1
================================================================================- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 19981999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
____________________------------------------ TO
____________________------------------------
COMMISSION FILE NO. 0-20243
------------------------
VALUEVISION INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-1673770
(State or Other Jurisdiction of (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6740 SHADY OAK ROAD, EDEN PRAIRIE, MN
"WWW.VVTV.COM" 55344-3433
(Address of Principal Executive Offices) (Zip Code)
612-947-5200
(Registrant's Telephone Number, Including Area Code)
------------------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X[X] No ____[ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained here-in,herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 20, 1998, 26,780,778March 26, 1999, 26,060,733 shares of the Registrant's common stock
were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant on such date, based upon the sale price of the
common stock as reported by the Nasdaq Stock Market on April 20, 1998,March 26, 1999, was
approximately $79,660,000.$362,679,000. For purposes of this computation, affiliates of the
registrant are deemed only to be the registrant's executive officers and
directors.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive ValueVision International, Inc. Proxy Statement forto be filed with
the 1998 Annual MeetingSecurities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of Shareholdersthe Registrant's 1999 fiscal year, are incorporated
by reference in Part III of this Annual Report on Form 10-K.
================================================================================- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
VALUEVISION INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JANUARY 31, 19981999
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 2827
Item 3. Legal Proceedings........................................... 2927
Item 4. Submission of Matters to a Vote of Security Holders......... 3028
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 3129
Item 6. Selected Financial Data..................................... 3230
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 3331
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 45
Item 8. Financial Statements........................................ 4546
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 7380
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 7481
Item 11. Executive Compensation...................................... 7481
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 7481
Item 13. Certain Relationships and Related Transactions.............. 7481
PART IV
Item 14. Exhibits, Lists and Reports on Form 8-K..................... 7582
SIGNATURES.............................................................. 8086
2
3
PART I
ITEM 1. BUSINESS
A. GENERAL
ValueVision International, Inc. ("ValueVision" or the "Company") is an
integrated direct marketing company which markets its products directly to
consumers through electronic and print media. The Company is a Minnesota
corporation with principal and executive offices at 6740 Shady Oak Road, Eden
Prairie, Minnesota 55344-3433. The Company was incorporated in the state of
Minnesota on June 25, 1990 and its fiscal year ends on January 31. Fiscal years
are designated by the calendar year in which the fiscal year ends (i.e., the
Company's fiscal year ended January 31, 19981999 shall be referred to as "fiscal
1998"1999").
The Company's principal electronic media activity is its television home
shopping networkbusiness which uses recognized on-air television home shopping
personalities to market brand name merchandise and proprietary and private label consumer
products at competitive or discount prices. The Company's 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 a Company owned or
affiliated full
power Ultra-High Frequency ("UHF") broadcast television stations,station, low power
television ("LPTV") stations and to satellite dish owners. The Company also
complements its television home shopping business by the sale of merchandise
through its Internet shopping website (www.vvtv.com).
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), is a direct-mail marketer of a broad range of
quality general merchandise which is sold to consumers through direct-mail
catalogs and other direct marketing solicitations. Products offered include
domestics, housewares, home accessories, electronics and various apparel wear. Through VVDM's wholly-owned
subsidiary, Catalog Ventures, Inc. ("CVI"), the Company sells a variety of
fashion jewelry, health and beauty aids, books, audio and video cassettes and
other related consumer merchandise through the publication of five consumer
specialty catalogs. The Company also manufactures and markets, via direct-mail,
women's foundation undergarments and other women's apparel through VVDM's
wholly-owned subsidiary Beautiful Images, Inc. ("BII").
Recent Developments
National Media Merger.NBC and GE Capital Strategic Alliance. On January 5, 1998,March 8, 1999, the Company
entered into a strategic alliance with the National Broadcasting Company, Inc.
("NBC") and G.E. Capital Equity Investments, Inc. ("GE Capital"). Pursuant to
the terms of the transaction, NBC and GE Capital have agreed to jointly acquire
an Agreement and Plan of Reorganization and Merger (the "Merger Agreement"), by and
amongapproximate 19.9% beneficial ownership interest in the Company National Media Corporation(consisting of
5,339,500 shares of Series A Redeemable Convertible Preferred Stock ("National Media") and Quantum
Direct Corporation, formerly known as V-L Holdings Corp. ("Quantum Direct"Preferred
Stock"), and a newly-formed Delaware corporation. Ifwarrant to acquire 1,450,000 shares of Common Stock (the
"Distribution Warrant") under a "Distribution and Marketing Agreement") for
aggregate consideration of approximately $56.0 million (or approximately $8.29
per share), representing approximately $44.0 million for the mergers (the "Mergers") contemplated
byPreferred Stock and
approximately $12.0 million upon exercise of the Merger Agreements were to be consummated,Distribution Warrant. In
addition, the Company will issue NBC and National Media
would have become wholly-owned subsidiaries of Quantum Direct, with each
outstanding shareGE Capital a warrant to increase their
potential aggregate equity stake to 39.9% (the "Investment Warrant"), subject to
approval of the Company's common stock being converted into 1.19 shares
of common stock of Quantum Direct and each outstanding share of common stock of
National Media being converted into one share of common stock of Quantum Direct.
Consummation ofshareholders. NBC will also have the Mergers is subjectexclusive right
to the satisfaction of a number of
conditions, including, but not limited to, holders of no more than 5% of the
issued and outstanding shares of common stocknegotiate on behalf of the Company makingfor the demands
and giving the notices required under Minnesota law to assert dissenters'
appraisal rights.
On April 8, 1998, it was announced thatdistribution of its television
home shopping service. The Federal Trade Commission notified the Company received preliminary
notification from holders of more than 5% of ValueVision's common stockon
April 5, 1999 that they intended to exercise their dissenter's rightsit had granted the Company early termination with respect to
the proposed
Mergers. The Company also reported that it had advised National Media that it
does not intend to waive30 day waiting period under the Merger Agreement condition to closing requiring
that holdersHart-Scott-Rodino Antitrust Improvements Act
of not more than 5% of the shares of the Company's common stock
have demanded their dissenter's rights. The Company and National Media had
special meetings of their shareholders scheduled on April 14, 1998 to vote on
the proposed Mergers.1976, as amended (the "HSR Act"). In light of this development, the receiptCompany
expects that the closing of the dissenters' notice, the
companies mutually agreed to postpone their respective shareholder meetings
while the companies attempted to negotiate a restructuringsale of the Mergers that
is acceptable3,739,500 shares of Preferred Stock
not subject to eachshareholder approval, the Investment Warrant and the Distribution
Warrant will take place during the week of April 12, 1999. Closing on the sale
of the companiesremaining shares of Preferred Stock and in the best interest of their
shareholders. Asexercisability of the date hereof, the CompanyInvestment
Warrant is subject to Shareholder Approval. See "Strategic Relationships -- NBC
and National Media are still
attempting to negotiateGE Capital Strategic Alliance" for a restructuringdetailed discussion of the Mergersthis alliance.
3
4
and have not yet rescheduled their respective special meetings. There can be no
assurances that the companies will successfully be able to negotiate such a
restructuring, or if negotiated, that such Mergers will be consummated. See
"Item 1. Business -- G. National Media Corporation -- 1998 Merger Proposal."
Chief Executive Officer. Mr. Gene McCaffery and Quantum Direct have entered
into a three year employment agreement pursuant to which Mr. McCaffery will
serve as Quantum Direct's Chief Executive Officer with a base salary of $500,000
during the first year, $525,000 during the second year, and $550,000 during the
third year. The agreement also provides for bonus salary of up to 100% of the
base salary, which may be earned only upon Quantum Direct meeting certain
operating income, revenue and stock performance criteria. In addition, pursuant
to the agreement, Mr. McCaffery is being issued stock options to acquire 800,000
shares of Quantum Direct's common stock, $.01 par value, with an exercise price
equal to $3.375 per share, the last trading price of the Company's common stock
on March 30, 1998. The exercise price of such options will be adjusted to the
last trading price of Quantum Direct's common stock on the first day it trades,
to the extent such price is lower than $3.375. In the event the Mergers are not
consummated, the Company and Mr. McCaffery have agreed to enter into an
employment agreement on substantially the same terms pursuant to which Mr.
McCaffery would become the Chief Executive Officer of the Company. See "Item 1.
Business -- G. National Media Corporation -- 1998 Merger Proposal."
Annual Meeting. The Company has scheduled its 1998 Annual Meeting of
Shareholders for June 2, 1998. The Company did not hold an 1997 Annual Meeting
of Shareholders. Accordingly, the 1998 Annual Meeting will address the Company's
performance for both the 1997 and 1998 fiscal years.
Electronic Media
The Company's principal electronic media activity is its live 24-hour per
day television home shopping network program. The Company's home shopping
network is the third largest television home shopping retailer in the United
States. Through its continuous merchandise-focused television programming, the
Company sells a wide variety of products and services directly to consumers.
Sales from the Company's television home shopping networkbusiness totaled $148,198,000
and $106,571,000 representing 73% and $99,419,000, representing 49% and 62% of net sales, for fiscal 19981999 and
1997,1998, respectively. Products are presented by on-air television home shopping
personalities and orders are placed directly with the Company by viewers who
call a toll-free telephone number. Orders are processed on-sitetaken by the Company's call center
representatives who use the Company's customized computer processing system
which provides real-time feedback to the on-air hosts. The Company's television
programming is produced at the Company's Eden Prairie, Minnesota facility and is
transmitted nationally via satellite to local cable system operators, broadcast
television stations and satellite dish owners.
Products and Product Mix. Products sold on the Company's television home
shopping network include jewelry, giftware, collectibles, and related
merchandise, apparel, electronics,
housewares, seasonal items and other merchandise. As part of the ongoinga shift in
merchandise mix, the Company continueddevoted additional air time to devote increasing airtime to non-jewelryits higher margin
jewelry merchandise during fiscal 1999 over fiscal 1998. Jewelry accounted for
61%72% of the programming air time during fiscal 19981999 compared with 67%61% for fiscal
1997.1998. Jewelry isrepresents the network's largest single category of merchandise,
representing 74% of television home shopping net sales in fiscal 1999, 60% of
net sales in fiscal 1998 and 62% of net sales in fiscal 1997 and 73% of net sales in fiscal 1996.1997. The Company has
developed this product group to include proprietary lines such as New York
Collection(TM), Ultimate Ice(TM), Vincenza Collections(TM)Gems at Large(TM), Brillante(R)Treasures D'Italia(TM),
C-Band, DaywearBrillante(TM), Trader Jack(TM), C-Band(TM), Daywear(TM) and Illusions(TM)
products produced to ValueVision's specifications or designed exclusively for
sale by the Company.
Program Distribution. Since the inception of the Company's television
operations, ValueVision has experienced continued growth in the number of
full-time equivalent cable homes ("FTEs")FTE"s) which receive the Company's
programming. As of January 31, 1998,1999, the Company served a total of 21.8 million
cable homes, or 14.9 million FTE's, compared with a total of 17.4 million cable
homes, or 11.7 million FTEs, compared with a total of 16.4 million cable
homes or 11.4 million FTEsFTE's as of January 31, 1997 and compared with 223,000
cable homes or 76,000 FTEs at January 31, 1992, the end of the Company's first
fiscal year.1998. Approximately 10.6 million,
8.6 million 7.7 million and 7.27.7 million cable homes at January 31, 1999, 1998 1997 and 1996,1997,
respectively, received the Company's television home shopping programming on a
full-time basis. As of January 31, 1998,1999, the Company's television home shopping
programming was carried by twoone full power 4
5
broadcast television stationsstation owned by
the Company, 208230 cable systems (188(208 in fiscal 1997)1998) on a full-time basis and 75106
cable systems (77(75 in fiscal 1997)1998) on a part-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 total number of cable homes that receive the Company's television home
shopping programming represents approximately 27%29% of the total number of cable
subscribers in the United States.
Satellite Service. The Company's programming is distributed to cable
systems, full and low power television stations and satellite dish owners via a
leased communications satellite transponder. Satellite service may be
interrupted due to a variety of circumstances beyond the Company's control, such
as satellite transponder failure, satellite fuel depletion, governmental action,
preemption by the satellite lessor and service failure. The Company does not
have any agreements fromhas an
agreement for preemptable immediate backupback-up satellite services, although itservice and believes it
could arrange for such services from others.back-up service if satellite transmission is interrupted.
However, there can be no assurance that the Company will be able to make anymaintain
such arrangements and the Company may incur substantial additional costs in enteringto
enter into new arrangements.
Print Media
The Company is also a direct-mail marketer of a broad range of quality
general merchandise which is sold to consumers through direct-mail catalogs and
other direct marketing solicitations. The Company's involvement in the print
media, direct marketing business is the result of a series of acquisitions made
in fiscal 1997 by VVDM. Sales from the Company's print media, direct marketing
business totaled $55,530,000 and $111,411,000, representing 27% and $60,059,000, representing 51% and 38% of net
sales for fiscal 1999 and 1998, respectively. The decrease in
4
5
net sales is directly attributable to the decline in catalog sales resulting
from the downsizing and 1997, respectively.eventual divestiture of the Company's unprofitable
HomeVisions catalog operations.
Effective July 27, 1996, VVDM acquired substantially all of the assets and
assumed certain obligations of Montgomery Ward Direct L.P., a four year old
catalog business operated under the Montgomery Ward Direct name ("MWD"). In
fiscal 1998, the Company changed the name of the MWD catalog to HomeVisions.
Through fiscal 1999, HomeVisions' principal direct marketing vehicle iswas its
home decor and furnishings catalog, a full-color booklet of approximately 50 to 100 pages that
is mailed semi-monthly to its customer list and to individuals whose names are
generated from mailing lists rented by HomeVisions. HomeVisions also produces
and mails special issues during the holiday season and produces inventory
clearance catalogs. Historically, a significant portion of HomeVisions' catalogs
have been targeted mainly to Montgomery Ward & Co., Incorporated ("Montgomery
Ward") credit card account holders.catalog. Effective March 31, 1998, overall
circulation of the HomeVisions catalog is expected to bewas reduced pursuant to thea November 1997
restructuring of an operating and license agreement the Company had with
Montgomery Ward, Operating and License Agreement in November
1997, whereby, among other things, the Company agreed to cease the
use of the Montgomery Ward and Montgomery Ward Direct names in its catalog
operations in exchange for Montgomery Ward's return of 3.8 million common stock
purchase warrants. See "Strategic AlliancesRelationships -- Montgomery Ward Alliance". In
the third quarter of fiscal 1999, the Company approved a restructuring plan and
effectively divested its unprofitable HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
the continuing operating losses and deteriorating financial performance over the
past year of HomeVisions' operations since Montgomery Ward's announcement of its
bankruptcy filing in the summer of 1997.
On October 22, 1996, VVDM acquired all of the outstanding shares of BII, a
manufacturer and direct marketer of women's foundation undergarments and other
women's apparel. DirectBII's direct marketing solicitation is through space
advertisements of BII'sits merchandise in national and regional newspapers and
magazines.
Effective November 1, 1996, VVDM acquired substantially all of the assets
and assumed certain obligations of Catalog Ventures, Inc. and Mitchell & Webb,
Inc. (collectively "CVI"), two direct marketing companies which together publish
five consumer specialty catalogs. CVI currently produces five special interest
catalogs which are mailed approximately monthly and include Nature's Jewelry(R),
The Pyramid Collection(TM), Serengeti(R), NorthStyle(R) and The Mind's Eye(R)Catalog Ventures'
Favorites(R). The full-color catalogs generally contain approximately 50 to 60
pages and are mailed to CVI's customer list and to individuals whose names are
generated from mailing lists rented by CVI.
Products and Product Mix. Products offered under the HomeVisions catalog
include domestics, housewares, home accessories and electronics. Products offered through CVI include a variety of
fashion jewelry, health and beauty aids, books, audio and video cassettes and
other related consumer merchandise. BII manufactures and markets, via direct
mail, women's foundation undergarments and other women's apparel designed to
provide comfort, support and posture enhancement.
5
6
Circulation. HomeVisions'CVI mails each of its five specialty catalogs areon a seasonal
basis and primarily targeted to educated
middle incometargets well-educated, middle- and upper-income women aged
35 to 50.55. Approximately 4232 million HomeVisionsCVI catalogs were mailed in fiscal 1998.1999 (35
million during fiscal 1998). At January 31, 1998, HomeVisions1999, CVI had approximately 548,000585,000
"active" catalog customers (defined as individuals that have purchased from the
Company within the preceding 12 months) and combined customer and prospect files
that totaled approximately 3.4 million names. CVI mails each of its five
specialty catalogs on a seasonal basis and primarily targets well-educated,
middle and upper-income women aged 35 to 55. Approximately 35 million CVI
catalogs were mailed in fiscal 1998. At January 31, 1998, CVI had approximately
553,000 active catalog customers and approximately 4.84.1 million customer
names in its catalog customer list database. During fiscal 1998,1999, BII had
approximately 678719 million printed space advertisements or "impressions"
circulated in national and regional newspapers and magazines.magazines (678 million during
fiscal 1998). At January 31, 1998,1999, BII had approximately 210,000265,000 active
customers and approximately 650,000733,000 customer names in its customer list
database.
B. BUSINESS STRATEGY
The Company's primary business strategy is to increase salesleverage its core television
home shopping business and cash flows
from existing direct marketing operationsposition the Company to become a principal player in
the evolving convergence and development of electronic commerce. As part of the
Company's recently announced strategic alliance with NBC and GE Capital, the NBC
cable distribution team will assist the Company in increasing its household
distribution, a key Company initiative. This alliance also positions the Company
for the future as transactional abilities become increasingly important in the
world of electronic convergence. As the television and personal computer
converge, access to electronic revenue streams, like home shopping through cable
and the acquisition of
additional direct-mail companies to complement its growing direct marketing
business.Internet, become extremely valuable. In addition, the Company's strategy
involves increasing sales and cash flows by increasing the number of FTEsFTE's that
receive the Company's television home shopping programming through (i)
affiliation agreements with
5
6
cable companies, (ii) block lease agreements and (iii) the use of broadcast
television stations and "must carry" rights.stations. The Company also anticipates growth through (i) increased
penetration of new customers from existing homes served by television
programming and through the Company's recent investment and future expected growth in
direct-to-consumer selling on theits Internet shopping website at (www.vvtv.com),
(ii) continued expansion of repeat sales to existing customers and (iii)
increased circulation of catalog mailings and (iv) the acquisition of additional direct-mail marketing
companies.mailings.
Cable Affiliation Agreements
As of January 31, 1998,1999, the Company had entered into long-term cable
affiliation agreements with thirteentwelve multiple system operators ("MSOs"), which
require each MSO to offer the Company's cable television home shopping
programming substantially on a full-time basis to their cable systems. The
aggregate number of cable homes served by these thirteentwelve MSOs is approximately
20.524.3 million, of which approximately 7.99.4 million cable homes (7.6(8.9 million FTEs)FTE'S)
currently receive the Company's programming. The stated terms of the affiliation
agreements range from twothree to seven years. Under certain circumstances, the
MSOs may cancel the agreements prior to their expiration. There can be no
assurance that such agreements will not be so terminated or that such
termination will not materially or adversely affect the Company's business. In
addition, these MSOs are also carrying the Company's programming on an
additional 690,0002,285,000 cable homes (265,000 FTEs)(1,059,000 FTE'S) pursuant to short-term cable
carriage arrangements. The affiliation agreements provide that the Company will
pay each MSO a monthly cable access fee and marketing support payments based
upon the number of homes carrying the Company's television home shopping
programming. Certain of the affiliation agreements also require payment of
one-time initial launch fees which are capitalized and amortized on a
straight-line basis over the term of the agreements. The Company has entered
into, and currently plans to enter into, affiliation agreements with other cable
television operators providing for full-
orfull-or part-time carriage of the Company's
television home shopping programming.
Block Lease Agreements
The Company currently leases blocks of cable television time from certain
cable operators, typically for one year periods, with thirty-day cancellation
privileges by either party.
General. Commencing in January 1992, the Company began leasing blocks of
cable television time for its programming. On average, the Company's lease
agreements provide for approximately 120 to 140 hours or more of programming
weekly and are generally terminable by either party on thirty days' notice.
This
method of programming distribution, as a component of the Company's overall
distribution strategy, may be significantly expanded in the event of favorable
action or a judicial review of the "leased access" rules pursuant
6
7
to the Cable Act. However, no assurance can be made with respect to the outcome
of these proceedings. See "Federal Regulation."
"LeasedLeased Access." Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. See
"Federal Regulation." In May 1993,1997, the Federal Communications Commission ("FCC")
issued rules generally limiting cable leased access rates that cable systems can
charge nonaffiliated programmers such as the Company. These rules, which used a
"highest implicit fee" proxy for the costs cable operators incurred in carrying
leased access programming, often allowed operatorsCompany to increase lease rates
dramatically and affected the Company's ability to gain carriage on some
systems. The FCC adopted revised rules in February 1997. These revised rules
include a modified version of the proxy called the "average implicit
fee," which
changesfee" received by the calculation of the proxy incable operator for a way that makes it unclear whether or
to what extent lease rates will be affected in any particular case. However, the
Company's preliminary impression has been that the new rates remain largely
unaffordable. The Company has petitioned the D.C. Circuit for review of these
newly revised rate provisions. Both the petition for review and a similar
petition are currently pending. There can be no assurances that the Company will
prevail in this litigation or, if it succeeds, that the rules the FCC would
adopt in place of the challenged ones will be favorable to the Company. The
timing of any FCC or court action is uncertain.channel.
Broadcast Television Stations
The Company currently owns one full power broadcast television station that
carries the ValueVision television home shopping program primarily on a
full-time basis, KVVV (TV), licensed to Baytown, Texas and serving the Houston,
Texas area. The Company's current strategy is to buy or sell broadcast
television stations at appropriate prices when investment opportunities arise.
When purchasing broadcast television stations, the Company does not
consider conventional measures of a station's performance, such as over the air
coverage, advertising revenues, audience share, programming or demographics, to
select stations for acquisition. Rather, the Company focuses on the Area of
Dominant Influence ("ADI") of the market in which the station is located and the
number of cable households within each ADI. The Company generally intends to
broadcast primarily home shopping programming over full power television
stations that it acquires, and does not expect its programming to generate
significant advertising revenues. Accordingly, the preacquisition operating
results of any full power television station will not be predictive of the
operating results following acquisition by the Company.
Summary of Acquisitions and Dispositions. In March 1996, the Company
completed the acquisition of the full power Ultra-High Frequency ("UHF")
independent television station KBGE (TV), Channel 33, serving the
Seattle-Tacoma, Washington market ("KBGE") for approximately $4.6 million.
During fiscal 1995, the Company acquired four full power UHF television stations
(WVVI -- Washington, D.C. ADI; KVVV -- Houston, Texas ADI; WHAI -- New York City
ADI; and WAKC -- Cleveland-Akron, Ohio ADI) for an aggregate purchase price,
including acquisition related costs, of approximately $22.4 million. In February
1998, the Company completed the sale of its television station KBGE, which
serves the Seattle-Tacoma, Washington market. In July 1997, the Company
completed the sale of its television station WVVI (TV), licensed to Manassas,
Virginia. In February 1996, the Company sold two stations serving the New York
City (WHAI) and Cleveland-Akron, Ohio (WAKC) markets. Television station KVVV
(TV) is
6
7
currently carrying the Company's television home shopping programming and is
located in the Houston, Texas market which has a total of approximately 1.6
million homes, including approximately 894,000918,000 cable homes within its combined
ADI. Approximately 287,000561,000 of these cable homes currently receive ValueVision's
programming.
The Company purchased KBGE, licensed to Bellevue, Washington and serving
Seattle-Tacoma, Washington from NWTV, Inc. for aggregate consideration of
$4,600,000 on March 15, 1996. KBGE commenced broadcast operations during October
1995. TheAt the time of purchase, the Seattle-Tacoma, Washington market representsrepresented
the 13th largest ADI in the nation and ranksranked ninth among U.S. cable markets,
with approximately 1.0 million cable television households and an average cable
penetration of almost 70%. On February 27, 1998, the Company completed the sale
of KBGE (TV), Channel 33, along with two of the Company's non-cable, low-power
stations in Portland, Oregon and Indianapolis, Indiana and a minority interest
in which an entity had 7
8
applied for a new full-power station to Paxson
Communications Corporation ("Paxson") for a total of approximately $35 million
in cash. Under the terms of the agreement, Paxson paid the Company approximately
$25 million upon closing and the remaining $10 million is to be paid when KBGE, which is currently
operating at reduced power from downtown Seattle, is able to relocate its
antenna and increase its transmitter power to a level at or near its licensed
full power.payable by the first
quarter of fiscal 2000. The Company will retain and continue to serve the
Seattle market via its recently-launched low-power station K58DP (TV), which transmits from
downtown Seattle. Management believes that the sale will not have a significant
impact on the ongoing operations of the Company. The pre-tax gain to be recorded on the first cash installment with
respect to the sale of this television station is expected to bewas approximately $19.8 million
and will bewas recognized in the first quarter of fiscal 1999.
The Company purchased WVVI (TV), licensed to Manassas, Virginia, from
National Capital Christian Broadcasting, Inc. ("National") for $4,850,000, of
which $4,050,000 was paid at the initial closing on March 28, 1994 and $800,000
was paid at a second closing on April 11, 1996. The Company also purchased at
the WVVI initial closing a five-year secured convertible debenture in the
principal amount of $450,000. The debenture was convertible at the Company's
option into that number of shares of common stock which represented
approximately 19% of the outstanding capital stock of Capital Television
Network, Inc. ("Capital"). In April 1996, the Company received certain studio
and production equipment from National and Capital in lieu of a cash repayment
of the amount outstanding under the secured convertible debenture. On July 31,
1997, the Company completed the sale of WVVI (TV), which serves the Washington,
D.C. market, to Paxson for approximately $30 million in cash and the receipt of
1,197,892 shares of Paxson common stock valued at $11.92 per share as determined
pursuant to an independent financial appraisal. Under the terms of the
agreement, Paxson paid the Company $20 million in cash upon closing and was
required to pay an additional $10 million to the Company as a result of the
United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. WVVI (TV) carried the Company's television home shopping programming
to approximately 874,000 cable television households. The pre-tax gain recorded
on the sale of this television station was approximately $38.9 million and was
recognized in the second fiscal quarter ended July 31, 1997.
The Company acquired WHAI (TV), a full power UHF television station
licensed to Bridgeport, Connecticut and servicing part of the New York City ADI
in December 1994 from Bridgeways Communications Corp. Total consideration for
the acquisition of WHAI was $7,320,000, including $3,900,000 in cash and 720,000
shares of the Company's common stock with a fair market value of $3,420,000. In
April 1994, the Company acquired WAKC, a full power UHF station licensed to
Akron, Ohio, for approximately $6,000,000, including $1,000,000 payable under
the terms of a non-compete agreement in five equal annual installments
commencing in April 1995. Since its acquisition, WAKC had been operated as an
ABC network affiliate and did not carry any of the Company's television home
shopping programming. On February 28, 1996, the Company completed the sale of
these two television stations to Paxson for $40.0 million in cash plus the
assumption of certain obligations. The pre-tax gain on the sale of these two
television stations of approximately $27 million was recognized in the first
fiscal quarter ended April 30, 1996.
The Company purchased KVVV, licensed to Baytown, Texas, from Pray, Inc. for
a purchase price of $5,750,000, of which $4,150,000 was paid at the initial
closing on March 28, 1994. On March 31, 1997, the Supreme Court upheld the "must
carry" provisions of the 1992 Cable Act, and as a result, the Company paid the
remaining $1,600,000 upon a second closing.
"Must7
8
Must Carry." The Company has achieved increased cable distribution of its
programming under the FCC's "must carry"must carry rules through mandatory carriage on local
cable systems of full power television stations it has acquired or intends to
acquire. In general, and subject to the right of a cable operator to seek FCC
relief upon a showing of lack of service or coverage or by other factors, the
current "must carry"must carry rules entitle full power television stations to mandatory
cable coverage, at no charge, in all cable homes located within each station's
ADI or Designated Market Area ("DMA"), provided that the signal is of adequate
strength and the cable system has "must carry"must carry designated channels available. See
"Federal Regulation." Mandatory cable carriage can substantially increase,
at a low cost, the number of homes that a full power television station can
8
9
reach. On March 31, 1997, the Supreme Court, rejecting a constitutional
challenge brought by cable industry plaintiffs, upheld in their entirety the
"must carry" rules applicable to full power television stations.
Other Methods of Program Distribution
The Company's programming is also broadcast full-time to "C"-band satellite
dish owners and homes via thirteentwelve low power television ("LPTV") stations that a
subsidiary of the Company owns or with which it has programming lease agreements.owns. The LPTV stations and satellite dish
transmissions were collectively responsible for less than 8%10% of the Company's
sales in its last fiscal year. LPTV stations reach a substantially smaller
radius of television households than full power television stations, are
generally not entitled to "must carry"must carry rights and are subject to substantial FCC
limitations on their operations. However, LPTV stations can be
constructed and operated atAdditionally, the Company's programming is
broadcast on a substantially lower cost than full power
television stations. During fiscal 1998,part-time basis to subscribers of the Company acquired five LPTV stations
located in Charlotte, North Carolina, Kansas City, Missouri (two LPTV stations),
Cleveland, Ohio, and Houston, Texas. In February 1998, the Company also sold two
LPTV stations located in Portland, Oregon and Indianapolis, Indiana. The Company
now owns and operates ten LPTV stations. The Company is preparing to close on
the acquisition of an additional LPTV station in Seattle, Washington with which
the Company has a programming lease agreement. One other LPTV station, located
in Richmond, Virginia, with which the Company currently has a programming
agreement, is scheduled to be acquired in fiscal 1999.medium-powered satellite
service called Primestar.
Internet Website
In April 1997, the Company launched an interactive shopping site address on
the Internet website located
at WWW.VVTV.COM.www.vvtv.com. The Internet site provides consumers with
access to the general merchandise offered on the Company's television home
shopping program as well as provide consumers the opportunity to
view and hear the live 24-hour per day television home shopping program and an
opportunity to purchase general merchandise offered on the Company's television
home shopping program. Although still a small portion of total sales, Internet
sales for the year ended January 31, 1999 increased at a far greater percentage
than television home shopping sales over the year ended January 31, 1998. This
method of program distribution is in the development stagecurrently being more fully developed and,
consequently, the Company cannot predict the impact it will have on future
operating results. In addition, the Company, through CVI, also uses a different
interlinked website for each of its five specialty catalogs. Each site features
a full selection of the merchandise currently offered in these catalogs as well
as discounts on closeout merchandise.
At this time, the Company is subject to liquidatea number of general business
regulations and laws or regulations regarding taxation and online commerce.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that additional laws and regulations may be
adopted with respect to the Internet or other online services, covering such
issues as user privacy, advertising, pricing, content, copyrights and
trademarks, distribution, taxation, and characteristics and quality of products
and services. Changes in consumer protection laws also may impose additional
burdens on those companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
products and services and increase its overstock merchandise.cost of doing business through the
Internet. Moreover, it is not clear how existing laws governing issues such as
property ownership, sales and other taxes, libel and personal privacy would
apply to the Internet and online commerce.
In addition, as the Company's web site is available over the Internet in
all states, and as it sells to numerous consumers residing in such states, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state, a requirement that could result in
taxes and penalties for the failure to qualify. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business or the application of
existing laws and regulations to the Internet and other online services could
have an adverse effect on the growth of the Company's business in this area.
Print Media Operations
The Company's print media operations provide customers with a broad range
of quality merchandise at competitive or discounted prices through the
convenience of catalog and other direct marketing solicitations.
8
9
The Company's objective for print media activities is to expand recently acquired direct marketing
operations while possibly acquiring additional direct-mail marketing companies.companies
should they fit within the Company's overall business strategy. The Company's
strategy for print media operations is to (i) perform effective target marketing
and increase catalog circulation to achieve strong sales growth, (ii) procure
products more efficiently and improve pricing to increase gross margins, (iii)
improve order processing and distribution efficiencies through consolidation of
operations, and (iv) share customer lists between operating units.
C. STRATEGIC RELATIONSHIPS
NBC and GE Capital Strategic Alliance
On March 8, 1999, the Company entered into a strategic alliance with NBC
and GE Capital. Pursuant to the terms of the transaction, NBC and GE Capital
have agreed to jointly acquire an approximate 19.9% ownership interest in the
Company (consisting of 5,339,500 shares of Series A Redeemable Convertible
Preferred Stock, and a warrant to acquire 1,450,000 shares of Common Stock (the
"Distribution Warrant") under a "Distribution and Marketing Agreement" discussed
below) for aggregate consideration of approximately $56.0 million (or
approximately $8.29 per share). In addition, the Company will issue NBC and GE
Capital a warrant to increase their potential aggregate equity stake to 39.9%,
subject to approval of the Company's shareholders ("Shareholder Approval"). NBC
will also have the exclusive right to negotiate on behalf of the Company for the
distribution of its television home shopping service.
INVESTMENT AGREEMENT
Pursuant to the Investment Agreement by and between the Company and GE
Capital dated March 8, 1999 (the "Investment Agreement"), the Company will sell
to GE Capital 5,339,500 shares of Series A Redeemable Convertible Preferred
Stock, $.01 par value (the "Preferred Stock") for an aggregate of $44,265,000
(or approximately $8.29 per share). The Preferred Stock is convertible into an
equal number of shares of the Company's Common Stock, $.01 par value ("Common
Stock"), subject to customary anti-dilution adjustments, has a mandatory
redemption on the 10th anniversary of its issuance or upon a "change of control"
at its stated value ($8.29 per share), participates in dividends on the same
basis as the Common Stock and has a liquidation preference over the Common Stock
and any other junior securities. So long as NBC or GE Capital is entitled to
designate a nominee to the Board of Directors (the "ValueVision Board") of the
Company (see discussion under "Shareholder Agreement" below), the holders of the
Preferred Stock shall be entitled to a separate class vote on the directors
subject to nomination by NBC and GE Capital. During such period of time, such
holders will not be entitled to vote in the election of any other directors, but
will be entitled to vote on all other matters put before shareholders of the
Company (including on the matter involving approval of the Investment Warrant
described below) on an as converted basis. Consummation of the sale of 3,739,500
shares of the Preferred Stock (the "Initial Closing") is subject to clearance of
the transaction with the Federal Trade Commission (the "Governmental
Clearance"), and with respect to approximately 1.6 million shares of the
Preferred Stock, is subject to Shareholder Approval. The Federal Trade
Commission notified the Company on April 5, 1999 that it had granted the Company
early termination with respect to the 30 day waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). In light of this development, the Company expects that the closing of the
sale of the 3,739,500 shares of Preferred Stock not subject to shareholder
approval, the Investment Warrant and the Distribution Warrant will take place
during the week of April 12, 1999. Closing on the sale of the remaining shares
of Preferred Stock and exercisability of the Investment Warrant is subject to
Shareholder Approval. The Investment Agreement may be terminated by mutual
consent or if the Initial Closing is not consummated by August 31, 1999.
The Investment Agreement also provides that the Company will issue GE
Capital a common stock purchase warrant (the "Investment Warrant") to acquire
the number of shares of the Common Stock that would result in the combined
beneficial ownership by GE Capital and NBC of 39.9% of the Company at the time
of exercise subject to certain limitations set forth in the Investment Warrant.
Subject to shareholder approval, the Investment Warrant is immediately
exercisable, has a term of 5 years from the date of issuance and its exercise
price during the first two years of the term of the Investment Warrant is the
greater of (i) the
9
10
45-day average closing price of the underlying Common Stock ending on the
trading day prior to exercise, (ii) the 150-day average closing price of the
underlying Common Stock ending on the trading day prior to exercise, or (iii)
$12 per share, and during the last three years of the term of the Investment
Warrant is the greater of (i) the 45-day average closing price of the underlying
Common Stock ending on the trading day prior to the exercise or (ii) $15 per
share. Exercisability of the Investment Warrant and issuance of approximately
1.6 million shares of the Preferred Stock (the "Second Closing"), in addition to
obtaining the Governmental Clearance noted above, is also subject to Shareholder
Approval.
SHAREHOLDER AGREEMENT
Pursuant to the Investment Agreement, upon closing of the sale of the
Preferred Stock, the Company and GE Capital will enter into a Shareholder
Agreement (the "Shareholder Agreement") providing for certain corporate
governance and standstill matters. The Shareholder Agreement (together with the
Certificate of Designation of the Preferred Stock) provides that GE Capital and
NBC will be entitled to designate nominees for an aggregate of 2 out of 7 board
seats so long as their aggregate beneficial ownership is at least equal to 50%
(or 75% if Shareholder Approval is not obtained) of their initial beneficial
ownership, and 1 out of 7 board seats so long as their aggregate beneficial
ownership is at least 10% of the "adjusted outstanding shares of Common Stock"
(or 50% of their initial beneficial ownership if Shareholder Approval is not
obtained). GE Capital and NBC have also agreed to vote their shares of Common
Stock in favor of the Company's nominees to the ValueVision Board in certain
circumstances.
All committees of the ValueVision Board will include a proportional number
of directors nominated by GE Capital and NBC. The Shareholder Agreement also
requires the consent of GE Capital prior to the Company entering into any
substantial agreements with certain restricted parties (broadcast networks and
internet portals in certain limited circumstances, as defined), as well as
taking any of the following actions: (i) issuance of more than 15% of the total
voting shares of the Company in any 12 month period (25% in any 24 month
period), (ii) payment of quarterly dividends in excess of 5% of the Company
market capitalization (or repurchases and redemption of Common Stock with
certain exceptions), (iii) entry by the Company into any business not ancillary,
complementary or reasonably related to the Company's current business, (iv)
acquisitions (including investments and joint ventures) or dispositions
exceeding the greater of $35.0 million or 10% of the Company's total market
capitalization, or (v) incurrence of debt exceeding the greater of $40.0 million
or 30% of the Company's total capitalization.
Pursuant to the Shareholder Agreement, so long as GE Capital and NBC have
the right to name at least one nominee to the ValueVision Board, the Company
will provide them with certain monthly, quarterly and annual financial reports
and budgets. In addition, the Company has agreed not to take actions which would
cause the Company to be in breach of or default under any of its material
contracts (or otherwise require a consent thereunder) as a result of
acquisitions of the Common Stock by GE Capital or NBC. The Company is also
prohibited from taking any action that would cause any ownership interest of
certain FCC regulated entities from being attributable to GE Capital, NBC or
their affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the Shareholder Agreement), and with certain limited exceptions, GE
Capital and NBC shall be prohibited from: (i) any asset/business purchases from
the Company in excess of 10% of the total fair market value of the Company's
assets, (ii) increasing their beneficial ownership above 39.9% of the Company's
shares, (iii) making or in any way participating in any solicitation of proxies,
(iv) depositing any securities of the Company in a voting trust, (v) forming,
joining, or in any way becoming a member of a 13D Group with respect to any
voting securities of the Company, (vi) arranging any financing for, or providing
any financing commitment specifically for, the purchase of any voting securities
of the Company, (vii) otherwise acting, whether alone or in concert with others,
to seek to propose to the Company any tender or exchange offer, merger, business
combination, restructuring, liquidation, recapitalization or similar transaction
involving the Company, or nominating any person as a director of the Company who
is not nominated by the then incumbent directors, or proposing any matter to be
voted upon by the shareholders of the Company. If during the Standstill Period
any inquiry has been made regarding a "takeover transaction" or "change in
control" which has not been rejected by the ValueVision Board, or the
ValueVision Board pursues such a transaction, or engages in negotiations or
provides information to a third party and the ValueVision Board has not resolved
to terminate such
10
11
discussions, then GE Capital or NBC may propose to the Company a tender offer or
business combination proposal.
