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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, 2003
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 [ ]
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 10, 2003, there were 36,005,637 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, 2003
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of October 31, 2003
and January 31, 2003 3
-Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended October 31, 2003 and 2002 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Nine Months Ended October 31, 2003 5
-Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended October 31, 2003 and 2002 6
-Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
OCTOBER 31, JANUARY 31,
2003 2003
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67,913 $ 55,109
Short-term investments 67,555 113,525
Accounts receivable, net 65,614 76,734
Inventories 78,277 61,246
Prepaid expenses and other 6,894 7,449
----------- -----------
Total current assets 286,253 314,063
PROPERTY & EQUIPMENT, NET 53,904 39,905
FCC BROADCASTING LICENSE 31,943 --
NBC TRADEMARK LICENSE AGREEMENT, NET 22,721 25,141
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 4,669 5,341
GOODWILL 9,442 9,442
OTHER INTANGIBLE ASSETS, NET 783 1,242
INVESTMENTS AND OTHER ASSETS, NET 4,967 11,140
----------- -----------
$ 414,682 $ 406,274
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 66,364 $ 56,961
Accrued liabilities 30,896 30,310
Income tax payable 120 226
----------- -----------
Total current liabilities 97,380 87,497
LONG-TERM CAPITAL LEASE OBLIGATIONS 2,176 1,669
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 42,674 42,462
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
35,956,074 and 36,171,250 shares issued and outstanding 360 362
Warrants to purchase 8,235,343 shares of common stock 47,638 47,638
Additional paid-in capital 243,043 244,134
Accumulated other comprehensive losses -- (2,517)
Deferred compensation (1,118) --
Note receivable from officer (4,142) (4,098)
Accumulated deficit (13,329) (10,873)
----------- -----------
Total shareholders' equity 272,452 274,646
----------- -----------
$ 414,682 $ 406,274
=========== ===========
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,
------------------------------------ ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
NET SALES $ 149,996 $ 135,754 $ 437,685 $ 396,939
COST OF SALES 96,634 93,816 276,953 254,770
-------------- -------------- -------------- --------------
Gross profit 53,362 41,938 160,732 142,169
-------------- -------------- -------------- --------------
OPERATING (INCOME) EXPENSE:
Distribution and selling 47,949 46,434 141,399 130,002
General and administrative 3,828 4,177 14,165 12,283
Depreciation and amortization 4,662 4,205 13,216 11,623
Gain on sale of television stations -- -- (4,417) --
-------------- -------------- -------------- --------------
Total operating (income) expense 56,439 54,816 164,363 153,908
-------------- -------------- -------------- --------------
OPERATING LOSS (3,077) (12,878) (3,631) (11,739)
-------------- -------------- -------------- ---------------
OTHER (INCOME) EXPENSE:
Gain (loss) on sale and conversion of investments -- (1) 361 (533)
Unrealized gain on security holdings -- -- -- 1,021
Write-down of investments -- -- -- (1,070)
Equity in losses of affiliates -- (236) -- (4,466)
Interest income 315 640 1,064 2,767
-------------- -------------- -------------- --------------
Total other income (expense) 315 403 1,425 (2,281)
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAXES (2,762) (12,475) (2,206) (14,020)
Income tax provision (benefit) 80 (4,478) 180 (5,041)
-------------- -------------- -------------- --------------
NET LOSS (2,842) (7,997) (2,386) (8,979)
Accretion of redeemable preferred stock (71) (70) (212) (211)
-------------- -------------- -------------- --------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (2,913) $ (8,067) $ (2,598) $ (9,190)
============== ============== =============== ==============
NET LOSS PER COMMON SHARE $ (0.08) $ (0.22) $ (0.07) $ (0.24)
=============== ============== =============== ==============
NET LOSS PER COMMON SHARE - ASSUMING DILUTION $ (0.08) $ (0.22) $ (0.07) $ (0.24)
=============== ============== =============== ==============
Weighted average number of common shares outstanding:
Basic 35,894,859 36,381,915 35,855,230 37,514,045
============== ============== ============== ==============
Diluted 35,894,859 36,381,915 35,855,230 37,514,045
============== ============== ============== ==============
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, 2003
(Unaudited)
(In thousands, except share data)
COMMON STOCK COMMON
------------------------------- STOCK ADDITIONAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN
INCOME OF SHARES VALUE WARRANTS CAPITAL
------------------- --------------- --------------- --------------- ---------------
BALANCE, JANUARY 31, 2003 36,171,250 $ 362 $ 47,638 $ 244,134
Comprehensive income:
Net loss $(2,386) -- -- -- --
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of tax: 2,878
Reclassification adjustment
for gains included in
net income, net of tax (361)
------
Other comprehensive income 2,517 -- -- -- --
------
Comprehensive income $ 131
======
Repurchases of common stock (586,100) (6) -- (6,423)
Increase in note receivable
from officer -- -- -- --
Exercise of stock
options and common
stock issuances 370,924 4 -- 3,983
Restricted stock award -- -- -- 1,491
Vesting of deferred
compensation -- -- -- --
Accretion on redeemable
preferred stock -- -- -- (142)
---------- ----- -------- ---------
BALANCE, OCTOBER 31, 2003 35,956,074 $ 360 $ 47,638 $ 243,043
========== ===== ======== =========
ACCUMULATED NOTE
OTHER RECEIVABLE TOTAL
COMPREHENSIVE DEFERRED FROM ACCUMULATED SHAREHOLDERS'
INCOME (LOSSES) COMPENSATION OFFICER DEFICIT EQUITY
------------------- ------------------ ------------ -------------- -----------------
BALANCE, JANUARY 31, 2003 $ (2,517) $ -- $(4,098) $(10,873) $ 274,646
Comprehensive income:
Net loss -- -- -- (2,386) (2,386)
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of tax:
Reclassification adjustment
for gains included in
net income, net of tax
Other comprehensive income 2,517 -- -- -- 2,517
Comprehensive income
Repurchases of common stock -- -- -- -- (6,429)
Increase in note receivable
from officer -- -- (44) -- (44)
Exercise of stock
options and common
stock issuances -- -- -- 3,987
Restricted stock award (1,491) -- -- --
Vesting of deferred
compensation -- 373 -- -- 373
Accretion on redeemable
preferred stock -- -- -- (70) (212)
-------- -------- ------- -------- ---------
BALANCE, OCTOBER 31, 2003 $ -- $ (1,118) $(4,142) $(13,329) $ 272,452
======== ======== ======= ======== =========
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)
