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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended April 1, 2000 Commission File Number 000-25617
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OR
[_]Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
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Valley Media, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 94-2556440
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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1280 Santa Anita Court, Woodland, California 95776
(Address of principal executive offices)
Registrant's telephone number, including area code: (530) 661-6600
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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. [_]
As of June 2, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $12,681,237. For purposes of this
information, the outstanding shares of Common Stock owned by directors and
executive officers of the registrant were deemed to be shares of Common Stock
held by affiliates.
The number of shares of Common Stock outstanding as of June 2, 2000, were
8,453,291 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement to be filed pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
(April 1, 2000) are incorporated by reference.
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This report on Form 10-K, including the discussion in Part I, Item 1
"Business" and Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operation," contains forward-looking
statements that involve risks and uncertainties. Such forward-looking
statements include, among others, those statements including the words
"expects," "anticipates," "intends," "believes" and similar language. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of a variety of factors, including those
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Operating Results."
PART I
ITEM 1. Business
Valley Media, Inc. is a full-line distributor of music and video
entertainment products. We distribute product to retailers operating
traditional storefronts as well as music and video Internet retailers. With our
advanced systems, technology and proprietary databases, we provide value-added
services to our customers and suppliers, and enable music and video suppliers
to more effectively reach a fragmented retail market. Valley is a Delaware
corporation.
We have taken major steps to reposition our e-Fulfillment (formerly New
Media) business for a future that we believe will blend physical and digital
fulfillment. The biggest step was the April 9, 2000 transfer of certain of our
Internet related assets to amplified.com, Inc. in return for 50% of the
outstanding shares of amplified.com. Additionally, in December 1999, we entered
into an agreement with Loudeye Technologies, Inc. (NASDAQ: LOUD) to launch a
music sampling service. We subsequently assigned our rights under this
agreement to amplified.com. In connection with that transaction, Valley
acquired 487,500 shares of Loudeye common stock through a cashless warrant
exercise.
We have developed our proprietary databases, as well as our distribution and
data collection systems, to handle a "deep catalog" of approximately 250,000
stock keeping units, or skus. In addition, we have developed fulfillment
centers to ship very small orders directly to customers ordering via on-line
music retailers, as well as large, complex orders from traditional retailers.
We believe we differentiate ourselves by our commitment to a deep selection of
music and video skus and our ability to offer value-added systems, data and
other capabilities.
We have benefited from retailers' efforts to outsource certain of their
distribution and purchasing functions. The music and video industries are
offering, and consumers are demanding, a growing product selection from
thousands of individual studios and labels. This demand for a wider variety of
titles has been particularly illustrated by Internet retailers, who
differentiate themselves from traditional stores by advertising the breadth of
their selections. It is inefficient for most retailers to manage the large
number of supplier relationships necessary to satisfy their customers. As a
result, retailers turn to product aggregators such as Valley to simplify their
own operations and reduce costs.
Over the past two years, we have gone through a number of transitions. In
fiscal 1999, we added a 330,000 square foot distribution center in Louisville,
Kentucky, which we refer to as the LDC. In fiscal 2000, we relocated our
Woodland California distribution center, which we refer to as the WDC, from a
110,000 square foot facility to a larger, more automated 260,000 square foot
facility.
We operate through three primary business groups: Full-line Distribution, e-
Fulfillment and Independent Distribution.
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Full-line Distribution
General
We are the largest full-line music distributor, one of the largest sell-
through video and DVD distributors and among the largest video rental
distributors. In fiscal 2000, we distributed music and videos to more than
6,300 traditional retailers operating over 39,000 traditional storefronts.
Working with Valley, retailers can increase sales by improving in-stock
position while reducing inventory, warehousing and other costs. Suppliers
benefit from Valley's ability to distribute their products through the full
array of retail channels.
Operations and Technology
By combining information systems and customized distribution center
automation equipment, we have developed efficient and advanced distribution
capabilities. These capabilities enable us to:
. maintain a highly reliable inventory management system
. increase accuracy and speed of order fulfillment
. provide other value-added services to both suppliers and retailers.
Valley has designed its systems to be scaleable and has developed software
that can handle multiple warehouses and sorters.
Our inventory system electronically accounts for, manages and maximizes
warehouse placement of millions of units of inventory in our distribution
centers. To maximize distribution center space utilization, incoming products
are scanned and located randomly within the center utilizing best-fit logic
that considers approximately 420,000 distinct potential locations in a single
distribution center. This logic considers, among other things, the size of the
incoming product and shipment as well as available locations within the center.
We utilize customized inventory replenishment software and purchasing
systems to adjust our inventory levels in response to changing demand. Our
integrated systems evaluate daily inventory levels on each sku and make
recommendations regarding optimal order replenishment based on several factors,
including historical seasonal demand, supplier discounts, payment terms, return
dates, supplier characteristics, carrying costs and warehouse processing costs.
Our knowledgeable product managers manually order new releases and adjust the
purchasing system's recommendations to accommodate volatile-demand skus.
Our high-capacity automated sorting equipment and order processing systems
in our Woodland and Louisville distribution centers reduce labor costs and
freight upgrade expenses, increase peak capacity and accuracy and enable us to
provide automated value-added services. Customer orders are picked in batches
of up to 90 or more, each batch representing one trip through the distribution
center. These batches are then placed in a sorting device, which uses high-
speed laser scanners to separate, sticker and stack individual store orders at
average speeds of 7,000 units per hour.
Our information systems are an integral part of our operations. We are
constantly upgrading these systems and developing new applications. Our primary
information system is currently utilized for our music and video operations in
our Woodland and Louisville distribution centers. We use an ancillary
information system for our video distribution facilities in Massachusetts and
Pennsylvania. In addition, in fiscal 2000 we successfully integrated vendor
managed inventory functionality into our primary business system.
Deep Catalog
We differentiate ourselves with both retailers and suppliers by stocking one
of the deepest catalogs of music and video skus of any full-line distributor.
Currently, we have an inventory of approximately 250,000 skus, approximately
42,000 of which are video skus. By managing deep catalog for many retailers, we
believe we can optimize the trade-off between availability and inventory
levels.
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Marketing and stocking lower volume skus is a key competitive advantage in
developing and maintaining relationships with retailers and suppliers. The
margins attainable on lower volume, deep catalog skus, such as older or less
popular titles, are generally higher than the hits. Retailers that do not have
access to these skus miss the opportunity for higher margin sales. Once a
retailer has retained Valley as its supplier for lower volume skus, it is often
convenient for that retailer to satisfy other product needs through Valley as
well.
Proprietary Data
Besides serving as the foundation of our traditional distribution
operations, our systems also accurately capture, compile and update product
data as inventory moves in and out of our fulfillment centers. We utilize this
data collection capability to maintain our proprietary audiofile database,
which we license to customers for a fee or as part of a package of services.
Audiofile is licensed to Internet customers through amplified.com. It contains
over 30 distinct fields of information (e.g., genre, title, suggested retail
price, catalog code numbers, first sales date, vendor return dates and parental
advisory information), which can be sorted and analyzed by retailers to help
them better manage their purchasing and inventory requirements and service
their customers.
E-Fulfillment
General
Over the past six years, e-Fulfillment has been our fastest growing business
group. Net sales grew from $1.6 million in fiscal 1995 to $275.9 million in
fiscal 2000.
Our e-Fulfillment group provides services and products to Internet
retailers. The group is focused on serving Internet retailers of music and
video with product, data and value added services such as direct-to-consumer
fulfillment, consumer invoicing, credit card processing and gift-wrapping. Our
e-Fulfillment systems are also designed to manage inventory that we do not own.
We provide third party fulfillment services to our customers allowing them to
offer product that we do not normally stock.
Most e-tailers outsource their inventory procurement and management
functions and stock little or no product of their own. Other customers,
including Amazon.com, fulfill their own orders, and we provide product to their
internal distribution centers on a just-in-time basis. E-Fulfillment currently
has more than 100 customers, including specialty Internet retailers, such as
Amazon.com, Buy.com, CDNOW, Online, Inc., and Family Wonder, Inc., and
traditional retailers adding on-line capabilities.
The infrastructure, market channels and supplier relationships developed
through our core Full-line Distribution business group are the foundation of
our e-Fulfillment group. We believe our first-to-market position and strategic
emphasis on data, catalog depth and systems enhancements have enabled us to
maintain our leadership position.
Most of our recent growth has come from the overall growth of the segment as
well as the acquisition of new customers from competitors. For our e-
Fulfillment business future sales growth depends on segment growth, our
customers' market share and the percentage of their business which we serve. In
this segment, one of our largest customers, CDNOW, recently announced that it
is experiencing significant financial difficulties. (See Factors Affecting
Operating Results.) In addition our largest e-Fulfillment customer, Amazon.com,
has been steadily increasing the percentage of music and video product it
purchases directly from labels and studios and decreasing the percentage of
such product it purchases from Valley.
Amplified.com
On April 9, 2000, we completed a transaction with amplified.com that has
repositioned our e-Fulfillment business. Amplified.com has been a pioneer in
the developing business of digital distribution of music to retailers for their
ultimate resale to their customers and a leader in custom CD production and
digital rights
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management services. Valley and amplified.com recognized synergies and
opportunities available from the combination of amplified.com's digital
distribution capabilities and Valley's extensive relationships with both labels
and studios and with music and video retailers. Valley believes that the
potential exists for creating greater value from its e-Fulfillment business by
establishing a separate entity. The transaction combined certain of Valley's
Internet related assets with amplified.com in a new company, also called
amplified.com, with Valley obtaining a 50% ownership interest in amplified.com.
As a result of this transaction, amplified.com will assume exclusive
responsibility for providing marketing and sales support services to Valley's
existing music and video e-Commerce customers, and for further development of
database products. Amplified.com will also be responsible for attracting new
music and video e-Commerce customers. Valley will continue to sell product and
provide back-end order fulfillment services for its existing e-Fulfillment
customers as well as for new customers obtained by amplified.com.
As part of the transaction, approximately 50 Valley employees who formerly
performed the marketing and sales support functions or who worked on data
products for Valley's e-Fulfillment business have now become amplified.com
employees. Amplified.com will now be responsible for marketing Valley's music
and video fulfillment services in the e-Commerce marketplace. Amplified.com
intends to market these services in combination with the full range of its
offerings, which include:
. complete digital distribution services
. digital rights to a significant catalog (in multiple-format downloads)
. custom CD compilations
. Digital rights management services (multiple technologies)
. Fulfillment services for online retail of CDs, DVDs and other
entertainment products
. "Just-In-Time Manufacturing" of CDs.
Deep Catalog
Our deep catalog commitment enables Internet retailers to offer their
customers fast, reliable access to an extensive selection of product without
having to take possession of inventory. Furthermore, industry sources have
observed that Internet retail customers buy a higher proportion of deep catalog
product relative to hit titles than do shoppers at traditional storefronts.
Internet retailers rely on our extensive inventory of product offerings to
supply the breadth of product selection that Internet shoppers demand.
Proprietary Data
Most Internet retailers served by e-Fulfillment rely on our proprietary
product database to support their product information systems as well as the
ordering systems used by their customers. We believe our database is a key
building block for Internet retailers' web sites because it would be
prohibitively expensive for most retailers to build such a database
independently. We have licensed this database to amplified.com for use with
Internet retailers and through amplified.com we intend to continue adding
additional data products and enhancements to strengthen our role as an
essential partner of Internet retailers, including a database that contains
detailed customer-oriented information on all DVD products.
Operations
Many Internet retailers require that their fulfillment partner fill a very
large number of small orders quickly and accurately and ship them in the name
of such retailers at the lowest cost possible. We developed e-Fulfillment's
fulfillment capabilities over a four-year period and incorporated the advanced
systems and equipment we utilize to support our Full-line Distribution business
group. Our e-Fulfillment systems are scaleable to support future growth.
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Independent Distribution
General
Our Independent Distribution business group is called Distribution North
America, or DNA. DNA represents approximately 150 independent suppliers and
their labels in the United States. DNA assumes retail and wholesale marketing
responsibilities for these labels and allows them to focus on their creative
operations. DNA has marketed and distributed gold and platinum titles as well
as titles by Grammy winning artists.
In seeking retail and wholesale marketing services, independent labels may
choose to work with distribution companies owned by major labels. However, many
independent labels select independent distributors instead of a distribution
company owned by a major label because:
. the label is too small to work with the major labels
. the label's product mix does not match the major labels' emphasis on
high volume and low sku count
. the labels and their artists wish to maintain greater control over their
distribution than the major labels allow
. labels are concerned that the major labels will not provide adequate
priority to their titles, which may sell in lower volume than the major
labels' proprietary hit titles
. labels may feature established artists who do not wish to pay the fees
charged by the major labels for consumer marketing services
. labels may have sufficient resources themselves to support consumer
marketing efforts, thereby not needing the press and publicity resources
of a major label.
DNA serves the special needs of each client label and assists such labels in
maximizing their market penetration. In promoting a label's products among
retailers and full-line distributors, DNA utilizes its broad understanding of
industry activities and its intimate knowledge of the music wholesale and
retail marketplaces, developed through close relationships with product
managers, operational management and marketing coordinators of many music
retailers. In addition, DNA coordinates its sales and marketing efforts with
retailers through promotion and publicity of the labels themselves.
DNA complements our core Full-line Distribution and e-Fulfillment businesses
in a number of ways:
. DNA sales increase the volume that passes through Valley's facilities.
. Cross-selling DNA product through our Full-line Distribution and e-
Fulfillment groups enables us to capture both the Independent
Distribution and wholesale margins on a single sale.
. Seeking out and promoting new and emerging labels helps us to better
understand the trends in the emerging music industry and adjust our
Full-line Distribution and e-Fulfillment businesses accordingly.
Valley Entertainment
In July 1999, Valley, Valley Entertainment, Inc. ("VE"), and Barnet J.
Cohen, Valley's founder, largest stockholder, Chairman of the Board and acting
Chief Executive Officer, entered into a Contribution Agreement whereby Mr.
Cohen contributed $1,320,000 in cash in exchange for 66 percent of VE's
outstanding common stock. Other individuals contributed $300,000 in cash in
exchange for a total of 15 percent of VE's outstanding common stock. The
Company assigned the net assets of its Valley Entertainment division to VE in
exchange for a cash payment of $277,000 and 19 percent of VE's outstanding
common stock.
Sales and Marketing
Strategies
Key to our marketing strategy is the development and maintenance of customer
relationships with music and video retailers. This strategy is implemented by a
sales and marketing staff of more than 300 people. We organize our sales
efforts around targeted customer groups. Generally, sales to independently
owned stores and
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small chains are serviced by designated commissioned sales representatives.
