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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-20243
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VALUEVISION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1673770
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Shady Oak Road, Minneapolis, MN 55344 (Address of
principal executive offices)
612-947-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of June 9, 1998, there were 25,478,343 shares of the Registrant's
common stock, $.01 par value, outstanding.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
APRIL 30, 1998
PART I FINANCIAL INFORMATION Page of
Form 10-Q
---------
Item 1. Financial Statements
- Condensed Consolidated Balance Sheets as of April 30, 1998 and 3
January 31, 1998
- Condensed Consolidated Statements of Operations for the Three 4
Months Ended April 30, 1998 and 1997
- Condensed Consolidated Statement of Shareholders' Equity for 5
the Three Months Ended April 30, 1998
- Condensed Consolidated Statements of Cash Flows for the Three 6
Months Ended April 30, 1998 and 1997
- Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
APRIL 30, JANUARY 31,
1998 1998
------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 45,859,500 $ 17,198,074
Short-term investments 6,567,424 14,667,669
Accounts receivable, net 9,417,124 8,694,293
Inventories, net 17,308,370 20,426,862
Prepaid expenses and other 8,729,329 10,478,848
Note receivable -- National Media Corporation 10,000,000 7,000,000
Income taxes receivable -- 748,319
Deferred income taxes 447,000 447,000
------------- -------------
Total current assets 98,328,747 79,661,065
Property and equipment, net 20,420,439 21,403,724
Federal Communications Commission licenses, net 2,082,585 5,807,187
Montgomery Ward operating agreement and licenses, net 2,025,231 2,073,360
Investment in Paxson Communications Corporation 14,497,006 9,847,688
Goodwill and other intangible assets, net 6,251,705 6,892,454
Investments and other assets, net 9,130,894 9,078,826
============= =============
$ 152,736,607 $ 134,764,304
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 389,484 $ 410,648
Accounts payable 15,195,569 17,643,895
Accrued liabilities 10,120,500 11,535,551
Income taxes payable 5,999,079 --
------------- -------------
Total current liabilities 31,704,632 29,590,094
LONG-TERM OBLIGATIONS 833,054 1,036,821
DEFERRED INCOME TAXES 3,697,000 1,869,660
------------- -------------
Total liabilities 36,234,686 32,496,575
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized;
26,780,778 and 26,780,778 shares issued and outstanding 267,808 267,808
Additional paid-in capital 74,538,225 74,538,225
Accumulated other comprehensive losses (3,288,871) (6,275,652)
Notes receivable from officers (993,295) (960,476)
Retained earnings 45,978,054 34,697,824
------------- -------------
Total shareholders' equity 116,501,921 102,267,729
------------- -------------
$ 152,736,607 $ 134,764,304
============= =============
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED
APRIL 30,
-----------------------------
1998 1997
------------ ------------
NET SALES $43,676,233 $51,061,796
COST OF SALES 25,022,354 28,366,858
----------- -----------
Gross profit 18,653,879 22,694,938
----------- -----------
Margin % 42.7% 44.4%
OPERATING EXPENSES:
Distribution and selling 16,818,763 21,102,834
General and administrative 2,853,668 2,914,699
Depreciation and amortization 1,270,079 1,801,240
----------- -----------
Total operating expenses 20,942,510 25,818,773
----------- -----------
OPERATING LOSS (2,288,631) (3,123,835)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations 19,750,000 --
Equity in losses of affiliates (16,362) (369,996)
Interest income 783,208 527,270
Other, net (32,985) 54,324
----------- -----------
Total other income 20,483,861 211,598
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 18,195,230 (2,912,237)
INCOME TAX PROVISION (BENEFIT) 6,915,000 (1,151,000)
=========== ===========
NET INCOME (LOSS) $11,280,230 $(1,761,237)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ 0.42 $ (0.05)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
---ASSUMING DILUTION $ 0.42 $ (0.05)
=========== ===========
Weighted average number of common shares outstanding:
Basic 26,780,778 32,949,056
=========== ===========
Diluted 26,877,387 32,949,056
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended April 30, 1998
(Unaudited)
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL OTHER
COMPREHENSIVE NUMBER PAR PAID-IN COMPREHENSIVE
INCOME OF SHARES VALUE CAPITAL INCOME (LOSSES)
-------------- -------------- -------------- ------------- --------------
BALANCE, January 31, 1998 26,780,778 $ 267,808 $ 74,538,225 $ (6,275,652)
Comprehensive income:
Net income $ 11,280,230 -- -- -- --
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of tax of $1,831,000 2,986,781 -- -- -- 2,986,781
-------------
Comprehensive income $ 14,267,011
=============
Increase in notes receivable from officers -- -- -- --
------------- ------------- ------------- -------------
BALANCE, April 30, 1998 26,780,778 $ 267,808 $ 74,538,225 $ (3,288,871)
============= ============= ============= =============
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
OFFICERS EARNINGS EQUITY
-------------- ------------- ---------------
BALANCE, January 31, 1998 $ (960,476) $ 34,697,824 $ 102,267,729
Comprehensive income:
Net income -- 11,280,230 11,280,230
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of tax of $1,831,000 -- -- 2,986,781
Comprehensive income
Increase in notes receivable from officers (32,819) -- (32,819)
------------- ------------- -------------
BALANCE, April 30, 1998 $ (993,295) $ 45,978,054 $ 116,501,921
============= ============= =============
The accompanying notes are an integral part of this
condensed consolidated finacial statement.
