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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-20243
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VALUEVISION MEDIA, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1673770
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Shady Oak Road, Minneapolis, MN 55344
------------------------------------------
(Address of principal executive offices)
952-943-6000
------------
(Registrant's telephone number, including area code)
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 [ ]
As of September 11, 2002, there were 36,297,498 shares of the Registrant's
common stock, $.01 par value per share, outstanding.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
JULY 31, 2002
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of July 31, 2002 3
and January 31, 2002
-Condensed Consolidated Statements of Operations for the 4
Three and Six Months Ended July 31, 2002 and 2001
-Condensed Consolidated Statement of Shareholders' Equity 5
for the Six Months Ended July 31, 2002
-Condensed Consolidated Statements of Cash Flows for the 6
Six Months Ended July 31, 2002 and 2001
-Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
CERTIFICATIONS 22-23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JULY 31, JANUARY 31,
2002 2002
--------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 27,484 $ 66,144
Short-term investments 171,426 165,723
Accounts receivable, net 55,747 54,104
Inventories, net 75,340 40,383
Prepaid expenses and other 6,602 5,189
Income tax receivable 458 --
Deferred income taxes 4,943 4,943
--------- ---------
Total current assets 342,000 336,486
PROPERTY & EQUIPMENT, NET 40,263 35,972
NBC TRADEMARK LICENSE AGREEMENT, NET 26,754 28,367
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 5,607 6,038
GOODWILL 7,442 --
OTHER INTANGIBLE ASSETS, NET 1,598 --
INVESTMENTS AND OTHER ASSETS, NET 42,840 42,827
DEFERRED INCOME TAXES 1,855 --
--------- ---------
$ 468,359 $ 449,690
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 67,299 $ 43,489
Accrued liabilities 30,740 18,564
Income tax payable -- 144
--------- ---------
Total current liabilities 98,039 62,197
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,680 395
DEFERRED INCOME TAXES -- 98
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 42,320 42,180
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares
authorized; 37,021,198 and 38,061,455 shares issued
and outstanding 370 381
Warrants to purchase 8,198,485 shares of common stock 47,466 47,466
Additional paid-in capital 256,096 273,505
Accumulated other comprehensive losses (968) (1,045)
Note receivable from officer (4,040) (4,006)
Retained earnings 27,396 28,519
--------- ---------
Total shareholders' equity 326,320 344,820
--------- ---------
$ 468,359 $ 449,690
========= =========
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES $ 128,336 $ 104,784 $ 261,185 $ 216,763
COST OF SALES 79,924 63,498 160,954 133,208
------------ ------------ ------------ ------------
Gross profit 48,412 41,286 100,231 83,555
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Distribution and selling 41,215 36,308 83,568 70,289
General and administrative 3,945 3,935 8,106 8,260
Depreciation and amortization 4,097 2,944 7,418 6,081
------------ ------------ ------------ ------------
Total operating expenses 49,257 43,187 99,092 84,630
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (845) (1,901) 1,139 (1,075)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale and conversion of investments (526) (23) (532) (415)
Unrealized gain (loss) on security holdings -- (56) 1,021 (270)
Write-down of investments (86) (1,560) (1,070) (7,566)
Equity in losses of affiliates (2,132) (2,879) (4,230) (4,616)
Interest income 1,091 2,493 2,127 5,343
------------ ------------ ------------ ------------
Total other income (expense) (1,653) (2,025) (2,684) (7,524)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,498) (3,926) (1,545) (8,599)
Income tax benefit (906) (2,236) (563) (1,886)
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (1,592) (1,690) (982) (6,713)
Cumulative effect of accounting change -- -- -- (329)
------------ ------------ ------------ ------------
NET LOSS (1,592) (1,690) (982) (7,042)
Accretion of redeemable preferred stock (70) (70) (141) (140)
------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (1,662) $ (1,760) $ (1,123) $ (7,182)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Before cumulative effect of accounting
change $ (0.04) $ (0.05) $ (0.03) $ (0.18)
Cumulative effect of accounting change -- -- -- (0.01)
------------ ------------ ------------ ------------
Net loss $ (0.04) $ (0.05) $ (0.03) $ (0.19)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
- ASSUMING DILUTION:
Before cumulative effect of accounting
change $ (0.04) $ (0.05) $ (0.03) $ (0.18)
Cumulative effect of accounting change -- -- -- (0.01)
------------ ------------ ------------ ------------
Net loss $ (0.04) $ (0.05) $ (0.03) $ (0.19)
============ ============ ============ ============
Weighted average number of common shares
outstanding:
Basic 38,007,047 38,624,727 38,080,110 38,574,919
============ ============ ============ ============
Diluted 38,007,047 38,624,727 38,080,110 38,574,919
============ ============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 2002
(Unaudited)
(In thousands, except share data)
COMMON STOCK COMMON
---------------------------- STOCK ADDITIONAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN
INCOME (LOSS) OF SHARES VALUE WARRANTS CAPITAL
------------ ------------ ------------ ------------ ------------
BALANCE, January 31, 2002 38,061,455 $ 381 $ 47,466 $ 273,505
Comprehensive income (loss):
Net loss $ (982) -- -- -- --
Other comprehensive
income (loss), net of tax:
Unrealized losses on
securities, net of
tax of $230 (376)
Losses on securities
included in net loss,
net of tax of $277 453
------------
Other comprehensive income 77 -- -- -- --
------------
Comprehensive loss $ (905)
============
Repurchases of common stock (1,320,100) (14) -- (21,121)
Increase in note
receivable from officer -- -- -- --
Exercise of stock
options and common
stock issuances 279,843 3 -- 3,712
Accretion on redeemable
preferred stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, July 31, 2002 37,021,198 $ 370 $ 47,466 $ 256,096
============ ============ ============ ============
ACCUMULATED NOTE
OTHER RECEIVABLE TOTAL
COMPREHENSIVE FROM RETAINED SHAREHOLDERS'
INCOME (LOSSES) OFFICER EARNINGS EQUITY
--------------- ------------ ------------ ------------
BALANCE, January 31, 2002 $ (1,045) $ (4,006) $ 28,519 $ 344,820
Comprehensive income (loss):
Net loss -- -- (982) (982)
Other comprehensive
income (loss), net of tax:
Unrealized losses on
securities, net of
tax of $230
Losses on securities
included in net loss,
net of tax of $277
Other comprehensive income 77 -- -- 77
Comprehensive loss
Repurchases of common stock -- -- -- (21,135)
Increase in note
receivable from officer -- (34) -- (34)
Exercise of stock
options and common
stock issuances -- -- -- 3,715
Accretion on redeemable
preferred stock -- -- (141) (141)
------------ ------------ ------------ ------------
BALANCE, July 31, 2002 $ (968) $ (4,040) $ 27,396 $ 326,320
============ ============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share data)
FOR THE SIX MONTHS ENDED JULY 31,
