<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 April 30, 2000
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 June 8, 2000, there were 38,562,158 shares of the Registrant's common
stock, $.01 par value, outstanding.
================================================================================
<PAGE> 2
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
APRIL 30, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE OF FORM
10-Q
<S> <C> <C>
Item 1. Financial Statements ------------
- Condensed Consolidated Balance Sheets as of April 30, 2000
and January 31, 2000 3
- Condensed Consolidated Statements of Operations for the
Three Months Ended April 30, 2000 and 1999 4
- Condensed Consolidated Statements of Shareholders' Equity
for the Three Months Ended April 30, 2000 5
- Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 2000 and 1999 6
- Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
APRIL 30, JANUARY 31,
2000 2000
-------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 232,312 $138,221
Short-term investments 52,222 156,422
Accounts receivable, net 45,308 49,070
Inventories, net 21,056 22,677
Prepaid expenses and other 5,187 4,888
Income taxes receivable 7,601 9,626
Deferred income taxes 1,950 1,950
--------- --------
Total current assets 365,636 382,854
PROPERTY AND EQUIPMENT, NET 16,582 14,350
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET 122 124
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 6,221 6,394
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 1,630 1,679
INVESTMENTS AND OTHER ASSETS, NET 61,705 66,454
DEFERRED INCOME TAXES 2,249 -
--------- --------
$ 454,145 $471,855
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 33,451 $ 34,937
Accrued liabilities 16,635 16,650
--------- --------
Total current liabilities 50,086 51,587
DEFERRED INCOME TAXES - 6,725
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PER SHARE PAR VALUE, 5,339,500 SHARES AUTHORIZED;
5,339,500 SHARES ISSUED AND OUTSTANDING 41,692 41,622
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
38,557,158 and 38,192,164 shares issued and outstanding 385 382
Common stock purchase warrants;
1,854,760 shares outstanding 13,610 13,610
Additional paid-in capital 282,556 280,578
Accumulated other comprehensive income (losses) (5,755) 8,891
Retained earnings 71,571 68,460
--------- --------
Total shareholders' equity 362,367 371,921
--------- --------
$ 454,145 $471,855
========= ========
</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)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
APRIL 30,
---------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
NET SALES $ 81,001 $ 53,142
COST OF SALES 49,277 30,663
----------- -----------
Gross profit 31,724 22,479
----------- -----------
Margin % 39.2% 42.3%
OPERATING EXPENSES:
Distribution and selling 25,422 18,231
General and administrative 3,470 2,755
Depreciation and amortization 1,327 1,151
----------- -----------
Total operating expenses 30,219 22,137
----------- -----------
OPERATING INCOME 1,505 342
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations - 9,980
Unrealized loss on trading securities (45) (452)
Interest income 3,773 589
Other, net (17) (17)
----------- -----------
Total other income (expense) 3,711 10,100
----------- -----------
INCOME BEFORE INCOME TAXES 5,216 10,442
PROVISION FOR INCOME TAXES 2,036 4,074
----------- -----------
NET INCOME 3,180 6,368
ACCRETION OF REDEEMABLE PREFERRED STOCK (69) -
----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,111 $ 6,368
=========== ===========
NET INCOME PER COMMON SHARE $ 0.08 $ 0.24
=========== ===========
NET INCOME PER COMMON SHARE - ASSUMING DILUTION $ 0.07 $ 0.22
=========== ===========
Weighted average number of common shares outstanding:
Basic 38,413,883 26,015,567
=========== ===========
Diluted 47,753,028 28,615,225
=========== ===========
</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 THREE MONTHS ENDED APRIL 30, 2000
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK COMMON
------------------------------ STOCK ADDITIONAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN
INCOME (LOSS) OF SHARES VALUE WARRANTS CAPITAL
------------------ ------------------ ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 2000 38,192,164 $ 382 $ 13,610 $ 280,578
Comprehensive income (loss):
Net income $ 3,180 - - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities,net
of tax of $ 8,974 (14,646) - - - -
----------------
Comprehensive loss $ (11,466)
================
Exercise of stock options 364,994 3 - 1,978
Accretion on redeemable preferred
stock - - - -
-------------------------------------------------------
BALANCE, APRIL 30, 2000 38,557,158 $ 385 $ 13,610 $ 282,556
=============== ========== ========== ============
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED SHAREHOLDERS'
INCOME (LOSSES) EARNINGS EQUITY
-------------------------------- ----------------
<S> <C> <C> <C>
BALANCE, JANUARY 31, 2000 $ 8,891 $ 68,460 $ 371,921
Comprehensive income (loss):
Net income - 3,180 3,180
Other comprehensive loss, net of tax:
Unrealized losses on securities,net
