.
.
.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<Table>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2007
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-20243
---------------------
VALUEVISION MEDIA, INC.
(Exact name of Registrant as Specified in Its Charter)
<Table>
MINNESOTA 41-1673770
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6740 SHADY OAK ROAD, EDEN PRAIRIE, MN 55344-3433
(Address of Principal Executive Offices) (Zip Code)
</Table>
952-943-6000
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
COMMON STOCK, $0.01 PAR VALUE
NAME OF EXCHANGE ON WHICH REGISTERED: NASDAQ GLOBAL MARKET
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
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 April 10, 2007, 37,595,268 shares of the registrant's common stock
were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant on August 5, 2006, based upon the closing sale
price for the registrant's common stock as reported by the Nasdaq Global Market
on August 5, 2006 was approximately $273,733,110. For purposes of determining
such aggregate market value, all officers and directors of the registrant are
considered to be affiliates of the registrant, as well as shareholders holding
10% or more of the outstanding common stock as reflected on Schedules 13D or 13G
filed with the registrant. This number is provided only for the purpose of this
annual report on Form 10-K and does not represent an admission by either the
registrant or any such person as to the status of such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of its fiscal year ended February 3, 2007 are
incorporated by reference in Part III of this annual report on Form 10-K.
VALUEVISION MEDIA, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
FEBRUARY 3, 2007
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 1A. Risk Factors................................................ 14
Item 1B. Unresolved Staff Comments................................... 18
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities........... 19
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 43
Item 8. Financial Statements and Supplementary Data................. 44
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 78
Item 9A. Controls and Procedures..................................... 78
Item 9B. Other Information........................................... 81
PART III
Item 10. Directors, and Executive Officers and Corporate
Governance.................................................. 81
Item 11. Executive Compensation...................................... 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.................. 81
Item 13. Certain Relationships and Related Transactions, and Director
Independence................................................ 82
Item 14. Principal Accountant Fees and Services...................... 82
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 82
Signatures............................................................ 88
</Table>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This annual report on Form 10-K, as well as other materials filed by us
with the Securities and Exchange Commission, and information included in oral
statements or other written statements made or to be made by us, contains
forward-looking statements regarding us, our business prospects and our results
of operations that are subject to certain risks and uncertainties posed by many
factors and events that could cause our actual business, prospects and results
of operations to differ materially from those that may be anticipated by the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those described in the "Risk
Factors" section of this annual report on Form 10-K, as well as risks relating
to: consumer spending and debt levels; interest rates; seasonal variations in
consumer purchasing activities; changes in the mix of products sold by us;
competitive pressures on sales; pricing and sales margins; the level of cable
and satellite distribution for our programming and associated fees; the success
of our e-commerce initiatives; the success of our strategic alliances and
relationships; our ability to manage our operating expenses successfully; risks
associated with acquisitions; changes in governmental or regulatory
requirements; litigation or governmental proceedings affecting our operations;
and our ability to obtain and retain key executives and employees.
PART I
ITEM 1. BUSINESS
When we refer to "we," "us" or the "company," we mean ValueVision Media,
Inc. and its subsidiaries unless the context requires otherwise. ValueVision
Media, Inc. is a Minnesota corporation with principal and executive offices
located at 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433. ValueVision
Media, Inc. was incorporated on June 25, 1990. Our fiscal year ended February 3,
2007 is designated fiscal 2006, our fiscal year ended February 4, 2006 is
designated fiscal 2005 and our fiscal year ended January 31, 2005 is designated
fiscal 2004.
A. GENERAL
We are 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. Our operating strategy as a
multi-channel retailer incorporates television home shopping, internet
e-commerce, direct mail marketing and fulfillment services. Our principal
electronic media activity is our television home shopping business, which uses
on-air spokespersons to market brand name merchandise and private label consumer
products at competitive prices. Our 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 lease agreements of cable and broadcast television time. In addition,
we distribute our programming through a company-owned full power television
station in Boston, Massachusetts. We also operate an internet retailing website,
www.shopnbc.com, which markets and sells a broad array of consumer merchandise,
including all products being featured in our television programming.
We have an exclusive license from NBC Universal, Inc., known as NBC, for
the worldwide use of an NBC-branded name and the peacock image for a period
ending in May 2011. Pursuant to the license, we operate our television home
shopping network under the ShopNBC brand name and operate our internet website
under the ShopNBC.com brand name.
We currently provide fulfillment, warehousing, customer service and
telemarketing services to Ralph Lauren Media, LLC, known as RLM, the operator of
the Polo.com e-commerce business.
TELEVISION AND INTERNET RETAILING
Our principal electronic media activity is our live 24-hour per day
television home shopping network program. Our home shopping network is the third
largest television home shopping retailer in the United States. Through our
merchandise-focused television programming, we sell a wide variety of products
and services directly to consumers. Sales from our television and companion
internet website business, including shipping and handling revenues, totaled
$755,302,000, $680,592,000 and $614,884,000, representing 98%, 98% and 99% of
net sales, for fiscal 2006, 2005 and 2004, respectively. Products are presented
by on-air television home shopping personalities and guests; viewers may then
call a toll-free telephone number and place orders directly with us or enter an
order on the ShopNBC.com website. Our television programming is produced at our
Eden Prairie, Minnesota facility and is transmitted nationally via satellite to
cable system operators, satellite dish owners and to our full power broadcast
television station WWDP TV-46 in Boston, Massachusetts.
PRODUCTS AND PRODUCT MIX
Products sold on our television network and internet shopping website
include jewelry, watches, computers and other electronics, housewares, apparel,
cosmetics, fitness products, giftware, collectibles, seasonal items and other
merchandise. Jewelry represents our largest single category of merchandise,
representing 39% of television and internet net sales in fiscal 2006, 43% in
fiscal 2005 and 49% in fiscal 2004. Home products, including electronics product
categories, represented approximately 37% of television home shopping and
internet net sales in fiscal 2006, 36% in fiscal 2005 and 31% in fiscal 2004.
Watches, apparel, and health and beauty product categories represented
approximately 24% of television and internet net sales in
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fiscal 2006, 21% in fiscal 2005 and 20% in fiscal 2004. We believe that having a
broad diversity of products appeals to a larger segment of potential customers
and is important to our growth. Our product diversification strategy is to
continue to develop new product offerings primarily in the home, apparel and
accessories, cosmetics, fitness and consumer electronics categories to
supplement the existing jewelry and computer businesses. Additionally, our
product strategy will continue to focus on: (i) jewelry and gems for core
customers; (ii) value products, including closeouts and opportunistic buys;
(iii) highly demonstratable products that leverage the television medium; and
(iv) unique offers that cannot be found elsewhere.
B. BUSINESS STRATEGY
Our objective is to be positioned as a growing and profitable leader in
multi-channel retailing in the United States, offering consumers an
entertaining, informative and interactive shopping experience. The following
strategies are being pursued to increase our revenues and profitability and grow
the active customer base, both for television sales and sales through the
internet: (i) continue to diversify our mix of product categories offered on
television and the internet, in order to appeal to a broader population of
potential customers; (ii) maintain and increase the distribution of our
television programming through new and expanded agreements with cable and
satellite system operators, as well as pursuing other means of reaching
customers such as through webcasting, internet videos and internet-based
broadcasting networks; (iii) increase the productivity of each hour of
television programming, through a focus on television offers of merchandise that
maximizes gross margin dollars per hour and marketing efforts to increase the
number of customers within the households currently receiving our television
programming; (iv) continue the growth of our internet business through the
innovative use of technology and marketing efforts, such as advanced search
techniques, personalization, internet video, affiliate agreements and
internet-based auction capabilities; (v) continue to enhance our television
broadcast quality, programming, website features and customer support; (vi)
increase the average order size through sales initiatives such as add-on sales,
continuity programs and warranty sales; and (vii) leverage the strong brand
recognition of the NBC brand name.
C. TELEVISION PROGRAM DISTRIBUTION AND INTERNET OPERATIONS
TELEVISION HOME SHOPPING NETWORK
Satellite Delivery of Programming. Our programming is presently
distributed via a leased communications satellite transponder to cable systems,
the full power television station in Boston, certain other broadcast stations
and satellite dish owners. On January 31, 2005, we entered into a new long-term
satellite lease agreement with our present provider of satellite services.
Pursuant to the terms of this agreement, we distribute our programming on a
satellite that was launched in February 2006. The agreement has reduced our
annual cost of satellite service and provides us with a state-of-the-art
satellite transponder that uses new technology to transmit a stronger signal.
Satellite service may be interrupted due to a variety of circumstances beyond
our control, such as satellite transponder failure, satellite fuel depletion,
governmental action, preemption by the satellite service provider or service
failure. The agreement provides us with preemptable back-up services if
satellite transmission is interrupted. However, there can be no assurance if
satellite transmission is interrupted that we will be able to utilize existing
back-up satellite service transponder or satellite capacity. In the event of any
transmission interruption, we may incur substantial additional costs to enter
into new arrangements and be unable to broadcast our signal for some period of
time.
Cable Affiliation Agreements. As of February 3, 2007, we had entered into
long-term affiliation agreements with approximately 130 cable system operators
that require each operator to offer our television home shopping programming
substantially on a full-time basis over their systems. The stated terms of the
affiliation agreements typically range from three to twelve years. Under certain
circumstances, the television operators may cancel the agreements prior to their
expiration. If these agreements are terminated, the termination may materially
or adversely affect our business. Also, we may not be able to successfully
negotiate acceptable terms with respect to any renewal of these contracts. The
affiliation agreements generally provide that we will pay each operator a
monthly access fee and marketing support payments based on the number of homes
receiving our programming. Certain of the affiliation agreements also required
payment of one-time initial launch fees, which are capitalized and amortized on
a straight-line basis over the term of the
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agreements. We are seeking to enter into affiliation agreements with additional
television operators providing for full- or part-time carriage of our
programming.
A significant number of cable operators have started to offer cable
programming on a digital basis. The use of digital compression technology
provides cable companies with greater channel capacity. While greater channel
capacity increases the opportunity for distribution and, in some cases, reduces
subscriber fees paid by us, it also may adversely impact our ability to compete
for television viewers to the extent it results in higher channel position for
us, placement of our programming in separate programming tiers, the broadcast of
additional competitive channels or viewer fragmentation due to a greater number
of programming alternatives.
During 2006, there were approximately 110 million homes in the United
States with at least one television set. Of those homes, there were
approximately 65 million basic cable television subscribers and approximately 27
million direct-to-home satellite subscribers. Homes that receive our television
home shopping programming 24 hours per day are each counted as one full-time
equivalent, or FTE, and homes that receive our 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. We have continued to experience growth in the
number of FTE subscriber homes that receive our programming.
As of February 3, 2007, we served a total of approximately 69.2 million
subscriber homes, or approximately 67.0 million FTEs, compared with a total of
approximately 66.0 million subscriber homes, or approximately 62.9 million FTEs,
as of February 4, 2006. As of February 3, 2007, our television home shopping
programming was carried by approximately 1,320 broadcasting systems on a
full-time basis, compared to 1,230 broadcasting systems on February 4, 2006, and
60 broadcasting systems on a part-time basis for both fiscal years. The total
number of cable homes that presently receive our television home shopping
programming represents approximately 65% of the total number of cable
subscribers in the United States. NBC has the exclusive right to negotiate on
our behalf for the distribution of our television home shopping service pursuant
to the terms of the strategic alliance between us, NBC and GE Capital Equity
Investments, Inc. (now known as GE Commercial Finance -- Equity, and referred to
in this report as GE Equity) entered into in March 1999. See "Strategic
Alliances -- NBC and GE Equity Strategic Alliance" discussed below.
Direct Satellite Service Agreements. Our programming is carried on the
direct-to-home, or DTH, satellite services DIRECTV and DISH Network. Carriage on
DIRECTV and DISH Network is full-time under long-term distribution agreements.
These agreements generally provide that we will pay each operator a monthly
access fee based upon the number of homes receiving our television home shopping
programming. As of February 3, 2007, our programming reached approximately 27
million DTH homes on a full-time basis.
Other Methods of Program Distribution. Our programming is also made
available full-time to "C"-band satellite dish owners nationwide and is made
available to homes in the Boston, Massachusetts market over the air via a full
power television broadcast station owned by us. In fiscal 2006 and fiscal 2005,
our Boston, Massachusetts station and "C"-band satellite dish transmissions were
responsible for less than 5% of our total consolidated net sales. In December
2005, we completed the sale of our remaining low power television station
located in Atlanta, Georgia for a total of $400,000. The sale of this station
did not have a significant impact on our ongoing operations. We no longer hold
any licenses for low power television stations.
INTERNET WEBSITE
Our website, ShopNBC.com, provides customers with a broad array of consumer
merchandise, including all products being featured on our television
programming. The website includes a live webcast feed of our programming, an
archive of recent past programming, videos of many individual products that the
customer can view on demand and clearance and auction sites. Internet sales for
fiscal 2006 increased at a greater rate than television sales over fiscal 2005.
Internet net sales in fiscal 2006 increased by 26% over internet net sales in
fiscal 2005, while television home shopping net sales in fiscal 2006 increased
by 7% over television home shopping net sales in fiscal 2005. Sales from our
website business, inclusive of shipping and handling revenues, totaled
$184,139,000, $146,067,000 and $126,692,000, representing 24%, 21% and 20% of
consolidated net sales for fiscal 2006, 2005 and 2004, respectively. We believe
that our internet business represents an
3
important component of our future growth opportunities, and we will continue to
invest in and enhance our internet-based capabilities.
Our e-commerce activities are subject to a number of general business
regulations and laws regarding taxation and online commerce. As the role and
importance of e-commerce has grown in the United States in recent years, there
have been continuing efforts to increase the legal and regulatory obligations
and restrictions on companies conducting commerce through the internet,
primarily in the areas of taxation, consumer privacy and protection of consumer
personal information. Such laws and regulations could increase the costs and
liabilities associated with our e-commerce activities. On December 3, 2004,
President Bush signed into law a three-year moratorium on internet access taxes.
This law extended a ban on internet taxes that expired on November 1, 2003. In
addition, in November 2002, a number of states approved a multi-state agreement
to simplify state sales tax laws by establishing one uniform system to
administer and collect sales taxes on traditional retailers and electronic
commerce merchants. No prediction can be made as to whether a new internet tax
moratorium will be enacted before the November 1, 2007 expiration of the
existing moratorium, or whether individual states will enact legislation
requiring retailers such as us to collect and remit sales taxes on transactions
that occur over the internet. Adding sales tax to our internet transactions
could negatively impact consumer demand.
The federal Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, or the CAN-SPAM Act, was signed by President Bush on
December 16, 2003 and went into effect on January 1, 2004. The CAN-SPAM Act
pre-empts similar laws passed by over thirty states, some of which contain
restrictions or requirements that are viewed as stricter than those of the
CAN-SPAM Act. The CAN-SPAM Act is primarily an opt-out type law; that is, prior
permission to send an e-mail to a recipient is not required, but a recipient may
affirmatively opt out of such future e-mail solicitations. The CAN-SPAM Act
requires commercial e-mails to contain a clear and conspicuous identification
that the message is an advertisement or solicitation for goods or services, as
well as a prominent unsubscribe function that allows recipients to alert the
sender that they do not desire to receive future e-mail messages. In addition,
the CAN-SPAM Act requires that all commercial e-mail messages include a postal
address unless the sender obtains prior affirmative assent from the recipient.
Changes in consumer protection laws also may impose additional burdens on
those companies conducting business online. The adoption of additional laws or
regulations may decrease the growth of the internet or other online services,
which could, in turn, decrease the demand for our products and services and
increase our cost of doing business through the internet.
In addition, since our website is available over the internet in all
states, various states may claim that we are required to qualify to do business
as a foreign corporation in such state, a requirement that could result in fees
and taxes as well as penalties for the failure to qualify. Any new legislation
or regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business or the application of existing laws
and regulations to the internet and other online services could have a material
adverse effect on the growth of our business in this area.
D. STRATEGIC RELATIONSHIPS
NBC TRADEMARK LICENSE AGREEMENT
On November 16, 2000, we entered into a trademark license agreement with
NBC pursuant to which NBC granted us an exclusive, worldwide license for a term
of ten years to use certain NBC trademarks, service marks and domain names to
rebrand our business and corporate name and website. We subsequently selected
the names ShopNBC and ShopNBC.com.
Under the license agreement we have agreed, among other things, to (i)
certain restrictions on using trademarks, service marks, domain names, logos or
other source indicators owned or controlled by NBC, (ii) the loss of our rights
under the license with respect to specific territories outside of the United
States in the event we fail to achieve and maintain certain performance targets
in such territories, (iii) not own, operate, acquire or expand our business to
include certain businesses without NBC's prior consent, (iv) comply with
4
NBC's privacy policies and standards and practices, and (v) not own, operate,
acquire or expand our business such that one-third or more of our revenues or
our aggregate value is attributable to certain services (not including retailing
services similar to our existing e-commerce operations) provided over the
internet. The license agreement also grants to NBC the right to terminate the
license agreement at any time upon certain changes of control of our company, in
certain situations upon the failure by NBC to own a certain minimum percentage
of our outstanding capital stock on a fully diluted basis, and certain other
situations. On March 28, 2007, we and NBC agreed to extend the term of the
license by six months, such that the license would continue through May 15,
2011, and to provide that certain changes of control involving a financial buyer
would not provide the basis for an early termination of the license by NBC.
STRATEGIC ALLIANCE WITH NBC AND GE EQUITY
In March 1999, we entered into a strategic alliance with NBC and GE Equity.
Pursuant to the terms of the transaction, NBC and GE Equity acquired 5,339,500
shares of our Series A Redeemable Convertible Preferred Stock between April 1999
and June 1999, and NBC was issued a warrant to acquire 1,450,000 shares of our
common stock, known as the distribution warrants, with an exercise price of
$8.29 per share, under a distribution and marketing agreement discussed below.
In addition, we issued to GE Equity a warrant, known as the investment warrant,
to increase its potential aggregate equity stake (together with its affiliates,
including NBC) at the time of exercise to approximately 40%. The preferred stock
is convertible into an equal number of shares of our common stock, subject to
anti-dilution adjustments, has a mandatory redemption on the tenth anniversary
of its issuance or upon a change of control at $8.29 per share, participates in
dividends on the same basis as the common stock and has a liquidation preference
over the common stock and any other junior securities. On July 6, 1999, GE
Equity exercised the investment warrant and acquired an additional 10,674,000
shares of our common stock for an aggregate of $178,370,000, or $16.71 per
share. Following the exercise of the investment warrant, the combined ownership
of our company by GE Equity and NBC on a diluted basis was approximately 40%. In
February 2005, GE Equity sold 2,000,000 shares of our common stock to several
purchasers. In July 2005, GE Equity entered into agreements to sell an
additional 2,604,932 shares of our common stock in privately negotiated
transactions to a number of different purchasers; this sale was completed on
September 15, 2005. GE Equity and NBC currently have a combined ownership in our
company of approximately 27% on a diluted basis.
SHAREHOLDER AGREEMENT
In March 1999, we also entered into a shareholder agreement with GE Equity,
which provides for certain corporate governance and standstill matters. The
shareholder agreement (together with the certificate of designation of the
preferred stock) initially provided that GE Equity and NBC would be entitled to
designate nominees for two out of seven members of our board of directors so
long as their aggregate beneficial ownership was at least equal to 50% of their
initial beneficial ownership, and one out of seven members so long as their
aggregate beneficial ownership was at least 10% of the "adjusted outstanding
shares of common stock," as defined in the shareholder agreement. The
shareholder agreement also requires the consent of GE Equity prior to our
entering into any material agreements with certain restricted parties (broadcast
networks and internet portals in certain limited circumstances). Finally, we are
prohibited from exceeding certain thresholds relating to the issuance of voting
securities over a twelve-month period, the payment of quarterly dividends, the
repurchase of common stock, acquisitions (including investments and joint
ventures) or dispositions, and the incurrence of debt greater than the larger of
$40 million or 30% of our total capitalization. We are also prohibited from
taking any action that would cause any ownership interest by us in TV broadcast
stations from being attributable to GE Equity, NBC or their affiliates.
The shareholder agreement provides that during the standstill period (as
defined in the shareholder agreement), subject to certain limited exceptions, GE
Equity and NBC are prohibited from: (i) any asset/ business purchases from us in
excess of 10% of the total fair market value of our assets; (ii) increasing
their beneficial ownership above 39.9% of our shares; (iii) making or in any way
participating in any solicitation of proxies; (iv) depositing any securities of
our company in a voting trust; (v) forming, joining or in any way becoming a
member of a "13D Group" with respect to any voting securities of our company;
(vi) arranging
5
any financing for, or providing any financing commitment specifically for, the
purchase of any voting securities of our company; (vii) otherwise acting,
whether alone or in concert with others, to seek to propose to us any tender or
exchange offer, merger, business combination, restructuring, liquidation,
recapitalization or similar transaction involving us, or nominating any person
as a director of our company who is not nominated by the then incumbent
directors, or proposing any matter to be voted upon by our shareholders. If,
during the standstill period, any inquiry has been made regarding a "takeover
transaction" or "change in control," each as defined in the shareholder
agreement, that has not been rejected by the board of directors, or the board
pursues such a transaction, or engages in negotiations or provides information
to a third party and the board has not resolved to terminate such discussions,
then GE Equity or NBC may propose to us a tender offer or business combination
proposal.
In addition, unless GE Equity and NBC beneficially own less than 5% or more
than 90% of the adjusted outstanding shares of common stock, GE Equity and NBC
shall not sell, transfer or otherwise dispose of any securities of our company
except for transfers: (i) to certain affiliates who agree to be bound by the
provisions of the shareholder agreement, (ii) that have been consented to by us,
(iii) pursuant to a third-party tender offer, (iv) pursuant to a merger,
consolidation or reorganization to which we are a party, (v) in a bona fide
public distribution or bona fide underwritten public offering, (vi) pursuant to
Rule 144 of the Securities Act of 1933, or (vii) in a private sale or pursuant
to Rule 144A of the Securities Act of 1933; provided, that in the case of any
transfer pursuant to clause (v) or (vii), the transfer does not result in, to
the knowledge of the transferor after reasonable inquiry, any other person
acquiring, after giving effect to such transfer, beneficial ownership,
individually or in the aggregate with that person's affiliates, of more than 10%
of the adjusted outstanding shares of the common stock.
The standstill period will terminate on the earliest to occur of (i) the
ten-year anniversary of the shareholder agreement, (ii) our entering into an
agreement that would result in a "change in control" (subject to reinstatement),
(iii) an actual "change in control," (iv) a third-party tender offer (subject to
reinstatement), or (v) six months after GE Equity and NBC can no longer
designate any nominees to the board of directors. Following the expiration of
the standstill period pursuant to clause (i) or (v) above (indefinitely in the
case of clause (i) and two years in the case of clause (v)), GE Equity and NBC's
beneficial ownership position may not exceed 39.9% of our diluted outstanding
stock, except pursuant to issuance or exercise of any warrants or pursuant to a
100% tender offer for our company.
On March 19, 2004, we agreed with NBC and GE Equity to amend the
shareholder agreement as follows: (i) to increase the authorized size of our
board of directors to nine from seven; (ii) to permit NBC and GE Equity together
to appoint three directors instead of two to our board of directors; and (iii)
to provide that NBC and GE Equity would no longer have the right to have its
director-nominees serve on the audit, compensation or nominating and governance
committees, in the event the committees must be comprised solely of
"independent" directors under applicable laws or Nasdaq regulations. In such
case, NBC and GE Equity would have the right to have an observer attend all of
these committee meetings, to the extent permitted by applicable law or
regulation.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the investment agreement, we entered into a registration rights
agreement with GE Equity providing GE Equity, NBC and their affiliates and any
transferees and assigns, an aggregate of five demand registrations and unlimited
piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
We entered into a distribution and marketing agreement with NBC dated March
8, 1999 that provides NBC with the exclusive right to negotiate on our behalf
for the distribution of our home shopping television programming. NBC may
terminate the distribution agreement if we enter into certain significant
affiliation agreements or a transaction resulting in a change in control. As
compensation for these services, we agreed to pay NBC an annual fee which was
approximately $1.8 million in fiscal 2006, and issued NBC 1,450,000 distribution
warrants. The exercise price of the distribution warrants is $8.29 per share. In
fiscal 2004, NBC
6
exercised a portion of the original distribution warrants in a cashless exercise
acquiring 101,509 shares of common stock. In fiscal 2005, NBC exercised all
remaining original distribution warrants in a cashless exercise acquiring
281,199 additional shares of common stock. On March 28, 2007, we agreed with NBC
to reduce the amount of the annual fee payable to NBC to a market rate.
POLO RALPH LAUREN/RALPH LAUREN MEDIA ELECTRONIC COMMERCE ALLIANCE
In February 2000, we entered into an agreement with Polo Ralph Lauren, NBC,
NBCi and CNBC whereby the parties created RLM, a joint venture formed for the
purpose of bringing the Polo Ralph Lauren lifestyle experience to consumers via
multiple media platforms, including internet, broadcast, cable and print. During
fiscal 2006, RLM was owned 50% by Polo Ralph Lauren, 37.5% by NBC and its
affiliates and 12.5% by us. RLM's primary business activity to date has been the
operation of the Polo.com website. Polo.com launched in November 2000 and
includes an assortment of men's, women's, children's and home products across
the Ralph Lauren family of brands as well as unique gift items. In connection
with the formation of RLM, we entered into various agreements setting forth the
manner in which certain aspects of the business of RLM are to be managed and
certain of the members' rights, duties and obligations with respect to RLM. On
March 28, 2007, we sold our 12.5% ownership interest in RLM to Polo Ralph Lauren
for approximately $43.8 million.
AGREEMENT FOR SERVICES
In February 2000, RLM and our subsidiary VVI Fulfillment Center, Inc.,
known as VVIFC, entered into an agreement for services under which VVIFC
provides certain telemarketing, customer support and fulfillment services to
RLM. In the third quarter of fiscal 2006, RLM agreed to extend the term of its
existing services agreement with us to at least August 31, 2008. RLM has advised
us that it intends to develop the capability to provide these services
internally in the future, and accordingly there can be no assurance that we will
continue to provide services to RLM beyond August 31, 2008 or, if so, for what
period of time thereafter. In March 2007, VVIFC and RLM further agreed to
certain changes to the agreement for services, including a potential extension
of the term through mid-2009 at RLM's option.
E. MARKETING AND MERCHANDISING
TELEVISION AND INTERNET RETAILING
Our television and internet revenues are generated from sales of
merchandise and services offered through our television home shopping
programming and website. Our television home shopping business utilizes live
television 24 hours a day, seven days a week, to create an interactive and
entertaining atmosphere to describe and demonstrate our merchandise. Selected
customers participate through live conversations with on-air hosts and
occasional celebrity guests. We believe our customers make purchases based
primarily on convenience, value, quality of merchandise and promotional
offerings, including financing. We believe that our customers are primarily
women between the ages of 35 and 55, with annual household income of
approximately $50,000 to $75,000. We schedule special programming at different
times of the day and week to appeal to specific viewer and customer profiles. We
feature announced and occasionally unannounced promotions to drive interest and
incremental sales, including "Our Top Value," a sales program that features one
special offer every day. We also feature other major and special promotional
events, along with bargain, discount and inventory-clearance sales.
Our merchandise is generally offered at or below comparable retail prices.
We continually introduce new products on our home shopping program. Inventory
sources include manufacturers, wholesalers, distributors and importers. We
intend to continue to promote private label merchandise, which generally has
higher than average margins.
SHOPNBC PRIVATE LABEL AND CO-BRAND CREDIT CARD PROGRAM
In the third quarter of fiscal 2006, we introduced a new private label and
co-brand revolving consumer credit card program. The program is made available
to all qualified consumers for the financing of purchases
7
of products and services from ShopNBC and for the financing of purchases from
other retailers. The program is intended to be used by cardholders for purchases
made primarily for personal, family or household use. The issuing bank is the
sole owner of the account issued under the program and absorbs all losses
associated with non-payment by cardholders. The issuing bank pays fees to us
based on the number of credit card accounts activated and on card usage. Once a
customer is approved to receive a ShopNBC private label or co-branded credit
card and the card is activated, the customer is eligible to participate in our
credit card rewards program. Under the rewards program, points are earned on
purchases made with the credit cards at ShopNBC and other retailers where the
co-branded card is accepted. Cardholders who accumulate the requisite number of
points are issued a $50 certificate award towards the future purchase of ShopNBC
merchandise. The certificate award expires after twelve months if unredeemed.
The program provides a number of benefits to customers in addition to the awards
program, including deferred billing options and other special offers. During
fiscal 2006, customer use of the private label and co-brand cards accounted for
approximately 17% of our television and internet sales. We believe that the use
of the ShopNBC credit card furthers customer loyalty and reduces our overall bad
debt exposure since the credit card issuing bank bears the risk of bad debt on
ShopNBC credit card transactions.
FAVORABLE PURCHASING TERMS
We obtain products for our direct marketing businesses from domestic and
foreign manufacturers and suppliers and are often able to make purchases on
favorable terms based on the volume of products purchased or sold. Many of our
purchasing arrangements with our vendors include inventory terms that allow for
return privileges for a portion of the order or stock balancing. We generally do
not have long-term commitments with our vendors, and a variety of sources are
available for each category of merchandise sold. In fiscal 2006, products
purchased from one vendor accounted for approximately 17% of our consolidated
net sales. We believe that we could find alternative sources for this vendor's
products if this vendor ceased supplying merchandise; however, the unanticipated
loss of any large supplier could impact our sales and earnings on a temporary
basis.
F. ORDER ENTRY, FULFILLMENT AND CUSTOMER SERVICE
Our products are available for purchase via toll-free telephone numbers or
our website. We maintain an agreement with West Teleservices Corporation to
provide us with telephone order entry operators for taking of customer orders.
West Teleservices provides teleservices to us from service sites located in
Omaha, Nebraska and Spokane, Washington, as well as through home agents. At the
present time, we do not utilize any call center services based overseas.
We own a 262,000 square foot distribution facility in Bowling Green,
Kentucky, which we use to fulfill our obligations under the services agreement
entered into with RLM. The Bowling Green facility is also used for the
fulfillment of mostly non-jewelry merchandise sold by us. We distribute jewelry
and other smaller merchandise from our Eden Prairie, Minnesota fulfillment
center.
The majority of customer purchases are paid by credit card and debit cards.
As discussed above, we maintain a private label and a co-brand credit card
program using the ShopNBC name. Purchases made with the ShopNBC private label
credit card are non-recourse to us. We also utilize an installment payment
program called ValuePay, which entitles customers to pay by credit card for
certain merchandise offered in two to six equal monthly installments. We intend
to continue to sell merchandise using the ValuePay program due to its
significant promotional value. It does, however, create a credit collection risk
from the potential inability to collect outstanding balances.
We maintain a product inventory, which consists primarily of consumer
merchandise held for resale. The product inventory is valued at the lower of
average cost or realizable value, and we reduce our balance by an allowance for
excess and obsolete merchandise. As of February 3, 2007 and February 4, 2006, we
had inventory balances of $66,622,000 and $67,844,000, respectively.
8
Merchandise is shipped to customers by the United States Postal Service,
UPS, DHL, and Federal Express or other recognized carriers. We also have
arrangements with certain vendors who ship merchandise directly to our customers
after an approved customer order is processed.
