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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 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 December 12, 2000, there were 38,675,401 shares of the Registrant's common
stock, $.01 par value per share, outstanding.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
OCTOBER 31, 2000
PART I FINANCIAL INFORMATION PAGE OF FORM
10-Q
Item 1. Financial Statements
- Condensed Consolidated Balance Sheets as of October 31, 3
2000 and January 31, 2000
- Condensed Consolidated Statements of Operations for the 4
Three and Nine Months Ended October 31, 2000 and 1999
- Condensed Consolidated Statements of Shareholders' Equity 5
for the Nine Months Ended October 31, 2000
- Condensed Consolidated Statements of Cash Flows for the 6
Nine Months Ended October 31, 2000 and 1999
- Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
2000 2000
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 96,495 $ 138,221
Short-term investments 170,946 156,422
Accounts receivable, net 59,141 49,070
Inventories, net 31,667 22,677
Prepaid expenses and other 8,087 4,888
Income taxes receivable 12,004 9,626
Deferred income taxes 1,950 1,950
--------- --------
Total current assets 380,290 382,854
PROPERTY AND EQUIPMENT, NET 31,705 14,350
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET 5,874 6,394
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 1,530 1,679
INVESTMENTS AND OTHER ASSETS, NET 29,196 66,578
--------- --------
$ 448,595 $471,855
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 47,733 $ 34,937
Accrued liabilities 23,102 16,650
--------- ---------
Total current liabilities 70,835 51,587
DEFERRED INCOME TAXES 853 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 41,831 41,622
SHAREHOLDERS' EQUITY:
Common stock, $.01 per share par value, 100,000,000 shares authorized;
38,675,401 and 38,192,164 shares issued and outstanding 387 382
Warrants to purchase 1,854,760 shares of
common stock 13,610 13,610
Additional paid-in capital 284,351 280,578
Accumulated other comprehensive income (losses) (689) 8,891
Note receivable from officer (515) -
Retained earnings 37,932 68,460
--------- ---------
Total shareholders' equity 335,076 371,921
--------- ---------
$ 448,595 $471,855
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except percentages, share and per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------------------ ---------------------------------
2000 1999 2000 1999
------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 95,241 $ 76,575 $ 261,920 $ 187,592
COST OF SALES 59,879 45,965 162,880 111,988
----------- ----------- ----------- -----------
Gross profit 35,362 30,610 99,040 75,604
----------- ----------- ----------- -----------
Margin % 37.1% 40.0% 37.8% 40.3%
OPERATING EXPENSES:
Distribution and selling 25,347 24,866 75,333 61,258
General and administrative 3,879 3,364 11,075 8,857
Depreciation and amortization 1,948 1,278 4,666 3,733
----------- ----------- ----------- -----------
Total operating expenses 31,174 29,508 91,074 73,848
----------- ----------- ----------- -----------
OPERATING INCOME 4,188 1,102 7,966 1,756
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Write-down of investments (54,564) (1,741) (55,147) (1,741)
Gain on sale of broadcast stations - 23,250 - 33,230
Gain (loss) on sale of property and investments (2) 2,036 (8) 2,172
Unrealized loss on trading securities (30) (94) (94) (888)
Equity in earnings (losses) of affiliates (1,288) 6 (1,694) 2
Interest income 3,848 3,694 11,335 5,921
Other, net (11) (11) (34) (39)
----------- ----------- ----------- -----------
Total other income (expense) (52,047) 27,140 (45,642) 38,657
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (47,859) 28,242 (37,676) 40,413
INCOME TAX PROVISION (BENEFIT) (11,124) 11,007 (7,356) 15,762
----------- ----------- ----------- -----------
NET INCOME (LOSS) (36,735) 17,235 (30,320) 24,651
ACCRETION OF REDEEMABLE PREFERRED STOCK (70) (69) (208) (138)
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (36,805) $ 17,166 $ (30,528) $ 24,513
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (0.95) $ 0.46 $ (0.79) $ 0.79
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
- ASSUMING DILUTION $ (0.95) $ 0.37 $ (0.79) $ 0.65
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic 38,643,778 37,044,121 38,541,342 30,903,466
=========== =========== =========== ===========
Diluted 38,643,778 46,295,031 38,541,342 37,939,517
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 31, 2000
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK COMMON ACCUMULATED NOTE
------------------ STOCK ADDITIONAL OTHER RECEIVABLE TOTAL
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN COMPREHENSIVE FROM RETAINED SHAREHOLDERS'
INCOME (LOSS) OF SHARES VALUE WARRANTS CAPITAL INCOME (LOSSES) OFFICER EARNINGS EQUITY
------------- --------- ----- -------- ---------- --------------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 2000 38,192,164 $ 382 $13,610 $ 280,578 $ 8,891 $ - $68,460 $ 371,921
Comprehensive income
(loss):
Net loss $ (30,320) - - - - - - (30,320) (30,320)
Other comprehensive
loss, net of tax:
Unrealized losses
on securities,
net of tax of
$13,293 (21,687)
Write-down of
securities to
net realizable
value, net of
tax of $7,421 12,107
-------------
Other comprehensive
loss (9,580) - - - - (9,580) - - (9,580)
-------------
Comprehensive loss $ (39,900)
=============
Officer note receivable - - - - - (515) - (515)
Exercise of stock options 483,237 5 - 3,773 - - - 3,778
Accretion on redeemable
preferred stock - - - - - - (208) (208)
------------- ---------- ------ ------- ---------- ------------- ----------- -------- ------------
BALANCE, OCTOBER 31, 2000 38,675,401 $ 387 $13,610 $ 284,351 $ (689) $ (515) $37,932 $ 335,076
------------- ---------- ------ ------- ---------- ------------- ----------- -------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 31,
