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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-20243
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VALUEVISION MEDIA, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1673770
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Shady Oak Road, 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 June 7, 2005, there were 36,992,572 shares of the Registrant's common
stock, $.01 par value per share, outstanding.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
APRIL 30, 2005
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of April 30, 2005
and January 31, 2005 3
-Condensed Consolidated Statements of Operations for the
Three Months Ended April 30, 2005 and 2004 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Three Months Ended April 30, 2005 5
-Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 2005 and 2004 6
-Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 6. Exhibits 22
Signatures 23
Exhibit Index 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
APRIL 30, JANUARY 31,
2005 2005
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 63,682 $ 62,640
Short-term investments 39,731 37,941
Accounts receivable, net 73,010 79,405
Inventories 59,308 54,903
Prepaid expenses and other 5,490 5,635
----------- -----------
Total current assets 241,221 240,524
PROPERTY & EQUIPMENT, NET 50,761 52,725
FCC BROADCASTING LICENSE 31,943 31,943
NBC TRADEMARK LICENSE AGREEMENT, NET 17,881 18,687
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 3,326 3,550
OTHER INTANGIBLE ASSETS, NET - 68
OTHER ASSETS 2,799 2,799
----------- -----------
$ 347,931 $ 350,296
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 59,458 $ 48,012
Accrued liabilities 37,910 41,062
----------- -------------
Total current liabilities 97,368 89,074
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,212 1,380
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 43,102 43,030
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
37,094,081 and 37,043,912 shares issued and outstanding 371 370
Warrants to purchase 7,630,583 shares of common stock 46,683 46,683
Additional paid-in capital 264,079 264,005
Deferred compensation (295) (353)
Accumulated deficit (104,589) (93,893)
----------- ------------
Total shareholders' equity 206,249 216,812
----------- -----------
$ 347,931 $ 350,296
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
FOR THE THREE MONTHS ENDED
APRIL 30,
-------------------------------
2005 2004
------------- -------------
Net sales $ 156,163 $ 159,197
Cost of sales (exclusive of depreciation and
amortization shown below) 103,780 106,113
------------- -------------
Gross profit 52,383 53,084
------------- -------------
OPERATING EXPENSE:
Distribution and selling 51,145 50,802
General and administrative 6,610 5,675
Depreciation and amortization 5,291 4,784
Asset impairment 400 --
Employee termination costs 528 --
------------- -------------
Total operating expense 63,974 61,261
------------- -------------
OPERATING LOSS (11,591) (8,177)
------------- -------------
OTHER INCOME:
Other income 255 --
Interest income 646 274
------------- -------------
Total other income 901 274
------------- -------------
LOSS BEFORE INCOME TAXES (10,690) (7,903)
Income tax provision 6 --
------------- -------------
NET LOSS (10,696) (7,903)
Accretion of redeemable preferred stock (72) (71)
------------- -------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (10,768) $ (7,974)
============= =============
NET LOSS PER COMMON SHARE $ (0.29) $ (0.22)
============= =============
NET LOSS PER COMMON SHARE
- ASSUMING DILUTION $ (0.29) $ (0.22)
============= =============
Weighted average number of common shares outstanding:
Basic 37,077,473 36,640,477
============= =============
Diluted 37,077,473 36,640,477
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 30, 2005
(Unaudited)
(In thousands, except share data)
COMMON STOCK COMMON
-------------------- STOCK ADDITIONAL TOTAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS'
LOSS OF SHARES VALUE WARRANTS CAPITAL COMPENSATION DEFICIT EQUITY
------------- --------- ----- -------- ---------- ------------ ----------- -------------
BALANCE, JANUARY 31, 2005 37,043,912 $ 370 $46,683 $264,005 $ (353) $ (93,893) $ 216,812
Net loss $(10,696) -- -- -- -- -- (10,696) (10,696)
========
Exercise of stock options and
common stock issuances 50,169 1 -- 155 -- -- 156
Restricted stock forfeited -- -- -- (9) 9 -- --
Amortization of deferred
compensation -- -- -- -- 49 -- 49
Accretion on redeemable
preferred stock -- -- -- (72) -- -- (72)
---------- ----- ------- -------- ------ --------- ---------
BALANCE, APRIL 30, 2005 37,094,081 $ 371 $46,683 $264,079 $ (295) $(104,589) $ 206,249
========== ===== ======= ======== ====== ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
FOR THE THREE MONTHS ENDED APRIL 30,
------------------------------------
2005 2004
------------- ------------
OPERATING ACTIVITIES:
Net loss $ (10,696) $ (7,903)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 5,291 4,784
Common stock issued to employees 4 7
Amortization of deferred compensation 49 81
Asset impairment 400 --
Gain on sale of investments (5) --
Changes in operating assets and liabilities:
Accounts receivable, net 6,395 3,125
Inventories (4,405) 1,906
Prepaid expenses and other (59) (1,346)
Accounts payable and accrued liabilities 8,294 (82)
----------- ------------
Net cash provided by operating activities 5,268 572
----------- -----------
INVESTING ACTIVITIES:
Property and equipment additions (2,426) (2,837)
Purchase of short-term investments (31,924) (68,538)
Proceeds from sale of short-term investments 30,139 25,173
----------- -----------
Net cash used for investing activities (4,211) (46,202)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 152 1,395
Payment of long-term obligation (167) (336)
----------- -----------
Net cash (used for) provided by financing activities (15) 1,059
