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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 April 30, 2004
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
---------------
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 June 7, 2004, there were 36,687,044 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
APRIL 30, 2004
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of April 30, 2004
and January 31, 2004 3
-Condensed Consolidated Statements of Operations for the
Three Months Ended April 30, 2004 and 2003 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Three Months Ended April 30, 2004 5
-Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 2004 and 2003 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 6. Exhibits and Reports on Form 8-K 20
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)
APRIL 30, JANUARY 31,
2004 2004
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,462 $ 81,033
Short-term investments 89,512 46,148
Accounts receivable, net 68,041 71,166
Inventories 65,713 67,620
Prepaid expenses and other 6,355 5,017
----------- -----------
Total current assets 266,083 270,984
PROPERTY & EQUIPMENT, NET 53,911 54,511
FCC BROADCASTING LICENSE 31,943 31,943
NBC TRADEMARK LICENSE AGREEMENT, NET 21,107 21,914
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 4,222 4,445
GOODWILL 9,442 9,442
OTHER INTANGIBLE ASSETS, NET 544 661
INVESTMENTS AND OTHER ASSETS, NET 2,500 2,691
----------- -----------
$ 389,752 $ 396,591
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,325 $ 51,482
Accrued liabilities 34,222 33,267
Income tax payable 57 88
----------- -----------
Total current liabilities 84,604 84,837
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,830 2,002
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 42,816 42,745
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
36,788,528 and 36,487,821 shares issued and outstanding 368 365
Warrants to purchase 8,035,343 and 8,235,343 shares of common stock 46,683 47,638
Additional paid-in capital 248,427 246,143
Deferred compensation (565) (646)
Note receivable from former officer (4,173) (4,158)
Accumulated deficit (30,238) (22,335)
----------- -----------
Total shareholders' equity 260,502 267,007
----------- -----------
$ 389,752 $ 396,591
=========== ===========
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
APRIL 30,
-------------------------------
2004 2003
------------ ------------
NET SALES $ 159,197 $ 143,475
COST OF SALES 106,113 90,386
------------ ------------
Gross profit 53,084 53,089
------------ ------------
OPERATING (INCOME) EXPENSE:
Distribution and selling 50,802 47,677
General and administrative 5,675 5,398
Depreciation and amortization 4,784 4,253
Gain on sale of television stations -- (4,417)
------------ ------------
Total operating (income) expense 61,261 52,911
------------ ------------
OPERATING INCOME (LOSS) (8,177) 178
------------ ------------
OTHER INCOME:
Interest income 274 354
------------ ------------
Total other income 274 354
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (7,903) 532
Income tax provision -- --
------------ ------------
NET INCOME (LOSS) (7,903) 532
Accretion of redeemable preferred stock (71) (71)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (7,974) $ 461
============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.22) $ 0.01
============ ============
NET INCOME (LOSS) PER COMMON SHARE - ASSUMING DILUTION $ (0.22) $ 0.01
============ ============
Weighted average number of common shares outstanding:
Basic 36,640,477 35,981,187
============ ============
Diluted 36,640,477 42,500,565
============ ============
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 THREE MONTHS ENDED APRIL 30, 2004
(Unaudited)
(In thousands, except share data)
NOTE
COMMON STOCK COMMON RECEIVABLE
----------------- STOCK ADDITIONAL FROM
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN DEFERRED FORMER
LOSS OF SHARES VALUE WARRANTS CAPITAL COMPENSATION OFFICER
---- --------- ----- -------- ------- ------------ -------
BALANCE, JANUARY 31, 2004 36,487,821 $365 $47,638 $ 246,143 $ (646) $ (4,158)
Net loss $(7,903) -- -- -- -- -- --
=======
Increase in note receivable
from former officer -- -- -- -- -- (15)
Exercise of stock
options and common
stock issuances 199,198 2 -- 1,400 -- --
Exercise of stock purchase warrants 101,509 1 (955) 955 -- --
Amortization of deferred compensation -- -- -- -- 81 --
Accretion on redeemable preferred stock -- -- -- (71) -- --
---------- ---- ------- --------- ---------- ----------
BALANCE, APRIL 30, 2004 36,788,528 $368 $46,683 $ 248,427 $ (565) $ (4,173)
========== ==== ======= ========= ========== ==========
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------- ------
BALANCE, JANUARY 31, 2004 $ (22,335) $ 267,007
Net loss (7,903) (7,903)
Increase in note receivable
from former officer -- (15)
Exercise of stock
options and common
stock issuances -- 1,402
Exercise of stock purchase warrants -- 1
Amortization of deferred compensation -- 81
Accretion on redeemable preferred stock -- (71)
---------- ----------
BALANCE, APRIL 30, 2004 $ (30,238) $ 260,502
========== ==========
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 THREE MONTHS ENDED APRIL 30,
------------------------------------
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (7,903) $ 532
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 4,784 4,253
Common stock issued to employees 7 4
Amortization of deferred compensation 81 124
Gain on sale of television stations -- (4,417)
Changes in operating assets and liabilities, net of businesses
acquired:
Accounts receivable, net 3,125 16,093