2000 1999
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (30,320) $ 24,651
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 4,666 3,733
Deferred taxes - (140)
Gain on sale of broadcast stations - (33,230)
Loss (gain) on sale of property and investments 8 (2,172)
Unrealized loss on trading securities 94 888
Equity in losses (earnings) of affiliates 1,694 (2)
Write-down of investments 55,147 1,741
Changes in operating assets and liabilities:
Accounts receivable, net (10,071) (17,492)
Inventories, net (8,990) (5,379)
Prepaid expenses and other (3,326) (1,484)
Accounts payable and accrued liabilities 19,146 22,125
Income taxes payable (receivable), net (2,378) 7,139
--------- --------
Net cash provided by operating activities 25,670 378
--------- --------
INVESTING ACTIVITIES:
Property and equipment additions (20,380) (2,369)
Proceeds from sale of investments and property 335 12,054
Proceeds from sale of broadcast stations - 38,130
Purchase of short-term investments (166,992) (299,609)
Proceeds from sale of short-term investments 152,374 279,275
Payment for investments and other assets (36,336) (5,719)
Issuance of officer note receivable (500) -
Proceeds from notes receivable 325 1,436
--------- --------
Net cash provided by (used for) investing activities (71,174) 23,198
--------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Series A Preferred Stock - 44,265
Proceeds from exercise of stock options and warrants 3,778 181,938
Payment of long-term obligations - (155)
--------- --------
Net cash provided by financing activities 3,778 226,048
--------- --------
Net increase (decrease) in cash and cash equivalents (41,726) 249,624
BEGINNING CASH AND CASH EQUIVALENTS 138,221 44,264
--------- --------
ENDING CASH AND CASH EQUIVALENTS $ 96,495 $293,888
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 34 $ 47
========= ========
Income taxes paid $ 22 $ 8,447
========= ========
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of 1,450,000 warrants in connection with NBC
Distribution and Marketing Agreement $ - $ 6,931
========= ========
Accretion on redeemable preferred stock $ 208 $ 138
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 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
operating strategy incorporates television home shopping, Internet e-commerce,
vendor programming and fulfillment services.
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 to satellite dish owners and through Company owned low power
television ("LPTV") stations. The Company also complements its television home
shopping business by the sale of merchandise through its Internet shopping
website (www.vvtv.com) which is broadcast live over the Internet 24 hours a day,
7 days a week.
The Company intends to rebrand its growing home shopping network and
companion Internet shopping website in fiscal 2002 as part of a wide-ranging
direct marketing strategy the Company is pursuing in conjunction with its
various strategic partners. 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. On November 21, 2000, the Company announced that it had entered into
a licensing agreement dated November 16, 2000 with National Broadcasting
Company, Inc. ("NBC") to rebrand the ValueVision home shopping network and its
companion Internet shopping website using an NBC-branded name. Under the terms
of the licensing agreement, NBC has granted ValueVision worldwide use of an
NBC-branded name and the Peacock image for ten years. The new name will be
unveiled as part of a wide-ranging marketing campaign that the Company intends
to launch in spring 2001. ValueVision's original intent was to re-launch its
television network and companion Internet website under the SnapTV and
SnapTV.com brand names, respectively, in conjunction with NBC Internet, Inc.
("NBCi"). On June 12, 2000, NBCi announced a strategy to integrate all of its
consumer properties under the single NBCi.com brand, effectively abandoning the
Snap name. 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.
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 in accordance with
such rules and regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring accruals 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 nine-month period ended
October 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2001.
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(3) NET INCOME (LOSS) 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.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
---------------------------------------- --------------------------------------
2000 1999 2000 1999
-------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) available to
common shareholders $ (36,805,000) $ 17,166,000 $ (30,528,000) $ 24,513,000
==================== =================== =================== ==================
Weighted average number of common
shares outstanding - Basic 38,644,000 37,044,000 38,541,000 30,903,000
Dilutive effect of convertible
preferred stock - 5,340,000 - 3,578,000
Dilutive effect of stock options and
warrants - 3,911,000 - 3,459,000
-------------------- ------------------- ------------------- ------------------
Weighted average number of common
shares outstanding - Diluted 38,644,000 46,295,000 38,541,000 37,940,000
==================== =================== =================== ==================
Net income (loss) per common share $ (0.95) $ 0.46 $ (0.79) $ 0.79
==================== =================== =================== ==================
Net income (loss) per common share -
assuming dilution $ (0.95) $ 0.37 $ (0.79) $ 0.65
==================== =================== =================== ==================
</TABLE>
For the quarters ended October 31, 2000 and 1999, respectively, 12,937,000
and 223,000 potentially dilutive common shares have been excluded from the
computation of diluted earnings per share, as required under SFAS No. 128, as
the effect of their inclusion would be antidilutive.
