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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 October 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.
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(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
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(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
As of December 11, 2002, there were 36,148,550 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
OCTOBER 31, 2002
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of October 31,
2002 and January 31, 2002 3
-Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended October 31, 2002 and 2001 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Nine Months Ended October 31, 2002 5
-Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended October 31, 2002 and 2001 6
-Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
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)
OCTOBER 31, JANUARY 31,
2002 2002
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,325 $ 66,144
Short-term investments 117,470 165,723
Accounts receivable, net 66,863 54,104
Inventories, net 64,888 40,383
Prepaid expenses and other 7,522 5,189
Income tax receivable 14,770 --
Deferred income taxes 4,943 4,943
------------ ---------
Total current assets 311,781 336,486
PROPERTY & EQUIPMENT, NET 42,220 35,972
NBC TRADEMARK LICENSE AGREEMENT, NET 25,947 28,367
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 5,392 6,038
GOODWILL 7,442 --
OTHER INTANGIBLE ASSETS, NET 1,420 --
INVESTMENTS AND OTHER ASSETS, NET 42,545 42,827
------------ ---------
$ 436,747 $ 449,690
============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,737 $ 43,489
Accrued liabilities 29,263 18,564
Income tax payable -- 144
------------ ---------
Total current liabilities 80,000 62,197
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,615 395
DEFERRED INCOME TAXES 7,505 98
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 42,391 42,180
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares
authorized; 36,140,966 and 38,061,455 shares issued
and outstanding 361 381
Warrants to purchase 8,198,485 shares of common stock 47,466 47,466
Additional paid-in capital 243,883 273,505
Accumulated other comprehensive losses (1,742) (1,045)
Note receivable from officer (4,061) (4,006)
Retained earnings 19,329 28,519
------------ ---------
Total shareholders' equity 305,236 344,820
------------ ---------
$ 436,747 $ 449,690
============ =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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 NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------------- -----------------------------
2002 2001 2002 2001
--------------- ------------- --------------- ------------
NET SALES $ 135,754 $ 109,420 $ 396,939 $ 326,184
COST OF SALES 93,816 69,008 254,770 202,216
----------- ----------- ----------- -----------
Gross profit 41,938 40,412 142,169 123,968
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Distribution and selling 46,434 37,710 130,002 107,998
General and administrative 4,177 3,729 12,283 11,989
Depreciation and amortization 4,205 3,096 11,623 9,177
----------- ----------- ----------- -----------
Total operating expenses 54,816 44,535 153,908 129,164
----------- ----------- ----------- -----------
OPERATING LOSS (12,878) (4,123) (11,739) (5,196)
----------- ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Loss on sale and conversion of
investments (1) 3 (533) (413)
Unrealized gain (loss) on security
holdings -- (260) 1,021 (530)
Write-down of investments -- (1) (1,070) (7,568)
Equity in losses of affiliates (236) (1,735) (4,466) (6,352)
Interest income 640 1,630 2,767 6,973
----------- ----------- ----------- -----------
Total other income (expense) 403 (363) (2,281) (7,890)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (12,475) (4,486) (14,020) (13,086)
Income tax benefit (4,478) (1,743) (5,041) (3,629)
----------- ----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (7,997) (2,743) (8,979) (9,457)
Cumulative effect of accounting change -- -- -- (329)
----------- ----------- ----------- -----------
NET LOSS (7,997) (2,743) (8,979) (9,786)
Accretion of redeemable preferred stock (70) (70) (211) (209)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (8,067) $ (2,813) $ (9,190) $ (9,995)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE:
Before cumulative effect of accounting
change $ (0.22) $ (0.07) $ (0.24) $ (0.25)
Cumulative effect of accounting change -- -- -- (0.01)
----------- ----------- ----------- ------------
Net loss $ (0.22) $ (0.07) $ (0.24) $ (0.26)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE
