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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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<S> <C>
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000 Commission file number 000-25617
OR
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _______
VALLEY MEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2556440
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
_________________________
1280 Santa Anita Court, Woodland, California 95776
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (530) 661-6600
_________________________
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 __.
-----
The number of shares outstanding of the Registrant's common stock as of October 2, 2000 was 8,517,876 shares.
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PART I - Financial Information
ITEM 1. Financial Statements
Valley Media, Inc.
Consolidated Balance Sheets
(Unaudited)
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<CAPTION>
September 30, April 1,
2000 2000
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Dollars in thousands, except share data
<S> <C> <C>
Assets
Current assets
Cash............................................................................ $ 78 $ 274
Accounts receivable, less allowance for doubtful accounts of $10,108 at
September 30, 2000 and $12,017 at April 1, 2000............................... 169,328 175,776
Inventories, net of reserves of $7,359 at September 30, 2000 and $4,145 at
April 1, 2000................................................................... 179,696 190,428
Investment in marketable equity securities, available for sale (Note 3)......... 3,325 17,002
Deferred income taxes........................................................... 7,291 7,234
Prepaid expenses and other...................................................... 8,563 2,164
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Total current assets....................................................... 368,281 392,878
Property and equipment, net........................................................... 26,763 26,132
Goodwill and other intangibles, net................................................... 12,474 13,207
Deferred income taxes................................................................. 951 951
Other assets.......................................................................... 1,059 910
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Total assets.......................................................................... $ 409,528 $ 434,078
========= =========
Liabilities and stockholders' equity
Current liabilities
Accounts payable................................................................ $ 173,305 $ 149,004
Accrued liabilities............................................................. 4,963 7,903
Revolving line of credit........................................................ 160,833 181,772
Current portion of long term debt............................................... 3,631 3,984
Deferred income taxes (Note 3).................................................. 388 2
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Total current liabilities.................................................. 343,120 342,665
Deferred income taxes................................................................. 7,035 12,890
Long term debt........................................................................ 6,095 7,861
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 2,000,000 shares authorized, none issued
Common stock, $.001 par value, 20,000,000 shares authorized, 8,517,876
shares issued and outstanding................................................... 8 8
Additional paid-in capital...................................................... 52,635 51,951
Stockholders' notes receivable.................................................. (154) (194)
Retained earnings (accumulated deficit)......................................... (412) 9,490
Accumulated other comprehensive income (Note 3)................................. 1,201 9,407
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Total stockholders' equity................................................. 53,278 70,662
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Total liabilities and stockholders' equity............................................ $ 409,528 $ 434,078
========= =========
</TABLE>
See notes to consolidated financial statements
1
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Valley Media, Inc.
Consolidated Statements of Operations
(Unaudited)
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<CAPTION>
========================== ===========================
Thirteen Weeks Ended Twenty-Six Weeks Ended
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September 30, October 2, September 30, October 2,
2000 1999 2000 1999
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Dollars in thousands, except share data
Net sales...................................................... $ 179,793 $ 205,186 $ 356,813 $ 390,952
Cost of goods sold............................................. 162,385 180,648 325,194 344,543
----------- ----------- ----------- -----------
Gross profit................................................... 17,408 24,538 31,619 46,409
Selling, general and administrative expenses................... 18,379 20,808 39,865 40,881
----------- ----------- ----------- -----------
Operating income (loss)........................................ (971) 3,730 (8,246) 5,528
Interest expense............................................... 4,002 3,157 8,254 6,321
----------- ----------- ----------- -----------
Income (loss) before income taxes.............................. (4,973) 573 (16,500) (793)
Income tax provision (benefit)................................. (1,991) 238 (6,598) (329)
----------- ----------- ----------- -----------
Net income (loss).............................................. $ (2,982) $ 335 $ (9,902) $ (464)
=========== =========== =========== ===========
Net income (loss) per share:
Basic and diluted net income (loss) per share.............. $ (0.35) $ 0.04 $ (1.17) $ (0.05)
Weighted average shares used in the calculation:
Basic...................................................... 8,471,776 8,451,904 8,462,534 8,450,457
----------- ----------- ----------- -----------
Diluted.................................................... 8,471,776 9,144,982 8,462,534 8,450,457
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
2
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Valley Media, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
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=================================
Twenty-Six Weeks Ended
