EXHIBIT 99.1
RALPH LAUREN MEDIA, LLC
Financial Statements
As of April 1, 2006 and for the 15 Month Period Ended
April 1, 2006 and
Independent Auditors' Report
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RALPH LAUREN MEDIA, LLC
TABLE OF CONTENTS
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PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF APRIL 1, 2006 AND FOR THE
15 MONTH PERIOD ENDED APRIL 1, 2006
Balance Sheet 2
Statement of Income 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-13
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INDEPENDENT AUDITORS' REPORT
To the Members of Ralph Lauren Media, LLC
We have audited the accompanying balance sheet of Ralph Lauren Media, LLC (the
"Company") as of April 1, 2006 and the related statements of income, partners'
capital, and cash flows for the 15 month period then ended. 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 audit.
We conducted our audit 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 April 1, 2006,
and the results of its operations and its cash flows for the 15 month period
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the financial statements, the Company changed its
fiscal year-end from the Saturday closest to December 31st to the Saturday
closest to March 31st.
As discussed in Note 10, on March 28, 2007, one of the partners of the Company
acquired the equity interest of the other two partners.
DELOITTE & TOUCHE LLP
October 30, 2006
(April 11, 2007 as to Note 10)
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RALPH LAUREN MEDIA, LLC
BALANCE SHEET
APRIL 1, 2006
(IN THOUSANDS)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,804
Accounts receivable 1,737
Related party receivables 98
Inventory 16,793
Other current assets 53
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Total current assets 52,485
PROPERTY AND EQUIPMENT---Net 307
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TOTAL ASSETS $ 52,792
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LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,184
Related party payables 9,100
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Total current liabilities 15,284
PARTNERS' CAPITAL 37,508
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TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 52,792
==================
See accompanying notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF INCOME
15 MONTH PERIOD ENDED APRIL 1, 2006
(IN THOUSANDS)
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NET REVENUES $ 106,216
COST OF GOODS SOLD 35,728
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Gross profit 70,488
OPERATING EXPENSES---
Selling, general and administrative 49,750
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INCOME FROM OPERATIONS 20,738
INTEREST INCOME 680
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NET INCOME $ 21,418
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See accompanying notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF PARTNERS' CAPITAL
15 MONTH PERIOD ENDED APRIL 1, 2006
(IN THOUSANDS)
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POLO RALPH NATIONAL
LAUREN VALUEVISION BROADCASTING
CORPORATION MEDIA, INC. COMPANY, INC. TOTAL
PARTNERS' CAPITAL --
January 1, 2005 $ 7,532 $ (8,426) $ 17,935 $ 17,041
Contribution of services 1,049 1,049
Distribution of capital (1,000) (250) (750) (2,000)
Net income 10,709 2,677 $ 8,032 21,418
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PARTNERS' CAPITAL -
April 1, 2006 $ 18,290 $ (5,999) $ 25,217 $ 37,508
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See accompanying notes to financial statements.
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RALPH LAUREN MEDIA, LLC
STATEMENT OF CASH FLOWS
15 MONTH PERIOD ENDED APRIL 1, 2006
(IN THOUSANDS)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,418
Adjustments to reconcile net income to net cash provided by operating activities:
Services provided by Joint Venture Partners 1,049
Changes in assets and liabilities:
Accounts receivable (558)
Related party receivables 2,989
Inventory (5,658)
Other current assets 25
Accounts payable and accrued expenses (176)
Related party payables 3,440
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Net cash provided by operating activities 22,529
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (307)
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Cash used in investing activities (307)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution of capital (2,000)
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Cash used in financing activities (2,000)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 20,222
CASH AND CASH EQUIVALENTS --- Beginning of period 13,582
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CASH AND CASH EQUIVALENTS --- End of period $ 33,804
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See accompanying notes to financial statements.
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RALPH LAUREN MEDIA, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE 15 MONTH PERIOD ENDED APRIL 1, 2006
(IN THOUSANDS)
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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
Company's first initiative is the Polo.com website, which opened its
virtual doors in November 2000. Polo.com provides entertaining format
and content that promotes and sells the Polo brands.