Smaller independent accounts are serviced by a team of music and video
specialists. We have established account management teams to work with the
large retail chains, which we refer to as national accounts. In connection with
the amplified.com transaction, we assigned the e-Fulfillment sales and
marketing function exclusively to amplified.com. E-Fulfillment sales are
conducted through account management teams, now employed by amplified.com, that
are equipped to meet the special needs of on-line retailers. Our senior
management also participates actively in sales and marketing activities.
Our marketing strategy employs the following customized programs and
services to strengthen the partnerships we have developed with our customers
and suppliers:
. customized marketing initiatives
. new market development
. advanced vendor managed inventory services.
Initiatives
We employ a number of marketing initiatives to build demand for music and
video, both among retailers and end consumers. These initiatives are generally
funded by our suppliers to promote their products among retailers and
consumers. Marketing initiatives to the music and video retail community
include the following:
. financial incentives, such as product discounts and advertising support
. in-house publications and our redesigned web site, which contain
information that helps retailers stay abreast of current industry
developments
. Schwann publications, which are the oldest and among the most popular
music reference guides in the United States.
Additionally, we have designed marketing programs to increase demand for the
products of Valley's suppliers and customers. These include:
. co-op advertising support from suppliers for print and electronic media
advertisements
. listening stations that we place in certain stores, allowing consumers
to select and listen to songs from featured artists
. point of purchase displays
. video promotions containing short descriptions and footage of selected
current and upcoming video releases, which retailers can play on
monitors throughout their stores.
New Market Development
Our special markets group develops new markets and channels for music and
video product. Special markets include non-music and non-video retail stores,
libraries, insurance replacement, and public television and radio stations.
Vendor Managed Inventory Services
We operate an advanced vendor managed inventory service, commonly referred
to as racking, for retailers that wish to outsource a substantial portion of
the inventory management responsibility for their music and video products.
Racking is typically provided to mass merchandise, drug, toy, grocery or other
stores not solely dedicated to music or video. This service involves managing
selection and manually stocking inventory in the retailers' dedicated space.
Racking requires technological sophistication to optimize product selection and
quantities for each storefront and generally entails the management of a
substantially lower sku count than is required of a full-line distributor. We
significantly enhanced our vendor managed inventory capabilities during fiscal
2000.
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Customers
Given the diversity in the size and operating philosophies of our customers,
we provide Full-line Distribution and e-Fulfillment services under a range of
programs designed to best meet each customer's needs. We describe below our
principal dealings with our Full-line Distribution and e-Fulfillment customers.
Independent Music Retailers
Independent music retailers typically do not have sufficient volume to deal
directly with the labels and studios, and therefore are supplied by a small
number of full-line distributors. For these customers, we are usually the
primary or secondary supply source for most or all of their inventory needs.
National Music Retailers
We have developed different programs to capture available opportunities to
provide product to national music retail customers. These larger retailers rely
on Valley to provide a range of product, from virtually all of their music
selections to certain designated categories of product. They use our special
order program to fill customer orders quickly for products that the retailer
has elected not to stock. Using our emergency fill program, the retailer can
obtain product on a fast turnaround basis. Through our rapid replenishment
program, retailers can outsource some or all of their distribution needs.
Sell-Through Video Retailers
Our national video chain customers primarily use us to fill their needs for
sell-through video. Some of these stores buy product from us that is produced
by studios with which the stores have not established a supplier relationship.
Others may only carry video on a special promotional basis, such as during
holiday periods or to feature a selected hit, and rely on us to supply these
promotions. Other customers use our racking services, where we select product
mix and provide inventory management and in-store servicing.
Rental Video Retailers
We sell video to independent video rental stores as well as chains. For the
independent video stores, we typically serve as the primary supplier. For the
video rental chains, we typically serve as a secondary supplier.
In the past three years, studios and full-line distributors have initiated
programs to increase the quantity of copies of popular video titles stocked by
retailers. These programs include providing retailers the opportunity to avoid
purchasing product by sharing their rental revenue with the studio or full-line
distributor. Evidence suggests that these programs have accelerated a shift of
market share away from independent video rental stores and small chains in
favor of the larger chains. Because full-line distributors generally play a
larger role with independent retailers than with larger chains, we believe that
the market may continue to contract for full-line distribution of video rental
product.
E-Fulfillment
Our agreement with amplified.com contemplates that existing Valley Media
customers will transition to amplified.com upon expiration of their current
contracts. We expect that new customers will contract directly with
amplified.com. Valley will continue to be the provider of product and services
to amplified.com in order to service these customers. Valley, through
amplified.com, provides Internet retailers with tailored packages of services
from which they can select to meet their individual needs. These services range
from the provision of product data and order fulfillment to complete turn-key
packages.
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Relationships
Set forth below are some of our largest or fastest growing customers for
fiscal 2000.
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Amazon.com Family Wonder, Inc.
Best Buy Fry's Electronics, Inc.
Borders Rite-Aid
Buy.com Toys R Us
CDNOW Transworld Entertainment
CVS Wherehouse Entertainment
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We believe customer service is an important factor in maintaining and
expanding our customer base. We have developed a sophisticated customer service
department with an experienced staff of approximately 20 customer service and
support professionals, and offer our customers toll-free telephone and
facsimile access. We have automated certain of the tools used by our customer
service and support team members. We intend to actively pursue enhancements and
further automate our customer service and support operations.
As is typical of the music and video businesses, we generally do not have
long term purchase and sale contracts with most of our Full-line Distribution
customers. In general, we deal with these customers on a purchase order basis.
We permit our customers to return music and video product subject to certain
time and quantity limitations that vary based on a number of factors, including
the product, price and quantity ordered.
Our e-Fulfillment business group has fulfillment agreements with most of its
customers. These agreements generally have terms of two or more years and
contain provisions regarding the level of exclusivity of the retailer's
relationship with us and other negotiated terms. The agreements generally do
not contain minimum volume requirements or other terms establishing required
purchase and sale quantities.
DNA's distribution agreements with its labels specify such matters as
payment terms, DNA's level of exclusivity in distributing the product, and
inventory ownership and management. These contracts generally do not specify
any particular volume of skus that will be purchased or sold.
Suppliers
Labels
Music and video entertainment products we sell are produced and supplied by
a complex network of labels, studios and distribution companies. Five large
record companies and their distribution companies, commonly referred to as the
major labels, and six large film studios and their distribution companies,
commonly referred to as the major studios, produce and supply products that
represent a majority of the sales in the music and video industries. The major
labels (and their respective distribution groups) are:
. Time Warner Inc. (WEA)
. The Seagram Company, Ltd. (Universal Music and Video Distribution)
. Bertelsmann AG (BMG Distribution)
. Sony Corp. (Sony Music Distributors)
. Thorne-EMI plc (EMI Distribution).
Studios
The major studios (and their respective distribution groups) are:
. The Walt Disney Company (Buena Vista Home Entertainment)
. Time Warner Inc. (Warner Home Video)
. Sony Corp. (Columbia Tri-Star Home Video)
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. News Corporation (Twentieth Century Fox Home Entertainment)
. Viacom Inc. (Paramount Home Video)
. The Seagram Company, Ltd. (Universal Music and Video Distribution).
The balance of music and video is produced by thousands of independent
labels and studios that either sell their product directly or, in the case of
music, distribute through one of the major labels or an independent
distribution company, such as DNA.
Relationships
We purchase music and video product from each of the majors and from the
leading independent studios and labels. We believe we have good relationships
with each of the majors as well as with the leading independents.
The majors offer various financial incentives to distributors and retailers
that purchase their product, including timely payment discounts and advertising
revenues and allowances. In addition, extended payment terms, discounts and
volume rebates are sometimes available under seasonal and promotional plans.
Payment terms vary considerably among the independent labels and independent
studios. We are often able to negotiate favorable pricing, advertising and
discount programs with these suppliers. Consistent with other music and video
distributors, we do not have any long-term contracts with suppliers. We
purchase our inventory from our suppliers through purchase orders. However, DNA
maintains contracts with most of its suppliers. DNA supplier contracts
typically range in length from one to three years, with varied payment terms.
Competitors
General
The full-line distribution of music and video is an intensely competitive
business. We face competition from national, regional and local full-line
distributors, vendor managed inventory firms, and from the majors and
independent distribution companies who sell directly to retailers.
Full-line Distribution and e-Fulfillment
We believe the primary competitive factors in the distribution of music for
our Full-line Distribution and e-Fulfillment business groups are:
. inventory breadth
. fulfillment rate
. reliability
. accuracy, completeness and depth of data
. price
. delivery time
. information systems and electronic data interchange capabilities
. customer service
. vendor-managed inventory capabilities
. advertising support
. financial strength
. data products and services
. other value added services.
These factors are also the primary competitive factors in video, but because
video is more "hit" driven than music, with fewer skus and less demand for deep
catalog product, price is a relatively more important competitive factor.
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The majors and the independent distribution companies sell substantial
amounts of their products directly to retailers but to date appear not to have
focused, to the same extent we have, on fulfilling the needs of smaller
independent stores or on providing value-added services.
Several of our retail chain customers have chosen, from time to time, to buy
a substantial volume of product they had been purchasing through us directly
from the majors or the independent distribution companies. To the extent our
customers increase their direct purchasing from the majors or the independent
distribution companies, our business, financial condition and results of
operations could be adversely affected.
In addition to our largest direct competitor in full-line music distribution
and e-Fulfillment, Alliance Entertainment Corp., we face competition from
dozens of other full-line distributors. Some of these competitors generally
sell to retailers nationwide and others are particularly active in their
respective geographic regions or in certain niche areas. We believe our fiscal
2000 net sales of music to our Full-line Distribution and e-Fulfillment
customers were greater than those of any of our full-line distribution
competitors. We believe we compete favorably in regard to each of the leading
competitive factors in music distribution relative to other full-line
distributors.
In our full-line video distribution and e-Fulfillment businesses, we compete
with six companies of greater or comparable size, the largest of which, Ingram
Entertainment, Inc., has significantly greater sales than we have. We believe
we are one of the two largest full-line distributors of video priced for sell-
through.
In music and video full-line distribution, we also compete with two national
vendor managed inventory firms, Anderson Merchandising and Handleman Company,
as well as several smaller regional firms. Vendor managed inventory firms
provide their customers with inventory selection services for a limited
selection of high-volume product, management services and in-store servicing in
addition to order fulfillment. Such services involve more direct physical
services for the retailer, are more labor intensive than wholesale distribution
and generally involve higher margins. In fiscal 2000 we increased our focus on
our vendor managed inventory program.
Record clubs also act as retailers for many labels. Record clubs license
select titles directly from the major labels and independent labels and sell
them by mail or Internet directly to consumers.
The delivery of music and video is subject to changes in market conditions
and to technological changes that can affect competitive conditions and give
rise to new forms of competition. Our business, financial condition and results
of operations could be adversely affected if such changes decrease suppliers'
or retailers' reliance on full-line distributors.
Independent Distribution
There are a number of independent music distribution companies, certain of
which may conduct larger distribution operations than DNA. Several of the major
labels operate their own independent distribution arms, which also compete with
DNA. DNA faces additional competition from a number of smaller and niche
independent distribution companies. As a label or artist gains in popularity,
DNA may face new competition from the major labels to retain distribution
rights for that label or artist. The principal competitive factors in
independent music distribution are:
. effectiveness in marketing and selling independent label product
. efficiency in managing distribution logistics
. price
. size and experience of sales staff
. financial strength
. industry knowledge and relationships
. number and prestige of labels represented.
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ITEM 2. Properties
We lease all of the sites, including the buildings and improvements, where
our offices and distribution centers are located. Our business is operated
principally out of our executive offices and the WDC, both located in Woodland,
California, and the LDC. The lease for our corporate headquarters expires in
2003. We relocated the WDC to a 260,000 square foot facility during the first
half of fiscal 2000 and leased the new facility. Our lease on the WDC expires
in 2009. The LDC building consists of approximately 330,000 square feet. Our
lease on the LDC expires in 2008. We also maintain smaller sales, distribution
or administrative offices in California, Connecticut, Massachusetts, Minnesota,
New Jersey, New York and Pennsylvania.
ITEM 3. Legal Proceedings
We are subject to various legal proceedings that arise in the ordinary
course of business. While the outcome of our pending legal proceedings cannot
be predicted with certainty, we believe that none of such proceedings,
individually or in the aggregate, will have a material adverse effect on our
business or financial condition.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
None.
ITEM 4A. Executive Officers of the Registrant
Our executive officers are listed below, together with brief accounts of
their business experience and certain other information.
<TABLE>
<CAPTION>
Name Age Position and Office
---- --- -------------------
<C> <C> <S>
Barnet J. Cohen..................... 53 Chairman of the Board and Acting Chief
Executive Officer
Peter M. Anderson................... 46 Senior Vice President, Sales and Marketing
Melanie Cullen...................... Senior Vice President and Chief Operating
48 Officer
Paige S. Dickow..................... 40 Senior Vice President, Administration and
Organization Effectiveness
John Kordic......................... 40 Senior Vice President, Operations
</TABLE>
Barnet J. Cohen is the founder of Valley and has been Chairman of the Board
from its formation. He served as Chief Executive Officer from March 1979 until
December 1997, and has served as acting Chief Executive Officer since June
2000. Mr. Cohen is the President and CEO of Valley Entertainment, Inc. Prior to
founding Valley, he owned and operated retail record stores. Mr. Cohen is Past-
Chairman of the Board of Directors of NARM. He is a graduate of Antioch College
and received an Executive M.B.A. from Harvard Business School.
Peter M. Anderson has served as Valley's Senior Vice President, Sales and
Marketing since March 2000. Prior to joining Valley, Mr. Anderson served as
Senior Vice President of Sales for Atlantic Records from June, 1993 to March
2000. Mr. Anderson is a graduate of Bethel College with a B.A. in Political
Science and History.
Melanie Cullen has served as Valley's Chief Operating Officer since January
2000, served as Senior Vice President, Information Services from March 1998 to
January 2000, and served as Vice President, Information Systems from February
1995 to March 1998. Ms. Cullen is a graduate of California State University,
Hayward with a B.S. in Business Administration, and received an M.B.A. from
Stanford University.
Paige S. Dickow has served as Valley's Senior Vice President, Administration
and Organization Effectiveness since January 2000, served as Senior Vice
President, Human Resources from March 1998 to
11
<PAGE>
December 1999, and served as Vice President, Human Resources, from February
1997 to March 1998. Prior to joining Valley, Ms. Dickow served as a consultant
with Hewitt Associates from August 1994 to February 1997. Ms. Dickow is a
graduate of the University of Georgia with a B.B.A. in Accounting.