- ASSUMING DILUTION:
Before cumulative effect of accounting
change $ (0.22) $ (0.07) $ (0.24) $ (0.25)
Cumulative effect of accounting change -- -- -- (0.01)
----------- ----------- ----------- -----------
Net loss $ (0.22) $ (0.07) $ (0.24) $ (0.26)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic 36,381,915 38,317,044 37,514,045 38,488,961
=========== =========== =========== ===========
Diluted 36,381,915 38,317,044 37,514,045 38,488,961
=========== =========== =========== ===========
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 NINE MONTHS ENDED OCTOBER 31, 2002
(Unaudited)
(In thousands, except share data)
COMMON STOCK COMMON ACCUMULATED NOTE
-------------------- STOCK ADDITIONAL 0THER RECEIVABLE TOTAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN COMPREHENSIVE FROM RETAINED SHAREHOLDERS'
INCOME (LOSS) OF SHARES VALUE WARRANTS CAPITAL LOSSES OFFICER EARNINGS EQUITY
------------- ---------- ----- -------- ---------- ------------- ---------- -------- -------------
BALANCE, JANUARY 31, 38,061,455 $381 $47,466 $273,505 $(1,045) $(4,006) $28,519 $344,820
2002
Comprehensive
income (loss):
Net loss $(8,979) -- -- -- -- -- -- (8,979) (8,979)
Other comprehensive
income (loss),
net of tax:
Unrealized losses on
securities, net of
tax of $704 (1,148)
Losses on securities
included in net loss,
net of tax of $277 451
-------
Other comprehensive
loss (697) -- -- -- -- (697) -- -- (697)
-------
Comprehensive loss $(9,676)
=======
Repurchases of
common stock (2,252,300) (23) -- (33,719) -- -- -- (33,742)
Increase in note
receivable from officer -- -- -- -- -- (55) -- (55)
Exercise of stock
options and common
stock issuances 331,811 3 -- 4,097 -- -- -- 4,100
Accretion on redeemable
preferred stock -- -- -- -- -- -- (211) (211)
---------- ---- ------- -------- ------ ----- ------- --------
BALANCE, OCTOBER 31, 2002 36,140,966 $361 $47,466 $243,883 $(1,742) $(4,061) $19,329 $305,236
========== ==== ======= ======== ======= ======= ======= ========
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 NINE MONTHS ENDED OCTOBER 31,
-------------------------------------
2002 2001
------------------- ----------------
OPERATING ACTIVITIES:
Net loss $ (8,979) $ (9,786)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities-
Depreciation and amortization 11,623 9,177
Deferred taxes 9,833 --
Common stock issued to employees 22 --
Loss on sale and conversion of investments 533 413
Unrealized loss (gain) on security holdings (1,021) 530
Equity in losses of affiliates 4,466 6,352
Write-down of investments 1,070 7,568
Cumulative effect of accounting change -- 329
Changes in operating assets and liabilities, net
of businesses acquired:
Accounts receivable, net (12,278) 8,570
Inventories, net (22,926) (682)
Prepaid expenses and other (4,590) (786)
Accounts payable and accrued liabilities 14,692 (6,919)
Income taxes payable (receivable), net (14,913) (4,533)
-------- ---------
Net cash provided by (used for) operating
activities (22,468) 10,233
--------- ---------
INVESTING ACTIVITIES:
Property and equipment additions (10,264) (9,710)
Proceeds from sale of investments and property 2 928
Purchase of short-term investments (99,893) (203,395)
Proceeds from sale of short-term investments 148,145 162,827
Payment for investments and other assets (4,099) (9,526)
Acquisition of FanBuzz, Inc., net of cash acquired (12,307) --
-------- ---------
Net cash provided by (used for) investing
activities 21,584 (58,876)
-------- ---------
FINANCING ACTIVITIES:
Payments for repurchases of common stock (33,742) (15,702)
Proceeds from exercise of stock options 4,078 2,262
Payment of long-term obligation (271) --
-------- ---------
Net cash used for financing activities (29,935) (13,440)
-------- ----------
Net decrease in cash and cash equivalents (30,819) (62,083)
BEGINNING CASH AND CASH EQUIVALENTS 66,144 136,045
-------- ---------
ENDING CASH AND CASH EQUIVALENTS $ 35,325 $ 73,962
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 104 $ 34
======== =========
Income taxes paid $ 39 $ 920
======== =========
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 $ 211 $ 209
======== =========
Equipment purchases under capital lease $ -- $ 747
======== =========
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
OCTOBER 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 a broad array of merchandise through its
Internet shopping website (www.shopnbc.com) and simulcasts the Company's
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 also provides e-commerce and
fulfillment solutions to some of the most recognized sports, media and other
well-known entertainment companies.
