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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 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.
-----------------------
(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
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(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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of December 5, 2005, there were 37,029,371 shares of the registrant's common
stock, $.01 par value per share, outstanding.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
OCTOBER 29, 2005
PAGE OF FORM
10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-Condensed Consolidated Balance Sheets as of October 29, 2005
and January 31, 2005 3
-Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods Ended October 29, 2005 and October 31, 2004 4
-Condensed Consolidated Statement of Shareholders' Equity
for the Nine Month Period Ended October 29, 2005 5
-Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended October 29, 2005 and October 31, 2004 6
-Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 5. Other Information 24
Item 6. Exhibits 26
Signatures 27
Exhibit Index 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
OCTOBER 29, JANUARY 31,
2005 2005
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 55,235 $ 62,640
Short-term investments 20,527 37,941
Accounts receivable, net 80,416 79,405
Inventories 79,269 54,903
Prepaid expenses and other 5,744 5,635
----------- -----------
Total current assets 241,191 240,524
PROPERTY & EQUIPMENT, NET 47,897 52,725
FCC BROADCASTING LICENSE 31,943 31,943
NBC TRADEMARK LICENSE AGREEMENT, NET 16,268 18,687
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 2,878 3,550
OTHER INTANGIBLE ASSETS, NET - 68
OTHER ASSETS 3,159 2,799
----------- -----------
$ 343,336 $ 350,296
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 59,807 $ 48,012
Accrued liabilities 42,295 41,062
----------- -----------
Total current liabilities 102,102 89,074
LONG-TERM CAPITAL LEASE OBLIGATIONS - 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 43,246 43,030
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
37,130,855 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 264,206 264,005
Deferred compensation (198) (353)
Accumulated deficit (113,074) (93,893)
----------- -----------
Total shareholders' equity 197,988 216,812
----------- -----------
$ 343,336 $ 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 MONTH PERIODS ENDED FOR THE NINE MONTH PERIODS ENDED
--------------------------------- --------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2005 2004 2005 2004
------------- ------------- -------------- -------------
Net sales $ 159,513 $ 139,480 $ 482,481 $ 449,013
Cost of sales (exclusive of depreciation and
amortization shown below) 105,026 95,072 317,002 302,303
------------- ------------- ------------- ------------
Gross profit 54,487 44,408 165,479 146,710
------------- ------------- ------------- ------------
OPERATING EXPENSE:
Distribution and selling 51,630 52,167 152,248 150,070
General and administrative 5,816 5,473 18,255 15,352
Depreciation and amortization 4,979 4,789 15,110 13,834
Employee termination costs -- 3,197 82 3,197
------------- ------------- ------------- ------------
Total operating expense 62,425 65,626 185,695 182,453
------------- ------------- ------------- ------------
OPERATING LOSS (7,938) (21,218) (20,216) (35,743)
------------- -------------- ------------- ------------
OTHER INCOME:
Other income (expense) 1 (300) -- (50)
Interest income 716 373 2,122 1,016
------------- ------------- ------------- ------------
Total other income 717 73 2,122 966
------------- ------------- ------------- ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (7,221) (21,145) (18,094) (34,777)
Equity in income of affiliates 382 -- 396 --
Income tax (provision) benefit (6) -- 813 --
------------- ------------- ------------- ------------
LOSS FROM CONTINUING OPERATIONS (6,845) (21,145) (16,885) (34,777)
DISCONTINUED OPERATIONS:
Loss from discontinued FanBuzz operations,
net of tax (Note 13) (221) (13,480) (2,296) (15,579)
------------- ------------- ------------- ------------
NET LOSS (7,066) (34,625) (19,181) (50,356)
Accretion of redeemable preferred stock (72) (72) (215) (214)
------------- ------------- ------------- ------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (7,138) $ (34,697) $ (19,396) $ (50,570)
============= ============= ============= ============
NET LOSS PER COMMON SHARE:
Continuing operations $ (0.18) $ (0.57) $ (0.45) $ (0.94)
Discontinued operations (0.01) (0.37) (0.07) (0.44)
------------- ------------- ------------- ------------
Net loss $ (0.19) $ (0.94) $ (0.52) $ (1.38)
============= ============= ============= ============
NET LOSS PER COMMON SHARE - ASSUMING DILUTION:
Continuing operations $ (0.18) $ (0.57) $ (0.45) $ (0.94)
Discontinued operations (0.01) (0.37) (0.07) (0.44)
------------- ------------- ------------- ------------
Net loss $ (0.19) $ (0.94) $ (0.52) $ (1.38)
============= ============= ============= ============
Weighted average number of common shares outstanding:
Basic 37,120,384 36,870,325 37,099,953 36,773,562
============= ============= ============= ============
Diluted 37,120,384 36,870,325 37,099,953 36,773,562
============= ============= ============= ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED OCTOBER 29, 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 $ (19,181) -- -- -- -- -- (19,181) (19,181)
============
Exercise of stock options and
common stock issuances 86,943 1 -- 425 -- -- 426
Restricted stock forfeited -- -- -- (9) 9 -- --
Amortization of deferred
compensation -- -- -- -- 146 -- 146
Accretion on redeemable
preferred stock -- -- -- (215) -- -- (215)
---------- ----- -------- ---------- ------------ ----------- -------------
BALANCE, OCTOBER 29, 2005 37,130,855 $ 371 $ 46,683 $ 264,206 $ (198) $ (113,074) $ 197,988
========== ===== ======== ========== ============ =========== =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
FOR THE NINE MONTH PERIODS ENDED
--------------------------------
OCTOBER 29, OCTOBER 31,
2005 2004
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (19,181) $ (50,356)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 15,412 14,804
Common stock issued to employees 25 16
Amortization of deferred compensation 146 436
Asset impairment 400 11,302
Equity in earnings of affiliates (396) --
(Gain) loss on sale and holdings of property (247) 300
Noncash tax benefit (832) --
Gain on long-term lease termination (924) --
Changes in operating assets and liabilities:
Accounts receivable, net (861) 5,243
Inventories (24,366) (15,116)
Prepaid expenses and other (677) (4,287)
Accounts payable and accrued liabilities 13,995 14,371
----------- -----------
Net cash used for operating activities (17,506) (23,287)
------------ -----------
INVESTING ACTIVITIES:
Property and equipment additions (7,332) (10,601)
Purchase of short-term investments (48,837) (113,285)
Proceeds from sale of short-term investments 66,257 88,986
Proceeds from sale of property 350 --
Proceeds from note receivable from former officer -- 1,600
----------- -----------
Net cash provided by (used for) investing activities 10,438 (33,300)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 401 2,474
Payment of long-term obligation (738) (892)
----------- -----------
Net cash provided by (used for) by financing activities (337) 1,582
------------ -----------
Net decrease in cash and cash equivalents (7,405) (55,005)
BEGINNING CASH AND CASH EQUIVALENTS 62,640 81,033
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 55,235 $ 26,028
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 111 $ 155
=========== ===========
Income taxes paid $ 11 $ 50
=========== ===========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exercise of common stock purchase warrants $ -- $ 955
=========== ===========
Restricted stock award $ -- $ 308
=========== ===========
Restricted stock forfeited $ 9 $ 115
=========== ===========
Property and equipment purchases included in accounts payable $ 149 $ --
=========== ===========
Accretion of redeemable preferred stock $ 215 $ 214
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 29, 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 and
direct-to-consumer mailings. 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 spokespersons
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 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, VVI Fulfillment Center,
Inc. ("VVIFC"), provides fulfillment, warehousing, customer service and
telemarketing services to Ralph Lauren Media, LLC ("RLM"), an entity in which
the Company holds a minority equity interest. 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 and fulfillment of certain
non-jewelry merchandise sold on the Company's television home shopping program
and Internet website.
