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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------------
Commission File Number 0-20243
------------------------
VALUEVISION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1673770
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Shady Oak Road, Minneapolis, MN 55344
(Address of principal executive offices)
612-947-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
As of September 8, 1997, there were 28,020,778 shares of the Registrant's
common stock, $.01 par value, outstanding.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
JULY 31, 1997
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page of
Form 10-Q
--------------
<S> <C> <C>
Item 1. Financial Statements
* Condensed Consolidated Balance Sheets as of July 31, 1997 and 3
January 31, 1997
* Condensed Consolidated Statements of Operations for the Three 4
and Six Months Ended July 31, 1997 and 1996
* Condensed Consolidated Statement of Shareholders' Equity for 5
the Six Months Ended July 31, 1997
* Condensed Consolidated Statements of Cash Flows for the Six 6
Months Ended July 31, 1997 and 1996
* Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1997 1997
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 43,943,696 $ 28,618,943
Short-term investments 14,210,200 24,239,840
Accounts receivable, net 11,134,985 6,488,094
Inventories, net 28,885,513 28,109,081
Prepaid expenses and other 14,236,536 11,483,394
Deferred taxes 392,000 416,000
----------------- -----------------
Total current assets 112,802,930 99,355,352
PROPERTY AND EQUIPMENT, NET 22,279,932 24,283,108
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET 5,769,191 6,934,546
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 14,414,825 15,052,935
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION 14,284,862 -
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 12,597,224 10,764,011
INVESTMENTS AND OTHER ASSETS, NET 9,441,892 10,022,718
----------------- -----------------
$191,590,856 $166,412,670
================== =================
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term obligations $ 420,964 $ 392,921
Accounts payable 25,700,261 24,887,904
Accrued liabilities 13,154,156 12,398,041
Income taxes payable 12,242,054 45,008
----------------- -----------------
Total current liabilities 51,517,435 37,723,874
LONG-TERM OBLIGATIONS 1,135,303 1,443,189
----------------- -----------------
Total liabilities 52,652,738 39,167,063
================= =================
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized;
28,020,778 and 28,842,198 shares issued and outstanding 280,208 288,422
Common stock purchase warrants;
3,842,143 and 5,368,557 26,984,038 26,984,038
Additional paid-in capital 73,069,654 83,309,455
Net unrealized holding gains on investments available-for-sale 2,712,668 69,437
Retained earnings 35,891,550 16,594,255
----------------- -----------------
Total shareholders' equity 138,938,118 127,245,607
----------------- -----------------
$191,590,856 $166,412,670
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 48,500,023 $ 24,340,754 $ 99,561,819 $ 47,128,421
COST OF SALES 28,576,368 14,612,379 56,943,226 28,011,710
--------------- --------------- -------------- ---------------
Gross profit 19,923,655 9,728,375 42,618,593 19,116,711
--------------- --------------- -------------- ---------------
Margin % 41.1% 40.0% 42.8% 40.6%
OPERATING EXPENSES:
Distribution and selling 20,278,997 7,690,723 41,381,831 15,094,677
General and administrative 2,445,438 1,460,663 5,360,137 2,769,169
Depreciation and amortization 1,907,374 1,371,673 3,708,614 2,730,390
--------------- --------------- -------------- --------------
Total operating expenses 24,631,809 10,523,059 50,450,582 20,594,236
--------------- --------------- -------------- --------------
OPERATING LOSS (4,708,154) (794,684) (7,831,989) (1,477,525)
--------------- --------------- -------------- --------------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations 38,850,000 - 38,850,000 27,050,000
Equity (loss) in earnings of affiliates 39,421 (95,124) (330,575) (95,124)
Interest income 348,523 1,085,670 875,793 2,158,057
Other, net (18,918) 45,582 35,406 9,446
--------------- --------------- -------------- --------------
Total other income 39,219,026 1,036,128 39,430,624 29,122,379
--------------- --------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 34,510,872 241,444 31,598,635 27,644,854