---------------------------------
September 30, October 2,
2000 1999
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Dollars in thousands
Cash flows from operating activities
Net loss.......................................................................... $ (9,902) $ (464)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization..................................................... 3,578 3,234
Bad debt expense.................................................................. 769 523
Noncash compensation expense...................................................... 538 -
Other............................................................................. 162 -
Changes in operating assets & liabilities:
Accounts receivable............................................................ 5,679 4,102
Inventories.................................................................... 10,732 (2,535)
Prepaid expenses and other..................................................... (6,790) (152)
Accounts payable............................................................... 24,301 (9,314)
Accrued liabilities............................................................ (2,019) (4,648)
-------------- ---------------
Net cash provided by (used in) operating activities............................ 27,048 (9,254)
-------------- ---------------
Cash flows from investing activities
Purchases of property and equipment............................................... (4,397) (10,072)
Other............................................................................. 25 (82)
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Net cash used in investing activities.......................................... (4,372) (10,154)
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Cash flows from financing activities
Short-term borrowings under revolving line of credit.............................. 349,062 393,865
Repayment of short-term borrowings................................................ (370,001) (380,535)
Issuance of long-term debt........................................................ - 6,080
Repayment of long-term debt....................................................... (2,119) (1,194)
Repayment of stockholder note receivable.......................................... - 117
Issuance of common stock.......................................................... 186 24
-------------- ---------------
Net cash provided by (used in) financing activities............................ (22,872) 18,357
-------------- ---------------
NET DECREASE IN CASH.................................................................... (196) (1,051)
CASH, BEGINNING OF PERIOD............................................................... 274 1,433
-------------- ---------------
CASH, END OF PERIOD..................................................................... $ 78 $ 382
============== ===============
</TABLE>
See notes to consolidated financial statements
3
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Valley Media, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements of Valley Media,
Inc., and its subsidiaries (the "Company"), are unaudited and reflect all
normal, recurring adjustments (as well as adjustments relating to obsolete
inventory and severance charges as described in Management's Discussion and
Analysis of Financial Condition and Results of Operations), which, in the
opinion of management, are necessary for a fair presentation of such financial
statements. The Company's interim results are not indicative of results for a
full year.
These unaudited consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended April 1, 2000.
2. Receivables from amplified.com
In April 2000, the Company entered into a series of strategic business
agreements with amplified.com, Inc. ("amplified.com") to merge both Companies'
Internet businesses. amplified.com provides marketing and sales support services
to existing Valley customers for a commission. The Company provides fulfillment
services, and certain occupancy, systems, human resources, accounting and credit
services to amplified.com, and receives a fee for such services. In addition,
the Company provides amplified.com with a line of credit for $2.0 million, which
is repayable at the earlier of the closing of $20.0 million in equity financing
by amplified.com, or April 9, 2001. As of September 30, 2000, the net amount due
Valley for these fees and the line of credit was $4,229,000. Management believes
such amount is fully collectible prior to fiscal year-end.
Subsequent to September 30, 2000, amplified.com received approximately
$5.0 million in additional equity financing. In addition, the Company plans to
offset future commissions due amplified.com under these agreements against such
receivable balance. As a result, the Company has not recorded its 50% share of
amplified.com's losses to date which was approximately $3.8 million.
3. Investment in Marketable Equity Securities
The Company's investment in Loudeye common stock at September 30,
2000, is recorded at $3,325,000 (based upon the closing price of Loudeye common
stock at September 29, 2000, of $6.82 per share) with an unrealized gain of
$1,201,000 (net of deferred taxes of $1,000,000) included in accumulated other
comprehensive income.
4
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4. Segment Information
Management has determined that there are three reportable segments
based on the customers served by each segment: Full-line Distribution,
e-Fulfillment and Independent Distribution. Such determination was based on the
level at which executive management reviews the results of operations in order
to make decisions regarding performance assessment and resource allocation.
Full-line Distribution serves music, video and other retailers
worldwide with customers ranging from independent stores to specialty chains to
retailers who sell music and video as an ancillary product line. e-Fulfillment
provides product and data to Internet retailers. Independent Distribution serves
independent labels and studios. Independent Distribution sells products to Full-
line Distribution and e-Fulfillment at market price, and accordingly, the
intersegment revenues are included in "intersegment eliminations" in the
reconciliation of operating income reported below.
Expenses of the advertising, distribution, information systems,
finance and administrative groups are not allocated to the operating segments
and are included in "other" in the reconciliation of operating income reported
below. The Company does not allocate equity in net loss of joint venture,
interest expense, income taxes or extraordinary items to operating segments. The
Company does not identify and allocate assets or depreciation by operating
segment.
