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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, 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, Eden Prairie, 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 7, 2004, there were 36,915,448 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, 2004
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of October 31, 2004
and January 31, 2004 (as restated - See Note 15) 3
-Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended October 31, 2004 and 2003 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Nine Months Ended October 31, 2004 (as restated - See Note 15) 5
-Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended October 31, 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II OTHER INFORMATION
Item 6. Exhibits 26
SIGNATURES 27
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,
2004 2004
------------ -----------
(UNAUDITED) (AS RESTATED
SEE NOTE 15)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,028 $ 81,033
Short-term investments 70,448 46,148
Accounts receivable, net 65,923 71,166
Inventories 82,736 67,620
Prepaid expenses and other 8,336 5,017
----------- -----------
Total current assets 253,471 270,984
PROPERTY & EQUIPMENT, NET 52,619 54,511
FCC BROADCASTING LICENSE 31,943 31,943
NBC TRADEMARK LICENSE AGREEMENT, NET 19,494 21,914
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 3,774 4,445
GOODWILL - 9,442
OTHER INTANGIBLE ASSETS, NET 171 661
INVESTMENTS AND OTHER ASSETS 2,768 2,691
----------- -----------
$ 364,240 $ 396,591
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 58,112 $ 51,482
Accrued liabilities 40,714 33,355
----------- -----------
Total current liabilities 98,826 84,837
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,531 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 42,959 42,745
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
36,915,448 and 36,487,821 shares issued and outstanding 369 365
Warrants to purchase 8,035,343 and 8,235,343 shares of common stock 46,683 47,638
Additional paid-in capital 263,521 260,100
Deferred compensation (403) (646)
Note receivable from former officer (2,598) (4,158)
Accumulated deficit (86,648) (36,292)
----------- ------------
Total shareholders' equity 220,924 267,007
----------- -----------
$ 364,240 $ 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 FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales $ 144,341 $ 149,996 $ 465,016 $ 437,685
Cost of sales (exclusive of depreciation and
amortization shown below) 98,848 96,634 312,539 276,953
------------- ------------- ------------- -------------
Gross profit 45,493 53,362 152,477 160,732
------------- ------------- ------------- -------------
OPERATING (INCOME) EXPENSE:
Distribution and selling 54,556 47,949 157,633 141,399
General and administrative 5,900 3,828 16,682 14,165
Depreciation and amortization 5,102 4,662 14,804 13,216
Asset impairment 11,302 -- 11,302 --
Employee termination costs 3,326 -- 3,326 --
Gain on sale of television stations -- -- -- (4,417)
------------- ------------- ------------- -------------
Total operating expense 80,186 56,439 203,747 164,363
------------- ------------- ------------- -------------
OPERATING LOSS (34,693) (3,077) (51,270) (3,631)
------------- ------------- -------------- -------------
OTHER INCOME (EXPENSE):
Gain on sale and conversion of investments -- -- -- 361
Other expense (300) -- (50) --
Interest income 368 315 964 1,064
------------- ------------- ------------- -------------
Total other income 68 315 914 1,425
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (34,625) (2,762) (50,356) (2,206)
Income tax provision -- 80 -- 180
------------- ------------- ------------- -------------
NET LOSS (34,625) (2,842) (50,356) (2,386)
Accretion of redeemable preferred stock (72) (71) (214) (212)
------------- ------------- ------------- -------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (34,697) $ (2,913) $ (50,570) $ (2,598)
============= ============= ============= =============
NET LOSS PER COMMON SHARE $ (0.94) $ (0.08) $ (1.38) $ (0.07)
============= ============= ============= =============
NET LOSS PER COMMON SHARE
- ASSUMING DILUTION $ (0.94) $ (0.08) $ (1.38) $ (0.07)
============= ============= ============= =============
Weighted average number of common shares outstanding:
Basic 36,870,325 35,894,859 36,773,562 35,855,230
============= ============= ============= =============
Diluted 36,870,325 35,894,859 36,773,562 35,855,230
============= ============= ============= =============
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, 2004
(Unaudited)
(In thousands, except share data)
COMMON STOCK COMMON
-------------------- STOCK ADDITIONAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN
LOSS OF SHARES VALUE WARRANTS CAPITAL
------------- ---------- ----- -------- ----------
BALANCE, JANUARY 31, 2004
(AS RESTATED, SEE NOTE 15) 36,487,821 $ 365 $47,638 $260,100
Net loss $(50,356) -- -- -- --
========
Increase in note receivable
from former officer -- -- -- --
Proceeds received on note
receivable -- -- -- --
Exercise of stock options and
common stock issuances 326,118 3 -- 2,487
Exercise of stock purchase
warrants 101,509 1 (955) 955
Issuance of restricted stock -- -- -- 308
Restricted stock forfeited -- -- -- (115)
Amortization of deferred
compensation -- -- -- --
Accretion on redeemable
preferred stock -- -- -- (214)
---------- ----- ------- --------
BALANCE, OCTOBER 31, 2004 36,915,448 $ 369 $46,683 $263,521
========== ===== ======= ========
NOTE
RECEIVABLE
FROM TOTAL
DEFERRED FORMER ACCUMULATED SHAREHOLDERS'
COMPENSATION OFFICER DEFICIT EQUITY
------------ ---------- ----------- ------------
BALANCE, JANUARY 31, 2004
(AS RESTATED, SEE NOTE 15) $ (646) $(4,158) $(36,292) $267,007
Net loss -- -- (50,356) (50,356)
Increase in note receivable
from former officer -- (40) -- (40)
Proceeds received on note
receivable -- 1,600 -- 1,600
Exercise of stock options and
common stock issuances -- -- -- 2,490
Exercise of stock purchase
warrants -- -- -- 1
Issuance of restricted stock (308) -- -- --
Restricted stock forfeited 115 -- -- --
Amortization of deferred
compensation 436 -- -- 436
Accretion on redeemable
preferred stock -- -- -- (214)
------ ------- -------- --------
BALANCE, OCTOBER 31, 2004 $ (403) $(2,598) $(86,648) $220,924
====== ======= ======== ========
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,
-------------------------------------
2004 2003
------------- -----------
OPERATING ACTIVITIES:
Net loss $ (50,356) $ (2,386)
Adjustments to reconcile net loss to net cash (used for) provided by
operating activities:
Depreciation and amortization 14,804 13,216
Common stock issued to employees 16 18
Amortization of deferred compensation 436 373
Asset impairment 11,302 --
Gain on sale of television stations -- (4,417)
Gain on sale of investments -- (361)
Loss on sale and holdings of property 300 2
Changes in operating assets and liabilities, net of businesses
acquired:
Accounts receivable, net 5,243 11,120
Inventories (15,116) (17,032)
Prepaid expenses and other (4,287) 1,166
Accounts payable and accrued liabilities 14,371 8,907
----------- -----------
Net cash (used for) provided by operating activities (23,287) 10,606
----------- -----------
INVESTING ACTIVITIES:
Property and equipment additions (10,601) (19,608)
Proceeds from sale of investments and property -- 7,581
Purchase of short-term investments (113,285) (62,821)
Proceeds from sale of short-term investments 88,986 108,791
Proceeds from note receivable from former officer 1,600 --
Acquisition of television station WWDP TV-46, net of cash acquired -- (33,466)
Proceeds from sale of television stations -- 5,000
----------- -----------
Net cash (used for) provided by investing activities (33,300) 5,477
----------- -----------
FINANCING ACTIVITIES:
Payments for repurchases of common stock -- (6,429)
Proceeds from exercise of stock options and warrants 2,474 3,969
Payment of long-term obligation (892) (819)
----------- -----------
Net cash provided by (used for) financing activities 1,582 (3,279)
----------- -----------
Net (decrease) increase in cash and cash equivalents (55,005) 12,804
BEGINNING CASH AND CASH EQUIVALENTS 81,033 55,109
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 26,028 $ 67,913
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 155 $ 141
=========== ===========
Income taxes paid $ 50 $ 291
=========== ===========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exercise of common stock purchase warrants $ 955 $ --
=========== ===========
Restricted stock award $ 308 $ 1,491
=========== ===========
Restricted stock forfeited $ 115 $ --
=========== ===========
Liabilities assumed from acquisitions $ -- $ 105
=========== ===========
Accretion of redeemable preferred stock $ 214 $ 212
=========== ===========
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, 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). The Company also sells certain
blocks of its programming airtime to third-party vendors on a limited and
selective basis through its vendor programming sales program.