Customer service functions are performed and processed by West Teleservices
as well as by us. Our in-house customer service functions are located in our
Brooklyn Center, Minnesota facility.
Our return policy allows a standard 30-day refund period from the date of
invoice for all customer purchases. Our return rates have been approximately 32%
to 33% over the past three fiscal years. These return rates are higher than the
average return rates reported by our larger competitors in the television home
shopping industry. Management believes the higher return rate is partially a
result of (i) the significantly higher average selling prices of our products as
compared to the average selling prices of our competitors, and (ii) the fact
that we have a higher percentage of sales attributable to jewelry products. Both
of these characteristics are associated with higher product return rates.
Management has been pursuing a number of initiatives to reduce the overall
return rate.
G. COMPETITION
The direct marketing and retail businesses are highly competitive. In our
television home shopping and e-commerce operations, we compete for customers
with other types of consumer retail businesses, including traditional "brick and
mortar" department stores, discount stores, warehouse stores and specialty
stores; other television home shopping and e-commerce retailers; infomercial
companies; catalog and mail order retailers and other direct sellers.
In the competitive television home shopping sector, we compete with QVC
Network, Inc. and HSN, Inc., both of whom are substantially larger than we are
in terms of annual revenues and customers, and whose programming is carried more
broadly to U.S. households than is our programming. Both QVC and HSN are owned
by large, well-capitalized parent companies in the media business, who are also
expanding into related e-commerce businesses. The American Collectibles Network
(ACN), the operator of Jewelry Television, also competes with us for television
home shopping customers in the jewelry category, and ACN recently acquired the
assets of Shop At Home from E. W. Scripps Company and is operating a second
channel of programming in a number of non-jewelry categories, including
collectible coins and knives. In addition, there are a number of smaller niche
players and startups in the television home shopping arena who compete with us.
The e-commerce sector is also highly competitive, and we are in direct
competition with virtually all other internet retailers, many of whom are
larger, more well-established, more well-financed and/or have broader customer
bases. Certain of our competitors in the television home shopping sector have
acquired internet businesses complementary to their existing internet sites,
which may pose new competitive challenges for us. For example, the parent
company of HSN has acquired the internet search business Ask Jeeves (now known
as Ask.com), and the parent company of QVC acquired Provide Commerce, an
operator of retail websites.
We anticipate continuing competition for viewers and customers, for
experienced home shopping personnel, for distribution agreements with cable and
satellite systems, and for vendors and suppliers -- not only from television
home shopping companies, but also from other companies that seek to enter the
home shopping and internet retail sectors, including telecommunications and
cable companies, television networks, and other established retailers. We
believe that our success in the television home shopping and e-commerce
businesses is dependent on a number of key factors, including (i) obtaining
carriage on additional cable systems on favorable terms, (ii) increasing the
number of households who purchase products from us, and (iii) increasing the
dollar value of sales per customer to our existing customer base. We believe
that we are positioned to compete because of our established relationships with
cable operators. No assurance can be given, however, that we will be able to
acquire additional cable carriage at prices favorable to us or maintain our
current cable carriage.
9
H. FEDERAL REGULATION
The cable television industry and the broadcasting industry in general are
subject to extensive regulation by the FCC. The following does not purport to be
a complete summary of all of the provisions of the Communications Act of 1934,
as amended, known as the Communications Act, the Cable Television Consumer
Protection Act of 1992 known as the Cable Act, the Telecommunications Act of
1996 known as the Telecommunications Act or other laws and FCC rules or policies
that may affect our operations.
CABLE TELEVISION
The cable industry is regulated by the FCC under the Cable Act and FCC
regulations promulgated thereunder, as well as by state or local governments
with respect to certain franchising matters.
Must Carry. In general, the FCC's "must carry" rules under the Cable Act
entitle analog full power television stations to mandatory cable carriage of
their signals, at no charge, to all cable homes located within each station's
broadcast area provided that the signal is of adequate strength, and the cable
system must carry designated channels available. FCC rules currently extend
similar cable must carry rights to the primary video and programming-related
material of new television stations that transmit only digital television
signals, and to existing television stations that return their analog spectrum
and convert to digital operations. The extent to which cable providers may or
may not be required to provide must carry rights to full power television
stations after the close of the transition to digital television is discussed
below in "Federal Regulation -- Advanced Television Systems." In addition,
certain aspects of the must carry rights of stations transmitting digital
television signals now, as well as after the transmission to digital television,
remain subject to pending FCC proceedings.
The FCC has also been asked to reevaluate its 1993 extension of must carry
rights to predominantly home shopping television stations. While the FCC has
never acted on that request, filed over ten years ago, there can be no assurance
that home shopping television stations will continue to have must carry rights.
In addition, under the Cable Act, cable systems may petition the FCC to
determine that a station is ineligible for must carry rights because of the
station's lack of service to the community, its previous noncarriage or other
factors. The unavailability of must carry rights to our existing or future
stations would likely substantially reduce the number of cable homes that could
be reached by any full power television station that we own or may acquire or on
which we might provide programming.
CABLE LEASED ACCESS
The Cable Act and the FCC's rules provide unaffiliated cable programmers
such as us with certain rights to lease channels from cable operators. The FCC
has recently announced plans to revisit its leased access rates and policies in
light of the lack of use of leased access channels, but there can be no
assurance that the FCC will act in any way that would increase the availability
or affordability of leased access by us.
BROADCAST TELEVISION
General. Our acquisition and operation of television stations is subject
to FCC regulation under the Communications Act. The Communications Act prohibits
the operation of television broadcasting stations except under a license issued
by the FCC. The statute empowers the FCC, among other things, to issue, revoke
and modify broadcasting licenses, adopt regulations to carry out the provisions
of the Communications Act and impose penalties for violation of such
regulations. Such regulations impose certain obligations with respect to the
programming and operation of television stations, including requirements for
carriage of children's educational and informational programming, programming
responsive to local problems, needs and interests, advertising upon request by
legally qualified candidates for federal office, closed captioning, and other
matters. In addition, FCC rules prohibit foreign governments, representatives of
foreign governments, aliens, representatives of aliens and corporations and
partnerships organized under the laws of a foreign nation from holding broadcast
licenses. Aliens may own up to 20% of the capital stock of a licensee
corporation, or generally up to 25% of a U.S. corporation, which, in turn, has a
controlling interest in a licensee.
10
Full Power Television Station. In April 2003, one of our wholly owned
subsidiaries acquired a full power television station serving the Boston,
Massachusetts market. On April 11, 2006, the FCC granted our application for
renewal of the station's license.
Broadcast Multiple Ownership Limits. Many of our existing and potential
competitors are larger and more diversified than we are, or have greater
financial, marketing, merchandising and distribution resources. In January 2004,
Congress passed legislation that would allow a television broadcaster to own
local television stations reaching 39% of the nation's households, up from the
previous 35% limit. On March 1, 2007, the FCC revised its rules to reflect this
legislation. In June 2003, the FCC adopted rules that would have significantly
relaxed the limits and restrictions on media ownership. Among other changes, the
FCC relaxed its rules governing the common ownership of more than one television
station in any given market. In June 2004, the U.S. Court of Appeals for the
Third Circuit invalidated these revised media ownership rules on the ground that
the FCC had failed to provide a sufficient justification for the relaxed
ownership limitations and restrictions, and stayed the new rules pending further
FCC proceedings and subsequent judicial review. In June 2006, the FCC issued a
further notice of proposed rulemaking, again seeking comment on potential
changes to its media ownership rules. Although no prediction can be made as to
the outcome of this proceeding, it is possible that the FCC will adopt changes
to these rules that permit increased consolidation in the broadcast industry,
making it more difficult for us to compete.
ALTERNATIVE TECHNOLOGIES
Alternative technologies could increase the types of video program delivery
systems on which we may seek carriage. Three direct broadcast satellite systems
known as DBS currently provide service to the public and, according to FCC
statistics, the number of DBS subscribers has increased to more than 27 million
households as of December 2005. Congress has enacted legislation designed to
facilitate the delivery of local broadcast signals by DBS operators and thereby
to promote DBS competition with cable systems. In addition, another new
technology permits the viewing of live linear cable television channels through
broadband-connected personal computers, laptops and mobile devices, without the
need for a physical cable-box or special software. We now make our live
programming available in this manner through an agreement with VDC Corporation,
a media and technology services provider. VDC recently has filed complaints with
the FCC claiming eligibility for access to other cable and broadcast programming
that it contends is necessary to attract subscribers, and the owners of that
programming have opposed these efforts, alleging that VDC's technology does not
qualify for this access.
ADVANCED TELEVISION SYSTEMS
Technological developments in television transmission will make it possible
for the broadcast and nonbroadcast media to provide advanced television
services, that is television services using digital or other advanced
technologies. The FCC in late 1996 approved a digital television technical
standard known as DTV to be used by television broadcasters, television set
manufacturers, the computer industry and the motion picture industry. This DTV
standard allows the simultaneous transmission of multiple streams of digital
data on the bandwidth presently used by a normal analog channel. It is possible
to broadcast one or more high-definition channels with visual and sound quality
superior to present-day television or several standard-definition channels with
digital sound and pictures of a quality slightly better than present television,
or one high-definition and one or more standard-definition channels; to provide
interactive data services, including visual or audio transmission, on multiple
channels simultaneously; or to provide some combination of these possibilities
on the multiple channels allowed by DTV.
As part of the nationwide transition from analog to digital broadcasting,
each full power television station has been granted a second channel by the FCC
on which to initiate digital operations. On February 1, 2006, Congress passed a
law setting a final deadline for the DTV transition of February 17, 2009, by
which broadcasters must surrender their analog signals and broadcast only on
their allotted digital frequency. We commenced operations on our digital channel
in May 2003. While broadcasters currently do not have to pay to obtain digital
channels, the FCC has ruled that a television station that receives compensation
from a third party for the ancillary or supplementary use of its DTV spectrum
(e.g., data transmission or paging services)
11
must pay a fee of 5% of gross revenues received. The FCC has rejected a proposal
that fees be imposed when a DTV broadcaster receives payment for transmitting
home shopping programming, although it left open the question whether
interactive home shopping programming might be treated differently. It is not
yet clear whether and how television broadcast stations will be able to profit
by the transition to DTV, how quickly the viewing public will embrace the cost
of new digital television sets and monitors, or how difficult it will be for
viewers who do not do so to continue to receive television broadcasts, whether
through cable or DBS service or over the air. In addition, it is unclear what
rights television broadcast stations will have to obtain carriage of their
digital signals on local cable systems.
As noted above, the FCC's must carry rules generally entitle analog full
power television stations to mandatory cable carriage of their signals, at no
charge, to all cable homes located within each station's designated market area,
or DMA. Although FCC rules currently extend similar cable must carry rights to
existing television stations that return their analog spectrum and convert to
digital operations, in February 2005, the FCC affirmed its prior decision not to
require cable operators to simultaneously carry broadcasters' analog and digital
signals during the transition. After the end of the digital transition in 2009,
the FCC has determined that full power television stations will be entitled to
mandatory cable carriage of their digital signals, although the FCC has yet to
determine the extent to which cable and DBS operators will be required to
provide those signals to subscribers with analog television receivers in a
viewable format. In addition, the FCC confirmed that after the transition, cable
operators will only be obligated to carry the primary video and
programming-related material of digital television station's signals and are not
required to carry any of the stations' additional programming streams. Petitions
for reconsideration of that decision remain pending at the FCC. In addition, as
noted above, a number of issues relating to the rights television broadcast
stations will have to obtain carriage of their digital signals on local cable
systems both during and after the close of the transition to digital television
remain subject to pending FCC proceedings.
As part of this transition to digital television, the spectrum currently
used by broadcasters transmitting on channels 52-69 will be transitioned to use
by new wireless and public safety operators. Some broadcast stations, including
our station in the Boston, Massachusetts marketplace, have been given a digital
channel allocation within this spectrum. Under FCC rules, although stations
awarded digital channels between channels 52 and 69 may use those channels until
the close of the DTV transition, they must either seek an alternative digital
channel below channel 52 on which to transmit their digital signal or transition
their digital operations to their analog channel. The FCC has established a
timetable within which broadcast stations must elect the channel on which they
will transmit their digital signal after the close of the DTV transition, and in
April 2006, we filed a notification with the FCC seeking to provide our digital
television operations in the Boston marketplace on channel 10 after the
transition. In October 2006, the FCC issued a notice tentatively proposing to
accept our proposal in a rulemaking proceeding that remains pending. While no
comments were filed opposing our selection of channel 10 as our digital
television channel, there can be no guarantee that the FCC will authorize us to
operate on channel 10, or that we will be able to locate a suitable alternate
channel below channel 52 on which to provide digital transmissions after the
close of the DTV transition that will provide coverage equivalent to our current
coverage.
TELEPHONE COMPANIES' PROVISION OF PROGRAMMING SERVICES
The Telecommunications Act eliminated the previous statutory restriction
forbidding the common ownership of a cable system and telephone company. AT&T,
Verizon and a number of other local telephone companies are planning to provide
or are providing video services through fiber to the home or fiber to the
neighborhood technologies, while other local exchange carriers are using video
digital subscriber loop technology, known as VDSL, to deliver video programming,
high-speed internet access and telephone service over existing copper telephone
lines. In March 2007, the FCC released an order designed to streamline entry by
carriers by preempting the imposition by local franchising authorities of
unreasonable conditions on entry. Franchising authorities and cable operators
have indicated an intention to seek judicial review of that order. No prediction
can be made as to the deployment schedules of these telephone companies, the
success of their technologies, or their ability to attract and retain customers.
12
REGULATIONS AFFECTING MULTIPLE PAYMENT TRANSACTIONS
The antitrust settlement between MasterCard, VISA and approximately 8
million retail merchants raises certain issues for retailers who accept
telephonic orders that involve consumer use of debit cards for multiple or
continuity payments. A condition of the settlement agreement provided that the
code numbers or other means of distinguishing between debit and credit cards be
made available to merchants by VISA and MasterCard. Under Federal Reserve Board
regulations, this may require merchants to obtain consumers' written consent for
preauthorized transfers where the merchant is aware that the method of payment
is a debit card as opposed to a credit card. We believe that debit cards are
currently being offered as the payment vehicle in approximately 30% of our
transactions with VISA and MasterCard. Effective February 9, 2006, the Federal
Reserve Board amended language in its official commentary to Regulation E by
removing an express prohibition on the use of taped verbal authorization from
consumers as evidence of a written authorization for purposes of the regulation.
There can be no assurance that compliance with the authorization procedures
under this regulation will not adversely affect the customer experience in
placing orders or adversely affect sales.
I. SEASONALITY AND ECONOMIC SENSITIVITY
Our businesses are subject to seasonal fluctuation, with the highest sales
activity normally occurring during our fourth fiscal quarter of the year,
primarily November through January. Our businesses are also sensitive to general
economic conditions and business conditions affecting consumer spending.
Additionally, our television audience (and therefore sales revenue) can be
significantly impacted by major world or domestic events, which divert audience
attention away from our programming.
J. EMPLOYEES
At February 3, 2007, we had approximately 1,200 employees, the majority of
whom are employed in customer service, order fulfillment and television
production. Approximately 18% of our employees work part-time. We are not a
party to any collective bargaining agreement with respect to our employees.
Management considers its employee relations to be good.
K. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and titles of the persons serving as
our executive officers.
<Table>
<Caption>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
William J. Lansing................... 48 President and Chief Executive Officer and
Director
Frank P. Elsenbast................... 41 Senior Vice President and Chief Financial
Officer
Nathan E. Fagre...................... 51 Senior Vice President, General Counsel &
Secretary
Karen F. Johnston.................... 48 Senior Vice President -- Merchandising
Bryan Venberg........................ 38 Senior Vice President -- Human Resources
</Table>
William J. Lansing joined our company as President and Chief Executive
Officer in December 2003 and is also a member of our board of directors. Mr.
Lansing has more than fifteen years of senior management experience, including
positions as president and CEO at public companies in the consumer direct
marketing and internet commerce arenas. Mr. Lansing joined us from General
Atlantic Partners, a global private equity firm, where he was a partner from
September 2001 to December 2003. Prior to joining General Atlantic Partners, Mr.
Lansing served as CEO of NBC Internet, a Nasdaq-listed company, from March 2000
to August 2001 and served as President and later as CEO of Fingerhut Companies,
then the nation's second largest catalog retailer and an NYSE-listed company,
from May 1998 to March 2000. Prior to joining Fingerhut, from October 1996 to
April 1998, Mr. Lansing was at General Electric, where he served as Vice
President of Business Development, reporting to Chairman Jack Welch. From
January 1996 to October 1996,
13
Mr. Lansing was Chief Operating Officer of Prodigy, Inc., where he launched the
company's flagship Prodigy internet offering. Earlier in his career, Mr. Lansing
was a partner at McKinsey and Company. Mr. Lansing currently serves on the board
of directors of Digital River, Inc., Right Now Technologies. Inc. and Fair Isaac
Corporation.
Frank P. Elsenbast served as our Vice President of Financial Planning and
Analysis from September 2003 to October 2004, when he became Vice President and
Chief Financial Officer. Mr. Elsenbast was promoted to Senior Vice President in
May 2006. Mr. Elsenbast has over eighteen years of corporate finance, operations
analysis and public accounting experience. From May 2001 to September 2003, he
served as Finance Director and from May 2000 to May 2001 he served as Finance
Manager at our company. Prior to joining us, Mr. Elsenbast served in various
analytical and operational roles with The Pillsbury Company from May 1995
through May 2000. Mr. Elsenbast is a CPA and began his career with Arthur
Andersen, LLP.
Nathan E. Fagre joined us as Senior Vice President, General Counsel and
Secretary in May 2000. From 1996 to 2000, Mr. Fagre was Senior Vice President
and General Counsel of Occidental Oil and Gas Corporation in Los Angeles,
California, the oil and gas operating subsidiary of Occidental Petroleum
Corporation. From 1995 to 1996, Mr. Fagre held other positions in the legal
department at Occidental. His previous legal experience included corporate and
securities law practice with the law firms of Sullivan & Cromwell in New York
and Gibson, Dunn & Crutcher in Washington, D.C. Mr. Fagre has served on the
board of Ralph Lauren Media, L.L.C. as our representative since 2004. In
addition, Mr. Fagre is a director, member of the executive committee and
secretary of the Electronic Retailing Association, an industry association
serving the television home shopping, e-commerce, infomercial and electronic
direct-response industry.
Karen F. Johnston joined us as Vice President of Merchandising in May 2004
and was promoted to Senior Vice President of Merchandising in February 2005. Ms.
Johnston has more than eighteen years of progressive experience in direct
marketing and retailing. From 2002 to 2004, Ms. Johnston was in Product
Development and Merchandising Director for Target Corporation. From 1992 to
2002, Ms. Johnston served in a number of merchandising positions at the
Fingerhut Corporation including the Merchandising Director for the jewelry,
apparel and footwear division.
Bryan Venberg joined us as Vice President of Human Resources in May 2004
and was promoted to Senior Vice President in May 2006. Mr. Venberg has more than
fourteen years of experience in human resource management. From October 1999 to
May 2004, Mr. Venberg served as regional director of human resources for Target
Corporation. From September 1990 to October 1999, Mr. Venberg served in a number
of human resource and merchandising positions at Target Corporation.
L. AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports if applicable, are
available, without charge, on our Investor Relations website as soon as
reasonably practicable after they are filed electronically with the Securities
and Exchange Commission. Copies also are available, without charge, by
contacting the General Counsel, ValueVision Media, Inc., 6740 Shady Oak Road,
Eden Prairie, Minnesota 55344-3433.
Our Investor Relations internet address is www.valuevisionmedia.com. The
information contained on and connected to our Investor Relations website is not
incorporated into this report.
ITEM 1A. RISK FACTORS
In addition to the general investment risks and those factors set forth
throughout this document, including those set forth under the caption
"Cautionary Statement Concerning Forward-Looking Information," the following
risks should be considered regarding our company.
14
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN
PROFITABLE OPERATIONS IN THE FUTURE.
We experienced operating losses from continuing operations of approximately
$9.5 million, $18.6 million and $44.3 million in fiscal 2006, 2005 and 2004,
respectively. We reported a net loss per diluted share of $0.07, $0.43 and $1.57
in fiscal 2006, 2005 and 2004, respectively. There is no assurance that we will
be able to achieve or maintain profitable operations in future fiscal years.
A MAJORITY OF OUR CABLE AND SATELLITE DISTRIBUTION AGREEMENTS ARE SCHEDULED TO
EXPIRE AT THE END OF 2008 AND IT MAY BE DIFFICULT OR MORE COSTLY TO RENEW THESE
AGREEMENTS FOR ADDITIONAL TERMS.
Cable and satellite distribution agreements representing approximately 60%
of the total cable and satellite households who currently receive our television
programming are scheduled to expire at the end of 2008. While we and NBC, as our
agent, have begun initial discussions with certain cable system operators
regarding extensions or renewals of these agreements, no assurance can be given
that we will be successful in negotiating renewal contracts with all the
existing systems, or that the financial and other terms of renewal will be on
acceptable terms. Failure to successfully renew carriage agreements covering a
material portion of our existing cable and satellite households on acceptable
financial and other terms could adversely affect our future growth, sales
revenues and earnings unless we were able to arrange for alternative means of
broadly distributing our television programming.
LOSS OF THE NBC BRANDING LICENSE WOULD REQUIRE US TO PURSUE A NEW BRANDING
STRATEGY THAT MAY NOT BE SUCCESSFUL AND MAY INCUR SIGNIFICANT ADDITIONAL
EXPENSE.
We have branded our television home shopping network and internet site as
ShopNBC and ShopNBC.com, respectively, under an exclusive, worldwide licensing
agreement with NBC for the use of NBC trademarks, service marks and domain names
that continues until May 2011. We do not have the right to automatic renewal at
the end of the license term, and consequently may be required to pursue a new
branding strategy which may not be as successful as the NBC brand with current
or potential customers, and which may involve significant additional expense. In
addition, there are limitations and conditions to our use of the license, which
may under certain circumstances restrict us from pursuing business opportunities
outside of our current scope of operations. NBC also has the right to terminate
the license prior to the end of the license term in the event of a breach by us
of the terms of the license agreement or upon certain changes of control, as
outlined in greater detail in "Business -- Strategic Relationships -- ABC
Trademark License Agreement" above.
NBC AND GE EQUITY HAVE THE ABILITY TO EXERT SIGNIFICANT INFLUENCE OVER US AND
HAVE THE RIGHT TO DISAPPROVE OF CERTAIN ACTIONS BY US.
As a result of their equity ownership in our company, NBC and GE Equity
together are currently our largest shareholder and have the ability to exert
significant influence over actions requiring shareholder approval, including the
election of directors, adoption of equity-based compensation plans and approval
of mergers or other significant corporate events. Through the provisions in the
shareholder agreement and certificate of designation for the preferred stock,
NBC and GE Equity also have the right to disapprove of certain major corporate
actions by our company (as discussed under "Business -- Strategic
Relationships -- Shareholder Agreement" above). In addition, because NBC has the
exclusive right to negotiate for the distribution of our television home
shopping programming, a termination of the strategic alliance with NBC could
adversely affect our ability to increase our program distribution.
MANDATORY REDEMPTION OF OUR CONVERTIBLE PREFERRED STOCK COULD HAVE A MATERIAL
IMPACT ON OUR LIQUIDITY AND CASH RESOURCES.
Our Class A Redeemable Convertible Preferred Stock issued to GE Equity may
be redeemed upon certain changes in control of our company and, in any event,
may be redeemed in 2009 upon the ten-year anniversary of its issuance (unless
previously converted into common stock). If we are unable to generate positive
cash flow or obtain additional capital prior to any such redemption, the
requirement that we pay cash
15
in connection with such redemption may have a material impact on our liquidity
and cash resources. The aggregate redemption cost of all the Preferred Stock is
$44,264,000. We ended fiscal 2006 with cash and cash equivalents and short-term
investments of $71,294,000 and no long-term debt. The Preferred Stock has a
redemption price of $8.29 per share and is convertible on a one-for-one basis
into our common stock, and accordingly, if the market value of our stock is
higher than the redemption price immediately prior to the redemption date, GE
Equity may choose to convert its shares of Preferred Stock to common stock
rather than exercise its right to redemption.
GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING; UNFAVORABLE
CHANGES COULD ADVERSELY AFFECT OUR BUSINESS.
We have made material investments in anticipation of the continuing growth
of the internet as an effective medium of commerce by merchants and shoppers.
Our sales over the internet accounted for approximately 24%, 21% and 20% of
consolidated net sales during fiscal 2006, 2005 and 2004, respectively.
Additional laws and regulations may be adopted with respect to the internet or
other online services, covering such issues as user privacy, data security,
advertising, pricing, content, copyrights and trademarks, access by persons with
disabilities, distribution, taxation and characteristics and quality of products
and services. These laws or regulations, if enacted, could make it more
difficult for us to conduct business online, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business
through the internet. Inherent with the internet and e-commerce is the risk of
unauthorized access to confidential data, including consumer credit card
information, the risk of computer virus infection or other unauthorized acts of
electronic intrusion with the malicious intent to do damage. Although we have
taken precautionary steps to secure and protect our data network from intrusion
and acts of hostility, there can be no assurance that unauthorized access to our
electronic systems will be prevented entirely.
INTENSE COMPETITION IN THE GENERAL MERCHANDISE RETAILING INDUSTRY AND
PARTICULARLY THE LIVE HOME SHOPPING AND E-COMMERCE SECTORS COULD LIMIT OUR
GROWTH AND REDUCE OUR PROFITABILITY.
As a general merchandise retailer, we compete for consumer expenditures
with other forms of retail businesses, including department, discount, warehouse
and specialty stores, television home shopping, e-commerce businesses, mail
order and catalog companies, and other direct sellers. The home shopping
industry is highly competitive, with the two largest competitors being HSN and
QVC. QVC and HSN offer home shopping programming similar to our programming, and
are well established, reach a significantly larger percentage of United States
television households than we do, and in many markets have more favorable
channel locations than we haved. QVC is owned by Liberty Media Corp., while HSN
is a wholly owned subsidiary of InterActiveCorp. Liberty Media and
InterActiveCorp are larger, more diversified and have greater financial,
marketing and distribution resources than us. The internet retailing industry is
also highly competitive, with numerous e-commerce websites competing in every
product category we carry, in addition to the websites operated by the other
television home shopping companies. This competition in the internet retailing
sector makes it more challenging and expensive for us to attract new customers,
retain existing customers and maintain desired gross margin levels.
WE MAY NOT BE ABLE TO MAINTAIN ITS SATELLITE SERVICES IN CERTAIN SITUATIONS,
BEYOND OUR CONTROL, WHICH MAY CAUSE OUR PROGRAMMING TO GO OFF THE AIR FOR A
PERIOD OF TIME AND INCUR SUBSTANTIAL ADDITIONAL COSTS.
Our programming is presently distributed to cable systems, full power
television stations and satellite dish owners via a leased communications
satellite transponder. In the future, satellite service may be interrupted due
to a variety of circumstances beyond our control, such as satellite transponder
failure, satellite fuel depletion, governmental action, preemption by the
satellite service provider and service failure. The agreement provides us with
preemptable back-up service if satellite transmission is interrupted. However,
there can be no assurance if satellite transmission is so interrupted that we
will be able to utilize existing back-up transponder or satellite capacity. In
the event of any transmission interruption, we may incur substantial additional
costs to enter into new arrangements and be unable to broadcast its signal for
some period of time.
16
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR ON AIR MISREPRESENTATIONS OR
IF PEOPLE OR PROPERTIES ARE HARMED BY PRODUCTS SOLD BY US.
Products sold by us and representations related to these products may
expose us to potential liability from claims by purchasers of such products,
subject to our rights, in certain instances, to seek indemnification against
this liability from the suppliers or manufacturers of the products. In addition
to potential claims of personal injury, wrongful death or damage to personal
property, the live unscripted nature of our television broadcasting may subject
us to claims of misrepresentation by our customers, the Federal Trade Commission
and state attorneys general. We maintain, and have generally required the
manufacturers and vendors of these products to carry, product liability and
errors and omissions insurance. There can be no assurance that we will be able
to maintain this coverage or obtain additional coverage on acceptable terms, or
that this insurance will provide adequate coverage against all potential claims
or even be available with respect to any particular claim. There also can be no
assurance that our suppliers will continue to maintain this insurance or that
this coverage will be adequate or available with respect to any particular
claims. Product liability claims could result in a material adverse impact on
our financial performance.
OUR VALUEPAY INSTALLMENT PAYMENT PROGRAM COULD LEAD TO SIGNIFICANT UNPLANNED
CREDIT LOSSES IF OUR CREDIT LOSS RATE WAS TO DETERIORATE.
We utilize an installment payment program called ValuePay that entitles
customers to purchase merchandise and generally pay for the merchandise in two
to six equal monthly installments. As of February 3, 2007 and February 4, 2006,
we had approximately $105 million and $77 million, respectively, due from
customers under the ValuePay installment program. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. While credit losses have historically been
within our estimates for such losses, there is no guarantee that we will
continue to experience the same credit loss rate that we have in the past. A
significant increase in our credit losses could result in a material adverse
impact on our financial performance.
WE PLACE A SIGNIFICANT RELIANCE ON TECHNOLOGY AND INFORMATION MANAGEMENT TOOLS
TO RUN OUR EXISTING BUSINESSES, THE FAILURE OF WHICH COULD ADVERSELY IMPACT OUR
OPERATIONS.
Our businesses are dependent, in part, on the use of sophisticated
technology, some of which is provided to us by third parties. These technologies
include, but are not necessarily limited to, satellite based transmission of our
programming, use of the internet in relation to our on-line business, new
digital technology used to manage and supplement our television broadcast
operations and a network of complex computer hardware and software to manage an
ever increasing need for information and information management tools. The
failure of any of these technologies, or our inability to have this technology
supported, updated, expanded or integrated into other technologies, could
adversely impact our operations. Although we have, when possible, developed
alternative sources of technology and built redundancy into our computer
networks and tools, there can be no assurance that these efforts to date would
protect us against all potential issues or disaster occurrences related to the
loss of any such technologies or their use.
THE EXPANSION OF DIGITAL CABLE COMPRESSION TECHNOLOGY MAY ADVERSELY IMPACT OUR
ABILITY TO COMPETE FOR TELEVISION VIEWERS.
The majority of cable operators have started to offer cable programming on
a digital basis. The use of digital compression technology provides cable
companies with greater channel capacity. While greater channel capacity
increases the opportunity for us to be more widely distributed, it also may
adversely impact our ability to compete for television viewers to the extent it
results in (i) higher channel position, (ii) placement of our programming in
separate programming tiers, or (iii) an expanding universe of programming
choices all competing for the same audience. We have historically experienced a
higher annual sales revenue per FTE with analog systems, as compared to digital
systems. As more cable system operators move to all-digital systems or require
our programming to be carried on a digital tier, we could experience a reduction
in the growth or an absolute decline in sales per FTE, unless we are able to
offset the reduction through increased
17
marketing efforts, greater internet-based sales or alternative distribution
channels for our television programming. Such efforts may not be successful or
may incur significant additional operating costs.
