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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
                                   FORM 10-K

        
   [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED FEBRUARY 4, 20063, 2007

                                  OR


   [ ]          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                FOR THE TRANSITION PERIOD FROM          TO
COMMISSION FILE NUMBER 0-20243 --------------------- VALUEVISION MEDIA, INC. (Exact name of Registrant as Specified in Its Charter) MINNESOTA 41-1673770 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 6740 SHADY OAK ROAD, EDEN PRAIRIE, MN 55344-3433 "WWW.SHOPNBC.COM" (Zip Code) (Address of Principal Executive Offices) (Zip Code)
952-943-6000 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONECOMMON STOCK, $0.01 PAR VALUE NAME OF EXCHANGE ON WHICH REGISTERED: NASDAQ GLOBAL MARKET SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $0.01 PAR VALUENONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X] As of April 17, 2006, 37,327,50310, 2007, 37,595,268 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 July 30, 2005,August 5, 2006, based upon the closing sale price for the registrant's common stock as reported by the Nasdaq StockGlobal Market on July 30, 2005August 5, 2006 was approximately $183,368,874.$273,733,110. For purposes of determining such aggregate market value, all officers and directors of the registrant are considered to be affiliates of the registrant, as well as shareholders holding 10% or more of the outstanding common stock as reflected on Schedules 13D or 13G filed with the registrant. This number is provided only for the purpose of this Annual Reportannual report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant'sits fiscal year ended February 4, 20063, 2007 are incorporated by reference in Part III of this annual report on Form 10-K. VALUEVISION MEDIA, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 4, 20063, 2007 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 1A. Risk Factors................................................ 1514 Item 1B. Unresolved Staff Comments................................... 2018 Item 2. Properties.................................................. 2018 Item 3. Legal Proceedings........................................... 2019 Item 4. Submission of Matters to a Vote of Security Holders......... 2119 PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities........... 2119 Item 6. Selected Financial Data..................................... 2122 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 2324 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 43 Item 8. Financial Statements and Supplementary Data................. 44 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 7978 Item 9A. Controls and Procedures..................................... 7978 Item 9B. Other Information........................................... 81 PART III Item 10. Directors, and Executive Officers of the Registrant..........and Corporate Governance.................................................. 81 Item 11. Executive Compensation...................................... 81 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.................. 8281 Item 13. Certain Relationships and Related Transactions..............Transactions, and Director Independence................................................ 82 Item 14. Principal Accountant Fees and Services...................... 82 PART IV Item 15. Exhibits and Financial Statement Schedules.................. 82 SignaturesSignatures............................................................ 88
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION This annual report on Form 10-K, as well as other materials filed by the registrantus with the Securities and Exchange Commission, ("SEC"), and information included in oral statements or other written statements made or to be made by the registrant,us, contains forward-looking statements regarding the registrant, itsus, our business prospects and itsour results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the registrant'sour actual business, prospects and results of operations to differ materially from those that may be anticipated by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in the "Risk Factors" section of this annual report on Form 10-K, as well as risks relating toto: consumer spending and debt levels; interest rates; seasonal variations in consumer purchasing activities; changes in the mix of products sold by us; competitive pressures on sales; pricing and gross profitsales margins; the level of cable and satellite distribution for the registrant'sour programming and associated fees; the success of the registrant'sour e-commerce and branding initiatives; the success of the registrant'sour strategic alliances and relationships; theour ability of the registrant to manage itsour operating expenses successfully; risks associated with acquisitions; changes in governmental or regulatory requirements; litigation or governmental proceedings affecting the registrant'sour operations; and theour ability of the registrant to obtain and retain key executives and employees. PART I ITEM 1. BUSINESS A. GENERALWhen we refer to "we," "us" or the "company," we mean ValueVision Media, Inc., together with and its subsidiaries (the "Company"),unless the context requires otherwise. ValueVision Media, Inc. is a Minnesota corporation with principal and executive offices located at 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433. ValueVision Media, Inc. was incorporated on June 25, 1990. Our fiscal year ended February 3, 2007 is designated fiscal 2006, our fiscal year ended February 4, 2006 is designated fiscal 2005 and our fiscal year ended January 31, 2005 is designated fiscal 2004. A. GENERAL We are an integrated direct marketing company that markets, sells and distributes its products directly to consumers through various forms of electronic media and direct-to-consumer mailings. The Company'sOur operating strategy as a multi-channel retailer incorporates television home shopping, Internetinternet e-commerce, vendor programming sales, fulfillment services and outsourced e-commercedirect mail marketing and fulfillment solutions. The Company'sservices. Our principal electronic media activity is itsour television home shopping business, which uses on-air spokespersons to market brand name merchandise and proprietary/private label consumer products at competitive prices. The Company'sOur live 24-hour per day television home shopping programming is distributed primarily through long-term cable and satellite affiliation agreements and the purchase of month-to-month full- and part-time lease agreements of cable and broadcast television time. In addition, the Company distributes itswe distribute our programming through a Company-ownedcompany-owned full power television station in Boston, Massachusetts. The CompanyWe also complements its television home shopping business by the sale ofoperate an internet retailing website, www.shopnbc.com, which markets and sells a broad array of consumer merchandise, through its Internet shopping website, www.shopnbc.com. On November 16, 2000, the Company entered intoincluding all products being featured in our television programming. We have an exclusive license agreement with National Broadcasting Company,from NBC Universal, Inc., now known as NBC, Universal, Inc. ("NBC"), pursuant to which NBC grantedfor the Company worldwide use of an NBC-branded name and the peacock image for a ten-year period. The Company rebranded itsperiod ending in May 2011. Pursuant to the license, we operate our television home shopping network under the ShopNBC brand name and companion Internet shoppingoperate our internet website as ShopNBC andunder the ShopNBC.com respectively, in fiscal 2001. The Company, through its wholly owned subsidiary, VVI Fulfillment Center, Inc. ("VVIFC"), providesbrand name. We currently provide fulfillment, warehousing, customer service and telemarketing services to Ralph Lauren Media, LLC, ("RLM"), isknown as RLM, the operator of the Polo.com e-commerce business which the Company holds a minority equity interest. VVIFC also provides fulfillment and warehousing services for the fulfillment of certain non-jewelry merchandise sold on the Company's television home shopping program and Internet website. The Company is a Minnesota corporation with principal and executive offices located at 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433. The Company was incorporated in the state of Minnesota on June 25, 1990. The fiscal year ended February 4, 2006 is designated fiscal 2005, the fiscal year ended January 31, 2005 is designated fiscal 2004 and the fiscal year ended January 31, 2004 is designated fiscal 2003. Electronic Media The Company'sbusiness. TELEVISION AND INTERNET RETAILING Our principal electronic media activity is itsour live 24-hour per day television home shopping network program. The Company'sOur home shopping network is the third largest television home shopping retailer in the United States. Through its continuousour merchandise-focused television programming, the Company sellswe sell a wide variety of products and services directly to consumers. Sales from the Company'sour television home shopping and companion Internetinternet website business, inclusive ofincluding shipping and handling revenues, totaled $755,302,000, $680,592,000 $614,884,000 and $581,999,000,$614,884,000, representing 98%, 99%98% and 98%99% of net sales, for fiscal 2006, 2005 2004 and 2003,2004, respectively. Products are presented by on-air television home shopping personalities and guests; viewers may then call a toll-free telephone number and place orders directly with the Companyus or enter an order on the ShopNBC.com website. The Company'sOur television programming is produced at itsour Eden Prairie, Minnesota facility and is transmitted nationally via satellite to cable system operators, satellite dish owners and to the Company'sour full power broadcast television station WWDP TV-46 in Boston, Massachusetts. Products and Product Mix.PRODUCTS AND PRODUCT MIX Products sold on the Company'sour television homenetwork and internet shopping networkwebsite include jewelry, watches, computers and other electronics, housewares, apparel, cosmetics, fitness products, giftware, collectibles, seasonal items and other merchandise. Jewelry represents the Company'sour largest single category of merchandise, representing 54%39% of television home shopping and Internetinternet net sales in fiscal 2005, 61%2006, 43% in fiscal 20042005 and 65%49% in fiscal 2003.2004. Home products, including electronics product categories, represented approxi- 1 mately 36%approximately 37% of television home shopping and Internetinternet net sales in fiscal 2006, 36% in fiscal 2005 and 31% in fiscal 20042004. Watches, apparel, and 30% in fiscal 2003. Apparel, health and beauty product categories represented approximately 10%24% of television home shopping and Internetinternet net sales in 1 fiscal 2006, 21% in fiscal 2005 8%and 20% in fiscal 2004 and 5% in fiscal 2003. The Company believes2004. We believe that product diversification will appealhaving a broad diversity of products appeals to a broaderlarger segment of potential customers and is important to growing the Company's business. The Company'sour growth. Our product diversification strategy is to continue to develop new product offerings primarily in the home, apparel and accessories, cosmetics, fitness and consumer electronics categories to supplement the existing jewelry and computer businesses. Additionally, the Company's on-goingour product strategy will alsocontinue to focus on: (i) jewelry and gems for core customers; (ii) value products, including closeouts and opportunistic buys; (iii) highly demonstratable products that leverage the television medium; and (iv) unique offers that cannot be found elsewhere. Program Distribution. As of February 2006, there were approximately 110 million homesB. BUSINESS STRATEGY Our objective is to be positioned as a growing and profitable leader in multi-channel retailing in the United States, offering consumers an entertaining, informative and interactive shopping experience. The following strategies are being pursued to increase our revenues and profitability and grow the active customer base, both for television sales and sales through the internet: (i) continue to diversify our mix of product categories offered on television and the internet, in order to appeal to a broader population of potential customers; (ii) maintain and increase the distribution of our television programming through new and expanded agreements with at least onecable and satellite system operators, as well as pursuing other means of reaching customers such as through webcasting, internet videos and internet-based broadcasting networks; (iii) increase the productivity of each hour of television set. Of those homes, there were approximately 73 million basic cableprogramming, through a focus on television subscribers, approximately 25 million direct-to-home satellite subscribersoffers of merchandise that maximizes gross margin dollars per hour and approximately 300,000 homes with satellite dish receivers. Homes that receive the Company's television home shopping programming 24 hours per day are each counted as one full-time equivalent ("FTE") 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 that programming is received. The Company has continuedmarketing efforts to experience growth inincrease the number of FTE subscriber homes that receive its programming. Ascustomers within the households currently receiving our television programming; (iv) continue the growth of February 4, 2006,our internet business through the Company served a totalinnovative use of approximately 66.0 million subscriber homes, or approximately 62.9 million FTEs, compared with a total of approximately 63.9 million subscriber homes, or approximately 60.1 million FTEstechnology and marketing efforts, such as of January 31, 2005. Approximately 57.7 million, 54.2 millionadvanced search techniques, personalization, internet video, affiliate agreements and 49.0 million subscriber homes at February 4, 2006, January 31, 2005internet-based auction capabilities; (v) continue to enhance our television broadcast quality, programming, website features and January 31, 2004, respectively, receivedcustomer support; (vi) increase the Company's television home shopping programming on a full-time basis. As of February 4, 2006,average order size through sales initiatives such as add-on sales, continuity programs and warranty sales; and (vii) leverage the Company's television home shopping programming was carried by 1,230 broadcasting systems on a full-time basis, compared to 1,180 broadcasting systems on January 31, 2005, and 60 broadcasting systems on a part-time basis, compared to 70 broadcasting systems on January 31, 2005. The total number of cable homes that presently receive the Company's television home shopping programming represents approximately 56%strong brand recognition of the total number of cable subscribers in the United States. NBC has the exclusive right to negotiate on behalf of the Company for the distribution of its television home shopping service pursuant to the terms of the strategic alliance between the Company, NBC and GE Capital Equity Investments, Inc. (now known as GE Commercial Finance -- Equity, and referred to herein as "GE Equity") entered into in March 1999. See "NBC and GE Strategic Alliance" discussed below.brand name. C. TELEVISION PROGRAM DISTRIBUTION AND INTERNET OPERATIONS TELEVISION HOME SHOPPING NETWORK Satellite Delivery of Company Programming. The Company'sOur programming is presently distributed via a leased communications satellite transponder to cable systems, the full power television station in Boston, certain other broadcast stations and satellite dish owners via a leased communications satellite transponder.owners. On January 31, 2005, the Companywe entered into a new long-term satellite lease agreement with the Company'sour present provider of satellite services. Pursuant to the terms of this new agreement, the Company distributes itswe distribute our programming on a satellite that was launched in February 2006. The new agreement is expected to reduce the Company'shas reduced our annual cost of satellite service and provide the Companyprovides us with a state-of-the-art satellite transponder that uses new technology to transmit a stronger signal to a greater number of households.signal. Satellite service may be interrupted due to a variety of circumstances beyond the Company'sour control, such as satellite transponder failure, satellite fuel depletion, governmental action, preemption by the satellite service provider andor service failure. The new agreement provides the Companyus with preemptable back-up services if satellite transmission is interrupted. However, there can be no assurance if satellite transmission is interrupted that the Companywe will be able to utilize existing back-up satellite service transponder or satellite capacity. In the event of any transmission interruption, the Companywe may incur substantial additional costs to enter into new arrangements and be unable to broadcast itsour signal for some period of time. B. BUSINESS STRATEGY The Company is a leader in multichannel retailing, offering consumers an entertaining, informative and interactive shopping experience. The following business strategies are intended to continue the growth of the 2 Company's television home shopping business and complimentary website: (i) diversify the types of products offered for sale outside of the historical categories of jewelry and computers; (ii) increase program distribution in the United States through new or expanded broadcast agreements with cable and satellite operators and other creative means for reaching consumers, such as webcasting on ShopNBC.com; (iii) increase average net sales per home by increasing penetration within existing homes receiving the Company's programming and by attracting new customers through a broader merchandise mix and targeted marketing efforts; (iv) continue to grow the Company's Internet business through the innovative use of marketing and technology, such as advanced search strategies, personalization, webcasting and unique auction capabilities; (v) upgrade the overall quality of the Company's network, programming and customer support infrastructure consistent with expectations associated with the NBC brand name; and (vi) increase the average order size through various sales initiatives including add-on sales, continuity programs and warranty sales; and (vii) leverage the strong brand recognition of the NBC name and associated peacock symbol to achieve greater brand recognition with the ShopNBC television channel and ShopNBC.com website. PROGRAMMING DISTRIBUTION Cable Affiliation AgreementsAgreements. As of February 4, 2006, the Company3, 2007, we had entered into long-term affiliation agreements with approximately 100130 cable system operators that require each operator to offer the Company'sour television home shopping programming substantially on a full-time basis over their systems. The stated terms of the affiliation agreements typically range from three to twelve years. Under certain circumstances, the television operators may cancel the agreements prior to their expiration. If these agreements are terminated, the termination may materially or adversely affect the Company'sour business. Also, the Companywe may not be able to successfully negotiate acceptable terms with respect to any renewal of these contracts. The affiliation agreements generally provide that the Company generallywe will pay each operator a monthly access fee and marketing support payments based uponon the number of homes receiving the Company's television home shoppingour programming. Certain of the affiliation agreements also required payment of one-time initial launch fees, which are capitalized and amortized on a straight-line basis over the term of the 2 agreements. The Company isWe are seeking to enter into affiliation agreements with additional television operators providing for fullfull- or part-time carriage of the Company's television home shoppingour programming. A significant number of cable operators have started to offer cable programming on a digital basis. The use of digital compression technology provides cable companies with greater channel capacity. While greater channel capacity increases the opportunity for the Company to be distributeddistribution and, in some cases, reduces the subscriber feefees paid by the Company,us, it also may adversely impact the Company'sour ability to compete for television viewers to the extent it results in higher channel position for us, placement of the Company'sour programming in separate programming tiers, or the broadcast of additional competitive channels.channels or viewer fragmentation due to a greater number of programming alternatives. During 2006, there were approximately 110 million homes in the United States with at least one television set. Of those homes, there were approximately 65 million basic cable television subscribers and approximately 27 million direct-to-home satellite subscribers. Homes that receive our television home shopping programming 24 hours per day are each counted as one full-time equivalent, or FTE, and homes that receive our programming for any period less than 24 hours are counted based upon an analysis of time of day and day of week that programming is received. We have continued to experience growth in the number of FTE subscriber homes that receive our programming. As of February 3, 2007, we served a total of approximately 69.2 million subscriber homes, or approximately 67.0 million FTEs, compared with a total of approximately 66.0 million subscriber homes, or approximately 62.9 million FTEs, as of February 4, 2006. As of February 3, 2007, our television home shopping programming was carried by approximately 1,320 broadcasting systems on a full-time basis, compared to 1,230 broadcasting systems on February 4, 2006, and 60 broadcasting systems on a part-time basis for both fiscal years. The total number of cable homes that presently receive our television home shopping programming represents approximately 65% of the total number of cable subscribers in the United States. NBC has the exclusive right to negotiate on our behalf for the distribution of our television home shopping service pursuant to the terms of the strategic alliance between us, NBC and GE Capital Equity Investments, Inc. (now known as GE Commercial Finance -- Equity, and referred to in this report as GE Equity) entered into in March 1999. See "Strategic Alliances -- NBC and GE Equity Strategic Alliance" discussed below. Direct Satellite Service Agreements The Company'sAgreements. Our programming is carried on the direct-to-home, ("DTH")or DTH, satellite services DIRECTV and DISH Network. Carriage on DIRECTV and DISH Network is full-time under long-term distribution agreements. As of February 4, 2006, the Company's programming reached approximately 25 million DTH homes on a full-time basis. The DTHThese agreements generally provide that the Company generallywe will pay each operator a monthly access fee based upon the number of homes receiving the Company'sour television home shopping programming. As of February 3, 2007, our programming reached approximately 27 million DTH homes on a full-time basis. Other Methods of Program Distribution The Company'sDistribution. Our programming is also made available full-time to "C"-band satellite dish owners nationwide and is made available to homes in the Boston, Massachusetts market over the air via a full-powerfull power television broadcast station owned by the Company. In the past the Company used a number of low power television stations for similar purposes.us. In fiscal 20052006 and fiscal 2004, the Company's low power television stations2005, our Boston, Massachusetts station and "C"-Band-band satellite dish transmissions were collectively responsible for not moreless than 5% of the 3 Company'sour total consolidated net sales. In February 2003, the CompanyDecember 2005, we completed the sale of ten low power television stations for a total of $5.0 million. In December 2005, the Company completed the sale of itsour remaining low power television station located in Atlanta, Georgia for a total of $400,000. The sale of these stationsthis station did not have a significant impact on theour ongoing operations of the Company. As of February 4, 2006, the Companyoperations. We no longer holdshold any licenses for low power television stations. Internet Website The Company'sINTERNET WEBSITE Our website, ShopNBC.com, provides viewerscustomers with an opportunity to purchase generala broad array of consumer merchandise, offeredincluding all products being featured on the Company'sour television home shopping program, and other related merchandise as well as to bid and purchase items on the auction portionprogramming. The website includes a live webcast feed of the website. The Internet site, using webcasting technology, provides consumers with the opportunity to view: (i) the Company's television home shopping program on a real-time basis; (ii)our programming, an archive of recent past programming;programming, videos of many individual products that the customer can view on demand and (iii) new programming developed specifically for the Internet.clearance and auction sites. Internet sales for fiscal 20052006 increased at a far greater percentagerate than television home shopping sales over fiscal 2004.2005. Internet net sales in fiscal 20052006 increased by 15%26% over Internetinternet net sales in fiscal 2004,2005, while television home shopping net salesales in fiscal 20052006 increased by 9%7% over television home shopping net sales in fiscal 2004.2005. Sales from the Company's Internetour website business, inclusive of shipping and handling revenues, totaled $184,139,000, $146,067,000 and $126,692,000, representing 24%, 21% and $111,449,000 representing 21%, 20% and 19% of consolidated net sales for fiscal 2006, 2005 and 2004, respectively. We believe that our internet business represents an 3 important component of our future growth opportunities, and 2003, respectively. The Company expectswe will continue to see continued growthinvest in its Internet business and believes that its e-commerce business both complements the Company's base television home shopping business and provides an additional growth vehicle. The Company'senhance our internet-based capabilities. Our e-commerce activities are subject to a number of general business regulations and laws regarding taxation and online commerce. Although to dateAs the Internetrole and importance of e-commerce has been subject to minimal regulation, due togrown in the increasing popularity and use of the Internet and other online services, a variety of laws and regulationsUnited States in recent years, there have been or may be enacted that affectcontinuing efforts to increase the Internetlegal and online services, covering such issues as advertising, pricing, content, copyrightsregulatory obligations and trademarks, access by persons with disabilities, distribution,restrictions on companies conducting commerce through the internet, primarily in the areas of taxation, characteristics and quality of products and services and userconsumer privacy and security, including imposing the duty to notify customersprotection of security breaches and liability for security incidents to victims of identity theft.consumer personal information. Such laws and regulations could increase the costs and liabilities associated with the Company'sour e-commerce activities. On December 3, 2004, President Bush signed into law a three-year moratorium on Internetinternet access taxes. This law extendsextended a ban on Internetinternet taxes that expired on November 1, 2003. In addition, in November 2002, a number of states approved a multi-state agreement to simplify state sales tax laws by establishing one uniform system to administer and collect sales taxes on traditional retailers and electronic commerce merchants. No prediction can be made as to whether a new Internetinternet tax moratorium will be enacted before the November 1, 2007 expiration of the existing moratorium, or whether individual states will enact legislation requiring retailers such as the Companyus to collect and remit sales taxes on transactions that occur over the Internet.internet. Adding sales tax to the Company's Internetour internet transactions could negatively impact consumer demand. The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, was signed by President Bush on December 16, 2003 and went into effect on January 1, 2004. The CAN-SPAM Act pre-empts similar laws passed by over thirty states, some of which contain restrictions or requirements that are viewed as stricter than those of the act.CAN-SPAM Act. The CAN-SPAM Act is primarily an opt-out type law,law; that is, prior permission to send an e-mail to a recipient is not required, unlessbut a recipient hasmay affirmatively optedopt out of such future e-mail solicitations. The CAN-SPAM Act requires commercial e-mails to contain a clear and conspicuous identification that the message is an advertisement or solicitation for goods or services, as well as a prominent "unsubscribe"unsubscribe function that allows recipients to alert the sender that they do not desire to receive future e-mail messages. In addition, the CAN-SPAM Act requires that all commercial e-mail messages include a pos talpostal address unless the sender obtains "priorprior affirmative assent"assent from the recipient. Changes in consumer protection laws such as the CAN-SPAM Act, 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 Internetinternet or other online services, which could, in turn, decrease the demand for the Company'sour products and services and increase itsour cost of doing business through the Internet. Moreover, it is 4 not clear how existing laws governing issues such as sales and other taxes and personal privacy would apply to the Internet and online commerce.internet. In addition, as the Company'ssince our website is available over the Internetinternet in all states, and as it sells to numerous consumers residing in these states, thesevarious states may claim that the Company iswe are required to qualify to do business as a foreign corporation in eachsuch state, a requirement that could result in fees and taxes andas well as penalties for the failure to qualify. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company'sour business or the application of existing laws and regulations to the Internetinternet and other online services could have a material adverse effect on the growth of the Company'sour business in this area. C.D. STRATEGIC RELATIONSHIPS NBC TRADEMARK LICENSE AGREEMENT On November 16, 2000, the Companywe entered into a Trademark License Agreement (the "License Agreement")trademark license agreement with NBC pursuant to which NBC granted the Companyus an exclusive, worldwide license (the "License") for a term of 10ten years to use certain NBC trademarks, service marks and domain names to rebrand the Company'sour business and corporate name and companion Internet website. The CompanyWe subsequently selected the names ShopNBC and ShopNBC.com to rebrand its marketing and sales effort. The Company has alsoShopNBC.com. Under the license agreement we have agreed, under the License Agreement, among other things, to (i) certain restrictions on using any trademarks, service marks, domain names, logos or other source indicators owned or controlled by NBC, (ii) the loss of itsour rights under the Licenselicense with respect to specific territories outside of the United States in the event the Company failswe fail to achieve and maintain certain performance targets in such territories, (iii) not own, operate, acquire or expand itsour business to include certain businesses without NBC's prior consent, (iv) comply with 4 NBC's privacy policies and standards and practices, and (v) not own, operate, acquire or expand the Company'sour business such that one thirdone-third or more of the Company'sour revenues or itsour aggregate value is attributable to certain services (not including retailing services similar to our existing e-commerce operations) provided over the Internet.internet. The License Agreementlicense agreement also grants to NBC the right to terminate the License Agreementlicense agreement at any time upon certain changes of control of the Company,our company, in certain situations upon the failure by NBC to own a certain minimum percentage of theour outstanding capital stock of the Company on a fully-dilutedfully diluted basis, the failure of NBC and the Company to agree on new trademarks, service marks or related intellectual property rights, and certain other related matters.situations. On March 28, 2007, we and NBC agreed to extend the term of the license by six months, such that the license would continue through May 15, 2011, and to provide that certain changes of control involving a financial buyer would not provide the basis for an early termination of the license by NBC. STRATEGIC ALLIANCE WITH NBC AND GE EQUITY STRATEGIC ALLIANCE In March 1999, the Companywe entered into a strategic alliance with NBC and GE Equity. Pursuant to the terms of the transaction, NBC and GE Equity acquired 5,339,500 shares of the Company'sour Series A Redeemable Convertible Preferred Stock between April 1999 toand June 1999, (the "Preferred Stock"), and NBC was issued a warrant to acquire 1,450,000 shares of the Company'sour common stock, (the "Distribution Warrants"),known as the distribution warrants, with an exercise price of $8.29 per share, under a Distributiondistribution and Marketing Agreementmarketing agreement discussed below. In addition, the Companywe issued to GE Equity a warrant, (the "Investment Warrant")known as the investment warrant, to increase its potential aggregate equity stake (together with its affiliates, including NBC) at the time of exercise to 39.9%approximately 40%. The Preferred Stockpreferred stock is convertible into an equal number of shares of the Company'sour common stock, subject to anti-dilution adjustments, has a mandatory redemption on the 10thtenth anniversary of its issuance or upon a change of control at $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. On July 6, 1999, GE Equity exercised the Investment Warrantinvestment warrant and acquired an additional 10,674,000 shares of the Company'sour common stock for an aggregate of $178,370,000, or $16.71 per share. Following the exercise of the Investment Warrant,investment warrant, the combined ownership of the Companyour company by GE Equity and NBC on a diluted basis was approximately 40%. In February 2005, GE Equity sold 2,000,000 shares of the Company'sour common stock to several purchasers. In July 2005, GE Equity entered into agreements to sell an additional 2,604,932 shares of the Company'sour common stock in privately negotiated transactions to a number of different purchasers; this sale was completed inon September 15, 2005. Following GE Equity's sale of this common stock, GE Equity and NBC currently have a combined ownership in the Companyour company of approximately 27% on a diluted basis. 5 Shareholder Agreement Pursuant to the Investment Agreement, the Company and GE EquitySHAREHOLDER AGREEMENT In March 1999, we also entered into a Shareholder Agreement (the "Shareholder Agreement"),shareholder agreement with GE Equity, which provides for certain corporate governance and standstill matters. The Shareholder Agreementshareholder agreement (together with the Certificatecertificate of Designationdesignation of the Preferred Stock)preferred stock) initially provided that GE Equity and NBC would be entitled to designate nominees for an aggregate of 2two out of 7seven members of our board seatsof directors so long as their aggregate beneficial ownership iswas at least equal to 50% of their initial beneficial ownership, and 1one out of 7 board seatsseven members so long as their aggregate beneficial ownership iswas at least 10% of the "adjusted outstanding shares of common stock",stock," as defined in the Shareholder Agreement.shareholder agreement. The Shareholder Agreementshareholder agreement also requires the consent of GE Equity prior to the Companyour entering into any substantialmaterial agreements with certain restricted parties (broadcast networks and Internetinternet portals in certain limited circumstances). Finally, the Company iswe are prohibited from exceeding certain thresholds relating to the issuance of voting securities over a 12-monthtwelve-month period, the payment of quarterly dividends, the repurchase of common stock, acquisitions (including investments and joint ventures) or dispositions, and the incurrence of debt greater than $40.0the larger of $40 million or 30% of the Company'sour total capitalization. The Company isWe are also prohibited from taking any action that would cause any ownership interest of certain Federal Communication Commission ("FCC") regulated entitiesby us in TV broadcast stations from being attributable to GE Equity, NBC or their affiliates. The Shareholder Agreementshareholder agreement provides that during the Standstill Periodstandstill period (as defined in the Shareholder Agreement)shareholder agreement), subject to certain limited exceptions, GE Equity and NBC are prohibited from: (i) any asset/ business purchases from the Companyus in excess of 10% of the total fair market value of the Company's assets,our assets; (ii) increasing their beneficial ownership above 39.9% of the Company's shares,our shares; (iii) making or in any way participating in any solicitation of proxies,proxies; (iv) depositing any securities of the Companyour company in a voting trust,trust; (v) forming, joining or in any way becoming a member of a "13D Group" with respect to any voting securities of the Company,our company; (vi) arranging 5 any financing for, or providing any financing commitment specifically for, the purchase of any voting securities of the Company,our company; (vii) otherwise acting, whether alone or in concert with others, to seek to propose to the Companyus any tender or exchange offer, merger, business combination, restructuring, liquidation, recapitalization or similar transaction involving the Company,us, or nominating any person as a director of the Companyour company who is not nominated by the then incumbent directors, or proposing any matter to be voted upon by the shareholders of the Company.our shareholders. If, during the Standstill Period,standstill period, any inquiry has been made regarding a "takeover transaction" or "change in control",control," each as defined in the Shareholder Agreement,shareholder agreement, that has not been rejected by the Board,board of directors, or the Boardboard pursues such a transaction, or engages in negotiations or provides information to a third party and the Boardboard has not resolved to terminate such discussions, then GE Equity or NBC may propose to the Companyus a tender offer or business combination proposal. In addition, unless GE Equity and NBC beneficially own less than 5% or more than 90% of the adjusted outstanding shares of common stock, GE Equity and NBC shall not sell, transfer or otherwise dispose of any securities of the Companyour company except for transfers: (i) to certain affiliates who agree to be bound by the provisions of the Shareholder Agreement,shareholder agreement, (ii) that have been consented to by the Company,us, (iii) pursuant to a third partythird-party tender offer, (iv) pursuant to a merger, consolidation or reorganization to which the Company iswe are a party, (v) in a bona fide public distribution or bona fide underwritten public offering, (vi) pursuant to Rule 144 of the Securities Act of 1933, or (vii) in a private sale or pursuant to Rule 144A of the Securities Act of 1933; provided, that in the case of any transfer pursuant to clause (v) or (vii), the 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 that person's affiliates, of more than 10% of the adjusted outstanding shares of the common stock. The Standstill Periodstandstill period will terminate on the earliest to occur of (i) the 10 yearten-year anniversary of the Shareholder Agreement,shareholder agreement, (ii) theour 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 partythird-party tender offer (subject to reinstatement), or (v) six months after GE Equity and NBC can no longer designate any nominees to the Board.board of directors. Following the expiration of the Standstill Periodstandstill 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 Equity and NBC's 6 beneficial ownership position may not exceed 39.9% of the Company'sour diluted outstanding stock, except pursuant to issuance or exercise of any warrants or pursuant to a 100% tender offer for the Company.our company. On March 19, 2004, the Company,we agreed with NBC and GE Equity agreed to amend the Shareholder Agreementshareholder agreement as follows: (i) to increase the authorized size of the Company'sour board of directors to 9nine from 7;seven; (ii) to permit NBC and GE Equity together to appoint an aggregate of 3three directors instead of 2two to the Company'sour board of directors; and (iii) to reflectprovide that NBC and GE Equity would no longer have the right to have its director-nominees serve on the Audit, Compensationaudit, compensation or Nominatingnominating and Governance Committees,governance committees, in the event the committees must be comprised solely of "independent" directors under applicable laws or Nasdaq regulations. In such event,case, NBC and GE Equity would have the right to have an observer attend all of these committee meetings, to the extent permitted by applicable law. Registration Rights Agreementlaw or regulation. REGISTRATION RIGHTS AGREEMENT Pursuant to the Investment Agreement, as amended, the Company and GE Equityinvestment agreement, we entered into a Registration Rights Agreementregistration rights agreement with GE Equity providing GE Equity, NBC and their affiliates and any transferees and assigns, an aggregate of five demand registrations and unlimited piggy-back registration rights. Distribution and Marketing Agreement NBC and the CompanyDISTRIBUTION AND MARKETING AGREEMENT We entered into a Distributiondistribution and Marketing Agreementmarketing agreement with NBC dated March 8, 1999 (the "Distribution Agreement") that provides that NBC shall havewith the exclusive right to negotiate on our behalf of the Company for the distribution of itsour home shopping television programming service. As compensation for these services, the Company currently pays NBC an annual fee of approximately $1.7 million (increasing no more than 5% annually) and issued NBC 1,450,000 Distribution Warrants. The exercise price of the Distribution Warrants is $8.29 per share. The Distribution Warrants are exercisable for five years after vesting and were fully vested in November 2000. Because NBC successfully delivered to the Company 10 million FTE homes pursuant to the Distribution Agreement, in fiscal 2001, the Company issued to NBC additional warrants to purchase 343,725 shares of the Company's common stock at an exercise price of $23.07 per share and in fiscal 2002, the Company issued to NBC additional warrants to purchase 36,858 shares of the Company's common stock at an exercise price of $15.74 per share.programming. NBC may terminate the Distribution Agreementdistribution agreement if the Company enterswe enter into certain "significant affiliation"significant affiliation agreements or a transaction resulting in a "changechange in control. As compensation for these services, we agreed to pay NBC an annual fee which was approximately $1.8 million in fiscal 2006, and issued NBC 1,450,000 distribution warrants. The exercise price of control." On April 7,the distribution warrants is $8.29 per share. In fiscal 2004, NBC 6 exercised a portion of the original Distribution Warrantsdistribution warrants in a cashless exercise acquiring 101,509 shares of the Company's common stock. In Novemberfiscal 2005, NBC exercised all remaining original Distribution Warrantsdistribution warrants in a cashless exercise acquiring 281,199 additional shares of the Company's common stock. On March 28, 2007, we agreed with NBC to reduce the amount of the annual fee payable to NBC to a market rate. POLO RALPH LAUREN/RALPH LAUREN MEDIA ELECTRONIC COMMERCE ALLIANCE In February 2000, the Companywe entered into an electronic commerce strategic allianceagreement with Polo Ralph Lauren, NBC, NBCi and CNBC whereby the parties created RLM, a joint venture formed for the purpose of bringing the Polo Ralph Lauren American lifestyle experience to consumers via multiple media platforms, including Internet,internet, broadcast, cable and print. During fiscal 2006, RLM is currentlywas owned 50% by Polo Ralph Lauren, 37.5% by NBC and its affiliates and 12.5% by the Company. In exchange for its ownership interest in RLM, the Company contributed $50 million.us. RLM's primary business activity to date has been the operation of the Polo.com website. Polo.com officially launched in November 2000 and includes an assortment of men's, women's, children's and children'shome products across the Ralph Lauren family of brands as well as unique gift items. In connection with the formation of RLM, the Companywe entered into various agreements setting forth the manner in which certain aspects of the business of RLM are to be managed and certain of the members' rights, duties and obligations with respect to RLM. On March 28, 2007, we sold our 12.5% ownership interest in RLM including the Amended and Restated Limited Liability Company Agreement, pursuant to which certain terms and conditions regarding operations ofPolo Ralph Lauren for approximately $43.8 million. AGREEMENT FOR SERVICES In February 2000, RLM and certain rights and obligations of its members are set forth. In fiscal 2002, the Company wrote off its investment in RLM because it determined that the decline in value of its investment was other than temporary. The Company still retains its 12.5% ownership interest. 7 Agreement for Services RLM andour subsidiary VVI Fulfillment Center, Inc., known as VVIFC, entered into an agreement for services under which VVIFC agreed to provide to RLMprovides certain telemarketing, customer support and fulfillment services to RLM. In the third quarter of fiscal 2006, RLM until May 31, 2006. In November 2005, RLM notified the Company that it had electedagreed to extend the term of thisits existing services agreement with us to Mayat least August 31, 2007.2008. RLM has advised the Companyus that it intends to develop the capability to provide these services internally in the future, and accordingly there can be no assurance that the Companywe will continue to provide services to RLM beyond MayAugust 31, 20072008 or, if so, for what period of time thereafter. D.In March 2007, VVIFC and RLM further agreed to certain changes to the agreement for services, including a potential extension of the term through mid-2009 at RLM's option. E. MARKETING AND MERCHANDISING Electronic Media The Company'sTELEVISION AND INTERNET RETAILING Our television and Internetinternet revenues are generated from sales of merchandise and services offered through itsour television home shopping programming. The Company'sprogramming and website. Our television home shopping business utilizes live television 24 hours a day, seven days a week, to create an interactive and entertaining atmosphere to effectively describe and demonstrate the Company'sour merchandise. Selected customers participate through live conversations with on-air hosts and occasional celebrity guests. The Company believes itsWe believe our customers make purchases based primarily on convenience, value, quality of merchandise and promotional offerings, including financing. The Company believesWe believe that itsour customers are primarily women between the ages of 35 and 55, with annual household income of approximately $50,000 to $75,000. The Company schedulesWe schedule special programming at different times of the day and week to appeal to specific viewer and customer profiles. The Company features frequentlyWe feature announced and occasionally unannounced promotions to drive interest and incremental sales, including "Our Top Value," a sales program that features one special offer every day, with pricing for that day only; plus,day. We also feature other major and special promotional events, along with bargain, discount and inventory-clearance sales in order to, among other reasons, encourage customer loyalty or add new customers. The Company's television home shoppingsales. Our merchandise is generally offered at or below comparable retail prices. The CompanyWe continually introducesintroduce new products on itsour home shopping program. Inventory sources include manufacturers, wholesalers, distributors and importers. The Company intendsWe intend to continue to promote private label merchandise, which generally has higher than average margins. ShopNBC Private Label Credit Card The Company maintainsSHOPNBC PRIVATE LABEL AND CO-BRAND CREDIT CARD PROGRAM In the third quarter of fiscal 2006, we introduced a new private label and co-brand revolving consumer credit card program. The program usingis made available to all qualified consumers for the financing of purchases 7 of products and services from ShopNBC name in partnershipand for the financing of purchases from other retailers. The program is intended to be used by cardholders for purchases made primarily for personal, family or household use. The issuing bank is the sole owner of the account issued under the program and absorbs all losses associated with Alliance Data Systems.non-payment by cardholders. The ShopNBCissuing bank pays fees to us based on the number of credit card accounts activated and on card usage. Once a customer is approved to receive a ShopNBC private label or co-branded credit card and the card is activated, the customer is eligible to participate in our credit card rewards program. Under the rewards program, points are earned on purchases made with the credit cards at ShopNBC and other retailers where the co-branded card is accepted. Cardholders who accumulate the requisite number of points are issued a $50 certificate award towards the future purchase of ShopNBC merchandise. The certificate award expires after twelve months if unredeemed. The program provides a number of benefits to customers in addition to the awards program, including providing a discount upon first use of their ShopNBC card, deferred billing options and other special offers. During fiscal 2005, the Company issued its 400,000th ShopNBC credit card and2006, customer use of the ShopNBC cardprivate label and co-brand cards accounted for approximately 16%17% of the Company'sour television home shopping and Internet sales in fiscal 2005. The Company believesinternet sales. We believe that the use of the ShopNBC credit card furthers customer loyalty and reduces the Company'sour overall bad debt exposure since the credit card issuerissuing bank bears the risk of bad debt on ShopNBC credit card transactions. Favorable Purchasing Terms The Company obtainsFAVORABLE PURCHASING TERMS We obtain products for itsour direct marketing businesses from domestic and foreign manufacturers and suppliers and isare often able to make purchases on favorable terms based on the volume of products purchased or sold. Many of the Company'sour purchasing arrangements with its television home shoppingour vendors include inventory terms that allow for return privileges for a portion of the order or stock balancing. The CompanyWe generally doesdo not have long-term commitments with itsour vendors, and a variety of sources are available for each category of merchandise sold. In fiscal 2005,2006, products purchased from one vendor accounted for approximately 19%17% of the Company'sour consolidated net sales. The Company believesWe believe that itwe could find alternative sources for this vendor's products if this vendor ceased supplying merchandise,merchandise; however, the unanticipated loss of any large supplier could impact the Company'sour sales and earnings on a temporary basis. 8 E.F. ORDER ENTRY, FULFILLMENT AND CUSTOMER SERVICE The Company'sOur products are available for purchase via toll-free telephone numbers. The Company maintainsnumbers or our website. We maintain an agreement with West Teleservices Corporation to provide the Companyus with telephone order entry operators for taking of home shopping customer orders. West Teleservices provides teleservices to the Companyus from service sites located in Baton Rouge, LouisianaOmaha, Nebraska and Spokane, Washington, as well as through home agents. At the present time, the Company doeswe do not utilize any call center services based overseas. The Company ownsWe own a 262,000 square foot distribution facility in Bowling Green, Kentucky, which the Company useswe use to fulfill itsour obligations under the services agreement entered into with RLM. The Bowling Green facility is also used for the fulfillment of mostly non-jewelry merchandise sold on the Company's television home shopping program and the ShopNBC website. The Company distributesby us. We distribute jewelry and other smaller merchandise from itsour Eden Prairie, Minnesota fulfillment center. The majority of customer purchases are paid by credit card and debit cards. As discussed above, the Company maintainswe maintain a private label and a co-brand credit card program using the ShopNBC name. Purchases made with the ShopNBC private label credit card are non-recourse to the Company. The Companyus. We also utilizesutilize an installment payment program called ValuePay, (not currently available on the ShopNBC card), which entitles television and Internet home shopping customers to pay by credit card for certain merchandise offered in two to six equal monthly installments. The Company intendsWe intend to continue to sell merchandise using the ValuePay program due to its significant promotional value. It does, however, create a credit collection risk from the potential inability to collect outstanding balances. The Company maintainsWe maintain a product inventory, which consists primarily of consumer merchandise held for resale. The product inventory is valued at the lower of average cost or realizable value, and the Company reduces itswe reduce our balance by an allowance for excess and obsolete merchandise. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Companywe had inventory balances of $66,622,000 and $67,844,000, and $54,903,000, respectively. 