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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, 2001
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)
952-943-6000
(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, 2001, 38,489,502 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 closing sale price
of the common stock as reported by the Nasdaq Stock Market on April 24, 2001 was
approximately $321,584,000.
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 fiscal year ending January 31, 2001
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, 2001
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..................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 44
Item 8. Financial Statements........................................ 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 80
Item 11. Executive Compensation...................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 80
Item 13. Certain Relationships and Related Transactions.............. 80
PART IV
Item 14. Exhibits, Lists and Reports on Form 8-K..................... 81
SIGNATURES.............................................................. 85
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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's operating
strategy incorporates television home shopping, Internet e-commerce, vendor
programming and fulfillment services. 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. In prior reporting years,
fiscal years were designated by the calendar year in which the fiscal year
ended. Effective with the current fiscal year ended January 31, 2001, the
Company changed the naming convention for its fiscal years. The year ended
January 31, 2001 is designated fiscal "2000" and the year ended January 31, 2002
will be designated fiscal "2001" to more accurately align the name of the
Company's fiscal year with the calendar year it primarily represents. All prior
fiscal year references have been renamed accordingly.
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/private label consumer
products at competitive value prices. The Company's live 24-hour per day
television home shopping programming is distributed primarily through long-term
cable and satellite 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. The Company also complements its
television home shopping business by the sale of merchandise through its
Internet shopping website (www.vvtv.com), which sells a broad array of
merchandise and simulcasts its television home shopping program live 24 hours a
day, 7 days a week.
The Company intends to rebrand its growing home shopping network and
companion Internet shopping website as "ShopNBC" and "ShopNBC.com,"
respectively, in fiscal 2001 as part of a wide-ranging direct marketing strategy
the Company is pursuing in conjunction with its strategic partners. This
rebranding is intended to position ValueVision as a multimedia retailer,
offering consumers an entertaining, informative and interactive shopping
experience, as well as a leader in the evolving convergence of television and
the Internet. On November 16, 2000, the Company entered into an exclusive
license agreement with National Broadcasting Company, Inc. ("NBC") pursuant to
which NBC granted ValueVision worldwide use of the NBC-branded name and the
Peacock image for a ten-year period. The new name will be promoted as part of a
wide-ranging marketing campaign that the Company intends to launch in 2001.
ValueVision's original intent was to re-launch its television network and
companion Internet website under the SnapTV and SnapTV.com brand names,
respectively, in conjunction with NBC Internet, Inc. ("NBCi"). On June 12, 2000,
NBCi announced a strategy to integrate all of its consumer properties under the
single NBCi.com brand, effectively abandoning the Snap name. This led to
ValueVision's search for an alternative rebranding strategy culminating in the
aforementioned license agreement with NBC.
The Company, through its wholly owned subsidiary, VVI Fulfillment Center,
Inc. ("VVIFC"), provides fulfillment, warehousing and telemarketing services on
a cost plus basis to Ralph Lauren Media, LLC. VVIFC's services agreement was
made in conjunction with the execution of the Company's investment and
electronic commerce alliance entered into with Polo Ralph Lauren Corporation
("Polo Ralph Lauren"), NBC and other NBC affiliates. The Company, through its
wholly-owned subsidiary, ValueVision Direct Marketing Company, Inc. ("VVDM"),
formerly 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 1999, the Company
sold its remaining direct-mail catalog subsidiaries and exited from the direct
marketing catalog business.
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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 and fastest growing television home shopping
retailer in the United States. Through its continuous merchandise-focused
television programming, the 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, inclusive of shipping and
handling revenues, totaled $378,158,000 and $264,962,000, representing 98% and
90% of net sales, for fiscal 2000 and 1999, respectively. Products are presented
by on-air television home shopping personalities; viewers can then 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, satellite dish owners and low power
broadcast television stations.
Products and Product Mix. Products sold on the Company's television home
shopping network include jewelry, electronics, giftware, collectibles, apparel,
health and beauty aids, 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 76% of the
programming airtime during fiscal 2000 and 72% of the programming airtime in
fiscal 1999. Jewelry represents the network's largest single category of
merchandise, representing 68% of television home shopping net sales in fiscal
2000, 70% of net sales in fiscal 1999 and 74% 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) and Dreams of India(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 that receive the Company's
programming. As of January 31, 2001, the Company served a total of 42.6 million
subscriber homes, or 34.2 million FTEs, compared with a total of 33.1 million
subscriber homes, or 25.0 million FTEs as of January 31, 2000. Approximately
27.6 million, 17.3 million and 10.6 million subscriber homes at January 31,
2001, 2000 and 1999, respectively, received the Company's television home
shopping programming on a full-time basis. As of January 31, 2001 and 2000, the
Company's television home shopping programming was carried by 320 broadcasting
systems (230 in fiscal 1999) on a full-time basis and 126 broadcasting systems
(140 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 45% of the total number of cable
subscribers in the United States.
Satellite Service. The Company's programming is distributed to cable
systems, 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 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 1996 by VVDM. In the second half of fiscal
1999, the Company sold its
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remaining direct-mail catalog subsidiaries and exited from the direct marketing
catalog business. Sales from the Company's print media direct marketing
business, inclusive of shipping and handling revenues, totaled $28,498,000 and
$64,363,000, representing 10% and 29% of net sales for fiscal 1999 and 1998,
respectively.
B. BUSINESS STRATEGY
The Company's mission is to be a leader in innovative multimedia retailing,
offering consumers an entertaining, informative and interactive shopping
experience. The following strategies are intended to continue the accelerated
growth of its core television home shopping business and complementary website
(vvtv.com): (i) rebrand its television network and website in fiscal 2001 to
ShopNBC and ShopNBC.com, respectively, leveraging the strong brand equity
implicit in the NBC name and associated Peacock symbol to achieve instant brand
recognition; (ii) increase program distribution in the United States via new or
expanded broadcast agreements with cable and satellite operators and other
creative means for reaching consumers such as webcasting on vvtv.com and Yahoo!
ShoppingVision; (iii) increase average net sales per home by increasing
penetration within the existing audience base and by attracting new customers;
(iv) upgrade the overall quality of the Company's network and programming
consistent with expectations associated with the NBC brand name; (v) develop the
sale of airtime to branded manufacturers, cataloguers and retailers who are
looking for an alternative advertising medium to build their brand directly with
the Company's audience base; (vi) continue to grow the Company's profitable and
cash positive Internet business with innovative use of marketing and technology,
such as interactive TV and converged TV/Internet auction capabilities; and (vii)
leverage our existing production, broadcasting, distribution and customer care
capabilities to support strategic partners, such as Ralph Lauren Media's
Polo.com.
PROGRAMMING DISTRIBUTION:
Cable and Satellite Affiliation Agreements
As of January 31, 2001, the Company had entered into long-term cable and
satellite affiliation agreements with thirty-six multiple system operators
("MSOs"), 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 thirty-six MSOs is approximately 58.1 million,
of which approximately 25.8 million homes (25.6 million FTEs) currently receive
the Company's programming. The stated terms of the affiliation agreements range
from three to eight years. Under certain circumstances, the MSOs 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 MSOs are also carrying the Company's programming
on an additional 5.5 million homes (2.5 million FTEs) pursuant to short-term
carriage arrangements. The affiliation agreements provide that the Company will
pay each MSO a monthly 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 is seeking to enter into affiliation
agreements with other television operators providing for full or part-time
carriage of the Company's television home shopping programming.
Leased Access. Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. 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. Some of the Company's cable carriage is designated
by the cable operator to be in satisfaction of the cable operator's lease access
requirements. See -- "Federal Regulation."
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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
and DISH Network is full-time under long-term distribution agreements. As of
January 31, 2001, the Company's programming reached a total of approximately
11.7 million DTH homes on a full-time basis.
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 analog 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 Designated Market Area ("DMA"), provided that the signal is of
adequate strength and the cable system has must carry designated channels
available. Current FCC rules extend similar cable "must carry" rights to new
television stations that transmit only digital television ("DTV") signals, and
to existing television stations that return their analog spectrum and convert to
digital operations. In addition, starting January 1, 2002, satellite carriers
will be required by federal law to provide carriage, upon request, of all local
television broadcast stations' signals in markets in which they carry at least
one television broadcast station signal. See "Federal Regulation."
Other Methods of Program Distribution
The Company's programming is also made available full-time to "C"-band
satellite dish owners and homes over the air 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, are
generally not entitled to must carry rights and, with the exception of certain
LPTV stations that have been granted "Class A" status, are generally 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 the Company intends to rebrand as ShopNBC.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, the Company
produces a limited number of original programming specifically for webcasting on
the website. The website provides viewers with an opportunity to purchase
general merchandise offered on the Company's television home shopping program,
and other related merchandise as well as bid and purchase items on the auction
portion of the website. Internet sales for the year ended January 31, 2001
increased at a far greater percentage than television home shopping sales over
the year ended January 31, 2000. Sales from the Company's Internet website
business, inclusive of shipping and handling revenues, totaled $28,148,000 and
$3,920,000 representing 7% and 1% of net sales, for fiscal 2000 and 1999,
respectively. The Company expects to see continuous strong growth in its
Internet business and believes that its e-commerce business complements 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 and
retail sales is currently being more fully developed and, consequently, the
Company cannot predict the ultimate impact it will have on future operating
results.
At this time, the Company's e-commerce activities are subject to a number
of general business regulations and laws regarding taxation and online commerce.
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,
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content, copyrights and trademarks, access by persons with disabilities,
distribution, taxation, and characteristics and quality of products and
services. Congress currently is considering a broad range of possible
legislation intended to address issues relating to online privacy, including
measures to regulate and/or limit the collection and use of online customers'
personal and financial information. Such legislation, if enacted, could make it
more difficult for companies to conduct business online. 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. Many states and
companies oppose an extension of the moratorium, however, and no prediction can
be made as to any such extension. 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 Trademark License Agreement
On November 16, 2000, the Company entered into a Trademark License
Agreement (the "License Agreement") with NBC pursuant to which NBC granted the
Company an exclusive, worldwide license (the "License") for a term of 10 years
to use certain NBC trademarks, service marks and domain names to rebrand the
Company's business and corporate name and companion Internet website on the
terms and conditions set forth in the License Agreement. The Company
subsequently selected the names "ShopNBC" and "ShopNBC.com," with the
concurrence of NBC. The new name will be promoted as part of a wide-ranging
marketing campaign that is expected to launch in 2001. In connection with the
License Agreement, the Company issued to NBC warrants (the "License Warrants")
to purchase 6,000,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), with an exercise price of $17.375 per share, the
closing price of a share of Common Stock on the Nasdaq National Market on
November 16, 2000. The agreement also includes a provision for a potential
cashless exercise of the License Warrants under certain circumstances. The
License Warrants have a five year term from the date of vesting and vest in
one-third increments, with one-third exercisable commencing November 16, 2000,
and the remaining License Warrants vesting in equal amounts on each of the first
two anniversaries of the License Agreement. Additionally, the Company agreed to
accelerate the vesting of warrants to purchase 1,450,000 shares of Common Stock
granted to NBC in connection with the 1999 Distribution and Marketing Agreement
(discussed below) between NBC and the Company.
The Company has also agreed under the License Agreement to (i) restrictions
on using (including sublicensing) any trademarks, service marks, domain names,
logos or other source indicators owned or controlled by NBC or its affiliates in
connection with certain permitted businesses (the "Permitted Businesses") before
the agreement of NBC to such use, (ii) the loss of its rights under the grant of
the License with respect to specific territories outside of the United States in
the event the Company fails to achieve and maintain certain performance targets,
(iii) amend and restate the current Registration Rights Agreement dated as of
April 15, 1999 among the Company, NBC and GE Capital Equity Investments, Inc.
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("GE Equity") so as to increase the demand rights held by NBC and GE Equity from
four to five, among other things, (iv) not, either directly or indirectly, own,
operate, acquire or expand its business to include any businesses other than the
Permitted Businesses without NBC's prior consent for so long as the Company's
corporate name includes the trademarks or service marks owned or controlled by
NBC, (v) strictly comply with NBC's privacy policies and standards and
practices, and (vi) until the earlier of the termination of the License
Agreement or the lapse of certain contractual restrictions on NBC, either
directly or indirectly, not own, operate, acquire or expand the Company's
business such that one third or more of the Company's revenues or its aggregate
value is attributable to certain services provided over the Internet. The
License Agreement also grants to NBC the right to terminate the License
Agreement at any time upon certain changes of control of the Company, the
failure by NBC to own a certain minimum percentage of the outstanding capital
stock of the Company on a fully-diluted basis, the failure of NBC and the
Company to agree on new trademarks, service marks or related intellectual
property rights, and certain other related matters. In certain events, the
termination by NBC of the License Agreement may result in the acceleration of
vesting of the License Warrants.
NBC and GE Equity Strategic Alliance
On March 8, 1999, the Company entered into a strategic alliance with NBC
and 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 warrants to acquire 1,450,000
shares of the Company's Common Stock (the "Distribution Warrants") 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 received an additional $12.0 million upon exercise of the
Distribution Warrants. In addition, the Company agreed to issue to GE Equity a
warrant (the "Investment 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%.
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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 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
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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 Warrants. The exercise
price of the Distribution Warrants is approximately $8.29 per share. Of the
aggregate 1,450,000 shares subject to the Distribution Warrants, 200,000 shares
vested immediately, with the remainder originally vesting 125,000 shares
annually over the 10-year term of the Distribution Agreement. The Distribution
Warrants is exercisable for five years after vesting. The value assigned to the
Distribution Agreement and Distribution Warrants 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 Warrants 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. In conjunction with the Company's execution of the
Trademark License Agreement with NBC in November 2000, the Company agreed to
accelerate the vesting of the remaining unvested Distribution Warrants. 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.
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NBCi Electronic Commerce Alliance
In September 1999, the Company entered into a strategic alliance with Snap!
LLC ("Snap") and Xoom.com, Inc. ("Xoom") whereby the parties entered into, among
other things, a rebranding trademark license agreement and an interactive
promotion agreement, spanning television home shopping, Internet shopping and
direct e-commerce initiatives. The Company's original intent was to re-launch
its television network and companion Internet website under the SnapTV and
SnapTV.com brand names, respectively, in conjunction with NBCi. On June 12,
2000, NBCi announced a strategy to integrate all of its consumer properties
under the single NBCi.com brand name, effectively abandoning the Snap name. As a
result, in June 2000, the Company effectively terminated the Snap trademark
license and interactive promotion agreements.
WARRANT PURCHASE AGREEMENT AND WARRANTS
In September 1999, in connection with the transactions contemplated under
the Snap 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.