In connection with the November 16, 2000 Trademark License Agreement entered
into with NBC, the Company issued to NBC warrants to purchase 6,000,000
additional shares of the Company's common stock in consideration for a ten-year
exclusive, worldwide license to use certain NBC trademarks, service marks and
domain names to rebrand the Company's business. If dilutive, these shares will
be reflected in diluted earnings per share in future periods. See Note 10 for
further discussion concerning the NBC Trademark License Agreement.
(4) COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) 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 (loss) 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 ($26,742,000) and $18,385,000 for the three months ended October 31,
2000 and 1999, respectively. Total comprehensive income (loss) was ($39,900,000)
and $27,179,000 for the nine months ended October 31, 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
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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 October 31 and included in the
consolidated statements of operations for the three and nine-month periods then
ended is as follows (in thousands):
<TABLE>
<CAPTION>
ELECTRONIC PRINT
THREE MONTHS ENDED OCTOBER 31, 2000 MEDIA MEDIA CORPORATE TOTAL
------------------------------------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 95,241 $ - $ - $ 95,241
Operating income 4,188 - - 4,188
Net loss (36,735) - - (36,735)
Identifiable assets 420,815 - 27,780 (a) 448,595
THREE MONTHS ENDED OCTOBER 31, 1999
Revenues 67,177 9,398 - 76,575
Operating income 957 145 - 1,102
Net income (loss) 17,290 (55) - 17,235
Identifiable assets 403,289 13,106 11,452 (a) 427,847
NINE MONTHS ENDED OCTOBER 31, 2000
Revenues 261,920 - - 261,920
Operating income 7,966 - - 7,966
Net loss (30,320) - - (30,320)
Identifiable assets 420,815 - 27,780 (a) 448,595
NINE MONTHS ENDED OCTOBER 31, 1999
Revenues 163,552 24,040 - 187,592
Operating income 1,748 8 - 1,756
Net income (loss) 25,083 (432) - 24,651
Identifiable assets 403,289 13,106 11,452 (a) 427,847
</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 ownership 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 approximately $13 million
has been funded through October 31, 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 officially launched in the November 2000 and includes 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 has received anchor
shopping tenancies on NBCi's Internet portal service. In connection with the
formation of Ralph Lauren
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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 a Second
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 LLC 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 LLC 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 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, on a
cost plus basis, 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 one-year renewal periods, under
certain conditions.
(7) EQUITY INVESTMENTS
As of October 31, 2000, the Company had equity investments totaling
approximately $26,381,000 of which $11,354,000 related to the Company's
investment in the Ralph Lauren Media joint venture after adjusting for the
Company's equity share of Ralph Lauren Media losses under the equity method of
accounting. At October 31, 2000, investments in the accompanying consolidated
balance sheet also include approximately $8,210,000 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"). In addition to the Company's investment in Ralph
Lauren Media, Inc., investments at October 31, 2000 include certain other
nonmarketable equity investments in private and other enterprises totaling
approximately $6,817,000 which are carried at the lower of cost or net
realizable value.
The Company evaluates the carrying values of its investments using recent
financing and securities transactions, present value and other pricing models,
as well as by evaluating financial condition, liquidity prospects, cash flow
forecasts and comparing operating results to plan. Impairment losses are
recorded if events or circumstances indicate that such investments may be
impaired and the decline in value is other than temporary. In the third quarter
ended October 31, 2000, the Company recorded a pre-tax loss of $54,564,000
relating to the write-down of investments made primarily in a number of Internet
retailers whose decline in fair value was determined by the Company to be other
than temporary. The decline in fair value of these companies was driven by their
large
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<PAGE> 11
operating losses and negative cash flow accompanied by an environment not
conducive to raising new financing. The major investment components of the
write-down included minority equity investments made in NBCi.com, Petopia.com,
SelfCare.com, Roxy.com and BigStar Entertainment, Inc. In accordance with SFAS
No. 115, public company investments were written down and recorded at the
respective entity's fair market value as of October 31, 2000. In the second
quarter ended July 31, 2000, the Company recorded a pre-tax loss of $583,000
relating to an investment made in 1998.
(8) RELATED PARTY TRANSACTION
At October 31, 2000 the Company held a $500,000 note receivable (the "Note")
from an officer of the Company for a loan made in connection with loan
provisions as stipulated in the officer's employment agreement. The Note is
reflected as a reduction of shareholders' equity in the accompanying
consolidated balance sheet as the Note is collateralized by a security interest
in vested stock options and in shares of the Company's common stock to be
acquired by the officer upon the exercise of such vested stock options.
(9) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a final consensus on EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." The consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue.
With respect to the classification of costs related to shipping and handling
incurred by the seller, the EITF determined that the classification of such
costs is an accounting policy decision that should be disclosed. The Company has
historically classified shipping charges to customers and related shipping and
handling costs on a net basis as components of distribution and selling expense
in the statement of operations. The Company plans to adopt the consensus reached
by the EITF relating to Issue No. 00-10 in the fourth quarter of fiscal 2001 as
required and plans to reflect amounts collected from customers as revenue and to
include shipping and handling costs as a component of cost of sales. Upon
adoption of EITF Issue No, 00-10, comparative financial statements for prior
periods will be reclassified to comply with the new classification guidelines.
