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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------ TO ------------
COMMISSION FILE NO. 0-20243
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VALUEVISION INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-1673770
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6740 SHADY OAK ROAD, EDEN PRAIRIE, MN
"WWW.VVTV.COM" 55344-3433
(Address of Principal Executive Offices) (Zip Code)
612-947-5200
(Registrant's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 24, 2000, 38,517,158 shares of the Registrant's common stock
were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant on such date, based upon the sale price of the
common stock as reported by the Nasdaq Stock Market on April 24, 2000 was
approximately $549,496,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's 2000 fiscal year are incorporated
by reference in Part III of this Form 10-K.
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VALUEVISION INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JANUARY 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
PART II
Item 5. Market For Registrant's Common Equity and Related
Shareholder Matters......................................... 27
Item 6. Selected Financial Data..................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements........................................ 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 77
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 78
Item 11. Executive Compensation...................................... 78
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 78
Item 13. Certain Relationships and Related Transactions.............. 78
PART IV
Item 14. Exhibits, Lists and Reports on Form 8-K..................... 79
SIGNATURES.............................................................. 83
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PART I
ITEM 1. BUSINESS
A. GENERAL
ValueVision International, Inc. ("ValueVision" or the "Company") is an
integrated direct marketing company, which markets its products directly to
consumers through various forms of electronic media. The Company is a Minnesota
corporation with principal and executive offices at 6740 Shady Oak Road, Eden
Prairie, Minnesota 55344-3433. The Company was incorporated in the state of
Minnesota on June 25, 1990 and its fiscal year ends on January 31. Fiscal years
are designated by the calendar year in which the fiscal year ends (i.e., the
Company's fiscal year ended January 31, 2000 shall be referred to as "fiscal
2000").
The Company's principal electronic media activity is its television home
shopping business which uses recognized on-air television home shopping
personalities to market brand name and proprietary and private label consumer
products at competitive or discount prices. The Company's live 24-hour per day
television home shopping programming is distributed primarily through long-term
cable affiliation agreements and the purchase of month-to-month full- and
part-time block lease agreements of cable and broadcast television time. In
addition, the Company distributes its programming through Company-owned low
power television ("LPTV") stations and to satellite dish owners. The Company
also complements its television home shopping business by the sale of
merchandise through its Internet shopping website (www.vvtv.com).
The Company's growing home shopping network and companion Internet shopping
website will be re-branded as SnapTV and SnapTV.com, respectively, as part of a
wide-ranging direct e-commerce strategy the Company is pursuing with NBC
Internet, Inc. ("NBCi"), a subsidiary of the National Broadcasting Company, Inc.
("NBC"). These moves are intended to position SnapTV and NBCi as leaders in the
evolving convergence of television and the Internet, combining the promotional
and selling power of television with the purely digital world of e-commerce.
NBCi is a new entity formed as a result of the merger of Snap! LLC, XOOM.com,
Inc. and several Internet assets of NBC. In mid-1999, the Company founded
ValueVision Interactive, Inc. as a wholly owned subsidiary of the Company, to
manage and develop the Company's Internet e-commerce initiatives using the
SnapTV.com brand, as well as to manage the Company's e-commerce investment
strategies and portfolio.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), was a direct-mail marketer of a broad range of
quality general merchandise which was sold to consumers through direct-mail
catalogs and other direct marketing solicitations. In the second half of fiscal
2000, the Company sold its remaining direct-mail catalog subsidiaries and exited
from the direct marketing catalog business.
Recent Development Since the End of Fiscal 2000
Ralph Lauren Media, LLC, Electronic Commerce Alliance. Effective February
7, 2000, the Company entered into a new electronic commerce strategic alliance
with Polo Ralph Lauren Corporation ("Polo Ralph Lauren"), NBC, NBCi and CNBC.com
LLC ("CNBC") whereby the parties created Ralph Lauren Media, LLC ("Ralph Lauren
Media"), a joint venture formed for the purpose of bringing the Polo Ralph
Lauren American lifestyle experience to consumers via multiple media platforms,
including the Internet, broadcast, cable and print. Each of the members of Ralph
Lauren Media contributes a critical business asset to Ralph Lauren Media in
exchange for which each such member has received an ownership interest in the
venture. See "Strategic Relationships -- Ralph Lauren Media, Electronic Commerce
Alliance" for a detailed discussion of this alliance.
Electronic Media
The Company's principal electronic media activity is its live 24-hour per
day television home shopping network program. The Company's home shopping
network is the third largest television home shopping retailer in the United
States. Through its continuous merchandise-focused television programming, the
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Company sells a wide variety of products and services directly to consumers.
Sales from the Company's television home shopping and companion Internet website
business totaled $250,223,000 and $148,198,000 representing 91% and 73% of net
sales, for fiscal 2000 and 1999, respectively. Products are presented by on-air
television home shopping personalities and viewers who call a toll-free
telephone number and place orders directly with the Company. Orders are taken
primarily by the Company's call center representatives who use the Company's
customized computer processing system, which provides real-time feedback to the
on-air hosts. The Company's television programming is produced at the Company's
Eden Prairie, Minnesota facility and is transmitted nationally via satellite to
cable system operators, broadcast television stations and satellite dish owners.
See "Business Strategy -- Internet Website".
Products and Product Mix. Products sold on the Company's television home
shopping network include jewelry, giftware, collectibles, apparel, electronics,
housewares, seasonal items and other merchandise. The Company devoted a
significant amount of airtime to its higher margin jewelry merchandise during
fiscal 2000 and fiscal 1999. Jewelry accounted for 72% of the programming
airtime during fiscal 2000 and fiscal 1999. Jewelry represents the network's
largest single category of merchandise, representing 74% of television home
shopping net sales in fiscal 2000, 74% of net sales in fiscal 1999 and 60% of
net sales in fiscal 1998. The Company has developed this product group to
include proprietary lines such as New York Collection(TM), Ultimate Ice(TM),
Gems at Large(TM), Treasures D'Italia(TM), Brilliante(TM), Trader Jack(TM),
C-Band(TM), Daywear(TM), Dreams of India(TM) and Illusions(TM) products produced
to ValueVision's specifications or designed exclusively for sale by the Company.
Program Distribution. Since the inception of the Company's television
operations, ValueVision has experienced continued growth in the number of
full-time equivalent ("FTE") subscriber homes, which receive the Company's
programming. As of January 31, 2000, the Company served a total of 33.1 million
cable homes, or 25.0 million FTE's, compared with a total of 21.8 million
subscriber homes, or 14.9 million FTE's as of January 31, 1999. Approximately
17.3 million, 10.6 million and 8.6 million subscriber homes at January 31, 2000,
1999 and 1998, respectively, received the Company's television home shopping
programming on a full-time basis. As of January 31, 2000 and 1999, the Company's
television home shopping programming was carried by 230 cable systems on a
full-time basis and 140 cable systems (106 in fiscal 1999) on a part-time basis.
Homes that receive the Company's television home shopping programming 24 hours
per day are counted as one FTE each and homes that receive the Company's
programming for any period less than 24 hours are counted based upon an analysis
of time of day and day of week. The total number of cable homes that receive the
Company's television home shopping programming represents approximately 34% of
the total number of cable subscribers in the United States.
Satellite Service. The Company's programming is distributed to cable
systems, full and low power television stations and satellite dish owners via a
leased communications satellite transponder. Satellite service may be
interrupted due to a variety of circumstances beyond the Company's control, such
as satellite transponder failure, satellite fuel depletion, governmental action,
preemption by the satellite lessor and service failure. The Company has an
agreement for preemptable immediate back-up satellite service and believes it
could arrange for such back-up service if satellite transmission is interrupted.
However, there can be no assurance that the Company will be able to maintain
such arrangements and the Company may incur substantial additional costs to
enter into new arrangements.
Print Media
From July 1996 to December 1999, the Company was a direct-mail marketer of
a broad range of quality general merchandise, which was sold to consumers
through direct-mail catalogs and other direct marketing solicitations. The
Company's involvement in the print media, direct marketing business was the
result of a series of acquisitions made in fiscal 1997 by VVDM. Sales from the
Company's print media, direct marketing business totaled $24,704,000 and
$55,530,000, representing 9% and 27% of net sales for fiscal 2000 and 1999,
respectively. The decrease in net sales is directly attributable to the decline
in catalog sales resulting from the downsizing and eventual divestiture of the
Company's unprofitable HomeVisions catalog operations in fiscal 1999 and the
divestiture of the Company's remaining direct-mail catalog subsidiaries, Catalog
Ventures, Inc. and Beautiful Images, Inc. in fiscal 2000.
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B. BUSINESS STRATEGY
The Company's primary business strategy is to leverage its core television
home shopping business and its Internet website, www.vvtv.com, positioning the
Company to become a principal player in the evolving convergence and development
of electronic commerce media. The Company's recent strategic alliance with NBC
and GE Equity, along with the strategic alliances of NBCi and other partners,
positions the Company for the future as transactional abilities become
increasingly important in the world of electronic commerce. As convergence of
the television and personal computer continues to evolve, access to electronic
revenue streams, like home shopping through cable and the Internet, are expected
to become extremely valuable. In addition, the Company's strategy entails
leveraging the alliance with NBC to increase the number of FTE's that receive
the Company's television home shopping programming through (i) affiliation
agreements with cable companies, (ii) block lease agreements, and (iii) direct
satellite service agreements. The Company also anticipates growth through
increased penetration to new customers from existing homes served by television
programming through the Company's investment and future expected growth in
direct-to-consumer selling on its Internet shopping website located at
(www.vvtv.com), the sale of airtime to strategic business partners in connection
with the Company's SnapTV initiative and continued expansion of repeat sales to
existing customers.
Cable Affiliation Agreements
As of January 31, 2000, the Company had entered into long-term cable
affiliation agreements with fourteen multiple system operators ("MSO's"), which
require each MSO to offer the Company's television home shopping programming
substantially on a full-time basis to their systems. The aggregate number of
homes served by these fourteen MSO's is approximately 35.9 million, of which
approximately 17.4 million cable homes (16.7 million FTE's) currently receive
the Company's programming. The stated terms of the affiliation agreements range
from three to eight years. Under certain circumstances, the MSO's may cancel the
agreements prior to their expiration. There can be no assurance that such
agreements will not be so terminated, that such termination will not materially
or adversely affect the Company's business or that the Company will be able to
successfully negotiate acceptable terms with respect to any renewal of such
contracts. In addition, these MSO's are also carrying the Company's programming
on an additional 3,205,000 cable homes (1,593,000 FTE's) pursuant to short-term
cable carriage arrangements. The affiliation agreements provide that the Company
will pay each MSO a monthly cable access fee and marketing support payments
based upon the number of homes carrying the Company's television home shopping
programming. Certain of the affiliation agreements also require payment of
one-time initial launch fees, which are capitalized and amortized on a
straight-line basis over the term of the agreements. The Company has plans to
enter into affiliation agreements with other television operators providing for
full-or part-time carriage of the Company's television home shopping
programming.
Cable Block Lease Agreements
The Company currently leases blocks of cable television time from certain
cable operators, typically for one year periods, with thirty-day cancellation
privileges by either party.
General. Commencing in January 1992, the Company began leasing blocks of
cable television time for its programming. On average, the Company's lease
agreements provide for approximately 120 to 140 hours or more of programming
weekly and are generally terminable by either party on thirty days' notice.
Leased Access. Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. See
"Federal Regulation." In 1997, the Federal Communications Commission ("FCC")
issued rules generally limiting cable leased access rates that cable systems can
charge nonaffiliated programmers such as the Company to the "average implicit
fee" received by the cable operator for a channel. See "Federal Regulations."
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Direct Satellite Service Agreements
In July 1999, the Company's programming was launched on the direct-to-home
("DTH") satellite services DIRECTV(TM) and DISH Network(TM). Carriage on DIRECTV
is full-time under a long-term distribution agreement. Carriage on DISH Network
is pre-emptible by the satellite lessor and subject to mutual early termination
rights. Additionally, the Company's programming is broadcast on a part-time
basis to subscribers of the medium-powered satellite service called Primestar,
which has been recently purchased by DIRECTV. As of January 31, 2000, the
Company served a total of approximately 9.8 million DTH homes or 8.6 million FTE
homes.
Sale of Broadcast Television Stations
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI-TV, which served the Washington D.C. market, to Paxson
Communications Corporation ("Paxson") for approximately $30 million in cash and
the receipt of 1,197,892 shares of Paxson common stock valued at $11.92 per
share as determined pursuant to an independent financial appraisal. Under the
terms of the agreement, Paxson paid the Company $20 million in cash upon closing
and was required to pay an additional $10 million to the Company as a result of
the United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. The Company acquired WVVI-TV in March 1994 for $4,850,000. The
pre-tax gain recorded on the sale of the television station was approximately
$38.9 million and was recognized in the second quarter of fiscal 1998.
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE-TV Channel 33, which serves the Seattle, Washington
market, along with two of the Company's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
was payable by the first quarter of fiscal 2000. The Company continues to serve
the Seattle market via its low-power station K58DP-TV, which transmits from
downtown Seattle. The Company acquired KBGE-TV in March 1996 for approximately
$4.6 million. The pre-tax gain recorded on the first installment with respect to
the sale of this television station was approximately $19.8 million and was
recognized in the first quarter of fiscal 1999. On April 12, 1999, the Company
received the contingent payment of $10 million relating to the sale of KBGE-TV
and as a result, the Company recognized a $10 million pre-tax gain, net of
applicable closing fees, in the first quarter of fiscal 2000. The $10 million
contingent payment finalized the agreement between the two companies.
On September 27, 1999, the Company completed the sale of its KVVV-TV
full-power television broadcast station, Channel 33, and K53 FV low-power
station, serving the Houston, Texas market, for a total of $28 million to
Visalia, California-based Pappas Telecasting Companies. The Company acquired
KVVV-TV in March 1994 for approximately $5.8 million. The pre-tax gain recorded
on the sale of the television station was approximately $23.3 million and was
recognized in the third quarter of fiscal 2000.
Must Carry. The Company has achieved increased cable distribution of its
programming under the FCC's must carry rules through mandatory carriage on local
cable systems of full power television stations it has acquired or intends to
acquire. In general, and subject to the right of a cable operator to seek FCC
relief upon a showing of lack of service or coverage or by other factors, the
current must carry rules entitle full power television stations to mandatory
cable carriage of that signal, at no charge, in all cable homes located within
each station's ADI or Designated Market Area ("DMA"), provided that the signal
is of adequate strength and the cable system has must carry designated channels
available. See "Federal Regulation."
Other Methods of Program Distribution
The Company's programming is also broadcast full-time to "C"-band satellite
dish owners and homes via eleven LPTV stations that a subsidiary of the Company
owns. The LPTV stations and satellite dish transmissions were collectively
responsible for less than 10% of the Company's sales in its last fiscal year.
LPTV stations reach a substantially smaller radius of television households than
full power television stations,
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are generally not entitled to must carry rights and are subject to substantial
FCC limitations on their operations.
Internet Website
In April 1997, the Company launched an interactive, retail Internet site
located at www.vvtv.com, which will be rebranded as snaptv.com later this year.
The Internet site provides consumers with the opportunity to view and hear the
live 24-hour per day television home shopping program via the Company's
state-of-the-art webcasting technologies. In addition, there are pure Internet
webcasts of ValueVision programming on the website. The website also provides
viewers with an opportunity to purchase general merchandise offered on the
Company's television home shopping program as well as bid and purchase items on
the auction portion of the website. Although still a small portion of total
sales, Internet sales for the year ended January 31, 2000 increased at a far
greater percentage than television home shopping sales over the year ended
January 31, 1999. The growth trends being realized on the Internet support not
only the continuing emergence of e-commerce, but also the Company's Internet
opportunities, which are both contemporary and complement the Company's base
television home shopping business. As an industry leader in the convergence of
television and Internet, the Company continues to position itself at the
forefront of this technology. This method of program distribution is currently
being more fully developed and, consequently, the Company cannot predict the
impact it will have on future operating results.
At this time, the Company is subject to a number of general business
regulations and laws regarding taxation and online commerce. However, due to the
increasing popularity and use of the Internet and other online services, it is
possible that additional laws and regulations may be adopted with respect to the
Internet or other online services, covering such issues as user privacy,
advertising, pricing, content, copyrights and trademarks, distribution,
taxation, and characteristics and quality of products and services. A moratorium
on Internet taxation is set to expire in October 2001. In April 2000, a federal
advisory commission, formed pursuant to the Internet Tax Freedom Act, submitted
recommendations on Internet taxation issues to Congress, including a
recommendation that the moratorium be extended until 2006. However, these
recommendations were adopted by less than the two-thirds majority of the
commission's members required by the Internet Tax Freedom Act, and a number of
states have opposed them. No prediction can be made as to the outcome of the
commission's recommendations or any future congressional action. Changes in
consumer protection laws also may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or other online services, which could,
in turn, decrease the demand for the Company's products and services and
increase its cost of doing business through the Internet. Moreover, it is not
fully clear how existing laws governing issues such as property ownership, sales
and other taxes, libel and personal privacy would apply to the Internet and
online commerce. In addition, governments in foreign jurisdictions may regulate
the Internet or other online services in such areas as content, privacy, network
security, encryption or distribution. This may affect the Company's ability to
conduct business internationally through its website.
In addition, as the Company's website is available over the Internet in all
states, and as it sells to numerous consumers residing in such states, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state, a requirement that could result in
taxes and penalties for the failure to qualify. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business or the application of
existing laws and regulations to the Internet and other online services could
have an adverse effect on the growth of the Company's business in this area.
C. STRATEGIC RELATIONSHIPS
NBC and GE Equity Strategic Alliance
On March 8, 1999, the Company entered into a strategic alliance with NBC
and GE Capital Equity Investments, Inc. ("GE Equity"). Pursuant to the terms of
the transaction, GE Equity acquired 5,339,500 shares of the Company's Series A
Redeemable Convertible Preferred Stock (the "Preferred Stock"), and
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NBC was issued a warrant to acquire 1,450,000 shares of the Company's Common
Stock (the "Distribution Warrant") under a Distribution and Marketing Agreement
discussed below. The Preferred Stock was sold for aggregate consideration of
$44,265,000 (or approximately $8.29 per share) and the Company will receive an
additional approximately $12.0 million upon exercise of the Distribution
Warrant. In addition, the Company agreed to issue to GE Equity a warrant to
increase its potential aggregate equity stake (together with its affiliates,
including NBC) at the time of exercise to 39.9%. NBC also has the exclusive
right to negotiate on behalf of the Company for the distribution of its
television home shopping service.
INVESTMENT AGREEMENT
Pursuant to the Investment Agreement between the Company and GE Equity
dated March 8, 1999 (as amended, the "Investment Agreement"), the Company sold
to GE Equity the Preferred Stock for an aggregate of $44,265,000. The Preferred
Stock is convertible into an equal number of shares of the Company's Common
Stock, subject to customary anti-dilution adjustments, has a mandatory
redemption on the 10th anniversary of its issuance or upon a "change of control"
at its stated value ($8.29 per share), participates in dividends on the same
basis as the Common Stock and has a liquidation preference over the Common Stock
and any other junior securities. So long as NBC or GE Equity is entitled to
designate a nominee to the Board of Directors (the "Board") of the Company (see
discussion under "Shareholder Agreement" below), the holders of the Preferred
Stock are entitled to a separate class vote on the directors subject to
nomination by NBC and GE Equity. During such period of time, such holders will
not be entitled to vote in the election of any other directors, but will be
entitled to vote on all other matters put before shareholders of the Company.
Consummation of the sale of 3,739,500 shares of the Preferred Stock was
completed on April 15, 1999. Final consummation of the transaction regarding the
sale of the remaining 1,600,000 Preferred Stock shares was completed on June 2,
1999. The Preferred Stock was recorded at fair value on the date of issuance
less issuance costs of $2,850,000. The excess of the redemption value over the
carrying value is being accreted by periodic charges to retained earnings over
the ten-year redemption period.
The Investment Agreement also provided that the Company issue GE Equity the
Investment Warrant. On July 6, 1999, GE Equity exercised the Investment Warrant
and acquired an additional 10,674,000 shares of the Company's Common Stock for
an aggregate of $178,370,000, or $16.71 per share, representing the 45-day
average closing price of the underlying Common Stock ending on the trading day
prior to exercise. Following the exercise of the Investment Warrant, the
combined ownership of the Company by GE Equity and NBC on a fully diluted basis
was approximately 39.9%.
SHAREHOLDER AGREEMENT
Pursuant to the Investment Agreement, the Company and GE Equity entered
into a Shareholder Agreement (the "Shareholder Agreement"), which provides for
certain corporate governance and standstill matters. The Shareholder Agreement
(together with the Certificate of Designation of the Preferred Stock) provides
that GE Equity and NBC will be entitled to designate nominees for an aggregate
of 2 out of 7 board seats so long as their aggregate beneficial ownership is at
least equal to 50% of their initial beneficial ownership, and 1 out of 7 board
seats so long as their aggregate beneficial ownership is at least 10% of the
"adjusted outstanding shares of Common Stock". GE Equity and NBC have also
agreed to vote their shares of Common Stock in favor of the Company's nominees
to the Board in certain circumstances.
All committees of the Board will include a proportional number of directors
nominated by GE Equity and NBC. The Shareholder Agreement also requires the
consent of GE Equity prior to the Company entering into any substantial
agreements with certain restricted parties (broadcast networks and internet
portals in certain limited circumstances, as defined), as well as taking any of
the following actions: (i) issuance of more than 15% of the total voting shares
of the Company in any 12-month period (25% in any 24-month period), (ii) payment
of quarterly dividends in excess of 5% of the Company's market capitalization
(or repurchases and redemption of Common Stock with certain exceptions), (iii)
entry by the Company into any business not ancillary, complementary or
reasonably related to the Company's current business, (iv) acquisitions
(including investments and joint ventures) or dispositions exceeding the greater
of $35.0 million or 10% of the
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Company's total market capitalization, or (v) incurrence of debt exceeding the
greater of $40.0 million or 30% of the Company's total capitalization.
Pursuant to the Shareholder Agreement, so long as GE Equity and NBC have
the right to name at least one nominee to the Board, the Company will provide
them with certain monthly, quarterly and annual financial reports and budgets.
In addition, the Company has agreed not to take actions, which would cause the
Company to be in breach of or default under any of its material contracts (or
otherwise require a consent thereunder) as a result of acquisitions of the
Common Stock by GE Equity or NBC. The Company is also prohibited from taking any
action that would cause any ownership interest of certain FCC regulated entities
from being attributable to GE Equity, NBC or their affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the Shareholder Agreement), and with certain limited exceptions, GE
Equity and NBC shall be prohibited from: (i) any asset/business purchases from
the Company in excess of 10% of the total fair market value of the Company's
assets, (ii) increasing their beneficial ownership above 39.9% of the Company's
shares, (iii) making or in any way participating in any solicitation of proxies,
(iv) depositing any securities of the Company in a voting trust, (v) forming,
joining, or in any way becoming a member of a "13D Group" with respect to any
voting securities of the Company, (vi) arranging any financing for, or providing
any financing commitment specifically for, the purchase of any voting securities
of the Company, (vii) otherwise acting, whether alone or in concert with others,
to seek to propose to the Company any tender or exchange offer, merger, business
combination, restructuring, liquidation, recapitalization or similar transaction
involving the Company, or nominating any person as a director of the Company who
is not nominated by the then incumbent directors, or proposing any matter to be
voted upon by the shareholders of the Company. If during the Standstill Period
any inquiry has been made regarding a "takeover transaction" or "change in
control" which has not been rejected by the Board, or the Board pursues such a
transaction, or engages in negotiations or provides information to a third party
and the Board has not resolved to terminate such discussions, then GE Equity or
NBC may propose to the Company a tender offer or business combination proposal.
In addition, unless GE Equity and NBC beneficially own less than 5% or more
than 90% of the adjusted outstanding shares of Common Stock, GE Equity and NBC
shall not sell, transfer or otherwise dispose of any securities of the Company
except for transfers: (i) to certain affiliates who agree to be bound by the
provisions of the Shareholder Agreement, (ii) which have been consented to by
the Company, (iii) pursuant to a third party tender offer, provided that no
shares of Common Stock may be transferred pursuant to this clause (iii) to the
extent such shares were acquired upon exercise of the Investment Warrant on or
after the date of commencement of such third party tender offer or the public
announcement by the offeror thereof or that such offeror intends to commence
such third party tender offer, (iv) pursuant to a merger, consolidation or
reorganization to which the Company is a party, (v) in a bona fide public
distribution or bona fide underwritten public offering, (vi) pursuant to Rule
144 of the Securities Act of 1933, as amended (the "Securities Act"), or (vii)
in a private sale or pursuant to Rule 144A of the Securities Act; provided that,
in the case of any transfer pursuant to clause (v) or (vii), such transfer does
not result in, to the knowledge of the transferor after reasonable inquiry, any
other person acquiring, after giving effect to such transfer, beneficial
ownership, individually or in the aggregate with such person's affiliates, of
more than 10% of the adjusted outstanding shares of the Common Stock.
The Standstill Period will terminate on the earliest to occur of (i) the 10
year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), and (v) six months after GE Equity and NBC can
no longer designate any nominees to the Board. Following the expiration of the
Standstill Period pursuant to clause (i) or (v) above (indefinitely in the case
of clause (i) and two years in the case of clause (v)), GE Equity and NBC's
beneficial ownership position may not exceed 39.9% of the Company on
fully-diluted outstanding stock, except pursuant to issuance or exercise of any
warrants or pursuant to a 100% tender offer for the Company.
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REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, ValueVision and GE Equity entered
into a Registration Rights Agreement providing GE Equity, NBC and their
affiliates and any transferees and assigns, an aggregate of four demand
registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company entered into the Distribution and Marketing Agreement
dated March 8, 1999 (the "Distribution Agreement") which provides that NBC shall
have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television programming service. The agreement
has a 10-year term and NBC has committed to delivering an additional 10 million
FTE subscribers over the first 42 months of the term. In compensation for such
services, the Company will pay NBC an annual fee of $1.5 million (increasing no
more than 5% annually) and issue NBC the Distribution Warrant. The exercise
price of the Distribution Warrant is approximately $8.29 per share. Of the
aggregate 1,450,000 shares subject to the Distribution Warrant, 200,000 shares
vested immediately, with the remainder vesting 125,000 shares annually over the
10-year term of the Distribution Agreement. The Distribution Warrant is
exercisable for five years after vesting. The value assigned to the Distribution
Agreement and Distribution Warrant of $6,931,000 was determined pursuant to an
independent appraisal and is being amortized on a straight-line basis over the
term of the agreement. Assuming certain performance criteria above the 10
million FTE homes are met, NBC will be entitled to additional warrants to
acquire Common Stock at the then current market price. The Company has a right
to terminate the Distribution Agreement after the twenty-fourth, thirty-sixth
and forty-second month anniversary if NBC is unable to meet the performance
targets. If terminated by the Company in such circumstance, the unvested portion
of the Distribution Warrant will expire. In addition, the Company will be
entitled to a $2.5 million payment from NBC if the Company terminates the
Distribution Agreement as a result of NBC's failure to meet the 24-month
performance target.
NBC may terminate the Distribution Agreement if the Company enters into
certain "significant affiliation" agreements or a transaction resulting in a
"change of control."
LETTER AGREEMENT
The Company, GE Equity and NBC have also entered into a non-binding letter
of intent dated March 8, 1999 providing for certain cooperative business
activities which the parties contemplate pursuing, including but not limited to,
development of a private label credit card, development of electronic commerce
and other internet strategies, development of programming concepts for the
Company and cross channel promotion.
