<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K/A-2
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20243
VALUEVISION INTERNATIONAL, INC.
(Exact Name of Issuer in Its Charter)
Minnesota 41-1673770
--------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6740 Shady Oak Road, Minneapolis, MN 55344 - 3433
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
612-947-5200
------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 17, 1998, 26,780,778 shares of the Registrant's common stock were
outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant on such date, based upon the sale price of the
common stock as reported by Nasdaq on February 17, 1998, was approximately
$ 84,991,827. For purposes of this computation, affiliates of the registrant
are deemed only to be the registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive ValueVision International, Inc. Proxy Statement for
the 1997 Annual Meeting of Shareholders are incorporated by reference in Part
III of this Annual Report on Form 10-K.
<PAGE> 2
PART I
Items 6 and 8 of the Annual Report on Form 10-K for the fiscal year ended
January 31, 1997 (the "10-K"), are hereby amended and restated in their
entirety as follows. Except as set forth herein, all other items of the 10-K
remain in full force and effect.
<PAGE> 3
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement
of Operations Data" and "Balance Sheet Data" as of and for each of the years in
the five-year period ended January 31, 1997 are derived from the financial
statements of the Company. The selected financial data presented below are
qualified in their entirety by, and should be read in conjunction with, the
financial statements and notes thereto and other financial and statistical
information referenced elsewhere herein including the information referenced
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------
1997(a) 1996 1995 1994 1993
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $159,477,917 $ 88,909,853 $ 53,930,847 $ 37,614,497 $ 14,545,194
Gross margin percentage 42.2% 41.2% 41.6% 38.8% 39.7%
Operating loss (2,639,784) (766,157) (3,712,364) (1,745,307) (1,633,060)
Income (loss) before income taxes
and extraordinary item (b) 29,689,722 11,119,565 (6,104,095) (1,413,775) (1,670,798)
Net income (loss) (b) 18,089,722 11,019,565 (6,104,095) (1,925,084) (1,670,798)
Net income (loss) per share $ 0.57 $ 0.38 $ (0.22) $ (0.12) $ (0.23)
Weighted average shares outstanding 31,984,463 28,627,356 27,264,856 15,400,289 7,158,833
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments $ 52,858,783 $ 46,451,327 $ 26,659,475 $ 48,382,401 $ 851,565
Working capital 61,631,478 52,085,060 29,121,909 50,151,583 86,950
Current ratio 2.6 4.9 3.9 7.7 1.0
Total assets 166,412,670 117,269,217 77,503,889 77,698,340 4,777,294
Long-term obligations 1,443,189 447,430 577,930 147,004 321,904
Shareholders' equity 127,245,607 103,303,139 66,802,024 70,018,430 1,178,328
</TABLE>
(a) Results of operations for the year ended January 31, 1997, included the
operations of Montgomery Ward Direct, Beautiful Images, Inc. and Catalog
Ventures, Inc. which were acquired by the Company in the second half of
fiscal 1997. See footnote 4 to the Notes to Consolidated Financial
Statements as of January 31, 1997 and 1996.
(b) Income (loss) before income taxes and extraordinary item and net income
(loss) include a pre-tax gain of $28.2 million from the sale of broadcast
properties for Fiscal 1997, $8.5 million gain on sale of investment in
National Media Corporation and $2.0 million equity in earnings of affiliates
in Fiscal 1996 and $3.7 million of costs associated with the National Media
Corporation tender offer in Fiscal 1995. See footnotes 2 and 4 to the Notes
to Consolidated Financial Statements as of January 31, 1997 and 1996.
29
<PAGE> 4
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
PAGE
Report of Independent Public Accountants 41
Consolidated Balance Sheets as of January 31, 1997 and 1996 42
Consolidated Statements of Operations for the Years
Ended January 31, 1997, 1996 and 1995 43
Consolidated Statements of Shareholders' Equity for the Years Ended
January 31, 1997, 1996 and 1995 44
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1997, 1996 and 1995 45
Notes to Consolidated Financial Statements 46
40
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ValueVision International, Inc.:
We have audited the accompanying consolidated balance sheets of ValueVision
International, Inc. (a Minnesota corporation) and Subsidiaries as of January
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ValueVision International,
Inc. and Subsidiaries as of January 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1997 in conformity with generally accepted accounting principles.
As disclosed in Note 5 to the consolidated financial statements, effective
February 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1997
41
<PAGE> 6
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
AS OF JANUARY 31,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 28,618,943 $ 20,063,901
Short-term investments 24,239,840 26,387,426
Accounts receivable, net 6,488,094 5,130,502
Inventories, net 28,109,081 8,889,426
Prepaid expenses and other 11,483,394 4,882,453
Deferred taxes 416,000 250,000
------------ ------------
Total current assets 99,355,352 65,603,708
PROPERTY AND EQUIPMENT, NET 24,283,108 13,813,347
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET 6,934,546 9,312,437
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 15,052,935 16,621,255
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 10,764,011 1,688,497
INVESTMENTS AND OTHER ASSETS, NET 10,022,718 10,229,973
------------ ------------
$166,412,670 $117,269,217
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 392,921 $ 200,000
Accounts payable 24,887,904 8,770,685
Accrued liabilities 12,398,041 4,197,963
Income taxes payable 45,008 350,000
------------ ------------
Total current liabilities 37,723,874 13,518,648
LONG-TERM OBLIGATIONS 1,443,189 447,430
------------ ------------
Total liabilities 39,167,063 13,966,078
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 6, 8, 10 and 11)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized;
28,842,198 and 29,343,748 shares issued and outstanding 288,422 293,437
Common stock purchase warrants;
5,368,557 and 25,770,461 shares 26,984,038 17,500,000
Additional paid-in capital 83,309,455 87,189,939
Net unrealized holding gains (losses) on investments
available-for-sale 69,437 (184,770)
Retained earnings (deficit) 16,594,255 (1,495,467)
------------ ------------
Total shareholders' equity 127,245,607 103,303,139
------------ ------------
$166,412,670 $117,269,217
============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
42
<PAGE> 7
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------------------
1997 1996 1995
-------------- ------------ -------------
<S> <C> <C> <C>
NET SALES $ 159,477,917 $ 88,909,853 $ 53,930,847
COST OF SALES 92,114,663 52,268,398 31,476,842
-------------- ------------ -------------
Gross profit 67,363,254 36,641,455 22,454,005
-------------- ------------ -------------
OPERATING EXPENSES:
Distribution and selling 56,819,304 28,177,953 19,654,681
General and administrative 7,187,377 4,421,924 4,238,108
Depreciation and amortization 5,996,357 4,807,735 2,273,580
-------------- ------------ -------------
Total operating expenses 70,003,038 37,407,612 26,166,369
-------------- ------------ -------------
OPERATING LOSS (2,639,784) (766,157) (3,712,364)
-------------- ------------ -------------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations 27,050,000 - -
Gain on sale of investments 808,449 8,480,453 -
Cost of National Media
Corporation tender offer - - (3,667,000)
Litigation costs - (617,000) (320,000)
Equity in earnings of affiliates 419,430 1,983,226 -
Interest income 3,912,231 2,137,720 1,722,275
Other, net 139,396 (98,677) (127,006)
-------------- ------------ -------------
Total other income (expense) 32,329,506 11,885,722 (2,391,731)
-------------- ------------ -------------
INCOME (LOSS) BEFORE PROVISOIN FOR INCOME TAXES 29,689,722 11,119,565 (6,104,095)
Provision for income taxes 11,600,000 100,000 -
-------------- ------------ -------------
NET INCOME (LOSS) $ 18,089,722 $ 11,019,565 $ (6,104,095)
============== ============ =============
NET INCOME (LOSS) PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE $ 0.57 $ 0.38 $ (0.22)
============== ============ =============
Weighted average number of common and
dulitive common equivalent shares outstanding 31,984,463 28,627,356 27,264,856