---------------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (982) $ (7,042)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 7,418 6,081
Common stock issued to employees 16 --
Loss on sale and conversion of investments 532 415
Unrealized loss (gain) on security holdings (1,021) 270
Equity in losses of affiliates 4,230 4,616
Write-down of investments 1,070 7,566
Cumulative effect of accounting change -- 329
Changes in operating assets and liabilities, net
of businesses acquired:
Accounts receivable, net (1,163) 5,867
Inventories, net (33,379) 2,581
Prepaid expenses and other (3,670) (1,362)
Accounts payable and accrued liabilities 32,752 (7,790)
Income taxes payable (receivable), net (602) (2,778)
--------- ---------
Net cash provided by operating activities 5,201 8,753
--------- ---------
INVESTING ACTIVITIES:
Property and equipment additions (5,522) (7,350)
Proceeds from sale of investments and property 2 928
Purchase of short-term investments (83,676) (147,399)
Proceeds from sale of short-term investments 77,972 101,202
Payment for investments and other assets (2,688) (7,609)
Acquisition of FanBuzz, Inc., net of cash acquired (12,307) --
--------- ---------
Net cash used for investing activities (26,219) (60,228)
--------- ---------
FINANCING ACTIVITIES:
Payments for repurchases of common stock (21,135) (1,275)
Proceeds from exercise of stock options 3,699 1,710
Payment of long-term obligation (206) --
--------- ---------
Net cash provided by (used for) financing activities (17,642) 435
--------- ---------
Net decrease in cash and cash equivalents (38,660) (51,040)
BEGINNING CASH AND CASH EQUIVALENTS 66,144 136,045
--------- ---------
ENDING CASH AND CASH EQUIVALENTS $ 27,484 $ 85,005
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 69 $ 23
========= =========
Income taxes paid $ 39 $ 908
========= =========
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Revaluation of common stock purchase warrants $ -- $ 26,878
========= =========
Issuance of warrants to purchase 343,725 shares of common
stock in connection with NBC Distribution and
Marketing Agreement $ -- $ 1,175
========= =========
Accretion of redeemable preferred stock $ 141 $ 140
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2002
(Unaudited)
(1) GENERAL
ValueVision Media, Inc. and its 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, fulfillment services and outsourced e-commerce and
fulfillment solutions. Effective May 16, 2002, the Company changed its name to
ValueVision Media, Inc. from ValueVision International, Inc.
The Company's television home shopping business uses on-air personalities to
market brand name merchandise and proprietary / private label consumer products
at competitive 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.shopnbc.com) which sells a broad array of merchandise and
simulcasts its television home shopping show live 24 hours a day, 7 days a week.
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 an NBC-branded name and the Peacock image
for a ten-year period. The Company rebranded 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 certain of 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. The new ShopNBC name is being promoted as part of a
marketing campaign that the Company launched in the second half of 2001.
In 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 ("RLM").
VVIFC's services agreement with RLM was entered into in conjunction with the
execution of the Company's investment and electronic commerce alliance entered
into with Polo Ralph Lauren Corporation, NBC and other NBC affiliates. VVIFC
also provides fulfillment and support services for the NBC Experience Store in
New York City and direct to consumer products sold on NBC's website. Through its
wholly owned subsidiary, FanBuzz, Inc., the Company is also an e-commerce and
fulfillment solutions provider of affinity based merchandise to some of the most
recognized sports, media and other well-known entertainment brands.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been
condensed or omitted in accordance with such rules and regulations. The
information furnished in the interim condensed consolidated financial statements
includes normal recurring accruals and reflects all adjustments which, in the
opinion of management, are necessary for a fair presentation of such financial
statements. Although management believes the disclosures and information
presented are adequate to make the information not misleading, it is suggested
that these interim condensed consolidated financial statements be read in
conjunction with the Company's most recent audited financial statements and
notes thereto included in its fiscal 2001 Annual Report on Form 10-K. Operating
results for the three and six-month periods ended July 31, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 31, 2003.
The accompanying consolidated financial statements include the accounts of
ValueVision and its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. The accompanying
consolidated results of operations for the three and six months ended July 31,
2002, include the operations of FanBuzz, Inc. as of the effective date of its
acquisition, March 8, 2002.
7
(3) 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:
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
---------------------------------- ------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ------------
Net loss available to
common shareholders $ (1,662,000) $ (1,760,000) $ (1,123,000) $ (7,182,000)
=============== =============== ============== ============
Weighted average number of common
shares outstanding - Basic 38,007,000 38,625,000 38,080,000 38,575,000
Dilutive effect of convertible preferred
stock -- -- -- --
Dilutive effect of stock options and
warrants -- -- -- --
--------------- --------------- -------------- ------------
Weighted average number of common
shares outstanding - Diluted 38,007,000 38,625,000 38,080,000 38,575,000
=============== =============== ============== ============
Net loss per common share $ (0.04) $ (0.05) $ (0.03) $ (0.19)
=============== =============== ============== ============
Net loss per common share-
assuming dilution $ (0.04) $ (0.05) $ (0.03) $ (0.19)
=============== =============== ============== ============
In accordance with SFAS No. 128, for the quarter ended July 31, 2002 and
2001, respectively, approximately 7,922,000 and 9,053,000, in-the-money dilutive
common shares have been excluded from the computation of diluted earnings per
share, as the effect of their inclusion would be antidilutive.
(4) 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 loss was
$2,791,000 and $2,046,000 for the three months ended July 31, 2002 and 2001,
respectively. Total comprehensive loss was $905,000 and $7,133,000 for the six
months ended July 31, 2002 and 2001, respectively.
(5) SEGMENT DISCLOSURES
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("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. The Company's current business units are categorized as
electronic media and consist primarily of the Company's television home shopping
business and Internet shopping website business. Management has reviewed the
provisions of SFAS No. 131 and determined that the Company meets the aggregation
criteria as outlined in the Statement since the Company's current business units
have similar customers, products and sales processes. As a result, the Company
reports as a single business segment.