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,042 (44,571)
BEGINNING CASH AND CASH EQUIVALENTS 62,640 81,033
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 63,682 $ 36,462
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 33 $ 53
=========== ===========
Income taxes paid $ 6 $ 31
=========== ===========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exercise of common stock purchase warrants $ -- $ 955
=========== ===========
Restricted stock forfeited $ 9 $ --
=========== ===========
Accretion of redeemable preferred stock $ 72 $ 71
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
(Unaudited)
(1) GENERAL
ValueVision Media, Inc. and its subsidiaries (the "Company") is an
integrated direct marketing company that markets, sells and distributes its
products directly to consumers through various forms of electronic media. The
Company's operating strategy incorporates television home shopping, Internet
e-commerce, vendor programming sales, fulfillment services and outsourced
e-commerce and fulfillment solutions.
The Company's television home shopping business uses on-air personalities
to market brand name merchandise and proprietary / private label consumer
products at competitive prices. The Company's live 24-hour per day television
home shopping programming is distributed primarily through long-term cable and
satellite affiliation agreements and the purchase of month-to-month full and
part-time block lease agreements of cable and broadcast television time. In
addition, the Company distributes its programming through one Company-owned full
power television station in Boston, Massachusetts and one low power television
station in Atlanta, Georgia. The Company also complements its television home
shopping business by the sale of a broad array of merchandise through its
Internet shopping website, www.shopnbc.com.
On November 16, 2000, the Company entered into an exclusive license
agreement with National Broadcasting Company, Inc., currently known as NBC
Universal, Inc. ("NBC"), pursuant to which NBC granted the Company worldwide use
of an NBC-branded name and the Peacock image for a ten-year period. The Company
rebranded its growing home shopping network and companion Internet shopping
website as "ShopNBC" and "ShopNBC.com", respectively, in fiscal 2001. This
rebranding was intended to position the Company as a multimedia retailer,
offering consumers an entertaining, informative and interactive shopping
experience, and position the Company as a leader in the evolving convergence of
television and the Internet.
The Company, through its wholly owned subsidiary, ValueVision Interactive,
Inc. maintains the ShopNBC.com website and manages 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").
(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
2004 Annual Report on Form 10-K. Operating results for the three month period
ended April 30, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending February 4, 2006.
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.
7
FISCAL YEAR
The Company's most recently completed fiscal year ended on January 31,
2005 and this year is designated "fiscal 2004". On April 29, 2005, the Company
elected to change its fiscal year from a fiscal year ending January 31 to a
52/53 week fiscal year ending on the first Saturday in February of each calendar
year. This is effective for the Company's current fiscal year, which will end on
February 4, 2006 and is designated "fiscal 2005". The Company is making this
change in order to align its fiscal year more closely to its retail seasonal
merchandising plan. The change will also enhance the weekly and monthly
comparability of sales results relating to the Company's television
home-shopping business. The Company does not expect this change to have a
significant impact on its consolidated financial statements.
(3) STOCK-BASED COMPENSATION
At April 30, 2005, the Company had a number of stock-based compensation
plans. The Company accounts for these plans under the recognition and
measurement principles of Accounting Principles Board 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", to
stock-based employee compensation:
THREE MONTHS ENDED APRIL 30,
2005 2004
--------------- --------------
Net loss available to common shareholders:
As reported................................... $ (10,768,000) $ (7,974,000)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effects................... (5,034,000) (2,302,000)
--------------- --------------
Pro forma..................................... $ (15,802,000) $ (10,276,000)
=============== ==============
Net loss per share:
Basic:
As reported................................ $ (0.29) $ (0.22)
Pro forma.................................. (0.43) (0.28)
Diluted:
As reported................................ $ (0.29) $ (0.22)
Pro forma.................................. (0.43) (0.28)
(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 APRIL 30,
--------------------------------
2005 2004
--------------- --------------
Net loss available to common shareholders.... $ (10,768,000) $ (7,974,000)
=============== ==============
Weighted average number of common shares
outstanding - Basic........................ 37,077,000 36,640,000
Dilutive effect of convertible preferred
stock...................................... -- --
Dilutive effect of stock options and
warrants................................... -- --
--------------- --------------
Weighted average number of common shares
outstanding - Diluted...................... 37,077,000 36,640,000
=============== ==============
Net loss per common share.................... $ (0.29) $ (0.22)
=============== ==============
Net loss per common share- assuming
dilution................................... $ (0.29) $ (0.22)
=============== ==============
8
In accordance with SFAS No. 128, for the three months ended April 30, 2005
and 2004, approximately 860,000 and 1,456,000, 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.
