<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 October 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 December 11, 1998, there were 25,565,781 shares of the Registrant's
common stock, $.01 par value, outstanding.
================================================================================
<PAGE> 2
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page of
Form 10-Q
---------
<S> <C>
Item 1. Financial Statements
o Condensed Consolidated Balance Sheets as of October 31, 1998 and 3
January 31, 1998
o Condensed Consolidated Statements of Operations for the Three 4
and Nine Months Ended October 31, 1998 and 1997
o Condensed Consolidated Statement of Shareholders' Equity for 5
the Nine Months Ended October 31, 1998
o Condensed Consolidated Statements of Cash Flows for the Nine 6
Months Ended October 31, 1998 and 1997
o Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</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
OCTOBER 31, JANUARY 31,
1998 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 24,418,322 $ 17,198,074
Short-term investments 7,271,028 14,667,669
Accounts receivable, net 15,511,583 8,694,293
Inventories, net 24,625,930 20,426,862
Prepaid expenses and other 12,397,632 10,478,848
Note receivable -- National Media Corporation 10,000,000 7,000,000
Income taxes receivable 2,038,651 748,319
Deferred income taxes 447,000 447,000
------------- -------------
Total current assets 96,710,146 79,661,065
PROPERTY AND EQUIPMENT, NET 14,888,220 21,403,724
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET 2,038,314 5,807,187
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 1,926,270 2,073,360
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION 9,039,118 9,847,688
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 6,066,565 6,892,454
INVESTMENTS AND OTHER ASSETS, NET 8,036,449 9,078,826
============= =============
$ 138,705,082 $ 134,764,304
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 387,708 $ 410,648
Accounts payable 17,837,323 17,643,895
Accrued liabilities 15,763,798 11,535,551
------------- -------------
Total current liabilities 33,988,829 29,590,094
LONG-TERM OBLIGATIONS 729,895 1,036,821
DEFERRED INCOME TAXES 1,559,000 1,869,660
------------- -------------
Total liabilities 36,277,724 32,496,575
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized;
25,478,015 and 26,780,778 shares issued and outstanding 254,780 267,808
Additional paid-in capital 69,251,462 74,538,225
Accumulated other comprehensive losses (4,948,744) (6,275,652)
Notes receivable from officers (1,045,264) (960,476)
Retained earnings 38,915,124 34,697,824
------------- -------------
Total shareholders' equity 102,427,358 102,267,729
------------- -------------
$ 138,705,082 $ 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 FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 50,027,001 $ 58,325,336 $ 137,785,284 $ 157,887,155
COST OF SALES 29,529,844 32,599,365 80,503,828 89,542,591
------------- ------------- ------------- -------------
Gross profit 20,497,157 25,725,971 57,281,456 68,344,564
------------- ------------- ------------- -------------
Margin % 41.0% 44.1% 41.6% 43.3%
OPERATING EXPENSES:
Distribution and selling 18,681,471 23,325,866 52,355,886 64,707,697
General and administrative 2,874,180 2,251,383 8,864,209 7,611,520
Depreciation and amortization 1,215,362 1,833,658 3,760,980 5,542,272
Restructuring and impairment of assets 2,950,000 -- 2,950,000 --
------------- ------------- ------------- -------------
Total operating expenses 25,721,013 27,410,907 67,931,075 77,861,489
------------- ------------- ------------- -------------
OPERATING LOSS (5,223,856) (1,684,936) (10,649,619) (9,516,925)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations -- -- 19,750,000 38,850,000
Gain on sale of property -- -- 3,639,360 --
Write-down of investment in CML Group, Inc. (5,731,645) -- (5,731,645) --
National Media Corporation
terminated acquisition costs -- -- (2,350,000) --
Equity in losses of affiliates (16,737) (17,037) (156,330) (347,612)
Interest income 726,325 599,310 2,291,206 1,475,103
Other, net 17,480 (34,111) 11,328 1,295
------------- ------------- ------------- -------------
Total other income (expense) (5,004,577) 548,162 17,453,919 39,978,786
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (10,228,433) (1,136,774) 6,804,300 30,461,861
INCOME TAX PROVISION (BENEFIT) (3,887,000) (471,000) 2,587,000 11,830,340
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (6,341,433) $ (665,774) $ 4,217,300 $ 18,631,521
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE $ (0.25) $ (0.02) $ 0.16 $ 0.58
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE
---ASSUMING DILUTION $ (0.25) $ (0.02) $ 0.16 $ 0.58
============= ============= ============= =============
Weighted average number of common shares outstanding:
Basic 25,467,000 31,873,573 26,075,657 32,217,321
============= ============= ============= =============
Diluted 25,467,000 31,873,573 26,192,095 32,375,370