Inventories 1,906 1,899
Prepaid expenses and other (1,346) 845
Accounts payable and accrued liabilities (51) (1,120)
Income taxes payable (31) (150)
-------- --------
Net cash provided by operating activities 572 18,063
-------- --------
INVESTING ACTIVITIES:
Property and equipment additions (2,837) (13,863)
Purchase of short-term investments (68,538) (28,316)
Proceeds from sale of short-term investments 25,173 78,526
Acquisition of television station WWDP TV-46, net of cash acquired -- (33,466)
Proceeds from sale of television stations -- 5,000
-------- --------
Net cash provided by (used for) investing activities (46,202) 7,881
-------- --------
FINANCING ACTIVITIES:
Payments for repurchases of common stock -- (6,195)
Proceeds from exercise of stock options and warrants 1,395 237
Payment of long-term obligation (336) (346)
-------- --------
Net cash provided by (used for) financing activities 1,059 (6,304)
-------- --------
Net increase (decrease) in cash and cash equivalents (44,571) 19,640
BEGINNING CASH AND CASH EQUIVALENTS 81,033 55,109
-------- --------
ENDING CASH AND CASH EQUIVALENTS $ 36,462 $ 74,749
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 53 $ 54
======== ========
Income taxes paid $ 31 $ 150
======== ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exercise of common stock purchase warrants $ 955 $ --
======== ========
Restricted stock award $ -- $ 1,491
======== ========
Liabilities assumed from acquisitions $ -- $ 105
======== ========
Accretion of redeemable preferred stock $ 71 $ 71
======== ========
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
APRIL 30, 2004
(Unaudited)
(1) GENERAL
ValueVision Media, Inc. and its subsidiaries (the "Company") is an
integrated direct marketing company that markets, sells and distributes 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.
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., currently known as NBC
Universal, Inc. ("NBC"), pursuant to which NBC granted the Company 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 the Company 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, customer
service 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, fulfillment of non-jewelry merchandise sold on the Company's television
home shopping program and Internet website and fulfillment 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
2003 Annual Report on Form 10-K. Operating results for the three-month period
ended April 30, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2005.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation. The accompanying
condensed consolidated results of operations for the three months ended April
30, 2003 include the operations of television station WWDP TV-46 as of the
effective date of its acquisition, April 1, 2003.
7
(3) STOCK-BASED COMPENSATION
At April 30, 2004, 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 income (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 income
(loss) and net income (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 APRIL 30,
-----------------------------------
2004 2003
-------------- --------------
Net income (loss) available to common shareholders:
As reported ........................................ $ (7,974,000) $ 461,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects ............................................ (2,302,000) (2,038,000)
-------------- --------------
Pro forma .......................................... $ (10,276,000) $ (1,577,000)
============== ==============
Net income (loss) per share:
Basic:
As reported ....................................... $ (0.22) $ 0.01
Pro forma ......................................... (0.28) (0.04)
Diluted:
As reported ....................................... $ (0.22) $ 0.01
Pro forma ......................................... (0.28) (0.04)
(4) NET INCOME (LOSS) PER COMMON SHARE
The Company calculates earnings per share ("EPS") in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Basic EPS is computed by dividing reported earnings by
the weighted average number of common shares outstanding for the reported
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock of the Company during reported periods.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
THREE MONTHS ENDED APRIL 30,
---------------------------------
2004 2003
--------------- -----------
Net income (loss) available to common
shareholders ............................. $ (7,974,000) $ 461,000
=============== ===========
Weighted average number of common shares
outstanding - Basic ...................... 36,640,000 35,981,000
Dilutive effect of convertible preferred
stock .................................... -- 5,340,000
Dilutive effect of stock options and
warrants ................................. -- 1,180,000
--------------- -----------
Weighted average number of common shares
outstanding - Diluted .................... 36,640,000 42,501,000
=============== ===========
Net income (loss) per common share ......... $ (0.22) $ 0.01
=============== ===========
Net income (loss) per common share-
assuming dilution ........................ $ (0.22) $ 0.01
=============== ===========
In accordance with SFAS No. 128, for the three months ended April 30, 2004
approximately 6,796,000 in-the-money potentially 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 income
(loss) was $(7,903,000) and $816,000 for the three months ended April 30, 2004
and 2003, respectively. As of January 31, 2004, the Company no longer has
long-term equity investments classified as "available-for-sale".
(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 SFAS No.