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED APRIL 30,
--------------------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net income (loss) $ 11,280,230 $ (1,761,237)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities-
Depreciation and amortization 1,270,079 1,801,240
Deferred taxes (3,660) (76,000)
Equity in losses of affiliates 16,362 369,996
Gain on sale of investments -- (100,075)
Gain on sale of broadcast stations (19,750,000) --
Changes in operating assets and liabilities:
Accounts receivable, net (722,831) (2,897,329)
Inventories, net 3,118,492 (1,790,529)
Prepaid expenses and other 1,702,035 (382,568)
Accounts payable and accrued liabilities (3,872,536) 963,873
Income taxes payable (receivable), net 6,747,398 (45,008)
------------ ------------
Net cash used for operating activities (214,431) (3,917,637)
------------ ------------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements (212,755) (1,479,917)
Proceeds from sale of investments -- 280,638
Proceeds from sale of broadcast stations 24,483,200 --
Loan to National Media Corporation (3,000,000) --
Purchase of short-term investments (1,479,021) (13,547,228)
Proceeds from sale of short-term investments 9,747,729 12,843,773
Payment for investments and other assets (407,254) (1,150,891)
------------ ------------
Net cash provided by (used for) investing activities 29,131,899 (3,053,625)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants -- 46,514
Payments for repurchases of common stock -- (10,458,412)
Payment of long-term obligations (256,042) (61,485)
------------ ------------
Net cash used for financing activities (256,042) (10,473,383)
------------ ------------
Net increase (decrease) in cash and cash equivalents 28,661,426 (17,444,645)
BEGINNING CASH AND CASH EQUIVALENTS 17,198,074 28,618,943
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 45,859,500 $ 11,174,298
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 52,000 $ 21,000
============ ============
Income taxes paid $ 410,000 $ 75,000
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
(Unaudited)
(1) GENERAL
ValueVision International, Inc. and Subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company which markets its products
directly to consumers through electronic and print media.
The Company's principal electronic media activity is its television home
shopping network which uses recognized on-air television home shopping
personalities to market brand name merchandise and proprietary and private label
consumer products at competitive or discount prices. The Company's 24-hour per
day television home shopping programming is distributed primarily through
long-term cable affiliation agreements and the purchase of month-to-month full-
and part-time block lease agreements of cable and broadcast television time. In
addition, the Company distributes its programming through Company owned or
affiliated full power Ultra-High Frequency ("UHF") broadcast television
stations, low power television ("LPTV") stations and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc., doing business as HomeVisions ("VVDM"), is a
direct-mail marketer of a broad range of quality general merchandise which is
sold to consumers through direct-mail catalogs and other direct marketing
solicitations. Products offered include domestics, housewares, home accessories
and electronics. Through its wholly-owned subsidiary, Catalog Ventures, Inc.
("CVI"), the Company sells a variety of fashion jewelry, health and beauty aids,
books, audio and video cassettes and other related consumer merchandise through
the publication of five consumer specialty catalogs. The Company also
manufactures and markets, via direct-mail, women's foundation undergarments and
other women's apparel through its wholly-owned subsidiary Beautiful Images, Inc.
("BII").
