<PAGE> 1
================================================================================
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, 1998
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 10, 1998, there were 25,464,681 shares of the Registrant's
common stock, $.01 par value, outstanding.
================================================================================
<PAGE> 2
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
JULY 31, 1998
<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, 1998 and 3
January 31, 1998
- Condensed Consolidated Statements of Operations for the Three 4
and Six Months Ended July 31, 1998 and 1997
- Condensed Consolidated Statement of Shareholders' Equity for 5
the Six Months Ended July 31, 1998
- Condensed Consolidated Statements of Cash Flows for the Six 6
Months Ended July 31, 1998 and 1997
- Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
JULY 31, JANUARY 31,
1998 1998
------------------ --------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 37,458,053 $ 17,198,074
Short-term investments 4,139,908 14,667,669
Accounts receivable, net 14,943,965 8,694,293
Inventories, net 20,228,766 20,426,862
Prepaid expenses and other 9,558,701 10,478,848
Note receivable -- National Media Corporation 10,000,000 7,000,000
Income taxes receivable - 748,319
Deferred income taxes 447,000 447,000
------------- -------------
Total current assets 96,776,393 79,661,065
PROPERTY AND EQUIPMENT, NET 14,937,710 21,403,724
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET 2,062,966 5,807,187
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 1,975,480 2,073,360
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION 11,532,233 9,847,688
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 6,161,919 6,892,454
INVESTMENTS AND OTHER ASSETS, NET 8,350,047 9,078,826
------------- -------------
$ 141,796,748 $ 134,764,304
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 387,072 $ 410,648
Accounts payable 17,177,539 17,643,895
Accrued liabilities 12,639,093 11,535,551
Income taxes payable 1,939,018 -
------------- -------------
Total current liabilities 32,142,722 29,590,094
LONG-TERM OBLIGATIONS 779,340 1,036,821
DEFERRED INCOME TAXES 1,703,000 1,869,660
------------- -------------
Total liabilities 34,625,062 32,496,575
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized;
25,464,681 and 26,780,778 shares issued and outstanding 254,647 267,808
Additional paid-in capital 69,234,928 74,538,225
Accumulated other comprehensive losses (6,542,692) (6,275,652)
Notes receivable from officers (1,031,754) (960,476)
Retained earnings 45,256,557 34,697,824
------------- -------------
Total shareholders' equity 107,171,686 102,267,729
------------- -------------
$ 141,796,748 $ 134,764,304
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE> 4
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JULY 31,
--------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
NET SALES $ 44,082,050 $ 48,500,023
COST OF SALES 25,951,630 28,576,368
------------ -------------
Gross profit 18,130,420 19,923,655
------------ -------------
Margin % 41.1% 41.1%
OPERATING EXPENSES:
Distribution and selling 16,855,652 20,278,997
General and administrative 3,136,361 2,445,438
Depreciation and amortization 1,275,539 1,907,374
------------ -------------
Total operating expenses 21,267,552 24,631,809
------------ -------------
OPERATING LOSS (3,137,132) (4,708,154)
------------ -------------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations - 38,850,000
Gain (loss) on sale of property 3,653,491 -
National Media Corporation
terminated acquisition costs (2,350,000) -
Equity in earnings (losses) of affiliates (123,231) 39,421
Interest income 781,673 348,523
Other, net 12,702 (18,918)
------------ -------------
Total other income 1,974,635 39,219,026
------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES (1,162,497) 34,510,872
INCOME TAX PROVISION (BENEFIT) (441,000) 13,452,340
------------ -------------
NET INCOME (LOSS) $ (721,497) $ 21,058,532
============ =============
NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ 0.66
============ =============
NET INCOME (LOSS) PER COMMON SHARE
---ASSUMING DILUTION $ (0.03) $ 0.66
============ =============
Weighted average number of common shares
outstanding:
Basic 25,979,193 31,829,335
============ =============
Diluted 25,979,193 31,952,713
============ =============
<CAPTION>
FOR THE SIX MONTHS ENDED
JULY 31,
-----------------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
NET SALES $ 87,758,283 $ 99,561,819
COST OF SALES 50,973,984 56,943,226
---------------- ---------------
Gross profit 36,784,299 42,618,593
---------------- ---------------
Margin % 41.9% 42.8%
OPERATING EXPENSES:
Distribution and selling 33,674,415 41,381,831
General and administrative 5,990,029 5,360,137
Depreciation and amortization 2,545,618 3,708,614
---------------- ---------------
Total operating expenses 42,210,062 50,450,582
---------------- ---------------
OPERATING LOSS (5,425,763) (7,831,989)
---------------- ---------------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations 19,750,000 38,850,000
Gain (loss) on sale of property 3,639,360 (3,387)
National Media Corporation
terminated acquisition costs (2,350,000) -
Equity in earnings (losses) of affiliates (139,593) (330,575)
Interest income 1,564,881 875,793
Other, net (6,152) 38,793
---------------- ---------------
Total other income 22,458,496 39,430,624
---------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 17,032,733 31,598,635