In addition, unless GE Capital and NBC beneficially own less than 5% or
more than 90% of the adjusted outstanding shares of Common Stock, GE Capital and
NBC shall not sell, transfer or otherwise dispose of any securities of the
Company except for transfers: (i) to certain affiliates who agree to be bound by
the provisions of the Shareholder Agreement, (ii) which have been consented to
by the Company, (iii) pursuant to a third party tender offer, provided that no
shares of Common Stock may be transferred pursuant to this clause (iv) to the
extent such shares were acquired upon exercise of the Investment Warrant on or
after the date of commencement of such third party tender offer or the public
announcement by the offeror thereof or that such offeror intends to commence
such third party tender offer, (v) pursuant to a merger, consolidation or
reorganization to which the Company is a party, (vi) in a bona fide public
distribution or bona fide underwritten public offering, (vii) pursuant to Rule
144 of the Securities Act, or (viii) in a private sale or pursuant to Rule 144A
of the Securities Act; provided that, in the case of any transfer pursuant to
clause (vi) or (viii), such transfer does not result in, to the knowledge of the
transferor after reasonable inquiry, any other person acquiring, after giving
effect to such transfer, beneficial ownership, individually or in the aggregate
with such person's affiliates, of more than 10% of the adjusted outstanding
shares of the Common Stock.
The Standstill Period will terminate on the earliest to occur of (i) the 10
year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), and (v) six months after GE Capital and NBC
can no longer designate any nominees to the ValueVision Board. Following the
expiration of the Standstill Period pursuant to clause (i) or (v) above
(indefinitely in the case of clause (i) and two years in the case of clause
(v)), GE Capital and NBC's beneficial ownership position may not exceed 39.9% of
the Company's fully-diluted outstanding stock, except pursuant to issuance or
exercise of any warrants or pursuant to a 100% tender offer for the Company.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, at the Initial Closing, the Company
and GE Capital will enter into a Registration Rights Agreement providing GE
Capital, NBC and their affiliates and any transferees and assigns, an aggregate
of four demand registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company have entered into the Distribution and Marketing
Agreement dated March 8, 1999 (the "Distribution Agreement") which provides that
NBC shall have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television programming service. The agreement
has a 10-year term and NBC has committed to delivering an additional 10 million
full time equivalent ("FTE") subscribers over the first 42 months of the term.
In compensation for such services, the Company will pay NBC an annual fee of
$1.5 million (increasing no more than 5% annually) and issue NBC the
Distribution Warrant. The exercise price of the Distribution Warrant is
approximately $8.29 per share and vests 200,000 shares immediately, with the
remainder of the Distribution Warrant vesting 125,000 shares annually over the
10-year term of the Distribution Agreement. The Distribution Warrant is
exercisable for five years after vesting. Assuming certain performance criteria
above the 10 million FTE homes are met, NBC will be entitled to additional
warrants to acquire Common Stock. The Company is seeking shareholder
ratification of the issuance of these additional warrants, although the issuance
and exercise of such warrants are not conditioned upon obtaining such approval.
The Company has a right to terminate the Distribution Agreement after the
twenty-fourth, thirty-sixth and forty-second month anniversary if NBC is unable
to meet the performance targets. If terminated by the Company in such
circumstance, the unvested portion of the Distribution Warrant will expire. In
addition, the Company will be entitled to a $2.5 million payment from NBC if the
Company terminates the Distribution Agreement as a result of NBC's failure to
meet the 24 month performance target.
11
12
If prior to ValueVision's shareholder vote, the Company receives a
"material transaction proposal" or "takeover proposal," NBC has the right to (i)
terminate the Distribution Agreement or (ii) increase the annual fee payable to
NBC to the greater of $5.0 million or 10% of the Company's annual net profits
(as defined in the Distribution Agreement). In addition, NBC may terminate the
Distribution Agreement if the Company's shareholders do not approve the
Investment Warrant or if the Company enters into certain "significant
affiliation" agreements or a transaction resulting in a "change of control."
LETTER AGREEMENT
The Company, GE Capital and NBC have also entered into a non-binding letter
of intent dated March 8, 1999 providing for certain cooperative business
activities which the parties contemplate pursuing, including but not limited to,
development of a private label credit card, development of electronic commerce
and other internet strategies, development of programming concepts for the
Company and cross channel promotion.
Montgomery Ward Alliance
During fiscal 1996, the Company entered into a Securities Purchase
Agreement, an Operating Agreement, a Credit Card License and Receivable Sales
Agreement, and a Servicemark License Agreement (collectively, the "MW
Agreements") with Montgomery Ward. Under the MW Agreements, Montgomery Ward
purchased 1,280,000 unregistered shares of common stock of the Company at $6.25
per share, which represented approximately 4.4% of the then issued and
outstanding shares of common stock of the Company, and received warrants to
purchase an additional 25 million shares of common stock of the Company. These
warrants had exercise prices ranging from $6.50 to $17.00 per share, with an
average exercise price of $9.16 per share (the "Warrants"). The value assigned
to the Warrants of $17,500,000 was determined pursuant to an independent
appraisal.
On June 7, 1996, the Company signed a non-bindingnon-
binding Memorandum of Understanding with Montgomery Ward pursuant to which the
companies agreed to the expansion and restructuring of their ongoing operating
9
10
and license agreements as well as the Company's acquisition of substantially all
of the assets and assumption of certain obligations of MWD. Effective July 27,
1996, the companies reached definitive agreements and closed the transaction in
the third quarter ended October 31, 1996. Pursuant to the provisions of the
agreements, the Company's sales promotion rights were expanded beyond television
home shopping to include the full use of the servicemark of Montgomery Ward for
direct-mail catalogs and ancillary promotions. In addition, the strategic
alliance between the companies had been restructured and amended such that (i)
18 million warrants not immediately exercisable granted to Montgomery Ward in
August 1995 and with exercise prices ranging from $7.00 - $17.00 were terminated
in exchange for the issuance by the Company of 1,484,467 new immediately
exercisable warrants exercisable at $0.01 per share, and valued at $5.625 per
warrant, which approximated the book value of the 18,000,000 unvested warrants
returned as of the date of the transaction, (ii) the Company issued 1,484,993
new immediately exercisable warrants, valued at $5.625 per warrant and
exercisable at $0.01 per share, to Montgomery Ward as full consideration for the
acquisition of approximately $4.0 million in net assets, representing
substantially all of the assets and the assumption of certain liabilities of
MWD, (iii) Montgomery Ward committed to provide $20 million in supplemental
advertising support over a five-year period, (iv) the Montgomery Ward operating
agreements and licenses were amended and expanded, as defined in the agreements,
and extended to July 31, 2008 and (v) the Company issued to Montgomery Ward new
immediately exercisable warrants to purchase 2.2 million shares of the Company's
common stock at an exercise price of $.01 per share in exchange for 7 million
immediately exercisable warrants granted to Montgomery Ward in August 1995 which
were exercisable at prices ranging from $6.50 - $6.75 per share. The fair value
of the warrants approximated the book value of the warrants exchanged. The
Operating Agreement has a twelve-year term and may be terminated under certain
circumstances as defined in the agreement.
Effective November 1, 1997, the
Company restructured its operating agreement with Montgomery Ward, which
governsgoverned the use of the Montgomery Ward name. In exchange for Montgomery Ward's return to ValueVision of warrants
covering the purchase of 3,842,143 shares of ValueVision common stock
(representing all remaining warrants held by Montgomery Ward), theThe Company ceded exclusive use of
the Montgomery Ward name for catalog, mail order, catalog "syndications" and
television shopping programming back to Montgomery Ward. Under the agreement,
the Company has ceased the use of the Montgomery Ward name in all outgoing catalog,
syndication, and mail order communication through March 31, 1998, with a wind
down of incoming orders and customer service permitted after March 31, 1998. The
agreement also includesincluded the reduction of Montgomery Ward's minimum commitment to
support ValueVision's cable television spot advertising purchases. Under the new
terms, Montgomery Ward's commitment iswas reduced from $4 million to $2 million
annually, and the time period was decreased from five years to three years effective
November 1, 1997. In addition, the agreement limitslimited the Company to offer the
Montgomery Ward credit card only in conjunction with its various television
offers and subject to the normal approvals by the credit card grantor. The
Company has accounted for the
restructuring of the Operating Agreement has a twelve-year term and may be terminated under certain
circumstances as an exchange or disposition of assets
at fair value,defined in accordance with the provisions of Accounting Principles Board
Opinion No. 29. The return of the warrants, which were valued at approximately
$19,211,000, represents consideration given by Montgomery Ward for the assets
relinquished by the Company, which effectively include the remaining goodwill
attributable to the acquisition of MWD, as well as a portion of the Montgomery
Ward Operating Agreement and License asset. The warrants were valued at $5.00
per warrant, which represented the fair market value of the Company's stock on
October 22, 1997, the date on which ValueVision and Montgomery Ward reached
agreement on the terms and consideration of the restructuring agreement and the
date the transaction was effectively announced. The warrant return has been
reflected as a reduction in shareholders' equity for the fair value of the
warrants, and the intangible asset amounts reflecting the assets sold back to
Montgomery Ward have been reduced accordingly to their remaining estimated fair
values as determined through analysis of future cash flows and benefits to be
received. The difference between the consideration given by the Company (the
assets sold back to Montgomery Ward) and the consideration received (the
warrants returned to the Company) was not material. The agreement also called
for the repurchase by the Company of 1,280,000 shares of its common stock owned
by Montgomery Ward, at a price of $3.80 per share. This repurchase was completed
on January 15, 1998. Management does not believe that this restructuring will
have any other material impact on the Company's financial condition, results of
operations or liquidity.
10
11agreement.
Net Radio Network
In March 1997, the Company acquired a 15% interest in Net Radio Corporation
("Net Radio") for an aggregate purchase price of $3 million, consisting of $1
million in cash and a commitment to provide $2 million in future advertising. In
addition, under certain circumstances, the Company had the right to acquire an
additional 5% of Net Radio for $500,000. In March 1999, the Company agreed to
fix this option to acquire 550,000 shares of Net Radio subject to certain
adjustments. As of January 31, 1999, the Company has provided Net Radio with
$338,000 of advertising. Net Radio is a music and entertainment site on the
Internet. Navarre Corporation, a leading national distributor of music, computer
software and interactive CD ROM products, owns the remaining 85% of Net Radio.
The Company's
24-hour per day shopping program is currently being carried by Net Radio. This investment allowsgives ValueVision another potential avenue to establish a foothold in providingprovide electronic
commerce on the Internet. Additionally, ValueVision has been granted exclusive
rights for most merchandise categories (other than music or similar items
currently sold by NetRadio or Navarre Corporation) to be made available in Net
Radio's program marketplace.marketplace, provided that the Company can provide such
merchandise at prices comparable to other vendors.
12
13
D. MARKETING AND MERCHANDISING
Electronic Media
The Company's television revenues are generated from sales of merchandise
and services offered through its television home shopping programming.
ValueVision's programming features recognizable on-air television home shopping
network personalities, many of whom have built a following on other home
shopping programs. The sales environment is friendly and informal. As a part of
its programming, the Company provides live, on-air telephone interaction between
the on-air host and customers. Such customer testimonials give credibility to
the products and provide entertainment value for the viewers.
The Company's television home shopping networkbusiness utilizes live television 24
hours per day, seven days a week, to create an interactive and entertaining
atmosphere to effectively describe and demonstrate the Company's merchandise.
Selected customers participate through live conversations with on-air hosts and
occasional celebrity guests. The Company believes its customers make purchases
based primarily on convenience and quality of merchandise and availability of brand
name value.merchandise.
The Company employs a variety of techniques for marketing the products sold
on the air including, among others, segmented merchandising programsproduces targeted, themed, and
merchandise-themed, in-studio and live remote "specials" to supplement the general merchandise offering format.programs, in
studio, including the Sports Page, The Coin Collector, Italian Romance, Home
Accents, Electronics Today, The New York Collection, Brilliante, Ultimate Ice,
It's About Time, Gems at Large and others. The Company supplements it's studio
programming with occasional live on-location programs, which in the last year
included shows from the New York garment district, the gold producing region of
Arezzo, Italy, the Comdex Computer Show, and The Carol Baldwin Charity Golf
Tournament. The Company believes that its customers are primarily women between
the ages of 35 and 55, with household income of approximately $35,000 to
$45,000. The typical viewer is from a household with a professional or
managerial primary wage earner. ValueVision schedules its special segments at
different times of the day and week to appeal to specific viewer and customer
profiles. The Company also produces special theme programs for events such as
Father's Day, Mother's Day and Valentine's Day. The Company features frequent
and occasionally unannounced, special bargain, discount and inventory-clearance
sales in order to, among other reasons, encourage customer loyalty or add new
customers.
The Company produces segmented merchandising programs and
merchandise-themed, in-studio and occasional remote "specials" to supplement the
general merchandise offering format, including The Doll Collector, The Sports
Page, The Coin Collector, Italian Romance, Home Accents, Silver Styles,
Everything Electric, New York Collection, The Personal Jeweler, Brillante,
Ultimate Ice and Estate Collectibles.
In addition to the Company's daily produced television home shopping
programming, the Company may from time to time test other types of strategies,
including localized home shopping programming in conjunction with retailers and
other catalogers. The Company may seek to enter into joint ventures,
acquisitions or similar arrangements with other consumer merchandising
companies, e-commerce and other television home shopping companies, television
stations, networks or programmers to complement or expand the Company's
television home shopping business. Most of the Company's cable lease and
affiliation agreements provide for cross channel 30-second promotional spots.
The Company purchases advertising time on other cable channels to advertise
specialty shows and other special promotions. The Company prominently features
its on-air hosts in advertising and promotion of its programming.
The Company's television home shopping merchandise is generally offered at
or below retail prices. Jewelry accounted for approximately 60%74% of the Company's
television home shopping net sales in fiscal 19981999 compared to 60% in fiscal 1998
and 62% in fiscal 1997 and 73% in fiscal 1996.1997. Giftware, collectibles and related merchandise, apparel,
electronics, housewares,
11
12 seasonal items and other merchandise comprise the
remaining sales. The Company continually introduces new items with additional
merchandise selection chosen from available inventories of previously featured
products. Inventory sources include manufacturers, wholesalers, distributors inventory liquidators and
importers.
ValueVision has also developed several lines of private label merchandise
that are targeted to its viewer/customer preferences, including Brillante(R)Brillante(TM),
C-Band,C-Band(TM), Day Wear,Wear(TM), Illusions(TM), New York Collections(TM)Collection(TM) and Vincenza
Collections(TM)Gems at
Large(TM). The Company intends to continue to promote private label merchandise,
which generally has higher than average margins. The Company also may negotiate
with celebrities, including television, motion picture and sports stars, for the
right to develop various licensed products and merchandising programs which may
include occasional on-air appearances by the celebrity.
In 1991, the Company introduced its Video Shopping Cart(SM) service. The
Video Shopping Cart allows customers to order as many items as often as they
wish during a 24-hour period between midnight to midnight
13
14
each day, and pay a single shipping and handling charge for the entire order
(currently $11.95;
$16.95$12.95; $17.95 to households in Alaska and Hawaii). Substantially all
of the Company's merchandise qualifies for inclusion in a customer's Video
Shopping Cart, except for certain large items, items over $300, items placed on
the "ValuePay" installment payment program or items that are direct-shipped from
the vendor.
The Company transmits daily programming instantaneously to cable operators,
full and low power television stations, and satellite dish owners by means of a
communications satellite. In March 1994, the Company entered into a 12-year
satellite lease on a new Hughes Communication cable programming satellite
offering transponders to the cable programming industry, including the Company.
Under certain circumstances, the Company's transponder could be preemptedpreempted. The
Company has an agreement for immediate back-up satellite service if satellite
transmission is interrupted. However, there can be no assurance that the Company
will be able to continue transmission of its programming in the event of
satellite transmission failure and the Company currently has not contracted for backup services.may incur substantial additional
costs to enter into new back-up service arrangements.
Print Media
VVDM, through HomeVisions, is a direct-mail marketer of a broad range of
quality general merchandise which is sold to consumers through direct-mail
catalogs. Products offered include domestics, housewares, home accessories and
electronics. HomeVisions' principal direct marketing vehicle is its home decor
and furnishings catalog, a full-color booklet of approximately 50 to 100 pages
that is mailed semi-monthly to its customer list and to individuals whose names
are generated from mailing lists rented by HomeVisions. HomeVisions also
produces and mails special issues during the holiday season and produces
inventory clearance catalogs. Historically, a significant portion of
HomeVisions' catalogs have been targeted to Montgomery Ward credit card account
holders.
CVI markets a variety of merchandise through five consumer specialty
catalogs under distinct titles. The catalogs are mailed seasonally and are
targeted to middlemiddle- and upper-income women aged 35-55 years old. Catalog titles
offered by CVI include: (i) Nature's Jewelry(R) -- offering moderately-priced,
nature-themed jewelry, apparel and gifts; (ii) The Pyramid Collection(TM) --
offering a wide array of self-improvement, spiritually oriented and New Age
books, tapes and CD's as well as jewelry and gifts with related themes; (iii)
Serengeti(R) -- offering jewelry, apparel and gifts based on various wildlife
themes; (iv) NorthStyle(R) -- "America's Nature Gift Catalog", sells
"northwoods" or "log cabin" styled home decor and apparel, as well as books,
videos and audio products on a similar theme; and (v) The Mind's Eye(R)Catalog Ventures'
Favorites(R) -- a nostalgia catalog offering audio, video, games and home products from customers'
childhood, some with a collectible component.unique selection of popular merchandise
items.
BII is a leading direct marketer of women's foundation undergarments and
other women's apparel. Products include the Posture X Bra(TM), cotton and denim
jumpers and other related products that provide comfort, support and posture
enhancement. BII markets its products through newspaper inserts, magazines and
other print media as well as through various syndication offers in the credit
card billing statements of individual consumers.
Favorable Purchasing Terms
The Company obtains products for its electronic and print media, direct
marketing businesses from domestic and foreign manufacturers and is often able
to make purchases on favorable terms based on the
12
13 volume of transactions. Many
of the Company's purchasing arrangements with its television home shopping
vendors include inventory terms which allow for return privileges or stock
balancing. The Company is not dependent upon any one supplier for a significant
portion of its inventory.
E. ORDER ENTRY, FULFILLMENT AND CUSTOMER SERVICE
Products offered through all of the Company's selling mediums, except BII,
are available for purchase via toll-free "800" telephone numbers. The Company
maintains on-site telephone response centers in its Eden Prairie, Minnesota and
Chelmsford, Massachusetts facilities, staffed by call center representatives,
each equipped with a terminal on-line with the Company's computerized order
response and fulfillment systems. These order response and fulfillment systems
have approximately 300 dedicated order entry agent stations, approximately 50 to
90 of which are currently staffed at various times and an additional 100 "flex"
order entry stations to handle overflow capacity during peak seasons. The
Company's primary telephone system has a 1,400 line capacity, and its primary
computer system has a 1,500-agent capacity, both of which can be readily
upgraded for additional volume. The Company's telephone systems display
up-to-the-second data on the volume of incoming calls, the number of call center
representatives on duty, the number of calls being handled and the number of
incoming calls, if any, waiting for available call center representatives. The
fulfillment systems automatically report and update available merchandise
quantities as customers place orders and stock
14
15
is depleted. The Company's computerized systems handle customer order entry,
order fulfillment, customer service, merchandise purchasing, on-air scheduling,
warehousing, customer record keeping and inventory control. In fiscal 1996, the
Company invested in backupback-up power supply systems to ensure that interruptions to
the Company's operations due to electrical power outages are minimized.
During fiscal 1997, the Company purchased a 262,000 square foot
distribution facility in Bowling Green, Kentucky which iswas being used in
connection with the fulfillment operations of HomeVisions through fiscal 1999
and is currently being used for the non-jewelry segment of the Company's
television home-shoppinghome shopping business. In addition, during fiscal 1997, the Company
installed a 192-line Automated Voice Response Unit ("VRU") to capture additional
ValueVision customer orders quickly without the assistance of a live call center
representative. Customers simply place orders using the touch-tone pad of their
telephone. Approximately 25-30%30-35% of dailythe Company's sales orders are taken using
the VRU system.
The majority of customer purchases are paid by credit card. Commencing in
March 1995, customers were able to use either a Montgomery Ward or a
ValueVision/Montgomery Ward credit card to charge ValueVision purchases. In
accordance with general industry practice,November, 1998, the Company accepts "reservation"
orders frominitiated a "Direct Check" program for customers who
wish to pay by personal check. Under the program, customer payment information
is taken online and processed electronically, thereby allowing customers the
flexibility of paying by check without delaying the shipment of their order. The
Company does not offer C.O.D. terms to customers. During fiscal 1995, the
Company introduced an installment payment program called ValuePay which entitles
television home shopping customers to purchase merchandise and generally pay for the
merchandise in two to fourfive equal successive monthly installments. The Company
intends to continue to sell merchandise using the ValuePay program.
Merchandise is shipped to customers via United Parcel Service and the
United States Postal Service, which generally results in delivery to the
customer within seven to ten days after an order is received. United Parcel
Service and the United States Postal Service, through a third-party carrier,
pick up merchandise directly at the Company's distribution centers. Orders are
generally shipped to customers within 48 hours after the order is placed. The
Company also offers Express Mail delivery via the United States Postal Service
upon request.
The Company's Customer Service departments handle customer inquiries, most
of which consist of inquiries with respect to the status of pending orders or
returns of merchandise. The customer service representatives are on-line with
the Company's computerized order response and fulfillment systems. Being on-line
permits access to a customer's purchase history while on the phone with the
customer, thus enabling most inquiries and requests to be promptly resolved. The
Company considers its order entry, fulfillment and customer service functions as
particularly important functions positioned with open capacity to enable it to
accommodate future growth. The Company designs all aspects of its infrastructure
to meet the needs of the customer and to accommodate future expansion.
13
14
The Company's television home shopping return policy allows a standard
30-day refund period for all customer purchases. The Company's return rates on
its television sales have been approximately 27%,26% to 28% over the past three
fiscal years, which is slightly higher than the reported historical industry
average of approximately 24% to 26%. Management attributes the higher return
rate in part to the Video Shopping Cart, as customers are more
likely to order additional items on a trial basis when using the Video Shopping
Cart; andfact that it generally maintains higher than average unit
price points of approximately $83$93 in fiscal 19981999 ($8583 in fiscal 1997)1998).
Management believes that the higher return rate is acceptable, given the higher
net sales generated and the Company's ability to quickly process returned
merchandise at relatively low cost. Generally, the Company maintains a very
liberal return policy for its direct-mail operations. The return rate for the
Company's direct-mail operations for fiscal 1999 and 1998 was approximately 11%
and the Company believes that this return rate is comparable to industry
averages.
F. COMPETITION
The direct marketing and retail businesses are highly competitive. In both
its
television home shopping, Internet (e-commerce) and direct-mail operations, the
Company competes for consumer expenditures with other forms of retail
businesses, including department, discount, warehouse and specialty stores,
other mail
15
16
order, catalog and television home shopping companies, retailers who sell and
market their products through the Internet and other direct sellers.
The television home shopping industry is highly competitive and is
dominated by two companies, QVC Network, Inc. ("QVC") and HSN, Inc. (formerly
known as Home Shopping Network, Inc. ("HSN")). The Company believes that the
home shopping industry is attractive to consumers, cable companies,
manufacturers and retailers. The industry offers consumers convenience, value
and entertainment, and offers manufacturers and retailers an opportunity to test
market new products, increase brand awareness and access additional channels of
distribution. The Company believes the industry is well positioned to compete
with other forms of cable programming for cable air time, as home shopping
networks compensate cable television operators, whereas other forms of cable
programming receive compensation from cable operators for carriage. The Company
competes for cable distribution with all other programmers, including other
television home shopping networks such as Shop at Home, Inc. ("SATH"), QVC and
HSN. The Company currently competes for viewership and sales with SATH, QVC and
HSN, or both companies, in virtually all of its markets. The Company is at a competitive
disadvantage in attracting viewers due to the fact that the Company's
programming is not carried full time in approximately one-half of its markets,
and that the Company may have less desirable cable channels in many markets.
The Company expects increasing competition for viewers/customers and for
experienced home shopping personnel from major cable systems, television
networks, e-commerce and other retailers that may seek to enter television home
shopping. The continued evolution and consolidation of retailers on the
Internet, together with strategic alliances being formed by other television
home shopping networks and Internet companies will also result in increased
competition. The Company will also compete to lease cable television time toand
enter into cable affiliation agreements, and to acquire full power broadcast television stations.agreements. Entry and ultimate success in the
television home shopping industry is dependent upon several key factors, the
most significant of which is obtaining carriage on cable systems reaching an
adequate number of subscribers. The Company believes that the number of new
entrants into the television home shopping industry will continue to increase.
The Company believes that it is strategically positioned to compete because of
its established relationships with cable operators and its current intentionsnew strategic
relationship with NBC and GE Capital pursuant to acquire additional television stations inwhich NBC will provide the
event that
stations in strategic markets can be acquired at favorable prices, however, noCompany with cable affiliation and distribution services. No assurance can be
given however, that the Company will be able to acquire cable carriage
or additional television stations at prices
favorable to the Company.
New technological and regulatory developments may also increase competition
and the Company's costs. In April 1997, theThe FCC has adopted rules for digital television
("DTV") that will allow full power television stations to broadcast multiple
channels of digital data simultaneously on the bandwidth presently used by one
normal analog channel. FCC rules will allow broadcasters to use this additional
capacity to provide new services,conventional programming, including home shopping
video
delivery andprogramming, as well as ancillary or supplementary services, including
interactive data transfer. The FCC has determined to charge a fee for the
provision of ancillary or supplementary services, but not for home shopping
programming. See "Federal Regulation". Every full power television station in
operation has been assigned an additional channel on which to broadcast DTV
until analog transmissions are terminated. Station affiliates of the four major
networks in the top ten markets must be on the air with a DTV signal by May 1,
1999; network affiliates in the top thirty markets must be on the air by
November 1, 1999. In addition, fouras of December 1998, three direct broadcast
satellite ("DBS") systems currently transmitand one fixed satellite service ("FSS") system
transmitted programming to subscribers, and at least three other companies havehad
been issued licenses to provide DBS service. One foreign company iswas also
authorized to operate earth stations in the United States that receive signals
from a 14
15
Mexican satellite. As of June 1997,1998, there were nearly 5.1more than 7.2 million DBS
and FSS subscribers. The DBS industry is developing antennas to improve over-the-air
broadcast transmission reception for DBS subscribers, and at least one DBS
systemOne company has approvedannounced plans to transmit local broadcast signals.provide local-into-local
service to DBS operators for the entire United States, and DBS equipment prices
and other "up-front costs," such as installation, have been declining
significantly. Furthermore, satellite master antenna television systems
("SMATV") have begun to deliver video programming to multiple dwelling units.
SMATV systems receive and process satellite signals at on-site facilities and
then distribute the programming to individual units. It is estimated that there were 1,126,000Estimates of the number of
SMATV residential subscribers as of June 30, 1997. Finally,1998 range from approximately 800,000
to 1.6 million subscribers. Additionally, a number of telephone companies have
acquired cable franchises, and obtainedone local exchange carrier is using very high
speed digital subscriber line
16
17
technology to deliver video programming, high-speed Internet access, and
telephone service over existing copper telephone lines in Phoenix, Arizona. The
FCC certificationhas also certified 11 operators to operateoffer open video systems ("OVS") in order
to provide video programming to customers. These
developments could have the effect of increasing home shopping competitors to
include firms with substantial financial and technical ability.
Developing alternative technologies couldCurrently, only two OVS systems are
operating. Finally, in the future provide outlets for
increased competition to the Company's programming. In 1996, the FCC completed auctions for authorizations to
provide multichannel multipoint distribution services ("MMDS"), also known as
wireless cable. Approximately 1.1 million
subscribers now receive traditional video programming through MMDS. Local
multipoint distribution servicecable, using Multipoint Distribution Service ("LMDS"MDS"), another technology that allows
wireless transmission and reception of video or audio programming or other data,
may also compete with cable and traditional broadcast television in the future.
In March 1998, the FCC completed the auction of 986 LMDS licenses nationwide. An
additional potential competing technology is instructional television fixed
serviceleased excess
capacity on Instructional Television Fixed Service ("ITFS"). The FCC now allows channels. MMDS
subscription fell to 1,050,000 at the educational entitiesend of 1997. However, it is anticipated
that hold ITFS
licensesthe advent of digital MMDS may improve the industry's financial status. All
of these developments could have the effect of increasing competition to lease their "excess" capacity for commercial purposes. The
multichannel capacity of ITFS could be combined with either an existing single
channel MDS or a new MMDS to increase the
number of available channels offered
by an individual operator.Company's programming.
In its direct-mail operations, the Company competes with other major
catalog sales organizations, as well as retail specialty stores, Internet and
conventional retailers with substantial catalog operations and other discount
retailers and companies that market via computer technology. In addition, the
Company's direct-mail catalog operations compete with retailers involved with
the evolving convergence and development of electronic commerce as well as other
retailers who sell and market their products through the Internet. Management
believes that the Company is able to compete effectively by offering its
customers a broad range of quality merchandise at competitive or discount prices
with a high degree of convenience and reliability.
Many of the Company's competitors are larger and more diversified than the
Company, or have greater financial, marketing, merchandising and distribution
resources. Therefore, the Company cannot predict the degree of success with
which it will meet competition in the future.
G. NATIONAL MEDIA CORPORATION
1994 Merger Proposal
In January 1994, the Company proposed an acquisition of National Media
Corporation ("National Media"). National Media is a publicly-held direct
marketer of consumer products through the use of direct response transactional
television programming, known as infomercials, and currently makes its
programming available to more than 370 million television households in more
than 70 countries worldwide In February 1994, the Company announced a tender
offer for a majority of the outstanding shares of National Media. In March 1994,
the Company and National Media entered into a Merger Agreement and the Company
modified the terms of its tender offer. In April 1994, the Company terminated
its tender offer and the Merger Agreement with National Media asserting
inaccurate representations and breach of warranties by National Media, and based
upon adverse regulatory developments concerning National Media. Litigation
challenging the Company's termination of the tender offer and Merger Agreement
was subsequently filed by National Media and its former chief executive officer
and president. In addition, shareholders of National Media filed four purported
class action lawsuits against the Company and certain officers of the Company.
Each of these suits alleged deception and manipulative practices by the Company
in connection with the tender offer and Merger Agreement.
In fiscal 1996, the Company, National Media and National Media's former
chief executive officer and president agreed to dismiss all claims, to enter
into joint operating agreements involving telemarketing and post-production
capabilities, and to enter into an international joint venture agreement. Under
the agreement, the Company received ten-year warrants, which vest over three
years, to purchase 500,000 shares of National
15
16
Media's common stock at a price of $8.865 per share. In November 1996, the
Company and National Media amended their agreement by providing for the
additional payment by the Company to National Media of $1.2 million as
additional exercise price for the warrants. As of January 31, 1998, $800,000 has
been paid with a final installment of $400,000 to be paid on September 1, 1998.
In March 1997, the court gave final approval to a $1.0 million settlement,
which was paid by the Company from insurance proceeds, as full settlement in the
matter of the class action suits initiated by certain shareholders of National
Media.
1998 Merger Proposal
On January 5, 1998, the Company entered into aan Agreement and Plan of
Reorganization and Merger Agreement,(the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation. IfCorporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. On April 8, 1998, it was announced that the Mergers
wereCompany received
preliminary notification from holders of more then 5% of the Company's common
stock that they intended to be consummated,exercise their dissenter's rights with respect to
the proposed merger of the Company and National Media would have become
wholly-owned subsidiariesand the Company did not
intend to waive the Merger Agreement condition to closing requiring that holders
of Quantum Direct, with each outstanding sharenot more than 5% of the Company'sshares of the Company common stock being converted into 1.19 shares of common stock in
Quantum Directhave demanded
their dissenter's rights. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and each outstanding share of common stock ofconditions regarding a
transaction with National Media being converted into one sharewere unsuccessful and the Merger Agreement was
terminated. The Company had incurred approximately $2,350,000 of common stockacquisition
related costs and wrote off these amounts in Quantum Direct.the second quarter of fiscal 1999.
Concurrently with the execution of the proposed Merger Agreement, the
Company agreed to loan (the "Loan") to National Media, pursuant to a Demand
Promissory Note, up to an aggregate of $10.0 million (the "Demand Note"), $7.0
million of which was advanced upon signing of the Demand Note on January 5,
1998, andwith the remaining $3.0 million of which has subsequently been advanced.advanced in fiscal 1999. The
Loanloan proceeds have
beenwere used by National Media for various purposes, including the
funding of accounts receivable, inventory and media purchases. The Loan bearsloan included
interest at the prime rate plus 1.5% per annum and iswas due on the earlier of
January 1, 1999 or upon termination of the Merger Agreement in certain
circumstances. In the event
National Media is unable to repay the Loan when due, ValueVision may elect to
receive payment in shares of National Media's common stock at the then present
market value. In consideration for providing the Loan, National Media issued to
ValueVision warrants to acquire 250,000 shares of National Media's common stock
withat an exercise price of $2.74 per share equaland amended the exercise price of
previously issued warrants to $2.74. The warrants are exercisable
untilpurchase 500,000 shares of common stock from
$8.865 per share to $2.74 per share.
In December 1998, National Media repaid the earlier of (i) January 5, 2003$10 million Demand Note in
full, plus accrued interest, and (ii) the occurrence of oneCompany exercised the 750,000 National
Media warrants. During fiscal 1999, the Company sold 460,000 shares of the
following termination events: (x) the consummation of the Merger or (y) the
termination by National Media of the Merger Agreement, if such termination
results from a breach of a covenant by ValueVision or in the event ValueVision's
shareholders do not approve the Merger Agreement; provided, however, that if,
within 75 days after the termination event described in clause (y) above,
National Media has not repaid the Loan in full or if during such 75 days,
National Media defaults under its obligations pursuant to the Loan, no
termination event will be deemed to have occurred and the warrants shall remain
exercisable.
Consummation of the Mergers is subject to the satisfaction (or waiver) of a
number of conditions, including, but not limited to: (i) approval by holders of
a majority of the issued and outstanding shares of National Media's common stock and ValueVision's common stock; (ii) redemption ofrecognized a $2,972,000 gain on the sale. In
addition, included in fiscal 1999 earnings is a $1,350,000 unrealized holding
gain related to the remaining 290,000 National Media's Series C
Preferred Stock; (iii)Media shares held by the receipt of certain regulatory and other approvals,
including those fromCompany.
These shares are classified as "trading securities" in the Federal Trade Commission and the Federal Communication
Commission; and (iv) not more than 5% of the holders of the issued and
outstanding shares ofaccompanying January
31, 1999 consolidated balance sheet as it is the Company's common stock shall have made demands and
given the notices required under Minnesota lawintent to assert dissenters' appraisal
rights.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it does not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company's common stock have demanded their dissenter's rights. The Company
and National Media had special meetings of their shareholders scheduled on April
14, 1998 to vote on the Mergers. In light of the receipt of the dissenters'
notice, the companies mutually agreed to postpone their respective shareholder
meetings while the companies attempt to negotiate a restructuring of the Mergers
that is acceptable to each of the companies andsell these
securities in the best interest of their
shareholders. As of the date hereof, National Media and the Company are still
attempting to negotiate a
16near future.
17
17
restructuring of the Mergers and have not rescheduled their respective special
meetings. There can be no assurance that the companies will be able to
successfully negotiate such a restructuring, or if negotiated, that such Mergers
will be consummated.
On March 30, 1998, the Company and National Media announced the selection
of veteran marketing, direct response and retail executive, Gene McCaffery, 50,
as Chief Executive Officer of Quantum Direct. Mr. McCaffery brings to Quantum
Direct 25 years in retail and marketing experience, as well as substantial
executive experience. He most recently served as Chief Executive Officer and
managing partner of Marketing Advocates, a celebrity-driven product and service
development company based in Los Angeles, California. Mr. McCaffery was formerly
Senior executive Vice President of Montgomery Ward, in charge of its
merchandising, strategic planning, advertising and marketing operations before
leaving in 1996 to start Marketing Advocates. While at Montgomery Ward, Mr.
McCaffery also oversaw The Signature Group, one of the nation's largest direct
marketing companies, and also served as Vice-Chairman of the Board of
ValueVision from August 1995 to March 1996. Mr. McCaffery served as an infantry
officer in the Vietnam War and was appointed as Civilian Aide to the Secretary
of the Army by President George Bush in 1991, a position that he still holds.
Mr. McCaffery and Quantum Direct have entered into a three year employment
agreement pursuant to which Mr. McCaffery will become Chief Executive Officer of
Quantum Direct, and receive a base salary of $500,000 during the first year,
$525,000 during the second year, and $550,000 during the third year. The
agreement also provides for bonus salary of up to 100% of the base salary, which
may be earned only upon Quantum Direct meeting certain operating income, revenue
and stock performance criteria. In addition, pursuant to the agreement, Mr.
McCaffery is being issued stock options to acquire 800,000 shares of Quantum
Direct's common stock, $.01 par value, with an exercise price equal to $3.375
per share, the last trading price of ValueVision's common stock on March 30,
1998. The exercise price of such options will be adjusted to the last trading
price of Quantum Direct's common stock on the first day it trades, to the extent
such price is lower than $3.375. Of such options, 200,000 vest monthly on a pro
rata basis over the term of the employment agreement, and 600,000 vest on the
earlier of the fifth anniversary of Mr. McCaffery's start date (provided he is
still an employee of Quantum Direct) or in equal 20% (120,000 share) blocks
based on the average closing price of Quantum's common stock for 20 consecutive
trading days being at $5.00, $6.00, $7.00, $8,00 and $9.00, respectively. Such
options are being issued as a stand-alone plan of Quantum Direct, outside of
Quantum Direct's 1998 Equity Participation Plan. The employment agreement
generally provides for a one year non-compete. In addition, in the event of a
change of control (as defined) of Quantum Direct, Mr. McCaffery's employment can
be terminated by Quantum Direct or Mr. McCaffery in certain circumstances. In
the event of such a termination, Mr. McCaffery would be entitled to receive the
base salary and bonus salary remaining to be paid through the end of the term of
the employment agreement, together with accrued benefits. In the event the
Mergers are not consummated, ValueVision and Mr. McCaffery have agreed to enter
into an employment agreement on substantially the same terms pursuant to which
Mr. McCaffery would become the Chief Executive Officer of ValueVision.18
H. FEDERAL REGULATION
The cable television industry, the acquisition, ownership and operation of
full and low power television stations and the broadcasting industry in general
are subject to extensive regulation by the FCC. The following does not purport
to be a complete summary of all of the provisions of the Communications Act of
1934, as amended (the "Communications Act"), the Cable Television Consumer
Protection Act of 1992 (the "Cable Act"), the Telecommunications Act of 1996
(the "Telecommunications Act") or the FCC rules or policies that may affect the
operations of the Company. Reference is made to the Communications Act, the
Cable Act, the Telecommunications Act and regulations and public notices
promulgated by the FCC for further information. The laws and regulations
affecting the industries are subject to change, including through pending
proposals. There can be no assurance that laws, rules or policies that may have
an adverse effect on the Company will not be enacted or promulgated at some
future date.
17
18
Cable Television
The cable industry is regulated by the FCC under the Cable Act and FCC
regulations promulgated thereunder.
"LeasedLeased Access." Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. Little
use has been made of leased access because of the prohibitively high lease rates
charged by cable systems. The Cable Act directs the FCC to establish procedures
to regulate the rates, terms and conditions of cable time leases so as to
encourage leased access.
The maximum leased access rates that cable systems may charge nonaffiliated
programmers such as the Company are unsettled because the rules governing those
rates have recently been amended and are subject to the filing of petitions for
reconsideration and judicial review. In May 1993, the FCC first issued rules
limiting leased access rates to the "highest implicit fee" of any channel on a
cable system, which was calculated by subtracting the license fee the cable
operator paid each programmer on the system to carry its channel from the
system's average subscriber charge for a channel and using the highest of those
differences. These rules often allowed cable operators to increase lease rates
and affected the Company's ability to gain carriage on some systems.
The FCC released its most recent revisions to these rules in February 1997.