(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 have been condensed or omitted pursuant to such
rules and regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments which, in the opinion of management, are necessary for
a fair presentation of such financial statements. Although management believes
the disclosures and information presented are adequate to make the information
not misleading, it is suggested that these interim condensed consolidated
financial statements be read in conjunction with the Company's most recent
audited financial statements and notes thereto included in its fiscal 1998
Annual Report on Form 10-K. Operating results for the three month period ended
April 30, 1998, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 1999.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation with no impact on
previously reported net income (loss).
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
(Unaudited)
(3) NET INCOME (LOSS) PER COMMON SHARE
In the fourth quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"),
which established new guidelines for computing and presenting earnings (loss)
per share data ("EPS"), and retroactively restated EPS for all prior periods.
SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is
computed by dividing reported net income (loss) by the weighted average number
of common shares outstanding. Diluted EPS reflects potential dilution from
outstanding stock options and warrants, using the treasury stock method. The
adoption of SFAS No. 128 did not have a significant effect on previously
reported EPS information.
(4) COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130") which establishes standards for reporting in the financial statements
all changes in equity during a period, except those resulting from investments
by and distributions to owners. For the Company, comprehensive income includes
net income and other comprehensive income (loss) which consists of unrealized
holding gains and losses from equity investments classified as
"available-for-sale". Total comprehensive income (loss) was $14,267,000 and
($1,761,000) for the three months ended April 30, 1998 and 1997, respectively.
(5) SALE OF BROADCAST STATIONS
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE- TV Channel 33, which serves the Seattle, Washington
market, along with two of the Company's non- cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson Communications
Corporation ("Paxson") for a total of approximately $35 million in cash. Under
the terms of the agreement, Paxson paid the Company approximately $25 million
upon closing and the remaining $10 million is to be paid when KBGE, which is
currently operating at reduced power from downtown Seattle, is able to relocate
its antenna and increase its transmitter power to a level at or near its
licensed full power. The Company will retain and continue to serve the Seattle
market via its recently-launched low-power station K58DP-TV, which transmits
from downtown Seattle. KBGE was acquired by the Company in March 1996 for
approximately $4.6 million. The pre-tax gain recorded on the first installment
with respect to the sale of these television stations was approximately $19.8
million and was recognized in the fiscal quarter ended April 30, 1998.
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(6) NATIONAL MEDIA CORPORATION
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media Corporation is a publicly-held direct marketer of
consumer products through the use of direct response transactional television
programming, known as infomercials, and currently makes its programming
available to more than 370 million television households in more than 70
countries worldwide.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it did not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company common stock have demanded their dissenter's rights. The Company and
National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenters' notice,
the companies mutually agreed to postpone their respective shareholder meetings.
On June 2, 1998, the Company announced that attempts to renegotiate new,
mutually acceptable terms and conditions regarding a transaction with National
Media were unsuccessful and the Merger Agreement was terminated. As of April 30,
1998, the Company has incurred approximately $2.0 million of acquisition related
costs and anticipates expensing these costs in the second quarter ended July 31,
1998.
(7) COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a 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. As of April 30, 1998,
the Company was authorized to repurchase an aggregate of $20 million of its
common stock of which approximately $16 million in stock had been repurchased .
In June 1998, the Company's Board of Directors authorized an additional
repurchase of up to $6 million of the Company's common stock.
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131") in June 1997. SFAS No. 131
requires that public business enterprises report information about operating
segments in annual financial statements and requires selected information in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers and is effective for fiscal years beginning after December 15, 1997.
The Company plans to adopt the disclosure requirements of SFAS No. 131 in its
fiscal 1999 year-end financial statements when required. The disclosure
requirements of SFAS No. 131 need not be applied to interim periods in the
initial year of application.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes thereto included
elsewhere herein and the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1998.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A
PERCENTAGE OF NET SALES
FOR THE THREE MONTHS
ENDED APRIL 30,
------------------------
1998 1997
--------- --------
Net sales 100.0% 100.0%
===== =====
Gross margin 42.7% 44.4%
----- -----
Operating expenses:
Distribution and selling 38.5% 41.3%
General and administrative 6.5% 5.7%
Depreciation and amortization 2.9% 3.5%
----- -----
47.9% 50.5%
----- -----
Operating loss (5.2%) (6.1%)
===== =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision International, Inc. and its subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company which markets its products
directly to consumers through electronic and print media.