of tax of $ 8,974 (14,646) - (14,646)
Comprehensive loss
Exercise of stock options - - 1,981
Accretion on redeemable preferred stock - (69) (69)
--------------------------------------------------
BALANCE, APRIL 30, 2000 $ (5,755) $ 71,571 $ 362,367
============= =========== ============
</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)
(In thousands, except share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30,
-----------------------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,180 $ 6,368
Adjustments to reconcile net income to net cash
provided by (used for) operating activities-
Depreciation and amortization 1,327 1,151
Gain on sale of broadcast stations - (9,980)
Gain on sale of property and investments and other 7 2
Unrealized loss on trading securities 45 452
Changes in operating assets and liabilities:
Accounts receivable, net 3,762 (4,096)
Inventories, net 1,621 (2,959)
Prepaid expenses and other (345) 1,021
Accounts payable and accrued liabilities (1,501) 3,360
Income taxes payable (receivable), net 2,025 1,707
---------- --------
Net cash provided by (used for) operating activities 10,121 (2,974)
---------- --------
INVESTING ACTIVITIES:
Property and equipment additions (3,098) (252)
Proceeds from sale of investments and property 4 -
Proceeds from sale of broadcast stations - 10,000
Purchase of short-term investments (7,022) (18,999)
Proceeds from sale of short-term investments 111,177 -
Payment for investments and other assets (19,323) (140)
Proceeds from notes receivable 251 1,140
---------- --------
Net cash provided by (used for) investing activities 81,989 (8,251)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of Series A Preferred Stock - 31,001
Proceeds from exercise of stock options 1,981 1,013
Payment of long-term obligations - (50)
---------- ---------
Net cash provided by financing activities 1,981 31,964
---------- --------
Net increase in cash and cash equivalents 94,091 20,739
BEGINNING CASH AND CASH EQUIVALENTS 138,221 44,264
---------- --------
ENDING CASH AND CASH EQUIVALENTS $ 232,312 $ 65,003
========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 11 $ 16
========== ========
Income taxes paid $ 11 $ 2,250
========== ========
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of a warrant to purchase 1,450,000 shares of common stock
In connection with the signing of a Distribution and Marketing
Agreement with NBC $ - $ 6,931
======== ========
Accretion on redeemable preferred stock $ 69 $ -
======== ========
</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
APRIL 30, 2000
(Unaudited)
(1) GENERAL
ValueVision International, Inc. and its Subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company, which markets its products
directly to consumers through various forms of electronic 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 live 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 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's growing home shopping network and companion Internet
shopping website will be rebranded later this year as part of a wide-ranging
direct e-commerce strategy the Company is pursuing in conjunction with its
various strategic partners including NBC Internet, Inc. ("NBCi"), a subsidiary
of the National Broadcasting Company, Inc. ("NBC"). These moves are intended to
position ValueVision as a leader in the evolving convergence of television and
the Internet, combining the promotional and selling power of television with the
purely digital world of e-commerce. In mid-1999, the Company founded
ValueVision Interactive, Inc. as a wholly-owned subsidiary of the Company, to
manage and develop the Company's Internet e-commerce initiatives as well as to
manage the Company's e-commerce investment strategies and portfolio.
ValueVision's original intent was to re-launch its television network and
companion Internet website under the SnapTV and SnapTV.com brand names,
respectively. On June 12, 2000, NBCi announced a strategy to integrate all of
their consumer properties under the single NBCi.com brand and as a result the
Company is currently evaluating rebranding alternatives in support of its
current business strategy.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc., was a direct-mail marketer of a broad range of general
merchandise, which was sold to consumers through direct-mail catalogs and other
direct marketing solicitations. In the second half of fiscal 2000, the Company
sold its remaining direct-mail catalog subsidiaries and exited from the direct
marketing catalog business.
(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 2000
Annual Report on Form 10-K. Operating results for the three-month period ended
April 30, 2000, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2001.
(3) NET INCOME PER COMMON SHARE
The Company calculates earnings per share ("EPS") in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Basic EPS is computed by dividing reported earnings by
the weighted average number of common shares outstanding for the reported
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock of the Company during reported periods.