(5) COMPREHENSIVE LOSS
The Company reports comprehensive 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). Total comprehensive
loss was $(10,696,000) and $(7,903,000) for the three months ended April 30,
2005 and 2004, respectively. As of January 31, 2004, the Company no longer had
any 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
periods ended April 30, 2005 and 2004 are as follows:
ELECTRONIC ALL
THREE MONTHS ENDED APRIL 30 (IN THOUSANDS) MEDIA FANBUZZ OTHER (a) TOTAL
- ------------------------------------------ ------------ ---------- ---------- -----------
2005
Revenues............................................. $ 151,215 $ 2,687 $ 2,261 $ 156,163
Operating (loss) income.............................. (10,039) (1,566) 14 (11,591)
Depreciation and amortization........................ 4,855 186 250 5,291
Interest income (expense)............................ 663 (17) -- 646
Income taxes......................................... 6 -- -- 6
Net loss............................................. (8,756) (1,706) (234) (10,696)
Identifiable assets.................................. 334,866 2,629 10,436 347,931
----------- ---------- ---------- -----------
2004
Revenues............................................. $ 151,127 $ 6,125 $ 1,945 $ 159,197
Operating (loss) income.............................. (7,408) (979) 210 (8,177)
Depreciation and amortization........................ 4,277 341 166 4,784
Interest income (expense)............................ 299 (25) -- 274
Income taxes......................................... -- -- -- --
Net loss............................................. (6,739) (1,126) (38) (7,903)
Identifiable assets.................................. 360,710 21,735 7,307 389,752
----------- ---------- ---------- -----------
9
(a) Revenue from segments below quantitative thresholds are attributable to
VVIFC, which provides fulfillment, warehousing and telemarketing services
primarily to RLM, the Company and the NBC Experience Store.
Information on net sales by significant product groups are as follows (in
thousands):
THREE MONTHS ENDED APRIL 30,
2005 2004
------------ ----------
Jewelry............................ $ 76,826 $ 97,322
Computers.......................... 15,200 17,113
Home............................... 16,932 15,595
All others, less than 10% each..... 47,205 29,167
------------ ----------
Total....................... $ 156,163 $ 159,197
============ ==========
(7) RELATED PARTY TRANSACTION
In conjunction with its services agreement with RLM, the Company records
revenue for amounts billed to RLM for customer service and fulfillment services.
Revenues recorded from these services were $1,784,000 and $1,944,000 for the
quarters ended April 30, 2005 and 2004, respectively. Amounts due from RLM were
$1,250,000 and $850,000, as of April 30, 2005 and January 31, 2005,
respectively.
In July 2004, the Company entered into an agreement with Right Now
Technologies, Inc. ("Right Now") under which the Company paid Right Now
approximately $150,000 during fiscal year 2004 to utilize certain customer
services technologies developed by Right Now. The Company's President and Chief
Executive Officer, William J. Lansing, serves on the board of directors of Right
Now. The Company pays Right Now approximately $17,000 for annual software
maintenance fees relating to this technology.
(8) 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.
(9) COMMON STOCK REPURCHASE PROGRAM
In the second quarter of fiscal 2001, the Company's Board of Directors
authorized a $25 million common stock repurchase program whereby the Company may
repurchase shares of its common stock in the open market and through negotiated
transactions, at prices and times deemed to be beneficial to the long-term
interests of shareholders and the Company. In the second quarter of fiscal 2002,
the Company's Board of Directors authorized the repurchase of an additional $25
million of the Company's common stock. 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 April 30, 2005,
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 three-month periods ended April 30, 2005
or 2004.
10
(10) GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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.
During the third quarter of fiscal 2004, the Company wrote off goodwill
totaling $9,442,000 attributable to the FanBuzz acquisition as the Company had
determined that the goodwill was impaired following FanBuzz's loss of its
National Hockey League contract in September 2004.