131 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 primarily operate 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 three months ended April 30, 2004 and 2003 are as follows:
ELECTRONIC ALL
THREE MONTHS ENDED APRIL 30 (IN THOUSANDS) MEDIA OTHER (a) CORPORATE TOTAL
- ------------------------------------------ ----- --------- --------- -----
2004
Revenues ................................. $ 151,127 $ 8,070 $ -- $ 159,197
Operating loss ........................... (7,408) (769) -- (8,177)
Depreciation and amortization ............ 4,277 507 -- 4,784
Interest income (expense) ................ 299 (25) -- 274
Income taxes ............................. -- -- -- --
Net loss ................................. (6,739) (1,164) -- (7,903)
Identifiable assets ...................... 360,710 29,042 -- 389,752
--------- --------- --------- ---------
2003
Revenues ................................. $ 137,120 $ 6,355 $ -- $ 143,475
Operating income (loss) .................. 1,022 (844) -- 178
Depreciation and amortization ............ 3,663 590 -- 4,253
Interest income (expense) ................ 396 (42) -- 354
Income taxes ............................. -- -- -- --
Net income (loss) ........................ 1,540 (1,008) -- 532
Identifiable assets ...................... 354,455 38,398 6,996(b) 399,849
--------- --------- --------- ---------
(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, the Company and the
NBC Experience Store.
(b) Corporate assets consist of long-term investments not directly assignable to
a business segment.
(7) EQUITY INVESTMENTS
As of April 30, 2004 and 2003, the Company had equity investments totaling
approximately $-0- and $6,996,000, respectively. At April 30, 2003, investments
in the accompanying condensed consolidated balance sheets included approximately
$4,985,000 related to
9
equity investments made in companies whose shares are traded on a public
exchange. These investments were sold by the Company in fiscal 2003. 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 April 30, 2003
included certain other nonmarketable equity investments in private and other
enterprises totaling approximately $2,011,000 which were carried at the lower of
cost or net realizable value. These investments were subsequently written off
during fiscal 2003.
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.
(8) RELATED PARTY TRANSACTION
At April 30, 2004, the Company held a note receivable totaling $4,173,000,
including interest (the "Note"), from its former chief executive officer for a
loan made in 2000 under the officer's employment agreement. 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 former officer upon the exercise of such vested stock options.
(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 restricted stock vests one third on each of the next three
anniversary dates of the grant so long as 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 April 30, 2004,
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. The Company did not repurchase any shares
under its repurchase program during the quarter ended April 30, 2004. During the
quarter ended April 30, 2003, the Company had repurchased 567,000 shares of its
common stock at an average price of approximately $10.90 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 reached 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. 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 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 tests 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 space, which the Company utilizes for additional office space. As a
result of this acquisition, the Company's long-term property lease on this space
was 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.
(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.
Goodwill has been recorded by the Company as a result of the acquisition of
FanBuzz in the first quarter of fiscal 2002.
Changes in the carrying amount of goodwill for the three-month periods ended
April 30 are as follows:
2004 2003
------------- -------------
Beginning balance................................ $ 9,442,000 $ 9,442,000
Goodwill acquired during the period.............. -- --
Impairment losses................................ -- --
-- --
------------- -------------
Ending balance................................... $ 9,442,000 $ 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:
11
APRIL 30, 2004 JANUARY 31, 2004
--------------------------- ----------------------------
AVERAGE GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
Amortized intangible
assets:
Website address.......... 3 $ 1,000,000 $ (694,000) $ 1,000,000 $ (611,000)
Partnership contracts.... 2 280,000 (280,000) 280,000 (280,000)
Non-compete agreements... 3 230,000 (160,000) 230,000 (141,000)
Favorable lease contracts 13 200,000 (32,000) 200,000 (28,000)
Other................... 2 290,000 (290,000) 290,000 (279,000)
----------- ----------- ----------- -----------
Total................. $ 2,000,000 $(1,456,000) $ 2,000,000 $(1,339,000)
=========== =========== =========== ===========
Unamortized intangible
assets:
FCC broadcast license.... $31,943,000 $31,943,000
=========== ===========
Amortization expense for intangible assets for the three months ended April
30, 2004 and 2003 was $117,000 and $178,000, respectively. Estimated
amortization expense for fiscal 2004 and the succeeding five fiscal years is as
follows: $436,000 in fiscal 2004, $84,000 in fiscal 2005, $15,000 in fiscal
2006, $15,000 in fiscal 2007, $15,000 in fiscal 2008 and $15,000 in fiscal 2009.
(13) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN
46R"), which served to clarify guidance in Financial Interpretation No. 46 ("FIN
46"), and provided additional guidance surrounding the application of FIN 46.
The Company adopted the provisions of FIN 46R related to non-special purpose
entities in the first quarter of fiscal 2004, which did not have an impact on
the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 2004.