8
(6) EQUITY INVESTMENTS
As of July 31, 2002, the Company had equity investments totaling
approximately $38,558,000 of which $30,886,000 related to the Company's
investment in RLM after adjusting for the Company's equity share of RLM losses
under the equity method of accounting. At July 31, 2002, investments in the
accompanying consolidated balance sheet also include approximately $5,661,000
related to equity investments made in companies whose shares are traded on a
public exchange. Investments in common stock are classified as
"available-for-sale" investments and are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No.115"). Investments held in
the form of stock purchase warrants are accounted for under the provisions of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No.133"). In addition to the
Company's investment in RLM, investments at July 31, 2002 include certain other
nonmarketable equity investments in private and other enterprises totaling
approximately $2,011,000 which are carried at the lower of cost or net
realizable value.
In February 2000, the Company entered into a strategic alliance with Polo
Ralph Lauren, NBC, NBCi and CNBC.com and created RLM, a joint venture formed for
the purpose of bringing the Polo Ralph Lauren American lifestyle experience to
consumers via multiple platforms, including the Internet, broadcast, cable and
print. The Company owns a 12.5% interest in RLM. In connection with forming this
strategic alliance, the Company has committed to provide up to $50 million of
cash for purposes of financing RLM's operating activities of which approximately
$48 million has been funded through July 31, 2002. Currently, the Company's
investment in RLM is $30,886,000 after adjusting for the Company's equity share
of RLM's losses under the equity method of accounting. The RLM joint venture is
still considered a start-up venture and to date has incurred significant
operating losses since it commenced operations in November 2000. The Company
does not have direct control over management's decisions affecting the strategic
operational direction of this joint venture. The Company periodically evaluates
the carrying value of its RLM investment by evaluating the current and
forecasted financial condition of the entity, its liquidity prospects, its cash
flow forecasts and by comparing its operational results to plan. The Company
will record an impairment loss if events and circumstances indicate that its RLM
investment has been impaired and a decline in value is deemed other than
temporary. No assurance can be given that this alliance will be successful or
that the Company will be able to ultimately realize any return on its ownership
interest in RLM. The Company has also committed and spent significant resources
totaling over $12 million to develop facilities to allow the Company to fulfill
its service obligations to RLM. 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. The Company will continue to evaluate its RLM investment, as it does
with all of its investments, in conjunction with the continued development and
forecast of RLM's operations.
The Company evaluates the carrying values of its other investments by 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 value is other than
temporary. During the quarter ended July 31, 2002, the Company, in a cashless
transaction, exchanged its warrants to purchase a total of 438,356 shares of
common stock of iDine Rewards Network, Inc. ("iDine"; f/k/a Transmedia Network,
Inc.), accounted for under the provision of SFAS No. 133, for 170,532 shares of
the common stock of iDine and recorded a loss of $526,000 on the exchange. In
the first half of fiscal 2002, the Company recorded pre-tax investment losses
totaling $1,070,000 relating primarily to an investment made in 1997. In the
first half of fiscal 2001, the Company recorded pre-tax investment losses
totaling $7,566,000 of which $6,006,000 related to the write-off of the
Company's investment in Internet company Wine.com pursuant to its announced
employee layoff, sale of assets to eVineyard.com and subsequent dissolution. The
declines in fair value of such investments were determined by the Company to be
other than temporary.
(7) RELATED PARTY TRANSACTION
At July 31, 2002, the Company held a note receivable totaling $4,040,000,
including interest (the "Note"), from an officer of the Company for a loan made
in accordance with provisions set forth in such officer's employment agreement
with the Company. 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.
9
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities", establishes
accounting and reporting standards requiring that derivative instruments, as
defined in the standard, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires changes in the
derivative's fair value to be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company adopted the provisions of SFAS
No. 133, as amended, effective February 1, 2001. The impact of the initial
adoption of SFAS No. 133 was ($329,000) and was reflected in the consolidated
statement of operations for the six months ended July 31, 2001 as a cumulative
effect of change in accounting principle.
In August 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30. The changes required by SFAS No. 144
resolve significant implementation issues related to SFAS No. 121 and improve
financial reporting by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. The requirements of SFAS No. 144 also broaden the presentation
of discontinued operations to include more disposal transactions. The Company's
adoption of SFAS No. 144 in fiscal 2002 did not have an effect on its financial
position or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). The standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operations, plant
closing, or other exit or disposal activity. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
(9) COMMON STOCK REPURCHASE PROGRAM
In the second quarter of fiscal 2001, the Company's Board of Directors
authorized a $25 million common 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 the second quarter of fiscal 2002,
the Company's Board of Directors authorized an additional $25 million for
repurchases of the Company's common stock pursuant to its common stock
repurchase program. The repurchase program is subject to applicable securities
laws and may be discontinued at any time without any obligation or commitment by
the Company to repurchase all or any portion of the shares covered by the
authorization. As of July 31, 2002, the Company had repurchased a total of
2,297,000 shares of its common stock under its stock repurchase programs for a
total net cost of $35,287,000 at an average price of $15.36 per share. During
the quarter ended July 31, 2002, the Company had repurchased 1,295,000 shares of
its common stock at an average price of $15.95 per share.
(10) ACQUISITION OF FANBUZZ, INC.
On February 25, 2002, the Company announced it had signed a definitive
agreement to acquire 100% of the outstanding shares of the parent of
Minneapolis-based FanBuzz, Inc. ("FanBuzz"), an e-commerce and fulfillment
solutions provider of affinity-based merchandise to some of the most recognized
sports, media and other well known entertainment brands in the world, including
ESPN, CNN/Sports Illustrated, the Salt Lake 2002 Winter Games, the Chicago Bears
and many other professional sports teams, leagues and colleges. FanBuzz has
focused its business model of operating online stores for already-established
brands and destinations. As a result of the acquisition, the Company has further
positioned itself to become a provider of outsourcing solutions to companies
wishing to add on-line/on-air commerce to their existing business models. The
Company also expects to reduce FanBuzz's costs through economies of scale. The
purchase price of the acquisition, which closed on March 8, 2002, was $14.1
million and has been accounted for using the purchase method of accounting as
stipulated by Statement of Financial Accounting Standards No. 141, "Business
Combinations," ("SFAS No. 141"). The results of operations of FanBuzz have been
included in the accompanying consolidated financial statements as of March 8,
2002, the date of acquisition. Pro-forma results of the Company, assuming the
acquisition had been made at the beginning of each period presented, would not
be materially different from the results reported.