============= ============= ============= =============
</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 NINE MONTHS ENDED OCTOBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------- ADDITIONAL
COMPREHENSIVE NUMBER PAR PAID-IN
INCOME OF SHARES VALUE CAPITAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1998 26,780,778 $ 267,808 $ 74,538,225
Comprehensive income:
Net income $ 4,217,300 -- -- --
Other comprehensive income (losses),
net of tax:
Unrealized losses on securities, net
of tax of $1,837,000 (2,997,202)
Gains on securities included in net
income, net of tax of $60,000 97,153
Write-down of securities to net realizable
value, net of tax of $1,470,000 4,226,957
-------------
Other comprehensive income 1,326,908 -- -- --
-------------
Comprehensive income $ 5,544,208
=============
Repurchases of common stock (1,322,430) (13,224) (5,311,150)
Increase in notes receivable from officers -- -- --
Exercise of stock options 19,667 196 24,387
------------- ------------- -------------
BALANCE, OCTOBER 31, 1998 25,478,015 $ 254,780 $ 69,251,462
============= ============= =============
<CAPTION>
ACCUMULATED NOTES
OTHER RECEIVABLE TOTAL
COMPREHENSIVE FROM RETAINED SHAREHOLDERS'
LOSSES OFFICERS EARNINGS EQUITY
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1998 $ (6,275,652) $ (960,476) $ 34,697,824 $ 102,267,729
Comprehensive income:
Net income -- -- 4,217,300 4,217,300
Other comprehensive income (losses),
net of tax:
Unrealized losses on securities, net
of tax of $1,837,000
Gains on securities included in net
income, net of tax of $60,000
Write-down of securities to net realizable
value, net of tax of $1,470,000
Other comprehensive income 1,326,908 -- -- 1,326,908
Comprehensive income
Repurchases of common stock -- -- -- (5,324,374)
Increase in notes receivable from officers -- (84,788) -- (84,788)
Exercise of stock options -- -- -- 24,583
------------- ------------- ------------- -------------
BALANCE, OCTOBER 31, 1998 $ (4,948,744) $ (1,045,264) $ 38,915,124 $ 102,427,358
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,217,300 $ 18,631,521
Adjustments to reconcile net income to net cash
provided by (used for) operating activities-
Depreciation and amortization 3,760,980 5,542,272
Deferred taxes (3,660) 24,000
Equity in losses of affiliates 156,330 347,612
Gain on sale of property (3,639,360) --
Gain on sale of broadcast stations (19,750,000) (38,850,000)
Write-down of investment in CML Group, Inc. 5,731,645 --
Restructuring and impairment of assets 2,950,000 --
National Media Corporation terminated
acquisition costs 2,350,000 --
Changes in operating assets and liabilities:
Accounts receivable, net (6,817,290) (4,622,488)
Inventories, net (4,199,068) 822,960
Prepaid expenses and other (2,061,216) (4,468,695)
Accounts payable and accrued liabilities 1,421,416 (2,535,819)
Income taxes receivable (1,290,332) 2,830,283
------------ ------------
Net cash used for operating activities (17,173,255) (22,278,354)
------------ ------------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements (1,378,875) (3,148,495)
Proceeds from sale of investments and property 9,426,605 1,369,006
Proceeds from sale of broadcast stations 24,483,200 30,000,000
Loan to National Media Corporation (3,000,000) --
Purchase of short-term investments (10,338,973) (38,534,148)
Proceeds from sale of short-term investments 13,196,955 36,555,220
Payment for investments and other assets (2,334,641) (5,474,773)
Proceeds from notes receivable -- 1,603,439
------------ ------------
Net cash provided by investing activities 30,054,271 22,370,249
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 24,583 257,897
Payments for repurchases of common stock (5,324,374) (10,458,412)
Payment of long-term obligations (360,977) (320,957)
------------ ------------
Net cash used for financing activities (5,660,768) (10,521,472)
------------ ------------
Net increase (decrease) in cash and cash equivalents 7,220,248 (10,429,577)
BEGINNING CASH AND CASH EQUIVALENTS 17,198,074 28,618,943
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 24,418,322 $ 18,189,366
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 90,000 $ 68,000
============ ============
Income taxes paid $ 3,889,000 $ 8,993,000
============ ============
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
OCTOBER 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 business 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 a 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"), 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 nine month period ended
October 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
OCTOBER 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 October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (6,341,433) $ (665,774) $ 4,217,300 $ 18,631,521
============ ============ ============ ============
Weighted average number of common
shares outstanding - Basic 25,467,000 31,873,573 26,075,657 32,217,321