8 Merchandise is shipped to customers by the United States Postal Service, UPS, DHL, and Federal Express or other recognized carriers. The CompanyWe also hashave arrangements with certain vendors who ship merchandise directly to itsour customers after an approved customer order is processed. The Company'sCustomer service functions are performed and processed by West Teleservices as well as by us. Our in-house customer service functions are located in itsour Brooklyn Center, Minnesota facility. The Company's television home shopping and InternetOur return policy allows a standard 30-day refund period from the date of invoice for all customer purchases. The Company'sOur return rates on its television and Internet sales have been approximately 33%32% to 35%33% over the past three fiscal years. These return rates are higher than the average return rates reported by itsour larger competitors in the television home shopping industry. Management believes itsthe higher return rate is partially a result of (i) the significantly higher average selling prices of itsour products as compared to the average selling prices of its larger industryour competitors, and (ii) the fact that the Company haswe have a higher percentage of sales attributable to jewelry products. Both of these characteristics are associated with higher product return rates. Management ishas been pursuing a number of initiatives to reduce the overall return rate. F.G. COMPETITION The direct marketing and retail businesses are highly competitive. In itsour television home shopping and Internete-commerce operations, the Company competeswe compete for consumer expenditurescustomers with other formstypes of consumer retail businesses, including traditional "brick and mortar" department stores, discount stores, warehouse stores and specialty stores; other mail order, catalog and television home shopping and e-commerce retailers; infomercial companies; infomercial companiescatalog and mail order retailers and other direct sellers. TheIn the competitive television home shopping industry is also highly competitive. The two largest competitors aresector, we compete with QVC Network, Inc. ("QVC") and HSN, Inc. (formerly known as Home Shopping Network, Inc. ("HSN")), both of whichwhom are substantially larger than we are in terms of annual revenues and customers, and whose programming is carried more diversifiedbroadly to U.S. households than is our programming. Both QVC and have greater financial and distribution resources thanHSN are owned by large, well-capitalized parent companies in the Company.media business, who are also expanding into related e-commerce businesses. The Shop at Home Inc. ("SATH") television network, in which E.W. Scripps Company ("Scripps") owns a controlling interest,American Collectibles Network (ACN), the operator of Jewelry Television, also competes with the Company. In addition, the American Collectibles Network, 9 ("ACN") which broadcasts the Jewelry Televisionus for television home shopping channel, competes with the Companycustomers in the jewelry sectorcategory, and ACN recently acquired the assets of Shop At Home from E. W. Scripps Company and is operating a second channel of programming in a number of non-jewelry categories, including collectible coins and knives. In addition, there are a number of smaller niche players and startups in the television home shopping industry.arena who compete with us. The e-commerce sector is also highly competitive, and we are in direct competition with virtually all other internet retailers, many of whom are larger, more well-established, more well-financed and/or have broader customer bases. Certain of our competitors in the television home shopping industry offers consumers convenience, value and entertainment, and offers manufacturers and retailers an opportunitysector have acquired internet businesses complementary to test-markettheir existing internet sites, which may pose 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 basic cable and satellite programmingcompetitive challenges for cable and satellite airtime because home shopping networks compensate basic cable and satellite television operators, whereas other forms of cable and satellite programming typically receive compensation from cable and satellite operators for carriage. The Company competes for cable and satellite distribution with all other programmers, including other television home shopping networks and currently competes for viewership and sales with QVC, HSN, SATH and ACN in virtually all of its markets. The Company is at a competitive disadvantage to QVC and HSN in attracting viewers due to the fact that the Company's programming is not carried full time in all of its cable markets, and that the Company may have less desirable cable channels in many markets. The Company also competes with retailers who sell and market their products through the highly competitive Internet channel. Many companies sell products over the Internet that are competitive with the Company's products. As the use of the Internet and other online services increase, larger, more well- established and more well-financed entities may continue to acquire, invest in or form joint ventures with providers of e-commerce and direct marketing solutions, and existing providers of e-commerce and direct marketing solutions. Recently,us. For example, the parent company of HSN has purchased a number of web-based businesses includingacquired the internet search engine company, Ask.com, formerlybusiness Ask Jeeves (now known as Ask Jeeves, Scripps acquired Shopzilla, a shopping search engine,Ask.com), and Liberty Media's (parentthe parent company of QVC)QVC acquired Provide Commerce, an operator of retail websites featuring brands such as Proflowers and Cherry Moon Farms. The Company expects continuedwebsites. We anticipate continuing competition for viewers/viewers and customers, and for experienced home shopping personnel, for distribution agreements with cable and satellite systems, and for vendors and suppliers -- not only from major cable systems, television networks, e-commerce andhome shopping companies, but also from other retailerscompanies that may seek to enter the television home shopping industry. The continued growth and evolution of retailers on the Internet, together with strategic alliances being formed by otherinternet retail sectors, including telecommunications and cable companies, television home shopping networks, and providers of e-commerce and direct marketing solutions, will also result in increased competition. The Company will also compete to lease cable television time and enter into cable affiliation agreements. The Company believesother established retailers. We believe that its ultimateour success in the television home shopping industryand e-commerce businesses is dependent upon severalon a number of key factors, including (i) obtaining carriage on additional cable systems on favorable terms;terms, (ii) increasing the number of households receiving the Company's programming who purchase products from the Company (termed "household penetration");us, and (iii) increasing the dollar value of sales per customer to itsour existing customer base. The Company believesWe believe that it iswe are positioned to compete because of itsour established relationships with cable operators. No assurance can be given, however, that the Companywe will be able to acquire additional cable carriage at prices favorable to the Companyus or maintain itsour current cable carriage. In addition, continued consolidation in the cable and satellite industry may lead to higher costs for the Company's programming over time. G.9 H. FEDERAL REGULATION The cable television industry 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"),known as the Communications Act, the Cable Television Consumer Protection Act of 1992 (the "Cable Act"),known as the Cable Act, the Telecommunications Act of 1996 (the "Telecommunications Act")known as the Telecommunications Act or other laws and FCC rules or policies that may affect the operations of the Company. Cable Televisionour operations. CABLE TELEVISION The cable industry is regulated by the FCC under the Cable Act and FCC regulations promulgated thereunder, as well as by state or local governments with respect to certain franchising matters. Must Carry. In general, the FCC's "must carry" rules under the Cable Act entitle analog full power television stations to mandatory cable carriage of their signals, at no charge, to all cable homes located within 10 each station's broadcast area provided that the signal is of adequate strength, and the cable system has must carry designated channels available. FCC rules currently extend similar cable must carry rights to the primary video and programming-related material of new television stations that transmit only digital television signals, and to existing television stations that return their analog spectrum and convert to digital operations. The extent to which cable providers may or may not be required to provide must carry rights to full power television stations after the close of the transition to digital television is discussed below in "Advanced"Federal Regulation -- Advanced Television Systems".Systems." In addition, certain aspects of the must carry rights of stations transmitting digital television signals now, as well as after the transmission to digital television, remainsremain subject to pending FCC proceedings. The FCC has also been asked to reevaluate its 1993 extension of must carry rights to predominantly home shopping television stations. ItWhile the FCC has yet to actnever acted on that request, andfiled over ten years ago, 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 the station's lack of service to the community, its previous noncarriage or other factors. The unavailability of must carry rights to the Company'sour 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 ownswe own or may acquire or on which itwe might provide programming. Broadcast TelevisionCABLE LEASED ACCESS The Cable Act and the FCC's rules provide unaffiliated cable programmers such as us with certain rights to lease channels from cable operators. The FCC has recently announced plans to revisit its leased access rates and policies in light of the lack of use of leased access channels, but there can be no assurance that the FCC will act in any way that would increase the availability or affordability of leased access by us. BROADCAST TELEVISION General. The Company'sOur acquisition and operation of television stations areis 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. The statute empowers the FCC, among other things, to issue, revoke and modify broadcasting licenses, adopt regulations to carry out the provisions of the Communications Act and impose penalties for violation of such regulations. Such regulations impose certain obligations with respect to the programming and operation of television stations, including requirements for carriage of children's educational and informational programming, programming responsive to local problems, needs and interests, advertising upon request by legally qualified candidates for federal office, closed captioning, and other matters. In addition, FCC rules prohibit foreign governments, representatives of foreign governments, aliens, representatives of aliens and corporations and partnerships organized under the laws of a foreign nation 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. 10 Full Power Television Stations.Station. In April 2003, aone of our wholly owned subsidiary of the Companysubsidiaries acquired a full-powerfull power television station serving the Boston, Massachusetts market. The Company's license for its Boston, Massachusetts television station will expire inOn April 2007, but will be renewed upon a showing to11, 2006, the FCC that the station has served the public interest, and that there have been no serious violations by the stationgranted our application for renewal of the FCC's rules and regulations. Low Power Television Stations. In December 2005, the Company completed the sale of its remaining low power television station located in Atlanta, Georgia and does not anticipate acquiring additional low power television stations in the foreseeable future.station's license. Broadcast Multiple Ownership Limits. Many of the Company'sour existing and potential competitors are larger and more diversified than the Company,we are, or have greater financial, marketing, merchandising and distribution resources. In January 2004, Congress passed legislation that would allow a television broadcaster to own local TVtelevision stations reaching 39% of the nation's households, up from the currentprevious 35% limit. Other changesOn March 1, 2007, the FCC revised its rules to the FCC's media ownership rules could permit increased consolidation in the broadcast industry, making it more difficult for the Company to compete.reflect this legislation. In June 2003, the FCC adopted new rules that would have significantly relaxrelaxed the limits and restrictions on media ownership. Among other changes, the FCC relaxed its rules governing the common ownership of more than one television station in any given market. In June 2004, the U.S. Court of Appeals for the Third Circuit invalidated these revised media ownership rules on the ground that the FCC had failed to provide a sufficient justification for the relaxed ownership limitations and restrictions, and stayed the new rules pending further FCC proceedings and subsequent judicial review. In June 2006, the FCC issued a further notice of proposed rulemaking, again seeking comment on potential changes to its media ownership rules. Although no prediction can be made as to the outcome of this proceeding, it is possible that the FCC will adopt changes to these rules that permit increased consolidation in June 2005, the U.S. Supreme Court declinedbroadcast industry, making it more difficult for us to review the lower Court's decision. 11 Alternative Technologiescompete. ALTERNATIVE TECHNOLOGIES Alternative technologies could increase the types of video program delivery systems on which the Companywe may seek carriage. Three direct broadcast satellite systems ("DBS")known as DBS currently provide service to the public and, according to FCC statistics, the number of DBS subscribers has increased to more than 2627 million households as of JuneDecember 2005. Congress has enacted legislation designed to facilitate the delivery of local broadcast signals by DBS operators and thereby to promote DBS competition with cable systems. In addition, another new technology permits the viewing of live linear cable television channels through broadband -- connectedbroadband-connected personal computers, laptops and mobile devices, without the need for a physical cable-box or special software. The Company has recently started having itsWe now make our live programming available in this manner through an agreement with VDC Corporation, a media and technology services provider. Advanced Television SystemsVDC recently has filed complaints with the FCC claiming eligibility for access to other cable and broadcast programming that it contends is necessary to attract subscribers, and the owners of that programming have opposed these efforts, alleging that VDC's technology does not qualify for this access. ADVANCED TELEVISION SYSTEMS Technological developments in television transmission will in the future make it possible for the broadcast and nonbroadcast media to provide advanced television services, that is television services using digital or other advanced technologies. The FCC in late 1996 approved a digital television ("DTV") technical standard known as DTV to be used by television broadcasters, television set manufacturers, the computer industry and the motion picture industry. This DTV standard allows the simultaneous transmission of multiple streams of digital data on the bandwidth presently used by a normal analog channel. It is possible to broadcast one "high definition" channel ("HDTV")or more high-definition channels with visual and sound quality superior to present-day television or several standard definitionstandard-definition channels ("SDTV") with digital sound and pictures of a quality slightly better than present television;television, or one high-definition and one or more standard-definition channels; 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. As part of the nationwide transition from analog to digital broadcasting, each full power television station has been granted a second channel by the FCC on which to initiate digital operations. On February 1, 2006, Congress passed a law setting a final deadline for the DTV transition of February 17, 2009, by which broadcasters must surrender their analog signals and broadcast only on their allotted digital frequency. The CompanyWe commenced operations on itsour digital channel in May 2003. While broadcasters currently do not have to pay to obtain digital channels, the FCC has ruled that a television station that receives compensation from a third party for the ancillary or supplementary use of its DTV spectrum (e.g., data transmission or paging services) 11 must pay a fee of five percent5% of gross revenues received. The FCC has rejected a proposal that fees be imposed when a DTV broadcaster receives payment for transmitting home shopping programming, although it left open the question whether interactive home shopping programming might be treated differently. It is not yet clear whether and how television broadcast stations will be able to profit by the transition to DTV, or how quickly the viewing public will embrace the cost of new digital television sets and monitors.monitors, or how difficult it will be for viewers who do not do so to continue to receive television broadcasts, whether through cable or DBS service or over the air. In addition, it is unclear what rights television broadcast stations will have to obtain carriage of their digital signals on local cable systems. As noted above, the FCC's must carry rules generally entitle analog full power television stations to mandatory cable carriage of their signals, at no charge, to all cable homes located within each stations' Designated Market Areastation's designated market area, or "DMA".DMA. Although FCC rules currently extend similar cable must carry rights to existing television stations that return their analog spectrum and convert to digital operations, in February 2005, the FCC affirmed its prior decision not to require cable operators to simultaneously carry broadcasters' analog and digital signals during the transition. After the end of the digital transition in 2009, the FCC has determined that full power television stations will be entitled to mandatory cable carriage of their digital signals, although the FCC has yet to determine the extent to which cable and DBS operators will be required to provide those signals to subscribers with analog television receivers in a viewable format. In addition, the FCC confirmed that after the transition, cable operators arewill only be obligated to carry the primary video and programming-related material of digital television station's signals and are not required to carry any of the stations' additional programming streams. Petitions for reconsideration of that decision remain pending at the FCC. In addition, as noted above, a number of issues relating to the rights television broadcast stations will have to obtain carriage of their digital signals on local cable systems both during and after the close of the transition to digital television remain subject to pending FCC proceedings. 12 As part of this transition to digital television, the spectrum currently used by broadcasters transmitting on channels 52-69 will be transitioned to use by new wireless and public safety operators. Some broadcast stations, including the Company'sour station in the Boston, Massachusetts marketplace, have been given a digital channel allocation within this spectrum. Under FCC rules, although stations awarded digital channels between channels 52 and 69 may use those channels until the close of the DTV transition, they must either seek an alternative digital channel below channel 52 on which to transmit their digital signal or transition their digital operations to their analog channel. The FCC has established a timetable within which broadcast stations must elect the channel on which they will transmit their digital signal after the close of the DTV transition, and in April 2006, the Companywe filed a notification with the FCC seeking to provide itsour digital television operations in the Boston marketplace on channel 10 after the transition. ThereIn October 2006, the FCC issued a notice tentatively proposing to accept our proposal in a rulemaking proceeding that remains pending. While no comments were filed opposing our selection of channel 10 as our digital television channel, there can be no guarantee that the FCC will authorize the Companyus to operate on channel 10, or that the Companywe will be able to locate a suitable alternate channel below channel 52 on which to provide digital transmissions after the close of the DTV transition that will provide coverage equivalent to that which it has now. Telephone Companies' Provision of Programming Servicesour current coverage. 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 Company cannot predict how many telephone companies will begin operation of open video systems ("OVS") 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 on cable systems, including those pertaining to must carryAT&T, Verizon and retransmission consent. The FCC has certified a number of OVS operators to offer OVS service. In addition, a number ofother local carrierstelephone companies are planning to provide or are providing video services through fiber to the home or fiber to the neighborhood technologies, while other local exchange carriers are using VDSL (videovideo digital subscriber loop)loop technology, known as VDSL, to deliver video programming, high-speed Internetinternet access and telephone service over existing copper telephone lines. Congress andIn March 2007, the FCC are considering measuresreleased an order designed to encouragestreamline entry by carriers by preempting the imposition by local franchising authorities of unreasonable conditions on entry. Franchising authorities and cable operators have indicated an intention to seek judicial review of that order. No prediction can be made as to the deployment schedules of these telephone company provisioncompanies, the success of video programming. Regulations Affecting Multiple Payment Transactionstheir technologies, or their ability to attract and retain customers. 12 REGULATIONS AFFECTING MULTIPLE PAYMENT TRANSACTIONS The announced antitrust settlement between MasterCard, VISA and approximately 8 million retail merchants raises certain issues for retailers who accept telephonic orders that involve consumer use of debit cards for multiple or continuity payments. A condition of the settlement agreement providesprovided that the code numbers or other means of distinguishing between debit and credit cards be made available to merchants by VISA and MasterCard. Under certain Federal Reserve Board regulations, this may require merchants to obtain consumers' written consent for preauthorized transfers where the merchant is aware that the method of payment is a debit card as opposed to a credit card. The Company believesWe believe that debit cards are currently being offered as the payment vehicle in approximately 25%30% of our transactions with VISA and MasterCard transactions withMasterCard. Effective February 9, 2006, the Company. The Federal Reserve Board recently amended language in its Official Commentaryofficial commentary to Regulation E that removed aby removing an express prohibition on the use of taped oralverbal authorization from consumers as evidence of a written approvalauthorization for purposes of the Regulation.regulation. There can be no assurance that compliance with the authorization procedures under this Regulationregulation will not adversely affect the customer experience in placing orders or adversely affect sales. H.I. SEASONALITY AND ECONOMIC SENSITIVITY The Company'sOur businesses are subject to seasonal fluctuation, with the highest sales activity normally occurring during the Company'sour fourth fiscal quarter of the year, primarily November through January. Seasonal fluctuation in demand is generally associated with fourth quarter seasonal holidays. The Company'sOur businesses are also sensitive to general economic conditions and business conditions affecting consumer spending. Additionally, the Company'sour television audience (and therefore sales revenue) can be significantly impacted by major world or domestic events, which divert audience attention away from the Company'sour programming. 13 I.J. EMPLOYEES At February 4, 2006, the Company, including its wholly owned subsidiaries,3, 2007, we had approximately 1,1101,200 employees, the majority of whom are employed in customer service, order fulfillment and television production. Approximately 18% of the Company'sour employees work part-time. The Company isWe are not a party to any collective bargaining agreement with respect to itsour employees. Management considers its employee relations to be good. J.K. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and titles of the persons serving as our executive officers of the Company.officers.
NAME AGE POSITION(S) HELD - ---- --- ---------------- William J. Lansing........................ 47Lansing................... 48 President and Chief Executive Officer and Director Frank P. Elsenbast........................ 40Elsenbast................... 41 Senior Vice President and Chief Financial Officer Brenda L. Boehler......................... 43 Executive Vice President -- TV & Internet Sales Nathan E. Fagre........................... 50Fagre...................... 51 Senior Vice President, General Counsel & Secretary Karen F. Johnston.................... 48 Senior Vice President -- Merchandising Bryan Venberg............................. 37Venberg........................ 38 Senior Vice President -- Human Resources
William J. Lansing joined the Companyour company as President and Chief Executive Officer in December 2003 and is also a member of the Company's Boardour board of Directors.directors. Mr. Lansing has more than fifteen years of senior management experience, including positions as president and CEO at public companies in the consumer direct marketing and Internetinternet commerce arenas. Mr. Lansing joined the Companyus from General Atlantic Partners, a global private equity firm, where he was a partner from September 2001 to December 2003. Prior to joining General Atlantic Partners, Mr. Lansing served as CEO of NBC Internet, a Nasdaq-listed company, from March 2000 to August 2001 and served as President and later as CEO of Fingerhut Companies, then the nation's second largest catalog retailer and aan NYSE-listed company, from May 1998 to March 2000. Prior to joining Fingerhut, from October 1996 to April 1998, Mr. Lansing was at General Electric, where he served as Vice President of Business Development, reporting to Chairman Jack Welch. From January 1996 to October 1996, 13 Mr. Lansing was Chief Operating Officer of Prodigy, Inc., where he launched the company's flagship Prodigy Internetinternet offering. Earlier in his career, Mr. Lansing was a partner at McKinsey and Company. Mr. Lansing currently serves on the board of directors of Digital River, Inc., Right Now Technologies. Inc. and Fair Isaac Corporation. Frank P. Elsenbast served as our Vice President of Financial Planning and Analysis of the Company from September 2003 to October 2004, when he became Vice President and Chief Financial Officer. Mr. Elsenbast was promoted to Senior Vice President in May 2006. Mr. Elsenbast has over 16eighteen years of corporate finance, operations analysis and public accounting experience. From May 2001 to September 2003, he served as Finance Director and from May 2000 to May 2001 he served as Finance Manager at the Company.our company. Prior to joining the Company,us, Mr. Elsenbast served in various analytical and operational roles with The Pillsbury Company from May 1995 through May 2000. Mr. Elsenbast is a CPA and began his career with Arthur Andersen, LLP. Brenda L. Boehler joined the Company as Executive Vice President of Merchandising and Marketing in February 2004. Ms. Boehler has more than 16 years of merchandising, direct marketing and e-commerce experience. From July 2003 to February 2004, Ms. Boehler was in product development and design at Target Corporation, responsible for developing a comprehensive branding strategy for the retailer's home business. From January 1990 to August 2002, she served in a number of senior and executive positions at Fingerhut Companies, a leading catalog and Internet retailer, serving most recently as Senior Vice President of Merchandising from March 1999 to August 2002 and as Vice President of Home and Apparel from February 1996 to March 1999. Ms. Boehler began her merchandising career at CVN Companies in 1986, a television home shopping business that was merged into QVC. 14 Nathan E. Fagre joined the Companyus as Senior Vice President, General Counsel and Secretary in May 2000. From 1996 to 2000, Mr. Fagre was Senior Vice President and General Counsel of Occidental Oil and Gas Corporation in Los Angeles, California, the oil and gas operating subsidiary of Occidental Petroleum Corporation. From 1995 to 1996, Mr. Fagre held other positions in the legal department at Occidental. His previous legal experience included corporate and securities law practice with the law firms of Sullivan & Cromwell in New York and Gibson, Dunn & Crutcher in Washington, D.C. Mr. Fagre has served on the board of Ralph Lauren Media, L.L.C. as theour representative of the Company since 2004. In addition, Mr. Fagre is a director, member of the executive committee and chairman of the finance committeesecretary of the Electronic Retailing Association, an industry association serving the television home shopping, e-commerce, infomercial and electronic direct-response industry. Karen F. Johnston joined us as Vice President of Merchandising in May 2004 and was promoted to Senior Vice President of Merchandising in February 2005. Ms. Johnston has more than eighteen years of progressive experience in direct marketing and retailing. From 2002 to 2004, Ms. Johnston was in Product Development and Merchandising Director for Target Corporation. From 1992 to 2002, Ms. Johnston served in a number of merchandising positions at the Fingerhut Corporation including the Merchandising Director for the jewelry, apparel and footwear division. Bryan Venberg joined the Companyus as Vice President of Human Resources in May 2004.2004 and was promoted to Senior Vice President in May 2006. Mr. Venberg has more than 14fourteen years of experience in human resource management. From October 1999 to May 2004, Mr. Venberg served as regional director of human resources for the Target Corporation. From September 1990 to October 1999, Mr. Venberg served in a number of human resource and merchandising positions at Target Corporation. K.L. AVAILABLE INFORMATION The Company'sOur annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports if applicable, are available, without charge, on the Company'sour Investor Relations website as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission. Copies also are available, without charge, by contacting the General Counsel, ValueVision Media, Inc., 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433. The Company's InternetOur Investor Relations internet address is www.shopnbc.com.www.valuevisionmedia.com. The information contained on and connected to the Company'sour Investor Relations website is not incorporated into this report. ITEM 1A. 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"Cautionary Statement Concerning Forward-Looking Information," the following risks should be considered regarding the Company. THE COMPANY HASour company. 14 WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS IN THE FUTURE. The CompanyWe experienced operating losses from continuing operations of approximately $9.5 million, $18.6 million $44.3 million and $8.0$44.3 million in fiscal 2006, 2005 and 2004, and 2003, respectively. The CompanyWe reported a net loss per diluted share of $0.07, $0.43 $1.57 and $0.32$1.57 in fiscal 2006, 2005 and 2004, and 2003, respectively. Net losses included pre-tax investment write-downs of approximately $1.7 million in fiscal 2003. There is no assurance that the Companywe will be able to achieve or maintain profitable operations in future fiscal years. A MAJORITY OF OUR CABLE AND SATELLITE DISTRIBUTION AGREEMENTS ARE SCHEDULED TO EXPIRE AT THE COMPANY LICENSESEND OF 2008 AND IT MAY BE DIFFICULT OR MORE COSTLY TO RENEW THESE AGREEMENTS FOR ADDITIONAL TERMS. Cable and satellite distribution agreements representing approximately 60% of the total cable and satellite households who currently receive our television programming are scheduled to expire at the end of 2008. While we and NBC, as our agent, have begun initial discussions with certain cable system operators regarding extensions or renewals of these agreements, no assurance can be given that we will be successful in negotiating renewal contracts with all the existing systems, or that the financial and other terms of renewal will be on acceptable terms. Failure to successfully renew carriage agreements covering a material portion of our existing cable and satellite households on acceptable financial and other terms could adversely affect our future growth, sales revenues and earnings unless we were able to arrange for alternative means of broadly distributing our television programming. LOSS OF THE SHOPNBC NAME AND CERTAIN LOGOS FROM NBC PURSUANT TO AN AGREEMENT THAT IF TERMINATEDBRANDING LICENSE WOULD CAUSE THE COMPANYREQUIRE US TO PURSUE A NEW BRANDING STRATEGY ATTHAT MAY NOT BE SUCCESSFUL AND MAY INCUR SIGNIFICANT ADDITIONAL EXPENSE. As discussed above, in November 2000, the Company entered into a Trademark License Agreement with NBC pursuant to which NBC granted the CompanyWe have branded our television home shopping network and internet site as ShopNBC and ShopNBC.com, respectively, under an exclusive, worldwide licenselicensing agreement with NBC for a termthe use of 10 years to use certain NBC trademarks, service marks and domain names to effectively rebrand the Company's business and corporate name and companion Internet website. Under the terms of the agreement, the Company's television home shopping network, previously called ValueVision, and companion Internet website were rebranded to ShopNBC and ShopNBC.com. In addition, the License Agreement contains significant restrictions on the Company's ability to use the rights granted to it in connection with businesses other than certain specified permitted businesses. This restricts the ability of the Company to take advantage of certain business opportunities. NBC hasthat continues until May 2011. We do not have the right to terminateautomatic renewal at the License Agreement at any time upon certain changes of controlend of the Company, the failure by NBC in certain circumstances to own, directly or indirectly, 15 a certain minimum percentage of the outstanding capital stock of the Company on a fully diluted basis and certain other related matters. In addition, the use of the NBC trademarks, service marks and domain names are limited to the ten-year license term, without automatic renewal. The non-renewal or termination of the License Agreement would require the Companyand consequently may be required to pursue a new branding strategy which would entailmay not be as successful as the NBC brand with current or potential customers, and which may involve significant expenseadditional expense. In addition, there are limitations and timeconditions to create and could have a negative impact onour use of the Company's presencelicense, which may under certain circumstances restrict us from pursuing business opportunities outside of our current scope of operations. NBC also has the right to terminate the license prior to the end of the license term in the marketplace. This may resultevent of a breach by us of the terms of the license agreement or upon certain changes of control, as outlined in a material adverse effect on the Company's sales and results of operations.greater detail in "Business -- Strategic Relationships -- ABC Trademark License Agreement" above. NBC AND GE EQUITY HAVE THE ABILITY TO EXERT SIGNIFICANT INFLUENCE OVER THE COMPANYUS AND HAVE THE RIGHT TO DISAPPROVE OF CERTAIN ACTIONS BY THE COMPANY.US. As a result of their equity ownership in the Company,our company, NBC and GE Equity together are currently theour largest shareholder in the Company and have the ability to exert significant influence over actions requiring shareholder approval, including the election of directors, of the Company, adoption of equity-based compensation plans and approval of mergers or other significant corporate events. Through the provisions in the Shareholder Agreementshareholder agreement and Certificatecertificate of Designationdesignation for the Preferred Stock,preferred stock, NBC and GE Equity also have the right to disapprove of certain major corporate actions by the Companyour company (as discussed under "Strategic"Business -- Strategic Relationships -- Shareholder Agreement" above). In addition, because NBC has the exclusive right to negotiate for the distribution of the Company'sour television home shopping programming, a termination of the strategic alliance with NBC could adversely affect the Company'sour ability to increase itsour program distribution. MANDATORY REDEMPTION OF THE COMPANY'SOUR CONVERTIBLE PREFERRED STOCK COULD HAVE A MATERIAL IMPACT ON THE COMPANY'SOUR LIQUIDITY AND CASH RESOURCES. The Company'sOur Class A Redeemable Convertible Preferred Stock issued to GE Equity may be redeemed upon certain "changeschanges in control"control of the Companyour company and, in any event, any outstanding Preferred Stock mustmay be redeemed in 2009 upon the ten-year anniversary of its issuance.issuance (unless previously converted into common stock). If the Company iswe are unable to generate positive cash flow or obtain additional capital prior to any such redemption, the requirement that the Companywe pay cash 15 in connection with such redemption may have a material impact on the Company'sour liquidity and cash resources. The aggregate redemption cost of all the Preferred Stock is $44,264,000. The CompanyWe ended fiscal 20052006 with cash and cash equivalents and short-term investments of $82,350,000,$71,294,000 and no debt and $130,000 of long-term capital lease obligations.debt. The Preferred Stock has a redemption price of $8.29 per share and is convertible on a one-for-one basis into the Company'sour common stock, and accordingly, if the market value of the Company'sour stock is higher than the redemption price immediately prior to the redemption date, GE Equity may choose to convert theirits shares of Preferred Stock to common stock rather than exercise theirits right to redemption. GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING; UNFAVORABLE CHANGES COULD ADVERSELY AFFECT THE COMPANY'SOUR BUSINESS. The Company hasWe have made material investments in anticipation of the growing usecontinuing growth of the Internetinternet as an effective medium of commerce by merchants and shoppers. The Company'sOur sales over the Internetinternet accounted for approximately 21%24%, 20%21% and 19%20% of consolidated net sales during fiscal 2006, 2005 2004 and fiscal 2003,2004, respectively. Additional laws and regulations may be adopted with respect to the Internetinternet or other online services, covering such issues as user privacy, data security, advertising, pricing, content, copyrights and trademarks, access by persons with disabilities, distribution, taxation and characteristics and quality of products and services. SuchThese laws or regulations, if enacted, could make it more difficult for the Companyus to conduct business online, which could, in turn, decrease the demand for the Company'sour products and services and increase itsour cost of doing business through the Internet.internet. Inherent with the Internetinternet and e-commerce is the risk of unauthorized access to confidential data, including consumer credit card information, the risk of computer virus infection or other unauthorized acts of electronic intrusion with the malicious intent to do damage. Although the Company haswe have taken precautionary steps to secure and protect itsour data network from intrusion and acts of hostility, there can be no assurance that unauthorized access to the Company'sour electronic systems will be prevented entirely. 16 INTENSE COMPETITION IN THE GENERAL MERCHANDISE RETAILING INDUSTRY AND PARTICULARLY THE LIVE HOME SHOPPING AND E-COMMERCE SECTORS COULD LIMIT THE COMPANY'SOUR GROWTH AND REDUCE ITSOUR PROFITABILITY. As a general merchandise retailer, the Company competeswe compete for consumer expenditures with other forms of retail businesses, including department, discount, warehouse and specialty stores, television home shopping, e-commerce businesses, mail order and catalog companies, and other direct sellers. The Company also competes with retailers who sell and market their products through the highly competitive Internet. In addition, as the use of the Internet increases, larger, well-established and well-financed entities may continue to acquire, invest in or form joint ventures with providers of e-commerce and direct marketing solutions. Any of these trends would increase the competition with respect to the Company. The home shopping industry is also highly competitive, with the two largest competitors being HSN and QVC. The Company's television home shopping programming also competes directly with HSN, QVC, SATH and ACN for cable distribution in virtually all of its markets. The Company is at a competitive disadvantage compared to QVC and HSN in attracting viewers due to the fact that its programming is not carried full-time in all of its markets, and the Company may have less desirable cable channel locations in many markets. QVC and HSN offer home shopping programming similar to the Company'sour programming, and are well established, and reach a significantly larger percentage of U.S.United States television households than does the Company. The television home shopping industry is also experiencing vertical integration. QVC, HSNwe do, and SATH are all affiliated with cable operators or cable networks serving significant numbers of subscribers nationwide. Scripps, the owner of SATH, is a media company with interests in newspaper publishing, broadcast television, national cable television networks and interactive media.many markets have more favorable channel locations than we haved. QVC is owned by Liberty Media Corp., while HSN is a wholly owned subsidiary of InterActiveCorp. Liberty Media Scripps and InterActiveCorp are larger, more diversified and have greater financial, marketing and distribution resources than us. The internet retailing industry is also highly competitive, with numerous e-commerce websites competing in every product category we carry, in addition to the Company. THE CONSOLIDATION OF CABLE AND SATELLITE TELEVISION SERVICE PROVIDERS COULD LIMIT THE COMPANY'S PROGRAM DISTRIBUTION ALTERNATIVES AND RESTRICT THE COMPANY'S ABILITY TO EXECUTE FAVORABLE CABLE AFFILIATION CONTRACTS IN THE FUTURE. Thewebsites operated by the other television home shopping and cable television industries are undergoing consolidation, with large, well-established enterprises acquiring less well-established, less well-financed entitiescompanies. This competition in the industry. The competitive pressures arising as a result of this industry consolidation include greater importance on increasing programming distributionsinternet retailing sector makes it more challenging and customer penetration. In April 2005, Time Warner Inc.expensive for us to attract new customers, retain existing customers and Comcast Corporation, two of the largest cable carriers, announced that they were jointly acquiring and dividing between them (subject to bankruptcy court and regulatory approval) the cable assets of Adelphia Communications Corporation out of bankruptcy. The continued consolidation of the television home shopping, cable television and broadcasting industries may result in fewer alternatives for the Company's programming distribution and may also restrict the Company's opportunity to execute economically favorable cable affiliation contracts in the future. A NUMBER OF THE COMPANY'S CABLE DISTRIBUTION AGREEMENTS MAY NOT BE RENEWED UPON EXPIRATION, WHICH COULD ADVERSELY AFFECT SALES GROWTH IN THE COMPANY'S HOME SHOPPING BUSINESS. A number of the Company's cable distribution agreements, representing a majority of the cable households who currently receive the Company's programming, are scheduled to expire beginning at the end of 2008 and thereafter. The Company's business could be materially adversely affected at such future time in the event that a significant number of these agreements are not renewed on acceptable terms. THE COMPANYmaintain desired gross margin levels. WE MAY NOT BE ABLE TO MAINTAIN ITS SATELLITE SERVICES IN CERTAIN SITUATION,SITUATIONS, BEYOND ITSOUR CONTROL, WHICH MAY CAUSE THE COMPANY'SOUR PROGRAMMING TO GO OFF THE AIR FOR A PERIOD OF TIME AND INCUR SUBSTANTIAL ADDITIONAL COSTS. The Company'sOur programming is presently distributed to cable systems, full 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'sour control, such as satellite transponder failure, satellite fuel depletion, governmental action, preemption by the satellite service provider and service 17 failure. The agreement provides the Companyus with preemptable back-up service if satellite transmission is interrupted. However, there can be no assurance if satellite transmission is so interrupted that the Companywe will be able to utilize existing back-up transponder or satellite capacity. In the event of any transmission interruption, the Companywe may incur substantial additional costs to enter into new arrangements and be unable to broadcast its signal for some period of time. THE COMPANY16 WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR ON AIR MISREPRESENTATIONS OR IF PEOPLE OR PROPERTIES ARE HARMED BY PRODUCTS SOLD BY THE COMPANY.US. Products sold by the Companyus and representations related to suchthese products may expose the Companyus to potential liability from claims by purchasers of such products, subject to the Company'sour rights, in certain instances, to seek indemnification against suchthis liability from the suppliers or manufacturers of suchthe products. In addition to potential claims of personal injury, wrongful death or damage to personal property, the live unscripted nature of the Company'sour television broadcasting may subject the Companyus to claims of misrepresentation by itsour customers, the Federal Trade Commission and state attorneys general. The Company hasWe maintain, and have generally required the manufacturers and vendors of these products to carry, product liability and errors and omissions insurance, although in certain instances the vendor may not be formally required to carry product liability insurance. There can be no assurance that these parties will continue to maintain this insurance or that this coverage will be adequate or even available with respect to any particular claims. There can be no assurance that the Companywe will be able to maintain suchthis coverage or obtain additional coverage on acceptable terms, or that suchthis insurance will provide adequate coverage against all potential claims or even be available with respect to any particular claim. There also can be no assurance that our suppliers will continue to maintain this insurance or that this coverage will be adequate or available with respect to any particular claims. Product liability claims could result in a material adverse impact on the Company'sour financial performance. THE COMPANY'SOUR VALUEPAY INSTALLMENT PAYMENT PROGRAM COULD LEAD TO SIGNIFICANT UNPLANNED CREDIT LOSSES IF THE COMPANY'SOUR CREDIT LOSS RATE WAS TO DETERIORATE. The Company utilizesWe utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to six equal monthly installments. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Companywe had approximately $77,447,000$105 million and $61,894,000,$77 million, respectively, due from customers under the ValuePay installment program. The Company maintainsWe maintain allowances for doubtful accounts for estimated losses resulting from the inability of itsour customers to make required payments. While credit losses have historically been within the Company'sour estimates for such losses, there is no guarantee that the Companywe will continue to experience the same credit loss rate that it haswe have in the past. A significant increase in the Company'sour credit losses could result in a material adverse impact on the Company'sour financial performance. THE COMPANY PLACESWE PLACE A SIGNIFICANT RELIANCE ON TECHNOLOGY AND INFORMATION MANAGEMENT TOOLS TO RUN ITSOUR EXISTING BUSINESSES, THE FAILURE OF WHICH COULD ADVERSELY IMPACT THE COMPANY'SOUR OPERATIONS. The Company'sOur businesses are dependent, in part, on the use of sophisticated technology, some of which is provided to the Companyus by third parties. SuchThese technologies include, but are not necessarily limited to, satellite based transmission of the Company'sour programming, use of the Internetinternet in relation to the Company'sour on-line business, new digital technology used to manage and supplement the Company'sour television broadcast operations and a network of complex computer hardware and software to manage an ever increasing need for information and information management tools. The failure of any of these technologies, or the Company'sour inability to have this technology supported, updated, expanded or integrated into other technologies, could adversely impact the operations of the Company.our operations. Although the Company has,we have, when possible, developed alternative sources of technology and built redundancy into itsour computer networks and tools, there can be no assurance that the Company's effortthese efforts to date would protect the Companyus against all potential issues or disaster occurrences related to the loss of any such technologies or their use. 18 THE EXPANSION OF DIGITAL CABLE COMPRESSION TECHNOLOGY MAY ADVERSELY IMPACT THE COMPANY'SOUR ABILITY TO COMPETE FOR TELEVISION VIEWERS. A significant numberThe majority of cable operators have started to offer cable programming on a digital basis. The use of digital compression technology provides cable companies with greater channel capacity. While greater channel capacity increases the opportunity for the Companyus to be more widely distributed, it also may adversely impact the Company'sour ability to compete for television viewers to the extent it results in (i) higher channel position;position, (ii) placement of the Company'sour programming in separate programming tiers, or (iii) an expanding universe of programming choices all competing for the same audience viewership.audience. We have historically experienced a higher annual sales revenue per FTE with analog systems, as compared to digital systems. As more cable system operators move to all-digital systems or require our programming to be carried on a digital tier, we could experience a reduction in the growth or an absolute decline in sales per FTE, unless we are able to offset the reduction through increased 17 marketing efforts, greater internet-based sales or alternative distribution channels for our television programming. Such efforts may not be successful or may incur significant additional operating costs. THE UNANTICIPATED LOSS OF ONE OF THE COMPANY'SOUR LARGER VENDORS COULD IMPACT THE COMPANY'SOUR SALES ON A TEMPORARY BASIS. The Company obtains products from domestic and foreign manufacturers and suppliers and is often able to make purchases on favorable terms based on the volume of its transactions. Many of the Company's purchasing arrangements with its vendors include inventory terms that allow for return privileges of a portion of the order or stock balancing. The Company hasHistorically, we have not historically entered into long termlong-term supply arrangements that would require vendors to provide products on an ongoing basis. In fiscal 2005,2006, products purchased from one vendor accounted for approximately 19%17% of the Company'sour consolidated net sales. The Company believesWe believe that itwe could find alternative sources for this vendor's products if this vendor ceased supplying merchandise; however, the unanticipated loss of any large supplier could impact the Company'sour sales on a temporary basis. THE COMPANY'S INABILITY TO RECRUITMANY OF OUR KEY FUNCTIONS ARE CONCENTRATED IN A SINGLE LOCATION, AND RETAIN KEY EMPLOYEES MAY ADVERSELYA NATURAL DISASTER COULD SERIOUSLY IMPACT THE COMPANY'SOUR ABILITY TO SUSTAIN GROWTH. The Company's continued growth is contingent,OPERATE. Our television broadcast studios, internet operations, IT systems, merchandising team, inventory control systems, executive offices and finance/accounting functions, among others, are centralized in part, on itsour adjacent offices at 6740 and 6690, Shady Oak Road in Eden Prairie, Minnesota. A natural disaster such as a tornado could seriously disrupt our ability to retaincontinue or resume normal operations for some period of time. While we have business continuity plans and recruit employees that have the unique skills necessary for a business that demands knowledge of the general retail industry, television production, direct-to-consumer marketingemergency preparedness protocols in place, no assurances can be given as to how quickly we would be able to resume operations and fulfillmenthow long it may take to return to normal operations. We could incur substantial financial losses above and the Internet. The marketplace for such employees is very competitive and limited, particularly for on-air hosts. The Company's growthbeyond what may be adversely impacted if the Company is unable to attractcovered by applicable insurance policies, and retain these key employees. During fiscal 2004, the Company experienced themay experience a loss of a number of experienced television hosts. THE COMPANY'S GROWTH AND PROFITABILITY COULD BE ADVERSELY AFFECTED IF ITS SALES VOLUME DOES NOT MEET EXPECTATIONS TO COVER THE COMPANY'Scustomers, vendors and employees during the recovery period. WE OPERATE WITH A HIGH FIXED COST INFRASTRUCTURE. The Company'sBASE. Our television home shopping business operates with a high fixed cost base, which is primarily driven by fixed contractualannual fees paid tounder multi-year contracts with cable and satellite system operators to carry the Company'sour programming. In addition, in fiscal 2004 the Company embarked on a series of new investment initiatives that required significant up-front investment. These new initiatives included: increased marketing support, improved customer experience, enhanced on-air quality and improved business intelligence.2006, these fees aggregated approximately $112.6 million. In order to attain profitability, the Companyoperate on a profitable basis, we must achievereach and maintain sufficient annual sales volume by acquiring new customers and retaining existing customersrevenues to cover theseour high fixed costscost base. In the event we do not achieve our expected sales revenue targets or experience an unanticipated decline in sales, our ability to reduce operating expenses in the near term will be limited by the fixed cost base. In that case, our earnings and new spending initiatives. The Company's growth and profitabilityprospects could be adversely impacted if sales volume does not meet expectations, as the Company will have limited immediate capability to reduce its fixed operating expenses to mitigate any potential sales shortfall. THE COMPANY'Saffected. OUR TELEVISION HOME SHOPPING AND INTERNET BUSINESSES ARE SENSITIVE TO GENERAL ECONOMIC CONDITIONS, CONSUMER CONFIDENCE AND MAJOR NEWS EVENTS, WHICH COULD ADVERSELY AFFECT VIEWERSHIP AND CONSUMER CONFIDENCE AND ULTIMATELY NET SALES. The Company'sEVENTS. Our businesses are sensitive to general economic conditions and business conditions affecting consumer spending. The Company'sOur two major categories of sales merchandise are jewelry and electronics, which due to their nature and relatively higherhigh price points are more economically sensitive to changes in consumer demand than other product categories. Unfavorable economic conditions and/or a loss of consumer confidence may lead to a reduction in consumer spending generally and in home shopping specifically, and may lead to a reduction in consumer spending on the types of merchandise the Companywe currently offers on its television 19 programming and over the Internet. Although the Company's current plan and effort is to further diversify its product mix away from primarily jewelry and computers, future revenue growth could be adversely affected if overall consumer spending or the demand for jewelry and computers decline.offer. Additionally, the Company'sour television audience and sales revenue can be significantly impacted by major world or domestic events, which divert audience attention away from the Company'sour programming. Economic conditions may also have a material adverse impact on the financial strength of the Company's vendors and suppliers, some of whom are focused on a limited range of product categories or who are dependent on home shopping as a primary outlet for their sales. ITEM 1B. UNRESOLVED STAFF COMMENTS None ITEM 2. PROPERTIES The Company ownsWe own two commercial buildings occupying approximately 209,000 square feet in Eden Prairie, Minnesota (a suburb of Minneapolis). One of the buildings is used for theour corporate administrative, television production and jewelry distribution operations of the Company.operations. The second building has approximately 70,000 square feet of commercial rental space, which the Company utilizeswe utilize for additional office space. The Company ownsWe own a 262,000 square foot distribution facility on a 34-acre parcel of land and leaseslease approximately 72,000 square feet of warehouse space in Bowling Green, Kentucky. The CompanyWe also leaseslease approximately 25,000 square feet of office space for a telephone 18 call center in Brooklyn Center, Minnesota, which the Companywe primarily usesuse to fulfill itsour service obligations in connection with the Services Agreementservices agreement entered into with RLM and itsour own customer service operations. Additionally, the Company rentswe rent transmitter site and studio locations in Boston, Massachusetts for itsour full power television station. The Company believesWe believe that itsour existing facilities are adequate to meet itsour current needs and that suitable additional or alternative space will be available as needed to accommodate expansion of operations. ITEM 3. LEGAL PROCEEDINGS The Company isWe are involved from time to time in various claims and lawsuits in the ordinary course of business. In the opinion of management, these claims and suits individually and in the aggregate willhave not havehad a material adverse effect on the Company'sour operations or consolidated financial statements. As previously described in our Quarterly Report on Form 10-Q for the secondannual and third quarters of fiscal 2005, onquarterly SEC filings, in July 7, 2004, the Companywe commenced legal proceedings against Navarre Corporation in state court in Minnesota seeking to enforce rights granted under a stock purchase agreement and conversion agreement entered in 1997 as an inducement to obtain the Company'sour investment in NetRadio Corporation. In the filings with the court, the Company contended that an event of default under the stock purchase agreement occurred when NetRadio ceased operations in October 2001, giving the Company a contractual right to obtain shares of Navarre stock or a cash payment from Navarre. After Navarre failed to deliver shares or cash after due demand in January 2002, the Company brought the litigation. In the lawsuit, the Company sought monetary damages, restitution, and specific performance or such other remedies as the court may order. In September 2005, the presiding Judge ruled that there was no basis for Navarre's third-party claim alleging a breach of fiduciary duty by Gene McCaffery, the former Chief Executive Officer of the Company and a former director of NetRadio. Accordingly, the court granted Mr. McCaffery's motion for summary judgment dismissing all claims against Mr. McCaffery. On November 15, 2005, the Company andwe agreed with Navarre agreed to settle the claims we made by the Company against Navarre and the counterclaims Navarre made by Navarre against the Company.us. Under the tentative settlement agreement finalized in April 2006, Navarre will makemade a cash payment to the Companyus and will also enterentered into an airtime agreement with the Companyus whereby Navarre willhad the right to purchase advertising time from the Companyus during 2006. The parties are negotiating the final details of the agreement, and until such time as those negotiations are successfully completed the dismissal of the litigation cannot be assured. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to our shareholders of the Company during the fourth quarter ended February 4, 2006.3, 2007. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION FOR COMMON STOCK The Company'sOur common stock is traded on the Nasdaq StockGlobal Market under the symbol "VVTV"."VVTV." The following table sets forth the range of high and low sales prices of the common stock as quoted by the Nasdaq StockGlobal Market for the periods indicated.