The Company, which was formed in February 2000, is a 30 year joint
venture between Polo Ralph Lauren Corporation ("Polo") which owns 50%
of the Company, National Broadcasting Company, Inc. ("NBC") which owns
37.5% of the Company, and ValueVision Media, Inc. (formerly
ValueVision International, Inc.) ("ValueVision") which owns 12.5% of
the Company. NBC and ValueVision collectively form the "Media
Partners." The Company's managing board has equal representation from
Polo and the Media Partners. The details are presented in the Joint
Venture agreement dated February 7, 2000.
Polo provides 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 Company's fiscal year end was changed this year. It
is now based on a 12 month fiscal year which ends on the Saturday
nearest to March 31. Previously the fiscal year ended on the Saturday
nearest to December 31. All references to "Fiscal 2006" represent the
15 month fiscal period ended April 1, 2006. This 15 month based
financial statement begins January 1, 2005 and ends April 1, 2006. All
references to "Fiscal 2007" represent the fiscal year ending March 31,
2007. Selected financial information derived from the results of
operations for the three month periods ended April 1, 2006 and April
2, 2005 is as follows:
THREE MONTH PERIOD ENDED
APRIL 1, 2006 APRIL 2, 2005
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Net revenues $20,632 $16,223
Cost of goods sold 7,115 5,961
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Gross profit 13,517 10,262
Operating expenses 9,503 9,055
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Income from operations 4,014 1,207
Interest income 357 17
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Net income $4,371 $1,224
==================================
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BASIS OF PRESENTATION (CONTINUED):
USE OF ESTIMATES-- The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions about future events. These estimates and assumptions
affect amounts of assets, liabilities, revenues and expenses, and the
disclosure of gain and loss contingencies at the date of the
financial statements. The amounts currently estimated by the Company
are subject to change if different assumptions as to the outcome of
future events were made. The Company evaluates its estimates and
judgments on an ongoing basis and predicates those estimates and
judgments on historical experience and on various other factors that
are believed to be reasonable under the circumstances. Management
makes adjustments to its assumptions and judgments when facts and
circumstances dictate. The primary estimates underlying the financial
statements include sales returns and deferred revenue. Actual results
may differ from the estimates used by the Company in preparing the
accompanying financial statements.
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 Company's reserve for sales returns which is included
in accounts payable and accrued expenses is approximately $1.4
million at April 1, 2006. 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 April
1, 2006 was $0.6 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. This 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 $6.8 million in Fiscal 2006.
ADVERTISING COSTS-- In accordance with 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 $5.0 million for Fiscal 2006. There were no
deferred advertising costs recorded as of April 1, 2006.
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 2006.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK-BASED COMPENSATION-- Through the end of fiscal 2006, the
Company used 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, ("APB 25")
and had adopted the disclosure-only provisions of Financial
Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation, as amended by FASB Statement No. 148,
Accounting for Stock-Based Compensation -- Transition and Disclosure
("FAS 123"). Accordingly, no compensation cost has been recognized
for fixed stock option grants issued at fair market value. This is
for the issuance of Polo common stock and restricted stock units,
which is managed by Polo. Had compensation costs for the Company's
stock option grants been determined based on the fair value at the
grant dates of such awards in accordance with FAS 123, the Company's
net income would have been reduced to the pro forma amount as follow:
Net income as reported $21,418
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards (224)
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Pro forma net income $21,194
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For purposes of applying the pro forma disclosure requirements of FAS
123, the fair value of each stock option grant was estimated on the
date of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for all grants in
Fiscal 2006: annual dividend rate of $0.20; expected volatility of
29.1%; risk-free interest rate of 3.66%; and an expected term to
exercise of 5.2 years. In addition, see Note 4 to the Notes to
Financial Statements for a discussion of the adoption of FASB
Statement No. 123R, Share-Based Payment, ("FAS 123R"), effective in
Fiscal 2007, which requires compensation cost to be recognized for
all stock-based compensation awards granted, modified or settled on
or after April 2, 2006.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all
highly liquid investments with an original maturity of three months
or less.
ACCOUNTS RECEIVABLE--The balance represents receivables related to
sales generated from the website through GSI Commerce, Inc ("GSI") a
third-party provider of e-commerce solutions. GSI remits the
collected tender to the Company.
INVENTORY--Inventory, which consists entirely of finished goods, is
valued at the lower of cost or market value as determined on a
weighted-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. Computer equipment
and technology and website development are depreciated using the
straight-line method over their estimated useful lives of up to 3
years when placed in service. Major additions are capitalized, and
repairs and maintenance are charged to operations in the period
incurred. Additions in Fiscal 2006 were not yet put into service at
April 1, 2006.