Dilutive effect of stock options -- -- 116,438 158,049
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding - Diluted 25,467,000 31,873,573 26,192,095 32,375,370
============ ============ ============ ============
Net income (loss) per common share $ (0.25) $ (0.02) $ 0.16 $ 0.58
Net income (loss) per common share
- assuming dilution $ (0.25) $ (0.02) $ 0.16 $ 0.58
============ ============ ============ ============
</TABLE>
Stock options to purchase approximately 132,000 and 191,000 weighted shares
of common stock were outstanding for the quarters ended October 31, 1998 and
1997, respectively. These shares were not included in the computation of diluted
EPS for these periods because of losses incurred by the Company in these
quarters, thus the effect on EPS would have been antidilutive.
8
<PAGE> 9
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 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 loss was ($4,748,000) and ($4,160,000)
for the three months ended October 31, 1998 and 1997, respectively. Total
comprehensive income was $5,544,000 and $16,820,000 for the nine months ended
October 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.
9
<PAGE> 10
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
(Unaudited)
(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. 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 and the Company 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. 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. 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 October 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. During fiscal 1999, the
Company repurchased 1,322,000 common shares at a total cost of $5,324,000.
(8) WRITE-DOWN OF INVESTMENT IN CML GROUP, INC.
In accordance with the provisions of Statement of Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115"), the Company wrote down to fair market value its investment in CML
Group, Inc. ("CML"). The decline in the investment's fair value was judged by
management to be other than temporary following CML's announcement stating that
its NordicTrack subsidiary had filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The write-down totaled approximately $5,732,000 and was
recognized in the third quarter ended October 31, 1998.
10
<PAGE> 11
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
(Unaudited)
(9) RESTRUCTURING AND IMPAIRMENT OF ASSETS
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective shut down of its HomeVisions catalog operations. The
decision to restructure and shut down HomeVisions was made primarily as a result
of the continuing operating losses and deteriorating financial performance over
the past year of the catalog's operations since Montgomery Ward & Co.,
Incorporated's announcement of its bankruptcy filing in the summer of 1997.
Operating losses for HomeVisions further increased as a result of the subsequent
termination of HomeVisions' right to use the Montgomery Ward private label
credit card in March 1998. As a result of the decision to shut down HomeVisions,
the company mailed its last HomeVisions catalog in the fourth quarter of fiscal
1999 and anticipates the catalog operation to be wound down by January 31, 1999.
In connection with the restructuring plan and shut down of HomeVisions, the
Company recorded a $2,950,000 restructuring and asset impairment charge in the
third quarter ended October 31, 1998, consisting of the following components:
o Write-down of advanced purchased, overstocked inventory totaling $1,450,000
purchased specifically for fourth quarter catalog mailings which will not
occur due to the decision to shut down HomeVision's operations in the third
quarter of fiscal 1999. The write-down recorded is net of any estimated
remaining fiscal 1999 cost of sales and reflects inventories at various
liquidation values.
o Write-down of certain other assets totaling $944,000 to reflect such assets
at their estimated net realizable value, based on the Company's
determination that the assets were substantially impaired as a direct
result of the decision to shut down HomeVisions. The write-down included:
$364,000 of capitalized catalog software made obsolete with no future
economic benefit to the Company; $282,000 of capitalized catalog costs, net
of remaining fiscal 1999 amortization, for which no catalog is to be
produced nor future revenue to be recognized against; $223,000 of property
and equipment to be disposed of, net of remaining fiscal 1999 depreciation,
with no future economic benefit to the Company; and $75,000 relating to
lost vendor purchase credits and other incremental costs.
o Employee-related severance costs of $556,000 related to the termination of
17 merchandising and other administrative employees pursuant to a plan of
termination announced in the third quarter of fiscal 1999. The entire
severance accrual remained unpaid as of October 31, 1998 and is payable
under the terms of the plan, primarily during the fourth quarter of fiscal
1999.