FOR THE NINE MONTHS ENDED OCTOBER 31,
------------------------------------
2003 2002
--------------- ---------------
OPERATING ACTIVITIES:
Net loss $ (2,386) $ (8,979)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities-
Depreciation and amortization 13,216 11,623
Deferred taxes -- 9,833
Common stock issued to employees 18 22
Vesting of deferred compensation 373 --
Gain on sale of television stations (4,417) --
Loss (gain) on sale and conversion of investments (361) 533
Gain on sale of property 2 --
Unrealized gain on security holdings -- (1,021)
Equity in losses of affiliates -- 4,466
Write-down of investments -- 1,070
Changes in operating assets and liabilities, net of businesses
acquired:
Accounts receivable, net 11,120 (12,278)
Inventories (17,032) (22,926)
Prepaid expenses and other 1,166 (4,590)
Accounts payable and accrued liabilities 9,013 14,692
Income taxes payable (106) (14,913)
--------------- ---------------
Net cash provided by (used for) operating activities 10,606 (22,468)
--------------- ---------------
INVESTING ACTIVITIES:
Property and equipment additions (19,608) (10,264)
Proceeds from sale of investments and property 7,581 2
Purchase of short-term investments (62,821) (99,893)
Proceeds from sale of short-term investments 108,791 148,145
Payment for investments and other assets -- (4,099)
Acquisition of television station WWDP TV-46, net of cash acquired (33,466) --
Proceeds from sale of television stations 5,000 --
Acquisition of FanBuzz, Inc., net of cash acquired -- (12,307)
--------------- ---------------
Net cash provided by investing activities 5,477 21,584
--------------- ---------------
FINANCING ACTIVITIES:
Payments for repurchases of common stock (6,429) (33,742)
Proceeds from exercise of stock options 3,969 4,078
Payment of long-term obligation (819) (271)
--------------- ---------------
Net cash used for financing activities (3,279) (29,935)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 12,804 (30,819)
BEGINNING CASH AND CASH EQUIVALENTS 55,109 66,144
--------------- ---------------
ENDING CASH AND CASH EQUIVALENTS $ 67,913 $ 35,325
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 141 $ 104
=============== ===============
Income taxes paid $ 291 $ 39
=============== ===============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Restricted stock award $ 1,491 $ --
=============== ===============
Liabilities assumed from acquisitions $ 105 $ 4,690
=============== ===============
Accretion of redeemable preferred stock $ 212 $ 211
=============== ===============
Equipment purchased under capital lease $ 2,054 $ --
=============== ===============
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, 2003
(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 one Company-owned full
power television station in Boston, Massachusetts and one low power television
station in Atlanta, Georgia. 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).
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. This rebranding was 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 Company, through its wholly owned subsidiary, ValueVision Interactive,
Inc. maintains the ShopNBC.com website and manages 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 to Ralph Lauren Media, LLC ("RLM"), the NBC Experience
Store in New York City and direct to consumer products sold on NBC's website and
to its FanBuzz, Inc. subsidiary. Through its wholly owned subsidiary, FanBuzz,
Inc. ("FanBuzz"), the Company also provides e-commerce and fulfillment solutions
to some of the most recognized sports, media and other well-known entertainment
and retail 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
2002 Annual Report on Form 10-K. Operating results for the three and nine month
periods ended October 31, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending January 31, 2004.
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 consolidated results of operations for the three and nine months ended
October 31, 2003 include the operations of television station WWDP TV-46 as of
the effective date of its acquisition, April 1, 2003. The accompanying condensed
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.
7
(3) STOCK-BASED COMPENSATION
At October 31, 2003, the Company had a number of stock-based compensation
plans. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123," Accounting for
Stock-Based Compensation" ("SFAS No. 123"), to stock-based employee
compensation:
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
-------------------------------- ----------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss available to common shareholders:
As reported.................................... $ (2,913,000) $ (8,067,000) $ (2,598,000) $ (9,190,000)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects........................................ (2,440,000) (3,394,000) (6,790,000) (9,412,000)
------------- ------------- ------------- -------------
Pro forma...................................... $ (5,353,000) $ (11,461,000) $ (9,388,000) $ (18,602,000)
============= ============= ============= =============
Net loss per share:
Basic:
As reported................................... $ (0.08) $ (0.22) $ (0.07) $ (0.24)
Pro forma..................................... (0.15) (0.32) (0.26) (0.50)
Diluted:
As reported................................... $ (0.08) $ (0.22) $ (0.07) $ (0.24)
Pro forma..................................... (0.15) (0.32) (0.26) (0.50)
(4) 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,
---------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net loss available to common
shareholders........................... $ (2,913,000) $ (8,067,000) $ (2,598,000) $ (9,190,000)
============== ============== =============== ==============
Weighted average number of common shares
outstanding - Basic.................... 35,895,000 36,382,000 35,855,000 37,514,000
Dilutive effect of convertible preferred
stock.................................. -- -- -- --
Dilutive effect of stock options and
warrants............................... -- -- -- --
-------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding - Diluted.................. 35,895,000 36,382,000 35,855,000 37,514,000
============== ============== ============== ==============
Net loss per common share................ $ (0.08) $ (0.22) $ (0.07) $ (0.24)
============== ============== =============== ==============
Net loss per common share - assuming
dilution............................... $ (0.08) $ (0.22) $ (0.07) $ (0.24)
============== ============== =============== ==============
In accordance with SFAS No. 128, for the quarter and nine-months ended
October 31, 2003 and 2002, respectively, approximately 7,422,000 and 6,733,000,
and 6,910,000 and 7,687,000 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.