ACCOUNTING FOR THE CAPITAL CONTRIBUTIONS--The Company records in-kind
contributions from the partners at the partners' carrying value on
their financial statements at the time of contribution. Partner cash
contributions are recorded at the time of contribution.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 expense or benefit has been
recorded by the Company for the period presented.
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 a number of major banks and
financial institutions and investing in high-quality instruments.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued FAS 123R and, in March 2005, the US
Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 107 ("SAB 107"). SAB 107 provides implementation
guidance for companies to use in their adoption of FAS 123R. FAS 123R
supersedes both APB 25, which permitted the use of the
intrinsic-value method in accounting for stock-based compensation,
and FAS 123, which allowed companies applying APB 25 to just disclose
in their financial statements the pro forma effect on net income from
applying the fair-value method of accounting for stock-based
compensation.
Under FAS 123R, all forms of share-based payments to employees,
including stock options, would be treated as compensation and
recognized in the statement of operations based on their fair value
at the date of grant for awards that actually vest. This standard is
effective for awards granted, modified or settled by the Company
beginning on April 2, 2006. The Company has historically accounted
for stock-based compensation under APB 25 and has adopted FAS 123R
effective as of Fiscal 2007 under the modified prospective transition
method. The adoption of FAS 123R did not have a material impact on
its financial statements. This program is managed by Polo and the
cost is allocated to the Company.
In May 2005, the FASB issued Statement No. 154, Accounting Changes
and Error Corrections ("FAS 154"). FAS 154 generally requires that
accounting changes and errors be applied retrospectively. FAS 154 is
effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The adoption of FAS
154 did not have a material impact on its financial statements.
In March 2005, the FASB issued Statement of Financial Accounting
Standards ("SFAS") Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations ("FIN 47"). FIN 47 provides
clarification regarding the timing of liability recognition for legal
obligations associated with the retirement of a tangible long-lived
asset when the timing and/or method of settlement are conditioned on
a future event. The Company adopted the provisions of FIN 47 during
Fiscal 2006. The application of FIN 47 did not have an impact on the
Company's financial statements.
In November 2004, the FASB issued Statement No. 151, Inventory Costs
("FAS 151"). FAS 151 clarifies standards for the treatment of
abnormal amounts of idle facility expense, freight, handling costs
and spoilage. FAS 151 is effective for fiscal years beginning after
June 15, 2005. The adoption of FAS 151 did not have a material effect
on its financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108
("SAB 108"). SAB 108 addresses the process and diversity in practice
of quantifying financial statement misstatements resulting in the
potential build-up of improper amounts on the balance sheet. The
Company will be required to adopt the provisions of SAB 108 in fiscal
year 2007. The Company does not expect the adoption of SAB 108 to
have a material impact on its financial statements.
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RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED):
In March 2006, the FASB issued Statement No. 156, Accounting for
Servicing of Financial Assets ("FAS 156") -- an amendment of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing
liabilities. This statement is effective as of the beginning of an
entity's first fiscal year that begins after September 15, 2006. The
Company believes FAS 156 does not have an impact on its financial
statements.
In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements ("FAS 157"). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements.
This statement applies under other accounting pronouncements that
require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this statement does not
require any new fair value measurements. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. The Company believes FAS 157 does not have an
impact on its financial statements.
In September 2006, the FASB issued Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans
("FAS 158") - an amendment of FASB Statements No. 87, 88, 106, and
132(R). FAS 158 improves financial reporting by requiring an employer
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. This
statement also improves financial reporting by requiring an employer
to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. An employer
without publicly traded equity securities is required to recognize the
funded status of a defined benefit postretirement plan and to provide
the required disclosures as of the end of the fiscal year ending after
June 15, 2007. The Company believes FAS 158 does not have an impact on
its financial statements.
In June 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48") -- an interpretation of FASB Statement No.
109. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with
FAS 109, Accounting for Income Taxes. This interpretation 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. This Interpretation also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition.
This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company believes FIN 48 does not have a
material impact on its financial statements.