OVERVIEW
Company Description
ValueVision Media, Inc. is an integrated direct marketing company that
markets its products directly to consumers through various forms of electronic
media. The Company's principal lines of business are television home shopping,
Internet e-commerce, vendor programming sales and fulfillment services and
outsourced e-commerce and fulfillment solutions. The Company's principal
electronic media activity is its television home shopping business, ShopNBC, and
companion Internet shopping website, ShopNBC.com, which sell 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.
Products and Customers
Products sold on the Company's television home shopping network and
Internet shopping website include jewelry, electronics, giftware, collectibles,
apparel, health and beauty aids, housewares, fitness products, seasonal items
and other merchandise. Jewelry represents the network's largest single category
of merchandise, representing 65% of television home shopping net sales in the
first quarter of fiscal 2004 and 68% of television home shopping net sales in
the first quarter of fiscal 2003. After jewelry, the second largest product
category of merchandise sold is computers and electronics, representing 14% of
television home shopping net sales in the first quarter of fiscal 2004 and 15%
of television home shopping net sales in the first quarter of fiscal 2003.
Product diversification, to appeal to a broader segment of potential customers,
is important to growing the Company's business. The Company's product
diversification strategy is to continue to develop new product offerings
primarily in the home, apparel and accessories, cosmetics, fitness and consumer
electronic categories to supplement the existing jewelry and computer and
electronics business. The Company continues to make progress on its strategic
objective of diversifying the merchandise mix offered to consumers during fiscal
2004 growing product categories outside of jewelry and computers & electronics
in the first quarter from 17% to 21% of total television home shopping and
Internet sales as compared to the first quarter of fiscal 2003. The Company
believes that its customers are primarily women between the ages of 35 and 65
with annual household incomes between $50,000 and $75,000 and believes its
customers make purchases based primarily on convenience, value and quality of
merchandise.
12
Company Strategy
The Company's mission is to be a leader in innovative multimedia
retailing, offering consumers an entertaining, informative and interactive
shopping experience. The following business strategies are intended to continue
the growth of the Company's television home shopping business and complementary
website: (i) leverage the strong brand equity implicit in the NBC name and
associated peacock symbol to achieve greater brand recognition; (ii) diversify
the types of products offered for sale; (iii) increase program distribution in
the United States via new or expanded broadcast agreements with cable and
satellite operators and other creative means; (iv) increase average net sales
per home by increasing penetration within the existing audience base and by
attracting new customers through a broadening of our merchandise mix, lowering
of average price points and targeted marketing efforts; (v) continue to grow the
Company's profitable Internet business; (vi) upgrade the overall quality of the
Company's network, programming and customer support infrastructure; and (vii)
leverage the service expertise implicit in the Company's existing production,
broadcasting, distribution and customer care capacities to support its strategic
partners.
Challenge
The Company's television home shopping business operates with a high fixed
cost base, which is primarily due to fixed contractual fees paid to cable and
satellite operators to carry the Company's programming. In addition, the Company
is embarking on a series of new investment initiatives intended to sustain
double-digit sales growth that will require significant up-front investment.
These new initiatives include: increased marketing support, improved customer
experience, enhanced on-air quality and improved business intelligence. In order
to attain profitability, the Company must achieve sufficient sales volume
through the acquisition of new customers and the increased retention of existing
customers to cover its high fixed costs and these new spending initiatives. The
Company's growth and profitability could be adversely impacted if sales volume
does not meet expectations, as the Company will have limited immediate
capability to reduce its fixed cable and satellite distribution operating
expenses to mitigate any potential sales shortfall.
Company's Competition
The direct marketing and retail businesses are highly competitive. In its
television home shopping and Internet operations, the Company competes for
consumer expenditures with other forms of retail businesses, including
traditional "brick and mortar" department, discount, warehouse and specialty
stores, other mail order, catalog and television home shopping companies,
infomercial companies and other direct sellers. The television home shopping
industry is highly competitive and is dominated by two companies, QVC Network,
Inc. and HSN, Inc., both of which are larger, more diversified and have greater
financial marketing and distribution resources than the Company. In 2002, Shop
at Home, Inc. ("SATH") and E.W. Scripps Company ("Scripps") announced the
completion of a transaction that resulted in Scripps owning a controlling
interest in the SATH television network, which also directly competes with the
Company. In addition, the American Collectibles Network ("ACN") competes with
the Company in the jewelry sector of the television home shopping industry. The
Company also competes with retailers who sell and market their products through
the highly competitive Internet medium. Many companies sell products over the
Internet that are competitive with the Company's products. As the use of the
Internet and other online services increase, larger, well-established and
well-financed entities may continue to acquire, invest in or form joint ventures
with providers of e-commerce and direct marketing solutions, and existing
providers of e-commerce and direct marketing solutions may continue to
consolidate. The Company expects increasing competition for viewers/customers
and for experienced home shopping personnel from major cable systems, television
networks, e-commerce and other retailers that may seek to enter the television
home shopping industry. The continued evolution and consolidation of retailers
on the Internet, together with strategic alliances being formed by other
television home shopping networks and Internet companies, will also result in
increased competition. The Company will also compete to lease cable television
time and enter into cable affiliation agreements. The Company believes that its
ultimate success in the television home shopping industry is dependent upon
several key factors, the most significant of which is obtaining carriage on
additional cable systems. The Company believes that it is positioned to compete
because of its established relationships with cable operators and its strategic
relationship with NBC and GE Equity.