THE UNANTICIPATED LOSS OF ONE OF OUR LARGER VENDORS COULD IMPACT OUR SALES ON A
TEMPORARY BASIS.
Historically, we have not entered into long-term supply arrangements that
would require vendors to provide products on an ongoing basis. In fiscal 2006,
products purchased from one vendor accounted for approximately 17% of our
consolidated net sales. We believe that we could find alternative sources for
this vendor's products if this vendor ceased supplying merchandise; however, the
unanticipated loss of any large supplier could impact our sales on a temporary
basis.
MANY OF OUR KEY FUNCTIONS ARE CONCENTRATED IN A SINGLE LOCATION, AND A NATURAL
DISASTER COULD SERIOUSLY IMPACT OUR ABILITY TO OPERATE.
Our television broadcast studios, internet operations, IT systems,
merchandising team, inventory control systems, executive offices and
finance/accounting functions, among others, are centralized in our adjacent
offices at 6740 and 6690, Shady Oak Road in Eden Prairie, Minnesota. A natural
disaster such as a tornado could seriously disrupt our ability to continue or
resume normal operations for some period of time. While we have business
continuity plans and emergency preparedness protocols in place, no assurances
can be given as to how quickly we would be able to resume operations and how
long it may take to return to normal operations. We could incur substantial
financial losses above and beyond what may be covered by applicable insurance
policies, and may experience a loss of customers, vendors and employees during
the recovery period.
WE OPERATE WITH A HIGH FIXED COST BASE.
Our television home shopping business operates with a high fixed cost base,
primarily driven by fixed annual fees under multi-year contracts with cable and
satellite system operators to carry our programming. In fiscal 2006, these fees
aggregated approximately $112.6 million. In order to operate on a profitable
basis, we must reach and maintain sufficient annual sales revenues to cover our
high fixed cost base. In the event we do not achieve our expected sales revenue
targets or experience an unanticipated decline in sales, our ability to reduce
operating expenses in the near term will be limited by the fixed cost base. In
that case, our earnings and growth prospects could be adversely affected.
OUR TELEVISION HOME SHOPPING AND INTERNET BUSINESSES ARE SENSITIVE TO GENERAL
ECONOMIC CONDITIONS, CONSUMER CONFIDENCE AND MAJOR NEWS EVENTS.
Our businesses are sensitive to general economic conditions affecting
consumer spending. Our two major categories of sales merchandise are jewelry and
electronics, which due to their nature and relatively high price points are more
sensitive to changes in consumer demand than other product categories.
Unfavorable economic conditions and/or a loss of consumer confidence may lead to
a reduction in consumer spending generally and in home shopping specifically,
and may lead to a reduction in consumer spending on the types of merchandise we
currently offer. Additionally, our television audience and sales revenue can be
significantly impacted by major world or domestic events, which divert audience
attention away from our programming.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
We own two commercial buildings occupying approximately 209,000 square feet
in Eden Prairie, Minnesota (a suburb of Minneapolis). One of the buildings is
used for our corporate administrative, television production and jewelry
distribution operations. The second building has approximately 70,000 square
feet of commercial rental space, which we utilize for additional office space.
We own a 262,000 square foot distribution facility on a 34-acre parcel of land
and lease approximately 72,000 square feet of warehouse space in Bowling Green,
Kentucky. We also lease approximately 25,000 square feet of office space for a
telephone
18
call center in Brooklyn Center, Minnesota, which we primarily use to fulfill our
service obligations in connection with the services agreement entered into with
RLM and our own customer service operations. Additionally, we rent transmitter
site and studio locations in Boston, Massachusetts for our full power television
station. We believe that our existing facilities are adequate to meet our
current needs and that suitable additional or alternative space will be
available as needed to accommodate expansion of operations.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in various claims and lawsuits in the
ordinary course of business. In the opinion of management, these claims and
suits individually and in the aggregate have not had a material adverse effect
on our operations or consolidated financial statements.
As previously described in our annual and quarterly SEC filings, in July
2004, we 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 our
investment in NetRadio Corporation. On November 15, 2005, we agreed with Navarre
to settle the claims we made against Navarre and the counterclaims Navarre made
against us. Under the settlement agreement finalized in April 2006, Navarre made
a cash payment to us and entered into an airtime agreement with us whereby
Navarre had the right to purchase advertising time from us during 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the fourth quarter
ended February 3, 2007.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION FOR COMMON STOCK
Our common stock is traded on the Nasdaq Global Market under the symbol
"VVTV." The following table sets forth the range of high and low sales prices of
the common stock as quoted by the Nasdaq Global Market for the periods
indicated.
<Table>
<Caption>
HIGH LOW
------ ------
FISCAL 2006
First Quarter............................................. $13.13 $11.48
Second Quarter............................................ 13.75 9.83
Third Quarter............................................. 12.95 10.03
Fourth Quarter............................................ 14.12 11.83
FISCAL 2005
First Quarter............................................. 14.42 9.40
Second Quarter............................................ 12.72 8.01
Third Quarter............................................. 13.51 9.24
Fourth Quarter............................................ 13.38 9.47
</Table>
HOLDERS
As of April 2, 2007 we had approximately 550 shareholders of record.
DIVIDENDS
We have never declared or paid any dividends with respect to our capital
stock. Pursuant to the shareholder agreement we have with GE Equity, we are
prohibited from paying dividends in excess of 5% of
19
our market capitalization in any quarter. We currently expect to retain our
earnings for the development and expansion of our business and do not anticipate
paying cash dividends in the foreseeable future. Any future determination by us
to pay cash dividends will be at the discretion of the board of directors and
will be dependent upon our results of operations, financial condition, any
contractual restrictions then existing and other factors deemed relevant at the
time by the board of directors.
ISSUER PURCHASES OF EQUITY SECURITIES
In August 2006, our board of directors authorized a common stock repurchase
program. The program authorizes our management, acting through an investment
banking firm selected as our agent, to repurchase up to $10 million of our
common stock through August 2007 by open market purchases or negotiated
transactions at prices and amounts as we determine from time to time. We did not
repurchase any shares under our stock repurchase program in the fourth quarter
of fiscal 2006. During the third quarter of fiscal 2006, we repurchased a total
of 406,000 shares of common stock for a total repurchase amount of $4,682,000 at
an average price of $11.54 per share. We did not repurchase any shares under any
stock repurchase program during fiscal 2005 or fiscal 2004.
20
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative five-year total return to our
shareholders (based on appreciation of the market price of our common stock) on
an indexed basis with (i) a broad equity market index and (ii) a peer group
created by us over the same period and consisting of companies involved in
various aspects of the television home shopping, jewelry and internet retail and
service industries. The presentation compares the common stock price in the
period from January 31, 2002 to February 3, 2007, to the Nasdaq Global Market
stock index and to the peer group. The total return to shareholders of those
companies comprising the peer group are weighted according to their stock market
capitalization. The companies in the current peer group are: InterActiveCorp,
the parent company of the Home Shopping Network; Liberty Media Corporation, the
parent company of QVC, a home shopping television network; Amazon.com, Inc., an
on-line retailer; RedEnvelope, Inc., an upscale on-line retailer; GSI Commerce,
Inc., a provider of professional services to the on-line retail industry; Zale
Corporation, a specialty jewelry retailer; and Whitehall Jewelers, Inc., a
specialty jewelry retailer. In fiscal 2006, we replaced E.W. Scripps Co., the
parent company of the Shop At Home home shopping television network from its
peer group with RedEnvelope, Inc. due to E.W. Scripps Co.'s divestiture of the
Shop At Home network. The cumulative return is calculated assuming an investment
of $100 on January 31, 2002, and reinvestment of all dividends. You should not
consider shareholder return over the indicated period to be indicative of future
shareholder returns.
Graph
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, FEBRUARY 4, FEBRUARY 3,
2002 2003 2004 2005 2006 2007
- --------------------------------------------------------------------------------------------------------------
ValueVision Media,
Inc. ............. $100.00 $70.09 $ 94.10 $ 75.72 $ 65.99 $ 65.94
- --------------------------------------------------------------------------------------------------------------
Nasdaq Stock Market
(U.S.) Index...... 100.00 67.88 105.70 106.89 121.35 130.43
- --------------------------------------------------------------------------------------------------------------
Peer Group......... 100.00 84.91 125.22 115.22 110.04 119.04
- --------------------------------------------------------------------------------------------------------------
</Table>
21
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended February 3, 2007 have
been derived from our audited consolidated financial statements. The selected
financial data presented below are qualified in their entirety by, and should be
read in conjunction with, the financial statements and notes thereto and other
financial and statistical information referenced elsewhere herein including the
information referenced under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<Table>
<Caption>
YEAR ENDED
-------------------------------------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31,
2007 2006(A) 2005(B) 2004(C) 2003
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $767,275 $691,851 $623,634 $591,185 $540,262
Net sales less cost of sales,
exclusive of depreciation and
amortization(f)..................... 267,161 238,944 204,096 209,508 192,924
Operating loss........................ (9,479) (18,646) (44,271) (7,987) (6,090)
Loss from continuing operations(d).... (2,396) (13,457) (42,719) (8,329) (35,753)
Discontinued operations(e)............ -- (2,296) (14,882) (3,063) (3,357)
PER SHARE DATA:
Net loss from continuing operations
per common share.................... $ (0.07) $ (0.37) $ (1.17) $ (0.23) $ (0.96)
Net loss from continuing operations
per common share -- assuming
dilution............................ $ (0.07) $ (0.37) $ (1.17) $ (0.23) $ (0.96)
Weighted average shares outstanding:
Basic............................... 37,646 37,182 36,815 35,934 37,173
Diluted............................. 37,646 37,182 36,815 35,934 37,173
</Table>
<Table>
<Caption>
FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31,
2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments....... $ 71,294 $ 82,350 $100,581 $127,181 $168,634
Current assets........................ 260,445 246,029 240,524 270,984 314,063
Property, equipment and other
assets.............................. 91,535 101,110 109,772 125,607 92,211
Total assets.......................... 351,980 347,139 350,296 396,591 406,274
Current liabilities................... 105,274 100,820 89,074 84,837 87,497
Other long-term obligations........... 2,553 130 1,380 2,002 1,669
Redeemable preferred stock............ 43,607 43,318 43,030 42,745 42,462
Shareholders' equity.................. 198,847 202,871 216,812 267,007 274,646
</Table>
22
<Table>
<Caption>
YEAR ENDED
-------------------------------------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31,
2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
OTHER DATA:
Sales margin(f)....................... 34.8% 34.5% 32.7% 35.4% 35.7%
Working capital....................... $155,171 $145,209 $151,450 $186,147 $226,566
Current ratio......................... 2.5 2.4 2.7 3.2 3.6
EBITDA (as defined)(g)................ $ 16,116 $ 3,302 $(25,401) $ 6,762 $(28,897)
CASH FLOWS:
Operating............................. $ 3,542 $(10,374) $(18,070) $ 3,368 $ 3,666
Investing............................. $ (1,562) $(10,111) $ (2,304) $ 23,003 $ 19,185
Financing............................. $ (3,627) $ 988 $ 1,981 $ (447) $(29,850)
</Table>
- ---------------
(a) Results of operations for the year ended February 4, 2006 includes a
$294,000 gain on the sale of a television station. See Note 4 to the
consolidated financial statements.
(b) Results of operations for the year ended January 31, 2005 includes a
non-cash charge of $1.9 million related to the write off of deferred
advertising credits. See Note 16 to the consolidated financial statements.
(c) Results of operations for the year ended January 31, 2004 include the
operations of television station WWDP TV-46 from the effective date of its
acquisition, April 1, 2003. Results of operations for the year ended
January 31, 2004 also include a charge of $4.6 million related to costs
associated with our chief executive officer transition and a $4.4 million
gain on the sale of television stations.
(d) Loss from continuing operations includes a net pre-tax loss of $1.7 million
from the sale and holdings of investments and other assets in fiscal 2003
and a net pre-tax loss of $37.3 million from the sale and holdings of
investments and other assets in fiscal 2002.
(e) Discontinued operations relate to the operations of our FanBuzz subsidiary,
which were shut down in fiscal 2005. See Notes 5 and 16 to the consolidated
financial statements.
(f) Management views net sales less cost of sales (exclusive of depreciation
and amortization), or sales margin, as an alternative operating measure
because it is commonly used by management, analysts and institutional
investors in analyzing our net sales profitability. This term is not
considered a measure determined in accordance with generally accepted
accounting principles, or GAAP. The comparable GAAP measurement is gross
profit, which is defined as net sales less cost of sales (inclusive of
depreciation and amortization). Our gross profit from continuing operations
for fiscal 2006, 2005 and 2004 is $244.9 million, $218.4 million and $185.2
million, respectively. The percentage change year over year under either
measure is relatively consistent.
(g) We define Earnings Before Interest, Taxes, Depreciation and Amortization,
or EBITDA, as net loss from continuing operations for the respective
periods excluding depreciation and amortization expense, interest income
(expense) and income taxes. Management views EBITDA as an important
alternative operating performance measure because it is commonly used by
analysts and institutional investors in analyzing the financial performance
of companies in the broadcast and television home shopping sectors.
However, EBITDA should not be construed as an alternative to operating loss
or to cash flows from operating activities (as determined in accordance
with GAAP) and should not be construed as a measure of liquidity. EBITDA,
as presented, may not be comparable to similarly entitled measures reported
by other companies. Management has included the term EBITDA, before
non-cash stock option expense, in its presentation in order to maintain
comparability of previously issued financial guidance and prior year's
reported results. Management also uses EBITDA, before non-cash stock option
expense, to evaluate operating performance and as a measure of performance
for incentive compensation purposes.
23
A reconciliation of EBITDA to its comparable GAAP measurement, net loss,
follows:
<Table>
<Caption>
YEAR ENDED
-------------------------------------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31,
2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
EBITDA, before non-cash stock option
expense............................. $17,672 $ 3,302 $(25,401) $ 6,762 $(28,897)
Less: non-cash stock option expense... (1,556) -- -- -- --
------- -------- -------- -------- --------
EBITDA (as defined)................... 16,116 3,302 (25,401) 6,762 (28,897)
A reconciliation of EBITDA to net loss
is as follows:
EBITDA, as defined.................... 16,116 3,302 (25,401) 6,762 (28,897)
Adjustments:
Depreciation and amortization......... (22,239) (20,569) (18,920) (16,399) (14,522)
Interest income....................... 3,802 3,048 1,627 1,488 3,221
Income taxes.......................... (75) 762 (25) (180) 4,445
Discontinued operations of FanBuzz.... -- (2,296) (14,882) (3,063) (3,357)
------- -------- -------- -------- --------
Net loss.............................. $(2,396) $(15,753) $(57,601) $(11,392) $(39,110)
======= ======== ======== ======== ========
</Table>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations is qualified by reference to and should be read in conjunction with
the financial statements and notes thereto included elsewhere herein.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations and other materials we file with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by us) contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. 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): consumer spending and debt
levels; interest rates; seasonal variations in consumer purchasing activities;
changes in the mix of products sold by us; competitive pressures on sales;
pricing and sales margins; the level of cable and satellite distribution for our
programming and the associated fees; the success of our e-commerce initiatives;
the success of our strategic alliances and relationships; our ability to manage
our operating expenses successfully; risks associated with acquisitions; changes
in governmental or regulatory requirements; litigation or governmental
proceedings affecting our operations; the risks identified under "Risk Factors";
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 compete with the viewership
of our programming; and our ability to obtain and retain key executives and
employees. Investors are cautioned that all forward-looking statements involve
risk and uncertainty and we are under no obligation (and expressly disclaims any
obligation) to update or alter our forward-looking statements whether as a
result of new information, future events or otherwise.
OVERVIEW
ValueVision Media, Inc. is an integrated direct marketing company that
markets its products to consumers through various forms of electronic media and
direct-to-consumer mailings. Our operating strategy
24
as a multi-channel retailer incorporates television home shopping business,
internet e-commerce, direct mail marketing and fulfillment services. Our 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 our television home shopping network and internet shopping
website include jewelry, watches, computers and other electronics, housewares,
apparel, cosmetics, fitness products, giftware, collectibles, seasonal items and
other merchandise. Jewelry is our largest single category of merchandise,
representing 39% of television home shopping and internet net sales in fiscal
2006, 43% in fiscal 2005 and 49% in fiscal 2004. Home products, including
electronics product categories, represented approximately 37% of television home
shopping and internet net sales in fiscal 2006, 36% in fiscal 2005 and 31% in
fiscal 2004. Watches, apparel and health and beauty product categories
represented approximately 24% of television home shopping and internet net sales
in fiscal 2006, 21% in fiscal 2005 and 20% in fiscal 2004. We believe that
having a broad diversity of products appeals to a broader segment of potential
customers and is important to growing our business. Our product diversification
strategy is to continue to develop new product offerings primarily in the home,
apparel and accessories, cosmetics, fitness and consumer electronics categories
to supplement the existing jewelry and computer businesses. We believe that our
customers are primarily women between the ages of 35 and 55 with annual
household incomes between $50,000 and $75,000 and believe our customers make
purchases based primarily on convenience, unique product offerings, value and
quality of merchandise.
COMPANY STRATEGY
Our objective is to be positioned as a growing and profitable leader in
multi-channel retailing in the United States, offering consumers an
entertaining, informative and interactive shopping experience. The following
strategies are being pursued to increase our revenues and profitability and grow
the active customer base, both for television sales and sales through the
internet: (i) continue to diversify our mix of product categories offered on
television and the internet, in order to appeal to a broader population of
potential customers; (ii) maintain and increase the distribution of our
television programming through new and expanded agreements with cable and
satellite system operators, as well as pursuing other means of reaching
customers such as through webcasting, internet videos and internet-based
broadcasting networks; (iii) increase the productivity of each hour of
television programming, through a focus on television offers of merchandise that
maximizes gross margin dollars per hour and marketing efforts to increase the
number of customers within the households currently receiving our television
programming; (iv) continue the growth of our internet business through the
innovative use of technology and marketing efforts, such as advanced search
techniques, personalization, internet video, affiliate agreements and
internet-based auction capabilities; (v) continue to enhance our television
broadcast quality, programming, website features and customer support; (vi)
increase the average order size through sales initiatives such as add-on sales,
continuity programs and warranty sales; and (vii) leverage the strong brand
recognition of the NBC brand name.
CHALLENGE
Our 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 our programming. In order to attain profitability, we must
achieve sufficient sales volume through the acquisition of new customers and the
increased retention of existing customers to cover our high fixed costs. Our
growth and profitability could be adversely impacted if sales volume does not
meet expectations, as we will have limited immediate capability to reduce our
fixed cable and satellite distribution operating expenses to mitigate any
potential sales shortfall.
OUR COMPETITION
The direct marketing and retail businesses are highly competitive. In our
television home shopping and e-commerce operations, we compete for customers
with other types of consumer retail businesses, including traditional "brick and
mortar" department stores, discount stores, warehouse stores and specialty
stores; other
25
television home shopping and e-commerce retailers; infomercial companies;
catalog and mail order retailers and other direct sellers.
In the competitive television home shopping sector, we compete with QVC
Network, Inc. and HSN, Inc., both of whom are substantially larger than we are
in terms of annual revenues and customers, and whose programming is carried more
broadly to U.S. households than is our programming. Both QVC and HSN are owned
by large, well-capitalized parent companies in the media business, who are also
expanding into related e-commerce and web-based businesses. The American
Collectibles Network (ACN), the operator of Jewelry Television, also competes
with us for television home shopping customers in the jewelry category, and ACN
has recently acquired the assets of Shop At Home from E. W. Scripps Company and
is operating a second channel of programming in a number of non-jewelry
categories, including collectible coins and knives. In addition, there are a
number of smaller niche players and startups in the television home shopping
arena who compete with us.
The e-commerce sector is also highly competitive, and we are in direct
competition with numerous other internet retailers, many of whom are larger,
more well-financed and/or have a broader customer base. Certain of our
competitors in the television home shopping sector have acquired internet
businesses complementary to their existing internet sites, which may pose new
competitive challenges for us. For example, the parent company of HSN has
acquired the internet search business Ask Jeeves (now known as Ask.com), and the
parent company of QVC acquired Provide Commerce, an operator of retail websites.
We anticipate continuing competition for viewers and customers, for
experienced home shopping personnel, for distribution agreements with cable and
satellite systems, and for vendors and suppliers -- not only from television
home shopping companies, but also from other companies that seek to enter the
home shopping and internet retail industries, including telecommunications and
cable companies, television networks, and other established retailers. We
believe that our success in the TV home shopping and e-commerce sectors is
dependent on a number of key factors, including (i) obtaining carriage on
additional cable systems on favorable terms, (ii) increasing the number of
households who purchase products from us, and (iii) increasing the dollar value
of sales per customer to our existing customer base.
RESULTS FOR FISCAL 2006
Consolidated net sales from continuing operations in fiscal 2006 were
$767,275,000 compared to $691,851,000 in fiscal 2005, an 11% increase. The
increase in consolidated net sales from continuing operations is directly
attributable to the continued improvement in and increased sales from our
television home shopping and internet operations. Effective for fiscal 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 our television home shopping and
internet operations increased 11% to $755,302,000 in fiscal 2006 from
$680,592,000 in fiscal 2005. We reported an operating loss of $9,479,000 and a
net loss of $2,396,000 in fiscal 2006. We reported an operating loss of
$18,646,000 and a net loss of $15,753,000, which included a net loss of
$2,296,000 from discontinued operations, in fiscal 2005. Operating expenses in
fiscal 2006 included a $29,000 asset impairment charge. Operating expenses in
fiscal 2005 included an $82,000 charge related to employee terminations and a
$294,000 gain on the sale of a television station.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. On an on-going basis, management
evaluates its estimates and assumptions, including those related to the
realizability of long-term investments and
26
intangible assets, accounts receivable, inventory and product returns.
Management bases its estimates and assumptions on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. There can be no assurance that actual results will not differ
from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect the
more significant assumptions and estimates used in the preparation of the
consolidated financial statements:
- Accounts receivable. We utilize an installment payment program called
ValuePay that entitles customers to purchase merchandise and generally
pay for the merchandise in two to six equal monthly credit card
installments in which we bear the risk for uncollectibility. As of
February 3, 2007 and February 4, 2006, we had approximately $105,197,000
and $77,447,000 respectively, due from customers under the ValuePay
installment program. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Estimates are used in determining the allowance for
doubtful accounts and are based on historical collection experience,
current trends, credit policy and a percentage of accounts receivable by
aging category. In determining these percentages, we review our
historical write-off experience, current trends in the credit quality of
the customer base as well as changes in credit policies. While credit
losses have historically been within our expectations and the provisions
established, there is no guarantee that we will continue to experience
the same credit loss rate that we have in the past or that losses will be
within current provisions. Provision for doubtful accounts receivable
(primarily related to our ValuePay program) for fiscal 2006, 2005 and
2004 were $6,065,000, $4,542,000 and $4,303,000, respectively. Based on
our fiscal 2006 bad debt experience, a one-half point increase or
decrease in our bad debt experience as a percentage of total television
home shopping and internet sales would have an impact of approximately
$3.8 million on consolidated distribution and selling expense.
- Inventory. We value our inventory, which consists primarily of consumer
merchandise held for resale, principally at the lower of average cost or
realizable value, and reduce our balance by an allowance for excess and
obsolete merchandise. As of February 3, 2007 and February 4, 2006, we had
inventory balances of $66,622,000 and $67,844,000, respectively. We
regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory based primarily on a percentage of the
inventory balance as determined by its age and specific product category.
In determining these percentages, we look at our historical write-off
experience, the specific merchandise categories on hand, our historic
recovery percentages on liquidations, forecasts of future product
television shows and the current market value of gold. If actual
recoveries or future demand or market conditions differ from our
estimates and assumptions, additional inventory write-downs may be
required in future periods. Provision for excess and obsolete inventory
for fiscal 2006, 2005 and 2004 were $2,977,000, $3,508,000 and
$3,811,000, respectively. Based on our fiscal 2006 inventory write down
experience, a 10% increase or decrease in inventory write downs would
have had an impact of approximately $298,000 on consolidated net sales
less cost of sales (exclusive of depreciation and amortization).
- Product returns. We record a reserve as a reduction of gross sales for
anticipated product returns at each month-end and must make estimates of
potential future product returns related to current period product
revenue. Our return rates on our television and internet sales have been
approximately 32% to 33% over the past three fiscal years. We estimate
and evaluate the adequacy of our returns reserve by analyzing historical
returns by merchandise category, looking at current economic trends and
changes in customer demand and by analyzing the acceptance of new product
lines. Assumptions and estimates are made and used in connection with
establishing the sales returns reserve in any accounting period. Material
differences may result in the amount and timing of revenue for any period
if management's assumptions and estimates were significantly different
from actual product return experiences. Reserves for product returns for
fiscal years 2006, 2005 and 2004 were $8,498,000, $7,658,000 and
$7,290,000, respectively. Based on our fiscal 2006 sales returns, a
one-point increase or decrease in our television and internet sales
returns rate would have had an impact of approximately $4.4 million on
consolidated net sales less cost of sales (exclusive of depreciation and
amortization).
27
- Long-term investments. As of February 3, 2007 and February 4, 2006, we
had $4,139,000 and $1,383,000, respectively, of long-term equity
investment securities of which all related to our investment in RLM
recorded in connection with our equity share of RLM income under the
equity method of accounting. We record an investment impairment charge
when we believe an investment has experienced a decline in value that is
deemed to be other than temporary. Future adverse changes in market
conditions, or continued poor operating results of the underlying
investments, could result in significant non-operating losses or an
inability to recover the carrying value of long-term investments that may
not be reflected in an investment's current carrying value, thereby
possibly requiring an impairment charge in the future. While we believe
that our estimates and assumptions regarding the valuation of our
investments are reasonable, different assumptions could have a material
affect on our valuations. On March 28, 2007, we sold our 12.5% ownership
interest in RLM for approximately $43.8 million. See Note 17 to the
consolidated financial statements.
- FCC broadcasting license asset and goodwill. As of February 3, 2007 and
February 4, 2006, we have recorded an intangible FCC broadcasting license
asset totaling $31,943,000 as a result of our acquisition of Boston
television station WWDP TV-46 in fiscal 2003. In assessing the
recoverability of our FCC broadcasting license asset, which we determined
to have an indefinite life, we must make assumptions regarding estimated
projected cash flows and other factors to determine the fair value of the
related reporting unit. We performed an impairment test with respect to
our FCC broadcasting license in the fourth quarter of fiscal 2006 and
determined that an impairment had not occurred. With respect to the FCC
broadcasting license asset, the fair value of the reporting unit exceeded
its carrying value. If these estimates or related assumptions change in
the future, we may be required to record impairment charges for our
indefinite life intangibles in future periods. While we believe that our
estimates and assumptions regarding the valuation of our reporting unit
are reasonable, different assumptions or future events could materially
affect our valuations. During the third quarter of fiscal 2004, we wrote
off goodwill attributable to the FanBuzz acquisition totaling $9,442,000
as we had determined that the goodwill was significantly impaired
following FanBuzz's loss of its National Hockey League contract in
September 2004. See Note 16 to the consolidated financial statements. The
results of operations for FanBuzz are classified as discontinued
operations in the accompanying consolidated financial statements of
operations.
- Intangible assets. As of February 3, 2007 and February 4, 2006, we had
amortizable intangible assets totaling $13,993,000 and $18,115,000,
respectively, recorded primarily as a result of warrants we issued in
connection with the trademark license agreement with NBC and the
distribution and marketing agreement entered into with NBC. In assessing
the recoverability of our intangible assets, we must make assumptions
regarding estimated future cash flows and other factors to determine the
fair value of the respective assets and reporting units. If these
estimates or related assumptions change in the future, we may be required
to record impairment charges for these assets in future periods. While we
believe that our estimates and assumptions regarding the valuation of
these intangible assets are reasonable, different assumptions or future
events could materially affect our valuations. During fiscal 2004, we
wrote off approximately $160,000 of intangible assets in connection with
the FanBuzz impairment. See Note 16 to the consolidated financial
statements.
- Stock-based compensation. We account for stock-based compensation issued
to employees in accordance with Statement of Financial Accounting
Standards No. 123(R) (revised 2004), "Share-Based Payment" ("SFAS No.
123(R)"), which revised SFAS No. 123, "Accounting for Stock-Based
Compensation," and superseded APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). This standard requires compensation
costs related to all share-based payment transactions to be recognized in
the financial statements at fair value. The fair value of each option
award is estimated on the date of grant using the Black-Scholes option
pricing model that uses assumptions for stock volatility, option terms,
risk-free interest rates and dividend yields. Expected volatilities are
based on the historical volatility of our stock. Expected term is
calculated using the simplified method taking into consideration the
option's contractual life and vesting terms. The risk-free interest rate
for periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time
28
of grant. Expected dividend yields are not used in the fair value
computations as we have never declared or paid dividends on our common
stock. While we believe that our estimates and assumptions regarding the
valuation of our share-based awards are reasonable, different assumptions
could have a material affect on our valuations. See Note 6, Shareholders'
Equity -- Stock-Based Compensation, for our disclosure regarding our
share-based equity awards.
- Deferred taxes. We account for income taxes under the liability method
of accounting whereby income taxes are recognized during the fiscal year
in which transactions enter into the determination of financial statement
income (loss). Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of the enactment of such laws. We assess the
recoverability of our deferred tax assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). In accordance with that
standard, as of February 3, 2007 and February 4, 2006, we recorded a
valuation allowance of approximately $54,663,000 and $55,244,000,
respectively, for our net deferred tax assets and net operating and
capital loss carryforwards. Based on our recent history of losses, a full
valuation allowance was recorded in fiscal 2006, 2005 and 2004 and was
calculated in accordance with the provisions of SFAS No. 109, which
places primary importance on our most recent operating results when
assessing the need for a valuation allowance. Although management
believes that our recent operating losses were heavily affected by a
challenging retail economic environment and slowdown in consumer spending
experienced by us and other merchandise retailers, we intend to maintain
a full valuation allowance for our net deferred tax assets and loss
carryforwards until sufficient positive evidence exists to support
reversal of allowances.
SHOPNBC PRIVATE LABEL AND CO-BRAND CREDIT CARD PROGRAM
In the third quarter of fiscal 2006, we introduced and established a new
private label and co-brand revolving consumer credit card program. The program
is made available to all qualified consumers for the financing of purchases of
products from ShopNBC and for the financing of purchases of products and
services from other non-ShopNBC retailers. The program is intended to be used by
cardholders for purchases made primarily for personal, family or household use.
The issuing bank is the sole owner of the account issued under the program and
absorbs all losses associated with non-payment by cardholders. The issuing bank
pays fees to us based on the number of credit card accounts activated and on
card usage. Once a customer is approved to receive a ShopNBC private label or
co-branded credit card and the card is activated, the customer is eligible to
participate in our credit card rewards program. Under the rewards program,
points are earned on purchases made with the credit cards at ShopNBC and other
retailers where the co-branded card is accepted. Cardholders who accumulate the
requisite number of points are issued a $50 certificate award towards the future
purchase of ShopNBC merchandise. The certificate award expires after twelve
months if unredeemed.