7
<PAGE> 8
A reconciliation of calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
---------------------------------------
2000 1999
-------------------- ------------------
<S> <C> <C>
Net income available to
common shareholders $ 3,111,000 $ 6,368,000
=================== ==================
Weighted average number of common
shares outstanding - Basic 38,414,000 26,016,000
Dilutive effect of convertible
preferred stock 5,340,000 630,000
Dilutive effect of stock options and
warrants 3,999,000 1,969,000
------------------- ------------------
Weighted average number of common
shares outstanding - Diluted 47,753,000 28,615,000
=================== ==================
Net income per common share $ 0.08 $ 0.24
=================== ===================
Net income per common share -
assuming dilution $ 0.07 $ 0.22
=================== ===================
</TABLE>
For the quarters ended April 30, 2000 and 1999, respectively, 110,000 and
-0- potentially dilutive common shares have been excluded from the computation
of diluted earnings per share as the effect of their inclusion would be
antidilutive.
(4) COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 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 (loss) includes net income and other comprehensive income (loss), which
consists of unrealized holding gains and losses from equity investments
classified as "available-for-sale". Total comprehensive income (loss) was
($11,466,000) and $7,495,000 for the three months ended April 30, 2000 and 1999,
respectively.
(5) SEGMENT DISCLOSURES
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires
the disclosure of certain information about operating segments in financial
statements. The Company's reportable segments are based on the Company's method
of internal reporting, which generally segregates the strategic business units
into two segments: electronic media, consisting primarily of the Company's
television home shopping business, and print media, whereby merchandise is sold
to consumers through direct-mail catalogs and other direct marketing
solicitations. In fiscal 2000, the Company sold its remaining direct-mail
catalog subsidiaries and exited from the direct marketing catalog business.
Segment information included in the accompanying consolidated balance sheets as
of April 30 and included in the consolidated statements of operations for the
three-month periods then ended is as follows (in thousands):
8
<PAGE> 9
<TABLE>
<CAPTION>
ELECTRONIC PRINT
THREE MONTHS ENDED APRIL 30, 2000 MEDIA MEDIA CORPORATE TOTAL
----------------------------------------- ---------- --------- --------- ------
<S> <C> <C> <C> <C>
Revenues $ 81,001 $ - $ - $ 81,001
Operating income 1,505 - - 1,505
Net income 3,180 - - 3,180
Identifiable assets 400,031 - 54,114 (a) 454,145
<CAPTION>
THREE MONTHS ENDED APRIL 30, 1999
------------------------------------------
<S> <C> <C> <C> <C>
Revenues 44,375 8,767 - 53,142
Operating income 144 198 - 342
Net income (loss) 6,388 (20) - 6,368
Identifiable assets 160,203 17,134 16,304 (a) 193,641
</TABLE>
(a) Corporate assets consist of long-term investment assets not directly
assignable to a business segment.
(6) RALPH LAUREN MEDIA, LLC, ELECTRONIC COMMERCE ALLIANCE
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), NBC, NBCi and CNBC.com LLC ("CNBC") whereby the parties created Ralph
Lauren Media, LLC ("Ralph Lauren Media"), a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for their interest in Ralph
Lauren Media, NBC agreed to contribute $110 million of television and online
advertising on NBC and CNBC properties, NBCi agreed to contribute $40 million in
online distribution and promotion and the Company has contributed a cash funding
commitment of up to $50 million of which $10 million has been funded through
April 30, 2000. Ralph Lauren Media's premier initiative will be Polo.com, an
Internet website dedicated to the American lifestyle that will include original
content, commerce and a strong community component. Polo.com is expected to
launch in the second half of the Company's fiscal 2001 and will initially
include an assortment of men's, women's and children's products across the Ralph
Lauren family of brands as well as unique gift items. Polo.com will also receive
anchor-shopping tenancies on NBCi's Internet portal service. In connection with
the formation of Ralph Lauren Media, the Company entered into various agreements
setting forth the manner in which certain aspects of the business of Ralph
Lauren Media are to be managed and certain of the members' rights, duties and
obligations with respect to Ralph Lauren Media, including the following:
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF RALPH LAUREN MEDIA
Each of Polo Ralph Lauren, NBC, NBCi, CNBC and the Company executed the
Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"),
pursuant to which certain terms and conditions regarding operations of Ralph
Lauren Media and certain rights and obligations of its members are set forth,
including but not limited to: (a) certain customary demand and piggyback
registration rights with respect to equity of Ralph Lauren Media held by the
members after its initial public offering, if any; (b) procedures for resolving
deadlocks among managers or members of Ralph Lauren Media; (c) rights of each of
Polo Ralph Lauren on the one hand and NBC, the Company, NBCi and CNBC, on the
other hand, to purchase or sell, as the case may be, all of their membership
interests in Ralph Lauren Media to the other in the event of certain material
deadlocks and certain changes of control of either Polo Ralph Lauren and/or its
affiliates or NBC or certain of its affiliates, at a price and on terms and