NBCi Re-branding and Electronic Commerce Alliance
Effective September 13, 1999, the Company entered into a new strategic
alliance with Snap! LLC ("Snap") and Xoom.com, Inc. ("Xoom") whereby the parties
entered into major re-branding and e-commerce agreements, spanning television
home shopping, Internet shopping and direct e-commerce initiatives. Under the
terms of the agreements, the Company's television home shopping network,
currently called ValueVision, will be re-branded as SnapTV. The re-branding will
be phased in during the latter half of fiscal 2001. The network, which will
continue to be owned and operated by the Company, will continue to feature its
present product line as well as offer new categories of products and brands. The
Company, along with Snap.com, NBC's Internet portal services company, will
roll-out a new companion Internet shopping service, SnapTV.com featuring online
purchasing opportunities that spotlight products offered on-air along with
online-only e-commerce opportunities offered by Snap TV and its merchant
partners. The new SnapTV.com online store will be owned and operated by the
Company and featured prominently within SnapTV.com's shopping area. Xoom.com, a
leading direct e-commerce services company, will become the exclusive direct
e-commerce partner for SnapTV, managing all such initiatives, including database
management, e-mail marketing and other sales endeavors. Direct online shopping
offers will include SnapTV merchandise, as well as Xoom.com products and
services. Pursuant to this new strategic alliance, the following agreements were
executed:
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TRADEMARK LICENSE AGREEMENT
Snap and the Company entered into a ten-year Trademark License Agreement
dated as of September 13, 1999 (the "Trademark Agreement"). Pursuant to the
agreement, Snap granted the Company an exclusive license to Snap's "SnapTV"
trademark (the "SnapTV Mark") for the purpose of operating a television home
shopping service and for the purpose of operating an Internet website at
"www.snaptv.com" (the "SnapTV Site"). The agreement also obligates the Company
to rebrand its television home shopping service using the SnapTV Mark. In
compensation for the license, the Company will pay to Snap a royalty of 2% of
revenues received from Internet users in connection with commerce transactions
on the SnapTV Site.
INTERACTIVE PROMOTION AGREEMENT
Snap, Xoom and the Company entered into a ten-year Interactive Promotion
Agreement dated as of September 13, 1999 (the "Interactive Promotion
Agreement"). Pursuant to the agreement: (a) the Company will pay Snap or Xoom,
as applicable, 20% of the gross revenue received from advertising on the
Company's television home shopping service where Snap or Xoom referred the
advertiser to the Company or materially assisted the Company with respect to the
sale of such advertising; (b) the Company will pay Xoom 50% of the gross revenue
received from e-mail campaigns conducted by Xoom on behalf of the Company for
the Company's products; and (c) the Company will pay Snap 20% of the gross
revenue generated from airtime on the Company's television home shopping service
which promotes any uniform resource locater ("URL") (excluding up to 15% of such
airtime to the extent used to promote URLs which do not include the
"www.snaptv.com" URL). Also under the agreement, Snap and Xoom shall have an
exclusive right to use the Company's user data for the purpose of conducting
e-mail marketing campaigns. Snap or Xoom, as applicable, will pay the Company
50% of the gross revenue generated from such campaigns. Snap will also be
granted the exclusive right to use or sell all Internet advertising on the
SnapTV Site, and Snap will pay the Company 50% of the gross revenue generated
from such use or sales. The agreement also provides that Snap and the Company
will provide certain cross-promotional activities. Specifically, commencing when
the Company's television home shopping program reaches 30 million full-time
equivalent subscribers and continuing through the fourth anniversary of the
effective date of the agreement, Snap will spend $1 million per quarter
promoting the SnapTV Mark on NBC's television network, and the Company will
spend $1 million per quarter promoting Snap, Snap's products or "www.snaptv.com"
on cable television advertising other than on the Company's television home
shopping program.
WARRANT PURCHASE AGREEMENT AND WARRANTS
Effective September 13, 1999, in connection with the transactions
contemplated under the Interactive Promotion Agreement, the Company issued a
warrant (the "ValueVision Warrant") to Xoom to acquire 404,760 shares of the
Company's Common Stock at an exercise price of $24.706 per share. In
consideration, Xoom issued a warrant (the "Xoom Warrant," and collectively with
the ValueVision Warrant, the "Warrants") to the Company to acquire 244,004
shares of Xoom's common stock, $.0001 par value, at an exercise price of $40.983
per share. Both Warrants are subject to customary anti-dilution features and
have a five-year term. Effective November 24, 1999, Xoom and Snap, along with
several Internet assets of NBC, were merged into NBCi and, as a result, the Xoom
Warrant is deemed converted to the right to purchase shares of Class A Common
Stock of NBCi.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the ValueVision Warrant to Xoom, the
Company agreed to provide Xoom certain customary piggyback registration rights
with no demand registration rights. Xoom also provided the Company with similar
customary piggyback registration rights with no demand registration rights with
respect to the Xoom Warrant.
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Polo Ralph Lauren/Ralph Lauren Media Electronic Commerce Alliance
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren, NBC, NBCi and CNBC whereby
the parties created Ralph Lauren Media, a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for their interest in Ralph
Lauren Media, NBC agreed to contribute $110 million of television and online
advertising on NBC and CNBC properties, NBCi agreed to contribute $40 million in
online distribution and promotion and the Company has contributed a cash funding
commitment of up to $50 million. Ralph Lauren Media's premier initiative will be
Polo.com, an internet web site dedicated to the American lifestyle that will
include original content, commerce and a strong community component. Polo.com is
expected to launch in the third quarter of fiscal 2001 and will initially
include an assortment of men's, women's and children's products across the Ralph
Lauren family of brands as well as unique gift items. Polo.com will also receive
anchor-shopping tenancies on NBCi's Snap portal service. In connection with the
formation of Ralph Lauren Media, the Company entered into various agreements
setting forth the manner in which certain aspects of the business of Ralph
Lauren Media are to be managed and certain of the members' rights, duties and
obligations with respect to Ralph Lauren Media, including the following:
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF RALPH LAUREN MEDIA
Each of Polo Ralph Lauren, NBC, NBCi, CNBC and the Company executed the
Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"),
pursuant to which certain terms and conditions regarding operations of Ralph
Lauren Media and certain rights and obligations of its members are set forth,
including but not limited to: (a) certain customary demand and piggyback
registration rights with respect to equity of Ralph Lauren Media held by the
members after its initial public offering, if any; (b) procedures for resolving
deadlocks among managers or members of Ralph Lauren Media; (c) rights of each of
Polo Ralph Lauren on the one hand and NBC, the Company, NBCi and CNBC, on the
other hand, to purchase or sell, as the case may be, all of their membership
interests in Ralph Lauren Media to the other in the event of certain material
deadlocks and certain changes of control of either Polo Ralph Lauren and/or its
affiliates or NBC or certain of its affiliates, at a price and on terms and
conditions set forth in the agreement; (d) rights of Polo Ralph Lauren to
purchase all of the outstanding membership interests of Ralph Lauren Media from
and after its 12th anniversary, at a price and on terms and conditions set forth
in the agreement; (e) rights of certain of the members to require Ralph Lauren
Media to consummate an initial public offering of securities; (f) restrictions
on Polo Ralph Lauren from participating in the business of Ralph Lauren Media
under certain circumstances; (g) number and composition of the management
committee of Ralph Lauren Media, and certain voting requirements; (h)
composition and duties of officers of Ralph Lauren Media; (i) requirements
regarding meetings of members and voting requirements; (j) management of capital
contributions and capital accounts; (k) provisions governing allocations of
profits and losses and distributions to members; (l) tax matters; (m)
restrictions on transfers of membership interests; (n) rights and
responsibilities of the members in connection with the dissolution, liquidation
or winding up of Ralph Lauren Media; and (o) certain other customary
miscellaneous provisions.
AGREEMENT FOR SERVICES
Ralph Lauren Media and VVI Fulfillment Center, Inc., a Minnesota
corporation and wholly owned subsidiary of the Company ("VVIFC"), entered into
an Agreement for Services under which VVIFC agreed to provide to Ralph Lauren
Media certain telemarketing services, order and record services, and merchandise
and warehouse services. The telemarketing services to be provided by VVIFC
consist of receiving and processing telephone orders and telephone inquiries
regarding merchandise, and developing and maintaining a related telemarketing
system. The order and record services to be provided by VVIFC consist of
receiving and processing orders for merchandise by telephone, mail, facsimile
and electronic mail, providing records of such orders and related
customer-service functions, and developing and maintaining a records system for
such purposes. The merchandise and warehouse services consist of receiving and
shipping merchandise, providing
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warehousing functions and merchandise management functions and developing a
system for such purposes. The term of this agreement continues until June 30,
2010, subject to renewal periods, under certain conditions, of one year each.
D. MARKETING AND MERCHANDISING
Electronic Media
The Company's television revenues are generated from sales of merchandise
and services offered through its television home shopping programming.
ValueVision's programming features recognizable on-air television home shopping
network personalities, many of whom have built a following on other home
shopping programs. The sales environment is friendly and informal. As a part of
its programming, the Company provides live, on-air telephone interaction between
the on-air host and customers. Such customer testimonials give credibility to
the products and provide entertainment value for the viewers.
The Company's television home shopping business utilizes live television 24
hours a day, seven days a week, to create an interactive and entertaining
atmosphere to effectively describe and demonstrate the Company's merchandise.
Selected customers participate through live conversations with on-air hosts and
occasional celebrity guests. The Company believes its customers make purchases
based primarily on convenience and quality of merchandise.
The Company produces targeted, themed, and general merchandise programs, in
studio, including Gems En Vogue, The Coin Collector, Weight Perfect, Italian
Romance, The Computer Store, Electronics Today, The New York Collection,
Brilliante, Ultimate Ice, It's About Time, Gems at Large and others. The Company
supplements its studio programming with occasional live on-location programs,
which in the last year included shows from the New York garment district and the
gold producing region of Arezzo, Italy. The Company believes that its customers
are primarily women between the ages of 35 and 55, with household income of
approximately $35,000 to $45,000. The typical viewer is from a household with a
professional or managerial primary wage earner. ValueVision schedules its
special segments at different times of the day and week to appeal to specific
viewer and customer profiles. The Company also produces special theme programs
for events such as Father's Day, Mother's Day, and Valentine's Day. The Company
features frequent and occasionally unannounced, special bargain, discount and
inventory-clearance sales in order to, among other reasons, encourage customer
loyalty or add new customers.
In addition to the Company's daily produced television home shopping
programming, the Company may from time-to-time test other types of strategies,
including localized home shopping programming in conjunction with retailers and
other catalogers. The Company may seek to enter into joint ventures,
acquisitions, or similar arrangements with other consumer merchandising
companies, e-commerce and other television home shopping companies, television
stations, networks, or programmers to complement or expand the Company's
television home shopping business. Most of the Company's cable lease and
affiliation agreements provide for cross channel 30-second promotional spots.
The Company purchases advertising time on other cable channels to advertise
specialty shows and other special promotions. The Company prominently features
its on-air hosts in advertising and promotion of its programming.
The Company's television home shopping merchandise is generally offered at
or below retail prices. Jewelry accounted for approximately 74% of the Company's
television home shopping net sales in fiscal 2000 and fiscal 1999 and 60% in
fiscal 1998. Giftware, collectibles and related merchandise, apparel,
electronics, housewares, seasonal items and other merchandise comprise the
remaining sales. The Company continually introduces new items with additional
merchandise selection chosen from available inventories of previously featured
products. Inventory sources include manufacturers, wholesalers, distributors,
and importers.
ValueVision has also developed several lines of private label merchandise
that are targeted to its viewer/customer preferences, including Brilliante(TM),
C-Band(TM), Day Wear(TM), Dreams of India(TM), Illusions(TM), New York
Collection(TM) and Gems at Large(TM). The Company intends to continue to promote
private label merchandise, which generally has higher than average margins. The
Company also may negotiate with
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celebrities, including television, motion picture and sports stars, for the
right to develop various licensed products and merchandising programs which may
include occasional on-air appearances by the celebrity.
The Company transmits daily programming instantaneously to cable operators,
full and low power television stations, and satellite dish owners by means of a
communications satellite. In March 1994, the Company entered into a 12-year
satellite lease on a new Hughes Communication cable programming satellite-
offering transponders to the cable programming industry, including the Company.
Under certain circumstances, the Company's transponder could be preempted. The
Company has an agreement for immediate back-up satellite service if satellite
transmission is interrupted. However, there can be no assurance that the Company
will be able to continue transmission of its programming in the event of
satellite transmission failure, and the Company may incur substantial additional
costs to enter into new back-up service arrangements.
Favorable Purchasing Terms
The Company obtains products for its electronic direct marketing businesses
from domestic and foreign manufacturers and is often able to make purchases on
favorable terms based on the volume of transactions. Many of the Company's
purchasing arrangements with its television home shopping vendors include
inventory terms which allow for return privileges or stock balancing. The
Company is not dependent upon any one supplier for a significant portion of its
inventory.
E. ORDER ENTRY, FULFILLMENT AND CUSTOMER SERVICE
Products offered through all of the Company's selling mediums are available
for purchase via toll-free "800" telephone numbers. In fiscal 2000, the Company
entered into an agreement with West Teleservices Corporation to provide the
Company with telephone order entry operators and automated voice response
systems for the taking of television home shopping customer orders. West
Teleservices Corporation provides teleservices to the Company from two service
sites located in Baton Rouge, Louisiana and Tulsa, Oklahoma. The facilities
provide call representatives that exclusively handle the Company's order calls
on the Company's on-line order entry, fulfillment computer system. The order
response and fulfillment system currently has 140 dedicated agent stations and
428 voice response ports with the ability to expand capacity within 30 days.
Currently, approximately 30-40% of all telephone orders are completed in the
voice response system. The Company's systems display up-to-the-second data on
the volume of incoming calls, the number of call center representatives on duty,
the number of calls being handled and the number of incoming calls, if any,
waiting for available call center representatives. The fulfillment systems
automatically report and update available merchandise quantities as customers
place orders and stock is depleted. The Company's computerized systems handle
customer order entry, order fulfillment, customer service, merchandise
purchasing, on-air scheduling, warehousing, customer record keeping and
inventory control. The Company maintains back-up power supply systems to ensure
that interruptions to the Company's operations due to electrical power outages
are minimized.
In fiscal 1997, the Company purchased a 262,000 square foot distribution
facility in Bowling Green, Kentucky which, until recently, was being used in
connection with the fulfillment operations of its HomeVisions catalog operations
and for the non-jewelry merchandise segment of the Company's television home
shopping business. The Company currently plans to use the Bowling Green,
Kentucky distribution facility, after certain capital improvements have been
made, to fulfill its service obligations under the service agreements with Ralph
Lauren Media.
The majority of customer purchases are paid by credit card. In November
1998, the Company initiated a "Direct Check" program for customers who wish to
pay by personal check. Under the program, customer payment information is taken
online and processed electronically. The Company does not offer C.O.D. terms to
customers. In fiscal 1995, the Company introduced an installment payment program
called ValuePay, which entitles television home shopping customers to purchase
merchandise and pay for the merchandise in two to six equal successive monthly
installments. The Company intends to continue to sell merchandise using the
ValuePay program.
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Merchandise is shipped to customers via the United States Postal Service
and United Parcel Service, which generally results in delivery to the customer
within seven to ten days after an order is received. The United States Postal
Service and United Parcel Service pick up merchandise directly at the Company's
distribution center. Orders are generally shipped to customers within 48 hours
after the order is placed. The Company also offers Express Mail delivery via the
United States Postal Service upon request. The Company also has arrangements
with certain vendors who ship merchandise directly to its customers after an
approved customer order is processed.
The Company's Customer Service departments handle customer inquiries, most
of which consist of inquiries with respect to the status of pending orders or
returns of merchandise. The customer service representatives are on-line with
the Company's computerized order response and fulfillment systems. Being on-line
permits access to a customer's purchase history while on the phone with the
customer, thus enabling most inquiries and requests to be promptly resolved. The
Company considers its order entry, fulfillment and customer service functions as
particularly important functions positioned with open capacity to enable it to
accommodate future growth. The Company designs all aspects of its infrastructure
to meet the needs of the customer and to accommodate future expansion.
The Company's television home shopping return policy allows a standard
30-day refund period for all customer purchases. The Company's return rates on
its television sales have been approximately 27% to 30% over the past three
fiscal years, which is slightly higher than the reported historical industry
average of approximately 24% to 26%. Management attributes the higher return
rate in part to the fact that it generally maintains higher than average unit
price points of approximately $124 in fiscal 2000 ($93 in fiscal 1999).
Management believes that the higher return rate is acceptable, given the higher
net sales generated and the Company's ability to quickly process returned
merchandise at relatively low cost.
F. COMPETITION
The direct marketing and retail businesses are highly competitive. In its
television home shopping and Internet (e-commerce) operations, the Company
competes for consumer expenditures with other forms of retail businesses,
including department, discount, warehouse and specialty stores, other mail
order, catalog and television home shopping companies and other direct sellers.
The Company also competes with retailers involved with the evolving
convergence and development of electronic commerce mediums as well as other
retailers who sell and market their products through the highly competitive
Internet medium. The number of companies providing these types of services over
the Internet is large and increasing at a rapid rate. The Company expects that
additional companies, including media companies and conventional retailers that
to date have not had a substantial commercial presence on the Internet, will
offer services that directly compete with the Company. In addition, as the use
of the Internet and other online services increases, larger, well-established
and well-financed entities may continue to acquire, invest in or form joint
ventures with providers of e-commerce and direct marketing solutions, and
existing providers of e-commerce and direct marketing solutions may continue to
consolidate.
The television home shopping industry is highly competitive and is
dominated by two companies, QVC Network, Inc. ("QVC") and HSN, Inc. (formerly
known as Home Shopping Network, Inc. ("HSN")). The Company believes that the
home shopping industry is attractive to consumers, cable companies,
manufacturers and retailers. The industry offers consumers convenience, value
and entertainment, and offers manufacturers and retailers an opportunity to
test-market new products, increase brand awareness and access additional
channels of distribution. The Company believes the industry is well positioned
to compete with other forms of cable programming for cable air time as home
shopping networks compensate cable television operators, whereas other forms of
cable programming receive compensation from cable operators for carriage. The
Company competes for cable distribution with all other programmers, including
other television home shopping networks such as Shop at Home, Inc. ("SATH"), QVC
and HSN. The Company currently competes for viewership and sales with SATH, QVC
and HSN, in virtually all of its markets. The Company is at a competitive
disadvantage in attracting viewers due to the fact that the Company's
programming is not
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carried full time in approximately one-half of its markets, and that the Company
may have less desirable cable channels in many markets.
The Company expects increasing competition for viewers/customers and for
experienced home shopping personnel from major cable systems, television
networks, e-commerce and other retailers that may seek to enter television home
shopping. The continued evolution and consolidation of retailers on the
Internet, together with strategic alliances being formed by other television
home shopping networks and Internet companies, will also result in increased
competition. The Company will also compete to lease cable television time and
enter into cable affiliation agreements. Entry and ultimate success in the
television home shopping industry is dependent upon several key factors, the
most significant of which is obtaining carriage on cable systems reaching an
adequate number of subscribers. The Company believes that the number of new
entrants into the television home shopping industry will continue to increase.
The Company believes that it is strategically positioned to compete because of
its established relationships with cable operators and its new strategic
relationship with NBC and GE Equity pursuant to which NBC will provide the
Company with cable affiliation and distribution services. No assurance can be
given however, that the Company will be able to acquire cable carriage at prices
favorable to the Company.
New technological and regulatory developments also may increase competition
and the Company's costs. The FCC has adopted rules for digital television
("DTV") that will allow full power television stations to broadcast multiple
channels of digital data simultaneously on the bandwidth presently used by one
normal analog channel. FCC rules allow broadcasters to use this additional
capacity to provide conventional programming, including home shopping
programming, as well as ancillary or supplemental services, including
interactive data transfer. The FCC has determined to charge a fee for the
provision of ancillary or supplemental services, but not for traditional home
shopping programming. See "Federal Regulation". Every full power television
station in operation has been assigned an additional channel on which to
broadcast DTV until analog transmissions are terminated. In addition, as of
December 1999, three direct broadcast satellite ("DBS") systems were
transmitting programming to subscribers and one additional company had been
issued licenses to provide DBS service. As of June 1999, there were more than 10
million DBS subscribers. Congress has authorized DBS operators to provide access
to broadcast television stations in their local markets, and DBS equipment
prices and other "up-front costs", such as installation, continue to decline
significantly. Furthermore, satellite master antenna television systems
("SMATV") have begun to deliver video programming to multiple dwelling units.
SMATV systems receive and process satellite signals at on-site facilities and
then distribute the programming to individual units. It is estimated that as of
June 1999, there were approximately 1.5 million SMATV residential subscribers.
Additionally, a number of telephone companies have acquired cable franchises,
and one local exchange carrier is using very high-speed digital subscriber line
technology to deliver video programming, high-speed Internet access, and
telephone service over existing copper telephone lines in Phoenix, Arizona. The
FCC has also certified 13 operators to offer open video systems ("OVS") in order
to provide video programming to customers. Currently, only three OVS systems are
operating. Finally, in 1996, the FCC completed auctions for authorizations to
provide multichannel multipoint distribution services ("MMDS"), also known as
wireless cable, using Multipoint Distribution Service ("MDS") and leased excess
capacity on Instructional Television Fixed Service ("ITFS") channels. In June
1999, there were approximately 821,000 MMDS subscribers.
Many of the Company's competitors are larger and more diversified than the
Company, or have greater financial, marketing, merchandising and distribution
resources. Therefore, the Company cannot predict the degree of success with
which it will meet competition in the future.
G. FEDERAL REGULATION
In the cable television industry, the acquisition, ownership and operation
of full and low power television stations and the broadcasting industry in
general are subject to extensive regulation by the FCC. The following does not
purport to be a complete summary of all of the provisions of the Communications
Act of 1934, as amended (the "Communications Act"), the Cable Television
Consumer Protection Act of 1992 (the "Cable Act"), the Telecommunications Act of
1996 (the "Telecommunications Act") or the FCC rules or policies that may affect
the operations of the Company. Reference is made to the Communications Act, the
Cable
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Act, the Telecommunications Act and regulations and public notices promulgated
by the FCC for further information. The laws and regulations affecting the
industries are subject to change, including through pending proposals. There can
be no assurance that laws, rules or policies that may have an adverse effect on
the Company will not be enacted or promulgated at some future date.
Cable Television
The cable industry is regulated by the FCC under the Cable Act and FCC
regulations promulgated thereunder.
Leased Access. Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. Little
use has been made of leased access because of the prohibitively high lease rates
charged by cable systems. The Cable Act directs the FCC to establish procedures
to regulate the rates, terms and conditions of cable time leases so as to
encourage leased access.
The FCC released its most recent revisions to these rules in February 1997.
These revisions capped rates at the "average implicit fee" for a channel on a
cable system, which is the difference between the average subscriber charge for
a channel and the average license fee the cable operator pays to carry
programming. It is unclear whether or to what extent the revised rules will
affect the maximum lease rates that the Company must pay for carriage in any
particular case. The Company's limited experience has been that the rates remain
largely unaffordable, although the rules do permit cable operators to charge
less than the maximum rates. The FCC also established rules governing the
process of negotiating for carriage, making other changes to the terms and
conditions of leased access carriage and making it easier for programmers like
the Company to lease channels for less than a full 24-hour day.
The FCC has left open the question of whether video content transmitted
over the Internet qualifies as video programming for purposes of the leased
access requirements. However, the FCC recently concluded that Internet service
providers (ISPs) are not eligible to obtain leased access channel capacity for
purposes other than providing video programming.
Must Carry. In general, the FCC's current "must carry" rules under the
Cable Act entitle full power television stations to mandatory cable carriage of
their signals, at no charge, to all cable homes located within each station's
ADI provided that the signal is of adequate strength, and the cable system has
"must carry" designated channels available. In March 1997, the Supreme Court
upheld in their entirety the "must carry" provisions applicable to full power
television stations. The scope of "must carry" rights for future broadcast
transmissions of digital television ("DTV") stations is as yet uncertain. In
July 1998, the FCC began a proceeding to determine such rights. No prediction
can be made as to the outcome of this proceeding, which is not anticipated until
later this year. The FCC has also been asked to reevaluate its July 1993
extension of "must carry" rights to predominantly home shopping television
stations. It has yet to act on that request, and there can be no assurance that
home shopping television stations will continue to have "must carry" rights. In
addition, under the Cable Act, cable systems may petition the FCC to determine
that a station is ineligible for "must carry" rights because of such station's
lack of service to the community, its previous noncarriage, or other factors. An
important factor considered by the FCC in its evaluation of such petitions is
whether a given station places "Grade B" coverage over the community in
question. The unavailability of "must carry" rights to the Company's existing or
future stations would likely substantially reduce the number of cable homes that
could be reached by any full power television station that the Company may
acquire or on which it might provide programming.
Closed Captioning. FCC rules require television stations, cable systems and
other video programming providers to phase in closed captioning for new
programming over an eight-year period beginning January 2000, in order to make
such programming accessible to the hearing impaired. Home shopping programming
is not exempt from these requirements, which could substantially increase the
Company's television programming expenses. The FCC has indicated that
programmers, cable operators and TV stations can petition the FCC for an
exemption for programming if complying with the closed captioning requirements
would impose an undue burden, and Home Shopping Network has requested such an
exemption. The request has been opposed and the Company cannot predict whether
the FCC will grant such requests.
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Full Power Television Stations
General. The Company's acquisition and operation of full power television
stations are subject to FCC regulation under the Communications Act. The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC. The statute empowers the FCC, among
other things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and impose
penalties for violation of such regulations.
The Company and its subsidiaries currently have pending before the FCC
applications for construction permits for full power television stations in
Destin, Florida, and Des Moines, Iowa. In each case, these applications are the
subject of mutually exclusive applications, and thus to the possibility of an
FCC auction at which the licenses will be awarded to the highest bidder. Both of
these applications originally proposed to operate above channel 59. The FCC has
concluded, however, that it will not authorize new analog full power television
stations on such channels and that applications for stations on these channels
will be dismissed if they are not amended to seek a new channel below channel
60. This decision currently is on appeal, and no prediction can be made as to
the outcome of this litigation. The FCC has established a filing window during
which applicants for channels above channel 59 may jointly propose a single
replacement channel to which all applicants could agree to modify their
applications. That window expires on July 15, 2000. There can be no assurance
that any acceptable channels will be found or that the Company will prevail as
against other applicants for the stations. At this time, the Company has no
plans to apply for or purchase additional full power television stations.
Foreign Ownership. Foreign governments, representatives of foreign
governments, aliens, representatives of aliens, and corporations and
partnerships organized under the laws of a foreign nation are barred from
holding broadcast licenses. Aliens may own up to 20% of the capital stock of a
licensee corporation, or generally up to 25% of a U.S. corporation, which, in
turn, has a controlling interest in a licensee.
Low Power Television Stations
Ownership and operation of LPTV stations are subject to FCC licensing
requirements similar to those applicable to full power television stations. LPTV
stations, however, are generally not eligible for "must carry" rights. Like full
power stations, the transfer of ownership of any LPTV station license requires
prior approval by the FCC. The FCC grants LPTV construction permits for an
initial term of 18 months, which may be extended for one or more six-month terms
if there is substantial progress towards station construction unless completion
of the station is prevented by causes not under the control of the permittee.
LPTV licenses are now issued for terms of eight years.
LPTV is a secondary broadcast service that is not permitted to interfere
with the broadcast signal of any existing or future full power television
station. Construction of a full power television station on the same channel in
the same region could therefore force a LPTV station off the air if such
interference is not corrected, subject to a right to apply for a replacement
channel. LPTV stations must also accept interference from existing and future
full power television stations.
The advent of DTV is expected to disrupt the operations of the Company's
LPTV stations to an as-yet unknown extent. The DTV proceedings have allocated an
additional channel to be used for DTV to every eligible full power television
station in the nation, effectively doubling the number of channels currently
used by full power television stations during the transition period between
analog and digital transmissions. A number of these new DTV stations have been
allocated to channels currently used by LPTV stations. Construction of these
newly authorized DTV stations will therefore force many LPTV stations off the
air unless they can find substitute channels. It is not known at this time
whether all or some of these "displaced" LPTV stations will be able to modify
their broadcast channel and continue operations.
Three of the Company's LPTV stations are currently licensed to UHF channels
between 60 and 69. Pursuant to a 1997 law requiring it to do so, the FCC has
determined that no low power (or full power) television stations will be
permitted to operate on these channels following the transition to DTV, which is
now
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not scheduled to be completed until 2006 at the earliest. Two of the Company's
LPTV stations are currently licensed to UHF channels between 52 and 59. The FCC
also intends to reallocate these channels to other uses at the end of the DTV
transition. While the FCC has permitted LPTV stations operating on these
channels to relocate to other channels when available, there can be no assurance
that these five of the Company's stations will be able to find suitable
alternate channels.