In connection with the decision to shut down HomeVisions, ValueVision has made
arrangements and entered into an agreement in principle to license and sell the
exclusive marketing rights to the "HomeVisions" name and related customer list
database to Direct Marketing Services, Inc. ("DMSI"), a direct-mail marketer and
catalog distributor headquartered in Chicago, Illinois. Over the next several
months, ValueVision intends to assist DMSI in the transition of responsibilities
for
11
<PAGE> 12
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
(Unaudited)
the HomeVisions catalog including merchandising, creation, customer service,
fulfillment and marketing, starting with the January 1999 HomeVisions catalog.
No assurance can be given that the transaction with DMSI will be consummated or
that ValueVision will receive any significant proceeds if such an agreement is
consummated.
Net sales and operating losses for HomeVisions for the three and nine months
ended October 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 3,897 $ 20,579 $ 15,084 $ 57,050
Operating loss $ (4,425) $ (1,046) $ (5,743) $ (4,782)
</TABLE>
(10) 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.
12
<PAGE> 13
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 NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
GROSS MARGIN 41.0% 44.1% 41.6% 43.3%
-------- -------- -------- --------
Operating expenses:
Distribution and selling 37.4% 40.0% 38.1% 41.0%
General and administrative 5.7% 3.9% 6.4% 4.8%
Depreciation and amortization 2.4% 3.1% 2.7% 3.5%
Restructuring and impairment of assets 5.9% -% 2.1% -%
-------- -------- -------- --------
51.4% 47.0% 49.3% 49.3%
-------- -------- -------- --------
Operating loss (10.4%) (2.9%) (7.7%) (6.0%)
======== ======== ======== ========
</TABLE>
13
<PAGE> 14
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 business 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 a Company owned full power Ultra-High Frequency ("UHF")
broadcast television station, Company owned 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"), 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").
RESTRUCTURING AND IMPAIRMENT OF ASSETS
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective shut down of its HomeVisions catalog operations. The
decision to restructure and shut down HomeVisions was made primarily as a result
of the continuing operating losses and deteriorating financial performance over
the past year of the catalog's operations since Montgomery Ward & Co.,
Incorporated's announcement of its bankruptcy filing in the summer of 1997.
Operating losses for HomeVisions further increased as a result of the subsequent
termination of HomeVisions' right to use the Montgomery Ward private label
credit card in March 1998. As a result of the decision to shut down HomeVisions,
the company mailed its last HomeVisions catalog in the fourth quarter of fiscal
1999 and anticipates the catalog operation to be wound down by January 31, 1999.
In connection with the restructuring plan and shut down of HomeVisions, the
Company recorded a $2,950,000 restructuring and asset impairment charge in the
third quarter ended October 31, 1998. The restructuring charge includes
severance costs and the write-down of certain assets including inventory,
property and equipment, capitalized software and capitalized catalog costs that
were deemed impaired as a direct result of the decision to shut down
HomeVisions.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In connection with the decision to shut down HomeVisions, ValueVision has
made arrangements and entered into an agreement in principle to license and sell
the exclusive marketing rights to the "HomeVisions" name and related customer
list database to Direct Marketing Services, Inc. ("DMSI"), a direct-mail
marketer and catalog distributor headquartered in Chicago, Illinois. Over the
next several months, ValueVision intends to assist DMSI in the transition of
responsibilities for the HomeVisions catalog including merchandising, creation,
customer service, fulfillment and marketing, starting with the January 1999
HomeVisions catalog. No assurance can be given that the transaction with DMSI
will be consummated or that ValueVision will receive any significant proceeds if
such an agreement is consummated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MMONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 3,897 $ 20,579 $ 15,084 $ 57,050
OPERATING LOSS $ (4,425) $ (1,046) $ (5,743) $ (4,782)
</TABLE>
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. 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 and the Company 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. 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. 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.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended October 31, 1998 (fiscal 1999), were
$50,027,000 compared with net sales of $58,325,000 for the three months ended
October 31, 1997 (fiscal 1998), a 14% decrease. Net sales for the nine months
ended October 31, 1998 were $137,785,000 compared with $157,887,000 for the nine
months ended October 31, 1997, a 13% 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 $13,433,000
or 27% of total net sales for the quarter ended October 31, 1998 and totaled