The Company's television home shopping network uses recognized on-air
television home shopping personalities to market brand name merchandise and
proprietary and private label consumer products at competitive or discount
prices. The Company's 24-hour per day television home shopping programming is
distributed primarily through long-term cable affiliation agreements and the
purchase of month-to-month full- and part-time block lease agreements of cable
and broadcast television time. In addition, the Company distributes its
programming through Company owned or affiliated full power Ultra-High Frequency
("UHF") broadcast television stations, low power television ("LPTV") stations
and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc., doing business as HomeVisions ("VVDM"), is a
direct-mail marketer of a broad range of quality general merchandise which is
sold to consumers through direct-mail catalogs. Through its wholly-owned
subsidiary, Catalog Ventures, Inc. ("CVI"), the Company sells a variety of
fashion jewelry and other related consumer merchandise through the publication
of five consumer specialty catalogs. The Company also manufactures and markets,
via direct-mail, women's foundation undergarments and other women's apparel
through its wholly-owned subsidiary, Beautiful Images, Inc. ("BII").
NATIONAL MEDIA CORPORATION
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media Corporation is a publicly-held direct marketer of
consumer products through the use of direct response transactional television
programming, known as infomercials, and currently makes its programming
available to more than 370 million television households in more than 70
countries worldwide.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it did not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company common stock have demanded their dissenter's rights. The Company and
National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenters' notice,
the companies mutually agreed to postpone their respective shareholder meetings.
On June 2, 1998, the Company announced that attempts to renegotiate new,
mutually acceptable terms and conditions regarding a transaction with National
Media were unsuccessful and the Merger Agreement was terminated. As of April 30,
1998, the Company has incurred approximately $2.0 million of acquisition related
costs and anticipates expensing these costs in the second quarter ended July 31,
1998.
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RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended April 30, 1998 (fiscal 1999), were
$43,676,000 compared with net sales of $51,062,000 for the three months ended
April 30, 1997 (fiscal 1998), a 14.5% decrease. The decrease in net sales is
directly attributable to the decline in catalog sales resulting from the
downsizing of the HomeVisions (formerly known as Montgomery Ward Direct)
direct-mail operations after the November 1997 restructuring of the Company's
operating agreements with Montgomery Ward & Co., Incorporated ("Montgomery
Ward"). Sales attributed to direct-mail marketing operations totaled $14,537,000
or 33.3% of total net sales for the quarter ended April 30, 1998 and totaled
$26,691,000 or 52.3% of total net sales for the quarter ended April 30, 1997.
Sales attributed to the Company's television home-shopping programming increased
19.6% to $29,140,000 for the quarter ended April 30, 1998 from $24,370,000 for
the comparable prior year period. The increase in television home-shopping net
sales occurred while full-time equivalent cable homes able to receive the
Company's home-shopping programming remained essentially unchanged from the
prior year at approximately 12.0 million. This improvement in home shopping is a
direct result of a strengthened merchandising effort under the leadership of
ValueVision - TV's new general management. During the 12-month period ended
April 30, 1998 the Company added approximately 1.3 million full-time cable
homes, a 16% increase. In addition to new full-time cable homes, television
home-shopping sales increased due to the continued addition of new customers
from households already receiving the Company's television home-shopping
programming, as well as an increase in repeat sales to existing customers. The
increase in repeat sales to existing customers experienced during the first
three months of fiscal 1999 was due, in part, to the effects of continued
testing of certain merchandising and programming strategies during the first
quarter of fiscal 1999. Certain changes were made to the Company's merchandising
and programming strategies in the fourth quarter of fiscal 1998 and the first
quarter of fiscal 1999 which contributed to an improvement in television
home-shopping sales. The Company intends to continue to test and change its
merchandising and programming strategies with the intent of improving its
television home-shopping sales results. However, while the Company is optimistic
that results will continue to improve, there can be no assurance that such
changes in strategy will achieve the intended results.
GROSS PROFIT
Gross profits for the first quarter ended April 30, 1998 and 1997 were
$18,654,000 and $22,695,000, respectively, a decrease of $4,041,000 or 17.8%.