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 ownership 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, of which approximately $30 million
has been funded through January 31, 2001. Ralph Lauren Media's premier
initiative will be Polo.com, an Internet website dedicated to the American
lifestyle that will include original content, commerce and a strong community
component. Polo.com officially launched in November 2000 and includes an
assortment of men's, women's and children's products across the Ralph Lauren
family of brands as well as unique gift items. 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
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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 VVIFC agreed to provide to Ralph Lauren Media, on a
cost plus basis, 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 one-year renewal periods, under
certain conditions.
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 on-air television home shopping network
personalities. 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, value 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, Electronic Connection, The New York Collection,
Brilliante, Ultimate Ice, Time Zone, 18K Elegance, 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 New York City, Las Vegas
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 $50,000 to $75,000. 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
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week to appeal to specific viewer and customer profiles. The Company features
frequent announced 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 compliment 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 comparable retail prices. Jewelry accounted for approximately 68% of
the Company's television home shopping net sales in fiscal 2000, 70% in fiscal
1999 and 74% in fiscal 1998. Electronics, giftware, collectibles and related
merchandise, apparel, health and beauty aids, 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),
Dreams of India(TM), Trader Jack(TM), Ultimate Ice(TM), Treasures D'Italia(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 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,
satellite dish owners and low power television stations 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 transponder 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 that allow for return privileges or stock balancing. The Company
is not dependent upon any one supplier for a significant portion of its
inventory.
MARKETING RELATIONSHIPS:
Yahoo! Inc. License and Promotion Agreement
On November 20, 2000, Yahoo! Inc. ("Yahoo!"), a leading global Internet
communications, commerce and media company, announced and unveiled Yahoo!
Shopping Vision (http://shoppingvision.yahoo.com), a rich media extension of
Yahoo! Shopping (http://shopping.yahoo.com). Designed to give consumers a
dynamic new way to buy products conveniently on the Internet, Yahoo!
ShoppingVision lets consumers view streaming video content and simultaneously
purchase relevant merchandise through a single interface. As part
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of the Yahoo! ShoppingVision launch, Yahoo! signed a content distribution and
marketing agreement with the Company. As part of its relationship with Yahoo!,
ValueVision is a featured content provider with a fixed graphic link on the
Yahoo! ShoppingVision player, and has agreed to provide live programming, 24
hours a day, seven days a week, in addition to archived video content. As people
see products in the Company's streaming video window, information and links to
merchandise that is being displayed simultaneously appear in the window
adjoining the video stream, allowing consumers to immediately purchase the
products being viewed. The Company also advertises throughout Yahoo! Shopping,
and in the jewelry and watches, and computers and electronics categories of
Yahoo! Auctions. Additionally, the Company is promoted on broadcast-related
modules in My Yahoo! and throughout the Yahoo! network of properties.
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 1999, 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 a service
site located in Baton Rouge, Louisiana. 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 over 150 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.
The Company owns a 262,000 square foot distribution facility in Bowling
Green, Kentucky, which, until January 1999, 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 primarily uses the Bowling Green, Kentucky distribution
facility to fulfill its obligations under the service agreements with Ralph
Lauren Media. The Company distributes jewelry and other smaller merchandise from
its Eden Prairie, Minnesota warehouse, a part of its corporate office.
The majority of customer purchases are paid by credit card. In 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. The Company utilizes 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 due to its significant promotional value. It does, however,
create a risk of bad debt from the potential inability to collect outstanding
balances.
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 centers. Orders are generally shipped to customers within 48 hours
after the order is placed. The Company offers Express Service upon request at
the customer's expense. The Company also has arrangements with certain vendors
who ship merchandise directly to its customers after an approved customer order
is processed.
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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 28% to 33% 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 maintained higher than average unit
price points of approximately $163 in fiscal 2000 ($124 in fiscal 1999).
Management believes that the higher return rate is acceptable, given the higher
net sales and margin 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. 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 basic cable programming for cable airtime as home
shopping networks compensate basic cable television operators, whereas other
forms of cable programming typically 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 QVC, HSN
and Shop at Home, Inc. ("SATH"). The Company currently competes for viewership
and sales with QVC, HSN and SATH 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 carried full time in all 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 the television
home shopping industry. 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
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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 may continue to increase. The Company believes
that it is strategically positioned to compete because of its established
relationships with cable operators and its 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 existing full power
television station has been assigned an additional channel on which to broadcast
DTV until analog transmissions are terminated. In addition, as of January 2001,
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 2000, there were more than 12.9 million DBS subscribers.
Congress has required 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 2000, 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 and Omaha, Nebraska. The FCC has also
certified 25 operators to offer open video systems ("OVS") in order to provide
video programming to customers. Currently, only four 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 2000, there
were approximately 700,000 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
The cable television industry 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 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.
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Cable Television
The cable industry is regulated by the FCC under the Cable Act and FCC
regulations promulgated thereunder, as well as by local governments with respect
to certain franchising matters.
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. 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. Although it has indicated that it will continue to study
the issue, the FCC has concluded that at present 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 analog 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
analog full power television stations. FCC rules currently extend similar cable
"must carry" rights to the primary video and programming-related material of new
television stations that transmit only digital television ("DTV") signals, and
to existing television stations that return their analog spectrum and convert to
digital operations. The FCC is considering additional issues relating to the
"must carry" rights of future DTV broadcast transmissions in an ongoing
proceeding, however, no prediction can be made as to the full scope of such
rights or whether such rights for DTV stations would be upheld against any
challenges under the principles established by the Supreme Court with respect to
analog "must carry." 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. FCC rules provide for exemptions from
the closed captioning requirements under certain circumstances, such as, for
example, where the costs of captioning for a particular channel exceed two
percent of the channel's gross revenues, and where a channel to be captioned
produced less than $3 million in annual revenues. In addition, programmers,
cable operators and TV stations can petition the FCC for an exemption for
programming where complying with the closed captioning requirements would
otherwise impose an undue burden. The Home Shopping Network requested such an
exemption for analogous programming, which was denied in June 2000 by an FCC
staff order and is currently subject to an administrative appeal. If the
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Company's programming cannot qualify for an exemption or waiver from those
standards, it may be required to expend substantial additional funds to comply
with them.
Broadcast Television
General. The Company's acquisition and operation of 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.
Full Power Television Stations. 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 would 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 established
a July 15, 2000 filing window during which applicants for channels above channel
59 could jointly propose a single replacement channel to which all applicants
could agree to modify their applications. The FCC also allowed applicants with
mutually exclusive applications to reach settlement agreements under which
competing applicants for a single license could agree to allow their
applications to be dismissed in exchange for compensation from a single
remaining applicant. Replacement channels have been identified and the Company
has reached timely settlement agreements with the other applicants for both the
Destin and Des Moines license applications. The Company's request that the FCC
approve the settlement agreements and dismiss its applications for these
licenses remains pending. At this time, the Company has no plans to apply for or
purchase additional full power television stations.
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
recently initiated a proceeding to reallocate these channels to other uses at
the end of the DTV transition. While the FCC will permit 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. The FCC
rules establishing specific eligibility and application requirements for LPTV
licensees seeking Class A status generally limit eligibility for such status to
those stations that previously have provided locally produced programming and
continue to do so, and that filed timely requests for such status by January
2000. In addition, as Class A licenses will only be granted for stations on
channels below channel 52, eligible stations operating on channels 52 or above
must first locate a replacement channel before applying for a Class A license.
The FCC has indicated that, except for the Company's two LPTV stations licensed
to Minneapolis, its LPTV stations do not meet the requirements for Class A
status. In January 2001, the FCC granted a Class A license for one of the
Minneapolis stations; the Company still must locate a replacement channel for
the second Minneapolis station before it can apply for Class A status. There can
be no guarantee that the Company will be able to do so.
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.
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 12.9 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 700,000 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.
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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, the FCC has adopted rules
extending cable "must carry" rights to new television stations that transmit
only DTV signals, and to existing television stations that return their analog
spectrum and convert to digital operations.
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 25 OVS operators to
offer OVS service in 50 areas and four 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 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 and
Omaha, Nebraska.
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H. SEASONALITY AND ECONOMIC SENSITIVITY
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, 2001, the Company, including its wholly-owned subsidiaries,
had approximately 700 employees, the majority of whom are employed in customer
service, order fulfillment and television production. Approximately 19% 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......................... 53 Chairman of the Board, President and Chief
Executive Officer
Steve Jackel.............................. 65 President -- TV Home Shopping Operations
Richard D. Barnes......................... 44 Executive Vice President, Chief Financial
Officer
Nathan E. Fagre........................... 45 Senior Vice President, General Counsel
Kevin C. Hanson........................... 41 Senior Vice President, Chief Technology
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, serving until 2000.
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 and was appointed Executive Vice President in
December 2000. 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 major telecommunications
supplier, Barnes also was a Group Vice President of Finance, Planning, and
Strategy. From 1993 to 1996, Mr. Barnes was Vice
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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.
Nathan E. Fagre joined the Company as Senior Vice President, General
Counsel and Secretary in May 2000. From 1996 to 2000, Mr. Fagre was Senior Vice
President and General Counsel of Occidental Oil and Gas Corporation in Los
Angeles, California, the oil and gas operating subsidiary of Occidental
Petroleum Corporation. At Occidental, an international oil exploration and
production company, Mr. Fagre was also a member of the Executive Committee. From
1995 to 1996, Mr. Fagre was Vice President and Deputy General Counsel of
Occidental International Exploration and Production Company. His previous legal
experience included corporate and securities law practice with the law firms of
Sullivan & Cromwell in New York and Gibson, Dunn & Crutcher in Washington, D.C.
Kevin C. Hanson joined the Company as Vice President and Chief Technology
Officer in June 1999 and was appointed Senior Vice President in October 2000.
From 1998 to June 1999, Mr. Hanson was a technology executive with U.S.
Internet, Inc., an Internet service provider, where he was responsible for
technology strategies for corporate accounts. From 1988 to 1998, Mr. Hanson was
Vice President of Operations and Technology for Management Information Systems
Incorporated (a wholly owned subsidiary of NTT Data), where he was responsible
for all technological strategies for Japanese accounts in the United States.
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 certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are based
on management's current expectations and are accordingly subject to uncertainty
and changes in circumstances. Actual results may vary materially from the
expectations contained herein due to various important factors, including (but
not limited to): consumer spending and debt levels; interest rates; seasonal
variations in consumer purchasing activities; competitive pressures on sales;
pricing and gross profit margins; the level of cable and satellite distribution
for the Company's programming and fees associated therewith; the success of the
Company's e-commerce and rebranding initiatives; the performance of the
Company's equity investments; the success of the Company's strategic alliances
and relationships; the performance of the Ralph Lauren Media venture; the
ability of the Company to manage its operating expenses successfully; risks
associated with acquisitions; changes in governmental or regulatory
requirements; litigation or governmental proceedings affecting the Company's
operations; and the ability of the Company to obtain and retain key executives
and employees. Investors are cautioned that all forward-looking statements
involve risk and uncertainty and the Company is under no obligation (and
expressly disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of new information, future events or otherwise.
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.
Historical Losses. The Company experienced operating losses of
approximately $2.6 million, $11.0 million and $8.6 million in fiscal 1996, 1997
and 1998, respectively, operating income of $4.0 million in fiscal 1999 and $6.6
million in fiscal 2000. The Company reported net income per diluted share of
$.56, $.57, $.18 and $.73 in fiscal 1996, 1997, 1998 and 1999, respectively, and
net loss per diluted share of $.78 in fiscal 2000. Net profits (losses) of
approximately $17.2 million, $23.6 million, $8.3 million, $20.4 million and
$(44.0) million and net profit (loss) per diluted share of $.53, $.74, $.32,
$.51 and $(1.14) in fiscal 1996, 1997, 1998, 1999 and 2000, respectively, were
derived from gains on sale of broadcast stations and other investments, offset
by
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other non-operating charges in fiscal 1998, and investment write downs in fiscal
2000. There can be no assurance that the Company will be able to achieve or
maintain profitable operations in future fiscal years.
NBC Rebranding and Trademark License Agreement. As discussed above, on
November 16, 2000, the Company entered into a Trademark License Agreement with
NBC pursuant to which NBC granted the Company an exclusive, worldwide license
for a term of 10 years to use certain NBC trademarks, service marks and domain
names to effectively rebrand the Company's business and corporate name and
companion Internet website. Under the terms of the agreement, the Company's
television home shopping network, currently called ValueVision, and companion
Internet website will be rebranded as ShopNBC and ShopNBC.com, respectively. The
new name will be promoted as part of a wide-ranging marketing campaign that is
expected to launch in 2001. There can be no assurance that this rebranding will
be successful. Additionally, if the Company's efforts to rebrand its network to
ShopNBC are ineffective, the Company's current growth expectations could be
substantially reduced. The Company's online marketplace initiatives through its
current website are still being developed 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. In addition, the License Agreement contains
significant restrictions on the Company's ability to use the rights granted to
it under the License Agreement in connection with businesses other than
Permitted Businesses. This may restrict the ability of the Company to take
advantage of certain business opportunities.
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, NBC and 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 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, of which approximately $30 million has been
funded through January 31, 2001 for purposes of financing operating activities
as well as certain telemarketing services, order and record services, and
merchandise and warehouse services for Ralph Lauren Media. The Company owns a
12.5% interest in 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. 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.
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. Inherent with
the Internet and e-commerce is the risk of unauthorized access to
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confidential data, the risk of computer virus infection or other unauthorized
acts of electronic intrusion with the malicious intent to do damage. Although
the Company has taken precautionary steps to secure and protect its data network
from intrusion and acts of hostility, there can be no assurance that
unauthorized access to the Company's electronic systems will be prevented
entirely. 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 all 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 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. Starting in fiscal 1999, 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 may involve 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, but not all, 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
of its investments. Each such investment
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involves a high degree of risk by the Company. In fiscal 2000 the Company
recorded pre-tax losses totaling $56,157,000 relating to the write-down of a
majority of these investments.
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.
Legacy Systems Replacement. In fiscal 2000, the Company launched an effort
to fully replace its legacy financial and order fulfillment computer systems in
an effort to further support the Company's growing television home shopping and
Internet businesses. The Company's financial systems were successfully completed
in midyear 2000. The Company is currently in the process of replacing its order
management, inventory management and customer care systems and is further
upgrading its website and making significant enhancements to the website's
underlying infrastructure. These systems are expected to be fully implemented by
early 2002, however, there can be no assurances that expected timeframes will be
met. The Company's television home shopping and Internet businesses, which are
significantly dependent on these systems, could be materially adversely affected
in the event of errors or omissions in the installed applications, errors in the
conversion of historical data or errors, which would prevent or delay the new
systems from performing as intended. The Company has taken specific measures to
ensure adequate functionality for these systems, however there can be no
assurances that all systems will perform as expected.