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:
APRIL 30, 2005 JANUARY 31, 2005
--------------------------- ----------------------------
AVERAGE GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ----------- ------------ ----------- ------------
Amortized intangible
assets:
Website address............. 3 $ 1,000,000 $(1,000,000) $ 1,000,000 $ (945,000)
Partnership contracts....... 2 280,000 (280,000) 280,000 (280,000)
Non-compete agreements...... 3 230,000 (230,000) 230,000 (217,000)
Favorable lease contracts... 13 200,000 (200,000) 200,000 (200,000)
Other....................... 2 290,000 (290,000) 290,000 (290,000)
----------- ------------ ----------- -----------
Total.................... $ 2,000,000 $ 2,000,000) $ 2,000,000 $(1,932,000)
=========== ============ =========== ===========
Unamortized intangible
assets:
FCC broadcast license....... $31,943,000 $31,943,000
=========== ===========
Amortization expense for intangible assets for the three months ended
April 30, 2005 and 2004 was $68,000 and $117,000, respectively. During the third
quarter of fiscal 2004, the Company wrote off approximately $160,000 of
intangible assets in connection with the FanBuzz asset impairment. As of April
30, 2005, intangible assets relating to the FanBuzz acquisition have a remaining
carrying value of $-0-.
(11) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revision to Statement of Financial
Accounting Standards No. 123, "Share-Based Payment" ("SFAS No. 123(R)"). The
revision requires all entities to recognize compensation expense in an amount
equal to the fair value of share-based payments granted to employees. The
statement eliminates the alternative method of accounting for employee
share-based payments previously available under Accounting Principles Board
Opinion No. 25. The statement will be effective for public companies for fiscal
years beginning after June 15, 2005. The Company has not completed the process
of evaluating the full financial statement impact that will result from the
adoption of SFAS No. 123(R). See Note 3, "Stock-Based Compensation", for the
Company's disclosure regarding the pro forma effect of the adoption of SFAS No.
123(R) on the Company's consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchange of Nonmonetary Assets" ("SFAS No. 153"), an
amendment of APB Opinion No. 29. SFAS No. 153 requires all nonmonetary exchanges
to be recorded at fair value, unless the assets exchanged do not have commercial
substance. A nonmonetary exchange has commercial substance under SFAS No. 153 if
future cash flows are expected to change significantly as a result of the
exchange. SFAS No. 153 will be effective for all nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect the adoption of SFAS No. 153 to have a significant impact on its
financial statements.
11
(12) ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended April 30, 2005, a number of FanBuzz customers had
notified FanBuzz that they had elected to not renew the term of their e-commerce
services agreement or had decided to terminate their agreement for convenience
as permitted in the agreement. Following these notifications, the Company
assessed whether there had been an impairment of the FanBuzz long-lived assets
in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). The Company performed a cash flow analysis and 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 $400,000 in the quarter ended April 30, 2005.
During the quarter ended April 30, 2005, the Company also recorded an
additional $528,000 charge to earnings and established a related accrual
primarily in connection with the downsizing of the Company's FanBuzz operations.
The charge consisted primarily of severance pay and related benefit costs
associated with the elimination of approximately twelve positions. The severance
is expected to be paid out over periods ranging from one to twelve months.
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, 2005.
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 that 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, 2005, specifically under the captions
entitled "Risk Factors" and "Critical Accounting Policies and Estimates,"
provide information that 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. 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.
12
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 is its television home shopping
business, ShopNBC, and companion Internet shopping website, ShopNBC.com, which
sells 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 Company's largest
single category of merchandise, representing 58% and 65% of television home
shopping and Internet net sales for the three months ended April 30, 2005 and
April 30, 2004, respectively. After jewelry, the second largest product category
of merchandise sold is computers and electronics, representing 19% and 14% of
television home shopping and Internet net sales for the three months ended April
30, 2005 and April 30, 2004, respectively. 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
electronics categories to supplement the existing jewelry and computer and
electronics business. The Company continued to make progress on its strategic
objective of diversifying the merchandise mix offered to consumers during fiscal
2005, growing product categories outside of jewelry and computers and
electronics in the three months ended April 30, 2005 from 21% to 23% of total
television home shopping and Internet sales as compared to the three months
ended April 30, 2004. The Company believes that its customers are primarily
women between the ages of 35 and 55 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 recognition of the NBC name and
associated peacock symbol to achieve greater brand recognition with the ShopNBC
television channel and ShopNBC.com website; (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 through new or expanded
broadcast agreements with cable and satellite operators and other creative means
for reaching consumers such as webcasting on ShopNBC.com; (iv) increase average
net sales per home by increasing penetration within the existing audience base
and by attracting new customers through a broadening of its merchandise mix and
targeted marketing efforts; (v) continue to grow the Company's Internet business
with innovative use of marketing and technology, such as advanced search
strategies, personalization, webcasting and unique auction capabilities; and
(vi) upgrade the overall quality of the Company's network, programming and
customer support infrastructure consistent with expectations associated with the
NBC brand name.