These recent revisions adopted an "implicit fee" formula similar to the one
already in place. However, instead of capping lease rates at the "highest
implicit fee," the new rules capped rates at the "average implicit fee" for a channel on a
cable system, which is the difference between the average subscriber charge for
a channel and the average license fee the cable operator pays to carry
programming. The rules have changed the base of cable channels on
which the averageIt is calculated in a way that makes it unclear whether or to what extent the revised rules will
affect the maximum lease rates that the Company must pay for carriage in any
particular case. The Company's limited experience has been that the rates remain
largely unaffordable, although the rules do permit cable operators to charge
less than the maximum rates. The FCC also established rules governing the
process of negotiating for carriage, making other changes to the terms and
conditions of leased access carriage and making it easier for programmers like
the Company to lease channels for less than a full 24-hour day.
The Company has petitioned the U.S. Court of Appeals for the District of
Columbia Circuit for review of the rate formula portions of the recent revisions
to the rules. Both the Company's petition for review and a similar petition are
currently pending. There can be no guarantee that the Company will succeed on
its petition for review or, if it does succeed, that the rules that the FCC
would adopt in place of the current formula would not have a material adverse
effect on the Company.
"MustMust Carry." In general, the FCC's current "must carry" rules under the
Cable Act entitle full power television stations to mandatory cable carriage of
their signals, at no charge, to all cable homes located within each station's
ADI provided that the signal is of adequate strength, and the cable system has
"must carry" designated channels available. In March 1997, the Supreme Court
upheld in their entirety the "must carry" provisions applicable to full power
television stations. The scope of "must carry" rights for future broadcast
transmissions of digital television stations ("DTV") stations is as yet
uncertain. TheIn July 1998, the FCC is expected to beginbegan a proceeding to determine such rights. No
prediction can be made as to the outcome of this proceeding, which is not
anticipated until the end of 1999. The FCC has also been asked to reevaluate its
July 1993 extension of "must carry" rights to predominantly home shopping
television stations. It has yet to reverseact on that decision, butrequest, and there can be no
assurance that home shopping television stations will continue to have "must
carry" rights. In addition, under the Cable Act, cable systems may petition the
FCC to determine that a station is ineligible for "must carry" rights because of
such station's lack of service to the community, its previous noncarriage, or
other factors. An important factor considered by the FCC in its evaluation of
such petitions is whether a given station places Grade B coverage over the
community in question. The unavailability of "must carry" rights to the
Company's existing or future stations would likely substantially reduce the
number of cable homes that could be reached by any full power television station
that the Company may acquire.
The Company's ability to increase the cable distribution of its programming
will be adversely affected in the event of unfavorable judicial, regulatoryacquire or administrative determinations of the validity and application of the "must
carry" and "leased access" provisions of the Cable Act and the FCC rules
promulgated thereunder. The Company believes, however, that even absent
favorable determinations regarding "must carry" and
18
19
"leased access,"on which it will be able to achieve growth through other strategies such
as affiliation agreements, block leasing and broadcast television programming.
However, no assurance can be given that the Company will achieve sufficient
growth through such other strategies, or that cable systems will continue to
carry television stations that broadcast the Company'smight provide programming.
Closed Captioning. FCC rules require television stations, cable systems and
other video programming providers to phase in closed captioning for new
programming over an eight-year period, in order to make such programming
accessible to the hearing impaired. Home shopping programming is not exempt from
this requirement. Several parties have filed petitions for reconsideration of
the Commission's order adopting these rules. The rules remain in effect while
these petitions are pending, and no prediction can be made as to the outcome of
the petitions. These requirements, which could substantially increase the Company's television
programming expenses.
18
19
Full Power Television Stations
General. The Company's acquisition and operation of full power television
stations are subject to FCC regulation under the Communications Act. The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC. This statute empowers the FCC, among
other things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and impose
penalties for violation of such regulations. Over-the-air coverage of full power
television stations assigned by the FCC to the UHF spectrum, such as the
stations that the Company has acquired, is significantly less extensive than
that of Very High Frequency ("VHF") stations.
FCC Approval of License Transfers. The Company's acquisition and sale of
full power television stations will be subject, in each case, to the prior
approval of the FCC. The Company has previously been found qualified by the FCC
to hold full power television and LPTV licenses, and the Company believes that
it should be found qualifiedcontinue to purchase additional full power television
stations.hold such licenses. FCC approval, however, is also subject
to other conditions, including the filing of petitions to deny or other
opposition by interested parties and, accordingly, there can be no assurance of
FCC approval.
License Grant and Renewal. The Communications Act provides that a broadcast
license may be granted to any qualified applicant if the public interest,
convenience and necessity will be served thereby, subject to certain
limitations. Under these recent changes, applicationsApplications for renewal of a broadcast license must be granted if
during the preceding term the station has served the public interest,
convenience and necessity; committed no serious violations of the Act or the
FCC's regulations; and committed no other violations that would constitute a
pattern of abuse. If the licensee cannot satisfy this test, the FCC may deny the
renewal application (if there are no mitigating circumstances) or grant it
subject to terms and conditions, including renewal for a shorter term. Competing
applications for the license at issue are to be accepted only if the FCC denies
the renewal application.
The new FCC rules implementing the renewal provisions of the
Telecommunications Act as yet provide no clear standards for interpretation. A
subsidiary of the Company holds a license for one full power television station,
KVVV (TV), Baytown, Texas, whose license expires August 1, 1998 and which has
pending an application for renewal of license.2006. Television
licenses are now issued for a term of eight years.
The Company and its subsidiaries have pending applications for construction
permits for nineseven full power television stations in the following locations:
Douglas, Arizona;
Rapid City, South Dakota; Provo, Utah; Destin, Florida; Des Moines, Iowa;
Virginia Beach, Virginia; Waterloo, Iowa; Spokane, Washington; and Tallahassee, Florida. In each of
these cases, there are competing applications for the construction permits. The
Company entered into a settlement agreement with the remaining applicants at
Waterloo, Iowa and agreed to dismiss its application in exchange for monetary
consideration of $65,000. Approval for this settlement agreement is currently
pending before the FCC. With respect to each of the Company's remaining
applications, the FCC has proposedintends to conduct an auction and award thea construction
permitspermit to the highest bidder in an auction whose rules, proceedings, and
timetable have not been established.bidder. The auction will be limited to the mutually
exclusive applicants for the initial licenses. However, the FCC will not conduct
an auction to select an applicant if it approves a settlement agreement that was
filed by February 2, 1998 by the applicants for a construction permit and that
removes the conflict between their applications. The Company has entered into
timely settlement agreements with the applicants for construction permits at
Spokane, Washington; Douglas, Arizona; and
19
20
Waterloo, Iowa. The Company has agreed to dismiss its applications in exchange
for monetary consideration of, respectively, $416,666, $50,000, and $65,000. The FCC approved the settlement agreement for Spokane, Washington by order which has not yet become final, andset a date for
the settlement agreements for Douglas, Arizona and
Waterloo, Iowa are currently pending.auction of these construction permits.
Two of the Company's pending applications propose to operate on channels
above channel 59: Des Moines, Iowa and Destin, Florida. The FCC has recently
concluded
that it will not authorize new analog full power television stations on channelchannels
60-69 and that applications for stations on these channels will be dismissed if
they are not amended to seek a new channel below channel 60, in accordance with
a timetable and procedure not yet established. The Company and
others have filed petitionsPetitions for reconsiderationreview of this portionFCC
order have been filed with the U.S. Court of Appeals for the FCC's
order. The petition is currently pending, and thereD.C. Circuit. No
prediction can be made as to the outcome of this decision. There is no assurance that the FCC
will reconsider its Order or
that the Company will be able to find available channels below channel 60.
Accordingly, the Company's applications for these two stations may be dismissed.
SevenFive of the Company's pending applications propose to operate below channel
60: Douglas, Arizona; Rapid City, South Dakota; Provo, Utah; Virginia Beach, Virginia; Waterloo,
Iowa; Spokane, Washington; and Tallahassee, Florida. The ultimate permittees of these stations may
construct either an analog or digital station on the channel that they are
granted. The FCC will not assign these stations an additional channel on which
to broadcast DTV until analog transmission is terminated. They may convert from
analog to digital on their single channel. If they choose to
19
20
transmit initially in analog, they may, upon application to the Commission,
convert their analog facility to DTV at any time during the transition period to
DTV, which is currently scheduled to end in 2006.
Paxson Communications Corporation has purchased a 49% interest in the
Company's subsidiary that has a pending application for a construction permit at
Tallahassee, Florida and holds an option to purchase the remaining 51% interest.
Multiple Ownership. Under existing FCC regulations governing multiple
ownership of broadcast stations, a license to operate a television station will
not be granted, unless established waiver standards are met, to any party (or
parties under common control) that has an "attributable interest" in another
television station with an overlapping service area (as specified by FCC
regulations promulgated under the Communications Act). However, the
Telecommunications Act directs the FCC to conduct a rulemaking with regard to
maintaining, modifying, or eliminating local television cross-ownership limits,
which is currently pending. The Commission has recentlyalso commenced a biennial review
of other television ownership rules pursuant to Section 202(h) of the
Telecommunications Act, which requires the Commission to review all of its
ownership rules every two years and to repeal or modify regulations that are no
longer in the public interest. The Commission has requested comment on whether
the following rules should be retained, modified, or eliminated: (i) the rule
that prohibits, with certain qualifications, any person or entity from having an
"attributable interest" in television stations that reach markets containing
more than 35% of the national television audience; (ii) the rule that discounts
by 50% the audience reach of UHF stations when calculating the national
television reach of a licensee of UHF stations; (iii) the rule that prohibits
any party or entity with an attributable interest in a television (or radio)
station from owning or controlling a daily newspaper in the same locale, and
(iv) the rule that prohibits any party or entity with an attributable interest
in a television broadcast station from owning or controlling a cable system in
the same local community. No prediction can be made as to the outcome of this
biennial review.
Under FCC regulations, the officers, directors and certain of the equity
owners of a television broadcasting company are deemed to have an "attributable
interest" in the company, so that there would be a violation of FCC regulations
if an officer, director or certain owners of a full power television
broadcasting company together held more than the permitted national audience
reach, or more than one broadcast station serving the same area, or a daily
newspaper or cable system in a television station coverage area. In the case of
a corporation controlling or operating television stations, there is generally
attribution only to directors and officers and to stockholders who own 5% or
more of the outstanding voting stock, except for institutional investors,
including mutual funds, insurance companies and banks acting in a fiduciary
capacity, which may own up to 10% of the outstanding voting stock without being
subject to attribution, provided that such 20
21
stockholders exercise no control over
the management or policies of the television broadcasting company. The FCC's
multiple ownership restrictions currently do not apply to LPTV stations. The FCC
is currently proposing changes to certain aspects of its rules. No prediction
can be made as to the outcome of these proposals.
Foreign Ownership. Foreign governments, representatives of foreign
governments, aliens, representatives of aliens, and corporations and
partnerships organized under the laws of a foreign nation are barred from
holding broadcast licenses. Aliens may own up to 20% of the capital stock of a
licensee corporation, or generally up to 25% of a U.S. corporation which, in
turn, has a controlling interest in a licensee.
Commercial and Other Limitations. The FCC has eliminated many of its former
rules applicable to commercial television stations in order to "deregulate"
broadcasting. Nonetheless, a commercial television station remains under an
obligation to provide non-entertainment programming that is responsive to issues
of concern to its community of license and to provide programming that serves
the informational and educational needs of children. The FCC reimposed
commercial limits on children's television programs, as required by the
Children's Television Act of 1990. In September 1993, the FCC initiated an
inquiry to determine whether to reimpose commercial limits on non-children's
programs on full power television stations including those that predominantly
broadcast home shopping programming (whether on an hourly, daily, weekly, or
some other basis). There can be no assurance as to the outcome of this inquiry.
20
21
Low Power Television Stations
Ownership and operation of LPTV stations are subject to FCC licensing
requirements similar to those applicable to full power television stations. LPTV
stations, however, are generally not eligible for "must carry" rights. Like full
power stations, the transfer of ownership of any LPTV station license requires
prior approval by the FCC. LPTV construction permits are granted by the FCC for
an initial term of 18 months, which may be extended for one or more six-month
terms if there is substantial progress towards station construction unless
completion of the station is prevented by causes not under the control of the
permittee. LPTV licenses are now issued for terms of eight years.
LPTV is a secondary broadcast service that is not permitted to interfere
with the broadcast signal of any existing or future full power television
station. Construction of a full power television station on the same channel in
the same region could therefore force a LPTV station off the air if such
interference is not corrected, subject to a right to apply for a replacement
channel. LPTV stations must also accept interference from existing and future
full power television stations.
The advent of DTV is expected to disrupt the operations of the Company's
LPTV stations to an as-yet unknown extent. The DTV proceedings have allocated an
additional channel to be used for DTV to every eligible full power television
station in the nation, effectively doubling the number of channels currently
used by full power television stations during the transition period between
analog and digital transmissions. A number of these new DTV stations have been
allocated to channels currently used by LPTV stations. Construction of these
newly authorized DTV stations will therefore force many LPTV stations off the
air unless they can find substitute channels. It is not known at this time
whether all or some of these "displaced" LPTV stations will be able to modify
their broadcast channel and continue operations.
The Community Broadcasters Association ("CBA") has filed with the FCC a
petition for rulemaking to create a "Class A" TV service, which would, on a
prospective basis, avoid unnecessary displacement of LPTV stations that provide
substantial local programming to their communities. Under CBA's proposal,
qualified LPTV licensees could apply for Class A status within one year of the
effective date of the new service class rule. Class A stations would not be
permitted to interfere with existing full power and LPTV stations. However, they
would have primary spectrum user status, within their principal service
contours, against all later authorized full power (DTV and analog) and low power
stations. Under certain circumstances, a Class A licensee would be permitted to
apply to convert from analog to digital operations and to obtain on a first-come
basis an additional channel for digital operations. The FCC has not taken any
action on CAB's petition for rulemaking. A similar proposal has been made in
legislation currently pending in Congress.
Alternative Technologies
Alternative technologies could increase the types of systems on which the
Company may seek carriage. FourThree DBS systems and one FSS system currently
provide service to the public and three additional companies currently hold
licenses to provide DBS services. The number of DBS and FSS subscribers has
increased to approximately 5.1more than 7.2 million households since July 1996.households. Approximately 1.1 million1,050,000
households now subscribe to wireless cable systems, also known as MMDS systems,
which provide traditional video programming and are beginning to provide
advanced data transmission services. The FCC has completed auctions for MMDS
licenses throughout the nation. LMDS is another technology that allows wireless
transmission and reception of video or audio programming or other data; one LMDS
system is presently operational in the New York area and the FCC auctioned 986
LMDS licenses nationwide in March 1998. Similar service can be offered by
instructional
21
22
television fixed service ("ITFS"). The FCC now allows the educational entities
that hold ITFS licenses to lease their "excess" capacity for commercial
purposes. The multichannel capacity of ITFS could be combined with either an
existing single channel MDS or a new MMDS to increase the number of available
channels offered by an individual operator. Lastly, the emergence of home satellite dish
antennas has also made it possible for individuals to receive a host of video
programming options via satellite transmission.
Advanced Television Systems
Technological developments in television transmission will in the near
future make it possible for the broadcast and nonbroadcast media to provide
advanced television services ("ATV") -- television services provided using digital or
other advanced technologies. The FCC in late 1996 approved a DTV technical
standard to be used by television broadcasters, television set manufacturers,
the computer industry and the motion picture industry. This DTV standard will allowallows
the simultaneous transmission of multiple streams of digital data on the
bandwidth presently used by a normal analog channel. It will beis possible to broadcast
one "high definition" channel ("HDTV") with visual and sound quality superior to
present-day television or several "standard definition"
21
22
channels ("SDTV") with digital sound and pictures of a quality slightly better
than present television; to provide interactive data services, including visual
or audio transmission, on multiple channels simultaneously; or to provide some
combination of these possibilities on the multiple channels allowed by DTV.
In April 1997, the FCC announced that it would allocate to every existing
television broadcaster one additional channel to be used for DTV during the
transition between present-day analog television and DTV. Broadcasters willare not
be
required to pay for this new DTV channel, but will be required to relinquish
their present analog channel when the transition to DTV is complete. The FCC
presently plans for the transition period to end by 2006; broadcasters will at
that time be required to return their present channel to the FCC. The FCC's
implementation with respect to DTV is currently subject to judicial review.
Station affiliates of the four major networks in the top ten markets mustare
required to be on the air with a DTV signal by May 1, 1999; network affiliates
in the top thirty markets must be on the air by November 1, 1999. All other
commercial stations must complete construction by May 1, 2002. The FCC has begun
to issue construction permits to build DTV stations.
The FCC has recently issued regulations with respect to DTV allocations and
interference criteria which are not yet final, and other aspects of the DTV
regulatory framework have not yet been established. The FCC is expected to apply
to DTV the rules applicable to analogous services in other contexts, including
those rules that require broadcasters to serve the public interest and may seek
to impose additional programming or other requirements on DTV service. While broadcasters willdo not have to pay for the additional DTV channel
itself, in November 1998, the FCC has indicatedruled that a television station which receives
compensation from a third party for the ancillary or supplementary use of its
DTV spectrum (e.g. data transmission or paging services) must pay a fee of five
percent of gross revenue received. The FCC rejected a proposal that fees will likely be
imposed upon broadcasters if they choosewhen a broadcaster receives payment for transmitting home shopping
programming. A petition for reconsideration of the FCC's ruling with respect to
usehome shopping programming is pending, which the DTV channel to provide paid subscription servicesCompany and others have opposed.
No prediction can be made as to the public.outcome of this petition for
reconsideration. As noted above, neither the Telecommunications Act nor the
recent Supreme Court decision resolves the applicability of the "must carry"
rules to DTV. The FCC is
expected to beginbegan proceedings on this issue.issue in June 1998. It is not
anticipated that the FCC will issue a decision until the end of 1999.
It is not yet clear when and to what extent DTV or other digital technology
will become available through the various media; whether and how television
broadcast stations will be able to avail themselves or profit by the transition
to DTV; the extent of any potential interference with analog channels; whether
viewing audiences will make choices among services upon the basis of such
differences; whether and how quickly the viewing public will embrace the cost of
the new digital television sets and monitors; to what extent the DTV standard
will be compatible with the digital standards adopted by cable, DBS MMDS, LMDS,
IVDS, or ITFS;and other
services; or whether significant additional expensive equipment will be required
for television stations to provide digital service, including HDTV and
supplemental or ancillary data transmission services. Pursuant to the
Telecommunications Act, the FCC must conduct a ten-year evaluation regarding
public interest in advanced television, alternative uses for the spectrum and
reduction of the amount of spectrum each licensee utilizes. Many segments of the
industry are also intensely studying these advanced technologies. There can be
no assurances as to the answers to these questions or the nature of future FCC
regulation.
22
23
Telephone Companies' Provision of Programming Services
The Telecommunications Act eliminated the previous statutory restriction
forbidding the common ownership of a cable system and telephone company. The
extent of the regulatory obligations that the Telecommunications Act imposes on
a telephone company that selects and provides video programming services to
subscribers depends essentially upon whether the telephone company elects to
provide its programming over an "open video system" or to do so as a cable
operator fully subject to the existing provisions of the Communications Act
regulating cable providers. A telephone company that provides programming over
an open video system will be subject only to new legislative provisions
governing open video systems and to certain specified existing cable provisions
of the Communications Act, including requirements equivalent to the "must carry"
regulations. Such a telephone company will be required to lease capacity to
unaffiliated programmers on a nondiscriminatory basis and may not select the
video programming services for carriage on more than one-third of activated
channel capacity of the system. Generally, a telephone company that provides
video programming but does not operate over an open video platform will be
regulated as a cable operator.
22
23
The Company cannot predict how many telephone companies will begin
operation of open video systems or otherwise seek to provide video programming
services, or whether such video providers will be likely to carry the Company's
programming. The FCC has adopted rules that impose on open video systems many of
the obligations imposed upon cable systems, including those pertaining to "must
carry" and retransmission consent. However, open video systems are not subject
to rate regulation and are exempt from local cable franchise requirements. These
rules are still subject to judicial review. The
FCC has certified seveneleven OVS systems for operationoperators to offer OVS service in 17 areas and threetwo
open video systems are currently operating. Moreover, a number of local carriers
are continuing to plan to provide video programming as traditional cable systems
or through MMDS.MMDS, and one local exchange carrier is using very high speed digital
subscriber line technology to deliver video programming, high-speed Internet
access, and telephone service over existing copper telephone lines in Phoenix,
Arizona.
I. SEASONALITY
The Company's businesses are subject to seasonal fluctuation, with the
highest sales activity normally occurring during the fourth calendar quarter of
the year. Seasonal fluctuation in demand is generally associated with the number
of households using television and the direct market and retail industries. In
addition, the Company's businesses are sensitive to general economic conditions
and business conditions affecting consumer spending.
J. EMPLOYEES
At January 31, 1998,1999, the Company, including its wholly-owned subsidiaries,
had approximately 1,1001,000 employees, the majority of whom are employed in
telemarketing, customer service, order fulfillment and production. Approximately
27%32% of the Company's employees work part-time. The Company is not a party to any
collective bargaining agreement with respect to its employees. Management
considers its employee relations to be good.
23
24
K. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and titles at ValueVision
International, Inc., principal occupations and employment for the past five
years of the persons serving as executive officers of the Company.
NAME AGE POSITION(S) HELD
---- --- ----------------
Robert L. Johander................... 52Gene C. McCaffery......................... 51 Chairman of the Board, President and Chief
Executive Officer
Nicholas M. Jaksich.................. 53 President, Chief Operating Officer and Director
Gregory D. Lerman.................... 52 Executive Vice President, General Manager ValueVision
Television
Stuart R. Romenesko.................. 35Romenesko....................... 36 Senior Vice President Finance, Chief
Financial Officer, Treasurer and Assistant
Secretary
Cary Deacon............................... 47 Senior Vice President, Marketing and
Business Development
Edwin G. Pohlmann......................... 51 Senior Vice President, Operations
David T. Quinby...................... 37Quinby........................... 38 Vice President, General Counsel and
Secretary
Michael L. Jones..................... 40Jon P. Thom............................... 46 Vice President, Television Broadcasting
Scott A. Lindquist................... 51 Vice President, AdministrationGeneral Merchandising
Manager
Robert L. Johander, a founder ofGene C. McCaffery joined the Company has served asin March 1998, was named Chief
Executive Officer in June 1998 and was appointed President and Chairman of the
Board and Chief Executive Officer of the Company since June 1990.in February 1999. Mr. Johander's
experience in television home shopping began in 1984McCaffery spent 14 years at Montgomery Ward & Co.,
Incorporated, most recently through 1995 as president of Telethon
Marketing Company, where he was responsible for the creation, production, and
management of national cable television home shopping programs, which were
subsequently acquired by C.O.M.B. Co. ("C.O.M.B."), a Minneapolis-based
mail-order liquidator of consumer merchandise. In early 1986, Mr. Johander, as
General Manager of C.O.M.B.'s Value Network, conceived and managed the launch of
Cable Value Network, Inc., a joint-venture television home shopping network
formed by C.O.M.B. and several national cable television system operators. In
1987, C.O.M.B. changed its name to CVN Companies, Inc. ("CVN"), which was
subsequently acquired by QVC Network, Inc.
Nicholas M. Jaksich, a founder of the Company, has served as President and
Chief Operating Officer and as a director of the Company since June 1990. From
February 1984 to June 1986, Mr. Jaksich was Vice President, Distribution and
Operations for Lillian Vernon Corporation, a national direct-mail merchandising
firm. In July 1986, Mr. Jaksich joined C.O.M.B. to assist in the launch of its
television activities. His responsibilities included the direct day-to-day
supervision of television production and merchandising activities; the
development of various television order response, inventory, and sales tracking
systems, and supervision of on-air hosts. In 1987, Mr. Jaksich succeeded Mr.
Johander as divisional Senior Vice President of CVN-Television, a division of
CVN.
Gregory D. Lerman joined the Company as Executive Vice President, General
Manager ValueVision Television in January 1998. From February 1997 to October
1997, Mr. Lerman was President and Chief Operating Officer of Kent and Spiegel
Direct, a major television direct marketing and infomercial company. From
November 1989 to December 1994, Mr. Lerman served as Executive Vice President of
Fingerhut Companies.Merchandising Marketing; Strategic Planning and Credit Services. During this
period, Mr. McCaffery also served as Vice Chairman of Signature Group. From
March 1996 to March 1998, Mr. McCaffery served as Chief Executive Officer and
managing partner of Marketing Advocates, a celebrity-driven product and service
development company based in Los Angeles, California and Chicago, Illinois. He
also served as Vice-Chairman of the Board of ValueVision from August 1995 to
March 1996. Mr. McCaffery served as an infantry officer in Vietnam and was
appointed as Civilian Aide to the Secretary of the Army by President George Bush
in 1991.
23
24
Stuart R. Romenesko has served the Company as Senior Vice President
Finance, Chief Financial Officer, Treasurer and Assistant Secretary since August
1995. Mr. Romenesko joined the Company in March 1994 as Vice President, Chief
Accounting Officer. From December 1991 to March 1994, Mr. Romenesko, a Certified
Public Accountant, was a Senior Manager in the Accounting and Audit Division of
Shinners, Hucovski & Company, S.C. From July 1985 to November 1991, Mr.
Romenesko served in a variety of capacities at Arthur Andersen LLP, an
international accounting firm ("Arthur Andersen"), leaving in 1991 as an
experienced manager in the firm's Audit and Business Advisory Practice.
Cary Deacon joined the Company as Vice President General Marketing in
September 1998 and was appointed Senior Vice President Marketing and Business
Development in December 1998. From January 1998 to June 1998, Mr. Deacon served
as the Chicago based General Partner of Marketing Advocates, a celebrity-driven
product and service development firm based in Los Angeles, California and
Chicago, Illinois. From March 1995 to January 1998, Mr. Deacon served as Senior
Vice President Marketing/Special Events/ Public Relations for Macy's Department
Stores in New York. From February 1993 to January 1995, Mr. Deacon served as
Senior Vice President Marketing for Montgomery Ward & Co., Incorporated. From
June 1988 to June 1991, Mr. Deacon served as President of Saffer USA, a $60
million advertising agency. Prior to Saffer USA, Mr. Deacon was an Executive
Vice President with the Hudson's Bay Company, Canada's largest retailer. Mr.
Deacon held various Senior positions spanning a ten year career including Vice
President of Merchandising, Vice President of Marketing and Vice President of
Stores.
Edwin G. Pohlmann joined the Company in March 1999 as Senior Vice
President, Operations. From January 1998 to February 1999, Mr. Pohlmann served
as Chief Financial Officer of Fedco, Inc., a $600 million general merchandise
retailer based in Los Angeles, California. In 1997, Mr. Pohlmann served as a
member of the Board of Directors and as a member of the Finance Committee of
Montgomery Ward & Co., Incorporated. From 1986 to 1997, Mr. Pohlmann served
Montgomery Ward as a senior executive involved with the planning and
implementation of the financial and operating strategies of the company. While
at Montgomery Ward, Mr. Pohlmann served as the Executive Vice President of Store
Operations, the Chief Financial Officer and a principal involved with a $3.8
billion management led buyout.
David T. Quinby joinedhas served the Company as Vice President, General Counsel
and Secretary insince February 1997. From May 1993 to February 1997, Mr. Quinby
was a senior associate at the law firm of Maslon Edelman Borman & Brand PLLP and
from August 1990 to May 1993, Mr. Quinby was an associate at the law firm of
Faegre & Benson, LLP, practicing at both firms primarily in the areas of general
corporate, mergers and acquisitions, and securities law.
From September 1983
until August 1987, Mr. Quinby served in a variety
24
25
of capacities at Arthur Andersen, leaving for law school in 1987 as an
experienced senior in the firm's Audit and Business Advisory Practice.
Michael L. JonesJon P. Thom joined the Company as Vice President, Television
Broadcasting-- e-commerce in
September 1993.1998 and became Vice President, General Merchandising Manager in
December 1998. From July 1997 to September 19921998, Mr. Thom was a self employed
consultant specializing in direct marketing, Internet and e-commerce companies.
From October 1995 to July 1993,1997, Mr. JonesThom served as Vice President Broadcasting of Corridor Broadcast.Marketing
for the Fingerhut Companies, Inc. From February 1992 to October 1990
to September 1992,1995, Mr. JonesThom
served as Vice President and General Sales Manager
of WDAS AM/FM in Philadelphia.
Scott A. Lindquist has served asMerchandising for the Company's Vice President,
Administration since November 1995. Prior to joining the Company, Mr. Lindquist
served as County Assessor for St. Louis County, Minnesota, from May 1984 to
November 1995.Fingerhut Companies, Inc.
L. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Forward-looking statementsCertain information contained herein and other materials filed by the
Company with the Securities and Exchange Commission (as well as statements madeinformation
included in oral presentationsstatements or other written statements made or to be made by
the Company) are made
pursuant tocontain various "forward looking statements" within the "Safe Harbor" provisionsmeaning of
the Private Securities Litigation
Reform Act of 1995 andfederal securities laws which represent management's expectations or beliefs
concerning future events,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 pursuit of
strategic initiatives, including statements regarding the consummation of its transactions with GE
Capital and NBC, the merger
betweenCompany's success in developing its e-commerce business,
expected contributions from the CompanyCompany's marketing and National Media,solicitation of its
customers for third-party club memberships, the outcomeexpected target date of the
Time Warner
litigation, anticipated operating results, revenue growth,completion and the materiality of total costs associated with the Company's Year
2000 readiness effort, capital spending requirements, potential future
acquisitions and the effects of regulation and competition. There are certainThese, and other
forward looking
24
25
statements made by the Company, must be evaluated in the context of a number of
important factors that could causemay affect the Company's financial position, results to
differ materially from those anticipated by some of
the statements made herein.
The factors, among others, that could cause actual results to differ materially
include:operations and the ability to negotiate a restructuringbecome profitable, including: the ability of the
proposed National Media
Merger and successful completion of all conditions thereto, including obtaining
shareholder approval,Company to continue improvements in its home shopping operations, the ability to
resolve satisfactorilydevelop new initiatives or enter strategic relationships, obtaining governmental
and shareholder approvals for the disputed issues
inconsummation of the Time Warner Cable litigation,GE Capital and NBC
transactions, the rate at which customers accept solicitations for club
membership, the ability of the Company to develop successful e-commerce
business, consumer spending and debt levels, interest rate fluctuations,
seasonal variations in consumer purchasing activities, increases in postal,
paper and outbound shipping costs, competition in the retail and direct
marketing industries, continuity of relationships with or purchases from major
vendors, product mix, competitive pressure on sales and pricing, the ability of
the Company to manage growth and expansion, changes in the regulatory framework
affecting the Company, increases in cable access fees and other costs which
cannot be recovered through improved pricing and the identification and
availability of potential acquisition targets at prices favorable to the Company
and the matters discussed below under "-- Risk
Factors.""Risk Factors". Investors are cautioned
that all forward-lookingforward looking statements involve risk and uncertainty.
M. RISK FACTORS
In addition to the general investment risks and those factors set forth
throughout this document (including those set forth under the caption
"Cautionary Statement Concerning Forward-Looking Information"), the following
risks should be considered regarding the Company.
Risks Associated With the National Media Merger. On April 8, 1998, the
Company and National Media announced that each of the companies were postponing
their respective special shareholder meetings while they attempt to negotiate a
restructuring of the Merger. This was a result of the Company receiving
preliminary notification from holders of more than 5% of its common stock that
they intended to exercise their dissenters' rights with respect to the Merger.
Although the Company and National Media are currently negotiating to restructure
the Merger, no assurance can be given that such negotiations will be successful,
or that if successful, that the Merger will be consummated. See "Business --
National Media Corporation." For a discussion of risks associated with National
Media and the combined companies, see "Risk Factors" in the Joint Proxy
Statement/Prospectus of the Company and National Media dated March 16, 1998.
Repayment by National Media of Demand Note. Concurrently with the execution
of the Merger Agreement, the Company agreed to loan to National Media, pursuant
to the Demand Note, up to an aggregate of $10.0 million, $7.0 million of which
was advanced upon signing of the Demand Note on January 5, 1998 and the
remaining $3.0 million of which has subsequently been advanced. The Demand Note
is payable on the earlier of January 1, 1999 and the happening of certain
events. In the event the Merger is consummated, the Loan will become an
intercompany payable between the Company and National Media.
25
26
However, in the event the Merger is not consummated, there can be no assurance
that National Media will be able to repay the Demand Note when due. Although the
Company would then have the ability to convert the Demand Note into shares of
National Media, no assurance can be given that the Company will be able to
recover any portion of the Loan.
Recent Losses. The Company experienced operating losses of approximately
$1.7 million, $3.7 million, $.8 million, $2.6 million , $11.0 million and $11.0$8.6 million in
fiscal 1994, 1995, 1996, 1997, 1998 and 1998,1999, respectively, and a net loss per diluted
share of $.13 and $.22 in fiscal 1994 and 1995, respectively, and net income per diluted share of $.38, $.56,
$.57 and $.57$.18 in fiscal 1996, 1997, 1998, and 1998,1999 respectively. Net profits of
approximately $10.5 million, $17.2 million, $23.6 and $23.6$8.3 million and net
profits per diluted share of $.36, $.53, $.74 and $.74$.32 in fiscal 1996, 1997,
1998 and 1998,1999, respectively, were derived from gains on sale of broadcast
stations and other investments, offset by other non-operating charges in fiscal
1999, which are not generally expected to occur in the future. In addition, the Company recently restructured its relationship with
Montgomery Ward regarding the Company's catalog operations. Although the
Company's management anticipates that such restructuring may result in a
reduction of the Company's revenues, it has not yet determined if such
restructuring will have a material adverse impact on the Company's results of
operations or its financial position. There can be no
assurance that the Company will be able to achieve or maintain profitable
operations.
NBC and GE Capital Strategic Alliance. Consummation of the transactions
with GE Capital and NBC is subject to shareholder approval. No assurance can be
given that such approval will be obtained, and if approved, there is no
assurance that the alliance will be successful. In addition the Investment
Warrant will allow GE Capital to purchase a substantial number of shares of the
Company's common stock which will allow it to exert substantial influence over
the election of directors and the management and affairs of the Company.
Accordingly, GE Capital may have sufficient voting power to determine the
outcome of various matters submitted to the Company's shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
the Company's assets. Such control may result in decisions that are not in the
best interests of the Company or its shareholders.
Sale of Television Stations to Paxson. On February 27, 1998, the Company
sold to Paxson Television Station KBGE (TV), Channel 33, Bellevue, Washington
along with two of the Company's non-cable, low power television stations in
Portland, Oregon and Indianapolis, Indiana, and a minority interest (and option
to acquire the remaining interest) in an entity which has applied for a new
station for aggregate proceeds of approximately $24.5$25 million. An additional $10.0
million (the "Additional Proceeds") will beis payable by Paxson to the Company if and when Television Station KBGE (TV), currently operating at reduced
power from downtown Seattle, Washington, is able to relocate its antenna and
increase its transmitter power to a level at or near its licensed full power.first quarter of fiscal
2000. There can be no assurance that Paxson will ever relocate the station and
increase its transmitter power to a level at or near its licensed full power so
that Paxson will be required to pay the Additional Proceeds.
Competition. As a general merchandise retailer, the Company competes for
consumer expenditures with other forms of retail businesses, including
department, discount, warehouse and specialty stores, television home shopping,
mail order and catalog companies and other direct sellers. The catalog and
direct mail industry includes a wide variety of specialty and general
merchandise retailers and is both highly fragmented and highly competitive. The
Company also competes with retailers involved with the evolving convergence and
development of electronic commerce as well as other retailers who sell and
market their products through the highly competitive Internet medium. In
addition, the Company competes with a wide variety of department, discount and
specialty stores which have greater financial, distribution and marketing
resources
25
26
than the Company. The home shopping industry is also highly competitive and is
dominated by two companies, HSN and QVC. The Company's television home shopping
programming competes directly with HSN and QVC in virtually all of the Company's
markets. The Company is at a competitive disadvantage in attracting viewers due
to the fact that the Company's programming is not carried full-time in many of
its markets, and that the Company may have less desirable cable channels in many
markets. QVC and HSN are well-established and, similar to the Company, offer
home shopping programming through cable systems, owned or affiliated full- and
low-power television stations and directly to satellite dish owners and,
accordingly, reach a large percentage of United States television households.
The television home shopping industry is also experiencing vertical integration.
QVC and HSN are both affiliated with cable operators serving significant numbers
of subscribers nationwide. While the Cable Television Consumer Protection and
Competition Act of 1992 includes provisions designed to prohibit coercion and
discrimination in favor of such affiliated programmers, the FCC has decided that
it will rule on the scope and effect of these provisions on a case-by-case
basis.
Potential Termination of Cable Time Purchase Agreements; Media Access;
Related Matters. The Company's television home shopping programming is
distributed primarily through purchased blocks of cable television time. Much of
the Company's cable television affiliation agreements are terminable by either
party upon 30 days, or less notice. The Company's television home shopping
business could be materially adversely affected in the event that a significant
number of its cable television affiliation agreements are terminated or not
renewed on acceptable terms.
26
27
Potential Loss of Satellite Service. The Company's programming is presently
distributed, in the first instance, to cable systems, full- and low-power
television stations and satellite dish owners via a leased communications
satellite transponder. In the future, satellite service may be interrupted due
to a variety of circumstances beyond the Company's control, such as satellite
transponder failure, satellite fuel depletion, governmental action, preemption
by the satellite lessor and service failure. The Company does not have any
agreementshas an agreement for
preemptable immediate backupback-up satellite services, although itservice and believes it could arrange
for such services from others.back-up service if satellite transmission is interrupted. However,
there can be no assurance that the Company will be able to make any such arrangementscontinue transmission
of its programming in the event of satellite transmission failure and the
Company may incur substantial additional costs in enteringto enter into new arrangements.
Year 2000 Considerations. The Year 2000 issue is the result of computer
programs using only the last two digits to indicate the calendar year. If
uncorrected, such computer programs may be unable to interpret dates correctly
beyond the year 1999, which in turn, may cause computer system failure or other
computer errors disrupting operations. The Company has reviewed the implications
of yearits Year 2000 compliance issues and has takenformed a Year 2000 Compliance Project
team to establish and take steps designed to ensure that the Company's computerinformation
systems and software applications will manage dates beyond 1999. The scope of
the Company's Year 2000 readiness effort includes the review of and taking
remedial action as necessary, regarding (i) information technology ("IT")
components such as software and hardware; (ii) non-IT systems or embedded
technology; and (iii) readiness of key third parties, including significant
vendors and service providers and the electronic data interchange (EDI) with
third parties. With respect to information systems and embedded technologies,
management presently believes that a combination of software modification,
upgrades and replacements will be necessary to mitigate the Company's Year 2000
issues. However, if such modifications are not made, or not completed on a
timely basis, the Year 2000 issues could have a materially adverse effect on the
Company's business, financial condition and results of operations. The Company
expects to implement successfully the systems and programming changes necessary
to be Year 2000 compliant in a timely manner. The target date for remediation of
its information systems is August 31, 1999. The Company does not expect the cost
of addressing its Year 2000 issues to have a material effect on the Company's
results of operations, financial position or liquidity and is funding such costs
with operating cash flows. Total costs are expected to be less than $500,000. In
addition to internal Year 2000 remediation activities, the Company has also
implemented a plan to communicate to its key suppliers, vendors and service
providers the expectation that they attain Year 2000 compliance in a timely
manner. While the Company expects its internal IT and non-IT systems to be Year
2000 compliant by the date specified, the Company is working on a contingency
plan specifying what the Company will do if it or important third parties are
not Year 2000 compliant by the
26
27
required dates. The Company expects to have such a contingency plan finalized in
1999. The Company believes that it has allocated adequate resources for this purposeto address
and that
planned software upgrades, which are underway andachieve Year 2000 compliance in the normal course of
business, will address the Company's internal year 2000 needs. While the Company
expects that efforts on the part of current employees of the Company will be
required to monitor year 2000 issues,a timely manner, however, no assurances can
be given that these efforts or the efforts of key third parties will be
successful. The Company does not expect the cost of addressing
any year 2000 issue to be a material event or uncertainty that would have a
material adverse effect on future operating results or financial condition.