Seasonality and Economic Sensitivity. 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 jewelry distribution
operations. The Company owns a 262,000 square foot distribution facility on a
34-acre parcel of land in Bowling Green, Kentucky and leases approximately
25,000 square feet of office space for a telephone call center in Brooklyn
Center, Minnesota, which the Company primarily uses to fulfill its service
obligations in connection with the Services Agreement 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, 2001.
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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............................................. $15 3/8 $ 8 1/8
Second Quarter............................................ 27 3/4 13 1/2
Third Quarter............................................. 33 21
Fourth Quarter............................................ 62 32 5/8
FISCAL 2000
First Quarter............................................. 50 3/8 17 5/8
Second Quarter............................................ 31 3/4 13 15/16
Third Quarter............................................. 31 5/8 15 7/8
Fourth Quarter............................................ 21 3/16 11 7/16
HOLDERS
As of April 24, 2001 the Company had approximately 330 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.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended January 31, 2001 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 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,
--------------------------------------------------------
2001 2000(a) 1999(b) 1998 1997(c)
---- ------- ------- ---- -------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................. $385,940 $293,460 $222,130 $244,127 $175,572
Gross profit.............................. 144,520 113,488 92,842 103,260 72,948
Operating income (loss)................... 6,637 3,996 (8,569) (10,975) (2,640)
Income (loss) before income taxes(d)...... (36,998) 46,771 7,491 29,604 29,690
Net income (loss)(d)...................... (29,894) 29,330 4,639 18,104 18,090
PER SHARE DATA:
Net income (loss) per common share........ $ (0.78) $ 0.89 $ 0.18 $ 0.57 $ 0.57
Net income (loss) per common share --
assuming dilution....................... $ (0.78) $ 0.73 $ 0.18 $ 0.57 $ 0.56
Weighted average shares outstanding:
Basic................................... 38,560 32,603 25,963 31,745 31,718
Diluted................................. 38,560 40,427 26,267 31,888 32,342
JANUARY 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments........... $244,723 $294,643 $ 46,870 $ 31,866 $ 52,859
Current assets............................ 367,536 382,854 98,320 79,661 101,029
Property, equipment and other assets...... 143,161 89,001 43,450 55,618 67,057
Total assets.............................. 510,697 471,855 141,770 135,279 168,086
Current liabilities....................... 75,371 51,587 32,684 29,590 37,724
Long-term obligations..................... -- -- 675 1,036 3,734
Redeemable preferred stock................ 41,900 41,622 -- -- --
Shareholders' equity...................... 393,426 371,921 108,411 104,653 126,628
YEAR ENDED JANUARY 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
OTHER DATA:
Gross margin percentage................... 37.4% 38.7% 41.8% 42.3% 41.5%
Working capital........................... $292,165 $ 331,267 $ 65,636 $ 50,071 $63,305
Current ratio............................. 4.9 7.4 3.0 2.7 2.7
EBITDA (as defined)(e).................... $ 19,489 $ 8,962 $ (3,570) $ (3,998) $ 3,356
CASH FLOWS:
Operating................................. $ 30,381 $ (1,469) $(18,091) $(19,445) $(5,779)
Investing................................. $(34,708) $(135,897) $ 48,131 $ 23,065 $19,223
Financing................................. $ 2,151 $ 231,323 $ (2,974) $(15,041) $(4,889)
- -------------------------
(a) In the second half of fiscal 1999, the Company divested the catalog
operations of Catalog Ventures, Inc. and Beautiful Images, Inc. See Note 4
of Notes to Consolidated Financial Statements.
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(b) In fiscal 1998, 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
1996. See Note 4 of Notes to Consolidated Financial Statements.
(d) Income (loss) before income taxes and net income (loss) include a net
pre-tax loss of $59.0 from the sale and holdings of investments and other
assets in fiscal 2000, a net pre-tax gain of $32.7 million from the sale
and holdings of broadcast properties and other assets in fiscal 1999, 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 1998, a pre-tax gain of $38.9 million from the sale of broadcast
properties in fiscal 1997 and a $28.3 million pre-tax gain on sale of
broadcast properties and other assets in fiscal 1996. See Notes 2 and 4 of
Notes to Consolidated Financial Statements.
(e) EBITDA represents operating income (loss) for the respective periods
excluding depreciation and amortization expense and the write-off due to
Montgomery Ward's bankruptcy in fiscal 2000. 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 certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on
management's current expectations and are accordingly subject to uncertainty and
changes in circumstances. Actual results may vary materially from the
expectations contained herein due to various important factors, including (but
not limited to): consumer spending and debt levels; interest rates; seasonal
variations in consumer purchasing activities; competitive pressures on sales;
pricing and gross profit margins; the level of cable and satellite distribution
for the Company's programming and fees associated therewith; the success of the
Company's e-commerce and rebranding initiatives; the performance of the
Company's equity investments; the success of the Company's strategic alliances
and relationships; the performance of the Ralph Lauren Media venture; the
ability of the Company to manage its operating expenses successfully; risks
associated with acquisitions; changes in governmental or regulatory
requirements; litigation or governmental proceedings affecting the Company's
operations; and the ability of the Company to obtain and retain key executives
and employees. Investors are cautioned that all forward-looking statements
involve risk and uncertainty and the Company is under no obligation (and
expressly disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of new information, future events or otherwise.
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NBC TRADEMARK LICENSE AGREEMENT
On November 16, 2000, the Company entered into a Trademark License
Agreement (the "License Agreement") with National Broadcasting Company, Inc.
("NBC") pursuant to which NBC granted the Company an exclusive, worldwide
license (the "License") for a term of 10 years to use certain NBC trademarks,
service marks and domain names to rebrand the Company's business and corporate
name and companion Internet website on the terms and conditions set forth in the
License Agreement. The Company subsequently selected the names "ShopNBC" and
"ShopNBC.com," with the concurrence of NBC. The new names will be promoted as
part of a wide-ranging marketing campaign that is expected to launch in 2001. In
connection with the License Agreement, the Company issued to NBC warrants (the
"License Warrants") to purchase 6,000,000 shares of the Company's common stock,
par value $.01 per share (the "Common Stock"), with an exercise price of $17.375
per share, the closing price of a share of Common Stock on the Nasdaq National
Market on November 16, 2000. The agreement also includes a provision for a
potential cashless exercise of the License Warrants under certain circumstances.
The License Warrants have a five year term from the date of vesting and vest in
one-third increments, with one-third exercisable commencing November 16, 2000,
and the remaining License Warrants vesting in equal amounts on each of the first
two anniversaries of the License Agreement. See Item 1 -- Business Section under
"Strategic Relationships" for a detailed discussion of the License Agreement.
NBC AND GE EQUITY STRATEGIC ALLIANCE
In March 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, NBC and GE Equity acquired 5,339,500 shares of the Company's Series
A Redeemable Convertible Preferred Stock (the "Preferred Stock"), and NBC was
issued warrants to acquire 1,450,000 shares of the Company's Common Stock ("the
Distribution Warrants") 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
Warrants. In addition, the Company issued to GE Equity a warrant to increase its
potential aggregate equity stake (together with the Distribution Warrants 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 Warrants) 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.
POLO RALPH LAUREN/RALPH LAUREN MEDIA ELECTRONIC COMMERCE ALLIANCE
In February 2000, the Company entered into an 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, of which approximately $30 million has been
funded through January 31, 2001. Ralph Lauren Media's premier initiative will be
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Polo.com, an Internet website dedicated to the American lifestyle that will
include original content, commerce and a strong community component. Polo.com
was officially launched in November 2000 and includes an assortment of men's,
women's and children's products across the Ralph Lauren family of brands as well
as unique gift items. 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. 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 on a cost plus basis. See Item
1 -- Business Section under "Strategic Relationships" for a detailed discussion
of the Ralph Lauren Media strategic alliance.
YAHOO! INC. LICENSE AND PROMOTION AGREEMENT
On November 20, 2000, Yahoo! Inc. ("Yahoo!"), a leading global Internet
communications, commerce and media company, announced and unveiled Yahoo!
Shopping Vision (http://shoppingvision.yahoo.com), a rich media extension of
Yahoo! Shopping (http://shopping.yahoo.com). Designed to give consumers a
dynamic new way to buy products conveniently on the Internet, Yahoo!
ShoppingVision lets consumers view streaming video content and simultaneously
purchase relevant merchandise through a single interface. As part of the Yahoo!
ShoppingVision launch, Yahoo! signed a content distribution and marketing
agreement with the Company. As part of its relationship with Yahoo!, ValueVision
is a featured content provider with a fixed graphic link on the Yahoo!
ShoppingVision player, and has agreed to provide live programming, 24 hours a
day, seven days a week, in addition to archived video content. As people see
products in the Company's streaming video window, information and links to
merchandise that is being displayed simultaneously appear in the window
adjoining the video stream, allowing consumers to immediately purchase the
products being viewed. The Company also advertises throughout Yahoo! Shopping,
and in the jewelry and watches, and computers and electronics categories of
Yahoo! Auctions. Additionally, the Company is promoted on broadcast-related
modules in My Yahoo! and throughout the Yahoo! network of properties.
NBCI ELECTRONIC COMMERCE ALLIANCE
In September 1999, the Company entered into a strategic alliance with Snap
and Xoom whereby the parties entered into, among other things, a rebranding
trademark license agreement and an interactive promotion agreement, spanning
television home shopping, Internet shopping and direct e-commerce initiatives.
In November 1999, Xoom and Snap, along with several Internet assets of NBC, were
merged into NBC Internet, Inc. ("NBCi"). The Company's original intent was to
re-launch its television network and companion Internet website under the SnapTV
and SnapTV.com brand names, respectively, in conjunction with NBCi. On June 12,
2000, NBCi announced a strategy to integrate all of its consumer properties
under the single NBCi.com brand, effectively abandoning the Snap name. As a
result, in June 2000, the Company effectively terminated the Snap trademark
license and interactive promotion agreements. See Item 1 -- Business Section
under "Strategic Relationships" for a detailed discussion of the NBCi Electronic
Commerce Alliance.
WRITE-DOWN OF INVESTMENTS
As of January 31, 2001, the Company had equity investments totaling
approximately $42,034,000 of which $25,646,000 related to the Company's
investment in the Ralph Lauren Media joint venture, after adjusting for the
Company's equity share of Ralph Lauren Media losses totaling $4.5 million under
the equity method of accounting. The Company's other equity investments include
minority interest holdings of companies whose shares are traded on a public
exchange, accounted for in accordance with the provisions of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115") and nonmarketable equity
investments of private enterprises, which are carried at the lower of cost or
net realizable value in the Company's financial statements. These equity
investments were made primarily in conjunction with the Company's strategy of
investing in e-commerce, Internet strategic alliances and the rebranding of the
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Company's television network. In fiscal 2000, the Company recorded pre-tax
losses totaling $56,157,000 relating to the write-down of investments made
primarily in a number of Internet retailers whose decline in fair value was
determined by the Company to be other than temporary. The decline in fair value
of these companies was driven by their large operating losses and negative cash
flow accompanied by an environment not conducive to raising new financing. The
major investment components of the write-down included minority investments made
in NBCi.com, Petopia.com, SelfCare.com, Roxy.com and BigStar Entertainment, Inc.
In accordance with the provisions of SFAS No. 115, the Company wrote off
its investment in CML Group, Inc. ("CML") in fiscal 1998. 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.
WRITE-OFF DUE TO BANKRUPTCY
In December 2000, Montgomery Ward & Co., Incorporated announced that it had
filed for bankruptcy and the Company terminated the use of the Montgomery Ward
private label credit card ("the MW Card") in its television home shopping
operations as of January 31, 2001. In conjunction with the bankruptcy filing,
the Company wrote off impaired assets totaling $4,609,000. Assets written off
consisted primarily of uncollected spot advertising and credit card processing
receivables totaling $3,112,000 and the remaining 1997 Montgomery Ward Operating
Agreement and License intangible asset balance of $1,497,000 which the Company
had concluded was permanently impaired as a result of the bankruptcy filing and
the subsequent termination of the use of the MW Card.
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 1998, 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.
RESTRUCTURING AND IMPAIRMENT OF ASSETS
In fiscal 1998, 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 MW
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 1998
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 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 1998.
ACQUISITIONS AND DISPOSITIONS:
MONTGOMERY WARD DIRECT
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. In fiscal 1997, the Company changed the
name of the MWD catalog to HomeVisions and in fiscal 1998 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 1998 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. 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 was payable
over a seven-year period and bears interest at 6 1/4% payable quarterly. As a
result of the former subsidiary's reported negative earnings, negative cash
flow, interest payment default and the inability of the acquiring entity to
obtain additional bank financing, the Company determined that the promissory
note was uncollectible and wrote off the $5,000,000 note in the third quarter of
fiscal 2000. Effective January 31, 2001, the Company restructured the promissory
note whereby the Company would be paid, among other things, $1,000,000 if the
acquiring entity obtains adequate bank financing to fund the acquisition.
Because of uncertainties surrounding the acquiring entity's ability to obtain
adequate financing, any consideration received by the Company in connection with
this sale 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.
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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.
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. In January 2001, the Company received
$2,130,000 of additional consideration, net of fees incurred, in connection with
the sale of CVI and recorded the pre-tax gain in the fourth quarter of fiscal
2000. Management believes that the sale will not have a significant impact on
the ongoing operations of the Company.
SALE OF BROADCAST STATIONS
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 television 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 paid in the first quarter of fiscal 1999. 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 1998. On
April 12, 1999, the Company received the contingent payment of $10 million
relating to the sale of KBGE-TV and recognized a $10 million pre-tax gain, net
of applicable closing fees, in the first quarter of fiscal 1999. 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 1999.