INCOME TAX PROVISION (BENEFIT) 6,474,000 12,301,340
---------------- ---------------
NET INCOME (LOSS) $ 10,558,733 $ 19,297,295
================ ===============
NET INCOME (LOSS) PER COMMON SHARE $ 0.40 $ 0.60
================ ===============
NET INCOME (LOSS) PER COMMON SHARE
---ASSUMING DILUTION $ 0.40 $ 0.59
================ ===============
Weighted average number of common shares
outstanding:
Basic 26,379,986 32,389,196
================ ===============
Diluted 26,488,418 32,530,842
================ ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
COMPREHENSIVE NUMBER PAR
INCOME OF SHARES VALUE
------ --------- -----
<S> <C> <C> <C>
BALANCE, JANUARY 31, 1998 26,780,778 $ 267,808
Comprehensive income:
Net income $ 10,558,733 - -
Other comprehensive income, net of tax:
Unrealized losses on securities, net
of tax of $223,000 (364,193)
Gains on securities included in net
income, net of tax of $60,000 97,153
------------
Other comprehensive loss (267,040) - -
------------
Comprehensive income $ 10,291,693
============
Repurchases of common stock (1,322,430) (13,224)
Increase in notes receivable from officers - -
Exercise of stock options 6,333 63
----------- ----------
BALANCE, JULY 31, 1998 25,464,681 $ 254,647
=========== ==========
<CAPTION>
ACCUMULATED NOTES
ADDITIONAL OTHER RECEIVABLE
PAID-IN COMPREHENSIVE FROM RETAINED
CAPITAL LOSSES OFFICERS EARNINGS
------- ------ -------- --------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1998 $ 74,538,225 $ (6,275,652) $ (960,476) $ 34,697,824
Comprehensive income:
Net income - - - 10,558,733
Other comprehensive income, net of tax:
Unrealized losses on securities, net
of tax of $223,000
Gains on securities included in net
income, net of tax of $60,000
Other comprehensive loss - (267,040) - -
Comprehensive income
Repurchases of common stock (5,311,150) - - -
Increase in notes receivable from officers - - (71,278) -
Exercise of stock options 7,853 - - -
-------------- ------------ ------------ ---------------
BALANCE, JULY 31, 1998 $ 69,234,928 $ (6,542,692) $ (1,031,754) $ 45,256,557
============== ============ ============ ===============
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
------
<S> <C>
BALANCE, JANUARY 31, 1998 $ 102,267,729
Comprehensive income:
Net income 10,558,733
Other comprehensive income, net of tax:
Unrealized losses on securities, net
of tax of $223,000
Gains on securities included in net
income, net of tax of $60,000
Other comprehensive loss (267,040)
Comprehensive income
Repurchases of common stock (5,324,374)
Increase in notes receivable from officers (71,278)
Exercise of stock options 7,916
-------------
BALANCE, JULY 31, 1998 $ 107,171,686
=============
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
5
<PAGE> 6
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 31,
----------------------------------------------
1998 1997
------------------ ----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 10,558,733 $ 19,297,295
Adjustments to reconcile net income to net cash
provided by (used for) operating activities-
Depreciation and amortization 2,545,618 3,708,614
Deferred taxes (3,660) 24,000
Equity in losses of affiliates 139,593 330,575
(Gain) loss on sale of property (3,639,360) 3,387
Gain on sale of broadcast stations (19,750,000) (38,850,000)
National Media Corporation terminated
acquisition costs 2,350,000 -
Changes in operating assets and liabilities:
Accounts receivable, net (6,249,672) (4,043,690)
Inventories, net 198,096 (776,432)
Prepaid expenses and other 788,780 (2,797,020)
Accounts payable and accrued liabilities 600,436 53,725
Income taxes payable (receivable), net 2,687,337 12,197,046
------------ ------------
Net cash used for operating activities (9,774,099) (10,852,500)
------------ ------------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements (638,296) (2,749,377)
Proceeds from sale of investments and property 9,426,606 1,257,656
Proceeds from sale of broadcast stations 24,483,200 29,979,159
Loan to National Media Corporation (3,000,000) -
Purchase of short-term investments (3,449,226) (17,456,305)
Proceeds from sale of short-term investments 11,226,750 29,595,411
Payment for investments and other assets (2,386,330) (3,934,180)
------------ ------------
Net cash provided by investing activities 35,662,704 36,692,364
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 7,916 210,397
Payments for repurchases of common stock (5,324,374) (10,458,412)
Payment of long-term obligations (312,168) (267,096)
------------ ------------
Net cash used for financing activities (5,628,626) (10,515,111)
------------ ------------
Net increase in cash and cash equivalents 20,259,979 15,324,753
BEGINNING CASH AND CASH EQUIVALENTS 17,198,074 28,618,943
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 37,458,053 $ 43,943,696
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 71,000 $ 45,000
============ ============
Income taxes paid $ 3,826,000 $ 75,000
============ ============
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
<PAGE> 7
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
(Unaudited)
(1) GENERAL
ValueVision International, Inc. and 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 full
power Ultra-High Frequency ("UHF") broadcast television stations, low power
television ("LPTV") stations and to satellite dish owners. The Company also
complements its television home shopping business by the sale of merchandise
through its Internet shopping website (www.vvtv.com).