8
(5) 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 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
$(2,842,000) and $(8,771,000) for the three months ended October 31, 2003 and
2002, respectively. Total comprehensive income (loss) was $131,000 and
$(9,676,000) for the nine months ended October 31, 2003 and 2002, respectively.
(6) 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 primary business segment is its electronic
media segment, which consists of the Company's television home shopping business
and Internet shopping website business. Management has reviewed the provisions
of SFAS No. 131 and has determined that the Company's television and internet
home shopping businesses meet the aggregation criteria as outlined in the
Statement since these two business units have similar customers, products,
economic characteristics and sales processes. Products sold through the
Company's electronic media segment primarily include jewelry, computers and
other electronics, housewares, apparel, health and beauty aids, seasonal items
and other merchandise. The Company's segments operate exclusively in the United
States and no one customer represents more than 5% of the Company's overall
revenue. There are no material intersegment product sales. Segment information
as of and for the quarters and nine-months ended October 31, 2003 and 2002 are
as follows:
ELECTRONIC ALL
THREE MONTHS ENDED OCTOBER 31 (IN THOUSANDS) MEDIA OTHER (A) CORPORATE TOTAL
- -------------------------------------------- ----------- ---------- ----------- -----------
2003
Revenues............................................. $ 143,560 $ 6,436 $ -- $ 149,996
Operating loss....................................... (2,985) (92) -- (3,077)
Depreciation and amortization........................ 4,139 523 -- 4,662
Interest income (expense)............................ 347 (32) -- 315
Income taxes......................................... 80 -- -- 80
Net loss............................................. (1,853) (989) -- (2,842)
Identifiable assets.................................. 376,865 35,806 2,011(b) 414,682
----------- ---------- ---------- -----------
2002
Revenues............................................. $ 132,242 $ 3,512 $ -- $ 135,754
Operating loss....................................... (11,702) (1,176) -- (12,878)
Depreciation and amortization........................ 3,267 938 -- 4,205
Interest income (expense)............................ 693 (53) -- 640
Income taxes......................................... (4,001) (477) -- (4,478)
Net loss............................................. (7,123) (874) -- (7,997)
Identifiable assets.................................. 365,679 32,582 38,486(b) 436,747
----------- ---------- ---------- -----------
ELECTRONIC ALL
NINE MONTHS ENDED OCTOBER 31 (IN THOUSANDS) MEDIA OTHER (A) CORPORATE TOTAL
- -------------------------------------------- ----------- ---------- ----------- -----------
2003
Revenues............................................. $ 419,556 $ 18,129 $ -- $ 437,685
Operating loss....................................... (2,550) (1,081) -- (3,631)
Depreciation and amortization........................ 11,523 1,693 -- 13,216
Interest income (expense)............................ 1,162 (98) -- 1,064
Income taxes......................................... 180 -- -- 180
Net loss............................................. (95) (2,291) -- (2,386)
Identifiable assets.................................. 376,865 35,806 2,011(b) 414,682
----------- ---------- ----------- -----------
2002
Revenues............................................. $ 384,701 $ 12,238 $ -- $ 396,939
Operating loss....................................... (9,608) (2,131) -- (11,739)
Depreciation and amortization........................ 8,857 2,766 -- 11,623
Interest income (expense)............................ 2,828 (61) -- 2,767
Income taxes......................................... (4,140) (901) -- (5,041)
Net loss............................................. (7,371) (1,608) -- (8,979)
Identifiable assets.................................. 365,679 32,582 38,486(b) 436,747
----------- ---------- ---------- -----------
9
(a) Revenue from segments below quantitative thresholds are attributable to
FanBuzz, which provides e-commerce and fulfillment solutions to sports,
media and entertainment companies and VVIFC, which provides fulfillment,
warehousing and telemarketing services primarily to RLM.
(b) Corporate assets consist of long-term investments not directly assignable
to a business segment.
(7) EQUITY INVESTMENTS
As of October 31, 2003 and 2002, the Company had equity investments totaling
approximately $2,011,000 and $38,486,000, respectively, of which $-0- and
$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 accounting. At
October 31, 2003 and 2002, investments in the accompanying condensed
consolidated balance sheets also included approximately $-0- and $4,414,000,
respectively, 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, investments at
October 31, 2003 and 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 had committed to provide up to $50 million of
cash for purposes of financing RLM's operating activities of which the entire
commitment has been funded. In the fourth quarter of fiscal 2002, the Company
evaluated the carrying value of its RLM investment and concluded that an
impairment had occurred with respect to this investment and the decline in value
was determined to be other than temporary whereby the Company will not be able
to recover the carrying amount of its investment. As a result, the Company wrote
off its investment in RLM in the fourth quarter of fiscal 2002.
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. In the second quarter of fiscal 2003, the Company recorded a net
pre-tax investment gain of $361,000 relating to the sale of its common stock
investments of Paxson Communications, Inc. and iDine Rewards Network, Inc.
("iDine"; f/k/a Transmedia Network, Inc.). In 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, accounted for under the
provisions 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 months ended October
31, 2002, the Company recorded pre-tax investment losses totaling $1,070,000
relating primarily to an investment made in 1997. The decline in fair value of
such investment was determined by the Company to be other than temporary.
(8) RELATED PARTY TRANSACTION
At October 31, 2003, the Company held a note receivable totaling $4,142,000,
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 condensed consolidated balance sheet and 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.
10
(9) RESTRICTED STOCK
On February 1, 2003, the Company awarded 114,170 shares of restricted stock
from the Company's 2001 Omnibus Stock Plan (as amended) to certain executive
officers. The stock vests one third on each of the next three anniversary dates
of the grant provided that the recipient is still employed with the Company. The
aggregate market value of the restricted stock at the date of award was
$1,491,000 and has been recorded as deferred compensation, a separate component
of shareholders' equity, and is being amortized as compensation expense over the
three-year vesting period.