conditions set forth in the agreement; (d) rights of Polo Ralph Lauren to
purchase all of the outstanding membership interests of Ralph Lauren Media from
and after its 12th anniversary, at a price and on terms and conditions set forth
in the agreement; (e) rights of certain of the members to require Ralph Lauren
Media to consummate an initial public offering of securities; (f) restrictions
on Polo Ralph Lauren from participating in the business of Ralph Lauren Media
under certain circumstances; (g) number and composition of the management
committee of Ralph Lauren Media, and certain voting requirements; (h)
composition and duties of officers of Ralph Lauren Media; (i) requirements
regarding meetings of members and voting requirements; (j) management of capital
contributions and capital accounts; (k) provisions governing allocations of
profits and losses and distributions to members; (l) tax matters; (m)
restrictions on transfers of
9
<PAGE> 10
membership interests; (n) rights and responsibilities of the members in
connection with the dissolution, liquidation or winding up of Ralph Lauren
Media; and (o) certain other customary miscellaneous provisions.
AGREEMENT FOR SERVICES
Ralph Lauren Media and VVI Fulfillment Center, Inc., a Minnesota corporation
and wholly-owned subsidiary of the Company ("VVIFC"), entered into an Agreement
for Services under which VVIFC agreed to provide to Ralph Lauren Media certain
telemarketing services, order and record services, and merchandise and warehouse
services. The telemarketing services to be provided by VVIFC consist of
receiving and processing telephone orders and telephone inquiries regarding
merchandise, and developing and maintaining a related telemarketing system. The
order and record services to be provided by VVIFC consist of receiving and
processing orders for merchandise by telephone, mail, facsimile and electronic
mail, providing records of such orders and related customer-service functions,
and developing and maintaining a records system for such purposes. The
merchandise and warehouse services consist of receiving and shipping
merchandise, providing warehousing functions and merchandise management
functions and developing a system for such purposes. The term of this agreement
continues until June 30, 2010, subject to renewal periods, under certain
conditions, of one year each.
(7) EQUITY INVESTMENTS
During the first quarter of fiscal 2001, the Company made additional equity
investments totaling approximately $20,137,000 of which $10,116,000 related to
the Company's investment in the Ralph Lauren Media joint venture. At April 30,
2000, investments in the accompanying consolidated balance sheet include
approximately $14,903,000 related to equity investments made in companies whose
shares are traded on a public exchange. These equity investments were made
primarily in conjunction with the Company's strategy of investing in e-commerce,
Internet strategic alliances and the launching and re-branding of the Company's
television home shopping network. These investments are classified as
"available-for-sale" investments and are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No.115"). Also included in
investments at April 30, 2000 are certain nonmarketable equity investments in
private and other enterprises totaling approximately $35,080,000 which are
carried at the lower of cost or net realizable value. The carrying values of
these investments are evaluated periodically by the Company using recent
financing and securities transactions, present value and other pricing models,
financial condition and operating results, liquidity prospects and cash flow
forecasts. Impaired losses are recorded if events or circumstances indicate that
such investments may be impaired and the decline in value is other than
temporary. To date, no such impairment losses have been recorded.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes included herein
and the audited consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNT AS A
PERCENTAGE OF NET SALES FOR THE
THREE MONTHS
ENDED APRIL 30,
2000 1999
------------------ ------------------
<S> <C> <C>
NET SALES 100.0% 100.0%
===== =====
GROSS MARGIN 39.2% 42.3%
===== =====
Operating expenses:
Distribution and selling 31.4% 34.3%
General and administrative 4.3% 5.2%
Depreciation and amortization 1.6% 2.2%
----- -----
37.3% 41.7%
----- -----
Operating income 1.9% 0.6%
===== =====
</TABLE>
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision International, Inc. and its Subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company, which markets its products
directly to consumers through various forms of electronic 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 live 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 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's growing home shopping network and companion Internet shopping
website will be rebranded later this year as part of a wide-ranging direct
e-commerce strategy the Company is pursuing in conjunction with its various
strategic partners including NBC Internet, Inc. ("NBCi"), a subsidiary of the
National Broadcasting Company, Inc. ("NBC"). These moves are intended to
position ValueVision as a leader in the evolving convergence of television and
the Internet, combining the promotional and selling power of television with the
purely digital world of e-commerce. In mid-1999, the Company founded
ValueVision Interactive, Inc. as a wholly-owned subsidiary of the Company, to
manage and develop the Company's Internet e-commerce initiatives as well as to
manage the Company's e-commerce investment strategies and portfolio.