DISCONTINUED FANBUZZ OPERATIONS
In the second quarter of fiscal 2005, we decided to close our FanBuzz
subsidiary operations and finalized the shut down in the third quarter of fiscal
2005. FanBuzz, acquired by us 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 National Hockey League
contract in September 2004 and after a number of other FanBuzz customers
notified us 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. 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 5 to the
consolidated financial statements.
29
ASSET IMPAIRMENTS AND EMPLOYEE TERMINATION COSTS
During the first quarter of fiscal 2005, we recorded a non-cash impairment
loss of $400,000 after receiving notice from a number of FanBuzz customers who
either elected not to renew the terms of their e-commerce services agreements or
decided to terminate their agreements as permitted under the agreements. The
impairment charge is included in loss from discontinued operations in the
accompanying fiscal 2005 consolidated statement of operations. During fiscal
2005, we also recorded an additional $979,000 charge 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 25 positions. Of this charge,
$897,000 is included in loss from discontinued operations in the accompanying
fiscal 2005 consolidated statement of operations.
In the third quarter of fiscal 2004, we wrote off goodwill attributable to
the FanBuzz acquisition as we had determined that the goodwill was impaired
following FanBuzz's loss of its National Hockey League contract in September
2004. In addition, we also concluded that the book value of certain long-lived
assets at FanBuzz was significantly higher than their expected future cash flows
and that an impairment had occurred in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Accordingly, we recorded a
non-cash impairment loss and related charge of $11,302,000 in the third quarter
of fiscal 2004. The charges included $9,442,000 of goodwill impairment,
$1,700,000 of fixed asset and capital expenditure impairment and $160,000 of
intangible asset impairment. The impairment is included in loss from
discontinued operations in the accompanying fiscal 2004 consolidated statement
of operations. In addition, in the fourth quarter of fiscal 2004, we recorded an
asset impairment charge of $1,900,000 related to deferred advertising costs in
the form of television advertising credits with NBC after it was determined that
we could no longer effectively use the credits. During the third and fourth
quarters of fiscal 2004, we also recorded a $3,836,000 charge to earnings in
connection with the decision to eliminate a number of positions within our
company in an effort to streamline the corporate organization and reduce
operating expenses. The charges consisted primarily of severance pay and related
benefit costs associated with the elimination of approximately 30 positions.
ACQUISITIONS AND DISPOSITIONS
In December 2005, we completed the sale of our low power television station
located in Atlanta, Georgia for a total of $400,000. We recorded a pre-tax
operating gain on the sale of this low power television station of $294,000 in
the fourth quarter of fiscal 2005. Management believes that the sale of this
station did not have a significant impact on our ongoing operations.
30
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of continuing operations data expressed as a percentage of net sales.
<Table>
<Caption>
YEAR ENDED
---------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ----------- -----------
NET SALES................................................... 100.0% 100.0% 100.0%
===== ===== =====
Sales margin................................................ 34.8% 34.5% 32.7%
----- ----- -----
OPERATING EXPENSES:
Distribution and selling.................................... 29.5% 30.7% 32.6%
General and administrative.................................. 3.6% 3.6% 3.3%
Depreciation and amortization............................... 2.9% 2.9% 3.0%
Asset impairments........................................... -- -- 0.3%
Employee termination costs.................................. -- -- 0.6%
----- ----- -----
Total operating expenses.................................. 36.0% 37.2% 39.8%
----- ----- -----
OPERATING LOSS.............................................. (1.2)% (2.7)% (7.1)%
Other income, net........................................... 0.5% 0.4% 0.3%
----- ----- -----
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EQUITY IN NET INCOME OF AFFILIATES........................ (0.7)% (2.3)% (6.8)%
Income taxes................................................ -- 0.1% --
Equity in net income of affiliates.......................... 0.4% 0.2% --
----- ----- -----
LOSS FROM CONTINUING OPERATIONS............................. (0.3)% (2.0)% (6.8)%
===== ===== =====
</Table>
KEY PERFORMANCE METRICS*
<Table>
<Caption>
FOR THE TWELVE MONTHS ENDED
---------------------------------------------------------
FEBRUARY 3, % FEBRUARY 4, % JANUARY 31,
2007 CHANGE 2006 CHANGE 2005
----------- ------ ----------- ------ -----------
PROGRAM DISTRIBUTION
Cable FTE's............................... 39,288 4% 37,822 4% 36,351
Satellite FTE's........................... 25,923 8% 24,088 13% 21,312
-------- -- -------- -- --------
Total FTEs (Average 000's).................. 65,211 5% 61,910 7% 57,663
Net Sales per FTE (Annualized).............. $ 11.58 5% $ 10.99 3% $ 10.66
CUSTOMER METRICS
Active Customers -- 12 month rolling........ 845,564 5% 803,607 7% 754,198
% New Customers -- 12 month rolling......... 53% 56% 57%
% Retained Customers -- 12 month rolling.... 47% 44% 43%
Customer Penetration -- 12 month rolling.... 1.3% 1.3% 1.3%
PRODUCT MIX
Jewelry................................ 39% 43% 49%
Watches Apparel, Health & Beauty....... 24% 21% 20%
Home and All Other..................... 37% 36% 31%
Shipped Units (000's)....................... 4,989 1% 4,942 (1)% 5,004
Average Selling Price -- Shipped Units...... $ 211 8% $ 196 9% $ 179
</Table>
- ---------------
* Includes television home shopping and internet sales only.
31
PROGRAM DISTRIBUTION
Our television home shopping program was available to approximately 65.2
million average full time equivalent, or FTE, households for the twelve months
ended February 3, 2007, approximately 61.9 million average FTE households for
the twelve months ended February 4, 2006 and approximately 57.7 million average
FTE households for the twelve months ended January 31, 2005. Average FTE
subscribers grew 5% in fiscal 2006, resulting in a 3.3 million increase in
average FTE's compared to fiscal 2005. Average FTE subscribers grew 7% in fiscal
2005, resulting in a 4.2 million increase in average FTE's compared to fiscal
2004. The annual increases were driven by continued strong growth in satellite
distribution of our programming and increased distribution of our programming on
digital cable. We anticipate that our cable programming distribution will
increasingly shift towards a greater mix of digital as opposed to analog cable
tiers, both through growth of the number of digital subscribers and through
cable system operators moving programming that is carried on analog channels
over to digital channels. Because of the broader universe of programming choices
available for viewers in digital systems and the higher channel placements
commonly associated with digital tiers, the shift towards digital systems may
adversely impact our ability to compete for television viewers. Our television
home shopping programming is also simulcast live 24 hours a day, 7 days a week
through our internet shopping website, www.shopnbc.com, which is not included in
total FTE households.
NET SALES PER FTE
Net sales per FTE for fiscal 2006 increased 5%, or $0.59, per FTE compared
to fiscal 2005. Net sales per FTE for fiscal 2005 increased 3%, or $0.33, per
FTE compared to fiscal 2004. The increases in fiscal 2006 and fiscal 2005 net
sales per FTE were largely the result of strong television home shopping and
internet net sales growth over each previous fiscal year, primarily in the first
three quarters of fiscal 2006 and in the third and fourth quarters of fiscal
2005. Net sales per FTE was significantly impacted in fiscal 2004 as a result of
a number of factors including the loss of a number of experienced television
hosts, the effect of several severe hurricanes that impacted areas of the East
Coast during the year and a soft retail environment. In addition, home shopping
net sales growth was unfavorably affected during the second half of fiscal 2004
due to a number of high profile television-covered special events that competed
with the viewership of our programming, including the 2004 Summer Olympics and
the 2004 presidential election. Consistent with industry practice, we include
internet sales along with television sales in our calculation of net sales per
FTE.
CUSTOMERS
During fiscal 2006, we added 41,957 active customers, a 5% increase over
fiscal 2005. During fiscal 2005, we added 49,409 active customers, a 7% increase
over fiscal 2004. 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 us over the past twelve months divided by our average FTE's for that same
period. This measure was 1.3% for each of fiscal 2006, fiscal 2005 and fiscal
2004. We include in our customer penetration calculations all of our customers
during the applicable time period, whether they became customers as a result of
our television programming, through direct-mail campaigns, or through our
e-commerce marketing efforts.
MERCHANDISE MIX
During fiscal 2006, jewelry net sales decreased from 43% of total
television and internet net sales to 39% as compared to fiscal 2005. Net sales
from home products, including electronic categories, increased to 37% of total
television home shopping and internet net sales from 36% as compared to fiscal
2005 and net sales from watches, apparel and health and beauty product
categories increased to 24% of total television home shopping and internet net
sales from 21% as compared to fiscal 2005. During fiscal 2005, jewelry net sales
decreased from 49% of total television home shopping and internet net sales to
43% as compared to fiscal 2004. Net sales
32
from home products, including electronic categories, increased to 36% of total
television home shopping and internet net sales from 31% as compared to fiscal
2004 and net sales from watches, apparel and health and beauty product
categories increased to 21% of total television home shopping and internet net
sales from 20% as compared to fiscal 2004. Our merchandise mix over the past
several years has been moving away from our historical reliance on jewelry and
computers to a broader mix that also includes apparel, watches, health and
beauty, fitness, home and other electronic product lines. Going forward, we will
be adjusting our merchandise mix as needed in response to both customer demand
and in order to maximize gross dollars per hour in our television home shopping
and internet operations. Net sales from home products, including electronic
product categories, increased as a percentage of total television home shopping
and internet net sales during fiscal 2006 and fiscal 2005 primarily due to
increased sales associated with consumer electronics.
SHIPPED UNITS
The number of units shipped during fiscal 2006 increased 1% from fiscal
2005 to 4,989,000 from 4,942,000. The number of units shipped during fiscal 2005
decreased 1% from fiscal 2004 to 4,942,000 from 5,004,000. The increase in
shipped units during fiscal 2006 was due primarily to the overall increase in
net sales over fiscal 2005. The decrease in shipped units during fiscal 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 consumer electronics.
AVERAGE SELLING PRICE
Our average selling price, or ASP, per unit was $211 in fiscal 2006, an 8%
increase over fiscal 2005. The increase in the ASP in fiscal 2006 was driven by
increases in price points associated primarily with watches, electronics and
apparel merchandise categories, in addition to the mix shift towards higher
priced electronics and home merchandise categories. For fiscal 2005, the average
per unit selling price was $196, a 9% increase over fiscal 2004. The increase in
average selling price in 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 home products, particularly
consumer electronics, which have higher average selling prices.
SALES
Consolidated net sales from continuing operations, inclusive of shipping
and handling revenue, for fiscal 2006 were $767,275,000 compared to $691,851,000
for fiscal 2005, an 11% increase. The increase in consolidated net sales from
continuing operations was directly attributable to continued improvement in net
sales from our television home shopping and internet operations. Net sales
attributed to our television home shopping and internet operations increased 11%
to $755,302,000 for fiscal 2006 from $680,592,000 for fiscal 2005. The growth in
television home shopping and internet net sales during fiscal 2006 is primarily
attributable to increased merchandise sales driven by the growth in the number
of homes receiving our television programming, higher productivity from existing
homes due to increased sales per hour results achieved in the jewelry, watches,
apparel and electronics merchandise categories and a 26% increase, or
$38,072,000, in internet net sales over fiscal 2005. In addition, television and
internet net sales increased due to increased shipping and handling revenue
resulting from increased sales during fiscal 2006 compared to fiscal 2005. We
intend to continue to develop our merchandising and programming strategies and
increase marketing spending with the goal of improving our television home
shopping and internet sales results. While we are optimistic that television
home shopping and internet sales results will continue to improve, there can be
no assurance that our sales strategy will achieve the intended results.
Consolidated net sales from continuing operations, inclusive of shipping
and handling revenue, for fiscal 2005 were $691,851,000 compared to $623,634,000
for fiscal 2004, an 11% increase. The increase in consolidated net sales from
continuing operations was directly attributable to continued improvement in net
sales from our television home shopping and internet operations. Net sales
attributed to our television home shopping and internet operations increased 11%
to $680,592,000 for fiscal 2005 from $614,884,000 for fiscal 2004. The growth in
the television home shopping and internet net sales is primarily attributable to
increased
33
merchandise sales driven by growth in the number of homes receiving our
television programming and higher productivity from existing homes due to
increased sales per hour results achieved in all major merchandise categories.
In addition, television home shopping and internet net sales increased due to
increased shipping and handling revenue as a result of fewer shipping promotions
in fiscal 2005 as compared to fiscal 2004. The average number of FTE subscriber
homes was 61.9 million for fiscal 2005 and 57.7 million for fiscal 2004, a 7%
increase. In addition to new FTE subscriber homes, television home shopping and
internet net sales increased due to the continued addition of new customers from
households already receiving our television home shopping programming and a 15%
increase, or $19,375,000, in internet net sales over fiscal 2004.
We record a reserve as a reduction of gross sales for anticipated product
returns at each month-end based upon historical product return experience. The
return rates for our television home shopping and internet operations have been
approximately 32% to 33% over the past three fiscal years and have remained
relatively stable. We continue to manage return rates and are adjusting average
selling price points and product mix in an effort to reduce the overall return
rate related to our television home shopping and internet businesses.
NET SALES LESS COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
Net sales less cost of sales (excluding depreciation and amortization), or
sales margin, from continuing operations for fiscal 2006 and 2005 was
$267,161,000 and $238,944,000, respectively, an increase of $28,217,000, or 12%.
This increase is directly attributable to increased sales volume from our
television home shopping and internet businesses. We define sales margin as net
sales less cost of sales (exclusive of depreciation and amortization). Sales
margin for fiscal 2006 was 34.8% compared to 34.5% for fiscal 2005. The sales
margin improvement for fiscal 2006 over fiscal 2005 was primarily due to the
achievement of higher merchandise margins on television and internet merchandise
in primarily the jewelry, watches, electronics and apparel product categories
and as a result of decreased inventory obsolescence and lower promotional
discounting as a percentage of total net sales. Sales margin may not be
comparable to those of other retailers, since some retailers include all of the
costs related to their product distribution network in cost of sales, including
depreciation and amortization, while others, including us, exclude a portion of
these costs from sales margin, including them instead as either a component of
distribution and selling expense or as a separate component of operating
expenses.
Net sales less cost of sales (exclusive of depreciation and amortization)
from continuing operations for fiscal 2005 and 2004 was $238,944,000 and
$204,096,000, respectively, an increase of $34,848,000, or 17%. The increase is
directly attributable to increased sales volume from our television home
shopping and internet businesses and increases in sales margins on shipping and
handling revenues. Sales margins for fiscal 2005 were 34.5% compared to 32.7%
for fiscal 2004. Sales margin for fiscal 2005 increased 1.8 percentage points as
compared to gross margins of fiscal 2004 primarily due to increases in
television home shopping and internet shipping and handling margins of
approximately 1.4%, as well as the achievement of higher merchandise margins
during fiscal 2005. These increases reflect the negative impact of our fiscal
2004 free shipping loyalty club which launched in February 2004, and lower
promotional discounting during fiscal 2005. In addition, sales margin also
improved overall due to the achievement of higher merchandise margins in
substantially all major product categories, which was offset by a product mix
shift that included greater sales in lower margin electronic product categories
during fiscal 2005.
Management views net sales less cost of sales (exclusive of depreciation
and amortization), or sales margin, as an alternative operating measure because
it is commonly used by management, analysts and institutional investors in
analyzing the profitability of our company. This term is considered a non-GAAP
measure. The comparable GAAP measurement is gross profit, which is defined as
net sales less cost of sales (inclusive of depreciation and amortization). Our
gross profit from continuing operations for fiscal 2006, 2005 and 2004 is $244.9
million, $218.4 million and $185.2 million, respectively. The percentage change
year over year under either measure is relatively consistent.
34
OPERATING EXPENSES
Total operating expenses from continuing operations were $276,640,000,
$257,590,000 and $248,367,000 for fiscal 2006, 2005 and 2004, respectively,
representing an increase of $19,050,000, or 7%, from fiscal 2005 to fiscal 2006,
and an increase of $9,223,000, or 4%, from fiscal 2004 to fiscal 2005. Fiscal
2005 total operating expenses included a charge of $82,000 recorded in
connection with employee terminations and a $294,000 gain recorded in connection
with the sale of our remaining low power television station, which reduced total
operating expenses in fiscal 2005. Fiscal 2004 total operating expenses included
a $1,900,000 non-cash charge relating to a fourth quarter write down of
television advertising credits and a charge of $3,836,000 recorded in connection
with management's decision to eliminate a number of positions within our
company.
Distribution and selling expense for fiscal 2006 increased $14,081,000, or
7%, to $226,450,000, or 30% of net sales compared to $212,369,000, or 31% of net
sales in fiscal 2005. Distribution and selling expense increased over fiscal
2005 primarily due to an increase in salaries, accrued bonuses and related
personnel costs associated with hiring and retaining primarily merchandising,
television production and show management personnel and on-air talent of
$3,452,000 during fiscal 2006; increased credit card and net collection fees of
$3,430,000 due to the overall increase in net sales; increased internet and
direct-mail and marketing expenses of $3,490,000 as we attempt to acquire
additional customers and increase our overall penetration; increased
telemarketing and customer service costs of $3,463,000 associated with increased
sales volumes and our commitment to improve our customer service; a $724,000
contract buyout fee relating to our legacy private label credit card agreement
and increased share-based compensation expense of $778,000. These increases were
offset by a decrease in net cable and satellite access fees of $888,000.
Distribution and selling expense for fiscal 2005 increased $9,210,000, or
5%, to $212,369,000, or 31% of net sales compared to $203,159,000, or 33% of net
sales in fiscal 2004. Distribution and selling expense increased primarily as a
result of increases in net cable access fees of $5,423,000 due to a 7% increase
in the number of average FTE subscribers over the prior year, increased costs
associated with hiring and retaining merchandising and show management personnel
and on-air talent of $4,460,000 during fiscal 2005 and increased credit card
fees of $1,282,000 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 $825,000 and a prior year merchandising software write-off
totaling $868,000.
General and administration expense for fiscal 2006 increased $3,058,000, or
12%, to $27,922,000, or 4% of net sales from continuing operations, compared to
$24,864,000, or 4% of net sales from continuing operations in fiscal 2005.
General and administrative expense increased over fiscal 2005 primarily as a
result of compensation recorded related to share-based payments of $778,000,
increased salaries, accrued bonuses, and related personnel costs of $2,982,000,
information systems service fees of $402,000 and director stock-based
compensation of $273,000, offset by decreased legal fees of $660,000 and
proceeds received from a litigation settlement totaling $300,000.
General and administration expense for fiscal 2005 increased $4,312,000, or
21%, to $24,864,000, or 4% of net sales from continuing operations, compared to
$20,552,000, or 3% of net sales from continuing operations in fiscal 2004.
General and administrative expense increased over fiscal 2004 primarily as a
result of increased information system personnel salaries and consulting fees
and software maintenance fees of $2,069,000, increased accrued bonuses of
$1,941,000 and increased legal fees of $491,000.
Depreciation and amortization expense was $22,239,000, $20,569,000 and
$18,920,000 for fiscal 2006, 2005 and 2004, respectively, representing an
increase of $1,670,000, or 8%, from fiscal 2005 to fiscal 2006 and an increase
of $1,649,000, or 9%, from fiscal 2004 to fiscal 2005. Depreciation and
amortization expense as a percentage of net sales was 3% for fiscal 2006, 2005
and 2004. The dollar increases experienced during fiscal 2006 and fiscal 2005
are primarily due to increased depreciation and amortization as a result of
assets places in service in connection with our various application software
development and functionality enhancements.
35
OPERATING LOSS
We reported an operating loss from continuing operations of $9,479,000 for
fiscal 2006 compared with an operating loss from continuing operations of
$18,646,000 for fiscal 2005, an improvement of $9,167,000. Our operating loss
for fiscal 2006 improved from fiscal 2005 primarily as a result of our increase
in sales margin as described above under "Net sales less cost of sales
(exclusive of depreciation and depreciation)." Offsetting the increase in sales
margin over fiscal 2005 were increases in distribution and selling expenses,
particularly (i) additional personnel costs associated with merchandising,
television production, show management and on-air talent, (ii) internet,
direct-mail and marketing expenses, (iii) credit card fees and bad debt expense,
(iv) increases in general and administrative expenses recorded in connection
with salaries, accrued bonuses and information system service fees, and (v)
increases in depreciation and amortization expense as a result of assets placed
in service in connection with our various application software development and
functionality enhancements, the details of which are discussed above. In
addition, operating expenses increased over the prior year due to the recording
of noncash stock option expense totaling $1,556,000 resulting from our adoption
of SFAS No. 123(R) in the first quarter of fiscal 2006.
We reported an operating loss from continuing operations of $18,646,000 for
fiscal 2005 compared with an operating loss from continuing operations of
$44,271,000 for fiscal 2004, an improvement of $25,625,000. Operating loss for
fiscal 2005 improved from fiscal 2004 primarily as a result of our increase in
sales margin as described above under "Net sales less cost of sales (exclusive
of depreciation and depreciation)." Offsetting the increase in sales margin over
fiscal 2004 were increases in distribution and selling expenses, particularly
(i) net cable access fees, (ii) additional costs associated with merchandising,
show and on-air talent and credit card fees, (iii) increases in general and
administrative expenses recorded in connection with information system personnel
salaries, consulting fees and software maintenance fees, and (iv) increases in
depreciation and amortization expense as a result of assets placed in service in
connection with our various application software development and functionality
enhancements. These expense increases were offset by the recording of a $294,000
pre-tax gain following the sale of a low power television station in the fourth
quarter of fiscal 2005.
NET LOSS
For fiscal 2006, we reported a net loss available to common shareholders of
$2,685,000, or $0.07 per basic and diluted share, on 37,646,000 weighted average
common shares outstanding. For fiscal 2005, we reported a net loss available to
common shareholders of $16,040,000, or $0.43 per basic and diluted share, on
37,182,000 weighted average common shares outstanding. For fiscal 2004, we
reported a net loss available to common shareholders of $57,886,000, or $1.57
per basic and diluted share, on 36,815,000 weighted average common shares
outstanding. Net loss available to common shareholders for fiscal 2006 includes
the recording of $3,006,000 of equity in earnings from RLM, a $500,000 gain on
the sale of an investment, a $150,000 write-down of a non-operating real estate
asset held for sale, and interest income totaling $3,802,000 earned on our cash
and short-term investments. Net loss available to common shareholders for fiscal
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 $1,383,000 of equity in earnings of
RLM, a $762,000 income tax benefit, and interest income totaling $3,048,000
earned on our cash and short-term investments. Net loss available to common
shareholders for fiscal 2004 includes a net loss of $14,882,000 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 $1,627,000 earned on our cash and short-term investments.
For fiscal 2006, 2005 and 2004, net loss reflects an income tax benefit
(provision) of $(75,000), $762,000 and $(25,000), respectively, which resulted
in a recorded effective tax rate of 3.2% in fiscal 2006, 4.9% in fiscal 2005 and
0% in fiscal 2004. We have recorded an income tax provision during fiscal 2006,
fiscal 2005 and fiscal 2004 relating to state income taxes payable on certain
income for which there is no loss carryforward benefit available. We 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. We have not recorded any other income tax benefit on
the losses recorded during fiscal 2006, fiscal 2005 and fiscal 2004
36
due to the uncertainty of realizing income tax benefits in the future as
indicated by our recording of an income tax valuation reserve. Based on our
recent history of losses, a full valuation allowance has been recorded and was
calculated in accordance with the provisions of SFAS No. 109, which places
primary importance on our most recent operating results when assessing the need
for a valuation allowance. Although management believes that our recent
operating losses were heavily affected by the attendant fixed costs associated
with a significant expansion of cable homes, a challenging retail economic
environment and a slowdown in consumer spending experienced by us and other
merchandise retailers, we intend to maintain a full valuation allowance for our
net deferred tax assets and net operating loss carryforwards until such point
that we believe it is more likely than not that such assets will be realized in
the future.
QUARTERLY RESULTS
The following summarized unaudited results of operations for the quarters
in fiscal 2006 and 2005 have been prepared on the same basis as the annual
financial statements and reflect adjustments (consisting of normal recurring
adjustments) that we consider necessary for a fair presentation of results of
operations for the periods presented. Our results of operations have varied and
may continue to fluctuate significantly from quarter to quarter. Results of
operations in any period should not be considered indicative of the results to
be expected for any future period.
37
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS)
FISCAL 2006:
Net sales....................... $178,724 $186,982 $184,886 $216,683 $767,275
Net sales less cost of sales
(exclusive of depreciation and
amortization)................. 63,202 65,227 63,575 75,157 267,161
Sales margin.................... 35.4% 34.9% 34.4% 34.7% 34.8%
Operating expenses.............. 67,120 67,923 68,322 73,275 276,640
Operating income (loss)......... (3,918) (2,696) (4,747) 1,882 (9,479)
Other income, net............... 1,296 1,015 990 851 4,152
Income (loss) from continuing
operations.................... (2,091) (696) (3,126) 3,517 (2,396)
Net income (loss)............... $ (2,091) $ (696) $ (3,126) $ 3,517 $ (2,396)
======== ======== ======== ======== ========
Net income (loss) per share..... $ (.06) $ (.02) $ (.09) $ .09 $ (.07)
======== ======== ======== ======== ========
Net income (loss) per share --
assuming dilution............. $ (.06) $ (.02) $ (.09) $ .08 $ (.07)
======== ======== ======== ======== ========
Weighted average shares
outstanding:
Basic......................... 37,679 37,736 37,628 37,484 37,646
======== ======== ======== ======== ========
Diluted....................... 37,679 37,736 37,628 42,861 37,646
======== ======== ======== ======== ========
FISCAL 2005:
Net sales....................... $153,476 $169,492 $159,513 $209,370 $691,851
Net sales less cost of sales
(exclusive of depreciation and
amortization)................. 51,298 59,694 54,487 73,465 238,944
Sales margin.................... 33.4% 35.2% 34.2% 35.1% 34.5%
Operating expenses.............. 61,323 61,947 62,425 71,895 257,590
Operating income (loss)......... (10,025) (2,253) (7,938) 1,570 (18,646)
Other income, net............... 917 487 717 923 3,044
Income (loss) from continuing
operations.................... (9,114) (927) (6,845) 3,429 (13,457)
Discontinued operations......... (1,582) (493) (221) -- (2,296)
Net income (loss)............... $(10,696) $ (1,420) $ (7,066) $ 3,429 $(15,753)
======== ======== ======== ======== ========
Net income (loss) per share..... $ (.29) $ (.04) $ (.19) $ .09 $ (.43)
======== ======== ======== ======== ========
Net income (loss) per share --
assuming dilution............. $ (.29) $ (.04) $ (.19) $ .08 $ (.43)
======== ======== ======== ======== ========
Weighted average shares
outstanding:
Basic......................... 37,077 37,102 37,120 37,427 37,182
======== ======== ======== ======== ========
Diluted....................... 37,077 37,102 37,120 43,077 37,182
======== ======== ======== ======== ========
</Table>
38
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of February 3, 2007 and February 4, 2006, cash and cash equivalents and
short-term investments were $71,294,000 and $82,350,000, respectively, an
$11,056,000 decrease. For fiscal 2006 working capital increased $9,962,000 to
$155,171,000 compared to working capital of $145,209,000 for fiscal 2005. The
current ratio was 2.5 at February 3, 2007 compared to 2.4 at February 4, 2006.
SOURCES OF LIQUIDITY
Our principal sources of liquidity are our available cash, cash equivalents
and short-term investments, accrued interest earned from our short-term
investments and our 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 our ValuePay installment program and the extent to which we extend credit to
our customers is important to our short-term liquidity and cash resources. A
significant increase in our accounts receivable aging or credit losses could
negatively impact our source of cash from operations in the short term. While
credit losses have historically been within our estimates for such losses, there
is no guarantee that we will continue to experience the same credit loss rate
that we have had in the past. Historically, we have also been able to generate
additional cash sources from the proceeds of stock option exercises and from the
sale of equity investments and other properties; however, these sources of cash
are neither relied upon nor controllable by us. We have no debt other than fixed
capital lease obligations and believe we have the ability to obtain additional
financing if necessary. At February 3, 2007 and February 4, 2006, 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 auction rate securities with tender option
terms ranging from one month to one year. Although management believes our
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 is subject to interest rate fluctuations. The maturities and tender
option terms within our investment portfolio generally range from 30 to 180
days.
CASH REQUIREMENTS
Our principal use of cash is to fund our business operations, which consist
primarily of purchasing inventory for resale, funding account receivables growth
in support of sales growth and funding operating expenses, particularly our
contractual commitments for cable and satellite programming and the funding of
capital expenditures. Expenditures made for property and equipment in fiscal
2006 and 2005 and for expected future capital expenditures include the upgrade
and replacement of computer software and front-end merchandising systems,
expansion of capacity to support our growing business, continued improvements
and modifications to our owned headquarter buildings and the upgrade and
digitalization of television production and transmission equipment and related
computer equipment associated with the expansion of our home shopping business
and e-commerce initiatives. Historically, we have also used our cash resources
for various strategic investments and for the repurchase of stock under stock
repurchase programs but are under no obligation to continue doing so if
protection of liquidity is desired. We have authorized a $10 million stock
repurchase program and have the discretion to repurchase stock under the program
and make strategic investments consistent with our business strategy.
We ended fiscal 2006 with cash and cash equivalents and short-term
investments of $71,294,000, and no long-term debt obligations. We expect future
growth in working capital as revenues grow beyond fiscal 2006 but expect cash
generated from operations to partially offset the expected use. We believe our
existing cash balances and our ability to raise additional financing will be
sufficient to fund our obligations and commitments as they come due on a
long-term basis and sufficient to fund potential foreseeable contingencies.
These estimates are subject to business risk factors, including those identified
under "Risk Factors." In addition to these risk factors, a significant element
of uncertainty in future cash flows arises from potential strategic investments
we may make, which are inherently opportunistic and difficult to predict. We
believe existing cash balances, our ability to raise financing and the ability
to structure transactions in a manner
39
reflective of capital availability will be sufficient to fund any investments
while maintaining sufficient liquidity for our normal business operations.
Total assets at February 3, 2007 were $351,980,000 compared to $347,139,000
at February 4, 2006. Shareholders' equity was $198,847,000 at February 3, 2007
compared to $202,871,000 at February 4, 2006, a decrease of $4,024,000. The
decrease in shareholders' equity from fiscal 2005 to fiscal 2006 resulted
primarily from the net loss of $2,396,000 recorded during the year, common stock
repurchases of $4,699,000 and accretion on redeemable preferred stock of
$289,000. These decreases were offset by increases in shareholders' equity of
$1,901,000 related to the recording of share-based compensation and $1,459,000
primarily from proceeds received related to the exercise of stock options. The
decrease in shareholders' equity from fiscal 2004 to fiscal 2005 resulted
primarily from the net loss of $15,753,000 recorded during the year and
accretion on redeemable preferred stock of $287,000. These decreases were offset
by increases in shareholders' equity of $1,906,000 related to the exercise of
stock options and vesting of deferred compensation of $190,000. As of February
4, 2006, we had long-term debt obligations totaling $130,000 related to assets
purchased under capital lease arrangements.
For fiscal 2006, net cash provided by operating activities totaled
$3,542,000 compared to net cash used for operating activities of $10,374,000 in
fiscal 2005 and net cash used for operating activities of $18,070,000 in fiscal
2004. Net cash provided by operating activities for fiscal 2006 reflects a net
loss, as adjusted for depreciation and amortization, share-based payment
compensation, common stock issued to employees, amortization of deferred
revenue, gain on sale of property and investments, asset impairments and write
off charges, proceeds from RLM dividends and equity in net income of affiliates.