Litigation. On December 17, 1997, Time Warner Entertainment Company, L.P.,
d/b/a Time Warner Cable ("Time Warner Cable"), filed a complaint (the
"Complaint") in the Connecticut Superior Court, Judicial District of
Ansonia/Milford (the "Court"), against Bridgeways Communications Corporation
("Bridgeways"), and the Company, alleging, among other things, tortious
interference with contractual and business relations and breach of contract.
According to the Complaint, Bridgeways and Time Warner Cable have been in
dispute since 1993 regarding Bridgeways' attempt to assert "must-carry" rights
with respect to television station WHAI-TV in the New York City Area of Dominant
Influence. The Company purchased television station WHAI-TV from Bridgeways in
1994 and subsequently sold it in 1996. The Company and Time Warner Cable entered
into a cable affiliation agreement in 1995 (the "Time Warner Cable Agreement"),
pursuant to which the Company agreed not to assert "must-carry" rights with
respect to television station WHAI-TV and pursuant to which the Company's
programming is currently carried by Time Warner Cable in approximately 4.4
million full-time equivalent cable households out of the Company's total
distribution of approximately 11.7 million full-time equivalent cable
households. Time Warner Cable seeks in the Complaint to receive unspecified
damages from the Company and to have the Court declare the Time Warner Cable
Agreement null and void. Responsive pleadings have not yet been filed in this
matter. The Company believes the Complaint is completely without merit and it
intends to vigorously defend itself. However, if Time Warner Cable were to
prevail under the Complaint, such an outcome could have a material adverse
effect on the Company's financial position and/or costs of operations to the
extent it jeopardized access to, or increased the cost of access to, these 4.4
million full-time equivalent households, which represent approximately 38% of
the full-time equivalent households to which the Company currently has access.
Product Liability Claims. Products sold by the Company may expose it to
potential liability from claims by users of such products, subject to the
Company's rights, in certain instances, to indemnification against such
liability from the manufacturers of such products. The Company has instead
generally required the manufacturers and/or vendors of these products to carry
product liability insurance, although in certain instances where a limited
quantity of products are purchased from non-U.S. vendors, the vendor may not be
formally required to carry product liability insurance. Certain of such vendors,
however, may in fact maintain such insurance. There can be no assurance that
such parties will maintain this insurance or that this coverage will be adequate
to cover all potential claims, including coverage in amounts which it believes
to be adequate. There can be no assurance that the Company will be able to
maintain such coverage or obtain additional coverage on acceptable terms, or
that such insurance will provide adequate coverage against all potential claims.
Seasonability.Seasonality. The television home shopping and mail order businesses in
general are somewhat seasonal, with the primary selling season occurring during
the first and last quarters of the calendar year. These businesses are also
sensitive to general economic conditions and business conditions affecting
consumer spending.
27
28
ITEM 2. PROPERTIES
The Company leases approximately 139,000 square feet of space in Eden
Prairie, Minnesota (a suburb of Minneapolis), which includes all corporate
administrative, television production, telemarketing, customer service and
television warehouse operations. During fiscal 1997, the Company purchased a
262,000 square foot distribution facility on a 34 acre parcel of land in Bowling
Green, Kentucky which is currently being used primarily in connection with the
fulfillment operations of HomeVisions and non-jewelry merchandise for the Company's television
home shopping operations. The Company also purchased approximately 34
acres of land in Eden Prairie, Minnesota during fiscal 1997 which is being held
for future potential expansion and investment purposes. The Company leases approximately 96,000 square feet of
office and warehouse space in Chelmsford, Massachusetts (a suburb of Boston) and
approximately 1,500 square feet of office space in Tempe, Arizona in connection
with the direct-mail operations of CVI and BII, respectively. Additionally, the
Company rents transmitter site and studio locations used to transmit programming
for KVVV (TV), serving the Houston market.market and other LPTV stations. The Company
believes that its existing facilities are adequate to meet its current needs and
that suitable additional or alternative space will be available as needed to
accommodate expansion of operations.
28
29
ITEM 3. LEGAL PROCEEDINGS
In a complaint filed December 17, 1997, (Time Warner Entertainment Company,
L.P., d/b/a Time Warner Cable v. Bridgeways Communications Corporation and
ValueVision International, Inc. (U.S. Superior Court, Judicial District of
Ansonia/Milford at Milford, CT)), Time Warner Cable filed a lawsuit against
Bridgeways Communications Corporation and ValueVision alleging, among other
things, tortious interference with contractual and business relations and breach
of contract. According to the complaint, Bridgeways and Time Warner Cable have
been in a dispute since 1993 regarding Bridgeways' attempt to assert "must
carry" rights with respect to television station WHAI-TV in the New York City
Area of Dominant Influence.Designated Market Area. ValueVision purchased television station WHAI-TV from
Bridgeways in 1994 and subsequently sold it in 1996. ValueVision and Time Warner
Cable entered into a cable affiliation agreement in 1995 pursuant to which
ValueVision agreed not to assert "must carry" rights with respect to television
station WHAI-TV and pursuant to which ValueVision's programming is currently
carried by Time Warner Cable in approximately 4.2 million full time equivalent
cable households. The complaint seeks unspecified damagesOn December 23, 1998 the Company announced that it settled the
lawsuit filed by Time Warner Cable. Under the terms of the settlement,
ValueVision paid Time Warner Cable $7.0 million in cash which was recognized by
ValueVision in the fourth quarter of fiscal 1999, resulting in an after tax
charge of approximately $4.3 million. In settling this matter, ValueVision did
not admit any wrongdoing or liability. ValueVision, however, determined to enter
into this settlement to avoid the
27
28
uncertainty and for the
courtcosts of litigation, as well as to declare theavoid disruption of its
relationship with a key business partner providing a substantial portion of
ValueVision's program distribution. ValueVision also announced that it has
renewed its cable affiliation agreement betweenwith Time Warner Cable and
ValueVision null and void. The Company is confident that it remains in full
compliance with the terms and conditions of the cable affiliation agreementfor an additional
five-year term, expiring on January 30, 2007, and that it has been inappropriately named in this lawsuit involving Time Warner Cable and Bridgeways. The Company believes that the lawsuit is completely
without merit and intendshas
agreed to vigorously defend itself. However, if Time Warner
Cable werelaunch ValueVision's programming full-time to prevail under the Complaint, such an outcome could have a material
adverse effect on the Company's financial position and/or costs of operations to
the extent it jeopardized access to, or increased the cost of access to, these
4.4 million full-time equivalent households, which represent approximately 38%
of the full-time equivalent households to which the Company currently has
access.its Staten Island, New
York cable subscribers.
In addition to the litigation noted above, the Company is involved from
time to time in various other claims and lawsuits in the ordinary course of
business. In the opinion of management, these claims and suits individually and
in the aggregate will not have a material adverse effect on the Company's
operations or consolidated financial statements.
29
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter ended
January 31, 1998.
301999.
28
3129
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock symbol is "VVTV" and is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market. The following table sets forth
the range of high and low sales prices of the common stock as quoted by the
Nasdaq Stock Market for the periods indicated.
HIGH LOW
---- ---
FISCAL 1997
First Quarter.................................. $8 9/16 $5 5/8
Second Quarter................................. 8 1/2 5 3/8
Third Quarter.................................. 6 7/16 5 3/8
Fourth Quarter................................. 5 7/8 4 5/8
FISCAL 1998
First Quarter..................................Quarter............................................. $ 4 3/4 $ 3 7/16
Second Quarter.................................Quarter............................................ 5 7/16 3 7/16
Third Quarter..................................Quarter............................................. 5 3/8 3 13/16
Fourth Quarter.................................Quarter............................................ 4 7/8 3 1/8
FISCAL 1999
First Quarter............................................. 3 31/32 3
Second Quarter............................................ 4 3/8 3 3/8
Third Quarter............................................. 5 3 1/8
Fourth Quarter............................................ 15 1/4 3 11/16
HOLDERS
As of April 20, 1998,March 26, 1999, the Company had approximately 490515 shareholders of
record.
DIVIDENDS
The Company has never declared or paid any dividends with respect to its
capital stock. Pursuant to the Shareholder Agreement between the Company and GE
Capital, the Company is prohibited from paying dividends in excess of 5% of the
Company's market capitalization in any quarter. The Company currently expects to
retain its earnings for the development and expansion of its business and does
not anticipate paying cash dividends in the foreseeable future. Any future
determination by the Company to pay cash dividends will be at the discretion of
the Board of Directors of the Company and will be dependent upon the Company's
results of operations, financial condition, any contractual restrictions then
existing, and other factors deemed relevant at the time by the Board of
Directors.
3129
3230
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
The selected financial data for the five years ended January 31, 19981999 have
been derived from the audited consolidated financial statements of the Company.
The selected financial data presented below are qualified in their entirety by,
and should be read in conjunction with, the financial statements and notes
thereto and other financial and statistical information referenced elsewhere
herein including the information referenced under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED JANUARY 31,
-------------------------------------------------------
1999(A) 1998 1997(A)1997(B) 1996 1995
1994------- ---- ------- ---- ----
----(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF OPERATIONS DATA:
Net sales...................................................sales.................................. $203,728 $217,982 $159,478 $ 88,910 $53,931
$ 37,614
Gross profit................................................profit............................... 85,971 95,174 67,363 36,641 22,454
14,583
Operating loss..............................................loss (8,569) (10,975) (2,640) (766) (3,712)
(1,745)
Income (loss) before income taxes and extraordinary
item(b)...................................................taxes(c)....... 7,491 29,604 29,690 11,120 (6,104)
(1,414)
Net income (loss)(b)........................................(c)....................... 4,639 18,104 18,090 11,020 (6,104)
(1,925)
PER SHARE DATA:(C)(D)
Net income (loss) per common share..........................share......... $ 0.18 $ 0.57 $ 0.57 $ 0.38 $ (0.22)
$ (0.13)
Net income (loss) per common
share -- assuming dilution.....dilution............... $ 0.18 $ 0.57 $ 0.56 $ 0.38 $ (0.22)
$ (0.13)
Weighted average shares outstanding:
Basic.....................................................Basic.................................... 25,963 31,745 31,718 28,627 27,265
15,400
Diluted...................................................Diluted.................................. 26,267 31,888 32,342 29,309 27,265 15,400
JANUARY 31,
-------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and short-term investments.............................investments............ $ 46,870 $ 31,866 $ 52,859 $ 46,451 $26,659
$ 48,382
Inventories, net............................................net........................... 21,101 20,427 28,109 8,889 7,833
7,226
Current assets..............................................assets............................. 98,320 79,661 101,029 65,045 39,246
57,684
Property, equipment and other assets........................ 55,103assets....... 43,450 55,618 67,057 51,666 38,258
20,014
Total assets................................................ 134,764assets............................... 141,770 135,279 168,086 116,711 77,504
77,698
Current liabilities.........................................liabilities........................ 32,684 29,590 37,724 13,519 10,124
7,533
Long-term obligations....................................... 2,906 3,708obligations...................... 675 1,036 3,734 447 578
147
Shareholders' equity........................................ 102,268 126,654equity....................... 108,411 104,653 126,628 102,745 66,802 70,018
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OTHER DATA:
Gross margin percentage.....................................percentage..................... 42.2% 43.7% 42.2% 41.2% 41.6%
38.8%
Working capital.............................................capital............................. $ 65,636 $ 50,071 $ 63,305$63,305 $ 51,526 $29,122
$ 50,151
Current ratio...............................................ratio............................... 3.0 2.7 2.7 4.8 3.9
7.7
EBITDA (as defined)(b)(d)...................................(c)(e)................... $ 9,586 $ 34,465 $ 31,774$31,774 $ 13,790 $(5,553)
$ (1,342)
Cash Flows:
Operating.................................................CASH FLOWS:
Operating................................... $(18,091) $(19,445) $ (5,779)$(5,779) $ 2,304 $ (463)
Investing................................... $ (3,345)
Investing.................................................48,131 $ 23,065 $ 19,223$19,223 $(11,443) $(5,902)
$(39,257)
Financing.................................................Financing................................... $ (2,974) $(15,041) $ (4,888)$(4,889) $ 7,547 $ (235) $ 70,007
- -------------------------
(a) During fiscal 1999, the Company divested its HomeVisions catalog operations.
Results of operations for the year ended January 31, 1999, includes a $2.9
million restructuring and asset impairment charge which was recorded in the
third quarter of fiscal 1999 in connection with the decision to divest
HomeVisions.
(b) Results of operations for the year ended January 31, 1997, included the
operations of HomeVisions (f/k/a Montgomery Ward Direct), Beautiful Images,
Inc. and Catalog Ventures, Inc. which were acquired by the Company in the
second half of fiscal 1997. See Note 4 of Notes to Consolidated Financial
Statements as of January 31, 19981999 and 1997.
(b)1998.
(c) Income (loss) before income taxes, and extraordinary item, net income (loss) and EBITDA (as defined)
include a net pre-tax gain of $22.8 million from the sale and holdings of
broadcast properties and other assets and pre-tax
30
31
charges totaling $9.5 million associated with a litigation settlement and
terminated acquisition costs in fiscal 1999, a pre-tax gain of $38.9 million
from the sale of broadcast properties for fiscal 1998, a $28.2$28.3 million
pre-tax gain on sale of broadcast properties and other assets for fiscal
1997, an $8.5 million pre-tax gain on the sale of an investment in National
Media Corporation, $2.0 million equity in earnings of affiliates in fiscal
1996 and $3.7 million of costs associated with the National Media
Corporation tender offer in fiscal 1995. See Notes 2 and 4 of Notes to
Consolidated Financial Statements as of January 31, 19981999 and 1997.
(c)1998.
(d) The Company computes per share data in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."Share". Under this
statement, basic and diluted earnings (loss) per share have replaced primary
and fully diluted earnings (loss) per share.
(d)(e) EBITDA (as defined) represents net income (loss) before interest income
(expense), income taxes and depreciation and amortization expense. EBITDA
(as defined) is viewed by management as an important alternative measure of
cash flows because it is commonly used by analysts and institutional
investors in analyzing the financial performance of companies in the
broadcast and television home shopping sectors. However, EBITDA (as defined)
should not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of operating performance or as a measure of liquidity. EBITDA (as defined),
as presented, may not be comparable to similarly entitled measures reported
by other companies.
32
33
ITEM 7. 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 are qualified by reference to and should be read in conjunction with
the financial statements and notes thereto included elsewhere herein.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations and 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,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 pursuit of strategic
initiatives, including statements regarding the consummation of its transactions with GE Capital and NBC,
the merger
betweenCompany's success in developing its e-commerce business, expected
contributions from the CompanyCompany's marketing and National Media,solicitation of its customers for
third-party club memberships, the outcomeexpected target date of the Time Warner
litigation, anticipated operating results, revenue growth,completion and the
materiality of total costs associated with the Company's Year 2000 readiness
effort, 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 effectaffect the Company's financial position, and results of
operations and the ability to become profitable, including: the ability to negotiate a restructuring of the
proposed National Media Merger and
successful completion of all conditions thereto, including obtaining shareholder
approval,Company to continue improvements in its home shopping operations, the ability to
resolve satisfactorilydevelop new initiatives or enter strategic relationships, obtaining governmental
and shareholder approvals for the disputed issues inconsummation of the Time
Warner Cable litigation,GE Capital and NBC
transactions, the rate at which customers accept solicitations for club
membership, the ability of the Company to develop successful e-commerce
business, consumer spending and debt levels, interest rate fluctuations,
seasonal variations in consumer purchasing activities, increases in postal,
paper and outbound shipping costs, competition in the retail and direct
marketing industries, continuity of relationships with or purchases from major
vendors, product mix, competitive pressure on sales and pricing, the ability of
the Company to manage growth and expansion, changes in the regulatory framework
affecting the Company, increases in cable access fees and other costs which
cannot be recovered through improved pricing and the identification and
availability of potential acquisition targets at
31
32
prices favorable to the Company. Investors are cautioned that all forward
looking statements involve risk and uncertainty.
NBC AND GE CAPITAL STRATEGIC ALLIANCE
On March 8, 1999 the Company entered into a strategic alliance with the
National Broadcasting Company, Inc. ("NBC") and G.E. Capital Equity Investments,
Inc. ("GE Capital"). Pursuant to the terms of the transaction, NBC and GE
Capital have agreed to jointly acquire a 19.9% beneficial ownership interest in
ValueVision (consisting of 5,339,500 shares of Series A Redeemable Convertible
Preferred Stock ("Preferred Stock"), and a warrant to acquire 1,450,000 shares
of Common Stock (the "Distribution Warrant") under a "Distribution and Marketing
Agreement") for aggregate consideration of approximately $56.0 million (or
approximately $8.29 per share), representing approximately $44.0 million for the
Preferred Stock and approximately $12.0 upon exercise of the Distribution
Warrant. In addition, the Company will issue NBC and GE Capital a warrant to
increase their potential aggregate equity stake to 39.9% (the "Investment
Warrant"), subject to approval of ValueVision's shareholders. NBC will also have
the exclusive right to negotiate on behalf of ValueVision for the distribution
of its television home shopping service. The Federal Trade Commission notified
the Company on April 5, 1999 that it had granted the Company early termination
with respect to the 30 day waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). In light of this
development, the Company expects that the closing of the sale of the 3,739,500
shares of Preferred Stock not subject to shareholder approval, the Investment
Warrant and the Distribution Warrant will take place during the week of April
12, 1999. Closing on the sale of the remaining shares of Preferred Stock and
exercisability of the Investment Warrant is subject to Shareholder Approval. See
Item 1 -- Business Section under "Strategic Relationships" for a detailed
discussion of the strategic alliance.
TIME WARNER CABLE LITIGATION SETTLEMENT
On December 23, 1998 the Company announced that it settled the lawsuit
which was filed by Time Warner Cable against the Company and Bridgeways
Communications Corporation in 1997. The lawsuit alleged, among other things,
tortious interference with contractual and business relations and breach of
contract. Under the terms of the settlement, ValueVision paid Time Warner Cable
$7.0 million in cash which was recognized by ValueVision in the fourth quarter
of fiscal 1999, resulting in an after tax charge of approximately $4.3 million.
In settling this matter, ValueVision did not admit any wrongdoing or liability.
ValueVision, however, determined to enter into this settlement to avoid the
uncertainty and costs of litigation, as well as to avoid disruption of its
relationship with a key business partner providing a substantial portion of
ValueVision's program distribution. ValueVision also announced that it has
renewed its cable affiliation agreement with Time Warner Cable for an additional
five-year term, expiring in January 30, 2007, and that Time Warner Cable has
agreed to launch ValueVision's programming full-time to its Staten Island, New
York cable subscribers.
WRITE-DOWN OF INVESTMENT IN CML GROUP, INC.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, the Company wrote off its investment in CML Group, Inc.
("CML") in fiscal 1999. The decline in the investment's fair value was judged by
management to be other than temporary following CML's announcement that its
NordicTrack subsidiary had filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The write-off totaled approximately $6,113,000. Subsequently,
CML also filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
RESTRUCTURING AND IMPAIRMENT OF ASSETS
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective divestiture of its HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
the continuing operating losses and deteriorating financial performance over the
past year of the catalog's operations since Montgomery Ward & Co.,
Incorporated's announcement of its bankruptcy filing in the summer of 1997.
Operating losses for HomeVisions further increased as a result of the subsequent
termination of HomeVisions' right to use the Montgomery Ward private label
credit card in
32
33
March 1998. As a result of the decision to divest HomeVisions, the Company
mailed its last HomeVisions catalog in the fourth quarter of fiscal 1999 and
effectively wound down the catalog operation as of January 31, 1999.
In connection with the restructuring plan and divestiture of HomeVisions,
the Company recorded a $2,950,000 restructuring and asset impairment charge in
the third quarter ended October 31, 1998. The restructuring charge included
severance costs and the write-down of certain assets including inventory,
property and equipment, capitalized software and capitalized catalog costs that
were deemed impaired as a direct result of the decision to divest HomeVisions.
See Notes to Consolidated Financial Statements for further discussion.
In connection with the decision to divest HomeVisions, the Company has
entered into an agreement to license and sell the exclusive marketing rights to
the "HomeVisions" name and related customer list database to Direct Marketing
Services, Inc. ("DMSI"), a direct-mail marketer and catalog distributor
headquartered in Chicago, Illinois. The Company recorded a $1,443,000 gain in
the fourth quarter of fiscal 1999 related to the sale of these assets.
NATIONAL MEDIA CORPORATION PROPOSED MERGER
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerlyFormerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media is a publicly-held direct marketer of consumer
products through the use of direct response transactional television
programming, known as infomercials, and currently makes its programming
available to more than 370 million television households in more than 70
countries worldwide. If the mergers (the "Mergers") contemplated by the Merger
Agreement were to be consummated, the Company and National Media would have
become wholly-owned subsidiaries of Quantum Direct, with each outstanding share
of the Company's common stock being converted into 1.19 shares of common stock
in Quantum Direct and each outstanding share of common stock of National Media,
being converted into one share of common stock in Quantum Direct.
Concurrently with the execution of the Merger Agreement, the Company agreed
to loan to National Media, pursuant to a Demand Promissory Note, up to an
aggregate of $10.0 million, $7.0 million of which was advanced upon signing of
the Demand Note on January 5, 1998 and the remaining $3.0 million of which has
subsequently been advanced. The Loan proceeds have been used by National Media
for various purposes, including the funding of accounts receivable, inventory
and media purchases. The Loan bears interest at prime rate plus 1.5% per annum
and is due on the earlier of January 1, 1999 or upon termination of the Merger
Agreement in certain circumstances. In the event National Media is unable to
repay the Loan when due, ValueVision may elect to receive payment in shares of
National Media's common stock at the then present market value. In consideration
for providing the Loan, National Media issued to ValueVision warrants to
33
34
acquire 250,000 shares of National Media's common stock with an exercise price
per share equal to $2.74. The warrants are exercisable until the earlier of (i)
January 5, 2003 and (ii) the occurrence of one of the following termination
events: (x) the consummation of the Merger or (y) the termination by National
Media of the Merger Agreement, if such termination results from a breach of a
covenant by ValueVision or in the event ValueVision's shareholders do not
approve the Merger Agreement; provided, however, that if, within 75 days after
the termination event described in clause (y) above, National Media has not
repaid the Loan in full or if during such 75 days, National Media defaults under
its obligations pursuant to the Loan, no termination event will be deemed to
have occurred and the warrants shall remain exercisable.
Consummation of the Mergers is subject to the satisfaction (or waiver) of a
number of conditions, including, but not limited to: (i) approval by holders of
a majority of the issued and outstanding shares of National Media's common stock
and the Company's common stock; (ii) redemption of National Media's Series C
Preferred Stock; (iii) the receipt of certain regulatory and other approvals,
including those from the Federal Trade Commission and the Federal Communication
Commission; and (iv) not more than 5% of the holders of the issued and
outstanding shares of the Company's common stock shall have made demands and
given the notices required under Minnesota law to assert dissenters' appraisal
rights. On April 8, 1998, it was announced that the Company received
preliminary notification from holders of more thanthen 5% of the Company's common
stock that they intended to exercise their dissenter's rights with respect to
the proposed merger of the Company and National Media. TheMedia and the Company also reported that it had
advised National Media that it doesdid not
intend to waive the Merger Agreement condition to closing requiring that holders
of not more than 5% of the shares of the Company common stock have demanded
their dissenter's rights. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and conditions regarding a
transaction with National Media were unsuccessful and the Merger Agreement was
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenters' notice,
the companies mutually agreed to postpone their respective shareholder meetings
while the companies attempt to negotiate a restructuring of the Mergers that is
acceptable to each of the companies andwrote off these amounts in the best interestsecond quarter of their
shareholders. As of the date hereof, National Media and the Company are still
attempting to negotiate a restructuring of the Mergers and have not reschedule
their respective special meetings. There can be no assurance that the companies
will be able to successfully negotiate such a restructuring, or if negotiated,
that such Mergers will be consummated.fiscal 1999.
ACQUISITIONS AND DISPOSITIONS
MONTGOMERY WARD DIRECT CATALOG OPERATIONS
Effective July 27, 1996, the Company acquired, through ValueVision Direct
Marketing Company, Inc. ("VVDM"), substantially all of the assets and assumed
certain obligations of Montgomery Ward Direct, L.P. ("MWD"), a four year old
catalog business, by issuing 1,484,993 vested warrants with an exercise price of
$.01 per share, to Montgomery Ward & Co., Incorporated ("Montgomery Ward") as
full consideration for the acquisition of approximately $4.0 million in net
assets of MWD.
The Company's acquisition of MWD was for an aggregate purchase price of
$8,497,000, which included approximately $4.0 million in net assets, including
acquired cash of $5,764,000. Acquisition related costs approximated $144,000.
The acquisition was accounted for using the purchase method of accounting and
accordingly, the net assets of MWD were recorded at their estimated fair values.
The excess of the purchase price over the net assets acquired was
$4,531,000, had been recorded as goodwill and other intangible assets and was
being amortized on a straight-line basis over 5-12 years. As discussed in Notes
2 and 3 ofthe
Notes to Consolidated Financial Statements as of January 31, 1998 and 1997,
intangible assets recorded in connection with this acquisition were reduced to
zero in fiscal 1998 in connection with the restructuring transaction with
Montgomery Ward. The operating results of MWD have been included in the fiscal
1997 consolidated statement of operations from the date of acquisition.
Unaudited pro forma consolidated net sales of the Company for the yearsyear ended
January 31, 1997, and 1996, as if the acquisition had occurred as of the beginning of the
respective periods were $194,284,000 and $240,850,000
respectively.year was $194,284,000. Unaudited pro forma net income was $17,151,000, or $.52
per diluted share, in fiscal 1997 and $4,341,000, or $.14 per diluted share, in
fiscal 1996.1997. Such pro forma amounts are not necessarily
indicative of what the actual
3433
3534
consolidated results of operations would have been had the acquisition been
effective at the beginning of the respective periods.fiscal 1997. In fiscal 1998, the Company changed
the name of the MWD catalog to HomeVisions. See additional discussion above
regarding the fiscal 1999 divestiture of the HomeVisions operations.
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of Beautiful Images, Inc. ("BII"), a manufacturer and direct
marketer of women's foundation undergarments and other women's apparel. The
Company paid $4,253,000 in cash, which included acquired cash of $423,000,
$500,000 relating to a non-compete agreement and acquisition costs of
approximately $75,000, and assumed certain obligations totaling $109,000. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon estimated fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets acquired
was $3,310,000, of which $2,810,000 has been recorded as goodwill, which is
being amortized on a straight-line basis over 15 years and $500,000 assigned to
the non-compete agreement, which is being amortized on a straight-line basis
over the 6 year6-year term of the agreement. The operating results of BII have been
included in the fiscal 1997 consolidated statement of operations from the date
of acquisition. Pro forma results of operations have not been presented because
the effects were not significant.
CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. (collectively "CVI"), two direct
marketing companies which together publish five consumer specialty catalogs. The
Company paid $7,369,000 in cash which included acquired cash of $1,465,000 and
acquisition costs of approximately $100,000. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair values of the net assets acquired was $1,953,000, and has been recorded
as goodwill, which is being amortized on a straight-line basis over 15 years.
The operating results of CVI have been included in the fiscal 1997 consolidated
statement of operations from the date of acquisition. Pro forma results of
operations have not been presented because the effects were not significant.
ACQUISITION OF BROADCAST STATIONS
During the first quarter of fiscal 1995, the Company completed the
acquisitions of three full power television broadcast stations serving the
Washington, D.C. ("WVVI"); Houston, Texas ("KVVV"); and Cleveland --- Akron, Ohio
("WAKC") Areas of Dominant Influence ("ADI"). On December 28, 1994 the Company
completed the acquisition of one full power television broadcast station serving
part of the New York City ADI and licensed to Bridgeport, Connecticut ("WHAI").
The aggregate purchase price for the four stations was approximately $22.4
million in cash, Company common stock and non-compete obligations. The
acquisitions were accounted for under the purchase method of accounting.
Accordingly, the net assets of the four stations were recorded at their
estimated fair values at the time of acquisition, as determined by independent
appraisals.
On March 15, 1996, the Company completed the acquisition of independent
television station KBGE (TV), Channel 33, serving the Seattle-Tacoma, Washington
market, for approximately $4.6 million including the assumption of certain debt
obligations and acquisition related costs. This acquisition was completed in
accordance with the terms of a five-year programming affiliation and financing
agreement with the station which was signed on July 21, 1995. Pursuant to this
agreement, the Company provided financing of up to $1,450,000 related to a
working capital loan for channel operations.
On April 11, 1996, the Company completed a second closing with respect to
its acquisition of independent television station WVVI whereby the Company paid
$800,000 to the former owner of WVVI as a final payment in exchange for not
having to pay $1,600,000 in the event the "must carry" provisions of the
34
35
Cable Act are upheld by a final decision. The Company had previously paid
$4,050,000 to National Capital 35
36
Christian Broadcasting, WVVI=sWVVI's former owners, at
an initial closing on March 28, 1994. The $800,000 additional payment had been
classified as excess purchase price and was amortized over 25 years on a
straight-line basis. In addition, the Company received certain studio and
production equipment from the former owner of WVVI, in lieu of a cash payment,
for the balance outstanding under a secured convertible debenture in the face
amount of $450,000.
On March 31, 1997, the United States Supreme Court upheld the "must carry"
provisions of the 1992 Cable Act and as a result, the Company paid an additional
$1,600,000 for the Houston, Texas station upon a second closing. The additional
payment has been classified as unallocated excess purchase price and is being
amortized over 25 years on a straight-line basis. Pro forma results of
operations have not been presented because the effects were not significant. The
Company views and treats the acquisition of its television broadcast stations as
a "purchase of assets" rather than as a purchase of a stand alone operating
business unit. This treatment is due to the fact that planned revenues of
acquired television broadcast stations do not constitute either a separate
business of ValueVision or represent a significant portion of the Company=sCompany's
operating businesses.
SALE OF BROADCAST STATIONS
On February 28, 1996, the Company completed the sale of two television
stations to Paxson Communications Corporation ("Paxson") for $40.0 million in
cash plus the assumption of certain obligations. The stations sold were ABC
affiliate WAKC (TV), Channel 23, licensed to Akron, Ohio, and independent
station WHAI (TV), Channel 43, licensed to Bridgeport, Connecticut. WAKC (TV)
was acquired by the Company in April 1994 for approximately $6.0 million and
WHAI (TV) was acquired by the Company in December 1994 for approximately $7.3
million. The pre-tax gain recorded on the sale of these two television stations
was approximately $27 million and was recognized in the first fiscal quarter
ended April 30, 1996.
On July 31, 1997, the Company completed the sale of its television
broadcast station WVVI (TV), which serves the Washington, D.C. market, to Paxson
for approximately $30 million in cash and the receipt of 1,197,892 shares of
Paxson common stock valued at $11.92 per share as determined pursuant to an
independent financial appraisal. Under the terms of the agreement, Paxson paid
the Company $20 million in cash upon closing and was required to pay an
additional $10 million to the Company as a result of the United States Supreme
Court upholding the "must carry" provision of the 1992 Cable Act. WVVI (TV) was
acquired by the Company in March 1994 for $4,850,000. The pre-tax gain recorded
on the sale of the television station was $38.9 million and was recognized in
the second fiscal quarter ended July 31, 1997.
On February 27, 1998, the Company completed the sale of its television
broadcast station, KBGE-TV Channel 33, which serves the Seattle, Washington
market along with two of the Company=sCompany's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
is to be paid when KBGE, which is currently operating at reduced power from
downtown Seattle, is able to relocate its antenna and increase its transmitter
power to a level at or near its licensed full power.payable by the first quarter of fiscal 2000. The Company will retain and
continue to serve the Seattle market via its recently-launched low-power station K58DP-TV, which
transmits from downtown Seattle. The pre-tax gain to be recorded on the first
installment with respect to the sale of this television station is
expected to bewas
approximately $19.8 million and will bewas recognized in the financial statements in
the first quarter of fiscal 1999.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
RESULTS OF OPERATIONS
Results of operations for the year ended January 31, 1997 include the
direct-mail operations of HomeVisions effective July 27, 1996, BII effective
October 31, 1996 and CVI effective November 1, 1996, which were acquired by the
Company in fiscal 1997.1996.
35
36 37
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
1999 1998 1997 1996
---- ---- ----
NET SALES...................................... 100.0 % 100.0 % 100.0 %
====== ====== ======SALES........................................... 100.0% 100.0% 100.0%
===== ===== =====
GROSS MARGIN................................... 43.7 % 42.2 % 41.2 %
------ ------ ------MARGIN........................................ 42.2% 43.7% 42.2%
----- ----- -----
OPERATING EXPENSES:
Distribution and selling....................... 40.8 % 35.6 % 31.7 %selling............................ 36.6% 40.8% 35.6%
General and administrative..................... 4.7 % 4.5 % 5.0 %administrative.......................... 5.9% 4.7% 4.5%
Depreciation and amortization.................. 3.2 % 3.8 % 5.4 %
------ ------ ------amortization....................... 2.5% 3.2% 3.8%
Restructuring and impairment of assets.............. 1.4% -- --
----- ----- -----
Total operating expenses..................... 48.7 % 43.9 % 42.1 %
------ ------ ------expenses....................... 46.4% 48.7% 43.9%
----- ----- -----
OPERATING LOSS:................................LOSS...................................... (4.2)% (5.0)% (1.7)% (.9)%
Other income (expense), net.................... 18.6 % 20.3 % 13.4 %
------ ------ ------net......................... 7.9% 18.6% 20.3%
----- ----- -----
INCOME BEFORE INCOME TAXES..................... 13.6 % 18.6 % 12.5 %TAXES.......................... 3.7% 13.6% 18.6%
Income taxes...................................taxes........................................ (1.4)% (5.3)% (7.3)%
(.1)%
------ ------ ----------- ----- -----
NET INCOME..................................... 8.3 % 11.3 % 12.4 %
====== ====== ======INCOME.......................................... 2.3% 8.3% 11.3%
===== ===== =====
NET
SALES
Net sales for the year ended January 31, 19981999 (fiscal 1998)1999), were
$217,982,000$203,728,000 compared to $159,478,000$217,982,000 for the year ended January 31, 19971998
(fiscal 1997)1998), a 36.7% increase.7% decrease. The majority of the increasedecrease in net sales is attributeddirectly attributable
to revenues associated withthe decline in catalog sales resulting from the downsizing and eventual
divestiture of the Company's acquisitionHomeVisions (formerly known as Montgomery Ward
Direct) direct-mail operations following the November 1997 restructuring of the
direct
marketing businesses in the second half of fiscal 1997.Company's operating agreements with Montgomery Ward & Co., Incorporated
("Montgomery Ward"). Sales attributed to direct marketing operations totaled
$111,411,000$55,530,000 or 51.1%27% of total net sales for the year ended January 31, 19981999 and
totaled $60,059,000$111,411,000 or 37.7%51% of total net sales for the year ended January 31,
1997.1998. Sales attributed to the Company's television home shopping programming
increased 39% to $148,198,000 for the year ended January 31, 1999 from
$106,571,000 for the year ended January 31, 1998. The increase in home shopping
net sales is a result of a strengthened merchandising effort under the
leadership of ValueVision -- TV's new general management team. The improvement
in television home shopping sales is due, in part, to various sales initiatives
which emphasized, among other things, the increased use of the Company's
ValuePay installment payment program and shipping and handling promotions. The
increase in television home shopping net sales is also attributable to the
increase in full-time equivalent ("FTE") cable homes able to receive the
Company's television home shopping programming, which increased approximately
300,0003.2 million or 2.6%27% from 11.4 million at January 31, 1997 to 11.7 million at January 31, 1998. During1998 to 14.9 million at
January 31, 1999. The average number of FTE's was 12.6 million for fiscal 1999
and 11.9 million for fiscal 1998, the Company added approximately
900,000 full-time cable homes, an 11.7%a 6% increase. In addition to new full-time
cable homes, television home shopping sales increased due to the continued
addition of new customers from households already receiving the Company's
television home shopping programming and an increase in repeat sales to existing
customers. The increase in repeat sales to existing customers experienced in
fiscal 19981999 was due, in part, to the effects of continued testing of certain
merchandising and programming strategies in the
second half of fiscal 1998.strategies. The Company intends to continue to
test and change its merchandising and programming strategies with the intent of
improving its television home shopping sales results. However, while the Company
is optimistic that results will continue to improve, there can be no assurance
that such changes in strategy will achieve the intended results. As a result of
the increased number of households able to receive the Company's programming and
continued growth in direct mail-ordertelevision home shopping operations, the Company anticipates
that net sales and operating expenses will continue to increase in fiscal 1999.2000.
Net sales for the year ended January 31, 1997,1998, were $159,478,000$217,982,000 compared
to fiscal 19961997 net sales of $88,910,000,$159,478,000, a 79.4%37% increase. The majority of the
increase in net sales was primarily attributed to revenues associated
36
37
with the Company's acquisition of the direct marketing businesses which were acquired in the second
half of fiscal 1997. Sales attributed to direct marketing operations totaled
$111,411,000 or 51% of total net sales for the year ended January 31, 1998 and
totaled $60,059,000 or 37.7%38% of total net sales for the year ended January 31,
1997. The increase in net sales was also attributedattributable to an increase in total
number of full-time and FTE cable homes able to receive the Company's television
home shopping programming, which increased from 7.2
million (10.5 million FTEs) at January 31, 1996 to 7.7 million (11.4 million FTEs)FTE's)
at January 31, 1997 to 8.6 million (11.7 million FTE's) at January 31, 1998, a
6.9%12% increase in full-time cable homes and an 8.6%a 3% increase in FTEs.FTE's. The average
number of FTE's was 11.9 million for fiscal 1998 and 10.8 million for fiscal
1997, a 10% increase.
The Company records a reserve as a reduction of gross sales for anticipated
product returns at each month-end based upon historical product return
experience. The return rates for fiscal years 1999, 1998 1997 and 19961997 were
approximately 19.4%24%, 21.9%19% and 26.8%22%, respectively. The lower return ratesrate in fiscal
1998 and fiscal
37
38
1997 arewas directly attributable to the effect of the Company's recentlyHomeVisions
catalog business which was acquired direct marketing businessesin the second half of fiscal 1997 and
significantly downsized in fiscal 1999. The HomeVisions operations, which
represented 34% of total sales in fiscal 1998 and only 9% of total sales in
fiscal 1999, typically experienceexperienced lower average return rates.rates than the
television operations. The fiscal 19981999 return rate for the Company'scompany's television
home shopping operations was 26.6%28%, compared to 27.8%27% in fiscal 19971998 and 26.8%28% in
fiscal 1996.1997. The return rate for the television home shopping operations is
slightly higher than the historic average industry return rate of 24% to 26% and
is attributable in part to the Company's Video Shopping Cart service, which allows for multiple items to
be shipped in one order for a single shipping and handling fee. The slightly
higher return rate is also attributed to the average unit selling price points for the
Company of approximately $83$93 in fiscal 19981999 ($8583 in fiscal 1997)1998) as compared to
the historic industry average selling price per unit of approximately $40 to
$50. The Company is continuing to manage return rates and is adjusting average
selling price points and product mix in an effort to reduce the overall return
rate related to its home shopping business. The returns ratereturn rates for the Company's
direct marketing operations were 11.2%11%, 11% and 9.8%10% in fiscal 1999, 1998 and 1997,
respectively, and the Company believes that this return rate is comparable to
industry averages.
GROSS PROFIT
Gross profits for fiscal 1999 and 1998 were $85,971,000 and $95,174,000,
respectively, a decrease of $9,203,000 or 10%. Gross margins for fiscal 1999
were 42.2% compared to 43.7% for fiscal 1998. The principal reason for the
decrease in gross profits was the decreased sales volume resulting from the
downsizing and eventual divestiture of the HomeVisions catalog operations.