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), doing business as HomeVisions, is a
direct-mail marketer of a broad range of 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 and
other women's apparel through its wholly-owned subsidiary Beautiful Images, Inc.
("BII").
(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 1998
Annual Report on Form 10-K. Operating results for the six month period ended
July 31, 1998, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 1999.
7
<PAGE> 8
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
(Unaudited)
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation with no impact on
previously reported net income (loss).
(3) NET INCOME (LOSS) PER COMMON SHARE
In the fourth quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"),
which established new guidelines for computing and presenting earnings (loss)
per share data ("EPS"), and retroactively restated EPS for all prior periods.
SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is
computed by dividing reported net income (loss) by the weighted average number
of common shares outstanding. Diluted EPS reflects potential dilution from
outstanding stock options and warrants, using the treasury stock method. The
adoption of SFAS No. 128 did not have a significant effect on previously
reported EPS information.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
----------------------------------- ------------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income <loss> $ (721,497) $ 21,058,532 $ 10,558,733 $ 19,297,295
=============== ============== =============== ===============
Weighted average number of common
shares outstanding - Basic 25,979,193 31,829,335 26,379,986 32,389,196
Dilutive effect of stock options -- 123,378 108,432 141,646
--------------- ------------- -------------- ---------------
Weighted average number of common
shares outstanding - Diluted 25,979,193 31,952,713 26,488,418 32,530,842
=============== ============== =============== ===============
Net income <loss> per common share $ (0.03) $ 0.66 $ 0.40 $ 0.60
=============== ============== =============== ===============
Net income <loss> per common share $ (0.03) $ 0.66 $ 0.40 $ 0.59
- assuming dilution =============== ============== =============== ===============
</TABLE>
Stock options to purchase approximately 120,000 weighted shares of common
stock were outstanding for the quarter ended July 31, 1998 but were not included
in the computation of diluted EPS for that period because of the loss incurred
by the Company in the quarter, therefore, the effect would have been
antidilutive.
8
<PAGE> 9
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
(Unaudited)
(4) COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130") which establishes standards for reporting in the financial statements
all changes in equity during a period, except those resulting from investments
by and distributions to owners. For the Company, comprehensive income includes
net income and other comprehensive income (loss) which consists of unrealized
holding gains and losses from equity investments classified as
"available-for-sale". Total comprehensive income (loss) was ($3,975,000) and
$22,740,000 for the three months ended July 31, 1998 and 1997, respectively.
Total comprehensive income was $10,292,000 and $20,979,000 for the six months
ended July 31, 1998 and 1997, respectively.
(5) SALE OF BROADCAST STATIONS
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE-TV Channel 33, which serves the Seattle, Washington
market, along with two of the Company's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson Communications
Corporation ("Paxson") for a total of approximately $35 million in cash. Under
the terms of the agreement, Paxson paid the Company approximately $25 million
upon closing and the remaining $10 million is to be paid when KBGE, which is
currently operating at reduced power from downtown Seattle, is able to relocate
its antenna and increase its transmitter power to a level at or near its
licensed full power. The Company will retain and continue to serve the Seattle
market via its recently-launched low-power station K58DP-TV, which transmits
from downtown Seattle. KBGE was acquired by the Company in March 1996 for
approximately $4.6 million. The pre-tax gain recorded on the first installment
with respect to the sale of these television stations was approximately $19.8
million and was recognized in the fiscal quarter ended April 30, 1998.
(6) NATIONAL MEDIA CORPORATION
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media Corporation is a publicly-held direct marketer of
consumer products through the use of direct response transactional television
programming known as infomercials.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it did not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the
9
<PAGE> 10
Company common stock have demanded their dissenter's rights. The Company and
National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenter's notice,
the companies mutually agreed to postpone their respective shareholder meetings.
On June 2, 1998, the Company announced that attempts to renegotiate new,
mutually acceptable terms and conditions regarding a transaction with National
Media were unsuccessful and the Merger Agreement was terminated. As of July 31,
1998, the Company had incurred approximately $2,350,000 of acquisition related
costs and wrote off these amounts in the second quarter ended July 31, 1998.
(7) COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a stock repurchase program whereby
the Company may repurchase shares of its common stock in the open market through
negotiated transactions, at prices and times deemed to be beneficial to the
long-term interests of shareholders and the Company. In June 1998, the Company's
Board of Directors authorized an additional repurchase of up to $6 million of
the Company's common stock. As of July 31, 1998, the Company was authorized to
repurchase an aggregate of $26 million of its common stock of which
approximately $22 million in stock had been repurchased. In the second quarter
of fiscal 1999, the Company repurchased 1,322,000 common shares at a total cost
of $5,324,000.
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("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.
The Company plans to adopt the disclosure requirements of SFAS No. 131 in its
fiscal 1999 year-end financial statements when required. The disclosure
requirements of SFAS No. 131 need not be applied to interim periods in the
initial year of application.
10
<PAGE> 11
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, 1998.