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 its 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"). VVIFC also provides
fulfillment and warehousing services for the NBC Experience Store in New York
City and direct-to-consumer products sold on NBC's website, fulfillment of
certain non-jewelry merchandise sold on the Company's television home shopping
program and Internet website and fulfillment to the Company's FanBuzz, Inc.
subsidiary ("FanBuzz"). Through its wholly owned subsidiary, 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 and nine month
periods ended October 31, 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 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.
7
(3) STOCK-BASED COMPENSATION
At October 31, 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 the 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,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net loss available to common shareholders:
As reported.............................. $ (34,697,000) $ (2,913,000) $ (50,570,000) $ (2,598,000)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effects............... (4,282,000) (2,440,000) (10,994,000) (6,790,000)
--------------- --------------- --------------- ---------------
Pro forma................................ $ (38,979,000) $ (5,353,000) $ (61,564,000) $ (9,388,000)
=============== =============== =============== ===============
Net loss per share:
Basic:
As reported........................... $ (0.94) $ (0.08) $ (1.38) $ (0.07)
Pro forma............................. (1.06) (0.15) (1.67) (0.26)
Diluted:
As reported........................... $ (0.94) $ (0.08) $ (1.38) $ (0.07)
Pro forma............................. (1.06) (0.15) (1.67) (0.26)
(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,
---------------------------------- ----------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net loss available to common shareholders... $ (34,697,000) $ (2,913,000) $ (50,570,000) $ (2,598,000)
============== ============== ============== ==============
Weighted average number of common shares
outstanding - Basic....................... 36,870,000 35,895,000 36,774,000 35,855,000
Dilutive effect of convertible preferred
stock..................................... -- -- -- --
Dilutive effect of stock options and
warrants.................................. -- -- -- --
-------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding - Diluted..................... 36,870,000 35,895,000 36,774,000 35,855,000
============== ============== ============== ==============
Net loss per common share................... $ (0.94) $ (0.08) $ (1.38) $ (0.07)
============== ============== ============== ==============
Net loss per common share- assuming
dilution.................................. $ (0.94) $ (0.08) $ (1.38) $ (0.07)
============== ============== ============== ==============
In accordance with SFAS No. 128, for the three months ended October 31,
2004 and 2003, approximately 909,000 and 2,082,000, respectively, in-the-money
potentially dilutive common share stock options and warrants and 5,340,000
shares of convertible preferred stock have been excluded from the computation of
diluted earnings per share, as the effect of their inclusion would be
antidilutive. For the nine months ended October 31, 2004 and 2003, approximately
1,114,000 and 1,571,000 in-the-money potentially
8
dilutive common share stock options and warrants and 5,340,000 shares of
convertible preferred stock have been excluded from the computation of diluted
earnings per share, as the effect of their inclusion would be antidilutive.
(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 loss includes net 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 $(34,625,000)
and $(2,842,000) for the three months ended October 31, 2004 and 2003,
respectively. Total comprehensive income (loss) was $(50,356,000) and $131,000
for the nine months ended October 31, 2004 and 2003, respectively. As of January
31, 2004, the Company no longer had 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, fitness products,
giftware, collectibles, 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 month
and nine month periods ended October 31, 2004 and 2003 are as follows:
ELECTRONIC ALL
THREE MONTHS ENDED OCTOBER 31 (IN THOUSANDS) MEDIA OTHER (A) CORPORATE TOTAL
- -------------------------------------------- ----------- ---------- ---------- -----------
2004
Revenues............................................. $ 137,610 $ 6,731 $ -- $ 144,341
Operating loss....................................... (21,090) (13,603) -- (34,693)
Depreciation and amortization........................ 4,575 527 -- 5,102
Interest income (expense)............................ 373 (5) -- 368
Income taxes......................................... -- -- -- --
Net loss............................................. (20,647) (13,978) -- (34,625)
Identifiable assets.................................. 351,063 13,177 -- 364,240
----------- ---------- ----------- -----------
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
----------- ---------- ---------- -----------
9
ELECTRONIC ALL
NINE MONTHS ENDED OCTOBER 31 (IN THOUSANDS) MEDIA OTHER (a) CORPORATE TOTAL
- ------------------------------------------- ----------- ---------- ---------- -----------
2004
Revenues............................................. $ 443,390 $ 21,626 $ -- $ 465,016
Operating loss....................................... (35,975) (15,295) -- (51,270)
Depreciation and amortization........................ 13,268 1,536 -- 14,804
Interest income (expense)............................ 1,016 (52) -- 964
Income taxes......................................... -- -- -- --
Net loss............................................. (33,900) (16,456) -- (50,356)
Identifiable assets.................................. 351,063 13,177 -- 364,240
----------- ---------- ----------- -----------
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
----------- ---------- ---------- -----------
(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.