10
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed from FanBuzz on the date of acquisition:
Current assets $ 3,965,000
Property and equipment 3,305,000
Other assets 2,078,000
Intangible assets 2,000,000
Goodwill 7,442,000
--------------
Total assets acquired 18,790,000
--------------
Current liabilities 3,265,000
Capital lease obligations 1,425,000
--------------
Total liabilities assumed 4,690,000
--------------
Net assets acquired $ 14,100,000
==============
Total amortizable intangible assets acquired was $2,000,000 (4-year weighted
average useful life) and were assigned as follows: registered website and URL
address of $1,000,000 (3-year weighted average useful life), partnership
contracts of $280,000 (2-year weighted average useful life), non-compete
agreements of $230,000 (3-year weighted average useful life), favorable lease
contracts of $200,000 (13-year weighted average useful life) and other assets of
$290,000 (1-year weighted average useful life). Total goodwill recorded as a
result of the acquisition was $7,442,000 none of which is expected to be
deductible for tax purposes. The Company does not expect there to be any
significant residual value with respect to these acquired intangible assets.
(11) GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141 which requires all business
combinations initiated after June 30, 2001 to use the purchase method of
accounting and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. The Company's
adoption of SFAS No. 141 in fiscal 2001 did not have a material effect on its
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the financial accounting and reporting standards for
the acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill be separately disclosed from other
intangible assets in the statement of financial position, and no longer be
amortized but tested for impairment on a periodic basis. These impairment tests
are required to be performed at adoption and at least annually thereafter. The
Company's adoption of SFAS No. 142 in fiscal 2002 did not have a material effect
on its financial position or results of operations.
Changes in the carrying amount of goodwill for the three months ended July
31, 2002 is as follows:
Balance as of January 31, 2002 $ --
Goodwill acquired during the period 7,442,000
Impairment losses --
------------
Balance as of July 31, 2002 $ 7,442,000
============
Intangible assets have been recorded by the Company as a result of the
acquisition of FanBuzz in the first quarter of fiscal 2002. The components of
amortized intangible assets in the accompanying consolidated balance sheets
consist of the following:
JULY 31, 2002
---------------------------
AVERAGE GROSS
LIFE CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION
------- ------------- ------------
Amortized intangible assets:
Website address 3 $ 1,000,000 $ (111,000)
Partnership contracts 2 280,000 (75,000)
Non-compete agreements 3 230,000 (25,000)
Favorable lease contracts 13 200,000 (5,000)
Other 1 290,000 (186,000)
------------- ------------
Total $ 2,000,000 $ (402,000)
============= =============
Amortization expense for intangible assets for the six months ended July 31,
2002 was $402,000. Estimated amortization expense for fiscal 2002 and the
succeeding five years is as follows: $699,000 in fiscal 2002, $590,000 in fiscal
2003, $431,000 in fiscal 2004, $108,000 in fiscal 2005, $5,000 in fiscal 2006
and $5,000 in fiscal 2007.
11
ITEM 2. 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 should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes included herein
and the audited consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2002.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNT AS A DOLLAR AMOUNT AS A
PERCENTAGE OF NET SALES FOR PERCENTAGE OF NET SALES FOR
THE THE
THREE MONTHS SIX MONTHS
ENDED JULY 31, ENDED JULY 31,
2002 2001 2002 2001
------------ ------------- --------------- --------------
NET SALES 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
GROSS MARGIN 37.7% 39.4% 38.4% 38.5%
----- ----- ----- -----
Operating expenses:
Distribution and selling 32.1% 34.6% 32.0% 32.4%
General and administrative 3.1% 3.8% 3.1% 3.8%
Depreciation and amortization 3.2% 2.8% 2.9% 2.8%
----- ----- ----- -----
38.4% 41.2% 38.0% 39.0%
----- ----- ----- -----
Operating income (loss) (0.7)% (1.8)% 0.4% (0.5)%
===== ===== ===== =====
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision Media, Inc. and its 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, fulfillment services and outsourced e-commerce and
fulfillment solutions. Effective May 16, 2002, the Company changed its name to
ValueVision Media, Inc. from ValueVision International, Inc.
The Company's television home shopping business uses on-air television
personalities to market brand name merchandise and proprietary / private label
consumer products at competitive 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.shopnbc.com) which sells a broad array of
merchandise and simulcasts its television home shopping show live 24 hours a
day, 7 days a week.
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 an NBC-branded name and the Peacock image
for a ten-year period. The Company rebranded 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 certain of 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. The new ShopNBC name is being promoted as part of a
marketing campaign that the Company launched in the second half of 2001.
In 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 ("RLM").
VVIFC's services agreement with RLM was entered into in conjunction with the
execution of the Company's investment and electronic commerce alliance entered
into with Polo Ralph Lauren Corporation, NBC and other NBC affiliates. VVIFC
also provides fulfillment and support services for the NBC Experience Store in
New York City and direct to consumer products sold on NBC's website. Through its
wholly owned subsidiary, FanBuzz, Inc., the Company is also an e-commerce and
fulfillment solutions provider of affinity based merchandise to some of the most
recognized sports, media and other well-known entertainment brands.
WRITE-DOWN OF INVESTMENTS AND OTHER LOSSES
During the quarter ended July 31, 2002, the Company, in a cashless
transaction, exchanged its warrants to purchase a total of 438,356 shares of
common stock of iDine Rewards Network, Inc. ("iDine"; f/k/a Transmedia Network,
Inc.), accounted for under the provision of SFAS No. 133, for 170,532 shares of
the common stock of iDine and recorded a loss of $526,000 on the exchange. In
the first half of fiscal 2002, the Company recorded pre-tax investment losses
totaling $1,070,000 relating primarily to an investment made in 1997. In the
first half of fiscal 2001, the Company recorded a pre-tax investment losses
totaling $7,566,000 of which $6,006,000 related to the write-off of the
Company's investment in Internet company Wine.com pursuant to its announced
employee layoff, sale of assets to eVineyard.com and subsequent dissolution. The
declines in fair value of such investments were determined by the Company to be
other than temporary.