Results for the First Quarter of Fiscal 2004
Consolidated net sales for the quarter ended April 30, 2004 were
$159,197,000 compared to $143,475,000 in the quarter ended April 30, 2003, an
11% increase. The increase in consolidated net sales is directly attributable to
the continued increased sales from the Company's television home shopping and
Internet operations. Net sales attributed to the Company's television and
Internet operations increased 10% to $151,127,000 for the quarter ended April
30, 2004 from $137,120,000 for the quarter ended April 30, 2003. Consolidated
gross margins were 33.3% for the quarter ended April 30, 2004 compared to 37.0%
for the quarter ended April
13
30, 2003. The Company reported an operating loss of $8,177,000 and a net loss of
$7,903,000 for the first quarter of fiscal 2004 compared to operating income of
$178,000 and net income of $532,000 for the first quarter of fiscal 2003.
Operating income in the first quarter of fiscal 2003 included a $4,417,000 gain
on the sale of television stations.
The Company's goal in fiscal 2004 is double-digit sales growth built on
high quality products at value prices, presented to the consumer in a compelling
way. The Company intends to support this through increased marketing efforts.
The Company will continue to build its position as a shopping destination of
value-priced merchandise and unique offerings across a range of product
categories. The Company will invest in new customer acquisition and retention
initiatives, improved customer service and fulfillment, enhanced on-air quality,
and development of more sophisticated business intelligence tools. Finally, the
Company will continue to diversify the merchandise mix on both the television
and Internet channels, particularly in home, apparel, cosmetics, and consumer
electronics.
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.
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 space, which the Company utilizes for additional office space. As a
result of this acquisition, the Company's long-term property lease had 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.
RESULTS OF OPERATIONS
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
DOLLAR AMOUNT AS A
PERCENTAGE OF NET SALES FOR
THE
THREE MONTHS
ENDED APRIL 30,
2004 2003
------ ------
NET SALES 100.0% 100.0%
====== ======
GROSS MARGIN 33.3% 37.0%
------ ------
Operating (income) expenses:
Distribution and selling 31.9% 33.2%
General and administrative 3.5% 3.8%
Depreciation and amortization 3.0% 3.0%
Gain on sale of television stations --% (3.1)%
------ ------
38.4% 36.9%
------ ------
Operating income (loss) (5.1)% 0.1%
====== ======
NET SALES
Consolidated net sales, inclusive of shipping and handling revenue, for
the three months ended April 30, 2004 were $159,197,000 compared with net sales
of $143,475,000 for the three months ended April 30, 2003, an 11% increase. The
increase in consolidated
14
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 10% to $151,127,000 for the three months ended April 30,
2004 from $137,120,000 for the comparable prior year period. During the first
quarter of fiscal 2004, the Company continued to make significant progress on
its dual strategic objectives of diversifying the merchandise mix offered to
consumers and lowering its average price points. For the quarter ended April 30,
2004, gross unit volume was up 42% while the Company's average price points were
down 23% from the corresponding prior-year period. In addition, the Company's
home, apparel, fitness and cosmetics categories grew from 17% to 21% over prior
year. 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 April 30, 2004, the
Company added approximately 4.0 million FTE subscriber homes, an 8% 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 37% year-to-date increase in Internet sales as
compared to the corresponding prior-year period offset by a decrease in the
average order size due to the aforementioned decrease in average selling prices.
In addition, total net sales increased as compared to the corresponding
prior-year period resulting from a 29% year-to-date increase in net sales from
FanBuzz driven by growth in the business. The Company intends to continue to
develop its merchandising and programming strategies, including the continuation
of its strategy of category diversification, lower average price points and
increased marketing spending 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 April 30, 2004 and 2003 were
$53,084,000 and $53,089,000, respectively, a decrease of $5,000. The principal
reason for the relatively flat gross profit from year to year was the decrease
in gross profit margin experienced by the Company during the first quarter of
fiscal 2004 offset by increased sales volume from the Company's television home
shopping and Internet businesses. In addition, gross profit for the three months
ended April 30, 2004 included positive contributions from the FanBuzz business.