(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 nine month period
ended October 29, 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 such 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 change is effective for the Company's current fiscal year, which will
end on February 4, 2006 and is designated "fiscal 2005". The Company made 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 October 29, 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 MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
---------------------------------- --------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2005 2004 2005 2004
---------------- ---------------- ---------------- --------------
Net loss available to common shareholders:
As reported............................... $ (7,138,000) $ (34,697,000) $ (19,396,000) $ (50,570,000)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effects............... (2,453,000) (4,282,000) (9,311,000) (10,994,000)
--------------- --------------- --------------- -------------
Pro forma................................. $ (9,591,000) $ (38,979,000) $ (28,707,000) $ (61,564,000)
=============== =============== =============== =============
Net loss per share:
Basic:
As reported............................ $ (0.19) $ (0.94) $ (0.52) $ (1.38)
Pro forma.............................. (0.26) (1.06) (0.77) (1.67)
Diluted:
As reported............................ $ (0.19) $ (0.94) $ (0.52) $ (1.38)
Pro forma.............................. (0.26) (1.06) (0.77) (1.67)
(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 MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
----------------------------------- -----------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net loss available to common shareholders $ (7,138,000) $ (34,697,000) $ (19,396,000) $ (50,570,000)
============== ============== ============== ==============
Weighted average number of common shares
outstanding - Basic.................... 37,120,000 36,870,000 37,100,000 36,774,000
Dilutive effect of convertible preferred
stock.................................. -- -- -- --
Dilutive effect of stock options and
warrants............................... -- -- -- --
-------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding - Diluted.................. 37,120,000 36,870,000 37,100,000 36,774,000
============== ============== ============== ==============
Net loss per common share................ $ (0.19) $ (0.94) $ (0.52) $ (1.38)
============== ============== ============== ==============
Net loss per common share- assuming
dilution............................... $ (0.19) $ (0.94) $ (0.52) $ (1.38)
============== ============== ============== ==============
8
In accordance with SFAS No. 128, for the three month periods ended October
29, 2005 and October 31, 2004, approximately 760,000 and 909,000, respectively,
in-the-money potentially dilutive common share stock options and warrants and
5,340,000 shares of convertible preferred stock have been excluded from the
computation of diluted earnings per share, as the effect of their inclusion
would be antidilutive. For the nine month periods ended October 29, 2005 and
October 31, 2004, approximately 711,000 and 1,114,000, 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 $7,066,000 and $34,625,000 for the three month periods ended October
29, 2005 and October 31, 2004, respectively. Total comprehensive loss was
$19,181,000 and $50,356,000 for the nine month periods ended October 29, 2005
and October 31, 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 businesses 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 and nine
month periods ended October 29, 2005 and October 31, 2004 are as follows:
SHOPNBC & ALL CONTINUING FANBUZZ, INC.
THREE MONTH PERIODS ENDED (IN THOUSANDS) SHOPNBC.COM OTHER (a) CORPORATE (b) OPERATIONS (DISCONTINUED) TOTAL
- ---------------------------------------- ------------ ---------- ------------- ----------- -------------- -----------
OCTOBER 29, 2005
Revenues................................. $ 156,899 $ 2,614 $ -- $ 159,513 $ 521 $
Operating (loss) income.................. (8,028) 90 -- (7,938) (181)
Depreciation and amortization............ 4,767 212 -- 4,979 41
Interest income (expense)................ 716 -- -- 716 (40)
Income tax provision..................... 6 -- -- 6 --
Net income (loss)........................ (7,317) 90 382 (6,845) (221) (7,066)
Identifiable assets...................... 334,955 6,705 396 342,056 1,280 343,336
----------- ---------- ------------- ---------- ------------- -----------
OCTOBER 31, 2004
Revenues................................. $ 137,610 $ 1,870 $ -- $ 139,480 $ 4,861 $
Operating loss........................... (21,090) (128) -- (21,218) (13,475)
Depreciation and amortization............ 4,575 214 -- 4,789 314
Interest income (expense)................ 373 -- -- 373 (5)
Income taxes............................. -- -- -- -- --
Net loss................................. (21,017) (128) -- (21,145) (13,480) (34,625)
Identifiable assets...................... 351,063 6,941 -- 358,004 6,236 364,240
----------- ---------- ------------- ---------- ------------- -----------
9
SHOPNBC & ALL CONTINUING FANBUZZ, INC.