Television home shopping gross margins for fiscal 1999 and 1998 were 38.0% and
39.8%, respectively. Gross margins for the Company's direct mail operations were
53.5% and 47.3% for the same respective periods. Television home shopping gross
margin percentages decreased from 1998 to 1999 as a result of changes in
merchandise mix and on-air promotions to enhance net gross margin contributions.
Specifically, television home shopping gross margins decreased from prior year
primarily as a result of a decrease in gross margin percentages in the jewelry,
giftware and houseware product categories offset by an increase in the sales
volume of the higher margin jewelry category. In addition, during fiscal 1999,
the Company promoted the movement of a significant amount of aging inventory
which further reduced television home shopping margins. During fiscal 1999, the
Company attempted to balance its merchandise mix between jewelry and non-jewelry
items as compared to fiscal 1998 in order to increase television home shopping
sales while at the same time maintain margins and increase inventory turns. As
part of a shift in merchandise mix, the Company devoted additional program air
time to its jewelry merchandise during fiscal 1999 over fiscal 1998. Jewelry
products accounted for approximately 72% of air time during fiscal 1999,
compared with 61% for fiscal 1998. Gross margins for the Company's direct
mail-order operations increased primarily as a result of the decrease in
HomeVisions sales due to the downsizing and divestiture of the HomeVisions
catalog operations, which has considerably lower margins than CVI or BII and as
a result of the exclusion of two lower margin catalog titles from the fiscal
1999 summer mailing.
Gross profits for fiscal 1998 and 1997 were $95,174,000 and $67,363,000,
respectively, an increase of $27,811,000 or 41.3%41%. Gross margins for fiscal 1998
were 43.7% compared to 42.2% for fiscal 1997. The principal reason for the
increase in gross profits was increased sales volume primarily as a result of
the direct mail operations included in the fiscal 1998 results.results for the full
year. Television home shopping gross margins for fiscal 1998 and 1997 were 39.9%39.8%
and 40.1%, respectively. Gross margins for the Company's direct mail
37
38
operations were 47.3%47.3 % and 45.9% for the same respective periods. Television
home shopping gross margins between comparable periods remained consistent,
primarily as a result of an increase in gross margin percentages in the jewelry
and houseware product categories and a greater proportion of higher margin non-jewelrynon-
jewelry products such as houseware products, offset by a decline in volume of
higher margin jewelry products. During fiscal 1998, the Company continued to broaden its merchandise
mix as compared to the same period last year by expanding the range and quantity
of non-jewelry merchandise. As part of the ongoing shift in merchandise mix, the
Company continued to devote increasing program air time to non-jewelry
merchandise during the past fiscal year. Jewelry products accounted for 61% of
air time during fiscal 1998, compared with 67% for fiscal 1997. Gross margins for the Company's direct mail
operations increased primarily due to the acquisition of CVI which generally has
higher margins and was included in prior year's results of operations only in
the fourth quarter. In addition, there was also a slight change in merchandise
mix to higher margin home accessories (furniture, giftware and wall decor) which
also contributed to the improvement in direct-mail margins.
Gross profits for fiscal 1997 and 1996 were $67,363,000 and $36,641,000,
respectively, which represented an increase of $30,722,000 or 83.8%. Gross
margins for the respective years were 42.2% and 41.2%. The increase in gross
profit was a direct result of increased sales volume primarily due to the 1997
direct mail acquisitions. Television home shopping gross margins for fiscal 1997
were 40.1% and gross margins on the Company's direct mail operations were 45.9%.
Television home shopping gross margins declined slightly as a result of
increased sales of traditionally lower margin electronic merchandising
categories, offset partially by an increase in gross margin percentages in
jewelry, giftware and apparel product categories and by the mix of a greater
proportion of higher margin non-jewelry products, such as housewares and
seasonal products.
OPERATING EXPENSES
Total operating expenses were $94,540,000, $106,149,000 $70,003,000 and $37,408,000$70,003,000 for
the years ended January 31, 1999, 1998 1997 and 1996,1997, respectively, representing increasesa
decrease of $11,609,000 or 11% from fiscal 1998 to fiscal 1999, and an increase
of $36,146,000 or 51.6%52% from fiscal 1997 to fiscal 1998. For fiscal 1999, total
operating expenses include a $2,950,000 one-time restructuring and asset
impairment charge recorded as a result of the Company's decision to divest its
HomeVisions catalog operations. The restructuring charge included severance
costs and the write-down of certain assets, including inventory, property and
equipment, capitalized software and catalog costs that were deemed impaired as a
direct result of the decision to divest HomeVisions.
Distribution and selling expenses for fiscal 1999 decreased $14,369,000 or
16% to $74,649,000 or 37% of net sales compared to $89,018,000 or 41% of net
sales in fiscal 1998. The decrease in distribution and selling expense from
prior year was a direct result of the downsizing of the HomeVisions catalog
operations, offset by increases in net cable access fees due to an increase in
the average rate per full-time equivalent cable home, increased marketing and
advertising fees as a result of absorbing additional advertising costs which
were previously resold to Montgomery Ward, costs associated with increased staff
levels, recruitment and labor rates due to increases in television home shopping
sales volumes. Distribution and selling expense for fiscal 1999 decreased as a
percentage of net sales over prior year primarily due to the Company's focus on
cost efficiencies, the increase in television home shopping net sales over prior
year and as a result of additional costs incurred by the Company and included in
fiscal 1998 in connection with the conversion, integration and $32,595,000 or 87.1% from fiscal 1996 to fiscal 1997.start-up of the
Company's acquired direct-mail operations and warehouse facility.
Distribution and selling expenses for fiscal 1998 increased $32,199,000$32,198,000 or
56.7%57% to $89,018,000 or 40.8%41% of net sales compared to $56,819,000$56,820,000 or 35.6%36% of net
sales infor fiscal 1997. Distribution and selling costs increased primarily as a
result of additional distribution and selling expenses associated with the
Company's direct marketing businesses, which were acquired in the second half of
fiscal 1997, increases in cable access fees resulting from the growth in the
number of cable homes receiving the Company's television home shopping
programming, additional personnel costs associated with increased staffing
levels and labor rates and additional costs associated with handling increased
sales volume. Distribution and selling expenses for fiscal
38
39 1998 increased as a
percentage of net sales over prior year primarily as a result of increases in
cable access fees on a full-time equivalent basis with respect to the Company's
television home shopping operations, a softening of sales on front-end
acquisition and sale/clearance catalogs, sales softening on books mailed to
customers in the Montgomery Ward & Co., Incorporated ("Montgomery Ward" or "MW")
credit file as a direct result of the MW bankruptcy announcement in July 1997,
increased mail promotion costs, the experience of slightly higher than
historical return rates with respect to the Company's direct-mail operations and
additional unusual costs incurred by the Company during the first quarter of fiscal 1998
in connection with the conversion and integration of the Company's direct-mail
operations and start-up costs associated with the Company's new fulfillment and
warehouse facility located in Bowling Green, Kentucky.
DistributionGeneral and sellingadministrative expenses for fiscal 19971999 increased $28,641,000$1,788,000 or
101.6%,18% to $56,819,000$11,942,000 or 35.6%6% of net sales compared to $28,178,000$10,154,000 or 31.7%5% of net sales
in fiscal 1996,1998. General and administrative costs increased primarily due to additional distribution and selling
expenses associated with the Company's acquired direct marketing businesses,
increases in cable access fees as a result
of the growth in the number of cable
homes, additional personnel costs associated with increased staffing levelsadministrative personnel and
additionalsalaries, particularly the hiring of several senior level executives, increased
rent and legal costs associated with handlingsettling certain merchandising litigation.
General and administrative costs increased as a percentage of net sales volumes.from
38
39
prior year as a result of increased general and administrative costs and the
decrease in net sales from year to year.
General and administrative expenses for fiscal 1998 increased $2,966,000$2,967,000 or
41.3%41% to $10,154,000 or 4.7%5% of net sales compared to $7,187,000 or 4.5%5% of net sales
in fiscal 1997. General and administrative costs increased as a result of
increased costs associated with the Company's direct-mail operations which were
acquired in the second half of fiscal 1997, increased personnel in support of
expanded operations and additional legal costs incurred relative to
clarification of certain cable regulations. General and administrative costs
remained relatively consistent between fiscal years as a percentage of net sales as the Company continues to leverage its existing operating infrastructure.
Generalbetween fiscal 1998
and administrative expenses for fiscal 1997 increased $2,765,000 or
62.5% to $7,187,000 or 4.5% of net sales compared to $4,422,000 or 5.0% of net
sales in fiscal 1996. General and administrative costs increased primarily as a
direct result of increased costs associated with the Company's acquired
direct-mail operations, increased personnel costs and additional legal costs
incurred relative to cable regulations.1997.
Depreciation and amortization costs were $6,978,000,$4,999,000, $6,977,000 and
$5,996,000 and
$4,808,000 for the years ended January 31, 1999, 1998 1997 and 1996,1997, respectively,
representing a decrease of $1,978,000 or 28% from fiscal 1998 to fiscal 1999 and
an increase of $981,000 or 16.4%16% from fiscal 1997 to fiscal 1998
and $1,189,000 or 24.7% from fiscal 1996 to fiscal 1997.1998. Depreciation and
amortization costs as a percentage of net sales were 3.2%2% in fiscal 1999, 3% in
fiscal 1998 3.8%and 4% in fiscal 1997 and 5.4% in fiscal 1996.1997. The dollar increasedecrease from fiscal 1998 to
fiscal 1999 is primarily due to a reduction in amortization expense of
approximately $1,363,000 relating to intangible assets reduced in connection
with the November 1997 amended Montgomery Ward operating and license agreement.
In addition, depreciation and amortization expense decreased from fiscal 1998 as
a result of the Company's sale of its Seattle, Washington television station
(KBGE-TV, Channel 33) in February 1998. Depreciation and amortization expense
increased from fiscal 1997 to fiscal 1998 primarily due to additional
depreciation and amortization of approximately $989,000 relating to assets
associated with the Company's acquired direct-mail operations, depreciation on
property and equipment additions, particularly with respect to the Company's
fulfillment facility, offset by a reduction in amortization associated with the
Montgomery Ward operating agreement and licenses entered into in August 1995 and
amended in November 1997.
Depreciation and amortization
expense increased from fiscal 1996 to fiscal 1997 primarily due to additional
amortization expense of $690,000 relating to the Montgomery Ward operating
agreement and licenses and depreciation and amortization of $640,000 relating to
direct-mail acquisition assets offset by reductions associated with the sale of
WAKC and WHAI in February 1996.
OPERATING LOSS
The operating loss was $8,569,000, $10,975,000 $2,640,000 and $766,000$2,640,000 for the years
ended January 31, 1999, 1998 and 1997, respectively. The fiscal 1999 operating
loss includes a one-time restructuring and 1996, respectively.asset impairment charge of $2,950,000
recorded in the third quarter relating to the Company's decision to divest its
HomeVisions catalog operations. Excluding the one-time HomeVisions restructuring
charge, the operating loss was $5,619,000 for the year ended January 31, 1999,
an improvement of $5,356,000 or 49% over fiscal 1998. The improvement in the
operating loss resulted primarily from the overall improvement in the Company's
television home shopping business, decreases in distribution and selling costs
over prior year due to the downsizing of the HomeVisions catalog operations and
because the first half of fiscal 1998 included certain unusual costs incurred by
the Company in connection with the conversion and integration of the Company's
fulfillment and warehouse facility. Also contributing to the operating loss
improvement in fiscal 1999 was a reduction in amortization expense compared to
fiscal 1998 relating primarily to the November 1997 amended Montgomery Ward
operating and license agreement. These operating improvements were offset, in
part, by increased general and administrative costs, decreased sales volumes in
the Company's direct mail operations and a corresponding decrease in gross
profits. The increase in the operating loss forfrom fiscal 1997 to fiscal 1998
resulted primarily from the following: increases in distribution and selling
costs over the prior year largely due to increases in front-end cable access fees associated with
new cable distribution,distribution; expansion of operations,operations; lower than anticipated response
rates from catalog solicitations and television home-shoppinghome shopping offerings as a
result of the Montgomery Ward bankruptcy notification in July 1997,1997; higher than
historical return rates on catalog operationsoperations; and certain unusual costs
incurred by the Company in the first quarterhalf of fiscal 1998 in connection with the
conversion and integration of the Company's acquired direct-mail operations, as well as start-up costs associated
with the Company's new fulfillment and warehouse facility located in Bowling
Green, Kentucky.facility.
These increases were offset by increased sales volume, margins and a
corresponding increase in gross profits.
The increase in the operating
39
40
loss for fiscal 1997 resulted primarily from decreases in gross margin
percentages relating to the Company's television home shopping business over
fiscal 1996, as well as increases in distribution and selling costs, general and
administrative and depreciation and amortization expenses due to expanded
operations. These increases were offset by increased sales volume and a
corresponding increase in gross profits.
OTHER INCOME (EXPENSE)
Total other income was $16,060,000 in fiscal 1999, $40,579,000 in fiscal
1998 and $32,330,000 in fiscal 19971997. Total other income for fiscal 1999 included
the following: a pre-tax gain of $19,750,000 from the sale of television station
KBGE-TV Channel 33 in Seattle, Washington along with two low power television
stations and $11,886,000a minority interest in fiscal 1996.an entity which had applied for a new full
power station; gains on the sale of property
39
40
and investments of $8,102,000; unrealized gains of $1,350,000 recognized on
equity investments classified as trading securities; and interest income of
$2,904,000. These gains were offset by the following charges: a $7,100,000
charge related to the litigation settlement with Time Warner Cable; the
$6,113,000 write-down of the Company's investment in CML Group, Inc. following
their announcement of bankruptcy; the write-off of $2,350,000 of acquisition
related costs associated with the terminated merger with National Media
Corporation; and equity in losses of affiliates of $323,000. Total other income
for fiscal 1998 resulted primarily from a $38,850,000 gain recorded on the sale
of television station WVVI (TV), Channel 66, in July 1997, gains of $215,000
recorded from sales of other investments and interest income of $2,116,000 earned on cash and cash
equivalents and short-term investments.$2,116,000.
These gains were offset by equity in losses of affiliates of $431,000 recorded
for the year. The equity in losses of
affiliates represents amounts lost on a 13% ownership interest in a limited
partnership accounted for under the equity method of accounting.fiscal 1998. Interest income decreased $1,796,000increased $788,000 from fiscal 19971998 due to
decreasesincreases in cash and cash equivalents and short-term investments from fiscal
19971998 to fiscal 1998.1999. Total other income for the year ended January 31, 1997
resulted primarily from a $27,050,000 gain recorded on the sale of television
stations WAKC and WHAI in February 1996, gains of $809,000 recorded from sales
of other investments, equity in earnings of affiliates of $419,000, gains of $808,000
recorded from sales of other investments and interest
income of $3,912,000
earned on cash$3,912,000.
NET INCOME
Net income was $4,639,000 or $.18 per basic and cash equivalents and short-term investments. Total otherdiluted share for the year
ended January 31, 1999. Net income for the year ended January 31, 1996 resulted primarily1999 includes
the following pretax items: a gain of $19,750,000 from an $8,480,000
gain on the sale of a broadcast
television station; a one-time charge of $7,100,000 in connection with a
litigation settlement with Time Warner Cable; the $6,113,000 write-down of the
Company's investment in National Media Corporation
("National Media"), equity in earningsCML Group, Inc.; the write-off of affiliates$2,350,000 of
$1,983,000acquisition related costs; net gains of $9,129,000 recorded on the sale and
interest
incomeholdings of $2,138,000 earned on cash and cash equivalents and short-term
investments. These items were partially offset by a $617,000 provision for
estimated litigation costs associated with settling the shareholder litigation
arising from the Company's terminated tender offer for National Media.
NET INCOMEproperty and investments; and the HomeVisions
restructuring and asset impairment charge of $2,950,000. Excluding these
one-time pretax gains and charges, the Company had a net loss of $1,783,000 or
$.07 per basic and diluted share. Net income was $18,104,000 or $.57 per basic
and diluted share ($.57 per basic share) for the year ended January 31, 1998. Excluding the gain on the
sale of television station WVVI, the gain on the sale of investments and loss on
earnings from affiliates, the Company had a net loss of $9,030,000$5,508,000 or $.28 per
diluted share ($.28$.17 per
basic share).and diluted share. Net income was $18,090,000 or $.56 per diluted share
($.57 per basic share) for the year ended January 31, 1997. Excluding the gain
on the sale of the two television stations, the gain on the sale of investments
and equity in earnings from affiliates, the Company had net income of $847,000,$861,000,
or $.03 per basic and diluted share ($.03 per basic share). Net income
was $11,020,000 or $.38 per diluted share ($.38 per basic share) for the year
ended January 31, 1996. Excluding the gain on sale of investments, equity in
earnings of affiliates and the provision for litigation costs, the Company had
net income for fiscal 1996 of $1,173,000 or $.04 per diluted share ($.04 per
basic share).share. For the years ended January 31, 1999, 1998
1997 and 1996,1997, respectively, the Company had approximately 26,267,000, 31,888,000 32,342,000 and
29,309,000,32,342,000 diluted weighted average common shares outstanding and 25,963,000,
31,745,000 31,718,000 and 28,627,00031,718,000 basic weighted average common shares outstanding.
For the years ended January 31, 1999 and 1998, net income reflects an
income tax provision of $2,852,000 and $11,500,000, respectively, which results
in an effective tax rate of 38% in fiscal 1999 and 39% in fiscal 1998. For the
year ended January 31, 1997, net income reflects an income tax provision of
$11,500,000 and $11,600,000 respectively, which results in an effective tax rate of 39% for each year. For the year ended January 31,
1996, net income reflects an income tax provision of $100,000.. As of January 31,
19981999, all net tax carryforwards available to offset future taxable income had
been utilized.
PROGRAM DISTRIBUTION
The Company's television home shopping program was available to
approximately 21.8 million cable homes as of January 31, 1999 as compared to
17.4 million cable homes as of January 31, 1998 as comparedand to 16.4 million cable homes
as of January 31, 1997 and to 13.6 million cable homes
as of January 31, 1996.1997. The Company's programming is currently available through
affiliation and time-block purchase agreements with approximately 285336 cable
systems and one wholly-owned full power UHF television broadcast station. In
addition, the Company's programming is broadcast full-time over thirteentwelve owned or
affiliated low power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of January 31, 1999,
1998 1997 and 1996,1997, the Company's programming
40
41 was available to approximately 14.9
million, 11.7 million 11.4 million and 10.511.4 million full-time equivalent cable homes ("FTE"),
respectively. Approximately 10.6 million, 8.6 million 7.7 million and 7.27.7 million cable
homes at January 31, 1999, 1998 1997 and 1996,1997, respectively, received the Company's
programming on a full-time basis. Homes that receive the Company's programming
24 hours a day are counted as one FTE each and homes that receive the Company's
television home shopping programming for any period less than 24 hours are
counted based upon an analysis of time of day and day of week.
40
41
CIRCULATION
With respect to the Company's direct marketing operations, approximately 4232
million and 4035 million HomeVisionsCVI catalogs were mailed in fiscal 19981999 and 1997,1998,
respectively. At January 31, 1998, HomeVisions1999, CVI had approximately 548,000585,000 "active"
catalog customers (defined as individuals that have purchased from the Company
within the preceding 12 months) and combined customer and prospect files that
totaled approximately 3.4 million names. Approximately 35 and 26 million CVI
catalogs were mailed in fiscal 1998 and 1997, respectively. At January 31, 1998,
CVI had approximately 553,000 active catalog customers and approximately 4.84.1 million customer names in
its catalog customer list database. During fiscal 1999 and 1998, and 1997,respectively,
BII had approximately 719 million and 678 million printed space advertisements
or "impressions" circulated in national and regional newspapers and magazines.
At January 31, 1998,1999, BII had approximately 210,000265,000 active customers and
approximately 650,000733,000 customer names in its customer list database.
YEAR 2000 CONSIDERATIONS
The Year 2000 issue is the result of computer programs using only the last
two digits to indicate the calendar year. If uncorrected, such computer programs
may be unable to interpret dates correctly beyond the year 1999, which in turn,
may cause computer system failure or other computer errors disrupting
operations. The Company has reviewed the implications of yearits Year 2000
compliance issues and has takenformed a Year 2000 Compliance Project team to
establish and take steps designed to ensure that the Company's computerinformation systems and
software applications will manage dates beyond 1999. The scope of the Company's
Year 2000 readiness effort includes the review of, and taking remedial action as
necessary, regarding (i) information technology ("IT") components such as
software and hardware; (ii) non-IT systems or embedded technology; and (iii)
readiness of key third parties, including significant vendors and service
providers and the electronic data interchange (EDI) with third parties. With
respect to information systems and embedded technologies, management presently
believes that a combination of software modification, upgrades and replacements
will be necessary to mitigate the Company's Year 2000 issues. However, if such
modifications are not made, or not completed on a timely basis, the Year 2000
issues could have a materially adverse effect on the Company's business,
financial condition and results of operations. The Company expects to implement
successfully the systems and programming changes necessary to be Year 2000
compliant in a timely manner. The target date for remediation of its information
systems is August 31, 1999. The Company does not expect the cost of addressing
its Year 2000 issues to have a material effect on the Company's results of
operations, financial position or liquidity and is funding such costs with
operating cash flows. Total costs are expected to be less than $500,000. In
addition to internal Year 2000 remediation activities, the Company has also
implemented a plan to communicate to its key suppliers, vendors and service
providers the expectation that they attain Year 2000 compliance in a timely
manner. While the Company expects its internal IT and non-IT systems to be Year
2000 compliant by the date specified, the Company is working on a contingency
plan specifying what the Company will do if it or important third parties are
not Year 2000 compliant by the required dates. The Company expects to have such
a contingency plan finalized in 1999. The Company believes that it has allocated
adequate resources for this purposeto address and that planned software
upgrades, which are underway andachieve Year 2000 compliance in the normal course of business, will address
the Company's internal year 2000 needs. While the Company expects that efforts
on the part of current employees of the Company will be required to monitor year
2000 issues,a timely
manner, however, no assurances can be given that these efforts or the efforts of
key third parties will be successful.
The Company does not expect the cost of addressing any year 2000 issue to be a
material event or uncertainty that would have a material adverse effect on
future operating results or financial condition.
41
42
QUARTERLY RESULTS
The following summarized unaudited results of operations for the quarters
in the fiscal years ended January 31, 19981999 and 19971998 have been prepared on the
same basis as the annual financial statements and reflect adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of results of operations for the periods
presented. The Company's results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of operations in any
period should not be considered indicative of the results to be expected for any
future period.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1999:
Net sales..................................... $43,676 $44,082 $50,027 $65,943 $203,728
Gross profit.................................. 18,654 18,130 20,497 28,690 85,971
Gross margin.................................. 42.7% 41.1% 41.0% 43.5% 42.2%
Operating expenses............................ 20,942 21,267 25,721 26,610 94,540
Operating income (loss)....................... (2,288) (3,137) (5,224) 2,080 (8,569)
Other income (expense), net................... 20,484 1,974 (5,005) (1,393) 16,060
Net income (loss)............................. $11,280 $ (721) $(6,341) $ 421 $ 4,639
======= ======= ======= ======= ========
Net income (loss) per share(a)................ $ .42 $ (.03) $ (.25) $ .02 $ .18
======= ======= ======= ======= ========
Net income (loss) per share -- assuming
dilution(a)................................. $ .42 $ (.03) $ (.25) $ .02 $ .18
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 26,781 25,979 25,467 25,626 25,963
======= ======= ======= ======= ========
Diluted..................................... 26,877 25,979 25,467 26,491 26,267
======= ======= ======= ======= ========
FISCAL 1998:
Net sales..................................... $51,062 $48,500 $58,325 $60,095 $217,982
Gross profit.................................. 22,695 19,924 25,726 26,829 95,174
Gross margin.................................. 44.4% 41.1% 44.1% 44.6% 43.7%
Operating expenses............................ 25,819 24,632 27,411 28,287 106,149
Operating loss................................ (3,124) (4,708) (1,685) (1,458) (10,975)
Other income, net............................. 212 39,219 548 600 40,579
Net income (loss)............................. $(1,761) $21,059 $ (666) $ (528) $ 18,104
======= ======= ======= ======= ========
Net income (loss) per share:.................. $(.05) $.66 $(.02) $(.02) $.57share (a)............... $ (.05) $ .66 $ (.02) $ (.02) $ .57
======= ======= ======= ======= ========
Net income (loss) per share -- assuming
dilution.................................... $(.05) $.66 $(.02) $(.02) $.57dilution(a)................................. $ (.05) $ .66 $ (.02) $ (.02) $ .57
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 32,949 31,829 31,874 30,330 31,745
======= ======= ======= ======= ========
Diluted..................................... 33,10932,949 31,953 32,064 30,42731,874 30,330 31,888
======= ======= ======= ======= ========
FISCAL 1997:
Net sales..................................... $22,788 $24,341 $47,118 $65,231 $159,478
Gross profit.................................. 9,388 9,728 18,661 29,586 67,363
Gross margin.................................. 41.2% 40.0% 39.6% 45.4% 42.2%
Operating expenses............................ 10,071 10,523 19,421 29,988 70,003
Operating loss................................ (683) (795) (760) (402) (2,640)
Other income, net............................. 28,086 1,036 1,773 1,435 32,330
Net income.................................... $16,453 $ 145 $ 609 $ 883 $ 18,090
======= ======= ======= ======= ========
Net income per share(a)....................... $.56 $-- $.02 $.03 $.57
======= ======= ======= ======= ========
Net income per share -- assuming
dilution(a)................................. $.54 $-- $.02 $.03 $.56
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 29,352 29,577 33,628 34,317 31,718
======= ======= ======= ======= ========
Diluted..................................... 30,416 30,266 34,060 34,626 32,342
======= ======= ======= ======= ========
- -------------------------
(a) The sum of quarterly per share amounts does not equal the annual amount due
to changes in the calculation of average common and dilutive shares
outstanding as well as
the effectsrequired under Statement of rounding.Financial Accounting Standards No.
128, "Earnings per Share".
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 19981999 and 1997,1998, cash and cash equivalents and short-term
investments were $31,866,000$46,870,000 and $52,859,000,$31,866,000, respectively, a $20,993,000
decrease.$15,004,000
increase. For the year ended January 31, 1998,1999, working capital decreasedincreased
$15,565,000 to $65,636,000 compared to a decrease of $13,234,000 to $50,071,000 compared to an increase of $11,779,000 to $63,305,000
for the year ended January 31, 1997.1998. The current ratio was 3.0 at January 31,
1999 compared to 2.7 at January 31, 1998 and 1997.1998. At January 31, 1999 and 1998,
short-term investments and cash equivalents were primarily
42
43
invested in debt securities with original maturity dates of less than 270 days.
42
43In addition, at January 31, 1999, short-term investments consisted of certain
equity investments in the amount of $2,606,000 classified as "trading
securities".
Total assets at January 31, 19981999 were $134,764,000$141,770,000 compared to $168,086,000$135,279,000
at January 31, 1997.1998. Shareholders' equity was $102,268,000$108,411,000 at January 31, 1999,
compared to $104,653,000 at January 31, 1998, comparedan increase of $3,758,000. The
increase in shareholders' equity for fiscal 1999 resulted primarily from
reported net income of $4,639,000, proceeds received on the exercise of stock
options of $1,729,000, other comprehensive income on available-for-sale
investments of $1,050,000 and a $731,000 income tax benefit relating to $126,654,000 at January 31, 1997, a decreasestock
options exercised, offset by $4,292,000 relating to the repurchase of $24,386,000.1,327,000
shares of Company common stock made in connection with the Company's authorized
stock repurchase program. The decrease in shareholders' equity forfrom fiscal 1997
to fiscal 1998 resulted primarily relates tofrom an $18,387,000 reduction in equity
recorded in connection with the Company's restructuring of its Operating and
License Agreement with Montgomery Ward. As discussed further in Note 3the notes to the
consolidated financial statements, the Company restructured its operating
agreement in an equity transaction whereby, among other matters, the Company
agreed to cease the use of the Montgomery Ward and Montgomery Ward Direct names
in its catalog operations in exchange for Montgomery Ward's return of 3.8
million common stock purchase warrants. In addition, shareholders' equity
decreased as a result of the following: $17,360,000 relating to the purchase of
2,417,000 shares of Company common stock made in connection with the Company's
authorized stock repurchase program and the repurchase of 1,280,000 shares from
Montgomery Ward; unrealized holdingother comprehensive losses of $6,345,000 on available-for-sale investments; increasedinvestments of
$3,934,000; increases in notes toreceivable from former officers of $369,000; and
a $366,000 tax effect relating to the repurchase of warrants. The decreases in
shareholders' equity were offset primarily by reported net income of $18,104,000
and proceeds of $298,000 received on the exercise of stock options of $299,000. The increase in shareholders' equity from fiscal 1996
to fiscal 1997 resulted primarily from net income of $18,090,000 for the year,
$9,484,000 of value assigned to common stock purchase warrants issued in
connection with the acquisition of MWD, proceeds received on the exercise of
stock options and warrants of $1,150,000, a $790,000 income tax benefit relating
to stock options exercised and an unrealized holding gain of $254,000 on
investments available-for-sale, offset by $5,826,000 relating to the repurchase
of 1,047,000 shares of Company common stock made in connection with the
Company's authorized stock repurchase program.options. As of
January 31, 1998,1999, the Company's long-term obligations consisted of a ten-year
$600,000 note due and payable in 2006 related to the purchase of land, and
capital lease obligations of $284,000 related to one of the Company's acquisitions and a five-year
non-compete obligation totaling $153,000 related to the acquisition of WAKC,
Akron, Ohio.$75,000. The Company has no other long-term debt
obligations.
For the year ended January 31, 1998,1999, net cash used for operating activities
totaled $19,445,000$18,091,000 compared to net cash used of $19,445,000 in fiscal 1998 and
$5,779,000 in fiscal 1997. Net
cash provided by operating activities totaled $2,304,000 in fiscal 1996. Cash flows from operations before consideration of
changes in working capital items and investing and financing activities was a
negative $3,570,000 in fiscal 1999 compared to a negative $3,998,000 in fiscal
1998 compared to a positive $3,357,000 in fiscal 1997 and a positive $4,042,000$3,356,000 in fiscal 1996.1997. Net cash used for operating
activities for fiscal 1999 reflects net income, as adjusted for depreciation and
amortization, equity in losses of affiliates, gains on the sale of property,
investments and broadcast stations, unrealized gains on trading securities, the
write-down of the investment in CML Group, Inc., the restructuring and asset
impairment charge and the write-off of terminated acquisition costs. In
addition, net cash used for operating activities for fiscal 1999 reflects
increases in accounts receivable and inventories, offset by decreases in prepaid
expenses, income taxes receivable and increases in accounts payable and accrued
liabilities. Accounts receivable increased primarily due to increased
receivables due from customers for merchandise sales made pursuant to the
"ValuePay" installment program. Inventories increased from 1998 to support
increased sales volumes primarily with respect to the Company's television home
shopping business, offset by decreases resulting from the downsizing and
divestiture of the HomeVisions catalog operations. Prepaid expenses increased
primarily as a result of the timing of contract payments for cable access fees
and satellite rentals. The increase in accounts payable and accrued liabilities
is primarily the result of increased inventory levels and the timing of related
invoice payments offset by decreased payables and accrued liabilities as a
result of the HomeVisions divestiture. Net cash used for operating activities
for fiscal 1998 reflects net income, as adjusted for depreciation and
amortization, equity in losses of affiliates and gaingains on the sale of a
broadcast station and investments, increased accounts payable and accrued
liabilities, increased net taxes receivable and funding required to support a
higher level of accounts receivable, offset by a decrease in inventories and
prepaid expenses. Accounts receivable primarily increased from fiscal 1997 to
fiscal 1998 due to the timing relative to receipt of funds from credit card
companies, increased sales volume and increased receivables due from customers
for merchandise sales made pursuant to the "ValuePay" installment program.
Inventories decreased from prior yearfiscal 1997 to fiscal 1998 as a result of tighter
inventory management and changes in merchandise mix.
Net cash used for operating
activities for fiscal 1997 reflects net income, as adjusted for depreciation and
amortization and gain on sale of broadcast stations and investments, increased
accounts payable and accrued liabilities, decreased prepaid expenses and other,
offset by funding required to support higher levels of accounts receivable and
inventories as a result of increased sales volume and merchandise mix.43
44
During fiscal 1995, the Company introduced an installment payment program
called ValuePay"ValuePay" which entitles customers to purchase merchandise and generally
pay for the merchandise in two to four equal monthly installments. As of January
31, 1998,1999, the Company had approximately $2,756,000$16,554,000 due from customers under the
ValuePay installment program, compared to $1,847,000$2,970,000 at January 31, 1997.1998. The
increase in ValuePay receivables from fiscal 1998 is the result of sales
incentive programs initiated during 1999 which emphasized the increased use of
the installment payment program. ValuePay was introduced to increase sales while
at the same time reducing return rates on merchandise with above-normal average
selling prices. The Company intends to continue to sell merchandise using the
ValuePay installment program. Receivables generated from the ValuePay program
will be funded in fiscal 19992000 from the Company's present capital resources and
future operating cash flows.
Net cash provided by investing activities totaled $23,065,000$48,131,000 in fiscal
19981999 compared to $23,065,000 for fiscal 1998 and $19,223,000 for fiscal 1997 and net cash used of $11,443,000
for fiscal 1996.1997.
Expenditures for property and equipment approximated $3,543,000were $1,565,000 in fiscal 19981999 compared
to $3,543,000 for fiscal 1998 and $14,365,000 for fiscal 1997 and $3,041,000 for fiscal
1996.
43
441997. Expenditures for
property and equipment for fiscal 19981999 and 19971998 primarily include (i) the
upgrade of broadcast station and production equipment, studios and transmission
equipment, (ii) the upgrade of computer software and related equipment, and
(iii) increased leasehold improvements as a result of expanded operations. The
increases in property and equipment in fiscal 1999 were offset by a decrease of
approximately $5,100,000 related to the sale of land which had been held for
investment purposes and decreases of approximately $594,000 of transmission and
production equipment and other fixed assets resulting primarily from the sale of
television broadcast station KBGE-TV. The increases in property and equipment in
fiscal 1998 were offset by a decrease of approximately $3,000,000 of
transmission and production equipment and other fixed assets resulting from the
sale of its television broadcast station WVVI. In addition, fiscal 1997
expenditures include a $4.7
million$4,700,000 related to land purchase which is being held for future expansionpurchased in fiscal 1997 and
investment
purposes.sold in fiscal 1999. Principal future capital expenditures will be for upgrading
television production and transmission equipment, studio expansions,
expenditures pursuant to electronic commerce initiatives and order fulfillment
equipment to support expanded operations, especially with respect to the
Company's direct-mail operations. During fiscal 1999, the secondCompany
received $9,548,000 of proceeds from the sale of real property in Eden Prairie,
Minnesota and other investments. During the first quarter of fiscal 1999, the
Company received $24,483,000 in proceeds from the sale of its broadcast
television station KBGE-TV. In addition, during fiscal 1999, the Company
disbursed $3,997,000 relating to certain investments and other long-term assets
of which $1,818,000 related to costs associated with the terminated National
Media Merger Agreement, advanced an additional $3,000,000 working capital loan
in the form of a demand note to National Media Corporation and received
$10,000,000 from National Media Corporation in connection with the repayment of
the demand note.
During fiscal 1998, the Company received approximately $30 million$30,000,000 in cash
proceeds from the sale of television station WVVI. During fiscal 1998, theThe Company disbursed
$6,632,000$6,631,000 relating to certain strategic investments and other long-term assets,
granted a $7 million$7,000,000 working capital loan in the form of a Demand Notedemand note to
National Media Corporation, bearing interest at prime plus 1.5%, received $1,381,000 in net proceeds from sales and
distributions of certain long-term investments and received proceeds of
$1,603,000 in collection of a long-term note receivable.
Subsequent to January 31, 1998, the Company had loaned National Media the
remaining $3 million available under the Demand Note.
During fiscal 1997, the Company used net cash of approximately $4,114,000
in connection with the acquisition of three direct-mail companies and received
$40.0 million in proceeds from the sale of two television stations; Akron ABC
affiliate WAKC (TV) and independent station WHAI (TV). The Company paid
approximately $3.8 million toward the acquisition of independent television
station KBGE (TV), including acquisition costs and paid $800,000 at a second
closing relative to broadcast station WVVI (TV). During fiscal 1997, the Company
also received $6,104,000 in net proceeds from the sale of certain long-term
investments and disbursed $6,534,000 for investments and other long-term assets.
Net cash used for financing activities totaled $2,974,000 for fiscal 1999,
$15,041,000 for fiscal 1998 and $4,888,000$4,889,000 for fiscal 1997. Net cash used for
financing activities primarily relates to common stock repurchases made under
the Company's common stock repurchase program, installment payments made under a
five year non-compete obligation entered into upon the acquisition of a
broadcast station and capital lease obligation payments offset by proceeds
received from the exercise of stock options and warrants.
Net cash provided by financing activities totaled
$7,547,000 for fiscal 1996 and was primarily due to proceeds received from
Montgomery Ward for its initial investment of $8.0 million, offset by the
payment of related offering costs.44
45
Management believes funds currently held by the Company will be sufficient
to fund the Company's operations, the repurchase of any additional Company
common stock pursuant to an authorized repurchase plan, anticipated capital
expenditures and cable launch fees through fiscal 19992000. In addition, the Company
anticipates receipt of approximately $44.3 million upon consummation of the
transactions with NBC and costsGE Capital. Such capital will be available for general
corporate purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and expenses
associated withdoes not currently utilize derivative financial
instruments. The operations of the proposed National Media Merger. Additional capital may be
requiredCompany are conducted primarily in the event theUnited
States and as such are not subject to foreign currency exchange rate risk. The
Company has virtually no long-term debt, and accordingly, is ablenot significantly
exposed to identify additional direct-mail
company acquisition targets and television stations in strategic markets at
favorable prices, and if the Company decides to acquire up to the maximum number
of full power television stations that it may own under current regulations.
44interest rate risk.