(10) SUBSEQUENT EVENT
On November 21, 2000, the Company announced that it had entered into a
Trademark License Agreement dated as of November 16, 2000 (the "License
Agreement") with NBC pursuant to which NBC granted the Company an exclusive,
worldwide license (the "License") for a term of 10 years to use certain NBC
trademarks, service marks and domain names to rebrand the Company's business and
corporate name on the terms and conditions set forth in the License Agreement.
The new name will be unveiled as part of a wide-ranging marketing campaign that
will launch in spring 2001. In connection with the License Agreement, the
Company issued to NBC warrants (the "Warrants") to purchase 6,000,000 shares of
the Company's common stock, par value $.01 per share (the "Common Stock"), with
an exercise price of $17.375 per share, the closing price of a share of Common
Stock on the Nasdaq National Market on November 16, 2000. The agreement also
includes a provision for a potential cashless exercise of the Warrants under
certain circumstances. The Warrants vest in one-third increments, with one-third
exercisable immediately, and the remaining Warrants vesting in equal amounts on
each of the first two anniversaries of the License Agreement. Additionally, the
Company agreed to accelerate the vesting of warrants to purchase 1,450,000
shares of Common Stock granted to NBC in connection with that certain
Distribution and Marketing Agreement dated as of March 8, 1999 between NBC and
the Company.
The Company has also agreed under the License Agreement to (i) restrictions
on using (including sublicensing) any trademarks, service marks, domain names,
logos or other source indicators owned or controlled by NBC or its affiliates in
connection with certain permitted businesses (the "Permitted Businesses") before
the agreement of NBC to such use, (ii) the loss of its rights under the grant of
the License with respect to specific territories outside of the United States in
the event the Company fails to achieve and maintain certain performance targets,
(iii) amend and restate the current Registration Rights Agreement dated as of
April 15, 1999 among the Company, NBC and GE Capital Equity Investments, Inc.
("GE Equity") so as to increase the demand rights held by NBC and GE Equity from
four to five, among other things, (iv) not, either directly or indirectly, own,
operate, acquire or expand its business to include any businesses other than the
Permitted Businesses without NBC's prior consent for so long as the Company's
corporate name includes the trademarks or service marks owned or controlled by
NBC, (v) strictly comply with NBC's privacy policies and standards and
practices, and (vi) until the earlier of the termination of the License
Agreement or the lapse of certain contractual restrictions on NBC, either
directly or indirectly, not own, operate, acquire or expand the Company's
business such that one third or more of the Company's revenues or its aggregate
value is attributable to certain services provided over the Internet. The
License Agreement also grants to NBC the right to terminate the License
Agreement at any time upon certain changes of control of the Company, the
failure by NBC to own a certain minimum percentage of the outstanding capital
stock of the Company on a fully-diluted basis, the failure of NBC and the
Company to agree on new trademarks, service marks or related intellectual
property rights, and certain other related matters. In certain events, the
termination by NBC of the License Agreement may result in the acceleration of
vesting of the Warrants.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes 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 DOLLAR AMOUNT AS A
PERCENTAGE OF NET SALES FOR PERCENTAGE OF NET SALES FOR
THE THE
THREE MONTHS NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
===== ===== ====== =====
GROSS MARGIN 37.1% 40.0% 37.8% 40.3%
----- ----- ----- -----
Operating expenses:
Distribution and selling 26.6% 32.5% 28.8% 32.7%
General and administrative 4.1% 4.4% 4.2% 4.7%
Depreciation and amortization 2.0% 1.7% 1.8% 2.0%
----- ----- ----- -----
32.7% 38.6% 34.8% 39.4%
----- ----- ----- -----
Operating income 4.4% 1.4% 3.0% 0.9%
===== ===== ===== =====
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision International, Inc. and its Subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company, which markets its products
directly to consumers through various forms of electronic media. The Company's
operating strategy incorporates television home shopping, Internet e-commerce,
vendor programming and fulfillment services.
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 to satellite dish owners and through Company owned low power
television ("LPTV") stations. The Company also complements its television home
shopping business by the sale of merchandise through its Internet shopping
website (www.vvtv.com) which is broadcast live over the Internet 24 hours a day
and 7 days a week.
The Company intends to rebrand its growing home shopping network and
companion Internet shopping website in fiscal 2002 as part of a wide-ranging
direct marketing strategy the Company is pursuing in conjunction with its
various strategic partners. 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. On November 21, 2000, the Company announced that it had entered into
a licensing agreement dated November 16, 2000 with National Broadcasting
Company, Inc. ("NBC") to rebrand the ValueVision home shopping network and its
companion Internet shopping website using an NBC-branded name. Under the terms
of the licensing agreement, NBC has granted ValueVision worldwide use of an
NBC-branded name and the Peacock image for ten years. The new name will be
unveiled as part of a wide-ranging marketing campaign that the Company intends
to launch in spring 2001. ValueVision's original intent was to re-launch its
television network and companion Internet website under the SnapTV and
SnapTV.com brand names, respectively, in conjunction with NBCi. On June 12,
2000, NBCi announced a strategy to integrate all of its consumer properties
under the single NBCi.com brand, effectively abandoning the Snap name. 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.