(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, 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 nine-month
periods ended October 31, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ending January 31, 2003.
The accompanying condensed consolidated financial statements include the
accounts of ValueVision and its wholly owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation. The accompanying
condensed
7
consolidated results of operations for the three and nine months ended October
31, 2002, include the operations of FanBuzz, Inc. as of the effective date of
its acquisition, March 8, 2002.
(3) NET 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 OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
-------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
Net loss available to
common shareholders $(8,067,000) $(2,813,000) $(9,190,000) $(9,995,000)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - Basic 36,382,000 38,317,000 37,514,000 38,489,000
Dilutive effect of convertible
preferred stock -- -- -- --
Dilutive effect of stock options and
warrants -- -- -- --
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding - Diluted 36,382,000 38,317,000 37,514,000 38,489,000
=========== =========== =========== ===========
Net loss per common share $ (0.22) $ (0.07) $ (0.24) $ (0.26)
=========== =========== =========== ===========
Net loss per common share-
assuming dilution $ (0.22) $ (0.07) $ (0.24) $ (0.26)
=========== =========== =========== ===========
In accordance with SFAS No. 128, for the quarter and nine-month periods ended
October 31, 2002 and 2001, respectively, approximately 6,733,000 and 7,342,000,
and 7,687,000 and 7,896,000 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
($8,771,000) and ($3,551,000) for the three months ended October 31, 2002 and
2001, respectively. Total comprehensive loss was ($9,676,000) and ($10,684,000)
for the nine months ended October 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.
(6) EQUITY INVESTMENTS
As of October 31, 2002, the Company had equity investments totaling
approximately $38,486,000 of which $32,061,000 related to the Company's
investment in RLM after adjusting for the Company's equity share of RLM losses
under the equity method of
8
accounting. At October 31, 2002, investments in the accompanying consolidated
balance sheet also include approximately $4,414,000 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 October 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
$49.7 million has been funded through October 31, 2002. Currently, the Company's
investment in RLM is $32,061,000 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 second quarter of fiscal 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 nine month period ended October 31, 2002, the Company recorded pre-tax
investment losses totaling $1,070,000 relating primarily to an investment made
in 1997. In the nine month period ended October 31, 2001, the Company recorded
pre-tax investment losses totaling $7,568,000 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 October 31, 2002, the Company held a note receivable totaling $4,061,000,
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.
(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 a loss
9
of $329,000 and is reflected in the consolidated statement of operations for the
nine months ended October 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 the repurchase of an additional $25
million of the Company's common stock. 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 October 31, 2002, the Company had
repurchased a total of 3,229,000 shares of its common stock under its stock
repurchase programs for a total net cost of $47,848,000 at an average price of
$14.82 per share. During the quarter ended October 31, 2002, the Company had
repurchased 932,000 shares of its common stock at an average price of $13.48 per
share. In November 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.
(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"), that currently provides e-commerce
and fulfillment solutions to some of the most recognized sports, media and other
well known entertainment companies in the world, including ESPN, the Salt Lake
2002 Winter Games, the National Hockey League 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 condensed
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 nine-month period ended
October 31, 2002 are as follows:
Balance as of January 31, 2002 $ --
Goodwill acquired during the period 7,442,000
Impairment losses --
----------
Balance as of October 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 condensed consolidated balance
sheets consist of the following:
OCTOBER 31, 2002
-------------------------
AVERAGE GROSS
LIFE CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION
------- ---------- ------------
Amortized intangible assets:
Website address 3 $1,000,000 $(194,000)
Partnership contracts 2 280,000 (131,000)
Non-compete agreements 3 230,000 (45,000)
Favorable lease contracts 13 200,000 (9,000)
Other 1 290,000 (201,000)
---------- ---------
Total $2,000,000 $(580,000)
========== =========
11
Amortization expense for intangible assets for the nine months ended October
31, 2002 was $580,000. 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.