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,
--------------------------------------------------------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
GROSS MARGIN 41.1% 41.1% 41.9% 42.8%
------ ------ ------- -----
Operating expenses:
Distribution and selling 38.2% 41.8% 38.4% 41.6%
General and administrative 7.1% 5.1% 6.8% 5.4%
Depreciation and amortization 2.9% 3.9% 2.9% 3.7%
----- ----- ----- -----
48.2% 50.8% 48.1% 50.7%
----- ----- ----- -----
Operating loss (7.1%) (9.7%) (6.2%) (7.9%)
======= ====== ====== ======
</TABLE>
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision International, Inc. and 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 television home shopping network 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 full power Ultra-High Frequency ("UHF")
broadcast television stations, low power television ("LPTV") stations and to
satellite dish owners. The Company also complements its television home shopping
business by the sale of merchandise through its Internet shopping website
(www.vvtv.com).
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), doing business as HomeVisions, is a
direct-mail marketer of a broad range of 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 related consumer merchandise through the publication of five consumer
specialty catalogs. The Company also manufactures and markets, via direct-mail,
women's foundation undergarments and other women's apparel through its
wholly-owned subsidiary, Beautiful Images, Inc. ("BII").
NATIONAL MEDIA CORPORATION
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media Corporation is a publicly-held direct marketer of
consumer products through the use of direct response transactional television
programming known as infomercials.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it did not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company common stock have demanded their dissenter's rights. The Company and
National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenter's notice,
the companies mutually agreed to postpone their respective shareholder meetings.
On June 2, 1998, the Company announced that attempts to renegotiate new,
mutually acceptable terms and conditions regarding a transaction with National
Media were unsuccessful and the Merger Agreement was terminated. As of July 31,
1998, the Company incurred approximately $2,350,000 of acquisition related costs
and wrote off these amounts in the second quarter ended July 31, 1998.
12
<PAGE> 13
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended July 31, 1998 (fiscal 1999), were
$44,082,000 compared with net sales of $48,500,000 for the three months ended
July 31, 1997 (fiscal 1998), a 9.1% decrease. Net sales for the six months ended
July 31, 1998 were $87,758,000 compared with $99,562,000 for the six months
ended July 31, 1997, an 11.9% decrease. The decrease in net sales is directly
attributable to the decline in catalog sales resulting from the downsizing of
the HomeVisions (formerly known as Montgomery Ward Direct) direct-mail
operations after the November 1997 restructuring of the Company's operating
agreements with Montgomery Ward & Co., Incorporated ("Montgomery Ward"). Sales
attributed to direct-mail marketing operations totaled $9,361,000 or 21.2% of
total net sales for the quarter ended July 31, 1998 and totaled $22,599,000 or
46.6% of total net sales for the quarter ended July 31, 1997. Sales attributed
to the Company's television home-shopping programming increased 34.0% to
$34,721,000 for the quarter ended July 31, 1998 from $25,901,000 for the
comparable prior year period. The increase in television home-shopping net sales
occurred while full-time equivalent cable homes able to receive the Company's
home-shopping programming decreased 3% to 12.0 million at July 31, 1998 from
12.3 million at July 31, 1997. This improvement in home shopping net sales is a
direct result of a strengthened merchandising effort under the leadership of
ValueVision - TV's new general management. During the 12-month period ended July
31, 1998 the Company added approximately 1.0 million full-time cable homes, a
12% increase. In addition to new full-time cable 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, as well as
an increase in repeat sales to existing customers. The increase in repeat sales
to existing customers experienced during the first six months of fiscal 1999 was
due, in part, to the effects of continued testing of certain merchandising and
programming strategies during the first half of fiscal 1999. Certain changes
were made to the Company's merchandising and programming strategies in the
fourth quarter of fiscal 1998 and the first half of fiscal 1999 which
contributed to an improvement in television home-shopping sales. 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 will continue to
improve, there can be no assurance that such changes in strategy will achieve
the intended results.
GROSS PROFITS
Gross profits for the second quarter ended July 31, 1998 and 1997 were
$18,130,000 and $19,924,000, respectively, a decrease of $1,794,000 or 9.0%.
Gross margins for the three months ended July 31, 1998 and 1997 were 41.1%.
Gross profits for the six months ended July 31, 1998 and 1997 were $36,784,000
and $42,619,000, respectively, a decrease of $5,835,000 or 13.7%. Gross margins
for the six months ended July 31, 1998 were 41.9% compared to 42.8% for the same
period last year. The principal reason for the decrease in gross profits was the
decreased sales volume resulting from the downsizing of the HomeVisions catalog
operations. Television gross margins for the three and six months ended July 31,
1998 were 38.2% and 38.1%, respectively. Gross margins for the Company's direct
mail-order operations were 52.1% and 52.0% for the same respective periods.
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-order
operations were 42.8% and 45.2% for the same respective periods. Television home
shopping gross margins between comparable periods decreased from prior year
primarily as a result of a decrease in gross margin percentages in the jewelry,
giftware and houseware product categories offset by an increase in the higher
margin jewelry product category. During the first half of fiscal 1999, the
Company has attempted to balance its merchandise mix between jewelry and non-
jewelry items as compared to the same period last year in order to increase
television home-shopping sales while
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
at the same time maintaining margins. As part of the ongoing shift in
merchandise mix, the Company devoted additional program air time to jewelry
merchandise in the second quarter of fiscal 1999. Jewelry products accounted for
approximately 66% of air time during the first six months of fiscal 1999,
compared with 60% for the same period last year. Gross margins for the Company's
direct mail-order operations increased primarily as a result of the decrease in
HomeVisions sales due to the downsizing of the HomeVisions catalog operations
which has a considerably lower margin than CVI or BII and as a result of the
exclusion of two lower margin CVI catalog titles from the fiscal 1999 summer
mailing.