The Company, through its wholly-owned subsidiary, 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, NBC, NBCi, and CNBC whereby
the parties created 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 ownership 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 approximately $13 million
has been funded through October 31, 2000. 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 officially launched in November 2000 and includes 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. In addition, Ralph Lauren Media
and 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 for additional information.
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<PAGE> 14
NBC REBRANDING AND TRADEMARK LICENSE AGREEMENT
On November 21, 2000, the Company announced that it had entered into a
Trademark License Agreement dated as of November 16, 2000 (the "License
Agreement") with NBC pursuant to which NBC granted the Company an exclusive,
worldwide license (the "License") for a term of 10 years to use certain NBC
trademarks, service marks and domain names to rebrand the Company's business and
corporate name on the terms and conditions set forth in the License Agreement.
The new name will be unveiled as part of a wide-ranging marketing campaign that
will launch in spring 2001. In connection with the License Agreement, the
Company issued to NBC warrants (the "Warrants") to purchase 6,000,000 shares of
the Company's common stock, par value $.01 per share (the "Common Stock"), with
an exercise price of $17.375 per share, the closing price of a share of Common
Stock on the Nasdaq National Market on November 16, 2000. The Warrants vest in
one-third increments, with one-third exercisable immediately, and the remaining
Warrants vesting on each of the first two anniversaries of the License
Agreement. Additionally, the Company agreed to accelerate the vesting of
warrants to purchase 1,450,000 shares of Common Stock granted to NBC in
connection with that certain Distribution and Marketing Agreement dated as of
March 8, 1999 between NBC and the Company. See Note 10 to Notes To Condensed
Consolidated Financial Statements for additional information.
YAHOO! INC. LICENSE AND PROMOTION AGREEMENT
On November 20, 2000, Yahoo! Inc. ("Yahoo!"), a leading global Internet
communications, commerce and media company, announced and unveiled Yahoo!
Shopping Vision (http://shoppingvision.yahoo.com), a rich media extension of
Yahoo! Shopping (http://shopping.yahoo.com). Designed to give consumers a
dynamic new way to buy products conveniently on the Internet, Yahoo!
ShoppingVision lets consumers view streaming video content and simultaneously
purchase relevant merchandise through a single interface. As part of the Yahoo!
ShoppingVision launch, Yahoo! has signed a content distribution and marketing
agreement with the Company. As part of its relationship with Yahoo!, ValueVision
will be a featured content provider with a fixed graphic link on the Yahoo!
ShoppingVision player, and has agreed to provide live programming, 24 hours a
day, seven days a week, in addition to archived video content. As people see
products in the streaming video window, information and links to merchandise
that is being displayed will simultaneously appear in the window adjoining the
video stream, allowing consumers to immediately purchase the products being
viewed. The Company will also advertise throughout Yahoo! Shopping, and in the
jewelry and watches, and computers and electronics categories of Yahoo!
Auctions. Additionally, the Company will be promoted on broadcast-related
modules in My Yahoo! and throughout the Yahoo! network of properties.
WRITE-DOWN OF INVESTMENTS
In the third quarter ended October 31, 2000, the Company recorded a pre-tax
loss of $54,564,000 relating to the write-down of investments made primarily in
a number of Internet retailers whose decline in fair value was determined by the
Company to be other than temporary. The decline in fair value of these companies
was driven by their large operating losses and negative cash flow accompanied by
an environment not conducive to raising new financing. The major components of
the write-down included minority equity investments made in NBCi.com,
Petopia.com, SelfCare.com, Roxy.com and BigStar Entertainment, Inc. See Note 7
to Notes To Condensed Consolidated Financial Statements for additional
information.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended October 31, 2000 (fiscal 2001) were
$95,241,000 compared with net sales of $76,575,000 for the three months ended
October 31, 1999 (fiscal 2000), a 24% increase. Net sales for the nine months
ended October 31, 2000 were $261,920,000 compared with $187,592,000 for the nine
months ended October 31, 1999, a 40% 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 40% sales increases, over the respective prior year
quarters, for the past eight quarters in a row and reported its largest total
revenue quarter in the Company's history. Sales attributed to the Company's
television home shopping and Internet businesses increased 42% to $95,241,000
for the quarter ended October 31, 2000 from $67,177,000 for the comparable prior
year period on a 23% increase in average full-time equivalent ("FTE") subscriber
homes able to receive the Company's television home shopping programming. On a
year-to-date basis, sales attributed to the Company's television home shopping
and Internet businesses increased 60% to $261,920,000 for the nine months ended
October 31, 2000 from $163,552,000 for the comparable prior year period on a 46%
increase in average FTE subscriber homes. The growth in home shopping net sales
is primarily attributable to the growth in FTE homes receiving the Company's
television programming. During the 12-month period ended October 31, 2000 the
Company added approximately 4.9 million FTE subscriber homes, a 21% increase. In
addition to new FTE subscriber homes, television home shopping and Internet
sales increased due to the continued addition of new customers from
14
<PAGE> 15
households already receiving the Company's television home shopping programming,
as well as an increase in repeat sales to existing customers, an increase in the
average order size and a 749% year-to-date increase in Internet sales over the
prior year. The increase in repeat sales to existing customers experienced
during 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 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
$9,398,000 or 12% of total net sales for the quarter ended October 31, 1999 and
$24,040,000 or 13% of total net sales for the nine months ended October 31,
1999.