Gross margins for the three months ended April 30, 2004 and 2003 were 33.3% and
37.0%, respectively. Gross margins for the three months ended April 30, 2004
decreased significantly as compared to gross margins for the three months ended
April 30, 2003 primarily due to the clearance of seasonal merchandise and other
low margin inventory during the current quarter to make room for fall season
merchandise and decreased television and Internet shipping and handling margins
driven by the Company's free shipping loyalty club which was launched in
February 2004, the benefit of which is expected in the form of increased sales
throughout the balance of the year. In addition, gross margins decreased in the
first quarter of fiscal 2004 as a result of a variety of marketing promotional
initiatives implemented by the Company, mainly in the form of coupon drops and
discounts offered in an effort to acquire and retain customers. The Company
expects the retail environment to continue to be uncertain and anticipates
continued promotional activity for the remainder of the fiscal year.
OPERATING EXPENSES
Total operating expenses for the three months ended April 30, 2004 were
$61,261,000 versus $57,328,000 (excluding the gain on sale of television
stations) for the comparable prior year period. Distribution and selling expense
increased $3,125,000, or 7%, to $50,802,000, or 32%, of net sales, during the
first quarter of fiscal 2004 compared to $47,677,000, 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 8%
year-to-date increase in the number of FTE subscribers over the comparable prior
year period and increased costs associated with the hiring of merchandising
personnel and on-air talent. In addition, distribution and selling expense also
increased over the comparable prior-year period as a result of increased
direct-mail and marketing expenses as the Company attempts to acquire customers
and stimulate ShopNBC program awareness, additional distribution and selling
costs incurred by FanBuzz as a result of business growth and increased customer
service costs associated with the Company's commitment to improve its customer
service. These general increases were offset by a decrease in bad debt expense
over the comparable prior-year period.
General and administrative expense for the three months ended April 30,
2004 increased $277,000, or 5%, to $5,675,000, or 4% of net sales, compared to
$5,398,000, or 4% of net sales, for the three months ended April 30, 2003.
General and administrative expense increased in the first quarter of fiscal 2004
primarily as a result of increased information system salaries and maintenance
fees, offset by a decrease in general and administrative expense associated with
the establishment of a $451,000 litigation settlement reserve in fiscal 2003 and
the write-off of approximately $500,000 of legal fees in fiscal 2003 incurred in
connection with a discontinued business development initiative.
15
Depreciation and amortization expense for the three months ended April 30,
2004 was $4,784,000 compared to $4,253,000 for the three months ended April 30,
2003, representing an increase of $531,000, or 12%, from the comparable
prior-year period. Depreciation and amortization expense as a percentage of net
sales for the three months ended April 30, 2004 and 2003 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
equipment put in service in connection with the Company's full power television
station in Boston, Massachusetts.
OPERATING INCOME (LOSS)
For the three months ended April 30, 2004, the Company reported an
operating loss of ($8,177,000) compared to operating income of $178,000 for the
three months ended April 30, 2003, a decrease of $8,355,000. Operating loss
increased for the three-month period ended April 30, 2004 from the comparable
prior-year period primarily as a result of the Company's decrease in gross
margins, as described above under "Gross Profits." In addition to the decrease
in gross margin over the comparable prior-year period, there were increases in
distribution and selling expenses, particularly net cable access fees, for which
the expense of adding approximately 4.0 million new FTE homes since April 2003
is being incurred but the future revenue benefit and productivity of these
additional homes is yet to be fully realized, increases in general and
administrative expenses recorded in connection with information system salaries
and maintenance fees and increases in depreciation and amortization expense as a
result of assets placed in service in connection with the Company's ERP systems
conversion and implementation and full power television station. 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 2004. During the first quarter of fiscal 2003, the Company also recorded
a $4,417,000 pre-tax gain following the sale of ten low power television
stations.
NET INCOME (LOSS)
For the three months ended April 30, 2004, the Company reported a net loss
available to common shareholders of $7,974,000 or $.22 per share on 36,640,000
weighted average common shares outstanding compared with net income available to
common shareholders of $461,000 or $.01 per share on 42,501,000 weighted average
diluted common shares outstanding (35,981,000 basic shares) for the quarter
ended April 30, 2003. The net loss available to common shareholders for the
three months ended April 30, 2004 includes interest income totaling $274,000
earned on the Company's cash and short-term investments. For the quarter ended
April 30, 2003, net income available to common shareholders included interest
income of $354,000 earned on the Company's cash and short-term investments.
The Company has not recorded an income tax benefit on the loss recorded in
the quarter ended April 30, 2004 due to the uncertainty of such benefit's
realization in the future as indicated by the Company's recording of an income
tax valuation reserve. The Company had not recorded a tax provision in the
quarter ended April 30, 2003 as such provision was offset fully by the reversal
of the income tax valuation allowance recorded in previous periods that was
applied against capital loss carryforwards that were utilized in this period.