John Kordic has served as Valley's Senior Vice President, Operations since
March 1998 and served as Vice President, Operations from February 1995 to March
1998. Mr. Kordic is a graduate of the University of California, Berkeley, with
a B.S. in Resource Economics.
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters
<TABLE>
<CAPTION>
Fiscal 2000 High Low
----------- ------- -------
<S> <C> <C>
First Quarter........... $40.000 $13.688
Second Quarter.......... 17.938 11.125
Third Quarter........... 14.094 6.625
Fourth Quarter.......... 9.375 5.250
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 High Low
----------- ------- -------
<S> <C> <C>
Fourth Quarter.......... $31.875 $20.000
</TABLE>
Our common stock has been listed for sale on the Nasdaq National Market
under the symbol "VMIX" since our initial public offering on March 26, 1999. As
of June 2, 2000, we had 80 shareholders of record of our common stock, although
there were a larger number of beneficial holders. The preceding table sets
forth the high and low sales prices as reported on the Nasdaq stock market.
The holders of common stock are entitled to share ratably in any dividends
we declare on the common stock. We did not declare any cash dividends on the
common stock during fiscal 1999 or 2000 and do not anticipate paying any
dividends in the foreseeable future. In addition, our credit facility contains
certain limitations on our ability to pay cash dividends.
12
<PAGE>
ITEM 6. Selected Financial Data
Our fiscal year is a 52 or 53 week period ending on the Saturday nearest to
March 31. Fiscal 1999 contained a 53-week period while the 2000, 1998, 1997 and
1996 fiscal years each contained a 52-week period.
The fiscal years ending after May 20, 1997 include results of operations of
the video business we acquired at that time. The Supplemental Operating Data
includes earnings before interest, income taxes, depreciation and amortization,
or EBITDA, for the periods presented. We believe that EBITDA is a useful
measure of our financial performance. However, EBITDA should not be construed
as an alternative to operating income, net income or cash flows from operations
as determined in accordance with generally accepted accounting principles.
Further, our calculation of EBITDA may be different from the calculation used
by other companies, which may limit comparability.
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Dollars in thousands,
except per share data
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Net sales............... $ 891,526 $ 888,966 $ 583,492 $ 199,231 $ 156,557
Cost of goods sold...... 793,589 791,154 516,627 175,706 137,847
---------- ---------- ---------- ---------- ----------
Gross profit............ 97,937 97,812 66,865 23,525 18,710
Selling, general and
administrative expenses
....................... 91,417 78,059 55,948 20,552 14,033
---------- ---------- ---------- ---------- ----------
Operating income........ 6,250 19,753 10,917 2,973 4,677
Equity in net loss of
joint venture.......... -- -- -- 207 903
Interest expense........ 14,122 10,928 6,627 1,745 1,305
---------- ---------- ---------- ---------- ----------
Income (loss) before
taxes.................. (7,602) 8,825 4,290 1,021 2,469
Income taxes (benefit).. (2,998) 3,673 1,731 410 1,016
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary loss..... (4,604) 5,152 2,559 611 1,453
Extraordinary loss (net
of income taxes of
$477).................. -- (723)(1) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (4,604) $ 4,429 $ 2,559 $ 611 $ 1,453
========== ========== ========== ========== ==========
Net income (loss) per
share:
Basic:
Income (loss) before
extraordinary loss.... $ (0.54) $ 1.04 $ 0.53 $ 0.13 $ 0.29
Extraordinary loss..... -- (0.15)(1) -- -- --
---------- ---------- ---------- ---------- ----------
Basic net income (loss)
per share............. $ (0.54) $ 0.89 $ 0.53 $ 0.13 $ 0.29
========== ========== ========== ========== ==========
Diluted:
Income (loss) before
extraordinary loss.... $ (0.54) $ 0.89 $ 0.49 $ 0.12 $ 0.28
Extraordinary loss..... -- (0.12)(1) -- -- --
---------- ---------- ---------- ---------- ----------
Diluted net income
(loss) per share...... $ (0.54) $ 0.77 $ 0.49 $ 0.12 $ 0.28
========== ========== ========== ========== ==========
Weighted average shares
used in the
calculation:
Basic.................. 8,455,371 4,950,753 4,791,864 4,797,193 4,965,375
Diluted................ 8,455,371 5,781,840 5,263,870 5,131,341 5,224,040
Supplemental Operating
Data
EBITDA.................. $ 13,711 $ 25,383 $ 15,030 $ 4,615 $ 5,070
Net cash provided by
(used in) operating
activities............. (28,993) (116,261) (13,851) 12,855 (5,460)
Net cash used in
investing activities... (11,154) (9,570) (37,554) (12,330) (1,762)
Net cash provided by
(used in) financing
activities............. 38,988 126,870 51,489 (359) 7,290
<CAPTION>
At Fiscal Year End
-------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
Balance sheet data
Working capital
(deficit).............. $ 50,213 $ 35,607 $ (17,310) $ (200) $ 4,397
Total assets............ 434,078 430,725 244,298 94,591 58,114
Total long-term
obligations............ 7,861 3,918 3,166 2,257 3,157
Total short-term
borrowings............. 185,756 150,635 75,715 21,705 20,280
Stockholders' equity.... 70,662 65,887 10,515 7,773 7,716
</TABLE>
--------
(1) Represents an extraordinary loss comprised of termination fees and write-
off of prepaid financing costs as a result of the termination of a prior
line of credit agreement.
13
<PAGE>
ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion and analysis should be read in conjunction with
Item 6, "Selected Financial Data," and our consolidated financial statements,
and the respective notes thereto included elsewhere in this Annual Report on
Form 10-K.
Overview
We have been engaged in the full-line distribution of music since 1985 and
expanded our operations to include the full-line distribution of video with the
acquisition of substantially all of the assets of Star Video Entertainment, L.P
(Star) in May 1997. In addition to our core Full-line Distribution business
group, we conduct our music and video distribution business through two other
business groups, e-Fulfillment and Independent Distribution. Our e-Fulfillment
business group provides product, data and direct-to-consumer fulfillment
services for Internet retailers and currently represents our fastest growing
business group. We generate most of our revenue from the sale of music and
video. We also receive revenue from providing certain services to customers
such as direct-to-consumer fulfillment and licensing our proprietary databases
of product information. Net sales include direct-to-consumer fulfillment fees,
sales of publications, fees for applying retailers' customized stickers, fees
for preparation of videos for rental and restocking fees. Our direct-to-
consumer fulfillment customers reimburse us for our shipping costs. Returns
from our customers and to our suppliers occur in the ordinary course of our
business. Accordingly, sales and cost of goods sold are recorded net of
estimated returns and allowances.
Our fiscal year is a 52 or 53 week period ending on the Saturday nearest to
March 31. Our three most recently completed fiscal years ended April 1, 2000,
April 3, 1999 and March 28, 1998. Fiscal 2000 and 1998 each contained a 52-week
period while fiscal 1999 contained a 53-week period. The following table sets
forth net sales of each of our three principal business groups for fiscal 2000,
1999 and 1998. Intercompany sales consist primarily of sales of music by
Independent Distribution to Full-line Distribution and e-Fulfillment.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
2000 1999 1998
-------- -------- --------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Full-line Distribution...... $570,299 $668,385 $520,465
e-Fulfillment............... 275,945 182,734 30,316
Independent Distribution.... 62,212 55,048 45,685
Eliminations................ (16,930) (17,201) (12,974)
-------- -------- --------
Total net sales........... $891,526 $888,966 $583,492
======== ======== ========
</TABLE>
The following table sets forth quarterly net sales of each of our three
principal groups for fiscal 2000 and 1999. Intercompany sales consist primarily
of sales of music by the Independent Distribution business group to the Full-
line Distribution and the e-Fulfillment business groups.
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
-------------------------------------- ---------------------------------------
Fourth Third Second First Fourth (1) Third Second First
-------- -------- -------- -------- ---------- -------- -------- --------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full-line Distribution.. $128,523 $193,121 $132,399 $116,256 $178,739 $214,733 $150,117 $124,796
e-Fulfillment........... 68,899 91,174 56,727 59,145 69,722 61,881 29,481 21,650
Independent
Distribution........... 13,342 15,511 19,368 13,991 14,022 15,191 13,252 12,583
Eliminations............ (4,704) (5,292) (3,308) (3,626) (4,619) (4,054) (3,872) (4,656)
-------- -------- -------- -------- -------- -------- -------- --------
Total net sales........ $206,060 $294,514 $205,186 $185,766 $257,864 $287,751 $188,978 $154,373
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
--------
(1) Represents a 14 week quarter
14
<PAGE>
Sales increases and decreases through the periods presented have been due
primarily to changes in unit volumes sold and to a lesser extent, in fiscal
2000, to lower prices in e-Fulfillment. Cost of goods sold is comprised almost
entirely of the average cost of product purchased. Supplier incentives
(including cash discounts, returns incentives, rebates and net advertising
support), freight expense and inventory carrying costs are included in cost of
goods sold, although in the aggregate these items represent a very small
portion of total cost of sales. The mix of product sales among higher margin
sales relative to lower margin sales is the most significant factor affecting
gross margins. The video distribution business typically generates lower gross
margins than the music business. Factors that can contribute to gross margin
fluctuations also include:
. the percentage of e-Fulfillment customers for which we perform direct-
to-consumer fulfillment
. the percentage of lower margin, higher volume hits versus catalog
product sold
. competitive pricing conditions
. the level of purchase discounts, rebates and advertising support
received from our suppliers
. changes in freight costs
Our selling, general and administrative expenses are comprised primarily of
salaries and benefits. They also include rent expense, depreciation,
amortization, bad debt expense and other items. Such expenses have increased in
absolute dollars with our growth in net sales and are expected to continue to
do so.
On April 9, 2000, we completed the amplified.com transaction by which we
contributed certain assets used in our music and video e-Fulfillment business
to amplified.com in exchange for a 50% interest in amplified.com. The book
value of the assets we contributed to amplified.com was nominal. As part of
that transaction, amplified.com will assume exclusive responsibility for
providing marketing and sales support services to our e-Fulfillment customers
and for further development of database products assigned to it. In connection
with the transaction, approximately 50 Valley employees who formerly provided
e-Fulfillment marketing and sales support or who worked on data products became
employees of amplified.com.
We do not expect the amplified.com transaction to have significant effects
on the financial statement presentation of our business. Sales of our music and
video product to e-Fulfillment customers will continue to be reflected in our
net sales. Our marketing and sales costs will be reduced by the costs
associated with the former Valley employees now employed by amplified.com, and
amplified.com will absorb costs associated with some e-Fulfillment development
initiatives that it has assumed. The impact of these savings will be offset by
the marketing fees we will pay to amplified.com, which will reduce our gross
margin.
On December 17, 1999, we entered into an agreement with Loudeye
Technologies, Inc. for Loudeye to provide certain services in connection with
the creation of a digital music sampling service. We received 487,500 shares of
Loudeye common stock through a cashless exercise of a warrant that we received
in connection with the agreement. The warrant was valued at $1,124,000 upon
receipt and was recorded as an investment in marketable securities. The
conversion of the warrant on March 15, 2000 was based upon the fair market
value of Loudeye's common stock on that date, which was $40.00 per share. No
gain was recognized upon conversion. As of April 1, 2000, the investment in
Loudeye was recorded at $17,002,000 (based upon the closing price of Loudeye
common stock, which was $34.875 at such date) and an unrealized gain of
$9,407,000 (net of deferred taxes of $6,471,000) was included in accumulated
other comprehensive income which is a separate component of stockholders'
equity. The value of the investment in Loudeye is subject to market
fluctuations and is required to be marked to market through accumulated other
comprehensive income, net of deferred taxes, at the end of each quarter.
Subsequently, upon sale of the stock, any resulting gain or loss would be
realized, and therefore, recognized in earnings for that period.
15
<PAGE>
Results of Operations
The following discussion is based on the historical results of operations
for fiscal 2000, 1999 and 1998. In May 1997, we entered the video distribution
business by acquiring substantially all of the assets of Star. The acquisition
was accounted for as a purchase and the results of Star are included in our
results of operations from the date of acquisition.
The following table sets forth certain operating data as a percentage of net
sales for fiscal 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Fiscal Years
--------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Gross profit......................................... 11.0 11.0 11.5
Selling, general and administrative expenses......... 10.3 8.8 9.6
Operating income..................................... 0.7 2.2 1.9
Net income (loss).................................... (0.5)% 0.5% 0.4%
Supplemental Data
EBITDA............................................... 1.5% 2.9% 2.6%
</TABLE>
Fiscal 2000 Compared to Fiscal 1999
The year-to-year comparison is impacted by the fact that fiscal 1999 was a
53 week year and fiscal 2000 was a 52 week year.
Our net sales increased $2.5 million, or 0.3%, from $889.0 million in fiscal
1999 to $891.5 million in fiscal 2000.
Full-line Distribution sales decreased $98.1 million, or 15%, from $668.4
million in fiscal 1999 to $570.3 million in fiscal 2000 primarily due to a
weaker video sell through release schedule and decreased sales to Wherehouse
Entertainment partially offset by increases in DVD sales. Sales to Wherehouse
Entertainment decreased approximately $60 million in fiscal 2000 as compared to
fiscal 1999 as a result of the completion of our contract to support the
transition of Blockbuster music stores from Viacom Entertainment to Wherehouse
Entertainment. In addition, fiscal 1999 included net sales of approximately $21
million related to the blockbuster video release of Titanic.
E-Fulfillment sales increased $93.2 million, or 51%, from $182.7 million in
fiscal 1999 to $275.9 million in fiscal 2000 due to sales growth with existing
customers and the addition of new customers. Our top twoe-Fulfillment
customers, Amazon.com and CDNOW, accounted for approximately 79% and 83% of
oure-Fulfillment net sales for fiscal 2000 and 1999, respectively. Net sales to
Amazon.com and CDNOW totaled $125.5 million and $91.3 million, respectively,
during fiscal 2000. Net sales to Amazon.com and CDNOW totaled $76.7 million and
$75.0 million, respectively, during fiscal 1999.
Independent Distribution sales increased $7.2 million, or 13%, from $55.0
million in fiscal 1999 to $62.2 million in fiscal 2000 due to the acquisition
of new labels, primarily Matador, and growth with existing labels, primarily
Fantasy.
Our gross profit increased $0.1 million, from $97.8 million in fiscal 1999
to $97.9 million in fiscal 2000, with gross margin remaining consistent at
11.0%. Gross margins in fiscal 2000 were affected by lower prices established
under new agreements with our two largest e-Fulfillment customers and increased
inventory carrying costs offset by the reimbursement of freight costs by some
of our customers.