(10) 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. 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. 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, 2003,
the Company had repurchased a total of 3,820,000 shares of its common stock
under its stock repurchase programs for a total net cost of $54,322,000 at an
average price of $14.22 per share. During the nine-month period ended October
31, 2003, the Company had repurchased 586,000 shares of its common stock at an
average price of approximately $10.94 per share.
(11) ACQUISITIONS AND DISPOSITIONS
On January 15, 2003, the Company announced that it entered into an agreement
with Norwell Television LLC to acquire full power television station WWDP TV-46
in Boston, which reaches approximately 1.8 million cable households. The deal
closed in the first quarter of fiscal 2003 on April 1, following FCC approval.
The Company made the investment in television station WWDP TV-46 in order to
build a long-term and cost effective distribution strategy in the Boston,
Massachusetts area. The purchase price of the acquisition was $33,617,000,
including professional fees, 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 the acquired television station have been included in the
accompanying condensed consolidated financial statements from April 1, 2003, the
date of acquisition. The allocation of the purchase price has been prepared on a
preliminary basis, however, the Company does not expect any material changes
when finalized. 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.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed from television station WWDP TV-46 on the date
of acquisition:
Current assets $ 176,000
Property and equipment 1,598,000
Other assets 5,000
FCC broadcasting license 31,943,000
--------------
Total assets acquired 33,722,000
Current liabilities 105,000
--------------
Net assets acquired $ 33,617,000
==============
The Company assigned $31,943,000 of the total acquisition price to
television station WWDP TV-46's Federal Communication Commission ("FCC")
broadcasting license, which is not subject to amortization as a result of its
indefinite useful life. The Company will test the FCC license asset for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired.
In February 2003, the Company entered into an agreement to purchase property
and two commercial buildings occupying approximately 209,000 square feet in Eden
Prairie, Minnesota for approximately $11,300,000. One building purchased is
where the Company currently maintains its corporate administrative, television
production and jewelry distribution operations. Included, as part of the
acquisition, was a second building of approximately 70,000 square feet of
commercial rental space, which the Company leases out to third parties and
utilizes for additional office space. As a result of this acquisition, the
Company's long-term property lease has been terminated.
11
In February 2003, the Company completed the sale of ten of its eleven LPTV
stations for a total of $5,000,000. The Company recorded a pre-tax operating
gain on the sale of these LPTV stations of $4,417,000 in the first quarter of
fiscal 2003. Management believes that the sale of these stations will not have a
significant impact on the ongoing operations of the Company.
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 that provides e-commerce and fulfillment solutions to
some of the most recognized sports, media and other well known entertainment
companies in the world and many other professional sports teams, leagues and
colleges. 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 SFAS No. 141. 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.
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.................. 78,000
Intangible assets............. 2,000,000
Goodwill...................... 9,442,000
--------------
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 were $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 (2-year weighted average useful life). Total goodwill recorded as a
result of the acquisition was $9,442,000, 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.
(12) GOODWILL AND OTHER INTANGIBLE ASSETS
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.
Changes in the carrying amount of goodwill for the nine-month period ended
October 31, 2003 are as follows:
Balance as of January 31, 2003........... $ 9,442,000
Goodwill acquired during the period...... --
Impairment losses........................ --
-------------
Balance as of October 31, 2003........... $ 9,442,000
=============
Intangible assets have been recorded by the Company as a result of the
acquisition of FanBuzz in the first quarter of fiscal 2002 and television
station WWDP TV-46 in the first quarter of fiscal 2003. The components of
amortized and unamortized intangible assets in the accompanying condensed
consolidated balance sheets consist of the following:
12
OCTOBER 31, 2003 JANUARY 31, 2003
---------------------------- ----------------------------
AVERAGE GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ----------- ------------- ------------- ------------
Amortized intangible
assets:
Website address............. 3 $ 1,000,000 $ (528,000) $ 1,000,000 $ (278,000)
Partnership contracts....... 2 280,000 (280,000) 280,000 (187,000)
Non-compete agreements...... 3 230,000 (121,000) 230,000 (64,000)
Favorable lease contracts... 13 200,000 (24,000) 200,000 (13,000)
Other....................... 2 290,000 (264,000) 290,000 (216,000)
----------- ----------- ----------- ----------
Total.................... $ 2,000,000 $(1,217,000) $ 2,000,000 $ (758,000)
=========== =========== =========== ==========
Unamortized intangible
assets:
FCC broadcast license....... $31,943,000 $ --
=========== ===========
Amortization expense for intangible assets for the nine months ended October
31, 2003 and 2002 was $459,000 and $580,000, respectively. Estimated
amortization expense for fiscal 2003 and the succeeding five years is as
follows: $581,000 in fiscal 2003, $436,000 in fiscal 2004, $84,000 in fiscal
2005, $15,000 in fiscal 2006, $15,000 in fiscal 2007 and $15,000 in fiscal 2008.
(13) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150).
SFAS No. 150 establishes standards for issuer classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. Instruments that fall within the scope of SFAS No. 150 must be
classified as a liability. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. For financial instruments issued
prior to June 1, 2003, SFAS No. 150 is effective for the Company in the third
quarter of fiscal year 2003. The Company adopted SFAS No. 150 which did not have
an impact on the Company's consolidated balance sheet or results of operations.
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, 2003.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
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,
2003 2002 2003 2002
-------------------- -------------------- ------------------- ------------------
NET SALES 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
GROSS MARGIN 35.6% 30.9% 36.7% 35.8%
------ ------ ------ ------
Operating (income) expenses:
Distribution and selling 32.0% 34.2% 32.3% 32.8%
General and administrative 2.6% 3.1% 3.2% 3.1%
Depreciation and amortization 3.1% 3.1% 3.0% 2.9%
Gain on sale of television stations --% --% (1.0)% --%
------ ------ ------ ------
37.7% 40.4% 37.5% 38.8%
------ ------ ------ ------
Operating loss (2.1)% (9.5)% (0.8)% (3.0)%
====== ====== ====== =======
13
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 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 one Company-owned full
power television station in Boston, Massachusetts and one low power television
station in Atlanta, Georgia. 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).