ValueVision's original intent was to re-launch its television network and
companion Internet website under the SnapTV and SnapTV.com brand names,
respectively. On June 12, 2000, NBCi announced a strategy to integrate all of
their consumer properties under the single NBCi.com brand and as a result the
Company is currently evaluating rebranding alternatives in support of its
current business strategy.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), was a direct-mail marketer of a broad range of
general merchandise, which was sold to consumers through direct-mail catalogs
and other direct marketing solicitations. In the second half of fiscal 2000, the
Company sold its remaining direct-mail catalog subsidiaries and exited from the
direct marketing catalog business.
POLO RALPH LAUREN/RALPH LAUREN MEDIA ELECTRONIC COMMERCE ALLIANCE
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), NBC, NBCi, and CNBC.com LLC ("CNBC") whereby the parties created Ralph
Lauren Media, LLC ("Ralph Lauren Media"), a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for their interest in Ralph
Lauren Media, NBC agreed to contribute $110 million of television and online
advertising on NBC and CNBC properties, NBCi agreed to contribute $40 million in
online distribution and promotion and the Company has contributed a cash funding
commitment of up to $50 million. Ralph Lauren Media's premier initiative will be
Polo.com, an internet web site dedicated to the American lifestyle that will
include original content, commerce and a strong community component. Polo.com is
expected to launch in the second half of fiscal 2001 and will initially include
an assortment of men's, women and children's products across the Ralph Lauren
family of brands as well as unique gift items. Polo.com will also receive anchor
shopping tenancies on NBCi's Internet portal service. In connection with the
formation of Ralph Lauren media, the Company entered into various agreements
setting forth the manner in which certain aspects of the business of Ralph
Lauren Media are to be managed and certain of the members' rights, duties and
obligations with respect to Ralph Lauren Media. In addition, Ralph Lauren Media
and VVI Fulfillment Center, Inc. ("VVIFC"), a wholly-owned subsidiary of the
Company, entered into an Agreement for Services under which VVIFC agreed to
provide all telemarketing, fulfillment and distribution services to Ralph Lauren
Media. See Note 6 to Notes To Condensed Consolidated Financial Statements.
12
<PAGE> 13
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended April 30, 2000 (fiscal 2001), were
$81,001,000 compared with net sales of $53,142,000 for the three months ended
April 30, 1999 (fiscal 2000), a 52% increase. The increase in net sales is
directly attributable to the continued improvement in and increased sales from
the Company's television home shopping and internet operations, which have
reported greater than 50% sales increases, over the respective prior year
quarters, for the past six quarters in a row and reported its largest first
quarter total revenue quarter in the Company's history. Sales attributed to the
Company's television home shopping and Internet business increased 83% to
$81,001,000 for the quarter ended April 30, 2000 from $44,375,000 for the
comparable prior year period on a 69% increase in average full-time equivalent
("FTE") subscriber homes able to receive the Company's television home shopping
programming. The growth in home shopping net sales is primarily attributable to
the growth in full-time equivalent homes receiving ValueVision programming.
During the 12-month period ended April 30, 2000 the Company added approximately
10.7 million full-time equivalent subscriber homes, a 69% increase. In addition
to new full-time equivalent subscriber homes, television home shopping and
Internet 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 and a 276% increase
in Internet sales over the prior year. The increase in repeat sales to existing
customers experienced during the first quarter of fiscal 2001 was due, in part,
to a strengthened merchandising effort under the leadership of ValueVision -
TV's general management and the effects of continued testing of certain
merchandising and programming strategies. The Company intends to continue to
test and change its merchandising and programming strategies with the goal of
improving its television home shopping sales results. However, while the Company
is optimistic that television home shopping sales results will continue to
improve, there can be no assurance that such changes in strategy will achieve
the intended results. There were no sales attributed to direct-mail catalog
operations in the first quarter of fiscal 2001 as the Company divested its
remaining mail order catalog operations in the fourth quarter of fiscal 2000.
Sales attributed to direct-mail catalog operations totaled $8,766,000 or 16% of
total net sales for the quarter ended April 30, 1999.