45
4546
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
PAGE
----
Report of Independent Public Accountants.................... 4647
Consolidated Balance Sheets as of January 31, 19981999 and
1997...................................................... 471998...................................................... 48
Consolidated Statements of Operations for the Years Ended
January 31, 1999, 1998 1997 and 1996........................... 481997........................... 49
Consolidated Statements of Shareholders' Equity for the
Years Ended January 31, 1999, 1998 1997 and 1996............... 491997............... 50
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1999, 1998 1997 and 1996........................... 501997........................... 52
Notes to Consolidated Financial Statements.................. 5153
Financial Statement Schedule -- Schedule II -- Valuation and
Qualifying Accounts....................................... 7279
4546
4647
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ValueVision International, Inc.:
We have audited the accompanying consolidated balance sheets of ValueVision
International, Inc. (a Minnesota corporation) and Subsidiaries as of January 31,
19981999 and 1997,1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1998.1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ValueVision International,
Inc. and Subsidiaries as of January 31, 19981999 and 1997,1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 19981999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 16, 1998
4615, 1999
47
4748
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31,
--------------------------------------------------
1999 1998
1997
---- ----
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 17,198,07444,264 $ 28,618,94317,198
Short-term investments.................................... 14,667,669 24,239,8402,606 14,668
Accounts receivable, net.................................. 8,694,293 6,446,64919,466 8,694
Inventories, net.......................................... 20,426,862 28,109,081net 21,101 20,427
Prepaid expenses and other................................ 10,478,848 10,933,3948,576 10,479
Note receivable -- National Media Corporation............. 7,000,000 -- 7,000
Income taxes receivable................................... 748,319 --500 748
Deferred income taxes..................................... 447,000 2,681,000
------------ ------------1,807 447
-------- --------
Total current assets................................... 79,661,065 101,028,907assets................................. 98,320 79,661
PROPERTY AND EQUIPMENT, NET................................. 21,403,724 24,283,10814,069 21,404
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET............. 5,807,187 6,934,5462,019 5,807
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET....... 2,073,360 15,052,9351,876 2,073
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION............. 9,847,688 --9,713 9,848
GOODWILL, AND OTHER INTANGIBLE ASSETS, NET................... 6,892,454 10,764,011NET............................................... 5,962 6,892
INVESTMENTS AND OTHER ASSETS, NET........................... 9,078,826 10,022,718
------------ ------------
$134,764,304 $168,086,225
============ ============9,160 9,079
DEFERRED INCOME TAXES....................................... 651 515
-------- --------
$141,770 $135,279
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ 410,648393 $ 392,921411
Accounts payable.......................................... 17,643,895 24,887,90420,736 17,644
Accrued liabilities....................................... 11,535,551 12,398,041
Income taxes payable...................................... -- 45,008
------------ ------------11,555 11,535
-------- --------
Total current liabilities.............................. 29,590,094 37,723,874
------------ ------------liabilities............................ 32,684 29,590
LONG-TERM OBLIGATIONS....................................... 1,036,821 1,443,189
DEFERRED INCOME TAXES....................................... 1,869,660 2,265,000
------------ ------------675 1,036
-------- --------
Total liabilities...................................... 32,496,575 41,432,063
------------ ------------liabilities.................................... 33,359 30,626
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 9,8, 10, and 10)11)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 26,780,77825,865,466 and 28,842,19826,780,778 shares issued and
outstanding............................................ 267,808 288,422
Common stock purchase warrants; 0 and 5,368,557 shares.... -- 26,984,038259 268
Additional paid-in capital................................ 74,538,225 83,309,455
Net unrealized holding gains (losses) on investments
available-for-sale..................................... (6,275,652) 69,43772,715 74,538
Accumulated other comprehensive losses.................... (2,841) (3,891)
Notes receivable from officers............................ (960,476) (591,445)shareholders........................ (1,059) (960)
Retained earnings......................................... 34,697,824 16,594,255
------------ ------------39,337 34,698
-------- --------
Total shareholders' equity............................. 102,267,729 126,654,162
------------ ------------
$134,764,304 $168,086,225
============ ============equity........................... 108,411 104,653
-------- --------
$141,770 $135,279
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
4748
4849
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------------------------------------------------
1999 1998 1997
1996
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
NET SALES........................................... $217,981,886 $159,477,917 $88,909,853SALES................................................ $ 203,728 $ 217,982 $ 159,478
COST OF SALES....................................... 122,807,613 92,114,663 52,268,398
------------ ------------ -----------SALES............................................ 117,757 122,808 92,115
---------- ---------- ----------
Gross profit...................................... 95,174,273 67,363,254 36,641,455
------------ ------------ -----------profit........................................ 85,971 95,174 67,363
---------- ---------- ----------
OPERATING EXPENSES:
Distribution and selling.......................... 89,018,303 56,819,304 28,177,953selling............................... 74,649 89,018 56,820
General and administrative........................ 10,153,565 7,187,377 4,421,924administrative............................. 11,942 10,154 7,187
Depreciation and amortization..................... 6,977,594 5,996,357 4,807,735
------------ ------------ -----------amortization.......................... 4,999 6,977 5,996
Restructuring and impairment of assets................. 2,950 -- --
---------- ---------- ----------
Total operating expenses....................... 106,149,462 70,003,038 37,407,612
------------ ------------ -----------expenses............................ 94,540 106,149 70,003
---------- ---------- ----------
OPERATING LOSS...................................... (10,975,189) (2,639,784) (766,157)
------------ ------------ -----------LOSS........................................... (8,569) (10,975) (2,640)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations................ 38,850,000 27,050,000 --stations..................... 19,750 38,850 27,050
Gain on sale of investments....................... 214,694 808,449 8,480,453
Litigation costs..................................property and investments............... 8,102 215 809
Time Warner litigation settlement...................... (7,100) -- --
(617,000)Write-down of investment in CML Group, Inc............. (6,113) -- --
National Media Corporation terminated acquisition
costs............................................... (2,350) -- --
Unrealized gain on trading securities.................. 1,350 -- --
Equity in earnings (losses) of affiliates......... (431,241) 419,430 1,983,226affiliates.............. (323) (431) 419
Interest income................................... 2,116,352 3,912,231 2,137,720income........................................ 2,904 2,116 3,912
Other, net........................................ (171,047) 139,396 (98,677)
------------ ------------ -----------net............................................. (160) (171) 140
---------- ---------- ----------
Total other income............................. 40,578,758 32,329,506 11,885,722
------------ ------------ -----------income.................................. 16,060 40,579 32,330
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 29,603,569 29,689,722 11,119,565TAXES................. 7,491 29,604 29,690
Provision for income taxes 11,500,000 11,600,000 100,000
------------ ------------ -----------taxes.......................... 2,852 11,500 11,600
---------- ---------- ----------
NET INCOME..........................................INCOME............................................... $ 18,103,5694,639 $ 18,089,722 $11,019,565
============ ============ ===========18,104 $ 18,090
========== ========== ==========
NET INCOME PER COMMON SHARE.........................SHARE.............................. $ 0.18 $ 0.57 $ 0.57
$ 0.38
============ ============ ===================== ========== ==========
NET INCOME PER COMMON SHARE -- ASSUMING DILUTION....DILUTION......... $ 0.18 $ 0.57 $ 0.56
$ 0.38
============ ============ ===================== ========== ==========
Weighted average number of common shares outstanding:
Basic.............................................Basic.................................................. 25,963,341 31,745,437 31,718,390
28,627,356
============ ============ ===========
Diluted...........................................========== ========== ==========
Diluted................................................ 26,266,814 31,888,229 32,342,082
29,308,692
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
48
49
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
NET UNREALIZED
COMMON STOCK COMMON HOLDING NOTES
--------------------- STOCK ADDITIONAL GAINS (LOSSES) RECEIVABLE
NUMBER PAR PURCHASE PAID-IN ON INVESTMENTS FROM
OF SHARES VALUE WARRANTS CAPITAL AVAILABLE-FOR-SALE OFFICERS
--------- ----- -------- ---------- ------------------ ----------
BALANCE, January 31, 1995......... 27,986,426 $279,864 $ -- $ 79,651,718 $ (614,526) $ --
Exercise of stock options......... 77,322 773 -- 141,071 --
Issuance of common stock.......... 1,280,000 12,800 -- 7,987,200 -- --
Value assigned to common stock
purchase warrants................ -- -- 17,500,000 -- -- --
Offering expenses................. -- -- -- (590,050) -- --
Unrealized holding gain on
investments available-for-sale... -- -- -- -- 429,756 --
Issuance of note to officers...... -- -- -- -- -- (558,670)
Net income........................ -- -- -- -- -- --
---------- -------- ------------ ------------ ----------- ---------
BALANCE, January 31, 1996......... 29,343,748 293,437 17,500,000 87,189,939 (184,770) (558,670)
Exercise of stock options and
warrants......................... 545,150 5,452 -- 1,144,943 -- --
Repurchases of common stock....... (1,046,700) (10,467) -- (5,815,427) -- --
Value assigned to common stock
purchase warrants................ -- -- 9,484,038 -- -- --
Income tax benefit from stock
options exercised................ -- -- -- 790,000 -- --
Unrealized holding gain on
investments available-for-sale... -- -- -- -- 254,207 --
Increase in notes receivable from
officers......................... -- -- -- -- -- (32,775)
Net income........................ -- -- -- -- -- --
---------- -------- ------------ ------------ ----------- ---------
BALANCE, January 31, 1997......... 28,842,198 288,422 26,984,038 83,309,455 69,437 (591,445)
Exercise of stock options and
warrants......................... 1,636,080 16,361 -- 282,161 -- --
Repurchases of common stock and
warrants......................... (3,697,500) (36,975) (18,386,927) (17,323,502) -- --
Value transferred from common
stock purchase warrants.......... -- -- (8,597,111) 8,597,111 -- --
Income tax effect of warrants
repurchased...................... -- -- -- (366,000) -- --
Income tax benefit from stock
options exercised................ -- -- -- 39,000 -- --
Unrealized holding loss on
investments available-for-sale... -- -- -- -- (6,345,089) --
Increase in notes receivable from
officers......................... -- -- -- -- -- (369,031)
Net income........................ -- -- -- -- -- --
---------- -------- ------------ ------------ ----------- ---------
BALANCE, January 31, 1998......... 26,780,778 $267,808 $ -- $ 74,538,225 $(6,275,652) $(960,476)
========== ======== ============ ============ =========== =========
RETAINED TOTAL
EARNINGS SHAREHOLDERS'
(DEFICIT) EQUITY
--------- -------------
BALANCE, January 31, 1995......... $(12,515,032) $ 66,802,024
Exercise of stock options......... -- 141,844
Issuance of common stock.......... -- 8,000,000
Value assigned to common stock
purchase warrants................ -- 17,500,000
Offering expenses................. -- (590,050)
Unrealized holding gain on
investments available-for-sale... -- 429,756
Issuance of note to officers...... -- (558,670)
Net income........................ 11,019,565 11,019,565
------------ ------------
BALANCE, January 31, 1996......... (1,495,467) 102,744,469
Exercise of stock options and
warrants......................... -- 1,150,395
Repurchases of common stock....... -- (5,825,894)
Value assigned to common stock
purchase warrants................ -- 9,484,038
Income tax benefit from stock
options exercised................ -- 790,000
Unrealized holding gain on
investments available-for-sale... -- 254,207
Increase in notes receivable from
officers......................... -- (32,775)
Net income........................ 18,089,722 18,089,722
------------ ------------
BALANCE, January 31, 1997......... 16,594,255 126,654,162
Exercise of stock options and
warrants......................... -- 298,522
Repurchases of common stock and
warrants......................... -- (35,747,404)
Value transferred from common
stock purchase warrants.......... -- --
Income tax effect of warrants
repurchased...................... -- (366,000)
Income tax benefit from stock
options exercised................ -- 39,000
Unrealized holding loss on
investments available-for-sale... -- (6,345,089)
Increase in notes receivable from
officers......................... -- (369,031)
Net income........................ 18,103,569 18,103,569
------------ ------------
BALANCE, January 31, 1998......... $ 34,697,824 $102,267,729
============ ====================== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
49
50
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
ACCUMULATED
COMMON STOCK COMMON OTHER
------------------ STOCK ADDITIONAL COMPREHENSIVE
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN INCOME
INCOME OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1996................... 29,343,748 $293 $ 17,500 $87,190 $ (115)
Comprehensive income:
Net income $18,090 -- -- -- -- --
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
tax of $97......... 158 -- -- -- -- 158
-------
Comprehensive
income: $18,248
=======
Exercise of stock options
and warrants........... 545,150 5 -- 1,145 --
Repurchases of common
stock.................. (1,046,700) (10) -- (5,815) --
Value assigned to common
stock purchase
warrants............... -- -- 9,484 -- --
Income tax benefit from
stock options
exercised.............. -- -- -- 790 --
Increase in notes
receivable from
shareholders........... -- -- -- -- --
---------- ---- -------- ------- -------
BALANCE, JANUARY 31,
1997................... 28,842,198 288 26,984 83,310 43
Comprehensive income:
Net income............. $18,104 -- -- -- -- --
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $2,395...... (3,908)
Losses on securities
included in net
income, net of tax
of $16............. (26)
-------
Other comprehensive
losses............... (3,934) -- -- -- -- (3,934)
-------
Comprehensive
income:......... $14,170
=======
Exercise of stock options
and warrants........... 1,636,080 16 -- 282 --
Repurchases of common
stock and warrants..... (3,697,500) (36) (18,387) (17,324) --
Value transferred from
common stock purchase
warrants............... -- -- (8,597) 8,597 --
Income tax effect of
warrants repurchased... -- -- -- (366) --
Income tax benefit from
stock options
exercised.............. -- -- -- 39 --
Increase in notes
receivable from
shareholders........... -- -- -- -- --
---------- ---- -------- ------- -------
NOTES
RECEIVABLE RETAINED TOTAL
FROM EARNINGS SHAREHOLDERS'
SHAREHOLDERS (DEFICIT) EQUITY
------------ --------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1996................... $ (559) $(1,496) $102,813
Comprehensive income:
Net income -- 18,090 18,090
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
tax of $97......... -- -- 158
Comprehensive
income:
Exercise of stock options
and warrants........... -- -- 1,150
Repurchases of common
stock.................. -- -- (5,825)
Value assigned to common
stock purchase
warrants............... -- -- 9,484
Income tax benefit from
stock options
exercised.............. -- -- 790
Increase in notes
receivable from
shareholders........... (32) -- (32)
------- ------- --------
BALANCE, JANUARY 31,
1997................... (591) 16,594 126,628
Comprehensive income:
Net income............. -- 18,104 18,104
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $2,395......
Losses on securities
included in net
income, net of tax
of $16.............
Other comprehensive
losses............... -- -- (3,934)
Comprehensive
income:.........
Exercise of stock options
and warrants........... -- -- 298
Repurchases of common
stock and warrants..... -- -- (35,747)
Value transferred from
common stock purchase
warrants............... -- -- --
Income tax effect of
warrants repurchased... -- -- (366)
Income tax benefit from
stock options
exercised.............. -- -- 39
Increase in notes
receivable from
shareholders........... (369) -- (369)
------- ------- --------
50
51
ACCUMULATED
COMMON STOCK COMMON OTHER
------------------ STOCK ADDITIONAL COMPREHENSIVE
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN INCOME
INCOME OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1998................... 26,780,778 268 -- 74,538 (3,891)
Comprehensive income:
Net income............. $ 4,639 -- -- -- -- --
Other comprehensive
income (losses), net
of tax:
Unrealized losses on
securities, net of
tax of $1,610...... (2,627)
Gains on securities
included in net
income, net of tax
of $60............. 98
Write-down of
securities to net
realizable value,
net of tax of
$1,499............. 3,579
-------
Other comprehensive
income............... 1,050 -- -- -- -- 1,050
-------
Comprehensive
income:......... $ 5,689
=======
Exercise of stock
options................ 412,118 4 -- 1,725 --
Repurchases of common
stock.................. (1,327,430) (13) -- (4,279) --
Income tax benefit from
stock options
exercised.............. -- -- -- 731 --
Increase in notes
receivable from
shareholders........... -- -- -- -- --
---------- ---- -------- ------- -------
BALANCE, JANUARY 31,
1999................... 25,865,466 $259 $ -- $72,715 $(2,841)
========== ==== ======== ======= =======
NOTES
RECEIVABLE RETAINED TOTAL
FROM EARNINGS SHAREHOLDERS'
SHAREHOLDERS (DEFICIT) EQUITY
------------ --------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 31,
1998................... (960) 34,698 104,653
Comprehensive income:
Net income............. -- 4,639 4,639
Other comprehensive
income (losses), net
of tax:
Unrealized losses on
securities, net of
tax of $1,610......
Gains on securities
included in net
income, net of tax
of $60.............
Write-down of
securities to net
realizable value,
net of tax of
$1,499.............
Other comprehensive
income............... -- -- 1,050
Comprehensive
income:.........
Exercise of stock
options................ -- -- 1,729
Repurchases of common
stock.................. -- -- (4,292)
Income tax benefit from
stock options
exercised.............. -- -- 731
Increase in notes
receivable from
shareholders........... (99) -- (99)
------- ------- --------
BALANCE, JANUARY 31,
1999................... $(1,059) $39,337 $108,411
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
51
52
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------
1999 1998 1997 1996
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.......................................income................................................ $ 18,103,5694,639 $ 18,089,72218,104 $ 11,019,56518,090
Adjustments to reconcile net income to net cash provided
by (used for) operating activities --activities-
Depreciation and amortization................. 6,977,594 5,996,357 4,807,735amortization.......................... 4,999 6,977 5,996
Deferred taxes................................ 1,838,660 (236,668) (250,000)taxes......................................... (1,408) 1,840 (236)
Gain on sale of broadcast stations............ (38,850,000) (27,050,000) --stations..................... (19,750) (38,850) (27,050)
Gain on sale of investments................... (214,694) (808,449) (8,480,453)property and investments............... (8,102) (215) (809)
Write-down of investment in CML Group, Inc............. 6,113 -- --
Restructuring and impairment of assets................. 2,950 -- --
National Media Corporation terminated acquisition
costs................................................ 2,350 -- --
Unrealized gain on trading securities.................. (1,350) -- --
Equity in (earnings) losses of affiliates..... 431,241 (419,430) (1,983,226)
Other non-cash charges........................ -- -- 646,268affiliates.............. 323 431 (419)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable, net.................... (3,762,629) (555,925) (2,064,405)net............................. (11,021) (3,763) (556)
Inventories, net............................ 5,682,219 (4,479,713) (1,056,425)net..................................... (2,255) 5,682 (4,480)
Prepaid expenses and other.................. 627,401 1,889,663 (3,230,141)other........................... 1,553 627 1,890
Accounts payable and accrued liabilities.... (9,157,557) 1,433,867 2,894,713liabilities............. 2,620 (9,158) 1,434
Income taxes payable (receivable), net...... (1,120,327) 361,481 --
------------ ------------ ------------net............... 248 (1,120) 361
-------- -------- --------
Net cash provided by (used for)used for operating activities............................. (19,444,523) (5,779,095) 2,303,631
------------ ------------ ------------activities............ (18,091) (19,445) (5,779)
-------- -------- --------
INVESTING ACTIVITIES:
Property and equipment additions, net of effect of
acquisitions............................... (3,543,054) (14,364,600) (3,040,865)acquisitions........................................... (1,565) (3,543) (14,365)
Purchase of broadcast stations...................stations............................ -- (4,618,743) -- (4,619)
Acquisition of direct-mail companies, net of cash
acquired......................................acquired............................................... -- (4,113,984) -- (4,114)
Proceeds from sale of broadcast stations......... 30,000,000 40,000,000 --stations.................. 24,483 30,000 40,000
Proceeds from sale of investments................ 1,381,162 6,103,541 16,438,979investments and property............ 9,548 1,381 6,104
Purchase of short-term investments............... (43,866,856) (84,506,099) (55,094,124)investments........................ (12,394) (43,867) (84,506)
Proceeds from sale of short-term investments..... 51,121,965 87,256,886 33,710,220investments.............. 25,056 51,122 87,257
Loan to National Media........................... (7,000,000) --Media Corporation........................ (3,000) (7,000) --
Payment for investments and other assets......... (6,631,791) (6,534,383) (3,457,071)assets.................. (3,997) (6,631) (6,534)
Proceeds from long-term notes receivable......... 1,603,439loans receivable............................ 10,000 1,603 --
--
------------ ------------ -------------------- -------- --------
Net cash provided by (used for) investing activities............................. 23,064,865 19,222,618 (11,442,861)
------------ ------------ ------------activities......... 48,131 23,065 19,223
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants...................................... 298,522 1,150,395 141,844warrants...... 1,729 299 1,150
Payments for repurchases of common stock......... (14,963,837) (5,825,894) --
Proceeds from sale of common stock............... -- -- 8,000,000
Payment of offering costs........................ -- -- (464,167)stock.................. (4,292) (14,964) (5,826)
Payment of long-term obligations................. (375,896) (212,982) (130,500)
------------ ------------ ------------obligations.......................... (411) (376) (213)
-------- -------- --------
Net cash provided by (used for)used for financing activities............................. (15,041,211) (4,888,481) 7,547,177
------------ ------------ ------------activities............ (2,974) (15,041) (4,889)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ (11,420,869) 8,555,042 (1,592,053)equivalents..................................... 27,066 (11,421) 8,555
BEGINNING CASH AND CASH EQUIVALENTS................ 28,618,943 20,063,901 21,655,954
------------ ------------ ------------EQUIVALENTS......................... 17,198 28,619 20,064
-------- -------- --------
ENDING CASH AND CASH EQUIVALENTS...................EQUIVALENTS............................ $ 17,198,07444,264 $ 28,618,94317,198 $ 20,063,901
============ ============ ============28,619
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5052
5153
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 19981999 AND 19971998
1. THE COMPANY:
ValueVision International, Inc. and Subsidiaries ("the Company") is an
integrated direct marketing company which markets its products directly to
consumers through electronic and print media.
The Company's television home shopping networkbusiness uses recognized on-air
television home shopping personalities to market brand name merchandise and
proprietary and private label consumer products at competitive or discount
prices. The Company's 24-hour per day television home shopping programming is
distributed primarily through long-term cable affiliation agreements and the
purchase of month-to-month full-and part-time block lease agreements of cable
and broadcast television time. In addition, the Company distributes its
programming through a Company owned or affiliated full power Ultra-High Frequency ("UHF")
broadcast television stations,station, low power television ("LPTV") stations and to
satellite dish owners. The Company also complements its television home shopping
business by the sale of merchandise through its Internet shopping website
(www.vvtv.com).
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), is a direct-mail marketer of a broad range of
quality general merchandise which is sold to consumers through direct-mail
catalogs and other direct marketing solicitations. Products offered include
domestics, housewares, home accessories and electronics. Through its wholly-owned
subsidiary, Catalog Ventures, Inc. ("CVI"), the Company sells a variety of
fashion jewelry, health and beauty aids, books, audio and video cassettes and
other related consumer merchandise through the publication of five consumer
specialty catalogs. The Company also manufactures and markets, via direct-mail,
women's foundation undergarments and other women's apparel through its
wholly-owned subsidiary, Beautiful Images, Inc. ("BII").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ValueVision International, Inc. ("ValueVision") and its wholly-owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Results of operations for the year ended January 31, 1997 include the
direct-mail operations of HomeVisions (formerly known as Montgomery Ward Direct)
effective July 27, 1996, BII effective October 22, 1996 and CVI effective
November 1, 1996, which were acquired by the Company in fiscal 1997.
FISCAL YEAR
The Company's fiscal year ends on January 31. Fiscal years are designated
in the accompanying consolidated financial statements and related notes by the
calendar year in which the fiscal year ends.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue is recognized at the time merchandise is shipped. Shipping and
handling fees collected from customers are recognized as merchandise is shipped
and are offset against actual shipping expenses as a component of distribution
and selling costs. Returns are estimated and provided for at the time of sale
based on historical experience. Payments received for unfilled orders are
reflected as a component of accrued liabilities.
Accounts receivable consist primarily of amounts due from customers for
merchandise sales and from credit card companies, and are reflected net of
reserves for estimated uncollectible amounts of $1,726,000 at January 31, 1999
and $453,000 at January 31, 1998 and
$529,000 at January 31, 1997.
511998.
53
5254
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 19981999 AND 19971998
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds and
commercial paper with an original maturity of 90 days or less.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of commercial paper with a
remaining maturity of less than 12 months and are stated at cost, which
approximates market value due to the short maturities of these instruments.instruments and
equity investments classified as "trading securities".
INVESTMENTS IN EQUITY SECURITIES
The Company classifies certain investments in equity securities as
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115"), and reports these investments at fair value. Under
SFAS No. 115, unrealized holding gains and losses on available-for-sale
securities are excluded from income and are reported as a separate component of
shareholders' equity. Realized gains and losses from securities classified as
available-for-sale are included in income and are determined using the average
cost method for ascertaining the cost of securities sold.
Information onregarding available-for-sale investments in equity securities
is as follows:
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ---------- ---------- ----------
January 31, 1999 equity securities............ $14,295,000 $-- $4,582,000 $ 9,713,000
=========== == ========== ===========
January 31, 1998 equity securities............ $21,044,000 $ --$-- $6,276,000 $14,768,000
=========== ======= ========== ===========
January 31, 1997 equity securities............ $ 181,000 $69,000 $ -- $ 250,000
=========== ========= ========== ===========
In accordance with the provisions of SFAS No. 115, the Company wrote off
its investment in CML Group, Inc. ("CML") in fiscal 1999. The decline in the
investment's fair value was judged by management to be other than temporary
following CML's announcement that its NordicTrack subsidiary had filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. The write-off totaled
approximately $6,113,000. Subsequently, CML also filed for protection under
Chapter 11 of the U.S. Bankruptcy Code.
As of January 31, 1999 and 1998, respectively, $0 and 1997 respectively, $4,920,000 and $0 of
available-for-sale investments were classified as short-term investments in the
accompanying consolidated balance sheets.
Proceeds from sales of investment securities available-for-sale were
$662,000, $3,084,000 $4,608,000 and $16,439,000$4,608,000 in fiscal 1999, 1998 1997 and 1996,1997, respectively,
and related netgross realized gains included in income were $26,000, $215,000 $808,000 and
$8,480,000$808,000 in fiscal 1999, 1998 and 1997, respectively.
As of January 31, 1999 and 1996, respectively.1998, respectively, the Company had $2,606,000
and $0 of investments classified as trading securities in the accompanying
consolidated balance sheets. Net unrealized holding gains on trading securities
included in income during fiscal 1999 totaled $1,350,000. See additional
discussion in Note 15 regarding these trading securities. There were no
unrealized holding gains or losses recorded with respect to trading securities
during fiscal 1998 or 1997 as the Company did not have any equity investments
classified as such in those years.
54
55
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
INVENTORIES
Inventories, which consist primarily of consumer merchandise held for
resale, are stated at the lower of first-in, first-out cost or realizable value.
ADVERTISING COSTS
Promotional advertising expenditures are expensed in the period the
advertising initially takes place. Direct response advertising costs, consisting
primarily of catalog preparation, printing and postage expenditures, are
deferred and amortized over the period during which the benefits are expected,
generally three to six months. Advertising costs of $31,729,000, $44,894,000 $21,164,000 and
$2,013,000$21,164,000 for the years ended January 31, 1999, 1998 1997 and 1996,1997, respectively,
are included in the accompanying consolidated statements of operations. Prepaid
expenses and other includes deferred advertising costs of $4,538,000 at January
31, 1999 and $6,114,000 at January 31, 1998, and $6,268,000 at January 31, 1997, which will be reflected as an
expense during the quarterly period benefited.
52
53
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Betterments and renewals that
extend the life of an asset are capitalized and depreciated. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts, and any residual values are charged or
credited to operations. Depreciation and amortization for financial reporting
purposes are provided principally on the straight-line method based upon
estimated useful lives. During fiscal 1999, the Company sold real property held
for investment purposes and recognized a $3,471,000 gain on the sale.
Property and equipment consisted of the following at January 31:
ESTIMATED
USEFUL LIFE
(IN YEARS) 1999 1998 1997
----------- ---- ----
Land and improvements....................................improvements.................... -- $ 6,564,0001,405,000 $ 7,151,0006,564,000
Buildings and improvements...............................improvements............... 40 4,267,000 4,326,000 4,630,000
Transmission and production equipment....................equipment.... 5-20 7,734,000 7,744,000 10,226,000
Office and warehouse equipment...........................equipment........... 3-10 4,332,000 4,033,000 2,962,000
Computer and telephone equipment.........................equipment......... 3-5 4,849,000 4,267,000
3,726,000
Leasehold improvements...................................improvements................... 3-10 2,120,000 2,074,000 1,720,000
Less -- Accumulated depreciation and
amortization........amortization........................... (10,638,000) (7,604,000)
(6,132,000)------------ -----------
-----------$ 14,069,000 $21,404,000
$24,283,000
======================= ===========
FEDERAL COMMUNICATIONS COMMISSION LICENSES
Federal Communications Commission ("FCC") licenses are stated at
acquisition cost as determined based upon independent appraisals and are
amortized on a straight-line basis over their estimated useful lives of 25
years. Accumulated amortization was $452,000 at January 31, 1999 and $653,000 at
January 31, 1998 and $529,000 at
January 31, 1997.1998.
Although the FCC has established eight year license terms for television
stations, the Telecommunications Act of 1996 requires the FCC to grant
applications for renewal of such licenses upon a finding that (i) the station
has served the public interest, convenience, and necessity; (ii) there have been
no serious violations by the licensee of the Communications actTelecommunications Act or the FCC's
rules and regulations; and (iii) there have been no other violations by the
licensee of such Act or rules and regulations which, taken together, would
55
56
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
constitute a pattern of abuse. The Company has met and continues to meet the
requirements set forth above, and based further on standard industry practice,
the Company has determined that 25 years is a reasonable estimated useful life
for its FCC licenses, considering the future periods to be benefited.
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES
As discussed further in Note 3, during fiscal 1996, the Company issued
common stock purchase warrants in exchange for various agreements entered into
with Montgomery Ward & Co., Incorporated ("Montgomery Ward") including an
Operating Agreement, a Credit Card License and Receivable Sales Agreement, and a
Servicemark License Agreement. The value assigned to the agreements of
$17,500,000 was
determined pursuant to an independent appraisal and is being amortized on a
straight-line basis over the amended term of the agreements (see discussion
below and Note 3). The Operating Agreement expires July 31, 2008 and may be
terminated under certain circumstances, as defined in the agreement. The Credit
Card License and Receivable Sales Agreement and Servicemark License Agreement
automatically terminate upon termination of the Operating Agreement.
53
54
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
In the fourth quarter of fiscal 1998, the Company and Montgomery Ward
restructured the Operating Agreement in an equity transaction whereby certain
rights and arrangements with respect to both the Company's television home
shopping and catalog operations were modified and amended and, among other
matters, the Company agreed to cease the use of the Montgomery Ward and
Montgomery Ward Direct names in its catalog operations in exchange for
Montgomery Ward's return of 3.8 million common stock purchase warrants.operations. As a result of the
restructuring, the Montgomery Ward Operating Agreement and License asset was
reduced to $2,115,000 which representsrepresented the asset's remaining fair value
assigned to the Company's non-catalog operations. The value assigned to the
asset as of the date of the restructuring was determined through an analysis of
the future cash flows and benefits expected to be received and is being
amortized on a straight-line basis over the remaining term of the agreement. As
of January 31, 1999, accumulated amortization related to this asset totaled
$239,000.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired in purchase transactions, and is being amortized on a
straight-line basis over periods ranging from 15 to 25 years. Other intangible
assets represent costs allocated to customer lists arising from business
acquisitions and are amortized on a straight-line basis over 5 years. The carrying
values of goodwill are evaluated periodically by the Company in relation to the
operating performance and future undiscounted net cash flows of the related
acquired businesses.
As discussed further in Note 3, in the fourth quarter of fiscal 1998, the
Company restructured its operating agreement with Montgomery Ward in an equity
transaction whereby, among other matters, the Company agreed to cease the use of
the Montgomery Ward and Montgomery Ward Direct names in its catalog operations
in exchange for Montgomery Ward's return of 3.8 million common stock purchase
warrants. As a result of the restructuring, $5,259,000, representing the remaining balancebalances of goodwill
and other intangible assets ($5,259,000) relating to the acquisition of
Montgomery Ward Direct were reduced to zero through equity in the transaction.transaction in
fiscal 1998. Accumulated amortization of goodwill related to other acquisitions
was $1,012,000 at January 31, 1999 and $671,000 at January 31, 1998 and
$660,000 at January1998.
56
57
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1997.1999 AND 1998
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following at January 31:
1999 1998 1997
---- ----
Investments........................................Investments........................................... $3,348,000 $4,211,000 $ 4,444,000
Prepaid cable launch fees, net.....................net........................ 1,575,000 1,622,000
2,382,000
Other, net.........................................net............................................ 4,237,000 3,246,000
3,197,000
---------- ---------------------
$9,160,000 $9,079,000
$10,023,000
========== =====================
Included in these investments are certain nonmarketable investments in
private companies and other enterprises which are carried at the lower of cost
or net realizable value. The fair values of these investments are estimated
based primarily on recent financing and securities transactions, present value
and other pricing models, and, to a lesser extent, other pertinent information,
including financial condition and operating results.
At January 31, 1998,1999, investments also include approximately $1,179,000$854,000 related to
a 13% interest in a venture capital limited partnership. The purpose of the
limited partnership is to invest in and assist new and emerging growth-oriented
businesses and leveraged buyouts in the consumer services, retailing and direct
marketing industries. In addition to the Company, Merchant Advisors, L.P. is the
only other limited partner in the limited partnership. The investment in this
partnership is accounted for using the equity method of accounting. InDuring
fiscal 1996, the Company received a distribution of certain
investment securities from the
54
55
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
limited partnership, including common stock1999 and common stock purchase warrants,
valued at $2,744,000, as determined pursuant to an independent financial
appraisal. During fiscal 1998, the Company received cash distributions of approximately
$1,061,000 and $1,101,000, respectively, from the limited partnership.
At January 31, 1998,1999, investments also include approximately $1,030,000$1,380,000
related to the Company's investment interest in Net Radio Corporation ("Net
Radio") which was purchased in March 1997 for an aggregate purchase price of $3
million, consisting of $1 million in cash and a commitment to provide $2 million
in future advertising. Net Radio is a music and entertainment site on the
Internet where the Company's 24-hour per day shopping program is currently being
carried.Internet. The investment is being accounted for under the cost method.
Prepaid cable launch fees represent amounts paid to cable operators upon
entering into cable affiliation agreements. These fees are capitalized and
amortized over the lives of the related cable affiliation contracts, which range
from 2-73-7 years.
Other assets consist principally of non-compete agreements, prepaid
satellite transponder launch fees, long-term deposits, notes receivable,
deferred acquisition costs, and software development costs, all of which are
carried at cost, net of accumulated amortization. Costs are amortized on a
straight-line basis over the estimated useful lives of the assets, ranging from
3 to 25 years. Accumulated amortization was $747,000 at January 31, 1999 and
$685,000 at January 31, 1998 and
$433,000 at1998. At January 31, 1997.1999, other assets also includes a
$1,443,000 long-term receivable related to the third-party sale of the Company's
HomeVisions catalog trade name and customer lists. The sale was made in
conjunction with the divestiture of the HomeVisions catalog operations discussed
in Note 5. The receivable was recorded at its net present value and payments are
to be received in quarterly installments through 2003.
57
58
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
JANUARY 31,
--------------------------
1999 1998
---- ----
Accrued marketing fees.............................. $ 3,688,000 $ 2,248,000
Reserve for product returns......................... 2,291,000 1,443,000
Other............................................... 5,576,000 7,844,000
----------- -----------
$11,555,000 $11,535,000
=========== ===========
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting under which deferred tax assets are recognized for deductible
temporary differences, and operating loss and tax credit carryforwardscarry forwards and
deferred tax liabilities are recognized for taxable temporary differences.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of the enactment of such laws.
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which established newestablishes guidelines for computing and presenting earnings
per share data ("EPS"). SFAS No. 128 replacesreplaced primary EPS with basic EPS. Basic
EPS is computed by dividing reported earnings by weighted average shares
outstanding, excluding potentially dilutive securities. Fully diluted EPS,
termed diluted EPS under SFAS No. 128, is also to be disclosed. The Company
adopted SFAS No. 128 in the fourth quarter of fiscal 1998. The adoption of SFAS
No. 128 did not have a significant effect on previously reported earnings per
share information.
55
56
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
---- ---- ----
Net income..........................................income............................... $4,639,000 $18,104,000 $18,090,000
$11,020,000
===================== =========== ===========
Weighted average number of common shares
outstanding -- Basic..............................Basic................... 25,963,000 31,745,000 31,718,000 28,627,000
Dilutive effect of stock options....................options......... 304,000 143,000 624,000
682,000
--------------------- ----------- -----------
Weighted average number of common shares
outstanding -- Diluted............................Diluted................. 26,267,000 31,888,000 32,342,000
29,309,000
===================== =========== ===========
Net income per common share......................... $0.57 $0.57 $0.38
===========share.............. $ 0.18 $ 0.57 $ 0.57
========== =========== ===========
Net income per common share -- assuming
dilution.... $0.57 $0.56 $0.38
===========dilution............................... $ 0.18 $ 0.57 $ 0.56
========== =========== ===========
COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for reporting in the financial statements
all changes in equity during a period, except those resulting from investments
by and distributions to owners. For the Company, comprehensive income includes
net income and other
58
59
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
comprehensive income (loss) which consists of unrealized holding gains and
losses from equity investments classified as "available-for-sale". Total
comprehensive income was $5,689,000, $14,170,000 and $18,248,000 for the years
ended January 31, 1999, 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair values for financial instruments:
The carrying amountamounts reported in the accompanying consolidated balance
sheet approximatessheets approximate the fair value for cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities, due
to the short maturities of those instruments.
Fair values for long-term investments are based on quoted market prices,
where available. For equity securities not actively traded, fair values are
estimated by using quoted market prices of comparable instruments or, if there
are no relevant comparables, on pricing models or formulas using current
assumptions.
The fair value for the Company's long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates, for similar types of borrowing arrangements, and approximated
carrying value at January 31, 19981999 and 1997.1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during reporting
periods. These estimates relate primarily to the carrying amounts of accounts
receivable and inventories, the realizability of certain long-term assets and
the recorded balances of certain accrued liabilities and reserves. Ultimate
results could differ from the use of these estimates.
56
57
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
RECLASSIFICATIONS
Certain 19971998 and 19961997 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 19981999 presentation,
with no impact on previously reported net income.
3. MONTGOMERY WARD ALLIANCE:
During fiscal 1996, the Company entered into a Securities Purchase
Agreement, an Operating Agreement, a Credit Card License and Receivable Sales
Agreement, and a Servicemark License Agreement (collectively, the "MW
Agreements") with Montgomery Ward. Under the MW Agreements, Montgomery Ward
purchased 1,280,000 unregistered shares of common stock of the Company at $6.25
per share, which represented approximately 4.4% of the then issued and
outstanding shares of common stock of the Company,
59
60
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
and received warrants to purchase an additional 25 million shares of common
stock of the Company. These warrants had exercise prices ranging from $6.50 to
$17.00 per share, with an average exercise price of $9.16 per share (the
"Warrants"). The value assigned to the Warrants of $17,500,000 was determined
pursuant to an independent appraisal.
On June 7, 1996, the Company signed a non-binding Memorandum of
Understanding with Montgomery Ward pursuant to which the companies agreed to the
expansion and restructuring of their ongoing operating and license agreements as
well as the Company's acquisition of substantially all of the assets and
assumption of certain obligations of Montgomery Ward Direct L.P. ("MWD"), a four
year old catalog business. Effective July 27, 1996 the companies reached
definitive agreements and closed the transaction in the third quarter ended
October 31, 1996. Pursuant to the provisions of the agreements, the Company's
sales promotion rights were expanded beyond television home shopping to include
the full use of the service mark of Montgomery Ward for direct-mail catalogs and
ancillary promotions. In addition, the strategic alliance between the companies
had been restructured and amended such that (i) 18,000,000 warrants not
immediately exercisable granted to Montgomery Ward in August 1995 and with
exercise prices ranging from $7.00 - $17.00 were terminated in exchange for the
issuance by the Company of 1,484,467 new immediately exercisable warrants
exercisable at $0.01 per share and valued at $5.625 per warrant, which
approximated the book value of the 18,000,000 warrants not immediately
exercisable returned as of the date of the transaction, (ii) the Company issued
1,484,993 new immediately exercisable warrants, valued at $5.625 per warrant and
exercisable at $0.01 per share, to Montgomery Ward as full consideration for the
acquisition of approximately $4.0 million in net assets, representing
substantially all of the assets and the assumption of certain liabilities of
MWD, (iii) Montgomery Ward committed to provide $20 million in supplemental
advertising support over a five-year period, (iv) the Montgomery Ward operating
agreements and licenses were amended and expanded, as defined in the agreements,
and extended to July 31, 2008 and (v) the Company issued to Montgomery Ward new
immediately exercisable warrants to purchase 2.2 million shares of the Company's
common stock at an exercise price of $.01 per share in exchange for 7,000,000
immediately exercisable warrants granted to Montgomery Ward in August 1995 which
were exercisable at prices ranging from $6.50 - $6.75 per share. The fair value
of the warrants approximated the book value of the warrants exchanged. The
Operating Agreement has a twelve-year term and may be terminated under certain
circumstances as defined in the agreement.
Effective November 1, 1997, the Company restructured its operating
agreement with Montgomery Ward, which governsgoverned the use of the Montgomery Ward
name. In exchange for Montgomery Ward's return to ValueVision of warrants
covering the purchase of 3,842,143 shares of ValueVision common stock
(representing all remaining warrants held by Montgomery Ward), the Company ceded
exclusive use of the Montgomery Ward name for catalog, mail order, catalog
"syndications" and television shopping programming back to Montgomery Ward.