Gross margins for the three months ended April 30, 1998 were 42.7% compared to
44.4% for the same period last year. The principal reason for the decrease in
gross profits was the decreased sales volume resulting from the downsizing of
the HomeVisions catalog operations. Television gross margins for the first
quarter ended April 30, 1998 and 1997 were 38.1% and 41.3% respectively. Gross
margins for the Company's direct mail-order operations were 51.9% and 47.3% for
the same respective periods. Television home shopping gross margins between
comparable periods decreased slightly from prior year primarily as a result of a
decrease in gross margin percentages in the giftware and houseware product
categories and a greater proportion of lower margin non-jewelry products such as
electronics, offset by increases in volume of higher margin seasonal and jewelry
products. During the first quarter of fiscal 1999, the Company continued to
broaden its merchandise mix as compared to the same period last year by
expanding the range and quantity of non-jewelry items. As part of the ongoing
shift in merchandise mix, the Company continued to devote additional program air
time to non-jewelry merchandise. Jewelry products accounted for approximately
63% of air time during the first quarter of fiscal 1999, compared with 64% for
the same period last year. Gross margins for the Company's direct mail-order
operations increased primarily as a result of the decrease in HomeVisions sales
due to the downsizing of the HomeVisions catalog operations which has a
considerably lower margin than CVI or BII
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and as a result of the exclusion of two lower margin CVI catalog titles from the
fiscal 1999 summer mailing.
OPERATING EXPENSES
Total operating expenses for the three months ended April 30, 1998 were
$20,943,000 versus $25,819,000 representing a decrease of $4,876,000 or 18.9%
from the three months ended April 30, 1997. Distribution and selling expenses
decreased $4,284,000 or 20.3% to $16,819,000 or 38.5% of net sales during the
first quarter of fiscal 1999 compared to $21,103,000 or 41.3% of net sales for
the comparable prior-year period. Distribution and selling costs decreased
primarily as a result of the downsizing of the Company's HomeVisions catalog
operations, offset by increases in net cable access fees due to an increase in
the rate per full-time equivalent cable home, increased marketing and
advertising fees as a result of absorbing additional advertising costs which
were previously resold to Montgomery Ward, additional personnel costs associated
with increased staffing levels, labor rates and increased costs associated with
handling the increased television home shopping sales volume. Distribution and
selling expenses decreased as a percentage of net sales over prior year
primarily as a result of additional unusual costs incurred by the Company and
included in the first quarter of fiscal 1998 in connection with the conversion
and integration of the Company's acquired direct-mail operations and start-up
costs associated with the Company's fulfillment and warehouse facility which
were not included in the first quarter of fiscal 1999.
General and administrative expenses for the three months ended April 30,
1998 decreased $61,000 or 2.1% to $2,854,000 or 6.5% of net sales compared to
$2,915,000 or 5.7% of net sales for the three month period ended April 30, 1997.
General and administrative costs remained relatively flat compared to the prior
year and increased as a percentage of net sales as a result of the decrease in
net sales from quarter to quarter.
Depreciation and amortization costs for the three months ended April 30,
1998 were $1,270,000 versus $1,801,000 representing a decrease of $531,000 or
29.5% from the comparable prior-year period. Depreciation and amortization costs
as a percentage of net sales were 2.9% for the three months ended April 30, 1998
versus 3.5% for the comparable prior-year period. The dollar decrease is
primarily due to a reduction in amortization expense of approximately $465,000
relating to intangible assets reduced in connection with the November 1997
amended Montgomery Ward operating and license agreement. In addition,
depreciation and amortization expense decreased from prior year as a result of
the Company's sale of its Seattle, Washington television broadcast station
(KBGE-TV , Channel 33) in February 1998.
OPERATING LOSS
For the three months ended April 30, 1998, the Company incurred an
operating loss of $2,289,000 compared to an operating loss of $3,124,000 for
the three months ended April 30, 1997, a decrease of $835,000 or 27%. The
improvement in the operating loss resulted primarily from decreases in
distribution and selling costs over prior year due to the recent downsizing of
the HomeVisions catalog operations and the fact that the first quarter of
fiscal 1998 included certain unusual costs incurred by the Company in
connection with the conversion and integration of the Company's acquired
direct-mail operations and start-up costs incurred associated with the
Company's fulfillment and warehouse facility. Also contributing to the
operating loss improvement for the first quarter of fiscal 1999 was a reduction
in amortization expense
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
over prior year relating primarily to the November 1997 amended Montgomery Ward
operating and license agreement. These decreases were offset by decreased sales
volumes, margins and a corresponding decrease in gross profits.