Information on net sales by significant product groups are as follows (in
thousands):
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
2004 2003 2004 2003
------------ ---------- ----------- -----------
Jewelry.......................... $ 74,446 $ 86,300 $ 273,038 $ 263,393
Computers........................ 22,655 25,229 59,966 61,657
Home............................. 16,484 15,397 48,176 43,412
All others, less than 5% each.... 30,756 23,070 83,836 69,223
------------ ---------- ----------- -----------
Total..................... $ 144,341 $ 149,996 $ 465,016 $ 437,685
============ ========== =========== ===========
(7) EQUITY INVESTMENTS
As of October 31, 2004 and 2003, the Company had equity investments
totaling approximately $-0- and $2,011,000, respectively. 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").
Investments at October 31, 2003 included certain other nonmarketable equity
investments in private and other enterprises that were carried at the lower of
cost or net realizable value. These investments were subsequently written off
during the fourth quarter of 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. 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 in Paxson Communications, Inc and iDine Rewards Network, Inc.
10
(8) RELATED PARTY TRANSACTION
At October 31, 2004, the Company held a note receivable totaling
$2,598,000 including interest (the "Note"), from its former chief executive
officer for a loan made in 2000 under the officer's employment agreement. The
Note bears interest at a floating rate equal to the Federal short-term rate in
effect under Section 1274(d) of the Internal Revenue Code of 1986, as amended,
and is secured by shares of the Company's common stock and options to purchase
shares of the Company's common stock held by the former executive with a fair
market value equal to 150% of the principal balance borrowed under the Note. The
Note is reflected as a reduction of shareholders' equity in the accompanying
condensed consolidated balance sheet since it 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. During the third quarter of fiscal 2004, the Company received proceeds
of $1,600,000 as partial repayment of the Note and the remaining outstanding
balance of $2,598,000 plus accrued interest was paid off in full on December 8,
2004.
(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. In the second quarter
of fiscal 2004, the Company awarded an additional 25,000 shares of restricted
stock to certain employees. The restricted stock vests over different periods
ranging from 17 to 53 months so long as the recipient is still employed with the
Company. The aggregate market value of the restricted stock at the award dates
was $308,000 and has been recorded as deferred compensation, a separate
component of shareholders' equity, and is being amortized as compensation
expense over the respective vesting periods.
(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 a third repurchase of up to $25 million of the Company's
common stock pursuant to its common stock repurchase program. The repurchase
programs are 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,
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 nine-month period ended October 31,
2004. During the nine-month period ended October 31, 2003, the Company
repurchased 586,000 shares of its common stock at an average price of $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 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 continue to broadcast the Company's signal into homes included within
its Boston market and 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 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.
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:
11
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. The Company
currently uses its remaining LPTV station and classifies this station as held
and used.
(12) GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," ("SFAS No. 142") 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 fiscal 2002.
Changes in the carrying amount of goodwill for the nine-month periods
ended October 31 were as follows:
2004 2003
------------- ------------
Beginning balance................................ $ 9,442,000 $ 9,442,000
Goodwill acquired during the period.............. -- --
Impairment loss.................................. 9,442,000 --
-- --
------------- ------------
Ending balance................................... $ --- $ 9,442,000
============= ============
During the quarter ended October 31, 2004, the Company wrote off the
goodwill attributable to the FanBuzz acquisition as the Company had determined
that the goodwill was significantly impaired following FanBuzz's loss of its
National Hockey League contract in September 2004. See Note 16 for a full
discussion of the Company's third quarter FanBuzz asset impairment write down.
Intangible assets have been recorded by the Company as a result of the
acquisition of FanBuzz in fiscal 2002 and television station WWDP TV-46 in
fiscal 2003. The components of amortized and unamortized intangible assets in
the accompanying condensed consolidated balance sheets consist of the following:
12
OCTOBER 31, 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 $ (861,000) $ 1,000,000 $ (611,000)
Partnership contracts....... 2 280,000 (280,000) 280,000 (280,000)
Non-compete agreements...... 3 230,000 (198,000) 230,000 (141,000)
Favorable lease contracts... 13 200,000 (200,000) 200,000 (28,000)
Other....................... 2 290,000 (290,000) 290,000 (279,000)
----------- ----------- ----------- -----------
Total.................... $ 2,000,000 $(1,829,000) $ 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 nine months ended
October 31, 2004 and 2003 was $330,000 and $459,000, respectively. Estimated
amortization expense for fiscal 2004 is $436,000 and the remaining $65,000 in
fiscal 2005. During the quarter ended October 31, 2004, the Company wrote off
approximately $160,000 of intangible assets in connection with the FanBuzz asset
impairment. See Note 16 for a full discussion of the Company's third quarter
FanBuzz asset impairment write down.
(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.
(14) 2004 OMNIBUS STOCK PLAN
In June 2004, the shareholders of the Company approved the Company's 2004
Omnibus Stock Plan (the "2004 Plan"), which provides for, among other things,
the issuance of up to 2,000,000 shares of the Company's common stock. The 2004
Plan is administered by the Company's Compensation Committee (the "Committee")
and has two basic components, (a) discretionary awards for employees and
consultants and (b) automatic option grants for outside directors. All employees
of the Company or its affiliates are eligible to receive awards under the 2004
Plan. The Committee may also award nonstatutory stock options under the 2004
Plan to individuals or entities who are not employees but who provide services
to the Company in capacities such as advisors, directors and consultants. The
types of awards that may be granted under the 2004 Plan include restricted and
unrestricted stock, incentive and nonstatutory stock options, stock appreciation
rights, performance units and other stock-based awards. Incentive stock options
may be granted to employees at such exercise prices as the Committee may
determine but not less than 100% of the fair market value of the underlying
stock as of the date of grant. No incentive stock option may be granted more
than ten years after the effective date of the 2004 Plan or be exercisable more
than ten years after the date of grant. The 2004 Plan provides for additional
restrictions on incentive stock options granted to an individual who
beneficially owns 10% or more of the outstanding shares of the Company. The 2004
Plan also provides for option grants on an annual basis to each outside director
of the Company. All options granted to outside directors pursuant to the 2004
Plan are nonstatutory stock options with an exercise price equal to 100% of the
fair market value of the underlying stock as of the date of grant. As of October
31, 2004, approximately 1,683,000 option shares have been issued from the 2004
Plan.