Information on reportable segments is as follows:
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Thirteen Weeks Ended Twenty-Six Weeks Ended
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Dollars in thousands September 30, October 2, September 30, October 2,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Full line Distribution
Net sales................................................. $ 121,204 $ 132,399 $ 226,319 $ 248,655
Operating income.......................................... $ 7,660 $ 11,518 $ 14,405 $ 20,353
e-Fulfillment
Net sales................................................. $ 44,562 $ 56,727 $ 102,335 $ 115,872
Operating income.......................................... $ 4,768 $ 6,987 $ 9,578 $ 14,269
Independent Distribution
Net sales................................................. $ 18,239 $ 19,368 $ 36,357 $ 33,359
Operating income.......................................... $ 1,893 $ 2,608 $ 3,867 $ 4,635
Other
Unallocated expenses...................................... $ (15,292) $ (17,383) $ (36,096) $ (33,729)
Intersegment Eliminations
Net sales................................................. $ (4,212) $ (3,308) $ (8,198) $ (6,934)
Total
Net sales................................................. $ 179,793 $ 205,186 $ 356,813 $ 390,952
Operating income (loss)................................... $ (971) $ 3,730 $ (8,246) $ 5,528
</TABLE>
5
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5. Net Loss Per Share
Basic net loss per shares has been computed by dividing net loss by
the weighted average number of shares outstanding during the period. Diluted net
loss per share is computed by adjusting the weighted average number of shares
outstanding during the period for all potentially dilutive shares outstanding
during the period. Net loss and weighted average shares outstanding used for
computing diluted loss per share were the same as that used for computing basic
loss per share for the twenty-six weeks ended September 30, 2000 and October 2,
1999, and the thirteen weeks ended September 30, 2000. Stock options to purchase
1,036,560 and 804,592, and 1,036,560 shares of common stock outstanding during
the twenty-six weeks ended September 30, 2000 and October 2, 1999, and the
thirteen weeks ended September 30, 2000, respectively, were not included in the
computation of diluted net loss per share since the inclusion of such shares
would be antidilutive.
6. Comprehensive Income (Loss)
The following table sets forth the calculation of comprehensive income (loss):
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Thirteen Weeks Ended Twenty-Six Weeks Ended
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Dollars in thousands September 30, October 2, September 30, October 2,
2000 1999 2000 1999
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss)........................................... $ (2,982) $ 335 $ (9,902) $ (464)
Unrealized loss on marketable equity securities............. (3,105) - (8,206) -
---------- --------- ----------- ---------
Total comprehensive income (loss)........................... $ (6,087) $ 335 $ (18,108) $ (464)
========== ========= =========== =========
</TABLE>
6
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ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Results of Operations
Thirteen Weeks Ended September 30, 2000 Compared with Thirteen Weeks Ended
October 2, 1999
Net sales decreased $25.4 million, or 12%, to $179.8 million in the
thirteen weeks ended September 30, 2000 from $205.2 million in the thirteen
weeks ended October 2, 1999. The net loss of $3.0 million ($.35 per share) for
the second fiscal quarter of fiscal 2001 compares to net income of $335,000
($.04 per share) in the second fiscal quarter of fiscal 2000.
Full-line Distribution net sales decreased $11.2 million, or 8%, to $121.2
million in the first quarter of fiscal 2001 from $132.4 million in the prior
year quarter. Net sales in this segment have been adversely affected by an
unusually light schedule of new product releases from major music and movie
suppliers which has been widely reported in the press. Product returns continue
at a higher rate than in previous years, in part because sales mix has become
more heavily weighted to video product.
e-Fulfillment sales decreased $12.1 million, or 21%, in the second quarter
to $44.6 million compared to $56.7 million in the prior year quarter. This
segment continues to be softer than expected as the startup rate of new internet
"store-fronts" has substantially slowed since last year. Some major suppliers
have also increased the amount of product being sold directly to a large
customer in this segment.
Independent Distribution net sales decreased $1.2 million, or 6%, in the
second quarter of fiscal 2001 to $18.2 million compared to $19.4 million for the
comparable quarter in the prior year period.
Gross profit decreased to $17.4 million in the second quarter of the year
compared to $24.5 million in the prior year quarter, with gross margin
decreasing from 12.0% to 9.7%. Margins decreased primarily due to higher product
cost associated with product mix, and lower marketing incentives due to the slow
new release schedule. Freight costs decreased slightly while inventory carrying
costs were slightly higher than in the previous year.
Selling, general and administrative expenses decreased $2.4 million, or
12%, to $18.4 million in the second quarter of fiscal 2001 from $20.8 million in
the second quarter of 2000, primarily as a result of a substantial reduction in
the work force and close attention to expense control.