Selling, general and administrative expenses increased $13.3 million, or
17%, from $78.1 million in fiscal 1999 to $91.4 million in fiscal 2000. This
increase resulted primarily from costs associated with the relocation of the
WDC and increases in salaries and wages, rent and depreciation and bad debt
expense. Salaries and wages related to higher levels of inventory returns
processing as well as severance costs are expected to
16
<PAGE>
negatively impact our selling, general and administrative expenses in the first
half of fiscal 2001. Selling, general and administrative expenses as a
percentage of sales increased from 8.8% in fiscal 1999 to 10.3% in fiscal 2000.
Interest expense increased $3.2 million, or 29%, from $10.9 million in
fiscal 1999 to $14.1 million in fiscal 2000 primarily because of higher
inventory levels and increased capital investments, which more than offset the
borrowing reduction associated with the initial public offering in late fiscal
1999. The interest expense associated with carrying our inventory increased
substantially as our average inventory position during the year was
substantially higher relative to sales than during recent years. The factors
contributing to our excess inventory level included the WDC relocation, slow
processing of returns and below forecast sales. Partially offsetting these
factors was a reduction of our average interest rate from 8.5% in fiscal 1999
to 8.1% in fiscal 2000.
Our effective tax rate decreased from a provision of 41.6% to a benefit of
39.4% primarily because of the impact of permanent tax differences in a loss
year.
Net income decreased $9.0 million, or 205%, from $4.4 million in fiscal 1999
to a loss of $4.6 million in fiscal 2000.
Fiscal 1999 Compared to Fiscal 1998
Our net sales increased $305.5 million, or 52%, from $583.5 million in
fiscal 1998 to $889.0 million in fiscal 1999.
Full-line Distribution sales increased $147.9 million, or 28%, from $520.5
million in fiscal 1998 to $668.4 million in fiscal 1999. Approximately $60
million of the increase was attributable to the inclusion of extraordinary
volume associated with supporting the transition of Blockbuster music stores
from Viacom Entertainment to Wherehouse Entertainment. In addition,
approximately $32.3 million of the increase was attributable to the inclusion
of twelve months of video sales in fiscal 1999 compared to ten months in fiscal
1998 as a result of the Star acquisition. Finally, the release of the Titanic
video and growth of DVD sales increased video sales in fiscal 1999. Net sales
of Titanic were approximately $21 million in fiscal 1999. The balance of the
growth was attributable to increased sales to existing and new Full-line
Distribution customers.
E-Fulfillment sales increased $152.4 million, or 503%, from $30.3 million in
fiscal 1998 to $182.7 million in fiscal 1999 due to (a) the addition of
Amazon.com as a new customer, (b) increased sales by our on-line customers and
(c) the addition of other new customers.
Independent Distribution sales increased $9.3 million, or 20%, from $45.7
million in fiscal 1998 to $55.0 million in fiscal 1999 due to (a) the
acquisition of new labels, (b) increased sales to our Full-line Distribution
and e-Fulfillment business groups and (c) successful marketing of existing
labels and artists.
Our gross profit increased $30.9 million, or 46%, from $66.9 million in
fiscal 1998 to $97.8 million in fiscal 1999, with gross margin decreasing from
11.5% to 11.0%. Margins decreased primarily because of additional discounts
earned by high volume customers and increased inventory carrying costs.
Selling, general and administrative expenses increased $22.2 million, or
40%, from $55.9 million in fiscal 1998 to $78.1 million in fiscal 1999,
primarily as a result of sales growth, additional costs associated with the
LDC, additional costs associated with a full year of Star operations, costs
associated with closing certain sales offices and distribution facilities and
an increase in our bad debt expense.
Selling, general and administrative expenses for fiscal 1999 also include
the write-off of approximately $600,000 of offering costs and $900,000
associated with the consolidation of certain operations acquired in the
17
<PAGE>
Star acquisition. In addition, we incurred a charge of $316,000 in the fourth
quarter of fiscal 1999 for costs associated with the move of our video
advertising group from New Jersey to California.
Selling, general and administrative expenses declined as a percentage of
sales from 9.6% in fiscal 1998 to 8.8% in fiscal 1999 due primarily to lower
general and administrative costs as a percentage of sales for full-line video
distribution as compared to full-line music distribution as well as our ability
to take advantage of our infrastructure investment to grow full-line music
distribution and e-Fulfillment sales without the requirement of proportionate
increases in our personnel and facilities.
Interest expense increased $4.3 million, or 65%, from $6.6 million in fiscal
1998 to $10.9 million in fiscal 1999 due to (a) growth in working capital
associated largely with increased sales and opening the LDC, (b) the Star
acquisition and (c) investment in systems and in the LDC. Partially offsetting
these factors was a reduction of our average interest rate from 9.9% in 1998 to
8.5% in 1999.
Our effective tax rate increased from 40.3% to 41.6% primarily due to the
write-off of non deductible offering costs partially offset by the true-up of
prior year tax returns.
In May 1998, termination fees from refinancing our revolving credit facility
resulted in an extraordinary loss of $723,000 (net of income taxes).
Net income increased $1.8 million, or 69%, from $2.6 million in fiscal 1998
to $4.4 million in fiscal 1999.
Liquidity and Capital Resources
Our capital requirements relate primarily to working capital. Our working
capital needs are seasonal and typically peak in the third and fourth fiscal
quarters due to increases in inventories purchased for the holiday selling
season and extension of credit terms to certain customers. We maintain
significant inventory levels to fulfill our operating commitment to carry a
deep catalog of music and video skus. Inventories generally can be returned to
suppliers. Historically, we have financed our cash requirements primarily from
short-term bank borrowings, cash from operations and the proceeds from the sale
of our common stock.
Net cash used in operating activities of $29.0 million in fiscal 2000 was
primarily attributable to an increase of $13.6 million in accounts receivable
and a decrease of $43.0 million in accounts payable, partially offset by a
decrease of $27.0 million in inventories. The increase in accounts receivable
was primarily a result of one large customer negotiating to pay on longer
terms. The reductions in accounts payable and inventory were primarily a result
of substantial product returns to vendors in the fourth quarter of fiscal 2000.
Net cash used in operating activities of $116.3 million in fiscal 1999
consisted primarily of increases of $66.4 million in accounts receivable and
$118.2 million in inventories. These were partially offset by an increase in
accounts payable of $51.6 million.
Net cash used in operating activities of $13.9 million in fiscal 1998 was
primarily attributable to increases of $43.5 million in accounts receivable and
$31.4 million in inventories. These were partially offset by an increase in
accounts payable of $51.7 million.
Net cash used in investing activities was $11.2 million, $9.6 million and
$37.6 million for fiscal 2000, 1999 and 1998, respectively. Cash used in fiscal
2000 consisted primarily of $11.1 million for property and equipment
acquisitions mostly at the WDC in connection with the relocation. Cash used in
fiscal 1999 consisted primarily of $8.8 million for property and equipment
acquisitions primarily at the LDC. Cash used in fiscal 1998 consisted of $33.1
million for business and net asset acquisitions, primarily the Star
acquisition, and $4.3 million for property and equipment acquisitions.
Financing activities provided net cash of $39.0 million, $126.9 million and
$51.5 million in fiscal 2000, 1999 and 1998, respectively. Cash provided by
financing activities in fiscal 2000 consisted primarily of
18
<PAGE>
additional borrowings under our credit facility to fund increased working
capital requirements and issuance of long term debt to fund property and
equipment acquisitions. Cash provided by financing activities in fiscal 1999
consisted primarily of additional borrowings under our credit facility to fund
increased working capital requirements and the proceeds from the initial public
offering of our common stock. Cash provided by financing activities in fiscal
1998 consisted primarily of additional borrowings under our previous credit
facility to fund the Star acquisition and working capital requirements
generated by our overall sales growth.
Effective February 23, 2000, our credit facility provides for borrowings up
to the lesser of $240.0 million or the amount of collateral availability.
Collateral availability is limited to certain percentages of eligible inventory
and accounts receivable, and is subject to certain limitations as to video and
DNA inventories and equipment. The credit facility bears interest, at our
election, at either the prime rate plus a margin of (0.25)% to 0.5% or the
Eurodollar Rate plus a margin of 2.0% to 2.75%, subject to monthly adjustments
and certain terms and conditions as stated in the credit facility.
Borrowings under the credit facility are secured by all eligible accounts
receivable, inventory, certain equipment and other intangible property. The
credit facility expires on May 21, 2002 and renews annually thereafter unless
notice of termination is given by either party. The credit facility contains
various covenants, including limitations on payment of cash dividends and
redemptions. We are also obligated under several equipment credit agreements.
As a result of our substantial leverage, under which we will incur
significant interest expense and principal repayment obligations, our ability
to obtain additional financing in the future may be limited. Accordingly, our
ability to compete through expansion, capital improvements and flexibility in
response to changing industry conditions may be limited. Our credit agreements
contain numerous restrictive covenants, including limitations on our ability to
acquire or invest in other businesses and requirements that we comply with
certain financial covenants. From time to time, we have been out of compliance
with certain financial covenants under certain credit agreements. At April 1,
2000, the Company was not in compliance with certain financial covenants under
equipment note payable agreements. The lenders waived such non-compliance as of
April 1, 2000. One of the lenders amended the agreement to eliminate all
financial covenants through the end of fiscal 2001. The other lender requires a
fiscal year end test of the covenant; as such, the next measurement date is
March 31, 2001. Historically, we have been able to obtain waivers or amendments
to our financial covenants from our lenders in order to remain in compliance
with all financial covenants, however there can be no assurance that we will be
able to do so for future violations.
If we fail to comply with the terms of the credit agreements or obtain
waivers from such obligations, we could trigger an event of default under the
credit agreements.
Our cash flow and capacity needs change significantly during the year, with
the heaviest credit needs and highest capacity requirements typically occurring
during the third and fourth fiscal quarters. If we do not have sufficient
finances to purchase the inventory required or the distribution capacity to
distribute product in a timely and accurate manner during such seasonal peak
periods, our financial results could be adversely affected.
We believe that our borrowing availability under the credit facility will be
sufficient to meet our operating and capital requirements through the next
year. Our future operating and capital requirements, however, will depend on
numerous factors, including growth of the business, additional infrastructure
needs, potential acquisitions and/or joint ventures and future results of
operations.
Seasonality in Operating Results
Our 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, our sales
are highest during the third fiscal quarter (the holiday season) and returns
are highest during the fourth fiscal quarter. Due to this seasonality, we
typically experience significant changes in cash flows and capacity
19
<PAGE>
needs during the year, with the heaviest credit needs and highest capacity
requirements typically occurring during the third and fourth fiscal quarters.
New Accounting Standard
See Notes to our consolidated financial statements for a discussion of the
impact of Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities.
Factors Affecting Operating Results
Certain statements contained or incorporated in this report are forward-
looking statements concerning our operations, economic performance and
financial condition. Forward-looking statements are included in the discussions
about the impact of our transaction with amplified.com and our ability to
obtain sufficient financing. Those forward-looking statements involve risks and
uncertainties and actual results may differ materially from those expressed or
implied in those statements. Factors that could cause these differences
include, but are not limited to, those discussed below.
Our Results of Operations and Financial Condition Could be Adversely Affected
by Conditions in the Online Retail Market for Music and Video
In March 2000, the auditors of one of our two largest customers, internet
retailer CDNOW, issued a qualified opinion regarding CDNOW's ability to
continue as a going concern, based on CDNOW's inability to state that it has
sufficient cash to continue funding its operations through the end of the
current calendar year. At June 2, 2000, our accounts receivable from CDNOW was
approximately $15.8 million. If CDNOW is unable to increase its liquidity and
is forced to curtail operations, our sales would likely decline. While we
believe that our current allowance for doubtful accounts is adequate, if CDNOW
were to curtail operations, we cannot be assured that we would not sustain a
material loss on then outstanding receivables from CDNOW.
Many of our other online music and video retailer customers are not
operating profitably, and their ability to continue operations will likely
depend on their securing additional funding until such time as their operations
generate the requisite cash flow. The funding needed to support these
businesses may not be available. Further, some industry observers anticipate
that there will be substantial consolidation within many internet retail
markets and that many existing retailers will not survive this process. If many
of our online retailer customers do not survive, our operating results and
financial condition would likely be adversely affected.
Amplified.com May Fail to be Economically Successful and May Impair our e-
Fulfillment Sales
In connection with our joint formation of amplified.com, we contributed to
the new entity the exclusive right to market our e-Fulfillment services to
online music and video retailers. Most of our e-Fulfillment marketing team left
our employ to become employed by amplified.com. We also contributed certain
assets used in this business, including proprietary databases that are very
important to the delivery of services to online retailers. Amplified.com will
need to secure additional funding to carry out its business plan, and we cannot
be assured that this funding can be obtained or that amplified.com will ever
achieve successful operations. If amplified.com were to fail for any reason, or
were it to operate ineffectively for a meaningful period of time, our e-
Fulfillment business could be materially adversely affected.
Our Sales Could Be Adversely Affected if We Lose Any of Our Largest Customers
If any of our largest customers were to stop or reduce their purchasing from
us, our financial results could be adversely affected. During fiscal 2000, our
top four customers accounted for approximately 37% of our net sales and our top
two e-Fulfillment customers accounted for approximately 79% of our e-
Fulfillment net sales. Net sales to Amazon.com and CDNOW, the Company's two
largest customers, totaled $125.5 million and $91.3 million, respectively,
during fiscal 2000.
20
<PAGE>
We May Be Delayed in Filling Certain Key Management Positions
In May 2000, Robert Cain, then our President, Chief Executive Officer and a
member of our Board of Directors, resigned from his positions with Valley.
Following Mr. Cain's resignation, Barnet Cohen, Valley's founder, and the
Chairman of the Board of Directors, was appointed to serve as Valley's acting
Chief Executive Officer while the Board conducts a search for a permanent
replacement. During the third quarter of fiscal 2000, we announced our
intention to hire a new Chief Financial Officer and a new Senior Vice
President, Sales and Marketing. We hired a Senior Vice President of Sales and
Marketing in March 2000, but we have not yet filled the Chief Financial Officer
position.
Although we intend to fill both the Chief Executive Officer and Chief
Financial Officer positions as soon as we are able to identify and hire the
appropriate persons, we may be unable to complete this process quickly. Delays
in filling these positions could adversely affect our financial condition and
results of operations. Further, we cannot be assured that the turnover at the
senior management level will not lead to additional management changes that
could adversely affect our financial condition and results of operations.