NINE MONTH PERIODS ENDED (IN THOUSANDS) SHOPNBC.COM OTHER (a) CORPORATE (b) OPERATIONS (DISCONTINUED) TOTAL
- ---------------------------------------- ------------ ---------- ------------- ----------- -------------- -----------
OCTOBER 29, 2005
Revenues................................. $ 475,603 $ 6,878 $ -- $ 482,481 $ 5,384 $
Operating (loss) income.................. (20,672) 456 -- (20,216) (2,235)
Depreciation and amortization............ 14,438 672 -- 15,110 302
Interest income (expense)................ 2,122 -- -- 2,122 (62)
Income tax benefit....................... (813) -- -- (813) --
Net income (loss)........................ (17,735) 454 396 (16,885) (2,296) (19,181)
Identifiable assets...................... 334,955 6,705 396 342,056 1,280 343,336
----------- ---------- ------------- ---------- ------------- -----------
OCTOBER 31, 2004
Revenues................................. $ 443,390 $ 5,623 $ -- $ 449,013 $ 16,003 $
Operating (loss) income.................. (35,975) 232 -- (35,743) (15,526)
Depreciation and amortization............ 13,268 566 -- 13,834 970
Interest income (expense)................ 1,016 -- -- 1,016 (52)
Income taxes............................. -- -- -- -- --
Net loss................................. (35,009) 232 -- (34,777) (15,579) (50,356)
Identifiable assets...................... 351,063 6,941 -- 358,004 6,236 364,240
----------- ---------- ------------- ---------- ------------- -----------
- ------------
(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.
(b) Corporate assets and net income consist of long-term investments accounted
for under the equity method of accounting and not directly assignable to a
business unit.
Information on net sales from continuing operations by significant product
groups are as follows (in thousands):
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Jewelry......................... $ 78,531 $ 74,446 $ 245,413 $ 273,037
Electronics..................... 33,366 24,123 99,997 64,198
Home............................ 19,779 16,484 56,465 48,193
All others, less than 10% each.. 27,837 24,427 80,606 63,585
----------- ----------- ----------- -----------
Total.................... $ 159,513 $ 139,480 $ 482,481 $ 449,013
=========== =========== =========== ===========
(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 $2,614,000 and $1,870,000 for the
quarters ended October 29, 2005 and October 31, 2004, respectively, and were
$6,878,000 and $5,623,000 for the nine month periods ended October 29, 2005 and
October 31, 2004, respectively. Amounts due from RLM were $984,000 and $850,000,
as of October 29, 2005 and January 31, 2005, respectively. In November 2005, RLM
notified the Company that it had elected to extend the term of their existing
services agreement with the Company to May 31, 2007.
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 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. To
date, the Company has paid Right Now approximately $17,000 during fiscal 2005,
for annual software maintenance fees relating to this technology and other
services.
10
(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. 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. 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 November 2002, the Company's Board of Directors authorized a $25
million common stock repurchase program whereby the Company was authorized to
repurchase shares of its common stock in the open market through negotiated
transactions at prices and times deemed beneficial to the long-term interests of
shareholders and the Company. The authorization expired in November 2005. As of
October 29, 2005, the Company had repurchased a total of 398,000 shares of its
common stock under the stock repurchase program for a total net cost of
$4,322,000 at an average price of $10.86 per share. The Company did not
repurchase any shares under its repurchase program during the nine month periods
ended October 29, 2005 or October 31, 2004.
(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 had been recorded by the Company as a result of the
acquisition of FanBuzz, Inc. ("FanBuzz") in 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 ("NHL") 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:
OCTOBER 29, 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 nine months ended
October 29, 2005 and October 31, 2004 was $68,000 and $330,000, respectively.
During the third quarter of fiscal 2004, the Company wrote off approximately
$160,000 of intangible assets in connection with a FanBuzz asset impairment. As
of October 29, 2005, intangible assets relating to the FanBuzz acquisition have
a remaining carrying value of $-0-. See Note 13 for a discussion of the
discontinued operations of FanBuzz.
11
(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). The effect of adopting SFAS No. 123(R) on the
Company's consolidated financial statements and estimated compensation expense
for current and prior periods can be found in Note 3, "Stock-Based
Compensation".
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 was effective for all nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company's
adoption of SFAS No. 153 did not have a significant impact on its financial
statements.
(12) ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended April 30, 2005, a number of FanBuzz customers
notified the Company that they elected not to renew the term of their e-commerce
services agreements with FanBuzz or decided to terminate their agreements 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 first quarter of fiscal 2005. The impairment
charge is included in loss from discontinued operations in the accompanying
consolidated statement of operations for the nine month period ended October 29,
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 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. $446,000
of this charge is included in loss from discontinued operations in the
accompanying consolidated statement of operations for the nine month period
ended October 29, 2005.
(13) DISCONTINUED FANBUZZ OPERATIONS
In the second quarter of fiscal 2005, the Company decided to wind down its
FanBuzz subsidiary operations and finalized the shut down in the quarter ended
October 29, 2005. FanBuzz, acquired by the Company in fiscal 2002, was an
e-commerce and fulfillment solutions provider for a number of sports, media,
entertainment and retail companies. The decision to shut down FanBuzz was made
after continued operating losses were experienced following the loss of its NHL
contract in September 2004 and after a number of other FanBuzz customers
notified the Company in the first quarter of fiscal 2005 that they elected not
to renew the term of their e-commerce services agreements. FanBuzz ceased
business operations as of October 29, 2005 and was a reportable segment under
SFAS No. 131. FanBuzz meets the definition of a "component of an entity" and has
been accounted for as a discontinued operation under SFAS No. 144. The results
of operations for FanBuzz have been classified as discontinued operations in the
accompanying condensed consolidated statements of operations for all periods
presented. Net sales from discontinued operations were $521,000 and $4,861,000
for the three month periods ended October 29, 2005 and October 31, 2004,
respectively. Net sales from discontinued operations were $5,384,000 and
$16,003,000 for the nine month periods ended October 29, 2005 and October 31,
2004, respectively. Pretax losses from discontinued operations were $221,000 and
$13,480,000 for the three month periods ended October 29, 2005 and October 31,
2004, respectively. Pretax losses from discontinued operations were $2,296,000
and $15,579,000 for the nine month periods ended October 29, 2005 and October
31, 2004, respectively. The Company's consolidated balance sheet as of October
29, 2005 includes $1,280,000 in current assets, $670,000 in current liabilities
and $-0- in long-term assets and long-term liabilities related to FanBuzz. The
Company's consolidated balance sheet as of January 31, 2005 included $4,117,000
in current assets, $2,745,000 in current liabilities, $890,000 in long-term
assets and $1,145,000 in long-term capital lease liabilities related to FanBuzz.