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 and 1999 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,
-----------------------------
2001 2000 1999
---- ---- ----
NET SALES........................................... 100.0% 100.0% 100.0%
===== ===== =====
GROSS MARGIN........................................ 37.4% 38.7% 41.8%
----- ----- -----
OPERATING EXPENSES:
Distribution and selling............................ 28.2% 31.3% 36.1%
General and administrative.......................... 4.2% 4.3% 6.0%
Depreciation and amortization....................... 2.1% 1.7% 2.3%
Write-off due to bankruptcy......................... 1.2% -- --
Restructuring and impairment of assets.............. -- -- 1.3%
----- ----- -----
Total operating expenses....................... 35.7% 37.3% 45.7%
----- ----- -----
OPERATING INCOME (LOSS)............................. 1.7% 1.4% (3.9)%
Other income (expense), net......................... (11.3)% 14.5% 7.2%
----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES................... (9.6)% 15.9% 3.3%
Income taxes........................................ 1.9% (5.9)% (1.2)%
----- ----- -----
NET INCOME (LOSS)................................... (7.7)% 10.0% 2.1%
===== ===== =====
SALES
Consolidated net sales, inclusive of shipping and handling revenue
(reclassified effective January 31, 2001, see below), for the year ended January
31, 2001 (fiscal 2000) were $385,940,000 compared to $293,460,000 for the year
ended January 31, 2000 (fiscal 1999), a 32% increase. The Company has recently
reported its largest revenue quarter in the Company's history. The increase in
consolidated net sales is directly attributable to the continued improvement and
increased sales from the Company's television home shopping and Internet
operations as well as a result of amounts billed for fulfillment services
provided in connection with the Company's service agreements with Ralph Lauren
Media. Sales attributed to the Company's television home shopping and Internet
operations increased 43% to $378,158,000 for the year ended January 31, 2001
from $264,962,000 for the year ended January 31, 2000. The growth in television
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, 2001, the Company
added approximately 9.2 million FTE subscriber homes (6.3 million FTEs in the
fourth quarter alone), an increase of 37%, going from 25.0 million FTE
subscriber homes at January 31, 2000 to 34.2 million FTE subscriber homes at
January 31, 2001. The average number of FTE subscriber homes was 27.9 million
for fiscal 2000 and 19.6 million for fiscal 1999, a 42% increase. In addition to
new FTE subscriber homes, television home shopping and Internet sales increased
due to the continued addition of new customers from households already receiving
the Company's television home shopping programming, as well as an increase in
repeat sales to existing customers, an increase in the average customer dollar
order size and a 618% increase in Internet sales over the prior year. 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 -- TV's general management and the effects of continued testing of
certain merchandising and programming strategies with the goal of improving its
television home shopping 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. There were no sales attributed to
direct-mail catalog operations in fiscal 2000 as the Company divested its
remaining mail order catalog operations in the fourth quarter of fiscal 1999.
Sales attributed to direct-mail marketing operations totaled $28,498,000 or 10%
of total net sales for the year ended January 31, 2000 and totaled $64,363,000
or 29% of total net sales for the year ended January 31, 1999.
Net sales for the year ended January 31, 2000 were $293,460,000 compared to
$222,130,000 for the year ended January 31, 1999, a 32% increase. The increase
in net sales was directly attributable to the increased
35
36
sales from the Company's television home shopping operations. Sales attributed
to the Company's television home shopping operations increased 68% to
$264,962,000 for the year ended January 31, 2000 from $157,767,000 for the year
ended January 31, 1999. 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 10.1 million or 68% from 14.9 million at January 31, 1999 to 25.0
million at January 31, 2000. The average number of FTE subscriber homes was 19.6
million for fiscal 1999 and 12.6 million for fiscal 1998, a 56% increase. In
addition to new FTE subscriber homes, television home shopping sales increased
as result of increased sales from households already receiving the Company's
programming, an increase in the average customer order size and sales
initiatives that emphasized, among other things, the increased use of the
Company's ValuePay installment payment program. Sales attributed to direct-mail
marketing operations totaled $28,498,000 or 10% of total net sales for the year
ended January 31, 2000 and totaled $64,363,000 or 29% of total net sales for the
year ended January 31, 1999. The decrease in direct-mail revenues was a direct
result of the Company's divestiture of its catalog operations during fiscal 1999
and fiscal 1998.
Consolidated net sales, for all years reported, includes the
reclassification of shipping and handling revenues in accordance with Emerging
Issues Task Force ("EITF") Issue Number 00-10, which requires amounts charged to
customers for shipping and handling to be classified as revenue in the Company's
statement of operations. The Company had previously classified its net shipping
and handling revenue as a reduction of operating expense. For the years ended
January 31, 2001, 2000 and 1999, shipping and handling revenues have increased
reported consolidated net sales by $17,248,000, $18,533,000 and $18,402,000,
respectively, with no impact on reported operating income (loss). For the years
ended January 31, 2001, 2000 and 1999, shipping and handling revenues have
increased reported television and Internet net sales by $17,248,000, $14,739,000
and $9,569,000, respectively, with no impact on reported operating income
(loss).
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 the fiscal years ended January 31, 2001, 2000
and 1999 were approximately 32%, 29% and 24%, respectively. The increase in the
overall return rate from fiscal 1998 to fiscal 2000 is a direct result of the
divestiture of the Company's direct-mail catalog operations in fiscal 1999.
Direct-mail operations, which represented only 10% of total sales in fiscal 1999
and 29% of total sales in fiscal 1998, typically experienced lower average
return rates than the Company's television operations. The fiscal 2000 return
rate for the Company's television home shopping and Internet operations was 33%,
compared to 30% in fiscal 1999 and 28% 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 a slowing of the
economy during the current year and its effect on consumer purchasing decisions
and higher average unit selling price points for the Company (approximately $163
in fiscal 2000 versus $124 in fiscal 1999), which typically result in higher
return rates. 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 1999 and 1998.
GROSS PROFIT
Gross profits for fiscal 2000 and 1999 were $144,520,000 and $113,488,000,
respectively, an increase of $31,032,000 or 27%. Gross margins for fiscal 2000
were 37.4% compared to 38.7% 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 and Internet businesses, offset by a decrease
in direct-mail order gross profits resulting from the fiscal 1999 divestiture of
the Company's remaining direct mail-order catalog operations. In addition, gross
profit for fiscal 2000 included positive contributions made from the Company's
fulfillment services. Television home shopping and Internet gross margins for
fiscal 2000 and 1999 were 36.7% and 36.8%, respectively. Gross margins for the
Company's direct mail operations were 55.8% in fiscal 1999. Overall, annual
television and Internet gross margins increased slightly; however, television
home shopping merchandise gross margins decreased slightly from prior year
primarily as a result of a decrease in the mix of higher
36
37
margin jewelry merchandise offset by an increase in gross margin percentages in
the electronics product category and the addition of airtime sales revenue in
fiscal 2000.
Gross profits for fiscal 1999 and 1998 were $113,488,000 and $92,842,000,
respectively, an increase of $20,646,000 or 22%. Gross margins for fiscal 1999
were 38.7% compared to 41.8% for fiscal 1998. 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 1999 and the divestiture of the
HomeVisions catalog operations in fiscal 1998. Television home shopping and
Internet gross margins for fiscal 1999 and 1998 were 36.8% and 37.7%,
respectively. Gross margins for the Company's direct mail operations were 55.8%
and 51.2% 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 1999 there was a substantial increase in the sales volume of lower
margin, high turn electronics merchandise over fiscal 1998. Also, and as a
result of the mix change, additional inventory reserves were established in the
second quarter of fiscal 1999, 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. 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 1998 divestiture of the HomeVisions catalog operations.
OPERATING EXPENSES
Total operating expenses were $137,883,000, $109,492,000 and $101,411,000
for the years ended January 31, 2001, 2000 and 1999, respectively, representing
an increase of $28,391,000 or 26% from fiscal 1999 to fiscal 2000, and an
increase of $8,081,000 or 8% from fiscal 1998 to fiscal 1999. For fiscal 2000,
total operating expense includes a $4,609,000 one-time asset write-off resulting
from a bankruptcy filing by Montgomery Ward in the fourth quarter. Assets
written off consisted primarily of uncollected spot advertising and credit card
processing receivables and the remaining Montgomery Ward Operating Agreement and
License intangible asset. The Company concluded that the intangible asset was
permanently impaired as a result of the bankruptcy filing and the subsequent
termination of the Company's use of the MW Card. For fiscal 1998, 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 $17,131,000 or
19% to $108,952,000 or 28% of net sales compared to $91,821,000 or 31% 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 42%
annual increase in the number of average FTE subscriber homes over the prior
year, an increase in the average net cost per FTE subscriber home, increased
marketing and advertising fees, fulfillment distribution costs, and increased
costs associated with credit card processing, telemarketing and the Company's
ValuePay program primarily resulting from increased sales volumes. These
increases were offset by decreases in distribution and selling expenses
associated with the divestiture of the Company's catalog operations.
Distribution and selling expense for fiscal 2000 decreased as a percentage of
net sales over fiscal 1999 as a result of expenses growing at a slower rate than
the increase in television home shopping and Internet net sales over the prior
year.
Distribution and selling expenses for fiscal 1999 increased $11,697,000 or
15% to $91,821,000 or 31% of net sales compared to $80,124,000 or 36% of net
sales in fiscal 1998. Distribution and selling expense increased from fiscal
1998 to fiscal 1999 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. In addition, distribution and selling expense increased as a
result of an increase in the rate per FTE subscriber home, increased marketing
and advertising fees, and increased costs associated with credit card
processing, telemarketing due to increases
37
38
in television home shopping sales volumes. These increases were offset by a
decrease in distribution and selling expenses associated with the divestiture of
the Company's catalog operations, specifically HomeVisions. Distribution and
selling expense for fiscal 1999 decreased as a percentage of net sales over
fiscal 1998 as a result of the increase in net sales over the prior year.
General and administrative expenses for fiscal 2000 increased $3,374,000 or
27% to $16,079,000 or 4% of net sales compared to $12,705,000 or 4% of net sales
in fiscal 1999. General and administrative expense increased from the prior year
primarily as a result of increases in personnel costs, travel and information
systems costs, including increased consulting and placement fees and increases
in general and administrative expenses associated with the Company's fulfillment
service operations. These increases were offset by a decrease in general and
administrative expense associated with the Company's divested catalog
operations. General and administrative expense as a percentage of net sales
remained flat from year to year.
General and administrative expenses for fiscal 1999 decreased $633,000 or
5% to $12,705,000 or 4% of net sales compared to $13,338,000 or 6% of net sales
in fiscal 1998. 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 headcount, 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 due to
the increase in net sales from year to year.
Depreciation and amortization expense was $8,243,000, $4,966,000 and
$4,999,000 for the years ended January 31, 2001, 2000 and 1999, respectively,
representing an increase of $3,277,000 or 66% from fiscal 1999 to fiscal 2000
and a decrease of $33,000 or 1% from fiscal 1998 to fiscal 1999. Depreciation
and amortization expense as a percentage of net sales was 2% for the three
fiscal years reported. The dollar increase from fiscal 1999 to fiscal 2000 is
primarily related to additional amortization incurred in fiscal 2000 in
connection with the NBC License Agreement and increased depreciation associated
with the Company's fixed assets as a result of significant capital additions
made during the recent fiscal year primarily in the areas of new systems
implementation and the Company's fulfillment obligations with Ralph Lauren
Media. These increases were offset by a reduction in depreciation expense in
connection with the divestiture of the Company's direct-mail catalog operations
and divested television broadcast stations. The dollar decrease from fiscal 1998
to fiscal 1999 was 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.
OPERATING INCOME (LOSS)
The Company reported operating income of $6,637,000 for the year ended
January 31, 2001 compared with operating income of $3,996,000 for the year ended
January 31, 2000. Operating income for fiscal 2000 includes a one-time asset
write-off of $4,609,000 resulting from a bankruptcy filing made by Montgomery
Ward in the fourth quarter. Excluding the one-time bankruptcy write-off,
operating income was $11,246,000 for the year ended January 31, 2001, an
improvement of $7,250,000 or 181% over fiscal 1999. The Company reported an
operating loss of $8,569,000 for the year ended January 31, 1999. The
improvement in operating income over the prior year is directly attributed to
the overall operating improvements in the Company's television home shopping and
Internet businesses which, excluding the one-time charge, improved by
approximately $6,938,000 or 188% for the year ended January 31, 2001. Operating
income improved as a result of increased sales and gross profits from the
Company's television home shopping and Internet businesses and the additional
positive contributions made during the year from the Company's fulfillment
operations. These operating income improvements were offset by increased
distribution and selling expense largely due to increases in cable access fees
associated with new cable distribution, increased general and administrative
expense, increased fixed asset depreciation and the additional amortization
associated with the new NBC trademark and license agreement.
The improvement in operating results from fiscal 1998 to fiscal 1999 was
directly attributed to the overall operating improvements of the Company's
television home shopping business, which improved by approxi-
38
39
mately $7,543,000 while the prior year's results included significant catalog
operating losses. The Company also experienced a modest improvement in operating
income over fiscal 1998 from its catalog operations primarily resulting from the
fiscal 1998 divestiture of its unprofitable HomeVisions catalog business.
Overall, operating income increased as a result of increased sales volumes and
gross profits, a decrease in general and administrative expense 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, increased general and administrative expense
associated with the Company's e-commerce initiatives and increased amortization
associated with the Company's NBC cable distribution and marketing agreement.
The fiscal 1998 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.
OTHER INCOME (EXPENSE)
Total other income (expense) was $(43,635,000) in fiscal 2000, $42,775,000
in fiscal 1999 and $16,060,000 in fiscal 1998. Total other expense for fiscal
2000 included the following: a pre-tax charge totaling $56,157,000 relating to
the write-down of investments made primarily in a number of Internet retailers
whose decline in fair value was determined by the Company to be other than
temporary. The major investment components of the write-down included minority
investments made in NBCi.com, Petopia.com, SelfCare.com, Roxy.com and BigStar
Entertainment, Inc; a pre-tax loss of $4,500,000 related to the Company's equity
share of losses in Ralph Lauren Media; net pre-tax gains of $1,644,000 recorded
on the sale and holdings of property and security investments; and interest
income of $15,423,000. Total other income for fiscal 1999 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 1998 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; 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; a $6,113,000 write-down made in connection
with the Company's investment in CML Group, Inc. following its announcement of
bankruptcy; a write-off of $2,350,000 for acquisition related costs associated
with the terminated merger with National Media Corporation; and equity in losses
of affiliates of $323,000.
NET INCOME (LOSS)
Net loss available to common shareholders was ($30,172,000) or ($.78) per
basic and diluted share for the year ended January 31, 2001. 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 $13,550,000, or $.35 per basic share and
$.29 per diluted share for the year ended January 31, 2001. 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. For the years ended January 31,
2001, 2000 and 1999, respectively, the Company had approximately 38,560,000,
40,427,000 and 26,267,000 diluted weighted average common shares outstanding and
38,560,000, 32,603,000 and 25,963,000 basic weighted average common shares
outstanding.
For the years ended January 31, 2001, 2000 and 1999, net income reflects an
income tax provision (benefit) of $(7,104,000), $17,441,000 and $2,852,000,
respectively, which results in an effective tax rate of
39
40
19% in fiscal 2000, 37% in fiscal 1999 and 38% in fiscal 1998. The Company's
effective tax rate for the year ended January 31, 2001 is lower than its
historical effective tax rate as a result of the timing of future tax benefits
relating to certain investments included in the third quarter investment
write-down.