HIGH LOW ------ ------ FISCAL 2006 First Quarter............................................. $13.13 $11.48 Second Quarter............................................ 13.75 9.83 Third Quarter............................................. 12.95 10.03 Fourth Quarter............................................ 14.12 11.83 FISCAL 2005 First Quarter............................................. $14.42 $14.42 9.40 Second Quarter............................................ 12.72 8.01 Third Quarter............................................. 13.51 9.24 Fourth Quarter............................................ 13.38 9.47 FISCAL 2004 First Quarter............................................. 17.84 13.55 Second Quarter............................................ 14.70 11.15 Third Quarter............................................. 14.34 10.03 Fourth Quarter............................................ 14.66 10.42
HOLDERS As of April 3, 2006 the Company2, 2007 we had approximately 575550 shareholders of record. DIVIDENDS The Company hasWe have never declared or paid any dividends with respect to itsour capital stock. Pursuant to the Shareholder Agreement between the Company andshareholder agreement we have with GE Equity, the Company iswe are prohibited from paying dividends in excess of 5% of the Company's19 our market capitalization in any quarter. The CompanyWe currently expectsexpect to retain itsour earnings for the development and expansion of itsour business and doesdo not anticipate paying cash dividends in the foreseeable future. Any future determination by the Companyus to pay cash dividends will be at the discretion of the board of directors and will be dependent upon the Company'sour results of operations, financial condition, any contractual restrictions then existing and other factors deemed relevant at the time by the board of directors. ISSUER PURCHASES OF EQUITY SECURITIES The Company does not currently haveIn August 2006, our board of directors authorized a common stock repurchase program. The program in placeauthorizes our management, acting through an investment banking firm selected as our agent, to repurchase up to $10 million of our common stock through August 2007 by open market purchases or negotiated transactions at prices and amounts as we determine from time to time. We did not repurchase any shares under our stock repurchase program in the fourth quarter of fiscal 2006. During the third quarter of fiscal 2006, we repurchased a total of 406,000 shares of common stock for a total repurchase amount of $4,682,000 at an average price of $11.54 per share. We did not repurchase any shares under any stock repurchase program during fiscal 2005.2005 or fiscal 2004. 20 STOCK PERFORMANCE GRAPH The graph below compares the cumulative five-year total return to our shareholders (based on appreciation of the market price of our common stock) on an indexed basis with (i) a broad equity market index and (ii) a peer group created by us over the same period and consisting of companies involved in various aspects of the television home shopping, jewelry and internet retail and service industries. The presentation compares the common stock price in the period from January 31, 2002 to February 3, 2007, to the Nasdaq Global Market stock index and to the peer group. The total return to shareholders of those companies comprising the peer group are weighted according to their stock market capitalization. The companies in the current peer group are: InterActiveCorp, the parent company of the Home Shopping Network; Liberty Media Corporation, the parent company of QVC, a home shopping television network; Amazon.com, Inc., an on-line retailer; RedEnvelope, Inc., an upscale on-line retailer; GSI Commerce, Inc., a provider of professional services to the on-line retail industry; Zale Corporation, a specialty jewelry retailer; and Whitehall Jewelers, Inc., a specialty jewelry retailer. In fiscal 2006, we replaced E.W. Scripps Co., the parent company of the Shop At Home home shopping television network from its peer group with RedEnvelope, Inc. due to E.W. Scripps Co.'s divestiture of the Shop At Home network. The cumulative return is calculated assuming an investment of $100 on January 31, 2002, and reinvestment of all dividends. You should not consider shareholder return over the indicated period to be indicative of future shareholder returns. Graph
- -------------------------------------------------------------------------------------------------------------- JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, FEBRUARY 4, FEBRUARY 3, 2002 2003 2004 2005 2006 2007 - -------------------------------------------------------------------------------------------------------------- ValueVision Media, Inc. ............. $100.00 $70.09 $ 94.10 $ 75.72 $ 65.99 $ 65.94 - -------------------------------------------------------------------------------------------------------------- Nasdaq Stock Market (U.S.) Index...... 100.00 67.88 105.70 106.89 121.35 130.43 - -------------------------------------------------------------------------------------------------------------- Peer Group......... 100.00 84.91 125.22 115.22 110.04 119.04 - --------------------------------------------------------------------------------------------------------------
21 ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the five years ended February 4, 20063, 2007 have been derived from theour audited consolidated financial statements of the Company.statements. 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 21 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 ------------------------------------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,2007 2006(A) 2005(B) 2004(C) 2003 2002 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales............................. $767,275 $691,851 $623,634 $591,185 $540,262 $462,322 Gross profit..........................Net sales less cost of sales, exclusive of depreciation and amortization(f)..................... 267,161 238,944 204,096 209,508 192,924 171,973 Operating loss........................ (9,479) (18,646) (44,271) (7,987) (6,090) (5,475) Loss from continuing operations(d).... (2,396) (13,457) (42,719) (8,329) (35,753) (9,489) Discontinued operations(e)............ -- (2,296) (14,882) (3,063) (3,357) -- PER SHARE DATA: Net loss from continuing operations per common share.................... $ (0.07) $ (0.37) $ (1.17) $ (0.23) $ (0.96) $ (0.25) Net loss from continuing operations per common share -- assuming dilution............................ $ (0.07) $ (0.37) $ (1.17) $ (0.23) $ (0.96) $ (0.25) Weighted average shares outstanding: Basic............................... 37,646 37,182 36,815 35,934 37,173 38,336 Diluted............................. 37,646 37,182 36,815 35,934 37,173 38,336
FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,2007 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and short-term investments....... $ 71,294 $ 82,350 $100,581 $127,181 $168,634 $227,831 Current assets........................ 260,445 246,029 240,524 270,984 314,063 335,106 Property, equipment and other assets.............................. 91,535 101,110 109,772 125,607 92,211 113,204 Total assets.......................... 351,980 347,139 350,296 396,591 406,274 448,310 Current liabilities................... 105,274 100,820 89,074 84,837 87,497 60,817 Long-term capital lease obligations...Other long-term obligations........... 2,553 130 1,380 2,002 1,669 493 Redeemable preferred stock............ 43,607 43,318 43,030 42,745 42,462 42,180 Shareholders' equity.................. 198,847 202,871 216,812 267,007 274,646 344,820
22
YEAR ENDED ------------------------------------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,2007 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT STATISTICAL DATA) OTHER DATA: Gross margin percentage...............Sales margin(f)....................... 34.8% 34.5% 32.7% 35.4% 35.7% 37.2% Working capital....................... $155,171 $145,209 $151,450 $186,147 $226,566 $274,289 Current ratio......................... 2.5 2.4 2.7 3.2 3.6 5.5 EBITDA (as defined)(f)(g)................ $ 16,116 $ 3,302 $(25,401) $ 6,762 $(28,897) $ (9,262) CASH FLOWS: Operating............................. $ 3,542 $(10,374) $(18,070) $ 3,368 $ 3,666 Investing............................. $ 19,007 Investing.............................(1,562) $(10,111) $ (2,304) $ 23,003 $ 19,185 $(80,079) Financing............................. $ (3,627) $ 988 $ 1,981 $ (447) $(29,850) $(12,865)
- --------------- (a) Results of operations for the year ended February 4, 2006 includes a $294,000 gain on the sale of a television station. See Note 4 to the consolidated financial statements. 22 (b) Results of operations for the year ended January 31, 2005 includes a non-cash charge of $1.9 million related to the write off of deferred advertising credits. See Note 16 to the consolidated financial statements. (c) Results of operations for the year ended January 31, 2004 include the operations of television station WWDP TV-46 from the effective date of its acquisition, April 1, 2003. Results of operations for the year ended January 31, 2004 also include a charge of $4.6 million related to costs associated with the Company'sour chief executive officer transition and a $4.4 million gain on the sale of television stations. See Notes 3 and 4 to the consolidated financial statements. (d) Net lossLoss from continuing operations includes a net pre-tax loss of $1.7 million from the sale and holdings of investments and other assets in fiscal 2003 and a net pre-tax loss of $37.3 million from the sale and holdings of investments and other assets in fiscal 2002 and a net pre-tax loss of $16.1 million from the sale and holdings of investments and other assets in fiscal 2001.2002. (e) Discontinued operations relate to the operations of the Company'sour FanBuzz subsidiary, which were shut down in fiscal 2005. See NoteNotes 5 and 16 to the consolidated financial statements. (f) Management views net sales less cost of sales (exclusive of depreciation and amortization), or sales margin, as an alternative operating measure because it is commonly used by management, analysts and institutional investors in analyzing our net sales profitability. This term is not considered a measure determined in accordance with generally accepted accounting principles, or GAAP. The Company definescomparable GAAP measurement is gross profit, which is defined as net sales less cost of sales (inclusive of depreciation and amortization). Our gross profit from continuing operations for fiscal 2006, 2005 and 2004 is $244.9 million, $218.4 million and $185.2 million, respectively. The percentage change year over year under either measure is relatively consistent. (g) We define Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, as net income (loss)loss from continuing operations for the respective periods excluding depreciation and amortization expense, interest income (expense) and income taxes. Management views EBITDA as an important alternative operating performance measure 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 should not be construed as an alternative to operating income (loss)loss or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles)GAAP) and should not be construed as a measure of liquidity. EBITDA, as presented, may not be comparable to similarly entitled measures reported by other companies. Management has included the term EBITDA, before non-cash stock option expense, in its presentation in order to maintain comparability of previously issued financial guidance and prior year's reported results. Management also uses EBITDA, before non-cash stock option expense, to evaluate operating performance and as a measure of performance for incentive compensation purposes. 23 A reconciliation of EBITDA to its comparable GAAP measurement, net loss, follows:
YEAR ENDED ------------------------------------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,2007 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) EBITDA, as defined................before non-cash stock option expense............................. $17,672 $ 3,302 $(25,401) $ 6,762 $(28,897) $ (9,262)Less: non-cash stock option expense... (1,556) -- -- -- -- ------- -------- -------- -------- -------- EBITDA (as defined)................... 16,116 3,302 (25,401) 6,762 (28,897) A reconciliation of EBITDA to net loss is as follows: EBITDA, as defined.................... 16,116 3,302 (25,401) 6,762 (28,897) Adjustments: Depreciation and amortization.....amortization......... (22,239) (20,569) (18,920) (16,399) (14,522) (12,341) Interest income...................income....................... 3,802 3,048 1,627 1,488 3,221 8,585 Income taxes......................taxes.......................... (75) 762 (25) (180) 4,445 3,858 Discontinued operations of FanBuzz.........................FanBuzz.... -- (2,296) (14,882) (3,063) (3,357) -- Cumulative effect of accounting change.......................... -- -- -- -- (329) --------------- -------- -------- -------- -------- Net loss..........................loss.............................. $(2,396) $(15,753) $(57,601) $(11,392) $(39,110) $ (9,489) =============== ======== ======== ======== ========
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 is 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 Companywe file with the Securities and Exchange Commission (as well as 23 information included in oral statements or other written statements made or to be made by the Company)us) contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are accordingly subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): consumer spending and debt levels; interest rates; seasonal variations in consumer purchasing activities; changes in the mix of products sold by us; competitive pressures on sales; pricing and gross profitsales margins; the level of cable and satellite distribution for the Company'sour programming and the associated fees; the success of the Company'sour e-commerce and branding initiatives; the success of the Company'sour strategic alliances and relationships; theour ability of the Company to manage itsour operating expenses successfully; risks associated with acquisitions; changes in governmental or regulatory requirements; litigation or governmental proceedings affecting the Company'sour operations; the risks identified under "Business Risk"Risk Factors"; significant public events that are difficult to predict, such as widespread weather catastrophes or other significant television-covering events causing an interruption of television coverage or that directly compete with the viewership of our programming; and theour ability of the Company to obtain and retain key executives and employees. Investors are cautioned that all forward-looking statements involve risk and uncertainty and the Company iswe are under no obligation (and expressly disclaims any such obligation) to update or alter itsour forward-looking statements whether as a result of new information, future events or otherwise. OVERVIEW Company Description ValueVision Media, Inc. is an integrated direct marketing company that markets its products directly to consumers through various forms of electronic media and direct-to-consumer mailings. The Company's principal line of business is itsOur operating strategy 24 as a multi-channel retailer incorporates television home shopping business, ShopNBC,internet e-commerce, direct mail marketing and companion Internet shopping website, ShopNBC.com, which sells brand name merchandise and proprietary/private label consumer products at competitive prices. The Company'sfulfillment services. Our live 24-hour per day television home shopping programming is distributed primarily through long-term cable and satellite affiliation agreements. Products and CustomersPRODUCTS AND CUSTOMERS Products sold on the Company'sour television home shopping network and Internetinternet shopping website include jewelry, watches, computers and other electronics, housewares, apparel, cosmetics, fitness products, giftware, collectibles, seasonal items and other merchandise. Jewelry represents the Company'sis our largest single category of merchandise, representing 54%39% of television home shopping and Internetinternet net sales in fiscal 2005, 61%2006, 43% in fiscal 20042005 and 65%49% in fiscal 2003.2004. Home products, including electronics product categories, represented approximately 36%37% of television home shopping and Internetinternet net sales in fiscal 2006, 36% in fiscal 2005 and 31% in fiscal 20042004. Watches, apparel and 30% in fiscal 2003. Apparel, health and beauty product categories represented approximately 10%24% of television home shopping and Internetinternet net sales in fiscal 2005, 8%2006, 21% in fiscal 20042005 and 5%20% in fiscal 2003. The Company believes2004. We believe that product diversification will appealhaving a broad diversity of products appeals to a broader segment of potential customers and is important to growing the Company'sour business. The Company'sOur product diversification strategy is to continue to develop new product offerings primarily in the home, apparel and accessories, cosmetics, fitness and consumer electronicelectronics categories to supplement itsthe existing jewelry and computer and electronics businesses. The Company believesWe believe that itsour customers are primarily women between the ages of 35 and 55 with annual household incomes between $50,000 and $75,000 and believes itsbelieve our customers make purchases based primarily on convenience, unique product offerings, value and quality of merchandise. Company Strategy The CompanyCOMPANY STRATEGY Our objective is to be positioned as a growing and profitable leader in multichannelmulti-channel retailing in the United States, offering consumers an entertaining, informative and interactive shopping experience. The following business strategies are intendedbeing pursued to increase our revenues and profitability and grow the active customer base, both for television sales and sales through the internet: (i) continue to diversify our mix of product categories offered on television and the growthinternet, in order to appeal to a broader population of potential customers; (ii) maintain and increase the Company'sdistribution of our television home shopping business and complementary website: (i) diversify the types of products offered for sale outside of the historical categories of jewelry and computers; (ii) increase program distribution in the United Statesprogramming through new orand expanded broadcast agreements with cable and satellite system operators, andas well as pursuing other creative means forof reaching consumers,customers such as through webcasting, on ShopNBC.com;internet videos and internet-based broadcasting networks; (iii) increase average net sales per home by increasing penetration within existing homes receiving the Company'sproductivity of each hour of television programming, and by attracting new customers through a broaderfocus on television offers of merchandise mixthat maximizes gross margin dollars per hour and targeted marketing efforts;efforts to increase the number of customers within the households currently receiving our television programming; (iv) continue to 24 grow the Company's Internetgrowth of our internet business through the innovative use of technology and marketing and technology,efforts, such as advanced search strategies,techniques, personalization, webcastinginternet video, affiliate agreements and uniqueinternet-based auction capabilities; (v) upgrade the overallcontinue to enhance our television broadcast quality, of the Company's network, programming, website features and customer support infrastructure consistent with expectations associated with the NBC brand name;support; (vi) increase the average order size through various sales initiatives includingsuch as add-on sales, continuity programs and warranty sales; and (vii) leverage the strong brand recognition of the NBC name and associated peacock symbol to achieve greater brand recognition with the ShopNBC television channel and ShopNBC.com website. Challenge The Company'sname. CHALLENGE Our television home shopping business operates with a high fixed cost base, which is primarily due to fixed contractual fees paid to cable and satellite operators to carry the Company'sour programming. In addition, the Company has invested in new initiatives intended to sustain sales growth that has required significant up-front investment. These new initiatives include increased marketing support, improved customer experience, enhanced on-air quality and improved business intelligence. In order to attain profitability, the Companywe must achieve sufficient sales volume through the acquisition of new customers and the increased retention of existing customers to cover itsour high fixed costs and the cost of these new initiatives. The Company'scosts. Our growth and profitability could be adversely impacted if sales volume does not meet expectations, as the Companywe will have limited immediate capability to reduce itsour fixed cable and satellite distribution operating expenses to mitigate any potential sales shortfall. Company's CompetitionOUR COMPETITION The direct marketing and retail businesses are highly competitive. In itsour television home shopping and Internete-commerce operations, the Company competeswe compete for consumer expenditurescustomers with other formstypes of consumer retail businesses, including traditional "brick and mortar" department stores, discount stores, warehouse stores and specialty stores; other mail order, catalog and25 television home shopping and e-commerce retailers; infomercial companies; infomercial companiescatalog and mail order retailers and other direct sellers. TheIn the competitive television home shopping industry is also highly competitive. The two largest competitors aresector, we compete with QVC Network, Inc. and HSN, Inc., both of whichwhom are substantially larger than we are in terms of annual revenues and customers, and whose programming is carried more diversifiedbroadly to U.S. households than is our programming. Both QVC and have greater financialHSN are owned by large, well-capitalized parent companies in the media business, who are also expanding into related e-commerce and distribution resources thanweb-based businesses. The American Collectibles Network (ACN), the Company. The Shop at Home, Inc. television network, in which E.W. Scripps Company owns a controlling interest,operator of Jewelry Television, also competes with the Company. In addition, the American Collectibles Network, which broadcasts the Jewelry Televisionus for television home shopping channel, competes with the Companycustomers in the jewelry sectorcategory, and ACN has recently acquired the assets of the television home shopping industry. There are alsoShop At Home from E. W. Scripps Company and is operating a second channel of programming in a number of other smallnon-jewelry categories, including collectible coins and knives. In addition, there are a number of smaller niche players and start-ups competingstartups in the television home shopping industry.arena who compete with us. The Company further competes with retailers who sell and market their products through thee-commerce sector is also highly competitive, Internet channel. Many companies sell products over the Internet thatand we are competitivein direct competition with the Company's products. As the usenumerous other internet retailers, many of the Internet and other online services increase,whom are larger, more well-established and more well-financed entitiesand/or have a broader customer base. Certain of our competitors in the television home shopping sector have acquired internet businesses complementary to their existing internet sites, which may continue to acquire, invest in or form joint ventures with providers of e-commerce and direct marketing solutions. Recently,pose new competitive challenges for us. For example, the parent company of HSN has purchased a number of web-based businesses includingacquired the internet search engine company,business Ask Jeeves Scripps acquired Shopzilla, a shopping search engine,(now known as Ask.com), and Liberty Media (parentthe parent company of QVC)QVC acquired Provide Commerce, an operator of retail websites featuring brands such as Proflowers and Cherry Moon Farms. The Company expects increasingwebsites. We anticipate continuing competition for viewers and customers, and for experienced home shopping personnel, for distribution agreements with cable and satellite systems, and for vendors and suppliers -- not only from major cable systems, television networks, e-commerce andhome shopping companies, but also from other retailerscompanies that may seek to enter the television home shopping industry. The continued growth and evolution of retailers on the Internet, together with strategic alliances being formed by otherinternet retail industries, including telecommunications and cable companies, television home shopping networks, and providers of e-commerce and direct marketing solutions, will also result in increased competition. The Company also competes to lease cable television time and enter into cable affiliation agreements. The Company believesother established retailers. We believe that its ultimateour success in the televisionTV home shopping industryand e-commerce sectors is dependent upon severalon a number of key factors, including (i) obtaining carriage on additional cable systems on favorable terms;terms, (ii) increasing the number of households receiving the Company's programming who purchase products from the Company (termed "household Penetration");us, and (iii) increasing the dollar value of sales per customer to itsour existing customer base. 25 Results for Fiscal 2005RESULTS FOR FISCAL 2006 Consolidated net sales from continuing operations in fiscal 20052006 were $691,851,000$767,275,000 compared to $623,634,000$691,851,000 in fiscal 2004,2005, an 11% increase. The increase in consolidated net sales from continuing operations is directly attributable to the continued improvement in and increased sales from the Company'sour television home shopping and Internetinternet operations. Effective for fiscal 2005, the results of operations of FanBuzz have been presented as loss from discontinued operations in the accompanying consolidated statements of operations for all periods presented. Net sales attributed to the Company'sour television home shopping and Internetinternet operations increased 11% to $755,302,000 in fiscal 2006 from $680,592,000 in fiscal 2005 from $614,884,0002005. We reported an operating loss of $9,479,000 and a net loss of $2,396,000 in fiscal 2004. Consolidated gross margins from continuing operations were 34.5% in fiscal 2005 compared to 32.7% in fiscal 2004. The Company2006. We reported an operating loss of $18,646,000 and a net loss of $15,753,000, which included a net loss of $2,296,000 from discontinued operations, in fiscal 2005. The Company reported an operating loss of $44,271,000 and a net loss of $57,601,000, whichOperating expenses in fiscal 2006 included a net loss of $14,882,000 from discontinued operations, in fiscal 2004.$29,000 asset impairment charge. Operating expenses in fiscal 2005 included an $82,000 charge related to employee terminations and a $294,000 gain on the sale of a television station. Operating expenses in fiscal 2004 included $1,900,000 of asset impairment charges and an additional charge of $3,836,000 related to employee terminations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company'sour consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and assumptions, including those related to the realizability of long-term investments and 26 intangible assets, accounts receivable, inventory and product returns. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect the more significant assumptions and estimates used in the preparation of itsthe consolidated financial statements: - Accounts receivable. The Company utilizesWe utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to six equal monthly credit card installments in which the Company bearswe bear the risk for uncollectibility. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Companywe had approximately $77,447,000$105,197,000 and $61,894,000$77,447,000 respectively, due from customers under the ValuePay installment program. The Company maintainsWe maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimates are used in determining the allowance for doubtful accounts and are based on historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. In determining these percentages, the Company reviews itswe review our historical write-off experience, current trends in the credit quality of the customer base as well as changes in credit policies. While credit losses have historically been within the Company'sour expectations and the provisions established, there is no guarantee that the Companywe will continue to experience the same credit loss rate that it haswe have in the past or that losses will be within current provisions. Provision for doubtful accounts receivable (primarily related to the Company'sour ValuePay program) for fiscal years2006, 2005 and 2004 were $6,065,000, $4,542,000 and 2003 were $4,542,000, $4,303,000, and $4,556,000, respectively. Based on the Company'sour fiscal 20052006 bad debt experience, a one-half point increase or decrease in the Company'sour bad debt experience as a percentage of total television home shopping and Internetinternet sales would have an impact of approximately $3.4$3.8 million on consolidated distribution and selling expense. 26 - Inventory. The Company values itsWe value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or realizable value, and reduces itsreduce our balance by an allowance for excess and obsolete merchandise. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Companywe had inventory balances of $66,622,000 and $67,844,000, and $54,903,000, respectively. The CompanyWe regularly reviewsreview inventory quantities on hand and recordsrecord a provision for excess and obsolete inventory based primarily on a percentage of the inventory balance as determined by its age and specific product category. In determining these percentages, the Company lookswe look at itsour historical write-off experience, the specific merchandise categories on hand, itsour historic recovery percentages on liquidations, forecasts of future product television shows and the current market value of gold. If actual recoveries or future demand or market conditions differ from the Company'sour estimates and assumptions, additional inventory write-downs may be required in future periods. Provision for excess and obsolete inventory for fiscal 2006, 2005 and 2004 were $2,977,000, $3,508,000 and 2003 were $3,508,000, $3,811,000, and $2,382,000, respectively. Based on the Company'sour fiscal 20052006 inventory write down experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately $351,000$298,000 on consolidated gross profit.net sales less cost of sales (exclusive of depreciation and amortization). - Product returns. The Company recordsWe record a reserve as a reduction of gross sales for anticipated product returns at each month-end and must make estimates of potential future product returns related to current period product revenue. The Company'sOur return rates on itsour television and Internetinternet sales have been approximately 33%32% to 35%33% over the past three fiscal years. The Company estimatesWe estimate and evaluatesevaluate the adequacy of itsour returns reserve by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the sales returns reserve in any accounting period. Material differences may result in the amount and timing of revenue for any period if management's assumptions and estimates were significantly different from actual product return experiences. Reserves for product returns for fiscal years 2006, 2005 and 2004 were $8,498,000, $7,658,000 and 2003 were $7,658,000, $7,290,000, and $8,780,000, respectively. Based on the Company'sour fiscal 20052006 sales returns, a one pointone-point increase or decrease in the Company'sour television and Internetinternet sales returns rate would have had an impact of approximately $4.0$4.4 million on consolidated gross profit.net sales less cost of sales (exclusive of depreciation and amortization). 27 - Long-term investments. As of February 3, 2007 and February 4, 2006, we had $4,139,000 and January 31, 2005, the Company had $1,383,000, and $-0-, respectively, of long-term equity investment securities of which all related to the Company'sour investment in RLM recorded in connection with the Company'sour equity share of RLM income under the equity method of accounting. The Company recordsWe record an investment impairment charge when it believeswe believe an investment has experienced a decline in value that is deemed to be other than temporary. Future adverse changes in market conditions, or continued poor operating results of the underlying investments, could result in significant non-operating losses or an inability to recover the carrying value of long-term investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. During fiscal 2003, the Company recorded a pre-tax investment loss of $2,011,000 relating to an investment in an Internet retailer whose decline in fair value was determined by the Company to be other than temporary. The decline in fair value of the Internet retailer was driven by their continued reported operating losses, large accumulated deficit and the inability of the company to make its original target plan for revenue, gross profit and earnings. While the Company believeswe believe that itsour estimates and assumptions regarding the valuation of itsour investments wereare reasonable, different assumptions could have materially affecteda material affect on our valuations. On March 28, 2007, we sold our 12.5% ownership interest in RLM for approximately $43.8 million. See Note 17 to the Company's evaluations.consolidated financial statements. - FCC broadcasting license asset and Goodwill.goodwill. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Company haswe have recorded an intangible FCC broadcasting license asset totaling $31,943,000 as a result of itsour acquisition of Boston television station WWDP TV-46 in fiscal 2003. In assessing the recoverability of itsour FCC broadcasting license asset, which the Companywe determined to have an indefinite life, the Companywe must make assumptions regarding estimated projected cash flows and other factors to determine the fair value of the related reporting unit. The CompanyWe performed an impairment test with respect to itsour FCC broadcasting license in the fourth quarter of fiscal 20052006 and determined that an impairment had not occurred. With respect to the FCC broadcasting license asset, the fair value of the 27 reporting unit exceeded its carrying value. If these estimates or related assumptions change in the future, the Companywe may be required to record impairment charges for itsour indefinite life intangibles in future periods. While the Company believeswe believe that itsour estimates and assumptions regarding the valuation of itsour reporting unit are reasonable, different assumptions or future events could materially affect the Company's evaluations.our valuations. During the third quarter of fiscal 2004, the Companywe wrote off goodwill attributable to the FanBuzz acquisition totaling $9,442,000 as the Companywe had determined that the goodwill was significantly impaired following FanBuzz's loss of its National Hockey League contract in September 2004. See Note 16 to the consolidated financial statements. The results of operations for FanBuzz are classified as discontinued operations in the accompanying consolidated financial statements of operations. - Intangible assets. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Companywe had amortizable intangible assets totaling $18,115,000$13,993,000 and $22,305,000$18,115,000, respectively, recorded primarily as a result of warrants we issued by the Company in connection with the Trademark License Agreement with NBC, the Distribution and Marketing Agreement entered intotrademark license agreement with NBC and the acquisition of FanBuzz.distribution and marketing agreement entered into with NBC. In assessing the recoverability of the Company'sour intangible assets, the Companywe must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets and reporting units. If these estimates or related assumptions change in the future, the Companywe may be required to record impairment charges for these assets in future periods. While the Company believeswe believe that itsour estimates and assumptions regarding the valuation of these intangible assets are reasonable, different assumptions or future events could materially affect the Company's evaluations.our valuations. During fiscal 2004, the Companywe wrote off approximately $160,000 of intangible assets in connection with the FanBuzz impairment. See Note 16 to the consolidated financial statements. - Stock-based compensation. The Company accountsWe account for stock-based compensation issued to employees in accordance with Statement of Financial Accounting Principles BoardStandards No. 123(R) (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"), which revised SFAS No. 123, "Accounting for Stock-Based Compensation," and superseded APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In cases where exercise prices are less thanThis standard requires compensation costs related to all share-based payment transactions to be recognized in the financial statements at fair value. The fair value of the underlying stock as of the date of grant, compensation expenseeach option award is recognized over the vesting period. For stock-based compensation issued to non-employees, the Company accounts for the grants in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation". All options granted by the Company had an exercise price equal to the fair market value of the underlying common stockestimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for stock volatility, option terms, risk-free interest rates and accordingly, no compensation expensedividend yields. Expected volatilities are based on the historical volatility of our stock. Expected term is reflectedcalculated using the simplified method taking into consideration the option's contractual life and vesting terms. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in net losses for fiscal 2005, 2004 and 2003. In December 2004,effect at the Financial Accounting Standards Board issued a revision to Statementtime 28 of Financial Accounting Standards No. 123, "Share-Based Payment" ("SFAS No. 123(R)"). The revision requires all entities to recognize compensation expensegrant. Expected dividend yields are not used in an amount equal to the fair value computations as we have never declared or paid dividends on our common stock. While we believe that our estimates and assumptions regarding the valuation of our share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under Accounting Principles Board Opinion No. 25. This standard is effective as of the first quarter of fiscal 2006. The Company has not completed the process of evaluating the full financial statement impact that will result from the adoption of SFAS No. 123(R).awards are reasonable, different assumptions could have a material affect on our valuations. See Note 2, "Stock-Based Compensation",6, Shareholders' Equity -- Stock-Based Compensation, for the Company'sour disclosure regarding the pro forma effects of SFAS No. 123 on the Company's consolidated financial statements.our share-based equity awards. - Deferred taxes. The Company accountsWe account for income taxes under the liability method of accounting whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income (loss). Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. 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. The Company assessesWe assess the recoverability of itsour deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). In accordance with that standard, as of February 3, 2007 and February 4, 2006, and January 31, 2005, the Companywe recorded a valuation allowance of approximately $55,244,000$54,663,000 and $45,479,000,$55,244,000, respectively, for itsour net deferred tax assets and net operating and capital loss carryforwards. Based on the Company'sour recent history of losses, a full 28 valuation allowance was recorded in fiscal 2006, 2005 2004 and 20032004 and was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on the Company'sour most recent operating results when assessing the need for a valuation allowance. Although management believes that the Company'sour recent operating losses were heavily affected by a challenging retail economic environment and slowdown in consumer spending experienced by the Companyus and other merchandise retailers, the Company intendswe intend to maintain a full valuation allowance for itsour net deferred tax assets and loss carryforwards until sufficient positive evidence exists to support reversal of allowances. SHOPNBC PRIVATE LABEL AND CO-BRAND CREDIT CARD PROGRAM In the third quarter of fiscal 2006, we introduced and established a new private label and co-brand revolving consumer credit card program. The program is made available to all qualified consumers for the financing of purchases of products from ShopNBC and for the financing of purchases of products and services from other non-ShopNBC retailers. The program is intended to be used by cardholders for purchases made primarily for personal, family or household use. The issuing bank is the sole owner of the account issued under the program and absorbs all losses associated with non-payment by cardholders. The issuing bank pays fees to us based on the number of credit card accounts activated and on card usage. Once a customer is approved to receive a ShopNBC private label or co-branded credit card and the card is activated, the customer is eligible to participate in our credit card rewards program. Under the rewards program, points are earned on purchases made with the credit cards at ShopNBC and other retailers where the co-branded card is accepted. Cardholders who accumulate the requisite number of points are issued a $50 certificate award towards the future purchase of ShopNBC merchandise. The certificate award expires after twelve months if unredeemed. DISCONTINUED FANBUZZ OPERATIONS In the second quarter of fiscal 2005, the Companywe decided to close itsour FanBuzz subsidiary operations and finalized the shut down in the third quarter of fiscal 2005. FanBuzz, acquired by the Companyus in fiscal 2002, was an e-commerce and fulfillment solutions provider for a number of sports, media, entertainment and retail companies. The decision to shut down FanBuzz was made after continued operating losses were experienced following the loss of its NHLNational Hockey League contract in September 2004 and after a number of other FanBuzz customers notified the Companyus in the first quarter of fiscal 2005 that they elected not to renew the term of their e-commerce services agreements. FanBuzz ceased business operations as of October 29, 2005 and was a reportable segment under SFAS No. 131. FanBuzz has been accounted for as a discontinued operation under SFAS No. 144.2005. The results of operations for FanBuzz have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. See Note 5 to the consolidated financial statements. 29 ASSET IMPAIRMENTS AND EMPLOYEE TERMINATION COSTS During the first quarter of fiscal 2005, the Companywe recorded a non-cash impairment loss of $400,000 after receiving notice from a number of FanBuzz customers who either elected not to renew the terms of their e-commerce services agreements or decided to terminate their agreements as permitted under the agreements. The impairment charge is included in loss from discontinued operations in the accompanying fiscal 2005 consolidated statement of operations. During fiscal 2005, the Companywe also recorded an additional $979,000 charge and established a related accrual primarily in connection with the downsizing of the FanBuzz operations. The charge consisted primarily of severance pay and related benefit costs associated with the elimination of approximately twenty-five25 positions. The severance is to be paid out over periods ranging from one to twelve months. Of this charge, $897,000 is included in loss from discontinued operations in the accompanying fiscal 2005 consolidated statement of operations. In the third quarter of fiscal 2004, the Companywe wrote off goodwill attributable to the FanBuzz acquisition as the Companywe had determined that the goodwill was impaired following FanBuzz's loss of its National Hockey League contract in September 2004. In addition, the Companywe also concluded that the book value of certain long-lived assets at FanBuzz was significantly higher than their expected future cash flows and that an impairment had occurred in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".Assets." Accordingly, the Companywe recorded a non-cash impairment loss and related charge of $11,302,000 in the third quarter of fiscal 2004. The charges included $9,442,000 of goodwill impairment, $1,700,000 of fixed asset and capital expenditure impairment and $160,000 of intangible asset impairment. The impairment is included in loss from discontinued operations in the accompanying fiscal 2004 consolidated statement of operations. In addition, in the fourth quarter of fiscal 2004, the Companywe recorded an asset impairment charge of $1,900,000 related to deferred advertising costs in the form of television advertising credits with NBC after it was determined that the Companywe could no longer effectively use the credits. During the third and fourth quarters of fiscal 2004, the Companywe also recorded a $3,836,000 charge to earnings in connection with the decision to eliminate a number of positions within the Companyour company in an effort to streamline the corporate organization and reduce operating expenses. The charges consisted primarily of severance pay and related benefit costs associated with the elimination of approximately 30 positions. The severance is currently being paid out over periods extending up to two years. 29 CEO TRANSITION COSTS On May 20, 2003, the Company announced that its Chairman and Chief Executive Officer (CEO), Gene McCaffery, would be part of a transition process to determine a successor as CEO of the Company. On December 1, 2003 the Company announced that its board of directors had named William J. Lansing as President and Chief Executive Officer of the Company, effective December 16, 2003. He also has been appointed to the Company's board of directors. In conjunction with Mr. McCaffery's resignation and the hiring of Mr. Lansing, the Company recorded a charge of $4,625,000 in the fourth quarter of fiscal 2003 related to the transition. CEO transition costs consisted primarily of contract severance and hiring costs totaling $4,317,000, legal and other professional fees totaling $247,000 and other direct transition costs totaling $61,000. ACQUISITIONS AND DISPOSITIONS In December 2005, the Companywe completed the sale of itsour low power television station located in Atlanta, Georgia for a total of $400,000. The CompanyWe recorded a pre-tax operating gain on the sale of this low power television station of $294,000 in the fourth quarter of fiscal 2005. Management believes that the sale of this station did not have a significant impact on theour ongoing operations of the Company. On January 15, 2003, the Company announced that it entered into an agreement with Norwell Television LLC to acquire full power television station WWDP TV-46 in Boston, which reached approximately 1.8 million cable households. The deal closed in the first quarter of fiscal 2003 on April 1, following FCC approval. The Company made the investment in order to build a long-term and cost effective distribution strategy in the Boston, Massachusetts area. The purchase price of the acquisition was $33,617,000, including professional fees, and has been accounted for using the purchase method of accounting as stipulated by SFAS No. 141 "Business Combinations". In February 2003, the Company entered into an agreement to purchase property and two commercial buildings occupying approximately 209,000 square feet in Eden Prairie, Minnesota for approximately $11,300,000. In one building, the Company currently maintains its corporate administrative, television production and jewelry distribution operations. Included, as part of the acquisition, was a second building of approximately 70,000 square feet of commercial rental space, which the Company utilizes for additional office space. As a result of this acquisition, the Company's long-term property lease has been terminated. In February 2003, the Company completed the sale of ten of its eleven LPTV stations for a total of $5,000,000. The Company recorded a pre-tax operating gain on the sale of these LPTV stations of $4,417,000 in the first quarter of fiscal 2003. Management believes that the sale of these stations will not have a significant impact on the ongoing operations of the Company. WRITE-DOWN OF INVESTMENTS During fiscal 2003, the Company recorded a pre-tax investment loss of $2,011,000 relating to an investment in an Internet retailer whose decline in fair value was determined by the Company to be other than temporary. The decline in fair value of the Internet retailer was driven by its continued reported operating losses, large cumulative deficit and the inability of the company to make its original target plan for revenue, gross profit and earnings.30 RESULTS OF OPERATIONS Results of operations for the year ended January 31, 2004 include the operations of television station WWDP TV-46 from the effective date of its acquisition, April 1, 2003. 30 The following table sets forth, for the periods indicated, certain statement of continuing operations data expressed as a percentage of net sales.