PROVISION FOR INCOME TAXES 13,452,340 96,000 12,301,340 11,046,000
--------------- --------------- -------------- --------------
NET INCOME $ 21,058,532 $ 145,444 $ 19,297,295 $ 16,598,854
=============== =============== ============== ==============
NET INCOME PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE $ 0.66 $ 0.00 $ 0.59 $ 0.55
=============== =============== ============== ==============
Weighted average number of common and
common equivalent shares outstanding 31,952,713 29,576,724 32,530,842 29,996,576
=============== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
COMMON STOCK COMMON GAINS
------------------------- STOCK ADDITIONAL ON INVESTMENTS
NUMBER PAR PURCHASE PAID-IN AVAILABLE RETAINED
OF SHARES VALUE WARRANTS CAPITAL FOR-SALE EARNINGS
------------ ----------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 28,842,198 $ 288,422 $ 26,984,038 $ 83,309,455 $ 69,437 $ 16,594,255
Exercise of stock options and warrants 1,596,080 15,961 - 194,436 - -
Common stock repurchases (2,417,500) (24,175) - (10,434,237) - -
Unrealized holding gain on
investments available-for-sale - - - - 2,643,231 -
Net income - - - - - 19,297,295
------------ ----------- -------------- --------------- ------------- ---------------
BALANCE, JULY 31, 1997 28,020,778 $ 280,208 $ 26,984,038 $ 73,069,654 $ 2,712,668 $ 35,891,550
============ =========== ============== ============== ============= ===============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
----------------
<S> <C>
BALANCE, JANUARY 31, 1997 $ 127,245,607
Exercise of stock options and warrants 210,397
Common stock repurchases (10,458,412)
Unrealized holding gain on
investments available-for-sale 2,643,231
Net income 19,297,295
----------------
BALANCE, JULY 31, 1997 $ 138,938,118
================
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
5
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 31,
-------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 19,297,295 $ 16,598,854
Adjustments to reconcile net income to net cash
provided by (used for) operating activities-
Depreciation and amortization 3,708,614 2,730,390
Deferred taxes 24,000 -
Loss in earnings of affiliates 330,575 95,124
Gain on sale of investments (100,075) -
Gain on sale of broadcast stations (38,850,000) (27,050,000)
Changes in operating assets and liabilities:
Accounts receivable, net (4,043,690) (3,103,826)
Inventories, net (776,432) (1,436,741)
Prepaid expenses and other (2,797,020) 304,091
Accounts payable and accrued liabilities 53,725 4,267,757
Income taxes payable 12,197,046 4,416,117
----------------- -----------------
Net cash used for operating activities (10,955,962) (3,178,234)
----------------- -----------------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements (2,749,377) (2,724,410)
Purchase of broadcast stations - (4,618,743)
Proceeds from sale of broadcast stations 29,979,159 40,000,000
Purchase of short-term investments (17,456,305) (60,660,703)
Proceeds from sale of short-term investments 29,595,411 39,011,424
Payment for investments and other assets (3,934,180) (2,526,458)
Proceeds from sale of investments 1,361,118 -
----------------- ----------------
Net cash provided by investing activities 36,795,826 8,481,110
----------------- ----------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 210,397 1,147,545
Payments for repurchases of common stock (10,458,412) -
Payment of long-term obligations (267,096) (141,685)
----------------- ----------------
Net cash provided by (used for)
financing activities (10,515,111) 1,005,860
----------------- ----------------
Net increase in cash and 15,324,753 6,308,736
cash equivalents
BEGINNING CASH AND CASH EQUIVALENTS 28,618,943 20,063,901
----------------- ----------------
ENDING CASH AND CASH EQUIVALENTS $ 43,943,696 $ 26,372,637
================= ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 45,000 $ 58,000
================= ================
Income taxes paid $ 75,000 $ 6,638,000
================= ================
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Receipt of 1,197,892 shares of Paxson Communications
Corporation common stock as partial consideration
from sale of broadcast television station $ 14,284,862 $ -
================= ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
(UNAUDITED)
(1) GENERAL
ValueVision International, Inc. and its subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company which markets its products
directly to consumers through electronic and print media.