============== ============ =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
43
<PAGE> 8
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Common
---------------------- ----------------- Stock Additional
Number Par Number Par Purchase Paid-In
of Shares Value of Shares Value Warrants Capital
--------- -------- --------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 31, 1994 26,995,975 $269,960 111,785 $ 112 $ - $76,159,295
Cumulative effect of change in
accounting for certain investments
in debt and equity securities - - - - - -
Exercise of stock options 158,666 1,586 - - - 176,089
Issuance of Class A Common Stock 720,000 7,200 - - - 3,412,800
Conversion of Class B Common
Stock to Class A Common Stock 111,785 1,118 (111,785) (112) - (1,006)
Offering expenses - - - - - (95,460)
Unrealized holding loss on
investments available-for-sale - - - - - -
Net loss - - - - - -
---------- -------- ------- ----- ----------- -----------
BALANCE, January 31, 1995 27,986,426 279,864 - - - 79,651,718
Exercise of stock options 77,322 773 - - - 141,071
Issuance of common stock 1,280,000 12,800 - - - 7,987,200
Value assigned to common stock
purchase warrants - - - - 17,500,000 -
Offering expenses - - - - - (590,050)
Unrealized holding gain on
investments available-for-sale - - - - - -
Net income - - - - - -
---------- -------- ------- ----- ----------- -----------
BALANCE, January 31, 1996 29,343,748 293,437 - - 17,500,000 87,189,939
Exercise of stock options and warrants 545,150 5,452 - - - 1,144,943
Common stock repurchases (1,046,700) (10,467) - - - (5,815,427)
Value assigned to common stock
purchase warrants - - - - 9,484,038 -
Income tax benefit from stock
options exercised - - - - - 790,000
Unrealized holding gain on
investments available-for-sale - - - - - -
Net income - - - - - -
---------- -------- ------- ----- ----------- -----------
BALANCE, January 31, 1997 28,842,198 $288,422 - $- $26,984,038 $83,309,455
========== ======== ======= ===== =========== ===========
<CAPTION>
Net
Unrealized
Holding
Gains (Losses)
on Investments Retained Total
Available- Earnings Shareholders'
For-Sale (Deficit) Equity
---------- --------- -------------
<S> <C> <C> <C>
BALANCE, January 31, 1994 $ - $(6,410,937) $70,018,430
Cumulative effect of change in
accounting for certain investments
in debt and equity securities 3,849,474 - 3,849,474
Exercise of stock options - - 177,675
Issuance of Class A Common Stock - - 3,420,000
Conversion of Class B Common
Stock to Class A Common Stock - - -
Offering expenses - - (95,460)
Unrealized holding loss on
investments available-for-sale (4,464,000) - (4,464,000)
Net loss - (6,104,095) (6,104,095)
----------- ----------- -----------
BALANCE, January 31, 1995 (614,526) (12,515,032) 66,802,024
Exercise of stock options - - 141,844
Issuance of common stock - - 8,000,000
Value assigned to common stock
purchase warrants - - 17,500,000
Offering expenses - - (590,050)
Unrealized holding gain on
investments available-for-sale 429,756 - 429,756
Net income - 11,019,565 11,019,565
----------- ----------- -----------
BALANCE, January 31, 1996 (184,770) (1,495,467) 103,303,139
Exercise of stock options and warrants - - 1,150,395
Common stock repurchases - - (5,825,894)
Value assigned to common stock
purchase warrants - - 9,484,038
Income tax benefit from stock
options exercised - - 790,000
Unrealized holding gain on
investments available-for-sale 254,207 - 254,207
Net income - 18,089,722 18,089,722
----------- ----------- -----------
BALANCE, January 31, 1997 $ 69,437 $16,594,255 $127,245,607
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
44
<PAGE> 9
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 18,089,722 $ 11,019,565 $ (6,104,095)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities-
Depreciation and amortization 5,996,357 4,807,735 2,273,580
Deferred taxes (236,668) (250,000) -
Gain on sale of broadcast stations (27,050,000) - -
Gain on sale of investments (808,449) (8,480,453) -
Cost of National Media Corporation tender offer - - 3,667,000
Equity in earnings of affiliates (419,430) (1,983,226) -
Other non-cash charges - 646,268 203,625
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable, net (555,925) (2,064,405) (1,433,577)
Inventories, net (4,479,713) (1,056,425) (607,333)
Prepaid expenses and other 1,889,663 (3,230,141) (1,118,153)
Accounts payable and accrued liabilities 1,433,867 2,894,713 2,655,665
Income taxes payable 361,481 - -
------------ ------------ -------------
Net cash provided by (used for) operating activities (5,779,095) 2,303,631 (463,288)
------------ ------------ -------------
INVESTING ACTIVITIES:
Property and equipment additions, net of effect of acquisitions (14,364,600) (3,040,865) (2,978,333)
Purchase of broadcast stations (4,618,743) - (11,689,025)
Acquisition of direct-mail companies, net of cash acquired (4,113,984) - -
Proceeds from sale of broadcast stations 40,000,000 - -
Proceeds from sale of investments 6,103,541 16,438,979 -
Purchase of short-term investments (84,506,099) (55,094,124) (23,900,870)
Proceeds from sale of short-term investments 87,256,886 33,710,220 39,023,136
Payment of National Media Corporation tender offer costs - - (3,110,749)
Payment for investments and other assets (6,534,383) (3,457,071) (3,246,341)
------------ ------------ --------------
Net cash provided by (used for) investing activities 19,222,618 (11,442,861) (5,902,182)
------------ ------------ -------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 1,150,395 141,844 177,675
Payments for repurchases of common stock (5,825,894) - -
Proceeds from sale of common stock - 8,000,000 -
Payment of offering costs - (464,167) (85,760)
Payment of long-term obligations (212,982) (130,500) (327,105)
------------ ------------ -------------
Net cash provided by (used for) financing activities (4,888,481) 7,547,177 (235,190)
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents 8,555,042 (1,592,053) (6,600,660)
BEGINNING CASH AND CASH EQUIVALENTS 20,063,901 21,655,954 28,256,614
------------ ------------ -------------
ENDING CASH AND CASH EQUIVALENTS $ 28,618,943 $ 20,063,901 $ 21,655,954
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 83,000 $ 69,000 $ 29,000
============ ============ ============
Income taxes paid $ 10,051,000 $ - $ -
============ ============ ============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 1,484,993 warrants in connection with
the acquisition of Montgomery Ward Direct, L.P. $ 8,353,000 $ - $ -
============ ============ ============
Issuance of 199,097 warrants as a limited partnership contribution $ 1,131,000 $ - $ -
============ ============ ============
Note payable issued in connection with the purchase of land $ 600,000 $ - $ -
============ ============ ============
Issuance of warrants to Montgomery Ward & Co., Incorporated $ - $ 17,500,000 $ -
============ ============ ============
Capital distribution received from investment in limited partnership $ - $ 2,744,000 $ -
============ ============ ============
Issuance of 720,000 shares of common stock as partial consideration
for the acquisition of a full power television station $ - $ - $ 3,420,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
45
<PAGE> 10
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
1. THE COMPANY:
ValueVision International, Inc. and Subsidiaries ("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 or affiliated full power Ultra-High Frequency
("UHF") broadcast television stations, low power television ("LPTV") stations
and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), is also a direct-mail marketer of a broad
range of quality general merchandise which is sold to consumers through
direct-mail catalogs and other direct marketing solicitations. Products offered
include domestics, housewares, home accessories and electronics. Through its
wholly-owned subsidiary, Catalog Ventures, Inc. ("CVI"), the Company sells a
variety of fashion jewelry, health and beauty aids, books, audio and video
cassettes and other related consumer merchandise through the publication of
five consumer specialty catalogs. The Company also manufactures and markets,
via direct-mail, women's foundation undergarments through its wholly-owned
subsidiary, Beautiful Images, Inc. ("BII").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ValueVision International, Inc. ("ValueVision") and its wholly-owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Results of operations for the year ended January 31, 1997 include the
direct-mail operations of Montgomery Ward Direct effective July 27, 1996,
Beautiful Images, Inc. effective October 22, 1996 and Catalog Ventures, Inc.