New Delivery Technologies Could Diminish Our Role in the Distribution Process
Music and video are currently marketed and distributed primarily on a
physical delivery basis through wholesale and retail distribution. In the
future, if products are marketed, sold and delivered by labels or studios
directly to stores or homes through electronic downloading or live streaming,
current methods of wholesale and retail distribution could decrease or be
eliminated. Microsoft, RealNetworks and others offer streaming technology,
which allows users to listen to, but not record, music and video. In addition,
digital distribution has begun on the Internet utilizing various coding
compression technologies that allow downloading and replication of any digital
music product.
The major labels and others have announced plans to develop a universal
standard for the electronic delivery of music with copyright protection. If
electronic distribution of music or video becomes widespread and displaces
significant demand for the formats we sell and we fail to play a significant
role in the electronic distribution market, our financial results would be
adversely affected.
In addition, cable and satellite television companies and others are
beginning to offer movies on a "near-video-on-demand" or other basis that
allows subscribers to order selected videos for in-home viewing. To the extent
that these programs achieve a broad level of acceptance, the market for
physical video product sold or rented by retailers could decline. This would
reduce our sales of video product.
We May Be Unable to Obtain Product from Labels or Studios
The major labels and studios produce most of the music and video product.
Our success depends upon our ability to obtain products in sufficient
quantities on competitive terms and conditions from each of the major labels
and studios as well as from thousands of smaller suppliers. We do not have long
term contracts with any supplier for our Full-line Distribution or e-
Fulfillment business groups. If we cannot obtain sufficient quantities of
product from the major labels or studios or a significant number of other
suppliers for our Full-line Distribution and e-Fulfillment operations, our
financial results could be adversely affected.
One video supplier, Warner Home Video, has elected to serve the video rental
market directly while bypassing all video distributors, including Valley,
beginning in August 2000. Our net sales of Warner Home Video rental product was
approximately $4.3 million in fiscal 2000. If other suppliers also bypass the
distribution segment, our financial results could be adversely affected.
Distribution North America maintains contracts with most of the suppliers it
represents. These contracts typically range in length from one to three years.
If Distribution North America were unable to maintain its distribution
relationship with any of its large suppliers, our financial results would be
adversely affected.
21
<PAGE>
We May Be Unable to Compete with Other Businesses that Offer Similar Products
and Services
The full-line distribution of music and video is an intensely competitive
business. We compete with national, regional and local full-line distributors,
including Alliance Entertainment Corp. and Ingram Entertainment. As a result of
such competition, we could experience pricing pressures or lose customers
altogether. Either event would adversely affect our financial results.
In addition, the major labels, major studios and independent distribution
companies sell substantial amounts of their products directly to retailers.
However, to date they have not focused, to the same extent we have, on
fulfilling the needs of smaller independent stores or providing value-added
services. If the major labels, major studios or independent distribution
companies start providing more responsive service to underserved retail
segments or value-added services at competitive costs, our financial results
could be adversely affected. We also compete with several vendor managed
inventory firms, including two national vendor managed inventory firms that we
believe have revenues greater than ours.
From time to time, several of our retail chain customers have chosen to buy
a substantial volume of their inventory directly from the major labels and
studios that they had previously been purchasing from us. To the extent that
our customers increase their direct purchasing from the major labels and
studios or the independent distribution companies, our financial results could
be adversely affected. Specifically, Valley's largest customer, Amazon.com has
increased, and may continue to increase, the proportion of product it buys
directly from the labels and studios.
In addition to competition from existing competitors, in the future we could
face competition from new competitors that may enter the business. If new
competitors enter the music and video distribution business, our financial
results could be adversely affected.
Our existing e-Fulfillment competitors include Alliance Entertainment Corp.,
Baker & Taylor and Ingram Entertainment. Other distributors have announced an
interest in starting to service the on-line market. In addition, to the extent
our Internet customers utilize fewer value-added services, such as direct-to-
consumer fulfillment and data, our financial results could also be adversely
affected.
Distribution North America competes with several other independent
distribution companies. Some of these competitors conduct distribution
operations equal to or larger than Distribution North America and others
operate in niche markets. We also compete with several of the major labels' own
independent distribution groups. In addition, as a label or artist gains in
popularity, Distribution North America faces new competition from the major
labels to retain distribution rights for that label or artist.
We Expect the Growth Rate of Our e-Fulfillment Sales To Continue To Decline
Our e-Fulfillment sales continue to grow at a substantial rate as compared
to prior years. During fiscal 2000, however, the rate of such growth declined
as compared to those prior years and we expect the decline in the growth rate
of our e-Fulfillment sales to continue.
We Have Significantly Increased Our Infrastructure
During fiscal 2000, we have significantly increased our investment in
infrastructure, primarily due to the relocation of the WDC. During fiscal 2000,
because our sales did not meet expected levels, we were unable to gain the
incremental efficiencies we anticipated would result from this increased
investment. Thus, because of the increase in fixed costs that resulted from the
expansion of our infrastructure, any continuing erosion in sales versus current
or expected levels could result in a further increase of our selling, general
and administrative expenses as a percentage of net sales.
22
<PAGE>
Tight Labor Markets Reduce our Ability to Attract an Adequate Number of
Employees or Force Us to Increase our Compensation Levels
Low unemployment levels in the markets in which we operate impede our
ability to attract adequate labor. The tight labor markets lead to increased
personnel expenses with no offsetting gain in productivity.
Trends in the Video Rental Market Could Hurt Our Sales
Studios and full-line distributors have instituted programs to increase the
quantity of copies of popular video rental titles stocked by retailers. We
believe that these programs have accelerated a shift in the market away from
independent video rental stores and small chains in favor of the larger chains.
Since, in general, full-line distributors play a larger role with independent
retailers than with the larger chains, we believe that the market may contract
for full-line distribution of video rental product.
We Might Have Inventory Risk Due to an Inability to Return Products
We bear inventory risk associated with the financial viability of the
independent labels and studios from which we purchase product. If a label or
studio cannot provide refunds in cash for the inventory we desire to return, we
may be forced to expense such inventory costs. Further, we often experience
higher return rates for products of financially troubled labels and studios. If
we fail to manage our inventory to avoid accumulating substantial product that
cannot be returned, our financial results could be adversely affected.
Our Ability to Obtain Sufficient Financing May Be Limited
We have a revolving credit agreement and several equipment credit agreements
that are secured by substantially all of our assets. As of April 1, 2000,
borrowings of approximately $181.8 million and $11.8 million were outstanding
under the revolving credit agreement and the equipment credit agreements,
respectively. The revolving credit agreement is used for general working
capital purposes while the equipment credit agreements provide financing for
specific fixed assets.
As a result of our substantial borrowings (under which we will incur
significant interest expense and principal repayment obligations), our ability
to obtain additional financing in the future may be limited. Accordingly, our
ability to compete through expansion, capital improvements and flexibility in
response to changing industry conditions may be limited. Our credit agreements
contain numerous restrictive covenants, including limitations on our ability to
acquire or invest in other businesses and requirements that we comply with
certain financial covenants. From time to time, we have been out of compliance
with certain financial covenants under certain credit agreements. Historically,
we have been able to obtain waivers or amendments to our financial covenants
from our lenders in order to remain in compliance with all financial covenants,
however there can be no assurance that we will be able to do so for future
violations.
If we fail to comply with the terms of the credit agreements or obtain
waivers from such obligations, we could trigger an event of default under the
credit agreements.
Our cash flow and capacity needs change significantly during the year, with
the heaviest credit needs and highest capacity requirements typically occurring
during the third and fourth fiscal quarters. If we do not have sufficient
finances to purchase the inventory required or the distribution capacity to
distribute product in a timely and accurate manner during such seasonal peak
periods, our financial results could be adversely affected.
We May Be Liable if Our Suppliers Fail to Comply with Copyright Laws
Substantially all of the music and video products we sell are subject to
copyright laws and licenses that limit the manner and geographic area in which
such products may be sold. Any sales of product in violation of such laws and
licenses by us could subject us to monetary damages or confiscation of such
product. We distribute thousands of titles from different artists over numerous
jurisdictions and rely primarily on our
23
<PAGE>
suppliers to ensure that such titles comply with the copyright laws, some of
which may be conflicting or not clearly developed. Although we have not
experienced a material loss due to copyright violations, we could be damaged in
the future by copyright violations.
We May Be Prevented from Distributing Music Internationally
Most of the major labels have adopted policies restricting the export of
their merchandise by domestic distributors. However, consistent with industry
practice, we distribute music of the major labels internationally. Our
international net sales of music for fiscal 2000 were approximately $40.2
million. We would be adversely affected if a major label enforced any
restriction on our ability to sell music outside the United States. In
addition, although our international sales are denominated in dollars, our
international sales volume can be adversely affected by appreciation of the
dollar relative to foreign currencies.
The Fluctuations in Our Operating Results Could Adversely Affect the Price of
Our Common Stock
We anticipate significant fluctuations in future quarterly sales and
operating results due to a number of factors outside our control, including:
. seasonal variations in the demand for music and video
. infrequent new releases of extremely popular hit video titles in a given
quarter
. the proportions in which retailers buy their music and videos directly
from major labels or studios as opposed to through full-line
distributors
. the percentage of returns in a given quarter
. the general economic condition in the music and video industries
Due to the foregoing factors, it is possible that in some future quarters
our operating results will be below the expectations of analysts and investors.
In such event, the price of the common stock may be adversely affected.
In addition to the factors that may affect our operating results, we hold
investments in various other companies, one of which is currently a publicly
traded company, Loudeye, which are subject to market price fluctuations of the
underlying stock.
The value of our investment in Loudeye is subject to market fluctuations and
is required to be marked to market through accumulated other comprehensive
income, net of deferred taxes, at the end of each quarter. Subsequently, upon
sale of the stock, any resulting gain or loss would be realized, and therefore,
recognized in earnings for that period.
The Market Price of Our Common Stock Could Fluctuate
Many factors could cause the market price of our common stock to fluctuate
substantially, including (i) future announcements concerning us or our
competitors, (ii) variations in operating results, (iii) loss of a key supplier
or customer, (iv) technological innovations such as changes in physical product
formats or delivery technologies, (v) changes in product pricing policies by
us, our suppliers or our competitors and (vi) changes in earnings estimates by
securities analysts. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price
of our common stock.
ITEM 7A. 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 therefore affected by changes in market interest
rates. If interest rates on variable rate debt rose 0.80 percentage points (a
10% change from the average interest rate as of April 1, 2000), assuming no
change in the Company's outstanding balance under the line of credit
(approximately $181.8 million as of April 1, 2000), the Company's loss before
taxes and cash flows from operating activities would increase by approximately
$1.5 million.
24
<PAGE>
ITEM 8. Financial Statements And Supplemental Data
Index to Consolidated Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Independent Auditors' Report............................................ 26
Consolidated Balance Sheets as of April 1, 2000 and April 3, 1999....... 27
Consolidated Statements of Operations for the Fiscal Years Ended April
1, 2000,
April 3, 1999 and March 28, 1998....................................... 28
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended
April 1, 2000, April 3, 1999 and March 28, 1998........................ 29
Consolidated Statements of Cash Flows for the Fiscal Years Ended April
1, 2000,
April 3, 1999 and March 28, 1998....................................... 30
Notes to Consolidated Financial Statements.............................. 31
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts and Reserves............. S-1
</TABLE>
All other schedules are omitted, because they are not required, are not
applicable, or the information is included in the consolidated financials
statements and notes thereto.
25
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders of
Valley Media, Inc.:
We have audited the accompanying consolidated balance sheets of Valley Media,
Inc. and its subsidiaries (the "Company") as of April 1, 2000 and April 3,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
April 1, 2000. Our audits also included the financial statement schedule listed
in the Index at Item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 financial position of Valley Media, Inc. and its
subsidiaries as of April 1, 2000 and April 3, 1999, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended April 1, 2000 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California
May 19, 2000
26
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 1, April 3,
2000 1999
-------- --------
Dollars in thousands, except
share data
<S> <C> <C>
Assets
Current assets
Cash......................................................... $ 274 $ 1,433
Accounts receivable, less allowance for doubtful accounts of
$12,017 at April 1, 2000 and $8,892 at April 3, 1999........ 175,776 167,925
Inventories, net of reserves of $4,145 at April 1, 2000 and
$2,823 at April 3, 1999..................................... 190,428 216,807
Investment in marketable equity securities, available for
sale........................................................ 17,002
Deferred income taxes........................................ 7,234 5,956
Prepaid expenses and other................................... 2,164 1,551
-------- --------
Total...................................................... 392,878 393,672
Property and equipment, net.................................... 26,132 20,913
Goodwill and other intangibles, net............................ 13,207 14,678
Deferred income taxes.......................................... 951 399
Other assets................................................... 910 1,063
-------- --------
Total assets................................................... $434,078 $430,725
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable............................................. $149,004 $191,978
Accrued liabilities.......................................... 7,903 11,534
Revolving line of credit..................................... 181,772 148,730
Current portion of long-term debt............................ 3,984 1,905
Deferred income taxes........................................ 2 3,918
-------- --------
Total...................................................... 342,665 358,065
Deferred income taxes.......................................... 12,890 2,855
Long-term debt................................................. 7,861 3,918
Commitments and contingencies (Notes 9 and 11)
Stockholders' equity
Preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued.....................................