The Company's principal electronic media activity is its television home
shopping network which uses recognized on-air television home shopping
personalities to market brand name merchandise and proprietary and private
label consumer products at competitive or discount prices. The Company's
24-hour per day television home shopping programming is distributed primarily
through long-term cable affiliation agreements and the purchase of
month-to-month full- and part-time block lease agreements of cable and
broadcast television time. In addition, the Company distributes its
programming through Company owned or affiliated full power Ultra-High Frequency
("UHF") broadcast television stations, low power television ("LPTV") stations
and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc., d.b.a. Montgomery Ward Direct ("VVDM"), is a
direct-mail marketer of a broad range of quality general merchandise which is
sold to consumers through direct-mail catalogs and other direct marketing
solicitations. Products offered include domestics, housewares, home accessories
and electronics. Through its wholly-owned subsidiary, Catalog Ventures, Inc.
("CVI"), the Company sells a variety of fashion jewelry, health and beauty
aids, books, audio and video cassettes and other related consumer merchandise
through the publication of five consumer specialty catalogs. The Company also
manufactures and markets, via direct-mail, women's foundation undergarments
through its wholly-owned subsidiary Beautiful Images, Inc. ("BII").
Results of operations for the three and six months ended July 31, 1997
include the direct-mail operations of VVDM, BII, and CVI, which were acquired
by the Company effective July 27, 1996, October 22, 1996 and November 1, 1996,
respectively.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The information furnished in the
interim condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which, in the opinion of management,
are necessary for a fair presentation of such financial statements. Although
management believes the disclosures and information presented are adequate to
make the information not misleading, it is suggested that these interim
condensed consolidated financial statements be read in conjunction with the
Company's most recent audited financial statements and notes thereto included
in its fiscal 1997 Annual Report on Form 10-K. Operating results for the six-
month period
7
<PAGE> 8
ended July 31, 1997, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 1998.
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform to the fiscal 1998 presentation with no impact on
previously reported net income or shareholders' equity.
(3) NET INCOME PER SHARE
The Company computes net income per share based on the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding, if any, during the period. The difference between primary and
fully diluted net income per share and weighted average number of shares
outstanding was not material or was antidilutive, and therefore not presented
separately.
(4) SALE OF BROADCAST STATION
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI (TV) Channel 66, which serves the Washington, D.C.
market, to Paxson Communications Corporation. The station was sold for
approximately $30 million in cash and 1,197,892 shares of Paxson Communications
Corporation common stock. WVVI (TV) was acquired by the Company in March 1994
for approximately $4,850,000. The pre-tax gain recorded on the sale of this
television station was $38,850,000 and was recognized in the quarter ended July
31, 1997.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128")
in February 1997. SFAS No. 128 establishes accounting standards for computing
and presenting earnings per share ("EPS") and is effective for reporting
periods ending after December 15, 1997. Management believes that the adoption
of SFAS No. 128 will not have a material impact on the Company's calculation of
EPS.
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") in June 1997. SFAS No. 131 requires that public business enterprises
report information about operating segments in annual financial statements and
requires selected information in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers and is effective
for fiscal years beginning after December 15, 1997.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes thereto
included elsewhere herein and the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF NET SALES PERCENTAGE OF NET SALES
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JULY 31, ENDED JULY 31,
----------------------- -----------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
GROSS MARGIN 41.1% 40.0% 42.8% 40.6%
------ ------ ------ ------
Operating expenses:
Distribution and selling 41.8% 31.6% 41.6% 32.0%
General and administrative 5.1% 6.0% 5.4% 5.9%
Depreciation and
amortization 3.9% 5.6% 3.7% 5.8%
------ ------ ------ ------
50.8% 43.2% 50.7% 43.7%
------ ------ ------ ------
Operating loss (9.7%) (3.3%) (7.9%) (3.1%)
====== ====== ====== ======
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision International, Inc. and its subsidiaries ("ValueVision"
or the "Company") is an integrated direct marketing company which markets
its products directly to consumers through electronic and print media.
Prior to July 1996, the Company's business operations consisted primarily
of its 24 hour per day television home-shopping program. Through a
series of strategic acquisitions in the second half of fiscal 1997, the
Company has expanded its business operations to include direct-mail
catalog business and other forms of direct marketing. The Company,
through its wholly-owned subsidiary, ValueVision Direct Marketing
Company, Inc., d.b.a. Montgomery Ward Direct ("VVDM"), is a direct-mail
marketer of a broad range of quality general merchandise which is sold to
consumers through direct-mail catalogs. Through its wholly-owned
subsidiary, Catalog Ventures, Inc. ("CVI"), the Company sells a variety
of fashion jewelry and other consumer merchandise through the publication
of five consumer specialty catalogs. The Company also manufactures and
markets, via direct-mail, women's foundation undergarments through its
wholly-owned subsidiary, Beautiful Images, Inc. ("BII").