YEAR ENDED --------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 ----------- ----------- ----------- NET SALES...........................................SALES................................................... 100.0% 100.0% 100.0% ===== ===== ===== GROSS MARGIN........................................Sales margin................................................ 34.8% 34.5% 32.7% 35.4% ----- ----- ----- OPERATING EXPENSES: Distribution and selling............................selling.................................... 29.5% 30.7% 32.6% 30.7% General and administrative..........................administrative.................................. 3.6% 3.6% 3.3% 2.9% Depreciation and amortization.......................amortization............................... 2.9% 2.9% 3.0% 2.8% Asset impairments...................................impairments........................................... -- -- 0.3% -- Employee termination costs.......................... -- 0.6% 0.3% CEO transition costs................................costs.................................. -- -- 0.8% Gain on sale of television stations................. -- -- (0.7)%0.6% ----- ----- ----- Total operating expenses..........................expenses.................................. 36.0% 37.2% 39.8% 36.8% ----- ----- ----- OPERATING LOSS......................................LOSS.............................................. (1.2)% (2.7)% (7.1)% (1.4)% Other income, (expense), net.........................net........................................... 0.5% 0.4% 0.3% -- ----- ----- ----- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN NET INCOME OF AFFILIATES............AFFILIATES........................ (0.7)% (2.3)% (6.8)% (1.4)% Income taxes........................................taxes................................................ -- 0.1% -- -- Equity in net income of affiliates..................affiliates.......................... 0.4% 0.2% -- -- ----- ----- ----- LOSS FROM CONTINUING OPERATIONS.....................OPERATIONS............................. (0.3)% (2.0)% (6.8)% (1.4)% ===== ===== =====
KEY PERFORMANCE METRICS*
FOR THE TWELVE MONTHS ENDED --------------------------------------------------------- FEBRUARY 3, % FEBRUARY 4, % JANUARY 31, % JANUARY 31,2007 CHANGE 2006 CHANGE 2005 CHANGE 2004 ----------- ------ ----------- ------ ----------- PROGRAM DISTRIBUTION Cable FTE's.......................FTE's............................... 39,288 4% 37,822 4% 36,351 5% 34,530 Satellite FTE's...................FTE's........................... 25,923 8% 24,088 13% 21,312 14% 18,633 -------- -- -------- ----- -------- Total FTEs (Average 000's)............................ 65,211 5% 61,910 7% 57,663 8% 53,163 Net Sales per FTE (Annualized).................... $ 11.58 5% $ 10.99 3% $ 10.66 (3)% $ 10.95 CUSTOMER METRICS Active Customers -- 12 month rolling...........................rolling........ 845,564 5% 803,607 7% 754,198 9% 689,850 % New Customers -- 12 month rolling...........................rolling......... 53% 56% 57% 59% % Retained Customers -- 12 month rolling...........................rolling.... 47% 44% 43% 41% Customer Penetration -- 12 month rolling...........................rolling.... 1.3% 1.3% 1.3% PRODUCT MIX Jewelry........................ 54% 61% 65% Home and All Other............. 36% 31% 30%Jewelry................................ 39% 43% 49% Watches Apparel, Health & Beauty....... 10% 8% 5%24% 21% 20% Home and All Other..................... 37% 36% 31% Shipped Units (000's)...................................... 4,989 1% 4,942 (1)% 5,004 23% 4,080 Average Selling Price -- Shipped Units.............................Units...... $ 211 8% $ 196 9% $ 179 (16)% $ 213
- --------------- * Includes television home shopping and Internetinternet sales only. 31 PROGRAM DISTRIBUTION AverageOur television home shopping program was available to approximately 65.2 million average full time equivalent, ("FTE")or FTE, households for the twelve months ended February 3, 2007, approximately 61.9 million average FTE households for the twelve months ended February 4, 2006 and approximately 57.7 million average FTE households for the twelve months ended January 31, 2005. Average FTE subscribers grew 5% in fiscal 2006, resulting in a 3.3 million increase in average FTE's compared to fiscal 2005. Average FTE subscribers grew 7% in fiscal 2005, resulting in a 4.2 million increase in average FTE's compared to fiscal 2004. Average FTE's grew 8% in fiscal 2004 resulting in a 4.5 million increase in average FTE's compared to fiscal 2003. The annual increases were driven by continued strong growth in satellite distribution of the Company'sour programming and increased penetrationdistribution of the Company'sour programming on digital cable. We anticipate that our cable programming distribution will increasingly shift towards a greater mix of digital as opposed to analog cable tiers, both through growth of the number of digital subscribers and through cable system operators moving programming that is carried on analog channels over to digital channels. Because of the broader universe of programming choices available for viewers in digital systems and the higher channel placements commonly associated with digital tiers, the shift towards digital systems may adversely impact our ability to compete for television viewers. Our television home shopping programming is also simulcast live 24 hours a day, 7 days a week through our internet shopping website, www.shopnbc.com, which is not included in total FTE households. NET SALES PER FTE Net sales per FTE for fiscal 2006 increased 5%, or $0.59, per FTE compared to fiscal 2005. Net sales per FTE for fiscal 2005 increased 3%, or $0.33, per FTE compared to fiscal 2004. Net sales per FTE forThe increases in fiscal 2004 decreased 3%, or $0.29, per FTE compared to fiscal 2003. The increase in2006 and fiscal 2005 net sales per FTE was primarilywere largely the result of strong third and fourth quarter television home shopping and Internetinternet net sales growth over each previous fiscal 2004. The decreasesyear, primarily in the first three quarters of fiscal 2004 net2006 and in the third and fourth quarters of fiscal 2005. Net sales per FTE resulted from the fact that the Company's annual FTE home growth had outpaced the growth in television sales year over year. Net television home shopping and Internet sales growth was significantly impacted in fiscal 2004 as a result of a number of factors including the loss of a number of experienced television hosts, the effect of several severe hurricanes that devastatedimpacted areas of the east coastEast Coast during the year and a soft retail environment. In addition, home shopping net sales growth was unfavorably impactedaffected during the second half of fiscal 2004 due to a number of high profile television-covered special events that competed with the viewership of the Company'sour programming, including television coverage of the 2004 Summer Olympics and the 2004 presidential election. Consistent with industry practice, we include internet sales along with television sales in our calculation of net sales per FTE. CUSTOMERS During fiscal 2006, we added 41,957 active customers, a 5% increase over fiscal 2005. During fiscal 2005, the Companywe added 49,409 active customers, a 7% increase over fiscal 2004. During fiscal 2004, the Company added 64,348 active customers, a 9% increase over fiscal 2003. The increase in active customers resulted from the increase in household distribution, product diversification efforts and increases in marketing and promotional efforts aimed at attracting new customers. CUSTOMER PENETRATION Customer penetration measures the total number of customers who purchased from the Companyus over the past twelve months divided by the Company'sour average FTE's for that same period. This measure was 1.3% for each of fiscal 2005,2006, fiscal 20042005 and fiscal 2003.2004. We include in our customer penetration calculations all of our customers during the applicable time period, whether they became customers as a result of our television programming, through direct-mail campaigns, or through our e-commerce marketing efforts. MERCHANDISE MIX During fiscal 2006, jewelry net sales decreased from 43% of total television and internet net sales to 39% as compared to fiscal 2005. Net sales from home products, including electronic categories, increased to 37% of total television home shopping and internet net sales from 36% as compared to fiscal 2005 and net sales from watches, apparel and health and beauty product categories increased to 24% of total television home shopping and internet net sales from 21% as compared to fiscal 2005. During fiscal 2005, jewelry net sales decreased from 61%49% of total television home shopping and Internetinternet net sales to 54%43% as compared to fiscal 2004. Net sales 32 from home products, including electronic categories, increased to 36% of total television home shopping and Internetinternet net sales from 31% as compared to fiscal 2004 and net sales from watches, apparel and health and beauty product categories increased to 10%21% of total television home shopping and Internetinternet net sales from 8%20% as compared to fiscal 2004. During fiscal 2004, jewelry net sales decreased from 65% of total television and Internet net sales to 61% as compared to fiscal 2003. Net sales from home products, including electronic categories, as a percent of totalOur merchandise mix increased during fiscal 2004, from 30% to 31% and net sales from apparel and health and beauty product categories increased from 5% to 8% as compared to fiscal 2003. The Company's merchandise mix is evolvingover the past several years has been moving away from itsour historical reliance on jewelry and computers to a broader mix that also includes apparel, watches, health and beauty, fitness, home and other electronic product lines. The evolution of theGoing forward, we will be adjusting our merchandise mix is a key component of the Company's strategyas needed in response to appealboth customer demand and in order to a broader audience, attract new customersmaximize gross dollars per hour in our television home shopping and increase household penetration.internet operations. Net sales from home products, including electronic product categories, increased as a percentage of total television home shopping and Internetinternet net sales during fiscal 2006 and fiscal 2005 primarily due to increased sales associated with consumer electronics. 32 SHIPPED UNITS The number of units shipped during fiscal 2006 increased 1% from fiscal 2005 to 4,989,000 from 4,942,000. The number of units shipped during fiscal 2005 decreased 1% from fiscal 2004 to 4,942,000 from 5,004,000. The increase in shipped units during fiscal 2006 was due primarily to the overall increase in net sales over fiscal 2005. The decrease in shipped units during fiscal 2005 was due primarily to a shift in the product mix in the first half of fiscal 2005 to higher priced merchandise in the home and electronics categories driven primarily by sales of consumer electronics. The number of units shipped duringAVERAGE SELLING PRICE Our average selling price, or ASP, per unit was $211 in fiscal 2004 increased 23%2006, an 8% increase over fiscal 2003 to 5,004,000 from 4,080,000.2005. The increase in the ASP in fiscal 2006 was driven by increases in price points associated primarily bywith watches, electronics and apparel merchandise categories, in addition to the reduction inmix shift towards higher priced electronics and home merchandise categories. For fiscal 2005, the Company's average per unit selling price compared to prior years of 16% during fiscal 2004 in addition to the increase in overall net sales. AVERAGE SELLING PRICE The average selling price ("ASP") per unit for the Company was $196, in fiscal 2005, a 9% increase over fiscal 2004. The increase in the ASPaverage selling price in fiscal 2005 was driven by increases in price points associated with gold, silver, apparel and home merchandise categories as well as a shift in merchandise mix from jewelry to sales of home products, particularly consumer electronics, which have higher average selling prices. ForSALES Consolidated net sales from continuing operations, inclusive of shipping and handling revenue, for fiscal 2004,2006 were $767,275,000 compared to $691,851,000 for fiscal 2005, an 11% increase. The increase in consolidated net sales from continuing operations was directly attributable to continued improvement in net sales from our television home shopping and internet operations. Net sales attributed to our television home shopping and internet operations increased 11% to $755,302,000 for fiscal 2006 from $680,592,000 for fiscal 2005. The growth in television home shopping and internet net sales during fiscal 2006 is primarily attributable to increased merchandise sales driven by the averagegrowth in the number of homes receiving our television programming, higher productivity from existing homes due to increased sales per unit selling price was $179, a 16% reduction from fiscal 2003. The reductionhour results achieved in average selling price in fiscal 2004 was due primarily to a merchandise mix shift away fromthe jewelry, and computerwatches, apparel and electronics merchandise categories and a 26% increase, or $38,072,000, in internet net sales over fiscal 2004 towards lower priced2005. In addition, television and internet net sales increased due to increased shipping and handling revenue resulting from increased sales during fiscal 2006 compared to fiscal 2005. We intend to continue to develop our merchandising and programming strategies and increase marketing spending with the goal of improving our television home apparelshopping and healthinternet sales results. While we are optimistic that television home shopping and beauty products. SALESinternet sales results will continue to improve, there can be no assurance that our sales strategy will achieve the intended results. Consolidated net sales from continuing operations, inclusive of shipping and handling revenue, for fiscal 2005 were $691,851,000 compared to $623,634,000 for fiscal 2004, an 11% increase. The fourth quarter of fiscal 2005 was the largest revenue quarter in the Company's history. The increase in consolidated net sales from continuing operations was directly attributable to continued improvement in net sales from the Company'sour television home shopping and Internetinternet operations. Net sales attributed to the Company'sour television home shopping and Internetinternet operations increased 11% to $680,592,000 for fiscal 2005 from $614,884,000 for fiscal 2004. The growth in the television home shopping and Internetinternet net sales is primarily attributable to increased 33 merchandise sales driven by growth in the number of homes receiving the Company'sour television programming and higher productivity from existing homes due to increased sales per hour results achieved in all major merchandise categories. In addition, television home shopping and Internetinternet net sales increased due to increased shipping and handling revenue as a result of fewer shipping promotions in fiscal 2005 as compared to fiscal 2004. The average number of FTE subscriber homes was 61.9 million for fiscal 2005 and 57.7 million for fiscal 2004, a 7% increase. In addition to new FTE subscriber homes, television home shopping and Internetinternet net sales increased due to the continued addition of new customers from households already receiving the Company'sour television home shopping programming and a 15% increase, or $19,375,000, in Internetinternet net sales over fiscal 2004. The Company intends to continue to develop its merchandising and programming strategies, including its strategy of product diversification and increased marketing spending with the goal of improving its television home shopping and Internet sales results. While the Company is optimistic that television home shopping and Internet sales results will improve, there can be no assurance that these changes in strategy will achieve the intended results. Consolidated net sales from continuing operations, inclusive of shipping and handling revenue, for fiscal 2004 were $623,634,000 compared to $591,185,000 for fiscal 2003, a 5% increase. The increase in consolidated net sales from continuing operations is directly attributable to increased sales from the Company's television home shopping and Internet operations year over year. Net sales attributed to the Company's television home shopping and Internet operations increased 6% to $614,884,000 for fiscal 2004 from $581,999,000 for fiscal 2003. Despite the increase in consolidated net sales for the year, the Company experienced a 4% decrease in net sales over prior year in the third quarter of fiscal 2004, which was directly attributable to a decrease in television home shopping net sales resulting from a number of factors including the loss of a number of experienced television hosts at the start of the third quarter, the effect of several severe hurricanes that devastated the east coast during the third quarter and a soft retail environment. In addition, home shopping net sales growth was unfavorably impacted during the second half of fiscal 2004 due to a number of high profile television-covered special events that competed with the viewership of our programming including 33 television coverage of the 2004 Summer Olympics and the 2004 presidential election. Collectively, these events significantly impacted overall consolidated net sales growth during fiscal 2004. The growth in fiscal 2004 home shopping net sales is attributable to the growth in FTE homes receiving the Company's television programming. The average number of FTE subscriber homes was 57.7 million for fiscal 2004 and 53.2 million for fiscal 2003, an 8% increase. In addition to new FTE subscriber homes, television home shopping and Internet sales increased due to the continued addition of new customers from households already receiving the Company's television home shopping programming and a 14% increase, or $15,244,000, in Internet sales over fiscal 2003 offset by an overall decrease in the average order size due to a decrease in average selling prices. The Company recordsWe record 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 the Company'sour television home shopping and Internetinternet operations have been approximately 33%32% to 35%33% over the past three fiscal years. The return rate for the television home shoppingyears and Internet operations hashave remained relatively stable at approximately 33% over the past two fiscal years. The Company is continuingstable. We continue to manage return rates and isare adjusting average selling price points and product mix in an effort to reduce the overall return rate related to itsour television home shopping and Internetinternet businesses. GROSS PROFIT Gross profitNET SALES LESS COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION) Net sales less cost of sales (excluding depreciation and amortization), or sales margin, from continuing operations for fiscal 2006 and 2005 was $267,161,000 and $238,944,000, respectively, an increase of $28,217,000, or 12%. This increase is directly attributable to increased sales volume from our television home shopping and internet businesses. We define sales margin as net sales less cost of sales (exclusive of depreciation and amortization). Sales margin for fiscal 2006 was 34.8% compared to 34.5% for fiscal 2005. The sales margin improvement for fiscal 2006 over fiscal 2005 was primarily due to the achievement of higher merchandise margins on television and internet merchandise in primarily the jewelry, watches, electronics and apparel product categories and as a result of decreased inventory obsolescence and lower promotional discounting as a percentage of total net sales. Sales margin may not be comparable to those of other retailers, since some retailers include all of the costs related to their product distribution network in cost of sales, including depreciation and amortization, while others, including us, exclude a portion of these costs from sales margin, including them instead as either a component of distribution and selling expense or as a separate component of operating expenses. Net sales less cost of sales (exclusive of depreciation and amortization) from continuing operations for fiscal 2005 and 2004 werewas $238,944,000 and $204,096,000, respectively, an increase of $34,848,000, or 17%. The increase in gross profit from continuing operations is directly attributable to increased sales volume from the Company'sour television home shopping and Internetinternet businesses and increases in gross profitsales margins on shipping and handling revenues. GrossSales margins for fiscal 2005 were 34.5% compared to 32.7% for fiscal 2004. Gross marginsSales margin for fiscal 2005 increased 1.8 percentage points as compared to gross margins of fiscal 2004 primarily due to increases in television home shopping and Internetinternet shipping and handling margins of approximately 1.4%, as well as the achievement of higher merchandise margins during fiscal 2005. These increases reflect the negative impact of the Company'sour fiscal 2004 free shipping loyalty club which launched in February 2004, and lower promotional discounting during fiscal 2005. In addition, grosssales margin also improved overall due to the achievement of higher merchandise margins in substantially all major product categories, thatwhich was offset by a product mix shift that included greater sales in lower margin electronic product categories during fiscal 2005. Gross margins may not be comparable to those of other entities, since some entities include all of the costs related to their product distribution network inManagement views net sales less cost of sales (exclusive of depreciation and others, includingamortization), or sales margin, as an alternative operating measure because it is commonly used by management, analysts and institutional investors in analyzing the Company, excludeprofitability of our company. This term is considered a portionnon-GAAP measure. The comparable GAAP measurement is gross profit, which is defined as net sales less cost of these costs fromsales (inclusive of depreciation and amortization). Our gross margin, including them instead as a component of distribution and selling expense. Gross profit from continuing operations for fiscal 2006, 2005 and 2004 is $244.9 million, $218.4 million and 2003 were $204,096,000 and $209,508,000, respectively, a decrease of $5,412,000 or 3%.$185.2 million, respectively. The principal reason for the decrease in gross profit from fiscal 2003 to fiscal 2004 was the decrease in gross profit margin experienced by the Company during fiscal 2004, offset by increased sales volume from the Company's television home shopping and Internet businesses. Gross margins for fiscal 2004 were 32.7% compared to 35.4% for fiscal 2003. Television and Internet gross margins for fiscal 2004 decreased as compared to gross margins of fiscal 2003 primarily due to decreased television and Internet shipping and handling margins of approximately 1.4% driven by the impact of the Company's free shipping loyalty club that launched in February 2004. Merchandise margins were also significantly down during fiscal 2004 as a result of product discounting promotions that were offered in order to generate additional sales during the second half of fiscal 2004 and reduced margins on RLM fulfillment services as a result of contract renegotiations. In addition, gross margins have also been unfavorably impacted during thepercentage change year as a result of other promotional activities initiated by the Company in order to clear out excess on-hand inventory and to test various marketing initiatives.over year under either measure is relatively consistent. 34 OPERATING EXPENSES Total operating expenses from continuing operations were $276,640,000, $257,590,000 $248,367,000 and $217,495,000$248,367,000 for fiscal years2006, 2005 2004 and 2003,2004, respectively, representing an increase of $19,050,000, or 7%, from fiscal 2005 to fiscal 2006, and an increase of $9,223,000, or 4%, from fiscal 2004 to fiscal 2005, and an increase of $30,872,000 or 14% from fiscal 2003 to fiscal 2004.2005. Fiscal 2005 total operating expenses included a charge of $82,000 recorded in connection with employee terminations and a 34 $294,000 gain recorded in the fourth quarter in connection with the sale of itsour remaining low power television station, which reduced total operating expenses in fiscal 2005. Fiscal 2004 total operating expenses included a $1,900,000 non-cash charge relating to a fourth quarter write down of television advertising credits and a charge of $3,836,000 recorded in connection with management's decision to eliminate a number of positions within the Company. Fiscal 2003 total operatingour company. Distribution and selling expense included a $4,625,000 chargefor fiscal 2006 increased $14,081,000, or 7%, to $226,450,000, or 30% of net sales compared to $212,369,000, or 31% of net sales in fiscal 2005. Distribution and selling expense increased over fiscal 2005 primarily due to an increase in salaries, accrued bonuses and related topersonnel costs associated with hiring and retaining primarily merchandising, television production and show management personnel and on-air talent of $3,452,000 during fiscal 2006; increased credit card and net collection fees of $3,430,000 due to the Company's chief executive officer transition. Theseoverall increase in net sales; increased internet and direct-mail and marketing expenses of $3,490,000 as we attempt to acquire additional customers and increase our overall penetration; increased telemarketing and customer service costs consisted primarily of $3,463,000 associated with increased sales volumes and our commitment to improve our customer service; a $724,000 contract severance and hiring costs totaling $4,317,000, legal and other professional fees totaling $247,000 and other direct transition costs totaling $61,000. During fiscal 2003, the Company also incurred an additional $2,000,000 of severancebuyout fee relating to organizational changesour legacy private label credit card agreement and increased share-based compensation expense of $778,000. These increases were offset by a decrease in its senior management teamnet cable and recorded a $4,417,000 gain related to the salesatellite access fees of ten low power television stations, which reduced total operating expenses in fiscal 2003.$888,000. Distribution and selling expense for fiscal 2005 increased $9,210,000, or 5%, to $212,369,000, or 31% of net sales compared to $203,159,000, or 33% of net sales in fiscal 2004. Distribution and selling expense increased primarily as a result of increases in net cable access fees of $5,423,000 due to a 7% increase in the number of average FTE subscribers over the prior year, increased costs associated with hiring and retaining merchandising and show management personnel and on-air talent of $4,460,000 during fiscal 2005 and increased credit card fees of $1,282,000 due to an overall decline in net sales made using the ShopNBC credit card, which generally carries lower fees. These increases were offset by selling and distribution expense decreases associated with decreased satellite rental fees of $825,000 and a prior year merchandising software write-off totaling $868,000. DistributionGeneral and sellingadministration expense for fiscal 20042006 increased $21,639,000,$3,058,000, or 12%, to $203,159,000$27,922,000, or 33%4% of net sales from continuing operations, compared to $181,520,000$24,864,000, or 31%4% of net sales from continuing operations in fiscal 2003. Distribution2005. General and sellingadministrative expense increased over fiscal 2005 primarily as a result of increases in net cable accesscompensation recorded related to share-based payments of $778,000, increased salaries, accrued bonuses, and related personnel costs of $2,982,000, information systems service fees of $6,713,000 due to$402,000 and director stock-based compensation of $273,000, offset by decreased legal fees of $660,000 and proceeds received from a 9% increase in the number of average FTE subscribers over the prior year and increased costs associated with the hiring of merchandising personnel and on-air talent of $6,776,000 during fiscal 2004. In addition, distribution and selling expense for fiscal 2004 also increased over fiscal 2003 as a result of increased direct-mail and marketing expenses of $2,714,000 as the Company attempted to acquire customers and stimulate ShopNBC program awareness and increased telemarketing and customer service costs of $3,701,000, associated with increased sales volumes and the Company's commitment to improve its customer service.litigation settlement totaling $300,000. General and administration expense for fiscal 2005 increased $4,312,000, or 21%, to $24,864,000, or 4% of net sales from continuing operations, compared to $20,552,000, or 3% of net sales from continuing operations in fiscal 2004. General and administrative expense increased over fiscal 2004 primarily as a result of increased information system personnel salaries and consulting fees and software maintenance fees of $2,069,000, increased accrued bonuses of $1,941,000 and increased legal fees of $491,000. General and administration expense for fiscal 2004 increased $3,184,000, or 18%, to $20,552,000, or 3% of net sales, compared to $17,368,000, or 3% of net sales, in fiscal 2003. General and administrative expense increased over fiscal 2003 primarily as a result of increased information system personnel salaries, recruiting costs and software maintenance fees of $3,150,000, increased legal and accounting fees $894,000, increased human resources and recruitment fees of $495,000, offset by a decrease in general and administration expense associated with the establishment of a $470,000 litigation settlement reserve in fiscal 2003 and the write-off of approximately $500,000 of legal fees in fiscal 2003 incurred in connection with a discontinued business development initiative. Depreciation and amortization expense was $22,239,000, $20,569,000 $18,920,000 and $16,399,000$18,920,000 for fiscal 2006, 2005 2004 and 2003,2004, respectively, representing an increase of $1,670,000, or 8%, from fiscal 2005 to fiscal 2006 and an increase of $1,649,000, or 9%, from fiscal 2004 to fiscal 2005 and an increase of $2,521,000 or 15% from fiscal 2003 to fiscal 2004.2005. Depreciation and amortization expense as a percentage of net sales was 3% for fiscal 2006, 2005 2004 and 2003.2004. The dollar increases experienced during fiscal 20052006 and fiscal 20042005 are primarily due to increased depreciation and amortization as a result of assets places in service in connection with the Company'sour various application software development and functionality enhancements. 35 OPERATING LOSS The CompanyWe reported an operating loss from continuing operations of $9,479,000 for fiscal 2006 compared with an operating loss from continuing operations of $18,646,000 for fiscal 2005, an improvement of $9,167,000. Our operating loss for fiscal 2006 improved from fiscal 2005 primarily as a result of our increase in sales margin as described above under "Net sales less cost of sales (exclusive of depreciation and depreciation)." Offsetting the increase in sales margin over fiscal 2005 were increases in distribution and selling expenses, particularly (i) additional personnel costs associated with merchandising, television production, show management and on-air talent, (ii) internet, direct-mail and marketing expenses, (iii) credit card fees and bad debt expense, (iv) increases in general and administrative expenses recorded in connection with salaries, accrued bonuses and information system service fees, and (v) increases in depreciation and amortization expense as a result of assets placed in service in connection with our various application software development and functionality enhancements, the details of which are discussed above. In addition, operating expenses increased over the prior year due to the recording of noncash stock option expense totaling $1,556,000 resulting from our adoption of SFAS No. 123(R) in the first quarter of fiscal 2006. We reported an operating loss from continuing operations of $18,646,000 for fiscal 2005 compared with an operating loss from continuing operations of $44,271,000 for fiscal 2004, an improvement of $25,625,000. Operating loss for fiscal 2005 improved from fiscal 2004 primarily as a result of the Company'sour increase in gross profitsales margin as described above under "Gross Profit""Net sales less cost of sales (exclusive of depreciation and depreciation)." Offsetting the increase in gross profitsales margin over fiscal 2004 were increases in distribution and selling expenses, particularly (i) net cable access fees, (ii) additional costs associated with merchandising, show and on-air talent and credit card fees, (iii) increases in general and administrative expenses recorded in connection with information system personnel salaries, consulting fees and software maintenance fees, and (iv) increases in depreciation and amortization expense as a result of assets placed in service in connection with the Company'sour various application software development and functionality enhancements. These expense increases were offset by the recording of a $294,000 pre-tax gain following the sale of a low power television station in the fourth quarter of fiscal 2005. The Company reported an operating loss from continuing operations of $44,271,000 for fiscal 2004 compared with an operating loss from continuing operations of $7,987,000 for fiscal 2003, an increase of $36,284,000. Operating loss for fiscal 2004 increased from prior year primarily as a result of the Company's decrease in gross margins as described above under "Gross Profits." In addition to the decrease in gross margin over fiscal 2003, there were increases in distribution and selling expenses, particularly net cable access fees and additional costs associated with merchandising, marketing and on-air talent, increases in general and administrative expenses recorded in connection with information system personnel salaries, recruiting costs and software maintenance fees and increases in depreciation and amortization expense as a result of assets placed in service in connection with the Company's various application software development and functionality enhancements. Additionally, the Company's fiscal 2004 operating loss also increased from fiscal 2003 due to $1,900,000 of asset impairment charge recorded in fiscal 2004 and a charge of $3,836,000 recorded in connection with costs associated with employee terminations. NET LOSS For fiscal 2006, we reported a net loss available to common shareholders of $2,685,000, or $0.07 per basic and diluted share, on 37,646,000 weighted average common shares outstanding. For fiscal 2005, the Companywe reported a net loss available to common shareholders of $16,040,000, or $0.43 per basic and diluted share, on 37,182,000 weighted average common shares outstanding. For fiscal 2004, the Companywe reported a net loss available to common shareholders of $57,886,000, or $1.57 per basic and diluted share, on 36,815,000 weighted average common shares outstanding. For fiscal 2003, the Company reported a netNet loss available to common shareholders was $11,675,000 or $.32 per basicfor fiscal 2006 includes the recording of $3,006,000 of equity in earnings from RLM, a $500,000 gain on the sale of an investment, a $150,000 write-down of a non-operating real estate asset held for sale, and diluted shareinterest income totaling $3,802,000 earned on 35,934,000 weighted average common shares outstanding.our cash and short-term investments. Net loss available to common shareholders for fiscal 2005 includes a net loss of $2,296,000 from discontinued operations, a $250,000 cash dividend received from RLM, a $256,000 write-down of a non operatingnon-operating real estate asset held for sale, the recording of $1,383,000 of equity in earnings of RLM, a $762,000 income tax benefit, and interest income totaling $3,048,000 earned on the Company'sour cash and short-term investments. Net loss available to common shareholders for fiscal 2004 includes a net loss of $14,882,000 from discontinued operations, a $250,000 cash dividend received from RLM, a $300,000 write-down of a non operatingnon-operating real estate asset held for sale, and interest income of $1,627,000 earned on the Company's cash and short-term investments. Net loss available to common shareholders for fiscal 2003 includes a net loss of $3,063,000 from discontinued operations, a pretax investment write-off totaling $2,011,000 relating to an investment in an Internet retailer whose decline in fair value was determined to be other than temporary, pretax gains of $361,000 recorded on the sale of security investments and interest income of $1,488,000 earned on the Company'sour cash and short-term investments. For fiscal years2006, 2005 2004 and 2003,2004, net loss reflects an income tax benefit (provision) of $(75,000), $762,000 $(25,000) and $(180,000)$(25,000), respectively, which resulted in a recorded effective tax rate of 3.2% in fiscal 2006, 4.9% in fiscal 2005 and 0% in fiscal 2004. We have recorded an income tax provision during fiscal 2006, fiscal 2005 and fiscal 2004 and (2.2)% in fiscal 2003. The Companyrelating to state income taxes payable on certain income for which there is no loss carryforward benefit available. We recorded an income tax benefit of $832,000 in the second quarter of fiscal 2005 related to the reversal of an income tax contingency reserve that expired in the quarter and was no longer required. The Company has recorded an income tax provision during fiscal 2005, fiscal 2004 and fiscal 2003 relating to state income taxes payable on certain income for which there is no loss carryforward benefit available. The Company hasWe have not recorded any other income tax benefit on the losses recorded during fiscal 2006, fiscal 2005 and fiscal 2004 and fiscal 200336 due to the uncertainty of realizing income tax benefits 36 in the future as indicated by the Company'sour recording of an income tax valuation reserve. Based on the Company'sour recent history of losses, a full valuation allowance has been recorded and was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on the Company'sour most recent operating results when assessing the need for a valuation allowance. Although management believes that the Company'sour recent operating losses were heavily affected by the attendant fixed costs associated with a significant expansion of cable homes, a challenging retail economic environment and a slowdown in consumer spending experienced by the Companyus and other merchandise retailers, the Company intendswe intend to maintain a full valuation allowance for itsour net deferred tax assets and net operating loss carryforwards until such point that the Company believeswe believe it is more likely than not that such assets will be realized in the future. PROGRAM DISTRIBUTION The Company's television home shopping program was available to approximately 61.9 million average FTE households for the twelve months ended February 4, 2006, approximately 57.7 million average FTE households for the twelve months ended January 31, 2005 and approximately 53.2 million average FTE households for the twelve months ended January 31, 2004. The Company's television home shopping programming is currently available through affiliation and time-block purchase agreements with approximately 1,300 cable or satellite systems. The Company also owns and operates a full-power television station in Boston, Massachusetts. Homes that receive the Company's television home shopping programming 24 hours a 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 that programming is received. The Company's television home shopping programming is also simulcast live 24 hours a day, 7 days a week through its Internet shopping website, www.shopnbc.com, which is not included in total FTE households. In December 2005, the Company completed the sale of its remaining low power television station and in March 2003, the Company completed the sale of ten of its eleven low power television stations. Management believes that the sale of these stations did not have a significant impact on the ongoing operations of the Company. QUARTERLY RESULTS The following summarized unaudited results of operations for the quarters in fiscal 20052006 and 20042005 have been prepared on the same basis as the annual financial statements and reflect adjustments (consisting of normal recurring adjustments) that the Company considerswe consider necessary for a fair presentation of results of operations for the periods presented. The Company'sOur results of operations have varied and may continue to 37 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. 37
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) FISCAL 2006: Net sales....................... $178,724 $186,982 $184,886 $216,683 $767,275 Net sales less cost of sales (exclusive of depreciation and amortization)................. 63,202 65,227 63,575 75,157 267,161 Sales margin.................... 35.4% 34.9% 34.4% 34.7% 34.8% Operating expenses.............. 67,120 67,923 68,322 73,275 276,640 Operating income (loss)......... (3,918) (2,696) (4,747) 1,882 (9,479) Other income, net............... 1,296 1,015 990 851 4,152 Income (loss) from continuing operations.................... (2,091) (696) (3,126) 3,517 (2,396) Net income (loss)............... $ (2,091) $ (696) $ (3,126) $ 3,517 $ (2,396) ======== ======== ======== ======== ======== Net income (loss) per share..... $ (.06) $ (.02) $ (.09) $ .09 $ (.07) ======== ======== ======== ======== ======== Net income (loss) per share -- assuming dilution............. $ (.06) $ (.02) $ (.09) $ .08 $ (.07) ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic......................... 37,679 37,736 37,628 37,484 37,646 ======== ======== ======== ======== ======== Diluted....................... 37,679 37,736 37,628 42,861 37,646 ======== ======== ======== ======== ======== FISCAL 2005: Net sales....................... $153,476 $169,492 $159,513 $209,370 $691,851 Gross profit....................Net sales less cost of sales (exclusive of depreciation and amortization)................. 51,298 59,694 54,487 73,465 238,944 GrossSales margin.................... 33.4% 35.2% 34.2% 35.1% 34.5% Operating expenses.............. 61,323 61,947 62,425 71,895 257,590 Operating income (loss)......... (10,025) (2,253) (7,938) 1,570 (18,646) Other income, net............... 917 487 717 923 3,044 Income (loss) from continuing operations.................... (9,114) (927) (6,845) 3,429 (13,457) Discontinued operations......... (1,582) (493) (221) -- (2,296) Net income (loss)............... $(10,697)$(10,696) $ (1,419)(1,420) $ (7,066) $ 3,429 $(15,753) ======== ======== ======== ======== ======== Net income (loss) per share..... $ (.29) $ (.04) $ (.19) $ .09 $ (.43) ======== ======== ======== ======== ======== Net income (loss) per share -- assuming dilution............. $ (.29) $ (.04) $ (.19) $ .08 $ (.43) ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic......................... 37,077 37,102 37,120 37,427 37,182 ======== ======== ======== ======== ======== Diluted....................... 37,077 37,102 37,120 43,077 37,182 ======== ======== ======== ======== ======== FISCAL 2004: Net sales....................... $153,072 $156,461 $139,480 $174,621 $623,634 Gross profit.................... 50,326 51,976 44,408 57,386 204,096 Gross margin.................... 32.9% 33.2% 31.8% 32.9% 32.7% Operating expenses.............. 57,524 59,304 65,626 65,913 248,367 Operating loss.................. (7,198) (7,328) (21,218) (8,527) (44,271) Other income, net............... 299 594 73 611 1,577 Loss from continuing operations.................... (6,899) (6,734) (21,145) (7,942) (42,719) Discontinued operations......... (1,004) (1,094) (13,480) 698 (14,882) Net loss........................ $ (7,903) $ (7,828) $(34,625) $ (7,245) $(57,601) ======== ======== ======== ======== ======== Net loss per share.............. $ (.22) $ (.21) $ (.94) $ (.20) $ (1.57) ======== ======== ======== ======== ======== Net loss per share -- assuming dilution...................... $ (.22) $ (.21) $ (.94) $ (.20) $ (1.57) ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic......................... 36,640 36,810 36,870 36,939 36,81537,077 37,102 37,120 37,427 37,182 ======== ======== ======== ======== ======== Diluted....................... 36,640 36,810 36,870 36,939 36,81537,077 37,102 37,120 43,077 37,182 ======== ======== ======== ======== ========