PROGRAM DISTRIBUTION
The Company's television home shopping program was available to
approximately 42.6 million homes as of January 31, 2001 as compared to 33.1
million homes as of January 31, 2000 and to 21.8 million homes as of January 31,
1999. The Company's programming is currently available through affiliation and
time-block purchase agreements with 446 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, 2001, 2000 and 1999, the
Company's programming was available to approximately 34.2 million, 25.0 million
and 14.9 million FTE households, respectively. Approximately 27.6 million, 17.3
million and 10.6 million households at January 31, 2001, 2000 and 1999,
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, 2001 and 2000 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 (a)............................... $85,655 $89,511 $ 99,436 $111,338 $385,940
Gross profit................................ 32,785 33,734 37,464 40,537 144,520
Gross margin................................ 38.3% 37.7% 37.7% 36.4% 37.4%
Operating expenses.......................... 31,280 31,461 33,276 41,866 137,883
Operating income (loss)..................... 1,505 2,273 4,188 (1,329) 6,637
Other income (expense), net................. 3,710 2,695 (52,047) 2,007 (43,635)
Net income (loss)........................... $ 3,179 $ 3,236 $(36,735) $ 426 $(29,894)
======= ======= ======== ======== ========
Net income (loss) per share................. $ .08 $ .08 $ (.95) $ .01 $ (.78)
======= ======= ======== ======== ========
Net income per share -- assuming
dilution(b)............................... $ .07 $ .07 $ (.95) $ .01 $ (.78)
======= ======= ======== ======== ========
Weighted average shares outstanding:
Basic..................................... 38,414 38,566 38,644 38,615 38,560
======= ======= ======== ======== ========
Diluted................................... 47,753 47,126 38,644 46,138 38,560
======= ======= ======== ======== ========
FISCAL 1999:
Net sales (a)............................... $57,363 $62,152 $ 81,909 $ 92,036 $293,460
Gross profit................................ 24,136 23,874 32,750 32,728 113,488
Gross margin................................ 42.1% 38.4% 40.0% 35.6% 38.7%
Operating expenses.......................... 23,794 23,563 31,647 30,488 109,492
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
======= ======= ======== ======== ========
40
41
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income per share (b).................... $ .24 $ .03 $ .46 $ .12 $ .89
======= ======= ======== ======== ========
Net income per share -- assuming
dilution(b)............................... $ .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
======= ======= ======== ======== ========
- -------------------------
(a) Net sales for all periods includes the reclassification of shipping and
handling revenues in accordance with EITF Issue No. 00-10.
(b) 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, 2001 and 2000, cash and cash equivalents and short-term
investments were $244,723,000 and $294,643,000, respectively, a $49,920,000
decrease. For the year ended January 31, 2001, working capital decreased
$39,102,000 to $292,165,000 compared to working capital of $331,267,000 for the
year ended January 31, 2000. The current ratio was 4.9 at January 31, 2001
compared to 7.4 at January 31, 2000. At January 31, 2001 and 2000, all
short-term investments and cash equivalents were invested primarily 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 and other tax advantaged certificates with original maturity
dates and/or tender option terms ranging from one month to one year. The average
maturity of the Company's investment portfolio is approximately 30 days.
Total assets at January 31, 2001 were $510,697,000 compared to $471,855,000
at January 31, 2000. Shareholders' equity was $393,426,000 at January 31, 2001,
compared to $371,921,000 at January 31, 2000, an increase of $21,505,000. The
increase in common shareholders' equity for fiscal 2000 resulted primarily from
the issuance of 6,000,000 common stock purchase warrants valued at $59,560,000
at January 31, 2001 as consideration paid to NBC in connection with the
Company's execution of the NBC License Agreement. In addition, shareholders'
equity increased from prior year as a result of proceeds received of $4,258,000
from the exercise of stock options and a $4,348,000 income tax benefit relating
to stock options exercised. The equity increases were offset by the $29,894,000
net loss reported by the Company, other comprehensive losses on investments
available-for-sale of $9,704,000, officer notes issued, inclusive of accrued
interest, of $3,863,000, the repurchase of 214,000 shares of Company common
stock for $2,922,000 and by accretion of redeemable preferred stock of $278,000.
The increase in common shareholders' equity from fiscal 1998 to fiscal 1999
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 from 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. As of
January 31, 2001, the Company had no long-term debt obligations.
For the year ended January 31, 2001, net cash provided by operating
activities totaled $30,381,000 compared to net cash used for operating
activities of $(1,469,000) in fiscal 1999 and $(18,091,000) in fiscal 1998. Cash
flows from operations before consideration of changes in working capital items
and investing and financing activities (which the Company defines as EBITDA) was
a positive $14,880,000 in fiscal 2000, a positive $8,962,000 in fiscal 1999 and
a negative $3,570,000 in fiscal 1998. Net cash provided by operating
41
42
activities for fiscal 2000 reflects a net loss, as adjusted for depreciation and
amortization, gains on the sale of property and investments, the write-down of
investments, a write-off due to a bankruptcy filing, unrealized losses on
trading securities and equity in losses of Ralph Lauren Media. In addition, net
cash provided by operating activities for fiscal 2000 reflects increases in
accounts receivable, inventories, prepaid expenses and net income taxes
receivable, offset by increases in accounts payable and accrued liabilities.
Accounts receivable increased primarily due to the increase in net sales and the
timing of credit card receivable payments. Inventories increased from fiscal
1999 to support increased sales volume and due to the timing of merchandise
receipts. Prepaid expenses increased primarily as a result of increases in
prepaid advertising. The increase in income taxes receivable is a result of the
net loss recorded and benefits recorded in the connection with the exercise of
employee stock options. The increase in accounts payable and accrued liabilities
is a direct result of the increase in inventory levels and the timing of vendor
payments.
Net cash used for operating activities for fiscal 1999 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 1999 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 1998 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 1998 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 1998 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 1997 to support increased sales
volumes primarily with respect to the 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, 2001, the Company
had approximately $54,759,000 due from customers under the ValuePay installment
program, compared to $42,212,000 at January 31, 2000. The increase in ValuePay
receivables from fiscal 1999 is primarily the result of the significant increase
in television home shopping sales over prior year. ValuePay was introduced to
increase sales while at the same time reducing return rates on merchandise with
above-normal average selling prices. The Company records a reserve for
uncollectible accounts in its financial statements in connection with ValuePay
installment sales and intends to continue to sell merchandise using the ValuePay
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 $(34,708,000)
in fiscal 2000 compared to $(135,897,000) in fiscal 1999 and $48,131,000 in
fiscal 1998. Expenditures for property and equipment were $24,557,000 in fiscal
2000 compared to $4,036,000 in fiscal 1999 and $1,565,000 in fiscal 1998.
Expenditures
42
43
for property and equipment in fiscal 2000 and 1999 primarily include capital
expenditures made for the Company's distribution facility and new customer
service and call center site in connection with the Ralph Lauren Media service
agreement, the upgrade and conversion of new computer software, related computer
equipment and other office equipment, web page development costs, warehouse
equipment, production equipment and expenditures on leasehold improvements.
Increases in property and equipment in fiscal 1999 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.
Increases in property and equipment in fiscal 1998 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. Principal future capital expenditures
include the upgrade of television production and transmission equipment and the
upgrade and replacement of computer software, systems and related computer
equipment associated with the expansion of the Company's home shopping business
and e-commerce initiatives. During fiscal 2000, the Company received $2,485,000
in proceeds from the sale of property and other investments. In addition, during
fiscal 2000, the Company invested $198,872,000 in various short-term
investments, received proceeds of $246,520,000 from the sale of short-term
investments, issued $3,800,000 in the form of an officer note, received $863,000
in connection with the repayment of outstanding notes receivable and made
disbursements of $57,347,000 for certain investments and other long-term assets.
During fiscal 1999, 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 1999, 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 1998, 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 1998, 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 a
$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 a demand note.
Net cash provided by financing activities totaled $2,151,000 in fiscal 2000
and related primarily to $5,073,000 of proceeds received from the exercise of
stock options offset by payments made of $2,922,000 in conjunction with the
repurchase of 214,000 shares of the Company's common stock at an average price
of $13.66. Net cash provided by financing activities totaled $231,323,000 for
fiscal 1999 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 1998 and primarily related
to common stock repurchases of $4,292,000 made under the Company's common stock
repurchase program, capital lease obligation payments of $411,000 offset by
proceeds received of $1,729,000 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 at least fiscal 2001.
43
44
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2000, the EITF of the Financial Accounting Standards Board
reached a final consensus on EITF Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs." The consensus requires that all amounts billed to a
customer in a sale transaction related to shipping and handling, if any,
represent revenue and should be classified as revenue. With respect to the
classification of costs related to shipping and handling incurred by the seller,
the EITF determined that the classification of such costs is an accounting
policy decision that should be disclosed. The Company has historically
classified shipping charges to customers and related shipping and handling costs
on a net basis as components of distribution and selling expense in the
statement of operations. The Company has adopted the consensus reached by the
EITF relating to Issue No. 00-10 in the fourth quarter of fiscal 2000 and, as
required, reflects amounts collected from customers as revenue in the
accompanying financial statements. The Company includes shipping and handling
costs as a component of cost of sales. Comparative financial statements for
prior periods have been reclassified to comply with the new classification
guidelines.
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. The Company's adoption of SFAS No. 133 on February 1, 2001 did
not have a material effect on its 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 as a hedge to offset market risk. The Company does hold certain
equity investments in the form of common stock purchase warrants and accounts
for these investments in accordance with the provisions of SFAS No. 133. 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, although changes in market interest rates do impact the level of interest
income earned on the Company's substantial cash and short-term investment
portfolio.
44
45
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
PAGE
----
Report of Independent Public Accountants.................... 46
Consolidated Balance Sheets as of January 31, 2001 and
2000...................................................... 47
Consolidated Statements of Operations for the Years Ended
January 31, 2001, 2000 and 1999........................... 48
Consolidated Statements of Shareholders' Equity for the
Years Ended January 31, 2001, 2000 and 1999............... 49
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2001, 2000 and 1999........................... 51
Notes to Consolidated Financial Statements.................. 52
Financial Statement Schedule -- Schedule II -- Valuation and
Qualifying Accounts....................................... 78
45
46
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,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2001 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
states 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 12, 2001
46
47
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31,
----------------------
2001 2000
---- ----
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $136,045 $138,221
Short-term investments.................................... 108,678 156,422
Accounts receivable, net.................................. 61,173 49,070
Inventories, net.......................................... 34,960 22,677
Prepaid expenses and other................................ 9,298 4,888
Income taxes receivable................................... 13,417 9,626
Deferred income taxes..................................... 3,965 1,950
-------- --------
Total current assets................................. 367,536 382,854
PROPERTY AND EQUIPMENT, NET................................. 33,982 14,350
NBC TRADEMARK LICENSE AGREEMENT, NET........................ 58,386 --
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET............. 5,701 6,394
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET....... -- 1,679
INVESTMENTS AND OTHER ASSETS, NET........................... 44,753 66,578
DEFERRED INCOME TAXES....................................... 339 --
-------- --------
$510,697 $471,855
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 56,033 $ 34,937
Accrued liabilities....................................... 19,338 16,650
-------- --------
Total current liabilities............................ 75,371 51,587
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 SHARES ISSUED AND OUTSTANDING................... 41,900 41,622
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 38,578,401 and 38,192,164 shares issued and
outstanding............................................ 386 382
Common stock purchase warrants; 7,854,760 and 1,854,760
shares................................................. 73,170 13,610
Additional paid-in capital................................ 286,258 280,578
Accumulated other comprehensive income (losses)........... (813) 8,891
Notes receivable from officer............................. (3,863) --
Retained earnings......................................... 38,288 68,460
-------- --------
Total shareholders' equity........................... 393,426 371,921
-------- --------
$510,697 $471,855
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
47
48
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
NET SALES......................................... $ 385,940 $ 293,460 $ 222,130
COST OF SALES..................................... 241,420 179,972 129,288
----------- ----------- -----------
Gross profit................................. 144,520 113,488 92,842
----------- ----------- -----------
OPERATING EXPENSES:
Distribution and selling........................ 108,952 91,821 80,124
General and administrative...................... 16,079 12,705 13,338
Depreciation and amortization................... 8,243 4,966 4,999
Write-off due to bankruptcy..................... 4,609 -- --
Restructuring and impairment of assets.......... -- -- 2,950
----------- ----------- -----------
Total operating expenses..................... 137,883 109,492 101,411
----------- ----------- -----------
OPERATING INCOME (LOSS)........................... 6,637 3,996 (8,569)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations.............. -- 33,230 19,750
Gain on sale of property and investments........ 1,740 2,347 8,102
Time Warner litigation settlement............... -- -- (7,100)
Write-down of investments....................... (56,157) (1,991) (6,113)
National Media Corporation terminated
acquisition costs............................ -- -- (2,350)
Unrealized gain (loss) on trading securities.... (96) (890) 1,350
Equity in losses of affiliates.................. (4,500) -- (323)
Interest income................................. 15,423 10,129 2,904
Other, net...................................... (45) (50) (160)
----------- ----------- -----------
Total other income (expense)................. (43,635) 42,775 16,060
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................. (36,998) 46,771 7,491
Income tax provision (benefit)............... (7,104) 17,441 2,852
----------- ----------- -----------
NET INCOME (LOSS)................................. (29,894) 29,330 4,639
ACCRETION OF REDEEMABLE PREFERRED STOCK........... (278) (207) --
----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS.................................... $ (30,172) $ 29,123 $ 4,639
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE................ $ (0.78) $ 0.89 $ 0.18
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE -- ASSUMING
DILUTION........................................ $ (0.78) $ 0.73 $ 0.18
=========== =========== ===========
Weighted average number of common shares
outstanding:
Basic........................................... 38,559,751 32,602,536 25,963,341
=========== =========== ===========
Diluted......................................... 38,559,751 40,426,925 26,266,814
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
48
49
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
ACCUMULATED
COMMON STOCK COMMON OTHER
COMPREHENSIVE ------------------ STOCK ADDITIONAL COMPREHENSIVE
INCOME NUMBER PAR PURCHASE PAID-IN INCOME
(LOSS) OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
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
officers............... -- -- -- -- --
---------- ---- ------- -------- -------
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........ -- -- -- -- --
---------- ---- ------- -------- -------
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
OFFICER EARNINGS EQUITY
---------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
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
officers............... (99) -- (99)
------- -------- --------
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)
------- -------- --------
49
50
ACCUMULATED
COMMON STOCK COMMON OTHER
COMPREHENSIVE ------------------ STOCK ADDITIONAL COMPREHENSIVE
INCOME NUMBER PAR PURCHASE PAID-IN INCOME
(LOSS) OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
2000................... 38,192,164 382 13,610 280,578 8,891
Comprehensive loss:
Net loss............... $(29,894) -- -- -- -- --
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $13,367..... (21,811)
Write-down of
securities to net
realizable value,
net of tax of
$7,421............. 12,107
--------
Other comprehensive
losses............... (9,704) -- -- -- -- (9,704)
--------
Comprehensive
loss:........... $(39,598)
========
Officer notes
receivable............. -- -- -- -- --
Value assigned to common
stock purchase
warrants............... -- -- 59,560 -- --
Exercise of stock
options................ 600,237 6 -- 4,252 --
Repurchases of common
stock.................. (214,000) (2) -- (2,920) --
Income tax benefit from
stock options
exercised.............. -- -- -- 4,348 --
Accretion of redeemable
preferred stock........ -- -- -- -- --
---------- ---- ------- -------- -------
BALANCE, JANUARY 31,
2001................... 38,578,401 $386 $73,170 $286,258 $ (813)
========== ==== ======= ======== =======
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
OFFICER EARNINGS EQUITY
---------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
2000................... -- 68,460 371,921
Comprehensive loss:
Net loss............... -- (29,894) (29,894)
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $13,367.....