Results of operations for the three and six months ended July 31, 1997
include the direct-mail operations of VVDM, BII and CVI, which were acquired
by the Company effective July 22, 1996, October 22, 1996 and November 1, 1996,
respectively.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended July 31, 1997 (fiscal 1998), were
$48,500,000 compared with $24,341,000 for the three months ended July 31, 1996
(fiscal 1997), a 99% increase. Net sales for the six months ended July 31,
1997 were $99,562,000 compared with $47,128,000 for the six months ended July
31, 1996 an 111% increase. Sales attributed to direct mail-order operations
totaled $22,599,000 or 46.6% of net sales for the quarter ended July 31, 1997.
The increase in net sales is primarily attributed to the Company's newly
acquired direct marketing businesses, primarily VVDM. The increase in net
sales is also attributable to an increase in full-time equivalent cable homes
able to receive the Company's television home-shopping programming, which
increased approximately 1.5 million or 14% from 10.8 million at July 31, 1996
to 12.3 million at July 31, 1997. During the 12-month period ended July 31,
1997 the Company added approximately 700,000 full-time cable homes, a 9%
increase. In addition to new homes, television home-shopping sales increased
due to the continued addition of new customers from households already
receiving the Company's television home shopping programming, offset by a
slight decline in repeat sales to existing customers. The slight decline in
repeat sales to existing customers experienced during the first six months of
fiscal 1998 was due, in part, to the effects of continued testing of certain
merchandising and programming strategies during the first half of fiscal 1998.
The Company intends to continue to test and change its merchandising and
programming strategies with the intent of improving its television
home-shopping sales results. However, while the Company is optimistic that
results may improve, there can be no assurance that such changes in strategy
will achieve the intended results. As a result of the increased number of
households able to receive the Company's programming, continued growth in
direct mail-order operations, as well as seasonality factors, the Company
anticipates net sales and operating expenses will continue to increase for the
balance of fiscal 1998.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
Gross profits for the second quarter ended July 31, 1997 and 1996 were
$19,924,000 and $9,728,000, respectively, an increase of $10,196,000 or 105%.
Gross margins for the three months ended July 31, 1997 were 41.1% compared to
40.0% for the same period last year. Gross profits for the six months ended
July 31, 1997 and 1996 were $42,619,000 and $19,117,000, respectively, an
increase of $23,502,000 or 123%. Gross margins for the six months ended July
31, 1997 were 42.8% compared to 40.6% for the same period last year. The
principal reason for the increase in gross profits was increased sales volume
primarily as a result of the direct mail operations included in the fiscal
1998 results. Television gross margins for the three and six months ended July
31, 1997 were 39.6% and 40.4%, respectively. Gross margins for the Company's
direct mail operations were 42.8% and 45.2% for the same respective periods.
Television gross margins between comparable periods remained consistent,
primarily as a result of an increase in gross margin percentages in the
jewelry and houseware product categories and a greater proportion of higher
margin non-jewelry products such as houseware products, offset by a decline in
volume of higher margin jewelry products. During the second quarter of fiscal
1998, the Company continued to broaden its merchandise mix as compared to the
same period last year by expanding the range and quantity of non-jewelry
items. As part of the ongoing shift in merchandise mix, the Company continued
to devote additional program air time to non-jewelry merchandise. Jewelry
products accounted for approximately 60% of air time during the first six
months of fiscal 1998, compared with 70% for the same period last year.
OPERATING EXPENSES
Total operating expenses for the three and six months ended July 31, 1997
were $24,632,000 and $50,451,000, respectively, versus $10,523,000 and
$20,594,000 for the comparable prior-year periods. Total distribution and
selling expenses increased $12,588,000 or 164% and $26,287,000 or 174% for the
three and six months ended July 31, 1997 over the comparable prior-year
periods. Distribution and selling expense as a percentage of net sales for
the three and six months ended July 31, 1997 were 41.8% and 41.6%,
respectively, versus 31.6% and 32.0% for the comparable prior-year periods.