38 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES As of February 3, 2007 and February 4, 2006, and January 31, 2005, cash and cash equivalents and short-term investments were $71,294,000 and $82,350,000, and $100,581,000, respectively, a $18,231,000an $11,056,000 decrease. For fiscal 20052006 working capital decreased 38 $6,241,000increased $9,962,000 to $145,209,000$155,171,000 compared to working capital of $151,450,000$145,209,000 for fiscal 2004.2005. The current ratio was 2.5 at February 3, 2007 compared to 2.4 at February 4, 2006 compared to 2.7 at January 31, 2005.2006. SOURCES OF LIQUIDITY The Company'sOur principal sources of liquidity are itsour available cash, cash equivalents and short-term investments, accrued interest earned from itsour short-term investments and itsour operating cash flow, which is primarily generated from credit card receipts from sales transactions and the collection of outstanding customer accounts receivables. The timing of customer collections made pursuant to the Company'sour ValuePay installment program and the extent to which the Company extendswe extend credit to itsour customers is important to the Company'sour short-term liquidity and cash resources. A significant increase in the Company'sour accounts receivable aging or credit losses could negatively impact the Company'sour source of cash from operations in the short term. While credit losses have historically been within the Company'sour estimates for such losses, there is no guarantee that the Companywe will continue to experience the same credit loss rate that it haswe have had in the past. Historically, the Company haswe have also been able to generate additional cash sources from the proceeds of stock option exercises and from the sale of its equity investments and other properties; however, these sources of cash are neither relied upon nor controllable by the Company. The Company hasus. We have no long-term debt other than fixed capital lease obligations and believes it hasbelieve we have the ability to obtain additional financing if necessary. At February 3, 2007 and February 4, 2006, and January 31, 2005, short-term investments and cash equivalents were invested primarily in money market funds, high quality commercial paper with original maturity dates of less than 270 days and investment grade corporate and municipal bonds and other tax advantaged certificatesauction rate securities with tender option terms ranging from one month to one year. Although management believes the Company'sour short-term investment policy is conservative in nature, certain short-term investments in commercial paper can be exposed to the credit risk of the underlying companies to which they relate and interest earned on these investments areis subject to interest rate fluctuations. The maturities and tender option terms within the Company'sour investment portfolio generally range from 30-18030 to 180 days. CASH REQUIREMENTS The Company'sOur principal use of cash is to fund itsour business operations, which consist primarily of purchasing inventory for resale, funding account receivables growth in support of sales growth and funding operating expenses, particularly the Company'sour contractual commitments for cable and satellite programming and the funding of capital expenditures. Expenditures made for property and equipment in fiscal 20052006 and 20042005 and for expected future capital expenditures include the upgrade and replacement of computer software and front-end merchandising systems, expansion of capacity to support the Company'sour growing business, continued improvements and modifications to the Company'sour owned headquarter buildings and the upgrade and digitalization of television production and transmission equipment and related computer equipment associated with the expansion of the Company'sour home shopping business and e-commerce initiatives. In addition, during fiscal 2003 the Company made a significant investment of cash in connection with the acquisition of television station WWDP TV-46 in Boston, Massachusetts and two commercial buildings where the Company maintains its corporate administrative, television production and jewelry distribution operations. Historically, the Company haswe have also used itsour cash resources for various strategic investments and for the repurchase of stock under stock repurchase programs but isare under no obligation to continue doing so if protection of liquidity is desired. The Company has the discretion in the future to reauthorizeWe have authorized a $10 million stock repurchase program and mayhave the discretion to repurchase stock under the program and make strategic investments as opportunities present themselves or when cash investments are determined to be beneficial to the long-term interests of its shareholders. The Companyconsistent with our business strategy. We ended fiscal 20052006 with cash and cash equivalents and short-term investments of $82,350,000,$71,294,000, and no long-term debt and $130,000 of long-term capital lease obligations. The Company expectsWe expect future growth in working capital as revenues grow beyond fiscal 20052006 but expectsexpect cash generated from operations to partially offset the expected use. The Company believes itsWe believe our existing cash balances and itsour ability to raise additional financing will be sufficient to fund itsour obligations and commitments as they come due on a long-term basis as well asand sufficient to fund potential foreseeable contingencies. These estimates are subject to normal business risk factors, including those identified under "Business -- Risk"Risk Factors." In addition to these Risk Factors,risk factors, a significant 39 element of uncertainty in future cash flows arises from potential strategic investments the Companywe may make, which are inherently opportunistic and difficult to predict. The Company believesWe believe existing cash balances, itsour ability to raise financing and the ability to structure transactions in a manner 39 reflective of capital availability will be sufficient to fund any investments while maintaining sufficient liquidity for itsour normal business operations. Total assets at February 4, 20063, 2007 were $347,139,000$351,980,000 compared to $350,296,000$347,139,000 at January 31, 2005.February 4, 2006. Shareholders' equity was $198,847,000 at February 3, 2007 compared to $202,871,000 at February 4, 2006, compared to $216,812,000 at January 31, 2005, a decrease of $13,941,000.$4,024,000. The decrease in shareholders' equity from fiscal 2005 to fiscal 2006 resulted primarily from the net loss of $2,396,000 recorded during the year, common stock repurchases of $4,699,000 and accretion on redeemable preferred stock of $289,000. These decreases were offset by increases in shareholders' equity of $1,901,000 related to the recording of share-based compensation and $1,459,000 primarily from proceeds received related to the exercise of stock options. The decrease in shareholders' equity from fiscal 2004 to fiscal 2005 resulted primarily from the net loss of $15,753,000 recorded during the year and accretion on redeemable preferred stock of $287,000. These decreases were offset by increases in shareholders' equity of $1,906,000 related to the exercise of stock options and vesting of deferred compensation of $190,000. As of February 4, 2006, the Companywe had long-term debt obligations totaling $130,000 related to assets purchased under capital lease arrangements. The decrease in shareholders' equity from fiscal 2003 to fiscal 2004 resulted primarily from the net loss of $57,601,000 recorded during the year, $53,000 relating to accrued interest on a note receivable from a former officer and accretion on redeemable preferred stock of $285,000. These decreases were offset by increases in shareholders' equity of $3,046,000 related to the exercise of stock options, $4,211,000 from proceeds received on notes receivable and vesting of deferred compensation of $486,000. As of January 31, 2005, the Company had long-term debt obligations totaling $1,380,000 related to assets purchased under capital lease arrangements. For fiscal 2005,2006, net cash provided by operating activities totaled $3,542,000 compared to net cash used for operating activities totaledof $10,374,000 compared toin fiscal 2005 and net cash used for operating activities of $18,070,000 in fiscal 20042004. Net cash provided by operating activities for fiscal 2006 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, common stock issued to employees, amortization of deferred revenue, gain on sale of property and investments, asset impairments and write off charges, proceeds from RLM dividends and equity in net income of affiliates. In addition, net cash provided by operating activities for fiscal 2006 reflects decreases in inventory, prepaid expenses and other assets, an increase in deferred revenue, accounts payable and accrued liabilities, offset by an increase in accounts receivable. Inventories decreased primarily as a result of $3,368,000our strong fourth quarter sales activity and management's focused effort to reduce overall inventory levels. Prepaid expenses decreased primarily as a result of the timing of prepaid cable access fees. The increase in fiscal 2003.deferred revenue was primarily the result of receiving upfront cash payments in connection with our new private label and co-branded credit card program. The increase in accounts payable and accrued expenses is a result of increases associated with accrued salaries, accrued cable access and marketing fees, offset primarily by amounts due to customers for returns. Accounts receivable increased primarily due to the overall increase in net sales and specifically due to increases in sales made utilizing extended payment terms and the timing of customer collections made under our ValuePay installment program. Net cash used for operating activities for fiscal 2005 reflects a net loss, as adjusted for depreciation and amortization, common stock issued to employees, amortization of deferred compensation, asset impairment charges,gain on sale of television stations, gain on sale of property and investments, gain on sale of television stations,asset impairment and write off charges, equity in net income of affiliates, a noncash tax benefit recorded in fiscal 2005 and a gain on the termination of a long-term lease associated with FanBuzz recorded in fiscal 2005.FanBuzz. In addition, net cash used for operating activities for fiscal 2005 reflects an increase in inventories, accounts receivable and prepaid expenses and other assets, offset by an increase in accounts payable and accrued liabilities. Inventories increased primarily in preparation for the fourth quarter anticipated strong holiday season and as a direct result of the Company'sour effort to diversify itsour product mix offerings. Accounts receivable increased primarily due to an increase in receivables from sales utilizing extended payment terms and the timing of customer collections under the "ValuePay"ValuePay installment program. Prepaid expenses and other assets increased primarily as a result of an increase in prepaid cable access fees due to the timing of payments, an increase in deferred satellite rent, offset by a decrease in prepaid postage. The increase in accounts payable and accrued liabilities is a direct result of the increase in inventory levels and the timing of merchandise receipts. In addition, accounts payable and accrued liabilities increased as a result of the timing of payments made for accrued cable access and marketing fees, offset by a decrease in accrued salaries and a decrease in amounts due to customers for returned merchandise. Net cash used for operating activities for fiscal 2004 reflects a net loss, as adjusted for depreciation and amortization, common stock issued to employees, amortization of deferred compensation, loss on sale of property and investments and asset impairment charges recorded in fiscal 2004. In addition, net cash used for operating activities for fiscal 2004 reflects a decrease in inventories and an increase in accounts payable and 40 accrued expenses, offset by an increase in accounts receivable and prepaid expenses and other. Inventories decreased primarily as a result of the Company'sour strong fourth quarter sales activity and management's focused effort to reduce overall inventory levels. The increase in accounts payable and accrued expenses is a result of the timing of payments related to long-term cable access fees, accrued severance recorded in connection with the third quarter employee terminations and the timing of merchandise receipts. Accounts receivable increased due to an increase in sales made utilizing extended payment terms for the ValuePay installment program and increased credit card sales directly resulting from increased sales. Prepaid expenses and other increased primarily as a result of the Company'sour temporary acquisition of a personal residence in conjunction with an executive's hiring and relocation, increases in prepaid maintenance and salary contracts, postage and deferred rent offset by a decrease in deferred television advertising costs. 40 Net cash provided by operating activities for fiscal 2003 reflects a net loss, as adjusted for depreciation and amortization, common stock issued to employees, vesting of deferred compensation, gain on sale of television stations, gain on sale and conversion of investments and write-down of investments. In addition, net cash provided by operating activities for fiscal 2003 reflects a decrease in accounts receivable and prepaid expenses, offset by an increase in inventories and a decrease in accounts payable and accrued liabilities. Accounts receivable decreased primarily due to the first quarter receipt of $11.0 million from RLM resulting from VVIFC's agreement to amend the RLM customer care and fulfillment services agreement in fiscal 2002. Receivables also decreased as a result of the timing of customer collections made from the ValuePay installment program and an increase in the percentage of sales made using the ShopNBC credit card, which is non-recourse to the Company. These decreases were offset by an increase in credit card receivables as a result of increased sales. Inventories increased from fiscal 2002 primarily to support increased sales volume during the fiscal 2003 holiday season and as a direct result of the Company's effort to diversify its product mix offerings and the timing of merchandise receipts. Prepaid expenses decreased primarily as a result of the timing of long-term cable access fee payments and decreases in prepaid rent, deferred advertising and postage. The decrease in accounts payable and accrued liabilities is primarily due to the timing of vendor payments and a decrease in amounts due to customers for merchandise returns over fiscal 2002. The Company utilizesWe utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to six equal monthly credit card installments. As of February 4, 2006, the Company3, 2007, we had approximately $77,447,000$105,197,000 due from customers under the ValuePay installment program, compared to $61,894,000$77,447,000 at January 31, 2005.February 4, 2006. The increase in ValuePay receivables from fiscal 20042005 is primarily the result of increased sales made utilizing extended payment terms and the general increase in overall sales over the prior year. ValuePay was introduced many years ago to increase sales and to respond to similar competitive programs while at the same time reducing return rates on merchandise with above average selling prices. The Company recordsWe record a reserve for uncollectible accounts in itsour financial statements in connection with ValuePay installment sales and intendsintend to continue to sell merchandise using the ValuePay program. Receivables generated from the ValuePay program will be funded in fiscal 20062007 from the Company'sour present capital resources and future operating cash flows. Net cash used for investing activities totaled $1,562,000 in fiscal 2006, compared to net cash used for investing activities of $10,111,000 in fiscal 2005 compared toand net cash used for investing activities of $2,304,000 in fiscal 2004 and net cash provided by investing activities of $23,003,000 in fiscal 2003.2004. Expenditures for property and equipment were $11,470,000 in fiscal 2006 compared to $9,750,000 in fiscal 2005 compared toand $14,722,000 in fiscal 2004 and $23,489,000 in fiscal 2003.2004. Expenditures for property and equipment during fiscal 2006, fiscal 2005 and fiscal 2004 and fiscal 2003 primarily include capital expenditures made for the upgrade and replacement of computer software and front-end ERP, customer care management and merchandising systems, related computer equipment, digital broadcasting equipment and other office equipment, warehouse equipment, production equipment and building improvements. Expenditures for property during fiscal 2003 also included the Company's $11,300,000 property and commercial building purchase in February 2003 where the Company maintains its corporate administrative, television production and jewelry distribution operations. Included as part of the acquisition was a second commercial building, which the Company utilizes for additional office space. Principal future capital expenditures are expected to include the upgrade and replacement of various enterprise software systems, continued improvements and modifications to the Company'sour owned headquarter buildings, the expansion of warehousing capacity, the upgrade and digitalization of television production and transmission equipment and related computer equipment associated with the expansion of the Company'sour home shopping business and e-commerce initiatives. During fiscal 2006, we invested $21,627,000 in various short-term investments, received proceeds of $31,035,000 from the sale of short-term investments and received proceeds of $500,000 from the sale of an internet investment previously written off. During fiscal 2005, the Companywe invested $80,454,000 in various short-term investments, received proceeds of $79,193,000 from the sale of short-term investments, received proceeds of $400,000 in connection with the sale of a low power television station and received proceeds of $500,000 from the sale of property and equipment in connection with the shut down of FanBuzz. During fiscal 2004, the Companywe invested $128,397,000 in various short-term investments, received proceeds of $136,604,000 from the sale of short-term investments and received proceeds of $4,211,000 in connection with a note receivable from a former officer. DuringNet cash used for financing activities totaled $3,627,000 in fiscal 2003,2006 and related primarily to payments made of $4,699,000 in conjunction with the Company invested $72,969,000 in various short-term investments,repurchase of 406,000 shares of our common stock and payments of long-term lease obligations of $363,000, offset by cash proceeds received proceeds of $140,346,000$1,435,000 from the saleexercise of short-term investments and received proceeds of $5,000,000 in 41 connection with the sale of ten low power television stations. Also during fiscal 2003, the Company invested $33,466,000, net of cash acquired, in connection with the acquisition of television station WWDP TV-46 in Boston, Massachusetts and received proceeds of $7,581,000 from the sale of common stock investments.options. Net cash provided by financing activities totaled $988,000 in fiscal 2005 and related primarily to cash proceeds received of $1,869,000 from the exercise of stock options, offset by payments of long-term capital lease obligations of $881,000. Net cash provided by financing activities totaled $1,981,000 in fiscal 2004 and related primarily to cash proceeds received of $3,024,000 from the exercise of stock options, offset by payments of long-term capital lease obligations of $1,043,000. Net cash used for financing activities totaled $447,000 in fiscal 2003 and related primarily to payments made of $6,429,000 in conjunction with the repurchase of 586,000 shares of the Company's common stock at an average price of $10.97 per share and payments of long-term capital lease obligations of $1,155,000, offset by cash proceeds received of $7,137,000 from the exercise of stock options.41 CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS The following table summarizes the Company'sour obligations and commitments as of February 4, 2006,3, 2007, and the effect these obligations and commitments are expected to have on theour liquidity and cash flow of the Company in future periods:
PAYMENTS DUE BY PERIOD (IN THOUSANDS) ---------------------------------------------------------------------------------------------------------------------- LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS -------- --------- --------- --------------------- ------------ --------- Cable and satellite agreements(a).................. $412,288 $101,015 $190,057 $67,778 $53,438$344,762 $110,118 $139,689 $66,672 $28,283 Employment agreements............ 6,733 4,994 1,7395,034 3,822 1,212 -- -- Operating leases................. 24,444 1,921 4,168 4,020 14,33522,898 2,387 4,164 4,029 12,318 Capital leases................... 527 386 141 141 -- -- -- Purchase order obligations....... 50,109 50,10948,875 48,875 -- -- -- -------- -------- -------- ------- ------- Total.......................... $494,101 $158,425 $196,105 $71,798 $67,773$421,710 $165,343 $145,065 $70,701 $40,601 ======== ======== ======== ======= =======
- --------------- (a) Future cable and satellite payment commitments are based on subscriber levels as of February 4, 20063, 2007 and future payment commitment amounts could increase or decrease as the number of cable and satellite subscribers increase or decrease. Under certain circumstances, operators may cancel their agreements prior to expiration. IMPACT OF INFLATION The Company believesWe believe that inflation has not had a material impact on itsour results of operations for each of the fiscal years in the three-year period ended February 4, 2006. The Company3, 2007. We cannot assure you that inflation will not have an adverse impact on itsour operating results and financial condition in future periods. TRANSACTIONS BY GE CAPITAL EQUITY INVESTMENTS, INC. On February 9, 2005, GE Commercial Finance -- Equity ("GE Equity"), the Company's largest shareholder, entered into agreements to sell 2,000,000 shares of the Company's common stock in privately negotiated transactions. On July 8, 2005, GE Equity entered into agreements to sell an additional 2,604,932 shares of the Company's common stock in privately negotiated transactions to different purchasers. In connection with such transactions, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 29, 2005 with respect to an aggregate of 4,604,932 shares of the Company's common stock, pursuant to contractual registration rights obligations. The Company received no proceeds from the sale of the shares covered by the registration statement. 42 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2004,February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Accounting Standards Board issued a revision to Statement ofAssets and Financial Accounting Standards No. 123, "Share-Based Payment"Liabilities" ("SFAS No. 123(R)"159"). The revision requires allThis statement permits entities to recognize compensation expense in an amount equalchoose to themeasure many financial instruments and certain other items at fair valuevalue. The provisions of share-based payments granted to employees. The statement eliminates the alternative method of accountingSFAS No. 159 are effective for employee share-based payments previously available under Accounting Principles Board Opinion No. 25. The statement is effective as of the first quarter of fiscal 2006. The Company has not completed the process ofyears beginning after November 15, 2007. We are currently evaluating the full financial statement impacteffect that will result from the adoption of SFAS No. 123(R). See Note 2, "Stock-Based Compensation"159 will have on our consolidated results of operations and financial condition. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), to establish a consistent framework for the Company's disclosure regarding the pro forma effectsmeasuring fair value and expand disclosures on fair value measurements. The provisions of SFAS No. 123157 are effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS No. 157 will have on the Company'sour consolidated results of operations and financial statements.condition. In December 2004,July 2006, the FASB issued Statement of Financial Accounting StandardsFASB Interpretation No. 153, "Exchanges of Nonmonetary Assets"48 ("SFAS No. 153"FIN 48"), an amendmentAccounting for Uncertainty in Income Taxes -- An interpretation of APB OpinionFASB Statement No. 29, "Accounting109. FIN 48 prescribes a comprehensive model for Nonmonetary Transactions". SFAS No. 153 requires all nonmonetary exchangesrecognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be recorded at fair value, unless thetaken on a tax return, including a decision whether to file or not to file a tax return in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets exchanged do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 was effective for all nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company's adoptionapplication of SFAS No. 153 did not have a significant impact on its financial statements. In March 2004, the EITF reached a consensus on Issue No. 03-1, "The meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securitiesFIN 48, these will be accounted for under SFAS No. 115as an adjustment to retained earnings. We are currently assessing the impact of FIN 48 on our consolidated results of operations and non-marketable equity securities accounted for under the cost method. The EITF developedfinancial position. SUBSEQUENT EVENT On March 26, 2007, our wholly-owned subsidiary VVIFC and RLM entered into a basic three-step model to evaluate whether an investment is other-than temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position ("FSP") No. 115-1 and FSP No. 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The FSP addresses when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequentrider to the recognitionexisting agreement for services (as amended) under which VVIFC provides RLM with fulfillment and certain customer support services. The term of the agreement for services, as amended in October 2006, extends through August 2008. Pursuant to the terms of the rider, VVIFC and RLM further agreed to certain changes 42 to the agreement for services (as amended), including VVIFC's agreement to extend the term of the agreement through mid-2009 if so requested by RLM. On March 28, 2007, we entered into a membership interest purchase agreement with Polo Ralph Lauren, NBC and certain NBC affiliates, pursuant to which we sold our 12.5% membership interest in RLM to Polo Ralph Lauren for an other-than-temporary impairmentaggregate purchase price of $43,750,000. The full text of the purchase agreement is attached as an exhibit to our Current Report on Form 8-K filed with the SEC on April 3, 2007. Concurrently with the execution of the purchase agreement, we also entered into an amendment to the license agreement (for the limited, worldwide use of NBC trademarks, service marks, domain names and requireslogos), under which NBC agreed to extend the term of the license agreement to May 15, 2011 and to certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effectivelimitations on NBC's right to terminate the license agreement in the event of a change in control of our company involving a financial buyer. On the same date, we also entered into an amendment to the distribution agreement with NBC providing for reporting periods beginning after December 15, 2005a reduction in the annual affiliate relations and is requiredmarketing fee paid by us to be adopted by the Company in fiscal 2006. The Company's adoption of this accounting principle is not expectedNBC to have a significant impact on its financial statements.market rate. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company doesWe do not enter into financial instruments for trading or speculative purposes and doesdo not currently utilize derivative financial instruments as a hedge to offset market risk. The Company hasWe have held certain equity investments in the form of common stock purchase warrants in public companies and accounted for these investments in accordance with the provisions of SFAS No. 133. As of January 31, 2003, the Company no longer hadWe currently do not have investments in the form of common stock purchase warrants. TheOur operations of the Company are conducted primarily in the United States and as such are not subject to foreign currency exchange rate risk. However, some of the Company'sour products are sourced internationally and may fluctuate in cost as a result of foreign currency swings. The Company hasWe have no long-term debt other than fixed capital lease obligations, and accordingly, isare not significantly exposed to interest rate risk, although changes in market interest rates do impact the level of interest income earned on the Company'sour substantial cash and short-term investment portfolio. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF VALUEVISION MEDIA, INC. AND SUBSIDIARIES
PAGE ---- Report of Independent Registered Public Accounting Firm..... 45 Consolidated Balance Sheets as of February 3, 2007 and February 4, 2006 and January 31, 2005..........................................2006.......................................... 46 Consolidated Statements of Operations for the Years Ended February 3, 2007, February 4, 2006 January 31, 2005 and January 31, 2004...2005... 47 Consolidated Statements of Shareholders' Equity for the Years Ended February 3, 2007, February 4, 2006 January 31, 2005 and January 31, 2004..................................................2005.................................................. 48 Consolidated Statements of Cash Flows for the Years Ended February 3, 2007, February 4, 2006 January 31, 2005 and January 31, 2004...2005... 49 Notes to Consolidated Financial Statements.................. 50 Financial Statement Schedule -- Schedule II -- Valuation and Qualifying Accounts....................................... 83
44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors ValueVision Media, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of ValueVision Media, Inc. and Subsidiaries (the "Company") as of February 3, 2007 and February 4, 2006 and January 31, 2005 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years ended February 3, 2007, February 4, 2006 January 31, 2005 and January 31, 2004.2005. Our audits also included Schedule II: Valuation and Qualifying Accounts for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, included in Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of ValueVision Media, Inc. and Subsidiaries as of February 3, 2007 and February 4, 2006, and January 31, 2005, and the results of its operations and its cash flows for each of the years ended February 3, 2007, February 4, 2006 and January 31, 2005 and January 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the February 3, 2007, February 4, 2006 and January 31, 2005 and January 31, 2004 financial statement schedule,schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 and Note 6 to the consolidated financial statements, in fiscal 2006 the Company changed its method of accounting for stock-based compensation. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of February 4, 2006,3, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 19, 2006,11, 2007, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota April 19, 200611, 2007 45 VALUEVISION MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FEBRUARY 3, FEBRUARY 4, JANUARY 31,2007 2006 2005 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 43,14341,496 $ 62,64043,143 Short-term investments.................................... 29,798 39,207 37,941 Accounts receivable, net.................................. 117,169 87,478 79,405 Inventories............................................... 66,622 67,844 54,903 Prepaid expenses and other................................ 5,360 8,357 5,635 --------- ----------------- Total current assets................................... 260,445 246,029 240,524 PROPERTY AND EQUIPMENT, NET................................. 40,107 46,958 52,725 FCC BROADCASTING LICENSE.................................... 31,943 31,943 NBC TRADEMARK LICENSE AGREEMENT, NET........................ 12,234 15,461 18,687 CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET............. 1,759 2,654 3,550 OTHER INTANGIBLE ASSETS, NET................................ -- 68 INVESTMENTS AND OTHER ASSETS................................ 5,492 4,094 2,799 --------- ----------------- $ 351,980 $ 347,139 $350,296 ========= ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 60,59757,196 $ 48,01260,597 Accrued liabilities....................................... 47,709 40,223 41,062Deferred revenue.......................................... 369 -- --------- ----------------- Total current liabilities.............................. 105,274 100,820 89,074OTHER LONG-TERM CAPITAL LEASE OBLIGATIONS.........................OBLIGATIONS................................. 2,553 130 1,380DEFERRED REVENUE............................................ 1,699 -- COMMITMENTS AND CONTINGENCIES (Notes 8 and 9) SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, 5,339,500 SHARES AUTHORIZED; 5,339,500 SHARES ISSUED AND OUTSTANDING.................................... 43,607 43,318 43,030 SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized; 37,643,67637,593,768 and 37,043,91237,643,676 shares issued and outstanding............................................ 376 370376 Warrants to purchase 6,380,5834,036,858 and 7,630,5836,380,583 shares of common stock........................................... 22,972 34,029 46,683 Additional paid-in capital................................ 287,541 278,266 264,005 Deferred compensation..................................... -- (154) (353) Accumulated deficit....................................... (112,042) (109,646) (93,893) --------- ----------------- Total shareholders' equity............................. 198,847 202,871 216,812 --------- ----------------- $ 351,980 $ 347,139 $350,296 ========= =================
The accompanying notes are an integral part of these consolidated financial statements. 46 VALUEVISION MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED ------------------------------------------------ FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 -------------- -------------- -------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NET SALES............................................. $ 767,275 $ 691,851 $ 623,634 $ 591,185 COST OF SALES (exclusive of depreciation and amortization shown below)........................... 500,114 452,907 419,538 381,677 ----------- ----------- ----------- Gross profit........................................ 238,944 204,096 209,508 ----------- ----------- ----------- OPERATING (INCOME) EXPENSES: Distribution and selling............................ 226,450 212,369 203,159 181,520 General and administrative.......................... 27,922 24,864 20,552 17,368 Depreciation and amortization....................... 22,239 20,569 18,920 16,399 Asset impairments................................... 29 -- 1,900 -- Employee termination costs.......................... -- 82 3,836 2,000 CEO transition costs................................ -- -- 4,625 Gain on sale of television stations.................station.................. -- (294) -- (4,417) ----------- ----------- ----------- Total operating expenses......................... 276,640 257,590 248,367 217,495 ----------- ----------- ----------- OPERATING LOSS........................................ (9,479) (18,646) (44,271) (7,987) ----------- ----------- ----------- OTHER INCOME (EXPENSE): Gain on sale and conversion of investments.......... -- -- 361 Write-down of investments........................... -- -- (2,011) Other............................................... 350 (4) (50) -- Interest income..................................... 3,802 3,048 1,627 1,488 ----------- ----------- ----------- Total other income (expense)..................... 4,152 3,044 1,577 (162) ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN NET INCOME OF AFFILIATES.............. (5,327) (15,602) (42,694) (8,149) Income tax benefit (provision)...................... (75) 762 (25) (180) Equity in net income of affiliates.................. 3,006 1,383 -- -- ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS....................... (2,396) (13,457) (42,719) (8,329) DISCONTINUED OPERATIONS: Loss from discontinued FanBuzz operations, net of tax.............................................. -- (2,296) (14,882) (3,063) ----------- ----------- ----------- NET LOSS.............................................. (2,396) (15,753) (57,601) (11,392) ACCRETION OF REDEEMABLE PREFERRED STOCK............... (289) (287) (285) (283) ----------- ----------- ----------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS............. $ (2,685) $ (16,040) $ (57,886) $ (11,675) =========== =========== =========== NET LOSS PER COMMON SHARE: Continuing operations............................... $ (0.07) $ (0.37) $ (1.17) $ (0.23) Discontinued operations............................. -- (0.06) (0.40) (0.09) ----------- ----------- ----------- Net loss......................................... $ (0.07) $ (0.43) $ (1.57) $ (0.32) =========== =========== =========== NET LOSS PER COMMON SHARE -- ASSUMING DILUTION: Continuing operations............................... $ (0.07) $ (0.37) $ (1.17) $ (0.23) Discontinued operations............................. -- (0.06) (0.40) (0.09) ----------- ----------- ----------- Net loss......................................... $ (0.07) $ (0.43) $ (1.57) $ (0.32) =========== =========== =========== Weighted average number of common shares outstanding: Basic............................................... 37,646,162 37,181,717 36,815,044 35,933,601 =========== =========== =========== Diluted............................................. 37,646,162 37,181,717 36,815,044 35,933,601 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 47 VALUEVISION MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 3, 2007, FEBRUARY 4, 2006 AND JANUARY 31, 2005 AND JANUARY 31, 2004
ACCUMULATED COMMON STOCK COMMON OTHER COMPREHENSIVE ------------------ STOCK ADDITIONAL COMPREHENSIVE INCOME NUMBER OF PAR PURCHASE PAID-IN INCOME DEFERRED (LOSS) SHARES VALUE WARRANTS CAPITAL (LOSSES) COMPENSATION ------------- ---------- ----- -------- ---------- ------------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, JANUARY 31, 2003........ 36,171,250 $362 $47,638 $258,091 $(2,517) -- Comprehensive loss:2004..... 36,487,821 $365 $ 47,638 $260,100 $(646) Net loss..................... $(11,392) -- -- -- -- -- -- Other comprehensive income (loss), net of tax: Unrealized gains on securities, net of tax..... 2,517 -- -- -- -- 2,517 -- -------- Comprehensive loss:........ $ (8,875)loss.................... $(57,601) ======== Increase in note receivable from officer........................officer................ -- -- -- -- -- Proceeds received on notes receivable.................. -- -- -- -- -- Exercise of stock options and common stock issuances......... 902,671 9 -- 7,154 -- -- Issuance of restricted stock..... -- -- -- 1,491 -- (1,491) Amortization of deferred compensation................... -- -- -- -- -- 845 Repurchases of common stock...... (586,100) (6) -- (6,423) -- -- Accretion on redeemable preferred stock.......................... -- -- -- (213) -- -- ---------- ---- ------- -------- ------- ------- BALANCE, JANUARY 31, 2004........ 36,487,821 365 47,638 260,100 -- (646) Net loss..................... $(57,601) ======== Increase in note receivable from officer........................ -- -- -- -- -- -- Proceeds received on notes receivable..................... -- -- -- -- -- -- Exercise of stock options and common stock issuances.........issuances...... 454,582 4 -- 3,042 -- -- Exercise of stock purchase warrants.......................warrants.................... 101,509 1 (955) 955 -- -- Issuance of restricted stock.....stock....................... -- -- -- 308 -- (308) Restricted stock forfeited.......forfeited.... -- -- -- (115) -- 115 Amortization of deferred compensation................... --compensation................ -- -- -- -- 486 Accretion on redeemable preferred stock..........................stock............. -- -- -- (285) -- -- ---------- ---- ------- -------- ------- --------------- ----- BALANCE, JANUARY 31, 2005........2005..... 37,043,912 370 46,683 264,005 -- (353) Net loss.....................loss.................... $(15,753) ======== Exercise of stock options and common stock issuances.........issuances...... 318,564 3 -- 1,903 -- -- Exercise of stock purchase warrants.......................warrants.................... 281,200 3 (5,378) 5,378 -- -- Stock purchase warrants forfeited......................forfeited................... -- -- (7,276) 7,276 -- -- Restricted stock forfeited.......forfeited.... -- -- -- (9) -- 9 Amortization of deferred compensation................... --compensation................ -- -- -- -- 190 Accretion on redeemable preferred stock..........................stock............. -- -- -- (287) -- ---------- ---- -------- -------- ----- BALANCE, FEBRUARY 4, 2006..... 37,643,676 376 34,029 278,266 (154) Net loss.................... $ (2,396) ======== Repurchase of common stock.... (405,685) (4) -- (4,695) -- Exercise of stock options and common stock issuances...... 355,777 4 -- 1,455 -- Stock purchase warrants forfeited................... -- -- (11,057) 11,057 -- Share-based payment compensation................ -- -- -- 1,901 -- Effect of accounting change (SFAS 123R)................. -- -- -- (154) 154 Accretion on redeemable preferred stock............. -- -- -- (289) -- ---------- ---- ------- -------- ------- --------------- ----- BALANCE, FEBRUARY 4, 2006........ 37,643,6763, 2007..... 37,593,768 $376 $34,029 $278,266$ 22,972 $287,541 $ -- $ (154) ========== ==== ======= ======== ======= =============== ===== NOTE RECEIVABLE FROM TOTAL FORMER ACCUMULATED SHAREHOLDERS' OFFICER DEFICIT EQUITY ---------- ----------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, JANUARY 31, 2003........ $(4,098)2004..... $(4,158) $ (24,830) $274,646 Comprehensive loss:(36,292) $267,007 Net loss..................... -- (11,392) (11,392) Other comprehensive income (loss), net of tax: Unrealized gains on securities, net of tax..... -- -- 2,517 Comprehensive loss:........ Increase in note receivable from officer........................ (60) -- (60) Exercise of stock options and common stock issuances......... -- -- 7,163 Issuance of restricted stock..... -- -- -- Amortization of deferred compensation................... -- -- 845 Repurchases of common stock...... -- -- (6,429) Accretion on redeemable preferred stock.......................... -- (70) (283) ------- --------- -------- BALANCE, JANUARY 31, 2004........ (4,158) (36,292) 267,007 Net loss.....................loss.................... (57,601) (57,601) Increase in note receivable from officer........................officer................ (53) -- (53) Proceeds received on notes receivable.....................receivable.................. 4,211 -- 4,211 Exercise of stock options and common stock issuances.........issuances...... -- -- 3,046 Exercise of stock purchase warrants.......................warrants.................... -- -- 1 Issuance of restricted stock.....stock....................... -- -- -- Restricted stock forfeited.......forfeited.... -- -- -- Amortization of deferred compensation...................compensation................ -- -- 486 Accretion on redeemable preferred stock..........................stock............. -- -- (285) ------- --------- -------- BALANCE, JANUARY 31, 2005........2005..... -- (93,893) 216,812 Net loss.....................loss.................... (15,753) (15,753) Exercise of stock options and common stock issuances.........issuances...... -- -- 1,906 Exercise of stock purchase warrants.......................warrants.................... -- -- 3 Stock purchase warrants forfeited......................forfeited................... -- -- -- Restricted stock forfeited.......forfeited.... -- -- -- Amortization of deferred compensation...................compensation................ -- -- 190 Accretion on redeemable preferred stock..........................stock............. -- -- (287) ------- --------- -------- BALANCE, FEBRUARY 4, 2006........2006..... -- (109,646) 202,871 Net loss.................... (2,396) (2,396) Repurchase of common stock.... -- -- (4,699) Exercise of stock options and common stock issuances...... -- -- 1,459 Stock purchase warrants forfeited................... -- -- -- Share-based payment compensation................ -- -- 1,901 Effect of accounting change (SFAS 123R)................. -- -- -- Accretion on redeemable preferred stock............. -- -- (289) ------- --------- -------- BALANCE, FEBRUARY 3, 2007..... $ -- $(109,646) $202,871$(112,042) $198,847 ======= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 48 VALUEVISION MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED --------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 ----------- ----------- ----------- (IN THOUSANDS) OPERATING ACTIVITIES: Net loss.................................................. $ (2,396) $(15,753) $(57,601) $(11,392)$ (57,601) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization.......................... 22,239 20,871 20,120 17,846Share-based payment compensation....................... 1,901 -- -- Common stock issued to employees....................... 24 37 22 26Amortization of deferred revenue....................... (119) -- -- Vesting of deferred compensation....................... -- 190 486 845 Gain on sale of television stations....................station..................... -- (294) -- (4,417) Loss (gain) on sale of property and investments........ (500) (250) 34 (361) Write-down of investments.............................. -- -- 2,011 Asset impairments......................................impairments and writeoffs........................ 179 400 13,202 -- Equity in net income of affiliates..................... (3,006) (1,383) -- RLM dividends.......................................... 250 -- -- Noncash lease termination benefit...................... -- (924) -- -- Noncash tax benefit.................................... -- (832) -- -- Changes in operating assets and liabilities, net of businesses acquired: Accounts receivable.................................. (29,691) (8,073) (8,239) 5,568 Inventories.......................................... 1,222 (12,941) 12,717 (6,374) Prepaid expenses and other........................... 3,594 (3,416) (3,417) 3,107Deferred revenue..................................... 2,188 -- -- Accounts payable and accrued liabilities............. 7,657 11,994 4,606 (3,491) -------- -------- ----------------- Net cash (used for) provided by operating activities...................................... 3,542 (10,374) (18,070) 3,368 -------- -------- ----------------- INVESTING ACTIVITIES: Property and equipment additions.......................... (11,470) (9,750) (14,722) (23,489) Proceeds from sale of investments and property............ 500 500 -- 7,581 Purchase of short-term investments........................ (21,627) (80,454) (128,397) (72,969) Proceeds from sale of short-term investments.............. 31,035 79,193 136,604 140,346 Collection of note receivable from former officer......... -- 4,211 -- Acquisition of television station WWDP TV-46, net of cash acquired............................................... -- -- (33,466)4,211 Proceeds from sale of television stations................. -- 400 -- 5,000 -------- -------- ----------------- Net cash (used for) provided byused for investing activities......................................activities............ (1,562) (10,111) (2,304) 23,003 -------- -------- ----------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options................... 1,435 1,869 3,024 7,137 Payments for repurchases of common stock.................. (4,699) -- -- (6,429) Payment of long-term obligations.......................... (363) (881) (1,043) (1,155) -------- -------- ----------------- Net cash provided by (used for) financing activities...................................... (3,627) 988 1,981 (447) -------- -------- ----------------- Net (decrease) increasedecrease in cash and cash equivalents.....................................equivalents......... (1,647) (19,497) (18,393) 25,924 BEGINNING CASH AND CASH EQUIVALENTS......................... 43,143 62,640 81,033 55,109 -------- -------- ----------------- ENDING CASH AND CASH EQUIVALENTS............................ $ 41,496 $ 43,143 $ 62,640 $ 81,033 ======== ======== =================
The accompanying notes are an integral part of these consolidated financial statements. 49 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 3, 2007, FEBRUARY 4, 2006, AND JANUARY 31, 2005 AND JANUARY 31, 2004 1. THE COMPANY: ValueVision Media, Inc. and Subsidiaries (the "Company") is an integrated direct marketing company that markets, sells and distributes its products directly to consumers through various forms of electronic media and direct-to-consumer mailings. The Company's operating strategy as a multi-channel retailer incorporates television home shopping, Internetinternet e-commerce, vendor programming sales, fulfillment services and outsourced e-commercedirect mail marketing and fulfillment solutions.services. The Company's television home shopping business uses on-air spokespersons to market brand name merchandise and proprietary/private label consumer products at competitive prices. The Company's live 24-hour per day television home shopping programming is distributed primarily through long-term cable and satellite affiliation agreements and the purchase of month-to-month full and part-time lease agreements of cable and broadcast television time. In addition, the Company distributes its programming through one Company-owned full power television station in Boston, Massachusetts. The Company also complements its television home shopping business by the sale of a broad array of merchandise through its Internetinternet shopping website, www.shopnbc.com. The Company has an exclusive license agreement with National Broadcasting Company, Inc., currently known as NBC Universal, Inc. ("NBC"), pursuant to which NBC granted the Company worldwide use of an NBC-branded name and the peacock image for a ten-year period. The Company rebranded its television home shopping network and companion Internetinternet shopping website as "ShopNBC" and "ShopNBC.com","ShopNBC.com," respectively, in fiscal 2001. This rebranding was intended to position the Company as a multimedia retailer, offering consumers an entertaining, informative and interactive shopping experience, and position the Company as a leader in the evolving convergence of television and the Internet. The Company, through its wholly owned subsidiary, VVI Fulfillment Center, Inc. ("VVIFC"), provides fulfillment, warehousing, customer service and telemarketing services to Ralph Lauren Media, LLC ("RLM"), the operator of the Polo.com e-commerce business which the Company holds a minority equity interest.business. VVIFC also provides fulfillment and warehousing services for the fulfillment of certain non-jewelry merchandise sold on the Company's television home shopping program and Internetinternet website. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated results of operations for the year ended January 31, 2004, include the operations of television station WWDP TV-46 as of the effective date of its acquisition, April 1, 2003. FISCAL YEAR The Company's most recently completed fiscal year ends on February 4, 20063, 2007 and such year is designated "fiscal 2005".2006." The year ended February 4, 2006 is designated fiscal 2005 and the year ended January 31, 2005 is designated fiscal 2004 and the year ended January 31, 2004 is designated fiscal 2003.2004. On April 29, 2005, the Company elected to change its fiscal year from a fiscal year ending January 31 to a 52/53 week fiscal year endingwhich ends on the first Saturday in February of each calendar year.nearest to January 31. This change was effective beginning with the Company's 2005 fiscal year. The Company made this change in order to align its fiscal year more closely to its retail seasonal merchandising plan. The change will also enhance the weekly and monthly comparability of sales results relating to the Company's television home-shopping business. As a result of this fiscal year change, the fourth quarter of fiscal 2006 had 13 weeks compared to the fourth quarter of fiscal 2005 which had 14 weeks, a 1.36% decrease in the number of days over fiscal 2005. In addition, fiscal 2005 had three additional days, or a 0.82% increase in days over fiscal 2004 and fiscal 2006 will have five less days, or a 1.36% decrease in days over fiscal 50 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2005.2004. The change in the fiscal year iswas not significant to the Company's annual consolidated financial statements. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE Revenue is recognized at the time merchandise is shipped or when services are provided. Shipping and handling fees charged to customers are recognized as merchandise is shipped and are classified as revenue in 50 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the accompanying statements of operations in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Cost" ("EITF 00-10"). The Company classifies shipping and handling costs in the accompanying statements of operations as a component of cost of sales. 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. Revenue is recognized for vendor programming airtime sales upon completion of the production of the vendor's show and its broadcast over the Company's ShopNBC television network in accordance with the Company's contractual service obligation, when the sales price is fixed or determinable and collectibility is reasonably assured. Revenue is recognized for the Company's fulfillment services when the services are provided in accordance with the Company's contractual obligation, the sales price is fixed or determinable and collectibility is reasonably assured. The Company's customary shipping terms for its fulfillment services are Freight-On-Board shipping point. 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 $3,641,000 at February 3, 2007 and $2,478,000 at February 4, 2006 and $2,421,000 at January 31, 2005.2006. The Company utilizes an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to six equal monthly credit card installments. As of February 3, 2007 and February 4, 2006, and January 31, 2005, the Company had approximately $77,447,000$105,197,000 and $61,894,000,$77,447,000, respectively, of net receivables due from customers under the ValuePay installment program. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Provision for doubtful accounts receivable (primarily related to the Company's ValuePay program) for the years ended February 3, 2007, February 4, 2006 and January 31, 2005 were $6,065,000, $4,542,000 and January 31, 2004 were $4,542,000, $4,303,000, and $4,556,000, respectively. COST OF SALES AND OTHER OPERATING EXPENSES Cost of sales includes primarily the cost of merchandise sold, shipping and handling costs, inbound freight costs, excess and obsolete inventory charges and customer courtesy credits. Purchasing and receiving costs, including costs of inspection, are included as a component of distribution and selling expense and were approximately $11,689,000, $10,460,000 $9,861,000 and $7,460,000$9,861,000 for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, respectively. Distribution and selling expense consist primarily of cable and satellite access fees, credit card fees, bad debt expense and costs associated with purchasing and receiving, inspection, marketing and advertising, show production, website marketing and merchandising, telemarketing, customer service, warehousing and fulfillment. General and administrative expense consists primarily of costs associated with executive, legal, accounting and finance, information systems and human resources departments, software and system maintenance contracts, insurance, investor and public relations and director fees. 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. The Company maintains its cash balances at financial institutions in investment accounts that are not federally insured. The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents. 51 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SHORT-TERM INVESTMENTS Short-term investments consist principally of high quality commercial paper with original maturity dates of less than 270 days and investment grade corporate and municipal bonds and other tax advantaged certificatesauction rate securities with tender option terms ranging from one month to one year. TheseAuction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. Auction rate securities have interest rate resets that occur through a modified Dutch auction, at predetermined short-term intervals, usually every 1, 7, 51 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 28 or 35 days. Short-term investments are stated at cost, which approximates market value due to the short maturities or the variable interests rates of these instruments. The average maturity of the Company's short-term investment portfolio is approximately 30-180 days. The Company maintains its short-term investments at financial institutions in investment accounts that are not federally insured. Although management believes the Company's short-term investment policy is conservative in nature, certain short-term investments in commercial paper can be exposed to the credit risk of the underlying companies to which they relate.relate and interest earned on these investments are subject to interest rate fluctuations. The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk on its short-term investments. INVESTMENTS IN EQUITY SECURITIES The Company hasaverage maturity of the Company's short-term investment portfolio ranges from 30-180 days. The Company's short-term investments consist of marketable equity and debt securities, which are classified certain long-term investments in equityas either available-for-sale or held-to-maturity, depending on management's investment intentions relating to these securities. Available-for-sale securities are marked to market based upon quoted market values of these securities, with the unrealized gains and losses, if any, net of tax, reported as "available-for-sale" under the provisionsa component 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 holdingaccumulated other comprehensive income (loss). Realized gains and losses on the sale of available-for-sale securities are excluded from income andcomputed based upon initial cost adjusted for any other-than-temporary declines in fair value. Investments categorized as held-to-maturity 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 averagecarried at amortized cost method for ascertaining the cost of securities sold. As of February 4, 2006 and January 31, 2005,because the Company has both the intent and ability to hold these investments until they mature. Premiums and discounts are amortized or accreted into earnings over the life of the related available-for-sale or held-to-maturity security. Dividends or interest income is recognized when earned. The Company owns no longer has long-term equity investmentinvestments that are considered to be trading securities. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes accounting and reporting standards requiring that derivative instruments, as defined in the standard, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires changes in the derivative's fair value to be recognized currently in earnings unless specific hedge accounting criteria are met. In the second quarter of fiscal 2003, the Company recorded a net pre-tax investment gain of $361,000 relating to the sale of its common stock investments of Paxson Communications, Inc. and iDine Rewards Network, Inc. The Company no longer has derivative warrant investments. Proceeds from sales of investment securities were $-0-, $-0- and $7,581,000 in fiscal 2005, 2004 and 2003, respectively, and related gross realized gains included in income were $-0-, $-0- and $361,000 in fiscal 2005, 2004 and 2003, respectively. INVENTORIES Inventories, which consist primarily of consumer merchandise held for resale, are stated principally at the lower of average cost or realizable value and are reflected net of obsolescence write downs of $4,431,000 at February 3, 2007 and $3,910,000 at February 4, 2006 and $4,674,000 at January 31, 2005.2006. 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 capitalized and amortized over the period during which the benefits are expected, generally one to three months. The Company receives vendor allowances for the reimbursement of direct advertising costs. Advertising allowances received by the Company are recorded as a reduction of advertising expense and were $1,125,000, $992,000 $1,254,000 and $1,175,000$1,254,000 for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, respectively. Advertising costs, after reflecting allowances given by vendors, totaled $12,201,000, 52 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $12,142,000$18,610,000, $14,408,000 and $10,344,000$14,785,000 for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, respectively, and consist primarily of contractual marketing fees paid to certain cable operators for cross channel promotions. The Company includes advertising costs as a component of distribution and selling expense in the Company's consolidated statement of operations. Prepaid expenses and other includes deferred advertising costs in the form of television advertising credits from NBC of $135,000 at January 31, 2005 which was expensed during fiscal 2005. In the fourth quarter of fiscal 2004, the Company wrote down $1,900,000 of theseNBC advertising credits as they were deemed by management to be impaired. See Note 16 for a full discussion of the Company's fiscal 2004 asset impairments. 52 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Improvements 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 on the straight-line method based upon estimated useful lives. Property and equipment consisted of the following:
ESTIMATED USEFUL LIFE FEBRUARY 3, FEBRUARY 4, JANUARY 31, (IN YEARS) 2007 2006 2005 ----------- ------------ ------------ Land and improvements......................... -- $ 3,455,0003,454,000 $ 3,455,000 Buildings and improvements.................... 5-205-40 18,403,000 18,109,000 16,345,000 Transmission and production equipment......... 5-10 7,881,000 7,979,000 11,143,000 Office and warehouse equipment................ 3-10 10,003,000 9,515,000 14,907,000 Computer hardware, software and telephone equipment................................... 3-7 57,206,000 52,579,000 53,722,000 Leasehold improvements........................ 3-5 3,440,000 3,515,000 5,795,000 Less -- Accumulated depreciation and amortization................................ (60,280,000) (48,194,000) (52,642,000) ------------ ------------ $ 46,958,00040,107,000 $ 52,725,00046,958,000 ============ ============
NBC TRADEMARK LICENSE AGREEMENT As discussed further in Note 15, in November 2000, the Company entered into a Trademark License Agreement with NBC (the "License Agreement") pursuant to which NBC granted the Company an exclusive, worldwide license for a term of 10ten years to use certain NBC trademarks, service marks and domain names to rebrand the Company's business and corporate name on the terms and conditions set forth in the License Agreement. In connection with the License Agreement, the Company issued to NBC warrants to purchase 6,000,000 shares of the Company's common stock at an exercise price of $17.375 per share (see Note 6). In March 2001, the Company established a measurement date with respect to the License Agreement by amending the agreement, and fixed the fair value of the trademark license asset at $32,837,000, which is being amortized over the remaining ten-year term of the License Agreement. The Company used the Black-Scholes option pricing model to compute the fair market value of the NBC warrants at March 12, 2001. Significant assumptions in the warrant fair value calculation included: market price of $11.00; exercise price of $17.375; risk-free interest rate of 5.08%; volatility factor of 53.54%; and dividend yield of 0%. As of January 31, 2003, all of the warrants were vested. In the fourth quarter of fiscal 2006, 2,000,000 of these warrants had expired unexercised. As of February 3, 2007 and February 4, 2006, and January 31, 2005, accumulated amortization related to this asset totaled $20,603,000 and $17,376,000, and $14,150,000, respectively. 53 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CABLE DISTRIBUTION AND MARKETING AGREEMENT As discussed further in Note 13, in March 1999, the Company entered into a ten-year Distribution and Marketing Agreement with NBC, which provides that NBC shall have the exclusive right to negotiate on behalf of the Company for the distribution of its home shopping television service. Under the ten-year agreement, NBC had committed to deliver 10 million full-time equivalent ("FTE") subscribers over a 42-month period. In compensation for these services, the Company currently pays NBC an annual fee of approximately $1.7$1.8 million and issued NBC a Distribution Warrant to purchase 1,450,000 shares of the Company's common stock at an exercise price of $8.29. The value assigned to the Distribution and Marketing Agreement and related warrant of $6,931,000 was determined pursuant to an independent appraisal using the Black-Scholes option pricing model and is being 53 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amortized on a straight-line basis over the term of the agreement. Significant assumptions used in the warrant valuation included: market price of $9.00; exercise price of $8.29; risk-free interest rate of 5.01%; volatility factor of 55.36%; and dividend yield of 0%. As of February 3, 2007 and February 4, 2006, and January 31, 2005, accumulated amortization related to this asset totaled $4,696,000$5,389,000 and $4,003,000,$4,696,000, respectively. In fiscal 2001, the Company issued to NBC additional warrants to purchase 343,725 shares of the Company's common stock at an exercise price of $23.07 per share. The warrants were assigned a fair value of $1,175,000, arewere immediately exercisable, and havehad a term of five years. In the fourth quarter of fiscal 2002, the Company issued to NBC additional warrants to purchase 36,858 shares of the Company's common stock at an exercise price of $15.74 per share. The warrants were assigned a fair value of $172,000, vest over five years and havehad a five-year term from the date of vesting. These warrants were issued in connection with the Distribution and Marketing Agreement which provides that additional warrants are to be granted at current market prices upon the achievement of specific goals associated with the distribution of the Company's television programming with respect to FTEfull-time equivalent ("FTE") subscriber homes. The fair value assigned to these distribution warrants were determined using the Black Scholes option pricing model and are being amortized over the weighted average term of the new distribution agreements which range from five to seven years. As of February 3, 2007 and February 4, 2006, and January 31, 2005, total accumulated amortization related to these assets totaled $928,000$1,130,000 and $726,000,$928,000, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"Assets" ("SFAS No. 142"), addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment annually or whenever an event has occurred that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill had been recorded by the Company in fiscal 2002 as a result of the acquisition of FanBuzz, Inc. ("FanBuzz"). FanBuzz's operations were discontinued in fiscal 2005. (See Note 5). Changes in the carrying amount of goodwill for the year ended January 31, 2005 is as follows: Beginning balance........................................... $9,442,000 Goodwill acquired during the period......................... -- Impairment losses from discontinued operations.............. 9,442,000 ---------- Ending balance.............................................. $ -- ==========
During the third quarter of fiscal 2004 the Company wrote off goodwill totaling $9,442,000 attributable to the FanBuzz acquisition as the Company had determined that the goodwill was impaired following FanBuzz's loss of its National Hockey League ("NHL") contract in September 2004. Intangible assets have been recorded in connection with the Company's acquisition of the ShopNBC license and with the issuance of distribution warrants to NBC. Intangible assets have also been recorded by 54 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible assets have been recorded by the Company as a result of the acquisition of FanBuzz and television station WWDP TV-46. The components of amortized and unamortized intangibleIntangible assets in the accompanying consolidated balance sheets consists of the following:
FEBRUARY 3, 2007 FEBRUARY 4, 2006 JANUARY 31, 2005WEIGHTED -------------------------- -------------------------- AVERAGE GROSS GROSS LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED (YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION --------------- ----------- ------------ ----------- ------------ Amortized intangible assets: Website address........... 3 $ 1,000,000 $(1,000,000) $ 1,000,000 $ (945,000) Partnership contracts..... 2 280,000 (280,000) 280,000 (280,000) Non-compete agreements.... 3 230,000 (230,000) 230,000 (217,000) Favorable lease contracts.............. 13 200,000 (200,000) 200,000 (200,000) Other..................... 2 290,000 (290,000) 290,000 (290,000)NBC trademark license agreement............... 10 $32,837,000 $(20,603,000) $32,837,000 $(17,376,000) Cable distribution and marketing agreement..... 9.5 8,278,000 (6,519,000) 8,278,000 (5,624,000) ----------- ------------ ----------- ----------- ----------- Total.................. $ 2,000,000 $(2,000,000) $ 2,000,000 $(1,932,000)------------ $41,115,000 $(27,122,000) $41,115,000 $(23,000,000) =========== ============ =========== =========== ======================= Unamortized intangible assets: FCC broadcast license.....license...... $31,943,000 $31,943,000 =========== ===========
Amortization expense for the NBC intangible assets was $4,122,000 for each of the years ended February 3, 2007, February 4, 2006 and January 31, 2005, respectively. Amortization expense for FanBuzz intangible assets for the years ended February 3, 2007, February 4, 2006 and January 31, 2005 was $-0-, $68,000 and January 31, 2004 was $68,000, $433,000, respectively. Estimated amortization expense for the succeeding five years is as follows: $4,113,000 in fiscal 2007, $3,943,000 in fiscal 2008, $3,383,000 in fiscal 2009, $2,554,000 in fiscal 2010 and $581,000, respectively.$-0- in fiscal 2011. During the third quarter of fiscal 2004, the Company wrote off approximately $160,000 of intangible assets in connection with a FanBuzz asset impairment. As of February 4, 2006, intangible assets relating to the FanBuzz acquisition have a remaining carrying value of $-0-. The results of operations for FanBuzz is classified as discontinued operations in the accompanying consolidated financial statements of operations. See Note 5 for a discussion of the discontinued operations of FanBuzz. The FCC broadcasting license, which relates to the Company's acquisition of television station WWDP TV-46, is not subject to amortization as a result of its indefinite useful life. The Company tests the FCC license asset for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. There was no impairment as of February 3, 2007. INVESTMENTS AND OTHER ASSETS Investments and other assets consisted of the following:
FEBRUARY 3, FEBRUARY 4, JANUARY 31,2007 2006 2005 ----------- ----------- Investment in RLM........................................... $4,139,000 $1,383,000 $ -- Prepaid launch fees, net.................................... 561,000 1,171,000 1,879,000 Deferred satellite rent..................................... 672,000 1,164,000 290,000 Other, net.................................................. 120,000 376,000 630,000 ---------- ---------- $5,492,000 $4,094,000 $2,799,000 ========== ==========
Prepaid launch fees represent prepaid amounts paid to cable operators upon entering into cable affiliation agreements and prepaid satellite transponder launch fees. These fees are capitalized and amortized over the lives of the related affiliation contracts, which range from 7-8 years. Deferred satellite rent is attributable to the Company's fiscal 2004 long-term satellite services rental agreement that contains provisions for scheduled rent decreases over the lease term. The Company recognizes 55 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the lease as deferred rent. Other assets consist principally of long-term deposits and the long-term portion of prepaid compensation costs associated with employment contracts entered into with certain key employees of the Company in fiscal 2004. Compensation expense is being recognized for these contracts over the four-year service period. EQUITY INVESTMENTS As discussed in Note 14, in February 2000, the Company entered into a strategic alliance with Polo Ralph Lauren, NBC, NBCi and CNBC and created RLM, a joint venture formed for the purpose of bringing the Polo Ralph Lauren American lifestyle experience to consumers via multiple platforms, including the Internet,internet, broadcast, cable and print. TheThrough fiscal 2006, the Company ownsowned a 12.5% interest in RLM. In connection with forming this strategic alliance, the Company had committed to provide an equity investment of $50 million of cash for purposes of financing RLM's operating activities of which the entire commitment had been funded by January 31, 2003. The Company, through VVIFC, alsohas entered into an agreement to provide certain fulfillment and customer care services to RLM. The Company accounts for its ownership interest in RLM under the equity method of accounting and adjusts its investment balance for its share of RLM income and losses each reporting period. In the fourth quarter of fiscal 2002, the Company evaluated the carrying value of its RLM investment by evaluating the current and forecasted financial condition of the entity, its liquidity prospects and its cash flow forecasts and by comparing its historical operational results to plan. TheThrough fiscal 2002, the RLM joint venture to date had incurred significant operating losses since it commenced operations in November 2000 and the Company's expectations regarding RLM's growth, earnings capability and ability to generate future positive cash flows had severely diminished. The Company believed that based on RLM's historic performance, future earnings and cash flow outlook, recent2002 services agreement amendment and a fiscal 2002 fourth quarter valuation analysis, an impairment had occurred with respect to this investment and the decline in value was determined to be other than temporary whereby the Company would not be able to recover the carrying amount of its investment. As a result, the Company wrote down of its remaining RLM investment to zero in the fourth quarter of fiscal 2002. During fiscal 2005, the Company recordedbegan recording equity in net income of RLM and an investment totaling $1,383,000 for its equity interest in RLM after recovering previously unrecorded losses. The following unaudited summarized financial information relates toTotal equity in net income of RLM as of December 31, 2005 and January 1, 2005 and for its fiscal years ended December 31, 2005, January 1, 2005 and December 27, 2003. Net sales: $85.6 million, $61.0 million, $37.3 million, respectively; Gross profit: $57.0 million, $36.2 million and $22.2 million, respectively; Net income: $17.0 million, $8.4 million and $1.4 million, respectively; Total assets: $62.3 million and $29.1 million, respectively; Total liabilities: $29.2 million and $12.0 million, respectively. The Company evaluates the carrying values of its other investments using recent financing and securities transactions, present value and other pricing models, as well as by evaluating available information on financial condition, liquidity prospects and cash flow forecasts and comparing operating results to plan. Impairment losses are recorded if events or circumstances indicate that such investments may be impaired and the decline in value is other than temporary. In the fourth quarter of fiscal 2003, the Company recorded a pre-tax investment loss of $2,011,000 relating to a 1999 investment in an Internet retailer whose decline in fair value was determined by the Company to be other than temporary. The declineduring fiscal 2006 and 2005 was $3,006,000 and $1,383,000, respectively. In addition, the Company received cash dividends totaling $250,000 from RLM during fiscal 2006. On March 28, 2007, the Company sold its 12.5% ownership interest in fair value of the Internet retailer was driven by their continued reported operating losses, large accumulated deficit and the inability of the company to make its original target planRLM for revenue, gross profit and earnings. 56 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)approximately $43.8 million. See Note 17. ACCRUED LIABILITIES Accrued liabilities consisted of the following:
FEBRUARY 3, FEBRUARY 4, JANUARY 31,2007 2006 2005 ----------- ----------- Accrued cable access fees.................................. $17,960,000 $15,143,000 $14,168,000Accrued salaries and related............................... 11,530,000 7,030,000 Reserve for product returns................................ 8,498,000 7,658,000 7,290,000 Accrued salaries........................................... 7,030,000 8,712,000 Other...................................................... 9,721,000 10,392,000 10,892,000 ----------- ----------- $47,709,000 $40,223,000 $41,062,000 =========== ===========
INCOME TAXES The Company accounts for income taxes under the liability method of accounting in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax basis of assets and liabilities. 56 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The Company assesses the recoverability of its deferred tax assets in accordance with the provisions of SFAS No. 109. In accordance with that standard, as of February 3, 2007 and February 4, 2006, and January 31, 2005, the Company recorded a valuation allowance of approximately $55,244,000$54,663,000 and $45,479,000,$55,244,000, respectively, for its net deferred tax assets including net operating and capital loss carryforwards. Based on the Company's recent history of losses, a full valuation allowance was recorded in fiscal 20052006 and fiscal 20042005 and was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on the Company's most recent operating results when assessing the need for a valuation allowance. Although management believes that the Company's recent operating losses were heavily affected by the attendant fixed costs associated with a significant expansion of cable homes, a challenging retail economic environment and a slowdown in consumer spending experienced by the Company and other merchandise retailers, the Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of the reserve. See Note 7 for additional information regarding income taxes. NET LOSS PER COMMON SHARE The Company calculates earnings per share ("EPS") in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). Basic EPS is computed by dividing reported earnings by the weighted average number of common shares outstanding for the reported periods. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods. 57 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of EPS calculations under SFAS No. 128 is as follows:
FOR THE YEARS ENDED ----------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004----------- ------------ ------------ ----------- Net loss from continuing operations......... $(2,396,000) $(13,457,000) $(42,719,000) $(8,329,000)=========== ============ ============ =========== Weighted average number of common shares outstanding -- Basic...................... 37,646,000 37,182,000 36,815,000 35,934,000 Dilutive effect of convertible preferred stock..................................... -- -- -- Dilutive effect of stock options and warrants.................................. -- -- -- ----------- ------------ ------------ ----------- Weighted average number of common shares outstanding -- Diluted.................... 37,646,000 37,182,000 36,815,000 35,934,000=========== ============ ============ =========== Net loss from continuing operations per common share.............................. $ (0.07) $ (0.37) $ (1.17) $ (0.23)=========== ============ ============ =========== Net loss from continuing operations per common share -- assuming dilution......... $ (0.07) $ (0.37) $ (1.17) $ (0.23) ======================= ============ =======================
ForIn accordance with SFAS No. 128, for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, approximately 228,000, 611,000 and January 31, 2004, approximately 611,000, 1,072,000, and 1,639,000, respectively, in-the-money potentially dilutive common share stock options and warrants and 5,340,000 shares of convertible preferred stock have been excluded from the computation of diluted earnings per share, as required under SFAS No. 128, as the effect of their inclusion would be anti-dilutive. 57 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMPREHENSIVE LOSS The Company reports comprehensive loss in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting in the financial statements all changes in equity during a period, except those resulting from investments by and distributions to owners. For the Company, comprehensive loss includesrepresents its net loss and other comprehensive loss, which consists of unrealized holding gains and losses on securities classified as "available-for-sale."loss. Total comprehensive loss was $2,396,000, $15,753,000 $57,601,000 and $8,875,000$57,601,000 for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, respectively. STOCK-BASED COMPENSATION At February 4, 2006, the Company has stock-based compensation plans, which are described more fully in Note 6. The Company accounts for these plans under the recognition and measurement principles of Accounting Principal Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied 58 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), to stock-based employee compensation:
FOR THE YEARS ENDED ------------------------------------------ FEBRUARY 4, JANUARY 31, JANUARY 31, 2006 2005 2004 ------------ ------------ ------------ Net loss available to common shareholders: As reported.............................. $(16,040,000) $(57,886,000) $(11,675,000) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects............... (17,591,000) (15,395,000) (9,710,000) ------------ ------------ ------------ Pro forma................................ $(33,631,000) $(73,281,000) $(21,385,000) ============ ============ ============ Net loss per share: Basic: As reported........................... $ (0.43) $ (1.57) $ (0.32) Pro forma............................. (0.90) (1.99) (0.60) Diluted: As reported........................... $ (0.43) $ (1.57) $ (0.32) Pro forma............................. (0.90) (1.99) (0.60)
The weighted average fair values of options granted were as follows:
OTHER NON- 2004 INCENTIVE 2001 INCENTIVE QUALIFIED STOCK OPTION STOCK OPTION STOCK PLAN PLAN OPTIONS -------------- -------------- ------------- Fiscal 2005 grants............................. $7.57 $7.19 $6.31 Fiscal 2004 grants............................. 6.44 6.20 7.01 Fiscal 2003 grants............................. -- 5.64 6.32
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 2005, 2004 and 2003, respectively: risk-free interest rates of 4.7, 3.8 and 3.5 percent; expected volatility of 36, 36 and 36 percent; and expected lives of 6 to 10 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. 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 of amounts presented do not represent the underlying value of the Company. 59 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company in estimating its fair values for financial instruments used the following methods and assumptions: The carrying amounts reported in the accompanying consolidated balance sheets 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, formulas or cash flow forecasting models using current assumptions. RECLASSIFICATIONS Certain fiscal 2004 amounts in the accompanying consolidated balance sheets and statement of operations have been reclassified to conform to the fiscal 2005 presentation. These reclassifications had no impact on previously reported net loss or shareholders' equity. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 these estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2004,STOCK-BASED COMPENSATION Effective February 5, 2006, the Financial Accounting Standards Board ("FASB") issued a revision toCompany adopted Statement of Financial Accounting Standards No. 123,123R (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"123R"). The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting, which revised SFAS No. 123, "Accounting for employee share-based payments previously available under Accounting Principles BoardStock-Based Compensation," and supersedes APB Opinion No. 25.25, "Accounting for Stock Issued to Employees" ("APB 25"). This standard is effective as ofrequires compensation costs related to share-based payment transactions to be recognized in the first quarter offinancial statements beginning in fiscal 2006. The Company has not completedadopted the process of evaluatingstandard using the full financial statement impact that will result frommodified prospective transition method, which requires the adoption of SFAS No. 123(R). The effect of SFAS No. 123 on the Company's consolidated financial statements and estimated compensation expense for current and prior periods can be found in Note 2 under the caption, "Stock-Based Compensation". In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets" ("SFAS No. 153"), an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions". SFAS No. 153 requires all nonmonetary exchanges to be recorded at fair value, unless the assets exchanged do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flowsapplication of the entity are expectedaccounting standard to change significantlyall share-based awards issued on or after the date of adoption and any outstanding share-based awards that were issued but not vested as a result of the exchange. SFAS No. 153 was effective for all nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company's adoptiondate of SFAS No. 153adoption. Accordingly, the Company did not have a significant impact on its financial statements. In March 2004, the EITF reached a consensus on Issue No. 03-1, "The meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115 and non-marketable equity securities accounted for under the cost method. The EITF 6058 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) developednot restate the financial statements for periods prior to the first quarter of fiscal 2006 as a basic three-step modelresult of the adoption but does present the disclosure-only effects of stock-based compensation. See Note 6. In accordance with SFAS 123R, the estimated grant date fair value of each stock-based award is recognized in income over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of grant. Prior to evaluate whetherFebruary 5, 2006 the Company applied the recognition and measurement principles of APB 25 to our stock options and other stock-based compensation plans as permitted pursuant to SFAS 123. In accordance with APB 25, cost for stock-based compensation was recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an investment is other-than temporarily impaired.employee must pay to acquire the stock. The exercise price for stock options granted to employees equaled the fair market value of the Company's common stock at the date of grant, thereby resulting in no recognition of compensation expense by the Company. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of grant. Unearned compensation cost on non-vested share awards was shown as a reduction to shareholders' equity. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November 2005,February 2007, the FASB approvedissued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the issuanceeffect that the adoption of SFAS No. 159 will have on its consolidated results of operations and financial condition. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), to establish a consistent framework for measuring fair value and expand disclosures on fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition. In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Staff Position ("FSP")Statement No. 115-1109." FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and FSP No. 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Applicationdisclosing in the financial statements tax positions taken or expected to Certain Investments". The FSP addresses when an investment is considered impaired,be taken on a tax return, including a decision whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that havefile or not been recognized as other-than-temporary. The FSPto file a tax return in a particular jurisdiction. FIN 48 is effective for reporting periodsfiscal years beginning after December 15, 20052006. If there are changes in net assets as a result of the application of FIN 48, these will be accounted for as an adjustment to retained earnings. The Company is currently assessing the impact of FIN 48 on its consolidated results of operations and financial position. 3. SHOPNBC PRIVATE LABEL AND CO-BRAND CREDIT CARD PROGRAM: In the third quarter of fiscal 2006, the Company introduced and established a new private label and co-brand revolving consumer credit card program (the "Program"). The Program is requiredmade available to all qualified consumers for the financing of purchases of products from ShopNBC and for the financing of purchases of products and services from other non-ShopNBC retailers. The Program is intended to be adoptedused by cardholders for purchases made primarily for personal, family or household use. The issuing bank is the sole owner of the account issued under the Program and absorbs losses associated with non-payment by cardholders. The issuing bank pays fees to the Company based on the number of credit card accounts activated and on card usage. Once a customer is approved to receive a ShopNBC private label or co-branded 59 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) credit card and the card is activated, the customer is eligible to participate in the Company's credit card rewards program. Under the rewards program, points are earned on purchases made with the credit cards at ShopNBC and other retailers where the co-branded card is accepted. Cardholders who accumulate the requisite number of points are issued a $50 certificate award towards the future purchase of ShopNBC merchandise. The certificate award expires after twelve months if unredeemed. The Company accounts for fiscal 2006.the rewards program in accordance with Emerging Issues Task Force ("EITF") issue No. 00-22, Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future. The Company's adoptionvalue of this accounting principlepoints earned is not expectedincluded in accrued liabilities and recorded as a reduction in revenue as points are earned, based on the retail value of points that are projected to have a significant impact on its financial statements. 3. CEO TRANSITION COSTS: On May 20, 2003,be redeemed. The Company accounts for the Company announced that its then ChairmanPrivate Label and Chief Executive Officer ("CEO"), Gene McCaffery, would be part of a transition process to determine a successor as CEO of the Company. On December 1, 2003 the Company announced that its Board of Directors had named William J. Lansing as President and CEO of the Company, effective December 16, 2003.Co-Brand Credit Card Agreement in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. In conjunction with Mr. McCaffery's resignationthe signing of the ShopNBC Private Label and the hiring of Mr. Lansing,Co-Brand Credit Card Agreement, the Company received from the issuing bank a non-refundable signing bonus as an incentive for the Company to enter into the agreement. The bonus has been recorded a charge to income of $4,625,000as deferred revenue in the fourth quarteraccompanying financial statements and is being recognized as revenue over the term of fiscal 2003 related to the transition. CEO transition costs consisted primarily of contract severance and hiring costs totaling $4,317,000, legal and other professional fees totaling $247,000 and other direct transition costs totaling $61,000.agreement. 4. ACQUISITIONS AND DISPOSITIONS: In December 2005, the Company completed the sale of its low power television station located in Atlanta, Georgia for a total of $400,000. The Company recorded a pre-tax operating gain on the sale of thesethe low power television station of $294,000 in the fourth quarter of fiscal 2005. Management believes that the sale of this station did not have a significant impact on the ongoing operations of the Company. On January 15, 2003, the Company announced that it entered into an agreement with Norwell Television LLC to acquire full power television station WWDP TV-46 in Boston, which reached approximately 1.8 million cable households. The deal closed in the first quarter of fiscal 2003 on April 1, following Federal Communication Commission ("FCC") approval. The Company made the investment in television station WWDP TV-46 in order to build a long-term and cost effective distribution strategy in the Boston, Massachusetts area. The purchase price of the acquisition was $33,617,000 and has been accounted for using the purchase method of accounting as stipulated by Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). The results of operations of the acquired television station have been included in the accompanying consolidated financial statements from April 1, 2003, the date of acquisition. Pro-forma results of the Company, assuming the acquisition had been made at the beginning of each period presented, would not be materially different from the results reported. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed from television station WWDP TV-46 on the date of acquisition: Current assets.............................................. $ 176,000 Property and equipment...................................... 1,598,000 Other assets................................................ 5,000 FCC broadcasting license.................................... 31,943,000 ----------- Total assets acquired..................................... 33,722,000 Current liabilities......................................... 105,000 ----------- Net assets acquired....................................... $33,617,000 ===========
61 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company assigned $31,943,000 of the total acquisition price to television station WWDP TV-46's FCC broadcasting license, which is not subject to amortization as a result of its indefinite useful life. The Company tests the FCC license asset for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. In February 2003, the Company entered into an agreement to purchase property and two commercial buildings occupying approximately 209,000 square feet in Eden Prairie, Minnesota for approximately $11,300,000. One building purchased is where the Company currently maintains its corporate administrative, television production and jewelry distribution operations. Included, as part of the acquisition, was a second building of approximately 70,000 square feet of commercial space, which the Company utilizes for additional office space. As a result of this acquisition, the Company's long-term property lease on this space was terminated. In February 2003, the Company completed the sale of ten of its eleven low power television stations for a total of $5,000,000. The Company recorded a pre-tax operating gain on the sale of these low power television stations of $4,417,000 in the first quarter of fiscal 2003. Management believes that the sale of these stations did not have a significant impact on the ongoing operations of the Company. 5. DISCONTINUED FANBUZZ OPERATIONS: In the second quarter of fiscal 2005, the Company decided to close its FanBuzz subsidiary operations and finalized the shut down in the third quarter of fiscal 2005. FanBuzz was an e-commerce and fulfillment solutions provider for a number of sports, media, entertainment and retail companies. The decision to shut down FanBuzz was made after continued operating losses were experienced following the loss of its NHL contract in September 2004 and after a number of other FanBuzz customers notified the Company in the first quarter of fiscal 2005 that they elected not to renew the term of their e-commerce services agreements. FanBuzz ceased business operations as of October 29, 2005 and was a reportable segment under SFAS No. 131. The results of operations for FanBuzz have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Net sales from discontinued operations were $5,384,000 $25,782,000 and $25,609,000$25,782,000 for the fiscal years ended February 4, 2006 January 31, 2005 and January 31, 2004,2005, respectively. Losses from discontinued operations were $2,296,000 $14,882,000 and $3,063,000$14,882,000 for the fiscal years ended February 4, 2006 January 31, 2005 and January 31, 2004,2005, respectively. Gain recognized on disposal of FanBuzz in fiscal 2005 was $895,000. The Company's consolidated balance sheet as of February 4, 2006 includes $357,000 in current assets, $276,000 in current liabilities and $-0- in long-term assets and long-term liabilities related to FanBuzz. The Company's consolidated balance sheet as of January 31, 2005 included $4,117,000 in current assets, $2,745,000 in current liabilities, $890,000 in long-term assets and $1,145,000 in long-term capital lease liabilities related to FanBuzz. 6. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: COMMON STOCK The Company currently has authorized 100,000,000 shares of undesignated capital stock, of which approximately 37,644,00037,594,000 shares were issued and outstanding as common stock as of February 4, 2006.3, 2007. The Boardboard of Directorsdirectors may establish new classes and series of capital stock by resolution without shareholder approval. 60 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DIVIDENDS The Company has never declared or paid any dividends with respect to its capital stock. Under the terms of the Shareholder Agreementshareholder agreement between the Company and GE Capital Equity Investments, Inc. (GE 62 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)("GE Equity"), the Company is prohibited from paying dividends in excess of 5% of the Company's market capitalization in any fiscal quarter. REDEEMABLE PREFERRED STOCK As discussed further in Note 13, in fiscal 1999, pursuant to an Investment Agreement between the Company and GE Equity, the Company sold to GE Equity 5,339,500 shares of its Series A Redeemable Convertible Preferred Stock, $0.01 par value for aggregate proceeds of $44,265,000 less issuance costs of $2,850,000. The preferred stock is convertible into an equal number of shares of the Company's common stock and has a mandatory redemption after ten years from date of issuance at $8.29 per share. The excess of the redemption value over the carrying value is being accreted by periodic charges to equity over the ten-year redemption period. WARRANTS As discussed further in Notes 2 and 15, in November 2000, the Company issued to NBC warrants to purchase 6,000,000 shares of the Company's common stock at an exercise price of $17.375 per share. The warrants were issued in connection with the Company's execution of a Trademark License Agreement pursuant to which NBC granted the Company an exclusive, worldwide license to use certain NBC trademarks, service marks and domain names to rebrand the Company's business and corporate name for a term of ten years. In the fourth quarter of fiscal 2006, 2,000,000 of these warrants had expired unexercised. As discussed further in Note 13, in fiscal 1999, the Company issued to NBC warrants to purchase 1,450,000 shares of the Company's common stock at an exercise price of $8.29 per share. The warrants were issued in connection with the Company's execution of a Distribution and Marketing Agreement with NBC. In conjunction with the Company's November 2000 execution of the Trademark License Agreement with NBC, the Company agreed to accelerate the vesting of these warrants. As of February 4, 2006, there are no longer warrants outstanding related to the fiscal 1999 Distribution and Marketing Agreement. In fiscal 2001, the Company issued to NBC warrants to purchase 343,725 shares of the Company's common stock at an exercise price of $23.07 per share. TheThese warrants are immediately exercisable, and have a term of 5 years.expired unexercised during fiscal 2006. In fiscal 2002, the Company issued to NBC warrants to purchase 36,858 shares of the Company's common stock at an exercise price of $15.74 per share. The warrants vest over 5five years, and have a term of 5five years from the date of vesting. The additional warrants, which are currently outstanding, were issued in connection with the Company's Distribution and Marketing Agreement with NBC, which provides that warrants will be granted at current market prices upon the achievement of specific goals in connection with distribution of the Company's television programming with respect to FTE subscriber homes. STOCK OPTIONS In June 2004,STOCK-BASED COMPENSATION Stock-based compensation expense charged to continuing operations for fiscal 2006 related to stock option awards was $1,556,000. The adoption of SFAS No. 123R in fiscal 2006 resulted in the shareholdersrecognition of incremental pre-tax stock-based compensation expense and an increase in the year to date net loss of $1,556,000 and a $.04 negative impact on basic and fully diluted loss per share. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future. Additionally, the Company approvedreclassified unearned compensation on restricted stock awards of $154,000 to additional paid in capital. The cumulative effect adjustment for forfeitures related to non-vested stock-based awards was not material. 61 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of February 3, 2007, the Company'sCompany had two active omnibus stock plans for which stock awards can be currently granted: the 2004 Omnibus Stock Plan (the "2004 Plan"),(as amended and restated in fiscal 2006) which provides for among other things, the issuance of up to 2,000,0004,000,000 shares of the Company's common stock; and the 2001 Omnibus Stock Plan which provides for the issuance of up to 3,000,000 shares of the Company's stock. The 2004 Plan isThese plans are administered by the Company's Human Resources and Compensation Committee (the "Committee"("Compensation Committee") and has two basic components, (a) discretionaryprovide for awards for employees, directors and consultantsconsultants. All employees and (b) automatic option grants for outside directors. All employeesdirectors of the Company or its affiliates are eligible to receive awards under the 2004 Plan. The Committee may also award nonstatutory stock options and other awards under the 2004 Plan to individuals or entities who are not employees but who provide services to the Company in capacities such as advisors, directors and consultants.plans. The types of awards that may be granted under the 2004 Planthese plans include restricted (unvested shares) and unrestricted stock, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the Compensation Committee may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. No incentive stock option 63 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) may be granted more than ten years after the effective date of the 2004 Planrespective plan's inception or be exercisable more than ten years after the date of grant. The 2004 Plan provides for additional restrictions on incentive stock options granted to an individual who beneficially owns 10% or more of the outstanding shares of the Company. The 2004 Plan also provides for option grants on an annual basis to each outside director of the Company. All optionsOptions granted to outside directors pursuant to the 2004 Plan are nonstatutory stock options with an exercise price equal to 100% of the fair market value of the underlying stock as of the date of grant. All optionsOptions granted under the 2004 Planthese plans are exercisable in wholeand generally vest over three years and generally have contractual terms of either five years from the date of vesting or in installments, as determined by the Committee, and are generally exercisable in annual installments of 33%. In June 2001, the shareholders of the Company voted to approve the 2001 Omnibus Stock Plan (the "2001 Plan"), which provides for the issuance of up to 3,000,000 shares of the Company's common stock. The 2001 Plan is administered by the Committee and has two basic components, (a) discretionary awards for employees, directors and consultants and (b) options for outside directors. All employees of the Company or its affiliates are eligible to receive awards under the 2001 Plan. The Committee may also award nonstatutory stock options and other awards under the 2001 Plan to individuals or entities who are not employees but who provide services to the Company in capacities such as advisors, directors and consultants. The types of awards that may be granted under the 2001 Plan include restricted and unrestricted stock, incentive and nonstatutory stock options, stock appreciation rights, performance units and other stock-based awards. Incentive stock options may be granted to participants at such exercise prices as the Committee may determine but not less than 100% of the fair market value of the underlying stock as often years from the date of grant. With respect to incentive stock options, no stock option may be granted more than ten years after the effective date of the 2001 Plan or be exercisable more than ten years after the date of grant. The 2001 Plan also provides for additional restrictions on incentive stock options granted to an individual who beneficially owns 10% or more of the outstanding shares of the Company. The 2001 Plan also provides for option grants on an annual basis to each outside director of the Company. All options granted to outside directors pursuant to the 2001 Plan are nonstatutory stock options with an exercise price equal to 100% of the fair market value of the underlying stock as of the date of grant. All options granted under the 2001 Plan are exercisable in whole or in installments, as determined by the Committee, and are generally exercisable in annual installments of 33% to 50%. PreviousPrior to the adoption of the 2004 and 2001 Plans,plans, the Company had in place another incentive stock option plan (as amended, the "1990 Plan"),plans in place in which provided for the grant ofstock options were granted to employees to purchase up to 4,250,000 shares of the Company's common stock. In addition to options granted under the 1990 Plan, thesimilar vesting terms. The Company no longer makes any further grants from these other plans. The Company has also granted non-qualified stock options to purchase shares of the Company's common stock to current and former directors and certain employees.employees with similar vesting terms. The Company also adopted an executive incentive stockfair value of each option plan (the "1994 Executive Plan"), which provided foraward is estimated on the date of grant of options to certain executives to purchase up to 2,400,000 sharesusing the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock. Incentivestock and currently intends to retain earnings for use in operations.