(15) RESTATEMENT OF PREVIOUSLY REPORTED ACCUMULATED DEFICIT AND ADDITIONAL
PAID-IN CAPITAL
In connection with the preparation of the Company's response to a letter
received from the staff of the Securities and Exchange Commission ("SEC") in
August 2004, pursuant to a normal course review of the Company's most recent
Annual Report on Form 10-K, the Company determined that the Company's March 1999
issuance of convertible redeemable preferred stock and investment warrant,
pursuant to the Company's strategic alliance with GE Equity and NBC, were
incorrectly recorded in the Company's financial statements. In fiscal 1999 the
Company did not record a beneficial conversion feature associated with 5,339,500
shares of convertible redeemable preferred stock as the Company and GE Equity
agreed to establish a conversion price of $8.29 per share that was equal to a
45-day trailing average stock price. Subsequently, the Company had determined
that the per share closing price on the date of issuance (March 8, 1999), of
$10.12, would have been the appropriate fair value of the common stock for the
purpose of determining whether or not there existed a beneficial conversion
feature. Utilizing the closing stock price on the date of issuance would have
resulted in a beneficial conversion feature of approximately $9,771,000. The
resulting impact should have been an allocation of this intrinsic value of
approximately $9,771,000 to additional paid-in capital. The discount created by
the allocation of intrinsic value to additional paid-in capital is analogous to
a dividend on the convertible redeemable preferred stock which would be
amortized from the
13
date of issuance, utilizing the effective interest method, through the date the
security is first convertible. Given the convertible redeemable preferred stock
was immediately convertible into common stock, the resulting discount should
have been amortized as a reduction to net income available to common
shareholders in the first quarter of fiscal 1999. Therefore, the January 31,
2004 beginning additional paid-in capital and related accumulated deficit
balances were both understated by approximately $9,771,000. There was no change
to previously reported total shareholders' equity or previously reported cash
flows as a result of this correction.
In conjunction with the strategic alliance with GE Equity and NBC, the
Company also agreed to issue a detachable investment warrant to GE Equity in
March 1999. The Company did not consider the investment warrant to have a
material value based upon the terms of the investment warrant and did not
allocate a portion of the proceeds on the convertible redeemable preferred stock
to the investment warrant at the time of issuance. Upon further consideration of
the relevant accounting guidance applicable in 1999, the Company believed an
independent appraisal of the relative fair value of the investment warrant was
necessary to determine whether a portion of the proceeds of the redeemable
preferred stock was allocable to the investment warrant. Based on this analysis
the Company has determined that $4,186,000 represented the fair value of the
investment warrant issued in 1999. The resulting impact would have been an
allocation of a portion of the proceeds from the issuance of the convertible
redeemable preferred stock to the fair value of the investment warrant,
analogous to a dividend on the convertible redeemable preferred stock.
Therefore, a credit to additional paid-in capital of approximately $4,186,000
with the resulting discount amortized from the date of issuance, utilizing the
effective interest method, through the date the security is first convertible
should have been recorded in the first quarter of fiscal 1999. Given the
convertible redeemable preferred stock was immediately convertible into common
stock, the resulting discount should have been amortized as a reduction to net
income available to common shareholders in fiscal 1999. Therefore, the January
31, 2004 beginning additional paid-in capital and related accumulated deficit
balances were both understated by approximately $4,186,000. There was no change
to previously reported total shareholders' equity or previously reported cash
flows as a result of this correction.
As a result of the above items the beginning additional paid-in capital
and accumulated deficit balances at January 31, 2004 have been restated as
follows (in thousands):
AS
AS PREVIOUSLY
RESTATED REPORTED
----------- -----------
January 31, 2004 Additional paid-in capital $ 260,100 $ 246,143
January 31, 2004 Accumulated deficit $ (36,292) $ (22,335)
January 31, 2004 Shareholders' equity $ 267,007 $ 267,007
(16) ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended October 31, 2004, the Company's FanBuzz reporting
unit was notified by the National Hockey League ("NHL") whereby the NHL had
exercised its termination option, pursuant to their agreement with FanBuzz, and
terminated their contract effective February 1, 2005. Revenue from the NHL
agreement was approximately $6,322,000 of FanBuzz's total net sales for the
nine-month period ended October 31, 2004. Following this notification, and in
accordance with SFAS No. 142, the Company performed a discounted cash flow
analysis which indicated that the book value of FanBuzz significantly exceeded
its estimated fair value and that a goodwill impairment had occurred. The
Company compared the implied fair value of the goodwill with the carrying amount
and concluded that the goodwill was fully impaired and recorded a third-quarter
impairment charge of $9,442,000. In addition, the Company assessed whether there
had been an impairment of the FanBuzz long-lived assets in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"). The Company concluded that the book value of certain
long-lived assets at FanBuzz was significantly higher than their
probability-weighted expected future cash flows and that an impairment had
occurred. Accordingly, the Company recorded a non-cash impairment loss and
related charge of $11,302,000 in the third quarter ended October 31, 2004. The
charges included $9,442,000 of goodwill impairment, $1,700,000 of fixed asset
and capital expenditure impairment, and $160,000 of intangible asset impairment.
The Company's FanBuzz subsidiary is included in the "All Other" segment category
of the SFAS No. 131 disclosures discussed in Note 6.
During the quarter ended October 31, 2004, the Company also recorded a
$3,326,000 charge to earnings and accrual in connection with the decision to
eliminate a number of positions within the Company in an effort to streamline
the corporate organization and reduce operating expenses. The charge consisted
primarily of severance pay and related benefit costs associated with the
elimination of approximately 30 positions. The severance is expected to be paid
out over periods ranging from two months to two years.
14
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.
RESTATEMENT OF PREVIOUSLY REPORTED ACCUMULATED DEFICIT AND ADDITIONAL PAID-IN
CAPITAL
In connection with the preparation of the Company's response to a letter
received from the staff of the Securities and Exchange Commission ("SEC") in
August 2004, pursuant to a normal course review of its annual report on Form
10-K, the Company determined that the Company's March 1999 issuance of
convertible redeemable preferred stock and investment warrant, pursuant to the
Company's strategic alliance with GE Equity and NBC, were incorrectly recorded
in the Company's financial statements. As a result, the Company had to restate
its January 31, 2004 beginning additional paid-in capital and related
accumulated deficit balances as both were understated by approximately
$13,957,000. There was no change to previously reported total shareholders'
equity or previously reported cash flows as a result of this correction. See
Note 15 of Notes to Condensed Consolidated Financial Statements for a complete
discussion of this restatement.