Write-down of
securities to net
realizable value,
net of tax of
$7,421.............
Other comprehensive
losses............... -- -- (9,704)
Comprehensive
loss:...........
Officer notes
receivable............. (3,863) -- (3,863)
Value assigned to common
stock purchase
warrants............... -- -- 59,560
Exercise of stock
options................ -- -- 4,258
Repurchases of common
stock.................. -- -- (2,922)
Income tax benefit from
stock options
exercised.............. -- -- 4,348
Accretion of redeemable
preferred stock........ -- (278) (278)
------- -------- --------
BALANCE, JANUARY 31,
2001................... $(3,863) $ 38,288 $393,426
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
50
51
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
----------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (29,894) $ 29,330 $ 4,639
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities --
Depreciation and amortization.......................... 8,243 4,966 4,999
Deferred taxes......................................... (3,133) (55) (1,408)
Gain on sale of broadcast stations..................... -- (33,230) (19,750)
Gain on sale of property and investments............... (1,740) (2,347) (8,102)
Write-down of investments.............................. 56,157 250 6,113
Write-off due to bankruptcy............................ 4,609 -- --
Restructuring and impairment of assets................. -- -- 2,950
National Media Corporation terminated acquisition
costs................................................ -- -- 2,350
Unrealized loss (gain) on trading securities........... 96 890 (1,350)
Equity in losses of affiliates......................... 4,500 -- 323
Changes in operating assets and liabilities, net of
effect of dispositions:
Accounts receivable, net............................. (15,157) (22,836) (11,021)
Inventories, net..................................... (12,283) (7,515) (2,255)
Prepaid expenses and other........................... (5,182) (1,646) 1,553
Accounts payable and accrued liabilities............. 23,609 21,927 2,620
Income taxes payable (receivable), net............... 556 8,797 248
--------- --------- --------
Net cash provided by (used for) operating
activities...................................... 30,381 (1,469) (18,091)
--------- --------- --------
INVESTING ACTIVITIES:
Property and equipment additions.......................... (24,557) (4,036) (1,565)
Proceeds from sale of broadcast stations.................. -- 38,130 24,483
Proceeds from sale of investments and property............ 2,485 12,403 9,548
Purchase of short-term investments........................ (198,872) (202,107) (12,394)
Proceeds from sale of short-term investments.............. 246,520 46,884 25,056
Loan to National Media Corporation........................ -- -- (3,000)
Payment for investments and other assets.................. (57,347) (28,607) (3,997)
Issuance of officer notes receivable...................... (3,800) -- --
Proceeds from notes receivable............................ 863 1,436 10,000
--------- --------- --------
Net cash provided by (used for) investing
activities...................................... (34,708) (135,897) 48,131
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Series A Preferred Stock, net... -- 41,415 --
Proceeds from exercise of stock options and warrants...... 5,073 190,063 1,729
Payments for repurchases of common stock.................. (2,922) -- (4,292)
Payment of long-term obligations.......................... -- (155) (411)
--------- --------- --------
Net cash provided by (used for) financing
activities...................................... 2,151 231,323 (2,974)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (2,176) 93,957 27,066
BEGINNING CASH AND CASH EQUIVALENTS......................... 138,221 44,264 17,198
--------- --------- --------
ENDING CASH AND CASH EQUIVALENTS............................ $ 136,045 $ 138,221 $ 44,264
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
51
52
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
1. THE COMPANY:
ValueVision International, Inc. and Subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company that markets its products
directly to consumers through various forms of electronic media. The Company's
operating strategy incorporates television home shopping, Internet e-commerce,
vendor programming sales and fulfillment services.
The Company's television home shopping business uses on-air television home
shopping personalities to market brand name merchandise and proprietary/private
label consumer products at competitive value prices. The Company's live 24-hour
per day television home shopping programming is distributed primarily through
long-term cable and satellite 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. The Company also
complements its television home shopping business by the sale of merchandise
through its Internet shopping website (www.vvtv.com), which sells a broad array
of merchandise and simulcasts its television home shopping show live 24 hours a
day, 7 days a week.
The Company intends to rebrand its growing home shopping network and
companion Internet shopping website as "ShopNBC" and "ShopNBC.com,"
respectively, in fiscal 2001 as part of a wide-ranging direct marketing strategy
the Company is pursuing in conjunction with its strategic partners. This
rebranding is intended to position ValueVision as a multimedia retailer,
offering consumers an entertaining, informative and interactive shopping
experience, and position the Company as a leader in the evolving convergence of
television and the Internet. On November 16, 2000, the Company entered into an
exclusive license agreement with National Broadcasting Company, Inc. ("NBC")
pursuant to which NBC granted ValueVision worldwide use of the NBC-branded name
and the Peacock image for a ten-year period. The new name will be promoted as
part of a wide-ranging marketing campaign that the Company intends to launch in
2001. ValueVision's original intent was to re-launch its television network and
companion Internet website under the SnapTV and SnapTV.com brand names,
respectively, in conjunction with NBC Internet, Inc. ("NBCi"). On June 12, 2000,
NBCi announced a strategy to integrate all of its consumer properties under the
single NBCi.com brand, effectively abandoning the Snap name. This led to
ValueVision's search for an alternative rebanding strategy culminating in the
aforementioned license agreement with 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.
The Company, through its wholly owned subsidiary, VVI Fulfillment Center,
Inc. ("VVIFC"), provides fulfillment, warehousing and telemarketing services on
a cost plus basis to Ralph Lauren Media, LLC. VVIFC's services agreement was
made in conjunction with the execution of the Company's investment and
electronic commerce alliance entered into with Polo Ralph Lauren Corporation
("Polo Ralph Lauren"), NBC and other NBC affiliates. See Note 17. The Company,
through its wholly owned subsidiary, ValueVision Direct Marketing Company, Inc.
("VVDM"), formerly 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 1999, 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 and its wholly owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
52
53
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
FISCAL YEAR
The Company's fiscal year ends on January 31. In prior reporting years,
fiscal years were designated by the calendar year in which the fiscal year
ended. Effective with the current fiscal year ended January 31, 2001, the
Company changed the naming convention for its fiscal years. The year ended
January 31, 2001 is designated fiscal "2000" and the year ended January 31, 2002
will be designated fiscal "2001" to more accurately align the name of the
Company's fiscal year with the calendar year it primarily represents. All prior
fiscal year references have been renamed accordingly.
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 classified as revenue in the accompanying statement of operations in
accordance with Emerging Issues Task Force Issue No. 00-10. The Company
classifies shipping and handling costs in the accompanying statement of
operations as a component of cost of sales. 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.
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 $5,869,000 at January 31, 2001
and $4,314,000 at January 31, 2000.
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 and other tax advantaged
certificates with original maturity dates and/or tender option terms ranging
from one month to one year. These investments are stated at cost, which
approximates market value due to the short maturities of these instruments. The
average maturity of the Company's investment portfolio is approximately 30 days.
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:
53
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
GROSS GROSS WRITE-DOWN
UNREALIZED UNREALIZED TO
COST GAINS LOSSES FAIR VALUE FAIR VALUE
---- ---------- ---------- ---------- ----------
January 31, 2001 equity
securities.................... $18,848,000 $ 430,000 $1,737,000 $9,974,000 $ 7,567,000
=========== =========== ========== ========== ===========
January 31, 2000 equity
securities.................... $24,929,000 $15,781,000 $1,438,000 $ -- $39,272,000
=========== =========== ========== ========== ===========
As of January 31, 2001 and 2000, 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
$57,000, $12,043,000 and $662,000 in fiscal 2000, 1999 and 1998, respectively,
and related gross realized gains (losses) included in income were $(389,000),
$2,206,000 and $26,000 in fiscal 2000, 1999 and 1998, respectively.
As of January 31, 2001 and 2000, respectively, the Company had $-0- and
$96,000 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, 1999 and 1998 totaled
$(96,000), $(890,000) and $1,350,000, respectively.
INVENTORIES
Inventories, which consist primarily of consumer merchandise held for
resale, are stated at the lower of average cost or realizable value.
ADVERTISING COSTS
Promotional advertising expenditures are expensed in the period the
advertising initially takes place. Direct response advertising costs in fiscal
1999 and 1998 consisted primarily of catalog preparation, printing and postage
expenditures, and are deferred and amortized over the period during which the
benefits are expected, generally three to six months. Advertising costs of
$6,861,000, $18,719,000 and $31,729,000 for the years ended January 31, 2001,
2000 and 1999, respectively, are included in the accompanying consolidated
statements of operations. Prepaid expenses and other includes deferred
advertising costs of $5,013,000 at January 31, 2001 and $2,242,000 at January
31, 2000, 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 on the straight-line method based upon estimated useful
lives. During fiscal 1998, the Company sold real property held for investment
purposes and recognized a $3,471,000 gain on the sale.
54
55
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
Property and equipment consisted of the following at January 31:
ESTIMATED
USEFUL LIFE
(IN YEARS) 2001 2000
----------- ---- ----
Land and improvements................... -- $ 1,405,000 $ 1,405,000
Buildings and improvements.............. 5-20 5,607,000 4,270,000
Transmission and production equipment... 5-20 6,687,000 5,920,000
Office and warehouse equipment.......... 3-10 15,880,000 5,806,000
Computer software and telephone
equipment............................. 3-7 15,764,000 5,451,000
Leasehold improvements.................. 3-5 4,047,000 2,033,000
Less -- Accumulated depreciation and
amortization.......................... (15,408,000) (10,535,000)
------------ ------------
$ 33,982,000 $ 14,350,000
============ ============
NBC TRADEMARK LICENSE AGREEMENT
As discussed further in Note 18, in November 2000, the Company entered into
a Trademark License Agreement with NBC pursuant to which NBC granted the Company
an exclusive, worldwide license for a term of 10 years to use certain NBC
trademarks, service marks and domain names to rebrand the Company's business and
corporate name on the terms and conditions set forth in the License Agreement.
In connection with the License Agreement, the Company issued to NBC warrants to
purchase 6,000,000 shares of the Company's common stock at an exercise price of
$17.375 per share. The original fair value assigned to the NBC License Agreement
and related warrants was determined pursuant to an independent appraisal. At the
date of the agreement, a measurement date had not yet been established and the
Company revalued the Trademark License and warrants to $59,629,000, the
estimated fair value as of January 31, 2001, including professional fees. The
Trademark License asset is being amortized on a straight-line basis over the
ten-year term of the agreement. As of January 31, 2001, accumulated amortization
related to this asset totaled $1,243,000. Subsequent to year-end in March 2001,
the Company established a measurement date with respect to the NBC Trademark
License Agreement by amending the agreement, and fixed the fair value of the
Trademark License asset at $32,837,000, which will be amortized over the
remaining term of the Trademark License Agreement.
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, 2001 and 2000, accumulated
amortization related to this asset totaled $1,230,000 and $537,000,
respectively.
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES
As discussed further in Note 3, in fiscal 1995, the Company issued common
stock purchase warrants in exchange for various agreements entered into with
Montgomery Ward & Co., Incorporated ("Montgomery
55
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
Ward") including an Operating Agreement, a Credit Card License and Receivable
Sales Agreement, and a Servicemark License Agreement. The Operating Agreement
had a twelve-year term, expiring July 31, 2008 and was terminatable 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 1997, 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 was being
amortized on a straight-line basis over the remaining term of the agreement. In
December 2000, Montgomery Ward announced that it had filed for bankruptcy and
the Company terminated the use of the Montgomery Ward private label credit card
in its television home shopping operations as of January 31, 2001. As a result,
the Company determined that the Montgomery Ward Operating Agreement and License
asset was permanently impaired and wrote off the remaining $1,497,000 intangible
asset balance in the fourth quarter of fiscal 2000.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following at January 31:
2001 2000
---- ----
Investments......................................... $42,034,000 $57,040,000
Long-term note...................................... -- 5,000,000
Prepaid launch fees, net............................ 1,398,000 1,549,000
Other, net.......................................... 1,321,000 2,989,000
----------- -----------
$44,753,000 $66,578,000
=========== ===========
As of January 31, 2001, the Company had equity investments totaling
approximately $42,034,000 of which $25,646,000 related to the Company's
investment in the Ralph Lauren Media joint venture after adjusting for the
Company's equity share of Ralph Lauren Media losses under the equity method of
accounting. The Company's equity share of Ralph Lauren Media losses was
approximately $4,500,000 in fiscal 2000. At January 31, 2001, investments in the
accompanying consolidated balance sheet also included approximately $7,567,000
related to equity investments made in companies whose shares are traded on a
public exchange. These equity investments were made primarily in conjunction
with the Company's strategy of investing in e-commerce, Internet strategic
alliances and the launching and rebranding of the Company's television home
shopping network. These investments are classified as "available-for-sale"
investments and are accounted for under the provisions of SFAS No. 115. In
addition to the Company's investment in Ralph Lauren Media, Inc., investments at
January 31, 2001 include certain other nonmarketable equity investments in
private and other enterprises totaling approximately $8,821,000 which are
carried at the lower of cost or net realizable value.
The Company evaluates the carrying values of its investments using recent
financing and securities transactions, present value and other pricing models,
as well as by evaluating available information on financial condition, liquidity
prospects, cash flow forecasts and comparing operating results to plan.
Impairment losses are recorded if events or circumstances indicate that such
investments may be impaired and the decline in
56
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
value is other than temporary. In the second half of fiscal 2000, the Company
recorded pre-tax losses totaling $55,574,000 relating to the write-down of
investments made primarily in a number of Internet retailers whose decline in
fair value was determined by the Company to be other than temporary. The decline
in fair value of these companies was driven by their large operating losses and
negative cash flow accompanied by an environment not conducive to raising new
financing. The major investment components of the write-down included minority
equity investments made in NBCi.com, Petopia.com, SelfCare.com, Roxy.com and
BigStar Entertainment, Inc. In the second quarter ended July 31, 2000, the
Company recorded a pre-tax loss of $583,000 relating to an investment made in
1998.
In fiscal 1998, the Company wrote off its investment in CML Group, Inc.