In addition, net cash provided by operating activities for fiscal 2006 reflects
decreases in inventory, prepaid expenses and other assets, an increase in
deferred revenue, accounts payable and accrued liabilities, offset by an
increase in accounts receivable. Inventories decreased primarily as a result of
our strong fourth quarter sales activity and management's focused effort to
reduce overall inventory levels. Prepaid expenses decreased primarily as a
result of the timing of prepaid cable access fees. The increase in deferred
revenue was primarily the result of receiving upfront cash payments in
connection with our new private label and co-branded credit card program. The
increase in accounts payable and accrued expenses is a result of increases
associated with accrued salaries, accrued cable access and marketing fees,
offset primarily by amounts due to customers for returns. Accounts receivable
increased primarily due to the overall increase in net sales and specifically
due to increases in sales made utilizing extended payment terms and the timing
of customer collections made under our ValuePay installment program.
Net cash used for operating activities for fiscal 2005 reflects a net loss,
as adjusted for depreciation and amortization, common stock issued to employees,
amortization of deferred compensation, gain on sale of television stations, gain
on sale of property and investments, asset impairment and write off charges,
equity in net income of affiliates, a noncash tax benefit recorded in fiscal
2005 and a gain on the termination of a long-term lease associated with FanBuzz.
In addition, net cash used for operating activities for fiscal 2005 reflects an
increase in inventories, accounts receivable and prepaid expenses and other
assets, offset by an increase in accounts payable and accrued liabilities.
Inventories increased primarily in preparation for the fourth quarter
anticipated strong holiday season and as a direct result of our effort to
diversify our product mix offerings. 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 prepaid cable access fees due to the timing of payments, an increase in
deferred satellite rent, offset by a decrease in prepaid postage. The increase
in accounts payable and accrued liabilities is a direct result of the increase
in inventory levels and the timing of merchandise receipts. In addition,
accounts payable and accrued liabilities increased as a result of the timing of
payments made for accrued cable access and marketing fees, offset by a decrease
in accrued salaries and a decrease in amounts due to customers for returned
merchandise.
Net cash used for operating activities for fiscal 2004 reflects a net loss,
as adjusted for depreciation and amortization, common stock issued to employees,
amortization of deferred compensation, loss on sale of property and investments
and asset impairment charges recorded in fiscal 2004. In addition, net cash used
for operating activities for fiscal 2004 reflects a decrease in inventories and
an increase in accounts payable and
40
accrued expenses, offset by an increase in accounts receivable and prepaid
expenses and other. Inventories decreased primarily as a result of our strong
fourth quarter sales activity and management's focused effort to reduce overall
inventory levels. The increase in accounts payable and accrued expenses is a
result of the timing of payments related to long-term cable access fees, accrued
severance recorded in connection with the third quarter employee terminations
and the timing of merchandise receipts. Accounts receivable increased due to an
increase in sales made utilizing extended payment terms for the ValuePay
installment program and increased credit card sales directly resulting from
increased sales. Prepaid expenses and other increased primarily as a result of
our temporary acquisition of a personal residence in conjunction with an
executive's hiring and relocation, increases in prepaid maintenance and salary
contracts, postage and deferred rent offset by a decrease in deferred television
advertising costs.
We utilize an installment payment program called ValuePay that entitles
customers to purchase merchandise and generally pay for the merchandise in two
to six equal monthly credit card installments. As of February 3, 2007, we had
approximately $105,197,000 due from customers under the ValuePay installment
program, compared to $77,447,000 at February 4, 2006. The increase in ValuePay
receivables from fiscal 2005 is primarily the result of increased sales made
utilizing extended payment terms and the general increase in overall sales over
the prior year. ValuePay was introduced many years ago to increase sales and to
respond to similar competitive programs while at the same time reducing return
rates on merchandise with above average selling prices. We record a reserve for
uncollectible accounts in our financial statements in connection with ValuePay
installment sales and intend to continue to sell merchandise using the ValuePay
program. Receivables generated from the ValuePay program will be funded in
fiscal 2007 from our present capital resources and future operating cash flows.
Net cash used for investing activities totaled $1,562,000 in fiscal 2006,
compared to net cash used for investing activities of $10,111,000 in fiscal 2005
and net cash used for investing activities of $2,304,000 in fiscal 2004.
Expenditures for property and equipment were $11,470,000 in fiscal 2006 compared
to $9,750,000 in fiscal 2005 and $14,722,000 in fiscal 2004. Expenditures for
property and equipment during fiscal 2006, fiscal 2005 and fiscal 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 our 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 our home shopping business and e-commerce initiatives. During
fiscal 2006, we invested $21,627,000 in various short-term investments, received
proceeds of $31,035,000 from the sale of short-term investments and received
proceeds of $500,000 from the sale of an internet investment previously written
off.
During fiscal 2005, we invested $80,454,000 in various short-term
investments, received proceeds of $79,193,000 from the sale of short-term
investments, received proceeds of $400,000 in connection with the sale of a low
power television station and received proceeds of $500,000 from the sale of
property and equipment in connection with the shut down of FanBuzz.
During fiscal 2004, we invested $128,397,000 in various short-term
investments, received proceeds of $136,604,000 from the sale of short-term
investments and received proceeds of $4,211,000 in connection with a note
receivable from a former officer.
Net cash used for financing activities totaled $3,627,000 in fiscal 2006
and related primarily to payments made of $4,699,000 in conjunction with the
repurchase of 406,000 shares of our common stock and payments of long-term lease
obligations of $363,000, offset by cash proceeds received of $1,435,000 from the
exercise of stock options. Net cash provided by financing activities totaled
$988,000 in fiscal 2005 and related primarily to cash proceeds received of
$1,869,000 from the exercise of stock options, offset by payments of long-term
capital lease obligations of $881,000. Net cash provided by financing activities
totaled $1,981,000 in fiscal 2004 and related primarily to cash proceeds
received of $3,024,000 from the exercise of stock options, offset by payments of
long-term capital lease obligations of $1,043,000.
41
CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS
The following table summarizes our obligations and commitments as of
February 3, 2007, and the effect these obligations and commitments are expected
to have on our liquidity and cash flow in future periods:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
--------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- --------- ------------ ------------ ---------
Cable and satellite
agreements(a).................. $344,762 $110,118 $139,689 $66,672 $28,283
Employment agreements............ 5,034 3,822 1,212 -- --
Operating leases................. 22,898 2,387 4,164 4,029 12,318
Capital leases................... 141 141 -- -- --
Purchase order obligations....... 48,875 48,875 -- -- --
-------- -------- -------- ------- -------
Total.......................... $421,710 $165,343 $145,065 $70,701 $40,601
======== ======== ======== ======= =======
</Table>
- ---------------
(a) Future cable and satellite payment commitments are based on subscriber
levels as of February 3, 2007 and future payment commitment amounts could
increase or decrease as the number of cable and satellite subscribers
increase or decrease. Under certain circumstances, operators may cancel
their agreements prior to expiration.
IMPACT OF INFLATION
We believe that inflation has not had a material impact on our results of
operations for each of the fiscal years in the three-year period ended February
3, 2007. We cannot assure you that inflation will not have an adverse impact on
our operating results and financial condition in future periods.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. The provisions of SFAS No. 159 are effective for
fiscal years beginning after November 15, 2007. We are currently evaluating the
effect that the adoption of SFAS No. 159 will have on our consolidated results
of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), to establish a consistent framework for measuring fair value
and expand disclosures on fair value measurements. The provisions of SFAS No.
157 are effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the effect that the adoption of SFAS No. 157 will have on
our consolidated results of operations and financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes -- An interpretation of FASB
Statement No. 109. FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return, including a decision whether to
file or not to file a tax return in a particular jurisdiction. FIN 48 is
effective for fiscal years beginning after December 15, 2006. If there are
changes in net assets as a result of the application of FIN 48, these will be
accounted for as an adjustment to retained earnings. We are currently assessing
the impact of FIN 48 on our consolidated results of operations and financial
position.
SUBSEQUENT EVENT
On March 26, 2007, our wholly-owned subsidiary VVIFC and RLM entered into a
rider to the existing agreement for services (as amended) under which VVIFC
provides RLM with fulfillment and certain customer support services. The term of
the agreement for services, as amended in October 2006, extends through August
2008. Pursuant to the terms of the rider, VVIFC and RLM further agreed to
certain changes
42
to the agreement for services (as amended), including VVIFC's agreement to
extend the term of the agreement through mid-2009 if so requested by RLM.
On March 28, 2007, we entered into a membership interest purchase agreement
with Polo Ralph Lauren, NBC and certain NBC affiliates, pursuant to which we
sold our 12.5% membership interest in RLM to Polo Ralph Lauren for an aggregate
purchase price of $43,750,000. The full text of the purchase agreement is
attached as an exhibit to our Current Report on Form 8-K filed with the SEC on
April 3, 2007.
Concurrently with the execution of the purchase agreement, we also entered
into an amendment to the license agreement (for the limited, worldwide use of
NBC trademarks, service marks, domain names and logos), under which NBC agreed
to extend the term of the license agreement to May 15, 2011 and to certain
limitations on NBC's right to terminate the license agreement in the event of a
change in control of our company involving a financial buyer. On the same date,
we also entered into an amendment to the distribution agreement with NBC
providing for a reduction in the annual affiliate relations and marketing fee
paid by us to NBC to a market rate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into financial instruments for trading or speculative
purposes and do not currently utilize derivative financial instruments as a
hedge to offset market risk. We have 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. We currently do
not have investments in the form of common stock purchase warrants. Our
operations are conducted primarily in the United States and as such are not
subject to foreign currency exchange rate risk. However, some of our products
are sourced internationally and may fluctuate in cost as a result of foreign
currency swings. We have no long-term debt other than fixed capital lease
obligations, and accordingly, are not significantly exposed to interest rate
risk, although changes in market interest rates do impact the level of interest
income earned on our substantial cash and short-term investment portfolio.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION MEDIA, INC.
AND SUBSIDIARIES
<Table>
<Caption>
PAGE
----
Report of Independent Registered Public Accounting Firm..... 45
Consolidated Balance Sheets as of February 3, 2007 and
February 4, 2006.......................................... 46
Consolidated Statements of Operations for the Years Ended
February 3, 2007, February 4, 2006 and January 31, 2005... 47
Consolidated Statements of Shareholders' Equity for the
Years Ended February 3, 2007, February 4, 2006 and January
31, 2005.................................................. 48
Consolidated Statements of Cash Flows for the Years Ended
February 3, 2007, February 4, 2006 and January 31, 2005... 49
Notes to Consolidated Financial Statements.................. 50
Financial Statement Schedule -- Schedule II -- Valuation and
Qualifying Accounts....................................... 83
</Table>
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
ValueVision Media, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of ValueVision
Media, Inc. and Subsidiaries (the "Company") as of February 3, 2007 and February
4, 2006 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years ended February 3, 2007, February 4,
2006 and January 31, 2005. Our audits also included Schedule II: Valuation and
Qualifying Accounts for the years ended February 3, 2007, February 4, 2006 and
January 31, 2005, included in Item 15. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of ValueVision Media,
Inc. and Subsidiaries as of February 3, 2007 and February 4, 2006, and the
results of its operations and its cash flows for each of the years ended
February 3, 2007, February 4, 2006 and January 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the February 3, 2007, February 4, 2006 and January 31, 2005
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 2 and Note 6 to the consolidated financial statements,
in fiscal 2006 the Company changed its method of accounting for stock-based
compensation.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of February 3, 2007,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated April 11, 2007, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
April 11, 2007
45
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
FEBRUARY 3, FEBRUARY 4,
2007 2006
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 41,496 $ 43,143
Short-term investments.................................... 29,798 39,207
Accounts receivable, net.................................. 117,169 87,478
Inventories............................................... 66,622 67,844
Prepaid expenses and other................................ 5,360 8,357
--------- ---------
Total current assets................................... 260,445 246,029
PROPERTY AND EQUIPMENT, NET................................. 40,107 46,958
FCC BROADCASTING LICENSE.................................... 31,943 31,943
NBC TRADEMARK LICENSE AGREEMENT, NET........................ 12,234 15,461
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET............. 1,759 2,654
INVESTMENTS AND OTHER ASSETS................................ 5,492 4,094
--------- ---------
$ 351,980 $ 347,139
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 57,196 $ 60,597
Accrued liabilities....................................... 47,709 40,223
Deferred revenue.......................................... 369 --
--------- ---------
Total current liabilities.............................. 105,274 100,820
OTHER LONG-TERM OBLIGATIONS................................. 2,553 130
DEFERRED REVENUE............................................ 1,699 --
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 PAR
VALUE, 5,339,500 SHARES AUTHORIZED; 5,339,500 SHARES
ISSUED AND OUTSTANDING.................................... 43,607 43,318
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 37,593,768 and 37,643,676 shares issued and
outstanding............................................ 376 376
Warrants to purchase 4,036,858 and 6,380,583 shares of
common stock........................................... 22,972 34,029
Additional paid-in capital................................ 287,541 278,266
Deferred compensation..................................... -- (154)
Accumulated deficit....................................... (112,042) (109,646)
--------- ---------
Total shareholders' equity............................. 198,847 202,871
--------- ---------
$ 351,980 $ 347,139
========= =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
46
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEARS ENDED
------------------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NET SALES............................................. $ 767,275 $ 691,851 $ 623,634
COST OF SALES (exclusive of depreciation and
amortization shown below)........................... 500,114 452,907 419,538
OPERATING (INCOME) EXPENSES:
Distribution and selling............................ 226,450 212,369 203,159
General and administrative.......................... 27,922 24,864 20,552
Depreciation and amortization....................... 22,239 20,569 18,920
Asset impairments................................... 29 -- 1,900
Employee termination costs.......................... -- 82 3,836
Gain on sale of television station.................. -- (294) --
----------- ----------- -----------
Total operating expenses......................... 276,640 257,590 248,367
----------- ----------- -----------
OPERATING LOSS........................................ (9,479) (18,646) (44,271)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Other............................................... 350 (4) (50)
Interest income..................................... 3,802 3,048 1,627
----------- ----------- -----------
Total other income (expense)..................... 4,152 3,044 1,577
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND EQUITY IN NET INCOME OF AFFILIATES.............. (5,327) (15,602) (42,694)
Income tax benefit (provision)...................... (75) 762 (25)
Equity in net income of affiliates.................. 3,006 1,383 --
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS....................... (2,396) (13,457) (42,719)
DISCONTINUED OPERATIONS:
Loss from discontinued FanBuzz operations, net of
tax.............................................. -- (2,296) (14,882)
----------- ----------- -----------
NET LOSS.............................................. (2,396) (15,753) (57,601)
ACCRETION OF REDEEMABLE PREFERRED STOCK............... (289) (287) (285)
----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS............. $ (2,685) $ (16,040) $ (57,886)
=========== =========== ===========
NET LOSS PER COMMON SHARE:
Continuing operations............................... $ (0.07) $ (0.37) $ (1.17)
Discontinued operations............................. -- (0.06) (0.40)
----------- ----------- -----------
Net loss......................................... $ (0.07) $ (0.43) $ (1.57)
=========== =========== ===========
NET LOSS PER COMMON SHARE -- ASSUMING DILUTION:
Continuing operations............................... $ (0.07) $ (0.37) $ (1.17)
Discontinued operations............................. -- (0.06) (0.40)
----------- ----------- -----------
Net loss......................................... $ (0.07) $ (0.43) $ (1.57)
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic............................................... 37,646,162 37,181,717 36,815,044
=========== =========== ===========
Diluted............................................. 37,646,162 37,181,717 36,815,044
=========== =========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
47
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 3, 2007, FEBRUARY 4, 2006 AND JANUARY 31, 2005
<Table>
<Caption>
COMMON STOCK COMMON
COMPREHENSIVE ------------------ STOCK ADDITIONAL
INCOME NUMBER OF PAR PURCHASE PAID-IN DEFERRED
(LOSS) SHARES VALUE WARRANTS CAPITAL COMPENSATION
------------- ---------- ----- -------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31, 2004..... 36,487,821 $365 $ 47,638 $260,100 $(646)
Net loss.................... $(57,601)
========
Increase in note receivable
from officer................ -- -- -- -- --
Proceeds received on notes
receivable.................. -- -- -- -- --
Exercise of stock options and
common stock issuances...... 454,582 4 -- 3,042 --
Exercise of stock purchase
warrants.................... 101,509 1 (955) 955 --
Issuance of restricted
stock....................... -- -- -- 308 (308)
Restricted stock forfeited.... -- -- -- (115) 115
Amortization of deferred
compensation................ -- -- -- -- 486
Accretion on redeemable
preferred stock............. -- -- -- (285) --
---------- ---- -------- -------- -----
BALANCE, JANUARY 31, 2005..... 37,043,912 370 46,683 264,005 (353)
Net loss.................... $(15,753)
========
Exercise of stock options and
common stock issuances...... 318,564 3 -- 1,903 --
Exercise of stock purchase
warrants.................... 281,200 3 (5,378) 5,378 --
Stock purchase warrants
forfeited................... -- -- (7,276) 7,276 --
Restricted stock forfeited.... -- -- -- (9) 9
Amortization of deferred
compensation................ -- -- -- -- 190
Accretion on redeemable
preferred stock............. -- -- -- (287) --
---------- ---- -------- -------- -----
BALANCE, FEBRUARY 4, 2006..... 37,643,676 376 34,029 278,266 (154)
Net loss.................... $ (2,396)
========
Repurchase of common stock.... (405,685) (4) -- (4,695) --
Exercise of stock options and
common stock issuances...... 355,777 4 -- 1,455 --
Stock purchase warrants
forfeited................... -- -- (11,057) 11,057 --
Share-based payment
compensation................ -- -- -- 1,901 --
Effect of accounting change
(SFAS 123R)................. -- -- -- (154) 154
Accretion on redeemable
preferred stock............. -- -- -- (289) --
---------- ---- -------- -------- -----
BALANCE, FEBRUARY 3, 2007..... 37,593,768 $376 $ 22,972 $287,541 $ --
========== ==== ======== ======== =====
<Caption>
NOTE
RECEIVABLE
FROM TOTAL
FORMER ACCUMULATED SHAREHOLDERS'
OFFICER DEFICIT EQUITY
---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31, 2004..... $(4,158) $ (36,292) $267,007
Net loss.................... (57,601) (57,601)
Increase in note receivable
from officer................ (53) -- (53)
Proceeds received on notes
receivable.................. 4,211 -- 4,211
Exercise of stock options and
common stock issuances...... -- -- 3,046
Exercise of stock purchase
warrants.................... -- -- 1
Issuance of restricted
stock....................... -- -- --
Restricted stock forfeited.... -- -- --
Amortization of deferred
compensation................ -- -- 486
Accretion on redeemable
preferred stock............. -- -- (285)
------- --------- --------
BALANCE, JANUARY 31, 2005..... -- (93,893) 216,812
Net loss.................... (15,753) (15,753)
Exercise of stock options and
common stock issuances...... -- -- 1,906
Exercise of stock purchase
warrants.................... -- -- 3
Stock purchase warrants
forfeited................... -- -- --
Restricted stock forfeited.... -- -- --
Amortization of deferred
compensation................ -- -- 190
Accretion on redeemable
preferred stock............. -- -- (287)
------- --------- --------
BALANCE, FEBRUARY 4, 2006..... -- (109,646) 202,871
Net loss.................... (2,396) (2,396)
Repurchase of common stock.... -- -- (4,699)
Exercise of stock options and
common stock issuances...... -- -- 1,459
Stock purchase warrants
forfeited................... -- -- --
Share-based payment
compensation................ -- -- 1,901
Effect of accounting change
(SFAS 123R)................. -- -- --
Accretion on redeemable
preferred stock............. -- -- (289)
------- --------- --------
BALANCE, FEBRUARY 3, 2007..... $ -- $(112,042) $198,847
======= ========= ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
48
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED
---------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss.................................................. $ (2,396) $(15,753) $ (57,601)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:
Depreciation and amortization.......................... 22,239 20,871 20,120
Share-based payment compensation....................... 1,901 -- --
Common stock issued to employees....................... 24 37 22
Amortization of deferred revenue....................... (119) -- --
Vesting of deferred compensation....................... -- 190 486
Gain on sale of television station..................... -- (294) --
Loss (gain) on sale of property and investments........ (500) (250) 34
Asset impairments and writeoffs........................ 179 400 13,202
Equity in net income of affiliates..................... (3,006) (1,383) --
RLM dividends.......................................... 250 -- --
Noncash lease termination benefit...................... -- (924) --
Noncash tax benefit.................................... -- (832) --
Changes in operating assets and liabilities, net of
businesses acquired:
Accounts receivable.................................. (29,691) (8,073) (8,239)
Inventories.......................................... 1,222 (12,941) 12,717
Prepaid expenses and other........................... 3,594 (3,416) (3,417)
Deferred revenue..................................... 2,188 -- --
Accounts payable and accrued liabilities............. 7,657 11,994 4,606
-------- -------- ---------
Net cash (used for) provided by operating
activities...................................... 3,542 (10,374) (18,070)
-------- -------- ---------
INVESTING ACTIVITIES:
Property and equipment additions.......................... (11,470) (9,750) (14,722)
Proceeds from sale of investments and property............ 500 500 --
Purchase of short-term investments........................ (21,627) (80,454) (128,397)
Proceeds from sale of short-term investments.............. 31,035 79,193 136,604
Collection of note receivable from former officer......... -- -- 4,211
Proceeds from sale of television stations................. -- 400 --
-------- -------- ---------
Net cash used for investing activities............ (1,562) (10,111) (2,304)
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options................... 1,435 1,869 3,024
Payments for repurchases of common stock.................. (4,699) -- --
Payment of long-term obligations.......................... (363) (881) (1,043)
-------- -------- ---------
Net cash provided by (used for) financing
activities...................................... (3,627) 988 1,981
-------- -------- ---------
Net decrease in cash and cash equivalents......... (1,647) (19,497) (18,393)
BEGINNING CASH AND CASH EQUIVALENTS......................... 43,143 62,640 81,033
-------- -------- ---------
ENDING CASH AND CASH EQUIVALENTS............................ $ 41,496 $ 43,143 $ 62,640
======== ======== =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
49
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 3, 2007, FEBRUARY 4, 2006, AND JANUARY 31, 2005
1. THE COMPANY:
ValueVision Media, Inc. and 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 as a multi-channel
retailer incorporates television home shopping, internet e-commerce, direct mail
marketing and fulfillment services.
The Company's television home shopping business uses on-air spokespersons
to market brand name merchandise and 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
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. The Company also complements its
television home shopping business by the sale of a broad array of merchandise
through its internet shopping website, www.shopnbc.com.
The Company has an exclusive license agreement with 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 television home shopping network and companion internet shopping
website as "ShopNBC" and "ShopNBC.com," respectively, in fiscal 2001.
The Company, through its wholly owned subsidiary, VVI Fulfillment Center,
Inc. ("VVIFC"), provides fulfillment, warehousing, customer service and
telemarketing services to Ralph Lauren Media, LLC ("RLM"), the operator of the
Polo.com e-commerce business. VVIFC also provides fulfillment and warehousing
services for the fulfillment of certain non-jewelry merchandise sold on the
Company's television home shopping program and internet website.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's most recently completed fiscal year ends on February 3, 2007
and such year is designated "fiscal 2006." The year ended February 4, 2006 is
designated fiscal 2005 and the year ended January 31, 2005 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 which ends on the
Saturday nearest to January 31. This change was effective beginning with the
Company's 2005 fiscal year. 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. As a result of this fiscal
year change, the fourth quarter of fiscal 2006 had 13 weeks compared to the
fourth quarter of fiscal 2005 which had 14 weeks, a 1.36% decrease in the number
of days over fiscal 2005. In addition, fiscal 2005 had three additional days, or
a 0.82% days over fiscal 2004. The change in the fiscal year was not significant
to the Company's annual consolidated financial statements.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue is recognized at the time merchandise is shipped or when services
are provided. Shipping and handling fees charged to customers are recognized as
merchandise is shipped and are classified as revenue in
50
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the accompanying statements of operations in accordance with Emerging Issues
Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Cost" ("EITF 00-10"). The Company classifies shipping and handling costs in
the accompanying statements of operations as a component of cost of sales.
Returns are estimated and provided for at the time of sale based on historical
experience. Payments received for unfilled orders are reflected as a component
of accrued liabilities.
Revenue is recognized for vendor programming airtime sales upon completion
of the production of the vendor's show and its broadcast over the Company's
ShopNBC television network in accordance with the Company's contractual service
obligation, when the sales price is fixed or determinable and collectibility is
reasonably assured. Revenue is recognized for the Company's fulfillment services
when the services are provided in accordance with the Company's contractual
obligation, the sales price is fixed or determinable and collectibility is
reasonably assured. The Company's customary shipping terms for its fulfillment
services are Freight-On-Board shipping point.
Accounts receivable consist primarily of amounts due from customers for
merchandise sales and from credit card companies, and are reflected net of
reserves for estimated uncollectible amounts of $3,641,000 at February 3, 2007
and $2,478,000 at February 4, 2006. The Company utilizes an installment payment
program called ValuePay that entitles customers to purchase merchandise and
generally pay for the merchandise in two to six equal monthly credit card
installments. As of February 3, 2007 and February 4, 2006, the Company had
approximately $105,197,000 and $77,447,000, respectively, of net receivables due
from customers under the ValuePay installment program. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. Provision for doubtful
accounts receivable (primarily related to the Company's ValuePay program) for
the years ended February 3, 2007, February 4, 2006 and January 31, 2005 were
$6,065,000, $4,542,000 and $4,303,000, respectively.
COST OF SALES AND OTHER OPERATING EXPENSES
Cost of sales includes primarily the cost of merchandise sold, shipping and
handling costs, inbound freight costs, excess and obsolete inventory charges and
customer courtesy credits. Purchasing and receiving costs, including costs of
inspection, are included as a component of distribution and selling expense and
were approximately $11,689,000, $10,460,000 and $9,861,000 for the years ended
February 3, 2007, February 4, 2006 and January 31, 2005, respectively.
Distribution and selling expense consist primarily of cable and satellite access
fees, credit card fees, bad debt expense and costs associated with purchasing
and receiving, inspection, marketing and advertising, show production, website
marketing and merchandising, telemarketing, customer service, warehousing and
fulfillment. General and administrative expense consists primarily of costs
associated with executive, legal, accounting and finance, information systems
and human resources departments, software and system maintenance contracts,
insurance, investor and public relations and director fees.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds and
commercial paper with an original maturity of 90 days or less. The Company
maintains its cash balances at financial institutions in investment accounts
that are not federally insured. The Company has not experienced losses in such
accounts and believes it is not exposed to any significant credit risk on its
cash and cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of high quality commercial paper
with original maturity dates of less than 270 days and investment grade
corporate and auction rate securities with tender option terms ranging from one
month to one year. Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of the securities in
excess of 90 days. Auction rate securities have interest rate resets that occur
through a modified Dutch auction, at predetermined short-term intervals, usually
every 1, 7,
51
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
28 or 35 days. Short-term investments are stated at cost, which approximates
market value due to the short maturities or the variable interests rates of
these instruments. The Company maintains its short-term investments at financial
institutions in investment accounts that are not federally insured. 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 fluctuations. The
Company has not experienced losses in such accounts and believes it is not
exposed to any significant credit risk on its short-term investments. The
average maturity of the Company's short-term investment portfolio ranges from
30-180 days.
The Company's short-term investments consist of marketable equity and debt
securities, which are classified as either available-for-sale or
held-to-maturity, depending on management's investment intentions relating to
these securities. Available-for-sale securities are marked to market based upon
quoted market values of these securities, with the unrealized gains and losses,
if any, net of tax, reported as a component of accumulated other comprehensive
income (loss). Realized gains and losses on the sale of available-for-sale
securities are computed based upon initial cost adjusted for any
other-than-temporary declines in fair value. Investments categorized as
held-to-maturity are carried at amortized cost because the Company has both the
intent and ability to hold these investments until they mature. Premiums and
discounts are amortized or accreted into earnings over the life of the related
available-for-sale or held-to-maturity security. Dividends or interest income is
recognized when earned. The Company owns no investments that are considered to
be trading securities.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards requiring that derivative instruments, as
defined in the standard, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires changes in the
derivative's fair value to be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company no longer has derivative warrant
investments.
INVENTORIES
Inventories, which consist primarily of consumer merchandise held for
resale, are stated principally at the lower of average cost or realizable value
and are reflected net of obsolescence write downs of $4,431,000 at February 3,
2007 and $3,910,000 at February 4, 2006.
ADVERTISING COSTS
Promotional advertising expenditures are expensed in the period the
advertising initially takes place. Direct response advertising costs, consisting
primarily of catalog preparation, printing and postage expenditures, are
capitalized and amortized over the period during which the benefits are
expected, generally one to three months. The Company receives vendor allowances
for the reimbursement of direct advertising costs. Advertising allowances
received by the Company are recorded as a reduction of advertising expense and
were $1,125,000, $992,000 and $1,254,000 for the years ended February 3, 2007,
February 4, 2006 and January 31, 2005, respectively. Advertising costs, after
reflecting allowances given by vendors, totaled $18,610,000, $14,408,000 and
$14,785,000 for the years ended February 3, 2007, February 4, 2006 and January
31, 2005, respectively, and consist primarily of contractual marketing fees paid
to certain cable operators for cross channel promotions. The Company includes
advertising costs as a component of distribution and selling expense in the
Company's consolidated statement of operations. In the fourth quarter of fiscal
2004, the Company wrote down $1,900,000 of NBC advertising credits as they were
deemed by management to be impaired. See Note 16 for a full discussion of the
Company's fiscal 2004 asset impairments.
52
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements and renewals that
extend the life of an asset are capitalized and depreciated. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts, and any residual values are charged or
credited to operations. Depreciation and amortization for financial reporting
purposes are provided on the straight-line method based upon estimated useful
lives.
Property and equipment consisted of the following:
<Table>
<Caption>
ESTIMATED
USEFUL LIFE FEBRUARY 3, FEBRUARY 4,
(IN YEARS) 2007 2006
----------- ------------ ------------
Land and improvements......................... -- $ 3,454,000 $ 3,455,000
Buildings and improvements.................... 5-40 18,403,000 18,109,000
Transmission and production equipment......... 5-10 7,881,000 7,979,000
Office and warehouse equipment................ 3-10 10,003,000 9,515,000
Computer hardware, software and telephone
equipment................................... 3-7 57,206,000 52,579,000
Leasehold improvements........................ 3-5 3,440,000 3,515,000
Less -- Accumulated depreciation and
amortization................................ (60,280,000) (48,194,000)
------------ ------------
$ 40,107,000 $ 46,958,000
============ ============
</Table>
NBC TRADEMARK LICENSE AGREEMENT
As discussed further in Note 15, in November 2000, the Company entered into
a Trademark License Agreement with NBC (the "License Agreement") pursuant to
which NBC granted the Company an exclusive, worldwide license for a term of ten
years to use certain NBC trademarks, service marks and domain names to rebrand
the Company's business and corporate name on the terms and conditions set forth
in the License Agreement. In connection with the License Agreement, the Company
issued to NBC warrants to purchase 6,000,000 shares of the Company's common
stock at an exercise price of $17.375 per share (see Note 6). In March 2001, the
Company established a measurement date with respect to the License Agreement by
amending the agreement, and fixed the fair value of the trademark license asset
at $32,837,000, which is being amortized over the remaining ten-year term of the
License Agreement. The Company used the Black-Scholes option pricing model to
compute the fair market value of the NBC warrants at March 12, 2001. Significant
assumptions in the warrant fair value calculation included: market price of
$11.00; exercise price of $17.375; risk-free interest rate of 5.08%; volatility
factor of 53.54%; and dividend yield of 0%. As of January 31, 2003, all of the
warrants were vested. In the fourth quarter of fiscal 2006, 2,000,000 of these
warrants had expired unexercised. As of February 3, 2007 and February 4, 2006,
accumulated amortization related to this asset totaled $20,603,000 and
$17,376,000, respectively.