Common stock, $.001 par value, 20,000,000 shares authorized,
8,453,291 and 8,449,009 shares issued and outstanding....... 8 8
Additional paid-in capital................................... 51,951 52,145
Stockholders' notes receivable............................... (194) (360)
Retained earnings............................................ 9,490 14,094
Accumulated other comprehensive income....................... 9,407
-------- --------
Total stockholders' equity................................. 70,662 65,887
-------- --------
Total liabilities and stockholders' equity..................... $434,078 $430,725
======== ========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------
April 1, April 3, March 28,
2000 1999 1998
---------- ---------- ----------
Dollars in thousands, except share data
<S> <C> <C> <C>
Net sales...................................... $ 891,526 $ 888,966 $ 583,492
Cost of goods sold............................. 793,589 791,154 516,627
---------- ---------- ----------
Gross profit................................... 97,937 97,812 66,865
Selling, general and administrative expenses... 91,417 78,059 55,948
---------- ---------- ----------
Operating income............................... 6,520 19,753 10,917
Interest expense............................... 14,122 10,928 6,627
---------- ---------- ----------
Income (loss) before income taxes.............. (7,602) 8,825 4,290
Income taxes (benefit)......................... (2,998) 3,673 1,731
---------- ---------- ----------
Income (loss) before extraordinary loss........ (4,604) 5,152 2,559
Extraordinary loss (net of income taxes of
$477)......................................... (723)
---------- ---------- ----------
Net income (loss).............................. $ (4,604) $ 4,429 $ 2,559
========== ========== ==========
Net income (loss) per share:
Basic:
Income (loss) before extraordinary loss.... $ (0.54) $ 1.04 $ 0.53
Extraordinary loss......................... (0.15)
---------- ---------- ----------
Net income (loss) per share................ $ (0.54) $ 0.89 $ 0.53
========== ========== ==========
Diluted:
Income (loss) before extraordinary loss.... $ (0.54) $ 0.89 $ 0.49
Extraordinary loss......................... (0.12)
---------- ---------- ----------
Net income (loss) per share................ $ (0.54) $ 0.77 $ 0.49
========== ========== ==========
Weighted average shares used in the
calculation:
Basic........................................ 8,455,371 4,950,753 4,791,864
Diluted...................................... 8,455,371 5,781,840 5,263,870
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Stockholders' Other
----------------- Paid-in Notes Retained Comprehensive Comprehensive
Shares Amount Capital Receivable Earnings Income Total Income
--------- ------ ---------- ------------- -------- ------------- ------- -------------
Dollars in thousands, except share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 29,
1997................... 4,784,865 $ 5 $ 662 $7,106 $ 7,773
Net income.............. 2,559 2,559 $ 2,559
=======
Repurchase of common
stock.................. (32,441) (143) (143)
Issuance of common stock
in connection with
acquisition............ 58,129 326 326
--------- --- ------- ------ -------
Balance at March 28,
1998................... 4,810,553 5 845 9,665 10,515
Net income.............. 4,429 4,429 $ 4,429
=======
Initial public offering
proceeds, net.......... 3,500,000 3 50,940 50,943
Exercise of stock
options in exchange for
notes receivable ...... 138,456 360 $(360)
--------- --- ------- ------ ------ -------
Balance at April 3,
1999................... 8,449,009 8 52,145 (360) 14,094 65,887
Net loss................ (4,604) (4,604) $(4,604)
Change in unrealized
gain on marketable
securities............. $9,407 9,407 9,407
-------
Comprehensive income.... $ 4,803
=======
Collection of notes
receivable............. 175 175
Exercise of stock
options in exchange for
notes receivable....... 2,500 9 (9)
Exercise of stock
options................ 21,902 77 77
Common stock purchased
and retired............ (20,120) (280) (280)
--------- --- ------- ------ ------ ------ -------
Balance at April 1,
2000................... 8,453,291 $ 8 $51,951 $ (194) $9,490 $9,407 $70,662
========= === ======= ====== ====== ====== =======
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------
April 1, April 3, March 28,
2000 1999 1998
-------- --------- ---------
Dollars in thousands
<S> <C> <C> <C>
Cash flows from operating activities
Income (loss) before extraordinary loss....... $ (4,604) $ 5,152 $ 2,559
Adjustments to reconcile income before
extraordinary loss to net cash used in
operating activities:
Depreciation and amortization................. 7,191 5,630 4,112
Bad debt expense.............................. 4,681 3,616 2,770
Deferred income taxes......................... (2,181) (2,652) 2,799
Amortization of deferred financing fees....... 586
Forgiveness of note receivable from
stockholder.................................. 48
Equity in net loss of joint venture........... (3)
Extraordinary loss on debt refinancing........ (723)
Changes in assets and liabilities (net of
acquisitions):
Accounts receivable......................... (13,566) (66,396) (43,526)
Inventories................................. 27,020 (118,158) (31,441)
Prepaid expenses and other.................. (704) 1,075 (1,213)
Accounts payable............................ (42,951) 51,598 51,748
Accrued expenses............................ (4,510) 4,597 (1,659)
-------- --------- --------
Net cash used in operating activities.......... (28,993) (116,261) (13,851)
-------- --------- --------
Cash flows from investing activities
Purchases of property and equipment........... (11,098) (8,842) (4,346)
Business and net asset acquisitions, net of
cash acquired................................ (33,147)
Other......................................... (56) (728) (61)
-------- --------- --------
Net cash used in investing activities.......... (11,154) (9,570) (37,554)
-------- --------- --------
Cash flows from financing activities
Short-term borrowings under revolving line of
credit....................................... 920,203 970,681 632,004
Repayment of short-term borrowings............ (887,161) (895,332) (579,070)
Issuance of long-term debt.................... 9,132 2,350 3
Repayment of long-term debt................... (3,110) (1,772) (1,306)
Collection of stockholders' notes receivable.. 127
Issuance of common stock upon exercise of
stock options................................ 77
Net proceeds from initial public offering..... 50,943
Repurchase of common stock.................... (280) (142)
-------- --------- --------
Net cash provided by financing activities...... 38,988 126,870 51,489
-------- --------- --------
NET INCREASE (DECREASE) IN CASH................ (1,159) 1,039 84
CASH, BEGINNING OF YEAR........................ 1,433 394 310
-------- --------- --------
CASH, END OF YEAR.............................. $ 274 $ 1,433 $ 394
======== ========= ========
Supplemental disclosure of cash flow
information
Cash paid for interest........................ $ 13,546 $ 10,121 $ 5,716
Cash paid for income taxes.................... 308 4,914 85
Noncash investing and financing activities
Purchase of equipment through capital leases.. 245 2,788
Investment in Loudeye:
Receipt of warrant.......................... 1,124
Unrealized gain, net of deferred taxes...... 9,407
Notes receivable from stockholders............ 9 360
Payable to Star Video Entertainment, L.P. as a
result of acquisition........................ 3,144
Issuance of common stock in connection with
acquisition.................................. 326
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Valley Media, Inc. (a Delaware corporation) and its subsidiaries (the
"Company") is a full-line distributor of prerecorded music and video
entertainment products. The Company has distribution facilities in California,
Kentucky, Pennsylvania and Massachusetts, and sells its products primarily to
retail stores throughout the United States and worldwide, as well as through
Internet music and video retailers. The Company also provides certain services
to customers such as direct-to-consumer fulfillment and licensing the Company's
proprietary products and databases of product information.
On March 26, 1999, the Company issued 3,500,000 shares of common stock at
$16.00 per share, for net proceeds of $50,943,000 in an initial public
offering.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Significant intercompany balances and
transactions are eliminated in consolidation. Affiliated companies in which
Valley does not have a controlling interest are accounted for using the equity
method.
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to March 31. The fiscal years ended April 1, 2000 ("fiscal 2000") and
March 28, 1998 ("fiscal 1998") each contained a 52 week period. The fiscal year
ended April 3, 1999 ("fiscal 1999") contained a 53 week period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include allowances for doubtful
accounts, vendor receivables and customer returns. Actual results could differ
from those estimates.
Investment in Marketable Equity Securities
Investments in marketable equity securities are classified as available for
sale and are recorded at fair value with any unrealized gains and losses, net
of tax, included in accumulated other comprehensive income. As of April 1, 2000
the value of available-for-sale securities totaled $17,002,000 and consisted of
investments in equity securities (see Note 4).
Inventories
Inventories are valued at the lower of cost or market and are accounted for
on the average cost basis. The Company performs periodic assessments to
determine the existence of obsolete, slow-moving and non-salable inventories
and records necessary provisions to reduce such inventories to net realizable
value.
Property and Equipment
Property and equipment is stated at cost and depreciated or amortized on a
straight-line basis over the estimated useful lives of the assets or the lease
term, whichever is shorter. Estimated useful lives range from five to ten
years.
31
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized Computer Software
Capitalized computer software included in property and equipment, reflects
costs related to internally developed or purchased software that are
capitalized and amortized on a straight-line basis over periods not exceeding
five years. Internally developed software costs are capitalized in accordance
with Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Amortization expense for fiscal 2000,
fiscal 1999 and fiscal 1998 was $1,245,000, $804,000 and $490,000,
respectively.
Goodwill and Other Intangibles
Goodwill is amortized on a straight-line basis over 15 years. Identifiable
intangible assets, consisting primarily of customer lists, are amortized on a
straight-line basis over five years.
Revenue Recognition
Sales of prerecorded music, video, music accessories, other related products
and fees for fulfillment services are recognized upon shipment of the product,
net of estimated returns and allowances, which are based on historical
experience and adjusted for current conditions. Certain of the Company's sales
are made to customers under agreements permitting rights of return.
Advertising Expense and Reimbursement
Advertising costs are expensed when incurred. Advertising reimbursements
from suppliers are recognized as earned. Net advertising reimbursements are
reported as a reduction of cost of goods sold and consist of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------
April 1, April 3, March 28,
2000 1999 1998
-------- -------- ---------
Dollars in thousands
<S> <C> <C> <C>
Advertising reimbursements........................ $ 31,173 $ 35,640 $15,239
Advertising expenses.............................. (23,018) (27,086) (8,181)
-------- -------- -------
Net advertising reimbursements.................... $ 8,155 $ 8,554 $ 7,058
======== ======== =======
</TABLE>
Concentration of Credit Risk
The Company is subject to credit risk through sales and related trade
receivables to retailers. Approximately 37% of the Company's net sales and 33%
of accounts receivable were represented by four customers for the year ended
April 1, 2000. The Company routinely assesses the financial strength of
significant customers and this assessment, combined with the large number and
geographic diversity of its customers, limits the Company's concentration of
risk with respect to trade accounts receivable.
Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board No. 25, Accounting
for Stock Issued to Employees ("APB 25").
32
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes under the asset and liability approach
where deferred income tax assets and liabilities reflect the future tax
consequences, based on enacted tax laws, of the temporary differences between
financial and tax reporting at the balance sheet date.
Fair Value of Financial Instruments
At April 1, 2000, the carrying value of cash, investments in marketable
equity securities, revolving line of credit, and long-term debt approximates
their estimated fair values.
Asset Impairment
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, requires periodic review of long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment, if
any, would be determined from a comparison of undiscounted net cash flows to
the carrying value of the assets.
Earnings per Share
Basic earnings per share is computed by dividing net income (loss) by the
weighted average of common shares outstanding for the period. Diluted earnings
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.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income established new rules for
reporting and display of comprehensive income and its components. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
New Accounting Pronouncement
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures these
instruments at fair value. SFAS No. 133 is effective for the Company in the
first quarter of fiscal 2002. The Company is currently evaluating what impact,
if any, SFAS No. 133 may have on its financial statements.
Stock Split
On March 22, 1999, the Company effected a 8.04-for-1 split of its common
stock in the form of a stock dividend. All share and per share amounts in the
accompanying consolidated financial statements have been restated to give
effect to the stock split.
3. Related Party Transactions
On July 2, 1999, the Company, Valley Entertainment, Inc. ("VE"), and Barnet
J. Cohen, the Company's founder, largest stockholder and the Chairman of the
Company's Board of Directors, entered into a
33
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Contribution Agreement (the "Contribution Agreement"). Pursuant to the
Contribution Agreement, Mr. Cohen, who is the President and Chief Executive
Officer of VE, contributed $1,320,000 in cash in exchange for 66 percent of
VE's outstanding common stock. Other individuals contributed $300,000 in cash
in exchange for a total of 15 percent of VE's outstanding common stock. The
Company assigned the net assets of its Valley Entertainment division to VE in
exchange for a cash payment of $277,000 and 19 percent of VE's outstanding
common stock. The Company did not recognize any gain or loss on the
transaction. The Company uses the equity method to account for its investment
in VE. The Company recorded equity income of $2,700 related to its investment
in VE for fiscal 2000.
4. Loudeye Agreement
On December 17, 1999, the Company entered into a three year services
agreement ("Agreement") with Loudeye Technologies, Inc. ("Loudeye") for Loudeye
to provide certain services in connection with the creation of a digital music
sampling service ("Sampling Service") that will be part of a consumer database
the Company offers to its retail customers. The Company has committed that
Loudeye will receive revenues from the Sampling Service of at least $1.5
million during the first year after the Sampling Service becomes operational,
as defined in the Agreement.
In connection with the Agreement, the Company received a warrant to purchase
650,000 shares of Loudeye's common stock at $10.00 per share expiring December
17, 2000. Pursuant to Emerging Issues Task Force Issue 00-08, "Accounting by a
Grantee for an Equity Investment to be Received in Conjunction with Providing
Goods or Services", the warrant was valued at $1,124,000 upon receipt using the
Black-Scholes option pricing model and assuming a term of one year, a risk-free
interest rate of 5.0% and an expected volatility of 70%. This amount was
recorded as an investment in marketable securities and deferred revenue to be
amortized over the three year term of the Agreement. On March 15, 2000, the
warrant was converted into 487,500 shares of Loudeye common stock, based upon
the fair market value of $40.00 at that date. No gain was recognized at that
date. As of April 1, 2000, the investment in Loudeye was recorded at
$17,002,000 (based upon the closing price of Loudeye common stock at such date)
and an unrealized gain of $9,407,000 (net of deferred taxes of $6,471,000) was
included in accumulated other comprehensive income.
Subsequent to April 1, 2000, substantially all of the Company's rights and
interest under the Agreement, including the revenue commitment and deferred
revenue liability, but excluding the investment in Loudeye common stock, were
assigned to amplified.com (see Note 16).
5. Acquisition of Business of Star Video Entertainment, L.P.
On May 20, 1997, the Company acquired certain of the assets and assumed
certain liabilities of Star Video Entertainment, L.P. ("Star Video"), a
distributor of prerecorded videocassettes. Consideration paid to the seller was
$37,872,000, of which $34,728,000 was paid in cash on May 20, 1997 and in
August 1997 and the remaining $3,144,000 was due in various installments over
the next three years. In connection with the acquisition, the Company incurred
$1,080,000 of transaction costs, comprised principally of legal fees.
As of May 20, 1997, the Company planned to (i) terminate certain Star Video
senior management in fiscal 1998, (ii) move virtually all Star Video
administrative functions to the Company's Woodland, California headquarters in
calendar 1998 and (iii) close three Star Video distribution facilities in
fiscal 1998 and early fiscal 1999. Therefore, the Company recorded a liability
of $1,485,000 at May 20, 1997 for severance costs related to these planned
activities.
As of March 28, 1998, the Company had terminated certain Star Video senior
management and closed two distribution facilities. As a result, the Company
charged $606,000 against the severance liability in fiscal 1998 and at March
28, 1998 the remaining severance liability was $879,000.
34
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In fiscal 1999, the Company moved the Star Video administrative functions to
Woodland, California and closed the third distribution facility. As a result,
the Company charged $595,000 against the severance liability and at April 3,
1999 had a remaining severance liability of $284,000, which was paid during
fiscal 2000.