OPERATING EXPENSES
Total operating expenses for the three and six months ended July 31, 1998
were $21,268,000 and $42,210,000, respectively, versus $24,632,000 and
$50,451,000 for the comparable prior-year periods. Distribution and selling
expense decreased $3,423,000 or 16.9% to $ 16,856,000 and $7,707,000 or 18.6% to
$33,674,000 for the three and six months ended July 31, 1998 over the comparable
prior-year period. Distribution and selling expense as a percentage of net sales
for the three and six months ended July 31, 1998 were 38% versus 42% for the
comparable prior year periods. Distribution and selling costs decreased
primarily as a result of the downsizing of the Company's HomeVisions catalog
operations, offset by increases in net cable access fees due to an increase in
the rate per full-time equivalent cable home, increased marketing and
advertising fees as a result of absorbing additional advertising costs which
were previously resold to Montgomery Ward, costs associated with increased
staffing levels and labor rates due to increases in television home shopping
sales volumes. Distribution and selling expenses decreased as a percentage of
net sales over prior year primarily as a result of additional unusual costs
incurred by the Company and included in the first half of fiscal 1998 in
connection with the conversion and integration of the Company's acquired
direct-mail operations and the start-up of the Company's fulfillment and
warehouse facility.
General and administrative expenses increased $690,000 or 28.3% and
$630,000 or 11.8% for the three and six months ended July 31, 1998 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, 1998 were 7%
versus 5% for the comparable prior-year periods. General and administrative
costs increased primarily as a result of increased costs associated with
increased administrative personnel and salaries, particularly the hiring of
several senior level executives, and legal costs associated with certain
merchandising litigation. General and administrative costs increased as a
percentage of net sales from prior year as a result of increased general
administrative costs and the decrease in net sales from year to year.
Depreciation and amortization costs for the three and six months ended July
31, 1998 were $1,275,000 and $2,546,000, respectively, versus $1,907,000 and
$3,709,000 for the comparable prior-year periods. Depreciation and amortization
costs decreased $632,000 or 33.1% and $1,163,000 or 31.4% for the three and six
months ended July 31, 1998 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, 1998 and 1997 were 3% and 4%, for both years respectively. The
dollar decrease is primarily due to a reduction in amortization expense of
approximately $844,000 relating to intangible assets reduced in connection with
the November 1997 amended Montgomery Ward operating and license agreement. In
addition, depreciation and amortization expense decreased from prior year as a
result of the Company's sale of its Seattle, Washington television broadcast
station (KBGE-TV, Channel 33) in February 1998.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING LOSS
For the three months ended July 31, 1998, the Company incurred an operating
loss of $3,137,000 compared to an operating loss of $4,708,000 for the three
months ended July 31, 1997, a decrease of $1,571,000 or 33%. For the six months
ended July 31, 1998, the Company incurred an operating loss of $5,426,000
compared to an operating loss of $7,832,000 for the six months ended July 31,
1997, a decrease of $ 2,406,000 or 31%. The improvement in the operating loss
resulted primarily from decreases in distribution and selling costs over prior
year due to the recent downsizing of the HomeVisions catalog operations, the
overall improvement in the Company's television home shopping business and
because the first half of fiscal 1998 included certain unusual costs incurred by
the Company in connection with the conversion and integration of the Company's
acquired direct-mail operations and start-up costs incurred associated with the
Company's fulfillment and warehouse facility. Also contributing to the operating
loss improvement for the second quarter and first half of fiscal 1999 was a
reduction in amortization expense compared to prior year relating primarily to
the November 1997 amended Montgomery Ward operating and license agreement. These
operating improvements were offset by increased general and administrative
costs, decreased sales volumes and a corresponding decrease in gross profits.
NET INCOME (LOSS)
For the three months ended July 31, 1998, the Company reported a net loss
of $721,000 or $.03 per share on 25,979,000 diluted weighted average common
shares outstanding ($.03 per share on 25,979,000 basic shares) compared with net
income of $21,058,000, or $.66 per share on 31,953,000 diluted weighted average
common shares outstanding ($.66 per share on 31,829,000 basic shares) for the
second quarter of fiscal 1998. Results for the second quarter of fiscal 1999
include the writeoff of $2,350,000 of acquisition related costs associated with
the terminated merger with National Media Corporation and gains on the sale of
property of $3,653,000. 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
WVVI, the Company had a net loss of $2,647,000 or $.08 per basic and diluted
share.