CABLE DISTRIBUTION AND MARKETING AGREEMENT
As discussed further in Note 13, in March 1999, the Company entered into a
ten-year Distribution and Marketing Agreement with NBC, which provides that NBC
shall have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television service. In compensation for these
services, the Company currently pays NBC an annual fee of approximately $1.8
million and issued NBC a Distribution Warrant to purchase 1,450,000 shares of
the Company's common stock at an exercise price of $8.29. The value assigned to
the Distribution and Marketing Agreement and related warrant of $6,931,000 was
determined pursuant to an independent appraisal using the Black-Scholes option
pricing model and is being
53
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized on a straight-line basis over the term of the agreement. Significant
assumptions used in the warrant valuation included: market price of $9.00;
exercise price of $8.29; risk-free interest rate of 5.01%; volatility factor of
55.36%; and dividend yield of 0%. As of February 3, 2007 and February 4, 2006,
accumulated amortization related to this asset totaled $5,389,000 and
$4,696,000, respectively.
In fiscal 2001, the Company issued to NBC additional warrants to purchase
343,725 shares of the Company's common stock at an exercise price of $23.07 per
share. The warrants were assigned a fair value of $1,175,000, were immediately
exercisable, and had a term of five years. In the fourth quarter of fiscal 2002,
the Company issued to NBC additional warrants to purchase 36,858 shares of the
Company's common stock at an exercise price of $15.74 per share. The warrants
were assigned a fair value of $172,000, vest over five years and had a five-year
term from the date of vesting. These warrants were issued in connection with the
Distribution and Marketing Agreement which provides that additional warrants are
to be granted at current market prices upon the achievement of specific goals
associated with the distribution of the Company's television programming with
respect to full-time equivalent ("FTE") subscriber homes. The fair value
assigned to these distribution warrants were determined using the Black Scholes
option pricing model and are being amortized over the weighted average term of
the new distribution agreements which range from five to seven years. As of
February 3, 2007 and February 4, 2006, total accumulated amortization related to
these assets totaled $1,130,000 and $928,000, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), 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 annually or whenever an
event has occurred that would more likely than not reduce the fair value of the
asset below its carrying amount. Goodwill had been recorded by the Company in
fiscal 2002 as a result of the acquisition of FanBuzz, Inc. ("FanBuzz").
FanBuzz's operations were discontinued in fiscal 2005. (See Note 5).
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 in connection with the Company's
acquisition of the ShopNBC license and with the issuance of distribution
warrants to NBC. Intangible assets have also been recorded by
54
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company as a result of the acquisition of television station WWDP TV-46.
Intangible assets in the accompanying consolidated balance sheets consists of
the following:
<Table>
<Caption>
FEBRUARY 3, 2007 FEBRUARY 4, 2006
WEIGHTED -------------------------- --------------------------
AVERAGE GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ----------- ------------ ----------- ------------
Amortized intangible assets:
NBC trademark license
agreement............... 10 $32,837,000 $(20,603,000) $32,837,000 $(17,376,000)
Cable distribution and
marketing agreement..... 9.5 8,278,000 (6,519,000) 8,278,000 (5,624,000)
----------- ------------ ----------- ------------
$41,115,000 $(27,122,000) $41,115,000 $(23,000,000)
=========== ============ =========== ============
Unamortized intangible
assets:
FCC broadcast license...... $31,943,000 $31,943,000
=========== ===========
</Table>
Amortization expense for the NBC intangible assets was $4,122,000 for each
of the years ended February 3, 2007, February 4, 2006 and January 31, 2005,
respectively. Amortization expense for FanBuzz intangible assets for the years
ended February 3, 2007, February 4, 2006 and January 31, 2005 was $-0-, $68,000
and $433,000, respectively. Estimated amortization expense for the succeeding
five years is as follows: $4,113,000 in fiscal 2007, $3,943,000 in fiscal 2008,
$3,383,000 in fiscal 2009, $2,554,000 in fiscal 2010 and $-0- in fiscal 2011.
During the third quarter of fiscal 2004, the Company wrote off approximately
$160,000 of intangible assets in connection with a FanBuzz asset impairment. The
results of operations for FanBuzz is classified as discontinued operations in
the accompanying consolidated financial statements of operations. See Note 5 for
a discussion of the discontinued operations of FanBuzz.
The FCC broadcasting license, which relates to the Company's acquisition of
television station WWDP TV-46, is not subject to amortization as a result of its
indefinite useful life. The Company tests the FCC license asset for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset might be impaired. There was no impairment as of February 3, 2007.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following:
<Table>
<Caption>
FEBRUARY 3, FEBRUARY 4,
2007 2006
----------- -----------
Investment in RLM........................................... $4,139,000 $1,383,000
Prepaid launch fees, net.................................... 561,000 1,171,000
Deferred satellite rent..................................... 672,000 1,164,000
Other, net.................................................. 120,000 376,000
---------- ----------
$5,492,000 $4,094,000
========== ==========
</Table>
Prepaid launch fees represent prepaid amounts paid to cable operators upon
entering into cable affiliation agreements and prepaid satellite transponder
launch fees. These fees are capitalized and amortized over the lives of the
related affiliation contracts, which range from 7-8 years.
Deferred satellite rent is attributable to the Company's fiscal 2004
long-term satellite services rental agreement that contains provisions for
scheduled rent decreases over the lease term. The Company recognizes
55
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the related rental expense on a straight-line basis and records the difference
between the recognized rental expense and amounts payable under the lease as
deferred rent.
Other assets consist principally of long-term deposits and the long-term
portion of prepaid compensation costs associated with employment contracts
entered into with certain key employees of the Company in fiscal 2004.
Compensation expense is being recognized for these contracts over the four-year
service period.
EQUITY INVESTMENTS
As discussed in Note 14, in February 2000, the Company entered into a
strategic alliance with Polo Ralph Lauren, NBC, NBCi and CNBC and created RLM, a
joint venture formed for the purpose of bringing the Polo Ralph Lauren American
lifestyle experience to consumers via multiple platforms, including the
internet, broadcast, cable and print. Through fiscal 2006, the Company owned a
12.5% interest in RLM. The Company, through VVIFC, has entered into an agreement
to provide certain fulfillment and customer care services to RLM.
The Company accounts for its ownership interest in RLM under the equity
method of accounting and adjusts its investment balance for its share of RLM
income and losses each reporting period. In the fourth quarter of fiscal 2002,
the Company evaluated the carrying value of its RLM investment by evaluating the
current and forecasted financial condition of the entity, its liquidity
prospects and its cash flow forecasts and by comparing its historical
operational results to plan. Through fiscal 2002, the RLM joint venture had
incurred significant operating losses since it commenced operations in November
2000 and the Company's expectations regarding RLM's growth, earnings capability
and ability to generate future positive cash flows had severely diminished. The
Company believed that based on RLM's historic performance, future earnings and
cash flow outlook, 2002 services agreement amendment and a fiscal 2002 fourth
quarter valuation analysis, an impairment had occurred with respect to this
investment and the decline in value was determined to be other than temporary
whereby the Company would not be able to recover the carrying amount of its
investment. As a result, the Company wrote down its RLM investment to zero in
the fourth quarter of fiscal 2002. During fiscal 2005, the Company began
recording equity in net income of RLM for its equity interest in RLM after
recovering previously unrecorded losses. Total equity in net income of RLM
recorded by the Company during fiscal 2006 and 2005 was $3,006,000 and
$1,383,000, respectively. In addition, the Company received cash dividends
totaling $250,000 from RLM during fiscal 2006. On March 28, 2007, the Company
sold its 12.5% ownership interest in RLM for approximately $43.8 million. See
Note 17.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<Table>
<Caption>
FEBRUARY 3, FEBRUARY 4,
2007 2006
----------- -----------
Accrued cable access fees.................................. $17,960,000 $15,143,000
Accrued salaries and related............................... 11,530,000 7,030,000
Reserve for product returns................................ 8,498,000 7,658,000
Other...................................................... 9,721,000 10,392,000
----------- -----------
$47,709,000 $40,223,000
=========== ===========
</Table>
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109")
whereby deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between financial statement and
tax basis of assets and liabilities.
56
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of the enactment of such laws. The Company
assesses the recoverability of its deferred tax assets in accordance with the
provisions of SFAS No. 109. In accordance with that standard, as of February 3,
2007 and February 4, 2006, the Company recorded a valuation allowance of
approximately $54,663,000 and $55,244,000, respectively, for its net deferred
tax assets including net operating and capital loss carryforwards. Based on the
Company's recent history of losses, a full valuation allowance was recorded in
fiscal 2006 and fiscal 2005 and was calculated in accordance with the provisions
of SFAS No. 109, which places primary importance on the Company's most recent
operating results when assessing the need for a valuation allowance. Although
management believes that the Company's recent operating losses were heavily
affected by the attendant fixed costs associated with a significant expansion of
cable homes, a challenging retail economic environment and a slowdown in
consumer spending experienced by the Company and other merchandise retailers,
the Company intends to maintain a full valuation allowance for its net deferred
tax assets and net operating loss carryforwards until sufficient positive
evidence exists to support reversal of the reserve. See Note 7 for additional
information regarding income taxes.
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
periods. 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:
<Table>
<Caption>
FOR THE YEARS ENDED
-----------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ------------ ------------
Net loss from continuing operations......... $(2,396,000) $(13,457,000) $(42,719,000)
=========== ============ ============
Weighted average number of common shares
outstanding -- Basic...................... 37,646,000 37,182,000 36,815,000
Dilutive effect of convertible preferred
stock..................................... -- -- --
Dilutive effect of stock options and
warrants.................................. -- -- --
----------- ------------ ------------
Weighted average number of common shares
outstanding -- Diluted.................... 37,646,000 37,182,000 36,815,000
=========== ============ ============
Net loss from continuing operations per
common share.............................. $ (0.07) $ (0.37) $ (1.17)
=========== ============ ============
Net loss from continuing operations per
common share -- assuming dilution......... $ (0.07) $ (0.37) $ (1.17)
=========== ============ ============
</Table>
In accordance with SFAS No. 128, for the years ended February 3, 2007,
February 4, 2006 and January 31, 2005, approximately 228,000, 611,000 and
1,072,000, 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 required
under SFAS No. 128, as the effect of their inclusion would be anti-dilutive.
57
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
represents its net loss. Total comprehensive loss was $2,396,000, $15,753,000
and $57,601,000 for the years ended February 3, 2007, February 4, 2006 and
January 31, 2005, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value of amounts presented do not represent the
underlying value of the Company.
The Company in estimating its fair values for financial instruments used
the following methods and assumptions:
The carrying amounts reported in the accompanying consolidated balance
sheets approximate the fair value for cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities, due
to the short maturities of those instruments.
Fair values for long-term investments are based on quoted market prices,
where available. For equity securities not actively traded, fair values are
estimated by using quoted market prices of comparable instruments or, if there
are no relevant comparables, on pricing models, formulas or cash flow
forecasting models using current assumptions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during reporting periods. These estimates relate primarily to the
carrying amounts of accounts receivable and inventories, the realizability of
certain long-term assets and the recorded balances of certain accrued
liabilities and reserves. Ultimate results could differ from these estimates.
STOCK-BASED COMPENSATION
Effective February 5, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R (revised 2004), "Share-Based Payment" ("SFAS No.
123R"), which revised SFAS No. 123, "Accounting for Stock-Based Compensation,"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). This standard requires compensation costs related to share-based
payment transactions to be recognized in the financial statements beginning in
fiscal 2006. The Company adopted the standard using the modified prospective
transition method, which requires the application of the accounting standard to
all share-based awards issued on or after the date of adoption and any
outstanding share-based awards that were issued but not vested as of the date of
adoption. Accordingly, the Company did
58
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not restate the financial statements for periods prior to the first quarter of
fiscal 2006 as a result of the adoption but does present the disclosure-only
effects of stock-based compensation. See Note 6.
In accordance with SFAS 123R, the estimated grant date fair value of each
stock-based award is recognized in income over the requisite service period
(generally the vesting period). The estimated fair value of each option is
calculated using the Black-Scholes option-pricing model. Non-vested share awards
are recorded as compensation cost over the requisite service periods based on
the market value on the date of grant.
Prior to February 5, 2006 the Company applied the recognition and
measurement principles of APB 25 to our stock options and other stock-based
compensation plans as permitted pursuant to SFAS 123. In accordance with APB 25,
cost for stock-based compensation was recognized in income based on the excess,
if any, of the quoted market price of the stock at the grant date of the award
or other measurement date over the amount an employee must pay to acquire the
stock. The exercise price for stock options granted to employees equaled the
fair market value of the Company's common stock at the date of grant, thereby
resulting in no recognition of compensation expense by the Company. Non-vested
share awards are recorded as compensation cost over the requisite service
periods based on the market value on the date of grant. Unearned compensation
cost on non-vested share awards was shown as a reduction to shareholders'
equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. The provisions of SFAS No. 159 are effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the effect that the adoption of SFAS No. 159 will have on its
consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), to establish a consistent framework for measuring fair value
and expand disclosures on fair value measurements. The provisions of SFAS No.
157 are effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effect that the adoption of SFAS No. 157
will have on its consolidated results of operations and financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement No. 109." FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return, including a decision whether to
file or not to file a tax return in a particular jurisdiction. FIN 48 is
effective for fiscal years beginning after December 15, 2006. If there are
changes in net assets as a result of the application of FIN 48, these will be
accounted for as an adjustment to retained earnings. The Company is currently
assessing the impact of FIN 48 on its consolidated results of operations and
financial position.
3. SHOPNBC PRIVATE LABEL AND CO-BRAND CREDIT CARD PROGRAM:
In the third quarter of fiscal 2006, the Company introduced and established
a new private label and co-brand revolving consumer credit card program (the
"Program"). The Program is made available to all qualified consumers for the
financing of purchases of products from ShopNBC and for the financing of
purchases of products and services from other non-ShopNBC retailers. The Program
is intended to be used by cardholders for purchases made primarily for personal,
family or household use. The issuing bank is the sole owner of the account
issued under the Program and absorbs losses associated with non-payment by
cardholders. The issuing bank pays fees to the Company based on the number of
credit card accounts activated and on card usage. Once a customer is approved to
receive a ShopNBC private label or co-branded
59
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit card and the card is activated, the customer is eligible to participate
in the Company's credit card rewards program. Under the rewards program, points
are earned on purchases made with the credit cards at ShopNBC and other
retailers where the co-branded card is accepted. Cardholders who accumulate the
requisite number of points are issued a $50 certificate award towards the future
purchase of ShopNBC merchandise. The certificate award expires after twelve
months if unredeemed. The Company accounts for the rewards program in accordance
with Emerging Issues Task Force ("EITF") issue No. 00-22, Accounting for
"Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers,
and Offers for Free Products or Services to Be Delivered in the Future. The
value of points earned is included in accrued liabilities and recorded as a
reduction in revenue as points are earned, based on the retail value of points
that are projected to be redeemed. The Company accounts for the Private Label
and Co-Brand Credit Card Agreement in accordance with EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables. In conjunction with the signing of the
ShopNBC Private Label and Co-Brand Credit Card Agreement, the Company received
from the issuing bank a non-refundable signing bonus as an incentive for the
Company to enter into the agreement. The bonus has been recorded as deferred
revenue in the accompanying financial statements and is being recognized as
revenue over the term of the agreement.
4. ACQUISITIONS AND DISPOSITIONS:
In December 2005, the Company completed the sale of its low power
television station located in Atlanta, Georgia for a total of $400,000. The
Company recorded a pre-tax operating gain on the sale of the low power
television station of $294,000 in the fourth quarter of fiscal 2005. Management
believes that the sale of this station did not have a significant impact on the
ongoing operations of the Company.
5. DISCONTINUED FANBUZZ OPERATIONS:
In the second quarter of fiscal 2005, the Company decided to close its
FanBuzz subsidiary operations and finalized the shut down in the third quarter
of fiscal 2005. FanBuzz 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. The results of operations for FanBuzz have been
classified as discontinued operations in the accompanying consolidated
statements of operations for all periods presented. Net sales from discontinued
operations were $5,384,000 and $25,782,000 for the fiscal years ended February
4, 2006 and January 31, 2005, respectively. Losses from discontinued operations
were $2,296,000 and $14,882,000 for the fiscal years ended February 4, 2006 and
January 31, 2005, respectively. Gain recognized on disposal of FanBuzz in fiscal
2005 was $895,000. The Company's consolidated balance sheet as of February 4,
2006 includes $357,000 in current assets, $276,000 in current liabilities and
$-0- in long-term assets and long-term liabilities related to FanBuzz.
6. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK:
COMMON STOCK
The Company currently has authorized 100,000,000 shares of undesignated
capital stock, of which approximately 37,594,000 shares were issued and
outstanding as common stock as of February 3, 2007. The board of directors may
establish new classes and series of capital stock by resolution without
shareholder approval.
60
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DIVIDENDS
The Company has never declared or paid any dividends with respect to its
capital stock. Under the terms of the shareholder agreement between the Company
and GE Capital Equity Investments, Inc. ("GE Equity"), the Company is prohibited
from paying dividends in excess of 5% of the Company's market capitalization in
any fiscal quarter.
REDEEMABLE PREFERRED STOCK
As discussed further in Note 13, in fiscal 1999, pursuant to an Investment
Agreement between the Company and GE Equity, the Company sold to GE Equity
5,339,500 shares of its Series A Redeemable Convertible Preferred Stock, $0.01
par value for aggregate proceeds of $44,265,000 less issuance costs of
$2,850,000. The preferred stock is convertible into an equal number of shares of
the Company's common stock and has a mandatory redemption after ten years from
date of issuance at $8.29 per share. The excess of the redemption value over the
carrying value is being accreted by periodic charges to equity over the ten-year
redemption period.
WARRANTS
As discussed further in Notes 2 and 15, in November 2000, the Company
issued to NBC warrants to purchase 6,000,000 shares of the Company's common
stock at an exercise price of $17.375 per share. The warrants were issued in
connection with the Company's execution of a Trademark License Agreement
pursuant to which NBC granted the Company an exclusive, worldwide license to use
certain NBC trademarks, service marks and domain names to rebrand the Company's
business and corporate name for a term of ten years. In the fourth quarter of
fiscal 2006, 2,000,000 of these warrants had expired unexercised.
As discussed further in Note 13, in fiscal 1999, the Company issued to NBC
warrants to purchase 1,450,000 shares of the Company's common stock at an
exercise price of $8.29 per share. The warrants were issued in connection with
the Company's execution of a Distribution and Marketing Agreement with NBC. In
conjunction with the Company's November 2000 execution of the Trademark License
Agreement with NBC, the Company agreed to accelerate the vesting of these
warrants. As of February 4, 2006, there are no longer warrants outstanding
related to the fiscal 1999 Distribution and Marketing Agreement. In fiscal 2001,
the Company issued to NBC warrants to purchase 343,725 shares of the Company's
common stock at an exercise price of $23.07 per share. These warrants expired
unexercised during fiscal 2006. In fiscal 2002, the Company issued to NBC
warrants to purchase 36,858 shares of the Company's common stock at an exercise
price of $15.74 per share. The warrants vest over five years, and have a term of
five years from the date of vesting. The additional warrants, which are
currently outstanding, were issued in connection with the Company's Distribution
and Marketing Agreement with NBC, which provides that warrants will be granted
at current market prices upon the achievement of specific goals in connection
with distribution of the Company's television programming with respect to FTE
subscriber homes.
STOCK-BASED COMPENSATION
Stock-based compensation expense charged to continuing operations for
fiscal 2006 related to stock option awards was $1,556,000. The adoption of SFAS
No. 123R in fiscal 2006 resulted in the recognition of incremental pre-tax
stock-based compensation expense and an increase in the year to date net loss of
$1,556,000 and a $.04 negative impact on basic and fully diluted loss per share.
The Company has not recorded any income tax benefit from the exercise of stock
options due to the uncertainty of realizing income tax benefits in the future.
Additionally, the Company reclassified unearned compensation on restricted stock
awards of $154,000 to additional paid in capital. The cumulative effect
adjustment for forfeitures related to non-vested stock-based awards was not
material.
61
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of February 3, 2007, the Company had two active omnibus stock plans for
which stock awards can be currently granted: the 2004 Omnibus Stock Plan (as
amended and restated in fiscal 2006) which provides for the issuance of up to
4,000,000 shares of the Company's common stock; and the 2001 Omnibus Stock Plan
which provides for the issuance of up to 3,000,000 shares of the Company's
stock. These plans are administered by the Company's Human Resources and
Compensation Committee ("Compensation Committee") and provide for awards for
employees, directors and consultants. All employees and directors of the Company
or its affiliates are eligible to receive awards under the plans. The types of
awards that may be granted under these plans include restricted (unvested
shares) and unrestricted stock, incentive and nonstatutory stock options, stock
appreciation rights, performance units, and other stock-based awards. Incentive
stock options may be granted to employees at such exercise prices as the
Compensation Committee may determine but not less than 100% of the fair market
value of the underlying stock as of the date of grant. No incentive stock option
may be granted more than ten years after the effective date of the respective
plan's inception or be exercisable more than ten years after the date of grant.
Options granted to outside directors are nonstatutory stock options with an
exercise price equal to 100% of the fair market value of the underlying stock as
of the date of grant. Options granted under these plans are exercisable and
generally vest over three years and generally have contractual terms of either
five years from the date of vesting or ten years from the date of grant. Prior
to the adoption of the 2004 and 2001 plans, the Company had other incentive
stock option plans in place in which stock options were granted to employees
under similar vesting terms. The Company no longer makes any further grants from
these other plans. The Company has also granted non-qualified stock options to
current and former directors and certain employees with similar vesting terms.
The fair value of each option award is estimated on the date of grant using
the Black-Scholes option pricing model that uses assumptions noted in the
following table. Expected volatilities are based on the historical volatility of
the Company's stock. Expected term is calculated using the simplified method
taking into consideration the option's contractual life and vesting terms. The
risk-free interest rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. Expected
dividend yields were not used in the fair value computations as the Company has
never declared or paid dividends on its common stock and currently intends to
retain earnings for use in operations.
<Table>
<Caption>
FISCAL FISCAL FISCAL
2006 2005 2004
---------- ------- -------
Expected volatility................................... 33%-35% 36% 36%
Expected term (in years).............................. 6 years 6 years 6 years
Risk-free interest rate............................... 4.7%-5.12% 4.7% 3.8%
</Table>
62
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option activity as of
February 3, 2007 and changes during the year then ended is as follows:
<Table>
<Caption>
2004 2001 1990 1994
INCENTIVE WEIGHTED INCENTIVE WEIGHTED INCENTIVE WEIGHTED OTHER NON- WEIGHTED EXECUTIVE
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE QUALIFIED AVERAGE STOCK
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE STOCK EXERCISE OPTION
PLAN PRICE PLAN PRICE PLAN PRICE OPTIONS PRICE PLAN
--------- -------- --------- -------- --------- -------- ---------- -------- ---------
Balance outstanding,
February 4, 2006...... 1,776,000 $12.03 2,124,000 $14.78 900,000 $18.16 2,551,000 $16.50 648,000
Granted............... 120,000 12.10 140,000 12.70 -- -- -- -- --
Exercised............. (41,000) 11.66 (59,000) 12.42 (46,000) 10.78 (57,000) 10.76 (292,000)
Forfeited or
canceled............ (121,000) 12.38 (581,000) 15.48 (392,000) 19.17 (656,000) 18.71 --
--------- ------ --------- ------ --------- ------ --------- ------ --------
Balance outstanding,
February 3 2007....... 1,734,000 $12.08 1,624,000 $14.44 462,000 $18.03 1,838,000 $15.89 356,000
========= ====== ========= ====== ========= ====== ========= ====== ========
Options exercisable at:
February 3, 2007...... 1,394,000 $12.22 1,467,000 $14.64 462,000 $18.03 1,804,000 $15.98 356,000
========= ====== ========= ====== ========= ====== ========= ====== ========
February 4, 2006...... 1,322,000 $12.39 2,097,000 $14.82 900,000 $18.16 2,501,000 $16.61 648,000
========= ====== ========= ====== ========= ====== ========= ====== ========
January 31, 2005...... 769,000 $12.88 1,300,000 $15.47 1,056,000 $17.52 1,422,000 $17.07 748,000
========= ====== ========= ====== ========= ====== ========= ====== ========
<Caption>
WEIGHTED
AVERAGE
EXERCISE
PRICE
--------
Balance outstanding,
February 4, 2006...... $16.68
Granted............... --
Exercised............. 3.38
Forfeited or
canceled............ --
------
Balance outstanding,
February 3 2007....... $27.57
======
Options exercisable at:
February 3, 2007...... $27.57
======
February 4, 2006...... $16.68
======
January 31, 2005...... $14.90
======
</Table>
The following table summarizes information regarding stock options at
February 3, 2007:
<Table>
<Caption>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE VESTED OR AVERAGE REMAINING AGGREGATE
OPTIONS EXERCISE CONTRACTUAL INTRINSIC EXPECTED TO EXERCISE CONTRACTUAL INTRINSIC
OPTION TYPE OUTSTANDING PRICE LIFE (YEARS) VALUE VEST PRICE LIFE (YEARS) VALUE
- ----------- ----------- -------- ------------ ---------- ----------- -------- ------------ ----------
2004 Incentive:....... 1,734,000 $12.08 7.9 $1,078,000 1,700,000 $12.09 7.9 $1,042,000
========= ========== ========= ==========
2001 Incentive:....... 1,624,000 $14.44 5.5 $ 85,000 1,608,000 $14.46 5.2 $ 84,000
========= ========== ========= ==========
1990 Incentive:....... 462,000 $18.03 0.7 $ 26,000 462,000 $18.03 0.7 $ 26,000
========= ========== ========= ==========
Other
Non-qualified:...... 1,838,000 $15.89 5.2 $ 49,000 1,838,000 $15.89 5.2 $ 49,000
========= ========== ========= ==========
1994 Executive:....... 356,000 $27.57 0.3 $ -- 356,000 $27.57 0.3 $ --
========= ========== ========= ==========
</Table>
The weighted average grant date fair value of options granted in fiscal
2006, 2005 and 2004 was $5.18, $6.84 and $6.52, respectively. The total
intrinsic value of options exercised during fiscal 2006, 2005 and 2004 was
$2,984,000, $1,252,000 and $2,991,000, respectively. As of February 3, 2007,
total unrecognized compensation cost related to stock options was $2,186,000 and
is expected to be recognized over a weighted average period of approximately 1.0
year.
Prior to fiscal 2006, the Company accounted for its stock option plans
under the recognition and measurement principles of APB No. 25, and the
disclosure-only provisions of SFAS 123. No employee stock option compensation
cost was 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
63
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
illustrates the effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation:
<Table>
<Caption>
FOR THE YEARS ENDED
---------------------------
FEBRUARY 4, JANUARY 31,
2006 2005
------------ ------------
Net loss available to common shareholders:
As reported............................................ $(16,040,000) $(57,886,000)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects..................... (17,591,000) (15,395,000)
------------ ------------
Pro forma.............................................. $(33,631,000) $(73,281,000)
============ ============
Net loss per share:
Basic:
As reported......................................... $ (0.43) $ (1.57)
Pro forma........................................... (0.90) (1.99)
Diluted:
As reported......................................... $ (0.43) $ (1.57)
Pro forma........................................... (0.90) (1.99)
</Table>
In December 2005, the Company's board of directors approved the
acceleration and vesting of approximately 1,200,000 outstanding unvested stock
options with an exercise price greater than $11.78 per share as of December 19,
2005 under the Company's stock-based incentive compensation plans. The options
affected are held by executive officers, directors and employees of the Company
and have a range of exercise prices between $11.80 and $19.26 per share and a
weighted average exercise price of $15.06 per share. The board accelerated the
vesting period to eliminate the Company's future recognition of compensation
expense associated with these out-of-the money stock options required under SFAS
No. 123R, which was effective for the Company beginning in the first quarter of
fiscal 2006. As a condition of the acceleration, the Company also imposed a
holding period on shares underlying the accelerated options held by certain of
its executive officers requiring these officers to refrain from selling any
shares acquired upon the exercise of the accelerated options until the date on
which the related options would have vested under the options' original vesting
terms.
STOCK OPTION TAX BENEFIT
The exercise of certain stock options granted under the Company's stock
option plans gives rise to compensation, which is includible in the taxable
income of the applicable employees and deductible by the Company for federal and
state income tax purposes. Such compensation results from increases in the fair
market value of the Company's common stock subsequent to the date of grant of
the applicable exercised stock options and is not recognized as an expense for
financial accounting purposes, as the options were originally granted at the
fair market value of the Company's common stock on the date of grant. The
related tax benefits will be recorded as additional paid-in capital if and when
realized, and totaled $1,106,000, $484,000 and $1,063,000 in fiscal 2006, 2005
and 2004, respectively. The Company has not recorded the tax benefit through
paid in capital in these fiscal years, as the related tax deductions were not
taken due to the losses incurred. These benefits will be recorded in the
applicable future periods.
RESTRICTED STOCK
On June 21, 2006, the Company granted a total of 40,000 shares of
restricted stock from the Company's 2004 Omnibus Stock Plan to its five
non-management directors elected by the holders of the Company's
64
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock (in contrast to the three directors elected by the holders of the
Company's preferred stock) as part of the Company's annual director compensation
program. The restricted stock vests on the first anniversary of the date of
grant. The aggregate market value of the restricted stock at the date of award
was $468,000 and is being amortized as director compensation expense over the
twelve-month vesting period. In the second quarter of fiscal 2004, the Company
awarded 25,000 shares of restricted stock to certain employees. This restricted
stock grant 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 is being amortized as compensation expense over the respective vesting
periods. Compensation expense recorded in fiscal 2006, 2005 and 2004 relating to
restricted stock grants was $345,000, $190,000 and $486,000, respectively. As of
February 3, 2007, there was $276,000 of total unrecognized compensation cost
related to non-vested restricted stock granted. That cost is expected to be
recognized over a weighted average period of 0.7 years. The total fair value of
restricted stock vested during fiscal 2006, 2005 and 2004 was $26,000, $888,000
and $672,000 respectively.