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 sustain 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.
13
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 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. There
are also a number of other small niche players and start-ups competing in the
television home shopping industry. The Company further 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 and 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 also competes 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 carriage on additional cable
systems and obtaining additional sales penetration from the Company's existing
customer base.
Results for the First Quarter of Fiscal 2005
Consolidated net sales for the quarter ended April 30, 2005 were
$156,163,000 compared to $159,197,000 for the quarter ended April 30, 2004, a 2%
decrease. The decrease in consolidated net sales is directly attributable to a
decrease in sales from the Company's FanBuzz operations following the loss of
its National Hockey League ("NHL") contract in September 2004. Net sales
attributed to the Company's television and Internet operations increased
slightly to $151,215,000 for the quarter ended April 30, 2005 from $151,127,000
for the quarter ended April 30, 2004. Consolidated gross margins were 33.5% for
the quarter ended April 30, 2005 compared to 33.3% for the quarter ended April
30, 2004. The Company reported an operating loss of $11,591,000 and a net loss
of $10,696,000 for the first quarter of fiscal 2005 compared to an operating
loss of $8,177,000 and a net loss of $7,903,000 for the first quarter of fiscal
2004.
ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended April 30, 2005, a number of FanBuzz customers had
notified FanBuzz that they had elected to not renew the term of their e-commerce
services agreement or had decided to terminate their agreement for convenience
as permitted in the agreement. Following these notifications, the Company
assessed whether there had been an impairment of the FanBuzz long-lived assets
in accordance with SFAS No. 144. The Company performed a cash flow analysis and
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 $400,000 in the quarter ended
April 30, 2005.
During the quarter ended April 30, 2005, the Company also recorded an
additional $528,000 charge to earnings and established a related accrual in
connection with the downsizing of the FanBuzz operations and 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 twelve positions. The severance is expected to be
paid out over periods ranging from one to twelve months.
14
RESULTS OF OPERATIONS
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
DOLLAR AMOUNT AS A
PERCENTAGE OF NET SALES FOR
THE
THREE MONTHS
ENDED APRIL 30,
2005 2004
----- -----
NET SALES 100.0% 100.0%
===== =====
GROSS MARGIN 33.5% 33.3%
----- -----
Operating expenses:
Distribution and selling 32.7% 31.9%
General and administrative 4.2% 3.5%
Depreciation and amortization 3.4% 3.0%
Asset impairment 0.3% --%
Employee termination costs 0.3% --%
----- -----
40.9% 38.4%
----- -----
Operating loss (7.4)% (5.1)%
===== =====
KEY PERFORMANCE METRICS*
(UNAUDITED)
FOR THE THREE MONTHS
ENDED APRIL 30,
---------------
%
2005 2004 CHANGE
---- ---- ------
PROGRAM DISTRIBUTION
Cable FTE's (Average 000,s) 37,510 35,896 4%
Satellite FTE's (Average 000's) 23,325 20,151 16%
------- ------- ---
Total FTEs (Average 000's) 60,835 56,047 9%
Net Sales per FTE (Annualized) $ 9.97 $ 10.79 (8)%
Active Customers - 12 month rolling 770,348 736,370 5%
% New Customers - 12 month rolling 58% 63%
% Reactivated & Retained - 12 month 42% 37%
rolling
Customer Penetration - 12 month 1.3% 1.3%
rolling
MERCHANDISE MIX
Jewelry 58% 65%
Apparel 5% 5%
Health & Beauty 4% 3%
Computers & Electronics 19% 14%
Fitness 2% 2%
Home 12% 11%
Shipped Units (000's) 1,196 1,316 (9%)
Average Selling Price - Shipped Units $ 183 $ 168 9%
*Includes television home shopping and Internet sales only.
15
PROGRAM DISTRIBUTION
Average full time equivalent ("FTE") subscribers grew 9% in the first
quarter ended April 30, 2005, resulting in a 4,788,000 increase in average FTE's
compared to the prior year comparable quarter. The increase was driven by
continued strong growth in satellite distribution and increased penetration of
digital cable.
NET SALES PER FTE
Net sales per FTE for the first quarter ended April 30, 2005 decreased 8%,
or $0.82 per FTE, compared to the prior year comparable quarter. The decrease
was primarily due to flat first quarter television home shopping and Internet
sales and the 9% increase in average FTE's for the quarter.
CUSTOMERS
The Company added 34,000 active customers over the twelve-month period
ended April 30, 2005, a 5% increase over active customers added in the prior
year comparable twelve-month period. The increase in active customers resulted
from the increase in household distribution, product diversification efforts 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 1.3% for the twelve months ended April 30,
2005 and 2004.