For the six months ended July 31, 1998, net income was $10,559,000 or $.40
per share on 26,488,000 diluted weighted average common shares outstanding ($.40
per share on 26,380,000 basic shares) compared with net income of $19,297,000 or
$.60 per share on 32,531,000 diluted weighted average common shares outstanding
($.59 per share on 32,389,000 basic shares). Results for the six months ended
July 31, 1998 include a pre-tax gain of $19,750,000 from the sale of television
station KBGE-TV Channel 33 in Seattle, Washington and two low-power television
stations and a minority interest in an entity which had applied for a new
full-power station. For the six months ended July 31, 1998, excluding the gain
on the sale of the television stations, the Company had a net loss of $1,685,000
or $.06 per basic and diluted share. Results for fiscal 1998 included a pre-tax
gain of $38,850,000 from the sale of television station WVVI. 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 basic and diluted share.
For the six months ended July 31, 1998, net income reflects an income tax
provision of $6,474,000 which results in an effective tax rate of 38%.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 17.3 million cable homes as of July 31, 1998, as compared to 17.4
million cable homes as of January 31, 1998 and to 18.5 million cable homes as of
July 31, 1997. The Company's programming is currently available through
affiliation and time-block purchase agreements with approximately 300 cable
systems and one wholly-owned full power television broadcast station. In
addition, the Company's programming is broadcast full-time over eleven owned low
power television stations in major markets, and is available unscrambled to
homes equipped with satellite dishes. As of July 31, 1998 and 1997, the
Company's programming was available to approximately 12.0 million and 12.3
million full-time equivalent ("FTE") cable homes, respectively. As of January
31, 1998, the Company's programming was available to 11.7 million FTE cable
homes. Approximately 9.3 million and 8.3 million cable homes at July 31, 1998
and 1997, 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.
CIRCULATION
With respect to the Company's direct-mail marketing operations,
approximately 3.7 and 6.5 million HomeVisions catalogs were mailed,
respectively, in the three and six months ended July 31, 1998, (10.0 and 19.0
million, respectively, in the three and six months ended July 31, 1997). At July
31, 1998, HomeVisions had approximately 400,000 "active" customers (defined as
individuals that have purchased from the Company within the preceding 12 months)
and combined customer and prospect files that totaled approximately 3.4 million
names. Approximately 4.8 and 9.6 million CVI catalogs were mailed, respectively,
in the three and six months ended July 31, 1998, (6.7 and 12.1 million,
respectively, in the three and six months ended July 31, 1997). At July 31,
1998, CVI had approximately 547,000 active catalog customers and approximately
5.0 million customer names in its catalog customer list database. BII had
approximately 167 and 342 million space advertisements or "impressions"
circulated in national and regional newspapers and magazines, respectively,
during the three and six months ended July 31, 1998, (67 and 235 million,
respectively, in the three and six months ended July 31, 1997). At July 31,
1998, BII had approximately 325,000 active customers and approximately 780,000
customer names in its customer list database.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 CONSIDERATIONS
The Year 2000 issue is the result of computer programs using only the last
two digits to indicate the calendar year. If uncorrected, such computer programs
may be unable to interpret dates correctly beyond the year 1999, which in turn,
may cause computer system failure or other computer errors disrupting
operations. The Company has reviewed the implications of its Year 2000
compliance issues and has formed a Year 2000 Compliance Project team to
establish and take steps to ensure that the Company's information systems and
software applications will manage dates beyond 1999. The scope of the Company's
Year 2000 readiness effort includes the review of and taking remedial action as
necessary, regarding (i) information technology ("IT") such as software and
hardware; (ii) non-IT systems or embedded technology; and (iii) readiness of key
third parties, including significant vendors and service providers and the
electronic data interchange (EDI) with third parties.
With respect to information systems, management presently believes that a
combination of software modification, upgrades and replacements will be
necessary to mitigate the Company's Year 2000 issues. However, if such
modifications are not made, or not completed on a timely basis, the Year 2000
issue could have a materially adverse effect on the Company's business,
financial condition and results of operations. The Company expects to implement
successfully the systems and programming changes necessary to be Year 2000
compliant in a timely manner. The target date for remediation of its information
systems is June 30, 1999. The Company does not expect the cost of addressing its
Year 2000 issues to have a material effect on the Company's results of
operations, financial position or liquidity and is funding such costs with
operating cash flows.
In addition to internal Year 2000 remediation activities, the Company has
also implemented a plan to communicate to its key suppliers, vendors and service
providers the expectation that they attain Year 2000 compliance in a timely
manner. While the Company expects its internal IT and non-IT systems to be Year
2000 compliant by the date specified, the Company is working on a contingency
plan specifying what the Company will do if it or important third parties are
not Year 2000 compliant by the required dates. The Company expects to have such
a contingency plan finalized in 1999.
The Company believes that it has allocated adequate resources to address
and achieve Year 2000 compliance in a timely manner, however, no assurances can
be given that these efforts or the efforts of key third parties will be
successful.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, cash and cash equivalents and short-term investments
were $41,598,000, compared to $31,866,000 as of January 31, 1998, a $9,732,000
increase. For the six months ended July 31, 1998, working capital increased
$14,563,000 to $64,634,000. The current ratio was 3.0 at July 31, 1998 compared
to 2.7 at January 31, 1998. At July 31, 1998 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, 1998 were $141,797,000, compared to $134,764,000
at January 31, 1998. Shareholders' equity was $107,172,000 at July 31, 1998,
compared to $102,268,000 at January 31, 1998, a $4,904,000 increase. The
increase in shareholders' equity for the six month period ended July 31, 1998
resulted
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
primarily from net income of $10,559,000 for the six-month period, offset by
$5,324,000 related to the repurchase of 1,322,000 shares of Company common stock
made in connection with the Company's authorized stock repurchase program and
net unrealized holding losses of $267,000 on investments available-for-sale.