GROSS PROFITS
Gross profits for the first quarter ended April 30, 2000 and 1999 were
$31,724,000 and $22,479,000, respectively, an increase of $9,245,000 or 41%.
Gross margins for the three months ended April 30, 2000 and 1999 were 39.2% and
42.3%, respectively. The principal reason for the increase in gross profits was
the increased sales volume from the Company's television home shopping and
Internet business offset by a decrease in direct mail-order gross profits
resulting from the fiscal 2000 divestiture of the Company's remaining direct
mail-order catalog operations. Television and Internet gross margins as a
percent of net sales for the three months ended April 30, 2000 and 1999 were
39.2% and 39.5%, respectively. Gross margins for the Company's direct mail-order
operations were 56.5% for the three months ended April 30, 1999. Overall, first
quarter television and Internet gross margins remained relatively flat; however,
television home shopping merchandise gross margins between comparable periods
decreased slightly from prior year primarily as a result of a decrease in the
mix of higher margin jewelry merchandise offset by an increase in gross margin
percentages in the electronics product category. During the first three months
of fiscal 2001, 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 and Internet sales while at the same time
maintaining margins and increasing inventory turns. Jewelry products accounted
for approximately 78% of airtime during the first three months of fiscal 2001
compared with 80% for the same period last year.
OPERATING EXPENSES
Total operating expenses for the three months ended April 30, 2000 were
$30,219,000 versus $22,137,000 representing an increase of $8,082,000 or 37%
from the three months ended April 30, 1999. Distribution and selling expense
increased $7,191,000 or 39% to $25,422,000 or 31% of net sales during the first
quarter of fiscal 2001 compared to $18,231,000 or 34% of net sales for the
comparable prior-year period. Distribution and selling costs increased primarily
as a result of increases in net cable access fees due to a 69% increase in the
number of average FTEs over prior year, increased marketing and advertising
fees, and increased costs associated with credit card processing, telemarketing
and the Company's ValuePay program, offset by decreases in distribution and
selling expenses associated with the divestiture of the Company's catalog
operations. Distribution and selling expenses decreased as a percentage of net
sales over the prior year as a result of the increase in television home
shopping and Internet net sales over the prior year.
13
<PAGE> 14
General and administrative expense for the three months ended April 30, 2000
increased $715,000 or 26% to $3,470,000 or 4% of net sales compared to
$2,755,000 or 5% of net sales for the three months ended April 30, 1999. General
and administrative costs slightly increased during the quarter from prior year
primarily as a result of increases in general and administrative personnel
costs, travel and information systems costs, including increased consulting and
placement fees. General and administrative expense decreased as a percentage of
net sales as a result of the increase in net sales over the prior year.
Depreciation and amortization expense for the three months ended April 30,
2000 was $1,327,000 versus $1,151,000, representing an increase of $176,000 or
15% from the comparable prior-year period. Depreciation and amortization expense
as a percentage of net sales was 2% for the three months ended April 30, 2000
and 1999. The dollar increase is primarily due to increased depreciation on
fixed assets and increased amortization over prior year associated with the
Company's NBC cable distribution and marketing agreement, offset by a reduction
in depreciation expense in connection with the divestiture of the Company's
direct-mail catalog operations and divested television broadcast stations.
OPERATING INCOME
For the three months ended April 30, 2000, the Company reported operating
income of $1,505,000 compared to operating income of $342,000 for the three
months ended April 30, 1999, an improvement of $1,163,000. The improvement in
quarterly operating income over prior year is directly attributed to the overall
operating improvements of the Company's television home shopping and Internet
business which improved by approximately $1,372,000 or 949%, offset by a
$209,000 reduction in operating income related to the Company's divested catalog
operations. Overall, operating income improved as a result of increased sales
volumes and gross profits and a decrease in operating expenses over prior year
resulting from the divestiture of the Company's direct-mail catalog businesses.
These operating income improvements were offset by increased distribution and
selling costs, increased general and administrative costs associated with the
Company's e-commerce initiatives and the increase in amortization expense
associated with the Company's NBC cable distribution and marketing agreement.