In November 1999, Congress enacted the Community Broadcasters Protection
Act, which required the FCC to adopt regulations under which certain LPTV
licensees may apply for a Class A television license. Unlike existing LPTV
licensees, which are accorded secondary status compared to full power television
licensees, Class A licensees will be accorded protection from certain future
changes to full power facilities (both analog and digital) so long as they
continue to meet the requirements for eligibility set forth in the statute and
FCC rules. Licensees qualifying for Class A status generally will be subject to
the same regulatory obligations as full power television licensees, including
children's television, other programming, and main studio requirements. In April
2000, the FCC released rules establishing specific eligibility and application
requirements for LPTV licensees seeking Class A status. Although these rules are
subject to further administrative and judicial review, they generally limit
eligibility for Class A status to those stations that previously have provided
locally produced programming, and continue to do so. While the Company's two
LPTV stations licensed to Minneapolis may meet this requirement, the others do
not appear to do so. Only LPTV applicants that meet the FCC's eligibility
criteria will be granted Class A licenses. There can be no guarantees that the
Company will obtain Class A licenses with respect to any of its LPTV stations,
should it seek Class A status. No Class A licenses may be issued to any of the
Company's five LPTV stations on channels 52-69 unless they are first able to
relocate to lower channels. As noted above, there can be no assurance that any
of these stations will be able to find such suitable channels.
Alternative Technologies
Alternative technologies could increase the types of systems on which the
Company may seek carriage. Three DBS systems currently provide service to the
public and one additional company currently holds a license to provide DBS
services. The number of DBS subscribers has increased to more than 10 million
households, and Congress has recently enacted legislation designed to facilitate
the delivery by DBS operators of local broadcast signals and thereby to promote
DBS competition with cable systems. Approximately 821,000 households now
subscribe to wireless cable systems, also known as MMDS systems, which provide
traditional video programming and are beginning to provide advanced data
transmission services. The FCC has completed auctions for MMDS licenses
throughout the nation. Lastly, the emergence of home satellite dish antennas has
also made it possible for individuals to receive a host of video programming
options via satellite transmission.
Advanced Television Systems
Technological developments in television transmission will in the near
future make it possible for the broadcast and nonbroadcast media to provide
advanced television services -- television services provided using digital or
other advanced technologies. The FCC in late 1996 approved a DTV technical
standard to be used by television broadcasters, television set manufacturers,
the computer industry and the motion picture industry. This DTV standard allows
the simultaneous transmission of multiple streams of digital data on the
bandwidth presently used by a normal analog channel. It is possible to broadcast
one "high definition" channel ("HDTV") with visual and sound quality superior to
present-day television or several "standard definition" channels ("SDTV") with
digital sound and pictures of a quality slightly better than present television;
to provide interactive data services, including visual or audio transmission, on
multiple channels simultaneously; or to provide some combination of these
possibilities on the multiple channels allowed by DTV.
The Company and its subsidiaries currently have pending applications for
construction permits for full power television stations in Destin, Florida and
Des Moines, Iowa. As discussed above, there is no assurance that the FCC will
approve the Company's applications. If the FCC were to grant the applications,
however, the Company would receive a license for one channel in each market, for
which the Company could choose to construct either an analog or a digital
station. If the Company were to construct an analog channel, it would be
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permitted to convert to DTV at any time before the close of the period for
transition to DTV. This transition period currently is set to end in 2006; at
that time, subject to certain possibilities for extension, broadcasters
operating analog channels will be required to return such channels to the FCC.
While broadcasters do not have to pay to obtain digital channels, the FCC
has ruled that a television station that receives compensation from a third
party for the ancillary or supplementary use of its DTV spectrum (e.g., data
transmission or paging services) must pay a fee of five percent of gross
revenues received. The FCC has rejected a proposal that fees be imposed when a
DTV broadcaster receives payment for transmitting home shopping programming,
although it left open the question whether interactive home shopping programming
might be treated differently. As noted above, neither the Telecommunications Act
nor the Supreme Court decision upholding the constitutionality of "must carry"
rules for analog stations addresses the question whether to apply the "must
carry" rules to DTV. The FCC began proceedings on this issue in 1998, and a
decision is expected this year.
It is not yet clear when and to what extent DTV or other digital technology
will become available through the various media; whether and how television
broadcast stations will be able to avail themselves or profit by the transition
to DTV; the extent of any potential interference with analog channels; whether
viewing audiences will make choices among services upon the basis of such
differences; whether and how quickly the viewing public will embrace the cost of
the new digital television sets and monitors; to what extent the DTV standard
will be compatible with the digital standards adopted by cable, DBS and other
services; or whether significant additional expensive equipment will be required
for television stations to provide digital service, including HDTV and
supplemental or ancillary data transmission services.
The Telecommunications Act requires that the FCC conduct a ten-year
evaluation regarding public interest in advanced television, alternative uses
for the spectrum and reduction of the amount of spectrum each licensee utilizes.
Many segments of the industry are also intensely studying these advanced
technologies. In March 2000, the FCC began its periodic review of the progress
of conversion to digital television. Among other issues, the FCC sought comment
on possible rules that would require that DTV stations elect the channel on
which they intend to operate following the transition to DTV before the close of
the DTV transition period. Adoption of such rules could negatively affect the
Company's operations. There can be no assurance as to the outcome of this or
other future FCC proceedings addressing the DTV transition.
Telephone Companies' Provision of Programming Services
The Telecommunications Act eliminated the previous statutory restriction
forbidding the common ownership of a cable system and telephone company. The
extent of the regulatory obligations that the Telecommunications Act imposes on
a telephone company that selects and provides video programming services to
subscribers depends essentially upon whether the telephone company elects to
provide its programming over an "open video system" or to do so as a cable
operator fully subject to the existing provisions of the Communications Act
regulating cable providers. A telephone company that provides programming over
an open video system will be subject only to new legislative provisions
governing open video systems and to certain specified existing cable provisions
of the Communications Act, including requirements equivalent to the "must carry"
regulations. Such a telephone company will be required to lease capacity to
unaffiliated programmers on a nondiscriminatory basis and may not select the
video programming services for carriage on more than one-third of activated
channel capacity of the system. Generally, a telephone company that provides
video programming but does not operate over an open video platform will be
regulated as a cable operator.
The Company cannot predict how many telephone companies will begin
operation of open video systems or otherwise seek to provide video programming
services, or whether such video providers will be likely to carry the Company's
programming. The FCC has adopted rules that impose on open video systems many of
the obligations imposed upon cable systems, including those pertaining to "must
carry" and retransmission consent. The FCC has certified thirteen OVS operators
to offer OVS service in 28 areas and three open video systems are currently
operating. Moreover, a number of local carriers are planning to provide or are
providing video programming as traditional cable systems or through MMDS, and
one local exchange carrier is using
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very high speed digital subscriber line technology to deliver video programming,
high-speed Internet access, and telephone service over existing copper telephone
lines in Phoenix, Arizona.
H. SEASONALITY
The Company's businesses are subject to seasonal fluctuation, with the
highest sales activity normally occurring during the fourth calendar quarter of
the year. Seasonal fluctuation in demand is generally associated with the number
of households using television and the direct market and retail industries. In
addition, the Company's businesses are sensitive to general economic conditions
and business conditions affecting consumer spending.
I. EMPLOYEES
At January 31, 2000, the Company, including its wholly-owned subsidiaries,
had approximately 520 employees, the majority of whom are employed in customer
service, order fulfillment and television production. Approximately 84% of the
Company's employees work part-time. The Company is not a party to any collective
bargaining agreement with respect to its employees. Management considers its
employee relations to be good.
J. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and titles at ValueVision, principal
occupations and employment for the past five years of the persons serving as
executive officers of the Company.
NAME AGE POSITION(S) HELD
---- --- ----------------
Gene C. McCaffery......................... 52 Chairman of the Board, President and Chief
Executive Officer
Stuart Goldfarb........................... 45 Vice Chairman
Cary Deacon............................... 48 President of Marketing
Steve Jackel.............................. 64 President -- TV Home Shopping Operations
Richard D. Barnes......................... 43 Senior Vice President, Chief Financial
Officer
Gene C. McCaffery joined the Company in March 1998, was named Chief
Executive Officer in June 1998 and was appointed President and Chairman of the
Board in February 1999. Mr. McCaffery spent 14 years at Montgomery Ward & Co.,
Incorporated, a department store retailer, most recently through 1995 as Senior
Executive Vice President of Merchandising Marketing; Strategic Planning and
Credit Services. During this period, Mr. McCaffery also served as Vice Chairman
of Signature Group. From March 1996 to March 1998, Mr. McCaffery served as Chief
Executive Officer and managing partner of Marketing Advocates, a
celebrity-driven product and service development company based in Los Angeles,
California and Chicago, Illinois. He also served as Vice-Chairman of the Board
of ValueVision from August 1995 to March 1996. Mr. McCaffery served as an
infantry officer in Vietnam and was appointed as Civilian Aide to the Secretary
of the Army by President George Bush in 1991.
Stuart Goldfarb joined the Company as Vice Chairman in August 1999. From
1995 to 1999, Mr Goldfarb was Executive Vice President of Worldwide Business
Development for NBC, where he was responsible for coordinating much of NBC's
United States and international business development activities. Mr. Goldfarb
was a principal architect of NBC's strategic alliances with ValueVision, Dow
Jones & Company, and National Geographic. From 1992 to 1995, Mr. Goldfarb was
Managing Director, Asia Pacific Region at Communications Equity Associates, a
media investment-banking firm. From 1988 to 1992, Mr. Goldfarb was President of
Heartland Ventures, a media consulting and investment firm. From 1986 until the
sale of the company in 1987, Mr. Goldfarb was Vice President, cofounder, and
principal of James Communications, Inc., a cable television operator serving
approximately 95,000 subscribers. From 1984 to 1986, Mr. Goldfarb was
responsible for all legal, regulatory, administrative, and governmental affairs
for the Cable Television Division of Capital Cities Communications, Inc., a
media company.
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Cary Deacon joined the Company as Vice President General Marketing in
September 1998 and held several key management positions before assuming
President of Marketing in March 2000. From January 1998 to June 1998, Mr. Deacon
served as the Chicago based General Partner of Marketing Advocates, a
celebrity-driven product and service development firm based in Los Angeles,
California and Chicago, Illinois. From March 1995 to January 1998, Mr. Deacon
served as Senior Vice President Marketing/Special Events/ Public Relations for
Macy's Department Stores in New York. From February 1993 to January 1995, Mr.
Deacon served as Senior Vice President Marketing for Montgomery Ward & Co.,
Incorporated. From June 1988 to June 1991, Mr. Deacon served as President of
Saffer USA, a $60 million advertising agency. Prior to Saffer USA, Mr. Deacon
was an Executive Vice President with the Hudson's Bay Company, Canada's largest
retailer. Mr. Deacon held various senior positions spanning a ten-year career
including Vice President of Merchandising, Vice President of Marketing and Vice
President of Stores.
Steve Jackel joined the Company as President -- TV Home Shopping Operations
in August 1999. From 1995 to 1999, Mr. Jackel served as President and Chief
Operating Officer of Florida-based Concord Camera Corporation Corp., a designer,
manufacturer and worldwide distributor of a broad range of cameras with global
annual sales exceeding $100 million. From 1990 to 1994, Mr. Jackel was President
of California-based McCrory Corporation and Chairman and Chief Executive Officer
of McCrory Stores, a retail mass merchandiser. His extensive experience in the
retail field also includes being founder and President of a consulting
corporation that provided services to a wide variety of leading retailers.
Richard D. Barnes joined the Company as Senior Vice President and Chief
Financial Officer in November 1999. From 1996 to November 1999, Mr. Barnes was a
key financial executive with Bell Canada in Toronto, serving as Senior Vice
President, Operations, and Financial Management. At Bell Canada, a premier
telecommunications supplier, Barnes also was a Group Vice President of Finance,
Planning, and Strategy. From 1993 to 1996, Mr. Barnes was Vice President &
Controller at The Pillsbury Company, a consumer food product manufacturer and
marketer. His previous business experience was principally in the consumer
products industry holding CFO and/or other key financial, development and
strategic management positions with Bristol-Myers Squibb, The Drackett Company
(a Bristol-Myers subsidiary), Bristol-Myers Products Canada Inc., Bristol-Myers
Pharmaceutical Group, and Procter & Gamble Inc.
K. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Certain information contained herein and other materials filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contains various "forward-looking statements" within the meaning of
federal securities laws which represent management's expectations or beliefs
concerning future events. Such "forward-looking statements" include, but are not
limited to, improved and growing television home shopping operations, general
expansion and profitability of the Company, new initiatives and the continuing
success in developing new strategic alliances (including the GE Equity, NBC,
NBCi and Ralph Lauren Media alliances), the Company's success in developing its
e-commerce business, the launching of the Company's Internet initiative,
SnapTV.com, the timing of the SnapTV rebranding, the success of the Ralph Lauren
Media joint venture, capital spending requirements, potential future
acquisitions and the effects of regulation and competition. These, and other
forward-looking statements made by the Company, must be evaluated in the context
of a number of important factors that may affect the Company's financial
position, results of operations and the ability to remain profitable, including:
the ability of the Company to continue improvements in its home shopping
operations, the ability to increase revenues, maintain strong gross profit
margins and increase subscriber home distribution, the ability to develop new
initiatives or enter strategic relationships, the rate at which customers accept
solicitations for club membership, the ability of the Company to develop a
successful e-commerce business, the ability of the Company to successfully
rebrand as SnapTV, the successful performance of the Company's equity
investments, consumer spending and debt levels, interest rate fluctuations,
seasonal variations in consumer purchasing activities, increases in postal,
paper and outbound shipping costs, competition in the retail and direct
marketing industries, continuity of relationships with or purchases from major
vendors, product mix, competitive pressure on sales and pricing, the ability of
the Company to manage growth and expansion, changes in the regulatory framework
affecting the Company,
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increases in cable access fees and other costs which cannot be recovered through
improved pricing and the identification and availability of potential
acquisition targets at prices favorable to the Company and the matters discussed
below under "Risk Factors". Investors are cautioned that all forward-looking
statements involve risk and uncertainty.
L. RISK FACTORS
In addition to the general investment risks and those factors set forth
throughout this document (including those set forth under the caption
"Cautionary Statement Concerning Forward-Looking Information"), the following
risks should be considered regarding the Company.
Recent Losses. The Company experienced operating losses of approximately
$.8 million, $2.6 million, $11.0 million and $8.6 million in fiscal 1996, 1997,
1998 and 1999, respectively, operating income of $4.0 million in fiscal 2000,
and net income per diluted share of $.38, $.56, $.57, $.18 and $.73 in fiscal
1996, 1997, 1998, 1999 and 2000, respectively. Net profits of approximately
$10.5 million, $17.2 million, $23.6 million, $8.3 million and $20.4 million and
net profits per diluted share of $.36, $.53, $.74, $.32 and $.51 in fiscal 1996,
1997, 1998, 1999 and 2000, respectively, were derived from gains on sale of
broadcast stations and other investments, offset by other non-operating charges
in fiscal 1999, which are not generally expected to occur in the future. There
can be no assurance that the Company will be able to achieve or maintain
profitable operations in future fiscal years.
NBC and GE Equity Strategic Alliance. No assurance can be given that the
alliance among the Company, GE Equity and NBC will be successful. As a result of
its equity ownership of the Company, GE Equity can exert substantial influence
over the election of directors and the management and affairs of the Company.
Accordingly, GE Equity may have sufficient voting power to determine the outcome
of various matters submitted to the Company's shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
the Company's assets. Such control may result in decisions that are not in the
best interests of the Company or its shareholders.
Ralph Lauren Media Joint Venture. As discussed above, the Company entered
into a strategic alliance with Polo Ralph Lauren, NBC, NBCi, and CNBC.com that
created Ralph Lauren Media, a 30-year joint venture formed for the purpose of
bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the internet, broadcast, cable and print. In
connection with forming this strategic alliance, the Company has committed to
provide up to $50 million of cash, representing a 12.5% ownership in the joint
venture, for operating activities as well as certain telemarketing services,
order and record services, and merchandise and warehouse services for Ralph
Lauren Media. No assurance can be given that this alliance will be successful or
that the Company will ever be able to realize any return on its ownership
interest in Ralph Lauren Media. In preparation for delivering such services, the
Company has committed significant resources to develop facilities to allow the
Company to fulfill its service obligations to Ralph Lauren Media. There can be
no assurance that the Company will recover its costs for developing and
constructing these facilities and, if the alliance is not successful, the
Company would have limited ability to recover such costs.
NBCi, Re-branding and Electronic Commerce Alliance. As discussed above, the
Company entered into a new strategic alliance with Snap and Xoom whereby the
parties entered into major re-branding and e-commerce agreements, spanning
television home shopping, Internet shopping and direct e-commerce initiatives.
Effective November 24, 1999, Xoom.com, Inc. and Snap! LLC along with several
Internet assets of NBC, were merged into NBCi. Under the terms of the
agreements, the Company's television home shopping network, currently called
ValueVision, will be re-branded as SnapTV. There can be no assurance that this
alliance will be successful. Additionally, if the Company's efforts to rebrand
its network as SnapTV are ineffective, the Company's current growth expectations
could be substantially reduced. The Company's online marketplace initiatives
through its current website have achieved only limited market acceptance to date
and the Company must continue to attract new merchants in order to increase its
attractiveness to consumers, however, there can be no assurance that its efforts
in this regard will be successful or profitable.
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Dependence on the Internet. Sales of consumer goods using the Internet
currently do not represent a significant portion of overall sales of consumer
goods. The Company has made material investments in anticipation of the growing
use and acceptance of the Internet as an effective medium of commerce by
merchants and shoppers. Rapid growth in the use of and interest in the Internet
and other online services is a recent development. No one can be certain that
acceptance and use of the Internet and other online services will continue to
develop or that a sufficiently broad base of merchants and shoppers will adopt
and continue to use the Internet and other online services as a medium of
commerce. The Internet may fail as a commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies, including
security technology and performance improvements. Additionally, because material
may be downloaded from websites hosted by or linked from the Company and
subsequently distributed to others, there is a potential that claims will be
made against the Company for negligence, copyright or trademark infringement or
other theories based on the nature and content of this material. Negligence and
product liability claims also potentially may be made against the Company due to
the Company's role in facilitating the purchase of certain products. The
Company's liability insurance may not cover claims of these types, or may not be
adequate to indemnify the Company against this type of liability. There is a
possibility that such liability could have a material adverse effect on the
Company's reputation or operating results.
Competition. As a general merchandise retailer, the Company competes for
consumer expenditures with other forms of retail businesses, including
department, discount, warehouse and specialty stores, television home shopping,
mail order and catalog companies and other direct sellers. The catalog and
direct mail industry includes a wide variety of specialty and general
merchandise retailers and is both highly fragmented and highly competitive. The
Company also competes with retailers involved with the evolving convergence and
development of electronic commerce as well as other retailers who sell and
market their products through the highly competitive Internet medium. The number
of companies providing these types of services over the Internet is large and
increasing at a rapid rate. The Company expects that additional companies,
including media companies and conventional retailers that to date have not had a
substantial commercial presence on the Internet, will offer services that
directly compete with the Company. In addition, as the use of the Internet and
other online services increases, larger, well-established and well-financed
entities may continue to acquire, invest in or form joint ventures with
providers of e-commerce and direct marketing solutions, and existing providers
of e-commerce and direct marketing solutions may continue to consolidate.
Providers of Internet browsers and other Internet products and services who are
affiliated with providers of Web directories and information services that
compete with the Company's website may more tightly integrate these affiliated
offerings into their browsers or other products or services. Any of these trends
would increase the competition with respect to the Company. The Company also
competes with a wide variety of department, discount and specialty stores, which
have greater financial, distribution and marketing resources than the Company.
The home shopping industry is also highly competitive and is dominated by two
companies, HSN and QVC. The Company's television home shopping programming
competes directly with HSN and QVC in virtually all of the Company's markets.
The Company is at a competitive disadvantage in attracting viewers due to the
fact that the Company's programming is not carried full-time in many of its
markets, and that the Company may have less desirable cable channels in many
markets. QVC and HSN are well-established and, similar to the Company, offer
home shopping programming through cable systems, owned or affiliated full- and
low-power television stations and directly to satellite dish owners and,
accordingly, reach a large percentage of United States television households.
The television home shopping industry is also experiencing vertical integration.
QVC and HSN are both affiliated with cable operators serving significant numbers
of subscribers nationwide. While the Cable Television Consumer Protection and
Competition Act of 1992 includes provisions designed to prohibit coercion and
discrimination in favor of such affiliated programmers, the FCC has decided that
it will rule on the scope and effect of these provisions on a case-by-case
basis.
Potential Termination of Cable Time Purchase Agreements; Media Access;
Related Matters. The Company's television home shopping programming is
distributed primarily through purchased blocks of cable television time. Many of
the Company's cable television affiliation agreements are terminable by either
party upon 30 days, or less notice. The Company's television home shopping
business could be materially adversely
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affected in the event that a significant number of its cable television
affiliation agreements are terminated or not renewed on acceptable terms.
Strategic Investments by the Company. During the fourth quarter of fiscal
2000, the Company began to enter into transactions with companies that it views
as emerging leaders in industries and markets complementary to the Company's
business strategy. In general, each such transaction involves an equity
investment by the Company in such entity as well as a production and marketing
component pursuant to which the third party also markets and sells its products
through the Company's television programming and Internet website. Most of these
companies are emerging-stage entities with a limited history of operating
results. There can be no assurance that the Company will realize a return on any
investment in such entities. Each such investment involves a high degree of risk
by the Company.
Potential Loss of Satellite Service. The Company's programming is presently
distributed, in the first instance, to cable systems, full- and low-power
television stations and satellite dish owners via a leased communications
satellite transponder. In the future, satellite service may be interrupted due
to a variety of circumstances beyond the Company's control, such as satellite
transponder failure, satellite fuel depletion, governmental action, preemption
by the satellite lessor and service failure. The Company has an agreement for
preemptable immediate back-up satellite service and believes it could arrange
for such back-up service if satellite transmission is interrupted. However,
there can be no assurance that the Company will be able to continue transmission
of its programming in the event of satellite transmission failure and the
Company may incur substantial additional costs to enter into new arrangements.
Product Liability Claims. Products sold by the Company may expose it to
potential liability from claims by users of such products, subject to the
Company's rights, in certain instances, to indemnification against such
liability from the manufacturers of such products. The Company has instead
generally required the manufacturers and/or vendors of these products to carry
product liability insurance, although in certain instances where a limited
quantity of products are purchased from non-U.S. vendors, the vendor may not be
formally required to carry product liability insurance. Certain of such vendors,
however, may in fact maintain such insurance. There can be no assurance that
such parties will maintain this insurance or that this coverage will be adequate
to cover all potential claims, including coverage in amounts, which it believes
to be adequate. There can be no assurance that the Company will be able to
maintain such coverage or obtain additional coverage on acceptable terms, or
that such insurance will provide adequate coverage against all potential claims.
Seasonality. The television home shopping and e-commerce businesses in
general are somewhat seasonal, with the primary selling season occurring during
the last quarter of the calendar year. These businesses are also sensitive to
general economic conditions and business conditions affecting consumer spending.
ITEM 2. PROPERTIES
The Company leases approximately 139,000 square feet of space in Eden
Prairie, Minnesota (a suburb of Minneapolis), which includes all corporate
administrative, television production, customer service and television warehouse
operations. During fiscal 1997, the Company purchased a 262,000 square foot
distribution facility on a 34 acre parcel of land in Bowling Green, Kentucky
which, until recently, was being used primarily in connection with the
fulfillment operations of non-jewelry merchandise for the Company's television
home shopping operations. The Company currently plans to use its Bowling Green,
Kentucky distribution facility to fulfill service obligations made in connection
with the Services Agreement recently entered into with Ralph Lauren Media.
Additionally, the Company rents transmitter site and studio locations in
connection with its LPTV stations. The Company believes that its existing
facilities are adequate to meet its current needs and that suitable additional
or alternative space will be available as needed to accommodate expansion of
operations.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various claims and lawsuits in
the ordinary course of business. In the opinion of management, these claims and
suits individually and in the aggregate will not have a material adverse effect
on the Company's operations or consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of the Company during the fourth
quarter ended January 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock symbol is "VVTV" and is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market. The following table sets forth
the range of high and low sales prices of the common stock as quoted by the
Nasdaq Stock Market for the periods indicated.
HIGH LOW
---- ---
FISCAL 1999
First Quarter............................................. $ 3 31/32 $ 3
Second Quarter............................................ 4 3/8 3 3/8
Third Quarter............................................. 5 3 1/8
Fourth Quarter............................................ 15 1/4 3 11/16
FISCAL 2000
First Quarter............................................. 15 3/8 8 1/8
Second Quarter............................................ 27 3/4 13 1/2
Third Quarter............................................. 33 21
Fourth Quarter............................................ 62 32 5/8
HOLDERS
As of April 28, 2000 the Company had approximately 350 shareholders of
record.
DIVIDENDS
The Company has never declared or paid any dividends with respect to its
capital stock. Pursuant to the Shareholder Agreement between the Company and GE
Equity, the Company is prohibited from paying dividends in excess of 5% of the
Company's market capitalization in any quarter. The Company currently expects to
retain its earnings for the development and expansion of its business and does
not anticipate paying cash dividends in the foreseeable future. Any future
determination by the Company to pay cash dividends will be at the discretion of
the Board and will be dependent upon the Company's results of operations,
financial condition, any contractual restrictions then existing, and other
factors deemed relevant at the time by the Board.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended January 31, 2000 have
been derived from the audited consolidated financial statements of the Company.
The selected financial data presented below are qualified in their entirety by,
and should be read in conjunction with, the financial statements and notes
thereto and other
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financial and statistical information referenced elsewhere herein including the
information referenced under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEAR ENDED JANUARY 31,
--------------------------------------------------------
2000(A) 1999(B) 1998 1997(C) 1996
------- ------- ---- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................. $274,927 $203,728 $217,982 $159,478 $ 88,910
Gross profit.............................. 106,528 85,971 95,174 67,363 36,641
Operating income (loss)................... 3,996 (8,569) (10,975) (2,640) (766)
Income before income taxes (d)............ 46,771 7,491 29,604 29,690 11,120
Net income (d)............................ 29,330 4,639 18,104 18,090 11,020
PER SHARE DATA:
Net income per common share............... $ 0.89 $ 0.18 $ 0.57 $ 0.57 $ 0.38
Net income per common share -- assuming
dilution................................ $ 0.73 $ 0.18 $ 0.57 $ 0.56 $ 0.38
Weighted average shares outstanding:
Basic................................... 32,603 25,963 31,745 31,718 28,627
Diluted................................. 40,427 26,267 31,888 32,342 29,309
JANUARY 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and short-term investments........... $294,643 $ 46,870 $ 31,866 $ 52,859 $ 46,451
Current assets............................ 382,854 98,320 79,661 101,029 65,045
Property, equipment and other assets...... 89,001 43,450 55,618 67,057 51,666
Total assets.............................. 471,855 141,770 135,279 168,086 116,711
Current liabilities....................... 51,587 32,684 29,590 37,724 13,519
Long-term obligations..................... -- 675 1,036 3,734 447
Redeemable preferred stock................ 41,622 -- -- -- --
Shareholders' equity...................... 371,921 108,411 104,653 126,628 102,745
YEAR ENDED JANUARY 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
OTHER DATA:
Gross margin percentage.................. 38.7% 42.2% 43.7% 42.2% 41.2%
Working capital.......................... $ 331,267 $ 65,636 $ 50,071 $63,305 $ 51,526
Current ratio............................ 7.4 3.0 2.7 2.7 4.8
EBITDA (as defined)(d)(e)................ $ 41,608 $ 9,586 $ 34,465 $31,774 $ 13,790
CASH FLOWS:
Operating................................ $ (1,469) $(18,091) $(19,445) $(5,779) $ 2,304
Investing................................ $(135,897) $ 48,131 $ 23,065 $19,223 $(11,443)
Financing................................ $ 231,323 $ (2,974) $(15,041) $(4,889) $ 7,547
- -------------------------
(a) In the second half of fiscal 2000, the Company divested the catalog
operations of Catalog Ventures, Inc. and Beautiful Images, Inc. See Note 4
of Notes to Consolidated Financial Statements.
(b) In fiscal 1999, the Company divested its HomeVisions catalog operations and
recorded a $2.9 million restructuring and asset impairment charge in
connection with this decision.
(c) Results of operations for the year ended January 31, 1997, included the
operations of HomeVisions, Beautiful Images, Inc. and Catalog Ventures, Inc.
from the respective acquisition dates in the second half of fiscal 1997. See
Note 4 of Notes to Consolidated Financial Statements.