NET INCOME (LOSS)
For the three months ended April 30, 1998, the Company reported net income
of $11,280,000 or $.42 per share on 26,877,000 diluted weighted average common
shares outstanding ($.42 per share on 26,781,000 basic shares) compared with a
net loss of $1,761,000, or $.05 per share on 32,949,000 diluted weighted average
common shares outstanding ($.05 per share on 32,949,000 basic shares) for the
first quarter of fiscal 1998. Results for the first quarter of fiscal 1999
include a pre-tax gain of $19,750,000 from the sale of television station
KBGE-TV, Channel 33 in Seattle, Washington and two low-power television stations
in February 1998. For the three months ended April 30, 1998, excluding the gain
on the sale of the television stations, the Company had a net loss of $964,000,
or $.04 per share. For the quarter ended April 30, 1998, net income reflects an
income tax provision of $6,915,000 which results in an effective tax rate of
38%.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 17.4 million cable homes as of April 30, 1998, as compared to 17.4
million cable homes as of January 31, 1998 and to 18.1 million cable homes as of
April 30, 1997. The Company's programming is currently available through
affiliation and time-block purchase agreements with approximately 320 cable
systems and one wholly-owned full power television broadcast station. In
addition, the Company's programming is broadcast full-time over eleven owned or
affiliated low power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of April 30, 1998 and
1997, the Company's programming was available to approximately 11.9 million and
12.0 million full-time equivalent ("FTE") cable homes, respectively. As of
January 31, 1998, the Company's programming was available to 11.7 million FTE
cable homes. Approximately 9.4 million and 8.1 million cable homes at April 30,
1998 and 1997, respectively, received the Company's programming on a full-time
basis. Homes that receive the Company's television home shopping programming 24
hours per day are counted as one FTE each and homes that receive the Company's
programming for any period less than 24 hours are counted based upon an analysis
of time of day and day of week.
CIRCULATION
With respect to the Company's direct-mail marketing operations,
approximately 2.8 million HomeVisions catalogs were mailed in the first quarter
of fiscal 1999. At April 30, 1998, HomeVisions had approximately 524,000
"active" customers (defined as individuals that have purchased from the Company
within the preceding 12 months) and combined customer and prospect files that
totaled approximately 4.1 million names. Approximately 4.8 million CVI catalogs
were mailed in the first quarter of fiscal 1999 and at April 30, 1998, CVI had
approximately 545,000 active catalog customers and approximately 4.8 million
customer names in its catalog customer list database. During the first quarter
of fiscal 1999, BII had approximately 175 million space advertisements or
"impressions" circulated in national and regional newspapers and magazines and
at April 30, 1998, BII had approximately 210,000 active customers and
approximately 690,000 customer names in its customer list database.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 CONSIDERATIONS
The Company has reviewed the implications of year 2000 compliance and has
taken steps designed to ensure that the Company's information systems and
software applications will manage dates beyond 1999. The Company believes that
it has allocated adequate resources for this purpose and that planned software
upgrades, which are underway and in the normal course of business, will address
the Company's internal year 2000 needs. While the Company expects that efforts
on the part of current employees of the Company will be required to monitor year
2000 issues, no assurances can be given that these efforts will be successful.
The Company does not expect the cost of addressing any year 2000 issue to be a
material event or uncertainty that would have a material, adverse effect on
future operating results or financial condition.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, cash and cash equivalents and short-term investments
were $52,427,000, compared to $31,866,000 as of January 31, 1998, a $20,561,000
increase. For the three months ended April 30, 1998, working capital increased
$16,553,000 to $66,624,000. The current ratio was 3.1 at April 30, 1998 compared
to 2.7 at January 31, 1998. At April 30, 1998 all short-term investments and
cash equivalents were invested in securities with original maturity dates of
less than two hundred and seventy (270) days.
Total assets at April 30, 1998 were $152,737,000, compared to $134,764,000
at January 31, 1998. Shareholders' equity was $116,502,000 at April 30, 1998,
compared to $102,268,000 at January 31, 1998, a $14,234,000 increase. The
increase in shareholders' equity for the three month period ended April 30, 1998
resulted primarily from net income of $11,280,000 for the quarter and net
unrealized holding gains of $2,987,000 on investments available-for-sale.