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 NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------
NET SALES 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
GROSS MARGIN 30.9% 36.9% 35.8% 38.0%
----- ----- ----- -----
Operating expenses:
Distribution and selling 34.2% 34.5% 32.8% 33.1%
General and administrative 3.1% 3.4% 3.1% 3.7%
Depreciation and amortization 3.1% 2.8% 2.9% 2.8%
----- ----- ----- -----
40.4% 40.7% 38.8% 39.6%
----- ----- ----- -----
Operating loss (9.5)% (3.8)% (3.0)% (1.6)%
===== ===== ====== =====
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 a broad array of merchandise
through its Internet shopping website (www.shopnbc.com) and simulcasts the
Company's 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 also provides e-commerce and
fulfillment solutions to some of the most recognized sports, media and other
well-known entertainment companies.
WRITE-DOWN OF INVESTMENTS AND OTHER LOSSES
During the second quarter of fiscal 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 provisions of SFAS No. 133, for 170,532 shares of
the common stock of iDine and recorded a realized loss of $526,000 on the
exchange. During the nine-month period ended October 31, 2002, the Company
recorded pre-tax investment losses totaling $1,070,000 relating primarily to an
investment made in 1997. During the nine-month period ended October 31, 2001,
the Company recorded a pre-tax investment losses totaling $7,568,000 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 a long-term systems 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 second and third quarters by
unforeseen operational challenges related to the implementation of this ERP
system. A number of unplanned and unexpected conversion issues led to delays and
disruptions in the taking of orders, credit processing and in the processing of
13
shipments and other customer transactions, which had a negative impact on net
sales and gross margins during these quarters and directly resulted in the
Company incurring incremental expenses to cover customer discounts, overtime,
additional talk time in the call centers, temporary labor, additional long
distance costs, bad debt, credit card chargebacks and various outbound customer
communications. The inability to service customers effectively caused the
Company to implement a series of customer amends and promotional programs to
overcome customer inconveniences and reinforce long-term loyalty. These programs
included free shipping and handling offerings and the issuance of discounts to
customers to make up for shipment and other customer processing delays. In
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 during the second and third quarters in the form of reduced
net sales, reduced gross profits 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 marketing
and other initiatives that started 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 October 31, 2002 were $135,754,000 compared with net sales of
$109,420,000 for the three months ended October 31, 2001, a 24% increase.
Consolidated net sales, inclusive of shipping and handling revenue, for the nine
months ended October 31, 2002 were $396,939,000 compared with $326,184,000 for
the nine months ended October 31, 2001, a 22% 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 23% to $132,242,000 for the three months ended
October 31, 2002 from $107,461,000 for the comparable prior year period. Net
sales attributed to the Company's television home shopping and Internet
businesses increased 20% to $384,701,000 for the nine months ended October 31,
2002 from $319,632,000. The still challenging retail economic environment and
slowdown in consumer spending 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 in both the
second and third quarters. Notwithstanding the challenging economic situation
and the systems conversion, the continued growth in home shopping net sales is
primarily attributable to the growth in full-time equivalent ("FTE") homes
receiving the Company's television programming. During the 12-month period ended
October 31, 2002, the Company added approximately 7 million FTE subscriber
homes, a 17% 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 62% 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 October 31, 2002 and 2001 were
$41,938,000 and $40,412,000, respectively, an increase of $1,526,000 or 4%.
Gross margins for the three months ended October 31, 2002 and 2001 were 30.9%
and 36.9%, respectively. Gross profits for the nine months ended October 31,
2002 and 2001 were $142,169,000 and $123,968,000, respectively, an increase of
$18,201,000 or 15%. Gross margins for the nine months ended October 31, 2002 and
2001 were 35.8% and 38.0%, 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 three
and nine-month periods ended October 31, 2002 included positive contributions as
a result of the Company's acquisition of FanBuzz, Inc. Television and Internet
gross margins for the three and nine-month periods ended October 31, 2002
decreased as compared to the three and nine-month periods ended October 31, 2001
primarily as a result of an increase in the mix of low margin computers sold in
the third quarter of fiscal 2002 at lower than normal gross margin percentages.
The combination of these two factors decreased overall company gross margins in
the third quarter versus prior year by
14
approximately 3%. Additional factors contributing to the decrease in television
and Internet gross margin performance in the quarter include a write down in
inventory as a result of the Company's first post ERP systems conversion
physical inventory and customer service decisions made by the Company
attributable to the overall software conversion problems experienced in the
second and third quarters of fiscal 2002. The inability to service customers
effectively caused the Company to implement a series of customer amends and
promotional programs to compensate customers for inconveniences and reinforce
long-term loyalty. These programs included free shipping and handling offerings
and the issuance of discounts to customers to make up for shipment and other
customer processing delays. In addition, year-to-date television and Internet
gross margins between comparable periods also decreased 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.