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. This rebranding was 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 Company, through its wholly owned subsidiary, ValueVision Interactive,
Inc. maintains the ShopNBC.com website and manages 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 to Ralph Lauren Media, LLC ("RLM"), the NBC Experience
Store in New York City and direct to consumer products sold on NBC's website and
to its FanBuzz, Inc. subsidiary. Through its wholly owned subsidiary, FanBuzz,
Inc. ("FanBuzz"), the Company also provides e-commerce and fulfillment solutions
to some of the most recognized sports, media and other well-known entertainment
and retail companies.
On May 20, 2003, the Company announced that its Chairman and Chief Executive
Officer (CEO), Gene McCaffery, would be part of a transition process to
determine a successor as CEO of the Company. On December 1, 2003 the Company
announced that its Board of Directors had named William Lansing as President and
Chief Executive Officer of the Company, effective December 16, 2003. Mr. Lansing
joins the Company with more than 15 years of senior management experience,
including positions as President and CEO at public companies in the consumer
direct marketing and Internet commerce arenas. He also has been appointed to the
Company's Board of Directors. In addition, the Board has appointed Marshall S.
Geller to serve as the non-executive Chairman of the Board, following Mr.
McCaffery's resignation from the Board. In conjunction with Mr. McCaffery's
resignation and the hiring of Mr. Lansing, the Company expects to take a charge
to income of approximately $4 million in the fourth quarter of fiscal 2003.
Documents relating to Mr. Lansing's employment with the Company and Mr.
McCaffery's separation from the Company were included in a Report on Form 8-K
filed on December 3, 2003.
ACQUISITIONS AND DISPOSITIONS
On January 15, 2003, the Company announced that it entered into an agreement
with Norwell Television LLC to acquire full power television station WWDP TV-46
in Boston, which reaches approximately 1.8 million cable households. The deal
closed in the first quarter of fiscal 2003 on April 1, following FCC approval.
The Company made the investment in television station WWDP TV-46 in order to
build a long-term and cost effective distribution strategy in the attractive
Boston, Massachusetts area. The purchase price of the acquisition was
$33,617,000, including professional fees, and has been accounted for using the
purchase method of accounting as stipulated by SFAS No. 141. The results of
operations of the acquired television station have been included in the
accompanying condensed consolidated financial statements as of April 1, 2003,
the date of acquisition.
14
In February 2003, the Company entered into an agreement to purchase property
and two commercial buildings occupying approximately 209,000 square feet in Eden
Prairie, Minnesota for approximately $11,300,000. One building purchased is
where the Company currently maintains its corporate administrative, television
production and jewelry distribution operations. Included, as part of the
acquisition, was a second building of approximately 70,000 square feet of
commercial rental space, which the Company leases out to third parties and
utilizes for additional office space. As a result of this acquisition, the
Company's long-term property lease has been terminated.
In February 2003, the Company completed the sale of ten of its eleven LPTV
stations for a total of $5,000,000. The Company recorded a pre-tax operating
gain on the sale of these LPTV stations of $4,417,000 in the first quarter of
fiscal 2003. Management believes that the sale of these stations will not have a
significant impact on the ongoing operations of the Company.
On February 25, 2002, the Company announced it had signed a definitive
agreement to acquire Minneapolis-based FanBuzz, Inc., 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, the National Hockey League, the Weather Channel, numerous
amateur sports organizations affiliated with the Olympics, and many other
professional and college sports teams and leagues. FanBuzz, Inc. has focused its
business model of operating online product stores and providing fulfillment and
customer care solutions for already-established brands and destinations. 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 SFAS No. 141.
WRITE-DOWN OF INVESTMENTS AND OTHER GAINS & LOSSES
During the quarter ended July 31, 2003, the Company recorded a net pre-tax
investment gain of $361,000 relating to the sale of its common stock investments
of Paxson Communications, Inc. and iDine Rewards Network, Inc. ("iDine"; f/k/a
Transmedia Network, Inc.). 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, 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. During the nine-month period ended October 31,
2002, the Company recorded pre-tax investment losses totaling $1,070,000
relating to an investment made in 1997. The decline in fair value of this
investment was determined by the Company to be other than temporary.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales, inclusive of shipping and handling revenue for the
three months ended October 31, 2003 were $149,996,000 compared with net sales of
$135,754,000 for the three months ended October 31, 2002, a 10% increase.
Consolidated net sales, inclusive of shipping and handling revenue for the nine
months ended October 31, 2003 were $437,685,000 compared with net sales of
$396,939,000 for the nine months ended October 31, 2002, a 10% 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 9% to $143,560,000 for the three
months ended October 31, 2003 from $132,242,000 for the comparable prior year
period. Net sales attributed to the Company's television home shopping and
Internet operations increased 9% to $419,555,000 for the nine months ended
October 31, 2003 from $384,701,000 for the comparable prior year period. The
still challenging retail economic environment and slowdown in consumer spending
experienced by the Company and other merchandise retailers along with the
distraction of hostilities in Iraq has continued to have an adverse affect on
total net sales growth for the quarter and year-to-date periods as compared to
the prior year. Also during the third quarter of fiscal 2003, the Company made
significant progress on its dual strategic objectives of diversifying the
merchandise mix offered to consumers and of lowering its price points. In
addition during the quarter, the Company chose not to repeat an aggressive, yet
unprofitable Internet sales promotion that was run during the third quarter last
year, which caused Internet sales growth for the current quarter to temporarily
slow to single digits but with improved margins. Notwithstanding the challenging
economic situation, 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,
2003, the Company added approximately 6.0 million FTE subscriber homes, a 12%
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 and a 13% year-to-date increase in Internet sales over the
prior year offset by a decrease in the average order size. In addition, total
net sales increased over prior year resulting from a 90% year-to-date increase
in net sales from FanBuzz driven by growth in the business and as a result of
the Company reflecting a full
15
nine months of FanBuzz net sales in fiscal 2003 in connection with its
acquisition of FanBuzz, Inc. in March 2002. The Company intends to continue to
develop its merchandising and programming strategies, including the continuation
of its strategy of category diversification and lower price points, with the
goal of improving its television home shopping and Internet sales results. 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, 2003 and 2002 were
$53,362,000 and $41,938,000, respectively, an increase of $11,424,000 or 27%.