("CML"). The decline in the investment's fair value was judged by management to
be other than temporary following CML's announcement that its Nordic Track
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.
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 was payable quarterly over a
seven-year period starting in March 2002 and bears interest at 6 1/4%, payable
quarterly starting in June 2000. As a result of the former subsidiary's reported
negative earnings, negative cash flow, interest payment default and inability to
obtain additional bank financing, the Company determined that the note was
uncollectable and wrote off the $5,000,000 note in the third quarter of fiscal
2000.
Prepaid launch fees represent prepaid satellite transponder launch fees and
amounts paid to cable operators upon entering into cable affiliation agreements.
These fees are capitalized and amortized over the lives of the related
affiliation contracts, which range from 3-7 years.
Other assets consist principally of long-term deposits, notes receivable
and Federal Communication Commission License fees, 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 5 to 25 years.
At January 31, 2001, other assets also includes a $353,000 long-term receivable
related to the third-party sale of the Company's divested HomeVisions catalog
trade name and customer lists.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
JANUARY 31,
--------------------------
2001 2000
---- ----
Accrued marketing fees.............................. $ 3,859,000 $ 3,960,000
Reserve for product returns......................... 5,049,000 3,710,000
Other............................................... 10,430,000 8,980,000
----------- -----------
$19,338,000 $16,650,000
=========== ===========
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.
57
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
NET INCOME (LOSS) 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,
------------------------------------------
2001 2000 1999
---- ---- ----
Net income (loss) available to common
shareholders......................... $(30,172,000) $29,123,000 $ 4,639,000
============ =========== ===========
Weighted average number of common
shares outstanding -- Basic.......... 38,560,000 32,602,000 25,963,000
Dilutive effect of convertible
Preferred stock...................... -- 4,019,000 --
Dilutive effect of stock options and
warrants............................. -- 3,806,000 304,000
------------ ----------- -----------
Weighted average number of common
shares outstanding -- Diluted........ 38,560,000 40,427,000 26,267,000
============ =========== ===========
Net income (loss) per common share..... $ (0.78) $ 0.89 $ 0.18
============ =========== ===========
Net income (loss) per common share --
assuming dilution.................... $ (0.78) $ 0.73 $ 0.18
============ =========== ===========
For the year ended January 31, 2001, approximately 8,465,000 in-the-money
dilutive common shares have been excluded from the computation of diluted
earnings per share, as required under SFAS No. 128, as the effect of their
inclusion would be anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) 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 (loss) includes net income (loss) and other comprehensive
income (loss), which consists of unrealized holding gains and losses from equity
investments, classified as "available-for-sale." Total comprehensive income
(loss) was $(39,598,000), $41,062,000 and $5,689,000 for the years ended January
31, 2001, 2000 and 1999, 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
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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.
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 fiscal 1999 and fiscal 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 September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a final consensus on EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." The consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue.
With respect to the classification of costs related to shipping and handling
incurred by the seller, the EITF determined that the classification of such
costs is an accounting policy decision that should be disclosed. The Company has
historically classified shipping charges to customers and related shipping and
handling costs on a net basis as components of distribution and selling expense
in the statement of operations. The Company has adopted the consensus reached by
the EITF relating to Issue No. 00-10 in the fourth quarter of fiscal 2000 and,
as required, reflects amounts collected from customers as revenue in the
accompanying statement of operations. The Company includes shipping and handling
costs as a component of cost of sales. Comparative financial statements for
prior periods have been reclassified to comply with the new classification
guidelines. For the years ended January 31, 2001, 2000 and 1999, shipping and
handling revenues have increased net sales as historically reported by
$17,248,000, $18,533,000 and $18,402,000, respectively, with no impact on
reported operating income (loss).
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.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
The Company's adoption of SFAS No. 133 on February 1, 2001 did not have a
material effect on its financial position or results of operations.
3. MONTGOMERY WARD ALLIANCE:
During fiscal 1995, 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.
In December 2000, Montgomery Ward announced that it had filed for
bankruptcy and the Company terminated the use of the Montgomery Ward private
label credit card (the "MW Card") in its television home shopping operations as
of January 31, 2001. In conjunction with the bankruptcy filing, the Company
wrote off impaired assets totaling $4,609,000. Assets written off consisted
primarily of uncollected spot advertising and credit card processing receivables
totaling $3,112,000 and the remaining Montgomery Ward Operating Agreement and
License intangible asset balance of $1,497,000, which the Company concluded was
permanently impaired as a result of the bankruptcy filing and the subsequent
termination of the use of the MW Card.
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 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. In fiscal 1997, the Company changed the
name of the MWD catalog to HomeVisions and in fiscal 1998 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 1998 related to the sale of these assets.
Net sales and operating results for HomeVisions for the years ended January
31, 2000, and 1999 were as follows (in thousands):
2000 1999
---- ----
Net sales................................................... $1,127 $18,862
Operating loss.............................................. $ (114) $(6,794)
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-
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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.
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 was
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.
As a result of the former subsidiary's reported negative earnings, negative
cash flow, interest payment default and the inability of the acquiring entity to
obtain additional bank financing, the Company determined that the promissory
note was uncollectible and wrote off the $5,000,000 note in the third quarter of
fiscal 2000. Effective January 31, 2001, the Company restructured the promissory
note whereby the Company would be paid, among other things, $1,000,000 if the
acquiring entity obtains adequate bank financing to fund the acquisition.
Because of uncertainties surrounding the acquiring entity's ability to obtain
adequate financing, any consideration received by the Company in connection with
this sale 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 results for BII for the years ended January 31,
2000, and 1999 were as follows (in thousands):
2000 1999
---- ----
Net sales................................................... $4,317 $4,994
Operating loss.............................................. $ (456) $ (416)
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.
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. In January 2001, the Company received
$2,130,000 of additional consideration, net of fees incurred, in connection with
the sale of CVI and recorded the pre-tax gain in the fourth quarter of fiscal
2000. Management believes that the sale will not have a significant impact on
the ongoing operations of the Company.
Net sales and operating results for CVI for the years ended January 31,
2000, and 1999 were as follows (in thousands):
2000 1999
---- ----
Net sales.................................................. $19,260 $31,674
Operating income........................................... $ 329 $ 1,946
61
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
SALE OF BROADCAST STATIONS
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 paid in the first quarter of fiscal 1999. 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 1998. On April 12, 1999, the Company
received the contingent payment of $10 million relating to the sale of KBGE-TV
and recognized a $10 million pre-tax gain, net of applicable closing fees, in
the first quarter of fiscal 1999. 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 1999.
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 1998, 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 1998 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 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
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, 2001, the Company held licenses for eleven LPTV
stations.
62
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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 38,578,000 shares were issued and
outstanding as Common Stock as of January 31, 2001. The Board of Directors can
establish new classes and series of capital stock by resolution without
shareholder approval.
REDEEMABLE PREFERRED STOCK
As discussed further in Note 15, in fiscal 1999, 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 Notes 2 and 18, in November 2000, the Company
issued to NBC warrants to purchase 6,000,000 shares of the Company's common
stock at an exercise price of $17.375 per share. The warrants were issued in
connection with the Company's execution of a Trademark License Agreement
pursuant to which NBC granted the Company an exclusive, worldwide license to use
certain NBC trademarks, service marks and domain names to rebrand the Company's
business and corporate name for a term of ten years.
As discussed further in Note 15, in fiscal 1999, 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 1999, 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 original
rebranding and strategic electronic commerce alliance with NBCi. Effective
November 24, 1999, Xoom.com, Inc. and Snap! LLC, along with several Internet
assets of NBC, were merged into NBCi and, as a result, the Xoom.com warrant was
converted into the right to purchase shares of Class A Common Stock of 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 4,250,000 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, 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
63
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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 50%. 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 (loss)
available to common shareholders and net income (loss) per common share would
have been reduced to the following pro forma amounts:
2001 2000 1999
---- ---- ----
Net income (loss) available to common
shareholders:
As reported........................... $(30,172,000) $29,123,000 $4,639,000
Pro forma............................. (40,156,000) 23,644,000 3,729,000
Net income (loss) per share:
Basic:
As reported........................ $ (0.78) $ 0.89 $ 0.18
Pro forma.......................... (1.04) 0.73 0.14
Diluted:
As reported........................ $ (0.78) $ 0.73 $ 0.18
Pro forma.......................... (1.03) 0.60 0.15
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...................... $ 9.30 $ 9.39 $15.66
Fiscal 1999 grants...................... 12.85 16.45 31.84
Fiscal 1998 grants...................... 2.90 -- 2.21
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 5.0, 6.5 and 5.0 percent; expected volatility of 54,
65 and 56 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.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
A summary of the status of the Company's stock option plan as of January
31, 2001, 2000 and 1999 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,
1998................................ 1,460,000 $ 4.60 955,000 $ 5.00 1,600,000 $ 9.13
Granted............................. 650,000 5.13 -- -- 800,000 3.38
Exercised........................... (336,000) 4.15 (32,000) 5.50 (44,000) 3.63
Forfeited or canceled............... (436,000) 5.38 (28,000) 5.50 (356,000) 8.58
--------- ------ --------- ------ --------- ------
Balance outstanding, January 31,
1999................................ 1,338,000 4.69 895,000 4.97 2,000,000 7.05
Granted............................. 1,167,000 19.67 925,000 25.19 100,000 40.56
Exercised........................... (712,000) 4.68 (340,000) 5.45 (600,000) 9.50
Forfeited or canceled............... (91,000) 6.59 (63,000) 5.81 -- --
--------- ------ --------- ------ --------- ------
Balance outstanding, January 31,
2000................................ 1,702,000 14.87 1,417,000 18.01 1,500,000 8.30
Granted............................. 1,095,000 16.58 891,000 16.67 256,000 22.50
Exercised........................... (454,000) 9.54 (147,000) 5.09 -- --
Forfeited or canceled............... (337,000) 18.58 (247,000) 24.17 -- --
--------- ------ --------- ------ --------- ------
Balance outstanding January 31,
2001................................ 2,006,000 $16.38 1,914,000 $17.58 1,756,000 $10.37
========= ====== ========= ====== ========= ======
Options exercisable at:
January 31, 2001.................... 592,000 $15.00 1,167,000 $17.89 1,500,000 $ 8.30
========= ====== ========= ====== ========= ======
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
========= ====== ========= ====== ========= ======
The following table summarizes information regarding stock options
outstanding at January 31, 2001:
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:.................. $2.53- $4.88 178,000 $ 4.59 2.3 153,000 $ 4.54
$5.38- $12.44 230,000 $ 9.23 5.7 145,000 $ 8.78
$14.38- $24.69 1,598,000 $18.72 6.6 294,000 $23.53
--------- ---------
$2.53- $24.69 2,006,000 $16.38 6.1 592,000 $15.00
========= =========
Non-qualified:.............. $4.56- $19.94 1,198,000 $13.02 5.3 570,000 $10.42
$21.13- $42.13 716,000 $25.20 5.7 597,000 $25.02
--------- ---------
$4.56- $42.13 1,914,000 $17.58 5.4 1,167,000 $17.89
========= =========
Executive:.................. $3.38- $9.50 1,400,000 $ 6.00 5.5 1,400,000 $ 6.00
$22.50- $40.56 356,000 $27.57 9.0 100,000 $40.56
--------- ---------
$3.38- $40.56 1,756,000 $10.37 6.5 1,500,000 $ 8.30
========= =========
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
FISCAL 2000 STOCK OPTION BONUS ELECTION
In fiscal 2000, the Company offered to its executive managers and other
eligible employees of the Company a choice of receiving Company stock options in
lieu of cash for bonuses earned during fiscal 2000. As a result of choices made
by eligible employees, the Company granted a total of 93,000 immediately vested
stock options at an exercise price of $11.438, the closing price of the
Company's stock on the date of grant, in lieu of cash bonuses totaling
approximately $548,000.
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 $4,348,000, $17,923,000 and $731,000 in fiscal 2000, 1999 and 1998,
respectively.
COMMON STOCK REPURCHASE PROGRAM
In fiscal 1995, 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, 2001, the Company was
authorized under the program to repurchase an aggregate of $26 million of its
common stock of which approximately $24.6 million in stock had been repurchased.
During fiscal 2000, the Company repurchased 214,000 common shares under the
program for a total net cost of $2,922,000. During fiscal 1998, the Company
repurchased 1,327,000 common shares under the program for a total net cost of
$4,292,000. No common shares were repurchased by the Company under the program
in fiscal 1999.
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,
--------------------------
2001 2000
---- ----
Accruals and reserves not currently deductible for
tax purposes...................................... $ 5,353,000 $ 1,528,000
Inventory capitalization............................ 489,000 433,000
Basis differences in intangible assets.............. 534,000 (684,000)
Differences in depreciation lives and methods....... (852,000) (635,000)
Differences in investments and other items.......... 4,087,000 (5,417,000)
Valuation allowance................................. (5,307,000) --
----------- -----------
Net deferred tax asset (liability).................. $ 4,304,000 $(4,775,000)
=========== ===========
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
The net deferred tax asset (liability) is classified as follows in the
accompanying consolidated balance sheets:
JANUARY 31,
-------------------------
2001 2000
---- ----
Current deferred taxes............................... $3,965,000 $ 1,950,000
Noncurrent deferred taxes............................ 339,000 (6,725,000)
---------- -----------
Net deferred tax asset (liability)................... $4,304,000 $(4,775,000)
========== ===========
The provision (benefit) for income taxes consisted of the following:
YEARS ENDED JANUARY 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
Current................................. $(3,971,000) $17,401,000 $ 4,590,000
Deferred................................ (3,133,000) 40,000 (1,738,000)
----------- ----------- -----------
$(7,104,000) $17,441,000 $ 2,852,000
=========== =========== ===========
A reconciliation of income taxes computed at the statutory rates to the
Company's effective tax rate is as follows:
YEARS ENDED JANUARY 31,
-------------------------
2001 2000 1999
---- ---- ----
Taxes at federal statutory rates....................... (34.0)% 35.0% 34.0%
State income taxes, net of federal tax benefit......... (1.5) 2.0 3.1
Amortization and other permanent items................. -- 0.3 1.0
Valuation allowance.................................... 18.6 -- --
Tax exempt interest.................................... (2.3) -- --
----- ---- ----
Effective tax rate..................................... (19.2)% 37.3% 38.1%
===== ==== ====
The Company has recorded a valuation allowance at January 31, 2001 because
a portion of the deferred tax asset created upon the write down of certain of
the Company's investments, as discussed further in Note 2, may not be
realizable. The ultimate realization of these deferred tax assets depends on the
ability of the Company to generate sufficient capital gains in the future.