Distribution and selling costs increased primarily as a result of additional
distribution and selling expenses associated with the Company's recently
acquired direct-mail marketing businesses, increases in cable access fees
resulting from the growth in the number of cable homes receiving the company's
programming, additional personnel costs associated with increased staffing
levels and labor rates and increased costs associated with handling increased
sales volume. Distribution and selling expenses for the six-month period
ended July 31, 1997 increased as a percentage of net sales over prior year
primarily as a result of increases in cable access fees on a full-time
equivalent basis with respect to the Company's television home shopping
operations, a softening of sales on front-end acquisition and sale/clearance
books, increased mail promotion costs and the experience of slightly higher
than historical return rates with respect to the Company's direct-mail
operations and additional unusual costs incurred by the Company during the
first quarter of fiscal 1998 in connection with converting and integrating the
Company's newly acquired direct-mail operations and start-up costs associated
with the Company's new fulfillment and warehouse facility located in Bowling
Green, Kentucky.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and administrative expenses increased $985,000 or 67% and
$2,591,000 or 94% for the three and six-month periods ended July 31, 1997 over
the comparable prior-year periods. General and administrative expenses as a
percentage of net sales for the three and six months ended July 31, 1997 were
5.0% and 5.4%, respectively, versus 6.0% and 5.9% for the comparable
prior-year periods. General and administrative costs increased as a result of
increased costs associated with the Company's newly acquired direct-mail
operations, increased personnel in support of expanded operations, additional
travel and related costs associated with evaluating potential acquisition
opportunities and additional legal and consulting costs incurred relative to
clarification of certain cable regulations. Overall, general and
administrative expenses have decreased as a percentage of net sales due to the
leveraging of costs relative to net sales.
Depreciation and amortization for the three and six months ended July 31,
1997 were $1,907,000 and $3,709,000 versus $1,372,000 and $2,730,000 for the
comparable prior-year periods. Depreciation and amortization costs increased
$536,000 or 39% and $978,000 or 36% for the second quarter and six-month
period ended July 31, 1997 over the comparable prior-year periods.
Depreciation and amortization costs as a percentage of net sales for the three
and six months ended July 31, 1997 were 3.9% and 3.7%, respectively, versus
5.6% and 5.8% for the comparable prior-year periods. The dollar increase is
primarily due to additional depreciation and amortization of approximately
$839,000 relating to assets associated with the Company's recently acquired
direct-mail operations, depreciation on property and equipment additions
offset by a reduction in amortization associated with the Montgomery Ward
operating agreement and licenses entered into in August 1995.
OPERATING LOSS
The operating loss was $4,708,000 and $795,000 for the three months ended
July 31, 1997 and 1996, respectively, and $7,832,000 and $1,478,000 for the
six months ended July 31, 1997 and 1996, respectively. The increase in the
operating loss resulted primarily from increases in distribution and selling
costs over prior year largely due to increases in front-end cable access fees
associated with new cable distribution, expansion of operations, sales
seasonality, lower than anticipated response rates from front-end catalog
solicitations and television home-shopping offerings and certain unusual costs
incurred by the Company in the first quarter of fiscal 1998 in connection with
the conversion and integration of the Company's recently acquired direct-mail
operations, as well as start-up costs incurred associated with the Company's
new fulfillment and warehouse facility located in Bowling Green, Kentucky.
These increases were offset by increased sales volumes, margins and a
corresponding increase in gross profits.