A summary of the status of the Company's non-vested restricted stock
activity as of February 3, 2007 and changes during the nine-month period then
ended is as follows:
<Table>
<Caption>
WEIGHTED AVERAGE
GRANT DATE FAIR
SHARES VALUE
------ ----------------
Non-vested outstanding, February 4, 2006.................... 23,000 $12.28
Granted................................................... 40,000 11.69
Vested.................................................... (3,000) 12.75
Forfeited................................................. -- --
------ ------
Non-vested outstanding, February 3, 2007.................... 60,000 $11.87
====== ======
</Table>
COMMON STOCK REPURCHASE PROGRAM
In August 2006, the Company's board of directors authorized a common stock
repurchase program. The program authorizes the Company's management, acting
through an investment banking firm selected as the Company's agent, to
repurchase up to $10 million of the Company's common stock through August 2007
by open market purchases or negotiated transactions at prices and amounts as
determined by the Company from time to time. During fiscal 2006, the Company
repurchased a total of 406,000 shares of common stock for a total investment of
$4,682,000 at an average price of $11.54 per share. The Company did not
repurchase any shares under its repurchase program during the fiscal years ended
February 4, 2006 and January 31, 2005.
65
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The Company records deferred taxes for differences between the financial
reporting and income tax bases of assets and liabilities, computed in accordance
with tax laws in effect at that time. The deferred taxes related to such
differences as of February 3, 2007 and February 4, 2006 were as follows:
<Table>
<Caption>
FEBRUARY 3, FEBRUARY 4,
2007 2006
------------ ------------
Accruals and reserves not currently deductible for tax
purposes............................................... $ 7,578,000 $ 6,093,000
Inventory capitalization................................. 1,273,000 967,000
Basis differences in intangible assets................... (3,477,000) (2,643,000)
Differences in depreciation lives and methods............ (5,043,000) (5,981,000)
Differences in investments and other items............... 2,182,000 2,830,000
Net operating loss carryforwards......................... 52,150,000 53,978,000
Valuation allowance...................................... (54,663,000) (55,244,000)
------------ ------------
Net deferred tax asset................................... $ -- $ --
============ ============
</Table>
The (provision) benefit from income taxes consisted of the following:
<Table>
<Caption>
YEARS ENDED
---------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ----------- -----------
Current............................................. $(75,000) $762,000 $(25,000)
Deferred............................................ -- -- --
-------- -------- --------
$(75,000) $762,000 $(25,000)
======== ======== ========
</Table>
A reconciliation of the statutory tax rates to the Company's effective tax
rate is as follows:
<Table>
<Caption>
YEARS ENDED
---------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ----------- -----------
Taxes at federal statutory rates.................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit...... 4.1 5.2 2.0
SFAS 123(R) stock option vesting expense............ (23.2) -- --
Non-deductible goodwill write down.................. -- -- (6.1)
Valuation allowance................................. (17.3) (35.3) (31.0)
Tax exempt interest................................. -- -- 0.1
----- ----- -----
Effective tax rate on continuing operations......... (1.4)% 4.9% 0.0%
===== ===== =====
Effective tax rate on equity in net income of
affiliates........................................ 0.0% 0.0% 0.0%
===== ===== =====
Effective tax rate on discontinued operations....... 0.0% 0.0% 0.0%
===== ===== =====
</Table>
Based on the Company's recent history of losses and as discussed further in
Note 2, the Company has recorded a full valuation allowance for its net deferred
tax assets and net operating loss carryforwards as of February 3, 2007 and
February 4, 2006 in accordance with the provisions of SFAS No. 109. The ultimate
realization of these deferred tax assets depends on the ability of the Company
to generate sufficient taxable income and capital gains in the future. As of
February 3, 2007, the Company has gross operating loss carryforwards for Federal
and State income tax purposes of approximately $152 million and $77 million,
respectively, which begin to expire in January 2022 and 2017, respectively.
66
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
CABLE AND SATELLITE AFFILIATION AGREEMENTS
As of February 3, 2007, the Company had entered into three- to twelve-year
affiliation agreements with approximately 130 cable system operators along with
the satellite companies DIRECTV and EchoStar (DISH Network) that require each to
offer the Company's television home shopping programming on a full-time basis
over their systems. Under certain circumstances, these television operators may
cancel their agreements prior to expiration. The affiliation agreements
generally provide that the Company will pay each operator a monthly access fee
and marketing support payment based upon the number of homes carrying the
Company's television home shopping programming. For the years ended February 3,
2007, February 4, 2006 and January 31, 2005, respectively, the Company paid
approximately $106,654,000, $99,857,000 and $93,539,000 under these long-term
affiliation agreements.
The Company has entered into, and will continue to enter into, affiliation
agreements with other television operators providing for full- or part-time
carriage of the Company's television home shopping programming. Under certain
circumstances the Company may be required to pay the operator a one-time initial
launch fee, which is capitalized and amortized on a straight-line basis over the
term of the agreement.
Future cable and satellite affiliation cash commitments at February 3, 2007
are as follows:
<Table>
<Caption>
FISCAL YEAR AMOUNT
- ----------- ------------
2007........................................................ $110,118,000
2008........................................................ 103,419,000
2009........................................................ 36,269,000
2010........................................................ 35,818,000
2011 and thereafter......................................... 59,138,000
</Table>
EMPLOYMENT AGREEMENTS
On December 1, 2003, the Company entered into a three-year employment
agreement with its chief executive officer. The employment agreement specifies,
among other things, the term and duties of employment, compensation and
benefits, termination of employment, severance, and non-compete restrictions.
The employment agreement renews automatically for one-year terms on December 1st
of each year, unless either the chief executive officer or the Company has given
notice of the intention not to renew the agreement. No such notice was given by
either party in fiscal year 2006, and accordingly the agreement was renewed for
a one-year term until December 1, 2007.
In addition, the Company has entered into employment agreements with a
number of officers and on-air hosts of the Company for original terms ranging
from 12 to 36 months. These agreements specify, among other things, the term and
duties of employment, compensation and benefits, termination of employment
(including for cause, which would reduce the Company's total obligation under
these agreements), severance payments and non-disclosing and non-compete
restrictions. The aggregate commitment for future base compensation at February
3, 2007 was approximately $5,034,000.
OPERATING LEASE COMMITMENTS
The Company leases certain property and equipment under non-cancelable
operating lease agreements. Property and equipment covered by such operating
lease agreements include offices and warehousing facilities at subsidiary
locations, satellite transponder, office equipment and certain tower site
locations.
67
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments at February 3, 2007 are as follows:
<Table>
<Caption>
FISCAL YEAR AMOUNT
- ----------- -----------
2007........................................................ $ 2,387,000
2008........................................................ 2,156,000
2009........................................................ 2,008,000
2010........................................................ 2,012,000
2011 and thereafter......................................... 14,335,000
</Table>
Total rent expense under such agreements was approximately $2,640,000 in
fiscal 2006, $2,771,000 in fiscal 2005 and $3,608,000 in fiscal 2004.
CAPITAL LEASE COMMITMENTS
The Company leases certain computer equipment and software licenses under
noncancelable capital leases and includes these assets in property and equipment
in the accompanying consolidated balance sheets. The capitalized cost of leased
assets was approximately $395,000 at February 3, 2007 and $2,084,000 at February
4, 2006.
Future minimum lease payments for assets under capital leases at February
3, 2007 are as follows:
<Table>
<Caption>
FISCAL YEAR
- -----------
2007........................................................ $ 141,000
---------
Total minimum lease payments................................ 141,000
Less: Amounts representing interest......................... (7,000)
---------
134,000
Less: Current portion....................................... (134,000)
---------
Long-term capital lease obligation.......................... $ --
=========
</Table>
2006 LONG TERM INCENTIVE PLAN
In January 2006, following the approval of the Company's board of
directors, the Company established the ValueVision Media, Inc. 2006 Long Term
Incentive Plan. The purpose of the plan is to provide designated key employees
with financial incentives tied to the Company's success in achieving challenging
multi-year financial and business goals. Management believes that the plan will
assist the Company in its ability to retain key employees, will reinforce a
performance culture by rewarding measurable results over time and will tie a
meaningful portion of key employees' total compensation to the achievement of
multi-year corporate goals and objectives.
Under the plan, for each performance period management and the compensation
committee of the board of directors establishes performance measures under the
plan and targets for these measures that must be achieved for awards under the
plan. The initial performance period under the plan covers fiscal years 2006
through 2007. For this initial period, the committee determined that
qualification for an incentive award under the plan will be tied to the
attainment of targets established for four specific financial and business
measures at the end of each of fiscal 2006 and fiscal 2007. These measures are:
net sales; EBITDA (as defined by the Company); net income; and gross margin
dollars per hour. Awards are earned for achievement of the specific targets for
each of the four measures at the rate of up to 50% of the potential incentive
award for fiscal 2006 and at the rate of up to 100% of the potential incentive
award for fiscal 2007; however, the awards will not be cumulative. The board of
directors has authorized the plan to operate only for the initial performance
period of
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fiscal years 2006 and 2007. The plan could be extended in future periods only
upon an affirmative determination by the board of directors.
All of the Company's named executive officers and certain key employees
designated by management and the compensation committee of the board of
directors were selected to participate in the plan for the initial period. Each
plan participant will be eligible to receive a 100% payout of their target award
equal to their base salary and annual bonus objective in the event that all of
the targets set for each of the four plan measures are fully achieved at the end
of fiscal 2007, and provided that such participant remains an employee in good
standing of the Company at the time of payment under the plan, which is
scheduled for early 2008. In the event all of the targets are not fully achieved
during the performance period, the participant is eligible to receive a lesser
amount under the plan based on the Company's performance, however, no amount
will be awarded with respect to a plan measure unless at least 60% of the plan
measure target is achieved. In the event of early termination or inoperability
of the plan due to a change in control of the Company and termination of
employment of a participant without cause by the company, the participant may
receive a payment under the plan as if all of the targets had been achieved in
the initial performance period. All payments under the plan will be made in
cash. As of February 3, 2007, the Company has accrued approximately $2.6 million
in connection with the 2006 Long Term Incentive Program.
CHANGE IN CONTROL AND SEPARATION AGREEMENTS
The Company has entered into change in control and separation agreements
with a number of its officers under which separation pay of up to 12 to 24
months of base salary and benefits could become payable in the event of
terminations without cause only under specified circumstances, including
terminations following a change in control (as defined in the related
agreements) of the Company.
RETIREMENT AND SAVINGS PLAN
The Company maintains a qualified 401(k) retirement savings plan covering
substantially all employees. The plan allows the Company's employees to make
voluntary contributions to the plan. The Company's contribution, if any, is
determined annually at the discretion of the board of directors. Starting in
January 1999, the Company elected to make matching contributions to the plan.
The Company currently matches $.50 for every $1.00 contributed by eligible
participants up to a maximum of 6% of eligible compensation. The Company made
plan contributions totaling approximately $860,000, $653,000 and $360,000 during
fiscal 2006, 2005 and 2004, respectively.
9. LITIGATION:
The Company is involved from time to time in various claims and lawsuits in
the ordinary course of business. In the opinion of management, the claims and
suits individually and in the aggregate have not had a material adverse effect
on the Company's operations or consolidated financial statements.
10. RELATED PARTY TRANSACTIONS:
In conjunction with its services agreement with RLM, the Company records
revenue for amounts billed to RLM for customer service, fulfillment and
warehousing services. Revenues recorded from these services were $11,973,000,
$11,259,000 and $8,705,000 for the years ended February 3, 2007, February 4,
2006 and January 31, 2005, respectively. Amounts due from RLM as of February 3,
2007 and February 4, 2006 were $994,000 and $923,000, respectively. In the third
quarter of fiscal 2006, RLM notified the Company that it had elected to extend
the term of their existing services agreement with the Company to at least
August 31, 2008.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into an agreement with RightNow Technologies, Inc.
("RightNow") in 2005 under which the Company purchased software applications
which enable the Company to utilize certain customer services technologies
developed by RightNow. The Company's President and Chief Executive Officer,
William J. Lansing, serves on the board of directors of RightNow. The Company
made payments totaling approximately $171,000 during fiscal 2006 and $48,000
during fiscal 2005 for this technology and annual software maintenance fees
relating to this technology and other services.
The Company entered into a Private Label Credit Card and Co-Brand Credit
Card Consumer Program Agreement with GE Money Bank for the financing of private
label credit card purchases from ShopNBC and for the financing of co-brand
credit card purchases of products and services from other non-ShopNBC retailers.
GE Money Bank, the issuing bank for the program, is indirectly wholly-owned by
the General Electric Company ("GE"), which is also the parent company of NBC and
GE Commercial Finance -- Equity. NBC and GE Commercial Finance -- Equity have a
substantial percentage ownership in the Company and together have the right to
select three of the nine members of the Company's board of directors.
The Company and NBC are partners in a ten-year Distribution and Marketing
Agreement dated March 8, 1999 that provides that NBC shall have the exclusive
right to negotiate on behalf of the Company for the distribution of its home
shopping television programming service. As compensation for these services, the
Company currently pays NBC an annual fee of approximately $1.8 million. As of
February 3, 2007 the Company has accrued approximately $151,000 in connection
with this distribution agreement with NBC.
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information and noncash investing and financing
activities were as follows:
<Table>
<Caption>
FOR THE YEARS ENDED
---------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ----------- -----------
Supplemental cash flow information:
Interest paid.................................. $ 33,000 $ 120,000 $198,000
=========== ========== ========
Income taxes paid.............................. $ 66,000 $ 71,000 $ 77,000
=========== ========== ========
Supplemental non-cash investing and financing
activities:
Common stock purchase warrants forfeited....... $11,057,000 $7,276,000 $ --
=========== ========== ========
Exercise of common stock purchase warrants..... $ -- $5,378,000 $955,000
=========== ========== ========
Restricted stock award......................... $ 468,000 $ -- $308,000
=========== ========== ========
Restricted stock forfeited..................... $ -- $ 9,000 $115,000
=========== ========== ========
Property and equipment purchases included in
accounts payable............................ $ 98,000 $ 883,000 $296,000
=========== ========== ========
Equipment purchases under capital lease........ $ -- $ 258,000 $ --
=========== ========== ========
Noncash reduction of capital lease obligation
from FanBuzz capital lease termination...... $ -- $ 924,000 $ --
=========== ========== ========
Accretion of redeemable preferred stock........ $ 289,000 $ 287,000 $285,000
=========== ========== ========
</Table>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SEGMENT DISCLOSURES AND RELATED INFORMATION:
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 primarily 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, watches,
computers and other electronics, housewares, apparel, health and beauty aids,
fitness products, giftware, collectibles, seasonal items and other merchandise.
The Company's segments currently operate in the United States and no one
customer represents more than 5% of the Company's overall revenue. The
accounting policies of the Company's segments are the same as those described in
the summary of significant accounting policies in Note 2. There are no material
intersegment product sales. Segment information included in the consolidated
balance sheets
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as of February 3, 2007, February 4, 2006 and January 31, 2005 and included in
the consolidated statements of operations for the years then ended is as follows
(in thousands):
<Table>
<Caption>
SHOPNBC & ALL EQUITY CONTINUING FANBUZZ, INC.
YEARS ENDED SHOPNBC.COM OTHER(A) INVESTMENTS(B) OPERATIONS (DISCONTINUED) TOTAL
- ----------- ----------- -------- -------------- ---------- -------------- --------
FEBRUARY 3, 2007
Revenues.............. $755,302 $11,973 $ -- $767,275 $ $
Operating income
(loss).............. (10,705) 1,226 -- (9,479)
Depreciation and
amortization........ 21,548 691 -- 22,239
Interest income
(expense)........... 3,802 -- -- 3,802
Income taxes.......... (66) (9) -- (75)
Net income (loss)..... (5,629) 227 3,006 (2,396) (2,396)
Identifiable assets... 341,576 6,265 4,139 351,980 351,980
Capital
expenditures........ 11,428 42 -- 11,470 11,470
-------- ------- ------ -------- ------- --------
FEBRUARY 4, 2006
Revenues.............. $680,592 $11,259 $ -- $691,851 $ 5,384 $
Operating income
(loss).............. (19,888) 1,242 -- (18,646) (2,235)
Depreciation and
amortization........ 19,707 862 -- 20,569 302
Interest income
(expense)........... 3,048 -- -- 3,048 (61)
Income tax benefit.... 762 -- -- 762 --
Net income (loss)..... (15,092) 252 1,383 (13,457) (2,296) (15,753)
Identifiable assets... 338,939 6,461 1,383 346,783 356 347,139
Capital
expenditures........ 9,623 55 -- 9,678 72 9,750
-------- ------- ------ -------- ------- --------
JANUARY 31, 2005
Revenues.............. $614,884 $ 8,750 $ -- $623,634 $25,782 $
Operating income
(loss).............. (44,890) 619 -- (44,271) (14,812)
Depreciation and
amortization........ 18,124 796 -- 18,920 1,200
Interest income
(expense)........... 1,627 -- -- 1,627 (70)
Income taxes.......... (25) -- -- (25) --
Net loss.............. (42,348) (371) -- (42,719) (14,882) (57,601)
Identifiable assets... 338,245 7,044 -- 345,289 5,007 350,296
Capital
expenditures........ 13,409 1,005 -- 14,414 308 14,722
-------- ------- ------ -------- ------- --------
</Table>
- ---------------
(a) Revenue from segments below quantitative thresholds is attributable to
VVIFC, which provides fulfillment, warehousing and telemarketing services
primarily to RLM and the Company.
(b) Equity Investment assets and net income from equity investments consist of
long-term investments and earnings from equity investments accounted for
under the equity method of accounting and are not directly assignable to a
business segment.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information on net sales from continuing operations by significant product
groups is as follows (in thousands):
<Table>
<Caption>
FOR THE YEARS ENDED
---------------------------------------
FEBRUARY 3, FEBRUARY 4, JANUARY 31,
2007 2006 2005
----------- ----------- -----------
Jewelry............................................. $285,262 $278,928 $288,142
Electronics......................................... 173,121 140,460 93,089
Watches, Apparel and Health & Beauty................ 181,093 145,697 134,900
Home................................................ 80,934 78,116 73,674
All others, less than 10% each...................... 46,865 48,650 33,829
-------- -------- --------
Total............................................. $767,275 $691,851 $623,634
======== ======== ========
</Table>
13. NBC AND GE EQUITY STRATEGIC ALLIANCE:
In March 1999, the Company entered into a strategic alliance with NBC and
GE Equity. Pursuant to the terms of the transaction, NBC and GE Equity acquired
5,339,500 shares of the Company's Series A Redeemable Convertible Preferred
Stock (the "Preferred Stock"), and NBC was issued a warrant to acquire 1,450,000
shares of the Company's common stock (the "Distribution Warrants") under a
Distribution and Marketing Agreement discussed below. The Preferred Stock was
sold for aggregate consideration of $44,265,000 (or approximately $8.29 per
share). In addition, the Company agreed to issue to GE Equity a warrant (the
"Investment Warrant") to increase its potential aggregate equity stake (together
with its affiliates, including NBC) at the time of exercise to approximately
40%. NBC also has the exclusive right to negotiate on behalf of the Company for
the distribution of its television home shopping service. The sale of 3,739,500
shares of the Preferred Stock was completed on April 15, 1999. Final
consummation of the transaction regarding the sale of the remaining 1,600,000
Preferred Stock shares was completed on June 2, 1999. The Preferred Stock was
recorded at fair value on the date of issuance. The Preferred Stock is
convertible into an equal number of shares of the Company's common stock,
subject to anti-dilution adjustments, has a mandatory redemption on the tenth
anniversary of its issuance or upon a "change of control" at $8.29 per share,
participates in dividends on the same basis as the common stock and has a
liquidation preference over the common stock and any other junior securities.
The excess of the redemption value over the carrying value is being accreted by
periodic charges to equity over the ten-year redemption period. On July 6, 1999,
GE Equity exercised the Investment Warrant and acquired an additional 10,674,000
shares of the Company's common stock for an aggregate of $178,370,000, or $16.71
per share. Following the exercise of the Investment Warrant, the combined
ownership of the Company by GE Equity and NBC on a fully diluted basis was
approximately 40%. In February 2005, GE Equity sold 2,000,000 shares of the
Company's common stock to a number of different purchasers. In July 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 a number of
different purchasers. In connection with such transactions, the Company filed a
registration statement on Form S-3 with the Securities and Exchange Commission
in July 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 received no proceeds from the sale of the shares covered by the
registration statement. GE Equity and NBC currently have a combined ownership in
the Company of approximately 27% on a diluted basis.
SHAREHOLDER AGREEMENT
In March 1999, the Company and GE Equity also entered into a Shareholder
Agreement (the "Shareholder Agreement"), which provides for certain corporate
governance and standstill matters. The
73
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shareholder Agreement (together with the Certificate of Designation of the
Preferred Stock) initially provided that GE Equity and NBC would be entitled to
designate nominees for two out of seven members of the Company's board of
directors so long as their aggregate beneficial ownership was at least equal to
50% of their initial beneficial ownership, and one out of seven members so long
as their aggregate beneficial ownership was at least 10% of the "adjusted
outstanding shares of common stock." The Shareholder Agreement also requires the
consent of GE Equity prior to the Company entering into any material agreements
with certain restricted parties (broadcast networks and internet portals in
certain limited circumstances). Finally, the Company is prohibited from
exceeding certain thresholds relating to the issuance of voting securities over
a 12-month period, the payment of quarterly dividends, the repurchase of common
stock, acquisitions (including investments and joint ventures) or dispositions,
and the incurrence of debt greater than the larger of $40.0 million or 30% of
the Company's total capitalization. The Company is also prohibited from taking
any action that would cause any ownership interest by the Company in television
broadcast stations from being attributable to GE Equity, NBC or their
affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the Shareholder Agreement), and subject to certain limited
exceptions, GE Equity and NBC are prohibited from: (i) any asset or business
purchases from the Company in excess of 10% of the total fair market value of
the Company's assets, (ii) increasing their beneficial ownership above 39.9% of
the Company's shares, (iii) making or in any way participating in any
solicitation of proxies, (iv) depositing any securities of the Company in a
voting trust, (v) forming, joining, or in any way becoming a member of a "13D
Group" with respect to any voting securities of the Company, (vi) arranging any
financing for, or providing any financing commitment specifically for, the
purchase of any voting securities of the Company, (vii) otherwise acting,
whether alone or in concert with others, to seek to propose to the Company any
tender or exchange offer, merger, business combination, restructuring,
liquidation, recapitalization or similar transaction involving the Company, or
nominating any person as a director of the Company who is not nominated by the
then incumbent directors, or proposing any matter to be voted upon by the
shareholders of the Company. If, during the standstill period, any inquiry has
been made regarding a "takeover transaction" or "change in control," each as
defined in the Shareholder Agreement, which has not been rejected by the Board,
or the Board pursues such a transaction, or engages in negotiations or provides
information to a third party and the Board has not resolved to terminate such
discussions, then GE Equity or NBC may propose to the Company a tender offer or
business combination proposal.
In addition, unless GE Equity and NBC beneficially own less than 5% or more
than 90% of the adjusted outstanding shares of common stock, GE Equity and NBC
shall not sell, transfer or otherwise dispose of any securities of the Company
except for transfers: (i) to certain affiliates who agree to be bound by the
provisions of the Shareholder Agreement, (ii) which have been consented to by
the Company, (iii) pursuant to a third party tender offer, (iv) pursuant to a
merger, consolidation or reorganization to which the Company is a party, (v) in
a bona fide public distribution or bona fide underwritten public offering, (vi)
pursuant to Rule 144 of the Securities Act of 1933, or (vii) in a private sale
or pursuant to Rule 144A of the Securities Act of 1933; provided that, in the
case of any transfer pursuant to clause (v) or (vii), the transfer does not
result in, to the knowledge of the transferor after reasonable inquiry, any
other person acquiring, after giving effect to such transfer, beneficial
ownership, individually or in the aggregate with such person's affiliates, of
more than 10% of the adjusted outstanding shares of the common stock.
The standstill period will terminate on the earliest to occur of (i) the
ten-year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), or (v) six months after GE Equity and NBC can
no longer designate any nominees to the Board. Following the expiration of the
standstill period pursuant to clause (i) or (v) above (indefinitely in the case
of clause (i) and two years in the case of clause (v)), GE Equity and NBC's
74
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beneficial ownership position may not exceed 39.9% of the Company's
fully-diluted outstanding stock, except pursuant to issuance or exercise of any
warrants or pursuant to a 100% tender offer for the Company.
On March 19, 2004 the Company, NBC and GE Equity agreed to amend the
Shareholder Agreement as follows: (i) to increase the authorized size of the
Company's board of directors to nine from seven, (ii) to permit NBC and GE
Equity together to appoint three directors instead of two to the Company's board
of directors, and (iii) to provide that NBC and GE Equity would no longer have
the right to have its director-nominees serve on the Audit, Compensation or
Nominating and Governance Committees, in the event the committees must be
comprised solely of "independent" directors under applicable laws or Nasdaq
regulations. In such case, NBC and GE Equity would have the right to have an
observer attend all of these committee meetings, to the extent permitted by
applicable law.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, the Company and GE Equity entered
into a Registration Rights Agreement providing GE Equity, NBC and their
affiliates and any transferees and assigns, an aggregate of four demand
registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company entered into a ten-year Distribution and Marketing
Agreement dated March 8, 1999 (the "Distribution Agreement") that provides that
NBC shall have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television programming. As compensation for
these services, the Company agreed to pay NBC an annual fee which was
approximately $1.8 million in fiscal 2006, and issued NBC 1,450,000 distribution
warrants. On March 28, 2007, the Company and NBC agreed to reduce the amount of
the annual fee payable to NBC to a market rate. See Note 17. The exercise price
of the distribution warrants was $8.29 per share. In conjunction with the
Company's November 2000 execution of the Trademark License Agreement with NBC,
the Company agreed to accelerate the vesting of the unvested original
Distribution Warrants. On April 7, 2004, NBC exercised a portion of the original
Distribution Warrants in a cashless exercise acquiring 101,509 shares of the
Company's common stock. In November 2005, NBC exercised all remaining original
Distribution Warrants in a cashless exercise acquiring 281,199 additional shares
of the Company's common stock. Because NBC successfully delivered to the Company
10 million FTE homes pursuant to the Distribution Agreement, in fiscal 2001, the
Company issued to NBC additional warrants to purchase 343,725 shares of the
Company's common stock at an exercise price of $23.07 which expired unexercised
during fiscal 2006 and in fiscal 2002, the Company issued to NBC additional
warrants to purchase 36,858 shares of the Company's common stock at an exercise
price of $15.74 which are currently outstanding. The Company had a right to
terminate the Distribution Agreement after the twenty-fourth, thirty-sixth and
forty-second month anniversary if NBC was unable to meet the performance
targets. In addition, the Company would have been entitled to a $2.5 million
payment from NBC if the Company terminated the Distribution Agreement as a
result of NBC's failure to meet the 24-month performance target. NBC may
terminate the Distribution Agreement if the Company enters into certain
"significant affiliation" agreements or a transaction resulting in a "change of
control."
14. RALPH LAUREN MEDIA, LLC ELECTRONIC COMMERCE ALLIANCE (RLM):
During fiscal 2006, the Company owned a 12.5% equity interest in RLM which
was being accounted for under the equity method of accounting. RLM's primary
business activity to date has been the operations of the Polo.com website.
Polo.com officially launched in November 2000 and includes an assortment of
men's,
75
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
women's and children's products across the Ralph Lauren family of brands as well
as unique gift items. In connection with the formation of RLM, the Company
entered into various agreements setting forth the manner in which certain
aspects of the business of RLM are to be managed and certain of the members'
rights, duties and obligations with respect to RLM, including the Amended and
Restated Limited Liability Company Agreement, pursuant to which certain terms
and conditions regarding operations of RLM and certain rights and obligations of
its members are set forth. On March 28, 2007, the Company sold its 12.5%
ownership interest in RLM to Polo Ralph Lauren for approximately $43.8 million.
See Note 17.
AGREEMENT FOR SERVICES
RLM and VVIFC entered into an Agreement for Services under which VVIFC
agreed to provide to RLM certain telemarketing, customer support and fulfillment
services to RLM. In the third quarter of fiscal 2006, RLM notified the Company
that it had elected to extend the term of their existing services agreement with
the Company to at least August 31, 2008. RLM has advised the Company that it
intends to develop the capability to provide these services internally in the
future. On March 28, 2007, VVIFC and RLM entered into an amendment to the
agreement for services providing for certain changes to the agreement, including
a potential extension of the term through mid-2009 at RLM's option. See Note 17.
15. NBC TRADEMARK LICENSE AGREEMENT:
On November 16, 2000, the Company entered into a Trademark License
Agreement (the "License Agreement") with NBC pursuant to which NBC granted the
Company an exclusive, worldwide license for a term of ten years to use certain
NBC trademarks, service marks and domain names to rebrand the Company's business
and corporate name and website. Under the License Agreement, the Company agreed
to (i) certain restrictions on using trademarks, service marks, domain names,
logos or other source indicators owned or controlled by NBC or its affiliates in
connection with certain permitted businesses (the "Permitted Businesses"), as
defined in the License Agreement, before the agreement of NBC to such use, (ii)
the loss of its rights under the grant of the license with respect to specific
territories outside of the United States in the event the Company fails to
achieve and maintain certain performance targets in such territories, (iii)
amend and restate the current Registration Rights Agreement dated as of April
15, 1999 among the Company, NBC and GE Equity so as to increase the demand
rights held by NBC and GE Equity from four to five, among other things, (iv)
not, own, operate, acquire or expand its business to include any businesses
other than the Permitted Businesses without NBC's prior consent, (v) comply with
NBC's privacy policies and standards and practices, and (vi) not own, operate,
acquire or expand the Company's business such that one-third or more of the
Company's revenues or its aggregate value is attributable to certain services
(not including retailing services similar to the Company's existing e-commerce
operations) provided over the internet. The License Agreement also grants to NBC
the right to terminate the License Agreement at any time upon certain changes of
control of the Company, in certain situations the failure by NBC to own a
certain minimum percentage of the outstanding capital stock of the Company on a
fully-diluted basis and certain other related matters. On March 28, 2007, the
Company and NBC agreed to extend the term of the license by six months, such
that the license would continue through May 15, 2011. See Note 17.
16. ASSET IMPAIRMENTS 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
76
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 year ended February 4, 2006.
During fiscal 2005, the Company also recorded an additional $979,000 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 25 positions. The severance was paid out over periods ranging from
one to twelve months. Of this charge, $897,000 is included in loss from
discontinued operations in the accompanying consolidated statement of operations
for the year ended February 4, 2006.
In the third quarter of fiscal 2004, the Company wrote off goodwill
attributable to the FanBuzz acquisition as the Company had determined that the
goodwill was impaired following FanBuzz's loss of its NHL contract in September
2004. In addition, the Company also concluded that the book value of certain
long-lived assets at FanBuzz was significantly higher than their expected future
cash flows and that an impairment had occurred in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly,
the Company recorded a non-cash impairment loss and related charge of
$11,302,000 in the third quarter of fiscal 2004. The charges included $9,442,000
of goodwill impairment, $1,700,000 of fixed asset and capital expenditure
impairment and $160,000 of intangible asset impairment. The impairment is
included in loss from discontinued operations in the accompanying fiscal 2004
consolidated statement of operations.