Under the agreement, the Company has ceased the use of the Montgomery Ward name in
all outgoing catalog, syndication, and mail order communication through March
31, 1998, with a wind down of incoming orders and customer service permitted
after March 31, 1998. The agreement also includesincluded the
57
58
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997 reduction of Montgomery
Ward's minimum commitment to support ValueVision's cable television spot
advertising purchases. Under the new terms, Montgomery Ward's commitment iswas
reduced from $4 million to $2 million annually, and the time period was
decreased from five years to three years effective November 1, 1997. In addition, the
agreement limitslimited the Company to offer the Montgomery Ward credit card only in
conjunction with its various television offers and subject to the normal
approvals by the credit card grantor. The Company has accounted for the
restructuring of the Operating Agreement as an exchange or disposition of assets
at fair value, in accordance with the provisions of Accounting Principles Board
Opinion No. 29. The return of the warrants, which were valued at approximately
$19,211,000, representsrepresented consideration given by Montgomery Ward for the assets
relinquished by the Company, which effectively include the remaining goodwill
attributable to the acquisition of MWD, as well as a portion of the Montgomery
Ward Operating Agreement and License asset (see Note 2). The warrants were
valued at $5.00 per warrant, which represented
60
61
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
the fair market value of the Company's stock on October 22, 1997, the date on
which ValueVision and Montgomery Ward reached agreement on the terms and
consideration of the restructuring agreement and the date the transaction was
effectively announced. The warrant return has beenwas reflected as a reduction in
shareholders' equity for the fair value of the warrants, and the intangible
asset amounts reflecting the assets sold back to Montgomery Ward have beenwere reduced
accordingly to their remaining estimated fair values as determined through
analysis of future cash flows and benefits to be received. The difference
between the consideration given by the Company (the assets sold back to
Montgomery Ward) and the consideration received (the warrants returned to the
Company) was not material. The agreement also called for the repurchase by the
Company of 1,280,000 shares of its common stock currently owned by Montgomery
Ward, at a price of $3.80 per share. ThisThe repurchase was completed on January 15,
1998.
Management does not
believe that this restructuring will have any other material impact on the
Company's financial condition, results of operations or liquidity.
Montgomery Ward purchased approximately $1.8 million, $3.3 million and $4.2
million of advertising spot time on cable systems affiliated with the Company
pursuant to cable affiliation agreements for the years ended January 31, 1999,
1998 and 1997, respectively. Under the terms of the Credit Card License and
Receivable Sales Agreement, the Company incurred $301,000, $1,123,000 and
$596,000 of processing fees during fiscal 1999, 1998 and 1997, respectively, as
a result of customers using Montgomery Ward/ValueVision credit cards. In
addition, during fiscal 1999, 1998 and 1997, respectfully, the Company earned
$135,000, $831,000 and $793,000 for administering and processing Montgomery Ward
credit card applications. As of January 31, 19981999 and 1997,1998, the Company had
$2,218,000$1,171,000 and $830,000$2,218,000 included in accounts receivable from Montgomery Ward
for merchandise sales made on Montgomery Ward/Value Vision credit cards,
advertising spot time acquired and administrative and processing fees, net of
processing fees due Montgomery Ward for use of its credit card.
4. ACQUISITIONS AND DISPOSITIONS:
MONTGOMERY WARD DIRECT
As discussed further in Note 3, effective July 27, 1996, the Company,
through VVDM, acquired substantially all of the assets and assumed certain
obligations of MWD by issuing 1,484,993 vested warrants with an exercise price
of $.01 per share to Montgomery Ward as full consideration for the acquisition
of approximately $4.0 million in net assets of MWD. The value of the warrants
issued in the acquisition of MWD was based on the market price of the Company's
common stock during the period in which the agreement was reached (i.e., signing
of the letter of intent) to undertake the relevant transaction which the Company
believes is indicative of the fair value of the acquired business.
The Company's acquisition of MWD was for an aggregate purchase price of
$8,497,000, which included approximately $4.0 million in net assets, including
acquired cash of $5,764,000. Acquisition related costs approximated $144,000.
The acquisition was accounted for using the purchase method of accounting and
58
59
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
accordingly, the net assets of MWD were recorded at their estimated fair values.
The allocation is summarized as follows:
Cash.............................................Cash.................................................. $ 5,764,000
Inventories......................................Inventories........................................... 9,140,000
Other current assets.............................assets.................................. 2,861,000
Property and equipment...........................equipment................................ 557,000
Intangible assets................................assets..................................... 4,531,000
Liabilities assumed..............................assumed................................... (14,356,000)
------------
$ 8,497,000
============
61
62
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
The excess of the purchase price over the net assets acquired was
$4,531,000, had been recorded as goodwill and other intangible assets in the
accompanying balance sheet and was being amortized on a straight-line basis over
5-12 years. As discussed in Notes 2 and 3, intangible assets recorded in
connection with this acquisition were reduced to zero in fiscal 1998 in
connection with the restructuring transaction with Montgomery Ward. The
operating results of MWD have been included in the fiscal 1997 consolidated
statement of operations from the date of acquisition. Unaudited pro forma
consolidated net sales of the Company for the yearsyear ended January 31, 1997, and
1996, as if
the acquisition had occurred as of the beginning of the respective
periods were $194,284,000 and $240,850,000 respectively.year was $194,284,000.
Unaudited pro forma net income was $17,151,000, or $.52 per diluted share, in
fiscal 1997 and
$4,341,000, or $.14 per diluted share, in fiscal 1996.1997. Such pro forma amounts are not necessarily indicative of what the
actual consolidated results of operations would have been had the acquisition
been effective at the beginning of the respective periods.fiscal 1997. In fiscal 1998, the Company
changed the name of the MWD catalog to HomeVisions. See additional discussion in
Note 5 regarding the fiscal 1999 shutdown of the HomeVisions operations.
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of BII, a manufacturer and direct marketer of women's
foundation undergarments and other women's apparel. The Company paid $4,253,000
in cash, which included acquired cash of $423,000, $500,000 relating to a non-
compete agreement and acquisition costs of approximately $75,000, and assumed
certain obligations totaling $109,000. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase price was
allocated to the assets purchased and the liabilities assumed based upon
estimated fair values at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired was $3,310,000, of which
$2,810,000 has been recorded as goodwill, which is being amortized on a
straight-line basis over 15 years, and $500,000 assigned to the non-compete
agreement, which is being amortized on a straight-line basis over the 6 year6-year
term of the agreement. The operating results of BII have been included in the
fiscal 1997 consolidated statement of operations from the date of acquisition.
Pro forma results of operations have not been presented because the effects were
not significant.
CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. ("Webb"), two direct marketing
companies which together publish five consumer specialty catalogs. The Company
paid $7,369,000 in cash which included acquired cash of $1,465,000 and
acquisition costs of approximately $100,000. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair values of the net assets acquired was $1,953,000, and has been recorded
as goodwill, which is being amortized on a straight-line basis over 15 years.
The 59
60
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
operating results of CVI have been included in the fiscal 1997 consolidated
statement of operations from the date of the acquisition. Pro forma results of
operations have not been presented because the effects were not significant.
BROADCAST STATIONS
During the first quarter of fiscal 1995, the Company completed the
acquisitions of three full power television broadcast stations serving the
Washington D.C. ("WVVI"); Houston, Texas ("KVVV"); and Cleveland -- Akron, Ohio
("WAKC") Areas of Dominant Influence ("ADI"). On December 28, 1994 the Company
completed the acquisition of one full power television broadcast station serving
the New York City ADI and licensed to Bridgeport, Connecticut ("WHAI"). The
aggregate purchase price for the four stations was approximately $22,374,000 in
cash, Company common stock and non-compete obligations. The
62
63
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
acquisitions were accounted for under the purchase method of accounting.
Accordingly, the net assets of the four stations were recorded at their
estimated values at the time of acquisition, as determined by independent
appraisals.
On March 15, 1996, the Company completed the acquisition of independent
television station KBGE (TV), Channel 33 serving the Seattle-Tacoma, Washington
market, for approximately $4.6 million including the assumption of certain debt
obligations and acquisition related costs. This acquisition was completed in
accordance with the terms of a five-year programming affiliation and financing
agreement with the station which was signed on July 21, 1995. Pursuant to this
agreement, the Company provided financing of up to $1,450,000 related to a
working capital loan for channel operations.
On April 11, 1996, the Company completed a second closing with respect to
its acquisition of independent television station WVVI whereby the Company paid
$800,000 to the former owner of WVVI as a final payment in exchange for not
having to pay $1,600,000 in the event the "must carry" provisions of the 1992
Cable Act are upheld by a final decision. The Company had previously paid
$4,050,000 to National Capital Christian Broadcasting, WVVI's former owners, at
an initial closing on March 28, 1994. The $800,000 additional payment had been
classified as excess purchase price and was amortized over 25 years on a
straight-line basis. In addition, the Company received certain studio and
production equipment from the former owner of WVVI, in lieu of a cash payment,
for the balance outstanding under a secured convertible debenture in the face
amount of $450,000.
On March 31, 1997, the United States Supreme Court upheld the "must carry"
provisions of the 1992 Cable Act and as a result, the Company paid an additional
$1,600,000 in connection with its 1995 acquisition of television station
KVVV(TV) in Houston, Texas upon a second closing. The additional payment has
been classified as excess purchase price and is being amortized over 25 years on
a straight-line basis. Pro forma results of operations have not been presented
because the effects were not significant. The Company views and treats the
acquisition of its television broadcast stations as a "purchase of assets"
rather than as a purchase of a stand alone operating business unit. This
treatment is due to the fact that planned revenues of acquired television
broadcast stations do not constitute either a separate business of ValueVision
or represent a significant portion of the Company's operating businesses.
The Company has filed applications for nine additional full-power stations,
all of which include multiple applicants, and expects to participate in
FCC-permitted private auctions to determine the grantee.
SALE OF BROADCAST STATIONS
On February 28, 1996, the Company completed the sale of two television
stations to Paxson Communications Corporation ("Paxson") for $40.0 million in
cash plus the assumption of certain obligations. The stations sold were ABC
affiliate WAKC (TV), Channel 23, licensed to Akron, Ohio, and independent
station WHAI
60
61
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997 (TV), Channel 43, licensed to Bridgeport, Connecticut. WAKC (TV)
was acquired by the Company in April 1994 for approximately $6.0 million and
WHAI (TV) was acquired by the Company in December 1994 for approximately $7.3
million. The net gain on the sale of these two television stations of
approximately $27 million was recognized in the first fiscal quarter ended April
30, 1996.
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI (TV) to Paxson for approximately $30 million in cash and
the receipt of 1,197,892 shares of Paxson common stock valued at $11.92 per
share as determined pursuant to an independent financial appraisal. Under the
terms of the agreement, Paxson paid the Company $20 million in cash upon closing
and was required to pay an additional $10 million to the Company as a result of
the United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. WVVI (TV) was acquired by the Company in March 1994 for $4,850,000.
The pre-tax gain recorded on the sale of the television station was
approximately $38.9 million and was recognized in the second fiscal quarter
ended July 31, 1997.
63
64
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE-TV Channel 33, which serves the Seattle, Washington
market, along with two of the Company's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
is to be paid when KBGE, which is currently operating at reduced power from
downtown Seattle, is able to relocate its antenna and increase its transmitter
power to a level at or near its licensed full power.payable by the first quarter of fiscal 2000. The Company will retain and
continue to serve the Seattle market via its recently-launched low-power station K58DP-TV, which
transmits from downtown Seattle. The pre-tax gain to be recorded on the first
installment with respect to the sale of this television station is
expected to bewas
approximately $19.8 million and will bewas recognized in the first quarter of fiscal
1999.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
5. LOW-POWERRESTRUCTURING AND IMPAIRMENT OF ASSETS:
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective divestiture of its HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
the continuing operating losses and deteriorating financial performance over the
past year of the catalog's operations since Montgomery Ward's announcement of
its bankruptcy filing in the summer of 1997. Operating losses for HomeVisions
further increased as a result of the subsequent termination of HomeVisions'
right to use the Montgomery Ward private label credit card in March 1998. As a
result of the decision to divest HomeVisions, the Company mailed its last
HomeVisions catalog in the fourth quarter of fiscal 1999 and effectively wound
down the catalog operation as of January 31, 1999.
In connection with the restructuring plan and divestiture of HomeVisions,
the Company recorded a $2,950,000 restructuring and asset impairment charge in
the third quarter ended October 31, 1998, consisting of the following
components:
- Write-down of advanced purchased, overstocked inventory totaling
$1,450,000 purchased specifically for fourth quarter catalog drops which
did not occur due to the decision to divest HomeVisions' operations in
the third quarter of fiscal 1999. The write-down recorded was net of
estimated remaining fiscal 1999 cost of sales and reflects inventories at
various liquidation values.
- Write-down of certain other assets totaling $944,000 to reflect such
assets at their estimated net realizable value, based on the Company's
determination that the assets were substantially impaired as a direct
result of the decision to divest HomeVisions. The write-down included:
$364,000 of capitalized catalog software made obsolete with no future
economic benefit to the Company; $282,000 of capitalized catalog costs,
net of remaining fiscal 1999 amortization, for which no catalog is to be
produced nor future revenue to be recognized against; $223,000 of
property and equipment to be disposed of, net of remaining fiscal 1999
depreciation, with no future economic benefit to the Company; and $75,000
relating to lost vendor purchase credits and other incremental costs.
- Employee-related severance costs of $556,000 related to the termination
of 17 merchandising and other administrative employees pursuant to a plan
of termination announced in the third quarter of fiscal 1999. As of
January 31, 1999, $256,000 of accrued severance costs had been paid out
to employees.
In connection with the decision to divest HomeVisions, ValueVision entered
into an agreement to license and sell the exclusive marketing rights to the
"HomeVisions" name and related customer list database to Direct Marketing
Services, Inc. ("DMSI"), a direct-mail marketer and catalog distributor
headquartered in Chicago, Illinois. The Company recorded a $1,443,000 gain in
the fourth quarter of fiscal 1999 related to the sale of these assets.
64
65
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
Net sales and operating results for HomeVisions for the years ended January
31, 1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997
---- ---- ----
Net sales.......................................... $18,862 $74,756 $43,755
Operating income (loss)............................ $(6,795) $(6,091) $ 1,202
6. LOW POWER TELEVISION STATIONS:
The licensing of LPTV stations' transmission authority is regulated by the
FCC through the Communications Act of 1934. LPTV construction permits and the
licensing rights that result upon definitive FCC operating approval are awarded
solely at the discretion of the FCC and are subject to periodic renewal
requirements. As of January 31, 1998,1999, the Company held licenses for tentwelve LPTV
stations, and had pending before the FCC an application to acquire an eleventh
LPTV station from a former officer and shareholder of the Company for which an
application has since been granted but the acquisition has not yet been
consummated.
The Company's President and Chief Operating Officer also holds a
construction permit for an additional LPTV station in Richmond, Virginia. The
Company has entered into an agreement with this permittee whereby the Company
has the option to enter into a secured financing arrangement to support the
construction of transmission equipment for the LPTV station and to provide its
programming to the station. The agreement contains a fixed price purchase option
of $5,000 in favor of the Company, effective 12 months from the FCC licensing
date, as defined. Under the agreement this permittee could receive maximum
annual programming fees of approximately $48,000.
61
62
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
6.stations.
7. SHAREHOLDERS' EQUITY:
COMMON STOCK
The Company currently has authorized 100,000,000 shares of undesignated
capital stock, of which approximately 26,780,77825,865,000 shares were issued and
outstanding as Common Stock as of January 31, 1998.1999. The Board of Directors can
establish new classes and series of capital stock by resolution without
shareholder approval.
WARRANTS
As discussed further in Note 3, in fiscal 1996, the Company issued
Montgomery Ward warrants to purchase 25 million shares of common stock of the
Company, subject to adjustment, with exercise prices ranging from $6.50 to
$17.00 per share, with an average price of $9.16 per share.
In July 1996, in connection with the acquisition of MWD, the Company's
strategic alliance with Montgomery Ward was restructured and amended whereby new
immediately exercisable warrants to purchase 3,684,467 shares of the Company's
common stock at an exercise price of $.01 per share were issued to Montgomery
Ward in exchange for the 25 million warrants held. In addition, the Company
issued 1,484,993 new immediately exercisable warrants with a fair market value
of $8,353,000 and exercisable at $.01 per share to Montgomery Ward as full
consideration for the acquisition of MWD. See Note 3 for further discussion.
In July 1996, the Company issued 199,097 new immediately exercisable
warrants with a fair market value of $1,131,000 and exercisable at $.01 per
share as a limited partnership investment contribution.
In February 1997, vested warrants to purchase 1,526,414 shares of the
Company's common stock at an exercise price of $.01 per share and originally
valued at $8,597,000, were exercised in full and their value was transferred to
paid in capital.
As discussed further in Note 3, in November 1997, 3,842,143 immediately
exercisable warrants owned by Montgomery Ward at an exercise price of $.01 per
share were exchanged and returned to the Company as consideration in the
transaction relating to the restructuring of the Company's operating agreement
with Montgomery Ward. In addition, the Company repurchased 1,280,000 shares of
its common stock held by Montgomery Ward for aggregate consideration of
approximately $4,505,000.
UNDERWRITER OPTIONS
In connection with the Company's fiscal 1992 initial public offering, the
Company issued options to purchase up to an aggregate 72,000 units for $5.23 per
unit. Each unit consisted of three shares of common
65
66
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
stock, three Class A Warrants and one-quarter of a Class B Warrant, subject to
adjustment pursuant to antidilution provisions as defined. At the beginning of
fiscal 1997, 20,400 units had been previously exercised. During the year ended
January 31, 1997, options to purchase the remaining 51,600 units were exercised
in full and resulted in the issuance of 509,550 shares of common stock. The
Company received proceeds of approximately $1,051,000 relating to this exercise.
No unit purchase
options were exercised in fiscal 1996.
The underwriters of the fiscal 1994 common stock offering were given
options to purchase up to 400,000 shares of common stock at an initial exercise
price of $16.41 per share, subject to certain specified adjustments, as defined,
exercisable until November 15, 1998. No underwriterThese options were exercisedexpired unexercised in fiscal
1998, 1997 or 1996.
62
63
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 19971999.
STOCK OPTIONS
The Company has adopted an incentive stock option plan ("the 1990 Plan"),
as amended, which provides for the grant of options to employees to purchase up
to 2,150,000 shares of the Company's common stock. In addition to options
granted under the 1990 Plan, the Company has also granted non-qualified stock
options to purchase shares of the Company=sCompany's common stock to current and former
directors, a consultant and certain employees. The Company also adopted an
executive incentive stock option plan ("the 1994 Executive Plan") which provides
for the grant of options to certain executives to purchase up to 2,400,000
shares of the Company's common stock. The exercise price for options granted
under the 1990 Plan and the 1994 Executive Plan are determined by the stock
option committee of the Board of Directors, but shall not be less than the fair
market value of the shares on the date of grant. The options=options' maximum term may
not exceed 10 years from the date of grant. Options are exercisable in whole or
in installments, as determined by the stock option committee, and are generally
exercisable in annual installments of 20% to 33% commencing one year after
grant. The exercise price of the non-qualified stock options equaled the market
value of the Company's common stock at the date of grant and the maximum term of
such options does not exceed 10 years from the date of grant.
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25 and has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized in the accompanying consolidated statements of operations. Had
compensation cost related to these options been determined based on the fair
value at the grant date for awards granted in fiscal 1999, 1998 and 1997,
consistent with the provisions of SFAS No. 123, the Company=sCompany's net income and net
income per share would have been reduced to the following pro forma amounts:
1999 1998 1997 1996
---- ---- ----
Net income:
As reported.........................reported............................ $4,639,000 $18,104,000 $18,090,000
$11,020,000
Pro forma...........................forma.............................. 3,729,000 17,805,000 17,794,000 10,775,000
Net income per share:
Basic:
As reported......................... $0.57 $0.57 $0.38$ 0.18 $ 0.57 $ 0.57
Pro forma........................... 0.14 0.56 0.56 0.38
Diluted:
As reported......................... $0.57 $0.56 $0.38$ 0.18 $ 0.57 $ 0.56
Pro forma........................... 0.15 0.57 0.56 0.37
66
67
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to February 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted were as follows:
1994
1990 1994EXECUTIVE
INCENTIVE STOCK NON-QUALIFIED EXECUTIVESTOCK OPTION
OPTION PLAN STOCK OPTIONS PLAN
STOCK OPTIONS OPTION PLAN
--------------- ------------- ---------------------------
Fiscal 1999 grants...................... $2.90 $ -- $2.21
Fiscal 1998 grants..................... $2.49 $2.77 $2.14grants...................... 2.49 2.77 2.14
Fiscal 1997 grants.....................grants...................... 3.36 3.46 --
Fiscal 1996 grants..................... 3.20 1.78 --
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1999, 1998 1997 and 1996,1997, respectively:
risk-free interest rates of 6.0,5.0, 6.0 and 6.26.0 percent; expected volatility of 56,
47, 46 and 4546 percent; and expected lives of 7.5 years. Dividend yields were not
used in the fair value computations as the Company has never declared or paid
dividends on its common stock and currently intends to retain earnings for use
in operations.
63
64
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
A summary of the status of the Company's stock option plan as of January
31, 1999, 1998, 1997, and 19961997 and changes during the years then ended is presented
below:
1990 1994
INCENTIVE WEIGHTED NON- WEIGHTED EXECUTIVE WEIGHTED
STOCK AVERAGE NON-QUALIFIEDQUALIFIED AVERAGE STOCK AVERAGE
OPTION EXERCISE STOCK EXERCISE OPTION EXERCISE
PLAN PRICE OPTIONS PRICE PLAN PRICE
--------- -------- ---------------------- -------- --------- --------
Balance outstanding, January 31,
1995.... 1,191,336 $4.20 365,000 $3.821996................................. 1,501,836 $4.52 505,000 $4.55 1,500,000 $9.50
Granted................................ 344,322 5.50 190,000 5.08 -- --
Exercised.............................. (27,322) 2.90 (50,000) 1.25 -- --
Forfeited or canceled (6,500) 4.37 -- -- -- --
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31, 1996.... 1,501,836 4.52 505,000 4.55 1,500,000 9.50
Granted................................Granted.............................. 151,000 5.74 325,000 5.62 -- --
Exercised..............................Exercised............................ (35,600) 2.79 -- -- -- --
Forfeited or canceled..................canceled................ (9,400) 4.84 -- -- -- --
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31,
1997....1997................................. 1,607,836 4.67 830,000 4.97 1,500,000 9.50
Granted................................Granted.............................. 160,000 4.23 150,000 4.56 100,000 3.63
Exercised..............................Exercised............................ (84,667) 2.93 (25,000) 1.25 -- --
Forfeited or canceled..................canceled................ (223,333) 5.47 -- -- -- --
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31,
1998....1998................................. 1,459,836 $4.604.60 955,000 $5.005.00 1,600,000 $9.139.13
Granted.............................. 650,266 5.13 -- -- 800,000 3.38
Exercised............................ (336,167) 4.15 (32,000) 5.50 (44,000) 3.63
Forfeited or canceled................ (435,500) 5.38 (28,000) 5.50 (356,000) 8.58
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31,
1999................................. 1,338,435 $4.69 895,000 $4.97 2,000,000 $7.05
========= ===== ======= ===== ========= =====
Options exercisable at:
January 31, 1998.......................1999..................... 729,000 $4.24 585,000 $4.88 1,719,000 $7.65
========= ===== ======= ===== ========= =====
January 31, 1998..................... 938,000 $4.37 538,000 $4.82 600,000 $9.50
========= ===== ======= ===== ========= =====
January 31, 1997.......................1997..................... 971,000 $4.24 505,000 $4.55 450,000 $9.50
========= ===== ======= ===== ========= =====
January 31, 1996....................... 759,000 $3.97 315,000 $4.20 300,000 $9.50
========= ===== ======= ===== ========= =====
67
68
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
The following table summarizes information regarding stock options
outstanding at January 31, 1998:1999:
OPTIONS OUTSTANDING -------------------------------------------------OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS AVERAGEEXERCISE CONTRACTUAL LIFE OPTIONS EXERCISE
OPTION TYPE EXERCISE PRICES OUTSTANDING EXERCISE PRICE (YEARS) EXERCISABLE PRICE
----------- -------------------------------- ----------- ---------------------- ---------------- ----------- --------
Incentive:..................................... $1.00 - $2.53 165,336 $1.43 2.1
$3.88$4.88 894,935 $3.85 5.1 550,000 $3.70
$5.19 - $7.50 1,294,500 $5.00 5.3$8.44 443,500 $6.39 6.9 179,000 $5.88
--------- ---------
$1.00 - $7.50 1,459,836 $4.60 4.9$8.44 1,338,435 $4.69 5.7 729,000 $4.24
========= =========
Non-qualified:............................. $4.13 - $6.19 955,000 $5.00 5.3895,000 $4.97 4.4 585,000 $4.88
=========
OPTIONS EXERCISABLE
-----------------------------
WEIGHTED
OPTIONS AVERAGE
OPTION TYPE EXERCISABLE EXERCISE PRICE
----------- ----------- --------------
Incentive:................... 165,000 $1.41
773,000 $5.00
-------
938,000 $4.37
=======
Non-qualified:............... 538,000 $4.82
================
Executive:.................. $3.38 800,000 $3.38 7.5 519,000 $3.38
$9.50 1,200,000 $9.50 7.5 1,200,000 $9.50
--------- ---------
$3.38 - $9.50 2,000,000 $7.05 7.5 1,719,000 $7.65
========= =========
STOCK OPTION TAX BENEFIT
The exercise of certain stock options granted under the Company's stock
option plan gives rise to compensation which is includable in the taxable income
of the applicable employees and deductible by the Company for federal and state
income tax purposes. Such compensation results from increases in the fair market
value of the Company's common stock subsequent to the date of grant of the
applicable exercised stock options and is not recognized as an expense for
financial accounting purposes, as the options were originally granted at the
fair market value of the Company's common stock on the date of grant. The
related tax benefits are recorded as additional paid-in capital when realized,
and totaled $731,000, $39,000 and $790,000 in fiscal 1999, 1998 and 1997,
respectively.
64
65
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a stock repurchase program whereby
the Company may repurchase shares of its common stock up to a maximum of $10
million, in the open market and
through negotiated transactions, at prices and times deemed to be beneficial to
the long-term interests of shareholders and the Company. In March 1997,June 1998, the
Company's Board of Directors authorized an additional repurchase of up to $10$6
million of the Company's common stock. As of January 31, 1999, the Company was
authorized to repurchase an aggregate of $26 million of its common stock of
which approximately $21.6 million in stock had been repurchased. During fiscal
1999, the Company repurchased 1,327,000 common shares under the program for a
total net cost of $4,292,000. During fiscal 1998, the Company repurchased
2,417,000 common shares under the program for a total cost of $10,458,000. During fiscal 1997, the
Company repurchased 1,047,000 common shares for a total cost of $5,826,000. No shares were
repurchased in fiscal 1996.
7.$5,825,000.
8. LONG-TERM OBLIGATIONS:
In conjunction with the acquisition of WAKC in fiscal 1995, the Company
entered into three covenant not-to-compete agreements with former employees and
majority stockholders of WAKC involving aggregate consideration of $1,000,000 to
be paid in five equal annual installments commencing in April 1995. Obligations
under these non-compete agreements were initially reflected in the accompanying
consolidated balance sheets at a present value of approximately $778,000 based
upon an 8% imputed interest rate and are being amortized on a straight-line
basis over the term of the agreements. The long-term and current portions of
this obligation at January 31, 19981999 were $0 and $153,000, and $200,000, respectively.
68
69
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
The Company leases computer and telephone equipment under noncancelable
capital leases and includes these assets in property and equipment in the
accompanying consolidated balance sheets. At January 31, 1998,1999, the capitalized
cost of leased equipment was approximately $539,000 and the related accumulated
depreciation was approximately $245,000.$332,000.
Future minimum lease payments for assets under capital leases at January
31, 19981999 are as follows:
FISCAL YEAR
-----------
1999...................................................... $242,000
2000......................................................2000..................................................... $ 225,000
2001......................................................2001..................................................... 76,000
-----------------
Total minimum lease payments.............................. 543,000payments............................. 301,000
Less: Amounts representing interest....................... (48,000)
--------
495,000interest...................... (17,000)
---------
284,000
Less: Current portion..................................... (211,000)
--------portion.................................... (209,000)
---------
Long-term capital lease obligation........................ $284,000
========obligation....................... $ 75,000
=========
The Company has entered into a $600,000, 10 year note payable arrangement
in connection with the purchase of land to be used infor the Company=sCompany's fulfillment
operations. The note bears interest, payable in monthly installments, at 7.5%
for the first five years and at prime interest thereafter until maturity. The
principal amount matures and is payable in December 2006. The note is
collateralized by the underlying related property.
65
66
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
8.9. INCOME TAXES:
The Company records deferred taxes for differences between the financial
reporting and income tax bases of certain assets and liabilities, computed in
accordance with tax laws in effect at that time. The differences which give rise
to deferred taxes were as follows:
JANUARY 31,
--------------------------------------------------
1999 1998 1997
---- ----
Accruals and reserves not currently deductible for
tax purposes...................................... $ 2,134,000 $ 2,579,000purposes........................................ $3,153,000 $2,134,000
Inventory capitalization............................capitalization.............................. 600,000 363,000 541,000
Deferred catalog costs..............................costs................................ (507,000) (766,000) (667,000)
Basis differences in intangible assets..............assets................ (250,000) (575,000) 30,000
Net tax carryforwards............................... -- 198,000
Differences in depreciation lives and methods.......methods......... (517,000) (1,341,000)
(1,237,000)
DifferenceDifferences in investments and other items........... (1,238,000) (1,028,000)
----------- -----------items............ (21,000) 1,147,000
---------- ----------
Net deferred tax asset (liability).................. $(1,423,000)asset................................ $2,458,000 $ 416,000
=========== ===========962,000
========== ==========
The net deferred tax asset (liability) is classified as follows in the accompanying
consolidated balance sheets:
JANUARY 31,
-----------------------------------------------
1999 1998 1997
---- ----
Current deferred taxes.............................. $ 447,000 $ 2,681,000taxes.................................. $1,807,000 $447,000
Noncurrent deferred taxes........................... (1,870,000) (2,265,000)
----------- -----------taxes............................... 651,000 515,000
---------- --------
Net deferred tax asset (liability).................. $(1,423,000) $ 416,000
=========== ===========asset.................................. $2,458,000 $962,000
========== ========
69
70
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
The provision (benefit) for income taxes consisted of the following:
YEARS ENDED JANUARY 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
---- ---- ----
Current...................................Current................................. $ 4,590,000 $ 9,661,000 $11,766,000
$ 350,000
Deferred..................................Deferred................................ (1,738,000) 1,839,000 (166,000)
(250,000)
----------- ----------- --------------------
$ 2,852,000 $11,500,000 $11,600,000
$ 100,000
=========== =========== ====================
A reconciliation of income taxes computed at the statutory rates to the
Company's effective tax rate is as follows:
YEARS ENDED JANUARY 31,
---------------------------------------------------
1999 1998 1997 1996
---- ---- ----
Taxes at federal statutory rates................... 35.0%rates........................ 34.0% 35.0% 35.0%
State income taxes, net of federal tax benefit..... 3.8% 4.1% 5.0%
Effect of recognition of previously unrecorded
deferred tax assets..............................benefit.......... 3.1 3.8 4.1
Amortization and other permanent items.................. 1.0 -- --
(39.1)%
---- ---- ---------
Effective tax rate.................................rate...................................... 38.1% 38.8% 39.1%
0.9%
==== ==== =========
66
67
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
9.10. COMMITMENTS AND CONTINGENCIES:
CABLE AFFILIATION AGREEMENTS
As of January 31, 1998,1999, the Company had entered into 23 to 7 year
affiliation agreements with thirteentwelve multiple systems operators ("MSOs") which
require each MSO to offer the Company's cable television home shopping
programming on a full-time basis over their cable systems. Under certain
circumstances, these cable television operators may cancel their agreements
prior to expiration. The affiliation agreements provide that the Company will
pay each MSO a monthly cable access fee and marketing support payment based upon
the number of homes carrying the Company's television home shopping programming.
For the years ended January 31, 1999, 1998 1997 and 1996,1997, the Company paid
approximately $19,494,000, $17,431,000, $15,182,000 and $12,078,000,$15,182,000, under these long-term
cable affiliation agreements.
The Company has entered into, and will continue to enter into, affiliation
agreements with other cable television operators providing for full- or
part-time carriage of the Company's television home shopping programming. Under
certain circumstances the Company may be required to pay the cable operator a
one time initial launch fee which is capitalized and amortized on a
straight-line basis over the term of the agreement.
EMPLOYMENT AGREEMENTS
The Company hashad entered into employment agreements with its former chief
executive officer and chief operating officer which expireexpired on January 31, 1999.
The employment agreements provideprovided that each officer, in addition to a base
salary, be granted options to purchase 375,000 shares of common stock at $8.50
per share and 375,000 shares of common stock at $10.50 per share. The options
were to vest and become exercisable at the earlier of the Company achieving
certain net income goals, as defined, or in September 2003. The aggregate commitmentAs of January 31,
1999, 1,200,000 of these options were exercisable and 300,000 options were
forfeited. Payments for future base compensation for these former officers athas
been terminated as of January 31, 1998 was $700,000.1999.
In addition, the Company has entered into employment agreements with a
number of officers of the Company and its subsidiaries for terms ranging from 24
to 36 months. These agreements specify, among other things, the term and duties
of employment, compensation and benefits, termination of employment (including
70
71
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
for cause, which would reduce the Company's total obligation under these
agreements), severance payments and non-disclosing and non-compete restrictions.
The aggregate commitment for future base compensation at January 31, 19981999 was
approximately $2,592,000.$5,266,000.
OPERATING LEASE COMMITMENTS
The Company leases certain property and equipment under non-cancelable
operating lease agreements. Property and equipment covered by such operating
lease agreements include the Company's main corporate office and warehousing
facility, offices and warehousing facilities at subsidiary locations, satellite
transponder and certain tower site locations.
Future minimum lease payments at January 31, 19981999 were as follows:
FISCAL YEAR AMOUNT
----------- ------
1999............................................... $4,023,000
2000............................................... 3,711,000
2001............................................... 3,393,000
2002............................................... 2,329,000
20032000.................................................... $3,978,000
2001.................................................... 2,786,000
2002.................................................... 2,372,000
2003.................................................... 2,270,000
2004 and thereafter................................ 9,030,000thereafter..................................... 6,679,000
67
68
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
Total lease expense under such agreements was approximately $4,145,000 in
1999, $4,227,000 in 1998, and $4,222,000 in 1997, and $3,348,000 in 1996.1997.
RETIREMENT AND SAVINGS PLAN
During fiscal 1995, the Company implemented a qualified 401(k) retirement
savings plan covering substantially all employees. The plan allows the Company's
employees to make voluntary contributions to the>the plan. The Company's
contribution, if any, is determined annually at the discretion of the Board of
Directors. Starting in January 1999, the Company has elected to make matching
contributions to the plan. The Company will match $.25 for every $1.00
contributed by eligible participants up to a maximum of 6% of eligible
compensation. The Company made plan contributions totaling $5,800 during fiscal
1999. There were no Company contributions made to the plan in fiscal 1998 1997 or
1996.
10.1997.
11. LITIGATION:
In December 1997, the Company was named in a lawsuit filed by Time Warner
Cable against Bridgeways Communications Corporation ("Bridgeways") and the
Company alleging, among other things, tortious interference with contractual and
business relations and breach of contract. According to the complaint,
Bridgeways and Time Warner Cable havehad been in a dispute since 1993 regarding
Bridgeways' attempt to assert "must carry" rights with respect to television
station WHAI-TV in the New York City Area of Dominant Influence.Designated Market Area. ValueVision
purchased television station WHAI-TV from Bridgeways in 1994 and subsequently
sold it in 1996. ValueVision and Time Warner Cable entered into cable
affiliation agreement in 1995 pursuant to which ValueVision agreed not to assert
"must carry" rights with respect to television station WHAI-TV and pursuant to
which ValueVision's programming is currently carried by Time Warner Cable in
approximately 4.2 million full-time equivalent cable households.
The
complaint seeks unspecified damagesOn December 23, 1998 the Company announced that it settled the lawsuit
filed by Time Warner Cable. Under the terms of the settlement, ValueVision paid
Time Warner Cable $7.0 million in cash which was recognized by ValueVision in
the fourth quarter of fiscal 1999, resulting in an after tax charge of
approximately $4.3 million. In settling this matter, ValueVision did not admit
any wrongdoing or liability. ValueVision, however, determined to enter into this
settlement to avoid the uncertainty and for the courtcosts of litigation,
71
72
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
as well as to declare theavoid disruption of its relationship with a key business partner
providing a substantial portion of ValueVision's program distribution.
ValueVision also announced that it has renewed its cable affiliation agreement
betweenwith Time Warner Cable and ValueVision null and void.
The Company is confident that it remainsfor an additional five-year term, expiring in full compliance with the terms and
conditions of the cable affiliation agreementJanuary 30,
2007, and that it has been
inappropriately named in this lawsuit involving Time Warner Cable and
Bridgeways. The Company claims that the lawsuit is completely without merit,
planshas agreed to defend it vigorously, and believes that the ultimate disposition of
this legal proceeding will not have a materially adverse effect on the Company's
consolidated financial position or future results of operations. However, if
Time Warner Cable werelaunch ValueVision's programming
full-time to prevail under the Complaint, such an outcome could
have a material adverse effect on the Company's financial position and/or costs
of operations to the extent it jeopardized access to, or increased the cost of
access to, these 4.4 million full-time equivalent households, which represent
approximately 38% of the full-time equivalent households to which the Company
currently has access.its Staten Island, New York cable subscribers.
In January 1994, the Company proposed an acquisition of National Media
Corporation ("National Media"). In February 1994, the Companyand announced a tender offer
for a majority of the outstanding shares of National Media.Media Corporation
("National Media"). In March 1994, the Company and National Media entered into a
Merger Agreement and the Company modified the terms of its tender offer. In
April 1994, the Company terminated its tender offer and the Merger Agreement
with National Media asserting inaccurate representations and breach of
warranties by National Media, and based upon adverse developments concerning
National Media. Litigation challenging the Company's termination of the tender
offer and Merger Agreement was subsequently filed by National Media and its
former chief executive officer and president. In addition, shareholders of
National Media filed four purported class action lawsuits against the Company
and certain officers of the Company. Each of these suits alleged deception and
manipulative practices by the Company in connection with the tender offer and
Merger Agreement.
In fiscal 1996, the Company, National Media and National Media's former
chief executive officer and president agreed to dismiss all claims, to enter
into joint operating agreements involving telemarketing and post-production
capabilities, and to enter into an international joint venture agreement. Under
the agreement, the Company received ten-year warrants, which vest over three
years, to purchase 500,000 shares of National 68
69
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
Media's common stock at a price of
$8.865 per share. In November 1996, the Company and National Media amended their
agreement by providing for the additional payment by the Company to National
Media of $1.2 million as additional exercise price for the warrants. Aswarrants, which has
been paid in full as of January 31, 1998, $800,000 has
been paid with a final installment of $400,000 to be paid on September 1, 1998.1999. See Note 15 for additional discussion
regarding these warrants.
In March 1997, the court gave final approval to a $1.0 million settlement,
which was paid by the Company from insurance proceeds, in the matter of the
class action suit initiated by certain shareholders of National Media.
During
the year ended January 31, 1996, the Company recorded a provision of $617,000
for estimated costs associated with settling the National Media shareholder
class action suit.
In addition to the litigation noted above, the Company is involved from
time to time in various other claims and lawsuits in the ordinary course of
business. In the opinion of Management, the claims and suits individually and in
the aggregate will not have a material adverse effect on the Company's
operations or consolidated financial statements.