ENTERPRISE RESOURCE PLANNING ("ERP") SYSTEMS CONVERSION
In the second quarter of fiscal 2002, the Company implemented a new
front-end ERP system to provide for a long-term foundation for the Company's
future growth. The new front-end systems conversion included the replacement of
the Company's legacy order entry, inventory, and customer service support
systems. The Company was adversely impacted in the quarter by unforeseen
operational challenges related to the implementation of this ERP system. A
number of unplanned and unexpected conversion issues led to delays in the
processing of shipments and other customer transactions, which had a negative
impact on net sales during the quarter and directly resulted in the Company
incurring incremental expenses to cover customer discounts, overtime, additional
talk time in the call centers, additional long distance costs, credit card
chargebacks and various outbound customer communications. In
13
addition, system-driven delays in processing transactions including shipments
to customers and returns to vendors caused a significant increase in the
Company's inventory position. These difficulties adversely impacted the
Company's financial results for the quarter in the form of reduced net sales and
incremental unplanned operating expenses. The majority of the implementation
problems associated with the ERP system conversion can be attributed to certain
aspects of the software not functioning as promised or expected. As a result, we
are working closely with the vendor to stabilize all aspects of the operating
systems. The Company is also looking at ways to recover as much of its losses as
possible through a number of initiatives starting in the second half of fiscal
2002 but there can be no assurances that these initiatives will be successful or
that additional expenses will not be incurred as a result of the stabilization
effort.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales, inclusive of shipping and handling revenue for the
three months ended July 31, 2002 were $128,336,000 compared with net sales of
$104,784,000 for the three months ended July 31, 2001, a 22% increase.
Consolidated net sales, inclusive of shipping and handling revenue, for the six
months ended July 31, 2002 were $261,185,000 compared with $216,763,000 for the
six months ended July 31, 2001, a 20% increase. The increase in consolidated net
sales is directly attributable to the continued improvement in and increased
sales from the Company's television home shopping and Internet operations. Net
sales attributed to the Company's television home shopping and Internet
operations increased 21% to $124,572,000 for the three months ended July 31,
2002 from $102,676,000 for the comparable prior year period. Net sales
attributed to the Company's television home shopping and Internet businesses
increased 19% to $252,459,000 for the six months ended July 31, 2002 from
$212,171,000. The still challenging retail economic environment experienced by
the Company and other merchandise retailers has continued to have an adverse
affect on total net sales growth for the quarter and current fiscal year. In
addition, as a result of a company-wide systems conversion initiated in the
second quarter of fiscal 2002, a number of unplanned and unexpected conversion
issues led to delays in processing shipments and other customer transactions,
which reduced reported net sales this quarter. Notwithstanding the challenging
economic situation and the systems conversion, the continued growth in home
shopping net sales is primarily attributable to the growth in FTE homes
receiving the Company's television programming. During the 12-month period ended
July 31, 2002, the Company added approximately 7 million FTE subscriber homes,
an 18% increase, however, the complete net sales impact and productivity from
these additional homes is still to be realized as these additional new homes
have yet to completely mature. 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, an increase in the average order size and
a 57% year-to-date increase in Internet sales over the prior year. In addition,
total net sales increased over prior year as a result of the Company's
acquisition of FanBuzz, Inc. in March 2002. The Company intends to continue to
test and change its merchandising and programming strategies with the goal of
improving its television home shopping and Internet sales results. However,
while the Company is optimistic that television home shopping and Internet sales
results will continue to improve, there can be no assurance that such changes in
strategy will achieve the intended results.
GROSS PROFITS
Gross profits for the three months ended July 31, 2002 and 2001 were
$48,412,000 and $41,286,000, respectively, an increase of $7,126,000 or 17%.
Gross margins for the three months ended July 31, 2002 and 2001 were 37.7% and
39.4%, respectively. Gross profits for the six months ended July 31, 2002 and
2001 were $100,231,000 and $83,555,000, respectively, an increase of $16,676,000
or 20%. Gross margins for the six months ended July 31, 2002 and 2001 were 38.4%
and 38.5%, respectively. The principal reason for the increase in gross profits
was the increased sales volume from the Company's television home shopping and
Internet businesses. In addition, gross profit for the first half of fiscal 2002
included positive contributions as a result of the Company's acquisition of
FanBuzz, Inc. Television and internet gross margins for the second quarter of
fiscal 2002 decreased as compared to the second quarter of fiscal 2001 due to
the fact that in fiscal 2001, the Company had negotiated and achieved higher
margins as a result of improved and favorable pricing on jewelry merchandise
from vendors driven by the establishment of minimum margin guarantees which were
effective for the first half of fiscal 2001. In addition, television and
internet gross margins for the second quarter of fiscal 2002 decreased as
compared to the second quarter of fiscal 2001 as a result of the Company issuing
discounts to its customers to make up for shipment and other customer processing
delays due to unplanned system conversion issues experienced during the current
quarter. Overall, year-to-date television and Internet gross margins between
comparable periods improved over prior year primarily as a result of an increase
in the mix and gross margin percentages of higher margin jewelry merchandise
categories.
14
OPERATING EXPENSES
Total operating expenses for the three and six months ended July 31, 2002
were $49,257,000 and $99,092,000, respectively, versus $43,187,000 and
$84,630,000 for the comparable prior year periods. Distribution and selling
expense increased $4,907,000 or 14% to $41,215,000 or 32% of net sales during
the second quarter of fiscal 2002 compared to $36,308,000 or 35% of net sales
for the comparable prior-year period. Distribution and selling expense increased
$13,279,000 or 19% to $83,568,000 or 32% of net sales for the six months ended
July 31, 2002 compared to $70,289,000 or 32% of net sales for the comparable
prior-year period. Distribution and selling expense increased primarily as a
result of increases in net cable access fees due to a 22% year-to-date increase
in the number of average FTE subscribers over the prior year, additional costs
associated with the fulfillment and support for the NBC Experience Store in New
York City and direct-to-consumer products sold on NBC's website, increased costs
associated with new celebrities, additional distribution and selling costs
associated with the acquisition of FanBuzz, Inc. and increased costs associated
with credit card processing resulting from increased sales. In addition, in June
2002, the Company implemented a new front-end ERP system to provide for a
long-term foundation for the Company's future growth. The new front-end systems
conversion included the replacement of the Company's legacy order entry,
inventory and customer service support systems. A number of unplanned and
unexpected conversion issues led to delays in processing shipments and other
customer transactions and as a direct result the Company incurred incremental
operating expenses during the quarter to cover overtime, additional talk time in
the call centers and various outbound customer communications.