$31,033,000 or 53% of total net sales for the quarter ended October 31, 1997. On
a year-to-date basis, sales attributed to direct-mail marketing operations
totaled $37,331,000 or 27% of total net sales for the nine months ended October
31, 1998 and totaled $80,323,000 or 51% for the nine months ended October 31,
1997. Sales attributed to the Company's television home shopping business
increased 34% to $36,594,000 for the quarter ended October 31, 1998 from
$27,292,000 for the comparable prior year period on a 9% increase in average
full-time equivalent cable homes able to receive the Company's television home
shopping programming. On a year-to-date basis, sales attributed to the Company's
television home shopping programming increased 30% to $100,454,000 for the nine
months ended October 31, 1998 from $77,564,000 for the comparable prior year
period on a 2% increase in average full-time equivalent cable homes. The growth
in home shopping net sales is a result of a strengthened merchandising effort
under the leadership of ValueVision - TV's new general management. The
improvement in television home shopping net sales is due, in part, to various
sales initiatives which emphasized, among other things, the increased use of the
Company's ValuePay installment payment program and shipping and handling
promotions. During the 12-month period ended October 31, 1998 the Company added
approximately 1.9 million full-time cable homes, a 22% 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 nine months of fiscal 1999 was due, in part, to the
effects of continued testing of certain merchandising and programming
strategies. 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.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFITS
Gross profits for the third quarter ended October 31, 1998 and 1997 were
$20,497,000 and $25,726,000, respectively, a decrease of $5,229,000 or 20%.
Gross margins for the three months ended October 31, 1998 and 1997 were 41.0%
and 44.1%, respectively. Gross profits for the nine months ended October 31,
1998 and 1997 were $57,281,000 and $68,344,000, respectively, a decrease of
$11,063,000 or 16%. Gross margins for the nine months ended October 31, 1998
were 41.6% compared to 43.3% 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 nine months ended October 31, 1998 were 36.8% and 37.7%,
respectively. Gross margins for the Company's direct mail-order operations were
52.2% and 52.1% for the same respective periods. Television gross margins for
the three and nine months ended October 31, 1997 were 40.7% and 40.5%,
respectively. Gross margins for the Company's direct mail-order operations were
47.1% and 46.0% for the same respective periods. Television home shopping gross
margin percentages decreased as a result of changes in merchandise mix and
on-air promotions to enhance net gross margin contributions. Specifically,
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 sales volume of the higher margin jewelry product category. In addition, the
Company has been promoting the movement of a significant amount of aging
inventory which further reduced television home shopping margins. During the
first nine months 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 at
the same time maintaining margins while increasing inventory turns. As part of
the ongoing shift in merchandise mix, the Company devoted additional program air
time to jewelry merchandise in the third quarter of fiscal 1999. Jewelry
products accounted for approximately 68% of air time during the first nine
months of fiscal 1999, compared with 59% 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 considerably lower margins 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 nine months ended October 31,
1998 were $25,721,000 and $67,931,000, respectively, versus $27,411,000 and
$77,861,000 for the comparable prior-year periods. For fiscal 1999, total
operating expenses includes a $2,950,000 one-time restructuring and asset
impairment charge recorded as a result of the Company's decision to shut down
its HomeVisions catalog operations. The restructuring charge includes severance
costs and the write-down of certain assets including inventory, property and
equipment, capitalized software and catalog costs that were deemed impaired as a
direct result of the decision to shut down HomeVisions. Distribution and selling
expense decreased $4,644,000 or 20% to $18,681,000 and $12,352,000 or 19% to
$52,356,000 for the three and nine months ended October 31, 1998 over the
comparable prior-year periods. Distribution and selling expense as a percentage
of net sales for the three months ended October 31, 1998 and 1997 were 37% and
38% respectively, and for the nine months ended October 31, 1998 and 1997 were
40% and 41%, respectively. Distribution and selling costs decreased primarily as
a result of the downsizing of the
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 due to the
Company's focus on cost efficiencies, the increase in television home shopping
net sales over prior year and as a result of additional unusual costs incurred
by the Company and included in fiscal 1998 in connection with the conversion,
integration and start-up of the Company's acquired direct-mail operations.