(d) Income before income taxes, net income and EBITDA (as hereinafter defined)
include a net pre-tax gain of $32.7 million from the sale and holdings of
broadcast properties and other assets in fiscal 2000, a net pre-tax gain of
$22.8 million from the sale and holdings of broadcast properties and other
assets and pre-tax charges totaling $9.5 million associated with a
litigation settlement and terminated acquisition costs in fiscal 1999, a
pre-tax gain of $38.9 million from the sale of broadcast properties in
fiscal 1998, a $28.3 million pre-tax gain on sale of broadcast properties
and other assets in fiscal 1997 and an
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$8.5 million pre-tax gain on the sale of an investment in National Media
Corporation and $2.0 million equity in earnings of affiliates in fiscal
1996. See Notes 2 and 4 of Notes to Consolidated Financial Statements.
(e) EBITDA represents net income before interest income (expense), income taxes
and depreciation and amortization expense. Management views EBITDA as an
important alternative measure of cash flows because it is commonly used by
analysts and institutional investors in analyzing the financial performance
of companies in the broadcast and television home shopping sectors. However,
EBITDA should not be construed as an alternative to operating income or to
cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of operating performance or as a measure of liquidity. EBITDA, as
presented, may not be comparable to similarly entitled measures reported by
other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations is qualified by reference to and should be read in conjunction with
the financial statements and notes thereto included elsewhere herein.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations and other materials filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain various "forward-looking statements" within the meaning of federal
securities laws which represent management's expectations or beliefs concerning
future events. Such "forward-looking statements" include, but are not limited
to, improved and growing television home shopping operations, general expansion
and profitability of the Company, new initiatives and the continuing success in
developing new strategic alliances (including the GE Equity, NBC, NBCi and Ralph
Lauren Media alliances), the Company's success in developing its e-commerce
business, the launching of the Company's Internet initiative, SnapTV.com, the
timing of the SnapTV rebranding, the success of the Ralph Lauren Media joint
venture, capital spending requirements, potential future acquisitions and the
effects of regulation and competition. These, and other forward-looking
statements made by the Company, must be evaluated in the context of a number of
important factors that may affect the Company's financial position, results of
operations and the ability to remain profitable, including: the ability of the
Company to continue improvements in its home shopping operations, the ability to
increase revenues, maintain strong gross profit margins and increase subscriber
home distribution, the ability to develop new initiatives or enter new strategic
relationships, the rate at which customers accept solicitations for club
membership, the ability of the Company to develop a successful e-commerce
business, the ability of the Company to successfully rebrand as SnapTV, the
successful performance of the Company's equity investments, consumer spending
and debt levels, interest rate fluctuations, seasonal variations in consumer
purchasing activities, increases in postal and outbound shipping costs,
competition in the retail and direct marketing industries, continuity of
relationships with or purchases from major vendors, product mix, competitive
pressure on sales and pricing, the ability of the Company to manage growth and
expansion, changes in the regulatory framework affecting the Company, increases
in cable access fees and other costs which cannot be recovered through improved
pricing and the identification and availability of potential acquisition targets
at prices favorable to the Company. Investors are cautioned that all
forward-looking statements involve risk and uncertainty.
NBC AND GE EQUITY STRATEGIC ALLIANCE
On March 8, 1999 the Company entered into a strategic alliance with
National Broadcasting Company, Inc. ("NBC") and GE Capital Equity Investments,
Inc. ("GE Equity"). Pursuant to the terms of the transaction, NBC and GE Equity
acquired 5,339,500 shares of the Company's Series A Redeemable
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Convertible Preferred Stock (the "Preferred Stock"), and NBC was issued a
warrant to acquire 1,450,000 shares of the Company's Common Stock ("the
Distribution Warrant") under the Distribution Agreement. The Preferred Stock was
sold for aggregate consideration of $44,265,000 and the Company will receive an
additional approximately $12.0 million upon the exercise of the Distribution
Warrant. In addition, the Company issued to GE Equity a warrant to increase its
potential aggregate equity stake (together with the Distribution Warrant issued
to NBC) to 39.9% (the "Investment Warrant"). NBC has the exclusive right to
negotiate on behalf of the Company for the distribution of its television home
shopping service. The sale of 3,739,500 shares of the Preferred Stock was
completed on April 15, 1999. Final consummation of the transaction regarding the
sale of the remaining 1,600,000 Preferred Stock shares and the exercisability of
the Investment Warrant was completed on June 2, 1999. On July 6, 1999, GE Equity
exercised the Investment Warrant acquiring an additional 10,674,000 shares of
the Company's Common Stock for an aggregate of $178,370,000, or $16.71 per
share, representing the 45-day average closing price of the underlying Common
Stock ending on the trading day prior to exercise. Proceeds received from the
issuance of the Preferred Stock and the Investment Warrant (and to be received
from the exercise of the Distribution Warrant) are for general corporate
purposes. Following the exercise of the Investment Warrant, the combined
ownership of the Company by GE Equity and NBC was approximately 39.9%. See Item
1 -- Business Section under "Strategic Relationships" for a detailed discussion
of the NBC and GE Equity strategic alliance.
NBCI RE-BRANDING AND ELECTRONIC COMMERCE ALLIANCE
Effective September 13, 1999, the Company entered into a new strategic
alliance with Snap and Xoom whereby the parties entered into major re-branding
and electronic commerce agreements, spanning television home shopping, Internet
shopping and direct e-commerce initiatives. Effective November 24, 1999, Xoom
and Snap along with several Internet assets of NBC, were merged into NBC
Internet, Inc. ("NBCi"). Under the terms of the agreements, the Company's
television home shopping network, currently called ValueVision, will be
re-branded as SnapTV ("SnapTV"). The re-branding will be phased in during the
second half of fiscal 2001. The network, which will continue to be owned and
operated by ValueVision, will continue to feature its present product line as
well as offer new categories of products and brands. The Company, along with
Snap.com, NBC's Internet portal services company, will roll-out a new companion
Internet shopping service, SnapTV.com, featuring online purchasing opportunities
that spotlight products offered on-air along with online-only e-commerce
opportunities offered by SnapTV and its merchant partners. The new SnapTV.com
online store will be owned and operated by the Company and be featured
prominently within SnapTV.com's shopping area. Xoom, a leading direct e-commerce
services company, will become the exclusive direct e-commerce partner for
SnapTV, managing all such initiatives, including database management, e-mail
marketing and other sales endeavors. Direct online shopping offers will include
SnapTV merchandise, as well as Xoom products and services. See Item
1 -- Business Section under "Strategic Relationships" for a detailed discussion
of the NBCi strategic alliance and the agreements entered into by the Company,
Snap and Xoom.
POLO RALPH LAUREN/RALPH LAUREN MEDIA ELECTRONIC COMMERCE ALLIANCE
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), NBC, NBCi and CNBC.com LLC ("CNBC") whereby the parties created Ralph
Lauren Media, LLC ("Ralph Lauren Media"), a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for their interest in Ralph
Lauren Media, NBC agreed to contribute $110 million of television and online
advertising on NBC and CNBC properties, NBCi agreed to contribute $40 million in
online distribution and promotion and the Company has contributed a cash funding
commitment of up to $50 million. Ralph Lauren Media's premier initiative will be
Polo.com, an internet web site dedicated to the American lifestyle that will
include original content, commerce and a strong community component. Polo.com is
expected to launch in the fourth quarter of fiscal 2001 and will initially
include an assortment of men's, women and children's products across the Ralph
Lauren family of brands as well as unique gift items. Polo.com will also receive
anchor shopping tenancies on NBCi's Snap portal service. In connection with the
formation of Ralph Lauren Media,
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the Company entered into various agreements setting forth the manner in which
certain aspects of the business of Ralph Lauren Media are to be managed and
certain of the members' rights, duties and obligations with respect to Ralph
Lauren Media. In addition, Ralph Lauren Media and VVI Fulfillment Center, Inc.
("VVIFC"), a wholly-owned subsidiary of the Company, entered into an Agreement
for Services under which VVIFC agreed to provide all telemarketing, fulfillment
and distribution services to Ralph Lauren Media. See Item 1 -- Business Section
under "Strategic Relationships" for a detailed discussion of the Ralph Lauren
Media strategic alliance.
STRATEGIC INVESTMENTS
Beginning in December 1999, the Company has entered into transactions with
a number of companies that it views as emerging leaders in industries and
markets complementary to the Company's business strategy. While each of these
transactions is unique, in general, each consists of both an equity investment
by the Company in the third party and a production and marketing component in
which the Company markets and sells the third party's products through the
Company's television programming and Internet website. The Company views each of
these third parties as strategic partners.
TIME WARNER CABLE LITIGATION SETTLEMENT
On December 23, 1998 the Company announced that it settled the lawsuit that
was filed by Time Warner Cable against the Company and Bridgeways Communications
Corporation in 1997. The lawsuit alleged, among other things, tortious
interference with contractual and business relations and breach of contract.
Under the terms of the settlement, ValueVision paid Time Warner Cable $7.0
million in cash which was recognized by ValueVision in the fourth quarter of
fiscal 1999, resulting in an after tax charge of approximately $4.3 million. In
settling this matter, ValueVision did not admit any wrongdoing or liability.
ValueVision, however, determined to enter into this settlement to avoid the
uncertainty and costs of litigation, as well as to avoid disruption of its
relationship with a key business partner providing a substantial portion of
ValueVision's program distribution.
WRITE-DOWN OF INVESTMENT IN CML GROUP, INC.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, the Company wrote off its investment in CML Group, Inc.
("CML") in fiscal 1999. The decline in the investment's fair value was judged by
management to be other than temporary following CML's announcement that its
NordicTrack subsidiary had filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The write-off totaled approximately $6,113,000. Subsequently,
CML also filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
RESTRUCTURING AND IMPAIRMENT OF ASSETS
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective divestiture of its HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
continuing operating losses and the deteriorating financial performance of the
catalog's operations since Montgomery Ward & Co., Incorporated's announcement of
its bankruptcy filing in the summer of 1997. Operating losses for HomeVisions
further increased as a result of the subsequent termination of HomeVisions'
right to use the Montgomery Ward private label credit card in March 1998. As a
result of the decision to divest HomeVisions, the Company mailed its last
HomeVisions catalog in the fourth quarter of fiscal 1999 and effectively wound
down the catalog operation as of January 31, 1999.
In connection with the restructuring plan and divestiture of HomeVisions,
the Company recorded a $2,950,000 restructuring and asset impairment charge in
the third quarter ended October 31, 1998. The restructuring charge included
severance costs and the write-down of certain assets including inventory,
property and equipment, capitalized software and capitalized catalog costs that
were deemed impaired as a direct result of the decision to divest HomeVisions.
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NATIONAL MEDIA CORPORATION
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly formed Delaware
corporation. On April 8, 1998, it was announced that the Company received
preliminary notification from holders of more then 5% of the Company's Common
Stock that they intended to exercise their dissenter's rights with respect to
the proposed merger of the Company and National Media and the Company did not
intend to waive the Merger Agreement condition to closing requiring that holders
of not more than 5% of the shares of the Company's Common Stock have demanded
their dissenter's rights. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and conditions regarding a
transaction with National Media were unsuccessful and the Merger Agreement was
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and wrote off these amounts in the second quarter of fiscal 1999.
ACQUISITIONS AND DISPOSITIONS
MONTGOMERY WARD DIRECT CATALOG OPERATIONS
Effective July 27, 1996, the Company acquired, through ValueVision Direct
Marketing Company, Inc. ("VVDM"), substantially all of the assets and assumed
certain obligations of Montgomery Ward Direct, L.P. ("MWD"), a four year old
catalog business, by issuing 1,484,993 vested warrants with an exercise price of
$.01 per share, to Montgomery Ward & Co., Incorporated ("Montgomery Ward") as
full consideration for the acquisition of approximately $4.0 million in net
assets of MWD.
The Company's acquisition of MWD was for an aggregate purchase price of
$8,497,000, which included approximately $4.0 million in net assets, including
acquired cash of $5,764,000. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the net assets of MWD were
recorded at their estimated fair values. The excess of the purchase price over
the net assets acquired was $4,531,000, had been recorded as goodwill and other
intangible assets and was amortized on a straight-line basis over 5-12 years.
Intangible assets recorded in connection with this acquisition were reduced to
zero in fiscal 1998 in connection with the restructuring transaction with
Montgomery Ward. In fiscal 1998, the Company changed the name of the MWD catalog
to HomeVisions and in fiscal 1999 decided to wind down and divest the
HomeVisions operations, as discussed above.
Also, in connection with the decision to divest HomeVisions, the Company
entered into an agreement to license and sell the exclusive marketing rights to
the "HomeVisions" name and related customer list database to Direct Marketing
Services, Inc. ("DMSI"), a direct-mail marketer and catalog distributor
headquartered in Chicago, Illinois. The Company recorded a $1,443,000 gain in
fiscal 1999 related to the sale of these assets.
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of Beautiful Images, Inc. ("BII"), a manufacturer and direct
marketer of women's foundation undergarments and other women's apparel. The
Company paid $4,253,000 in cash, which included acquired cash of $423,000 and
$500,000 relating to a non-compete agreement and assumed certain obligations
totaling $109,000. The acquisition was accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based upon estimated fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $3,310,000, of which $2,810,000 was recorded as
goodwill, and amortized on a straight-line basis over 15 years, and $500,000 was
assigned to a non-compete agreement, and amortized on a straight-line basis over
the 6-year term of the agreement. Effective December 31, 1999, the Company
completed the sale of BII for a total of $5,000,000 which was received in the
form of a promissory note, representing the net book value of BII on the date of
sale. Accordingly, no gain or loss was recorded on the closing of the sale. The
note is payable over a seven-year period and bears interest at 6 1/4% payable
quarterly. Management believes that the sale will not have a significant impact
on the ongoing operations of the Company.
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CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. (collectively "CVI"), two direct
marketing companies which together publish five consumer specialty catalogs. The
Company paid $7,369,000 in cash, which included acquired cash of $1,465,000. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets purchased and
liabilities assumed based upon estimated fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets acquired
was $1,953,000, was recorded as goodwill, and was amortized on a straight-line
basis over 15 years. On October 31, 1999, the Company completed the sale of CVI
to privately held Massachusetts-based Potpourri Holdings, Inc. for approximately
$7,300,000 cash and up to an additional $5,500,000 contingent upon CVI's
performance over the twelve months following the sale. A pre-tax loss of
approximately $128,000 was recorded on the initial closing of the sale of CVI
and was recognized in the third quarter ended October 31, 1999. Any contingent
consideration received by the Company will be recorded as a gain when received.
Management believes that the sale will not have a significant impact on the
ongoing operations of the Company.
SALE OF BROADCAST STATIONS
On July 31, 1997, the Company completed the sale of its television
broadcast station WVVI-TV, which serves the Washington, D.C. market, to Paxson
Communications Corporation ("Paxson") for approximately $30 million in cash and
the receipt of 1,197,892 shares of Paxson common stock valued at $11.92 per
share as determined pursuant to an independent financial appraisal. Under the
terms of the agreement, Paxson paid the Company $20 million in cash upon closing
and was required to pay an additional $10 million to the Company as a result of
the United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. The Company acquired WVVI-TV in March 1994 for $4,850,000. The
pre-tax gain recorded on the sale of the television station was $38.9 million
and was recognized in the second quarter of fiscal 1998.
On February 27, 1998, the Company completed the sale of its television
broadcast station, KBGE-TV Channel 33, which serves the Seattle, Washington
market along with two of the Company's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
was payable by the first quarter of fiscal 2000. The Company continues to serve
the Seattle market via its low-power station K58DP-TV, which transmits from
downtown Seattle. The Company acquired KBGE-TV in March 1996 for approximately
$4.6 million. The pre-tax gain to be recorded on the first installment with
respect to the sale of this television station was approximately $19.8 million
and was recognized in the financial statements in the first quarter of fiscal
1999. On April 12, 1999, the Company received the contingent payment of $10
million relating to the sale of KBGE-TV and as a result, the Company recognized
a $10 million pre-tax gain, net of applicable closing fees, in the first quarter
of fiscal 2000. The $10 million contingent payment finalized the agreement
between the two companies.
On September 27, 1999, the Company completed the sale of its KVVV-TV
full-power television broadcast station, Channel 33, and K53 FV low-power
station, serving the Houston, Texas market, for a total of $28 million to
Visalia, California-based Pappas Telecasting Companies. The Company acquired
KVVV-TV in March 1994 for approximately $5.8 million. The pre-tax gain recorded
on the sale of the television station was approximately $23.3 million and was
recognized in the third quarter of fiscal 2000.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
RESULTS OF OPERATIONS
Results of operations for the years ended January 31, 2000, 1999 and 1998
include the direct-mail operations of Home Visions, which was effectively wound
down and sold as of January 31, 1999, CVI, which was sold effective October 31,
1999 and BII, which was sold effective December 31, 1999.
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The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
YEAR ENDED JANUARY 31,
-----------------------------
2000 1999 1998
---- ---- ----
NET SALES........................................... 100.0% 100.0% 100.0%
===== ===== =====
GROSS MARGIN........................................ 38.7% 42.2% 43.7%
----- ----- -----
OPERATING EXPENSES:
Distribution and selling............................ 31.3% 36.6% 40.8%
General and administrative.......................... 4.2% 5.9% 4.7%
Depreciation and amortization....................... 1.8% 2.5% 3.2%
Restructuring and impairment of assets.............. -- 1.4% --
----- ----- -----
Total operating expenses....................... 37.3% 46.4% 48.7%
----- ----- -----
OPERATING INCOME (LOSS)............................. 1.4% (4.2)% (5.0)%
Other income, net................................... 15.6% 7.9% 18.6%
----- ----- -----
INCOME BEFORE INCOME TAXES.......................... 17.0% 3.7% 13.6%
Income taxes........................................ (6.3)% (1.4)% (5.3)%
----- ----- -----
NET INCOME.......................................... 10.7% 2.3% 8.3%
===== ===== =====
SALES
Net sales for the year ended January 31, 2000 (fiscal 2000) were
$274,927,000 compared to $203,728,000 for the year ended January 31, 1999
(fiscal 1999), a 35% increase. The increase in net sales is directly
attributable to the continued improvement and increased sales from the Company's
television home shopping operations, which have reported greater than 30% sales
increases (quarter over quarter) for the past seven quarters in a row and
recently reported its largest revenue quarter in the Company's history. Sales
attributed to the Company's television home shopping operations increased 69% to
$250,223,000 for the year ended January 31, 2000 from $148,198,000 for the year
ended January 31, 1999. The growth in home shopping net sales is primarily
attributable to the growth in full-time equivalent ("FTE") homes able to receive
the Company's television home shopping programming. During the 12-month period
ended January 31, 2000, the Company added approximately 10.1 million FTE
subscriber homes, an increase of 68%, going from 14.9 million FTE subscriber
homes at January 31, 1999 to 25.0 million FTE subscriber homes at January 31,
2000. The average number of FTE subscriber homes was 19.6 million for fiscal
2000 and 12.6 million for fiscal 1999, a 56% increase. In addition to new FTE
subscriber homes, television home shopping sales increased due to the continued
addition of new customers from households already receiving the Company's
television home shopping programming, an increase in the average customer dollar
order size over fiscal 1999, as well as an increase in repeat sales to existing
customers. The increase in repeat sales to existing customers experienced during
fiscal 2000 was due, in part, to a strengthened merchandising effort under the
leadership of ValueVision television operation's new general management and the
effects of continued testing of certain merchandising and programming
strategies. The improvement in television home shopping net sales is also due,
in part, to various sales initiatives that emphasized, among other things, the
increased use of the Company's ValuePay installment payment program. The Company
will continue to test and change its merchandising and programming strategies
with the intent of improving its television home shopping sales results.
However, while the Company is optimistic that results will continue to improve,
there can be no assurance that such changes in strategy will achieve the
intended results. Sales attributed to direct-mail marketing operations totaled
$24,704,000 or 9% of total net sales for the year ended January 31, 2000 and
totaled $55,530,000 or 27% of total net sales for the year ended January 31,
1999. The decrease in direct-mail revenues is a result of the Company's
divestiture of its catalog operations during fiscal 2000 and fiscal 1999.
Net sales for the year ended January 31, 1999 were $203,728,000 compared to
fiscal 1998 net sales of $217,982,000, a 7% decrease. The decrease in net sales
was directly attributable to the decline in catalog sales resulting from the
downsizing and eventual divestiture of the Company's HomeVisions (formerly known
as
34
35
Montgomery Ward Direct) direct-mail operations following the November 1997
restructuring of the Company's operating agreements with Montgomery Ward & Co.,
Incorporated ("Montgomery Ward"). Sales attributed to direct marketing
operations totaled $55,530,000 or 27% of total net sales for the year ended
January 31, 1999 and totaled $111,411,000 or 51% of total net sales for the year
ended January 31, 1998. Sales attributed to the Company's television home
shopping programming increased 39% to $148,198,000 for the year ended January
31, 1999 from $106,571,000 for the year ended January 31, 1998. The increase in
television home shopping net sales was primarily attributable to the increase in
FTE subscriber homes able to receive the Company's television home shopping
programming, which increased approximately 3.2 million or 27% from 11.7 million
at January 31, 1998 to 14.9 million at January 31, 1999. The average number of
FTE subscriber homes was 12.6 million for fiscal 1999 and 11.9 million for
fiscal 1998, a 6% increase.
The Company records a reserve as a reduction of gross sales for anticipated
product returns at each month-end based upon historical product return
experience. The return rates for fiscal years 2000, 1999 and 1998 were
approximately 29%, 24% and 19%, respectively. The increase in the return rate
for fiscal 2000 is a direct result of the divestiture of the Company's
direct-mail catalog operations. Direct-mail operations, which represented 27% of
total sales in fiscal 1999 and only 9% of total sales in fiscal 2000, typically
experienced lower average return rates than the Company's television operations.
The lower return rate in fiscal 1998 was directly attributable to the effect of
the Company's HomeVisions catalog business, which was acquired in the second
half of fiscal 1997 and significantly downsized in fiscal 1999. The fiscal 2000
return rate for the company's television home shopping operations was 30%,
compared to 28% in fiscal 1999 and 27% in fiscal 1998. The return rate for the
television home shopping operations is slightly higher than prior year and
historic industry averages and is attributable in part to higher average unit
selling price points for the Company (approximately $124 in fiscal 2000 versus
$93 in fiscal 1999), which typically result in higher return rates. Historic
industry average selling prices per unit have been approximately $40 to $50. The
Company is continuing to manage return rates and is adjusting average selling
price points and product mix in an effort to reduce the overall return rate
related to its home shopping business. The average return rate for the Company's
direct marketing operations was 11% in fiscal 2000, 1999 and 1998.
GROSS PROFIT
Gross profits for fiscal 2000 and 1999 were $106,528,000 and $85,971,000,
respectively, an increase of $20,557,000 or 24%. Gross margins for fiscal 2000
were 38.7% compared to 42.2% for fiscal 1999. The principal reason for the
increase in gross profit dollars was the increased sales volume from the
Company's television home shopping business offset by a decrease in direct-mail
order gross profits resulting from the divestiture of the CVI and BII's catalog
operations in the second half of fiscal 2000 and the divestiture of the
HomeVisions catalog operations in fiscal 1999. Television home shopping gross
margins for fiscal 2000 and 1999 were 36.8% and 38.0%, respectively. Gross
margins for the Company's direct mail operations were 58.3% and 53.5% for the
same respective periods. Television home shopping gross margins decreased
slightly from the prior year primarily as a result of changes made to the
Company's merchandise mix in an effort to increase television home shopping
sales while at the same time increasing inventory turns. Specifically, in fiscal
2000 there was a substantial increase in the sales volume of lower margin
electronics merchandise over fiscal 1999. Also, and as a result of the mix
change, additional inventory reserves were established in the second quarter of
fiscal 2000, which put further pressure on television home shopping margins. In
addition, television home shopping gross margins also decreased from the prior
year as a result of decreased gross margin percentages in the electronic product
category. Jewelry gross margin percentages remained relatively flat over the
prior year. Jewelry products accounted for approximately 72% of airtime during
fiscal 2000 and fiscal 1999. Gross margins for the Company's direct mail-order
operations increased primarily as a result of the decrease in catalog sales due
to the fiscal 1999 divestiture of the HomeVisions catalog operations.
Gross profits for fiscal 1999 and 1998 were $85,971,000 and $95,174,000,
respectively, a decrease of $9,203,000 or 10%. Gross margins for fiscal 1999
were 42.2% compared to 43.7% for fiscal 1998. The principal reason for the
decrease in gross profits was the decreased sales volume resulting from the
downsizing and eventual divestiture of the HomeVisions catalog operations.
Television home shopping gross margins for fiscal 1999 and 1998 were 38.0% and
39.8%, respectively. Gross margins for the Company's direct mail
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36
operations were 53.5% and 47.3% for the same respective periods. Television home
shopping gross margin percentages decreased from 1998 to 1999 as a result of
changes in merchandise mix and on-air promotions to enhance net gross margin
contributions. Specifically, television home shopping gross margins decreased
from the prior year primarily as a result of a decrease in gross margin
percentages in the jewelry, giftware and houseware product categories offset by
an increase in the sales volume of the higher margin jewelry category. In
addition, during fiscal 1999, the Company promoted the movement of a significant
amount of aging inventory, which further reduced television home shopping
margins. Gross margins for the Company's direct mail-order operations increased
primarily as a result of the decrease in HomeVisions sales due to the downsizing
and divestiture of the HomeVisions catalog operations, which had considerably
lower margins than the Company's other catalog operating entities and as a
result of the exclusion of two lower margin catalog titles from the fiscal 1999
summer mailing.
OPERATING EXPENSES
Total operating expenses were $102,532,000, $94,540,000 and $106,149,000
for the years ended January 31, 2000, 1999 and 1998, respectively, representing
an increase of $7,992,000 or 8% from fiscal 1999 to fiscal 2000, and a decrease
of $11,609,000 or 11% from fiscal 1998 to fiscal 1999. For fiscal 1999, total
operating expenses include a $2,950,000 one-time restructuring and asset
impairment charge recorded as a result of the Company's decision to divest its
HomeVisions catalog operations. The restructuring charge included severance
costs and the write-down of certain assets, including inventory, property and
equipment, capitalized software and catalog costs that were deemed impaired as a
direct result of the decision to divest HomeVisions.
Distribution and selling expenses for fiscal 2000 increased $11,485,000 or
15% to $86,134,000 or 31% of net sales compared to $74,649,000 or 37% of net
sales in fiscal 1999. Distribution and selling expense increased from the prior
year primarily as a result of increases in net cable access fees due to a 56%
annual increase in the number of average FTE subscriber homes over the prior
year, an increase in the rate per FTE subscriber home, increased marketing and
advertising fees, and increased costs associated with credit card processing,
telemarketing and the Company's ValuePay program due to increases in television
home shopping sales volumes, offset by decreases in distribution and selling
expenses associated with the divestiture of the Company's catalog operations,
specifically HomeVisions. Distribution and selling expense for fiscal 2000
decreased as a percentage of net sales over fiscal 1999 as a result of the
increase in net sales over the prior year.
Distribution and selling expenses for fiscal 1999 decreased $14,369,000 or
16% to $74,649,000 or 37% of net sales compared to $89,018,000 or 41% of net
sales in fiscal 1998. The decrease in distribution and selling expense from
fiscal 1998 was a direct result of the downsizing of the HomeVisions catalog
operations, offset by increases in net cable access fees due to an increase in
the average rate per FTE cable home, increased marketing and advertising fees as
a result of absorbing additional advertising costs which were previously resold
to Montgomery Ward, costs associated with increased staff levels, recruitment
and labor rates due to increases in television home shopping sales volumes.
Distribution and selling expense for fiscal 1999 decreased as a percentage of
net sales over fiscal 1998 primarily due to the Company's focus on cost
efficiencies, the increase in television home shopping net sales over the prior
year and as a result of additional costs incurred by the Company and included in
fiscal 1998 in connection with the conversion, integration and start-up of the
Company's acquired direct-mail operations and warehouse facility.
General and administrative expenses for fiscal 2000 decreased $510,000 or
4% to $11,432,000 or 4% of net sales compared to $11,942,000 or 6% of net sales
in fiscal 1999. General and administrative costs decreased primarily as a result
of decreased costs due to the Company's recent catalog divestitures. This
decrease was offset by general and administrative expense increases in salaries
and other related personnel costs, including increased headcounts, and increases
in information systems costs and consulting fees incurred in connection with the
Company's e-commerce initiative and operating systems enhancements. General and
administrative expense decreased as a percentage of net sales primarily as a
result of the increase in net sales from year to year.