effective November 1, 1996, which were acquired by the Company in fiscal 1997.
FISCAL YEAR
The Company's fiscal year ends on January 31. Fiscal years are designated
in the accompanying consolidated financial statements and related notes by the
calendar year in which the fiscal year ends.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue is recognized at the time merchandise is shipped. Shipping and
handling fees collected from customers are recognized as merchandise is shipped
and are offset against actual shipping expenses as a component of distribution
and selling costs. Returns are estimated and provided for at the time of sale
based on historical experience. Payments received for unfilled orders are
reflected as a component of accrued liabilities.
46
<PAGE> 11
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
Accounts receivable consist primarily of amounts due from customers for
merchandise sales and from credit card companies, and are reflected net of
reserves for estimated uncollectible amounts of $529,000 at January 31, 1997
and $181,000 at January 31, 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds and
commercial paper with an original maturity of 90 days or less.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of commercial paper with a
remaining maturity of less than 12 months and are stated at cost, which
approximates market value.
INVENTORIES
Inventories, which consist primarily of consumer merchandise held for
resale, are stated at the lower of first-in, first-out cost or realizable
value.
ADVERTISING COSTS:
Promotional advertising expenditures are expensed in the period the
advertising initially takes place. Direct response advertising costs,
consisting primarily of catalog preparation, printing and postage
expenditures, are deferred and amortized over the period during which the
benefits are expected, generally three to six months. Advertising costs of
$21,164,000, $2,013,000, and $0 for the years ended January 31, 1997, 1996 and
1995, respectively, are included in the accompanying consolidated statements
of operations. Prepaid expenses and other includes deferred advertising costs
of $6,268,000 at January 31, 1997 and $1,223,000 at January 31, 1996, which
will be reflected as an expense during the quarterly period benefited.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Betterments and renewals that
extend the life of an asset are capitalized and depreciated. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts, and any residual values are charged or
credited to operations. Depreciation and amortization for financial reporting
purposes are provided principally on the straight-line method based upon
estimated useful lives.
Property and equipment consisted of the following at January 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
(In Years) 1997 1996
---------- ---- ----
<S> <C> <C> <C>
Land and improvements - $ 7,151,000 $ 1,026,000
Buildings and improvements 40 4,630,000 866,000
Transmission and production equipment 5-20 10,226,000 11,258,000
Office and warehouse equipment 3-10 2,962,000 1,923,000
Computer and telephone equipment 3- 5 3,726,000 2,431,000
Leasehold improvements 3-10 1,720,000 1,164,000
Less - Accumulated depreciation (6,132,000) (4,855,000)
----------- -----------
$24,283,000 $13,813,000
=========== ===========
</TABLE>
47
<PAGE> 12
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
FEDERAL COMMUNICATIONS COMMISSION LICENSES
Federal Communications Commission ("FCC") licenses are stated at
acquisition cost as determined based upon independent appraisals and are
amortized on a straight-line basis over their estimated useful lives of 25
years. Although the FCC has established eight year license terms for
television stations, the Telecommunications Act of 1996 requires the FCC to
grant applications for renewal of such licenses upon a finding that (1) the
station has served the public interest, convenience, and necessity; (2) there
have been no serious violations by the licensee of the Communications Act or
the FCC's rules and regulations; and (3) there have been no other violations by
the licensee of such Act or rules and regulations which, taken togther, would
constitute a pattern of abuse. The Company has met and continues to meet the
requirements set forth above, and based further on standard industry practice,
the Company has determined that 25 years is a reasonable estimated useful life
for its FCC licenses, considering the future periods to be benefited.
Accumulated amortization was $529,000 at January 31,1997 and $536,000 at
January 31, 1996.
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES
As discussed further in Note 3, during fiscal 1996, the Company issued
common stock purchase warrants in exchange for various agreements entered into
with Montgomery Ward & Co., Incorporated ("Montgomery Ward") including an
Operating Agreement, a Credit Card License and Receivable Sales Agreement, and
a Servicemark License Agreement. The value assigned to the agreements of
$17,500,000 was determined pursuant to an independent appraisal and is being
amortized on a straight-line basis over the amended term of the agreements.
The Operating Agreement expires July 31, 2008 and may be terminated under
certain circumstances, as defined in the agreement. The Credit Card License and
Receivable Sales Agreement and Servicemark License Agreement automatically
terminate upon termination of the Operating Agreement. Accumulated
amortization related to the agreements was $2,447,000 at January 31, 1997 and
$879,000 at January 31, 1996.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following at
January 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Goodwill, net $ 9,054,000 $1,688,000
Other intangible assets, net 1,710,000 -
----------- -----------
$10,764,000 $1,688,000
=========== ==========
</TABLE>
Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired in purchase transactions, and is being amortized on a
straight-line basis over periods ranging from 12 to 25 years. Other intangible
assets represent costs allocated to customer lists arising from business
acquisitions and are being amortized on a straight-line basis over 5 years.
The carrying values of goodwill and other intangible assets are evaluated
periodically by the Company in relation to the operating performance and future
undiscounted net cash flows of the related acquired businesses. Accumulated
amortization was $660,000 at January 31, 1997 and $361,000 at January 31, 1996.