OPERATING EXPENSES
Total operating expenses for the three and nine months ended October 31, 2002
were $54,816,000 and $153,908,000, respectively, versus $44,535,000 and
$129,164,000 for the comparable prior year periods. Distribution and selling
expense increased $8,724,000 or 23% to $46,434,000 or 34% of net sales during
the third quarter of fiscal 2002 compared to $37,710,000 or 34% of net sales for
the comparable prior-year period. Distribution and selling expense increased
$22,004,000 or 20% to $130,002,000 or 33% of net sales for the nine months ended
October 31, 2002 compared to $107,998,000 or 33% 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 20% 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, as a
result of the Company's recent ERP systems conversion, which 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 the screening and processing of shipments and other customer
transactions including collection efforts and as a direct result the Company
experienced an increase in bad debt and chargebacks during the quarter. The
Company also incurred incremental operating expenses during the quarter to cover
overtime, additional talk time in the call centers, long distance charges,
temporary labor and various outbound customer communications.
General and administrative expense for the three months ended October 31,
2002 increased $448,000 or 12% to $4,177,000 or 3% of net sales compared to
$3,729,000 or 3% of net sales for the three months ended October 31, 2001. For
the nine months ended October 31, 2002, general and administrative expense
increased $294,000 or 2% to $12,283,000 or 3% of net sales compared to
$11,989,000 or 4% of net sales for the nine months ended October 31, 2001.
General and administrative expense increased over prior year as a result of
increases in general and administrative costs associated with the acquisition of
FanBuzz, Inc., increased consulting fees associated with the Company's systems
conversion effort and the settlement of a vendor litigation dispute. These
increases were offset by a decrease in accrued bonuses and management's efforts
to control overall spending which resulted in decreases in personnel costs,
travel and placement fees. Year-to-date 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 October 31,
2002 was $4,205,000 versus $3,096,000, representing an increase of $1,109,000 or
36% from the comparable prior-year period. Depreciation and amortization expense
for the nine months ended October 31, 2002 was $11,623,000 versus $9,177,000,
representing an increase of $2,446,000 or 27% from the comparable prior-year
period. Depreciation and amortization expense as a percentage of net sales for
the three and nine months ended October 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 Company's ERP systems conversion and
implementation.
OPERATING LOSS
For the three months ended October 31, 2002, the Company reported an operating
loss of $12,878,000 compared to an operating loss of $4,123,000 for the three
months ended October 31, 2001, an increase of $8,755,000. For the nine months
ended October 31, 2002, the Company reported an operating loss of $11,739,000
compared to an operating loss of $5,196,000, an increase of $6,543,000.
Operating loss increased for the three and nine-month periods ended October 31,
2002 from prior year comparable periods primarily as a result of the Company
experiencing a third quarter gross margin shortfall, which was due primarily to
an increase in the mix of low margin computers sold in the current quarter at
lower than normal gross margin percentages along with an inventory write down
15
recorded following the Company's first post ERP systems conversion physical
inventory and the impact of a number of customer amends and promotional programs
initiated to compensate customers for inconveniences and reinforce long-term
loyalty. Also contributing to the increase in operating losses were increases in
distribution and selling expense, particularly net cable access fees for which
the expense of adding approximately 7 million new FTE homes since October 2001
is being incurred but the future revenue benefit and productivity of these
additional homes is yet to be fully realized and increases in depreciation and
amortization as a result of the FanBuzz, Inc. acquisition. In addition,
operating results were reduced further due to additional operating expenses and
amortization expense incurred as a result of the company-wide ERP systems
conversion and implementation. These expense increases were somewhat offset by
the increase in net sales and gross profits reported by the Company's television
home shopping and Internet businesses.