General and administrative expenses increased $623,000 and $1,253,000 for
the three and nine months ended October 31, 1998 over the comparable prior-year
periods. General and administrative expenses as a percentage of net sales were
6% versus 4% for the three months ended October 31, 1998 and 1997, respectively,
and were 6% versus 5% for the nine months ended October 31, 1998 and 1997,
respectively. General and administrative costs increased primarily as a result
of additional costs associated with increased administrative personnel and
salaries, particularly the hiring of several senior level executives, and legal
costs associated with settling certain merchandising litigation. General and
administrative costs increased as a percentage of net sales from prior year as a
result of increased general and administrative costs and the decrease in net
sales from year to year.
Depreciation and amortization costs for the three and nine months ended
October 31, 1998 were $1,215,000 and $3,761,000, respectively, versus $1,834,000
and $5,542,000 for the comparable prior-year periods. Depreciation and
amortization costs decreased $618,000 or 34% and $1,781,000 or 32% for the three
and nine months ended October 31, 1998 over the comparable prior-year periods.
Depreciation and amortization costs as a percentage of net sales were 2% and 3%,
for the three months ended October 31, 1998 and 1997, respectively, and 3% and
4% for the nine months ended October 31, 1998 and 1997, respectively. The dollar
decrease is primarily due to a reduction in amortization expense of
approximately $1,309,000 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.
OPERATING LOSS
For the three months ended October 31, 1998, the Company incurred an
operating loss of $5,224,000 compared to an operating loss of $1,685,000 for the
three months ended October 31, 1997, an increase of $3,539,000. The operating
loss for the third quarter of fiscal 1999 includes a one-time restructuring and
asset impairment charge of $2,950,000 relating to the Company's decision to shut
down its HomeVisions catalog operations. Excluding the one-time HomeVisions
restructuring charge, the operating loss was $2,274,000 for the three months
ended October 31, 1998, an increase of $589,000 over the comparable prior year.
The increase in the third quarter operating loss over the comparable prior year
period was primarily attributed to increased operating losses incurred by
HomeVisions offset by an improvement in the television home shopping operations.
For the nine months ended October 31, 1998, the Company incurred an operating
loss of $10,650,000 compared to an operating loss of $9,517,000
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the nine months ended October 31, 1997, an increase of $ 1,133,000.
Excluding the one-time HomeVisions restructuring charge, the operating loss was
$7,700,000 for the nine months ended October 31, 1998, an improvement of 19%
over the prior year comparable period. The improvement in the operating loss
resulted primarily from the overall improvement in the Company's television home
shopping business, decreases in distribution and selling costs over prior year
due to the recent downsizing of the HomeVisions catalog operations 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 nine months ended October 31, 1998 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, in part, by increased general and administrative
costs, decreased sales volumes and a corresponding decrease in gross profits.
NET INCOME (LOSS)
For the three months ended October 31, 1998, the Company reported a net
loss of $6,341,000 or $.25 per basic and diluted share on 25,467,000 weighted
average common shares outstanding compared with a net loss of $666,000, or $.02
per basic and diluted share on 31,874,000 weighted average common shares
outstanding for the third quarter of fiscal 1998. Results for the third quarter
of fiscal 1999 include the $5,732,000 write-down of the Company's investment in
CML Group, Inc. For the quarter ended October 31, 1998, excluding the write-down
of the investment in CML Group Inc. and the one-time HomeVisions restructuring
and asset impairment charge, the Company had a net loss of $959,000 or
$.04 per basic and diluted share.