The Company allocated the total purchase price of $40,437,000 to the fair
value of the net assets acquired as follows:
<TABLE>
<CAPTION>
Dollars in
thousands
----------
<S> <C>
Cash........................................................... $ 3,697
Accounts receivable............................................ 58,025
Inventories.................................................... 20,513
Property and equipment......................................... 1,472
Goodwill....................................................... 15,540
Customer lists................................................. 2,300
Prepaid and other assets....................................... 812
Accounts payable............................................... (43,061)
Accrued expenses............................................... (1,722)
Short-term borrowings.......................................... (17,139)
-------
Total.......................................................... $40,437
=======
</TABLE>
During November 1998, the Company and Star Video settled an arbitration
proceeding relating to the acquisition of Star Video regarding the valuation of
certain accounts receivables and payables. The settlement resulted in the
reduction of approximately $1,500,000 of accounts payable and $500,000 of notes
payable no longer due to the previous owners of Star Video and a $2,000,000
decrease in goodwill.
The following unaudited pro forma information has been presented as if the
acquisition of business of Star Video had occurred at the beginning of fiscal
1998. The unaudited pro forma information is based on historical results of
operations adjusted for purchase price adjustments and, in the opinion of
management, is not necessarily indicative of what results would have been if
the acquisition had occurred at the beginning of fiscal 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended
March 28, 1998
-----------------
(unaudited)
Dollars in thousands, except per share data
<S> <C>
Net sales............................................... $616,034
Net income.............................................. 1,991
Net income per share:
Basic................................................. $ 0.42
Diluted............................................... 0.38
</TABLE>
6. Other Acquisitions
During fiscal 1998, the Company acquired inventories and accounts receivable
from a wholesale prerecorded music distributor for a purchase price of
$798,000, which was paid in cash. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the operations and net assets
have been included in the Company's consolidated financial statements from the
date of acquisition.
35
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
April 1, 2000 April 3, 1999
------------- -------------
Dollars in thousands
<S> <C> <C>
Office furniture and equipment.............. $15,468 $11,757
Machinery and equipment..................... 13,117 10,134
Computer software........................... 10,182 6,879
Leasehold improvements...................... 3,706 2,988
------- -------
Total..................................... 42,473 31,758
Less accumulated depreciation and
amortization............................... (16,341) (10,845)
------- -------
Property and equipment, net................. $26,132 $20,913
======= =======
</TABLE>
The Company leases some of its office furniture and equipment under capital
leases. At April 1, 2000 and April 3, 1999, property and equipment recorded
under capital leases were $4,603,000 and $4,606,000, respectively. Related
accumulated amortization was $1,850,000 and $1,093,000, respectively.
8. Goodwill and Other Intangibles
Goodwill and other intangibles consist of:
<TABLE>
<CAPTION>
April 1, April 3,
2000 1999
-------- --------
Dollars in thousands
<S> <C> <C>
Goodwill............................................. $15,578 $15,578
Identifiable intangible assets, primarily customer
lists............................................... 2,554 2,554
------- -------
Total.............................................. 18,132 18,132
Less accumulated amortization........................ (4,925) (3,454)
------- -------
Goodwill and other intangibles, net.................. $13,207 $14,678
======= =======
</TABLE>
9. Revolving Line of Credit
At April 1, 2000, the Company has a revolving line of credit agreement
("Credit Facility") that provides for borrowings up to the lesser of
$240,000,000 or the amount of collateral availability. Collateral availability
is limited to 76% of accounts receivable plus the lesser of 62% of cost or 91%
of net realizable value of inventories (subject to certain limitations as to
video and DNA inventories, as defined in the Credit Facility). At April 1,
2000, the outstanding amount under the line of credit was $181,772,000. The
Credit Facility bears interest, at the Company's election, at prime plus a
margin of (0.25)% to 0.5% or the Eurodollar Rate plus a margin of 2.0% to
2.75%, subject to monthly adjustments and certain terms and conditions stated
in the Credit Facility. At April 1, 2000, the average interest rate on
outstanding borrowings was 8.04%. The Credit Facility requires a monthly fee of
0.38% on the amount by which 60% of the available borrowings exceeds the
average daily principal balance of outstanding loans and letters of credit. The
Credit Facility allows for a maximum of $30.0 million in standby letters of
credit. There were no outstanding letters of credit at April 1, 2000.
Borrowings under the Credit Facility are secured by all eligible accounts
receivable, inventory, certain equipment, and other intangible property of the
Company. The Credit Facility contains various covenants, including among other
things, compliance with adjusted net worth requirements, restriction of
encumbrances, indebtedness, loans, investments and guarantees, and restriction
on the payment of cash dividends. Dividends are restricted to 25% of fiscal
year net income, subject to certain borrowing availability requirements. The
Credit Facility expires on May 21, 2002 and renews annually thereafter unless
notice is given by either party.
36
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of terminating a prior line of credit agreement in the first
quarter of fiscal 1999, the Company incurred termination fees and wrote off
prepaid financing costs resulting in an extraordinary loss of $723,000 (net of
income tax benefit of $477,000) or $0.12 per diluted share.
10. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 1, April 3,
2000 1999
-------- --------
Dollars in thousands
<S> <C> <C>
Various notes payable in monthly installments of $152,
interest at 8.1% to 9.6%, due at various dates
through December 2004, secured by equipment.......... $5,605
Various notes payable in monthly installments of $139,
interest at 8.8% to 9.5%, due at various dates
through July 2003, secured by equipment.............. 3,441 $1,590
Note payable in monthly installments of $52, interest
at the treasury rate plus 3.2% (8.7% on April 1,
2000), due November 2000, secured by equipment....... 406 974
Capital lease obligations (Note 11)................... 2,393 3,259
------ ------
Total............................................... 11,845 5,823
Less current portion.................................. (3,984) (1,905)
------ ------
Total long-term debt.................................. $7,861 $3,918
====== ======
</TABLE>
Scheduled principal maturities as of April 1, 2000 for fiscal years are as
follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
2001............................................................. $ 3,984
2002............................................................. 3,459
2003............................................................. 2,313
2004............................................................. 1,279
2005............................................................. 773
Thereafter....................................................... 37
-------
Total.......................................................... $11,845
=======
</TABLE>
Certain notes payable agreements contain various covenants, including among
other things, compliance with debt service coverage ratio and minimum interest
coverage ratios.
At April 1, 2000, the Company was not in compliance with certain financial
covenants under equipment note payable agreements. The lenders waived such non-
compliance as of April 1, 2000. One of the lenders amended the agreement to
eliminate all financial covenants through the end of fiscal 2001. The other
lender requires a fiscal year end test of the covenant; as such, the next
measurement date is March 31, 2001. The Company believes that it will be in
compliance with all financial covenants through the end of fiscal 2001.
11. Commitments and Contingencies
The Company has several capital leases for office furniture and equipment.
The Company also leases computer equipment and office and warehouse facilities
and equipment under noncancelable operating leases. During fiscal 2000, fiscal
1999 and fiscal 1998, total rent expense under all operating leases was
$6,185,000, $4,603,000 and $1,479,000, respectively.
37
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of April 1, 2000, the Company had commitments to purchase property and
equipment of approximately $1,918,000.
Future minimum payments under capital leases and noncancelable operating
leases with terms of one year or more at April 1, 2000 for fiscal years
consisted of the following:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
Dollars in thousands
<S> <C> <C>
2001................................................ $ 977 $ 7,631
2002................................................ 552 7,037
2003................................................ 505 4,282
2004................................................ 472 3,923
2005................................................ 385 2,853
Thereafter.......................................... 8,409
------ -------
Total lease payments.............................. 2,891 $34,135
=======
Less amounts representing interest.................... (498)
------
Present value of net minimum lease payments........... $2,393
======
</TABLE>
In the ordinary course of its business the Company is a party to certain
claims and legal actions. After consulting with legal counsel, the management
of the Company believes that the ultimate resolution of these matters will not
have a material adverse effect on the consolidated financial statements of the
Company taken as a whole.
12. Income Taxes
The income tax provision consists of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------
April 1, 2000 April 3, 1999 March 28, 1998
------------- ------------- --------------
Dollars in thousands
<S> <C> <C> <C>
Income tax expense (benefit):
Current
Federal.................... $ (676) $ 4,630 $ 98
State...................... (84) 1,182 3
------- ------- ------
Total..................... (760) 5,812 101
Deferred
Federal.................... (1,958) (1,747) 1,114
State...................... (280) (392) 516
------- ------- ------
Total..................... (2,238) (2,139) 1,630
------- ------- ------
Income tax provision
(benefit)................... $(2,998) $ 3,673 $1,731
======= ======= ======
</TABLE>
38
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------
April 1, 2000 April 3, 1999 March 28, 1998
------------- ------------- --------------
<S> <C> <C> <C>
Federal tax at statutory
rate........................ (35.0)% 35.0% 34.0%
State income taxes, net of
Federal benefit............. (5.0) 5.8 5.8
True-up of prior year tax
returns..................... (2.2)
Write off of deferred
offering costs.............. 3.0
Other........................ 0.6 0.5
----- ---- ----
Total...................... (39.4)% 41.6% 40.3%
===== ==== ====
</TABLE>
The significant components of the Company's deferred tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
April 1, 2000 April 3, 1999
------------- -------------
Dollars in thousands
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts............ $ 4,207 $ 2,895
Capitalized inventory costs................ 484 484
Accrued vacation........................... 623 268
Nondeductible reserves..................... 1,721 1,481
Deferred state taxes....................... 403 232
Other...................................... 747 995
-------- -------
Total deferred tax assets................ 8,185 6,355
-------- -------
Deferred tax liabilities
Fair value adjustment on receivables....... (2,406) (2,881)
Mark to market adjustment on investment.... (6,516)
Capitalized software....................... (1,219) (889)
Depreciation and amortization.............. (2,834) (1,964)
Other...................................... 83 (1,039)
-------- -------
Total deferred tax liabilities........... (12,892) (6,773)
-------- -------
Net deferred tax liability................. $ (4,707) $ (418)
======== =======
</TABLE>
13. Employee Benefit Plans
Stock Ownership Plan
The Company previously had an employee stock ownership plan ("ESOP") for the
benefit of its employees. The ESOP required annual Company contributions of 1%
of eligible employees' annual compensation in the form of common stock, cash or
any combination thereof. The ESOP was terminated effective April 1, 2000, the
end of the fiscal 2000 plan year, as such, a company contribution to the ESOP
was not required for fiscal 2000. In connection with this termination, all
participants became fully vested in the allocated shares on that date. ESOP
contribution expense, which represented 1% of eligible compensation totaled
$261,000 and $216,000 for fiscal 1999 and fiscal 1998, respectively. At April
1, 2000 and April 3, 1999 the ESOP held 780,531 and 798,234 shares,
respectively. All of the shares at the end of each fiscal year were allocated
to participants. All ESOP shares are considered outstanding for net income per
share calculations.
39
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans
Under the 1994 and 1997 Stock Option Plans, there are 2,090,400 shares of
common stock reserved for which the Company could grant options to eligible
employees, directors, and consultants at prices not less than the fair market
value at the date of grant for incentive stock options and not less than 85% of
the fair market value at the date of grant for nonqualified stock options.
Options granted under the Plans generally vest over four years, and generally
expire 10 years from the date of grant. During fiscal 2000, an option to
purchase 8,040 shares of common stock was issued to a 10% shareholder at an
exercise price of 115% of the fair market value at the grant date with a term
of five years.
Outstanding options under both plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price Exercisable Price
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding, March 29, 1997..... 801,809 $ 2.53 200,397 $2.43
Granted (weighted average fair
value of $1.07)................ 368,577 4.48
Forfeited....................... (22,753) 5.05
---------
Outstanding, March 28, 1998..... 1,147,633 3.11 759,386 2.54
Granted (weighted average fair
value of $2.09)................ 249,033 9.83
Exercised....................... (138,456) 2.61
Forfeited....................... (83,916) 4.41
---------
Outstanding, April 3, 1999...... 1,174,294 4.50 777,867 3.02
Granted (weighted average fair
value of $6.33)................ 335,928 12.53
Exercised....................... (24,402) 3.54
Forfeited....................... (89,369) 10.61
---------
Outstanding, April 1, 2000...... 1,396,451 $ 6.05 882,242 $3.55
=========
</TABLE>
At April 1, 2000, there were 531,091 shares available for future grant under
both plans.
During fiscal 2000 and fiscal 1999, certain officers exercised options to
purchase 2,500 and 138,456 shares of common stock, respectively. The exercise
price was paid by $9,300 and $360,000 in stockholder notes for fiscal 2000 and
fiscal 1999, respectively, with interest ranging from 7.8% to 8.0%, due in one
to three years. During fiscal 2000, $127,000 in stockholder notes were repaid
to the Company and $48,000 in stockholder notes were forgiven by the Company in
connection with a separation agreement and expensed.
The following table summarizes information about both plans at April 1,
2000:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 2.43 - $ 4.35 868,972 5.5 $ 2.98 784,814 $ 2.84
$ 5.60 - $ 9.95 288,289 8.7 8.34 83,568 8.79
$11.19 - $14.94 239,190 9.2 14.46 13,860 11.60
--------- -------
1,396,451 6.8 $ 6.05 882,242 $ 3.55
========= =======
</TABLE>
40
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company measures compensation cost using the intrinsic value-based
method of accounting. Had compensation cost been determined using the fair
market value-based accounting method, pro forma net income (loss) and earnings
per share amounts would have been as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------
April 1, April 3, March 28,
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Pro Forma Net Income (Loss) (in thousands).. $(5,041) $4,334 $2,517
Pro Forma Basic Income (Loss) Per Share..... (0.60) 0.88 0.53
Pro Forma Diluted Income (Loss) Per Share... (0.60) 0.75 0.48
</TABLE>
For purposes of fair market value disclosures, the fair market value of an
option grant was estimated using the Black-Scholes single option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------
April 1, April 3, March 28,
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Risk-Free Interest Rate........................ 6.0% 4.7% 5.6%
Average Life of Options (years)................ 5.0 5.0 5.0
Volatility..................................... 50.0% 0.0% 0.0%
Dividend Yield................................. 0.0% 0.0% 0.0%
</TABLE>
Employee Retirement Plan
The Company has an employee retirement plan intended to be qualified under
Section 401(k) of the Internal Revenue Code. Participation in the plan is
available to substantially all employees. Generally, employees may contribute
up to 17% of their annual compensation to the plan on a pre-tax basis. Under
the plan, the Company makes matching contributions of 50% up to a maximum of 4%
of each participating employee's annual compensation. The Company's
contributions to the plan totaled $606,000, $468,000 and $282,000 in fiscal
2000, fiscal 1999 and fiscal 1998, respectively.