The Company continues to maintain a valuation reserve against its net deferred
tax assets until such point that the Company believes it is more likely than not
that such assets will be realized in the future.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 60.9 million homes as of April 30, 2004, as compared to 61.9
million homes as of January 31, 2004 and to 58.6 million homes as of April 30,
2003. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 1,150 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. The Company also owns and operates a low power television station in
Atlanta, Georgia. As of April 30, 2004 and 2003, the Company's programming was
available to approximately 56.6 million and 52.6 million FTE households,
respectively. As of January 31, 2004, the Company's programming was available to
55.6 million FTE households. FTE homes increased from January 31, 2004 while
total homes decreased from January 31, 2004 due to the loss of part time
subscribers during fiscal 2004 that did not have a significant impact on the
calculation of total FTE households offset by the addition of a smaller number
of full time subscribers added during the period. Approximately 50.4 million and
45.8 million households at April 30, 2004 and 2003, 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
16
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 are discussed in
detail in the Company's fiscal 2003 Annual Report on Form 10-K under the
captions entitled "Risk Factors" and "Critical Accounting Policies and
Estimates."
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2004, cash and cash equivalents and short-term investments
were $125,974,000, compared to $127,181,000 as of January 31, 2004, a $1,207,000
decrease. For the three months ended April 30, 2004, working capital decreased
$4,668,000 to $181,479,000. The current ratio was 3.1 at April 30, 2004 compared
to 3.2 at January 31, 2004.
SOURCES OF LIQUIDITY
The Company's principal source of liquidity is its available cash, cash
equivalents and short-term investments, accrued interest earned from its
short-term investments and its operating cash flow, which is primarily generated
from credit card receipts from sales transactions and the collection of
outstanding customer accounts receivable. The timing of customer collections
made pursuant to the Company's ValuePay installment program and the extent to
which the Company extends credit to its customers is important to the Company's
short-term liquidity and cash resources. In addition, a significant increase in
the Company's accounts receivable aging or credit losses could negatively impact
the Company's source of cash from operations in the short term. While credit
losses have historically been within the Company's estimates for such losses,
there is no guarantee that the Company will continue to experience the same
credit loss rate that it has in the past. Historically, the Company has also
been able to generate additional cash sources from the proceeds of stock option
exercises and from the sale of its equity investments and other properties;
however, these sources of cash are neither relied upon nor controllable by the
Company. The Company has no long-term debt other than fixed capital lease
obligations and believes it has the ability to obtain additional financing if
necessary. At April 30, 2004, all short-term investments and cash equivalents
were invested primarily in money market funds, high quality commercial paper
with original maturity dates of less than 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. Although management believes
the Company's short-term investment policy is 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 and interest earned on these
investments are subject to interest rate market fluctuations. The average
maturity of the Company's investment portfolio ranges from 30-60 days.
CASH REQUIREMENTS
The Company's principal use of cash is to fund its business operations,
which consist primarily of purchasing inventory for resale, funding account
receivables growth in support of sales growth, funding operating expenses,
particularly the Company's contractual commitments for cable and satellite
programming and the funding of capital expenditures. Expenditures made for
property and equipment in fiscal 2004 and 2003 and for expected future capital
expenditures include the upgrade and replacement of computer software and
front-end merchandising systems, expansion of capacity to support a growing
business, continued improvements/modifications to the Company's owned
headquarter buildings, 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
addition, during fiscal 2003 the Company made a significant investment of cash
in connection with the acquisition of television station WWDP TV-46 in Boston,
Massachusetts and two commercial buildings where the Company maintains its
corporate administrative, television production and jewelry distribution
operations. Historically, the Company has also used its cash resources for
various strategic investments and for the repurchase of stock under the
Company's stock repurchase program but is under no obligation to continue doing
so if protection of liquidity is desired. The Company has the discretion in the
future to continue its stock repurchase program and will make strategic
investments as opportunities present themselves or when cash investments are
determined to be beneficial to the long-term interests of its shareholders.
Management believes that funds currently held and sourced by the Company should
be sufficient to fund the Company's operations, anticipated capital expenditures
or strategic investments and cable launch fees through at least fiscal 2004. A
discussion of the nature and amount of future cash commitments is contained in
the Company's 2003 Annual Report on Form 10-K.
17
Total assets at April 30, 2004 were $389,752,000, compared to $396,591,000
at January 31, 2004, a $6,839,000 decrease. Shareholders' equity was
$260,502,000 at April 30, 2004, compared to $267,007,000 at January 31, 2004, a
$6,505,000 decrease. The decrease in shareholders' equity for the three-month
period ended April 30, 2004 resulted primarily from the net loss of $7,903,000
recorded during the three-month period, $15,000 relating to accrued interest on
a note receivable from a former officer and accretion on redeemable preferred
stock of $71,000. These decreases were offset by increases in shareholders'
equity of $1,403,000 from proceeds received related to the exercise of stock
options and warrants and vesting of deferred compensation of $81,000.