Members of the Company's senior management began reviewing the previously
reported fiscal 1999 financial statements following receipt of the SEC staff
letter in August 2004 and concluded on September 2, 2004, for the reasons
outlined in Note 15, that net income available to common shareholders and
related earnings per share reported in fiscal 1999 should no longer be relied
upon, and that the amount of the restatement reported for additional paid-in
capital and accumulated deficit should be applied on a similar basis to each
previously reported fiscal year end and each quarterly period end balance sheet
from January 31, 2000 through January 31, 2004. This conclusion was discussed
among the Company's audit committee, officers of the Company and the Company's
independent public accountants, Deloitte & Touche, LLP.
The Company intends to reflect this restatement in its filing on Form 10-K
for the fiscal year ended January 31, 2005.
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, computers and other electronics,
housewares, apparel, cosmetics, fitness products, giftware, collectibles,
seasonal items and other merchandise. Jewelry represents the network's largest
single category of merchandise, representing 59% and 64% of television home
shopping and Internet net sales for the three and nine month respective periods
ended October 31, 2004 and 63% and 67% of television home shopping and Internet
net sales for the three and nine month respective periods ended October 31,
2003. After jewelry, the second largest product category of merchandise sold is
computers and electronics, representing 19% and 16% of television home shopping
and Internet net sales for the three and nine month respective periods ended
October 31, 2004 and 19% and 16% of television home shopping and Internet net
sales for the three and nine month respective periods ended October 31, 2003.
The Company believes that product diversification will appeal to a broader
segment of potential customers and 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
15
consumers during fiscal 2004, growing product categories outside of jewelry and
computers and electronics in the nine months ended October 31, 2004 from 17% to
20% of total television home shopping and Internet sales as compared to the nine
months ended October 31, 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, unique product offerings, value and quality of
merchandise.
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 outside of the historical categories of
jewelry and computers; (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 the 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 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
has invested in new initiatives intended to achieve double-digit sales growth
that has required 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 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 also 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"), which
broadcasts the Jewelry Television home shopping channel, competes with the
Company in the jewelry sector of the television home shopping industry.
Additionally, there are a number of other small niche players and start-ups
competing in 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 providers of e-commerce and direct marketing solutions, 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, one of which is obtaining additional sales penetration from
the Company's existing customer base. The Company believes that it is positioned
to compete effectively because of its established relationships with cable
operators and its strategic relationship with NBC and GE Equity.
16
Results for the Third Quarter of Fiscal 2004
Consolidated net sales for the quarter ended October 31, 2004 were
$144,341,000 compared to $149,996,000 for the quarter ended October 31, 2003, a
4% decrease. The decrease in consolidated net sales is directly attributable a
decrease in sales from the Company's television home shopping operations. Net
sales attributed to the Company's television and Internet operations decreased
4% to $137,610,000 for the quarter ended October 31, 2004 from $143,560,000 for
the quarter ended October 31, 2003. Consolidated gross margins were 31.5% for
the quarter ended October 31, 2004 compared to 35.6% for the quarter ended
October 31, 2003. The Company reported an operating loss of $34,693,000 and a
net loss of $34,625,000 for the third quarter of fiscal 2004 compared to an
operating loss of $3,077,000 and a net loss of $2,842,000 for the third quarter
of fiscal 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 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.
ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended October 31, 2004, the Company wrote off goodwill
attributable to the FanBuzz acquisition as the Company had determined that the
goodwill was significantly impaired following FanBuzz's loss of its NHL contract
in September 2004. In addition, the Company also concluded that the book value
of certain long-lived assets at FanBuzz was significantly higher than their
expected future cash flows and that an impairment had occurred in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, the Company recorded a non-cash impairment loss and related
charge of $11,302,000 in the third quarter ended October 31, 2004. The charges
included $9,442,000 of goodwill impairment, $1,700,000 of fixed asset and
capital expenditure impairment and $160,000 of intangible asset impairment. The
Company is considering alternative courses of action for the future operations
of FanBuzz. As a result, the Company used a probability-weighted approach for
developing estimates of future cash flows used to test the recoverability of
FanBuzz's long-lived assets. Management will continue to evaluate the
assumptions used and the probability weight assigned to the alternative courses
of action. If circumstances arise that change certain assumptions additional
impairment of FanBuzz's long-lived assets may result.
During the quarter ended October 31, 2004, the Company recorded a
$3,326,000 charge to earnings and accrual in connection with the decision to
eliminate a number of positions within the Company in an effort to streamline
the corporate organization and reduce operating costs. The charge consisted
primarily of severance pay and related benefit costs associated with the
elimination of approximately 30 positions. The severance is expected to be paid
out over periods ranging from two months to two years.
17
RESULTS OF OPERATIONS
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,
2004 2003 2004 2003
----- ----- ----- -----
NET SALES 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
GROSS MARGIN 31.5% 35.6% 32.8% 36.7%
----- ----- ----- -----
Operating (income) expenses:
Distribution and selling 37.8% 32.0% 33.9% 32.3%
General and administrative 4.1% 2.6% 3.6% 3.2%
Depreciation and amortization 3.5% 3.1% 3.2% 3.0%
Asset impairment 7.8% --% 2.4% --%
Employee termination costs 2.3% --% 0.7% --%
Gain on sale of television stations --% --% --% (1.0)%
----- ----- ----- -----
55.5% 37.7% 43.8% 37.5%
----- ----- ----- -----
Operating loss (24.0)% (2.1)% (11.0)% (0.8)%
===== ===== ===== =====
KEY PERFORMANCE METRICS*
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------- -----------
2004 2003 % 2004 2003 %
------- ------- ----- ------- ------- ----
PROGRAM DISTRIBUTION
Cable FTE's 36,565 34,787 5% 36,231 34,236 6 %
Satellite FTE's 21,651 18,843 15% 20,910 18,378 14 %
------- ------- ---- ------- ------- --
Total FTEs (Average 000's) 58,216 53,630 9% 57,141 52,614 9 %
Net Sales per FTE (Annualized) $ 9.46 $ 10.71 (11.7)% $ 10.35 $10.63 (2.6)%
New Customer Count 123,089 105,055 17% 405,515 317,564 28 %
Customer Penetration - 12
month rolling 1.4% 1.4% n/a n/a
MERCHANDISE MIX
Jewelry 58.9% 62.8% 64.0% 67.0%
Apparel 6.3% 2.8% 4.7% 1.4%
Health & Beauty 3.7% 2.7% 3.4% 2.5%
Computers & Electronics 18.8% 19.0% 15.6% 16.3%
Fitness 1.2% 1.2% 1.3% 1.3%
Home 11.1% 11.5% 11.0% 11.5%
Shipped Units (000's) 1,106 952 16% 3,655 2,786 31 %
Average Selling Price - Shipped
Units $ 180 $ 224 (20%) $ 178 $ 227 (22 %)
*Includes television home shopping and Internet sales only.