9. COMMITMENTS AND CONTINGENCIES:
CABLE AND SATELLITE AFFILIATION AGREEMENTS
As of January 31, 2001, the Company had entered into 3 to 8 year
affiliation agreements with thirty-six 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. In
fiscal 1999, 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. For the years ended January 31, 2001,
2000 and 1999, the Company paid approximately $45,486,000, $28,134,000 and
$19,494,000 under these long-term affiliation agreements.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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 was due to expire 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. This bonus was accrued at
January 31, 2001 and was paid in April 2001. On October 9, 2000, the Company
amended and extended the term of the employment agreement with its Chief
Executive Officer by an additional 36 months, which now expires on April 1,
2004. The employment agreement provides for an additional $1,000,000 retention
bonus payable by the Company if the officer remains employed through the end of
the extended contract period.
In fiscal 2000, the Company offered to its chief executive officer a choice
of receiving Company stock options in lieu of cash for bonuses earned during
fiscal 2000. As a result of choices made by the officer, the Company granted a
total of 74,000 immediately vested stock options at an exercise price of
$11.438, the closing price of the Company's stock on the date of grant, in lieu
of cash bonuses totaling approximately $438,000.
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 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 earliest of the Company achieving certain net income goals,
as defined, or in September 2003. As of January 31, 2001, 600,000 of these
options were exercisable, 600,000 had been exercised and 300,000 options had
been forfeited.
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, 2001 was approximately $13,820,000.
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.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
Future minimum lease payments at January 31, 2001 were as follows:
FISCAL YEAR AMOUNT
- ----------- ------
2001................................................... $ 4,154,000
2002................................................... 4,167,000
2003................................................... 4,142,000
2004................................................... 4,052,000
2005 and thereafter.................................... 10,506,000
Total lease expense under such agreements was approximately $3,924,000 in
fiscal 2000, $4,028,000 in fiscal 1999 and $4,145,000 in fiscal 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 $78,000, $72,000 and $6,000 during
fiscal 2000, 1999 and 1998, respectively.
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. 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 1998, 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, 2001 the Company held a note receivable totaling $3,863,000,
including accrued interest, (the "Note") from an officer of the Company for a
loan made in connection with loan provisions as stipulated in the officer's
employment agreement. The Note is reflected as a reduction of shareholders'
equity in the accompanying consolidated balance sheet as the Note is
collateralized by a security interest in vested stock options and in shares of
the Company's common stock to be acquired by the officer upon the exercise of
such vested stock options.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information and noncash investing and financing
activities were as follows:
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Supplemental cash flow information:
Interest paid........................................ $ 45,000 $ 58,000 $ 107,000
=========== =========== ==========
Income taxes paid.................................... $ 1,132,000 $ 8,456,000 $3,889,000
=========== =========== ==========
Supplemental non-cash investing and financing
activities:
Issuance of 6,000,000 warrants in connection with NBC
Trademark License Agreement....................... $59,560,000 $ -- $ --
=========== =========== ==========
Increase in additional paid-in capital resulting from
income tax benefit recorded on stock option
exercises......................................... $ 4,348,000 $17,923,000 $ 731,000
=========== =========== ==========
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.............. $ 278,000 $ 207,000 $ --
=========== =========== ==========
13. SEGMENT DISCLOSURES AND RELATED INFORMATION:
The Company has 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 and Internet businesses, 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 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
- -------------------------------------- ---------- ----- --------- -----
2001
Revenues............................................ $385,940 $ -- $ -- $385,940
Operating income.................................... 6,637 -- -- 6,637
Depreciation and amortization....................... 8,243 -- -- 8,243
Interest income, net................................ 15,423 -- -- 15,423
Income taxes........................................ (7,104) -- -- (7,104)
Net loss............................................ (29,894) -- -- (29,894)
Identifiable assets................................. 467,661 -- 43,036(a) 510,697
Capital expenditures(b)............................. 24,557 -- -- 24,557
------------------------------------------------
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
ELECTRONIC PRINT
YEARS ENDED JANUARY 31, (IN THOUSANDS) MEDIA MEDIA CORPORATE TOTAL
- -------------------------------------- ---------- ----- --------- -----
2000
Revenues............................................ $264,962 $28,498 $ -- $293,460
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............................................ $157,767 $64,363 $ -- $222,130
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
------------------------------------------------
- -------------------------
(a) Corporate assets consist of long-term investment assets not directly
assignable to a business segment.
(b) Electronic Media capital expenditures in fiscal 2000 includes capital
expenditures totaling $16,091,000 which were made to the Company's
distribution facility and new call center to prepare for the Company's
service obligations made in connection with the agreements entered into
with Ralph Lauren Media LLC.
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
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and wrote off these amounts in fiscal 1998.
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 Warrants") 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)
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
and the Company will receive an additional approximately $12.0 million upon
exercise of the Distribution Warrants. In addition, the Company agreed to issue
to GE Equity a warrant (the "Investment 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 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
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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 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
73
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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 Warrants. The exercise
price of the Distribution Warrants is approximately $8.29 per share. Of the
aggregate 1,450,000 shares subject to the Distribution Warrants, 200,000 shares
vested immediately, with the remainder vesting 125,000 shares annually over the
10-year term of the Distribution Agreement. In conjunction with the Company's
November 2000 execution of the Trademark License Agreement with NBC, the Company
agreed to accelerate the vesting of the remaining unvested Distribution
Warrants. The Distribution Warrants is exercisable for five years after vesting.
The value assigned to the Distribution Agreement and Distribution Warrants 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 Warrants 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. ELECTRONIC COMMERCE ALLIANCE:
In September 1999, the Company entered into a strategic alliance with Snap!
LLC ("Snap") and Xoom.com, Inc. ("Xoom") whereby the parties entered into, among
other things, a rebranding trademark license agreement and an interactive
promotion agreement, spanning television home shopping, Internet shopping and
direct e-commerce initiatives. In November 1999, Xoom and Snap, along with
several Internet assets of NBC, were merged into NBCi. The Company's original
intent was to re-launch its television network
74
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
and companion Internet website under the SnapTV and SnapTV.com brand names,
respectively, in conjunction with NBCi. On June 12, 2000, NBCi announced a
strategy to integrate all of its consumer properties under the single NBCi.com
brand, effectively abandoning the Snap name. As a result, in June 2000, the
Company effectively terminated the Snap trademark license and interactive
promotion agreements.
WARRANT PURCHASE AGREEMENT AND WARRANTS
In September 1999, in connection with the transactions contemplated under
the Snap 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. 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.
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 ownership 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, of which approximately $30 million
has been funded through January 31, 2001. Ralph Lauren Media's premier
initiative will be Polo.com, an Internet website dedicated to the American
lifestyle that will include original content, commerce and a strong community
component. Polo.com officially launched in November 2000 and includes an
assortment of men's, women's and children's products across the Ralph Lauren
family of brands as well as unique gift items. 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
75
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
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 VVIFC entered into an Agreement for Services under
which VVIFC agreed to provide to Ralph Lauren Media, on a cost plus basis,
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 one-year renewal periods, under
certain conditions.
18. NBC TRADEMARK LICENSE AGREEMENT
On November 16, 2000, the Company entered into a Trademark License
Agreement (the "License Agreement") with NBC pursuant to which NBC granted the
Company an exclusive, worldwide license (the "License") for a term of 10 years
to use certain NBC trademarks, service marks and domain names to rebrand the
Company's business and corporate name and companion Internet website on the
terms and conditions set forth in the License Agreement. The Company
subsequently selected the names "ShopNBC" and "ShopNBC.com," with the
concurrence of NBC. The new name will be promoted as part of a wide-ranging
marketing campaign that is expected to launch in 2001. In connection with the
License Agreement, the Company issued to NBC warrants (the "License Warrants")
to purchase 6,000,000 shares of the Company's Common Stock, par value $.01 per
share, with an exercise price of $17.375 per share, the closing price of a share
of Common Stock on the Nasdaq National Market on November 16, 2000. The
agreement also includes a provision for a potential cashless exercise of the
License Warrants under certain circumstances. The License Warrants vest in
one-third increments, with one-third exercisable commencing November 16, 2000,
and the remaining License Warrants vesting in equal amounts on each of the first
two anniversaries of the License Agreement. Additionally, the Company agreed to
accelerate the vesting of warrants to purchase
76
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2001 AND 2000
1,450,000 shares of Common Stock granted to NBC in connection with the 1999
Distribution and Marketing Agreement dated as of March 8, 1999 between NBC and
the Company.
The Company has also agreed under the License Agreement to (i) restrictions
on using (including sublicensing) any trademarks, service marks, domain names,
logos or other source indicators owned or controlled by NBC or its affiliates in
connection with certain permitted businesses (the "Permitted Businesses") before
the agreement of NBC to such use, (ii) the loss of its rights under the grant of
the License with respect to specific territories outside of the United States in
the event the Company fails to achieve and maintain certain performance targets,
(iii) amend and restate the current Registration Rights Agreement dated as of
April 15, 1999 among the Company, NBC and GE Equity so as to increase the demand
rights held by NBC and GE Equity from four to five, among other things, (iv)
not, either directly or indirectly, own, operate, acquire or expand its business
to include any businesses other than the Permitted Businesses without NBC's
prior consent for so long as the Company's corporate name includes the
trademarks or service marks owned or controlled by NBC, (v) strictly comply with
NBC's privacy policies and standards and practices, and (vi) until the earlier
of the termination of the License Agreement or the lapse of certain contractual
restrictions on NBC, either directly or indirectly, not own, operate, acquire or
expand the Company's business such that one third or more of the Company's
revenues or its aggregate value is attributable to certain services provided
over the Internet. The License Agreement also grants to NBC the right to
terminate the License Agreement at any time upon certain changes of control of
the Company, the failure by NBC to own a certain minimum percentage of the
outstanding capital stock of the Company on a fully-diluted basis, the failure
of NBC and the Company to agree on new trademarks, service marks or related
intellectual property rights, and certain other related matters. In certain
events, the termination by NBC of the License Agreement may result in the
acceleration of vesting of the License Warrants.
77
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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,
2001:
Allowance for doubtful accounts... $4,314,000 $ 6,923,000 $ -- $ (5,368,000)(1) $5,869,000
========== ============ ========= ============= ==========
Reserve for returns............... $3,710,000 $170,269,000 $ -- $(168,930,000)(2) $5,049,000
========== ============ ========= ============= ==========
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
========== ============ ========= ============= ==========
- -------------------------
(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.
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80
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.
80
81
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 -- Second Amended 1990 Stock Option Plan of the Registrant (as
amended and restated).(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 -- 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)
10.18 -- Second Amended and Restated Operating Agreement made as of
November 1, 1997 between Montgomery Ward and the
Registrant.(F)
81
82
EXHIBIT
NUMBER
- -------
10.19 -- Amended and Restated Credit Card License Agreement made as
of November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.20 -- Second Amended and Restated Servicemark License Agreement
made as of November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.21 -- Investment Agreement by and between ValueVision and GE
Equity dated as of March 8, 1999.(G)
10.22 -- 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)
10.23 -- Distribution and Marketing Agreement dated as of March 8,
1999 by and between NBC and the Registrant.(G)
10.24 -- Letter Agreement dated March 8, 1999 between NBC, GE Equity
and the Registrant.(G)
10.25 -- Shareholder Agreement dated April 15, 1999 between the
Registrant, and GE Equity.(H)
10.26 -- ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to GE Equity.(H)
10.27 -- Registration Rights Agreement dated April 15, 1999 between
the Registrant, GE Equity and NBC.(H)
10.28 -- ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to NBC.(H)
10.29 -- Letter Agreement dated November 16, 2000 between the
Registrant and NBC. (Q)
10.30 -- Employment Agreement between the Registrant and Steve Jackel
dated June 4, 1999.(L)+
10.31 -- Employment Agreement between the Registrant and Richard D.
Barnes dated October 19, 1999.(M)+
10.32 -- Amended and Restated Employment Agreement between the
Registrant and Gene McCaffery dated December 2, 1999.(O)+
10.33 -- Option Agreement between the Registrant and Richard D.
Barnes dated October 19, 1999.(O)+
10.34 -- 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)
10.35 -- Trademark License Agreement dated September 13, 1999 between
the Registrant and Snap!LLC, a Delaware limited liability
company.(L)
10.36 -- 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)
10.37 -- Common Stock Purchase Warrant dated September 13, 1999 to
purchase shares of the Registrant held by Xoom.com, Inc., a
Delaware corporation.(L)
10.38 -- 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)
10.39 -- 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)
82
83
EXHIBIT
NUMBER
- -------
10.40 -- 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)
10.41 -- 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)
10.42 -- Option Agreement between the Registrant and Roy Seinfeld
dated July 31, 2000.(Q)+
10.43 -- Option Agreement between the Registrant and Nathan Fagre
dated April 30, 2000.(O)+
10.44 -- Amendment No. 1 to Amended and Restated Employee Agreement
Dated October 9, 2000 between the Registrant and Mr.
McCaffery.(P)+
10.45 -- Trademark License Agreement dated as of November 16, 2000
between NBC and the Registrant.(P)
10.46 -- Warrant Purchase Agreement dated as of November 16, 2000
between NBC and the Registrant.(P)
10.47 -- Common Stock Purchase Warrant dated as of November 16, 2000
between NBC and the Registrant.(P)
10.48 -- Employment Agreement between the Registrant and Nathan E.
Fagre dated May 1, 2000.(Q)+
21 -- Significant Subsidiaries of the Registrant.(Q)
23 -- Consent of Arthur Andersen LLP.(Q)
- -------------------------
(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
Registration Statement on Form S-8 dated September 25, 2000,
filed on September 25, 2000, Filing No. 0-20243.
(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.
83
84
(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.
(N) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 2001,
File No. 0-20243.
(O) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 dated September 25, 2000,
filed on September 25, 2000, file No. 0-20243.
(P) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October
31, 2000, Filed on December 14, 2000 File No. 0-20243.
(Q) Filed herewith.
+ Management compensatory plan/arrangement
b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on November 27, 2000 reporting under Item 5,
that the Registrant announced that effective November 16, 2000, the Company
entered into a Trademark License Agreement with NBC pursuant to which NBC
granted the Company an exclusive, worldwide license for a term of 10 years
to use certain NBC trademarks, service marks and domain names to rebrand the
Company's business and corporate name. In connection with the license
agreement, the Company issued to NBC warrants to purchase 6.0 million shares
of the Company's common stock at an exercise price of $17.375 per share.
84
85
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 30, 2001.
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 30, 2001.
NAME TITLE
---- -----
/s/ GENE MCCAFFERY Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer),
Gene McCaffery President and Director
/s/ RICHARD D. BARNES Executive Vice President Finance and
- -------------------------------------------------------- Chief Financial Officer (Principal
Richard D. Barnes Financial and Accounting Officer)
/s/ NATHAN E. FAGRE Senior Vice President and General Counsel
- --------------------------------------------------------
Nathan E. Fagre
/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
85