NET INCOME
For the three months ended April 30, 2000, the Company reported net income
available to common shareholders of $3,111,000 or $.07 per share on 47,753,000
diluted weighted average common shares outstanding ($.08 per share on 38,414,000
basic shares) compared with net income of $6,368,000 or $.22 per share on
28,615,000 diluted weighted average common shares outstanding ($.24 per share on
26,016,000 basic shares) for the quarter ended April 30, 1999. Net income
available to common shareholders for the quarter ended April 30, 2000 includes a
pre-tax loss of $45,000 recorded on the holdings of the Company's trading
security investments. Net income available to common shareholders for the
quarter ended April 30, 1999 includes a pre-tax gain of approximately
$10,000,000 relating to the receipt of a contingent payment in connection with
the Company's sale of a television broadcast station and two low-power
television stations to Paxson Communications Corporation and a pre-tax loss of
$452,000 recorded on the holdings of the Company's trading security investments.
Excluding the net gains/losses on the sale and holdings of property and
investments, net income available to common shareholders for the quarter ended
April 30, 2000 totaled $3,140,000, or $.07 per diluted share ($.08 per basic
share), compared to net income of $558,000, or $.02 per basic and diluted share
for the quarter ended April 30, 1999, an increase of $2,582,000 over fiscal
2000. For the three months ended April 30, 2000, net income reflects an income
tax provision at an effective tax rate of 39%.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 34.2 million homes as of April 30, 2000, as compared to 33.1
million homes as of January 31, 2000 and to 22.2 million homes as of April 30,
1999. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 370 cable or satellite
systems. In addition, the Company's programming is broadcast full-time over
eleven owned low-power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of April 30, 2000 and
1999, the Company's programming was available to approximately 26.0 million and
15.4 million FTE households, respectively. As of January 31, 2000, the Company's
programming was available to 25.0 million FTE households. Approximately 17.4
million and 10.6 million households at April 30, 2000 and 1999, 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.
14
<PAGE> 15
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2000, cash and cash equivalents and short-term investments
were $284,534,000, compared to $294,643,000 as of January 31, 2000, a
$10,109,000 decrease. For the three months ended April 30, 2000, working capital
decreased $15,717,000 to $315,550,000. The current ratio was 7.3 at April 30,
2000 compared to 7.4 at January 31, 2000. At April 30, 2000, short-term
investments and cash equivalents were invested primarily in money market funds,
high quality commercial paper with original maturity dates of less than two
hundred and seventy (270) days and investment grade corporate and municipal
bonds with original maturity dates and/or tender option terms ranging from one
month to two years.
Total assets at April 30, 2000 were $454,145,000, compared to $471,855,000
at January 31, 2000. Shareholders' equity was $362,367,000 at April 30, 2000,
compared to $371,921,000 at January 31, 2000, a $9,554,000 decrease. The
decrease in shareholders' equity for the three month period ended April 30, 2000
resulted primarily from the recording of unrealized losses on investments
classified as "available-for-sale" totaling $14,646,000, offset by net income of
$3,180,000 for the three-month period and proceeds received of $1,981,000
related to the exercise of stock options.
For the three-month period ended April 30, 2000, net cash provided by
operating activities totaled $10,121,000 compared to net cash used for operating
activities of $2,974,000 for the three-month period ended April 30, 1999. Cash
flows from operations before consideration of changes in working capital items
and investing and financing activities was a positive $2,832,000 for the three
months ended April 30, 2000, compared to a positive $1,493,000 for the same
prior-year period. Net cash provided by operating activities for the three
months ended April 30, 2000 reflects net income, as adjusted for depreciation
and amortization, unrealized losses on trading securities, and gains on the sale
of property and investments. In addition, net cash provided by operating
activities for the three months ended April 30, 2000 reflects decreases in
accounts receivable and inventories, offset by an increase in prepaid expenses
and decreases in accounts payable and accrued liabilities. Accounts receivable
decreased primarily due to the timing of customer collections made pursuant to
the "ValuePay" installment program and decreased interest receivable resulting
from lower cash balances. Inventories decreased due to the timing of merchandise
receipts and overall inventory management efforts. The decrease in accounts
payable and accrued liabilities is a direct result of the decrease in inventory
levels and the timing of vendor payments.