11.12. RELATED PARTY TRANSACTIONS:
At January 31, 19981999 and 1997,1998, the Company had approximately $960,000$1,059,000 and
$591,000,$960,000, respectively, of notes receivable from certain former officers of the
Company. These notes range in the principal amount of $10,000 to $500,000, bear
interest at 5.6% to 6.8%, and withhave payment terms ranging from due on demand to
November 2002. The notes have been reflected as a reduction of shareholders'
equity in the accompanying consolidated balance sheets, as the notes are
partially collateralized by shares of the Company's common stock owned by the
former officers.
6972
7073
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
AND 1997
12.13. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information and noncash investing and financing
activities were as follows:
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996
---- ---- ----
Supplemental cash flow information:
Interest paid.......................................paid........................................ $ 107,000 $ 89,000 $ 83,000
$ 69,000
===================== =========== ===========
Income taxes paid...................................paid.................................... $3,889,000 $11,482,000 $10,051,000
$ --
===================== =========== ===========
Supplemental non-cash investing and financing
activities:
Reduction of Montgomery Ward operating license asset
and other assets in exchange for the return of
warrants.........................................warrants.......................................... $ -- $19,211,000 $ --
$ --
===================== =========== ===========
Receipt of 1,197,892 shares of Paxson Communications
Corporation common stock as partial consideration
from the sale of a broadcast television station.....station... $ -- $14,285,000 $ --
$ --
===================== =========== ===========
Issuance of 1,484,993 warrants in connection with the
acquisition of Montgomery Ward Direct, L.P..........L.P. ...... $ -- $ -- $ 8,353,000
$ --
===================== =========== ===========
Issuance of 199,097 warrants as part of a long-term
investment contribution.............................contribution........................... $ -- $ -- $ 1,131,000
$ --
===================== =========== ===========
Issuance of note payable in connection with the
purchase of land.................................... $ -- $ 600,000 $ --
=========== =========== ===========
Issuance of warrants to Montgomery Ward & Co.,
Incorporated........................................ $ -- $ -- $17,500,000
=========== =========== ===========
Receipt of a capital distribution from an investment
in a limited partnership............................land.................................. $ -- $ -- $ 2,744,000
===========600,000
========== =========== ===========
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards14. SEGMENT DISCLOSURES AND RELATED INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS(SFAS No. 131") in June 1997.131). SFAS No. 131
requires that
public business enterprises reportthe disclosure of certain information about operating segments in
annual 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
73
74
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
solicitations. Segment information included in the accompanying consolidated
balance sheets as of January 31 and included in the consolidated statements of
operations for the years then ended is as follows:
ELECTRONIC PRINT
YEARS ENDED JANUARY 31, (IN THOUSANDS) MEDIA MEDIA CORPORATE TOTAL
-------------------------------------- ---------- ----- --------- -----
1999
Revenues........................................... $148,198 $ 55,530 $ -- $203,728
Operating loss..................................... (3,305) (5,264) -- (8,569)
Depreciation and amortization...................... 3,970 1,029 -- 4,999
Interest income, net............................... 2,724 180 -- 2,904
Income taxes....................................... 4,823 (1,971) -- 2,852
Net income (loss).................................. 7,870 (3,231) -- 4,639
Identifiable assets................................ 107,385 19,941 14,444(a) 141,770
Capital expenditures............................... 1,339 226 -- 1,565
-------------------------------------------------
1998
Revenues........................................... $106,571 $111,411 $ -- $217,982
Operating loss..................................... (7,132) (3,843) -- (10,975)
Depreciation and amortization...................... 5,350 1,627 -- 6,977
Interest income, net............................... 1,817 299 -- 2,116
Income taxes....................................... 13,482 (1,982) -- 11,500
Net income (loss).................................. 21,076 (2,972) -- 18,104
Identifiable assets................................ 70,314 38,460 26,505(a) 135,279
Capital expenditures............................... 3,166 377 -- 3,543
-------------------------------------------------
1997
Revenues........................................... $ 99,419 $ 60,059 $ -- $159,478
Operating income (loss)............................ (4,687) 2,047 -- (2,640)
Depreciation and amortization...................... 5,357 639 -- 5,996
Interest income, net............................... 3,755 157 -- 3,912
Income taxes....................................... 10,750 850 -- 11,600
Net income......................................... 16,820 1,270 -- 18,090
Identifiable assets................................ 125,385 37,797 4,904(a) 168,086
Capital expenditures............................... 8,882 55 5,428(b) 14,365
-------------------------------------------------
- -------------------------
(a) Corporate assets consists of long-term investment assets not directly
assignable to a business segment.
(b) Relates to initial capital expenditures for the Company's warehouse and
requires selected information in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers and is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the impact of SFAS No. 131 and will adopt
the disclosure requirements in fiscal 1999 when required.
14.distribution facility.
15. NATIONAL MEDIA CORPORATION PROPOSED MERGER:CORPORATION:
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media Corporation is a publicly-held direct marketer of
consumer products through the use of direct response transactional television
programming, known as infomercials, and currently makes its programming
available to more than 370 million television households in more than 70
countries worldwide. If the mergers (the "Mergers") contemplated by the Merger
Agreement were to be
70
71
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
consummated, the Company and National Media would have become wholly-owned
subsidiaries of Quantum Direct, with each outstanding share of the Company's
common stock being converted into 1.19 shares of common stock in Quantum Direct
and each outstanding share of common stock of National Media, being converted
into one share of common stock in Quantum Direct.
Concurrently with the execution of the Merger Agreement, the Company agreed
to loan to National Media, pursuant to a Demand Promissory Note, up to an
aggregate of $10.0 million, $7.0 million of which was advanced upon signing of
the Demand Note on January 5, 1998 and the remaining $3.0 million of which has
subsequently been advanced. The Loan proceeds have been used by National Media
for various purposes, including the funding of accounts receivable, inventory
and media purchases. The Loan bears interest at prime rate plus 1.5% per annum
and is due on the earlier of January 1, 1999 or upon termination of the Merger
Agreement in certain circumstances. In the event National Media is unable to
repay the Loan when due, the Company may elect to receive payment in shares of
National Media's common stock at the then present market value. In consideration
for providing the Loan, National Media issued to the Company warrants to acquire
250,000 shares of National Media's common stock with an exercise price per share
equal to $2.74. The warrants are exercisable until the earlier of (i) January 5,
2003 and (ii) the occurrence of one of the following termination events: (x) the
consummation of the Merger or (y) the termination by National Media of the
Merger Agreement, if such termination results from a breach of a covenant by the
Company or in the event the Company's shareholders do not approve the Merger
Agreement; provided, however, that if, within 75 days after the termination
event described in clause (y) above, National Media has not repaid the Loan in
full or if during such 75 days, National Media defaults under its obligations
pursuant to the Loan, no termination event will be deemed to have occurred and
the warrants shall remain exercisable.
Consummation of the Mergers is subject to the satisfaction (or waiver) of a
number of conditions, including, but not limited to: (i) approval by holders of
a majority of the issued and outstanding shares of National Media's common stock
and ValueVision common stock; (ii) redemption of National Media's Series C
Preferred Stock; (iii) the receipt of certain regulatory and other approvals,
including those from the Federal Trade Commission and the Federal Communication
Commission; and (iv) not more than 5% of the holders of the issued and
outstanding shares of the Company's common stock shall have made demands and
given the notices required under Minnesota law to assert dissenters' appraisal
rights.
15. UNAUDITED SUBSEQUENT EVENT:
On April 8, 1998, it was announced that the Company received
preliminary notification from holders of more than 5% of the Company's common
stock that they intended to exercise their dissenter's rights with respect to
the proposed merger of the Company and National Media. TheMedia and the Company also reported that it had
advised National Media that it doesdid not
intend to waive the Merger Agreement condition to closing requiring that holders
of not more than 5% of the shares of the CompanyCompany's common stock have demanded
their dissenter's rights. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and conditions regarding a
transaction with National Media were unsuccessful and the Merger Agreement was
74
75
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and wrote off these amounts in the second quarter of fiscal 1999.
Concurrently with the execution of the proposed Merger Agreement, the
Company agreed to loan to National Media, had special meetingspursuant to a Demand Promissory Note,
up to an aggregate of $10.0 million, $7.0 million of which was advanced upon
signing of the Demand Note on January 5, 1998, with the remaining $3.0 million
subsequently advanced in fiscal 1999. The loan proceeds were used by National
Media for various purposes, including the funding of accounts receivable,
inventory and media purchases. The loan included interest at the prime rate plus
1.5% per annum and was due on the earlier of January 1, 1999 or upon termination
of the Merger Agreement in certain circumstances. In consideration for providing
the Loan, National Media issued to the Company warrants to acquire 250,000
shares of National Media's common stock at an exercise price of $2.74 per share
and amended the exercise price of previously issued warrants to purchase 500,000
shares of common stock from $8.865 per share to $2.74 per share.
In December 1998, National Media repaid the $10 million Demand Note, plus
accrued interest, and the Company exercised warrants to purchase 750,000 shares
of National Media common stock for an aggregate purchase price of $3,255,000.
During fiscal 1999, the Company sold 460,000 shares of National Media common
stock and recognized a $2,972,000 gain on the sale. In addition, included in
fiscal 1999 earnings is a $1,350,000 unrealized holding gain related to the
remaining 290,000 National Media shares held by the Company. These shares are
classified as "trading securities" in the accompanying January 31, 1999
consolidated balance sheet, as it is the Company's intent to sell these
securities in the near future.
16. UNAUDITED SUBSEQUENT EVENT:
On March 8, 1999, the Company entered into a strategic alliance with the
National Broadcasting Company, Inc. ("NBC") and G.E. Capital Equity Investments,
Inc. ("GE Capital"). Pursuant to the terms of the transaction, NBC and GE
Capital have agreed to jointly acquire an approximate 19.9% beneficial ownership
interest in the Company (consisting of 5,339,500 shares of Series A Redeemable
Convertible Preferred Stock, and a warrant to acquire 1,450,000 shares of Common
Stock (the "Distribution Warrant") under the "Distribution and Marketing
Agreement" discussed below) for aggregate consideration of approximately $56.0
million (or approximately $8.29 per share) representing approximately $44.0
million for the Preferred Stock and approximately $12.0 million upon exercise of
the Distribution Warrant. In addition, the Company will issue NBC and GE Capital
a warrant to increase their potential aggregate equity stake to 39.9%, subject
to approval of the Company's shareholders scheduled("Shareholder Approval"). NBC will
also have the exclusive right to negotiate on April 14,behalf of the Company for the
distribution of its television home shopping service.
INVESTMENT AGREEMENT
Pursuant to the Investment Agreement by and between the Company and GE
Capital dated March 8, 1999 (the "Investment Agreement"), the Company will sell
to GE Capital 5,339,500 shares of Series A Redeemable Convertible Preferred
Stock, $.01 par value (the "Preferred Stock") for an aggregate of $44,265,000
(or approximately $8.29 per share). The Preferred Stock is convertible into an
equal number of shares of the Company's Common Stock, $.01 par value ("Common
Stock"), subject to customary anti-dilution adjustments, has a mandatory
redemption on the 10th anniversary of its issuance or upon a "change of control"
at its stated value ($8.29 per share), participates in dividends on the same
basis as the Common Stock and has a liquidation preference over the Common Stock
and any other junior securities. So long as NBC or GE Capital is entitled to
designate a nominee to the Board of Directors (the "ValueVision Board") of the
Company (see discussion under "Shareholder Agreement" below), the holders of the
Preferred Stock shall be entitled to a separate class vote on the directors
subject to nomination by NBC and GE Capital.
75
76
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
During such period of time, such holders will not be entitled to vote in the
election of any other directors, but will be entitled to vote on all other
matters put before shareholders of the Mergers.Company (including on the matter
involving approval of the Investment Warrant described below) on an as converted
basis. Consummation of the sale of 3,739,500 shares of the Preferred Stock (the
"Initial Closing") is subject to clearance of the transaction with the Federal
Trade Commission (the "Governmental Clearance"), and with respect to
approximately 1.6 million shares of the Preferred Stock, is subject to
Shareholder Approval. The Federal Trade Commission notified the Company on April
5, 1999 that it had granted the Company early termination with respect to the 30
day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"). In light of this development, the receiptCompany
expects that the closing of the dissenters' notice,sale of the companies mutually3,739,500 shares of Preferred Stock
not subject to shareholder approval, the Investment Warrant and the Distribution
Warrant will take place during the week of April 12, 1999. Closing on the sale
of the remaining shares of Preferred Stock and exercisability of the Investment
Warrant is subject to Shareholder Approval. The Investment Agreement may be
terminated by mutual consent or if the Initial Closing is not consummated by
August 31, 1999.
The Investment Agreement also provides that the Company will issue GE
Capital a common stock purchase warrant (the "Investment Warrant") to acquire
the number of shares of the Common Stock that would result in the combined
beneficial ownership by GE Capital and NBC of 39.9% of the Company at the time
of exercise subject to certain limitations set forth in the Investment Warrant.
The Investment Warrant is immediately exercisable, has a term of 5 years from
the date of issuance and its exercise price during the first two years of the
term of the Investment Warrant is the greater of (i) the 45-day average closing
price of the underlying Common Stock ending on the trading day prior to
exercise, (ii) the 150-day average closing price of the underlying Common Stock
ending on the trading day prior to exercise, or (iii) $12 per share, and during
the last three years of the term of the Investment Warrant is the greater of (i)
the 45-day average closing price of the underlying Common Stock ending on the
trading day prior to the exercise or (ii) $15 per share. Issuance of the
Investment Warrant and approximately 1.6 million shares of the Preferred Stock
(the "Second Closing"), in addition to obtaining the Governmental Clearance
noted above, is also subject to Shareholder Approval.
SHAREHOLDER AGREEMENT
Pursuant to the Investment Agreement, upon closing of the sale of the
Preferred Stock, the Company and GE Capital will enter into a Shareholder
Agreement (the "Shareholder Agreement") providing for certain corporate
governance and standstill matters. The Shareholder Agreement (together with the
Certificate of Designation of the Preferred Stock) provides that GE Capital and
NBC will be entitled to designate nominees for an aggregate of 2 out of 7 board
seats so long as their aggregate beneficial ownership is at least equal to 50%
(or 75% if Shareholder Approval is not obtained) of their initial beneficial
ownership, and 1 out of 7 board seats so long as their aggregate beneficial
ownership is at least 10% of the "adjusted outstanding shares of Common Stock"
(or 50% of their initial beneficial ownership if Shareholder Approval is not
obtained). GE Capital and NBC have also agreed to postponevote their respective shareholder meetings
while the companies attempt to negotiate a restructuringshares of Common
Stock in favor of the Mergers that is
acceptableCompany's nominees to eachthe ValueVision Board in certain
circumstances.
All committees of the companiesValueVision Board will include a proportional number
of directors nominated by GE Capital and NBC. The Shareholder Agreement also
requires the consent of GE Capital prior to the Company entering into any
substantial agreements with certain restricted parties (broadcast networks and
internet portals in certain limited circumstances, as defined), as well as
taking any of the following actions: (i) issuance of more than 15% of the total
voting shares of the Company in any 12 month period (25% in any 24 month
period), (ii) payment of quarterly dividends in excess of 5% of the Company's
market capitalization (or repurchases and redemption of Common Stock with
certain exceptions), (iii) entry by the Company into any business not ancillary,
complementary or reasonably related to the Company's current business, (iv)
76
77
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
acquisitions (including investments and joint ventures) or dispositions
exceeding the greater of $35.0 million or 10% of the Company's total market
capitalization, or (v) incurrence of debt exceeding the greater of $40.0 million
or 30% of the Company's total capitalization.
Pursuant to the Shareholder Agreement, so long as GE Capital and NBC have
the right to name at least one nominee to the ValueVision Board, the Company
will provide them with certain monthly, quarterly and annual financial reports
and budgets. In addition, the Company has agreed not to take actions which would
cause the Company to be in breach of or default under any of its material
contracts (or otherwise require a consent thereunder) as a result of
acquisitions of the Common Stock by GE Capital or NBC. The Company is also
prohibited from taking any action that would cause any ownership interest of
certain FCC regulated entities from being attributable to GE Capital, NBC or
their affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the best interestShareholder Agreement), and with certain limited exceptions, GE
Capital and NBC shall be prohibited from: (i) any asset/business purchases from
the Company in excess of their
shareholders. As10% of the total fair market value of the Company's
assets, (ii) increasing their beneficial ownership above 39.9% of the Company's
shares, (iii) making or in any way participating in any solicitation of proxies,
(iv) depositing any securities of the Company in a voting trust, (v) forming,
joining, or in any way becoming a member of a 13D Group with respect to any
voting securities of the Company, (vi) arranging any financing for, or providing
any financing commitment specifically for, the purchase of any voting securities
of the Company, (vii) otherwise acting, whether alone or in concert with others,
to seek to propose to the Company any tender or exchange offer, merger, business
combination, restructuring, liquidation, recapitalization or similar transaction
involving the Company, or nominating any person as a director of the Company who
is not nominated by the then incumbent directors, or proposing any matter to be
voted upon by the shareholders of the Company. If during the Standstill Period
any inquiry has been made regarding a "takeover transaction" or "change in
control" which has not been rejected by the ValueVision Board, or the
ValueVision Board pursues such a transaction, or engages in negotiations or
provides information to a third party and the ValueVision Board has not resolved
to terminate such discussions, then GE Capital or NBC may propose to the Company
a tender offer or business combination proposal.
In addition, unless GE Capital and NBC beneficially own less than 5% or
more than 90% of the adjusted outstanding shares of Common Stock, GE Capital and
NBC shall not sell, transfer or otherwise dispose of any securities of the
Company except for transfers: (i) to certain affiliates who agree to be bound by
the provisions of the Shareholder Agreement, (ii) which have been consented to
by the Company, (iii) pursuant to a third party tender offer, provided that no
shares of Common Stock may be transferred pursuant to this clause (iv) to the
extent such shares were acquired upon exercise of the Investment Warrant on or
after the date hereof, National Mediaof commencement of such third party tender offer or the public
announcement by the offeror thereof or that such offeror intends to commence
such third party tender offer, (v) pursuant to a merger, consolidation or
reorganization to which the Company is a party, (vi) in a bona fide public
distribution or bona fide underwritten public offering, (vii) pursuant to Rule
144 of the Securities Act, or (viii) in a private sale or pursuant to Rule 144A
of the Securities Act; provided that, in the case of any transfer pursuant to
clause (vi) or (viii), such transfer does not result in, to the knowledge of the
transferor after reasonable inquiry, any other person acquiring, after giving
effect to such transfer, beneficial ownership, individually or in the aggregate
with such person's affiliates, of more than 10% of the adjusted outstanding
shares of the Common Stock.
The Standstill Period will terminate on the earliest to occur of (i) the 10
year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), and (v) six months after GE Capital and NBC
can no longer designate any
77
78
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1999 AND 1998
nominees to the ValueVision Board. Following the expiration of the Standstill
Period pursuant to clause (i) or (v) above (indefinitely in the case of clause
(i) and two years in the case of clause (v)), GE Capital and NBC's beneficial
ownership position may not exceed 39.9% of the Company on fully-diluted
outstanding stock, except pursuant to issuance or exercise of any warrants or
pursuant to a 100% tender offer for the Company.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, at the Initial Closing, ValueVision
and GE Capital will enter into a Registration Rights Agreement providing GE
Capital, NBC and their affiliates and any transferees and assigns, an aggregate
of four demand registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company are still
attemptinghave entered into the Distribution and Marketing
Agreement dated March 8, 1999 (the "Distribution Agreement") which provides that
NBC shall have the exclusive right to negotiate a restructuringon behalf of the MergersCompany for the
distribution of its home shopping television programming service. The agreement
has a 10-year term and have not reschedule
their respective special meetings. There can beNBC has committed to delivering an additional 10 million
full time equivalent ("FTE") subscribers over the first 42 months of the term.
In compensation for such services, the Company will pay NBC an annual fee of
$1.5 million (increasing no assurance thatmore than 5% annually) and issue NBC the
companiesDistribution Warrant. The exercise price of the Distribution Warrant is
approximately $8.29 per share and vests 200,000 shares immediately, with the
remainder of the Distribution Warrant vesting 125,000 shares annually over the
10-year term of the Distribution Agreement. The Distribution Warrant is
exercisable for five years after vesting. Assuming certain performance criteria
above the 10 million FTE homes are met, NBC will be ableentitled to successfully negotiateadditional
warrants to acquire Common Stock. The Company is seeking shareholder
ratification of the issuance of these additional warrants, although the issuance
and exercise of such warrants are not conditioned upon obtaining such approval.
The Company has a restructuring,right to terminate the Distribution Agreement after the
twenty-fourth, thirty-sixth and forty-second month anniversary if NBC is unable
to meet the performance targets. If terminated by the Company in such
circumstance, the unvested portion of the Distribution Warrant will expire. In
addition, the Company will be entitled to a $2.5 million payment from NBC if the
Company terminates the Distribution Agreement as a result of NBC's failure to
meet the 24 month performance target.
If prior to the Company's shareholder vote, the Company receives a
"material transaction proposal" or "takeover proposal", NBC has the right to (i)
terminate the Distribution Agreement or (ii) increase the annual fee payable to
NBC to the greater of $5.0 million or 10% of the Company's annual net profits
(as defined in the Distribution Agreement). In addition, NBC may terminate the
Distribution Agreement if the Company's shareholders do not approve the
Investment Warrant or if negotiated,
that such Mergers will be consummated.
71the Company enters into certain "significant
affiliation" agreements or a transaction resulting in a "change of control."
LETTER AGREEMENT
The Company, GE Capital and NBC have also entered into a non-binding letter
of intent dated March 8, 1999 providing for certain cooperative business
activities which the parties contemplate pursuing, including but not limited to,
development of a private label credit card, development of electronic commerce
and other internet strategies, development of programming concepts for the
Company and cross channel promotion.
78
7279
SCHEDULE II
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- ------------------------------------ ------------------------------------------------- ----------- ----------------------- ------------ ---------------------
CHARGED TO
BALANCES AT CHARGED TOCOSTS BALANCE AT
BEGINNING AND END OF
COSTS AND BALANCE ATOF YEAR EXPENSES OTHER DEDUCTIONS END OF YEAR
----------------------- ---------- ----- ---------- ---------------------
FOR THE YEAR ENDED JANUARY 31, 1999:
Allowance for doubtful accounts...... $ 453,000 $ 1,934,000 $ -- $ (661,000) $1,726,000
========== =========== ======== ============ ==========
Reserve for returns.................. $1,443,000 $60,295,000 $ -- $(59,447,000) $2,291,000
========== =========== ======== ============ ==========
Restructuring-related severance
accrual............................ $ -- $ 556,000 $ -- $ (256,000) $ 300,000
========== =========== ======== ============ ==========
FOR THE YEAR ENDED JANUARY 31, 1998:
Allowance for doubtful accounts.....accounts...... $ 529,000 $ 561,000 $ -- $ (637,000)(1) $ 453,000
========== =========== ======== ============ ==========
Reserve for returns.................returns.................. $1,690,000 $50,837,000 $ -- $(51,084,000)(2) $1,443,000
========== =========== ======== ============ ==========
FOR THE YEAR ENDED JANUARY 31, 1997:
Allowance for doubtful accounts.....accounts...... $ 181,000 $ 413,000 $224,000(3) $ (289,000)(1) $ 529,000
========== =========== ======== ============ ==========
Reserve for returns.................returns.................. $1,046,000 $44,202,000 $918,000(3) $(44,476,000)(2) $1,690,000
========== =========== ======== ============ ==========
FOR THE YEAR ENDED JANUARY 31, 1996:
Allowance for doubtful accounts..... $ 142,000 $ 99,000 $ -- $ (60,000)(1) $ 181,000
========== =========== ======== ============ ==========
Reserve for returns................. $ 642,000 $32,793,000 $ -- $(32,389,000)(2) $1,046,000
========== =========== ======== ============ ==========
- -------------------------
(1) Write off of uncollectible receivables, net of recoveries.
(2) Refunds or credits on products returned.
(3) Assumed through acquisitions.
7279
7380
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7380
7481
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item with respect to certain information
relating to the Company's executive officers is contained in paragraph K of Item
I and with respect to other information relating to the Company's executive
officers and its directors is incorporated herein by reference to the Company's
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
7481
7582
PART IV
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
a) Exhibits
EXHIBIT
NUMBER
PAGE
- ------- ----
2 -- Agreement and Plan of Reorganization and Merger, dated
January 5, 1998, by and among the Registrant, National Media
Corporation and Quantum Direct Corporation (formerly known
as V-L Holdings Corp.) (A)..................................
3.1 -- Sixth Amended and Restated Articles of Incorporation, as
amended.(B)................................................
3.2 -- Bylaws, as amended.(B).....................................
10.1 -- Amended 1990 Stock Option Plan of the Registrant.(C)+......
10.2 -- Form of Option Agreement under the Amended 1990 Stock Option
Plan of the Registrant.(A)+................................
10.3 -- 1994 Executive Stock Option and Compensation Plan of the
Registrant. (I)(F)+............................................
10.4 -- Form of Option Agreement under the 1994 Executive Stock
Option and Compensation Plan of the Registrant.(G)+........
10.5 -- Option Agreement between the Registrant and Marshall Geller
dated as of June 24, 1993.(D)..............................
10.6 -- Option Agreement between the Registrant and Marshall Geller
dated as of June 3, 1994.(A)+..............................
10.7 -- Option Agreement between the Registrant and Marshall Geller
dated August 8, 1995.(E)+..................................
10.8 -- Option Agreement between the Registrant and Marshall Geller
dated as of March 3, 1997.(A)+.............................
10.9 -- Option Agreement between the Registrant and Robert Korkowski
dated as of June 24, 1993.(D)+.............................
10.10 -- Option Agreement between the Registrant and Robert Korkowski
dated June 3, 1994.(A)+....................................
10.11 -- Option Agreement between the Registrant and Robert Korkowski
dated August 8, 1995.(E)+..................................
10.12 -- Option Agreement between the Registrant and Robert Korkowski
dated March 3, 1997.(A)+...................................
10.13 -- Employment Agreement between the Registrant and Robert
Johander dated as of September 1, 1993.(D)+................
10.14 -- Amendment to Employment Agreement between the Registrant and
Robert Johander dated January 5, 1998.(A)..................
10.15 -- Promissory Note payable to the Registrant dated December 31,
1997 for $25,000 executed by Robert L. Johander.(A)........
10.16 -- Promissory Note payable to the Registrant dated April 24,
1997 for $140,000 executed by Robert L. Johander.(A).......
10.17 -- Promissory Note payable to the Registrant dated April 29,
1997 for $35,000 executed by Robert L. Johander.(A)........
10.18 -- Promissory Note payable to the Registrant dated May 2, 1997
for $58,000 executed by Robert L. Johander.(A).............
75
76
EXHIBIT
NUMBER PAGE
- ------- ----
10.19 -- Promissory Note payable to the Registrant dated May 13, 1997
for $15,000 executed by Robert L. Johander.(A).............
10.20 -- Promissory Note payable to the Registrant dated March 21,
1997 for $50,000 executed by Robert L. ohander. Johander.(A).........
82
83
EXHIBIT
NUMBER
- -------
10.21 -- Employment Agreement between the Registrant and Nicholas
Jaksich dated as of September 1, 1993.(D)+.................
10.22 -- Amendment to Employment Agreement between the Registrant and
Nicholas Jaksich dated January 5, 1998.(A).................
10.23 -- Term Promissory Note payable to the Registrant dated
November 20, 1995 for $500,000 executed by Nicholas M.
Jaksich.(A)................................................
10.24 -- Mortgage dated November 20, 1995 between Nicholas M. Jaksich
and the Registrant.(A).....................................
10.25 -- Form of Mortgage Subordination Agreement dated as of
November, 1997 by and among LaSalle Bank F.S.B. and the
Registrant.(A).............................................
10.26 -- Promissory Note payable to the Registrant dated May 15, 1995
for $50,000 executed by Nicholas MM. Jaksich.(A).............
10.27 -- Transponder Lease Agreement between the Registrant and
Hughes Communications Galaxy, Inc. dated as of July 23, 1993
as supplemented by letters dated as of July 23, 1993.(D)...
10.28 -- Transponder Service Agreement between the Registrant and
Hughes Communications Satellite Services, Inc.(D)..........
10.29 -- Industrial Space Lease Agreement between Registrant and
Shady Oak Partners dated August 31, 1994.(B)...............
10.30 -- Employment Agreement between the Registrant and Stuart R.
Romenesko dated January 5, 1998. (A)+.......................
10.31 -- Option Agreement between the Registrant and Paul Tosetti
dated September 4, 1996.(A)+...............................
10.32
10.31 -- Option Agreement between the Registrant and Paul Tosetti
dated March 3, 1997.(A)+...................................
10.33 -- Employment Agreement between the Registrant and Scott
Lindquist dated November 30, 1995. (E)+.....................
10.34 -- Employment Agreement between the Registrant and Scott
Lindquist dated January 5, 1998. (G)+.......................
10.35 -- Employment Agreement between the Registrant and David T.
Quinby dated February 1, 1997. (F)+.........................
10.36 -- Employment Agreement dated January 5, 1998 by and between
the Registrant and David T. Quinby. (G)+....................
10.37
10.32 -- Asset and Stock Purchase and Option Grant Agreement dated as
of November 14, 1997 by and among the Registrant, VVI
Seattle, Inc., VVILPTV, Inc., VVI Spokane, Inc., VVI
Tallahassee, Inc. and Paxson Communications Corporation.(A).........................................................
10.38
10.33 -- Amendment to Asset and Stock Purchase Agreement dated
February 27, 1998.(A)......................................
10.39
10.34 -- Employment Agreement dated January 12, 1998 by and between
the Registrant and Gregory Lerman.(G)+.....................
10.40 -- Employment Agreement dated March 30, 1998 by and among
Quantum Direct Corporation, the Registrant and Gene
McCaffery. (H)+.............................................
76
77
EXHIBIT
NUMBER PAGE
- ------- ----
10.41
10.35 -- Stipulation made as of November 1, 1997 between Montgomery
Ward & Co., Incorporated ("Montgomery Ward") and the
Registrant Regarding the Assumption and Modification of
Executory Contracts and Related Agreements.(G).............
10.42
10.36 -- Second Amended and Restated Operating Agreement made as of
November 1, 1997 between Montgomery Ward and the
Registrant.(G).........................................................
10.43
10.37 -- Amended and Restated Credit Card License Agreement made as
of November 1, 1997 between Montgomery Ward and the
Registrant.(G).............................................
10.44
10.38 -- Second Amended and Restated Servicemark License Agreement
made as of November 1, 1997 between Montgomery Ward and the
Registrant.(G).............................................
10.45 -- Stock Option Agreement (ValueVision) dated as of January 5,
1998 between the Registrant and National Media. (J).........
10.46 -- Stock Option Agreement (National Media) dated as of January
5, 1998 between National Media and the Registrant. (J)......
10.47 -- Redemption and Consent Agreement dated January 5, 1998 by
and between National Media, the Registrant, Capital Ventures
International and RGC International Investors, LDC. (J).....
10.48 -- $10,000,000 Demand Promissory Note dated January 5, 1998
issued by National Media to the Registrant. (J).............
10.49 -- Subsidiary Guarantee dated as of January 5, 1998 by Quantum
North America, Inc., Quantum International Limited, Quantum
Far East Ltd., Quantum Marketing International, Inc.,
Quantum International Japan Company Ltd., DirectAmerica
Corporation, Positive Response Television, Inc., Quantum
Productions AG, Suzanne Paul (Australia) Pty Limited, and
National Media Holdings, Inc., for the benefit of the
Registrant. (J).............................................
10.50 -- Warrant Agreement by and between National Media and the
Registrant dated as of January 5, 1998. (J).................
10.51 -- Warrant Certificate No. 1 dated January 5, 1998, issued by
National Media to the Registrant to purchase 250,000 shares
of National Media common stock. (J).........................
10.52
10.39 -- Registration Rights Agreement by and between National Media
and the Registrant dated as of January 5, 1998. (J).........
11(H)
10.40 -- ComputationEmployment Agreement between the Registrant and Gene
McCaffery dated March 30, 1998.(I)+
10.41 -- Employment Agreement between the Registrant and Stuart R.
Romenesko dated May 1, 1998.(I)+
10.42 -- Employment Agreement between the Registrant and David T.
Quinby dated May 1, 1998.(I)+
10.43 -- Employment Agreement between the Registrant and Cary Deacon
dated December 30, 1998.(K)+
83
84
EXHIBIT
NUMBER
- -------
10.44 -- Employment Agreement between the Registrant and Edwin
Pohlmann dated January 6, 1999.(K)+
10.45 -- Employment Agreement between the Registrant and Jon Thom
dated December 30, 1998.(K)+
10.46 -- Investment Agreement by and between ValueVision and GE
Capital dated as of Net Income Per Share. (G).................... 87March 8, 1999.(J)
10.47 -- Distribution and Marketing Agreement dated as of March 8,
1999 by and between NBC and ValueVision.(J)
10.48 -- Letter Agreement dated March 8, 1999 between NBC, GE Capital
and ValueVision.(J)
10.49 -- Form of Shareholder Agreement between ValueVision and GE
Capital.(J)
10.50 -- Form of Certificate of Designation of Series A Redeemable
Convertible Preferred Stock.(J)
10.51 -- Form of ValueVision Common Stock Purchase Warrant to be
issued to GE Capital.(J)
10.52 -- Form of Registration Rights Agreement between ValueVision
and GE Capital.(J)
21 -- Significant Subsidiaries of the Registrant. (G)............. 88(K)
23 -- Consent of Arthur Andersen LLP. (G)......................... 89(K)
27 -- Financial Data Schedule (for SEC use only). (G).............(K)
- -------------------------
(A) Incorporated herein by reference to Quantum Direct Corporation's
Registration Statement on Form S-4, filed on March 13, 1998, File No.
333-47979.
(B) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-QSB, for the quarter ended August 31, 1994, filed on September 13,
1994.
(C) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1, filed on December 20, 1994, No. 33-38374, as amended on Form
SB-2.
(D) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-3 filed on October 13, 1993, as amended, File No. 33-70256.
(E) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K, for the year ended January 31, 1996, filed April 29, 1996, as
amended, File No. 0-20243.
77
78
(F) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1997, filed on May 1, 1997, as amended,
File No. 0-20243.
(G) Filed herewith.
(H) Incorporated herein by reference to the Registrant's Current Report on Form
8-K dated March 26, 1998, filed on March 31, 1998, File No. 0-20243.
(I) Incorporated herein by reference to the Registrant's Proxy Statement in
connection with its annual meeting of shareholders held on August 17, 1994,
filed on July 19, 1994, File No. 0-20243.
(J) Incorporated herein by reference to the Registrant's Current Report on Form
8-K dated January 5, 1998, filed on January 8, 1998, File No. 0-20243.
+ Management compensatory plan/arrangement.
(A) Incorporated herein by reference to Quantum Direct
Corporation's Registration Statement on Form S-4, filed on
March 13, 1998, File No 333-47979.
(B) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-QSB, for the quarter ended
August 31, 1994, filed on September 13, 1994.
(C) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-1, filed on December 20,
1994, No. 33-38374, as amended on Form SB-2.
(D) Incorporated herein by reference to the Registrant's
Registration Statement on Form S-3 filed on October 13,
1993, as amended, File No 33-70256.
(E) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K, for the year ended January 31, 1996,
filed April 29, 1996, as amended, File No. 0-20243.
(F) Incorporated herein by reference to the Registrant's Proxy
Statement in connection with its annual meeting of
shareholders held on August 17, 1994, filed on July 19,
1994, File No. 0-20243.
(G) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1998,
filed on April 30, 1998, File No. 0-20243.
(H) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 5, 1998, filed on January
8, 1998, File No 0-20243.
(I) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q, for the quarter ended April
30, 1998, filed on June 10, 1998.
(J) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated March 8, 1999, filed on March 18,
1999, File No. 0-20243.
(K) Filed herewith
+ Management compensatory plan/arrangement
b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on November 17, 1997December 23, 1998 reporting under Item
5, that the Registrant and Paxson Communications Corporation ("Paxson")
signed a definitive agreement under which Paxson will acquire,Company announced that it had settled the lawsuit filed on
December 17, 1997 by Time Warner Entertainment
84
85
Company, L.P. for total
consideration of $35$7.0 million in cash the Registrant's television station
KBGE-TV, Channel 33, Seattle, Washington along with two of the Registrant's
non-cable, low-power stations in Portland, Oregon and Indianapolis, Indiana and
minority interests in entities which have applied for two new stations.
(ii) The company filed a Form 8-K on December 22, 1997 reporting under Item
5, the Registrant's Press Release dated December 19, 1997 announcing that the Registrant was named in a lawsuit filed byCompany had also
renewed its cable affiliation agreement with Time Warner Cable against Bridgeways
Communications Corporation and the Registrant alleging, among other things,
tortious interference with contractual and business relations and breach of
contract.
(iii) The Registrant filed a Form 8-K on January 8, 1998 reporting under
Item 5, the Registrant's Press Release dated January 5, 1998 announcing the
National Media Corporation and ValueVision Agreement and Plan of Reorganization
and Merger dated January 5, 1998 by and among the Registrant, National Media
Corporation and Quantum Direct Corporation (formerly known as V-L Holdings
Corp).
(iv)for an
additional five-year term.
(ii) The Registrant filed a Form 8-K on March 31, 199818, 1999 reporting under Item 5,
that the Registrant's Press Release dated March 26, 1998 announcingCompany entered into a strategic alliance with the Registrant's fourth quarterNational
Broadcasting Company, Inc. ("NBC") and year end earningsG.E. Capital Equity Investments,
Inc. ("GE Capital"). Pursuant to the terms of the transaction, NBC and GE
Capital have agreed to jointly acquire an approximate 19.9% ownership
interest in ValueVision (consisting of 5,339,500 shares of Series A
Redeemable Convertible Preferred Stock, and a warrant to acquire 1,450,000
shares of Common Stock under a Distribution and Marketing Agreement) for
aggregate consideration of approximately $56.0 million (or approximately
$8.29 per share). In addition, ValueVision will issue NBC and GE Capital a
warrant to increase their potential aggregate equity stake to 39.9%,
subject to approval of ValueVision's shareholders. NBC will also have the
exclusive right to negotiate on behalf of ValueVision for the three and twelve
months ended January 31, 1998. The Registrant also reported under Item 5 the
selectiondistribution
of veteran marketing, direct response and retail executive, Gene
McCaffery, as Chief Executive Officer of Quantum Direct Corporation, the
international electronic commerce company to be formed by the proposed merger of
the Registrant and National Media Corporation.
(v) The Registrant filed a Form 8-K on April 9, 1998 reporting under Item
5, the Registrant's Press Release dated April 8, 1998 announcing the
postponement of the special shareholder meetings of the Registrant's and
National Media Corporation to vote on their proposed merger in light of the
Registrant's dissenting shareholders.
78its television home shopping services.
85
79
This Page Intentionally Left Blank
79
8086
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 29, 1998.6, 1999.
ValueVision International, Inc.
(registrant)
By: /s/ ROBERT L. JOHANDERGENE MCCAFFERY
------------------------------------
Robert L. JohanderGene McCaffery
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on April 29, 1998.6, 1999.
NAME TITLE
---- -----
/s/ ROBERT L. JOHANDERGENE MCCAFFERY Chairman of the Board, Chief Executive
- ----------------------------------------------------------------------------------------------------- Officer (Principal Executive Officer)
and
Robert L. Johander Director
/s/ NICHOLAS M. JAKSICH Chief Operating Officer,Gene McCaffery President and - --------------------------------------------- Director
Nicholas M. Jaksich
/s/ STUART R. ROMENESKO Senior Vice President Finance and Chief
- ----------------------------------------------------------------------------------------------------- Financial Officer (Principal Financial
and
Stuart R. Romenesko and Accounting Officer)
/s/ MARSHALL S. GELLER Director
- -----------------------------------------------------------------------------------------------------
Marshall S. Geller
/s/ PAUL D. TOSETTI Director
- -----------------------------------------------------------------------------------------------------
Paul D. Tosetti
/s/ ROBERT J. KORKOWSKI Director
- -----------------------------------------------------------------------------------------------------
Robert J. Korkowski
8086