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37
General and administrative expenses for fiscal 1999 increased $1,788,000 or
18% to $11,942,000 or 6% of net sales compared to $10,154,000 or 5% of net sales
in fiscal 1998. General and administrative costs increased primarily as a result
of additional costs associated with increased administrative personnel and
salaries, particularly the hiring of several senior level executives, increased
rent and increased legal costs associated with settling certain merchandising
litigation. General and administrative costs increased as a percentage of net
sales from fiscal 1998 to fiscal 1999 as a result of increased general and
administrative costs and the decrease in net sales from year to year.
Depreciation and amortization costs were $4,966,000, $4,999,000 and
$6,977,000 for the years ended January 31, 2000, 1999 and 1998, respectively,
representing a decrease of $33,000 or 1% from fiscal 1999 to fiscal 2000 and a
decrease of $1,978,000 or 28% from fiscal 1998 to fiscal 1999. Depreciation and
amortization costs as a percentage of net sales were 2% in fiscal 2000, 2% in
fiscal 1999 and 3% in fiscal 1998. The dollar decrease is primarily due to a
reduction in depreciation expense in connection with the divestiture of the
Company's catalog operations and reduced amortization with respect to FCC
licenses offset by increased amortization associated with the Company's NBC
cable distribution and marketing agreement. The dollar decrease from fiscal 1998
to fiscal 1999 was primarily due to a reduction in amortization expense of
approximately $1,363,000 relating to intangible assets reduced in connection
with the November 1997 amended Montgomery Ward operating and license agreement.
In addition, depreciation and amortization expense decreased from fiscal 1998 as
a result of the Company's sale of its Seattle, Washington television station
(KBGE-TV, Channel 33) in February 1998.
OPERATING INCOME (LOSS)
The Company reported operating income of $3,996,000 for the year ended
January 31, 2000 compared with an operating loss of $8,569,000 for the year
ended January 31, 1999, an improvement of $12,565,000 over the prior year. The
Company reported an operating loss of $10,975,000 for the year ended January 31,
1998. The improvement in operating results over fiscal 1999 is directly
attributed to the overall operating improvements of the Company's television
home shopping business, which improved by approximately $7,543,000 while the
prior years' results included significant catalog operating losses. The Company
also experienced a modest improvement in operating income over prior year from
its catalog operations primarily resulting from the fiscal 1999 divestiture of
its unprofitable HomeVisions catalog operations. Overall, operating income
increased as a result of increased sales volumes and gross profits, a decrease
in general and administrative costs as a result of the divestiture and
downsizing of the Company's catalog business segment and a reduction of
depreciation and amortization expense over prior year. This was offset by
increases in distribution and selling costs largely due to increases in
front-end cable access fees associated with new cable distribution, increased
general and administrative costs associated with the Company's e-commerce
initiatives and increased amortization associated with the Company's NBC cable
distribution and marketing agreement.
The fiscal 1999 operating loss included a one-time restructuring and asset
impairment charge of $2,950,000 recorded in connection with the Company's
decision to divest its HomeVisions catalog operations. Excluding the one-time
HomeVisions restructuring charge, the operating loss was $5,619,000 for the year
ended January 31, 1999, an improvement of $5,356,000 or 49% over fiscal 1998.
The improvement in the operating loss from fiscal 1998 to fiscal 1999 resulted
primarily from an improvement in the Company's television home shopping
business, decreased distribution and selling costs due to the downsizing of the
HomeVisions catalog operations and because the first half of fiscal 1998
included certain additional costs incurred by the Company in connection with the
conversion and integration of the Company's fulfillment and warehouse facility.
Also contributing to the operating loss improvement in fiscal 1999 was a
reduction in amortization expense compared to fiscal 1998 which related
primarily to the November 1997 amended Montgomery Ward operating and license
agreement. These operating improvements were offset by increased general and
administrative costs, decreased sales volumes in the Company's direct mail
operations and a corresponding decrease in gross profits.
37
38
OTHER INCOME (EXPENSE)
Total other income was $42,775,000 in fiscal 2000, $16,060,000 in fiscal
1999 and $40,579,000 in fiscal 1998. Total other income for fiscal 2000 included
the following: pre-tax gains of $23,250,000 from the sale of two television
stations serving the Houston, Texas market; a pre-tax gain of $9,980,000
relating to a payment received from a prior year television station sale; net
pre-tax gains of $1,457,000 recorded on the sale and holdings of property and
security investments; a pre-tax loss of $1,991,000 related to an investment made
in 1997; and interest income of $10,129,000. Total other income for fiscal 1999
included the following: a pre-tax gain of $19,750,000 from the sale of
television station KBGE-TV Channel 33 in Seattle, Washington along with two low
power television stations and a minority interest in an entity which had applied
for a new full power station; pre-tax gains on the sale and holdings of property
and security investments of $9,452,000; and interest income of $2,904,000. These
gains were offset by the following charges: a $7,100,000 charge related to the
litigation settlement with Time Warner Cable; the $6,113,000 write-down of the
Company's investment in CML Group, Inc. following its announcement of
bankruptcy; the write-off of $2,350,000 of acquisition related costs associated
with the terminated merger with National Media Corporation; and equity in losses
of affiliates of $323,000. Total other income for fiscal 1998 resulted primarily
from a $38,850,000 gain recorded on the sale of television station WVVI-TV,
Channel 66, in July 1997, gains of $215,000 recorded from sales of other
investments and interest income of $2,116,000. These gains were offset by equity
in losses of affiliates of $431,000 recorded in fiscal 1998. Interest income
increased $7,225,000 from fiscal 1999 due to increases in cash and cash
equivalents and short-term investments from fiscal 1999 to fiscal 2000.
NET INCOME
Net income available to common shareholders was $29,123,000 or $.89 per
basic share and $.73 per diluted share for the year ended January 31, 2000.
Excluding the net gains/losses recorded on the sale and holdings of property and
investments and other one-time charges, discussed above, the Company recorded
net income available to common shareholders of $8,590,000, or $.26 per basic
share and $.21 per diluted share for the year ended January 31, 2000. Net income
available to common shareholders was $4,639,000 or $.18 per basic and diluted
share for the year ended January 31, 1999. Excluding the one-time pretax gains
and charges, discussed above, the Company had a net loss available to common
shareholders of $1,783,000 or $.07 per basic and diluted share. Net income
available to common shareholders was $18,104,000 or $.57 per basic and diluted
share for the year ended January 31, 1998. Excluding the gain on the sale of
television station WVVI, the gain on the sale of investments and loss on
earnings from affiliates, the Company had a net loss available to common
shareholders of $5,508,000 or $.17 per basic and diluted share. For the years
ended January 31, 2000, 1999 and 1998, respectively, the Company had
approximately 40,427,000, 26,267,000 and 31,888,000 diluted weighted average
common shares outstanding and 32,603,000, 25,963,000 and 31,745,000 basic
weighted average common shares outstanding.
For the years ended January 31, 2000, 1999 and 1998, net income reflects an
income tax provision of $17,441,000, $2,852,000 and $11,500,000, respectively,
which results in an effective tax rate of 37% in fiscal 2000, 38% in fiscal 1999
and 39% in fiscal 1998. As of January 31, 2000, all net tax carryforwards
available to offset future taxable income had been utilized.
PROGRAM DISTRIBUTION
The Company's television home shopping program was available to
approximately 33.1 million homes as of January 31, 2000 as compared to 21.8
million homes as of January 31, 1999 and to 17.4 million homes as of January 31,
1998. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 370 cable and or satellite
systems. In addition, the Company's programming is broadcast full-time over
eleven owned low power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of January 31, 2000,
1999 and 1998, the Company's programming was available to approximately 25.0
million, 14.9 million and 11.7 million FTE households, respectively.
Approximately 17.3 million, 10.6 million and 8.6 million households at January
31,
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2000, 1999 and 1998, respectively, received the Company's programming on a
full-time basis. Homes that receive the Company's programming 24 hours a day are
counted as one FTE each and homes that receive the Company's television home
shopping programming for any period less than 24 hours are counted based upon an
analysis of time of day and day of week.
QUARTERLY RESULTS
The following summarized unaudited results of operations for the quarters
in the fiscal years ended January 31, 2000 and 1999 have been prepared on the
same basis as the annual financial statements and reflect adjustments
(consisting of normal recurring adjustments), which the Company considers
necessary for a fair presentation of results of operations for the periods
presented. The Company's results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of operations in any
period should not be considered indicative of the results to be expected for any
future period.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 2000:
Net sales..................................... $53,142 $57,875 $76,575 $87,335 $274,927
Gross profit.................................. 22,479 22,514 30,610 30,925 106,528
Gross margin.................................. 42.3% 38.9% 40.0% 35.4% 38.7%
Operating expenses............................ 22,137 22,203 29,508 28,684 102,532
Operating income.............................. 342 311 1,102 2,241 3,996
Other income, net............................. 10,100 1,418 27,140 4,117 42,775
Net income.................................... $ 6,368 $ 1,048 $17,235 $ 4,679 $ 29,330
======= ======= ======= ======= ========
Net income per share (a)...................... $ .24 $ .03 $ .46 $ .12 $ .89
======= ======= ======= ======= ========
Net income per share -- assuming
dilution(a)................................. $ .22 $ .03 $ .37 $ .10 $ .73
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 26,016 29,651 37,044 37,700 32,603
======= ======= ======= ======= ========
Diluted..................................... 28,615 38,908 46,295 47,889 40,427
======= ======= ======= ======= ========
FISCAL 1999:
Net sales..................................... $43,676 $44,082 $50,027 $65,943 $203,728
Gross profit.................................. 18,654 18,130 20,497 28,690 85,971
Gross margin.................................. 42.7% 41.1% 41.0% 43.5% 42.2%
Operating expenses............................ 20,942 21,267 25,721 26,610 94,540
Operating income (loss)....................... (2,288) (3,137) (5,224) 2,080 (8,569)
Other income (expense), net................... 20,484 1,974 (5,005) (1,393) 16,060
Net income (loss)............................. $11,280 $ (721) $(6,341) $ 421 $ 4,639
======= ======= ======= ======= ========
Net income (loss) per share (a)............... $ .42 $ (.03) $ (.25) $ .02 $ .18
======= ======= ======= ======= ========
Net income (loss) per share -- assuming
dilution(a)................................. $ .42 $ (.03) $ (.25) $ .02 $ .18
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 26,781 25,979 25,467 25,626 25,963
======= ======= ======= ======= ========
Diluted..................................... 26,877 25,979 25,467 26,491 26,267
======= ======= ======= ======= ========
- -------------------------
(a) The sum of quarterly per share amounts does not equal the annual amount due
to changes in the calculation of average common and dilutive shares
outstanding required under Statement of Financial Accounting Standards No.
128, "Earnings per Share".
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000 and 1999, cash and cash equivalents and short-term
investments were $294,643,000 and $46,870,000, respectively, a $247,773,000
increase. For the year ended January 31, 2000,
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40
working capital increased $265,631,000 to $331,267,000 compared to an increase
of $15,565,000 to $65,636,000 for the year ended January 31, 1999. The current
ratio was 7.4 at January 31, 2000 compared to 3.0 at January 31, 1999. At
January 31, 2000 and 1999, all short-term investments and cash equivalents were
invested in money market funds, high quality commercial paper with original
maturity dates of less than two hundred and seventy (270) days and investment
grade corporate and municipal bonds with original maturity dates and/or tender
option terms ranging from two months to two years. In addition, at January 31,
2000, short-term investments included certain equity investments in the amount
of $96,000 classified as "trading securities".
Total assets at January 31, 2000 were $471,855,000 compared to $141,770,000
at January 31, 1999. Shareholders' equity was $371,921,000 at January 31, 2000,
compared to $108,411,000 at January 31, 1999, an increase of $263,510,000. The
increase in common shareholders' equity for fiscal 2000 resulted primarily from
the issuance of 10,674,000 shares of common stock at $16.71 per share, or
$178,370,000, to GE Equity upon the exercise of the Investment Warrant, net
income of $29,330,000 for the year, the issuance of 1,450,000 common stock
purchase warrants valued at $6,931,000 in connection with the NBC and GE Equity
strategic alliance, the issuance of 404,760 common stock purchase warrants
valued at $6,679,000 in connection with the NBCi strategic alliance, other
comprehensive income on investments available-for-sale of $11,732,000, proceeds
of $11,693,000 related to the exercise of stock options, proceeds of $1,059,000
related to the payoff of notes receivable from shareholders and a $17,923,000
income tax benefit relating to stock options exercised, offset by accretion of
redeemable preferred stock of $207,000. The increase in shareholders' equity
from fiscal 1998 to fiscal 1999 resulted primarily from reported net income of
$4,639,000, proceeds received on the exercise of stock options of $1,729,000,
other comprehensive income on available-for-sale investments of $1,050,000 and a
$731,000 income tax benefit relating to stock options exercised, offset by
$4,292,000 relating to the repurchase of 1,327,000 shares of Company common
stock made in connection with the Company's authorized stock repurchase program.
As of January 31, 2000, the Company had no long-term debt obligations.
For the year ended January 31, 2000, net cash used for operating activities
totaled $1,469,000 compared to net cash used of $18,091,000 in fiscal 1999 and
$19,445,000 in fiscal 1998. Cash flows from operations before consideration of
changes in working capital items and investing and financing activities was a
positive $8,962,000 in fiscal 2000 compared to a negative $3,570,000 in fiscal
1999 and a negative $3,998,000 in fiscal 1998. Net cash used for operating
activities for fiscal 2000 reflects net income, as adjusted for depreciation and
amortization, gains on the sale of property, investments and broadcast stations,
unrealized losses on trading securities and the write-down of an investment. In
addition, net cash used for operating activities for fiscal 2000 reflects
increases in accounts receivable, inventories and net income taxes receivable,
offset by increases in accounts payable and accrued liabilities and a decrease
in prepaid expenses. Accounts receivable increased primarily due to increased
receivables from customers for merchandise sales made pursuant to the "ValuePay"
installment program, the timing of credit card receivable payments and increased
interest receivable resulting from higher cash balances. Inventories increased
from fiscal 1999 to support increased sales volume offset by decreases resulting
from the divestiture of the Company's direct-mail catalog operations. The
increase in accounts payable and accrued liabilities is a direct result of the
increase in inventory levels and the timing of vendor payments. Prepaid expenses
decreased primarily as a result of decreased prepaid catalog costs as a result
of the divestiture of the Company's direct-mail catalog operations. Income taxes
receivable increased as a direct result of benefits recorded in the connection
with the exercise of employee stock options offset by an increase in income
taxes payable resulting from increased earnings.
Net cash used for operating activities for fiscal 1999 reflects net income,
as adjusted for depreciation and amortization, equity in losses of affiliates,
gains on the sale of property, investments and broadcast stations, unrealized
gains on trading securities, the write-down of an investment, a restructuring
and asset impairment charge and a write-off of terminated acquisition costs. Net
cash used for operating activities for fiscal 1999 also reflects increases in
accounts receivable and inventories, offset by decreases in prepaid expenses,
income taxes receivable and increases in accounts payable and accrued
liabilities. Accounts receivable increased primarily due to increased
receivables from merchandise sales made pursuant to the "ValuePay" installment
program. Inventories increased from fiscal 1998 to support increased sales
volumes primarily with respect to the
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Company's television home shopping business, offset by decreases resulting from
the downsizing and divestiture of the HomeVisions catalog operations. Prepaid
expenses increased primarily as a result of the timing of contract payments for
cable access fees and satellite rentals. The increase in accounts payable and
accrued liabilities was primarily the result of increased inventory levels and
the timing of related invoice payments offset by decreases resulting from the
HomeVisions divestiture.
The Company utilizes an installment payment program called "ValuePay" which
entitles customers to purchase merchandise and generally pay for the merchandise
in two to six equal monthly installments. As of January 31, 2000, the Company
had approximately $42,212,000 due from customers under the ValuePay installment
program, compared to $16,554,000 at January 31, 1999. The increase in ValuePay
receivables from fiscal 1999 is primarily the result of the significant increase
in television home shopping sales over prior year and sales incentive programs
initiated during 2000, which emphasized the increased use of the installment
payment program. ValuePay was introduced to increase sales while at the same
time reducing return rates on merchandise with above-normal average selling
prices. The Company intends to continue to sell merchandise using the ValuePay
installment program. Receivables generated from the ValuePay program will be
funded in fiscal 2001 from the Company's present capital resources and future
operating cash flows.
Net cash provided by (used for) investing activities totaled ($135,897,000)
in fiscal 2000 compared to $48,131,000 in fiscal 1999 and $23,065,000 in fiscal
1998. Expenditures for property and equipment were $4,036,000 in fiscal 2000
compared to $1,565,000 in fiscal 1999 and $3,543,000 in fiscal 1998.
Expenditures for property and equipment in fiscal 2000 and 1999 included (i) the
upgrade of computer software, related computer equipment and other office
equipment, (ii) webpage development costs associated with the Company's
e-commerce initiative, (iii) warehouse equipment and (iv) expenditures on
leasehold improvements. The increases in property and equipment in fiscal 2000
were offset by a decrease of approximately $1,091,000 related to the divestiture
of the Company's direct-mail catalog businesses and the sale of television
broadcast station KVVV-TV. The increases in property and equipment in fiscal
1999 were offset by a decrease of approximately $5,100,000 related to the sale
of land which had been held for investment purposes and decreases of
approximately $594,000 of transmission and production equipment and other fixed
assets resulting from the sale of television broadcast station KBGE-TV. The
increases in property and equipment in fiscal 1998 were offset by a decrease of
approximately $3,000,000 of transmission and production equipment and other
fixed assets resulting from the sale of its television broadcast station WVVI.
Principal future capital expenditures will be for upgrading television
production and transmission equipment, and the upgrade and replacement of
computer software, systems and related computer equipment associated with the
expansion of the home shopping business and the Company's e-commerce initiative.
In addition, during fiscal 2001, the Company plans to make capital expenditures
in its Bowling Green, Kentucky distribution facility and to develop additional
call center capabilities to prepare for fulfillment and service obligations made
in connection with the services agreements recently entered into with Ralph
Lauren Media, LLC. During fiscal 2000, the Company received $28,130,000 in
proceeds from the sale of its full power television station KVVV-TV and K53 FV
low power stations and received a $10,000,000 contingent payment relating to the
sale of its television station KBGE-TV. In addition, during fiscal 2000, the
Company invested $202,107,000 in various short-term investments, received
proceeds of $46,884,000 from the sale of short-term investments, received
proceeds of $12,403,000 from the sale of property and other investments,
received $1,436,000 in connection with the repayment of outstanding notes
receivable and made disbursements of $28,607,000 for certain investments and
other long-term assets.
During fiscal 1999, the Company received $9,548,000 of proceeds from the
sale of real property in Eden Prairie, Minnesota and other investments, received
$24,483,000 in proceeds from the sale of its broadcast television station
KBGE-TV, invested $12,394,000 in various short-term investments and received
proceeds of $25,056,000 from the sale of short-term investments. In addition,
during fiscal 1999, the Company disbursed $3,997,000 relating to certain
investments and other long-term assets of which $1,818,000 related to costs
associated with the terminated National Media Merger Agreement, advanced an
additional $3,000,000 working capital loan in the form of a demand note to
National Media Corporation and received $10,000,000 from National Media
Corporation in connection with the repayment of the demand note.
41
42
During fiscal 1998, the Company received approximately $30,000,000 in cash
proceeds from the sale of television station WVVI, invested $43,867,000 in
various short-term investments and received proceeds of $51,122,000 from the
sale of short-term investments. The Company also disbursed $6,631,000 relating
to certain strategic investments and other long-term assets, granted a
$7,000,000 working capital loan in the form of a demand note to National Media
Corporation, received $1,381,000 in net proceeds from sales and distributions of
certain long-term investments and received proceeds of $1,603,000 in collection
of a long-term note receivable.
Net cash provided by financing activities totaled $231,323,000 for fiscal
2000 and related primarily to $178,370,000 of proceeds received from GE Equity
on the issuance of 10,674,000 shares of Common Stock in conjunction with the
exercise of the Investment Warrant and $41,415,000 of net proceeds received from
the issuance of Series A Redeemable Preferred Convertible Stock in conjunction
with the Company's new strategic alliance with GE Equity. In addition, the
Company also received proceeds of $11,693,000 from the exercise of stock options
and made payments of $155,000 on capital leases. Net cash used for financing
activities totaled $2,974,000 for fiscal 1999 and $15,041,000 for fiscal 1998.
Net cash used for financing activities for fiscal 1999 and fiscal 1998 primarily
related to common stock repurchases made under the Company's common stock
repurchase program, installment payments made under a five year non-compete
obligation entered into upon the acquisition of a broadcast station and capital
lease obligation payments offset by proceeds received from the exercise of stock
options and warrants.
Management believes that funds currently held by the Company should be
sufficient to fund the Company's operations, anticipated capital expenditures or
strategic investments and cable launch fees through fiscal 2001.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 is effective for the Company's fiscal quarter ending
April 30, 2000. SAB No. 101 is not expected to have a material effect on the
Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued in
June 1998 and amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133" to
require adoption at the beginning of the Company's fiscal year ending January
31, 2002. The standard requires every derivative to be recorded on the balance
sheet as either an asset or liability measured at fair value with changes in the
derivative's fair value recognized in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is not expected to have a material effect on the
Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the United
States and as such are not subject to foreign currency exchange rate risk. The
Company has no long-term debt, and accordingly, is not significantly exposed to
interest rate risk.
42
43
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
PAGE
----
Report of Independent Public Accountants.................... 44
Consolidated Balance Sheets as of January 31, 2000 and
1999...................................................... 45
Consolidated Statements of Operations for the Years Ended
January 31, 2000, 1999 and 1998........................... 46
Consolidated Statements of Shareholders' Equity for the
Years Ended January 31, 2000, 1999 and 1998............... 47
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2000, 1999 and 1998........................... 49
Notes to Consolidated Financial Statements.................. 50
Financial Statement Schedule -- Schedule II -- Valuation and
Qualifying Accounts....................................... 76
43
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ValueVision International, Inc.:
We have audited the accompanying consolidated balance sheets of ValueVision
International, Inc. (a Minnesota corporation) and Subsidiaries as of January 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 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. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of ValueVision International,
Inc. and Subsidiaries as of January 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly state
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 13, 2000
44
45
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31,
----------------------
2000 1999
---- ----
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $138,221 $ 44,264
Short-term investments.................................... 156,422 2,606
Accounts receivable, net.................................. 49,070 19,466
Inventories, net.......................................... 22,677 21,101
Prepaid expenses and other................................ 4,888 8,576
Income taxes receivable................................... 9,626 500
Deferred income taxes..................................... 1,950 1,807
-------- --------
Total current assets................................. 382,854 98,320
PROPERTY AND EQUIPMENT, NET................................. 14,350 14,069
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET............. 124 2,019
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET............. 6,394 --
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET....... 1,679 1,876
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION............. 3,911 9,713
GOODWILL, NET............................................... 64 5,962
INVESTMENTS AND OTHER ASSETS, NET........................... 62,479 9,160
DEFERRED INCOME TAXES....................................... -- 651
-------- --------
$471,855 $141,770
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ -- $ 393
Accounts payable.......................................... 34,937 20,736
Accrued liabilities....................................... 16,650 11,555
-------- --------
Total current liabilities............................ 51,587 32,684
LONG-TERM OBLIGATIONS....................................... -- 675
DEFERRED INCOME TAXES....................................... 6,725 --
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PAR VALUE, 5,339,500 SHARES AUTHORIZED; 5,339,500
AND 0 ISSUED AND OUTSTANDING........................... 41,622 --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 38,192,164 and 25,865,466 shares issued and
outstanding............................................ 382 259
Common stock purchase warrants; 1,854,760 and 0 shares.... 13,610 --
Additional paid-in capital................................ 280,578 72,715
Accumulated other comprehensive income (losses)........... 8,891 (2,841)
Notes receivable from shareholders........................ -- (1,059)
Retained earnings......................................... 68,460 39,337
-------- --------
Total shareholders' equity........................... 371,921 108,411
-------- --------
$471,855 $141,770
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
45
46
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------
2000 1999 1998
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
NET SALES.......................................... $ 274,927 $ 203,728 $ 217,982
COST OF SALES...................................... 168,399 117,757 122,808
---------- ----------- -----------
Gross profit.................................. 106,528 85,971 95,174
---------- ----------- -----------
OPERATING EXPENSES:
Distribution and selling......................... 86,134 74,649 89,018
General and administrative....................... 11,432 11,942 10,154
Depreciation and amortization.................... 4,966 4,999 6,977
Restructuring and impairment of assets........... -- 2,950 --
---------- ----------- -----------
Total operating expenses...................... 102,532 94,540 106,149
---------- ----------- -----------
OPERATING INCOME (LOSS)............................ 3,996 (8,569) (10,975)
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations............... 33,230 19,750 38,850
Gain on sale of property and investments......... 2,347 8,102 215
Time Warner litigation settlement................ -- (7,100) --
Write-down of investments........................ (1,991) (6,113) --
National Media Corporation terminated acquisition
costs......................................... -- (2,350) --
Unrealized gain (loss) on trading securities..... (890) 1,350 --
Equity in losses of affiliates................... -- (323) (431)
Interest income.................................. 10,129 2,904 2,116
Other, net....................................... (50) (160) (171)
---------- ----------- -----------
Total other income............................ 42,775 16,060 40,579
---------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES........... 46,771 7,491 29,604
Provision for income taxes.................... 17,441 2,852 11,500
---------- ----------- -----------
NET INCOME......................................... 29,330 4,639 18,104
ACCRETION OF REDEEMABLE PREFERRED STOCK............ (207) -- --
---------- ----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS........ $ 29,123 $ 4,639 $ 18,104
========== =========== ===========
NET INCOME PER COMMON SHARE........................ $ 0.89 $ 0.18 $ 0.57
========== =========== ===========
NET INCOME PER COMMON SHARE -- ASSUMING DILUTION... $ 0.73 $ 0.18 $ 0.57
========== =========== ===========
Weighted average number of common shares
outstanding:
Basic............................................ 32,602,536 25,963,341 31,745,437
========== =========== ===========
Diluted.......................................... 40,426,925 26,266,814 31,888,229
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
46
47
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK COMMON OTHER
------------------ STOCK ADDITIONAL COMPREHENSIVE
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN INCOME
INCOME OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1997.................. 28,842,198 $288 $ 26,984 $ 83,310 $ 43
Comprehensive income:
Net income............ $18,104 -- -- -- -- --
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $2,411..... (3,934) -- -- -- -- (3,934)
-------
Comprehensive
income:........ $14,170
=======
Exercise of stock
options and
warrants.............. 1,636,080 16 -- 282 --
Repurchases of common
stock and warrants.... (3,697,500) (36) (18,387) (17,324) --
Value transferred from
common stock purchase
warrants.............. -- -- (8,597) 8,597 --
Income tax effect of
warrants
repurchased........... -- -- -- (366) --
Income tax benefit from
stock options
exercised............. -- -- -- 39 --
Increase in notes
receivable from
shareholders.......... -- -- -- -- --
---------- ---- -------- -------- -------
BALANCE, JANUARY 31,
1998.................. 26,780,778 268 -- 74,538 (3,891)
Comprehensive income:
Net income............ $ 4,639 -- -- -- -- --
Other comprehensive
income (losses),
net of tax:
Unrealized losses on
securities, net of
tax of $1,550..... (2,529)
Write-down of
securities to net
realizable value,
net of tax of
$1,499............ 3,579
-------
Other comprehensive
income.............. 1,050 -- -- -- -- 1,050
-------
Comprehensive
income:........ $ 5,689
=======
Exercise of stock
options............... 412,118 4 -- 1,725 --
Repurchases of common
stock................. (1,327,430) (13) -- (4,279) --
Income tax benefit from
stock options
exercised............. -- -- -- 731 --
Increase in notes
receivable from
shareholders.......... -- -- -- -- --
---------- ---- -------- -------- -------
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
SHAREHOLDERS EARNINGS EQUITY
------------ -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1997.................. $ (591) $16,594 $126,628
Comprehensive income:
Net income............ -- 18,104 18,104
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $2,411..... -- -- (3,934)
Comprehensive
income:........