For the three-month period ended April 30, 1998, net cash used for
operating activities totaled $214,000 compared to net cash used for operating
activities of $3,918,000 for the three-month period ended April 30, 1997. Cash
flows from operations before consideration of changes in working capital items
and investing and financing activities was a negative $1,019,000 for the three
months ended April 30, 1998, compared to a negative $1,323,000 for the same
prior-year period. Net cash used for operating activities for the three months
ended April 30, 1998 reflects net income, as adjusted for depreciation and
amortization, equity in losses of affiliates and gain on sale of broadcast
stations, decreased accounts payable and accrued liabilities and increased
accounts receivable, offset by a decrease in inventories, prepaid expenses and
an increase in net income taxes payable. Accounts receivable increased primarily
due to timing relative to receipt of funds from credit card companies and
increased receivables due from customers for merchandise sales made pursuant to
the "ValuePay" installment program. Inventories decreased from year end as a
result of tighter inventory management, changes in merchandise mix and the
downsizing of the HomeVisions catalog operations. Prepaid expenses decreased
primarily as a result of decreased deferred catalog costs as the Company's
direct-mail operations end the Spring 1998 catalog season.
Net cash provided by investing activities totaled $29,132,000 during the
first quarter of fiscal 1999 compared to net cash used for investing activities
of $3,054,000 for the same period of fiscal 1998. For the three months ended
April 30, 1998 and 1997, expenditures for property and equipment were $213,000
and $1,480,000, respectively. Expenditures for property and equipment during the
periods ended April 30, 1998 and 1997 include (i) the upgrade of broadcast
station and production equipment, studios and
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
transmission equipment and (ii) the upgrade of computer software and related
equipment. Principal future capital expenditures will be for upgrading
television production and transmission equipment, studio expansions and order
fulfillment equipment to support expanded operations. During the first quarter
of fiscal 1999, the Company received $24,483,000 in proceeds from the sale of
its broadcast television station KBGE-TV. In addition, during the first quarter
of fiscal 1999, the Company disbursed $407,000 relating to certain strategic
investments and other long-term assets and granted an additional $3.0 million
working capital loan in the form of a demand note to National Media Corporation.
During the first quarter of fiscal 1998, the Company disbursed $1,151,000
relating to certain strategic investments and other long-term assets and
received $281,000 in net proceeds from the sale of certain long-term
investments.
Net cash used for financing activities totaled $256,000 for the three
months ended April 30, 1998 and included a $200,000 installment payment made
under a five year non-compete obligation entered into upon the acquisition of a
broadcast television station and payments made on capital lease obligations. Net
cash used for financing activities totaled $10,473,000 for the three months
ended April 30, 1997 and primarily related to repurchases of the Company's
common stock under its stock repurchase program and capital lease obligation
payments, offset by proceeds received from the exercise of stock options and
warrants.
Management believes that funds currently held by the Company will be
sufficient to fund the Company's operations, the repurchase of any additional
Company common stock pursuant to an authorized repurchase plan, anticipated
capital expenditures and cable launch fees through fiscal 1999. Additional
capital may be required in the event the Company is able to identify additional
direct marketing company acquisition targets and television stations in
strategic markets at favorable prices.
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 various "forward looking statements" within the meaning of
federal securities laws which represent management's expectations or beliefs
concerning future events, including the outcome of litigation, anticipated
operating results, revenue growth, capital spending requirements, potential
future acquisitions and the effects of regulation and competition. These, and
other forward looking statements made by the Company, must be evaluated in the
context of a number of important factors that may affect the Company's
financial position and results of operations including: the ability to resolve
satisfactorily the disputed issues in litigation, consumer spending and debt
levels, interest rate fluctuations, seasonal variations in consumer purchasing
activities, increases in postal, paper and outbound shipping costs, competition
in the retail and direct marketing industries, continuity of relationships with
or purchases from major vendors, product mix, competitive pressure on sales and
pricing, the ability of the Company to manage growth and expansion, changes in
the regulatory framework affecting the Company, increases in cable access fees
and other costs which cannot be recovered through improved pricing and the
identification and availability of potential acquisition targets at prices
favorable to the Company. Investors are cautioned that all forward looking
statements involve risk and uncertainty.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1998, specifically under the caption
entitled "Risk Factors", provide information which should be considered in
evaluating any of the Company's forward looking statements. In addition, the
facts and circumstances which 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.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
(a) Increase in Stock Repurchase Program.
The Company announced that its Board of Directors
has revised upward its Common Stock repurchase authorization so
that approximately $10 million is currently available to
repurchase stock. The Company's stock repurchase program was
initiated by the Board of Directors in November 1996. The Company
is currently authorized to repurchase an aggregate of up to $26
million of its Common Stock in open market or negotiated
transactions. As of April 30, 1998, approximately $16 million in
stock had been repurchased under the program.
(b) Chief Executive Officer
On June 3, 1998, the Company announced the election of
veteran marketing, direct response and retail executive, Gene
McCaffery, 50, as Chief Executive Officer of the Company. Mr.