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5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses consist of the
following as of April 1, 2006:
Operating expenses $ 1,568
Reserve for sales returns 1,419
Gift cards liability 1,154
Accrued employee costs 1,042
Sales tax payable 389
Deferred revenue 612
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$ 6,184
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6. PARTNERS' CAPITAL
Contributions of services by Polo had a value of $1.0 million in
Fiscal 2006 which were determined on a proportional cost allocation
method. Distributions of capital amounted to $2.0 million in Fiscal
2006, and were allocated in accordance with ownership percentages.
The Company allocates profits and losses to the partners in accordance
with the LLC Agreement. The LLC agreement provides that losses are
first allocated to the partners in a manner to make their partner's
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 partners 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 20,015
options on June 15, 2005 at an exercise price of $43.05 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. This is managed by Polo.
Polo granted 3,400 restricted stock units on June 15, 2005, which are
subject to Polo's satisfaction of performance goals and will vest in
three equal installments on the first three anniversaries of the grant
date through June 15, 2008. Performance-based restricted stock units
also are payable in shares of Polo's common stock and may vest over
(1) a three-year period of time (cliff vesting), subject to the
employee's continuing employment and Polo's 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 employee's
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. The is 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 2006 related to the
restricted stock units and are included in SG&A.
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8. SIGNIFICANT AGREEMENTS
In May 2003, the Company entered into an agreement with Amazon.com
("Amazon") whereby the Company would make its website available
through Amazon.com's internet operations. As part of the arrangement,
a percentage of sales to customers who access Polo.com through the
Amazon.com web portal are paid as a commission to Amazon. Amazon is
also responsible for credit card fees and credit risk on transactions
processed through their operations. The Company began selling through
the Amazon site in October 2003. During Fiscal 2006, the Company
recorded expenses of approximately $0.5 million.
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 with the exception of
sales through Amazon's internet operations as described above. During
Fiscal 2006, the Company recorded expenses of approximately $12.3
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 is based on a calendar year ending
December 31, 2005.
During fiscal 2006, the Company paid royalties of $0.5 million which
are included in SG&A.
INVENTORY--Under the terms of the Supply Agreement, the Company has
the right to purchase its inventory from Polo, its suppliers and its
licensees, at Polo's cost. During Fiscal 2006, the Company purchased
approximately $33.1 million or 74% of its inventory from Polo and its
suppliers, and the remaining 26% 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 Supply 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 Supply Agreement,
subject to certain exclusions. During Fiscal 2006, Polo purchased $3.7
million in unsold inventory from the Company. At April 1, 2006, the
Company had a receivable and a payable due to Polo for inventory and
other services of approximately $0.1 million and $6.9 million,
respectively. These amounts are included in related party receivables
and related party payables in the accompanying balance sheet.
FULFILLMENT--ValueVision provides telemarketing, customer support and
fulfillment operations to the Company based on the agreement entered
on May 18, 2004. For Fiscal 2006, telemarketing, customer support and
fulfillment expenses (inclusive of system expenses) amounted to
approximately $10.6 million and are included in SG&A. The liability
for these services was $2.2 million and is included in related party
payables in the accompanying balance sheet.
ADMINISTRATIVE SERVICES--Polo provides the Company with administrative
services in the way of accounting, treasury, human resources, payroll
services, accounts payable services, office space and utilities, IT
support and legal services. The services Polo provided totaled
approximately $1.0 million for Fiscal 2006 based on a proportional
cost allocation method and are included in SG&A and as a capital
contribution in Polo's capital account. The Company reimburses payroll
and operating expenses which are initially paid by Polo.
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RELATED PARTY TRANSACTIONS (CONTINUED):
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.
During Fiscal 2006, the Company recorded expenses of approximately
$1.1 million for these benefits based on a proportional cost
allocation method.
10. SUBSEQUENT EVENTS
In October 2006, the Company amended its Services Agreement with
ValueVision. The amendment provided for an extension of the term of
the agreement to August 31, 2008, with an option to extend this term
for up to an additional 12 months, required the Company to commit to
minimum order and call center contact volumes, and changed its order
fulfillment pricing from a net order to gross units shipped pricing
structure, among other things.
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 commences upon the
substantial completion of the facility by the lessor which is
anticipated to be in September 2007. During the first year, the fixed
annual rent is approximately $1,264,000 with annual rent increases
over the initial lease term of 1.125%.
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 is now a wholly-owned subsidiary of Polo, and NBC and
ValueVision no longer have any Partners' Capital in the Company. In
connection with the acquisition, the LLC 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.
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