Exercise of stock
options and
warrants.............. -- -- 298
Repurchases of common
stock and warrants.... -- -- (35,747)
Value transferred from
common stock purchase
warrants.............. -- -- --
Income tax effect of
warrants
repurchased........... -- -- (366)
Income tax benefit from
stock options
exercised............. -- -- 39
Increase in notes
receivable from
shareholders.......... (369) -- (369)
------- ------- --------
BALANCE, JANUARY 31,
1998.................. (960) 34,698 104,653
Comprehensive income:
Net income............ -- 4,639 4,639
Other comprehensive
income (losses),
net of tax:
Unrealized losses on
securities, net of
tax of $1,550.....
Write-down of
securities to net
realizable value,
net of tax of
$1,499............
Other comprehensive
income.............. -- -- 1,050
Comprehensive
income:........
Exercise of stock
options............... -- -- 1,729
Repurchases of common
stock................. -- -- (4,292)
Income tax benefit from
stock options
exercised............. -- -- 731
Increase in notes
receivable from
shareholders.......... (99) -- (99)
------- ------- --------
47
48
ACCUMULATED
COMMON STOCK COMMON OTHER
------------------ STOCK ADDITIONAL COMPREHENSIVE
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN INCOME
INCOME OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1999.................. 25,865,466 259 -- 72,715 (2,841)
Comprehensive income:
Net income............ $29,330 -- -- -- -- --
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
tax of $7,193..... 11,732 -- -- -- -- 11,732
-------
Comprehensive
income:........ $41,062
=======
Proceeds received on
officer notes......... -- -- -- -- --
Value assigned to common
stock purchase
warrants.............. -- -- 13,610 -- --
Exercise of stock
warrants.............. 10,674,418 107 -- 178,263 --
Exercise of stock
options............... 1,652,280 16 -- 11,677 --
Income tax benefit from
stock options
exercised............. -- -- -- 17,923 --
Accretion of redeemable
preferred stock....... -- -- -- -- --
---------- ---- -------- -------- -------
BALANCE, JANUARY 31,
2000.................. 38,192,164 $382 $ 13,610 $280,578 $ 8,891
========== ==== ======== ======== =======
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
SHAREHOLDERS EARNINGS EQUITY
------------ -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1999.................. (1,059) 39,337 108,411
Comprehensive income:
Net income............ -- 29,330 29,330
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
tax of $7,193..... -- -- 11,732
Comprehensive
income:........
Proceeds received on
officer notes......... 1,059 -- 1,059
Value assigned to common
stock purchase
warrants.............. -- -- 13,610
Exercise of stock
warrants.............. -- -- 178,370
Exercise of stock
options............... -- -- 11,693
Income tax benefit from
stock options
exercised............. -- -- 17,923
Accretion of redeemable
preferred stock....... -- (207) (207)
------- ------- --------
BALANCE, JANUARY 31,
2000.................. $ -- $68,460 $371,921
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
48
49
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
---------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................................ $ 29,330 $ 4,639 $ 18,104
Adjustments to reconcile net income to net cash provided
by
(used for) operating activities-
Depreciation and amortization.......................... 4,966 4,999 6,977
Deferred taxes......................................... (55) (1,408) 1,840
Gain on sale of broadcast stations..................... (33,230) (19,750) (38,850)
Gain on sale of property and investments............... (2,347) (8,102) (215)
Write-down of investments.............................. 250 6,113 --
Restructuring and impairment of assets................. -- 2,950 --
National Media Corporation terminated acquisition
costs................................................ -- 2,350 --
Unrealized loss (gain) on trading securities........... 890 (1,350) --
Equity in losses of affiliates......................... -- 323 431
Changes in operating assets and liabilities, net of
effect of divestitures:
Accounts receivable, net............................. (22,836) (11,021) (3,763)
Inventories, net..................................... (7,515) (2,255) 5,682
Prepaid expenses and other........................... (1,646) 1,553 627
Accounts payable and accrued liabilities............. 21,927 2,620 (9,158)
Income taxes payable (receivable), net............... 8,797 248 (1,120)
--------- -------- --------
Net cash used for operating activities............ (1,469) (18,091) (19,445)
--------- -------- --------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements...... (4,036) (1,565) (3,543)
Proceeds from sale of broadcast stations.................. 38,130 24,483 30,000
Proceeds from sale of investments and property............ 12,403 9,548 1,381
Purchase of short-term investments........................ (202,107) (12,394) (43,867)
Proceeds from sale of short-term investments.............. 46,884 25,056 51,122
Loan to National Media Corporation........................ -- (3,000) (7,000)
Payment for investments and other assets.................. (28,607) (3,997) (6,631)
Proceeds from notes receivable............................ 1,436 10,000 1,603
--------- -------- --------
Net cash provided by (used for) investing
activities...................................... (135,897) 48,131 23,065
--------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Series A Preferred Stock, net... 41,415 -- --
Proceeds from exercise of stock options and warrants...... 190,063 1,729 299
Payments for repurchases of common stock.................. -- (4,292) (14,964)
Payment of long-term obligations.......................... (155) (411) (376)
--------- -------- --------
Net cash provided by (used for) financing
activities...................................... 231,323 (2,974) (15,041)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 93,957 27,066 (11,421)
BEGINNING CASH AND CASH EQUIVALENTS......................... 44,264 17,198 28,619
--------- -------- --------
ENDING CASH AND CASH EQUIVALENTS............................ $ 138,221 $ 44,264 $ 17,198
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
49
50
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
1. THE COMPANY:
ValueVision International, Inc. and Subsidiaries ("the Company") is an
integrated direct marketing company which markets its products directly to
consumers through various forms of electronic media.
The Company's television home shopping business uses recognized on-air
television home shopping personalities to market brand name merchandise and
proprietary and private label consumer products at competitive or discount
prices. The Company's 24-hour per day television home shopping programming is
distributed primarily through long-term cable affiliation agreements and the
purchase of month-to-month full-and part-time block lease agreements of cable
and broadcast television time. In addition, the Company distributes its
programming through Company owned low power television ("LPTV") stations and to
satellite dish owners. The Company also complements its television home shopping
business by the sale of merchandise through its Internet shopping website
(www.vvtv.com).
The Company's growing home shopping network and companion Internet shopping
website will be re-branded as SnapTV and SnapTV.com, respectively, as part of a
wide-ranging direct e-commerce strategy the Company is pursuing with NBC
Internet, Inc. ("NBCi"), a subsidiary of the National Broadcasting Company, Inc.
("NBC"). These moves are intended to position SnapTV and NBCi as leaders in the
evolving convergence of television and the Internet, combining the promotional
and selling power of television with the purely digital world of e-commerce.
NBCi is a new entity formed as a result of the merger of Snap! LLC, XOOM.com,
Inc. and several Internet assets of NBC. In mid-1999, the Company founded
ValueVision Interactive, Inc. as a wholly owned subsidiary of the Company, to
manage and develop the Company's Internet e-commerce initiatives using the
SnapTV.com brand, as well as to manage the Company's e-commerce investment
strategies and portfolio.
The Company, through its wholly owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), was a direct-mail marketer of a broad range of
quality general merchandise which was sold to consumers through direct-mail
catalogs and other direct marketing solicitations. In the second half of fiscal
2000, the Company sold its remaining direct-mail catalog subsidiaries and exited
from the direct marketing catalog business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ValueVision International, Inc. ("ValueVision") and its wholly owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year ends on January 31. Fiscal years are designated
in the accompanying consolidated financial statements and related notes by the
calendar year in which the fiscal year ends.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue is recognized at the time merchandise is shipped. Shipping and
handling fees collected from customers are recognized as merchandise is shipped
and are offset against actual shipping expenses as a component of distribution
and selling costs. Returns are estimated and provided for at the time of sale
based on historical experience. Payments received for unfilled orders are
reflected as a component of accrued liabilities.
50
51
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
Accounts receivable consist primarily of amounts due from customers for
merchandise sales and from credit card companies, and are reflected net of
reserves for estimated uncollectible amounts of $4,314,000 at January 31, 2000
and $1,726,000 at January 31, 1999.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds and
commercial paper with an original maturity of 90 days or less.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of high quality commercial paper
with original maturity dates of less than two hundred and seventy (270) days and
investment grade corporate and municipal bonds with original maturity dates
and/or tender option terms ranging from two months to two years. These
investments are stated at cost, which approximates market value due to the short
maturities of these instruments. Short-Term Investments also include certain
equity investments classified as "trading securities".
INVESTMENTS IN EQUITY SECURITIES
The Company classifies certain investments in equity securities as
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115"), and reports these investments at fair value. Under
SFAS No. 115, unrealized holding gains and losses on available-for-sale
securities are excluded from income and are reported as a separate component of
shareholders' equity. Realized gains and losses from securities classified as
available-for-sale are included in income and are determined using the average
cost method for ascertaining the cost of securities sold.
Information regarding available-for-sale investments in equity securities
is as follows:
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ---------- ---------- ----------
January 31, 2000 equity securities......... $24,929,000 $15,781,000 $1,438,000 $39,272,000
=========== =========== ========== ===========
January 31, 1999 equity securities......... $14,295,000 $ -- $4,582,000 $ 9,713,000
=========== =========== ========== ===========
As of January 31, 2000 and 1999, all available-for-sale investments were
classified as long-term investments in the accompanying consolidated balance
sheets. Also see "Investments and Other Assets."
Proceeds from sales of investment securities available-for-sale were
$12,043,000, $662,000 and $3,084,000 in fiscal 2000, 1999 and 1998,
respectively, and related gross realized gains included in income were
$2,206,000, $26,000 and $215,000 in fiscal 2000, 1999 and 1998, respectively.
As of January 31, 2000 and 1999, respectively, the Company had $96,000 and
$2,606,000 of investments classified as trading securities in the accompanying
consolidated balance sheets. Net unrealized holding gains (losses) on trading
securities included in income during fiscal 2000 and 1999 totaled $(890,000) and
$1,350,000, respectively. See additional discussion in Note 14 regarding these
trading securities. There were no unrealized holding gains or losses recorded
with respect to trading securities during fiscal 1998 as the Company did not
have any equity investments classified as such in that year.
In accordance with the provisions of SFAS No. 115, the Company wrote off
its investment in CML Group, Inc. ("CML") in fiscal 1999. The decline in the
investment's fair value was judged by management to be other than temporary
following CML's announcement that its NordicTrack subsidiary had
51
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The write-off
totaled approximately $6,113,000. Subsequently, CML also filed for protection
under Chapter 11 of the U.S. Bankruptcy Code.
INVENTORIES
Inventories, which consist primarily of consumer merchandise held for
resale, are stated at the lower of first-in, first-out cost or realizable value.
ADVERTISING COSTS
Promotional advertising expenditures are expensed in the period the
advertising initially takes place. Direct response advertising costs, consisting
primarily of catalog preparation, printing and postage expenditures, are
deferred and amortized over the period during which the benefits are expected,
generally three to six months. Advertising costs of $18,719,000, $31,729,000 and
$44,894,000 for the years ended January 31, 2000, 1999 and 1998, respectively,
are included in the accompanying consolidated statements of operations. Prepaid
expenses and other includes deferred advertising costs of $2,242,000 at January
31, 2000 and $4,538,000 at January 31, 1999, which will be reflected as an
expense during the quarterly period benefited.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements and renewals that
extend the life of an asset are capitalized and depreciated. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts, and any residual values are charged or
credited to operations. Depreciation and amortization for financial reporting
purposes are provided principally on the straight-line method based upon
estimated useful lives. During fiscal 1999, the Company sold real property held
for investment purposes and recognized a $3,471,000 gain on the sale.
Property and equipment consisted of the following at January 31:
ESTIMATED
USEFUL LIFE
(IN YEARS) 2000 1999
----------- ---- ----
Land and improvements.................... -- $ 1,405,000 $ 1,405,000
Buildings and improvements............... 40 4,270,000 4,267,000
Transmission and production equipment.... 5-20 5,920,000 7,734,000
Office and warehouse equipment........... 3-10 5,806,000 4,332,000
Computer and telephone equipment......... 3-5 5,451,000 4,849,000
Leasehold improvements................... 3-5 2,033,000 2,120,000
Less -- Accumulated depreciation and
amortization........................... (10,535,000) (10,638,000)
------------ -----------
$ 14,350,000 $14,069,000
============ ===========
FEDERAL COMMUNICATIONS COMMISSION LICENSES
Federal Communications Commission ("FCC") licenses are stated at
acquisition cost as determined based upon independent appraisals and are
amortized on a straight-line basis over their estimated useful lives of 25
years. Accumulated amortization was $11,000 at January 31, 2000 and $452,000 at
January 31, 1999.
Although the FCC has established eight year license terms for television
stations, the Telecommunications Act of 1996 requires the FCC to grant
applications for renewal of such licenses upon a finding that
52
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
(i) the station has served the public interest, convenience, and necessity; (ii)
there have been no serious violations by the licensee of the Telecommunications
Act or the FCC's rules and regulations; and (iii) there have been no other
violations by the licensee of such Act or rules and regulations which, taken
together, would constitute a pattern of abuse. The Company has met and continues
to meet the requirements set forth above, and based further on standard industry
practice, the Company has determined that 25 years is a reasonable estimated
useful life for its FCC licenses, considering the future periods to be
benefited.
CABLE DISTRIBUTION AND MARKETING AGREEMENT
As discussed further in Note 15, in March 1999, the Company entered into a
Distribution and Marketing Agreement with NBC, which provides that NBC shall
have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television service. Under the ten-year
agreement, NBC has committed to deliver 10 million full-time equivalent ("FTE")
subscribers over a forty-two month period. In compensation for these services,
the Company pays NBC a $1.5 million annual fee and issued NBC a Distribution
Warrant to purchase 1,450,000 shares of the Company's common stock at an
exercise price of $8.29 per share. The value assigned to the Distribution and
Marketing Agreement and related warrant of $6,931,000 was determined pursuant to
an independent appraisal and is being amortized on a straight-line basis over
the term of the agreement. As of January 31, 2000, accumulated amortization
related to this asset totaled $537,000.
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES
As discussed further in Note 3, in fiscal 1996, the Company issued common
stock purchase warrants in exchange for various agreements entered into with
Montgomery Ward & Co., Incorporated ("Montgomery Ward") including an Operating
Agreement, a Credit Card License and Receivable Sales Agreement, and a
Servicemark License Agreement. The value assigned to the agreements was
determined pursuant to an independent appraisal and was being amortized on a
straight-line basis over the term of the agreements. The Operating Agreement has
a twelve-year term, expiring July 31, 2008 and may be terminated under certain
circumstances, as defined in the agreement. The Credit Card License and
Receivable Sales Agreement and Servicemark License Agreement automatically
terminate upon termination of the Operating Agreement.
In the fourth quarter of fiscal 1998, the Company and Montgomery Ward
restructured the Operating Agreement in an equity transaction whereby certain
rights and arrangements with respect to both the Company's television home
shopping and catalog operations were modified and amended and, among other
matters, the Company agreed to cease the use of the Montgomery Ward and
Montgomery Ward Direct names in its catalog operations. As a result of the
restructuring, the Montgomery Ward Operating Agreement and License asset was
reduced to $2,115,000, which represented the asset's remaining fair value
assigned to the Company's non-catalog operations. The value assigned to the
asset as of the date of the restructuring was determined through an analysis of
the future cash flows and benefits expected to be received and is being
amortized on a straight-line basis over the remaining term of the agreement. As
of January 31, 2000, accumulated amortization related to this asset totaled
$436,000.
53
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following at January 31:
2000 1999
---- ----
Investments.......................................... $53,129,000 $3,348,000
Long-term note....................................... 5,000,000 --
Prepaid cable launch fees, net....................... 1,042,000 1,575,000
Other, net........................................... 3,308,000 4,237,000
----------- ----------
$62,479,000 $9,160,000
=========== ==========
At January 31, 2000, investments include approximately $35,361,000 related
to equity investments made in Internet companies whose shares are traded on a
public exchange. These equity investments were made primarily in conjunction
with the Company's recent e-commerce, Internet strategic alliances and the
launching and re-branding of the Company's SnapTV shopping network. These
investments are classified as "available-for-sale" investments and are accounted
for under the provisions of SFAS No. 115. Also, included in investments at
January 31, 2000 are certain nonmarketable equity investments in private
companies and other enterprises totaling approximately $17,768,000 which are
carried at the lower of cost or net realizable value. The carrying values of
these investments are evaluated periodically by the Company using recent
financing and securities transactions, present value and other pricing models,
and, to a lesser extent, other pertinent information, including financial
condition and operating results.
At January 31, 2000, investments include approximately $842,000 related to
a 13% interest in a venture capital limited partnership. The purpose of the
limited partnership is to invest in and assist new and emerging growth-oriented
businesses and leveraged buyouts in the consumer services, retailing and direct
marketing industries. In addition to the Company, Merchant Advisors, L.P. is the
only other limited partner in the limited partnership. The investment in this
partnership is accounted for using the equity method of accounting. During
fiscal 2000 and 1999, the Company received cash distributions of approximately
$826,000 and $1,061,000, respectively, from the limited partnership.
As discussed further in Note 4, in December 1999, the Company recorded a
$5,000,000 long-term promissory note in connection with the sale of one of its
direct-mail subsidiaries. The principal on the note is payable quarterly over a
seven-year period starting in March 2002 and bears interest at 6 1/4%, payable
quarterly starting in June 2000. The note is collateralized by substantially all
of the operating assets of the former subsidiary.
Prepaid cable launch fees represent amounts paid to cable operators upon
entering into cable affiliation agreements. These fees are capitalized and
amortized over the lives of the related cable affiliation contracts, which range
from 3-7 years.
Other assets consist principally of prepaid satellite transponder launch
fees, long-term deposits, notes receivable and deferred acquisition costs, all
of which are carried at cost, net of accumulated amortization. Costs are
amortized on a straight-line basis over the estimated useful lives of the
assets, ranging from 12 to 25 years. Accumulated amortization was $553,000 at
January 31, 2000 and $747,000 at January 31, 1999. At January 31, 2000, other
assets also include a $1,075,000 long-term receivable related to the third-party
sale of the Company's HomeVisions catalog trade name and customer lists. The
sale was made in conjunction with the divestiture of the HomeVisions catalog
operations as discussed in Note 4. The receivable was recorded at its net
present value and payments are being received in quarterly installments through
2003.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
JANUARY 31,
--------------------------
2000 1999
---- ----
Accrued marketing fees.............................. $ 3,960,000 $ 3,688,000
Reserve for product returns......................... 3,710,000 2,291,000
Other............................................... 8,980,000 5,576,000
----------- -----------
$16,650,000 $11,555,000
=========== ===========
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting under which deferred tax assets are recognized for deductible
temporary differences, and operating loss and tax credit carry forwards and
deferred tax liabilities are recognized for taxable temporary differences.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of the enactment of such laws.
NET INCOME PER COMMON SHARE
The Company calculates earnings per share ("EPS") in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Basic EPS is computed by dividing reported earnings by
the weighted average number of common shares outstanding for the reported
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock of the Company during reported periods.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------
2000 1999 1998
---- ---- ----
Net income available to common
shareholders............................ $29,123,000 $ 4,639,000 $18,104,000
=========== =========== ===========
Weighted average number of common shares
outstanding -- Basic.................... 32,602,000 25,963,000 31,745,000
Dilutive effect of convertible Preferred
Stock................................... 4,019,000 -- --
Dilutive effect of stock options and
warrants................................ 3,806,000 304,000 143,000
----------- ----------- -----------
Weighted average number of common shares
outstanding -- Diluted.................. 40,427,000 26,267,000 31,888,000
=========== =========== ===========
Net income per common share............... $ 0.89 $ 0.18 $ 0.57
=========== =========== ===========
Net income per common share -- assuming
dilution................................ $ 0.73 $ 0.18 $ 0.57
=========== =========== ===========
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting in the financial
statements all changes in equity during a period, except those resulting from
investments by and distributions to owners. For the Company, comprehensive
income includes net income and other comprehensive income (loss), which consists
of unrealized holding gains and losses from
55
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
equity investments, classified as "available-for-sale". Total comprehensive
income was $41,062,000, $5,689,000 and $14,170,000 for the years ended January
31, 2000, 1999 and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair values for financial instruments:
The carrying amounts reported in the accompanying consolidated balance
sheets approximate the fair value for cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities, due
to the short maturities of those instruments.
Fair values for long-term investments are based on quoted market prices,
where available. For equity securities not actively traded, fair values are
estimated by using quoted market prices of comparable instruments or, if there
are no relevant comparables, on pricing models or formulas using current
assumptions.
The fair value for the Company's long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates, for similar types of borrowing arrangements, and approximated
carrying value at January 31, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during reporting
periods. These estimates relate primarily to the carrying amounts of accounts
receivable and inventories, the realizability of certain long-term assets and
the recorded balances of certain accrued liabilities and reserves. Ultimate
results could differ from these estimates.
RECLASSIFICATIONS
Certain 1999 and 1998 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 2000 presentation,
with no impact on previously reported net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 is effective for the Company's fiscal quarter ending
April 30, 2000. SAB No. 101 is not expected to have a material effect on the
Company's financial position or results of operations.
56
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued in
June 1998 and amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133" to
require adoption at the beginning of the Company's fiscal year ending January
31, 2002. The standard requires every derivative to be recorded on the balance
sheet as either an asset or liability measured at fair value with changes in the
derivative's fair value recognized in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is not expected to have a material effect on the
Company's financial position or results of operations.
3. MONTGOMERY WARD ALLIANCE:
During fiscal 1996, the Company entered into a Securities Purchase
Agreement, an Operating Agreement, a Credit Card License and Receivable Sales
Agreement, and a Servicemark License Agreement (collectively, the "MW
Agreements") with Montgomery Ward. In June 1996, the Company signed a non-
binding Memorandum of Understanding with Montgomery Ward pursuant to which the
companies agreed to the expansion and restructuring of their ongoing operating
and license agreements as well as the Company's acquisition of substantially all
of the assets and assumption of certain obligations of Montgomery Ward Direct
L.P. ("MWD"), a four year old catalog business.
Effective November 1, 1997, the Company restructured its operating
agreement with Montgomery Ward, which governed the use of the Montgomery Ward
name. In exchange for Montgomery Ward's return to ValueVision of warrants
covering the purchase of 3,842,143 shares of ValueVision common stock, the
Company ceded exclusive use of the Montgomery Ward name for catalog, mail order,
catalog "syndications" and television shopping programming back to Montgomery
Ward. Under the agreement, the Company ceased the use of the Montgomery Ward
name in all outgoing catalog, syndication, and mail order communication through
March 31, 1998. The agreement also included the reduction of Montgomery Ward's
minimum commitment to support ValueVision's cable television spot advertising
purchases. Under the new terms, Montgomery Ward's commitment was reduced from $4
million to $2 million annually, and the time period was decreased from five to
three years effective November 1, 1997. In addition, the agreement limited the
Company to offer the Montgomery Ward credit card only in conjunction with its
various television offers and subject to the normal approvals by the credit card
grantor. The Company accounted for the restructuring of the Operating Agreement
as an exchange or disposition of assets at fair value, in accordance with the
provisions of Accounting Principles Board Opinion No. 29.
Montgomery Ward purchased approximately $2.0 million, $1.8 million and $3.3
million of advertising spot time on cable systems affiliated with the Company
pursuant to cable affiliation agreements for the years ended January 31, 2000,
1999 and 1998, respectively. Under the terms of the Credit Card License and
Receivable Sales Agreement, the Company incurred $167,000, $301,000 and
$1,123,000 of processing fees during fiscal 2000, 1999 and 1998, respectively,
as a result of customers using Montgomery Ward/ValueVision credit cards. In
addition, during fiscal 2000, 1999 and 1998, respectively, the Company earned
$147,000, $135,000 and $831,000 for administering and processing Montgomery Ward
credit card applications. As of January 31, 2000 and 1999, the Company had
$1,940,000 and $1,171,000 included in accounts receivable from Montgomery Ward
for merchandise sales made on Montgomery Ward/Value Vision credit cards,
advertising spot time acquired and administrative and processing fees, net of
processing fees due Montgomery Ward for use of its credit card.
57
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
4. ACQUISITIONS AND DISPOSITIONS:
MONTGOMERY WARD DIRECT
Effective July 27, 1996, the Company, through VVDM, acquired substantially
all of the assets and assumed certain obligations of MWD by issuing 1,484,993
vested warrants with an exercise price of $.01 per share to Montgomery Ward as
full consideration for the acquisition of approximately $4.0 million in net
assets of MWD. The value of the warrants issued in the acquisition of MWD was
based on the market price of the Company's common stock during the period in
which the agreement was reached (i.e., signing of the letter of intent) to
undertake the relevant transaction which the Company believed was indicative of
the fair value of the acquired business. The Company's acquisition of MWD was
for an aggregate purchase price of $8,497,000, which included approximately $4.0
million in net assets, including acquired cash of $5,764,000. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
net assets of MWD were recorded at their estimated fair values. The excess of
the purchase price over the net assets acquired was $4,531,000, had been
recorded as goodwill and other intangible assets and was amortized on a
straight-line basis over 5-12 years. Intangible assets recorded in connection
with this acquisition were reduced to zero in fiscal 1998 in connection with the
restructuring transaction with Montgomery Ward. In fiscal 1998, the Company
changed the name of the MWD catalog to HomeVisions and in fiscal 1999 decided to
wind down and divest the HomeVisions operations.
In connection with the decision to divest HomeVisions, ValueVision entered
into an agreement to license and sell the exclusive marketing rights to the
"HomeVisions" name and related customer list database to Direct Marketing
Services, Inc. ("DMSI"), a direct-mail marketer and catalog distributor
headquartered in Chicago, Illinois. The Company recorded a $1,443,000 gain in
fiscal 1999 related to the sale of these assets.
Net sales and operating results for HomeVisions for the years ended January
31, 2000, 1999 and 1998 were as follows (in thousands):
2000 1999 1998
---- ---- ----
Net sales........................................... $1,127 $18,862 $74,756
Operating loss...................................... $ (114) $(6,794) $(6,091)
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of BII, a manufacturer and direct marketer of women's
foundation undergarments and other women's apparel. The Company paid $4,253,000
in cash, which included acquired cash of $423,000, $500,000 relating to a non-
compete agreement and assumed certain obligations totaling $109,000. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon estimated fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets acquired
was $3,310,000, of which $2,810,000 was recorded as goodwill and amortized on a
straight-line basis over 15 years, and $500,000 was assigned to a non-compete
agreement and amortized on a straight-line basis over the 6-year term of the
agreement.
Effective December 31, 1999, the Company completed the sale of BII for a
total of $5,000,000 which was received in the form of a promissory note,
representing the net book value of BII on the date of sale. Accordingly, no gain
or loss was recorded on the closing of the sale. The principal on the note is
payable quarterly, starting in March 2002, over a seven-year period and bears
and interest at 6 1/4%, payable quarterly starting in June 2000. Management
believes that the sale will not have a significant impact on the ongoing
operations of the Company.
58
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
Net sales and operating results for BII for the years ended January 31,
2000, 1999 and 1998 were as follows (in thousands):
2000 1999 1998
---- ---- ----
Net sales............................................. $4,317 $4,994 $4,748
Operating income (loss)............................... $ (456) $ (416) $ 83
CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. ("Webb"), two direct marketing
companies which together publish five consumer specialty catalogs. The Company
paid $7,369,000 in cash, which included acquired cash of $1,465,000. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the assets purchased and
liabilities assumed based upon estimated fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets acquired
was $1,953,000, was recorded as goodwill, and was amortized on a straight-line
basis over 15 years.
On October 31, 1999 the Company completed the sale of CVI to privately held
Massachusetts-based Potpourri Holdings, Inc. for approximately $7,300,000 cash
and up to an additional $5,500,000 contingent upon CVI's performance over the
twelve months following the sale. A pre-tax loss of approximately $128,000 was
recorded on the initial closing of the sale of CVI and was recognized in the
third quarter ended October 31, 1999. Any contingent consideration received by
the Company will be recorded as a gain when received. Management believes that
the sale will not have a significant impact on the ongoing operations of the
Company.
Net sales and operating income for CVI for the years ended January 31,
2000, 1999 and 1998 were as follows (in thousands):
2000 1999 1998
---- ---- ----
Net sales.......................................... $19,260 $31,674 $31,907
Operating income................................... $ 329 $ 1,946 $ 2,165
SALE OF BROADCAST STATIONS
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI-TV, which served the Washington D.C. market, to Paxson
Communications Corporation ("Paxson") for approximately $30 million in cash and
the receipt of 1,197,892 shares of Paxson common stock valued at $11.92 per
share as determined pursuant to an independent financial appraisal. Under the
terms of the agreement, Paxson paid the Company $20 million in cash upon closing
and was required to pay an additional $10 million to the Company as a result of
the United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. The Company acquired WVVI-TV in March 1994 for $4,850,000. The
pre-tax gain recorded on the sale of the television station was approximately
$38.9 million and was recognized in the second quarter of fiscal 1998.