General and administrative expense for the three months ended July 31, 2002
remained relatively flat at $3,945,000 or 3% of net sales compared to $3,935,000
or 4% of net sales for the three months ended July 31, 2001. For the six months
ended July 31, 2002, general and administrative expense decreased $154,000 or 2%
to $8,106,000 or 3% of net sales compared to $8,260,000 or 4% of net sales for
the six months ended July 31, 2001. General and administrative expense decreased
from the prior year as a result of a decrease in accrued bonuses and
management's efforts to control overall spending which resulted in decreases in
personnel costs, travel and placement fees. These decreases were offset by
increases in general and administrative costs associated with the acquisition of
FanBuzz, Inc. General and administrative expense as a percentage of net sales
decreased over prior year 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.
Depreciation and amortization expense for the three months ended July 31,
2002 was $4,097,000 versus $2,944,000, representing an increase of $1,153,000 or
39% from the comparable prior-year period. Depreciation and amortization expense
for the six months ended July 31, 2002 was $7,418,000 versus $6,081,000,
representing an increase of $1,337,000 or 22% from the comparable prior-year
period. Depreciation and amortization expense as a percentage of net sales for
the three and six months ended July 31, 2002 and 2001 were each 3%,
respectively. The dollar increase is primarily due to increased depreciation and
amortization incurred in the first half of fiscal 2002 associated with the
Company's acquisition of FanBuzz, Inc. in March 2002 and as a result of assets
placed in service in connection with the second quarter company-wide systems
conversion and implementation.
OPERATING INCOME (LOSS)
For the three months ended July 31, 2002, the Company reported an operating
loss of $845,000 compared to an operating loss of $1,901,000 for the three
months ended July 31, 2001, a positive increase of $1,056,000. For the six
months ended July 31, 2002, the Company reported operating income of $1,139,000
compared to an operating loss of $1,075,000, a positive increase of $2,214,000.
Operating income increased from prior year primarily as a result of the increase
in net sales and gross profits reported by the Company's television home
shopping and Internet businesses and the lack of a significant increase in
overall general and administrative expense as management attempts to control
spending. These increases were reduced by increased distribution and selling
expense, particularly net cable access fees for which the expense of adding
approximately 7 million new FTE homes since July 2001 is being incurred but the
future revenue benefit and productivity of these additional homes is yet to be
fully realized and by increases in depreciation and amortization as a result of
the FanBuzz, Inc. acquisition. In addition, operating income (loss) was also
reduced further due to the additional expense the Company incurred as a result
of the company-wide ERP systems conversion and implementation.
NET LOSS
For the three months ended July 31, 2002, the Company reported a net loss
available to common shareholders of $1,662,000 or $.04 per share on 38,007,000
weighted average common shares outstanding compared with a net loss available to
common shareholders of $1,760,000 or $.05 per share on 38,625,000 weighted
average common shares outstanding for the quarter ended July 31, 2001. The net
loss available to common shareholders for the quarter ended July 31, 2002
includes a pre-tax loss of $526,000, which resulted from the cashless exchange
of iDine warrants for iDine common stock. In addition, the net loss also
included an $86,000 pre-tax loss related to the write-down of an investment
whose decline in fair value was determined to be other than temporary. For the
quarter ended July 31, 2002, the net loss available to common shareholders also
included a pre-tax loss of $2,132,000 related to the Company's equity interest
in RLM and interest income totaling $1,091,000 earned on the Company's cash
15
and short-term investments. The net loss available to common shareholders for
the quarter ended July 31, 2001 includes a pre-tax loss of $1,560,000 related to
the write-off of certain pre-fiscal 2000 investments whose decline in fair value
was determined to be other than temporary and pre-tax losses totaling $79,000
recorded on the sale and holdings of the Company's investments. For the quarter
ended July 31, 2001, the net loss available to common shareholders also included
a pre-tax loss of $2,879,000 related to the Company's equity interest in RLM and
interest income totaling $2,493,000 earned on the Company's cash and short-term
investments.
Excluding the net losses on the sale, conversion and holdings of the
Company's investments, the net loss available to common shareholders for the
quarter ended July 31, 2002 totaled $1,092,000, or $.03 per share compared to
the net loss available to common shareholders of $1,464,000, or $.04 per share
for the quarter ended July 31, 2001.
For the six months ended July 31, 2002, the Company reported a net loss
available to common shareholders of $1,123,000 or $.03 per share on 38,080,000
weighted average common shares outstanding, compared with a net loss available
to common shareholders of $7,182,000 or $0.19 per share on 38,575,000 weighted
average common shares outstanding for the six months ended July 31, 2001. The
net loss available to common shareholders for the six months ended July 31, 2002
includes pre-tax losses totaling $1,070,000 related to the write-down of
investments whose decline in fair value was determined to be other than
temporary, a net pre-tax unrealized gain of $1,021,000 resulting from market
price increases on the holdings of the Company's warrant investments and pre-tax
losses totaling $532,000 related to the sale and conversion of investments. For
the six months ended July 31, 2002, the net loss available to common
shareholders also included a pre-tax loss of $4,230,000 related to the Company's
equity interest in RLM and interest income totaling $2,127,000 earned on the
Company's cash and short-term investments. The net loss available to common
shareholders for the six months ended July 31, 2001 includes a pre-tax loss of
$7,566,000 related primarily to the write-down of the Company's investment in
Internet retailer Wine.com and other investments whose decline in fair value
were determined by the Company to be other than temporary and pre-tax realized
and unrealized losses totaling $685,000 recorded on the sale and holdings of the
Company's other investments. For the six months ended July 31, 2001, the net
loss available to common shareholders also included a pre-tax loss of $4,616,000
related to the Company's equity interest in RLM, a loss of $329,000 relating to
the cumulative effect of adopting SFAS No. 133 and interest income totaling
$5,343,000 earned on the Company's cash and short-term investments.
Excluding the net gains/losses on the sale and holdings of the Company's
investments and other one-time charges, net income available to common
shareholders for the six months ended July 31, 2002 totaled $223,000, or $.01
per diluted share ($.01 per basic share) compared to a net loss available to
common shareholders of $195,000, or $.01 per share for the six months ended July
31, 2001.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 53.2 million homes as of July 31, 2002, as compared to 51.9
million homes as of January 31, 2002 and to 47.6 million homes as of July 31,
2001. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 835 cable or satellite
systems. In addition, the Company's programming is available unscrambled to
homes equipped with satellite dishes and is broadcast full-time over eleven
Company-owned, low-power television stations in major markets. As of July 31,
2002 and 2001, the Company's programming was available to approximately 46.7
million and 39.7 million FTE households, respectively. As of January 31, 2002,
the Company's programming was available to 44.0 million FTE households.