GROSS PROFITS
Gross profits for the third quarter ended October 31, 2000 and 1999 were
$35,362,000 and $30,610,000, respectively, an increase of $4,752,000 or 16%.
Gross margins for the three months ended October 31, 2000 and 1999 were 37.1%
and 40.0%, respectively. Gross profits for the nine months ended October 31,
2000 and 1999 were $99,040,000 and $75,604,000, respectively, an increase of
$23,436,000 or 31%. The principal reason for the increase in gross profits was
the increased sales volume from the Company's television home shopping and
Internet businesses, 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 October 31, 2000 and 1999 were
37.1% for each period. Television and Internet gross margins as a percent of net
sales for the nine months ended October 31, 2000 and 1999 were 37.8% and 37.6%,
respectively. Gross margins for the Company's direct mail-order operations for
the three and nine months ended October 31, 1999 were 60.6% and 58.4%,
respectively. Overall, third quarter and year-to-date television and Internet
gross margins remained 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
and the addition of airtime sales revenue in fiscal 2001.
OPERATING EXPENSES
Total operating expenses for the three and nine months ended October 31,
2000 were $31,174,000 and $91,074,000, respectively, versus $29,508,000 and
$73,848,000 for the comparable prior year periods. Distribution and selling
expense increased $481,000 or 2% to $25,347,000 or 27% of net sales during the
third quarter of fiscal 2001 compared to $24,866,000 or 32% of net sales for the
comparable prior-year period. Distribution and selling expense increased
$14,075,000 or 23% to $75,333,000 or 29% of net sales during for the nine months
ended October 31, 2000 compared to $61,258,000 or 33% of net sales for the
comparable prior-year period. Distribution and selling expense increased
primarily as a result of increases in net cable access fees due to a 46%
year-to-date increase in the number of average FTE subscribers over the prior
year, increased marketing and advertising fees, and increased costs associated
with credit card processing, telemarketing and the Company's ValuePay program
primarily resulting from increased sales, offset by decreases in distribution
and selling expenses associated with the divestiture of the Company's catalog
operations. Distribution and selling expense decreased as a percentage of net
sales over the prior year as a result of expenses growing at a slower rate than
the increase in television home shopping and Internet net sales over the prior
year.
General and administrative expense for the three months ended October 31,
2000 increased $515,000 or 15% to $3,879,000 or 4% of net sales compared to
$3,364,000 or 4% of net sales for the three months ended October 31, 1999. For
the nine months ended October 31, 2000, general and administrative expense
increased $2,218,000 or 25% to $11,075,000 or 4% of net sales compared to
$8,857,000 or 5% of net sales for the nine months ended October 31, 1999.
General and administrative expense increased from the prior year primarily as a
result of increases in 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 October 31,
2000 was $1,948,000 versus $1,278,000, representing an increase of $670,000 or
52% from the comparable prior-year period. Depreciation and amortization expense
for the nine months ended October 31, 2000 was $4,666,000 versus $3,733,000,
representing an increase of $933,000 or 25% from the comparable prior-year
period. Depreciation and amortization expense as a percentage of net sales was
2% for the three and nine-month periods ended October 31, 2000 and 1999. The
dollar increase is primarily due to increased depreciation on fixed assets and
increased amortization over the 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.
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OPERATING INCOME
For the three months ended October 31, 2000, the Company reported operating
income of $4,188,000 compared to operating income of $1,102,000 for the three
months ended October 31, 1999, an improvement of $3,086,000 or 280%. For the
nine months ended October 31, 2000, the Company reported operating income of
$7,966,000 compared to operating income of $1,756,000 for the nine months ended
October 31, 1999, an improvement of $6,210,000 or 354%. The improvement in
quarterly and year-to-date operating income over the prior year is directly
attributed to the overall operating improvements in the Company's television
home shopping and Internet businesses which improved by approximately $3,234,000
or 338% and $6,235,000 or 357% for the three and nine months ended October 31,
2000, respectively. These improvements were slightly offset by reductions in
operating income for the same respective periods of $148,000 and $25,000 related
to the Company's divested catalog operations. Operating income improved as a
result of increased sales and gross profits from the Company's television home
shopping and Internet businesses with a minor positive contribution due to 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 expense,
increased general and administrative expense associated with the Company's
e-commerce initiatives, increases in fixed asset depreciation associated
primarily with newly implemented computer systems and the increased amortization
expense associated with the Company's NBC cable distribution and marketing
agreement.
NET INCOME (LOSS)
For the three months ended October 31, 2000, the Company reported a net loss
available to common shareholders of ($36,805,000) or ($.95) per share on
38,644,000 weighted average common shares outstanding compared with net income
available to common shareholders of $17,166,000 or $.37 per share on 46,295,000
diluted weighted average common shares outstanding ($.46 per share on 37,044,000
basic shares) for the quarter ended October 31, 1999. The net loss available to
common shareholders for the quarter ended October 31, 2000 includes a pre-tax
loss of $54,564,000 related to the write-down of investments made primarily in a
number of Internet retailers whose decline in fair value was determined by the
Company to be other than temporary and pre-tax losses totaling $32,000 recorded
on the sale and holdings of the Company's property and investments. Net income
available to common shareholders for the quarter ended October 31, 1999 includes
a pre-tax gain of $23,250,000 from the sale of two television stations serving
the Houston, Texas market, a $1,741,000 pre-tax loss related to an investment
made in 1997 and a net pre-tax gain totaling $1,942,000 recorded on the sale and
holdings of the Company's property and investments. For the quarter ended
October 31, 2000, the net loss also included a pre-tax loss of $1,288,000
related primarily to the Company's equity interest in Ralph Lauren Media LLC and
interest income totaling $3,848,000 earned on the Company's cash and short-term
investments.