For the nine months ended October 31, 1998, net income was $4,217,000 or
$.16 per share on 26,192,000 diluted weighted average common shares outstanding
($.16 per share on 26,076,000 basic shares) compared with net income of
$18,632,000 or $.58 per share on 32,375,000 diluted weighted average common
shares outstanding ($.58 per share on 32,217,000 basic shares). Results for
fiscal 1999 include: a pre-tax gain of $19,750,000 from the sale of television
station KBGE-TV Channel 33 in Seattle, Washington along with two low-power
television stations and a minority interest in an entity which had applied for a
new full-power station; the $5,732,000 CML Group, Inc. investment write-down;
the write-off of $2,350,000 of acquisition related costs associated with the
terminated merger with National Media Corporation; gains on the sale of property
of $3,639,000 and the HomeVisions restructuring and asset impairment charge of
$2,950,000. For the nine months ended October 31, 1998, excluding these
non-operating gains and losses and one-time restructuring charge, the Company
had a net loss of $3,443,000 or $.13 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 nine months ended October 31, 1997, excluding the gain on
the sale of the television station, the Company had a net loss of $5,117,000 or
$.16 per basic and diluted share. For the nine months ended October 31, 1998,
net income reflects an income tax provision at an effective tax rate of 38%.
19
<PAGE> 20
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 21.1 million homes as of October 31, 1998, as compared to 17.4
million homes as of January 31, 1998 and to 17.8 million homes as of October 31,
1997. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 330 cable systems and one
wholly-owned full power television broadcast station. In addition, the Company's
programming is broadcast full-time over twelve owned low power television
stations in major markets, and is available unscrambled to homes equipped with
satellite dishes. As of October 31, 1998 and 1997, the Company's programming was
available to approximately 13.9 million and 11.6 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 10.4
million and 8.5 million cable homes at October 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 4.3 and 10.9 million HomeVisions catalogs were mailed,
respectively, in the three and nine months ended October 31, 1998, (12.0 and
31.0 million, respectively, in the three and nine months ended October 31,
1997). At October 31, 1998, HomeVisions had approximately 324,000 "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 14.5 and 24.1 million CVI
catalogs were mailed, respectively, in the three and nine months ended October
31, 1998, (14.0 and 26.1 million, respectively, in the three and nine months
ended October 31, 1997). At October 31, 1998, CVI had approximately 541,000
active catalog customers and approximately 5.2 million customer names in its
catalog customer list database. BII had approximately 238 and 633 million space
advertisements or "impressions" circulated in national and regional newspapers
and magazines, respectively, during the three and nine months ended October 31,
1998, (316 and 551 million, respectively, in the three and nine months ended
October 31, 1997). At October 31, 1998, BII had approximately 325,000 active
customers and approximately 780,000 customer names in its customer list
database.
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
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 October 31, 1998, cash and cash equivalents and short-term
investments were $31,689,000, compared to $31,866,000 as of January 31, 1998, a
$177,000 decrease. For the nine months ended October 31, 1998, working capital
increased $12,650,000 to $62,721,000. The current ratio was 2.9 at October 31,
1998 compared to 2.7 at January 31, 1998. At October 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 October 31, 1998 were $138,705,000, compared to
$134,764,000 at January 31, 1998. Shareholders' equity was $102,427,000 at
October 31, 1998, compared to $102,268,000 at January 31, 1998, a $159,000
increase. The increase in shareholders' equity for the nine month period ended
October 31, 1998 resulted primarily from net income of $4,217,000 for the
nine-month period and other comprehensive income on investments
available-for-sale of $1,327,000 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.
For the nine-month period ended October 31, 1998, net cash used for
operating activities totaled $17,173,000 compared to net cash used for operating
activities of $22,278,000 for the nine-month period ended October 31, 1997. Cash
flows from operations before consideration of changes in working capital
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
items and investing and financing activities was a negative $6,889,000 for the
nine months ended October 31, 1998, compared to a negative $3,975,000 for the
same prior-year period. Net cash used for operating activities for the nine
months ended October 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, the write-down of the investment in CML Group, Inc., the
restructuring and asset impairment charge and the write-off of terminated
acquisition costs. In addition, net cash used for operating activities for the
nine months ended October 31, 1998 reflects increases in accounts receivable,
inventories, prepaid expenses and income taxes receivable, offset by increases
in accounts payable and accrued liabilities. Accounts receivable increased
primarily due to increased receivables due from customers for merchandise sales
made pursuant to the "ValuePay" installment program. Inventories increased from
year end to support increased sales volume and seasonal preparation, offset by
decreases resulting from the downsizing of the HomeVisions catalog operations.
Prepaid expenses increased primarily as a result of increased deferred catalog
costs as the Company's direct-mail operations prepared for the holiday season.
The increase in accrued liabilities primarily relates to certain components of
the $2.95 million restructuring charge taken in the third quarter of fiscal 1999
as a result of the decision to shut down HomeVisions and the timing of vendor
payments.