12
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 public events that are 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 the Company's 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.
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 and direct-to-consumer mailings. The Company's principal line 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 53% and 55% of television home
shopping and Internet net sales for the three and nine month respective periods
ended October 29, 2005. Home products, including electronics product categories,
represented approximately 37% and 36% of television home shopping and Internet
net sales for the three and nine month respective periods ended October 29,
2005. Apparel, health and beauty product categories represented approximately
10% and 9% of television home shopping and Internet net sales for the three and
nine month respective periods ended October 29, 2005. The Company believes that
product diversification appeals 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
13
home, apparel and accessories, cosmetics, fitness and consumer electronics
categories to supplement the existing jewelry and computer businesses. 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.
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 existing homes receiving the
Company's programming and by attracting new customers through a broader
merchandise mix and targeted marketing efforts; (v) continue to grow the
Company's Internet business through the innovative use of marketing and
technology, such as advanced search strategies, personalization, webcasting and
unique auction capabilities; (vi) upgrade the overall quality of the Company's
network, programming and customer support infrastructure consistent with
expectations associated with the NBC brand name; and (vii) increase the average
order size through various sales initiatives including add-on sales, continuity
programs and warranty sales.
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 the cost of 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.
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. The Shop at Home,
Inc. television network, in which E.W. Scripps Company owns a controlling
interest, 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 channel. 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 e.g. IAC/InteractiveCorp's (parent company of HSN) continued
purchase of web based businesses (including search engine company Ask Jeeves),
Scripps' acquisition of Shopzilla, a shopping search engine and Liberty Media's
(parent company of QVC) recently announced acquisition of Provide Commerce, an
operator of retail websites featuring brands such as Proflowers and Cherry Moon
Farms. 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
14
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 Third Quarter of Fiscal 2005
Consolidated net sales from continuing operations for the quarter ended
October 29, 2005 were $159,513,000 compared to $139,480,000 for the quarter
ended October 31, 2004, a 14% increase. The increase in consolidated net sales
from continuing operations is directly attributable to the continued improvement
in and increased net sales from the Company's television home shopping and
Internet operations. Effective for the quarter ended October 29, 2005, the
results of operations of FanBuzz have been presented as loss from discontinued
operations in the accompanying consolidated statements of operations for all
periods presented. Net sales attributed to the Company's television home
shopping and Internet operations increased to $156,899,000 for the quarter ended
October 29, 2005 from $137,610,000 for the quarter ended October 31, 2004.
Consolidated gross margins from continuing operations were 34.2% for the quarter
ended October 29, 2005 compared to 31.8% for the quarter ended October 31, 2004.
The Company reported an operating loss of $7,938,000 and a net loss of
$7,066,000, which included a net loss of $221,000 from discontinued operations,
for the third quarter of fiscal 2005. The Company reported an operating loss of
$21,218,000 and a net loss of $34,625,000, which included a net loss of
$13,480,000 from discontinued operations, for the third quarter of fiscal 2004.
ASSET IMPAIRMENT AND EMPLOYEE TERMINATION COSTS
During the quarter ended April 30, 2005, a number of FanBuzz customers
notified the Company that they elected not to renew the term of their e-commerce
services agreements with FanBuzz or decided to terminate their agreements 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 first quarter of
fiscal 2005. The impairment charge is included in loss from discontinued
operations in the accompanying consolidated statement of operations for the nine
month period ended October 29, 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 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. $446,000
of this charge is included in loss from discontinued operations in the
accompanying condensed consolidated statement of operations for the nine month
period ended October 29, 2005.
DISCONTINUED FANBUZZ OPERATIONS
In the second quarter of fiscal 2005, the Company decided to wind down its
FanBuzz subsidiary operations and finalized the shut down in the quarter ended
October 29, 2005. FanBuzz, acquired by the Company in fiscal 2002, was an
e-commerce and fulfillment solutions provider for a number of sports, media,
entertainment and retail companies. The decision to shut down FanBuzz was made
after continued operating losses were experienced following the loss of its NHL
contract in September 2004 and after a number of other FanBuzz customers
notified the Company in the first quarter of fiscal 2005 that they elected not
to renew the term of their e-commerce services agreements. FanBuzz ceased
business operations as of October 29, 2005 and was a reportable segment under
SFAS No. 131. FanBuzz meets the definition of a "component of an entity" and has
been accounted for as a discontinued operation under SFAS No. 144. The results
of operations for FanBuzz have been classified as discontinued operations in the
accompanying consolidated statements of operations for all periods presented.
See Note 13 to the condensed consolidated financial statements.
15
RESULTS OF OPERATIONS
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
CONTINUING OPERATIONS
(UNAUDITED)
DOLLAR AMOUNT AS A DOLLAR AMOUNT AS A
PERCENTAGE OF NET SALES FOR PERCENTAGE OF NET SALES FOR
THE THE
THREE MONTH PERIODS NINE MONTH PERIODS
ENDED ENDED
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET SALES 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
GROSS MARGIN 34.2% 31.8% 34.3% 32.7%
----- ----- ----- -----
Operating Expenses:
Distribution and selling 32.5% 37.4% 31.6% 33.4%
General and administrative 3.6% 3.9% 3.8% 3.4%
Depreciation and amortization 3.1% 3.4% 3.1% 3.1%
Employee termination costs --% 2.3% --% 0.8%
----- ----- ----- -----
39.2% 47.0% 38.5% 40.7%
----- ----- ----- -----
Operating loss (5.0)% (15.2)% (4.2)% (8.0)%
===== ===== ===== =====
KEY PERFORMANCE METRICS*
(UNAUDITED)
FOR THE THREE MONTH FOR THE NINE MONTH
PERIODS ENDED PERIODS ENDED
-------------------------------- -------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2005 2004 % 2005 2004 %
----------- ----------- --- ----------- ----------- ----
PROGRAM DISTRIBUTION
Cable FTE's (Average 000's) 38,011 36,565 4% 37,816 36,231 4%
Satellite FTE's (Average 000's) 24,293 21,651 12% 23,827 20,910 14%
-------- -------- -- ------- ------- --
Total FTEs (Average 000's) 62,304 58,216 7% 61,643 57,141 8%
Net Sales per FTE (Annualized) $ 10.07 $ 9.46 6% $ 10.29 $ 10.35 (1)%
Active Customers - 12 month rolling 778,896 757,215 3% n/a n/a
% New Customers - 12 month rolling 58% 60% n/a n/a
% Reactivated & Retained - 12 month rolling 42% 40% n/a n/a
Customer Penetration - 12 month rolling 1.3% 1.3% n/a n/a
MERCHANDISE MIX
Jewelry 53% 59% 55% 64%
Apparel, Health & Beauty 10% 10% 9% 8%
Home and All Other 37% 31% 36% 28%
Shipped Units (000's) 1,113 1,106 1% 3,468 3,655 (5)%
Average Selling Price - Shipped Units $ 197 $ 180 9% $ 195 $ 178 10%
* Includes television home shopping and Internet sales only.