FISCAL FISCAL FISCAL 2006 2005 2004 ---------- ------- ------- Expected volatility................................... 33%-35% 36% 36% Expected term (in years).............................. 6 years 6 years 6 years Risk-free interest rate............................... 4.7%-5.12% 4.7% 3.8%
62 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of the Company's stock option activity as of February 3, 2007 and changes during the year then ended is as follows:
2004 2001 1990 1994 INCENTIVE WEIGHTED INCENTIVE WEIGHTED INCENTIVE WEIGHTED OTHER NON- WEIGHTED EXECUTIVE STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE QUALIFIED AVERAGE STOCK OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE STOCK EXERCISE OPTION PLAN PRICE PLAN PRICE PLAN PRICE OPTIONS PRICE PLAN --------- -------- --------- -------- --------- -------- ---------- -------- --------- Balance outstanding, February 4, 2006...... 1,776,000 $12.03 2,124,000 $14.78 900,000 $18.16 2,551,000 $16.50 648,000 Granted............... 120,000 12.10 140,000 12.70 -- -- -- -- -- Exercised............. (41,000) 11.66 (59,000) 12.42 (46,000) 10.78 (57,000) 10.76 (292,000) Forfeited or canceled............ (121,000) 12.38 (581,000) 15.48 (392,000) 19.17 (656,000) 18.71 -- --------- ------ --------- ------ --------- ------ --------- ------ -------- Balance outstanding, February 3 2007....... 1,734,000 $12.08 1,624,000 $14.44 462,000 $18.03 1,838,000 $15.89 356,000 ========= ====== ========= ====== ========= ====== ========= ====== ======== Options exercisable at: February 3, 2007...... 1,394,000 $12.22 1,467,000 $14.64 462,000 $18.03 1,804,000 $15.98 356,000 ========= ====== ========= ====== ========= ====== ========= ====== ======== February 4, 2006...... 1,322,000 $12.39 2,097,000 $14.82 900,000 $18.16 2,501,000 $16.61 648,000 ========= ====== ========= ====== ========= ====== ========= ====== ======== January 31, 2005...... 769,000 $12.88 1,300,000 $15.47 1,056,000 $17.52 1,422,000 $17.07 748,000 ========= ====== ========= ====== ========= ====== ========= ====== ======== WEIGHTED AVERAGE EXERCISE PRICE -------- Balance outstanding, February 4, 2006...... $16.68 Granted............... -- Exercised............. 3.38 Forfeited or canceled............ -- ------ Balance outstanding, February 3 2007....... $27.57 ====== Options exercisable at: February 3, 2007...... $27.57 ====== February 4, 2006...... $16.68 ====== January 31, 2005...... $14.90 ======
The following table summarizes information regarding stock options at February 3, 2007:
WEIGHTED WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE AVERAGE REMAINING AGGREGATE VESTED OR AVERAGE REMAINING AGGREGATE OPTIONS EXERCISE CONTRACTUAL INTRINSIC EXPECTED TO EXERCISE CONTRACTUAL INTRINSIC OPTION TYPE OUTSTANDING PRICE LIFE (YEARS) VALUE VEST PRICE LIFE (YEARS) VALUE - ----------- ----------- -------- ------------ ---------- ----------- -------- ------------ ---------- 2004 Incentive:....... 1,734,000 $12.08 7.9 $1,078,000 1,700,000 $12.09 7.9 $1,042,000 ========= ========== ========= ========== 2001 Incentive:....... 1,624,000 $14.44 5.5 $ 85,000 1,608,000 $14.46 5.2 $ 84,000 ========= ========== ========= ========== 1990 Incentive:....... 462,000 $18.03 0.7 $ 26,000 462,000 $18.03 0.7 $ 26,000 ========= ========== ========= ========== Other Non-qualified:...... 1,838,000 $15.89 5.2 $ 49,000 1,838,000 $15.89 5.2 $ 49,000 ========= ========== ========= ========== 1994 Executive:....... 356,000 $27.57 0.3 $ -- 356,000 $27.57 0.3 $ -- ========= ========== ========= ==========
The weighted average grant date fair value of options granted in fiscal 2006, 2005 and 2004 was $5.18, $6.84 and $6.52, respectively. The total intrinsic value of options exercised during fiscal 2006, 2005 and 2004 was $2,984,000, $1,252,000 and $2,991,000, respectively. As of February 3, 2007, total unrecognized compensation cost related to participantsstock options was $2,186,000 and is expected to be recognized over a weighted average period of approximately 1.0 year. Prior to fiscal 2006, the Company accounted for its stock option plans under thesethe recognition and measurement principles of APB No. 25, and the disclosure-only provisions of SFAS 123. No employee stock option compensation cost was reflected in the net loss, as all options granted under those plans were granted at suchhad an exercise prices asprice equal to the Committee determined but were not less than 100% of the fair market value of the underlying common stock as ofon the date of grant. The maximum term for any options issued under either plan does not exceed 10 years fromfollowing table 63 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) illustrates the dateeffect on net loss and net loss per share if the Company had applied the fair value recognition provisions of grant. All options granted are exercisable in whole or in installments, as determined by the Committee, and are generally exercisable in annual installments of 20%SFAS No. 123 to 50%. 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. No further grants will be made under the 1990 Plan or the 1994 Executive Plan. Onstock-based employee compensation:
FOR THE YEARS ENDED --------------------------- FEBRUARY 4, JANUARY 31, 2006 2005 ------------ ------------ Net loss available to common shareholders: As reported............................................ $(16,040,000) $(57,886,000) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects..................... (17,591,000) (15,395,000) ------------ ------------ Pro forma.............................................. $(33,631,000) $(73,281,000) ============ ============ Net loss per share: Basic: As reported......................................... $ (0.43) $ (1.57) Pro forma........................................... (0.90) (1.99) Diluted: As reported......................................... $ (0.43) $ (1.57) Pro forma........................................... (0.90) (1.99)
In December 19, 2005, the Company's board of directors approved the acceleration and vesting of approximately 1,200,000 outstanding unvested stock options with an exercise price greater than $11.78 per share as of December 19, 2005 under the Company's stock-based incentive compensation plans. The options affected are held by executive officers, directors and employees 64 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the Company and have a range of exercise prices between $11.80 and $19.26 per share and a weighted average exercise price of $15.06 per share. The board accelerated the vesting period to eliminate the Company's future recognition of compensation expense associated with these out-of-the money stock options required under SFAS No. 123(R),123R, which iswas effective for the Company beginning in the first quarter of fiscal 2006. As a condition of the acceleration, the Company also imposed a holding period on shares underlying the accelerated options held by certain of its executive officers requiring these officers to refrain from selling any shares acquired upon the exercise of the accelerated options until the date on which the related options would have vested under the options' original vesting terms. A summary of the status of the Company's stock option plans as of February 4, 2006, January 31, 2005 and January 31, 2004 and changes during the years then ended are presented below:
2004 2001 1990 1994 INCENTIVE WEIGHTED INCENTIVE WEIGHTED INCENTIVE WEIGHTED OTHER NON- WEIGHTED EXECUTIVE STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE QUALIFIED AVERAGE STOCK OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE STOCK EXERCISE OPTION PLAN PRICE PLAN PRICE PLAN PRICE OPTIONS PRICE PLAN --------- -------- --------- -------- --------- -------- ---------- -------- --------- Balance outstanding, January 31, 2003....... -- $ -- 2,517,000 $16.14 1,726,000 $16.89 1,553,000 $16.83 1,456,000 Granted................ -- -- 782,000 13.69 -- -- 1,629,000 15.25 -- Exercised.............. -- -- (70,000) 14.34 (197,000) 13.45 (226,000) 9.33 (408,000) Forfeited or canceled............. -- -- (476,000) 16.12 (183,000) 17.92 (60,000) 19.67 -- --------- ------ --------- ------ --------- ------ --------- ------ --------- Balance outstanding, January 31, 2004....... -- -- 2,753,000 15.50 1,346,000 17.20 2,896,000 16.47 1,048,000 Granted................ 1,809,000 12.07 192,000 15.01 -- -- 450,000 16.96 -- Exercised.............. (5,000) 13.02 (168,000) 12.62 (91,000) 8.93 (107,000) 4.99 (300,000) Forfeited or canceled............. (24,000) 11.49 (704,000) 16.23 (202,000) 19.34 (415,000) 21.01 -- --------- ------ --------- ------ --------- ------ --------- ------ --------- Balance outstanding, January 31, 2005....... 1,780,000 12.08 2,073,000 15.42 1,053,000 17.51 2,824,000 16.32 748,000 Granted................ 245,000 11.54 491,000 12.79 -- -- 50,000 11.22 -- Exercised.............. (64,000) 11.67 (27,000) 12.23 (98,000) 11.10 (85,000) 12.75 (100,000) Forfeited or canceled............. (185,000) 11.92 (413,000) 15.80 (55,000) 18.20 (238,000) 14.49 -- --------- ------ --------- ------ --------- ------ --------- ------ --------- Balance outstanding February 4, 2006....... 1,776,000 $12.03 2,124,000 $14.78 900,000 $18.16 2,551,000 $16.50 648,000 ========= ====== ========= ====== ========= ====== ========= ====== ========= Options exercisable at: February 4, 2006....... 1,322,000 $12.39 2,097,000 $14.82 904,000 $18.16 2,501,000 $16.61 648,000 ========= ====== ========= ====== ========= ====== ========= ====== ========= January 31, 2005....... 769,000 $12.88 1,300,000 $15.47 1,056,000 $17.52 1,422,000 $17.07 748,000 ========= ====== ========= ====== ========= ====== ========= ====== ========= January 31, 2004....... -- $ -- 1,036,000 $15.91 1,269,000 $17.10 1,318,000 $17.89 1,026,000 ========= ====== ========= ====== ========= ====== ========= ====== ========= WEIGHTED AVERAGE EXERCISE PRICE -------- Balance outstanding, January 31, 2003....... $10.76 Granted................ -- Exercised.............. 3.38 Forfeited or canceled............. -- ------ Balance outstanding, January 31, 2004....... 13.64 Granted................ -- Exercised.............. 10.50 Forfeited or canceled............. -- ------ Balance outstanding, January 31, 2005....... 14.90 Granted................ -- Exercised.............. 3.38 Forfeited or canceled............. -- ------ Balance outstanding February 4, 2006....... $16.68 ====== Options exercisable at: February 4, 2006....... $16.68 ====== January 31, 2005....... $14.90 ====== January 31, 2004....... $13.45 ======
65 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information regarding stock options outstanding at February 4, 2006:
OPTIONS OUTSTANDING ----------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF OPTIONS EXERCISE CONTRACTUAL LIFE OPTIONS EXERCISE OPTION TYPE EXERCISE PRICES OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE - ----------- --------------- ----------- -------- ---------------- ----------- -------- 2004 Incentive:...... $ 9.77-$14.10 1,776,000 $12.03 8.7 1,322,000 $12.39 ========= ========= 2001 Incentive:...... $11.08-$19.99 2,124,000 $14.78 5.7 2,097,000 $14.82 ========= ========= 1990 Incentive:...... $ 8.44-$10.69 31,000 $ 9.91 1.3 32,000 $ 9.86 $11.19-$18.18 492,000 $14.92 1.9 493,000 $14.92 $20.55-$24.69 377,000 $23.06 2.6 379,000 $23.07 --------- --------- $ 8.44-$24.69 900,000 $18.16 2.2 904,000 $18.16 ========= ========= Other Non-qualified:..... $10.69-$19.94 2,366,000 $15.76 5.4 2,316,000 $15.86 $21.13-$34.50 185,000 $26.04 0.7 185,000 $26.04 --------- --------- $10.69-$34.50 2,551,000 $16.50 5.1 2,501,000 $16.61 ========= ========= Executive:........... $ 3.38 292,000 $ 3.38 0.9 292,000 $ 3.38 $22.50-$40.56 356,000 $27.57 4.5 356,000 $27.57 --------- --------- $ 3.38-$40.56 648,000 $16.68 2.9 648,000 $16.68 ========= ========= Totals:............ 7,999,000 7,472,000 ========= =========
STOCK OPTION TAX BENEFIT The exercise of certain stock options granted under the Company's stock option plans gives rise to compensation, which is includible 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 will be recorded as additional paid-in capital if and when realized, and totaled $1,106,000, $484,000 $1,063,000 and $2,149,000$1,063,000 in fiscal 2006, 2005 2004 and 2003,2004, respectively. The Company has not recorded the tax benefit through paid in capital in these fiscal years, as the related tax deductions were not taken due to the losses incurred. These benefits will be recorded in the applicable future periods. RESTRICTED STOCK On February 1, 2003,June 21, 2006, the Company awarded 114,170granted a total of 40,000 shares of restricted stock underfrom the Company's 20012004 Omnibus Stock Plan (as amended) to certain executive officers.its five non-management directors elected by the holders of the Company's 64 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock (in contrast to the three directors elected by the holders of the Company's preferred stock) as part of the Company's annual director compensation program. The restricted stock vests one third on eachthe first anniversary of the next three anniversary datesdate of the grant provided that the recipient is still employed with the Company.grant. The aggregate market value of the restricted stock at the date of award was $1,491,000.$468,000 and is being amortized as director compensation expense over the twelve-month vesting period. In the second quarter of fiscal 2004, the Company awarded an additional 25,000 shares of restricted stock to certain employees. TheThis restricted stock grant vests over different periods ranging from 17 to 53 months so long as the recipient is still employed with the Company.months. The aggregate market value of the restricted stock at the award dates was $308,000. The restricted stock has been recorded as deferred compensation, a separate component of shareholders' equity,$308,000 and is being amortized as compensation expense over the respective vesting periods. 66 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DuringCompensation expense recorded in fiscal 2006, 2005 and fiscal 2004 respectively, approximately 1,000 and 5,000 shares of unvestedrelating to restricted stock were forfeited by employees who had resigned fromgrants was $345,000, $190,000 and $486,000, respectively. As of February 3, 2007, there was $276,000 of total unrecognized compensation cost related to non-vested restricted stock granted. That cost is expected to be recognized over a weighted average period of 0.7 years. The total fair value of restricted stock vested during fiscal 2006, 2005 and 2004 was $26,000, $888,000 and $672,000 respectively. A summary of the Company.status of the Company's non-vested restricted stock activity as of February 3, 2007 and changes during the nine-month period then ended is as follows:
WEIGHTED AVERAGE GRANT DATE FAIR SHARES VALUE ------ ---------------- Non-vested outstanding, February 4, 2006.................... 23,000 $12.28 Granted................................................... 40,000 11.69 Vested.................................................... (3,000) 12.75 Forfeited................................................. -- -- ------ ------ Non-vested outstanding, February 3, 2007.................... 60,000 $11.87 ====== ======
COMMON STOCK REPURCHASE PROGRAM In November 2002,August 2006, the Company's Boardboard of Directorsdirectors authorized a $25 million common stock repurchase program. The program wherebyauthorizes the Company was authorizedCompany's management, acting through an investment banking firm selected as the Company's agent, to repurchase sharesup to $10 million of itsthe Company's common stock in thethrough August 2007 by open market throughpurchases or negotiated transactions at prices and times deemed beneficialamounts as determined by the Company from time to the long-term interests of shareholders and the Company. The authorization expired in November 2005. As of February 4,time. During fiscal 2006, the Company had repurchased a total of 398,000406,000 shares of its common stock under the stock repurchase program for a total net costinvestment of $4,322,000$4,682,000 at an average price of $10.86$11.54 per share. The Company did not repurchase any shares under its repurchase program during the fiscal years ended February 4, 2006 and January 31, 2005. During the year ended January 31, 2004, the Company repurchased 586,000 shares of its common stock at an average price of $10.97 per share.65 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES: The Company records deferred taxes for differences between the financial reporting and income tax bases of assets and liabilities, computed in accordance with tax laws in effect at that time. The deferred taxes related to such differences as of February 3, 2007 and February 4, 2006 and January 31, 2005 were as follows:
FEBRUARY 3, FEBRUARY 4, JANUARY 31,2007 2006 2005 ------------ ------------ Accruals and reserves not currently deductible for tax purposes............................................... $ 6,093,0007,578,000 $ 8,074,0006,093,000 Inventory capitalization................................. 1,273,000 967,000 634,000 Basis differences in intangible assets................... (3,477,000) (2,643,000) (946,000) Differences in depreciation lives and methods............ (5,043,000) (5,981,000) (6,039,000) Differences in investments and other items............... 2,182,000 2,830,000 6,404,000 Net operating loss carryforwards......................... 52,150,000 53,978,000 37,352,000 Valuation allowance...................................... (54,663,000) (55,244,000) (45,479,000) ------------ ------------ Net deferred tax asset................................... $ -- $ -- ============ ============
The (provision) benefit from income taxes consisted of the following:
YEARS ENDED --------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 ----------- ----------- ----------- Current............................................Current............................................. $(75,000) $762,000 $(25,000) $(180,000) Deferred...........................................Deferred............................................ -- -- -- -------- -------- ----------------- $(75,000) $762,000 $(25,000) $(180,000) ======== ======== =================
67 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the statutory tax rates to the Company's effective tax rate is as follows:
YEARS ENDED --------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 ----------- ----------- ----------- Taxes at federal statutory rates.................... 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit...... 4.1 5.2 2.0 3.4SFAS 123(R) stock option vesting expense............ (23.2) -- -- Non-deductible goodwill write down.................. -- -- (6.1) -- Valuation allowance................................. (17.3) (35.3) (31.0) (40.8) Tax exempt interest................................. -- -- 0.1 0.2 ----- ----- ----- Effective tax rate on continuing operations......... (1.4)% 4.9% 0.0% (2.2)% ===== ===== ===== Effective tax rate on equity in net income of affiliates........................................ 0.0% 0.0% 0.0% ===== ===== ===== Effective tax rate on discontinued operations....... 0.0% 0.0% 0.0% ===== ===== =====
Based on the Company's recent history of losses and as discussed further in Note 2, the Company has recorded a full valuation allowance for its net deferred tax assets and net operating loss carryforwards as of February 3, 2007 and February 4, 2006 and January 31, 2005 in accordance with the provisions of SFAS No. 109. The ultimate realization of these deferred tax assets depends on the ability of the Company to generate sufficient taxable income and capital gains in the future. As of February 4, 2006,3, 2007, the Company has gross operating loss carryforwards for Federal and State income tax purposes of approximately $155$152 million and $66$77 million, respectively, which begin to expire in January 2022 and 2017, respectively. In addition, the Company has net capital loss carryforwards of approximately $800,000 that will expire in January 2007.66 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES: CABLE AND SATELLITE AFFILIATION AGREEMENTS As of February 4, 2006,3, 2007, the Company had entered into 3three- to 12 yeartwelve-year affiliation agreements with approximately 100130 cable system operators along with the satellite companies DIRECTV and EchoStar (DISH Network) that require each to offer the Company's television home shopping programming on a full-time basis over their systems. Under certain circumstances, these television operators may cancel their agreements prior to expiration. The affiliation agreements generally provide that the Company will pay each operator a monthly access fee and marketing support payment based upon the number of homes carrying the Company's television home shopping programming. For the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, respectively, the Company paid approximately $106,654,000, $99,857,000 $93,539,000 and $85,359,000$93,539,000 under these long-term affiliation agreements. The Company has entered into, and will continue to enter into, affiliation agreements with other television operators providing for fullfull- or part-time carriage of the Company's television home shopping programming. Under certain circumstances the Company may be required to pay the operator a one-time initial launch fee, which is capitalized and amortized on a straight-line basis over the term of the agreement. Future cable and satellite affiliation cash commitments at February 3, 2007 are as follows:
FISCAL YEAR AMOUNT - ----------- ------------ 2007........................................................ $110,118,000 2008........................................................ 103,419,000 2009........................................................ 36,269,000 2010........................................................ 35,818,000 2011 and thereafter......................................... 59,138,000
EMPLOYMENT AGREEMENTS On December 1, 2003, the Company entered into a three-year employment agreement with its new CEO.chief executive officer. The employment agreement specifies, among other things, the term and duties of employment, compensation and benefits, termination of employment, severance, and non-compete restrictions. On November 25, 2003,The employment agreement renews automatically for one-year terms on December 1st of each year, unless either the chief executive officer or the Company entered into a Separation Agreement with the then-serving CEO whereby the executive resigned as President, CEO and Chairmanhas given notice of the Board. In addition,intention not to renew the agreement. No such notice was given by either party in fiscal year 2006, and accordingly the agreement 68 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stipulated, among other things, the terms of separation including severance payments, non-compete restrictions, and transition and continuing employment. Aswas renewed for a direct result of entering into this Separation Agreement, the Company recorded a $3,530,000 charge to earnings in the fourth quarter of fiscal 2003, which has been included as part of CEO transition costs.one-year term until December 1, 2007. In addition, the Company has entered into employment agreements with a number of officers and on-air hosts of hethe Company for original terms ranging from 12 to 36 months. These agreements specify, among other things, the term and duties of employment, compensation and benefits, termination of employment (including for cause, which would reduce the Company's total obligation under these agreements), severance payments and non-disclosing and non-compete restrictions. The aggregate commitment for future base compensation at February 4, 20063, 2007 was approximately $6,733,000.$5,034,000. 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 offices and warehousing facilities at subsidiary locations, satellite transponder, office equipment and certain tower site locations. 67 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments at February 4, 2006 were3, 2007 are as follows:
FISCAL YEAR AMOUNT - ----------- ----------- 2006........................................................2007........................................................ $ 1,921,000 2007........................................................ 2,165,0002,387,000 2008........................................................ 2,003,0002,156,000 2009........................................................ 2,008,000 20102010........................................................ 2,012,000 2011 and thereafter......................................... 16,347,00014,335,000
Total rent expense under such agreements was approximately $2,640,000 in fiscal 2006, $2,771,000 in fiscal 2005 and $3,608,000 in fiscal 2004 and $3,953,000 in fiscal 2003.2004. CAPITAL LEASE COMMITMENTS The Company leases certain computer equipment and software licenses under noncancelable capital leases and includes these assets in property and equipment in the accompanying consolidated balance sheets. The capitalized cost of leased assets was approximately $395,000 at February 3, 2007 and $2,084,000 at February 4, 2006 and $4,572,000 at January 31, 2005.2006. Future minimum lease payments for assets under capital leases at February 4, 20063, 2007 are as follows:
FISCAL YEAR - ----------- 2006........................................................2007........................................................ $ 386,000 2007........................................................ 141,000 --------- Total minimum lease payments................................ 527,000141,000 Less: Amounts representing interest......................... (32,000)(7,000) --------- 495,000134,000 Less: Current portion....................................... (365,000)(134,000) --------- Long-term capital lease obligation.......................... $ 130,000-- =========
69 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2006 LONG TERM INCENTIVE PLAN In January 2006, following the approval of the Company's board of directors, the Company established the ValueVision Media, Inc. 2006 Long Term Incentive Plan. The purpose of the plan is to provide designated key employees with financial incentives tied to the Company's success in achieving challenging multi-year financial and business goals. Management believes that the plan will assist the Company in its ability to retain key employees, will reinforce a performance culture by rewarding measurable results over time and will tie a meaningful portion of key employees' total compensation to the achievement of multi-year corporate goals and objectives. Under the plan, for each performance period management and the compensation committee of the board of directors establishes performance measures under the plan and targets for these measures that must be achieved for awards under the plan. The initial performance period under the plan covers fiscal years 2006 through 2007. For this initial period, the committee determined that qualification for an incentive award under the plan will be tied to the attainment of targets established for four specific financial and business measures at the end of each of fiscal 2006 and fiscal 2007. These measures are: net sales; EBITDA (as defined by the Company); net income; and gross margin dollars per hour. Awards are earned for achievement of the specific targets for each of the four measures at the rate of up to 50% of the potential incentive award for fiscal 2006 and at the rate of up to 100% of the potential incentive award for fiscal 2007; however, the awards will not be cumulative. The board of directors has authorized the plan to operate only for the initial performance period of 68 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fiscal years 2006 and 2007. The plan could be extended in future periods only upon an affirmative determination by the board of directors. All of the Company's named executive officers and certain key employees designated by management and the compensation committee of the board of directors were selected to participate in the plan for the initial period. Each plan participant will be eligible to receive a 100% payout of their target award equal to their base salary and annual bonus objective in the event that all of the targets set for each of the four plan measures are fully achieved at the end of fiscal 2007, and provided that such participant remains an employee in good standing of the Company at the time of payment under the plan, which is scheduled for early 2008. In the event all of the targets are not fully achieved during the performance period, the participant is eligible to receive a lesser amount under the plan based on the Company's performance, however, no amount will be awarded with respect to a plan measure unless at least 60% of the plan measure target is achieved. In the event of early termination or inoperability of the plan due to a change in control of the Company and termination of employment of a participant without cause by the company, the participant may receive a payment under the plan as if all of the targets had been achieved in the initial performance period. All payments under the plan will be made in cash. As of February 3, 2007, the Company has accrued approximately $2.6 million in connection with the 2006 Long Term Incentive Program. CHANGE IN CONTROL AND SEPARATION AGREEMENTS The Company has entered into change in control and separation agreements with a number of its officers under which separation pay of up to 12 to 24 months of base salary and benefits could become payable in the event of terminations without cause only under specified circumstances, including terminations following a change in control (as defined in the related agreements) of the Company. RETIREMENT AND SAVINGS PLAN The Company maintains a qualified 401(k) retirement savings plan covering substantially all employees. The plan allows the Company's employees to make voluntary contributions to the plan. The Company's contribution, if any, is determined annually at the discretion of the board of directors. Starting in January 1999, the Company elected to make matching contributions to the plan. The Company currently matches $.50 for every $1.00 contributed by eligible participants up to a maximum of 6% of eligible compensation. The 70 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company made plan contributions totaling approximately $860,000, $653,000 $360,000 and $263,000$360,000 during fiscal 2006, 2005 2004 and 2003,2004, respectively. 9. LITIGATION: The Company is involved from time to time in various claims and lawsuits in the ordinary course of business. In the opinion of management, the claims and suits individually and in the aggregate willhave not havehad a material adverse effect on the Company's operations or consolidated financial statements. As previously described in our Quarterly Report on Form 10-Q for the second and third quarters of fiscal 2005, on July 7, 2004, the Company commenced legal proceedings against Navarre Corporation in state court in Minnesota seeking to enforce rights granted under a stock purchase agreement and conversion agreement entered in 1997 as an inducement to obtain the Company's investment in NetRadio Corporation. In the filings with the court, the Company contended that an event of default under the stock purchase agreement occurred when NetRadio ceased operations in October 2001, giving the Company a contractual right to obtain shares of Navarre stock or a cash payment from Navarre. After Navarre failed to deliver shares or cash after due demand in January 2002, the Company brought the litigation. In the lawsuit, the Company sought monetary damages, restitution, and specific performance or such other remedies as the court may order. In September 2005, the presiding Judge ruled that there was no basis for Navarre's third-party claim alleging a breach of fiduciary duty by Gene McCaffery, the former Chief Executive Officer of the Company and a former director of NetRadio. Accordingly, the court granted Mr. McCaffery's motion for summary judgment dismissing all claims against Mr. McCaffery. On November 15, 2005, the Company and Navarre agreed to settle the claims made by the Company against Navarre and the counterclaims made by Navarre against the Company. Under the tentative settlement agreement, Navarre will make a cash payment to the Company and will also enter into an airtime agreement with the Company whereby Navarre will purchase advertising time from the Company during 2006. The parties are negotiating the final details of the agreement, and until such time as those negotiations are successfully completed the dismissal of the litigation cannot be assured. 10. RELATED PARTY TRANSACTIONS: In conjunction with its services agreement with RLM, the Company records revenue for amounts billed to RLM for customer service, fulfillment and warehousing services. Revenues recorded from these services were $11,973,000, $11,259,000 $8,705,000 and $8,605,000$8,705,000 for the years ended February 3, 2007, February 4, 2006 and January 31, 2005, and January 31, 2004, respectively. Amounts due from RLM as of February 3, 2007 and February 4, 2006 were $994,000 and January 31, 2005 were $923,000, and $850,000, respectively. In November 2005,the third quarter of fiscal 2006, RLM notified the Company that it had elected to extend the term of their existing services agreement with the Company to Mayat least August 31, 2007. In July 2004, the2008. 69 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company entered into an agreement with Right NowRightNow Technologies, Inc. ("Right Now"RightNow") in 2005 under which the Company paid Right Now approximately $150,000 during fiscal year 2004purchased software applications which enable the Company to utilize certain customer services technologies developed by Right Now.RightNow. The Company's President and Chief Executive Officer, William J. Lansing, serves on the board of directors of Right Now.RightNow. The Company made payments totaling approximately $171,000 during fiscal 2006 and $48,000 during fiscal 2005 for this technology and annual software maintenance fees relating to this technology. 71 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTStechnology and other services. The Company entered into a Private Label Credit Card and Co-Brand Credit Card Consumer Program Agreement with GE Money Bank for the financing of private label credit card purchases from ShopNBC and for the financing of co-brand credit card purchases of products and services from other non-ShopNBC retailers. GE Money Bank, the issuing bank for the program, is indirectly wholly-owned by the General Electric Company ("GE"), which is also the parent company of NBC and GE Commercial Finance -- (CONTINUED)Equity. NBC and GE Commercial Finance -- Equity have a substantial percentage ownership in the Company and together have the right to select three of the nine members of the Company's board of directors. The Company and NBC are partners in a ten-year Distribution and Marketing Agreement dated March 8, 1999 that 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. As compensation for these services, the Company currently pays NBC an annual fee of approximately $1.8 million. As of February 3, 2007 the Company has accrued approximately $151,000 in connection with this distribution agreement with NBC. 11. SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow information and noncash investing and financing activities were as follows:
FOR THE YEARS ENDED --------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 ----------- ----------- ----------- Supplemental cash flow information: Interest paid...................................paid.................................. $ 33,000 $ 120,000 $198,000 $ 197,000=========== ========== ======== ========== Income taxes paid...............................paid.............................. $ 66,000 $ 71,000 $ 77,000 $ 336,000=========== ========== ======== ========== Supplemental non-cash investing and financing activities: Common stock purchase warrants forfeited....... $11,057,000 $7,276,000 $ -- =========== ========== ======== Exercise of common stock purchase warrants......warrants..... $ -- $5,378,000 $955,000 =========== ========== ======== Restricted stock award......................... $ 468,000 $ -- $308,000 =========== ========== ======== ========== CommonRestricted stock purchase warrants forfeited........ $7,276,000forfeited..................... $ -- $ --9,000 $115,000 =========== ========== ======== ========== Restricted stock award.......................... $ -- $308,000 $1,491,000 ========== ======== ========== Restricted stock forfeited...................... $ 9,000 $115,000 $ -- ========== ======== ========== Liabilities assumed from acquisitions........... $ -- $ -- $ 105,000 ========== ======== ========== Property and equipment purchases included in accounts payable.............................payable............................ $ 98,000 $ 883,000 $296,000 $ --=========== ========== ======== ========== Equipment purchases under capital lease.........lease........ $ -- $ 258,000 $ -- $2,054,000=========== ========== ======== ========== Noncash reduction of capital lease obligation from FanBuzz capital lease termination.......termination...... $ -- $ 924,000 $ -- $ --=========== ========== ======== ========== Accretion of redeemable preferred stock.........stock........ $ 289,000 $ 287,000 $285,000 $ 283,000=========== ========== ======== ==========
70 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SEGMENT DISCLOSURES AND RELATED INFORMATION: Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires the disclosure of certain information about operating segments in financial statements. The Company's reportable segments are based on the Company's method of internal reporting. The Company's primary business segment is its electronic media segment, which consists primarily of the Company's television home shopping business and Internetinternet shopping website business. Management has reviewed the provisions of SFAS No. 131 and has determined that the Company's television and Internetinternet home shopping businesses meet the aggregation criteria as outlined in SFAS No. 131 since these two businesses have similar customers, products, economic characteristics and sales processes. Products sold through the Company's electronic media segment primarily include jewelry, watches, computers and other electronics, housewares, apparel, health and beauty aids, fitness products, giftware, collectibles, seasonal items and other merchandise. The Company's segments primarilycurrently operate in the United States and no one customer represents more than 5% of the Company's overall revenue. The accounting policies of the Company's segments are the same as those described in the summary of significant accounting policies in Note 2. There are no material intersegment product sales. Segment information included in the consolidated balance sheets as of February 4, 7271 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as of February 3, 2007, February 4, 2006 and January 31, 2005 and January 31, 2004 and included in the consolidated statements of operations for the years then ended is as follows:follows (in thousands):
SHOPNBC & ALL OTHER CORPORATEEQUITY CONTINUING FANBUZZ, INC. YEARS ENDED SHOPNBC.COM (A) (B)OTHER(A) INVESTMENTS(B) OPERATIONS (DISCONTINUED) TOTAL - ----------- ----------- --------- ----------------- -------------- ---------- -------------- -------- FEBRUARY 3, 2007 Revenues.............. $755,302 $11,973 $ -- $767,275 $ $ Operating income (loss).............. (10,705) 1,226 -- (9,479) Depreciation and amortization........ 21,548 691 -- 22,239 Interest income (expense)........... 3,802 -- -- 3,802 Income taxes.......... (66) (9) -- (75) Net income (loss)..... (5,629) 227 3,006 (2,396) (2,396) Identifiable assets... 341,576 6,265 4,139 351,980 351,980 Capital expenditures........ 11,428 42 -- 11,470 11,470 -------- ------- ------ -------- ------- -------- FEBRUARY 4, 2006 Revenues..................Revenues.............. $680,592 $11,259 $ -- $691,851 $ 5,384 $ Operating income (loss)................. (19,888) 1,242 -- (18,646) (2,235) Depreciation and amortization............amortization........ 19,707 862 -- 20,569 302 Interest income (expense).......................... 3,048 -- -- 3,048 (61) Income tax benefit........benefit.... 762 -- -- 762 -- Net income (loss)......... (14,724)..... (15,092) 252 1,383 (13,089) (2,664)(13,457) (2,296) (15,753) Identifiable assets.......assets... 338,939 6,461 1,383 346,783 356 347,139 Capital expenditures......expenditures........ 9,623 55 -- 9,678 72 9,750 -------- ------- ------ -------- --------------- -------- JANUARY 31, 2005 Revenues..................Revenues.............. $614,884 $ 8,750 $ -- $623,634 $ 25,782$25,782 $ Operating income (loss)................. (44,890) 619 -- (44,271) (14,812) Depreciation and amortization............amortization........ 18,124 796 -- 18,920 1,200 Interest income (expense).......................... 1,627 -- -- 1,627 (70) Income taxes..............taxes.......... (25) -- -- (25) -- Net loss.................. (41,858)loss.............. (42,348) (371) -- (42,229) (15,372)(42,719) (14,882) (57,601) Identifiable assets.......assets... 338,245 7,044 -- 345,289 5,007 350,296 Capital expenditures......expenditures........ 13,409 1,005 -- 14,414 308 14,722 -------- ------- ------ -------- -------- -------- JANUARY 31, 2004 Revenues.................. $581,999 $ 9,186 $ -- $591,185 $ 25,609 $ Operating income (loss)... (12,148) 4,161 -- (7,987) (2,937) Depreciation and amortization............ 15,642 757 -- 16,399 1,447 Interest income (expense)............... 1,488 -- -- 1,488 (126) Income taxes.............. (180) -- -- (180) -- Net income (loss)......... (11,010) 3,171 -- (7,839) (3,553) (11,392) Identifiable assets....... 359,673 26,110 -- 385,783 10,808 396,591 Capital expenditures...... 23,071 15 -- 23,086 403 23,489 -------- ------- ------ -------- -------- --------
- --------------- (a) Revenue from segments below quantitative thresholds is attributable to VVIFC, which provides fulfillment, warehousing and telemarketing services primarily to RLM the Company and the NBC Experience Store.Company. (b) CorporateEquity Investment assets and net income from equity investments consist of long-term investments and earnings from equity investments accounted for under the equity method of accounting and are not directly assignable to a business segment. 7372 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information on net sales from continuing operations by significant product groups is as follows (in thousands):
FOR THE YEARS ENDED --------------------------------------- FEBRUARY 3, FEBRUARY 4, JANUARY 31, JANUARY 31,2007 2006 2005 2004 ----------- ----------- ----------- Jewelry............................................. $351,638 $361,886 $362,383$285,262 $278,928 $288,142 Electronics......................................... 173,121 140,460 93,089 92,326Watches, Apparel and Health & Beauty................ 181,093 145,697 134,900 Home................................................ 80,934 78,116 73,674 61,168 All others, less than 10% each...................... 121,637 94,985 75,30846,865 48,650 33,829 -------- -------- -------- Total............................................. $767,275 $691,851 $623,634 $591,185 ======== ======== ========