MERCHANDISE MIX
During the quarter ended April 30 2005, jewelry net sales decreased to 58%
of total television and Internet net sales from 65% during the prior year
comparable quarter. Computer and electronic net sales as a percentage of total
merchandise mix increased from 14% to 19% and all other merchandise categories
increased from 21% to 23% versus the comparable prior year quarter. The
Company's merchandise mix is evolving away from its historical reliance on
jewelry and computers 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. Computer and
electronic net sales as a percentage of total television home shopping and
Internet net sales increased during the first quarter of fiscal 2005 primarily
due to increased sales associated with LCD television sets, which are very
popular with the Company's customers.
SHIPPED UNITS
The number of units shipped during the first quarter ended April 30, 2005
decreased 9% from the prior year comparable quarter to 1,196,000 from 1,316,000.
The decrease in shipped units for the quarter ended April 30, 2005 was due
primarily to a shift in the product mix in the first quarter of fiscal 2005 to
higher priced merchandise in the computer and electronics categories driven
primarily by sales of LCD televisions.
AVERAGE SELLING PRICE
The Average Selling Price ("ASP") per unit for the Company was $183 in the
quarter ended April 30, 2005, a 9% increase from the comparable prior year
quarter. The increase in the ASP during the first quarter of fiscal 2005 was due
primarily driven by increases in price points associated with gems, gold,
apparel and home merchandise categories.
NET SALES
Consolidated net sales, inclusive of shipping and handling revenue, for
the three months ended April 30, 2005 were $156,163,000 compared with net sales
of $159,197,000 for the three months ended April 30, 2004, a 2% decrease. The
decrease in consolidated net sales is directly attributable to a $3,438,000
decrease in sales from the Company's FanBuzz operations following the loss of
its NHL contract in September 2004. Net sales attributed to the Company's
television and Internet operations increased slightly to $151,215,000 for the
quarter ended April 30, 2005 from $151,127,000 for the quarter ended April 30,
2004. The growth in year-to-
16
date television home shopping and Internet net sales is primarily attributable
to increased shipping and handling revenue as a result of fewer shipping
promotions in the first quarter of fiscal 2005 compared to fiscal 2004 and the
growth in FTE homes receiving the Company's television programming. During the
twelve-month period ended April 30, 2005, the Company added approximately 4.8
million average FTE subscriber homes, a 9% increase, which was offset by an 8%
decrease in the productivity of already existing FTE homes. Annualized net sales
per FTE was $9.97 during the first quarter of fiscal 2005 decreasing from $10.79
during the first quarter of fiscal 2004. 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 PROFIT
Gross profit for the three months ended April 30, 2005 and 2004 were
$52,383,000 and $53,084,000, respectively, a decrease of $701,000. The decrease
in consolidated gross profit is directly attributable to a $1,674,000 decrease
in gross profit from the Company's FanBuzz operations following the loss of its
NHL contract in September 2004. Gross profit attributed to the Company's
television and Internet operations increased $966,000 for the quarter ended
April 30, 2005 over the quarter ended April 30, 2004 due primarily to increased
gross profit margins on shipping and handling and increased sales volume from
the Company's television home shopping business. Gross margins for the three
months ended April 30, 2005 and 2004 were 33.5% and 33.3%, respectively. Gross
margins for the three months ended April 30, 2005 increased as compared to gross
margins of the comparable prior year periods primarily due to a 1.3% margin
increase resulting from an increase in television and Internet shipping and
handling margins driven by the negative impact of the Company's fiscal 2004 free
shipping loyalty club launched in February 2004, offset by a reduction in
overall merchandise margins and a 1.0% decrease in margin relating to the
reduction in FanBuzz's operations. 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.
OPERATING EXPENSES
Total operating expenses for the three months ended April 30, 2005 were
$63,974,000 compared to $61,261,000 for the comparable prior year period. Total
operating expenses for the three month period ended April 30, 2005 included a
non-cash charge of $400,000 relating to impairments of long-lived assets
associated with the Company's FanBuzz subsidiary. Total operating expenses for
the three month period ended April 30, 2005 also included a charge of $528,000
recorded in connection with the downsizing of the FanBuzz operations and
management's decision to eliminate a number of positions within the Company.