Net cash provided by investing activities totaled $30,054,000 for the nine
months ended October 31, 1998 compared to $22,370,000 for the same period of
fiscal 1998. For the nine months ended October 31, 1998 and 1997, expenditures
for property and equipment were $1,379,000 and $3,148,000, respectively.
Expenditures for property and equipment during the periods ended October 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 $9,427,000 of proceeds from the sale of real property
in Eden Prairie, Minnesota and other investments. 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 nine months ended
October 31, 1998, the Company disbursed $2,335,000 relating to certain
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 nine months ended October 31, 1997, the
Company received approximately $30 million in cash proceeds from the sale of
television station WVVI, disbursed $5,475,000 relating to certain strategic
investments and other long-term assets, received $1,369,000 in net proceeds from
the sale of certain long-term investments and received proceeds of $1,603,000 in
collection of a long-term note receivable.
Net cash used for financing activities totaled $5,661,000 for the nine
months ended October 31, 1998 and primarily related to repurchases of the
Company's common stock under its stock repurchase program. In addition, for the
nine months ended October 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 $161,000.
Net cash used for financing activities totaled $10,521,000 for the nine months
ended October 31, 1997 and primarily related to
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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, any anticipated
Time Warner litigation settlement payments and 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 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 television home shopping operations, resolution
of the Time Warner litigation, general expansion and profitability of the
Company, new initiatives and the pursuit of strategic initiatives such as the
expected contributions from the announced marketing agreement with The Hi-Tech
Group, Inc. and the Company's success in soliciting its customers for
memberships, the Company's success in developing its e-commerce business, the
expected target date of completion and the materiality of total costs associated
with the Company's Year 2000 readiness effort, consummation of a transaction
with DMSI regarding the HomeVisions catalog, 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
club membership, the ability of the Company to develop a successful e-commerce
business and consummate a transaction with DMSI regarding the HomeVisions
catalog, the Company's ability to successfully resolve the Time Warner
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. 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
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
24
<PAGE> 25
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently negotiating with Time Warner
Entertainment Company, L.P. d/b/a Time Warner Cable ("Time Warner ") to settle
the lawsuit filed by Time Warner against the Company on December 17, 1997 (Time
Warner Entertainment Company, L.P., d/b/a Time Warner Cable v. Bridgeways
Communications Corporation and ValueVision International, Inc. (Connecticut
Superior Court, Judicial District of Ansonia/Milford at Milford, CT)). No
assurance can be given that a settlement will be negotiated. See ValueVision's
Annual Report on Form 10-K for the year ended January 31, 1998, for a discussion
of this matter.
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
The Company filed a Form 8-K on October 9, 1998
reporting under Item 5 the Company's Press Release
dated October 8, 1998 announcing the launch of its
television home shopping programming to over three
million new homes including Denver-based Primestar,
Inc.'s 2.2 million subscriber base on a part-time
basis (850,000 FTE's) and the addition of 847,000
full-time subscribers from New York-based Cablevision
Systems Corporation.
25
<PAGE> 26
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 Financial and Accounting Officer)
December 14, 1998
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from ValueVision
International, Inc.'s consolidated balance sheet as of October 31, 1998 and
consolidated statements of operations for the three and nine month periods ended
October 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> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 24,418,322
<SECURITIES> 7,271,028
<RECEIVABLES> 15,511,583<F1>
<ALLOWANCES> 0
<INVENTORY> 24,625,930
<CURRENT-ASSETS> 96,710,146
<PP&E> 14,888,220<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 138,705,082
<CURRENT-LIABILITIES> 33,988,829
<BONDS> 0
0
0
<COMMON> 254,780
<OTHER-SE> 102,172,578
<TOTAL-LIABILITY-AND-EQUITY> 138,705,082
<SALES> 137,785,284
<TOTAL-REVENUES> 137,785,284
<CGS> 80,503,828
<TOTAL-COSTS> 147,434,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,804,300
<INCOME-TAX> 2,587,000
<INCOME-CONTINUING> 4,217,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,217,300
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<FN>
<F1>Accounts Receivable represents amounts net of allowances for doubtful accounts.
<F2>Property and equipment represents amounts net of accumulated depreciation.
</FN>
</TABLE>