18
PROGRAM DISTRIBUTION
Average full time equivalent ("FTE") subscribers grew 9% in the third
quarter ended October 31, 2004, resulting in a 4,586,000 increase in average
FTE's versus the prior year comparable quarter. For the nine months ended
October 31, 2004, average FTE's grew 9%, an increase of 4,527,000 versus the
prior year comparable period. The increases were driven by continued strong
growth in satellite distribution and increased penetration of digital cable.
NET SALES PER FTE
Net sales per FTE for the third quarter ended October 31, 2004 decreased
12% or $1.25 per FTE versus the prior year comparable quarter. For the nine
months ended October 31, 2004, net sales per FTE decreased 3% or $0.28 per FTE
versus the prior year comparable period. The decreases were due to the third
quarter decrease in sales within the television home shopping business.
NEW CUSTOMERS
New customers added during the third quarter ended October 31, 2004 were
123,000 a 17% increase over the new customers added in the prior year comparable
quarter. For the nine months ended October 31, 2004, the Company added 406,000
new customers, a 28% increase over the new customers added in the prior year
comparable period. The increase in new customers resulted from the increase in
household distribution, product diversification efforts, the lowering of average
price points and an increase in the marketing and promotional efforts aimed at
attracting new customers.
CUSTOMER PENETRATION
Penetration measures the total number of customers who purchased from the
Company over the past twelve months divided by the Company's average FTE's for
that same period. This measure was 1.4% for the twelve months ended October 31,
2004, the same as the previous year.
MERCHANDISE MIX
During the third quarter ended October 31 2004, jewelry net sales
decreased from 62.8% of total television and Internet net sales to 58.9% versus
the prior year comparable quarter. Computer and electronic net sales as a
percent of total merchandise mix decreased as well, from 19.0% to 18.8%, and all
other merchandise categories increased from 18.2% to 22.3% versus the comparable
prior year quarter. For the nine months ended October 31, 2004 versus the
comparable prior year period, jewelry net sales decreased from 67.0% of total
television and Internet net sales to 64.0%. Computers and electronics decreased
from 16.3% to 15.6%. All other merchandise categories increased from 16.7% to
20.4%. The Company's merchandise mix is evolving away from its historical
reliance on jewelry and computers and electronics to a broader mix that also
includes apparel, health and beauty, fitness, home and other product lines. The
evolution of the merchandise mix is a key component of the Company's strategy to
appeal to a broader audience, attract new customers and increase household
penetration.
SHIPPED UNITS
The number of units shipped during the third quarter ended October 31,
2004 increased 16% over the prior year comparable quarter to 1,106,000 from
952,000. For the nine months ended October 31, 2004, shipped units increased 31%
to 3,655,000 from 2,786,000 versus the prior comparable period. The increases
were driven primarily by the percentage reduction in the Company's average unit
selling price versus prior year of 20% and 22%, during the third quarter ended
October 31, 2004 and nine months ended October 31, 2004, respectively. The
Company believes that the reduced average per unit selling price allows the
Company to appeal to a broader segment of potential customers.
ASP
The Average Selling Price ("ASP") per unit for the Company was $180 in the
third quarter ended October 31, 2004, a 20% reduction from the comparable prior
year quarter. For the nine months ended October 31, 2004, the average per unit
selling price was $178, a 22% reduction from the comparable prior year period.
These reductions were due primarily to the merchandise mix shift away from
jewelry and computer and electronics, towards lower priced home, apparel and
health and beauty products.
19
NET SALES
Consolidated net sales, inclusive of shipping and handling revenue, for
the three months ended October 31, 2004 were $144,341,000 compared with net
sales of $149,996,000 for the three months ended October 31, 2003, a 4%
decrease. Consolidated net sales, inclusive of shipping and handling revenue,
for the nine months ended October 31, 2004 were $465,016,000 compared with net
sales of $437,685,000 for the nine months ended October 31, 2003, a 6% increase.
Management believes that the decrease in net sales for the quarter ended October
31, 2004 is directly attributable to a decrease in television home shopping net
sales which resulted from a number of factors which included the loss of a
number of experienced television hosts at the start of the third quarter, the
effect of several severe hurricanes that devastated Florida and the east coast
during the quarter and the continued soft retail environment. Each of these
events had a negative impact on third quarter television net sales growth. In
addition, home shopping net sales were also unfavorably impacted during the
third quarter due to a number of high profile television-covered special events
that competed with the viewership of our programming which included television
coverage of the 2004 summer Olympics, the 2004 presidential election and
extended news coverage of the multiple hurricane destruction. Management
believes that these factors will have a short-term impact on overall television
home shopping net sales. The increase in year-to-date consolidated net sales is
directly attributable to increased sales from the Company's television home
shopping and Internet operations year over year. Net sales attributed to the
Company's television home shopping and Internet operations decreased 4% to
$137,610,000 for the three months ended October 31, 2004 from $143,560,000 for
the comparable prior year period for the reasons noted above. Net sales
attributed to the Company's television home shopping and Internet operations
increased 6% to $443,390,000 for the nine months ended October 31, 2004 from
$419,555,000 for the comparable prior year period. During the first nine months
of fiscal 2004, the Company continued to make significant progress on its
strategic objective of diversifying the merchandise mix offered to consumers.