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE-TV Channel 33, which served the Seattle, Washington
market, along with two of the Company's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
was payable by the first quarter of fiscal 2000. The Company continues to serve
the Seattle market
59
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
via its low-power station K58DP-TV, which transmits from downtown Seattle. The
Company acquired KBGE-TV in March 1996 for approximately $4.6 million. The
pre-tax gain recorded on the first installment with respect to the sale of this
television station was approximately $19.8 million and was recognized in the
first quarter of fiscal 1999. On April 12, 1999, the Company received the
contingent payment of $10 million relating to the sale of KBGE-TV and as a
result, the Company recognized a $10 million pre-tax gain, net of applicable
closing fees, in the first quarter of fiscal 2000. The $10 million contingent
payment finalized the agreement between the two companies.
On September 27, 1999, the Company completed the sale of its KVVV-TV
full-power television broadcast station, Channel 33, and K53 FV low-power
station, serving the Houston, Texas market, for a total of $28 million to
Visalia, California-based Pappas Telecasting Companies. The Company acquired
KVVV-TV in March 1994 for approximately $5.8 million. The pre-tax gain recorded
on the sale of the television station was approximately $23.3 million and was
recognized in the third quarter of fiscal 2000.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
5. RESTRUCTURING AND IMPAIRMENT OF ASSETS:
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective divestiture of its HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
continuing operating losses and the deteriorating financial performance of the
catalog's operations since Montgomery Ward's announcement of its bankruptcy
filing in the summer of 1997. Operating losses for HomeVisions further increased
as a result of the subsequent termination of HomeVisions' right to use the
Montgomery Ward private label credit card in March 1998. As a result of the
decision to divest HomeVisions, the Company mailed its last HomeVisions catalog
in the fourth quarter of fiscal 1999 and effectively wound down the catalog
operation as of January 31, 1999. In connection with the restructuring plan and
divestiture of HomeVisions, the Company recorded a $2,950,000 restructuring and
asset impairment charge in the third quarter of fiscal 1999. The restructuring
charge included severance costs and the write-down of certain assets including
inventory, property and equipment, capitalized software and capitalized catalog
costs that were deemed impaired as a direct result of the decision to divest
Home Visions. As of January 31, 2000, all accrued restructuring reserves had
been utilized.
6. LOW POWER TELEVISION STATIONS:
The FCC through the Communications Act of 1934 regulates the licensing of
LPTV stations' transmission authority. LPTV construction permits and the
licensing rights that result upon definitive FCC operating approval are awarded
solely at the discretion of the FCC and are subject to periodic renewal
requirements. As of January 31, 2000, the Company held licenses for eleven LPTV
stations.
7. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK:
COMMON STOCK
The Company currently has authorized 100,000,000 shares of undesignated
capital stock, of which approximately 38,192,000 shares were issued and
outstanding as Common Stock as of January 31, 2000. The Board of Directors can
establish new classes and series of capital stock by resolution without
shareholder approval.
60
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
REDEEMABLE PREFERRED STOCK
As discussed further in Note 15, in fiscal 2000, pursuant to an Investment
Agreement between the Company and GE Capital Equity Investments, Inc., the
Company sold to GE Equity 5,339,500 shares of Series A Redeemable Convertible
Preferred Stock, $0.01 par value for aggregate proceeds of $44,265,000 less
issuance costs of $2,850,000. The Preferred Stock is convertible into an equal
number of shares of the Company's Common Stock and has a mandatory redemption
after ten years from date of issuance at $8.29 per share, its stated value. The
excess of the redemption value over the carrying value is being accreted by
periodic charges to retained earnings over the ten-year redemption period.
WARRANTS
As discussed further in Note 15, in fiscal 2000, the Company issued to NBC
warrants to purchase 1,450,000 shares of the Company's common stock at an
exercise price of $8.29 per share. The warrants were issued in connection with
the Company's execution of a Distribution and Marketing Agreement with NBC.
As discussed further in Note 16, in fiscal 2000, the Company issued to
Xoom.com, Inc. warrants to purchase 404,760 shares of the Company's common stock
at an exercise price of $24.706 per share. The warrants were issued in
consideration for the Company's receipt of 244,004 warrants to acquire shares of
Xoom.com, Inc.'s $0.0001 par value common stock at an exercise price of $40.983
per share. The exchange of warrants was made pursuant to the Company's
re-branding and strategic electronic commerce alliance with NBCi.
STOCK OPTIONS
The Company has adopted an incentive stock option plan ("the 1990 Plan"),
as amended, which provides for the grant of options to employees to purchase up
to 3,250,000 shares of the Company's common stock. In addition to options
granted under the 1990 Plan, the Company has also granted non-qualified stock
options to purchase shares of the Company's common stock to current and former
directors, a consultant and certain employees. The Company also adopted an
executive incentive stock option plan ("the 1994 Executive Plan"), which
provides for the grant of options to certain executives to purchase up to
2,400,000 shares of the Company's common stock. The exercise price for options
granted under the 1990 Plan and the 1994 Executive Plan are determined by the
stock option committee of the Board of Directors, but shall not be less than the
fair market value of the shares on the date of grant. The options' maximum term
may not exceed 10 years from the date of grant. Options are exercisable in whole
or in installments, as determined by the stock option committee, and are
generally exercisable in annual installments of 20% to 33%. The exercise price
of the non-qualified stock options equaled the market value of the Company's
common stock at the date of grant and the maximum term of such options does not
exceed 10 years from the date of grant.
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25 and has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized in the accompanying consolidated statements of operations. Had
compensation cost related to these options been determined based on the fair
value at the grant date for awards granted in fiscal 2000, 1999 and 1998,
consistent with the provisions of SFAS No. 123, the Company's net income
available to common
61
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
shareholders and net income per common share would have been reduced to the
following pro forma amounts:
2000 1999 1998
---- ---- ----
Net income available to common
shareholders:
As reported........................... $29,123,000 $ 4,639,000 $18,104,000
Pro forma............................. 23,644,000 3,729,000 17,805,000
Net income per share:
Basic:
As reported........................ $ 0.89 $ 0.18 $ 0.57
Pro forma.......................... 0.73 0.14 0.56
Diluted:
As reported........................ $ 0.73 $ 0.18 $ 0.57
Pro forma.......................... 0.60 0.15 0.57
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to February 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted were as follows:
1994
1990 EXECUTIVE
INCENTIVE STOCK NON-QUALIFIED STOCK OPTION
OPTION PLAN STOCK OPTIONS PLAN
--------------- ------------- ------------
Fiscal 2000 grants...................... $12.85 $16.45 $31.84
Fiscal 1999 grants...................... 2.90 -- 2.21
Fiscal 1998 grants...................... 2.49 2.77 2.14
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 2000, 1999 and 1998, respectively:
risk-free interest rates of 6.5, 5.0 and 6.0 percent; expected volatility of 65,
56 and 47 percent; and expected lives of 6 to 7.5 years. Dividend yields were
not used in the fair value computations as the Company has never declared or
paid dividends on its common stock and currently intends to retain earnings for
use in operations.
62
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
A summary of the status of the Company's stock option plan as of January
31, 2000, 1999, and 1998 and changes during the years then ended is presented
below:
1990 1994
INCENTIVE WEIGHTED NON- WEIGHTED EXECUTIVE WEIGHTED
STOCK AVERAGE QUALIFIED AVERAGE STOCK AVERAGE
OPTION EXERCISE STOCK EXERCISE OPTION EXERCISE
PLAN PRICE OPTIONS PRICE PLAN PRICE
--------- -------- --------- -------- --------- --------
Balance outstanding, January 31,
1997................................ 1,607,836 $ 4.67 830,000 $ 4.97 1,500,000 $ 9.50
Granted............................. 160,000 4.23 150,000 4.56 100,000 3.63
Exercised........................... (84,667) 2.93 (25,000) 1.25 -- --
Forfeited or canceled............... (223,333) 5.47 -- -- -- --
--------- ------ --------- ------ --------- ------
Balance outstanding, January 31,
1998................................ 1,459,836 4.60 955,000 5.00 1,600,000 9.13
Granted............................. 650,266 5.13 -- -- 800,000 3.38
Exercised........................... (336,167) 4.15 (32,000) 5.50 (44,000) 3.63
Forfeited or canceled............... (435,500) 5.38 (28,000) 5.50 (356,000) 8.58
--------- ------ --------- ------ --------- ------
Balance outstanding, January 31,
1999................................ 1,338,435 4.69 895,000 4.97 2,000,000 7.05
Granted............................. 1,166,500 19.67 925,000 25.19 100,000 40.56
Exercised........................... (712,280) 4.68 (340,000) 5.45 (600,000) 9.50
Forfeited or canceled............... (90,916) 6.59 (63,000) 5.81 -- --
--------- ------ --------- ------ --------- ------
Balance outstanding January 31,
2000................................ 1,701,739 $14.87 1,417,000 $18.01 1,500,000 $ 8.30
========= ====== ========= ====== ========= ======
Options exercisable at:
January 31, 2000.................... 765,000 $10.74 751,000 $13.01 1,500,000 $ 8.30
========= ====== ========= ====== ========= ======
January 31, 1999.................... 729,000 $ 4.24 585,000 $ 4.88 1,719,000 $ 7.65
========= ====== ========= ====== ========= ======
January 31, 1998.................... 938,000 $ 4.37 538,000 $ 4.82 600,000 $ 9.50
========= ====== ========= ====== ========= ======
The following table summarizes information regarding stock options
outstanding at January 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL LIFE OPTIONS EXERCISE
OPTION TYPE PRICES OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
----------- ----------------- ----------- -------- ---------------- ----------- --------
Incentive:.................. $1.00- $4.88 321,867 $ 4.40 4.0 297,000 $ 4.36
$5.38- $10.31 483,700 $ 8.49 6.4 262,000 $ 7.33
$16.00- $24.69 896,172 $22.07 6.6 206,000 $24.27
--------- ---------
$1.00- $24.69 1,701,739 $14.87 6.1 765,000 $10.74
========= =========
Non-qualified:.............. $4.13- $6.19 495,000 $ 4.67 2.6 445,000 $ 4.68
$23.81- $42.13 922,000 $25.17 6.7 306,000 $25.13
--------- ---------
$4.13- $42.13 1,417,000 $18.01 5.2 751,000 $13.01
========= =========
Executive:.................. $3.38- $9.50 1,400,000 $ 6.00 6.5 1,400,000 $ 6.00
$40.56 100,000 $40.56 6.5 100,000 $40.56
--------- ---------
$3.38- $40.56 1,500,000 $ 8.30 6.5 1,500,000 $ 8.30
========= =========
63
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
STOCK OPTION TAX BENEFIT
The exercise of certain stock options granted under the Company's stock
option plans gives rise to compensation, which is includable in the taxable
income of the applicable employees and deductible by the Company for federal and
state income tax purposes. Such compensation results from increases in the fair
market value of the Company's common stock subsequent to the date of grant of
the applicable exercised stock options and is not recognized as an expense for
financial accounting purposes, as the options were originally granted at the
fair market value of the Company's common stock on the date of grant. The
related tax benefits are recorded as additional paid-in capital when realized,
and totaled $17,923,000, $731,000 and $39,000 in fiscal 2000, 1999 and 1998,
respectively.
COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a stock repurchase program whereby
the Company may repurchase shares of its common stock in the open market and
through negotiated transactions, at prices and times deemed to be beneficial to
the long-term interests of shareholders and the Company. In June 1998, the
Company's Board of Directors authorized an additional repurchase of up to $6
million of the Company's common stock. As of January 31, 2000, the Company was
authorized to repurchase an aggregate of $26 million of its common stock of
which approximately $21.6 million in stock had been repurchased. During fiscal
1999, the Company repurchased 1,327,000 common shares under the program for a
total net cost of $4,292,000. During fiscal 1998, the Company repurchased
2,417,000 common shares for a total cost of $10,458,000.
8. INCOME TAXES:
The Company records deferred taxes for differences between the financial
reporting and income tax bases of certain assets and liabilities, computed in
accordance with tax laws in effect at that time. The differences which give rise
to deferred taxes were as follows:
JANUARY 31,
-------------------------
2000 1999
---- ----
Accruals and reserves not currently deductible for
tax purposes....................................... $ 1,528,000 $3,153,000
Inventory capitalization............................. 433,000 600,000
Deferred catalog costs............................... -- (507,000)
Basis differences in intangible assets............... (684,000) (250,000)
Differences in depreciation lives and methods........ (635,000) (517,000)
Differences in investments and other items........... (5,417,000) (21,000)
----------- ----------
Net deferred tax asset (liability)................... $(4,775,000) $2,458,000
=========== ==========
The net deferred tax asset (liability) is classified as follows in the
accompanying consolidated balance sheets:
JANUARY 31,
-------------------------
2000 1999
---- ----
Current deferred taxes............................... $ 1,950,000 $1,807,000
Noncurrent deferred taxes............................ (6,725,000) 651,000
----------- ----------
Net deferred tax asset (liability)................... $(4,775,000) $2,458,000
=========== ==========
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
The provision (benefit) for income taxes consisted of the following:
YEARS ENDED JANUARY 31,
-----------------------------------------
2000 1999 1998
---- ---- ----
Current................................. $17,401,000 $ 4,590,000 $ 9,661,000
Deferred................................ 40,000 (1,738,000) 1,839,000
----------- ----------- -----------
$17,441,000 $ 2,852,000 $11,500,000
=========== =========== ===========
A reconciliation of income taxes computed at the statutory rates to the
Company's effective tax rate is as follows:
YEARS ENDED JANUARY 31,
------------------------
2000 1999 1998
---- ---- ----
Taxes at federal statutory rates........................ 35.0% 34.0% 35.0%
State income taxes, net of federal tax benefit.......... 2.0 3.1 3.8
Amortization and other permanent items.................. 0.3 1.0 --
---- ---- ----
Effective tax rate...................................... 37.3% 38.1% 38.8%
==== ==== ====
9. COMMITMENTS AND CONTINGENCIES:
CABLE AND SATELLITE AFFILIATION AGREEMENTS
As of January 31, 2000, the Company had entered into 3 to 8 year
affiliation agreements with fourteen multiple systems operators ("MSO's") which
require each operator to offer the Company's television home shopping
programming on a full-time basis over their systems. Under certain
circumstances, these television operators may cancel their agreements prior to
expiration. The affiliation agreements provide that the Company will pay each
operator a monthly access fee and marketing support payment based upon the
number of homes carrying the Company's television home shopping programming. For
the years ended January 31, 2000, 1999 and 1998, the Company paid approximately
$28,134,000, $19,494,000 and $17,431,000 under these long-term affiliation
agreements.
As of January 31, 2000, the Company had entered into an eight-year
affiliation agreement with DIRECTV, which requires DIRECTV to offer the
Company's television home shopping programming on a full-time basis over its
systems. The affiliation agreement provides that the Company will pay a monthly
access fee based upon the number of homes carrying the programming.
The Company has entered into, and will continue to enter into, affiliation
agreements with other television operators providing for full- or part-time
carriage of the Company's television home shopping programming. Under certain
circumstances the Company may be required to pay the operator a one-time initial
launch fee, which is capitalized and amortized on a straight-line basis over the
term of the agreement.
EMPLOYMENT AGREEMENTS
On December 2, 1999, the Company entered into an employment agreement with
its Chief Executive Officer, which expires on March 31, 2001. The employment
agreement specifies, among other things, the term and duties of employment,
compensation and benefits, termination of employment and non-compete
restrictions. In addition, the employment agreement also provides for a
$1,000,000 retention bonus payable by the Company if the officer remains
employed through the end of the contract period.
The Company had entered into employment agreements with its former chief
executive officer and chief operating officer, which expired on January 31,
1999. The employment agreements provided that each officer,
65
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
in addition to a base salary, be granted options to purchase 375,000 shares of
common stock at $8.50 per share and 375,000 shares of common stock at $10.50 per
share. The options were to vest and become exercisable at the earlier of the
Company achieving certain net income goals, as defined, or in September 2003. As
of January 31, 2000, 600,000 of these options were exercisable, 600,000 had been
exercised and 300,000 options had been forfeited. Payments for future base
compensation for these former officers were terminated as of January 31, 1999.
In addition, the Company has entered into employment agreements with a
number of officers of the Company and its subsidiaries for original terms
ranging from 12 to 36 months. These agreements specify, among other things, the
term and duties of employment, compensation and benefits, termination of
employment (including for cause, which would reduce the Company's total
obligation under these agreements), severance payments and non-disclosing and
non-compete restrictions. The aggregate commitment for future base compensation
at January 31, 2000 was approximately $9,220,000.
OPERATING LEASE COMMITMENTS
The Company leases certain property and equipment under non-cancelable
operating lease agreements. Property and equipment covered by such operating
lease agreements include the Company's main corporate office and warehousing
facility, offices and warehousing facilities at subsidiary locations, satellite
transponder and certain tower site locations.
Future minimum lease payments at January 31, 2000 were as follows:
FISCAL YEAR AMOUNT
- ----------- ------
2001.................................................... $3,255,000
2002.................................................... 3,245,000
2003.................................................... 3,291,000
2004.................................................... 3,291,000
2005 and thereafter..................................... 4,399,000
Total lease expense under such agreements was approximately $4,028,000 in
2000, $4,145,000 in 1999 and $4,227,000 in 1998.
RETIREMENT AND SAVINGS PLAN
The Company maintains a qualified 401(k) retirement savings plan covering
substantially all employees. The plan allows the Company's employees to make
voluntary contributions to the plan. The Company's contribution, if any, is
determined annually at the discretion of the Board of Directors. Starting in
January 1999, the Company has elected to make matching contributions to the
plan. The Company will match $.25 for every $1.00 contributed by eligible
participants up to a maximum of 6% of eligible compensation. The Company made
plan contributions totaling approximately $72,000 and $6,000 during fiscal 2000
and 1999, respectively. There were no Company contributions made to the plan in
fiscal 1998.
10. LITIGATION:
In December 1997, the Company was named in a lawsuit filed by Time Warner
Cable against Bridgeways Communications Corporation ("Bridgeways") and the
Company alleging, among other things, tortious interference with contractual and
business relations and breach of contract. According to the complaint,
Bridgeways and Time Warner Cable had been in a dispute since 1993 regarding
Bridgeways' attempt to assert "must carry" rights with respect to television
station WHAI-TV in the New York City Designated Market Area. ValueVision
purchased television station WHAI-TV from Bridgeways in 1994 and subsequently
sold it
66
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
in 1996. ValueVision and Time Warner Cable entered into cable affiliation
agreement in 1995 pursuant to which ValueVision agreed not to assert "must
carry" rights with respect to television station WHAI-TV and pursuant to which
ValueVision's programming is currently carried by Time Warner Cable in
approximately 4.2 million full-time equivalent cable households.
On December 23, 1998 the Company announced that it settled the lawsuit
filed by Time Warner Cable. Under the terms of the settlement, ValueVision paid
Time Warner Cable $7.0 million in cash which was recognized by ValueVision in
the fourth quarter of fiscal 1999, resulting in an after tax charge of
approximately $4.3 million. In settling this matter, ValueVision did not admit
any wrongdoing or liability. ValueVision, however, determined to enter into this
settlement to avoid the uncertainty and costs of litigation, as well as to avoid
disruption of its relationship with a key business partner providing a
substantial portion of ValueVision's program distribution.
In addition to the litigation noted above, the Company is involved from
time to time in various other claims and lawsuits in the ordinary course of
business. In the opinion of management, the claims and suits individually and in
the aggregate will not have a material adverse effect on the Company's
operations or consolidated financial statements.
11. RELATED PARTY TRANSACTIONS:
At January 31, 1999 the Company had approximately $1,059,000 of notes
receivable from certain former officers of the Company that were repaid in
fiscal 2000. The notes were reflected as a reduction of shareholders' equity in
the January 31, 1999 consolidated balance sheet, as the notes were partially
collateralized by shares of the Company's common stock owned by the former
officers.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information and noncash investing and financing
activities were as follows:
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------
2000 1999 1998
---- ---- ----
Supplemental cash flow information:
Interest paid........................................ $ 58,000 $ 107,000 $ 89,000
=========== ========== ===========
Income taxes paid.................................... $ 8,456,000 $3,889,000 $11,482,000
=========== ========== ===========
Supplemental non-cash investing and financing
activities:
Increase in additional paid-in capital resulting from
income tax benefit recorded on stock option
exercises......................................... $17,923,000 $ 731,000 $ 39,000
=========== ========== ===========
Issuance of 1,450,000 warrants in connection with NBC
Distribution and Marketing Agreement.............. $ 6,931,000 $ -- $ --
=========== ========== ===========
Issuance of 244,044 warrants in connection with NBCi
investment........................................ $ 6,679,000 $ -- $ --
=========== ========== ===========
Receipt of interest bearing note in connection with
the sale of BII................................... $ 5,000,000 $ -- $ --
=========== ========== ===========
Accretion of redeemable preferred stock.............. $ 207,000 $ -- $ --
=========== ========== ===========
Reduction of Montgomery Ward operating license asset
and other assets in exchange for the return of
warrants.......................................... $ -- $ -- $19,211,000
=========== ========== ===========
Receipt of 1,197,892 shares of Paxson Communications
Corporation common stock as partial consideration
from the sale of a broadcast television station... $ -- $ -- $14,285,000
=========== ========== ===========
13. SEGMENT DISCLOSURES AND RELATED INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
requires the disclosure of certain information about operating segments in
financial statements. The Company's reportable segments are based on the
Company's method of internal reporting, which generally segregates the strategic
business units into two segments: electronic media, consisting primarily of the
Company's television home shopping business, and print media, whereby
merchandise is sold to consumers through direct-mail catalogs and other direct
marketing solicitations. See Note 4 regarding the disposition of the Company's
catalog operations. Segment information
68
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
included in the accompanying consolidated balance sheets as of January 31 and
included in the consolidated statements of operations for the years then ended
is as follows:
ELECTRONIC PRINT
YEARS ENDED JANUARY 31, (IN THOUSANDS) MEDIA MEDIA CORPORATE TOTAL
- -------------------------------------- ---------- ----- --------- -----
2000
Revenues........................................... $250,223 $ 24,704 $ -- $274,927
Operating income (loss)............................ 4,237 (241) -- 3,996
Depreciation and amortization...................... 4,369 597 -- 4,966
Interest income, net............................... 9,869 260 -- 10,129
Income taxes....................................... 17,806 (365) -- 17,441
Net income (loss).................................. 29,882 (552) -- 29,330
Identifiable assets................................ 401,737 11,705 58,413(a) 471,855
Capital expenditures............................... 4,001 35 -- 4,036
-------------------------------------------------
1999
Revenues........................................... $148,198 $ 55,530 $ -- $203,728
Operating loss..................................... (3,305) (5,264) -- (8,569)
Depreciation and amortization...................... 3,970 1,029 -- 4,999
Interest income, net............................... 2,724 180 -- 2,904
Income taxes....................................... 4,823 (1,971) -- 2,852
Net income (loss).................................. 7,870 (3,231) -- 4,639
Identifiable assets................................ 107,385 19,941 14,444(a) 141,770
Capital expenditures............................... 1,339 226 -- 1,565
-------------------------------------------------
1998
Revenues........................................... $106,571 $111,411 $ -- $217,982
Operating loss..................................... (7,132) (3,843) -- (10,975)
Depreciation and amortization...................... 5,350 1,627 -- 6,977
Interest income, net............................... 1,817 299 -- 2,116
Income taxes....................................... 13,482 (1,982) -- 11,500
Net income (loss).................................. 21,076 (2,972) -- 18,104
Identifiable assets................................ 70,314 38,460 26,505(a) 135,279
Capital expenditures............................... 3,166 377 -- 3,543
-------------------------------------------------
- -------------------------
(a) Corporate assets consist of long-term investment assets not directly
assignable to a business segment.
14. NATIONAL MEDIA CORPORATION:
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly formed Delaware
corporation. On April 8, 1998, it was announced that the Company received
preliminary notification from holders of more than 5% of the Company's common
stock that they intended to exercise their dissenter's rights with respect to
the proposed merger of the Company and National Media and the Company did not
intend to waive the Merger Agreement condition to closing requiring that holders
of not more than 5% of the shares of the Company's common stock have demanded
their dissenter's rights. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and conditions regarding a
transaction with National Media were unsuccessful and the Merger Agreement was
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and wrote off these amounts in fiscal 1999.
Concurrently with the execution of the proposed Merger Agreement, the
Company agreed to loan to National Media, pursuant to a Demand Promissory Note,
up to an aggregate of $10.0 million, $7.0 million of which was advanced upon
signing of the Demand Note on January 5, 1998, with the remaining $3.0 million
subsequently advanced in fiscal 1999. The loan proceeds were used by National
Media for various purposes, including the funding of accounts receivable,
inventory and media purchases. The loan included interest at the prime rate plus
1.5% per annum and was due on the earlier of January 1, 1999 or upon termination
of the Merger Agreement in certain circumstances. In consideration for providing
the Loan, National Media issued to the Company warrants to acquire 250,000
shares of National Media's common stock at an exercise price of $2.74 per share
and amended the exercise price of previously issued warrants to purchase 500,000
shares of common stock from $8.865 per share to $2.74 per share.
In December 1998, National Media repaid the $10 million Demand Note, plus
accrued interest, and the Company exercised warrants to purchase 750,000 shares
of National Media common stock for an aggregate purchase price of $3,255,000.
During fiscal 2000 and fiscal 1999, respectively, the Company sold 252,000 and
460,000 shares of National Media common stock and recognized gains of $145,000
and $2,972,000, respectively, on the sale. In addition, fiscal 2000 and fiscal
1999 earnings include unrealized holding gains (losses) of $(891,000) and
$1,350,000, respectively, related to National Media shares held by the Company.
Remaining shares held are classified as "trading securities" in the accompanying
January 31, 2000 consolidated balance sheet, as it is the Company's intent to
sell these securities in the near future.
15. NBC AND GE EQUITY STRATEGIC ALLIANCE:
On March 8, 1999, the Company entered into a strategic alliance with NBC
and GE Capital Equity Investments, Inc. ("GE Equity"). Pursuant to the terms of
the transaction, GE Equity acquired 5,339,500 shares of the Company's Series A
Redeemable Convertible Preferred Stock (the "Preferred Stock"), and NBC was
issued a warrant to acquire 1,450,000 shares of the Company's Common Stock (the
"Distribution Warrant") under a Distribution and Marketing Agreement discussed
below. The Preferred Stock was sold for aggregate consideration of approximately
$44.0 million (or approximately $8.29 per share) and the Company will receive an
additional approximately $12.0 million upon exercise of the Distribution
Warrant. In addition, the Company agreed to issue to GE Equity a warrant to
increase its potential aggregate equity stake (together with its affiliates,
including NBC) at the time of exercise to 39.9%. NBC also has the exclusive
right to negotiate on behalf of the Company for the distribution of its
television home shopping service.
INVESTMENT AGREEMENT
Pursuant to the Investment Agreement between the Company and GE Equity
dated March 8, 1999 (the "Investment Agreement"), the Company sold to GE Equity
the Preferred Stock for an aggregate of $44,265,000. The Preferred Stock is
convertible into an equal number of shares of the Company's Common Stock,
subject to customary anti-dilution adjustments, has a mandatory redemption on
the 10th anniversary of its issuance or upon a "change of control" at its stated
value ($8.29 per share), participates in dividends on the same basis as the
Common Stock and has a liquidation preference over the Common Stock and any
other junior securities. So long as NBC or GE Equity is entitled to designate a
nominee to the Board of Directors (the "Board") of the Company (see discussion
under "Shareholder Agreement" below), the holders of the Preferred Stock are
entitled to a separate class vote on the directors subject to nomination by NBC
and GE Equity. During such period of time, such holders will not be entitled to
vote in the election of any other directors, but will be entitled to vote on all
other matters put before shareholders of the Company. Consummation of the sale
of 3,739,500 shares of the Preferred Stock was completed on April 15, 1999.
Final
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
consummation of the transaction regarding the sale of the remaining 1,600,000
Preferred Stock shares was completed on June 2, 1999. The Preferred Stock was
recorded at fair value on the date of issuance less issuance costs of
$2,850,000. The excess of the redemption value over the carrying value is being
accreted by periodic charges to retained earnings over the ten-year redemption
period.