In addition, in the fourth quarter of fiscal 2004, the Company recorded an
asset impairment charge of $1,900,000 related to deferred advertising costs in
the form of television advertising credits with NBC after it was determined that
the Company could no longer effectively use the credits. During the third and
fourth quarters of fiscal 2004, the Company also recorded a $3,836,000 charge to
earnings in connection with the decision to eliminate a number of positions
within the Company in an effort to streamline the corporate organization and
reduce operating expenses. The charges consisted primarily of severance pay and
related benefit costs associated with the elimination of approximately 30
positions.
17. SUBSEQUENT EVENT:
On March 26, 2007, a wholly-owned subsidiary of the Company, VVIFC, and RLM
entered into a rider to the existing agreement for services (as amended) under
which VVIFC provides RLM with fulfillment and certain customer support services.
The term of the agreement for services, as amended in October 2006, extends
through August 2008. Pursuant to the terms of the rider, VVIFC and RLM further
agreed to certain changes to the agreement for services (as amended), including
VVIFC's agreement to extend the term of the agreement through mid-2009 if so
requested by RLM.
On March 28, 2007, the Company entered into a Membership Interest Purchase
Agreement ("Purchase Agreement") with Polo Ralph Lauren, NBC and certain NBC
affiliates, pursuant to which the Company sold its 12.5% membership interest in
RLM to Polo Ralph Lauren for an aggregate purchase price of $43,750,000. The
full text of the Purchase Agreement is attached as an exhibit to the Company's
Current Report on Form 8-K filed with the SEC on April 3, 2007.
Concurrently with the execution of the Purchase Agreement, the Company also
entered into an amendment to the License Agreement (for the limited, worldwide
use of NBC trademarks, service marks, domain names and logos), under which NBC
agreed to extend the term of the License Agreement to May 15, 2011 and to
certain limitations on NBC's right to terminate the License Agreement in the
event of a change in control of the Company involving a financial buyer. On the
same date, the Company and NBC also entered into an amendment to the
Distribution Agreement providing for a reduction in the annual affiliate
relations and marketing fee paid by the Company to NBC to a market rate.
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management conducted an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer of the effectiveness of our
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 our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file
or submit 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, and to ensure that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
accumulated and communicated to management, including our principal executive
and principal financial officers, as appropriate to allow timely decisions
regarding required disclosures.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of ValueVision Media, Inc. is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15 (f) under the Securities Exchange Act 1934. The Company's internal
control system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of February 3, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control -- Integrated
Framework.
Based on management's evaluation under the framework in Internal
Control -- Integrated Framework, management concluded that the Company's
internal control over financial reporting was effective as of February 3, 2007.
78
Management's assessment of the Company's internal control over financial
reporting as of February 3, 2007, has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report.
/s/ WILLIAM J. LANSING
--------------------------------------
William J. Lansing
Chief Executive Officer
and President (Principal Executive
Officer)
/s/ FRANK P. ELSENBAST
--------------------------------------
Frank P. Elsenbast
Senior Vice President Finance, Chief
Financial
Officer (Principal Financial Officer)
April 11, 2007
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
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 is reasonably likely to materially affect, the internal
controls over financial reporting.
79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
ValueVision Media, Inc. and Subsidiaries
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting", that
ValueVision Media, Inc. and Subsidiaries (the "Company") maintained effective
internal control over financial reporting as of February 3, 2007, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the Company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
Company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of February 3, 2007, is
fairly stated, in all material respects, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of February 3, 2007, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
80
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule listed in the Index at Item 15 as of
and for the year ended February 3, 2007, of the Company and our report dated
April 11, 2007, expressed an unqualified opinion on those financial statements
and financial statement schedule and included an explanatory paragraph relating
to the Company's change in 2006 of its method of accounting for stock-based
compensation.
/s/ DELOITTE & TOUCHE LLP
April 11, 2007
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information in response to this item with respect to certain information
relating to our executive officers is contained in Item 1 under the heading
"Executive Officers of the Registrant" and with respect to other information
relating to our executive officers and directors is incorporated herein by
reference to the sections titled "Proposal 1 -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
end of the fiscal year covered by this Form 10-K.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a code of business conduct and ethics applicable to all of
our directors and employees, including our principal executive officer,
principal financial officer, principal accounting officer, controller and other
employees performing similar functions. A copy of this code of business conduct
and ethics is available on our website at www.shopnbc.com, under "Investor
Relations -- Business Ethics Policy." In addition, we have adopted a code of
ethics policy for our senior financial management; this policy is also available
on our website at www.shopnbc.com, under "Investor Relations -- Code of Ethics
Policy for Chief Executive and Senior Financial Officers."
We intend to satisfy the disclosure requirements under Form 8-K regarding
an amendment to, or waiver from, a provision of our code of business conduct and
ethics by posting such information on our website at the address specified
above.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated herein by reference to
the sections titled "Proposal 1 -- Election of Directors -- Director
Compensation" and "Executive Compensation" in our definitive proxy statement to
be filed pursuant to Regulation 14A within 120 days after the end of the fiscal
year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Information in response to this item is incorporated herein by reference to
the sections titled "Security Ownership of Principal Shareholders and
Management" and "Equity Compensation Plan Information" in our definitive proxy
statement to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information in response to this item is incorporated herein by reference to
the section titled "Certain Transactions" and "Proposal 1 -- Election of
Directors" in our definitive proxy statement to be filed pursuant to Regulation
14A within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information in response to this item is incorporated herein by reference to
the section titled "Proposal 2 -- Ratification of the Independent Registered
Public Accounting Firm -- Fees Billed by Deloitte & Touche LLP" and "Proposal
2 -- Ratification of the Independent Auditors -- Approval of Independent
Registered Public Accounting Firm Services and Fees" in our definitive proxy
statement to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULE
1. Financial Statements
- Report of Independent Registered Public Accounting Firm
- Consolidated Balance Sheets as of February 3, 2007 and February 4, 2006
- Consolidated Statements of Operations for the Years Ended February 3,
2007, February 4, 2006 and January 31, 2005
- Consolidated Statements of Shareholders' Equity for the Years Ended
February 3, 2007, February 4, 2006 and January 31, 2005
- Consolidated Statements of Cash Flows for the Years Ended February 3,
2007, February 4, 2006 and January 31, 2005
- Notes to Consolidated Financial Statements
82
2. Financial Statement Schedule
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------- ------------ ------------ ------------- -----------
ADDITIONS
------------
BALANCES AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------ ------------ ------------- -----------
FOR THE YEAR ENDED FEBRUARY 3, 2007:
Allowance for doubtful accounts...... $2,478,000 $ 6,065,000 $ (4,902,000)(1) $3,641,000
========== ============ ============= ==========
Reserve for returns.................. $7,658,000 $142,983,000 $(142,143,000)(2) $8,498,000
========== ============ ============= ==========
FOR THE YEAR ENDED FEBRUARY 4, 2006:
Allowance for doubtful accounts...... $2,421,000 $ 4,542,000 $ (4,485,000)(1) $2,478,000
========== ============ ============= ==========
Reserve for returns.................. $7,290,000 $131,682,000 $(131,314,000)(2) $7,658,000
========== ============ ============= ==========
FOR THE YEAR ENDED JANUARY 31, 2005:
Allowance for doubtful accounts...... $2,054,000 $ 4,303,000 $ (3,936,000)(1) $2,421,000
========== ============ ============= ==========
Reserve for returns.................. $8,780,000 $120,238,000 $(121,728,000)(2) $7,290,000
========== ============ ============= ==========
</Table>
- ---------------
(1) Write off of uncollectible receivables, net of recoveries.
(2) Refunds or credits on products returned.
3. Exhibits
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
------- -------
2 Membership Interest Purchase Agreement dated as of March 28,
2007 by and among Polo Ralph Lauren Corporation, Ralph
Lauren Media, LLC, NBC-Lauren Media Holding, Inc., NBC
Universal, Inc., CNBC.COM LLC, and ValueVision Media,
Inc.(FF)
3.1 Sixth Amended and Restated Articles of Incorporation, as
Amended.(B)
3.2 Certificate of Designation of Series A Redeemable
Convertible Preferred Stock.(G)
3.3 Articles of Merger.(Q)
3.4 Bylaws, as amended.(B)
10.1 Second Amended 1990 Stock Option Plan of the Registrant (as
amended and restated).(H)+
10.2 Form of Option Agreement under the Amended 1990 Stock Option
Plan of the Registrant.(A)+
10.3 1994 Executive Stock Option and Compensation Plan of the
Registrant.(D)+
10.4 Form of Option Agreement under the 1994 Executive Stock
Option and Compensation Plan of the Registrant.(E)+
10.5 2001 Omnibus Stock Plan of the Registrant.(N)+
10.6 Amendment No. 1 to the 2001 Omnibus Stock Plan of the
Registrant.(P)+
10.7 Form of Incentive Stock Option Agreement under the 2001
Omnibus Stock Plan of the Registrant.(R)+
10.8 Form of Nonstatutory Stock Option Agreement under the 2001
Omnibus Stock Plan of the Registrant.(R)+
</Table>
83
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
------- -------
10.9 Form of Restricted Stock Agreement under the 2001 Omnibus
Stock Plan of the Registrant.(R)+
10.10 Option Agreement between the Registrant and Marshall Geller
dated as of March 3, 1997.(A)+
10.11 Option Agreement between the Registrant and Marshall Geller
dated May 9, 2001.(N)+
10.12 Option Agreement between the Registrant and Marshall Geller
dated June 21, 2001.(N)+
10.13 Option Agreement between the Registrant and Robert Korkowski
dated March 3, 1997.(A)+
10.14 Option Agreement between the Registrant and Robert Korkowski
dated May 9, 2001.(N)+
10.15 Option Agreement between the Registrant and Robert Korkowski
dated June 21, 2001.(N)+
10.16 Employment Agreement between the Registrant and William J.
Lansing dated December 1, 2003.(S)+
10.17 Option Agreement between the Registrant and William J.
Lansing dated December 1, 2003.(S)+
10.18 Option Agreement between the Registrant and Nathan Fagre
dated May 1, 2000.(K)+
10.19 2002 Annual Management Incentive Plan of the Registrant.(P)+
10.20 Employment Agreement between the Registrant and Nathan E.
Fagre dated April 30, 2000.(M)+
10.21 Amendment No. 1 to Employment Agreement between Registrant
and Nathan E. Fagre dated as of April 5, 2001.(R)+
10.22 Form of Salary Continuation Agreement between the Registrant
and each of Nathan Fagre dated July 2, 2003 and Scott
Danielson dated June 16, 2004.(T)+
10.23 Option Agreement between the Registrant and Jim Gilbertson
dated November 30, 2005.(EE)+
10.24 Form of Option Agreement between the Registrant and each of
Brenda Boehler and Scott Danielson.(U)+
10.25 Investment Agreement by and between the Registrant and GE
Equity dated as of March 8, 1999.(F)
10.26 First Amendment and Agreement dated as of April 15, 1999 to
the Investment Agreement, dated as of March 8, 1999, by and
between the Registrant and GE Equity.(G)
10.27 Distribution and Marketing Agreement dated as of March 8,
1999 by and between NBC and the Registrant.(F)
10.28 Letter Agreement dated March 8, 1999 between NBC, GE Equity
and the Registrant.(F)
10.29 Shareholder Agreement dated April 15, 1999 between the
Registrant, and GE Equity.(G)
10.30 Amendment No. 1 dated March 19, 2004 to Shareholder
Agreement dated April 15, 1999 between the Registrant, NBC
and GE Equity.(V)
10.31 ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to GE Equity.(G)
10.32 Registration Rights Agreement dated April 15, 1999 between
the Registrant, GE Equity and NBC.(G)
10.33 ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to NBC.(G)
10.34 Letter Agreement dated November 16, 2000 between the
Registrant and NBC.(M)
10.35 Warrant Purchase Agreement dated September 13, 1999 between
the Registrant, Snap!LLC, a Delaware limited liability
company and Xoom.com, Inc., a Delaware corporation.(I)
10.36 Common Stock Purchase Warrant dated September 13, 1999 to
purchase shares of the Registrant held by Xoom.com, Inc., a
Delaware corporation.(I)
10.37 Registration Rights Agreement dated September 13, 1999
between the registrant and Xoom.com, Inc., a Delaware
corporation, relating to Xoom.com, Inc.'s warrant to
purchase shares of the Registrant.(I)
10.38 Amended and Restated Limited Liability Company Agreement of
Ralph Lauren Media, LLC, a Delaware limited liability
company, dated as of February 7, 2000, among Polo Ralph
Lauren Corporation, a Delaware corporation, National
Broadcasting Company, Inc., a Delaware corporation, the
Registrant, CNBC.com LLC, a Delaware limited liability
company and NBC Internet, Inc., a Delaware corporation.(J)
</Table>
84
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
------- -------
10.39 Agreement for Services dated February 7, 2000 between Ralph
Lauren Media, LLC, a Delaware limited liability company, and
VVI Fulfillment Center, Inc., a Minnesota corporation.(J)
10.40 Amendment to Agreement for Services dated as of January 31,
2003 between Ralph Lauren Media, LLC and VVI Fulfillment
Center, Inc.(R)
10.41 Trademark License Agreement dated as of November 16, 2000
between NBC and the Registrant.(L)
10.42 Warrant Purchase Agreement dated as of November 16, 2000
between NBC and the Registrant.(L)
10.43 Common Stock Purchase Warrant dated as of November 16, 2000
between NBC and the Registrant.(L)
10.44 Amendment No. 1 dated March 12, 2001 to Common Stock
Purchase Warrant dated as of November 16, 2000 between NBC
and the Registrant.(O)
10.45 ValueVision Common Stock Purchase Warrant dated as of March
20, 2001 between NBC and the Registrant.(O)
10.46 2004 Omnibus Stock Plan.(V)+
10.47 Form of Stock Option Agreement (Employees) under 2004
Omnibus Stock Plan.(W)+
10.48 Form of Stock Option Agreement (Executive Officers) under
2004 Omnibus Stock Plan.(W)+
10.49 Form of Stock Option Agreement (Executive Officers) under
2004 Omnibus Stock Plan.(W)+
10.50 Form of Stock Option Agreement (Directors -- Annual Grant)
under 2004 Omnibus Stock Plan.(W)+
10.51 Form of Stock Option Agreement (Directors -- Other Grants)
under 2004 Omnibus Stock Plan.(W)+
10.52 Stock Purchase Agreement dated as of February 9, 2005
between GE Capital Equity Investments, Inc. and Delta
Onshore, LP, Delta Institutional, LP, Delta Pleiades, LP and
Delta Offshore, Ltd.(Z)
10.53 Stock Purchase and Registration Agreement dated as of July
8, 2005 between GE Capital Equity Investments, Inc. and
Janus Investment Fund.(Y)
10.54 Stock Purchase and Registration Agreement dated as of July
8, 2005 between GE Capital Equity Investments, Inc. and
Caxton International Limited.(Y)
10.55 Stock Purchase and Registration Agreement dated as of July
8, 2005 between GE Capital Equity Investments, Inc. and
Magnetar Investment Management, LLC.(Y)
10.56 Stock Purchase and Registration Agreement dated as of July
8, 2005 between GE Capital Equity Investments, Inc. and RCG
Ambrose Master Fund, Ltd., RCG Halifax Fund, Ltd., Ramius
Securities, LLC, Starboard Value and Opportunity Fund, LLC,
Parche, LLC and Ramius Master Fund, Ltd.(Y)
10.57 Employment Agreement between the Registrant and Bryan
Venberg dated May 3, 2004.(X)+
10.58 Form of Change of Control and Severance Agreement with
Executive Officers.(AA)+
10.59 Form of Resale Restriction Agreement with Executive
Officers.(BB)+
10.60 2006 Long Term Incentive Plan.(CC)+
10.61 Description of Director Compensation Program(C)
10.62 Form of Restricted Stock Agreement (Directors) under 2004
Omnibus Stock Plan. (DD)
21 Significant Subsidiaries of the Registrant.*
23.1 Consent of Independent Registered Public Accounting Firm.*
23.2 Consent of Independent Registered Public Accounting Firm.*
23.3 Consent of Independent Registered Public Accounting Firm (by
amendment)++
24 Powers of Attorney**
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.*
</Table>
85
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
------- -------
99.1 Audited Financial Statements for Ralph Lauren Media, LLC as
of April 1, 2006, and for the fifteen-month period ended
April 1, 2006*
99.2 Audited Financial Statements for Ralph Lauren Media, LLC as
of March 31, 2007, and for the year ended March 31, 2007 ++
</Table>
- ---------------
* Filed herewith.
** Included with Signatures.
+ Management compensatory plan/arrangement.
++ To be filed by amendment.
(A) Incorporated herein by reference to Quantum Direct Corporation's
Registration Statement on Form S-4, filed on March 13, 1998, File No.
333-47979.
(B) 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.
(C) Incorporated herein by reference to the description of this program
contained in the Registrant's Current Report on Form 8-K dated June 14,
2006, filed on June 20, 2006, File No. 0-20243.
(D) Incorporated herein by reference to the Registrant's Proxy Statement in
connection with its annual meeting of shareholders held on August 17,
1994, filed on July 19, 1994, File No. 0-20243.
(E) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 31, 1998, filed on April 30, 1998,
File No. 0-20243.
(F) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated March 8, 1999, filed on March 18, 1999, File No. 0-20243.
(G) 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.
(H) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed on September 25, 2000, File No. 333-46572.
(I) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1999, filed on September 14,
1999, File No. 0-20243.
(J) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 31, 2000, File No. 0-20243.
(K) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed on September 25, 2000, File No. 333-46576.
(L) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 2000, filed on December 14,
2000, File No. 0-20243.
(M) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 31, 2001, File No. 0-20243.
(N) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on January 25, 2002, File No. 333-81438.
(O) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 2001, filed on June 14, 2001,
File No. 0-20243.
(P) Incorporated herein by reference to the Registrant's Proxy Statement in
connection with its annual meeting of shareholders held on June 20, 2002,
filed on May 23, 2002, File No. 0-20243.
(Q) 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.
(R) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 31, 2003, File No. 0-20243.
(S) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated December 1, 2003, filed on December 3, 2003, File No.
0-20243.
(T) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003, filed on August 15, 2003,
File No. 0-20243.
86
(U) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on March 19, 2004, File No. 333-113736.
(V) Incorporated herein by reference to the Registrant's Proxy Statement in
connection with its annual meeting of shareholders held on June 21, 2006,
filed on May 23, 2006, File No. 0-20243.
(W) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated January 14, 2005, filed on January 14, 2005, File No.
0-20243.
(X) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 2005, filed on June 9, 2005,
File No. 0-20243.
(Z) Incorporated by reference to the Schedule 13D/A (Amendment No. 7) dated
February 11, 2005, filed February 15, 2005, File No. 005-41757.
(Y) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 filed on July 29, 2005, File No. 333-127040.
(AA) Incorporated by reference to the description of this program included in
the Registrant's Current Report on Form 8-K dated August 24, 2005, filed
on August 26, 2005, File No. 0-20243.
(BB) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 29, 2005, filed on December 8,
2005, File No. 0-20243.
(CC) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated December 19, 2005, filed on December 23, 2005, File No.
0-20243.
(DD) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated June 21, 2006, filed on June 26, 2006, File No. 0-20243.
(EE) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on December 22, 2006, File No. 333-13957.
(FF) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated March 28, 2007, filed on April 3, 2007, File No. 0-20243.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on April 17, 2007.
VALUEVISION MEDIA, INC.
(Registrant)
By: /s/ WILLIAM J. LANSING
------------------------------------
William J. Lansing
Chief Executive Officer and
President
Each of the undersigned hereby appoints William J. Lansing and Frank P.
Elsenbast, and each of them (with full power to act alone), as attorneys and
agents for the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned, to sign and file with the Securities
and Exchange Commission under the Securities Act of 1934, any and all amendments
and exhibits to this annual report on Form 10-K and any and all applications,
instruments, and other documents to be filed with the Securities and Exchange
Commission pertaining to this annual report on Form 10-K or any amendments
thereto, with full power and authority to do and perform any and all acts and
things whatsoever requisite and necessary or desirable. Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated on April 17, 2007.
<Table>
<Caption>
NAME TITLE
---- -----
/s/ WILLIAM J. LANSING Chief Executive Officer President and Director
------------------------------------------------ (Principal Executive Officer)
William J. Lansing
/s/ FRANK P. ELSENBAST Senior Vice President Finance, Chief Financial
------------------------------------------------ Officer
Frank P. Elsenbast (Principal Financial and Accounting Officer)
/s/ MARSHALL S. GELLER Chairman of the Board
------------------------------------------------
Marshall S. Geller
/s/ JAMES J. BARNETT Director
------------------------------------------------
James J. Barnett
/s/ JOHN D. BUCK Director
------------------------------------------------
John D. Buck
/s/ RONALD J. HERMAN, JR. Director
------------------------------------------------
Ronald J. Herman, Jr.
/s/ DOUGLAS V. HOLLOWAY Director
------------------------------------------------
Douglas V. Holloway
/s/ JAY IRELAND Director
------------------------------------------------
Jay Ireland
</Table>
88
<Table>
<Caption>
NAME TITLE
---- -----
/s/ ROBERT J. KORKOWSKI Director
------------------------------------------------
Robert J. Korkowski
/s/ GEORGE A. VANDEMAN Director
------------------------------------------------
George A. Vandeman
</Table>
89
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT FILED BY
------- ------- --------
2 Membership Interest Purchase Agreement dated as of March Incorporated by reference
28, 2007 by and among Polo Ralph Lauren Corporation, Ralph
Lauren Media, LLC, NBC-Lauren Media Holding, Inc., NBC
Universal, Inc., CNBC.COM LLC, and ValueVision Media, Inc.
3.1 Sixth Amended and Restated Articles of Incorporation, as Incorporated by reference
Amended
3.2 Certificate of Designation of Series A Redeemable Incorporated by reference
Convertible Preferred Stock
3.3 Articles of Merger Incorporated by reference
3.4 Bylaws, as amended Incorporated by reference
10.1 Second Amended 1990 Stock Option Plan of the Registrant (as Incorporated by reference
amended and restated)
10.2 Form of Option Agreement under the Amended 1990 Stock Incorporated by reference
Option Plan of the Registrant
10.3 1994 Executive Stock Option and Compensation Plan of the Incorporated by reference
Registrant
10.4 Form of Option Agreement under the 1994 Executive Stock Incorporated by reference
Option and Compensation Plan of the Registrant
10.5 2001 Omnibus Stock Plan of the Registrant Incorporated by reference
10.6 Amendment No. 1 to the 2001 Omnibus Stock Plan of the Incorporated by reference
Registrant
10.7 Form of Incentive Stock Option Agreement under the 2001 Incorporated by reference
Omnibus Stock Plan of the Registrant
10.8 Form of Nonstatutory Stock Option Agreement under the 2001 Incorporated by reference
Omnibus Stock Plan of the Registrant
10.9 Form of Restricted Stock Agreement under the 2001 Omnibus Incorporated by reference
Stock Plan of the Registrant+
10.10 Option Agreement between the Registrant and Marshall Geller Incorporated by reference
dated as of March 3, 1997
10.11 Option Agreement between the Registrant and Marshall Geller Incorporated by reference
dated May 9, 2001
10.12 Option Agreement between the Registrant and Marshall Geller Incorporated by reference
dated June 21, 2001
10.13 Option Agreement between the Registrant and Robert Incorporated by reference
Korkowski dated March 3, 1997
10.14 Option Agreement between the Registrant and Robert Incorporated by reference
Korkowski dated May 9, 2001
10.15 Option Agreement between the Registrant and Robert Incorporated by reference
Korkowski dated June 21, 2001
10.16 Employment Agreement between the Registrant and William J. Incorporated by reference
Lansing dated December 1, 2003
10.17 Option Agreement between the Registrant and William J. Incorporated by reference
Lansing dated December 1, 2003
10.18 Option Agreement between the Registrant and Nathan Fagre Incorporated by reference
dated May 1, 2000
10.19 2002 Annual Management Incentive Plan of the Registrant Incorporated by reference
10.20 Employment Agreement between the Registrant and Nathan E. Incorporated by reference
Fagre dated April 30, 2000
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT FILED BY
------- ------- --------
10.21 Amendment No. 1 to Employment Agreement between Registrant Incorporated by reference
and Nathan E. Fagre dated as of April 5, 2001
10.22 Form of Salary Continuation Agreement between the Incorporated by reference
Registrant and each of Nathan Fagre dated July 2, 2003 and
Scott Danielson dated June 16, 2004
10.23 Option Agreement between the Registrant and Jim Gilbertson Incorporated by reference
dated November 30, 2005.(EE)
10.24 Form of Option Agreement between the Registrant and each of Incorporated by reference
Brenda Boehler and Scott Danielson
10.25 Investment Agreement by and between the Registrant and GE Incorporated by reference
Equity dated as of March 8, 1999
10.26 First Amendment and Agreement dated as of April 15, 1999 to Incorporated by reference
the Investment Agreement, dated as of March 8, 1999, by and
between the Registrant and GE Equity
10.27 Distribution and Marketing Agreement dated as of March 8, Incorporated by reference
1999 by and between NBC and the Registrant
10.28 Letter Agreement dated March 8, 1999 between NBC, GE Equity Incorporated by reference
and the Registrant
10.29 Shareholder Agreement dated April 15, 1999 between the Incorporated by reference
Registrant, and GE Equity
10.30 Amendment No. 1 dated March 19, 2004 to Shareholder Agree- Incorporated by reference
ment dated April 15, 1999 between the Registrant, NBC and
GE Equity
10.31 ValueVision Common Stock Purchase Warrant dated as of April Incorporated by reference
15, 1999 issued to GE Equity
10.32 Registration Rights Agreement dated April 15, 1999 between Incorporated by reference
the Registrant, GE Equity and NBC
10.33 ValueVision Common Stock Purchase Warrant dated as of April Incorporated by reference
15, 1999 issued to NBC
10.34 Letter Agreement dated November 16, 2000 between the Incorporated by reference
Registrant and NBC
10.35 Warrant Purchase Agreement dated September 13, 1999 between Incorporated by reference
the Registrant, Snap!LLC, a Delaware limited liability
company and Xoom.com, Inc., a Delaware corporation
10.36 Common Stock Purchase Warrant dated September 13, 1999 to Incorporated by reference
purchase shares of the Registrant held by Xoom.com, Inc., a
Delaware corporation.(I)
10.37 Registration Rights Agreement dated September 13, 1999 Incorporated by reference
between the registrant and Xoom.com, Inc., a Delaware
corporation, relating to Xoom.com, Inc.'s warrant to
purchase shares of the Registrant
10.38 Amended and Restated Limited Liability Company Agreement of Incorporated by reference
Ralph Lauren Media, LLC, a Delaware limited liability
company, dated as of February 7, 2000, among Polo Ralph
Lauren Corporation, a Delaware corporation, National
Broadcasting Company, Inc., a Delaware corporation, the
Registrant, CNBC.com LLC, a Delaware limited liability
company and NBC Internet, Inc., a Delaware corporation
10.39 Agreement for Services dated February 7, 2000 between Ralph Incorporated by reference
Lauren Media, LLC, a Delaware limited liability company,
and VVI Fulfillment Center, Inc., a Minnesota corporation
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT FILED BY
------- ------- --------
10.40 Amendment to Agreement for Services dated as of January 31, Incorporated by reference
2003 between Ralph Lauren Media, LLC and VVI Fulfillment
Center, Inc
10.41 Trademark License Agreement dated as of November 16, 2000 Incorporated by reference
between NBC and the Registrant
10.42 Warrant Purchase Agreement dated as of November 16, 2000 Incorporated by reference
between NBC and the Registrant
10.43 Common Stock Purchase Warrant dated as of November 16, 2000 Incorporated by reference
between NBC and the Registrant
10.44 Amendment No. 1 dated March 12, 2001 to Common Stock Incorporated by reference
Purchase Warrant dated as of November 16, 2000 between NBC
and the Registrant
10.45 ValueVision Common Stock Purchase Warrant dated as of March Incorporated by reference
20, 2001 between NBC and the Registrant
10.46 2004 Omnibus Stock Plan Incorporated by reference
10.47 Form of Stock Option Agreement (Employees) under 2004 Incorporated by reference
Omnibus Stock Plan
10.48 Form of Stock Option Agreement (Executive Officers) under Incorporated by reference
2004 Omnibus Stock Plan
10.49 Form of Stock Option Agreement (Executive Officers) under Incorporated by reference
2004 Omnibus Stock Plan
10.50 Form of Stock Option Agreement (Directors -- Annual Grant) Incorporated by reference
under 2004 Omnibus Stock Plan
10.51 Form of Stock Option Agreement (Directors -- Other Grants) Incorporated by reference
under 2004 Omnibus Stock Plan
10.52 Stock Purchase Agreement dated as of February 9, 2005 Incorporated by reference
between GE Capital Equity Investments, Inc. and Delta
Onshore, LP, Delta Institutional, LP, Delta Pleiades, LP
and Delta Offshore, Ltd.
10.53 Stock Purchase and Registration Agreement dated as of July Incorporated by reference
8, 2005 between GE Capital Equity Investments, Inc. and
Janus Investment Fund
10.54 Stock Purchase and Registration Agreement dated as of July Incorporated by reference
8, 2005 between GE Capital Equity Investments, Inc. and
Caxton International Limited
10.55 Stock Purchase and Registration Agreement dated as of July Incorporated by reference
8, 2005 between GE Capital Equity Investments, Inc. and
Magnetar Investment Management, LLC
10.56 Stock Purchase and Registration Agreement dated as of July Incorporated by reference
8, 2005 between GE Capital Equity Investments, Inc. and RCG
Ambrose Master Fund, Ltd., RCG Halifax Fund, Ltd., Ramius
Securities, LLC, Starboard Value and Opportunity Fund, LLC,
Parche, LLC and Ramius Master Fund, Ltd
10.57 Employment Agreement between the Registrant and Bryan Incorporated by reference
Venberg dated May 3, 2004
10.58 Form of Change of Control and Severance Agreement with Incorporated by reference
Executive Officers
10.59 Form of Resale Restriction Agreement with Executive Incorporated by reference
Officers
10.60 2006 Long Term Incentive Plan Incorporated by reference
10.61 Description of Director Compensation Program Changes Incorporated by reference
10.62 Form of Restricted Stock Agreement (Directors) under 2004 Incorporated by reference
Omnibus Stock Plan.
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT FILED BY
------- ------- --------
21 Significant Subsidiaries of the Registrant Filed Herewith
23.1 Consent of Independent Registered Public Accounting Firm Filed Herewith
23.2 Consent of Independent Registered Public Accounting Firm Filed Herewith
23.3 Consent of Independent Registered Public Accounting Firm To be Filed by amendment
24 Powers of Attorney Included with Signatures
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Filed Herewith
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Filed Herewith
Officer
32.1 Section 1350 Certification of Chief Executive Officer Filed Herewith
32.2 Section 1350 Certification of Chief Financial Officer Filed Herewith
99.1 Audited Financial Statements for Ralph Lauren Media, LLC as Filed Herewith
of April 1, 2006, and for the fifteen-month period ended
April 1, 2006
99.2 Audited Financial Statements for Ralph Lauren Media, LLC as To be Filed by amendment
of March 31, 2007, and for the year ended March 31, 2007
</Table>