Interest expense increased $0.8 million, or 25%, to $4.0 million in the
second quarter of fiscal 2001 compared to $3.2 million in the second quarter of
the prior year, primarily due to an increase of the average interest rate to
9.3% in the most recent quarter from 7.9% in the corresponding quarter last
year, along with higher average debt balances in the second quarter of fiscal
2001 compared to fiscal 2000.
The effective tax rate was a benefit of 40.0% in the second quarter of
fiscal 2001, compared to a 41.5% provision in the prior year quarter.
7
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Twenty-Six Weeks Ended September 30, 2000 Compared with Twenty-Six Weeks
Ended October 2, 1999
Net sales decreased $34.2 million, or 9%, to $356.8 million in the twenty-
six weeks ended September 30, 2000 from $391.0 million in the twenty-six weeks
ended October 2, 1999. The net loss of $9.9 million ($1.17 per share) for the
first half of fiscal 2001 compares to a net loss of $464,000 ($.05 per share) in
the same period of fiscal 2000, and includes a one-time adjustment for obsolete
inventory of $1.2 million after tax, as well as severance charges totaling $1.0
million after tax.
Full-line Distribution net sales decreased $22.4 million, or 9%, to $226.3
million in the first twenty-six weeks of fiscal 2001 from $248.7 million in the
prior year first half. Net sales in this segment have been adversely affected by
higher sales discounting due to competitive conditions as well as unusually high
returns from customers.
e-Fulfillment sales decreased $13.6 million, or 12%, in the first twenty-
six weeks to $102.3 million compared to $115.9 million in the same period of
fiscal 2000. This segment continues to be softer than expected as the startup
rate of new internet "store-fronts" has slowed since last year. Some major
suppliers have also increased the amount of product being shipped directly to a
large customer in this segment.
Independent Distribution net sales increased $3.0 million, or 9%, in the
first half of fiscal 2001 to $36.4 million from $33.4 million for the first
twenty-six weeks ended October 2, 1999.
Gross profit decreased to $31.6 million in the first twenty-six weeks ended
September 30, 2000, compared to $46.4 million in the prior year first half, with
gross margin decreasing from 11.9% to 8.9%. Margins decreased primarily due to
higher product cost associated with product mix, and lower marketing incentives
due to the slow new release schedule. Freight costs decreased $1.0 million while
inventory carrying costs were slightly higher than in the previous year.
Selling, general and administrative expenses decreased $1.0 million, or
2.4%, to $39.9 million in the first twenty-six weeks of fiscal 2001 from $40.9
million in the corresponding period of fiscal 2000, primarily as a result of a
substantial reduction in the work force at the end of the current year's first
fiscal quarter along with close attention to expense control.
Interest expense increased $2.0 million, or 32%, to $8.3 million in the
twenty-six weeks ended September 30, 2000, compared to $6.3 million in the
comparable first half of the prior fiscal year, primarily due to an increase of
the average interest rate to 9.3% during the period from 7.8% in the
corresponding period last year, along with higher average debt balances in the
first half of fiscal 2001 compared to the fiscal 2000 period.
The effective tax rate was a benefit of 40.0% in the first twenty-six weeks
of fiscal 2001, compared to 41.5% in the prior year period.
8
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Liquidity and Capital Resources
Net cash provided by operating activities of $27.0 million in the first
half of fiscal 2001 consisted primarily of decreases in accounts receivable and
inventories of $5.7 million and $10.7 million, respectively, and by increases in
accounts payable of $24.3 million, offset by increases in prepaid and other
expenses of $6.8 million. Net cash used in operating activities of $9.3 million
in the first half of fiscal 2000 consisted primarily of decreases of $9.3
million in accounts payable and $4.6 million in accrued liabilities and an
increase of $2.5 million in inventories, offset by a decrease in accounts
receivable of $4.1 million.
Net cash used in investing activities was $4.4 million and $10.2 million
for the first half of fiscal 2001 and 2000, respectively. Cash used in the first
half of fiscal 2001 consisted of expenditures for property and equipment
acquisitions. Cash used in the first half of fiscal 2000 consisted of
expenditures for property and equipment acquisitions, primarily related to the
new California distribution facility and investments in information systems
technology.
Net cash used in financing activities of $22.9 million in the first half of
fiscal 2001 consisted primarily of repayments of amounts under our credit
facility in excess of additional borrowings for the period. Financing activities
provided net cash of $18.4 million in the first half of fiscal 2000 and
consisted primarily of additional borrowings under our credit facility to fund
increased working capital requirements. Cash provided by financing activities in
the first half of fiscal 2000 also included $6.1 million related to the issuance
of notes payable for the purchase of certain equipment.