Distribution and selling expense increased $343,000, or 1%, to $51,145,000, or
33% of net sales, during the first quarter of fiscal 2005 compared to
$50,802,000, 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 $1,108,000 for the three-month period ended April 30,
2005 due to a 9% year-to-date increase in the number of average FTE subscribers
over the comparable prior year period and increased credit card fees of $491,000
due to an overall decline in first quarter net sales made using the ShopNBC
credit card, which generally carries lower fees, and as a result of a higher
percentage of the quarter's ShopNBC credit card sales being used for extended
payment plans which are more costly. In addition, distribution and selling
expense also increased over the comparable prior-year period as a result of
increased costs associated with the hiring of programming personnel and on-air
talent of $512,000, offset by a $1,677,000 decrease in distributing and selling
expenses associated with the downsizing of the FanBuzz operations and decreased
direct-mail and marketing expenses of $185,000 for the quarter ended April 30,
2005.
General and administrative expense for the three months ended April 30,
2005 increased $935,000, or 16%, to $6,610,000, or 4% of net sales, compared to
$5,675,000, or 4% of net sales, for the three months ended April 30, 2004.
General and administrative expense increased on a year-to-date basis over prior
year primarily as a result of increased information system personnel salaries
and consulting fees and software maintenance fees of $1,078,000 and increased
legal fees of $151,000, offset by a decrease in executive bonuses totaling
$314,000.
Depreciation and amortization expense for the three months ended April 30,
2005 was $5,291,000 compared to $4,784,000 for the three months ended April 30,
2004, representing an increase of $507,000, or 11%, from the comparable
prior-year period. Depreciation and amortization expense as a percentage of net
sales for the three months ended April 30, 2005 and 2004 was 3%. 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.
17
OPERATING LOSS
For the three months ended April 30, 2005, the Company reported an
operating loss of $11,591,000 compared to an operating loss of $8,177,000 for
the three months ended April 30, 2004. The Company's operating loss increased
for the three month period ended April 30, 2005 from the comparable prior-year
period as a result of the Company's decrease in gross profit as described above
under "Gross Profit." In addition to the decrease in gross profit over the
comparable prior-year period, there were increases in distribution and selling
expenses, particularly net cable access fees, credit card fees and additional
costs associated with production and on-air talent, increases in general and
administrative expenses recorded in connection with information system personnel
salaries, consulting fees 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-month
period ended April 30, 2005 from the comparable prior-year period due to a
$400,000 asset impairment charge recorded in the first quarter of fiscal 2005
and a charge of $528,000 recorded in connection with costs incurred associated
with first quarter employee terminations.
NET LOSS
For the three months ended April 30, 2005, the Company reported a net loss
available to common shareholders of $10,768,000 or $(.29) per share on
37,077,000 weighted average common shares outstanding compared with a net loss
available to common shareholders of $7,974,000 or $(.22) per share on 36,640,000
weighted average common shares outstanding for the quarter ended April 30, 2004.
The net loss available to common shareholders for the three months ended April
30, 2005 includes a $250,000 cash dividend received from RLM, a $5,000 gain on
the sale of investments and interest income totaling $646,000 earned on the
Company's cash and short-term investments. For the quarter ended April 30, 2004,
the net loss available to common shareholders included interest income of
$274,000 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 quarters ended April 30, 2005 and 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 ended April 30, 2005, relating to state income taxes payable on
certain income for which there was no loss carryforward benefit available. The
Company will continue to maintain a valuation reserve against its net deferred
tax assets until such time that the Company believes it is more likely than not
that such assets will be realized in the future.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 60.8 million average FTE households for the three months ended
April 30, 2005 and approximately 56.0 million average FTE households for the
three months ended April 30 2004. The Company's programming is currently
available through affiliation and time-block purchase agreements with
approximately 1,300 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. 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 that
programming is received. 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 2004 Annual Report on Form 10-K under the
captions entitled "Risk Factors" and "Critical Accounting Policies and
Estimates."
18
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2005, cash and cash equivalents and short-term investments
were $103,413,000, compared to $100,581,000 as of January 31, 2005, a $2,832,000
increase. For the three months ended April 30, 2005, working capital decreased
$7,597,000 to $143,853,000. The current ratio was 2.5 at April 30, 2005 compared
to 2.7 at January 31, 2005.
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. A significant increase in the Company's
accounts receivable aging or credit losses could negatively impact the Company's
source of cash from operations in the short term. While credit losses have
historically been within the Company's estimates for such losses, there is no
guarantee that the Company will continue to experience the same credit loss rate
that it has in the past. Historically, the Company has also been able to
generate additional cash sources from the proceeds of stock option exercises and
from the sale of its equity investments and other properties; however, these
sources of cash are neither relied upon nor controllable by the Company. The
Company has no long-term debt other than fixed capital lease obligations and
believes it has the ability to obtain additional financing if necessary. At
April 30, 2005, 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 2005 and 2004 and for expected future capital
expenditures include the upgrade and replacement of computer software and
front-end merchandising systems, expansion of capacity to support the Company's
growing business, continued improvements and 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. 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 April 30, 2005 with cash and cash equivalents and
short-term investments of $103,413,000, no long-term debt and $1,212,000 of
long-term capital lease obligations. The Company expects continued future growth
in working capital as revenues grow beyond fiscal 2005 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 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 2004 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 will be sufficient
to fund any such investments while maintaining sufficient liquidity for its
normal business operations.