16
PROGRAM DISTRIBUTION
Average full time equivalent ("FTE") subscribers grew 7% in the third
quarter ended October 29, 2005, resulting in a 4,088,000 increase in average
FTE's versus the prior year comparable quarter. For the nine month period ended
October 29, 2005, average FTE's grew 8%, an increase of 4,502,000 versus the
prior year comparable period. The increases were driven by continued strong
growth in satellite distribution of the Company's programming and increased
penetration of the Company's programming on digital cable.
NET SALES PER FTE
Net sales per FTE for the third quarter ended October 29, 2005 increased
6%, or $0.61 per FTE, compared to the prior year comparable quarter. For the
nine month period ended October 29, 2005, net sales per FTE decreased 1%, or
$0.06 per FTE versus the prior year comparable period. The increase in the third
quarter net sales per FTE was primarily the result of strong third quarter
television home shopping and Internet sales growth over the prior year third
quarter. The decrease in the year-to-date net sales per FTE was primarily due to
television home shopping and Internet sales increasing at a slower rate during
the nine month period ended October 29, 2005 than the 8% increase in average
FTE's for that nine month period. This was primarily due to the relatively flat
sales growth experienced in television home shopping and Internet net sales
during the first quarter of fiscal 2005.
CUSTOMERS
The Company added 21,681 active customers over the twelve-month period
ended October 29, 2005, a 3% 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
increases in marketing and promotional efforts aimed at attracting new
customers.
CUSTOMER PENETRATION
Customer 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 both twelve month periods
ended October 29, 2005 and October 31, 2004.
MERCHANDISE MIX
During the quarter ended October 29, 2005, jewelry net sales decreased to
53% of total television home shopping and Internet net sales from 59% during the
prior year comparable quarter. Net sales from home products, including
electronics categories, increased to 37% of total television home shopping and
Internet net sales from 31% as compared to the prior year third quarter and net
sales from apparel and health and beauty product categories remained at 10% of
total television home shopping and Internet net sales as compared to the prior
year third quarter. During the nine month period ended October 29, 2005 versus
the comparable prior year period, jewelry net sales decreased to 55% of total
television home shopping and Internet net sales from 64%. Net sales from home
products, including electronics product categories, increased from 28% to 36%
during the nine month period ended October 29, 2005 versus the comparable prior
year period. Apparel and health and beauty product categories increased from 8%
to 9% during the same nine month comparable period. 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 electronic 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. Net sales from home products,
including electronic product categories, increased as a percentage of total
television home shopping and Internet net sales during the third quarter and
first nine months of fiscal 2005 primarily due to increased sales associated
with liquid crystal display (LCD) television sets.
SHIPPED UNITS
The number of units shipped during the third quarter ended October 29,
2005 increased 1% from the prior year comparable quarter to 1,113,000 from
1,106,000. For the nine month period ended October 29, 2005, shipped units
decreased 5% from the prior year comparable period to 3,468,000 from 3,655,000.
The decrease in shipped units for the nine month period ended October 29, 2005
was due primarily to a shift in the product mix in the first half of fiscal 2005
to higher priced merchandise in the home and electronics categories driven
primarily by sales of LCD television sets.
17
AVERAGE SELLING PRICE
The Average Selling Price ("ASP") per unit for the Company was $197 in the
third quarter ended October 29, 2005, a 9% increase from the comparable prior
year quarter. For the nine month period ended October 29, 2005, the average per
unit selling price was $195, a 10% increase from the comparable prior year
period. The increase in the ASP during the third quarter and first nine months
of fiscal 2005 was driven by increases in price points associated with gold,
silver, apparel and home merchandise categories as well as a shift in
merchandise mix from jewelry to sales of LCD television sets which have higher
average selling prices.
NET SALES
Consolidated net sales from continuing operations for the three month
period ended October 29, 2005 were $159,513,000 compared with consolidated net
sales of $139,480,000 for the three month period ended October 31, 2004, a 14%
increase. Consolidated net sales from continuing operations for the nine month
period ended October 29, 2005 were $482,481,000 compared with consolidated net
sales from continuing operations of $449,013,000 for the nine month period ended
October 31, 2004, a 7% increase. The increase in consolidated net sales from
continuing operations is directly attributable to the continued improvement in
net sales from the Company's television home shopping and Internet operations.
Net sales attributed to the Company's television home shopping and Internet
operations increased 14% to $156,899,000 for the quarter ended October 29, 2005
from $137,610,000 for the quarter ended October 31, 2004. Net sales attributed
to the Company's television home shopping and Internet operations increased 7%
to $475,603,000 for the nine month period ended October 29, 2005 from
$443,390,000 for the comparable prior year period. The growth in the quarter and
year-to-date television home shopping and Internet net sales is primarily
attributable to increased merchandise sales driven by growth in the number of
homes receiving the Company's television programming and higher productivity
from existing homes due to increased sales per hour results achieved in all
major merchandise categories. In addition, television and Internet net sales
increased due to increased shipping and handling revenue as a result of fewer
shipping promotions in the first nine months of fiscal 2005 compared to fiscal
2004. During the twelve-month period ended October 29, 2005, the Company added
approximately 4.5 million FTE homes, an 8% increase. 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 continue to improve, there can be no assurance that
the Company's sales strategy will achieve the intended results.