The Investment Agreement also provided that the Company issue GE Equity the
Investment Warrant. On July 6, 1999, GE Equity exercised the Investment Warrant
and acquired an additional 10,674,000 shares of the Company's Common Stock for
an aggregate of $178,370,000, or $16.71 per share, representing the 45-day
average closing price of the underlying Common Stock ending on the trading day
prior to exercise. Following the exercise of the Investment Warrant, the
combined ownership of the Company by GE Equity and NBC on a fully diluted basis
was approximately 39.9%.
SHAREHOLDER AGREEMENT
Pursuant to the Investment Agreement, the Company and GE Equity entered
into a Shareholder Agreement (the "Shareholder Agreement"), which provides for
certain corporate governance and standstill matters. The Shareholder Agreement
(together with the Certificate of Designation of the Preferred Stock) provides
that GE Equity and NBC will be entitled to designate nominees for an aggregate
of 2 out of 7 board seats so long as their aggregate beneficial ownership is at
least equal to 50% of their initial beneficial ownership, and 1 out of 7 board
seats so long as their aggregate beneficial ownership is at least 10% of the
"adjusted outstanding shares of Common Stock". GE Equity and NBC have also
agreed to vote their shares of Common Stock in favor of the Company's nominees
to the Board in certain circumstances.
All committees of the Board will include a proportional number of directors
nominated by GE Equity and NBC. The Shareholder Agreement also requires the
consent of GE Equity prior to the Company entering into any substantial
agreements with certain restricted parties (broadcast networks and internet
portals in certain limited circumstances, as defined), as well as taking any of
the following actions: (i) issuance of more than 15% of the total voting shares
of the Company in any 12-month period (25% in any 24-month period), (ii) payment
of quarterly dividends in excess of 5% of the Company's market capitalization
(or repurchases and redemption of Common Stock with certain exceptions), (iii)
entry by the Company into any business not ancillary, complementary or
reasonably related to the Company's current business, (iv) acquisitions
(including investments and joint ventures) or dispositions exceeding the greater
of $35.0 million or 10% of the Company's total market capitalization, or (v)
incurrence of debt exceeding the greater of $40.0 million or 30% of the
Company's total capitalization.
Pursuant to the Shareholder Agreement, so long as GE Equity and NBC have
the right to name at least one nominee to the Board, the Company will provide
them with certain monthly, quarterly and annual financial reports and budgets.
In addition, the Company has agreed not to take actions, which would cause the
Company to be in breach of or default under any of its material contracts (or
otherwise require a consent thereunder) as a result of acquisitions of the
Common Stock by GE Equity or NBC. The Company is also prohibited from taking any
action that would cause any ownership interest of certain FCC regulated entities
from being attributable to GE Equity, NBC or their affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the Shareholder Agreement), and with certain limited exceptions, GE
Equity and NBC shall be prohibited from: (i) any asset/business purchases from
the Company in excess of 10% of the total fair market value of the Company's
assets, (ii) increasing their beneficial ownership above 39.9% of the Company's
shares, (iii) making or in any way participating in any solicitation of proxies,
(iv) depositing any securities of the Company in a voting trust, (v) forming,
joining, or in any way becoming a member of a "13D Group" with respect to any
voting securities of the Company, (vi) arranging any financing for, or providing
any financing commitment specifically for, the purchase of any voting securities
of the Company, (vii) otherwise acting, whether alone or
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
in concert with others, to seek to propose to the Company any tender or exchange
offer, merger, business combination, restructuring, liquidation,
recapitalization or similar transaction involving the Company, or nominating any
person as a director of the Company who is not nominated by the then incumbent
directors, or proposing any matter to be voted upon by the shareholders of the
Company. If during the Standstill Period any inquiry has been made regarding a
"takeover transaction" or "change in control" which has not been rejected by the
Board, or the Board pursues such a transaction, or engages in negotiations or
provides information to a third party and the Board has not resolved to
terminate such discussions, then GE Equity or NBC may propose to the Company a
tender offer or business combination proposal.
In addition, unless GE Equity and NBC beneficially own less than 5% or more
than 90% of the adjusted outstanding shares of Common Stock, GE Equity and NBC
shall not sell, transfer or otherwise dispose of any securities of the Company
except for transfers: (i) to certain affiliates who agree to be bound by the
provisions of the Shareholder Agreement, (ii) which have been consented to by
the Company, (iii) pursuant to a third party tender offer, provided that no
shares of Common Stock may be transferred pursuant to this clause (iii) to the
extent such shares were acquired upon exercise of the Investment Warrant on or
after the date of commencement of such third party tender offer or the public
announcement by the offeror thereof or that such offeror intends to commence
such third party tender offer, (iv) pursuant to a merger, consolidation or
reorganization to which the Company is a party, (v) in a bona fide public
distribution or bona fide underwritten public offering, (vi) pursuant to Rule
144 of the Securities Act of 1933, as amended (the "Securities Act"), or (vii)
in a private sale or pursuant to Rule 144A of the Securities Act; provided that,
in the case of any transfer pursuant to clause (v) or (vii), such transfer does
not result in, to the knowledge of the transferor after reasonable inquiry, any
other person acquiring, after giving effect to such transfer, beneficial
ownership, individually or in the aggregate with such person's affiliates, of
more than 10% of the adjusted outstanding shares of the Common Stock.
The Standstill Period will terminate on the earliest to occur of (i) the 10
year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), and (v) six months after GE Equity and NBC can
no longer designate any nominees to the Board. Following the expiration of the
Standstill Period pursuant to clause (i) or (v) above (indefinitely in the case
of clause (i) and two years in the case of clause (v)), GE Equity and NBC's
beneficial ownership position may not exceed 39.9% of the Company on
fully-diluted outstanding stock, except pursuant to issuance or exercise of any
warrants or pursuant to a 100% tender offer for the Company.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, ValueVision and GE Equity entered
into a Registration Rights Agreement providing GE Equity, NBC and their
affiliates and any transferees and assigns, an aggregate of four demand
registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company entered into the Distribution and Marketing Agreement
dated March 8, 1999 (the "Distribution Agreement") which provides that NBC shall
have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television programming service. The agreement
has a 10-year term and NBC has committed to delivering an additional 10 million
FTE subscribers over the first 42 months of the term. In compensation for such
services, the Company will pay NBC an annual fee of $1.5 million (increasing no
more than 5% annually) and issue NBC the Distribution Warrant. The exercise
price of the Distribution Warrant is approximately $8.29 per share. Of the
aggregate 1,450,000 shares subject to the Distribution Warrant, 200,000 shares
vested immediately, with the remainder vesting 125,000
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
shares annually over the 10-year term of the Distribution Agreement. The
Distribution Warrant is exercisable for five years after vesting. The value
assigned to the Distribution Agreement and Distribution Warrant of $6,931,000
was determined pursuant to an independent appraisal and is being amortized on a
straight-line basis over the term of the agreement. Assuming certain performance
criteria above the 10 million FTE homes are met, NBC will be entitled to
additional warrants to acquire Common Stock at the then current market price.
The Company has a right to terminate the Distribution Agreement after the
twenty-fourth, thirty-sixth and forty-second month anniversary if NBC is unable
to meet the performance targets. If terminated by the Company in such
circumstance, the unvested portion of the Distribution Warrant will expire. In
addition, the Company will be entitled to a $2.5 million payment from NBC if the
Company terminates the Distribution Agreement as a result of NBC's failure to
meet the 24-month performance target.
NBC may terminate the Distribution Agreement if the Company enters into
certain "significant affiliation" agreements or a transaction resulting in a
"change of control."
LETTER AGREEMENT
The Company, GE Equity and NBC have also entered into a non-binding letter
of intent dated March 8, 1999 providing for certain cooperative business
activities which the parties contemplate pursuing, including but not limited to,
development of a private label credit card, development of electronic commerce
and other internet strategies, development of programming concepts for the
Company and cross channel promotion.
16. NBC INTERNET, INC. RE-BRANDING AND ELECTRONIC COMMERCE ALLIANCE:
Effective September 13, 1999, the Company entered into a new strategic
alliance with Snap! LLC ("Snap") and Xoom.com, Inc. ("Xoom") whereby the parties
entered into major re-branding and e-commerce agreements, spanning television
home shopping, Internet shopping and direct e-commerce initiatives. Under the
terms of the agreements, the Company's television home shopping network,
currently called ValueVision, will be re-branded as SnapTV. The re-branding will
be phased in during the latter half of fiscal 2001. The network, which will
continue to be owned and operated by the Company, will continue to feature its
present product line as well as offer new categories of products and brands. The
Company, along with Snap.com, NBC's Internet portal services company, will
roll-out a new companion Internet shopping service, SnapTV.com featuring online
purchasing opportunities that spotlight products offered on-air along with
online-only e-commerce opportunities offered by Snap TV and its merchant
partners. The new SnapTV.com online store will be owned and operated by the
Company and featured prominently within SnapTV.com's shopping area. Xoom.com, a
leading direct e-commerce services company, will become the exclusive direct
e-commerce partner for SnapTV, managing all such initiatives, including database
management, e-mail marketing and other sales endeavors. Direct online shopping
offers will include SnapTV merchandise, as well as Xoom.com products and
services. Pursuant to this new strategic alliance, the following agreements were
executed:
TRADEMARK LICENSE AGREEMENT
Snap and the Company entered into a ten-year Trademark License Agreement
dated as of September 13, 1999 (the "Trademark Agreement"). Pursuant to the
agreement, Snap granted the Company an exclusive license to Snap's "SnapTV"
trademark (the "SnapTV Mark") for the purpose of operating a television home
shopping service and for the purpose of operating an Internet website at
"www.snaptv.com" (the "SnapTV Site"). The agreement also obligates the Company
to rebrand its television home shopping service using the SnapTV Mark. In
compensation for the license, the Company will pay to Snap a royalty of 2% of
revenues received from Internet users in connection with commerce transactions
on the SnapTV Site.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
INTERACTIVE PROMOTION AGREEMENT
Snap, Xoom and the Company entered into a ten-year Interactive Promotion
Agreement dated as of September 13, 1999 (the "Interactive Promotion
Agreement"). Pursuant to the agreement: (a) the Company will pay Snap or Xoom,
as applicable, 20% of the gross revenue received from advertising on the
Company's television home shopping service where Snap or Xoom referred the
advertiser to the Company or materially assisted the Company with respect to the
sale of such advertising; (b) the Company will pay Xoom 50% of the gross revenue
received from e-mail campaigns conducted by Xoom on behalf of the Company for
the Company's products; and (c) the Company will pay Snap 20% of the gross
revenue generated from airtime on the Company's television home shopping service
which promotes any uniform resource locater ("URL") (excluding up to 15% of such
airtime to the extent used to promote URLs which do not include the
"www.snaptv.com" URL). Also under the agreement, Snap and Xoom shall have an
exclusive right to use the Company's user data for the purpose of conducting
e-mail marketing campaigns. Snap or Xoom, as applicable, will pay the Company
50% of the gross revenue generated from such campaigns. Snap will also be
granted the exclusive right to use or sell all Internet advertising on the
SnapTV Site, and Snap will pay the Company 50% of the gross revenue generated
from such use or sales. The agreement also provides that Snap and the Company
will provide certain cross-promotional activities. Specifically, commencing when
the Company's television home shopping program reaches 30 million full-time
equivalent subscribers and continuing through the fourth anniversary of the
effective date of the agreement, Snap will spend $1 million per quarter
promoting the SnapTV Mark on NBC's television network, and the Company will
spend $1 million per quarter promoting Snap, Snap's products or "www.snaptv.com"
on cable television advertising other than on the Company's television home
shopping program.
WARRANT PURCHASE AGREEMENT AND WARRANTS
Effective September 13, 1999, in connection with the transactions
contemplated under the Interactive Promotion Agreement, the Company issued a
warrant (the "ValueVision Warrant") to Xoom to acquire 404,760 shares of the
Company's Common Stock, at an exercise price of $24.706 per share. In
consideration, Xoom issued a warrant (the "Xoom Warrant," and collectively with
the ValueVision Warrant, the "Warrants") to the Company to acquire 244,004
shares of Xoom's common stock, $.0001 par value, at an exercise price of $40.983
per share. Both Warrants are subject to customary anti-dilution features and
have a five-year term. Effective November 24, 1999, Xoom and Snap, along with
several Internet assets of NBC, were merged into NBCi and, as a result, the Xoom
Warrant is deemed converted to the right to purchase shares of Class A Common
Stock of NBCi.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the ValueVision Warrant to Xoom, the
Company agreed to provide Xoom certain customary piggyback registration rights
with no demand registration rights. Xoom also provided the Company with similar
customary piggyback registration rights with no demand registration rights with
respect to the Xoom Warrant.
17. UNAUDITED SUBSEQUENT EVENT:
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), NBC, NBCi and CNBC.com LLC ("CNBC") whereby the parties created Ralph
Lauren Media, LLC ("Ralph Lauren Media"), a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
their interest in Ralph Lauren Media, NBC agreed to contribute $110 million of
television and online advertising on NBC and CNBC properties, NBCi agreed to
contribute $40 million in online distribution and promotion and the Company has
contributed a cash funding commitment of up to $50 million. Ralph Lauren Media's
premier initiative will be Polo.com, an internet web site dedicated to the
American lifestyle that will include original content, commerce and a strong
community component. Polo.com is expected to launch in the third quarter of 2001
and will initially include an assortment of men's, women's and children's
products across the Ralph Lauren family of brands as well as unique gift items.
Polo.com will also receive anchor-shopping tenancies on NBCi's Snap portal
service. In connection with the formation of Ralph Lauren Media, the Company
entered into various agreements setting forth the manner in which certain
aspects of the business of Ralph Lauren Media are to be managed and certain of
the members' rights, duties and obligations with respect to Ralph Lauren Media,
including the following:
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF RALPH LAUREN MEDIA
Each of Polo Ralph Lauren, NBC, NBCi, CNBC and the Company executed the
Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"),
pursuant to which certain terms and conditions regarding operations of Ralph
Lauren Media and certain rights and obligations of its members are set forth,
including but not limited to: (a) certain customary demand and piggyback
registration rights with respect to equity of Ralph Lauren Media held by the
members after its initial public offering, if any; (b) procedures for resolving
deadlocks among managers or members of Ralph Lauren Media; (c) rights of each of
Polo Ralph Lauren on the one hand and NBC, the Company, NBCi and CNBC, on the
other hand, to purchase or sell, as the case may be, all of their membership
interests in Ralph Lauren Media to the other in the event of certain material
deadlocks and certain changes of control of either Polo Ralph Lauren and/or its
affiliates or NBC or certain of its affiliates, at a price and on terms and
conditions set forth in the agreement; (d) rights of Polo Ralph Lauren to
purchase all of the outstanding membership interests of Ralph Lauren Media from
and after its 12th anniversary, at a price and on terms and conditions set forth
in the agreement; (e) rights of certain of the members to require Ralph Lauren
Media to consummate an initial public offering of securities; (f) restrictions
on Polo Ralph Lauren from participating in the business of Ralph Lauren Media
under certain circumstances; (g) number and composition of the management
committee of Ralph Lauren Media, and certain voting requirements; (h)
composition and duties of officers of Ralph Lauren Media; (i) requirements
regarding meetings of members and voting requirements; (j) management of capital
contributions and capital accounts; (k) provisions governing allocations of
profits and losses and distributions to members; (l) tax matters; (m)
restrictions on transfers of membership interests; (n) rights and
responsibilities of the members in connection with the dissolution, liquidation
or winding up of Ralph Lauren Media; and (o) certain other customary
miscellaneous provisions.
AGREEMENT FOR SERVICES
Ralph Lauren Media and VVI Fulfillment Center, Inc., a Minnesota
corporation and wholly owned subsidiary of the Company ("VVIFC"), entered into
an Agreement for Services under which VVIFC agreed to provide to Ralph Lauren
Media certain telemarketing services, order and record services, and merchandise
and warehouse services. The telemarketing services to be provided by VVIFC
consist of receiving and processing telephone orders and telephone inquiries
regarding merchandise, and developing and maintaining a related telemarketing
system. The order and record services to be provided by VVIFC consist of
receiving and processing orders for merchandise by telephone, mail, facsimile
and electronic mail, providing records of such orders and related
customer-service functions, and developing and maintaining a records system for
such purposes. The merchandise and warehouse services consist of receiving and
shipping merchandise, providing warehousing functions and merchandise management
functions and developing a system for such purposes. The term of this agreement
continues until June 30, 2010, subject to renewal periods, under certain
conditions, of one year each.
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SCHEDULE II
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- ---------------------------------- ----------- ------------------------- ------------- ----------
BALANCES AT CHARGED TO BALANCE AT
BEGINNING COSTS END OF
OF YEAR AND EXPENSES OTHER DEDUCTIONS YEAR
----------- ------------ ----- ---------- ----------
FOR THE YEAR ENDED JANUARY 31,
2000:
Allowance for doubtful accounts... $1,726,000 $ 6,184,000 $ (53,000)(3) $ (3,543,000)(1) $4,314,000
========== ============ ========= ============= ==========
Reserve for returns............... $2,291,000 $103,653,000 $(591,000)(3) $(101,643,000)(2) $3,710,000
========== ============ ========= ============= ==========
Restructuring-related severance
accrual......................... $ 300,000 $ -- $ -- $ (300,000) $ --
========== ============ ========= ============= ==========
FOR THE YEAR ENDED JANUARY 31,
1999:
Allowance for doubtful accounts... $ 453,000 $ 1,934,000 $ -- $ (661,000)(1) $1,726,000
========== ============ ========= ============= ==========
Reserve for returns............... $1,443,000 $ 60,295,000 $ -- $ (59,447,000)(2) $2,291,000
========== ============ ========= ============= ==========
Restructuring-related severance
accrual......................... $ -- $ 556,000 $ -- $ (256,000) $ 300,000
========== ============ ========= ============= ==========
FOR THE YEAR ENDED JANUARY 31,
1998:
Allowance for doubtful accounts... $ 529,000 $ 561,000 $ -- $ (637,000)(1) $ 453,000
========== ============ ========= ============= ==========
Reserve for returns............... $1,690,000 $ 50,837,000 $ -- $ (51,084,000)(2) $1,443,000
========== ============ ========= ============= ==========
- -------------------------
(1) Write off of uncollectible receivables, net of recoveries.
(2) Refunds or credits on products returned.
(3) Reduced through divestiture.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
77
78
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item with respect to certain information
relating to the Company's executive officers is contained in paragraph J of Item
I and with respect to other information relating to the Company's executive
officers and its directors is incorporated herein by reference to the Company's
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
78
79
PART IV
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
a) Exhibits
EXHIBIT
NUMBER
- -------
3.1 -- Sixth Amended and Restated Articles of Incorporation, as
Amended.(B)
3.2 -- Certificate of Designation of Series A Redeemable
Convertible Preferred Stock.(H)
3.3 -- Bylaws, as amended.(B)
10.1 -- Amended 1990 Stock Option Plan of the Registrant.(I)+
10.2 -- Form of Option Agreement under the Amended 1990 Stock Option
Plan of the Registrant.(A)+
10.3 -- 1994 Executive Stock Option and Compensation Plan of the
Registrant.(E)+
10.4 -- Form of Option Agreement under the 1994 Executive Stock
Option and Compensation Plan of the Registrant.(F)+
10.5 -- Option Agreement between the Registrant and Marshall Geller
dated as of June 3, 1994.(A)+
10.6 -- Option Agreement between the Registrant and Marshall Geller
dated August 8, 1995.(D)+
10.7 -- Option Agreement between the Registrant and Marshall Geller
dated as of March 3, 1997.(A)+
10.8 -- Option Agreement between the Registrant and Robert Korkowski
dated as of June 3, 1994.(A)+
10.9 -- Option Agreement between the Registrant and Robert Korkowski
dated August 8, 1995.(D)+
10.10 -- Option Agreement between the Registrant and Robert Korkowski
dated March 3, 1997.(A)+
10.11 -- Form of Mortgage Subordination Agreement dated as of
November, 1997 by and among LaSalle Bank F.S.B. and the
Registrant.(A)
10.12 -- Transponder Lease Agreement between the Registrant and
Hughes Communications Galaxy, Inc. dated as of July 23, 1993
as supplemented by letters dated as of July 23, 1993.(C)
10.13 -- Transponder Service Agreement between the Registrant and
Hughes Communications Satellite Services, Inc.(C)
10.14 -- Industrial Space Lease Agreement between Registrant and
Shady Oak Partners dated August 31, 1994.(B)
10.15 -- Option Agreement between the Registrant and Paul Tosetti
dated September 4, 1996.(A)+
10.16 -- Option Agreement between the Registrant and Paul Tosetti
dated March 3, 1997.(A)+
10.17 -- Asset and Stock Purchase and Option Grant Agreement dated as
of November 14, 1997 by and among the Registrant, VVI
Seattle, Inc., VVILPTV, Inc., VVI Spokane, Inc., VVI
Tallahassee, Inc. and Paxson Communications Corporation.(A)
10.18 -- Amendment to Asset and Stock Purchase Agreement dated
February 27, 1998.(A)
10.19 -- Stipulation made as of November 1, 1997 between Montgomery
Ward & Co., Incorporated ("Montgomery Ward") and the
Registrant Regarding the Assumption and Modification of
Executory Contracts and Related Agreements.(F)
79
80
EXHIBIT
NUMBER
- -------
10.20 -- Second Amended and Restated Operating Agreement made as of
November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.21 -- Amended and Restated Credit Card License Agreement made as
of November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.22 -- Second Amended and Restated Servicemark License Agreement
made as of November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.23 -- Employment Agreement between the Registrant and Cary Deacon
dated December 30, 1998.(N)+
10.24 -- Investment Agreement by and between ValueVision and GE
Equity dated as of March 8, 1999.(G)
10.25 -- First Amendment and Agreement dated as of April 15, 1999 to
the Investment Agreement, dated as of March 8, 1999, by and
between the Registrant and GE Equity.(H)
10.26 -- Distribution and Marketing Agreement dated as of March 8,
1999 by and between NBC and the Registrant.(G)
10.27 -- Letter Agreement dated March 8, 1999 between NBC, GE Equity
and the Registrant.(G)
10.28 -- Shareholder Agreement dated April 15, 1999 between the
Registrant, and GE Equity.(H)
10.29 -- ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to GE Equity.(H)
10.30 -- Registration Rights Agreement dated April 15, 1999 between
the Registrant, GE Equity and NBC.(H)
10.31 -- ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to NBC.(H)
10.32 -- Asset Purchase Agreement by and among VVI Baytown, Inc.,
VVILPTV, Inc. and Pappas Telecasting of Houston, a
California limited partnership, dated as of May 3, 1999.(K)
10.33 -- Employment Agreement between the Registrant and Steve Jackel
dated June 4, 1999.(L)+
10.34 -- Employment Agreement between the Registrant and Stuart
Goldfarb dated July 28, 1999.(L)+
10.35 -- Employment Agreement between the Registrant and Richard D.
Barnes dated October 19, 1999.(M)+
10.36 -- Amended and Restated Employment Agreement between the
Registrant and Gene McCaffery dated December 2, 1999.(O)+
10.37 -- Option Agreement between the Registrant and Stuart Goldfarb
dated July 28, 1999.(L)+
10.38 -- Option Agreement between the Registrant and Stuart Goldfarb
dated July 28, 1999.(L)+
10.39 -- Option Agreement between the Registrant and Richard D.
Barnes dated October 19, 1999.(O)+
10.40 -- Interactive Promotion Agreement dated September 13, 1999,
among the Registrant, Snap!LLC, a Delaware limited liability
company and Xoom.com, Inc., a Delaware corporation.(L)
10.41 -- Trademark License Agreement dated September 13, 1999 between
the Registrant and Snap!LLC, a Delaware limited liability
company.(L)
10.42 -- Warrant Purchase Agreement dated September 13, 1999 between
the Registrant, Snap!LLC, a Delaware limited liability
company and Xoom.com, Inc., a Delaware corporation.(L)
10.43 -- Common Stock Purchase Warrant dated September 13, 1999 to
purchase shares of the Registrant held by Xoom.com, Inc., a
Delaware corporation.(L)
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EXHIBIT
NUMBER
- -------
10.44 -- Registration Rights Agreement dated September 13, 1999
between the registrant and Xoom.com, Inc., a Delaware
corporation, relating to Xoom.com, Inc.'s warrant to
purchase shares of the Registrant.(L)
10.45 -- Stock Purchase Agreement dated October 8, 1999 by and among
Potpourri Holdings, Inc., a Delaware corporation,
ValueVision Direct Marketing Company, Inc., a Minnesota
corporation, and the Registrant.(J)
10.46 -- Amended and Restated Limited Liability Company Agreement of
Ralph Lauren Media, LLC, a Delaware limited liability
company, dated as of February 7, 2000, among Polo Ralph
Lauren Corporation, a Delaware corporation, National
Broadcasting Company, Inc., a Delaware corporation, the
Registrant, CNBC.com LLC, a Delaware limited liability
company and NBC Internet, Inc., a Delaware corporation.(O)
10.47 -- Agreement for Services dated February 7, 2000 between Ralph
Lauren Media, LLC, a Delaware limited liability company, and
VVI Fulfillment Center, Inc., a Minnesota corporation.(O)
21 -- Significant Subsidiaries of the Registrant.(O)
23 -- Consent of Arthur Andersen LLP.(O)
27 -- Financial Data Schedule.(O)
- -------------------------
(A) Incorporated herein by reference to Quantum Direct
Corporation's Registration Statement on Form S-4, filed on
March 13, 1998, File No 333-47979.
(B) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-QSB, for the quarter ended
August 31, 1994, filed on September 13, 1994.
(C) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-3 filed on October 13,
1993, as amended, File No 33-70256.
(D) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K, for the year ended January 31, 1996,
filed April 29, 1996, as amended, File No. 0-20243.
(E) Incorporated herein by reference to the Registrant's Proxy
Statement in connection with its annual meeting of
shareholders held on August 17, 1994, filed on July 19,
1994, File No. 0-20243.
(F) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1998,
filed on April 30, 1998, File No. 0-20243.
(G) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated March 8, 1999, filed on March 18,
1999, File No. 0-20243.
(H) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated April 15, 1999, filed on April 29,
1999, File No. 0-20243.
(I) Incorporated herein by reference to the Registrant's
Schedule 14A dated April 29, 1999, filed on April 29, 1999.
(J) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated October 12, 1999, filed on October
12, 1999, File No. 0-20243.
(K) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated May 3, 1999, filed on May 3, 1999,
File No. 0-20243.
(L) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999, filed on September 14, 1999, File No. 0-20243.
(M) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October
31, 1999, filed on December 15, 1999, File No. 0-20243.
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82
(N) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1999,
filed on April 6, 1999, File No. 0-20243.
(O) Filed herewith.
+ Management compensatory plan/arrangement
b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on February 8, 2000 reporting under Item 5,
that the Registrant announced that effective February 7, 2000, the Company
entered into a new electronic commerce strategic alliance with Polo Ralph
Lauren Corporation, NBC, NBC Internet, Inc. and CNBC.com LLC whereby the
parties created Ralph Lauren Media, LLC, a 30-year joint venture formed for
the purpose of bringing the Polo Ralph Lauren American lifestyle experience
to consumers via multiple media platforms, including the Internet,
broadcast, cable and print.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 28, 2000.
ValueVision International, Inc.
(Registrant)
By: /s/ GENE MCCAFFERY
------------------------------------
Gene McCaffery
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on April 28, 2000.
NAME TITLE
---- -----
/s/ GENE MCCAFFERY Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer)
Gene McCaffery President and Director
/s/ STUART GOLDFARB Vice Chairman
- --------------------------------------------------------
Stuart Goldfarb
/s/ RICHARD BARNES Senior Vice President Finance and Chief
- -------------------------------------------------------- Financial Officer (Principal Financial
Richard Barnes and Accounting Officer)
/s/ MARSHALL S. GELLER Director
- --------------------------------------------------------
Marshall S. Geller
/s/ PAUL D. TOSETTI Director
- --------------------------------------------------------
Paul D. Tosetti
/s/ ROBERT J. KORKOWSKI Director
- --------------------------------------------------------
Robert J. Korkowski
/s/ JOHN FLANNERY Director
- --------------------------------------------------------
John Flannery
/s/ MARK W. BEGOR Director
- --------------------------------------------------------
Mark W. Begor
83