48
<PAGE> 13
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following at January 31:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Investments $ 4,444,000 $ 2,922,000
Prepaid cable launch fees, net 2,382,000 2,455,000
Other, net 3,197,000 4,853,000
---------- -----------
$10,023,000 $10,230,000
=========== ===========
</TABLE>
The Company has nonmarketable investments in private companies,
partnerships and a venture capital limited partnership which are carried at the
lower of cost or net realizable value. In addition, the Company has, from time
to time, made investments in public companies which are classified as
"available-for-sale" investment securities, and are stated at fair value, with
unrealized gains and losses reported as a separate component of shareholders'
equity. (See Note 5.) The fair values of other investments were estimated
based primarily on recent financing and securities transactions and, to a
lesser extent, on other pertinent information, including financial condition
and operating results.
At January 31, 1997, investments include approximately $2,710,000 related
to a 13% interest in a venture capital limited partnership. The purpose of the
limited partnership is to invest in and assist new and emerging growth-oriented
businesses and leveraged buyouts in the consumer services, retailing and direct
marketing industries. In addition to the Company, Merchant Advisors, L.P. is
the only other limited partner in the limited partnership. The investment in
this partnership is accounted for using the equity method of accounting. In
fiscal 1996, the Company received from the limited partnership a distribution
of certain investment securities including common stock and common stock
purchase warrants, valued at $2,744,000 as determined pursuant to an
independent financial appraisal.
Other assets consist principally of non-compete agreements, prepaid
satellite transponder launch fees, long-term deposits, notes receivable and
software development costs, all of which are carried at cost, net of
accumulated amortization. Costs are amortized on a straight-line basis over
the estimated useful lives of the assets ranging from 3 to 12 years.
Accumulated amortization was $433,000 at January 31, 1997 and $373,000 at
January 31, 1996.
In March 1997, the Company acquired a 15% interest in Net Radio
Corporation ("Net Radio") for an aggregate purchase price of $3 million,
consisting of $1 million in cash and a commitment to provide $2 million in
future advertising. Net Radio is a music and entertainment site on the
Internet. Navarre Corporation, a national distributor of music, computer
software and interactive CD ROM products, owns the remaining 85% of Net Radio.
The Company's 24-hour per day shopping program is currently being carried by
Net Radio. This investment allows ValueVision to establish a foothold in
providing electronic commerce on the Internet. Additionally, ValueVision has
been granted exclusive rights for most merchandise categories to be made
available in Net Radio's program marketplace.
49
<PAGE> 14
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting under which deferred tax assets are recognized for deductible
temporary differences, and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of the enactment of such laws.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding, as determined using the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, ("SFAS No. 107")
"Disclosures about Fair Value of Financial Instruments", requires disclosures
of fair value information about financial instruments for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including discount rates and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair values for financial instruments:
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities, due to the short
maturities of those instruments.
Fair values for long-term investments are based on quoted market prices,
where available. For equity securities not actively traded, fair values are
estimated by using quoted market prices of comparable instruments or, if there
are no relevant comparables, on pricing models or formulas using current
assumptions.
The fair value for the Company's long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates, for similar types of borrowing arrangements, and approximated
carrying value at January 31, 1997 and 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during reporting
periods. These estimates relate primarily to the carrying amounts of accounts
receivable and inventories, the realizability of certain long-term assets and
the recorded balances of certain accrued liabilities and reserves. Ultimate
results could differ from the use of these estimates.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 1997 presentation
with no impact on previously reported net income (loss) or shareholders'
equity.
3. MONTGOMERY WARD ALLIANCE:
During fiscal 1996, the Company entered into a Securities Purchase
Agreement, an Operating Agreement, a Credit Card License and Receivable Sales
Agreement, and a Servicemark License Agreement (collectively, the "MW
Agreements") with Montgomery Ward. Under the MW Agreements, Montgomery Ward
purchased 1,280,000 unregistered shares of common stock of the Company at $6.25
per share, which represented approximately 4.4% of the issued and outstanding
shares of common stock of the Company, and received warrants to purchase an
additional 25 million shares of common stock of the Company, subject to
adjustment (25,770,461 as adjusted through January 31, 1996). These warrants
had exercise prices ranging from $6.50 to $17.00 per share, with an average
exercise price of $9.16 per share (the "Warrants"). The value assigned to the
Warrants of $17,500,000 was determined pursuant to an independent appraisal.
50
<PAGE> 15
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
On June 7, 1996, the Company signed a non-binding Memorandum of
Understanding with Montgomery Ward pursuant to which the companies agreed to
the expansion and restructuring of their ongoing operating and license
agreements as well as the Company's acquisition of substantially all of the
assets and assumption of certain obligations of Montgomery Ward Direct L.P.
("MWD"), a four year old catalog business. Effective July 27, 1996 the
companies reached definitive agreements and closed the transaction in the third
quarter ended October 31, 1996. Pursuant to the provisions of the agreements,
the Company's sales promotion rights were expanded beyond television home
shopping to include the full use of the service mark of Montgomery Ward for
direct-mail catalogs and ancillary promotions. In addition, the strategic
alliance between the companies has been restructured and amended such that (i)
18,000,000 unvested warrants granted to Montgomery Ward in August 1995 and
exercisable at prices ranging from $7.00 - $17.00 were terminated in exchange
for the issuance by the Company of 1,484,467 new vested warrants exercisable at
$0.01 per share, valued at $5.625 per warrant, which approximated the book
value of the 18,000,000 unvested warrants returned as of the date of the
transaction, (ii) the Company issued 1,484,993 new vested warrants, valued
at $5.625 per share and exercisable at $0.01 per share, to Montgomery Ward as
full consideration for the acquisition of approximately $4.7 million in net
assets, representing substantially all of the assets and the assumption of
certain liabilities of MWD, (iii) Montgomery Ward has committed to provide $20
million in supplemental advertising support over a five-year period, (iv) the
Montgomery Ward operating agreements and licenses have been amended and
expanded, as defined in the agreements, and extended to July 31, 2008 and (v)
the Company issued to Montgomery Ward new vested warrants to purchase 2.2
million shares of the Company's common stock at an exercise price of $.01 per
share in exchange for 7,000,000 vested warrants granted to Montgomery Ward in
August 1995 which were exercisable at prices ranging from $6.50 - $6.75 per
share. The fair value of the warrants approximated the book value of the
warrants exchanged.
Under the MW Agreements, Montgomery Ward provides the Company with certain
operational support, including merchandise sourcing and use of the Montgomery
Ward credit card by the Company's customers, and may also assist the Company in
obtaining a line of credit for strategic acquisitions or expansion. Montgomery
Ward may assist the Company in obtaining cable carriage agreements by
purchasing advertising time on cable systems. During the term of the MW
Agreements, the Company will be Montgomery Ward's exclusive outlet for
television shopping (as defined in the MW Agreements), subject to certain
exceptions. The Operating Agreement has a twelve-year term and may be
terminated under certain circumstances as defined in the agreement.