GROSS PROFIT
Gross profit from continuing operations for the three months ended October
29, 2005 and October 31, 2004 was $54,487,000 and $44,408,000, respectively, an
increase of $10,079,000. Gross profit from continuing operations for the nine
months ended October 29, 2005 and October 31, 2004 was $165,479,000 and
$146,710,000, respectively, an increase of $18,769,000. The increase in gross
profit from continuing operations is directly attributable to increased sales
volume from the Company's television home shopping and Internet businesses and
increases in gross profit margins on shipping and handling revenues. Gross
margins for the three month periods ended October 29, 2005 and October 31, 2004
were 34.2% and 31.8%, respectively. Gross margins for the nine month periods
ended October 29, 2005 and October 31, 2004 were 34.3% and 32.7%, respectively.
Gross margins for the three and nine months ended October 29, 2005 increased 2.4
percentage points and 1.6 percentage points, respectively, as compared to gross
margins of the comparable prior year periods primarily due to increases in
television home shopping and Internet shipping and handling margins as well as
the achievement of higher merchandise margins during the fiscal year. These
increases reflect the negative impact of the Company's fiscal 2004 free shipping
loyalty club launched in February 2004, and lower promotional discounting during
the first nine months of fiscal 2005. In addition, gross margin also improved
overall due to the achievement of higher merchandise margins in substantially
all major product categories that was offset by a product mix shift that
included greater sales in lower margin electronic product categories during
fiscal 2005. 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 these costs from gross margin, including them instead as a
component of distribution and selling expense.
OPERATING EXPENSES
Total operating expenses from continuing operations for the three months
ended October 29, 2005 were $62,425,000 compared to $65,626,000 for the
comparable prior year period. Total operating expenses from continuing
operations for the nine months ended October 29, 2005 were $185,695,000 compared
to $182,453,000 for the comparable prior year period. Total operating expenses
from
18
continuing operations for the nine month period ended October 29, 2005 included
a charge of $82,000 recorded in connection with employee terminations. Total
operating expenses from continuing operations for the three and nine month
periods ended October 31, 2004 included a charge of $3,197,000 recorded in
connection with management's decision to eliminate a number of positions within
the Company. Distribution and selling expense decreased $537,000, or 1%, to
$51,630,000, or 32% of net sales from continuing operations, during the third
quarter of fiscal 2005 compared to $52,167,000, or 37% of net sales from
continuing operations, for the comparable prior year period. Distribution and
selling expense increased $2,178,000 to $152,248,000, or 32% of net sales from
continuing operations, for the nine month period ended October 29, 2005 compared
to $150,070,000, or 33% of net sales from continuing operations, for the
comparable prior year period. Distribution and selling expense increased on a
year-to-date basis over the prior year primarily due to increased net cable
access fees of $3,172,000 due to an 8% year-to-date increase in the number of
average FTE subscribers over the comparable prior year period and increased
credit card fees of $633,000 due to an overall decline in net sales made using
the ShopNBC credit card, which generally carries lower fees. These increases
were offset by selling and distribution expense decreases associated with
decreased satellite rental fees of $877,000 and a prior year third quarter
merchandising software write-off totaling $868,000.
General and administrative expense for the three months ended October 29,
2005 increased $343,000, or 6%, to $5,816,000, or 4% of net sales from
continuing operations, compared to $5,473,000, or 4% of net sales from
continuing operations, for the three months ended October 31, 2004. General and
administrative expense for the nine months ended October 29, 2005 increased
$2,903,000, or 19%, to $18,255,000, or 4% of net sales from continuing
operations, compared to $15,352,000, or 3% of net sales from continuing
operations, for the nine months ended October 31, 2004. General and
administrative expense increased on a year-to-date basis over the prior year
primarily as a result of increased information system personnel salaries and
consulting fees and software maintenance fees of $2,481,000 and increased legal
fees of $247,000.
Depreciation and amortization expense for the three months ended October
29, 2005 was $4,979,000 compared to $4,789,000 for the three months ended
October 31, 2004, representing an increase of $190,000, or 4%, from the
comparable prior year period. Depreciation and amortization expense for the nine
months ended October 29, 2005 was $15,110,000 compared to $13,834,000 for the
nine months ended October 31, 2004, representing an increase of $1,276,000, or
9%, from the comparable prior year period. Depreciation and amortization expense
as a percentage of net sales from continuing operations for the three and nine
months ended October 29, 2005 and October 31, 2004 was 3% for each period. The
increases are primarily due to increased depreciation and amortization as a
result of assets placed in service in connection with the Company's various
application software development and functionality enhancements.
OPERATING LOSS
For the three months ended October 29, 2005, the Company reported an
operating loss from continuing operations of $7,938,000 compared to an operating
loss from continuing operations of $21,218,000 for the three months ended
October 31, 2004. For the nine months ended October 29, 2005, the Company
reported an operating loss from continuing operations of $20,216,000 compared to
an operating loss from continuing operations of $35,743,000 for the nine months
ended October 31, 2004. The Company's operating loss from continuing operations
decreased for the nine month period ended October 29, 2005 from the comparable
prior year period primarily as a result of the Company's increase in gross
profit as described above under "Gross Profit." Offsetting the increase in gross
profit over the comparable prior year period, were increases in distribution and
selling expenses, particularly net cable access fees and credit card fees,
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.
NET LOSS
For the three months ended October 29, 2005, the Company reported a net
loss available to common shareholders of $7,138,000 or $.19 per share on
37,120,000 weighted average common shares outstanding compared with a net loss
available to common shareholders of $34,697,000 or $.94 per share on 36,870,000
weighted average common shares outstanding for the quarter ended October 31,
2004. The net loss available to common shareholders for the three months ended
October 29, 2005 includes the recording of $382,000 of equity in earnings from
RLM, a net loss of $221,000 from discontinued operations and interest income
totaling $716,000 earned on the Company's cash and short-term investments. For
the quarter ended October 31, 2004, the net loss available to common
shareholders included a net loss of $13,480,000 from discontinued operations, a
$300,000 write-down of a non-operating real estate asset held for sale and
interest income totaling $373,000 earned on the Company's cash and short-term
investments.