For the six-month period ended July 31, 1998, net cash used for operating
activities totaled $9,774,000 compared to net cash used for operating activities
of $10,852,000 for the six-month period ended July 31, 1997. Cash flows from
operations before consideration of changes in working capital items and
investing and financing activities was a negative $2,880,000 for the six months
ended July 31, 1998, compared to a negative $4,123,000 for the same prior-year
period. Net cash used for operating activities for the six months ended July 31,
1998 reflects net income, as adjusted for depreciation and amortization, equity
in losses of affiliates, gains on the sale of property and broadcast stations
and the write-off of terminated acquisition costs. In addition, net cash used
for operating activities for the six months ended July 31, 1998 reflects an
increase in accounts receivable offset by decreases in inventories, prepaid
expenses and increases in accounts payable and accrued liabilities and net
income taxes payable. Accounts receivable increased primarily due to increased
receivables due from customers for merchandise sales made pursuant to the
"ValuePay" installment program. Inventories decreased from year end as a result
of the downsizing of the HomeVisions catalog operations. Prepaid expenses
decreased primarily as a result of decreased deferred catalog costs on
HomeVisions catalogs.
Net cash provided by investing activities totaled $35,663,000 for the six
months ended July 31, 1998 compared to $36,692,000 for the same period of fiscal
1998. For the six months ended July 31, 1998 and 1997, expenditures for property
and equipment were $638,000 and $2,749,000, respectively. Expenditures for
property and equipment during the periods ended July 31, 1998 and 1997 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. During the second quarter of fiscal 1999, the Company
received $9,453,000 of proceeds from the sale of property. During the first
quarter of fiscal 1999, the Company received $24,483,000 in proceeds from the
sale of its broadcast television station KBGE-TV. In addition, for the six
months ended July 31, 1998, the Company disbursed $2,386,000 relating to certain
strategic investments and other long-term assets of which $1,818,000 related to
costs associated with the terminated National Media Merger Agreement and granted
an additional $3.0 million working capital loan in the form of a demand note to
National Media Corporation. For the six months ended July 31, 1997, the Company
received approximately $30.0 million in cash proceeds from the sale of
television station WVVI, disbursed $3,934,000 relating to certain strategic
investments and other long-term assets and received $1,358,000 in net proceeds
from the sale of certain long-term investments.
Net cash used for financing activities totaled $5,629,000 for the six
months ended July 31, 1998 and primarily related to repurchases of the Company's
common stock under its stock repurchase program. In addition, for the six months
ended July 31, 1998, the Company made a $200,000 installment payment on a five
year non-compete obligation entered into upon the acquisition of a broadcast
television station and made capital lease payments of $112,000. 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.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management believes that 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 1999. Additional
capital may be required in the event the Company is able to identify additional
direct marketing company acquisition targets, television stations in strategic
markets at favorable prices, or other strategic opportunities.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Information contained in this Form 10-Q and in other materials filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain various "forward looking statements" within the meaning of
federal securities laws which represent management's expectations or beliefs
concerning future events. Such "forward looking statements" include, but are
not limited to, improved and growing home shopping operations, general expansion
and profitability of the Company, new initiatives and the pursuit of strategic
initiatives such as the expected contributions from the recently announced
marketing agreement with The Hi-Tech Group, Inc. and the Company's success in
soliciting its customers for memberships, the expected target date of completion
and the materiality of total costs anticipated in becoming Year 2000 compliant,
the outcome of the Time Warner Cable litigation, capital spending requirements,
potential future acquisitions 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, results of operations and the ability to become
profitable, including: the ability of the Company to continue improvements in
its home shopping operations, the ability to develop new initiatives or enter
strategic relationships, the rate at which customers accept solicitations for
clubs offered by The Hi-Tech Group, Inc., the ability to resolve satisfactorily
the disputed issues in the Time Warner Cable litigation, 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 acquisition targets
at prices favorable to the Company. Investors are cautioned that all forward
looking statements involve risk and uncertainty.
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, 1998, specifically under the caption
entitled "Risk Factors", provide information which should be considered in
evaluating any of the Company's forward looking statements. In addition, 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.
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<PAGE> 20
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of ValueVision International,
Inc. was held on June 2, 1998. Shareholders holding 20,676,186 shares, or
approximately 77.21% of the outstanding shares, were represented at the meeting
by proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
(a) Election of Directors
The following nominees were elected with the following votes to
serve as members of the Board of Directors until the next annual meeting of
shareholders in 1999 or until such time as a successor may be elected:
<TABLE>
<CAPTION>
Shares Shares
Voted For Withheld
--------- --------
<S> <C> <C>
Robert L. Johander 17,419,769 3,256,417
Nicholas M. Jaksich 17,419,769 3,256,417
Robert J. Korkowski 17,428,669 3,247,517
Marshall S. Geller 17,419,669 3,256,517
Paul D. Tosetti 17,427,769 3,248,417
</TABLE>
(b) Approval of the ValueVision International, Inc. 1997
Director Stock Option Plan
Shareholders approved the ValueVision International, Inc. 1997
Director Stock Option Plan by a vote of 17,994,972 shares, or 67.19% of the
outstanding shares in favor, 2,630,723 shares against, and 50,491 shares
abstained.