Montgomery Ward purchased approximately $4.2 million and $1.5 million of
advertising spot time on cable systems affiliated with the Company pursuant to
cable affiliation agreements for the years ended January 31, 1997 and 1996,
respectively. Under the terms of the Credit Card License and Receivable Sales
Agreement, the Company processed approximately $20,960,000 and $19,453,000 of
merchandise sales as a result of customers using Montgomery Ward/ValueVision
credit cards and the Company incurred $596,000 and $175,000 of processing fees
during fiscal 1997 and 1996, respectively. In addition, during fiscal 1997 and
1996, the Company earned $793,000 and $292,000 for administering and processing
Montgomery Ward credit card applications. As of January 31, 1997 and 1996, the
Company had $830,000 and $1,981,000 included in accounts receivable from
Montgomery Ward for merchandise sales made on Montgomery Ward/Value Vision
credit cards, advertising spot time acquired and administrative and processing
fees, net of processing fees due Montgomery Ward for use of its credit card.
4. ACQUISITIONS AND DISPOSITIONS:
MONTGOMERY WARD DIRECT
As discussed further in Note 3, effective July 27, 1996, the Company
acquired substantially all of the assets and assumed certain obligations of MWD
by issuing 1,484,993 vested warrants with an exercise price of $.01 per share,
to Montgomery Ward as full consideration for the acquisition of approximately
$4.7 million in net assets of MWD. The value of the warrants issued in the
acquisition of MWD was based on the market price of the Company's common
stock during the period in which the agreement was reached (i.e., signing of
letter of intent) to undertake the relevant transaction which the Company
believes is indicative of the fair value of the acquired business.
51
<PAGE> 16
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
The Company's acquisition of MWD was made through VVDM, for an aggregate
purchase price of $8,497,000, which included acquired cash of $5,764,000 and
acquisition costs of $144,000. The acquisition was accounted for using the
purchase method of accounting and accordingly, the net assets of MWD were
recorded at their estimated fair values based upon a preliminary allocation of
the purchase price to such net assets. The preliminary purchase price
allocations are subject to change upon receipt of additional information
relative to asset and liability valuations. Therefore, the final allocation
may differ from the preliminary allocation. The preliminary allocation is
summarized as follows:
<TABLE>
<S> <C>
Cash $ 5,764,000
Inventories 9,140,000
Other current assets 2,861,000
Property and equipment 557,000
Intangible assets 4,531,000
Liabilities assumed (14,356,000)
-----------
$ 8,497,000
===========
</TABLE>
The excess of the purchase price over the net assets acquired was
$4,531,000 and has been recorded as goodwill and other intangible assets in
the accompanying balance sheet and is being amortized on a straight-line basis
over 5-12 years. The operating results of MWD have been included in the fiscal
1997 consolidated statement of operations from the date of acquisition.
Unaudited pro forma consolidated net sales of the Company for the years ended
January 31, 1997 and 1996, as if the acquisition had occurred as of the
beginning of the respective periods were $194,284,000 and $240,850,000
respectively. Unaudited pro forma net income was $17,151,000, or $.52 per
share, in fiscal 1997 and $4,341,000, or $.14 per share, in fiscal 1996. Such
pro forma amounts are not necessarily indicative of what the actual
consolidated results of operations would have been had the acquisition been
effective at the beginning of the respective periods.
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of BII, a manufacturer and direct marketer of women's
foundation undergarments. The Company paid $4,253,000 in cash, which included
acquired cash of $423,000, $500,000 relating to a non-compete agreement and
acquisition costs of approximately $75,000, and assumed certain obligations
totaling $109,000. The acquisition was accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based upon estimated fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $3,310,000, of which $2,810,000 has been recorded
as goodwill, which is being amortized on a straight-line basis over 15 years
and $500,000 has been assigned to the non-compete agreement, which is being
amortized on a straight-line basis over the 6 year term of the agreement. The
operating results of BII have been included in the fiscal 1997 consolidated
statement of operations from the date of acquisition. Pro forma results of
operations have not been presented because the effects were not significant.
52
<PAGE> 17
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. ("Webb"), two direct marketing
companies which together publish five consumer specialty catalogs. The Company
paid $7,369,000 in cash which included acquired cash of $1,465,000 and
acquisition costs of approximately $100,000. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair values of the net assets acquired was $1,953,000, and has been
recorded as goodwill, which is being amortized on a straight-line basis over 15
years. The operating results of CVI have been included in the fiscal 1997
consolidated statement of operations from the date of the acquisition. Pro
forma results of operations have not been presented because the effects were
not significant.
BROADCAST STATIONS
During the first quarter of fiscal 1995, the Company completed the
acquisitions of three full power television broadcast stations serving the
Washington D.C. ("WVVI"); Houston, Texas ("KVVV"); and Cleveland - Akron, Ohio
("WAKC") Areas of Dominant Influence ("ADI"). On December 28, 1994 the Company
completed the acquisition of a full power television broadcast station serving
the New York City ADI and licensed to Bridgeport, Connecticut ("WHAI"). The
aggregate purchase price for the four stations was approximately $22,374,000 in
cash, Company common stock and non-compete obligations. The acquisitions were
accounted for under the purchase method of accounting. Accordingly, the net
assets of the four stations were recorded at their estimated values at the time
of acquisition, as determined by independent appraisals.
On March 15, 1996, the Company completed the acquisition of independent
television station KBGE (TV), Channel 33 serving the Seattle-Tacoma, Washington
market, for approximately $4.6 million including the assumption of certain debt
obligations and acquisition related costs. This acquisition was completed in
accordance with the terms of a five-year programming affiliation and financing
agreement with the station which was signed on July 21, 1995. Pursuant to this
agreement, the company provided financing of up to $1,450,000 related to a
working capital loan for channel operations.
On April 11, 1996, the Company completed a second closing with respect to
its acquisition of independent television station WVVI (TV), Channel 66,
serving the Washington, D.C. market whereby the Company paid $800,000 to the
former owner of WVVI (TV) as a final payment in exchange for not having to pay
$1,600,000 in the event the "must carry" provisions of the 1992 Cable Act are
upheld by a final decision. The Company had previously paid $4,050,000 to
National Capital Christian Broadcasting, WVVI's former owners, at an initial
closing on March 28, 1994. The $800,000 additional payment has been
classified as excess purchase price and is being amortized over 25 years on a
straight-line basis. In addition, the Company received certain studio and
production equipment from the former owner of WVVI, in lieu of a cash payment,
for the balance outstanding under a secured convertible debenture in the face
amount of $450,000.
On March 31, 1997, the United States Supreme Court upheld the "must carry"
provisions of the 1992 Cable Act. Assuming there is no petition for a
rehearing, and the decision becomes final, the Company will be obligated to pay
an additional $1,600,000 in connection with its 1995 acquisition of television
station KVVV (TV) in Houston, Texas upon a second closing. In lieu of paying
$1,600,000 in cash, the Company may issue that number of shares of common stock
having a market value of $2,000,000 on the date of the second closing. The
additional payment, when made, will be classified as unallocated excess
purchase price and amortized over 25 years on a straight-line basis.