19
For the nine months ended October 29, 2005, the Company reported a net
loss available to common shareholders of $19,396,000 or $.52 per share on
37,100,000 weighted average common shares outstanding compared with a net loss
available to common shareholders of $50,570,000 or $1.38 per share on 36,774,000
weighted average common shares outstanding for the nine months ended October 31,
2004. The net loss available to common shareholders for the nine months ended
October 29, 2005 includes a net loss of $2,296,000 from discontinued operations,
a $250,000 cash dividend received from RLM, a $256,000 write-down of a
non-operating real estate asset held for sale, the recording of $396,000 of
equity in earnings from RLM, an $820,000 income tax benefit and interest income
totaling $2,122,000 earned on the Company's cash and short-term investments. For
the nine months ended October 31, 2004, the net loss available to common
shareholders included a net loss of $15,579,000 from discontinued operations, a
$250,000 cash dividend received from RLM, a $300,000 write-down of a
non-operating real estate asset held for sale and interest income of $1,016,000
earned on the Company's cash and short-term investments.
The Company recorded an income tax benefit of $832,000 in the second
quarter of fiscal 2005 related to the reversal of an income tax contingency
reserve that expired in the quarter and was no longer required. The Company has
not recorded any other income tax benefit on the losses recorded in the quarters
ended October 29, 2005 and October 31, 2004 due to the uncertainty of realizing
income tax benefits in the future as indicated by the Company's recording of an
income tax valuation reserve. The Company has recorded a quarterly income tax
provision relating to state income taxes payable on certain income for which
there is no loss carryforward benefit available. The Company will continue to
maintain a valuation reserve against its net deferred tax assets until the
Company believes it is more likely than not that these assets will be realized
in the future.
PROGRAM DISTRIBUTION
The Company's television home shopping programming was available to
approximately 62.3 million average FTE households for the three months ended
October 29, 2005 and approximately 58.2 million average FTE households for the
three months ended October 31, 2004. The Company's television home shopping
programming was available to approximately 61.6 million average FTE households
for the nine month period ended October 29, 2005 and approximately 57.1 million
average FTE households for the nine month period ended October 31, 2004. The
Company's television home shopping programming is currently available through
affiliation and time-block purchase agreements with approximately 1,300 cable or
satellite systems. The Company also owns and operates a full-power television
station in Boston, Massachusetts and 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.
TRANSACTIONS BY GE CAPITAL EQUITY INVESTMENTS, INC.
On February 9, 2005, GE Commercial Finance - Equity ("GE Equity"), the
Company's largest shareholder, entered into agreements to sell 2,0000,000 shares
of the Company's common stock in privately negotiated transactions. On July 8,
2005, GE Equity entered into agreements to sell an additional 2,604,932 shares
of the Company's common stock in privately negotiated transactions to different
purchasers. In connection with such transactions, the Company filed a
registration statement on Form S-3 with the Securities and Exchange Commission
on July 29, 2005 with respect to an aggregate of 4,604,932 shares of the
Company's common stock, pursuant to contractual registration rights obligations.
The Company will receive no proceeds from the sale of the shares covered by the
registration statement.
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."
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of October 29, 2005, cash and cash equivalents and short-term
investments were $75,762,000, compared to $100,581,000 as of January 31, 2005, a
$24,819,000 decrease. For the nine month period ended October 29, 2005, working
capital decreased $12,361,000 to $139,089,000. The current ratio was 2.4 at
October 29, 2005 compared to 2.7 at January 31, 2005.
20
SOURCES OF LIQUIDITY
The Company's principal sources of liquidity are 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 and believes it has the ability to obtain
additional financing if necessary. At October 29, 2005, 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 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 reauthorize its stock repurchase program and make strategic
investments as opportunities present themselves or when cash investments are
determined to be beneficial to the long-term interests of its shareholders.
The Company ended October 29, 2005 with cash and cash equivalents and
short-term investments of $75,762,000 and no long-term debt. The Company expects
future growth in working capital as revenues grow beyond fiscal 2005 but expects
cash generated from operations to partially 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 fund 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 the
Company may make, 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 investments while maintaining
sufficient liquidity for its normal business operations.
Total assets at October 29, 2005 were $343,336,000, compared to
$350,296,000 at January 31, 2005, a $6,960,000 decrease. Shareholders' equity
was $197,988,000 at October 29, 2005, compared to $216,812,000 at January 31,
2005, an $18,825,000 decrease. The decrease in shareholders' equity for the nine
month period ended October 29, 2005 resulted primarily from the net loss of
$19,181,000 recorded during the nine month period and accretion on redeemable
preferred stock of $215,000. These decreases were offset by increases in
shareholders' equity of $426,000 from proceeds received related to the exercise
of stock options and vesting of deferred compensation of $146,000.
For the nine month period ended October 29, 2005, net cash used for
operating activities totaled $17,506,000 compared to net cash used for operating
activities of $23,287,000 for the nine month period ended October 31, 2004. Net
cash used for operating activities for the nine month periods ended October 29,
2005 and October 31, 2004 reflects the net loss, as adjusted for depreciation
and
21
amortization, common stock issued to employees, amortization of deferred
compensation, asset impairment charges, gain on sale of property and
investments, equity in earnings of affiliates, a noncash tax benefit recorded in
fiscal 2005 and a gain on the termination of a long-term lease associated with
FanBuzz recorded in fiscal 2005. In addition, net cash used for operating
activities for the nine months ended October 29, 2005 reflects primarily an
increase in inventories, accounts receivable and prepaid expenses and other
assets, offset by an increase in accounts payable and accrued liabilities.
Inventories increased from year-end primarily in preparation for the fourth
quarter holiday season and as a direct result of the Company's effort to
diversify its product mix offerings and the timing of merchandise receipts.
Accounts receivable increased primarily due to an increase in receivables from
sales utilizing extended payment terms and the timing of customer collections
under the "ValuePay" installment program. Prepaid expenses and other assets
increased primarily as a result of an increase in deferred satellite rent and
increases in prepaid insurance following the Company's annual insurance renewal.
The increase in accounts payable and accrued expenses is a direct result of the
increase in inventory levels and the timing of merchandise receipts. In
addition, accounts payable and accrued expenses increased from year-end as a
result of the timing of payments made for accrued cable access and marketing
fees, the accrual recorded in connection with first quarter employee termination
costs, offset by a decrease in accrued salaries and a decrease in amounts due to
customers for returned merchandise.