For the first nine months of fiscal 2004, gross unit volume was up 31% while the
Company's average price points were down 22% from the corresponding prior-year
period. In addition, the Company's home, apparel, fitness and cosmetics
categories grew from 17% to 20% during the first nine months of fiscal 2004 over
prior year. The growth in year-to-date home shopping net sales is primarily
attributable to the growth in FTE homes receiving the Company's television
programming. During the 12-month period ended October 31, 2004, the Company
added approximately 4.6 million FTE subscriber homes, a 9% increase. In addition
to new FTE subscriber homes, year-to-date 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 19%
year-to-date increase, or $14,936,000, in Internet sales as compared to the
corresponding prior-year period offset by an overall decrease in the average
order size due to the aforementioned decrease in average per unit selling
prices. The Company intends to continue to develop its merchandising and
programming strategies, including the continuation of its strategy of product
diversification 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
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, 2004 and 2003 were
$45,493,000 and $53,362,000, respectively, a decrease of $7,869,000. Gross
profits for the nine months ended October 31, 2004 and 2003 were $152,477,000
and $160,732,000, respectively, a decrease of $8,255,000. The principal reason
for the decrease in gross profit from year to year was the decrease in gross
profit margin experienced by the Company during the first nine months of fiscal
2004 offset by increased sales volume from the Company's television home
shopping and Internet businesses. Gross margins for the three months ended
October 31, 2004 and 2003 were 31.5% and 35.6%, respectively. Gross margins for
the nine months ended October 31, 2004 and 2003 were 32.8% and 36.7%,
respectively. Gross margins for the three and nine months ended October 31, 2004
decreased as compared to gross margins of the comparable prior year periods
primarily due to decreased television and Internet shipping and handling margins
driven by the impact of the Company's free shipping loyalty club that launched
in February 2004. Merchandise margins were also significantly down during the
third quarter as a result of product discounting promotions which were offered
in order to generate additional sales during the quarter and a third quarter
FanBuzz NHL inventory impairment write down of $565,000 recorded as a result of
the loss of the NHL contract. In addition, gross margins have also been
unfavorably impacted during the year as a result of other promotional activities
initiated by the Company in order to clear out excess on-hand inventory and to
test various marketing initiatives. Gross margins may not be comparable to those
of other entities, since some entities include all of the costs related to their
product distribution network in cost of sales and others, including the Company,
exclude a portion of them from gross margin, including them instead as a
component of distribution and selling expense. The Company expects the retail
environment to continue to be uncertain and anticipates continued promotional
activity for the remainder of the fiscal year.
20
OPERATING EXPENSES
Total operating expenses for the three months ended October 31, 2004 were
$80,186,000 versus $56,439,000 for the comparable prior year period. Total
operating expenses for the nine months ended October 31, 2004 were $203,747,000
versus $168,780,000 (excluding the gain on sale of television stations) for the
comparable prior year period. Total operating expenses for the three and nine
month periods ended October 31, 2004 included a third quarter non-cash charge of
$11,302,000 relating to impairments of goodwill and other long-lived assets
associated with the Company's FanBuzz subsidiary. Total operating expenses for
the three and nine month periods ended October 31, 2004 also included a third
quarter charge of $3,326,000 recorded in connection with management's decision
to eliminate a number of positions within the Company. Distribution and selling
expense increased $6,607,000, or 14%, to $54,556,000, or 38% of net sales,
during the third quarter of fiscal 2004 compared to $47,949,000, or 32% of net
sales, for the comparable prior-year period. Distribution and selling expense
increased $16,234,000, or 11%, to $157,633,000, or 34% of net sales, for the
nine months ended October 31, 2004 compared to $141,399,000, or 32% of net
sales, for the comparable prior-year period. Distribution and selling expense
increased primarily as a result of increases in net cable access fees of $2.1
million and $4.3 million for the three and nine month respective periods ended
October 31, 2004 due to a 9% year-to-date increase in the number of FTE
subscribers over the comparable prior year periods and increased costs
associated with the hiring of merchandising personnel and on-air talent of $2.0
million and $5.5 million for the three and nine month respective periods. In
addition, distribution and selling expense also increased over the comparable
prior-year periods as a result of increased direct-mail and marketing expenses
of $1.8 million for the nine month period ended October 31, 2004 as the Company
attempts to acquire customers and stimulate ShopNBC program awareness, increased
telemarketing and customer service costs of $1.3 million and $2.9 million for
the three and nine month respective periods associated with increased sales
volume and the Company's commitment to improve its customer service.
General and administrative expense for the three months ended October 31,
2004 increased $2,072,000, or 54%, to $5,900,000, or 4% of net sales, compared
to $3,828,000, or 3% of net sales, for the three months ended October 31, 2003.
General and administrative expense for the nine months ended October 31, 2004
increased $2,517,000, or 18%, to $16,682,000, or 4% of net sales, compared to
$14,165,000, or 3% of net sales, for the nine months ended October 31, 2003.
General and administrative expense increased on a year-to-date basis over prior
year primarily as a result of increased information system personnel salaries,
recruiting costs and software maintenance fees of $1,567,000, increased legal
and accounting fees of $596,000, increased human resource and recruitment fees
of $409,000, 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.
Depreciation and amortization expense for the three months ended October
31, 2004 was $5,102,000 compared to $4,662,000 for the three months ended
October 31, 2003, representing an increase of $440,000, or 9%, from the
comparable prior-year period. Depreciation and amortization expense for the nine
months ended October 31, 2004 was $14,804,000 compared to $13,216,000 for the
nine months ended October 31, 2003, representing an increase of $1,588,000, or
12%, 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, 2004 were 4% and 3%, respectively. Depreciation and amortization expense as
a percentage of net sales for the three and nine months ended October 31, 2003
were each 3%, respectively. The increase is primarily due to increased
depreciation and amortization as a result of assets placed in service in
connection with the Company's various application software development and
functionality enhancements.
OPERATING LOSS
For the three months ended October 31, 2004, the Company reported an
operating loss of $34,693,000 compared to an operating loss of $3,077,000 for
the three months ended October 31, 2003. For the nine months ended October 31,
2004, the Company reported an operating loss of $51,270,000 compared to an
operating loss of $3,631,000 for the nine months ended October 31, 2003. The
Company's operating loss increased for the three and nine-month periods ended
October 31, 2004 from the comparable prior-year periods 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 periods, there were increases in distribution and selling expenses,
particularly net cable access fees and additional costs associated with
merchandising, marketing and on-air talent, increases in general and
administrative expenses recorded in connection with information system personnel
salaries, recruiting costs and software maintenance fees and increases in
depreciation and amortization expense as a result of assets placed in service in
connection with the Company's various application software development and
functionality enhancements, the details of which are discussed above.
Additionally, the Company's operating loss also increased for the three and
nine-month periods ended October 31, 2004 from the comparable prior-year periods
due to an $11,302,000 asset impairment charge recorded in the third quarter of
fiscal 2004 and a charge of $3,326,000 recorded in connection with costs
incurred associated with third quarter employee terminations. During the nine
months ended October 31, 2003, the Company also recorded a $4,417,000 pre-tax
gain following the sale of ten low power television stations.
21
NET LOSS
For the three months ended October 31, 2004, the Company reported a net
loss available to common shareholders of $34,697,000 or $(.94) per share on
36,870,000 weighted average common shares outstanding compared with a net loss
available to common shareholders of $2,913,000 or $(.08) per share on 35,895,000
weighted average common shares outstanding for the quarter ended October 31,
2003. The net loss available to common shareholders for the three months ended
October 31, 2004 includes a $300,000 write-down of a non operating real estate
asset held for sale and interest income totaling $368,000 earned on the
Company's cash and short-term investments. For the quarter ended October 31,
2003, the net loss available to common shareholders included interest income of
$315,000 earned on the Company's cash and short-term investments.