For the three-month period ended April 30, 2004, net cash provided by
operating activities totaled $572,000 compared to net cash provided by operating
activities of $18,063,000 for the three-month period ended April 30, 2003. Net
cash provided by operating activities for the three-month periods ended April
30, 2004 and 2003 reflects net income (loss), as adjusted for depreciation and
amortization, common stock issued to employees, amortization of deferred
compensation and a gain on the sale of low powered television stations. In
addition, net cash provided by operating activities for the three months ended
April 30, 2004 reflects a decrease in accounts receivable and inventories,
offset by a decrease in accounts payable and accrued liabilities, an increase in
prepaid expenses and other assets and a decrease in income taxes payable.
Accounts receivable decreased primarily due to a decrease in credit card
receivables and a decrease in receivables from sales utilizing extended payment
terms as a result of the timing of customer collections made pursuant to the
"ValuePay" installment program, offset by an increase in vendor airtime
receivables. Inventories decreased from year-end as a result of management
efforts to reduce inventory levels and the timing of merchandise receipts.
Prepaid expenses and other assets increased primarily as a result of the
Company's temporary acquisition of a personal residence in conjunction with an
executive's hiring and relocation, offset by a decrease in prepaid insurance.
The decrease in accounts payable and accrued expenses is a result of the timing
of merchandise receipts and amounts due to customers for returned merchandise,
offset by increases in accrued cable access fees and accrued marketing fees.
Net cash used for investing activities totaled $46,202,000 for the three
months ended April 30, 2004 compared to net cash provided by investing
activities of $7,881,000 for the three months ended April 30, 2003. For the
three months ended April 30, 2004 and 2003, expenditures for property and
equipment were $2,837,000 and $13,863,000, respectively. Expenditures for
property and equipment during the periods ended April 30, 2004 and 2003
primarily include capital expenditures made for the upgrade 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 leasehold
improvements. Expenditures for property for the three months ended April 30,
2003 also 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 utilizes for additional office space. Principal future capital
expenditures include the upgrade and replacement of computer software and
front-end merchandising systems and business processes, continued
improvements/modifications to the Company's owned headquarter buildings, 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 three months ended
April 30, 2004, the Company invested $68,538,000 in various short-term
investments and received proceeds of $25,173,000 from the sale of short-term
investments. In the three months ended April 30, 2003, the Company invested
$28,316,000 in various short-term investments, received proceeds of $78,526,000
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
first quarter 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.
Net cash provided by financing activities totaled $1,059,000 for the three
months ended April 30, 2004 and related primarily to cash proceeds received of
$1,395,000 from the exercise of stock options, offset by payments of long-term
capital lease obligations of $336,000. Net cash used for financing activities
totaled $6,304,000 for the three months ended April 30, 2003 and related
primarily to payments of $6,195,000 made in conjunction with the repurchase of
567,000 shares of the Company's common stock at an average price of
approximately $10.90 per share and payments of long-term capital lease
obligations of $346,000, offset by cash proceeds of $237,000 received from the
exercise of stock options.
18
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, 2004, 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 April 30, 2004, 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 Executive Officer, William J. Lansing, and Chief Financial Officer,
Richard D. Barnes, of the effectiveness 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
officers 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.
19
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Sixth Amended and Restated Articles of Incorporation, as
Amended (A)
3.2 Certificate of Designation of Series A Redeemable
Convertible Preferred Stock (B)
3.3 Articles of Merger (C)
3.4 Bylaws, as Amended (A)
31.1 Rule 13a-14 (a) / 15d-14 (a) Certification of Chief
Executive Officer
31.2 Rule 13a-14 (a) / 15d-14 (a) Certification of Chief
Financial Officer
32 Section 1350 Certifications
(A) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended August 31, 1994, filed
on September 13, 1994, File No. 0-20243.
(B) Incorporated herein by reference to the Registrant's Current Report
on Form 8-K dated April 15, 1999, filed on April 29, 1999, File No.
0-20243.
(C) Incorporated herein by reference to the Registrant's Current Report
on Form 8-K dated May 16, 2002, filed on May 17, 2002, File No.
0-20243.
(b) Reports on Form 8-K
(i) The Registrant filed a Current Report on Form 8-K on February 4,
2004 announcing the hiring of two new Corporate Executive Vice
Presidents.
(ii) The Registrant furnished a Current Report on Form 8-K on March 24,
2004 reporting that the Registrant issued a press release dated
March 22, 2004 disclosing its fourth quarter and fiscal 2003
earnings announcing the appointment of three new board members.
(iii) The Registrant filed a Current Report on Form 8-K on May 10, 2004
announcing the appointment of one new board member.
(iv) The Registrant furnished a Current Report on Form 8-K on May 20,
2004 reporting that the Registrant issued a press release dated May
18, 2004 disclosing its first quarter fiscal 2004 earnings.
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/ William J. Lansing
-------------------------------------------------
William J. Lansing
Chief Executive Officer, President and Director
(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)
June 9, 2004
21