NET LOSS
For the three months ended October 31, 2002, the Company reported a net loss
available to common shareholders of $8,067,000 or $.22 per share on 36,382,000
weighted average common shares outstanding compared with a net loss available to
common shareholders of $2,813,000 or $.07 per share on 38,317,000 weighted
average common shares outstanding for the quarter ended October 31, 2001. The
net loss available to common shareholders for the quarter ended October 31, 2002
includes a pre-tax loss of $236,000 related to the Company's equity interest in
RLM and interest income totaling $640,000 earned on the Company's cash and
short-term investments. The net loss available to common shareholders for the
quarter ended October 31, 2001 includes net pre-tax losses totaling $257,000
recorded on the sale and holdings of the Company's property and other
investments. For the quarter ended October 31, 2001, the net loss available to
common shareholders also included a pre-tax loss of $1,735,000 related to the
Company's equity interest in RLM and interest income totaling $1,630,000 earned
on the Company's cash and short-term investments.
For the nine months ended October 31, 2002, the Company reported a net loss
available to common shareholders of $9,190,000 or $.24 per share on 37,514,000
weighted average common shares outstanding, compared with a net loss available
to common shareholders of $9,995,000 or $0.26 per share on 38,489,000 weighted
average common shares outstanding for the nine months ended October 31, 2001.
The net loss available to common shareholders for the nine months ended October
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 $533,000 related primarily to the cashless exchange of iDine
Rewards Network, Inc warrants for its common stock. For the nine months ended
October 31, 2002, the net loss available to common shareholders also included a
pre-tax loss of $4,466,000 related to the Company's equity interest in RLM and
interest income totaling $2,767,000 earned on the Company's cash and short-term
investments. The net loss available to common shareholders for the nine months
ended October 31, 2001 includes a pre-tax loss of $7,568,000 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 pre-tax losses totaling
$943,000 recorded on the sale and holdings of the Company's other investments.
For the nine months ended October 31, 2001, the net loss available to common
shareholders also included a pre-tax loss of $6,352,000 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 $6,973,000 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, the net loss available to common
shareholders for the nine months ended October 31, 2002 totaled $7,655,000, or
$.20 per compared to a net loss available to common shareholders of $2,800,000,
or $.07 per share for the nine months ended October 31, 2001.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 54.0 million homes as of October 31, 2002, as compared to 51.9
million homes as of January 31, 2002 and to 50.1 million homes as of October 31,
2001. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 890 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 October 31,
2002 and 2001, the Company's programming was available to approximately 48.1
million and 41.2 million FTE households, respectively. As of January 31, 2002,
the Company's programming was available to 44.0 million FTE households.
Approximately 41.8 million and 33.9 million households at October 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
16
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 October 31, 2002, cash and cash equivalents and short-term investments
were $152,795,000, compared to $231,867,000 as of January 31, 2002, a
$79,072,000 decrease. For the nine months ended October 31, 2002, working
capital decreased $42,508,000 to $231,781,000. The current ratio was 3.9 at
October 31, 2002 compared to 5.4 at January 31, 2002. At October 31, 2002,
short-term 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 to 60
days.
Total assets at October 31, 2002 were $436,747,000, compared to $449,690,000
at January 31, 2002, a $12,943,000 decrease. Shareholders' equity was
$305,236,000 at October 31, 2002, compared to $344,820,000 at January 31, 2002,
a $39,584,000 decrease. The decrease in shareholders' equity for the nine-month
period ended October 31, 2002 resulted primarily from the repurchase of
2,252,000 common shares totaling $33,742,000 under the Company's authorized
stock repurchase plans, the recording of the year-to-date net loss of
$8,979,000, unrealized losses on investments classified as "available-for-sale"
totaling $697,000, $55,000 relating to accrued interest on a note receivable
from an officer and accretion on redeemable preferred stock of $211,000. These
decreases were offset by increases in shareholders' equity of $4,100,000 from
proceeds received related to the exercise of stock options.
For the nine-month period ended October 31, 2002, net cash used for operating
activities totaled $22,468,000 compared to net cash provided by operating
activities of $10,233,000 for the nine-month period ended October 31, 2001.