Excluding the net gains/losses on the sale and holdings of property and
investments and other one-time charges, net income available to common
shareholders for the quarter ended October 31, 2000 totaled $4,174,000, or $.09
per diluted share ($.11 per basic share), compared to net income available to
common shareholders of $2,854,000, or $.06 per diluted share ($.08 per basic
share) for the quarter ended October 31, 1999, an improvement of $1,320,000 or
46%.
For the nine months ended October 31, 2000, the Company reported a net loss
available to common shareholders of ($30,528,000) or ($.79) per share on
38,541,000 weighted average common shares outstanding compared with net income
available to common shareholders of $24,513,000 or $.65 per share on 37,940,000
diluted weighted average common shares outstanding ($.79 per share on 30,903,000
basic shares) for the nine months ended October 31, 1999. Net loss available to
common shareholders for the nine months ended October 31, 2000 includes a
pre-tax loss of $55,147,000 related to the write-down of investments made
primarily in a number of Internet retailers whose decline in fair value was
determined by the Company to be other than temporary and pre-tax losses totaling
$102,000 recorded on the sale and holdings of the Company's property and
investments. Net income available to common shareholders for the nine months
ended October 31, 1999 includes a pre-tax gain of approximately $23,250,000
relating to the sale of two television stations serving the Houston, Texas
market, a pre-tax gain of $9,980,000 relating to the receipt of a contingent
payment in connection with the Company's sale of a television stations in March
1998, a net pre-tax gain of $1,284,000 recorded on the sale and holdings of the
Company's property and investments and a pre-tax loss of $1,741,000 related to
an investment made in 1997. For the nine-month period ended October 31, 2000,
the net loss also included a pre-tax loss of $1,694,000 related primarily to the
Company's equity interest in Ralph Lauren Media LLC and interest income totaling
$11,335,000 earned on the Company's cash and short-term investments.
Excluding the net gains/losses on the sale and holdings of property and
investments and other one-time charges, net income available to common
shareholders for the nine months ended October 31, 2000 totaled $10,863,000, or
$.23 per diluted share ($.28 per basic share), compared to net income available
to common shareholders of $4,522,000, or $.12 per diluted share ($.15 per basic
share) for the nine months ended October 31, 1999, an improvement of $6,341,000
or 140%.
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For the nine months ended October 31, 2000 and 1999, net income (loss)
reflects an income tax provision (benefit) at an effective tax rate of 19.5% and
39%, respectively. The lower effective tax rate for fiscal 2001 results
primarily from the timing of future tax benefits relating to certain public
investments included in the third quarter investment write-down and an increase
in the mix of interest income generated from tax-free, short-term investments
over prior year.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 35.5 million homes as of October 31, 2000, as compared to 33.1
million homes as of January 31, 2000 and to 31.0 million homes as of October 31,
1999. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 350 cable or satellite
systems. In addition, the Company's programming is available unscrambled to
homes equipped with satellite dishes and is broadcast full-time over eleven
Company-owned, low-power television stations in major markets. As of October 31,
2000 and 1999, the Company's programming was available to approximately 27.9
million and 23.0 million FTE households, respectively. As of January 31, 2000,
the Company's programming was available to 25.0 million FTE households.
Approximately 23.3 million and 15.8 million households at October 31, 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. The Company's television home shopping
programming is also broadcast live 24 hours a day, 7 days a week through its
Internet shopping website (www.vvtv.com) which is not included in total FTE
households.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, cash and cash equivalents and short-term investments
were $267,441,000, compared to $294,643,000 as of January 31, 2000, a
$27,202,000 decrease. For the nine months ended October 31, 2000, working
capital decreased $21,812,000 to $309,455,000 driven primarily from the
reduction in cash and cash equivalents and short-term investments. The current
ratio was 5.4 at October 31, 2000 compared to 7.4 at January 31, 2000. At
October 31, 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 and other tax advantaged certificates with
original maturity dates and/or tender option terms ranging from one month to two
years. The average maturity of the Company's investment portfolio is
approximately 40 days.
Total assets at October 31, 2000 were $448,595,000, compared to $471,855,000
at January 31, 2000. Shareholders' equity was $335,076,000 at October 31, 2000,
compared to $371,921,000 at January 31, 2000, a $36,845,000 decrease. The
decrease in shareholders' equity for the nine-month period ended October 31,
2000 resulted primarily from the recording of the $30,320,000 net loss for the
nine-month period, which was caused specifically by the pretax investment
write-down of $54,564,000, recorded in the third quarter. In addition,
shareholders' equity decreased as a result of recording unrealized losses on
investments classified as "available-for-sale" totaling $9,580,000, notes
receivable from officers of $515,000 and accretion on redeemable preferred stock
of $208,000. These decreases were offset by proceeds received of $3,778,000
related to the exercise of stock options.