Gross margins for the three months ended October 31, 2003 and 2002 were 35.6%
and 30.9%, respectively. Gross profits for the nine months ended October 31,
2003 and 2002 were $160,732,000 and $142,169,000, respectively, an increase of
$18,563,000 or 13%. Gross margins for the nine months ended October 31, 2003 and
2002 were 36.7% and 35.8%, 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 months ended October 31, 2003 included positive contributions from
VVIFC's fulfillment services provided to RLM and FanBuzz businesses. Television
and Internet gross margins for the three months ended October 31, 2003 increased
significantly as compared to television and Internet gross margins for the three
months ended October 31, 2002 primarily due to a decrease in the mix of low
margin computers sold in the third quarter of fiscal 2003 as the Company
continues its effort to diversify its product mix offerings. Additional factors
contributing to the increase in television and Internet gross margin performance
in the third quarter over prior year was a write down of inventory in the third
quarter of fiscal 2002 following the Company's first post ERP systems conversion
physical inventory and the margin impact of a number of customer amends and
promotional programs initiated in the third quarter of fiscal 2002 to compensate
customers for inconveniences and to reinforce long-term loyalty following its
conversion effort. Television and Internet gross margins for the nine months
ended October 31, 2003 increased as compared to the nine months ended October
31, 2002 primarily due to the reasons mentioned above, offset by first quarter
promotional activity in the form of discounting and shipping and handling
promotions which were implemented by the Company in an effort to maintain sales
levels during the Iraq conflict when viewership was decreased and general
uncertainty had an adverse impact on retail merchants. The Company expects the
retail environment to continue to be uncertain and anticipates continued
promotional activity. Also, during the first quarter of fiscal 2002, gross
margins were favorably impacted by the sale of high margin Winter Olympics
merchandise.
OPERATING EXPENSES
Total operating expenses for the three months ended October 31, 2003 were
$56,439,000 versus $54,816,000 for the comparable prior year period. Total
operating expenses for the nine months ended October 31, 2003 were $168,780,000
(excluding the gain on sale of television stations) versus $153,908,000 for the
comparable prior year period. Distribution and selling expense increased
$1,515,000 or 3% to $47,949,000 or 32% of net sales during the third quarter of
fiscal 2003 compared to $46,434,000 or 34% of net sales for the comparable
prior-year period. Distribution and selling expense increased $11,397,000 or 9%
to $141,399,000 or 32% of net sales for the nine months ended October 31, 2003
compared to $130,002,000 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 15% year-to-date increase in the
number of average FTE subscribers over the prior year, increased costs
associated with new merchandising personnel hired to develop new product
categories, additional costs associated with the Company's test broadcasting
launch of the Shop & Style program, in conjunction with NBC and certain NBC
owned and operated television station affiliates, additional distribution and
selling costs associated with FanBuzz resulting from its partnership with the
National Hockey League, additional costs associated with closed captioning and
increased customer service costs associated with the Company's commitment to
improve its customer care service, offset by decreased bad debt expense
resulting from increased customer usage of the ShopNBC credit card, decreased
telemarketing costs from prior year relating to efficiencies realized and
decreased advertising expense. Year-to-date distribution and selling expense
remained relatively flat as a percentage of net sales over the prior year.
General and administrative expense for the three months ended October 31,
2003 decreased $349,000 or 8% to $3,828,000 or 3% of net sales compared to
$4,177,000 or 3% of net sales for the three months ended October 31, 2002. For
the nine months ended October 31, 2003, general and administrative expense
increased $1,882,000 or 15% to $14,165,000 or 3% of net sales compared to
$12,283,000 or 3% of net sales for the nine months ended October 31, 2002.
General and administrative expense decreased in the third quarter of fiscal 2003
from prior year primarily as a result of the recording of a $400,000 litigation
settlement made in the third quarter of fiscal 2002. On a year-to-date basis,
general and administrative expense increased over prior year as a result of
increased consulting and maintenance fees totaling $891,000 associated with the
Company's systems conversion effort, the establishment of a $451,000 reserve in
the first quarter of fiscal 2003 for a pending litigation settlement, the
write-off of approximately $500,000 of legal fees in the first quarter of fiscal
2003 incurred in connection with a discontinued business development initiative
and additional
16
expense incurred in connection with the Company's search for a new chief
executive officer. These increases were offset by a decrease in rent expense and
an increase in rental income, which resulted from the termination of the
Company's long-term property lease following the Company's acquisition of the
leased property in the first quarter of fiscal 2003.
Depreciation and amortization expense for the three months ended October 31,
2003 was $4,662,000 versus $4,205,000, representing an increase of $457,000 or
11% from the comparable prior-year period. Depreciation and amortization expense
for the nine months ended October 31, 2003 was $13,216,000 versus $11,623,000,
representing an increase of $1,593,000 or 14% 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, 2003 and 2002 were each 3%,
respectively. The dollar increase is primarily due to increased depreciation and
amortization as a result of assets placed in service in connection with the
Company's ERP systems conversion and implementation and depreciation on the two
commercial buildings purchased by the Company in February 2003, offset by
decreased depreciation associated with VVIFC fixed assets which were written
down in the fourth quarter of fiscal 2002 following the Company's restructuring
of its customer care and fulfillment services agreement with RLM.