Net cash provided by investing activities totaled $10,438,000 for the nine
months ended October 29, 2005 compared to net cash used for investing activities
of $33,300,000 for the nine months ended October 31, 2004. For the nine month
periods ended October 29, 2005 and October 31, 2004, expenditures for property
and equipment were $7,332,000 and $10,601,000, respectively. Expenditures for
property and equipment during the periods ended October 29, 2005 and October 31,
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 are expected to
include the upgrade and replacement of various enterprise software systems,
continued improvements and modifications to the Company's owned headquarter
buildings, the expansion of warehousing capacity, the upgrade and digitalization
of television production and transmission equipment and related computer
equipment associated with the expansion of the Company's home shopping business
and e-commerce initiatives. In the nine months ended October 29, 2005, the
Company invested $48,837,000 in various short-term investments, received
proceeds of $66,257,000 from the sale of short-term investments and received
proceeds of $350,000 from the sale of property and equipment in connection with
the shut down of FanBuzz. In the nine months ended October 31, 2004, the Company
invested $113,285,000 in various short-term investments, received proceeds of
$88,986,000 from the sale of short-term investments and received proceeds of
$1,600,000 in connection with a note receivable from a former officer.
Net cash used for financing activities totaled $337,000 for the nine
months ended October 29, 2005 and related primarily to payments of long-term
capital lease obligations of $738,000, offset by cash proceeds received of
$401,000 from the exercise of stock options. Net cash provided by financing
activities totaled $1,582,000 for the nine months ended October 31, 2004 and
related primarily to cash proceeds received of $2,474,000 from the exercise of
stock options, offset by payments of long-term capital lease obligations of
$892,000.
22
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
currently has no long-term debt, 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.
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously described in our Quarterly Report on Form 10-Q for the
quarter ended July 30, 2005, on July 7, 2004, the Company commenced legal
proceedings against Navarre Corporation in state court in Minnesota seeking to
enforce rights granted under a stock purchase agreement and conversion agreement
entered in 1997 as an inducement to obtain the Company's investment in NetRadio
Corporation. In the filings with the court, the Company contended that an event
of default under the stock purchase agreement occurred when NetRadio ceased
operations in October 2001, giving the Company a contractual right to obtain
shares of Navarre stock or a cash payment from Navarre. After Navarre failed to
deliver shares or cash after due demand in January 2002, the Company brought the
litigation. In the lawsuit, the Company sought monetary damages, restitution,
and specific performance or such other remedies as the court may order.
In September 2005, the presiding Judge ruled that there was no basis for
Navarre's third-party claim alleging a breach of fiduciary duty by Gene
McCaffery, the former Chief Executive Officer of the Company and a former
director of NetRadio. Accordingly, the court granted Mr. McCaffery's motion for
summary judgment dismissing all claims against Mr. McCaffery.
On November 15, 2005, the Company and Navarre agreed to settle the claims
made by the Company against Navarre and the counterclaims made by Navarre
against the Company. Under the tentative settlement agreement, Navarre will make
a cash payment to the Company and will also enter into an airtime agreement with
the Company whereby Navarre will purchase advertising time from the Company
during 2006. The parties are negotiating the final details of the agreement, and
until such time as those negotiations are successfully completed the dismissal
of the litigation cannot be assured.
ITEM 5. OTHER INFORMATION
The Company, with the approval of the human resources and compensation
committee of the Company's board of directors, recently determined that senior
executives (below the chief executive officer level) will no longer be offered
employment contracts or salary continuation agreements, and that instead these
officers will be offered change of control and severance agreements, referred to
herein as separation agreements, in the form filed as Exhibit 10 to this
Quarterly Report on Form 10-Q. On December 7, 2005, the Company entered into
separation agreements with each of Frank Elsenbast, the Company's vice president
and chief financial officer, Karen Johnston, the Company's senior vice president
- - merchandising, Nathan Fagre, the Company's senior vice president and general
counsel, and Bryan Venberg, the Company's vice president of human resources.
The Company believes that this policy change benefits the Company by
eliminating disparate, individually-negotiated employment contracts that must be
renegotiated on a periodic basis, and generally reduces the potential severance
benefits payable to senior executives in the early years of the fixed-term
employment contracts previously used by the Company. The severance benefits in
the separation agreements are also lower than the benefits contained in the
salary continuation agreements previously offered to certain executives. The new
agreements will also give the chief executive officer and the human resources
and compensation committee greater flexibility in restructuring senior-level
responsibilities without triggering a severance payment obligation. At the same
time, the Company believes that by having a consistent separation agreement for
senior executives, it will continue to be able to attract and retain qualified
executives.
A summary of the separation agreements follows:
If the executive is removed from his or her duties without cause or
resigns for good reason within 18 months following a change of control of the
Company, the executive receives a pro rata portion of his or her bonus target
amount for the fiscal year in which the removal or resignation occurred and the
continuation of his or her base salary, auto allowance and medical and dental
benefits for a 24-month severance period. The executive may elect to receive
reimbursement for payments made under COBRA instead of or addition to continued
medical or dental coverage.
If the executive is removed from his or her duties without cause or
resigns for good reason in the absence of a change in control of the Company,
the executive receives a pro rata portion of his or her bonus target amount
adjusted for the actual bonus payouts made to
24
similarly situated executives in the fiscal year in which the removal or
resignation occurred (so long as the removal or resignation occurred after the
180th day of the fiscal year) and the continuation of his or her base salary,
auto allowance and medical and dental benefits for an 18-month severance period.
As a condition for an executive to receive the benefits of the separation
agreement, he or she must agree to (i) sign a release of claims against the
Company, (ii) not disclose confidential information, (iii) not compete with the
Company or interfere with the Company's employment or business relationships
during the severance period (or if there is no severance period, for 12 months
following termination or resignation), (iv) provide advice to and consult with
the Company during the severance period and (v) cooperate with respect to
litigation during the severance period. The separation agreements have a term of
three years.
25
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 Form of Change of Control and Severance Agreement with Executive Officers * +
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.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
December 8, 2005
/s/ William J. Lansing
-----------------------------------------------
William J. Lansing
Chief Executive Officer, President and Director
(Principal Executive Officer)
December 8, 2005
/s/ Frank P. Elsenbast
-----------------------------------------------
Frank P. Elsenbast
Vice President Finance, Chief Financial Officer
(Principal Financial Officer)
27
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 Form of Change of Control and Severance Agreement with Executive Officers 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
28