14. Net Income (Loss) Per Share
A reconciliation of basic to diluted weighted average shares used in the
calculation of net income (loss) per share is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------
April 1, April 3, March 28,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares used in the
calculation-basic........................ 8,455,371 4,950,753 4,791,864
Effect of dilutive stock options.......... 831,087 472,006
--------- --------- ---------
Weighted average shares used in the
calculation-diluted...................... 8,455,371 5,781,840 5,263,870
========= ========= =========
</TABLE>
Stock options outstanding to purchase 1,396,451 shares of common stock
during the year ended April 1, 2000 were not included in the computation of
diluted net loss per share since the inclusion of such shares would be
antidilutive.
41
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Segment Information
In accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related 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. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2).
Information on reportable segments is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------
April 1, April 3, March 28,
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Dollars in thousands
Full-line Distribution
Net sales..................................... $570,299 $668,385 $520,465
Operating income.............................. $ 45,090 $ 52,503 $ 40,251
e-Fulfillment
Net sales..................................... $275,945 $182,734 $ 30,316
Operating income.............................. $ 31,622 $ 24,531 $ 4,022
Independent Distribution
Net sales..................................... $ 62,212 $ 55,048 $ 45,685
Operating income.............................. $ 7,662 $ 5,184 $ 6,415
Other
Unallocated expenses.......................... $(77,854) $(62,465) $(39,771)
Intersegment Eliminations
Net sales..................................... $(16,930) $(17,201) $(12,974)
Total
Net sales..................................... $891,526 $888,966 $583,492
Operating income.............................. $ 6,520 $ 19,753 $ 10,917
</TABLE>
In fiscal 2000, two customers accounted for approximately 24% of the
Company's net sales; substantially all of which were from e-Fulfillment. In
fiscal 1999, one customer accounted for approximately 11% of the Company's net
sales; substantially all of which were from Full-line Distribution. No customer
accounted for more than 10% of the Company's fiscal 1998 net sales.
42
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information concerning principal geographic areas, as determined by the
location of the customer, is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------
April 1, April 3, March 28,
2000 1999 1998
-------- -------- ---------
Dollars in thousands
<S> <C> <C> <C>
Sales by geographic area:
United States................................ $851,331 $851,545 $540,285
Foreign countries............................ 40,195 37,421 43,207
-------- -------- --------
Consolidated net sales....................... $891,526 $888,966 $583,492
======== ======== ========
</TABLE>
Foreign revenues were principally to Asia, Canada, Central America, Europe
and South America.
16. Subsequent Events
Subsequent to April 1, 2000, the Company entered into agreements with
amplified.com, Inc. ("amplified.com") to merge both Companies' Internet
businesses. The Company contributed certain of its Internet-related assets in
exchange for 50% of the outstanding shares of amplified.com. The net book value
of the net assets contributed, which included customer lists, trademarks and
tradenames, databases, design documents, office furniture and equipment, and
the Company's rights and interests under the Agreement with Loudeye (see Note
4) was insignificant. The Company did not recognize any gain or loss on the
transaction. The Company will use the equity method to account for its
investment in amplified.com.
Amplified.com will provide marketing and sales support services to existing
Valley customers for a commission. Valley will provide fulfillment services to
amplified.com customers for the cost of the product and a fulfillment fee. The
Company will provide certain services (including occupancy, systems
connectivity and support, human resource, accounting and credit department
services) to amplified.com. The Company will receive a fee for services
provided. In addition, the Company will provide amplified.com with a line of
credit under which amplified.com may borrow up to an aggregate of $2.0 million.
As of April 1, 2000 the Company has incurred certain costs totaling $737,000 in
connection with these agreements which are recorded as a receivable from
amplified.com.
43
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Quarterly Information (Unaudited)
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
-------------------------------------- ------------------------------------
Fourth Third Second First Fourth(1) Third Second First(2)
-------- -------- -------- -------- --------- -------- -------- --------
Dollars in thousands, except per share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $206,060 $294,514 $205,186 $185,766 $257,864 $287,751 $188,978 $154,373
Gross profit............ 21,699 29,829 24,538 21,871 27,822 32,044 20,996 16,950
Selling, general and
administrative
expenses............... 26,191(3) 24,345 20,808 20,073 22,311 21,605 17,409 16,734
Total operating income
(loss)................. (4,492) 5,484 3,730 1,798 5,511 10,439 3,587 216
Income (loss) before
extraordinary loss..... (5,240) 1,100 335 (799) 1,240 4,759 415 (1,262)
Net income (loss)....... $ (5,240) $ 1,100 $ 335 $ (799) $ 1,240 $ 4,759 $ 415 $ (1,985)
Basic net income (loss)
per share before
extraordinary loss..... $ (0.62) $ 0.13 $ 0.04 $ (0.09) $ 0.23 $ 0.98 $ 0.09 $ (0.26)
Diluted net income
(loss) per share before
extraordinary loss..... $ (0.62) $ 0.12 $ 0.04 $ (0.09) $ 0.21 $ 0.85 $ 0.07 $ (0.26)
Basic net income (loss)
per share.............. $ (0.62) $ 0.13 $ 0.04 $ (0.09) $ 0.23 $ 0.98 $ 0.09 $ (0.41)
Diluted net income
(loss) per share....... $ (0.62) $ 0.12 $ 0.04 $ (0.09) $ 0.21 $ 0.85 $ 0.07 $ (0.41)
</TABLE>
--------
(1) Represents a 14 week quarter.
(2) Includes extraordinary loss of $723,000 or $0.15 per share.
(3) Includes a $2.6 million increase in bad debt expense to reflect reduced
probability of collection on old accounts receivable.
44
<PAGE>
ITEM 9. Changes In And Disagreement With Accountants On Accounting And
Financial Disclosures
Not applicable.
PART III
ITEM 10. Directors And Executive Officers Of The Registrant
Information concerning our directors and executive officers is incorporated
by reference to the section entitled "Election of Directors" contained in our
definitive Proxy Statement with respect to our 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Form 10-K (the
"Proxy Statement"). Information concerning compliance with Section 16(a) of the
Exchange Act of 1934 is incorporated by reference to the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Proxy Statement.
ITEM 11. Executive Compensation
Information concerning executive compensation is incorporated by reference
to the section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management
Information concerning the security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Principal
Stockholders" contained in the Proxy Statement.
ITEM 13. Certain Relationships And Related Transactions
Information concerning certain relationships and related transactions is
incorporated by reference to the section entitled "Certain Transactions" in the
Proxy Statement.
45
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, And Reports On Form 8-K
(a) 1. Financial Statements--See Index to Consolidated Financial Statements
and Financial Statement Schedule at page 25 of this Form 10-K.
2. Financial Statement Schedules--See Index to Consolidated Financial
Statements and Financial Statement Schedule at page 25 of this Form
10-K.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1(1) Contribution Agreement dated July 2, 1999, by and among the Company,
Valley Entertainment, Inc. and Barnet J. Cohen
3.1(2) Amended and Restated Certificate of Incorporation
3.2(2) Amended and Restated Bylaws
4.3(2) Stockholder Agreement, dated January 15, 1995, between Valley and
Robert R. Cain
4.4(2) Reference is made to Exhibits 3.1 and 3.2
10.1(2) Loan and Security Agreement, dated May 21, 1998, between Valley,
Congress Financial Corporation (Northwest) and the institutions
named therein
10.1.1(3) Amendment No. 1 to Loan and Security Agreement, dated May 21, 1998,
between Valley, Congress Financial Corporation (Northwest) and the
institutions named therein
10.1.2(3) Amendment No. 2 to Loan and Security Agreement, dated May 21, 1998,
between Valley, Congress Financial Corporation (Northwest) and the
institutions named therein
10.1.3(3) Amendment No. 3 to Loan and Security Agreement, dated May 21, 1998,
between Valley, Congress Financial Corporation (Northwest) and the
institutions named therein
10.1.4(3) Amendment No. 4 to Loan and Security Agreement, dated May 21, 1998,
between Valley, Congress Financial Corporation (Northwest) and the
institutions named therein
10.1.5 Amendment No. 5 to Loan and Security Agreement, dated May 21, 1998,
between Valley, Congress Financial Corporation(Northwest) and the
institutions named therein
10.1.6 Amendment No. 6 to Loan and Security Agreement, dated May 21, 1998,
between Valley, Congress Financial Corporation (Northwest) and the
institutions named therein
10.2(2) Asset Purchase Agreement, dated May 20, 1997, between Valley and
Star Video Entertainment, LP
10.3(2) Standard Industrial Lease--Net, dated October 6, 1988, between
Valley and Betty Kuhn
10.4(2) Build-to-Suit Facility--Absolute Net Lease, dated October 3, 1989,
between Valley and Betty Kuhn
10.4.1 First Amendment to Build-to-Suit Facility--Absolute Net Lease, dated
October 3, 1989, between Valley and Betty Kuhn
10.5(2) Industrial Real Estate Lease, dated May 21, 1992, between Valley and
Panattoni Development Company
10.5.1 Surrender of Lease Agreement for Industrial Real Estate Lease, dated
May 21, 1992, between Valley and Panattoni Development Company
10.6(2) Build to Suit Lease Agreement, dated October 1, 1997, between Valley
and Pizzuti Equities Inc.
10.7(1) Form of Indemnification Agreement between Valley and each of its
officers and directors
10.8(2) 1994 Stock Option Plan and form of Option Agreement under Plan
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.8.1(2) Amendment No. 1 to 1994 Stock Option Plan
10.9.2(4) Amended and Restated 1997 Stock Option Plan (Exhibit 4.3 to Form S-
8)
10.10(2) Employee Stock Ownership Plan
10.10.1(2) Amendment No. 4 to Employee Stock Ownership Plan
10.10.2(2) Amendment No. 5 to Employee Stock Ownership Plan
10.10.3(2) Amendment No. 6 to Employee Stock Ownership Plan
10.11(2) Form of Severance and Change in Control Agreement between Valley
and its executive officers
10.12(5) Management Incentive Plan--Plan Summary
10.13(5) Lease for 260 North Pioneer Avenue, dated March 30, 1999, between
Valley and 33 North La Salle, LLC
10.14+ Services Agreement dated December 17, 1999 by and between
encoding.com Inc. (now Loudeye Technologies, Inc.) and Valley
10.14.1+ Amended and Restated Services Agreement executed as of April 7,
2000 by and between Loudeye Technologies, Inc. and Valley.
10.15+ Marketing, Sales Support and Fulfillment Agreement, dated April 9,
2000 between Valley and amplified Holdings, Inc.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
</TABLE>
--------
(1) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 8-K filed on July 16, 1999.
(2) Incorporated by reference to corresponding Exhibit included with
Registrant's Registration Statement on Form S-1 originally filed on
December 21, 1998 (File No. 333-69329).
(3) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed on August 13, 1999 (File No. 000-25617).
(4) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrants' Form S-8 filed on September
10, 1999 (File No. 333-86859).
(5) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-K filed on June 28, 1999 (File No. 000-25617).
+ Confidential treatment has been requested as to certain portions of this
exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
(b) Reports On Form 8-K.
None.
47
<PAGE>
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.
Date: June 12, 2000 Valley Media, Inc.
By:/s/ Barnet J. Cohen
----------------------------------
Barnet J. Cohen
Chairman of the Board and Acting
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Barnet J. Cohen and Patricia L. Wright, and each
of them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution for him or her in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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 and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Barnet J. Cohen Chairman of the Board and June 12, 2000
___________________________________________ Acting Chief Executive
Barnet J. Cohen Officer
/s/ Patricia L. Wright Vice President and Controller June 12, 2000
___________________________________________ (Principal Financial and
Patricia L. Wright Accounting Officer)
/s/ Lawrence Archibald Director June 12, 2000
___________________________________________
Lawrence Archibald
/s/ Robert R. Cain Director June 12, 2000
___________________________________________
Robert R. Cain
/s/ Christopher Mottern Director June 12, 2000
___________________________________________
Christopher Mottern
/s/ Wendy Paskin-Jordan Director June 12, 2000
___________________________________________
Wendy Paskin-Jordan
/s/ James Sha Director June 12, 2000
___________________________________________
James Sha
</TABLE>
48
<PAGE>
Schedule II
VALLEY MEDIA, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended April 1, 2000, April 3, 1999 and March 28, 1998
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Charged to Other End of
Description of Period Expense Accounts Deductions Period
----------- ----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Fiscal year ended March
28, 1998:
Inventory reserves.... $ 391,924 $ 1,273,409 $ 229,680 $ (308,177) $ 1,586,836
Allowance for doubtful
accounts receivable.. 825,148 6,077,164 1,833,357 (3,459,488) 5,276,181
Customer returns
reserve.............. 1,608,623 12,369,496 1,436,200 (11,693,043) 3,721,276
Vendor receivables
reserve.............. 288,487 152,680 1,695,326 (1,335,915) 800,579
----------- ----------- ---------- ------------ -----------
Total............... $ 3,114,182 $19,872,749 $5,194,563(1) $(16,796,622) $11,384,872
=========== =========== ========== ============ ===========
Fiscal year ended April
3, 1999:
Inventory reserves.... $ 1,586,836 $ 4,305,139 -- $ (3,068,608) $ 2,823,367
Allowance for doubtful
accounts receivable.. 5,276,181 5,001,511 -- (1,385,897) 8,891,795
Customer returns
reserve.............. 3,721,276 16,467,386 -- (14,433,205) 5,755,457
Vendor receivables
reserve.............. 800,579 8,762,711 -- (6,323,164) 3,240,126
----------- ----------- ------------ -----------
Total............... $11,384,872 $34,536,747 -- $(25,210,874) $20,710,745
=========== =========== ============ ===========
Fiscal year ended April
1, 2000:
Inventory reserves.... $ 2,823,367 $ 6,889,505 -- $ (5,567,974) $ 4,144,898
Allowance for doubtful
accounts receivable.. 8,891,795 4,565,512 -- (1,440,629) 12,016,678
Customer returns
reserve.............. 5,755,457 11,672,763 -- (13,909,183) 3,519,037
Vendor receivables
reserve.............. 3,240,126 10,305,962 -- (10,342,017) 3,204,071
----------- ----------- ------------ -----------
Total............... $20,710,745 $33,433,742 -- $(31,259,803) $22,884,684
=========== =========== ============ ===========
</TABLE>
--------
(1) Represents increases in reserves related to inventories and receivables
resulting from Star Video acquisition in May 1997.
S-1