Approximately 39.8 million and 33.9 million households at July 31, 2002 and
2001, respectively, received the Company's programming on a full-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 Company's television home shopping
programming is also broadcast live 24 hours a day, 7 days a week through its
Internet shopping website (www.shopnbc.com) which is not included in total FTE
households.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A discussion of the critical accounting policies related to accounting
estimates and assumptions is contained in the Company's 2001 Annual Report on
Form 10-K.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2002, cash and cash equivalents and short-term investments
were $198,910,000, compared to $231,867,000 as of January 31, 2002, a
$32,957,000 decrease. For the six months ended July 31, 2002, working capital
decreased $30,328,000 to $243,961,000. The current ratio was 3.5 at July 31,
2002 compared to 5.4 at January 31, 2002. At July 31, 2002, short-term
16
investments and cash equivalents were invested primarily in money market funds,
high quality commercial paper with original maturity dates of less than 270 days
and investment grade corporate and municipal bonds and other tax advantaged
certificates with tender option terms ranging from one month to one year. The
Company's principal source of liquidity is its cash, cash equivalents and
short-term investments as well as its operating cash flows. Although management
believes the Company's short-term investment policy is very conservative in
nature, certain short-term investments in commercial paper can be exposed to the
credit risk of the underlying companies to which they relate. The average
maturity of the Company's investment portfolio ranges from 30-60 days.
Total assets at July 31, 2002 were $468,359,000, compared to $449,690,000 at
January 31, 2002, an $18,669,000 decrease. Shareholders' equity was $326,320,000
at July 31, 2002, compared to $344,820,000 at January 31, 2002, an $18,500,000
decrease. The decrease in shareholders' equity for the six-month period ended
July 31, 2002 resulted primarily from the repurchase of 1,320,000 common shares
totaling $21,135,000 under the Company's authorized stock repurchase plan, the
recording of the year-to-date net loss of $982,000, $34,000 relating to accrued
interest on a note receivable from an officer and accretion on redeemable
preferred stock of $141,000. These decreases were offset by increases in
shareholders' equity of $3,715,000 from proceeds received related to the
exercise of stock options and unrealized gains on investments classified as
"available-for-sale" totaling $77,000.
For the six-month period ended July 31, 2002, net cash provided by operating
activities totaled $5,201,000 compared to net cash provided by operating
activities of $8,753,000 for the six-month period ended July 31, 2001. Cash
flows from operations after adding back depreciation and amortization expense
(which the Company defines as EBITDA) was a positive $8,557,000 for the six
months ended July 31, 2002, compared to a positive $5,006,000 for the same
prior-year period. Net cash provided by operating activities for the six months
ended July 31, 2002 reflects a net loss, as adjusted for depreciation and
amortization, common stock issued to employees, write-down of investments,
unrealized gains (losses) on security holdings, equity in losses of affiliates
and losses on the sale and conversion of investments. In addition, net cash
provided by operating activities for the six months ended July 31, 2002 reflects
an increase in accounts receivable, inventories, prepaid expenses and income
taxes receivable offset by increases in accounts payable and accrued
liabilities. Accounts receivable increased primarily due to an increase in sales
made utilizing extended payment terms and the timing of customer collections
made pursuant to the "ValuePay" installment program and an increase in accrued
interest receivable offset by the net effect of increased usage of the Company's
ShopNBC private label credit card. In addition to the normal timing of customer
payments, the Company's ValuePay receivable increased from year-end as a direct
result of the timing of shipments to customers which were closer to quarter end
due to shipment delays driven by the systems conversion issues experienced in
the second quarter. Inventories increased from year-end as a direct result of
the Company's recent front-end ERP systems conversion whereby unexpected system
issues caused significant delays in the processing of transactions including
shipments to customers and returns to vendors. These system-related delays
caused a significant increase in inventory on hand as of July 31, 2002.
Inventories also increased due to a significant reduction in "advance order"
selling over prior year in an effort to improve customer satisfaction through
fewer stockouts and faster order fulfillment, to support continued sales growth,
the acquisition of FanBuzz, Inc. in March 2002 and the timing of merchandise
receipts. Although the Company believes it will be able to reduce current
inventory quantities to more normal historic levels, there remains the risk of
inventory obsolescence and/or markdowns should this prove unsuccessful. Prepaid
expenses increased primarily as a result of the timing of long-term cable launch
fee extension renewals and the Company's annual insurance renewal. The increase
in accounts payable and accrued liabilities is a direct result of the increase
in inventory levels, amounts due to customers from returns, the timing of cable
and satellite affiliation vendor payments and the acquisition of FanBuzz, Inc.
Net cash used for investing activities totaled $26,219,000 for the six
months ended July 31, 2002 compared to net cash used for investing activities of
$60,228,000 for the six months ended July 31, 2001. For the six months ended
July 31, 2002 and 2001, expenditures for property and equipment were $5,522,000
and $7,350,000, respectively. Expenditures for property and equipment during the
periods ended July 31, 2002 and 2001 primarily include capital expenditures made
for the upgrade and conversion of the Company's new front-end ERP computer
software systems, related computer equipment and other office equipment,
warehouse equipment, production equipment and expenditures on leasehold
improvements. Principal future capital expenditures include the upgrade,
stabilization and replacement of computer software and front-end ERP systems,
the upgrade of television production and transmission equipment and related
computer equipment associated with the expansion of the Company's home shopping
business and e-commerce initiatives. In the first six months of fiscal 2002, the
Company invested $83,676,000 in various short-term investments, received
proceeds of $77,972,000 from the sale of short-term investments, received
proceeds of $2,000 from the sale of investments and property and made
disbursements of $2,688,000 for certain investments and other long-term assets
primarily related to the Company's equity interest in RLM. Also during the first
quarter of fiscal 2002, the Company invested $12,307,000, net of cash acquired,
in connection with the acquisition of FanBuzz, Inc. In the first six months of
fiscal 2001, the Company invested $147,399,000 in various short-term
investments, received proceeds of $101,202,000 from the sale of short-term
investments, made disbursements of $7,609,000 for certain investments and other
assets, and received proceeds of $928,000 from the sale of investments and
property.