For the nine-month period ended October 31, 2000, net cash provided by
operating activities totaled $25,670,000 compared to net cash provided by
operating activities of $378,000 for the nine-month period ended October 31,
1999. Cash flows from operations before consideration of changes in working
capital items and investing and financing activities was a positive $12,632,000
for the nine months ended October 31, 2000, compared to a positive $5,489,000
for the same prior-year period. Net cash provided by operating activities for
the nine months ended October 31, 2000 reflects net loss, as adjusted for
depreciation and amortization, unrealized losses on trading securities, equity
in losses of affiliates and gains (losses) on the sale of property and
investments. In addition, net cash provided by operating activities for the nine
months ended October 31, 2000 reflects increases in accounts receivable,
inventories, prepaid expenses and income taxes receivable, offset by an increase
in accounts payable and accrued liabilities. Accounts receivable increased
primarily due to the increase in net sales. Inventories increased from year-end
to support increased sales volume, to prepare for the fourth quarter holiday
season and as a result of the timing of merchandise receipts. Prepaid expenses
increased primarily as a result of the timing of prepaid cable access fees and
increases in prepaid advertising. The increase in accounts payable and accrued
liabilities is a direct result of the increase in inventory levels and the
timing of vendor payments. The increase in income taxes receivable is a result
of the year-to-date net loss recorded.
Net cash used for investing activities totaled $71,174,000 for the nine
months ended October 31, 2000 compared to net cash provided by investing
activities of $23,198,000 for the same period of fiscal 2000. For the nine
months ended October 31, 2000 and
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1999, expenditures for property and equipment were $20,380,000 and $2,369,000,
respectively. Expenditures for property and equipment during the periods ended
October 31, 2000 and 1999 primarily include 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 agreement, the upgrade and
conversion of new computer software, related computer equipment and other office
equipment, web page development costs, warehouse equipment, production equipment
and expenditures on leasehold improvements. Principal future capital
expenditures include the upgrade of 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 initiatives. Included in property expenditures
for the nine months ended October 31, 2000, is approximately $13,000,000 of
additional investments made to the Company's 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 nine months of fiscal 2001, the Company invested $166,992,000 in various
short-term investments, received proceeds of $152,374,000 from the sale of
short-term investments, received proceeds of $335,000 from the sale of property
and investments, made disbursements of $36,336,000 for certain investments and
other long-term assets including approximately $13,000,000 for the Company's
equity interest in Ralph Lauren Media, made a $515,000 loan to an officer of the
Company and received $325,000 in connection with the repayment of outstanding
notes receivable. During fiscal 2000, the Company received $28,130,000 in
proceeds from the sale of its full-power television station KVVV-TV and K53 FV
low-power station to Pappas Telecasting Companies. During fiscal 2000, the
Company also received a contingent payment of $10,000,000 relating to the sale
of television station KBGE-TV and two low power television stations. In
addition, during the first nine months of fiscal 2000, the Company invested
$299,609,000 in various short-term investments, received proceeds of
$279,275,000 from the sale of short-term investments, received $1,436,000 in
connection with the repayment of outstanding notes receivable, made
disbursements of $5,719,000 for certain investments and other assets and
received proceeds of $12,054,000 from the sale of property and other
investments.
Net cash provided by financing activities totaled $3,778,000 for the nine
months ended October 31, 2000 and related to proceeds received from the exercise
of stock options. Net cash provided by financing activities totaled $226,048,000
for the nine months ended October 31, 1999 and primarily related to $178,370,000
of proceeds received from GE Equity on the issuance of 10,674,000 shares of
common stock and $44,265,000 of proceeds received from the issuance of Series A
Redeemable Convertible Preferred Stock in conjunction with the Company's
strategic alliance with GE Equity. In addition, the Company also received
proceeds of $3,568,000 from the exercise of stock options and made payments of
$155,000 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.
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 and Internet
operations, increased subscriber distribution, general expansion and
profitability of the Company, new initiatives and the continuing success in
developing and executing against new strategic alliances (including the GE
Equity, NBC, and Ralph Lauren Media alliances) and relationships (including the
NBC, and Yahoo! relationships), the Company's success in developing its
e-commerce business, the successful 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 maintain its current 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.
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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 that 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.
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to Amendment and Restated Employment Agreement dated
October 9, 2000 between the Registrant and Mr. McCaffery. +
10.2 Trademark License Agreement, dated as of November 16, 2000 between the
Registrant and NBC.
10.3 Warrant Purchase Agreement dated as of November 16, 2000 between the
Registrant and NBC.
10.4 Common Stock Purchase Warrant dated November 16, 2000 issued to NBC
to purchase shares of the Registrant.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on November 16, 2000 reporting under
Item 5, that the Registrant announced that effective November 16,
2000, the Company had entered into a Trademark License Agreement with
NBC pursuant to which NBC granted the Company an exclusive, worldwide
license for a term of 10 years to use certain NBC trademarks, service
marks and domain names to rebrand the Company's business and corporate
name. In connection with the License Agreement, the Company issued to
NBC warrants to purchase 6,000,000 shares of the Company's common
stock at an exercise price of $17.375 per share.
+ Management compensatory plan / arrangement
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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)
December 13, 2000
20