McCaffery also was appointed to the Company's Board of Directors
and brings to the Company 25 years in retail and marketing
experience, as well as substantial executive experience. Since
March 30, 1998, he served as Chief Executive Officer of Quantum
Direct Corporation, the entity that was formed for the proposed
merger of the Company and National Media. Prior to such time, Mr.
McCaffery served as Chief Executive Officer and managing partner
of Marketing Advocates, a celebrity-driven product and service
development company based in Los Angeles, CA. Mr. McCaffery was
formerly Senior Executive Vice President of Montgomery Ward &
Co., Incorporated, a $7 billion retail chain ("Montgomery Ward"),
in charge of its merchandising, strategic planning, advertising
and marketing operations before leaving in 1996. While at
Montgomery Ward, Mr. McCaffery also oversaw The Signature Group,
one of the nation's largest direct marketing companies, and also
served as Vice-Chairman of the Board of the Company from August
1995 to March 1996. Mr. McCaffery served as an infantry officer
in the Vietnam War and was appointed as Civilian Aide to the
Secretary of the Army by President George Bush in 1991.
Mr. McCaffery and the Company have entered into a three
year employment agreement providing for him to serve as Chief
Executive Officer and a Director of the Company, with a base
salary of $500,000 during the first year, $525,000 during the
second year, and $550,000 during the third year. The agreement
also provides for bonus salary of up to 100% of the base salary,
which may be earned only upon the Company meeting certain
operating income, revenue and stock performance criteria. In
addition, pursuant to the agreement, Mr. McCaffery is being
issued stock options to acquire 800,000 shares of the Company's
Common Stock, $.01 par value, with an exercise price equal to
$3.375 per share, the last trading price of the Company's Common
Stock on March 30, 1998. Of such options, 200,000 vest monthly
on a pro rata basis over the term of the employment agreement,
and 600,000 vest on the earlier of the fifth anniversary of Mr.
McCaffery's start date (provided he is still an employee of the
Company) or in equal 20% (120,000 share) blocks based on the
average closing price of the Company's common stock for 20
consecutive trading days being at $5.00, $6.00, $7.00, $8.00 and
$9.00 respectively. Such
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options are being issued pursuant to the Company's 1994 Executive
Stock Option and Compensation Plan. The employment agreement
generally provides for a one year non-compete. In addition, in
the event of a change of control (as defined) of the Company, Mr.
McCaffery's employment can be terminated by the Company or Mr.
McCaffery in certain circumstances. In the event of such a
termination, Mr. McCaffery would be entitled to receive the base
salary and bonus salary remaining to be paid through the end of
the term of the employment agreement, together with accrued
benefits. The foregoing description of certain terms of the
employment agreement by and among the Company, Quantum Direct and
Mr. McCaffery, does not purport to be complete and is subject to
and qualified in its entirety by reference to a copy of the
employment agreement attached as Exhibit 10.1 to this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement made as of June 2, 1998 by and
among the Company, Gene McCaffery and Quantum Direct
Corporation.
10.2 Employment Agreement made effective as of May 1,
1998 between the Company and Stuart R. Romenesko.
10.3 Employment Agreement made effective as of May 1,
1998 between the Company and David T. Quinby.
11 Computation of Net Income (Loss) Per Share.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on March 31, 1998
reporting under Item 5, the Registrant's Press Release dated March
26, 1998 announcing the Registrant's fourth quarter and year end
earnings for the three and twelve months ended January 31, 1998.
The Registrant also reported under Item 5 the selection of veteran
marketing, direct response and retail executive, Gene McCaffery,
as Chief Executive Officer of Quantum Direct Corporation, the
international electronic commerce company that was to be formed by
the proposed merger of the Registrant and National Media
Corporation.
(ii) The Registrant filed a Form 8-K on April 9, 1998
reporting under Item 5, the Registrant's Press Release dated April
8, 1998 announcing the postponement of the special shareholder
meetings of the Registrant's and National Media Corporation to
vote on their proposed merger in light of the Registrant's
dissenting shareholders.
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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 INTERNATIONAL, INC. AND SUBSIDIARIES
/s/ Gene McCaffery
----------------------------------------
Gene McCaffery
Chief Executive Officer
(Principal Executive Officer)
/s/ Stuart R. Romenesko
----------------------------------------
Stuart R. Romenesko
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
June 10, 1998
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