provided totaled approximately $920 and
$500 for fiscal 2001 and fiscal 2000, respectively, and are included in
general and administrative expense and as a capital contribution in Polo's
capital account. Polo pays the Company's payroll and operating expenses
and is then reimbursed for all cash expenditures by the Company.
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EMPLOYEE BENEFITS - The Company currently does not maintain any of its own
employee benefit plans, including, health, dental, short-term disability,
long-term disability and 401(k). Polo administers these benefits and the
Company's employees are permitted to participate. The Company recorded
expenses of approximately $679 and $508 for these benefits for fiscal 2001
and fiscal 2000, respectively.
8. SUBSEQUENT EVENTS
On March 1, 2002, the Company amended its supply agreement dated February
7, 2000 (the "Supply Agreement") between Polo and the Company. Pursuant to
the amendment, the Company may assign and transfer television advertising
spots having a total spot value of up to $7,000 in payment for inventory
supplied by Polo having an equal cost to the Company under the Supply
Agreement. The transferred spots must be running no later than the earlier
of (i) 180 days after the Company uses all of its remaining spot inventory
or (ii) July 31, 2004. The Company has not commenced the assignment and
transfer of television advertising spots.
Also on March 1, 2002, the Company amended its agreement dated February 7,
2000 with Value Vision covering fulfillment services from Value Vision.
The amendment calls for the Company to assign and transfer a certain
portion of its advertising spot inventory having a spot value of up to
$2,100 to Value Vision in exhange for certain fulfillment services equal
to $175 per month. Value Vision commenced providing services under this
amendment immediately upon its execution. Under the amendment, Value
Vision must use all assigned spots no later than December 31, 2004. At
that time any unusued spots will be forfeited. All spots transferred shall
promote Value Vision and/or the Company, its site and/or Polo Ralph Lauren
Products.
******
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