OPERATING LOSS
For the three months ended October 31, 2003, the Company reported an
operating loss of $3,077,000 compared to an operating loss of $12,878,000 for
the three months ended October 31, 2002, a positive increase of $9,801,000. For
the nine months ended October 31, 2003, the Company reported an operating loss
of $3,631,000 compared to an operating loss of $11,739,000 for the nine months
ended October 31, 2002, a positive increase of $8,108,000. Operating loss
decreased for the three and nine-month periods ended October 31, 2003 from prior
year comparable periods primarily as a result of the Company's increase in gross
margins, as described above under "Gross Profits." Offsetting the increase in
gross profit and gross margin over prior year were increases in distribution and
selling expenses, particularly net cable access fees for which the expense of
adding approximately 6.0 million new FTE homes since October 2002 is being
incurred but the future revenue benefit and productivity of these additional
homes is yet to be fully realized, increased general and administrative expenses
recorded in connection with pending litigation, additional consulting and
maintenance fees and the write off of capitalized legal fees associated with a
discontinued business development initiative and increases in depreciation and
amortization as a result of assets placed in service in connection with the
Company's ERP systems conversion and implementation and fiscal 2003 building
purchases. These expense increases were offset by the increase in net sales and
gross profits reported by the Company's television home shopping, Internet and
other businesses during fiscal 2003 and the recording of a $4,417,000 pre-tax
gain following the sale of ten low power television stations in the first
quarter of fiscal 2003.
NET LOSS
For the three months ended October 31, 2003, the Company reported a net loss
available to common shareholders of $2,913,000 or $.08 per share on 35,895,000
weighted average common shares outstanding compared with a net loss available to
common shareholders of $8,067,000 or $.22 per share on 36,382,000 weighted
average common shares outstanding for the quarter ended October 31, 2002. The
net loss available to common shareholders for the quarter ended October 31, 2003
includes interest income totaling $315,000 earned on the Company's cash and
short-term investments. For the quarter ended October 31, 2002, the net loss
available to common shareholders included a pre-tax loss of $236,000 related to
the Company's equity interest in RLM and interest income of $640,000 earned on
the Company's cash and short-term investments.
For the nine months ended October 31, 2003, the Company reported a net loss
available to common shareholders of $2,598,000 or $.07 per share on 35,855,000
weighted average common shares outstanding compared with a net loss available to
common shareholders of $9,190,000 or $.24 per share on 37,514,000 weighted
average common shares outstanding for the nine months ended October 31, 2002.
Net income available to common shareholders for the nine months ended October
31, 2003 includes a pre-tax gain of $361,000 relating to the sale of its common
stock investments of Paxson Communications, Inc. and iDine Rewards Network, Inc.
and interest income totaling $1,064,000 earned on the Company's cash and
short-term investments. The net loss available to common shareholders for the
nine months ended October 31, 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 to
the sale and conversion of investments. 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 Company recorded an income tax provision during fiscal 2003, relating to
state income taxes payable on certain income for which there was no loss
carryforward benefit available. The Company has not recorded any additional tax
provision in fiscal 2003 as
17
such provision is offset fully by the reversal of the income tax valuation
allowance recorded against loss carryforwards in fiscal 2002. The Company's
effective tax rate for the quarter and nine months ended October 31, 2002 was
36%.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 60.8 million homes as of October 31, 2003, as compared to 55.1
million homes as of January 31, 2003 and to 54.0 million homes as of October 31,
2002. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 1,100 cable or satellite
systems. Beginning in April 2003, the Company's programming was also made
available full-time to homes in the Boston, Massachusetts market via a
full-power television broadcast station that a subsidiary of the Company
acquired and the Company also owns a low power television station in Atlanta,
Georgia. As of October 31, 2003 and 2002, the Company's programming was
available to approximately 54.1 million and 48.1 million FTE households,
respectively. As of January 31, 2003, the Company's programming was available to
50.5 million FTE households. Approximately 47.4 million and 41.8 million
households at October 31, 2003 and 2002, 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 simulcast 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, ESTIMATES AND RISK FACTORS
A discussion of the critical accounting policies related to accounting
estimates and assumptions and specific risks and uncertainties specifically
under the captions entitled "Risk Factors" and "Critical Accounting Policies and
Estimates," are discussed in detail in the Company's 2002 Annual Report on Form
10-K.
The announced antitrust settlement between MasterCard, VISA and
approximately 8 million retail merchants raises certain issues for retailers who
accept telephonic orders that involve consumer use of debit cards for multiple
or continuity payments. A condition of the settlement agreement provides that
the code numbers or other means of distinguishing between debit or credit cards
be made available to merchants by VISA and MasterCard; under certain Federal
Reserve Board regulations, this may require merchants to obtain consumers'
written consent for preauthorized transfers where the merchant is aware that the
method of payment is a debit card as opposed to a credit card. The Company
believes that debit cards are currently being offered as the payment vehicle in
the range of approximately 25 percent of VISA and MasterCard transactions with
the Company. While the Company is working with industry associations and counsel
to seek clarification and develop appropriate procedures for transactions
involving debit cards for multiple or continuity payments, there can be no
assurance that such procedures will be developed or that the Company's ability
to accept debit cards for multiple or continuity payments in the future will not
be adversely affected.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2003, cash and cash equivalents and short-term investments
were $135,468,000, compared to $168,634,000 as of January 31, 2003, a
$33,166,000 decrease primarily related to the Company's acquisition of
television station WWDP TV-46 in Boston, Massachusetts. For the nine months
ended October 31, 2003, working capital decreased $37,693,000 to $188,873,000.
The current ratio was 2.9 at October 31, 2003 compared to 3.6 at January 31,
2003. At October 31, 2003, 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, 2003 were $414,682,000, compared to $406,274,000
at January 31, 2003, a $8,408,000 increase. Shareholders' equity was
$272,452,000 at October 31, 2003, compared to $274,646,000 at January 31, 2003,
a $2,194,000 decrease. The decrease in shareholders' equity for the nine-month
period ended October 31, 2003 resulted primarily from the repurchase of 586,000
common shares totaling $6,429,000 under the Company's authorized stock
repurchase plan, the net loss of $2,386,000 recorded during the nine-month
period, $44,000 relating to accrued interest on a note receivable from an
officer and accretion on redeemable preferred stock of $212,000. These decreases
were offset by increases in shareholders' equity of $3,987,000 from proceeds
18
received related to the exercise of stock options, unrealized gains on
investments classified as "available-for-sale" totaling $2,517,000 and vesting
of deferred compensation of $373,000.