For the nine months ended October 31, 2004, the Company reported a net
loss available to common shareholders of $50,570,000 or $(1.38) per share on
36,774,000 weighted average common shares outstanding compared with a net loss
available to common shareholders of $2,598,000 or $(.07) per share on 35,855,000
weighted average common shares outstanding for the nine months ended October 31,
2003. The net loss available to common shareholders for the nine months ended
October 31, 2004 includes a $250,000 cash dividend received from RLM, a $300,000
write-down of a non operating real estate asset held for sale and interest
income totaling $964,000 earned on the Company's cash and short-term
investments. For the nine months ended October 31, 2003, the net loss available
to common shareholders included a pre-tax gain of $361,000 relating to the sale
of the Company's common stock investments in Paxson Communications, Inc. and
iDine Network, Inc. and interest income of $1,064,000 earned on the Company's
cash and short-term investments.
The Company has not recorded an income tax benefit on the losses recorded
in the quarter and nine-month period ended October 31, 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 recorded an
income tax provision in the quarter and nine-month period ended October 31,
2003, relating to state income taxes payable on certain income for which there
was no loss carryforward benefit available. 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 62.5 million homes as of October 31, 2004, as compared to 61.9
million homes as of January 31, 2004 and to 60.7 million homes as of October 31,
2003. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 1,190 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 October 31, 2004 and 2003, the Company's programming was
available to approximately 58.8 million and 54.1 million FTE households,
respectively. As of January 31, 2004, the Company's programming was available to
55.6 million FTE households. 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 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."
22
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2004, cash and cash equivalents and short-term
investments were $96,476,000, compared to $127,181,000 as of January 31, 2004, a
$30,705,000 decrease. For the nine months ended October 31, 2004, working
capital decreased $31,502,000 to $154,645,000. The current ratio was 2.6 at
October 31, 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 receivables. 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 October 31, 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 30-180 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 and 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.
The Company ended October 31, 2004 with cash and cash equivalents and
short-term investments of $96,476,000, no debt and $1,531,000 of long-term
capital lease obligations. The Company expects continued future growth in
working capital as revenues grow beyond 2004 but expects cash generated from
operations to largely offset the expected use. The Company believes its existing
cash balances and its ability to raise additional financing, considering its
strong balance sheet, will be sufficient to fund its obligations and commitments
as they come due on a long-term basis as well as potential foreseeable
contingencies. These estimates are subject to normal business risk factors as
identified under "Risk Factors" in the Company's fiscal 2003 Annual Report on
Form 10-K. In addition to these Risk Factors, a significant element of
uncertainty in future cash flows arises from potential strategic investments,
which are inherently opportunistic and difficult to predict. The Company
believes existing cash balances, its ability to raise financing and the ability
to structure transactions in a manner reflective of capital availability would
be sufficient to fund any such investments while maintaining sufficient
liquidity for its normal business operations.
23
Total assets at October 31, 2004 were $364,240,000, compared to
$396,591,000 at January 31, 2004, a $32,351,000 decrease. Shareholders' equity
was $220,924,000 at October 31, 2004, compared to $267,007,000 at January 31,
2004, a $46,083,000 decrease. The decrease in shareholders' equity for the
nine-month period ended October 31, 2004 resulted primarily from the net loss of
$50,356,000 recorded during the nine-month period, $40,000 relating to accrued
interest on a note receivable from a former officer and accretion on redeemable
preferred stock of $214,000. These decreases were offset by increases in
shareholders' equity of $2,491,000 from proceeds received related to the
exercise of stock options and warrants, $1,600,000 from proceeds received on
notes receivable and vesting of deferred compensation of $436,000.
For the nine-month period ended October 31, 2004, net cash used for
operating activities totaled $23,287,000 compared to net cash provided by
operating activities of $10,606,000 for the nine-month period ended October 31,
2003. Net cash provided by (used for) operating activities for the nine-month
periods ended October 31, 2004 and 2003 reflects the net loss, as adjusted for
depreciation and amortization, common stock issued to employees, amortization of
deferred compensation, an asset impairment charge recorded in fiscal 2004 and a
gain on the sale of low powered television stations recorded in fiscal 2003. In
addition, net cash used for operating activities for the nine months ended
October 31, 2004 reflects primarily an increase in inventories and prepaid
expenses and other assets, offset by a decrease in accounts receivable and an
increase in accounts payable and accrued liabilities. 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. 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, increased
prepaid postage and 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
merchandise receipts. In addition, accounts payable and accrued expenses
increased from year-end as a result of the timing of payments made for accrued
cable access and marketing fees, the accrual recorded in connection with the
third quarter employee termination costs, offset by a decrease in amounts due to
customers for returned merchandise. Accounts receivable decreased primarily due
to the timing of customer collections made pursuant to the "ValuePay"
installment program.
Net cash used for investing activities totaled $33,300,000 for the nine
months ended October 31, 2004 compared to net cash provided by investing
activities of $5,477,000 for the nine months ended October 31, 2003. For the
nine months ended October 31, 2004 and 2003, expenditures for property and
equipment were $10,601,000 and $19,608,000, respectively. Expenditures for
property and equipment during the periods ended October 31, 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 and equipment for the nine months ended
October 31, 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 various enterprise software
systems, continued improvements/modifications to the Company's owned headquarter
buildings, the expansion of warehousing capacity, 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, 2004, the
Company invested $113,285,000 in various short-term investments, received
proceeds of $88,986,000 from the sale of short-term investments and received
proceeds of $1,600,000 in connection with a note receivable from a former
officer. 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
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 and received proceeds of $7,581,000 from the sale of
common stock investments.
Net cash provided by financing activities totaled $1,582,000 for the nine
months ended October 31, 2004 and related primarily to cash proceeds received of
$2,474,000 from the exercise of stock options, offset by payments of long-term
capital lease obligations of $892,000. Net cash used for financing activities
totaled $3,279,000 for the nine months ended October 31, 2003 and related
primarily to payments of $6,429,000 made 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 of $3,969,000 received from the
exercise of stock options.
24
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; significant factors difficult to predict, such as
widespread weather catastrophes or other significant television-covering events
causing an interruption of television coverage or that directly competes with
the viewership of our programming, and the ability of the Company to obtain and
retain key executives, on-air hosts and other key 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 October 31, 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 Acting Chief Financial Officer,
Frank P. Elsenbast, 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.
25
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. 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.
26
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/ Frank P. Elsenbast
------------------------------------------
Frank P. Elsenbast
Vice President Finance, Acting Chief Financial
Officer
(Principal Financial Officer)
December 10, 2004
27