Losses from operations after adding back depreciation and amortization expense
(which the Company defines as EBITDA) was a negative $116,000 for the nine
months ended October 31, 2002, compared to a positive $3,981,000 for the same
prior-year period. Net cash used for operating activities for the nine months
ended October 31, 2002 reflects a net loss, as adjusted for depreciation and
amortization, deferred taxes, 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 used for operating activities for the nine months ended October 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. Inventories increased from year-end in
preparation for the fourth quarter holiday season and as a direct result of the
Company's recent front-end ERP systems conversion where unexpected
implementation 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 over
prior year. 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. These increases were mitigated by third quarter
aggressive management efforts to reduce inventory levels. 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
insurance premium increases following the Company's annual insurance renewal.
Income tax receivable increased as a result of the Company's filing for net
operating loss ("NOL's") carryback claims in the third quarter following a
change in the federal tax laws which allow companies to carryback NOL's up to
five years. The increase in accounts payable and accrued liabilities is a direct
result of the increase in inventory levels, the timing of cable and satellite
affiliation vendor payments and the acquisition of FanBuzz, Inc.
Net cash provided by investing activities totaled $21,584,000 for the nine
months ended October 31, 2002 compared to net cash used for investing activities
of $58,876,000 for the nine months ended October 31, 2001. For the nine months
ended October 31, 2002 and 2001, expenditures for property and equipment were
$10,264,000 and $9,710,000, respectively. Expenditures for property and
17
equipment during the periods ended October 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 nine months of fiscal
2002, the Company invested $99,893,000 in various short-term investments,
received proceeds of $148,145,000 from the sale of short-term investments,
received proceeds of $2,000 from the sale of investments and property and made
disbursements of $4,099,000 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 nine months of
fiscal 2001, the Company invested $203,395,000 in various short-term
investments, received proceeds of $162,827,000 from the sale of short-term
investments, made disbursements of $9,526,000 for certain investments and other
assets, and received proceeds of $928,000 from the sale of investments and
property.
Net cash used for financing activities totaled $29,935,000 for the nine
months ended October 31, 2002 and related primarily to payments made of
$33,742,000 in conjunction with the repurchase of 2,252,000 shares of the
Company's common stock at an average price of $14.93 per share and payments of
long-term capital lease obligations of $271,000, offset by cash proceeds
received of $4,078,000 from the exercise of stock options. Net cash used for
financing activities totaled $13,440,000 for the nine months ended October 31,
2001 and related primarily to payments made of $15,702,000 in conjunction with
the repurchase of 1,092,000 shares of the Company's common stock at an average
price of $14.60 per share, offset by cash proceeds received of $2,262,000 from
the exercise of stock options.
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 including 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 additional incremental unanticipated
expense and the conversion's impact on net sales and gross 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.
18
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 October 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, Gene McCaffery, and Chief Financial
Officer, Richard D. Barnes, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
19
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2001, the Company entered into a Consent Agreement and Order with
the Federal Trade Commission ("FTC") regarding the substantiation of certain
claims for health and beauty products made on-air during the Company's TV
programming and on the Company's Internet web site. To ensure that it remains in
compliance with the Consent Agreement and Order and with generally applicable
FTC advertising standards, the Company has implemented a Compliance Program
applicable to health and beauty products offered through ShopNBC. Under the
terms of the Consent Order, the Company must ensure that it has scientific
evidence to back up any claims it might make regarding the health benefits of
any food, drug, dietary supplement, cellulite-treatment product or weight-loss
program in connection with the advertisement or sale of such products. In the
event of noncompliance with the Consent Order, the Company could be subject to
civil penalties. In connection with the Consent Agreement and Order, the FTC may
periodically review the scientific substantiation obtained by the Company for
various advertising claims made for products covered under the Agreement, and
may pursue additional enforcement actions in the future if it concludes that
such scientific substantiation does not meet FTC standards. The Company's
execution of the Consent Agreement and Order with the FTC did not have a
material impact on the Company's operations or consolidated financial
statements.
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. The Company was seeking declaratory
relief and other remedies. In October 2002, the companies jointly agreed to
settle the dispute, terminate the business relationship and dismiss any further
litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
None.
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 and Chief Operating Officer
(Principal Financial and Accounting
Officer)
December 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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a -14 and 15d --14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Gene McCaffery
-----------------------------------
Gene McCaffery
Chairman of the Board, Chief
Executive Officer and President
December 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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a -14 and 15d --14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Richard D. Barnes
-----------------------------------------
Richard D. Barnes
Executive Vice President, Chief Financial
Officer, Chief Operating Officer
December 13, 2002
23