NET INCOME
For the three months ended July 31, 1997, net income was $21,059,000 or
$.66 per share on 31,953,000 weighted average common and common-equivalent
shares outstanding compared with net income of $145,000, break-even on a per
share basis on 29,577,000 weighted average shares outstanding for the second
quarter of fiscal 1997. Results for the second quarter of fiscal 1998 include
a pre-tax gain of $38,850,000 from the sale of television station WVVI in July
1997. For the quarter ended July 31, 1997, excluding the gain on the sale of
the television station, the Company had a net loss of $2,647,000, or $.08 per
share.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the six months ended July 31, 1997, net income was $19,297,000 or
$.59 per share on 32,531,000 weighted average common and common-equivalent
shares outstanding compared with net income of $16,599,000 or $.55 per share
on 29,997,000 weighted average common and common-equivalent shares outstanding
for the prior year period. Results for the second quarter of fiscal 1998
include a pre-tax gain of $38,850,000 from the sale of television station WVVI
in July 1997. For the six months ended July 31, 1997, excluding the gain on
the sale of the television station, the Company had a net loss of $4,423,000
or $.14 per share. Results for the second quarter of fiscal 1997 included a
pre-tax gain of $27,050,000 from the sale of television stations WAKC and WHAI
in February 1996. For the six months ended July 31, 1996, excluding the gain
on the sale of the two television stations, the Company had net income
$369,000, or $0.01 per share. For the six months ended July 31, 1997, net
income reflects an income tax provision of $12,301,000, which results in an
effective tax rate of 39%.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 18.5 million cable homes as of July 31, 1997, as compared to
16.4 million cable homes as of January 31, 1997 and to 13.5 million cable
homes as of July 31, 1996. The Company's programming is currently available
through affiliation and time-block purchase agreements with approximately 270
cable systems and two wholly-owned full power television broadcast stations.
In addition, the Company's programming is broadcast full-time over twelve
owned or affiliated low power television stations in major markets, and is
available unscrambled to homes equipped with satellite dishes. As of July 31,
1997 and 1996, the Company's programming was available to approximately 12.3
million and 10.8 million full-time equivalent cable homes ("FTE"),
respectively, an approximate 14% increase. As of January 31, 1997, the
Company's programming was available to 11.4 million FTE cable homes.
Approximately 8.3 million and 7.6 million cable homes at July 31, 1997 and
1996, respectively, received the Company's programming on a full-time basis.
Homes that receive the Company's television home shopping programming 24 hours
per day are counted as one FTE each and homes that receive the Company's
programming for any period less than 24 hours are counted based upon an
analysis of time-of day and day-of week.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997, cash and cash equivalents and short-term investments
were $58,154,000, compared to $52,859,000 as of January 31, 1997, a $5,295,000
increase. For the six months ended July 31, 1997, working capital decreased
$346,000 to $61,285,000. The current ratio was 2.2 at July 31, 1997 compared
to 2.6 at January 31, 1997. At July 31, 1997 all short-term investments and
cash equivalents were invested in securities with original maturity dates of
less than two hundred and seventy (270) days.
Total assets at July 31, 1997 were $191,591,000, compared to $166,413,000
at January 31, 1997. Shareholders' equity was $138,938,000 at July 31, 1997,
compared to $127,246,000 at January 31, 1997, an $11,692,000 increase. The
increase in shareholders' equity for the six month period ended July 31, 1997
resulted primarily from net income of $19,297,000 for the six month period
ended July 31, 1997, unrealized holding gains of $2,643,000 on investments
available-for-sale and proceeds received on the exercise of stock options and
warrants of $210,000. The equity increases were offset by $10,458,000
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
related to the repurchase of 2,418,000 shares of Company common stock made in
connection with the Company's authorized stock repurchase program.
For the six-month period ended July 31,1997 net cash used for operating
activities totaled $10,956,000 compared to net cash used for operating
activities of $3,273,000 for the six-month period ended July 31, 1996. Cash
flows from operations before consideration of changes in working capital items
and investing and financing activities was a negative $4,123,000 for the six
months ended July 31, 1997, compared to a positive $1,253,000 for the same
prior-year period. Net cash used for operating activities for the six months
ended July 31, 1997 reflects net income, as adjusted for depreciation and
amortization, loss in earnings of affiliates, gain on sale of broadcast
station and gain on sale of investments, increased prepaid expenses and
funding required to support higher levels of accounts receivable and
inventories. These uses were offset by increased accounts payable, accrued
liabilities and income taxes payable. Accounts receivable increased primarily
due to timing relative to receipt of funds from credit card companies and
increased sales volume. Prepaid expenses primarily increased as a result of
increased deferred catalog costs as the Company's direct-mail operations
prepare for the upcoming holiday season. Inventories increased from year end
to support increased sales volume and changes in merchandise mix.