For the nine-month period ended October 31, 2003, net cash provided by
operating activities totaled $10,606,000 compared to net cash used for operating
activities of $22,468,000 for the nine-month period ended October 31, 2002, a
$33,074,000 increase. Net cash provided by operating activities for the
nine-month periods ended October 31, 2003 and 2002 reflects a net loss, as
adjusted for depreciation and amortization, deferred taxes, common stock issued
to employees, vesting of deferred compensation, gain on sale of television
stations, write-down of investments, unrealized gains on security holdings,
equity in losses of affiliates and (gains) losses on the sale and conversion of
investments. In addition, net cash provided by operating activities for the nine
months ended October 31, 2003 reflects a decrease in accounts receivable,
prepaid expenses and increases in accounts payable and accrued liabilities,
offset by an increase in inventories and a decrease in income taxes payable.
Accounts receivable decreased primarily due to the first quarter receipt of
$11.0 million from RLM resulting from VVIFC's agreement to amend the RLM
customer care and fulfillment services agreement in fiscal 2002. Receivables
also decreased as a result of the timing of customer collections made pursuant
to the "ValuePay" installment program and an increase in the percentage of sales
made using the ShopNBC credit card. These decreases were offset by an increase
in credit card receivables as a result of increased sales. Inventories increased
from year-end primarily in preparation for the fourth quarter holiday season and
as a direct result of the Company's effort to diversify its product mix
offerings 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 decreased primarily as a result of the
timing of long-term cable access fee payments, offset by an increase in prepaid
insurance following the Company's annual insurance renewal. The increase in
accounts payable and accrued expenses is a direct result of the increase in
inventory levels and the timing of cable and satellite affiliation vendor
payments.
Net cash provided by investing activities totaled $5,477,000 for the nine
months ended October 31, 2003 compared to net cash provided by investing
activities of $21,584,000 for the nine months ended October 31, 2002. For the
nine months ended October 31, 2003 and 2002, expenditures for property and
equipment were $19,608,000 and $10,264,000, respectively. Expenditures for
property for the nine months ended October 31, 2003 included the Company's
$11,300,000 property and commercial building purchase in February 2003 where the
Company maintains its corporate administrative, television production and
jewelry distribution operations. Included as part of the acquisition was a
second commercial building, which the Company leases out to third parties and
utilizes for additional office space. Other expenditures for property and
equipment during the periods ended October 31, 2003 and 2002 primarily include
capital expenditures made for the upgrade, stabilization and replacement of
computer software and front-end ERP, customer care management and merchandising
systems, related computer equipment, digital broadcasting 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
merchandising systems and business processes, the upgrade and digitalization 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 nine months ended October 31, 2003, the Company
invested $62,821,000 in various short-term investments, received proceeds of
$108,791,000 from the sale of short-term investments and received proceeds of
$5,000,000 in connection with the sale of ten low power television stations.
Also during the nine months of fiscal 2003, the Company invested $33,466,000,
net of cash acquired, in connection with the acquisition of television station
WWDP TV-46 in Boston, Massachusetts and received proceeds of $7,581,000 from the
sale of common stock investments. In the nine months ended October 31, 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, made
disbursements of $4,099,000 for certain investments and other assets, and
received proceeds of $2,000 from the sale of investments and property. Also
during the nine months of fiscal 2002, the Company invested $12,307,000, net of
cash acquired, in connection with the acquisition of FanBuzz, Inc.
Net cash used for financing activities totaled $3,279,000 for the nine
months ended October 31, 2003 and related primarily to payments made of
$6,429,000 in conjunction with the repurchase of 586,000 shares of the Company's
common stock at an average price of approximately $10.94 per share and payments
of long-term capital lease obligations of $819,000, offset by cash proceeds
received of $3,969,000 from the exercise of stock options. Net cash used for
financing activities totaled $29,935,000 for the nine months ended October 31,
2002 and related primarily to payments of $33,742,000 made 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.
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 2002 Annual Report on Form 10-K.
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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; changes in the mix
of products sold by the Company; competitive pressures on sales; changes in
pricing and gross profit margins; changes in the level of cable, satellite and
other distribution for the Company's programming and fees associated therewith;
the success of the Company's strategic alliances and relationships; the ability
of the Company to manage its operating expenses successfully; risks associated
with acquisitions; changes in governmental or regulatory requirements;
litigation or governmental proceedings involving or otherwise affecting the
Company's operations; and the ability of the Company to obtain and retain key
executives and employees. Investors are cautioned that all forward-looking
statements involve risk and uncertainty and the Company is under no obligation
(and expressly disclaims any such obligation) to update or alter its
forward-looking statements whether as a result of new information, future events
or otherwise.
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, 2003, 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 October 31, 2003, 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
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the Company's
Chief Financial Officer (who is currently serving as the Company's principal
executive and financial officer), Richard D. Barnes, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
20
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Salary Continuation Agreement dated November 7,
2003 between the Registrant and Liz Hassler +
31 Certification Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Chief Financial Officer
32 Certification Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - Chief Financial Officer
+ Management compensatory plan/arrangement.
(b) Reports on Form 8-K
(i) The Registrant filed a Current Report on Form 8-K on November 25,
2003 reporting under Item 12 that the Registrant issued a press
release dated November 19, 2003 disclosing its third quarter fiscal
2003 earnings.
(ii) The Registrant filed a Current Report on Form 8-K on December 3, 2003
reporting under Item 5 that the Registrant issued a press release
announcing the election of William Lansing to the Registrant's Board
of Directors and his appointment, effective December 16, 2003, as
President and Chief Executive Officer of the Registrant and the
resignation of Gene McCaffery from the Registrant's Board of
Directors and as President and Chief Executive Officer of the
Registrant.
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/ Richard D. Barnes
-------------------------------------------------
Richard D. Barnes
Executive Vice President, Chief Financial
Officer and Chief Operating Officer
(Principal Executive, Financial and Accounting
Officer)
December 15, 2003
21