17
Net cash used for financing activities totaled $17,642,000 for the six
months ended July 31, 2002 and related primarily to payments made of $21,135,000
in conjunction with the repurchase of 1,295,000 shares of the Company's common
stock at an average price of $15.95 per share and payments of long-term capital
lease obligations of $206,000, offset by cash proceeds received of $3,699,000
from the exercise of stock options. Net cash provided by financing activities
totaled $435,000 for the six months ended July 31, 2001 and related primarily to
proceeds received of $1,710,000 from the exercise of stock options offset by
payments made of $1,275,000 in conjunction with the repurchase of 105,000 shares
of the Company's common stock at an average price of $12.14 per share.
Management believes that funds currently held by the Company should be
sufficient to fund the Company's operations, anticipated capital expenditures,
strategic investments and cable launch fees through at least the next twelve
months. A discussion of the nature and amount of future cash commitments is
contained in the Company's 2001 Annual Report on Form 10-K.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Information contained in this Form 10-Q and in 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
federal securities laws which represent management's expectations or beliefs
concerning future events. 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): changes in consumer spending habits and debt levels; changes in interest
rates; seasonal variations in consumer purchasing activities; competitive
pressures on sales; changes in pricing and gross profit margins; changes in 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 joint venture and the Company's ultimate return on this
investment; the ability of the Company to stabilize all aspects of its recently
implemented ERP system without incurring incremental unanticipated expense and
the conversion's impact on net sales and margins; the ability of the Company to
manage its operating expenses successfully; risks associated with acquisitions;
changes in governmental or regulatory requirements; material adverse impacts
caused by litigation or governmental proceedings involving or otherwise
affecting the Company; 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.
In addition to any specific risks and uncertainties discussed in this Form
10-Q, the risks and uncertainties discussed in detail in the Company's Form 10-K
for the fiscal year ended January 31, 2002, specifically under the captions
entitled "Risk Factors" and "Critical Accounting Policies and Estimates",
provide information which should be considered in evaluating any of the
Company's forward-looking statements. In addition, the facts and circumstances
that exist when any forward-looking statements are made and on which those
forward-looking statements are based may significantly change in the future,
thereby rendering obsolete the forward-looking statements on which such facts
and circumstances were based.
ITEM 3. 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 has held certain
equity investments in the form of common stock purchase warrants in public
companies and accounted for these investments in accordance with the provisions
of SFAS No. 133. As of July 31, 2002, the Company no longer has investments in
the form of common stock purchase warrants. The operations of the Company are
conducted primarily in the United States and as such are not subject to foreign
currency exchange rate risk. However, some of the Company's products are sourced
internationally and may fluctuate in cost as a result of foreign currency
swings. The Company has no long-term debt other than fixed capital lease
obligations, 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.
18
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 30, 2002, the Company commenced a lawsuit in the United States
District Court located in the District of Minnesota against one of its vendors,
D.G. Jewelry, Inc. of Canada, as well as D.G. Jewelry's President and Chairman,
Samuel Jacob Berkovits, and D.G. Jewelry's Executive Vice President for Sales,
Bentzion Berkovits. The lawsuit was filed in response to threats by D.G. Jewelry
to commence litigation against the Company regarding claims that were previously
released under a December 6, 2001 settlement agreement between the Company and
D.G. Jewelry. The Company is seeking declaratory relief and other remedies. The
litigation is in the preliminary phase and, consequently, the Company cannot
predict the outcome of the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of ValueVision International, Inc. was
held on June 20, 2002. Shareholders holding an aggregate of 40,168,135 shares
(common and preferred shares), or approximately 92% of the outstanding shares,
were represented at the meeting by proxy or in person. Matters submitted at the
meeting for vote by the shareholders were as follows:
(a) Election of Directors
The following nominees were elected with the following votes to serve as members
of the Board of Directors until the next annual meeting of shareholders in 2003
or until such time as a successor may be elected:
Shares Shares
Voted For Withheld
--------- --------
Gene McCaffery 34,277,034 551,601
Marshall S. Geller 34,267,444 561,191
Robert J. Korkowski 34,193,097 635,538
Paul D. Tosetti 34,104,489 724,146
R. Brandon Burgess * 5,339,500 -
John L. Flannery, Jr. * 5,339,500 -
* Messrs. Burgess and Flannery are the representatives of the holders
of the Company's Series A Redeemable Convertible Preferred stock.
(b) Adoption of Amendment No. 1 to the ValueVision Media, Inc. 2001 Omnibus
Stock Plan
Shareholders approved the adoption of Amendment No. 1 to the ValueVision Media,
Inc. 2001 Omnibus Stock Plan by a vote of 32,607,905 shares in favor, 7,360,841
shares against, and 199,389 shares abstained. The purpose of the Plan Amendment
is to enable the Company to maximize any federal tax deductions in connection
with certain payments made to the Company's most highly compensated executive
officers under the 2001 Omnibus Stock Plan.
(c) Adoption of the ValueVision Media, Inc. Annual Management Incentive
Plan
Shareholders approved the adoption of the ValueVision Media, Inc. Annual
Management Incentive Plan by a vote of 38,386,327 shares in favor, 1,589,589
shares against, and 192,219 shares abstained.
19
(d) Ratification of Deloitte & Touche LLP as independent auditors for the
current fiscal year
Shareholders ratified the appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ending January 31, 2003 by a vote of 39,331,081
shares in favor, 816,545 shares against, and 20,509 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Employment Agreement Amendment for Richard D. Barnes,
Steven Goldsmith, Roy Seinfeld and Howard F. Fox
99.1 Certification Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- Chief Financial Officer
(b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on September 3, 2002 reporting
under Item 5 that the Registrant announced that it had commenced
a lawsuit against one of its jewelry vendors.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
/s/ Gene McCaffery
---------------------------------------------
Gene McCaffery
Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer)
/s/ Richard D. Barnes
---------------------------------------------
Richard D. Barnes
Executive Vice President, Chief Financial
Officer Chief Operating Officer
(Principal Financial and Accounting Officer)
September 13, 2002
21
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gene McCaffery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ValueVision
Media, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
/s/ Gene McCaffery
---------------------------
Gene McCaffery
Chairman of the Board, Chief
Executive Officer and President
September 13, 2002
22
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard D. Barnes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ValueVision
Media, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
/s/ Richard D. Barnes
------------------------------------------
Richard D. Barnes
Executive Vice President, Chief Financial
Officer, Chief Operating Officer
September 13, 2002
23