Total assets at April 30, 2005 were $347,931,000, compared to $350,296,000
at January 31, 2005, a $2,365,000 decrease. Shareholders' equity was
$206,249,000 at April 30, 2005, compared to $216,812,000 at January 31, 2005, a
$10,563,000 decrease. The decrease in shareholders' equity for the three-month
period ended April 30, 2005 resulted primarily from the net loss of $10,696,000
recorded during the three-month period and accretion on redeemable preferred
stock of $72,000. These decreases were
19
offset by increases in shareholders' equity of $156,000 from proceeds received
related to the exercise of stock options and vesting of deferred compensation of
$49,000.
For the three-month period ended April 30, 2005, net cash provided by
operating activities totaled $5,268,000 compared to net cash provided by
operating activities of $572,000 for the three-month period ended April 30,
2004. Net cash provided by operating activities for the three-month periods
ended April 30, 2005 and 2004 reflects the net loss, as adjusted for
depreciation and amortization, common stock issued to employees, amortization of
deferred compensation, gain on sale of investments and an asset impairment
charge recorded in fiscal 2005. In addition, net cash provided by operating
activities for the three months ended April 30, 2005 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 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 increased prepaid postage. 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 first 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 and a reduction in credit card receivables.
Net cash used for investing activities totaled $4,211,000 for the three
months ended April 30, 2005 compared to net cash used for investing activities
of $46,202,000 for the three months ended April 30, 2004. For the three months
ended April 30, 2005 and 2004, expenditures for property and equipment were
$2,426,000 and $2,837,000, respectively. Expenditures for property and equipment
during the periods ended April 30, 2005 and 2004 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 building improvements. 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 three months
ended April 30, 2005, the Company invested $31,924,000 in various short-term
investments and received proceeds of $30,139,000 from the sale of short-term
investments. In the three months ended April 30, 2004, the Company invested
$68,538,000 in various short-term investments and received proceeds of
$25,173,000 from the sale of short-term investments.
Net cash used for financing activities totaled $15,000 for the three
months ended April 30, 2005 and related primarily to cash proceeds received of
$152,000 from the exercise of stock options, offset by payments of long-term
capital lease obligations of $167,000. Net cash provided by financing activities
totaled $1,059,000 for the three months ended April 30, 2004 and related
primarily to cash proceeds received of $1,395,000 from the exercise of stock
options, offset by payments of long-term capital lease obligations of $336,000.
20
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. 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
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's
management conducted an evaluation, under the supervision and with the
participation of the Company's chief executive officer and chief financial
officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based on this evaluation, the officers concluded that the
Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company's management, with the participation of the chief executive
officer and chief financial officer, performed an evaluation as to whether any
change in the internal controls over financial reporting (as defined in Rules
13a-15 and 15d-15 under the Securities Exchange Act of 1934) occurred during the
period covered by this report. Based on that evaluation, the chief executive
officer and chief financial officer concluded that no change occurred in the
internal controls over financial reporting during the period covered by this
report that materially affected, or were reasonably likely to materially affect,
the internal controls over financial reporting.
21
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBIT NUMBER EXHIBIT
- -------------- ------------------------------------------------------------------------------------
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)
10 Employment Agreement between the Registrant and Bryan Venberg dated May 3, 2004. *+
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.*
32.1 Section 1350 Certification of Chief Executive Officer.*
32.2 Section 1350 Certification of Chief Financial Officer.*
- ----------
* Filed herewith.
+ Management compensatory plan/arrangement.
(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.
22
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, Chief Financial Officer
(Principal Financial Officer)
June 9, 2005
23
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT FILED BY
- ------- ----------------------------------------------------------------- -------------------------
3.1 Sixth Amended and Restated Articles of Incorporation, as Amended Incorporated by reference
3.2 Certificate of Designation of Series A Redeemable Convertible
Preferred Stock Incorporated by reference
3.3 Articles of Merger Incorporated by reference
3.4 Bylaws, as amended Incorporated by reference
10 Employment Agreement between the Registrant and Bryan Venberg
dated May 3, 2004 Filed herewith
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer Filed herewith
32.1 Section 1350 Certification of Chief Executive Officer Filed herewith
32.2 Section 1350 Certification of Chief Financial Officer. Filed herewith
24