The Company's total and short-term debt to equity ratios were 3.20 to 1.00
and 3.09 to 1.00, respectively, and working capital was $25.2 million at
September 30, 2000. As of September 30, 2000, the Company had a credit facility
with a commercial bank providing for borrowings up to the lesser of $240.0
million or the amount of collateral availability, of which $160.8 million was
used. As of September 30, 2000, the Company was not in compliance with a
financial covenant under an equipment note payable agreement. The lender waived
such non-compliance for the quarter ended September 30, 2000. The Company
believes its available cash and existing credit facilities are sufficient to
meet its short-term requirements.
Seasonality in Operating Results
The Company's quarterly net sales and operating results have varied
significantly in the past and will likely continue to do so in the future as a
result of seasonal variations in the demand for music and video. Historically,
sales are highest during the third fiscal quarter (the holiday season) and
returns are highest during the fourth fiscal quarter. Due to this seasonality,
the Company typically experiences significant changes in cash flows and capacity
needs during the year, with the heaviest credit needs and highest capacity
requirements typically occurring during the third and fourth fiscal quarters.
9
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Factors Affecting Operating Results
This report contains forward-looking statements made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These statements are identified by words such as "will", "expects",
"anticipates", "plans", or "intends" and by other descriptions of future
circumstances or conditions and include statements regarding our expected
savings from staff reductions. Actual results may differ materially from those
projected in these forward-looking statements. Factors that could affect the
Company's actual results include, without limitation, risks and uncertainties
related to the following factors: changing conditions in the online market for
music and video; the success of the Company's affiliate, amplified.com; the
impact of new delivery technologies on demand for the product the Company sells;
competitive conditions in the Company's markets; customer concentration; and
inability to fill certain key management positions and the impact of turnover
among the Company's senior executives. More information about these and other
factors that could negatively affect the Company's financial performance and the
value of its common stock is contained in the Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K.
Readers of the 10-K should pay particular attention to the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Factors Affecting Operating Results."
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks primarily from changes in U.S.
interest rates. The Company does not engage in financial transactions for
trading or speculative purposes.
The interest payable on the Company's revolving line of credit is based on
variable interest rates and is therefore affected by changes in market interest
rates. If interest rates on variable rate debt rose 0.91 percentage points (a
10% change from the average interest rate as of September 30, 2000), assuming no
change in the Company's outstanding balance under the line of credit
(approximately $160.8 million as of September 30, 2000), the Company's annual
loss before taxes and cash flows from operating activities would increase by
approximately $1.5 million.
PART II - Other Information
ITEM 1. Legal Proceedings
The Company is subject to various legal proceedings that arise in the
ordinary course of business. While the outcome of all of these proceedings
cannot be predicted with certainty, management believes that none of such
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company's business or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
10
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ITEM 4. Submission Of Matters To A Vote of Security Holders
(a) The Company held its Annual Shareholders' Meeting on August 11, 2000.
(b) The shareholders voted for two directors for three-year terms. The
vote was as follows for each of the nominees:
Name Affirmative Votes Voting Authority Withheld
---- ----------------- -------------------------
Barnet J. Cohen 7,740,781 228,358
Christopher Mottern 7,741,720 227,417
(c) (1) An amendment to the Company's Amended and Restated 1997 Stock
Option Plan increasing the number of shares that may be issued
pursuant to awards granted under the plan was voted on and approved.
There were 4,985,930 votes for, 358,583 votes against, 64,741
abstentions and 2,559,882 broker non-votes.
(2) The selection by the Board of Directors of Deloitte & Touche LLP,
independent public accountants, as independent auditors of the Company
for the year ending March 31, 2001, was voted on and ratified. There
were 7,722,919 votes for, 190,285 votes against, 55,933 abstentions
and zero broker non-votes.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
______________________________________________________________________
Exhibit Number Description of Document
----------------- -------------------------------------------
27.1 Financial Data Schedule.
_______________________
(b) Reports On Form 8
The following reports on Form 8-K were filed during the thirteen weeks
ended September 30, 2000.
(1) Report on Form 8-K dated July 3, 2000, filed July 3, 2000,
announcing staffing reductions to target cost savings.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY MEDIA, INC.
By: /s/ Barnet J. Cohen
----------------------------
Barnet J. Cohen
Chairman of the Board and Acting
Chief Executive Officer
Date: November 14, 2000
By: /s/ James P. Miller
----------------------------
James P. Miller
President and Chief Operating Officer
and Acting Chief Financial Officer
Date: November 14, 2000
12