53
<PAGE> 18
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
SALE OF BROADCAST STATIONS
On February 28, 1996, the Company completed the sale of two television
stations to Paxson Communications Corporation ("Paxson") for $40.0 million in
cash plus the assumption of certain obligations. The stations sold were ABC
affiliate WAKC (TV), Channel 23, licensed to Akron, Ohio, and independent
station WHAI (TV), Channel 43, licensed to Bridgeport, Connecticut. WAKC (TV)
was acquired by the Company in April 1994 for approximately $6.0 million and
WHAI (TV) was acquired by the Company in December 1994 for approximately $7.3
million. The net gain on the sale of these two television stations of
approximately $27 million was recognized in the quarter ended April 30, 1996.
On November 22, 1996, the Company announced that an agreement had been
reached with Paxson for the sale of its television broadcast station, WVVI
(TV), Channel 66, which serves the Washington, D.C. market, for approximately
$30 million. Under the terms of the agreement, Paxson will pay the Company $20
million in cash and $10 million in Paxson common stock valued at the average
closing price during the 60-day period following the signing of the agreement.
As part of the agreement, Paxson will be required to pay an additional $10
million to the Company as a result of the United States Supreme Court upholding
the "must carry" provision of the 1992 Cable Act. WVVI (TV) carries the
Company's television home shopping programming and was acquired by the Company
in March 1994 for $4,850,000. The transaction is anticipated to close by the
end of the second quarter of fiscal 1998. The effects of the disposition will
be reflected in the financial statements at the date of closing. Management
believes that the sale will not have a significant impact on the operations of
the Company.
5. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115,
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES":
Effective February 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires (i) investments in
debt and equity securities to be classified at the time of their acquisition
into one of three categories (trading, available-for-sale and
held-to-maturity), and (ii) unrealized gains (losses) on investments
available-for-sale to be reflected as a separate component of shareholders'
equity and in certain instances, as a realized loss at the time a decline in
fair value below the cost basis is determined to be other than temporary. The
cumulative effect of adopting SFAS No. 115 effective February 1, 1994 resulted
in the recognition of an unrealized holding gain on investments
available-for-sale of approximately $3,849,000.
At January 31, 1997 and 1996, the Company had cash equivalents and
short-term investments of approximately $44,840,000 and $45,828,000,
respectively, that are classified as "held-to-maturity" investment securities
and stated at cost which approximates market value. The Company's long-term
investments are classified as "available-for-sale" investment securities.
6. LOW POWER TELEVISION STATIONS:
The licensing of LPTV stations' transmission authority is regulated by the
FCC through the Communications Act of 1934. LPTV construction permits and the
licensing rights that result upon definitive FCC operating approval are awarded
solely at the discretion of the FCC and are subject to periodic renewal
requirements. Prior to the incorporation of the Company, certain of the
Company's officers, directors and principal shareholders received construction
permits pursuant to individual initiatives. As of January 31, 1997, certain of
the Company's officers, directors and principal shareholders held six
construction permits for the stations. In addition, as of January 31, 1997,
the Company had been granted one construction permit on its own behalf.
54
<PAGE> 19
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
The Company has entered into non-binding agreements with holders of the
six LPTV construction permits held or applied for by related parties whereby
the Company has the option to enter into a secured financing arrangement to
support the construction of transmission equipment for each LPTV station and to
provide its programming to the station. Four of the agreements contain a fixed
price purchase option of $5,000 each in favor of the Company, effective
immediately upon FCC licensing or within 12 months from the FCC licensing date,
as defined. The remaining two agreements provide the Company with the right of
first refusal should the station be offered for sale. Under the six agreements
with related parties, such parties could receive maximum annual programming
fees of approximately $300,000.
In March 1997, the Company entered into asset purchase agreements with the
holders of the six LPTV construction permits whereby a wholly-owned subsidiary
of the Company will acquire all of such holders' rights in and to the licenses,
permits, authorizations and other assets used in connection with each of the
stations. Four of the agreements provide for a purchase price of $5,000 and two
of the agreements provide for a purchase price of $75,000. The transactions
are anticipated to close by the end of the second quarter of fiscal 1998 and
are subject to regulatory approvals. Upon the closing of these transactions,
the Company will have no further obligations to the related parties thereunder
regarding these LPTV stations.
7. SHAREHOLDERS' EQUITY:
COMMON STOCK
The Company currently has authorized 100,000,000 shares of undesignated
capital stock, of which approximately 28,842,000 shares were issued and
outstanding as Common Stock as of January 31, 1997. The Board of Directors can
establish new classes and series of capital stock by resolution without
shareholder approval. The Company's Sixth Amended and Restated Articles of
Incorporation, which were approved at the 1994 Annual Meeting of Shareholders,
eliminated Class B Common Stock, Class A Convertible Preferred Stock and Class
B Convertible Preferred Stock.
Prior to the adoption of the Sixth Amended and Restated Articles of
Incorporation, the Company's Articles of Incorporation provided for two classes
of common stock, Class A Common Stock and Class B Common Stock. The Company's
Class A and Class B Common Stock were substantially identical in all respects,
except that Class B Common Stock had a four to one per share voting advantage
over Class A Common Stock. Class B Common Stock was convertible into Class A
Common Stock on a share-for-share basis at any time. The Company's amended and
restated Articles of Incorporation limited the transfer of Class B Common
Stock to permitted transferees, as defined. Additionally, the Class B Common
Stock automatically converted to Class A Common Stock in the event that the
holder thereof violated certain non-compete clauses, including competing
directly or indirectly with the Company.
55
<PAGE> 20
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
WARRANTS
As discussed further in Note 3, in fiscal 1996, the Company issued
Montgomery Ward warrants to purchase 25 million shares of common stock of the
Company, subject to adjustment (25,770,461 as adjusted through January 31,
1996), with exercise prices ranging from $6.50 to $17.00 per share, with an
average price of $9.16 per share.
In July 1996, in connection with the acquisition of MWD, the Company's
strategic alliance with Montgomery Ward was restructured and amended whereby
new vested warrants to purchase 3,684,467 shares of the Company's common stock
at an exercise price of $.01 per share were issued to Montgomery Ward in
exchange for the 25,770,461 vested warrants currently held. In addition, the
Company issued 1,484,993 new vested warrants with a fair market value of
$8,353,000 and exercisable at $.01 per share to Montgomery Ward as full
consideration for the acquisition of MWD.
In July 1996, the Company also issued 199,097 new vested warrants with a
fair market value of $1,131,000 and exercisable at $.01 per share as a limited
partnership investment contribution.
UNDERWRITER OPTIONS
In connection with the Company's fiscal 1992 initial public offering, the
Company issued options to purchase up to an aggregate 72,000 units for $5.23
per unit. Each unit consisted of three shares of common stock, three Class A
Warrants and one-quarter of a Class B Warrant, subject to adjustment pursuant
to antidilution provisions as defined. At the beginning of fiscal 1997, 20,400
units had been previously exercised. During the year ended January 31, 1997,
options to purchase the remaining 51,600 units were exercised in full and
resulted in the issuance of 509,550 shares of common stock. The Company
received proceeds of approximately $1,051,000 relating to this exercise. No
unit purchase options were exercised in fiscal 1996 or 1995.
The underwriters of the fiscal 1994 common stock offering were given
options to purchase up to 400,000 shares of common stock at an initial
exercise price of $16.41 per share, subject to certain specified adjustments,
as defined, exercisable until November 15, 1998. No underwriter options were
exercised in fiscal 1997, 1996 or 1995.