Net cash provided by investing activities totaled $81,989,000 for the three
months ended April 30, 2000 compared to net cash used for investing activities
of $8,251,000 for the same period of fiscal 2000. For the three months ended
April 30, 2000 and 1999, expenditures for property and equipment were $3,098,000
and $252,000, respectively. Expenditures for property and equipment during the
periods ended April 30, 2000 and 1999 include (i) the upgrade of computer
software, related computer equipment and other office equipment, (ii) web page
development costs, (iii) warehouse equipment, (iv) production equipment, (v)
capital expenditures made for the Company's distribution facility and new
customer service and call center site in connection with the Ralph Lauren Media
service agreements and (vi) expenditures on leasehold improvements. Principal
future capital expenditures will be for upgrading television production and
transmission equipment and the upgrade and replacement of computer software,
systems and related computer equipment associated with the expansion of the
Company's home shopping business and e-commerce initiative. In addition, during
fiscal 2001, the Company plans to make additional investments to its Bowling
Green, Kentucky distribution facility and new customer service and call center
site in preparation for its Ralph Lauren Media service agreement obligations. In
the first quarter of fiscal 2001, the Company invested $7,022,000 in various
short-term investments, received proceeds of $111,177,000 from the sale of
short-term investments, made disbursements of $19,323,000 for certain
investments and other long-term assets including $10,116,000 for the Company's
equity interest in Ralph Lauren Media and received $251,000 in connection with
the repayment of outstanding notes receivable. In the first quarter of fiscal
2000, the Company received a contingent payment of $10,000,000 relating to the
sale of television station KBGE-TV and two low power television stations. During
the first quarter of fiscal 2000, the Company also invested $18,999,000 in
various short-term investments, received $1,140,000 in connection with the
repayment of outstanding notes receivable and made disbursements of $140,000 for
certain investments and other assets.
Net cash provided by financing activities totaled $1,981,000 for the three
months ended April 30, 2000 and related to proceeds received from the exercise
of stock options. Net cash provided by financing activities totaled $31,964,000
for the three months ended April 30, 1999 and primarily related to $31,001,000
of proceeds received from the issuance of Series A Redeemable Convertible
Preferred Stock in conjunction with the Company's strategic alliance with G.E.
Capital Equity Investments, Inc. ("GE Equity"). In addition, the Company also
received proceeds of $1,013,000 from the exercise of stock options and made
payments of $50,000 in connection with its capital lease obligations.
Management believes that funds currently held by the Company will be
sufficient to fund the Company's operations, anticipated capital expenditures,
strategic investments and cable launch fees through fiscal 2001.
15
<PAGE> 16
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, general
expansion and profitability of the Company, new initiatives and the continuing
success in developing new strategic alliances (including the GE Equity, NBC,
NBCi and Ralph Lauren Media alliances), the Company's success in developing its
e-commerce business, the launching of the Company's Internet initiative, the
timing of the rebranding of the Company's television home shopping network, the
success of the Ralph Lauren Media joint venture, 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 remain
profitable, including: the ability of the Company to continue improvements in
its home shopping operations, the ability to increase revenues, maintain strong
gross profit margins and increase subscriber home distribution, the ability to
develop new initiatives or enter into new strategic relationships, the ability
of the Company to develop a successful e-commerce business, the ability of the
Company to successfully rebrand, the successful performance of the Company's
equity investments, consumer spending and debt levels, interest rate
fluctuations, seasonal variations in consumer purchasing activities, increases
in postal and outbound shipping costs, competition in the retail and direct
marketing industries, continuity of relationships with or purchases from major
vendors, product mix, competitive pressure on sales and pricing, the ability of
the Company to manage growth and expansion, changes in the regulatory framework
affecting the Company, increases in cable access fees and other costs which
cannot be recovered through improved pricing and the identification and
availability of potential acquisition targets at prices favorable to the
Company. Investors are cautioned that all forward-looking statements involve
risk and uncertainty.
In addition to any specific risks and uncertainties discussed in this Form
10-Q, the risks and uncertainties discussed in detail in the Company's Form 10-K
for the fiscal year ended January 31, 2000, specifically under the caption
entitled "Risk Factors", provide information which should be considered in
evaluating any of the Company's forward-looking statements. In addition, the
facts and circumstances which exist when any forward-looking statements are made
and on which those forward-looking statements are based may significantly change
in the future, thereby rendering obsolete the forward-looking statements on
which such facts and circumstances were based.
16
<PAGE> 17
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on February 8, 2000
reporting under Item 5, that the Registrant announced that
effective February 7, 2000, the Company entered into a new
electronic commerce strategic alliance with Polo Ralph
Lauren Corporation, NBC, NBC Internet, Inc. and CNBC.com
LLC whereby the parties created Ralph Lauren Media, LLC, a
30-year joint venture formed for the purpose of bringing
the Polo Ralph Lauren American lifestyle experience to
consumers via multiple media platforms, including the
Internet, broadcast, cable and print.
17
<PAGE> 18
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/ Richard D. Barnes
------------------------------------------------
Richard D. Barnes
Senior Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
June 14, 2000
18