Net cash provided by investing activities totaled $36,796,000 for the
six months ended July 31, 1997 compared to $8,576,000 for the same period of
fiscal 1997. For the six months ended July 31, 1997 and 1996, expenditures
for property and equipment were $2,749,000 and $2,724,000, respectively.
Expenditures for property and equipment during the periods ended July 31, 1997
and 1996 include (i) the upgrade of broadcast station and production
equipment, studios and transmission equipment and (ii) the upgrade of
computer software and related equipment. Principal future capital expenditures
will be for upgrading television production and transmission equipment, studio
expansions and order fulfillment equipment in support of expanded operations,
especially with respect to the Company's recently acquired direct-mail
operations. During the second quarter of fiscal 1998, the Company received
approximately $30.0 million in cash proceeds from the sale of television
station WVVI. For the six months ended July 31, 1997, the Company disbursed
$3,934,000 relating to certain strategic investments and other long-term
assets and received $1,361,000 in net proceeds from sales and distributions of
certain long-term investments. During the first quarter of fiscal 1997, the
Company received $40.0 million in proceeds from the sale of two television
stations; Akron ABC affiliate WAKC-TV and independent station WHAI-TV. In
addition, during the first quarter of fiscal 1997, the Company paid
approximately $3.8 million toward the acquisition of independent television
station KBGE (TV), including acquisition costs and paid $800,000 at a second
closing relative to broadcast station WVVI (TV). The Company also disbursed
$2,431,000 for investments and other long-term investments.
Net cash used for financing activities totaled $10,515,000 for the six
months ended July 31, 1997 and primarily related to repurchases of the
Company's common stock under its stock repurchase program and capital lease
obligation payments offset by proceeds received from the exercise of stock
options and warrants. Net cash provided by financing activities totaled
$1,006,000 for the six months ended July 31, 1996, and primarily related to
proceeds received from the exercise of stock options offset by installment
payments made under a five year non-compete obligation entered into upon the
acquisition of a broadcast television station.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management believes funds currently held by the Company will be
sufficient to fund the Company's operations, the repurchase of any additional
Company common stock pursuant to an authorized repurchase plan, anticipated
capital expenditures and cable launch fees through fiscal 1998. Additional
capital may be required in the event the Company is able to identify
additional acquisition targets and television stations in strategic markets at
favorable prices.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report on Form 10-Q and other materials filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain various "forward looking statements" within the meaning
of federal securities laws which represent management's expectations or
beliefs concerning future events, including statements regarding a management
restructuring, strategic investments, acquisitions and other business
combinations, anticipated operating results, revenue growth, capital spending
requirements, and the effects of regulation and competition. These, and other
forward looking statements made by the Company, must be evaluated in the
context of a number of important factors that may affect the Company's
financial position and results of operations including: the availability of
experienced managers for a management restructuring, consumer spending and
debt levels, interest rate fluctuations, seasonal variations in consumer
purchasing activities, increases in postal, paper and outbound shipping costs,
competition in the retail and direct marketing industries, continuity of
relationships with or purchases from major vendors, product mix, competitive
pressure on sales and pricing, the ability of the Company to manage growth and
expansion, changes in the regulatory framework affecting the Company,
increases in cable access fees and other costs which cannot be recovered
through improved pricing and the identification and availability of potential
strategic investments, acquisition or business combination candidates at
prices favorable to the Company. Investors are cautioned that all forward
looking statements involve risk and uncertainty and that actual results may
differ materially from such statements.
In addition to any specific risks and uncertainties discussed in this
Form 10-Q, the risks and uncertainties discussed in detail in the Company's
Form 10-K for the fiscal year ended January 31, 1997 provide information which
should be considered in evaluating any of the Company's forward looking
statements. In addition, investors should be aware that the facts and
circumstances which exist when any forward looking statements are made and on
which those forward looking statements are based, may significantly change in
the future, thereby rendering obsolete the forward looking statements on which
such facts and circumstances were based.
15
<PAGE> 16
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
(a) Equity investment in CML Group, Inc.