(c) Approval of an amendment to the ValueVision International,
Inc. 1994 Executive Stock Option and Compensation Plan
Shareholders approved the amendment to the ValueVision
International, Inc. 1994 Executive Stock Option and Compensation Plan by a vote
of 17,303,199 shares, or 64.61% of the outstanding shares in favor, 3,150,311
shares against, 45,391 shares abstained, and 177,285 shares present or
represented by proxy but not voted. The amendment increased the number of shares
available for issuance under such plan from 2,000,000 shares to 2,400,000
shares.
20
<PAGE> 21
ITEM 5. OTHER INFORMATION
(a) The Hi-Tech Group, Inc. Marketing Agreement.
On August 13, 1998, the Company announced that it had entered into a
marketing agreement with Chicago-based The Hi-Tech Group, Inc. to offer a
Preferred Buyer Program for products and services to ValueVision customers. As
part of the agreement, the Company will offer its customers a variety of
Hi-Tech's club membership services and continuity programs. Membership in the
Preferred Buyer Program will entitle members to receive discounts on a variety
of products and services, including eyewear, electronics, appliances, travel,
hotel accommodations, dining, golf, car rentals, long distance services and much
more. The Hi-Tech Group, Inc. is a privately held company based in Chicago,
Illinois and has been in business for over 30 years as a Premier Direct Marketer
of numerous continuity club services and merchandise to the credit card
industry. The company's client base includes most major oil companies as well as
significant financial institutions and major national retailers.
(b) Renewal Agreement with Cablevision Systems Corporation
On August 27, 1998, the Company announced that it renewed its
agreement with New York-based Cablevision Systems Corporation (ASE: CVC) for
continued carriage of ValueVision's home shopping network on Cablevision's cable
television systems. ValueVision launched in Cablevision markets in September
1993 as part of its original agreement. At present, the network is available to
over 1.6 million Cablevision subscribers, primarily in the New York City area of
dominant influence ("ADI").
(c) Strengthened Management Team
On August 27, 1998, the Company also announced the appointment of Cary
Deacon to Vice President General Marketing and Jon Thom to Vice President
e-commerce, both newly created positions.
Most recently, Mr. Deacon served as a General Partner at Marketing Advocates,
Ltd., a privately held marketing consulting firm with offices in Chicago and Los
Angeles. The firm specializes in providing strategic counsel to companies in the
direct marketing area, as well as assisting small cap and start-up companies
with marketing and public relations for capital needs, management, growth and
acquisitions.
From 1995-1997, Mr. Deacon served as Senior Vice President and Public Relations
for New York-based Macy's, a $5 billion department store retailer. During his
tenure at Macy's, he managed a $300 million expense budget, while assisting in
achieving profit objectives two years in a row.
Before joining ValueVision, Mr. Thom served as a principal at Medialign where he
advised direct response and Internet companies that specialize in strategic
planning, venture development, strategic partnerships, content and commerce
development.
From 1993-1997, Mr. Thom served as Vice President Marketing - Electronic
Commerce with Fingerhut Companies, Inc. In this position, he developed
successful Internet sites that have received industry recognition for innovation
and the outstanding use of the medium. He also oversaw marketing programs for
the company's inbound and outbound telemarketing campaigns and managed a staff
responsible for product and product selection, performance analysis,
segmentation, scripting and new program development.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
None
22
<PAGE> 23
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/ Gene McCaffery
------------------------------------
Gene McCaffery
Chief Executive Officer
(Principal Executive Officer)
/s/ Stuart R. Romenesko
------------------------------------
Stuart R. Romenesko
Senior Vice President Finance and
Chief Financial Officer
(Principal Financing and Accounting Officer)
September 11, 1998
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VALUEVISION
INTERNATIONAL INC'S CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1998 AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED
JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS AS FILED ON FORM 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 37,458,053
<SECURITIES> 4,139,908
<RECEIVABLES> 14,943,965<F1>
<ALLOWANCES> 0
<INVENTORY> 20,228,766
<CURRENT-ASSETS> 96,776,393
<PP&E> 14,937,710<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 141,796,748
<CURRENT-LIABILITIES> 32,142,722
<BONDS> 0
0
0
<COMMON> 254,647
<OTHER-SE> 106,917,039
<TOTAL-LIABILITY-AND-EQUITY> 141,796,748
<SALES> 87,758,283
<TOTAL-REVENUES> 87,758,283
<CGS> 50,973,984
<TOTAL-COSTS> 93,184,046
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,032,733
<INCOME-TAX> 6,474,000
<INCOME-CONTINUING> 10,558,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,558,733
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION
</FN>
</TABLE>