STOCK OPTIONS
The Company has adopted an incentive stock option plan ("the 1990 Plan"),
as amended, which provides for the grant of options to employees to purchase up
to 2,150,000 shares of the Company's common stock. In addition to options
granted under the 1990 Plan, the Company has also granted nonqualified stock
options to purchase shares of the Company's common stock to current and former
directors, a consultant and certain employees. The exercise price for options
granted under the 1990 Plan are determined by the stock option committee of the
Board of Directors, but shall not be less than the fair market value of the
shares on the date of grant. The options' maximum term may not exceed 10 years
from the date of grant. Options are exercisable in whole or in installments,
as determined by the stock option committee, and are generally exercisable in
annual installments of 20% to 33% commencing one year after grant. The
exercise price of the nonqualified stock options equaled the market value of
the Company's common stock at the date of grant and the maximum term of such
options does not exceed 10 years from the date of grant.
56
<PAGE> 21
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25 and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Accordingly, no compensation cost
has been recognized in the accompanying consolidated statements of operations.
Had compensation cost related to these options been determined based on the
fair value at the grant date for awards granted in fiscal 1997 and 1996,
consistent with the provisions of SFAS No. 123, the Company's net income and
net income per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income: As reported $18,089,700 $11,019,600
Pro forma 17,794,500 10,775,500
Net income per share: As reported $0.57 $0.38
Pro forma 0.56 0.38
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to February 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted were as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
Stock Stock
Options Options
--------- ------------
<S> <C> <C>
Fiscal 1997 grants $3.36 $3.46
Fiscal 1996 grants 3.20 1.78
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and 1996,
respectively: risk-free interest rates of 6.0 and 6.2 percent; expected
volatility of 46 and 45 percent; and expected lives of 7.5 years. Dividend
yields were not used in the fair value computations as the Company has never
declared or paid dividends on its common stock and currently intends to retain
earnings for use in operations.
57
<PAGE> 22
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
A summary of the status of the Company's stock option plan as of January
31, 1997, 1996, and 1995 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
Weighted Non- Weighted
Incentive Average qualified Average
Stock Exercise Stock Exercise
Options Price Options Price
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance outstanding, January 31, 1994 880,002 $4.28 175,000 $3.27
Granted 760,863 5.00 190,000 4.32
Exercised (158,666) 1.12 - -
Forfeited or canceled (290,863) 8.23 - -
--------- -------- --------- --------
Balance outstanding, January 31, 1995 1,191,336 4.20 365,000 3.82
Granted 344,322 5.50 190,000 5.08
Exercised (27,322) 2.90 (50,000) 1.25
Forfeited or canceled (6,500) 4.37 - -
--------- -------- --------- --------
Balance outstanding, January 31, 1996 1,501,836 4.52 505,000 4.55
Granted 151,000 5.74 325,000 5.62
Exercised (35,600) 2.79 - -
Forfeited or canceled (9,400) 4.84 - -
--------- -------- --------- --------
Balance outstanding, January 31, 1997 1,607,836 $4.67 830,000 $4.97
========= ======== ========= ========
Options exercisable at:
January 31, 1997 971,000 $4.24 505,000 $4.55
========= ======== ========= ========
January 31, 1996 759,000 $3.97 315,000 $4.22
========= ======== ========= ========
January 31, 1995 378,000 $3.97 365,000 $3.82
========= ======== ========= ========
</TABLE>
58
<PAGE> 23
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
The following table summarizes information regarding stock options outstanding
at January 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS EXERCISE REMAINING OPTIONS EXERCISE
OPTION TYPE EXERCISE PRICES OUTSTANDING PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
----------- --------------- ----------- -------- ---------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCENTIVE: $1.00 - $2.53 210,336 $1.51 3.2 YEARS 210,000 $1.51
$4.00 - $6.00 1,397,500 $5.14 6.0 761,000 $4.99
--------- -------
$1.00 - $6.00 1,607,836 $4.67 5.7 971,000 $4.24
========= =======
NONQUALIFIED: $1.25 25,000 $1.25 1.4 25,000 $1.25
$4.13 - $6.19 805,000 $5.08 6.0 480,000 $4.72
--------- -------
$1.25 - $6.19 830,000 $4.97 5.9 505,000 $4.55
========= =======
</TABLE>
STOCK OPTION TAX BENEFIT
The exercise of stock options which have been granted under the
Company's stock option plan gives rise to compensation which is includable in
the taxable income of the applicable employees and deductible by the Company
for federal and state income tax purposes. Such compensation results from
increases in the fair market value of the Company's common stock subsequent to
the date of grant of the applicable exercised stock options and is not
recognized as an expense for financial accounting purposes. The related tax
benefits are recorded as additional paid-in capital when realized, and totaled
$790,000 in fiscal 1997.
COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a stock repurchase program
whereby the Company may repurchase shares of its common stock, up to a maximum
of $10 million, in the open market and through negotiated transactions, at
prices and times deemed to be beneficial to the long-term interests of
shareholders and the Company. During fiscal 1997, the Company repurchased
1,047,000 common shares under the program for a total cost of $5,826,000. No
shares were repurchased in fiscal 1996. In March 1997, the Company's Board of
Directors authorized an additional repurchase of up to $10 million of the
Company's common stock.
59
<PAGE> 24
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
8. LONG-TERM OBLIGATIONS:
In conjunction with the acquisition of WAKC (see Note 4), the Company
entered into three covenant not-to-compete agreements with former employees and
majority stockholders of WAKC involving aggregate consideration of $1,000,000
to be paid in five equal annual installments commencing in April 1995.
Obligations under these non-compete agreements were initially reflected in the
accompanying consolidated balance sheets at a present value of approximately
$778,000 based upon an 8% imputed interest rate and are being amortized on a
straight-line basis over the term of the agreements. The long-term and current
portions of this obligation at January 31, 1997 were $306,000 and $200,000,
respectively.
As a result of the Company's recent acquisitions, the Company leases
computer and telephone equipment under noncancelable capital leases and
includes these assets as part of property and equipment in the accompanying
consolidated balance sheets. At January 31, 1997, the capitalized cost of
leased equipment was approximately $539,000 and the related accumulated
depreciation was approximately $93,000. Future minimum lease payments for
assets under capital leases at January 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 284,000
1999 243,000
2000 224,000
2001 76,000
---------
Total minimum lease payments 827,000
Less: Amounts representing interest (97,000)
---------
730,000
Less: Current portion (193,000)
---------
Long-term capital lease obligation $ 537,000
=========
</TABLE>
The Company has entered into a $600,000, 10 year note payable
arrangement in connection with the purchase of land to be used in the
Company's fulfillment operations. The note bears interest, payable in monthly
installments, at 7.5% for the first five years and at Prime interest thereafter
until maturity. The principal amount matures and is payable in December 2006.
The note is collateralized by the underlying related property.