On July 30, 1997, the Company reported that it filed a Schedule
13D with the Securities and Exchange Commission relating to the
accumulation of the common stock of CML Group, Inc. As of July 30,
1997, the Company, together with an affiliate, beneficially owned
2,538,000 shares, or approximately 5.1% of shares outstanding, of CML
Group Inc.'s common stock. The Schedule 13D states that ValueVision
and its affiliate acquired the shares of common stock of CML Group
for investment purposes, and that consistent with such purposes, will
seek to have conversations with management of CML Group concerning
various general operational, marketing and financial aspects of CML
Group's business. The Schedule 13D further states that ValueVision
and its affiliate may seek to have further substantive conversations
with management of CML Group to discuss various ways in which
ValueVision and CML Group may work together for the mutual benefit of
their businesses, including, but not limited to, possible working
synergies that may be available in television, direct mail and retail
supportive marketing endeavors. In addition, either or both of
ValueVision and its affiliate may also seek to engage in discussions
with other stockholders of CML Group with respect to manners in which
the value of the common stock of CML Group may be enhanced.
(b) Management Restructuring
On August 28, 1997, the Company announced that founders Robert L.
Johander and Nicholas M. Jaksich have received the approval of the
independent members of the board to begin a plan for restructuring
the Company's management. With the board's assistance, Mr. Johander
and Mr. Jaksich will develop a plan to identify and attract a new
team to assume both chief executive and chief operating officer roles
to direct the Company and its growing financial resources. The
management restructuring plan is anticipated to be completed by the
end of fiscal 1999. The board will also consider possible strategic
investments, acquisitions or other business combinations that could
merge the Company's financial strength with proven managerial
expertise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net Income Per Share.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
/s/ Robert L. Johander
----------------------------
Robert L. Johander
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Stuart R. Romenesko
----------------------------
Stuart R. Romenesko
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
September 10, 1997
17
<PAGE> 1
Exhibit 11
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
Computation of Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended July 31,
---------------------------
1997 1996
------- -------
<S> <C> <C>
Net income $21,058,532 $ 145,444
=========== ===========
Weighted average number of common
shares outstanding 27,987,192 29,576,724
Shares assumed to be issued upon the
exercise of common stock options and
warrants under the treasury stock method 3,965,521 -
----------- ----------
Weighted average number of common
shares and common equivalent shares
outstanding 31,952,713 29,576,724
=========== ==========
Net income per common and dilutive
common equivalent shares $ 0.66 $ 0.00
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended July 31,
--------------------------
1997 1996
------ ------
<S> <C> <C>
Net income $19,297,295 $16,598,854
=========== ===========
Weighted average number of common
shares outstanding 28,384,121 29,464,430
Shares assumed to be issued upon the
exercise of common stock options and
warrants under the treasury stock method 4,146,721 532,146
----------- ----------
Weighted average number of common
shares and common equivalent shares
outstanding 32,530,842 29,996,576
=========== ==========
Net income per common and dilutive
common equivalent shares $ 0.59 $ 0.55
</TABLE> =========== ==========
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Value
Vision International, Inc's consolidated balance sheet as of July 31, 1997 and
consolidated statements of operations for the three and six month periods ended
July 31, 1997, and is qualified in its entirety by reference to such
consolidated financial statements as filed on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 43,943,696
<SECURITIES> 14,210,200
<RECEIVABLES> 11,134,985<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 28,885,513
<CURRENT-ASSETS> 112,802,930
<PP&E> 22,279,932<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 191,590,856
<CURRENT-LIABILITIES> 51,517,435
<BONDS> 0
0
0
<COMMON> 280,208
<OTHER-SE> 138,657,910
<TOTAL-LIABILITY-AND-EQUITY> 191,590,856
<SALES> 99,561,819
<TOTAL-REVENUES> 99,561,819
<CGS> 56,943,226
<TOTAL-COSTS> 107,393,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,598,635
<INCOME-TAX> 12,301,340
<INCOME-CONTINUING> 19,297,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,297,295
<EPS-PRIMARY> .59
<EPS-DILUTED> 0
<FN>
<F1>Accounts receivable represents amounts net of allowances for doubtful account.
<F2>Property and equipment represents amounts net of accumulated depreciation.
</FN>
</TABLE>