60
<PAGE> 25
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
9. INCOME TAXES:
The Company records deferred taxes for differences between the
financial reporting and income tax bases of certain assets and liabilities,
computed in accordance with tax laws in effect at that time. The differences
which give rise to deferred taxes were as follows:
<TABLE>
<CAPTION>
January 31,
---------------------------------
1997 1996
---- ----
<S> <C> <C>
Accruals and reserves not currently
deductible for tax purposes $ 2,579,000 $ 988,000
Inventory capitalization 541,000 219,000
Deferred catalog costs (667,000) -
Start-up costs capitalized for tax purposes 30,000 64,000
Net tax carryforwards 198,000 977,000
Differences in depreciation lives and (1,237,000) (1,031,000)
methods
Difference in investments and other items (1,028,000) (967,000)
----------- -----------
Net deferred tax asset $ 416,000 $ 250,000
=========== ===========
</TABLE>
The net tax carryforwards at January 31, 1997 consist of alternative
minimum tax carryforwards which are available to offset future taxable income.
The realization of the carryforwards is dependent upon the generation of taxable
income in future years as well as any limitations on utilization imposed by the
Internal Revenue Code relating to ownership changes.
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended January 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $11,434,000 $350,000 $ -
Deferred 166,000 (250,000) -
----------- -------- ------------
$11,600,000 $100,000 $ -
=========== ======== ============
</TABLE>
61
<PAGE> 26
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
A reconciliation of income taxes computed at the statutory rates to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended January 31,
---------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rates 35.0% 35.0% (35.0%)
State income taxes, net of federal tax benefit 4.1 5.0 (5.0)
Effect of recognition of previously unrecorded
deferred tax assets - (39.1) 40.0
---- ----- ----
Effective tax rate 39.1% .9% -%
==== ===== ====
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
CABLE AFFILIATION AGREEMENTS
As of January 31, 1997, the Company had entered into 3 to 7 year
affiliation agreements with eleven multiple systems operators ("MSOs") which
require each MSO to offer the Company's cable television home shopping
programming on a full-time basis over their cable systems. Under certain
circumstances, these cable television operators may cancel their agreements
prior to expiration. The affiliation agreements provide that the Company will
pay each MSO a monthly cable access fee and marketing support payment based upon
the number of homes carrying the Company's television home shopping
programming. For the years ended January 31, 1997, 1996 and 1995, the Company
paid approximately $15,182,000, $12,078,000 and $4,531,000, under these
long-term cable affiliation agreements.
The Company has entered into, and will continue to enter into,
affiliation agreements with other cable television operators providing for full-
or part-time carriage of the Company's television home shopping programming.
Under certain circumstances the Company may be required to pay the cable
operator a one time initial launch fee which is capitalized and amortized on a
straight-line basis over the term of the agreement.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its chief
executive officer and chief operating officer which expire on January 31, 1999.
The employment agreements provide that each officer, in addition to a base
salary, were granted options to purchase 375,000 shares of common stock at
$8.50 per share and 375,000 shares of common stock at $10.50 per share.
The options vest and become exercisable at the earlier of the Company
achieving certain net income goals, as defined, or in September 2003.
In addition, the Company has entered into employment agreements with a
number of officers of the Company and its subsidiaries for terms ranging from 24
to 36 months. These agreements specify, among other things, the term and duties
of employment, compensation and benefits, termination of employment (including
for cause, which would reduce the Company's total obligation under these
agreements), severance payments and non-disclosing and non-compete
restrictions. The aggregate commitment for future base compensation at January
31, 1997 was approximately $2,498,000.
62
<PAGE> 27
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
OPERATING LEASE COMMITMENTS
The Company leases certain property and equipment under non-cancelable
operating lease agreements. Property and equipment covered by such operating
lease agreements include the Company's main corporate office and warehousing
facility, offices and warehousing facilities at subsidiary locations, satellite
transponder and certain tower site locations.
Future minimum lease payments at January 31, 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
------ ------
<S> <C>
1998 $ 4,077,000
1999 3,712,000
2000 3,563,000
2001 2,617,000
2002 and thereafter 11,356,000
</TABLE>
Total lease expense under such agreements was approximately $4,222,000
in 1997, $3,348,000 in 1996 and $3,031,000 in 1995.
RETIREMENT AND SAVINGS PLAN
During fiscal 1995, the Company implemented a qualified 401(k)
retirement savings plan covering substantially all employees. The plan allows
the Company's employees to make voluntary contributions to the plan. The
Company's contribution, if any, is determined annually at the discretion of the
Board of Directors. There were no contributions to the plan for fiscal 1997
and 1996 or 1995.
11. LITIGATION:
In January 1994, the Company proposed an acquisition of National Media
Corporation ("National Media"). In February 1994, the Company announced a
tender offer for a majority of the outstanding shares of National Media. In
March 1994, the Company and National Media entered into a merger agreement and
the Company modified the terms of its tender offer. In April 1994, the Company
terminated its tender offer and the merger agreement with National Media based
upon inaccurate representations and breach of warranties by National Media, and
based upon adverse developments concerning National Media. Litigation
challenging the Company's termination of the tender offer and merger agreement
was subsequently filed by National Media and its former chief executive officer
and president. In addition, shareholders of National Media filed four
purported class action lawsuits against the Company and certain officers of the
Company. Each of these suits alleged deception and manipulative practices by
the Company in connection with the tender offer and merger agreement.
63
<PAGE> 28
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
(CONTINUED)
In fiscal 1996, the Company, National Media and National Media's former
chief executive officer and president agreed to dismiss all claims, to enter
into joint operating agreements involving telemarketing and post-production
capabilities, and to enter into an international joint venture agreement.
Under the agreement, the Company received ten-year warrants, which vest over
three years, to purchase 500,000 shares of National Media's common stock at a
price of $8.865 per share. In November 1996, the Company and National Media
amended their agreement by providing for the additional payment by the Company
to National Media of $1.2 million as additional exercise price on the warrants.
An initial $400,000 was paid upon signing the amendment with two additional
annual installments of $400,000 to be paid on each of September 1, 1997 and
1998.
In March 1997, the court gave final approval to a $1.0 million
settlement, which was paid by the Company from insurance proceeds, in the
matter of the class action suit initiated by certain shareholders of National
Media. During the year ended January 31, 1996, the Company recorded a
provision of $617,000 for estimated costs associated with settling the National
Media shareholder class action suit. The Company is not a party to any other
material legal proceeding.
12. RELATED PARTY TRANSACTIONS:
At January 31, 1997 and 1996, accounts receivable included approximately
$591,000 and $781,000, respectively, of notes receivable from certain officers
of the Company. These notes range in the principal amount of $50,000 to
$500,000, bear interest at 5.9% to 8.0%, and with payment terms ranging from
due on demand to November 1997.
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") in
February 1997. SFAS No. 128 establishes accounting standards for computing and
presenting earnings per share ("EPS") and is effective for reporting periods
ending after December 15, 1997. Management believes that the adoption of SFAS
No. 128 will not have a material impact on the Company's calculation of EPS.
64
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on February 20, 1998.
ValueVision International, Inc.
(registrant)
By: /s/ Stuart R. Romenesko
-----------------------------
Stuart R. Romenesko
Senior Vice President Finance and
chief Financial Officer