13. NBC AND GE EQUITY STRATEGIC ALLIANCE: In March 1999, the Company entered into a strategic alliance with NBC and GE Equity. Pursuant to the terms of the transaction, NBC and GE Equity acquired 5,339,500 shares of the Company's Series A Redeemable Convertible Preferred Stock (the "Preferred Stock"), and NBC was issued a warrant to acquire 1,450,000 shares of the Company's common stock (the "Distribution Warrants") under a Distribution and Marketing Agreement discussed below. The Preferred Stock was sold for aggregate consideration of $44,265,000 (or approximately $8.29 per share). In addition, the Company agreed to issue to GE Equity a warrant (the "Investment Warrant") to increase its potential aggregate equity stake (together with its affiliates, including NBC) at the time of exercise to 39.9%approximately 40%. NBC also has the exclusive right to negotiate on behalf of the Company for the distribution of its television home shopping service. The sale of 3,739,500 shares of the Preferred Stock was completed on April 15, 1999. Final consummation of the transaction regarding the sale of the remaining 1,600,000 Preferred Stock shares was completed on June 2, 1999. The Preferred Stock was recorded at fair value on the date of issuance. The Preferred Stock is convertible into an equal number of shares of the Company's common stock, subject to anti-dilution adjustments, has a mandatory redemption on the 10thtenth anniversary of its issuance or upon a "change of control" at $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. The excess of the redemption value over the carrying value is being accreted by periodic charges to equity over the ten-year redemption period. On July 6, 1999, GE Equity exercised the Investment Warrant and acquired an additional 10,674,000 shares of the Company's common stock for an aggregate of $178,370,000, or $16.71 per share. Following the exercise of the Investment Warrant, the combined ownership of the Company by GE Equity and NBC on a fully diluted basis was approximately 40%. In February 2005, GE Equity sold 2,000,000 shares of the Company's common stock to a number of different purchasers. In July 2005, GE Equity entered into agreements to sell an additional 2,604,932 shares of the Company's common stock in privately negotiated transactions to a number of different purchasers. In connection with such transactions, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission in July 2005 with respect to an aggregate of 4,604,932 shares of the Company's common stock, pursuant to contractual registration rights obligations. The Company received no proceeds from the sale of the shares covered by the registration statement. Following GE Equity's sale of such common stock, GE Equity and NBC currently have a combined ownership in the Company of approximately 27% on a diluted basis. SHAREHOLDER AGREEMENT Pursuant to the Investment Agreement,In March 1999, the Company and GE Equity also entered into a Shareholder Agreement (the "Shareholder Agreement"), which provides for certain corporate governance and standstill matters. The 73 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shareholder Agreement (together with the Certificate of Designation of the Preferred Stock) initially provided that GE Equity and NBC would be entitled to designate nominees for an aggregatetwo out of 2 out 74 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)seven members of 7the Company's board seatsof directors so long as their aggregate beneficial ownership iswas at least equal to 50% of their initial beneficial ownership, and 1one out of 7 board seatsseven members so long as their aggregate beneficial ownership iswas at least 10% of the "adjusted outstanding shares of common stock".stock." The Shareholder Agreement also requires the consent of GE Equity prior to the Company entering into any substantialmaterial agreements with certain restricted parties (broadcast networks and Internetinternet portals in certain limited circumstances). Finally, the Company is prohibited from exceeding certain thresholds relating to the issuance of voting securities over a 12-month period, the payment of quarterly dividends, the repurchase of common stock, acquisitions (including investments and joint ventures) or dispositions, and the incurrence of debt greater than the larger of $40.0 million or 30% of the Company's total capitalization. The Company is also prohibited from taking any action that would cause any ownership interest of certain FCC regulated entitiesby the Company in television broadcast stations from being attributable to GE Equity, NBC or their affiliates. The Shareholder Agreement provides that during the Standstill Period (as defined in the Shareholder Agreement), and subject to certain limited exceptions, GE Equity and NBC are prohibited from: (i) any asset or 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," each as defined in the Shareholder Agreement, which has not been rejected by the Board, or the Board pursues such a transaction, or engages in negotiations or provides information to a third party and the Board has not resolved to terminate such discussions, then GE Equity or NBC may propose to the Company a tender offer or business combination proposal. In addition, unless GE Equity and NBC beneficially own less than 5% or more than 90% of the adjusted outstanding shares of common stock, GE Equity 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, (iv) pursuant to a merger, consolidation or reorganization to which the Company is a party, (v) in a bona fide public distribution or bona fide underwritten public offering, (vi) pursuant to Rule 144 of the Securities Act of 1933, or (vii) in a private sale or pursuant to Rule 144A of the Securities Act of 1933; provided that, in the case of any transfer pursuant to clause (v) or (vii), the 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 yearten-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), or (v) six months after GE Equity and NBC can no longer designate any nominees to the 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 Equity and NBC's 74 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 75 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 19, 2004 the Company, NBC and GE Equity agreed to amend the Shareholder Agreement as follows: (i) to increase the authorized size of the Company's board of directors to 9nine from 7,seven, (ii) to permit NBC and GE Equity together to appoint an aggregate of 3three directors instead of 2two to the Company's board of directors, and (iii) to reflectprovide that NBC and GE Equity would no longer have the right to have its director-nominees serve on the Audit, Compensation or Nominating and Governance Committees, in the event the committees must be comprised solely of "independent" directors under applicable laws or Nasdaq regulations. Instead,In such case, NBC and GE Equity would have the right to have an observer attend all of these committee meetings, to the extent permitted by applicable law. REGISTRATION RIGHTS AGREEMENT Pursuant to the Investment Agreement, the Company and GE Equity entered into a Registration Rights Agreement providing GE Equity, 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 entered into thea ten-year Distribution and Marketing Agreement dated March 8, 1999 (the "Distribution Agreement") that 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 committed to delivering an additional 10 million FTE subscribers over the first 42 months of the term.programming. As compensation for these services, the Company currently paysagreed to pay NBC an annual fee ofwhich was approximately $1.7$1.8 million (increasing no more than 5% annually)in fiscal 2006, and issued NBC 1,450,000 distribution warrants. On March 28, 2007, the Distribution Warrants.Company and NBC agreed to reduce the amount of the annual fee payable to NBC to a market rate. See Note 17. The exercise price of the Distribution Warrants isdistribution warrants was $8.29 per share. Of the aggregate 1,450,000 shares subject to the Distribution Warrants, 200,000 shares vested immediately, with the remainder vesting 125,000 shares annually over the ten-year term of the Distribution Agreement. In conjunction with the Company's November 2000 execution of the Trademark License Agreement with NBC, the Company agreed to accelerate the vesting of the remaining unvested original Distribution Warrants. The Distribution Warrants are exercisable for five years after vesting. Because NBC successfully delivered to the Company 10 million FTE homes pursuant to the Distribution Agreement, in fiscal 2001, the Company issued to NBC additional warrants to purchase 343,725 shares of the Company's common stock at an exercise price of $23.07 and in fiscal 2002, the Company issued to NBC additional warrants to purchase 36,858 shares of the Company's common stock at an exercise price of $15.74. On April 7, 2004, NBC exercised a portion of the original Distribution Warrants in a cashless exercise acquiring 101,509 shares of the Company's common stock. In November 2005, NBC exercised all remaining original Distribution Warrants in a cashless exercise acquiring 281,199 additional shares of the Company's common stock. Because NBC successfully delivered to the Company 10 million FTE homes pursuant to the Distribution Agreement, in fiscal 2001, the Company issued to NBC additional warrants to purchase 343,725 shares of the Company's common stock at an exercise price of $23.07 which expired unexercised during fiscal 2006 and in fiscal 2002, the Company issued to NBC additional warrants to purchase 36,858 shares of the Company's common stock at an exercise price of $15.74 which are currently outstanding. The Company had a right to terminate the Distribution Agreement after the twenty-fourth, thirty-sixth and forty-second month anniversary if NBC was unable to meet the performance targets. In addition, the Company would have been entitled to a $2.5 million payment from NBC if the Company terminated the Distribution Agreement as a result of NBC's failure to meet the 24-month performance target. NBC may terminate the Distribution Agreement if the Company enters into certain "significant affiliation" agreements or a transaction resulting in a "change of control." 14. RALPH LAUREN MEDIA, LLC ELECTRONIC COMMERCE ALLIANCE: In February 2000,ALLIANCE (RLM): During fiscal 2006, the Company entered into an electronic commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph Lauren"), NBC, NBCi and CNBC ("CNBC") whereby the parties created Ralph Lauren Media, LLC ("RLM"),owned a joint venture formed for the purpose of bringing the Polo Ralph Lauren American lifestyle experience to consumers via multiple media platforms, including the Internet, broadcast, cable and print. RLM is currently owned 50% by Polo Ralph Lauren, 37.5% by NBC and its affiliates and 12.5% by the Company. In exchange for its ownershipequity interest in RLM which was being accounted for under the Company contributed $50 million.equity method of accounting. RLM's primary business activity to date has been the operations of the Polo.com 76website. Polo.com officially launched in November 2000 and includes an assortment of men's, 75 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) website. Polo.com officially launched in November 2000 and includes an assortment of men's, women's and children's products across the Ralph Lauren family of brands as well as unique gift items. In connection with the formation of RLM, the Company entered into various agreements setting forth the manner in which certain aspects of the business of RLM are to be managed and certain of the members' rights, duties and obligations with respect to RLM, including the Amended and Restated Limited Liability Company Agreement, pursuant to which certain terms and conditions regarding operations of RLM and certain rights and obligations of its members are set forth. On March 28, 2007, the Company sold its 12.5% ownership interest in RLM to Polo Ralph Lauren for approximately $43.8 million. See Note 17. AGREEMENT FOR SERVICES RLM and VVIFC entered into an Agreement for Services under which VVIFC agreed to provide to RLM certain telemarketing, customer support and fulfillment services to RLM until May 31, 2006.RLM. In November 2005,the third quarter of fiscal 2006, RLM notified the Company that it had elected to extend the term of their existing services agreement with the Company to Mayat least August 31, 2007.2008. RLM has advised the Company that it intends to develop the capability to provide these services internally in the future,future. On March 28, 2007, VVIFC and accordingly there can be no assurance thatRLM entered into an amendment to the Company will continueagreement for services providing for certain changes to provide services to RLM beyond May 31, 2007 or, if so, for what periodthe agreement, including a potential extension of time thereafter.the term through mid-2009 at RLM's option. See Note 17. 15. NBC TRADEMARK LICENSE AGREEMENT: On November 16, 2000, the Company entered into a Trademark License Agreement (the "License Agreement") with NBC pursuant to which NBC granted the Company an exclusive, worldwide license for a term of 10ten years to use certain NBC trademarks, service marks and domain names to rebrand the Company's business and corporate name and companion Internet website. The Company subsequently selected the names "ShopNBC" and "ShopNBC.com," to rebrand its marketing and sales effort. In connection withUnder the License Agreement, the Company issued to NBC five year warrants (the "License Warrants") to purchase 6,000,000 shares of the Company's common stock with an exercise price of $17.375 per share, the closing price of a share of common stock on the Nasdaq National Market on November 16, 2000. As of January 31, 2003, all of the License Warrants were vested. Additionally, the Company agreed to accelerate the vesting of warrants to purchase 1,450,000 shares of common stock granted to NBC in connection with the Distribution and Marketing Agreement dated March 1999 between NBC and the Company. The Company has also agreed under the License Agreement to (i) certain restrictions on using (including sublicensing) any trademarks, service marks, domain names, logos or other source indicators owned or controlled by NBC or its affiliates in connection with certain permitted businesses (the "Permitted Businesses"), as defined in the License Agreement, before the agreement of NBC to such use, (ii) the loss of its rights under the grant of the license with respect to specific territories outside of the United States in the event the Company fails to achieve and maintain certain performance targets in such territories, (iii) amend and restate the current Registration Rights Agreement dated as of April 15, 1999 among the Company, NBC and GE Equity so as to increase the demand rights held by NBC and GE Equity from four to five, among other things, (iv) not, either directly or indirectly, own, operate, acquire or expand its business to include any businesses other than the Permitted Businesses without NBC's prior consent, for so long as the Company's corporate name includes the trademarks or service marks owned or controlled by NBC, (v) strictly comply with NBC's privacy policies and standards and practices, and (vi) until the earlier of the termination of the License Agreement or the lapse of certain contractual restrictions on NBC, either directly or indirectly, not own, operate, acquire or expand the Company's business such that one thirdone-third or more of the Company's revenues or its aggregate value is attributable to certain services (not including retailing services similar to the Company's existing e-commerce operations) provided over the Internet.internet. The License Agreement also grants to NBC the right to terminate the License Agreement at any time upon certain changes of control of the Company, in certain situations the failure by NBC to own a certain minimum percentage of the outstanding capital stock of the Company on a fully-diluted basis the failure of NBC and the Company to 77 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agree on new trademarks, service marks or related intellectual property rights, and certain other related matters. On March 28, 2007, the Company and NBC agreed to extend the term of the license by six months, such that the license would continue through May 15, 2011. See Note 17. 16. ASSET IMPAIRMENTS AND EMPLOYEE TERMINATION COSTS: During the quarter ended April 30, 2005, a number of FanBuzz customers notified the Company that they elected not to renew the term of their e-commerce services agreements with FanBuzz or decided to terminate their agreements as permitted in the agreement. Following these notifications, the Company assessed whether there had been an impairment of the FanBuzz long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The Company performed a cash flow analysis and concluded that the book value of certain long-lived assets at FanBuzz was significantly higher than their probability-weighted expected 76 VALUEVISION MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) future cash flows and that an impairment had occurred. Accordingly, the Company recorded a non-cash impairment loss and related charge of $400,000 in the first quarter of fiscal 2005. The impairment charge is included in loss from discontinued operations in the accompanying consolidated statement of operations for the year ended February 4, 2006. During fiscal 2005, the Company also recorded an additional $979,000 charge to earnings and established a related accrual primarily in connection with the downsizing of the FanBuzz operations. The charge consisted primarily of severance pay and related benefit costs associated with the elimination of approximately twenty-five25 positions. The severance is expected to bewas paid out over periods ranging from one to twelve months. Of this charge, $897,000 is included in loss from discontinued operations in the accompanying consolidated statement of operations for the year ended February 4, 2006. In the third quarter of fiscal 2004, the Company'sCompany wrote off goodwill attributable to the FanBuzz reporting unit was notified by the NHL whereby the NHL had exercised its termination option, pursuant to their agreement with FanBuzz, and terminated their contract effective February 1, 2005. Revenue from the NHL agreement represented approximately 40% of FanBuzz's total net sales for the nine-month period ended October 31, 2004. Following this notification, and in accordance with SFAS No. 142,acquisition as the Company performed a discounted cash flow analysis that indicated that the book value of FanBuzz significantly exceeded its estimated fair value and that a goodwill impairment had occurred. The Company compared the implied fair value of the goodwill with the carrying amount and concludeddetermined that the goodwill was fully impaired and recorded a third-quarter impairment chargefollowing FanBuzz's loss of $9,442,000.its NHL contract in September 2004. In addition, the Company assessed whether there had been an impairment of the FanBuzz long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"). The Companyalso concluded that the book value of certain long-lived assets at FanBuzz was significantly higher than their probability-weighted expected future cash flows and that an impairment had occurred.occurred in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, the Company recorded a non-cash impairment loss and related charge of $11,302,000 in the third quarter of fiscal 2004. The charges included $9,442,000 of goodwill impairment, $1,700,000 of fixed asset and capital expenditure impairment and $160,000 of intangible asset impairment. The impairment loss is included in loss from discontinued operations in the accompanying fiscal 2004 consolidated statement of operations for the year ended January 31, 2005.operations. In addition, in the fourth quarter of fiscal 2004, the Company recorded an asset impairment charge of $1,900,000 related to deferred advertising costs in the form of television advertising credits fromwith NBC after it was determined that the Company could no longer effectively use the credits. During the third and fourth quarters of fiscal 2004, the Company also recorded a $3,836,000 charge to earnings in connection with the decision to eliminate a number of positions within the Company in an effort to streamline the corporate organization and reduce operating expenses. The chargecharges consisted primarily of severance pay and related benefit costs associated with the elimination of approximately 30 positions. 17. SUBSEQUENT EVENT: On March 26, 2007, a wholly-owned subsidiary of the Company, VVIFC, and RLM entered into a rider to the existing agreement for services (as amended) under which VVIFC provides RLM with fulfillment and certain customer support services. The severanceterm of the agreement for services, as amended in October 2006, extends through August 2008. Pursuant to the terms of the rider, VVIFC and RLM further agreed to certain changes to the agreement for services (as amended), including VVIFC's agreement to extend the term of the agreement through mid-2009 if so requested by RLM. On March 28, 2007, the Company entered into a Membership Interest Purchase Agreement ("Purchase Agreement") with Polo Ralph Lauren, NBC and certain NBC affiliates, pursuant to which the Company sold its 12.5% membership interest in RLM to Polo Ralph Lauren for an aggregate purchase price of $43,750,000. The full text of the Purchase Agreement is currently beingattached as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on April 3, 2007. Concurrently with the execution of the Purchase Agreement, the Company also entered into an amendment to the License Agreement (for the limited, worldwide use of NBC trademarks, service marks, domain names and logos), under which NBC agreed to extend the term of the License Agreement to May 15, 2011 and to certain limitations on NBC's right to terminate the License Agreement in the event of a change in control of the Company involving a financial buyer. On the same date, the Company and NBC also entered into an amendment to the Distribution Agreement providing for a reduction in the annual affiliate relations and marketing fee paid out over periods extending upby the Company to two years. 78NBC to a market rate. 77 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company's management conducted an evaluation, under the supervision and with the participation of the Company'sour chief executive officer and chief financial officer of the effectiveness of the Company'sour disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"))1934). Based on this evaluation, the officers concluded that the Company'sour disclosure controls and procedures are effective to ensure that information required to be disclosed by the Companyus in reports that it fileswe file or submitssubmit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of ValueVision Media, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15 (f) under the Securities Exchange Act 1934. The Company's internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of February 4, 2006.3, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control -- Integrated Framework. Based on management's evaluation under the framework in Internal Control -- Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of February 4, 2006.3, 2007. 78 Management's assessment of the Company's internal control over financial reporting as of February 4, 2006,3, 2007, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report. /s/ WILLIAM J. LANSING -------------------------------------- William J. Lansing Chief Executive Officer and President (Principal Executive Officer) /s/ FRANK P. ELSENBAST -------------------------------------- Frank P. Elsenbast Senior Vice President Finance, Chief Financial Officer (Principal Financial Officer) April 19, 2006 79 11, 2007 CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company's management,Management, with the participation of the Chief Executive Officerchief executive officer and Chief Financial Officer,chief financial officer, performed an evaluation as to whether any change in the internal controls over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) occurred during the period covered by this report. Based on that evaluation the Chief Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that no change occurred in the internal controls over financial reporting during the period covered by this report that materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting. 79 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors ValueVision Media, Inc. and Subsidiaries We have audited management's assessment, included in the accompanying "Management's Report on Internal Control Over Financial Reporting", that ValueVision Media, Inc. and Subsidiaries (the "Company") maintained effective internal control over financial reporting as of February 4, 2006,3, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's Boardboard of Directors,directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of February 4, 2006,3, 2007, is fairly stated, in all material respects, based on criteria established 80 in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 4, 2006,3, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 80 We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended February 4, 2006,3, 2007, of the Company and our report dated April 19, 2006,11, 2007, expressed an unqualified opinion on those financial statements and financial statement schedule.schedule and included an explanatory paragraph relating to the Company's change in 2006 of its method of accounting for stock-based compensation. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota April 19, 200611, 2007 ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE Information in response to this item with respect to certain information relating to the Company'sour executive officers is contained in Item 1 under the heading "Executive Officers of the Registrant" and with respect to other information relating to the Company'sour executive officers and its directors is incorporated herein by reference to the sections titled "Proposal 1 -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company'sour 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. CODE OF BUSINESS CONDUCT AND ETHICS The Company hasWe have adopted a code of business conduct and ethics applicable to all of itsour directors and employees, including itsour principal executive officer, principal financial officer, principal accounting officer, controller and other employees performing similar functions. A copy of this code of business conduct and ethics is available on itsour website at www.shopnbc.com, under "Investor Relations -- Business Ethics Policy".Policy." In addition, the Company haswe have adopted a code of ethics policy for itsour senior financial management; this policy is also available on our website at www.shopnbc.com, under "Investor Relations -- Code of Ethics Policy for Chief Executive and Senior Financial Officers". The Company intendsOfficers." We intend to satisfy the disclosure requirements under Form 8-K regarding an amendment to, or waiver from, a provision of its codesour code of business conduct and ethics by posting such information on itsour website at the address specified above. ITEM 11. EXECUTIVE COMPENSATION Information in response to this item is incorporated herein by reference to the sections titled "Proposal 1 -- Election of Directors -- Director Compensation,"Compensation" and "Executive Compensation" and "Stock Performance Graph" in the Company'sour 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. 81 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS Information in response to this item is incorporated herein by reference to the sections titled "Security Ownership of Principal Shareholders and Management" and "Equity Compensation Plan Information" in the Company'sour 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. 81 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information in response to this item is incorporated herein by reference to the section titled "Certain Transactions" and "Proposal 1 -- Election of Directors" in the Company'sour 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 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information in response to this item is incorporated herein by reference to the section titled "Proposal 2 -- Ratification of the Independent Registered Public Accounting Firm -- Fees Billed by Deloitte & Touche LLP" and "Proposal 2 -- Ratification of the Independent Auditors -- Approval of Independent Registered Public Accounting Firm Services and Fees" in the Company'sour 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. PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULE 1. Financial Statements - Report of Independent Registered Public Accounting Firm - Consolidated Balance Sheets as of February 3, 2007 and February 4, 2006 and January 31, 2005 - Consolidated Statements of Operations for the Years Ended February 3, 2007, February 4, 2006 and January 31, 2005 and January 31, 2004 - Consolidated Statements of Shareholders' Equity for the Years Ended February 3, 2007, February 4, 2006 and January 31, 2005 and January 31, 2004 - Consolidated Statements of Cash Flows for the Years Ended February 3, 2007, February 4, 2006 and January 31, 2005 and January 31, 2004 - Notes to Consolidated Financial Statements 82 2. Financial Statement Schedule VALUEVISION MEDIA, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------- ------------ ------------ ------------- ----------- ADDITIONS ------------ BALANCES AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT YEAR EXPENSES DEDUCTIONS END OF YEAR ------------ ------------ ------------- ----------- FOR THE YEAR ENDED FEBRUARY 3, 2007: Allowance for doubtful accounts...... $2,478,000 $ 6,065,000 $ (4,902,000)(1) $3,641,000 ========== ============ ============= ========== Reserve for returns.................. $7,658,000 $142,983,000 $(142,143,000)(2) $8,498,000 ========== ============ ============= ========== FOR THE YEAR ENDED FEBRUARY 4, 2006: Allowance for doubtful accounts...... $2,421,000 $ 4,542,000 $ (4,485,000)(1) $2,478,000 ========== ============ ============= ========== Reserve for returns.................. $7,290,000 $131,682,000 $(131,314,000)(2) $7,658,000 ========== ============ ============= ========== FOR THE YEAR ENDED JANUARY 31, 2005: Allowance for doubtful accounts...... $2,054,000 $ 4,303,000 $ (3,936,000)(1) $2,421,000 ========== ============ ============= ========== Reserve for returns.................. $8,780,000 $120,238,000 $(121,728,000)(2) $7,290,000 ========== ============ ============= ========== FOR THE YEAR ENDED JANUARY 31, 2004: Allowance for doubtful accounts...... $3,500,000 $ 4,556,000 $ (6,002,000)(1) $2,054,000 ========== ============ ============= ========== Reserve for returns.................. $7,954,000 $124,941,000 $(124,115,000)(2) $8,780,000 ========== ============ ============= ==========
- --------------- (1) Write off of uncollectible receivables, net of recoveries. (2) Refunds or credits on products returned. 3. Exhibits EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------- 2 Membership Interest Purchase Agreement dated as of March 28, 2007 by and among Polo Ralph Lauren Corporation, Ralph Lauren Media, LLC, NBC-Lauren Media Holding, Inc., NBC Universal, Inc., CNBC.COM LLC, and ValueVision Media, Inc.(FF) 3.1 Sixth Amended and Restated Articles of Incorporation, as Amended.(B) 3.2 Certificate of Designation of Series A Redeemable Convertible Preferred Stock.(G) 3.3 Articles of Merger.(Q) 3.4 Bylaws, as amended.(B) 10.1 Second Amended 1990 Stock Option Plan of the Registrant (as amended and restated).(H)+ 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.(D)+ 10.4 Form of Option Agreement under the 1994 Executive Stock Option and Compensation Plan of the Registrant.(E)+ 10.5 2001 Omnibus Stock Plan of the Registrant.(N)+ 10.6 Amendment No. 1 to the 2001 Omnibus Stock Plan of the Registrant.(P)+ 10.7 Form of Incentive Stock Option Agreement under the 2001 Omnibus Stock Plan of the Registrant.(R)+ 10.8 Form of Nonstatutory Stock Option Agreement under the 2001 Omnibus Stock Plan of the Registrant.(R)+
83
EXHIBIT NUMBER EXHIBIT ------- ------- 10.9 Form of Restricted Stock Agreement under the 2001 Omnibus Stock Plan of the Registrant.(R)+ 10.10 Option Agreement between the Registrant and Marshall Geller dated as of March 3, 1997.(A)+ 10.11 Option Agreement between the Registrant and Marshall Geller dated May 9, 2001.(N)+ 10.12 Option Agreement between the Registrant and Marshall Geller dated June 21, 2001.(N)+ 10.13 Option Agreement between the Registrant and Robert Korkowski dated March 3, 1997.(A)+
83
EXHIBIT NUMBER EXHIBIT ------- ------- 10.14 Option Agreement between the Registrant and Robert Korkowski dated May 9, 2001.(N)+ 10.15 Option Agreement between the Registrant and Robert Korkowski dated June 21, 2001.(N)+ 10.16 Employment Agreement between the Registrant and William J. Lansing dated December 1, 2003.(S)+ 10.17 Option Agreement between the Registrant and William J. Lansing dated December 1, 2003.(S)+ 10.18 Option Agreement between the Registrant and Nathan Fagre dated May 1, 2000.(K)+ 10.19 2002 Annual Management Incentive Plan of the Registrant.(P)+ 10.20 Employment Agreement between the Registrant and Nathan E. Fagre dated April 30, 2000.(M)+ 10.21 Amendment No. 1 to Employment Agreement between Registrant and Nathan E. Fagre dated as of April 5, 2001.(R)+ 10.22 Form of Salary Continuation Agreement between the Registrant and each of Nathan Fagre dated July 2, 2003 and Scott Danielson dated June 16, 2004.(T)+ 10.23 Salary ContinuationOption Agreement between the Registrant and Brenda BoehlerJim Gilbertson dated February 9, 2004.(V)November 30, 2005.(EE)+ 10.24 Form of Option Agreement between the Registrant and each of Brenda Boehler and Scott Danielson.(U)+ 10.25 Investment Agreement by and between the Registrant and GE Equity dated as of March 8, 1999.(F) 10.26 First Amendment and Agreement dated as of April 15, 1999 to the Investment Agreement, dated as of March 8, 1999, by and between the Registrant and GE Equity.(G) 10.27 Distribution and Marketing Agreement dated as of March 8, 1999 by and between NBC and the Registrant.(F) 10.28 Letter Agreement dated March 8, 1999 between NBC, GE Equity and the Registrant.(F) 10.29 Shareholder Agreement dated April 15, 1999 between the Registrant, and GE Equity.(G) 10.30 Amendment No. 1 dated March 19, 2004 to Shareholder Agreement dated April 15, 1999 between the Registrant, NBC and GE Equity.(V) 10.31 ValueVision Common Stock Purchase Warrant dated as of April 15, 1999 issued to GE Equity.(G) 10.32 Registration Rights Agreement dated April 15, 1999 between the Registrant, GE Equity and NBC.(G) 10.33 ValueVision Common Stock Purchase Warrant dated as of April 15, 1999 issued to NBC.(G) 10.34 Letter Agreement dated November 16, 2000 between the Registrant and NBC.(M) 10.35 Warrant Purchase Agreement dated September 13, 1999 between the Registrant, Snap!LLC, a Delaware limited liability company and Xoom.com, Inc., a Delaware corporation.(I) 10.36 Common Stock Purchase Warrant dated September 13, 1999 to purchase shares of the Registrant held by Xoom.com, Inc., a Delaware corporation.(I) 10.37 Registration Rights Agreement dated September 13, 1999 between the registrant and Xoom.com, Inc., a Delaware corporation, relating to Xoom.com, Inc.'s warrant to purchase shares of the Registrant.(I) 10.38 Amended and Restated Limited Liability Company Agreement of Ralph Lauren Media, LLC, a Delaware limited liability company, dated as of February 7, 2000, among Polo Ralph Lauren Corporation, a Delaware corporation, National Broadcasting Company, Inc., a Delaware corporation, the Registrant, CNBC.com LLC, a Delaware limited liability company and NBC Internet, Inc., a Delaware corporation.(J)
84
EXHIBIT NUMBER EXHIBIT ------- ------- 10.39 Agreement for Services dated February 7, 2000 between Ralph Lauren Media, LLC, a Delaware limited liability company, and VVI Fulfillment Center, Inc., a Minnesota corporation.(J) 10.40 Amendment to Agreement for Services dated as of January 31, 2003 between Ralph Lauren Media, LLC and VVI Fulfillment Center, Inc.(R) 10.41 Trademark License Agreement dated as of November 16, 2000 between NBC and the Registrant.(L) 10.42 Warrant Purchase Agreement dated as of November 16, 2000 between NBC and the Registrant.(L) 10.43 Common Stock Purchase Warrant dated as of November 16, 2000 between NBC and the Registrant.(L)
84
EXHIBIT NUMBER EXHIBIT ------- ------- 10.44 Amendment No. 1 dated March 12, 2001 to Common Stock Purchase Warrant dated as of November 16, 2000 between NBC and the Registrant.(O) 10.45 ValueVision Common Stock Purchase Warrant dated as of March 20, 2001 between NBC and the Registrant.(O) 10.46 2004 Omnibus Stock Plan.(V)+ 10.47 Form of Stock Option Agreement (Employees) under 2004 Omnibus Stock Plan.(W)+ 10.48 Form of Stock Option Agreement (Executive Officers) under 2004 Omnibus Stock Plan.(W)+ 10.49 Form of Stock Option Agreement (Executive Officers) under 2004 Omnibus Stock Plan.(W)+ 10.50 Form of Stock Option Agreement (Directors -- Annual Grant) under 2004 Omnibus Stock Plan.(W)+ 10.51 Form of Stock Option Agreement (Directors -- Other Grants) under 2004 Omnibus Stock Plan.(W)+ 10.52 Stock Purchase Agreement dated as of February 9, 2005 between GE Capital Equity Investments, Inc. and Delta Onshore, LP, Delta Institutional, LP, Delta Pleiades, LP and Delta Offshore, Ltd.(Z) 10.53 Stock Purchase and Registration Agreement dated as of July 8, 2005 between GE Capital Equity Investments, Inc. and Janus Investment Fund.(Y) 10.54 Stock Purchase and Registration Agreement dated as of July 8, 2005 between GE Capital Equity Investments, Inc. and Caxton International Limited.(Y) 10.55 Stock Purchase and Registration Agreement dated as of July 8, 2005 between GE Capital Equity Investments, Inc. and Magnetar Investment Management, LLC.(Y) 10.56 Stock Purchase and Registration Agreement dated as of July 8, 2005 between GE Capital Equity Investments, Inc. and RCG Ambrose Master Fund, Ltd., RCG Halifax Fund, Ltd., Ramius Securities, LLC, Starboard Value and Opportunity Fund, LLC, Parche, LLC and Ramius Master Fund, Ltd.(Y) 10.57 Employment Agreement between the Registrant and Bryan Venberg dated May 3, 2004.(X)+ 10.58 Form of Change of Control and Severance Agreement with Executive Officers.(AA)+ 10.59 Form of Resale Restriction Agreement with Executive Officers.(BB)+ 10.60 2006 Long Term Incentive Plan.(CC)+ 10.61 Description of Director Compensation Program Changes(C)Program(C) 10.62 Form of Restricted Stock Agreement (Directors) under 2004 Omnibus Stock Plan. (DD) 21 Significant Subsidiaries of the Registrant.* 23.1 Consent of Independent Registered Public Accounting Firm.* 23.2 Consent of Independent Registered Public Accounting Firm.* 23.3 Consent of Independent Registered Public Accounting Firm (by amendment)++ 24 Powers of Attorney** 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.* 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.* 32.1 Section 1350 Certification of Chief Executive Officer.* 32.2 Section 1350 Certification of Chief Financial Officer.*
85
EXHIBIT NUMBER EXHIBIT ------- ------- 99.1 Audited Financial Statements for Ralph Lauren Media, LLC as of April 1, 2006, and for the fifteen-month period ended April 1, 2006* 99.2 Audited Financial Statements for Ralph Lauren Media, LLC as of March 31, 2007, and for the year ended March 31, 2007 ++
- --------------- * Filed herewith. ** Included with Signatures. + Management compensatory plan/arrangement. ++ To be filed by amendment. (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, File No. 0-20243. (C) Incorporated herein by reference to the description of this program contained in the Registrant's Current Report on Form 8-K dated January 18,June 14, 2006, filed on January 18,June 20, 2006, File No. 0-20243. (D) 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. 85 (E) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, filed on April 30, 1998, File No. 0-20243. (F) 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. (G) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated April 15, 1999, filed on April 29, 1999, File No. 0-20243. (H) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8, filed on September 25, 2000, File No. 333-46572. (I) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999, filed on September 14, 1999, File No. 0-20243. (J) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2000, File No. 0-20243. (K) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8, filed on September 25, 2000, File No. 333-46576. (L) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed on December 14, 2000, File No. 0-20243. (M) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2001, File No. 0-20243. (N) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8 filed on January 25, 2002, File No. 333-81438. (O) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 2001, filed on June 14, 2001, File No. 0-20243. (P) Incorporated herein by reference to the Registrant's Proxy Statement in connection with its annual meeting of shareholders held on June 20, 2002, filed on May 23, 2002, File No. 0-20243. (Q) Incorporated herein by reference to the Registrant's Current Report on Form 8-K Dated May 16, 2002, filed on May 17, 2002, File No. 0-20243. (R) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2003, File No. 0-20243. (S) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated December 1, 2003, filed on December 3, 2003, File No. 0-20243. (T) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed on August 15, 2003, File No. 0-20243. 86 (U) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8 filed on March 19, 2004, File No. 333-113736. (V) Incorporated herein by reference to Annex B to the Registrant's Proxy Statement in connection with its annual meeting of shareholders held on June 22, 2004,21, 2006, filed on May 19, 2004,23, 2006, File No. 0-20243. (W) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated January 14, 2005, filed on January 14, 2005, File No. 0-20243. (X) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 2005, filed on June 9, 2005, File No. 0-20243. (Z) Incorporated by reference to the Schedule 13D/A (Amendment No. 7) dated February 11, 2005, filed February 15, 2005, File No. 005-41757. (Y) Incorporated herein by reference to the Registrant's Registration Statement on Form S-3 filed on July 29, 2005, File No. 333-127040. (AA) Incorporated by reference to the description of this program included in the Registrant's Current Report on Form 8-K dated August 24, 2005, filed on August 26, 2005, File No. 0-20243. (BB) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 29, 2005, filed on December 8, 2005, File No. 0-20243. (CC) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated December 19, 2005, filed on December 23, 2005, File No. 0-20243. 86(DD) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated June 21, 2006, filed on June 26, 2006, File No. 0-20243. (EE) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8 filed on December 22, 2006, File No. 333-13957. (FF) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated March 28, 2007, filed on April 3, 2007, File No. 0-20243. 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 19, 2006.17, 2007. VALUEVISION MEDIA, INC. (Registrant) By: /s/ WILLIAM J. LANSING ------------------------------------ William J. Lansing Chief Executive Officer and President Each of the undersigned hereby appoints William J. Lansing and Frank P. Elsenbast, and each of them (with full power to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act of 1934, any and all amendments and exhibits to this annual report on Form 10-K and any and all applications, instruments, and other documents to be filed with the Securities and Exchange Commission pertaining to this annual report on Form 10-K or any amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary or desirable. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 19, 2006.17, 2007.
NAME TITLE ---- ----- /s/ WILLIAM J. LANSING Chief Executive Officer President and Director ------------------------------------------------ (Principal Executive Officer) William J. Lansing /s/ FRANK P. ELSENBAST Senior Vice President Finance, Chief Financial ------------------------------------------------ Officer ------------------------------------------------Frank P. Elsenbast (Principal Financial and Accounting Officer) Frank P. Elsenbast /s/ MARSHALL S. GELLER Chairman of the Board ------------------------------------------------ Marshall S. Geller /s/ JAMES J. BARNETT Director ------------------------------------------------ James J. Barnett /s/ JOHN D. BUCK Director ------------------------------------------------ John D. Buck /s/ RONALD J. HERMAN, JR. Director ------------------------------------------------ Ronald J. Herman, Jr. /s/ DOUGLAS V. HOLLOWAY Director ------------------------------------------------ Douglas V. Holloway /s/ JAY IRELAND Director ------------------------------------------------ Jay Ireland
8788
NAME TITLE ---- ----- /s/ ROBERT J. KORKOWSKI Director ------------------------------------------------ Robert J. Korkowski /s/ GEORGE A. VANDEMAN Director ------------------------------------------------ George A. Vandeman
8889 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT FILED BY ------- ------- -------- 2 Membership Interest Purchase Agreement dated as of March Incorporated by reference 28, 2007 by and among Polo Ralph Lauren Corporation, Ralph Lauren Media, LLC, NBC-Lauren Media Holding, Inc., NBC Universal, Inc., CNBC.COM LLC, and ValueVision Media, Inc. 3.1 Sixth Amended and Restated Articles of Incorporation, as Incorporated by reference Amended 3.2 Certificate of Designation of Series A Redeemable Incorporated by reference Convertible Preferred Stock 3.3 Articles of Merger Incorporated by reference 3.4 Bylaws, as amended Incorporated by reference 10.1 Second Amended 1990 Stock Option Plan of the Registrant (as Incorporated by reference amended and restated) 10.2 Form of Option Agreement under the Amended 1990 Stock Incorporated by reference Option Plan of the Registrant 10.3 1994 Executive Stock Option and Compensation Plan of the Incorporated by reference Registrant 10.4 Form of Option Agreement under the 1994 Executive Stock Incorporated by reference Option and Compensation Plan of the Registrant 10.5 2001 Omnibus Stock Plan of the Registrant Incorporated by reference 10.6 Amendment No. 1 to the 2001 Omnibus Stock Plan of the Incorporated by reference Registrant 10.7 Form of Incentive Stock Option Agreement under the 2001 Incorporated by reference Omnibus Stock Plan of the Registrant 10.8 Form of Nonstatutory Stock Option Agreement under the 2001 Incorporated by reference Omnibus Stock Plan of the Registrant 10.8 Form of Nonstatutory Stock Option Agreement under the 2001 Incorporated by reference Omnibus Stock Plan of the Registrant 10.9 Form of Restricted Stock Agreement under the 2001 Omnibus Incorporated by reference Stock Plan of the Registrant+ 10.10 Option Agreement between the Registrant and Marshall Geller Incorporated by reference dated as of March 3, 1997 10.11 Option Agreement between the Registrant and Marshall Geller Incorporated by reference dated May 9, 2001 10.12 Option Agreement between the Registrant and Marshall Geller Incorporated by reference dated June 21, 2001 10.13 Option Agreement between the Registrant and Robert Incorporated by reference Korkowski dated March 3, 1997 10.14 Option Agreement between the Registrant and Robert Incorporated by reference Korkowski dated May 9, 2001 10.15 Option Agreement between the Registrant and Robert Incorporated by reference Korkowski dated June 21, 2001 10.16 Employment Agreement between the Registrant and William J. Incorporated by reference Lansing dated December 1, 2003 10.17 Option Agreement between the Registrant and William J. Incorporated by reference Lansing dated December 1, 2003 10.17 Option Agreement between the Registrant and William J. Incorporated by reference Lansing dated December 1, 2003 10.18 Option Agreement between the Registrant and Nathan Fagre Incorporated by reference dated May 1, 2000 10.19 2002 Annual Management Incentive Plan of the Registrant Incorporated by reference 10.20 Employment Agreement between the Registrant and Nathan E. Incorporated by reference Fagre dated April 30, 2000 10.21 Amendment No. 1 to Employment Agreement between Registrant Incorporated by reference and Nathan E. Fagre dated as of April 5, 2001 10.22 Form of Salary Continuation Agreement between the Incorporated by reference Registrant and each of Nathan Fagre dated July 2, 2003 and Scott Danielson dated June 16, 2004
EXHIBIT NUMBER EXHIBIT FILED BY ------- ------- -------- 10.2310.21 Amendment No. 1 to Employment Agreement between Registrant Incorporated by reference and Nathan E. Fagre dated as of April 5, 2001 10.22 Form of Salary Continuation Agreement between the Registrant and Incorporated by reference Brenda BoehlerRegistrant and each of Nathan Fagre dated February 9,July 2, 2003 and Scott Danielson dated June 16, 2004 10.23 Option Agreement between the Registrant and Jim Gilbertson Incorporated by reference dated November 30, 2005.(EE) 10.24 Form of Option Agreement between the Registrant and each of Incorporated by reference Brenda Boehler and Scott Danielson 10.25 Investment Agreement by and between the Registrant and GE Incorporated by reference Equity dated as of March 8, 1999 10.26 First Amendment and Agreement dated as of April 15, 1999 to Incorporated by reference the Investment Agreement, dated as of March 8, 1999, by and between the Registrant and GE Equity 10.27 Distribution and Marketing Agreement dated as of March 8, Incorporated by reference 1999 by and between NBC and the Registrant 10.28 Letter Agreement dated March 8, 1999 between NBC, GE Equity Incorporated by reference and the Registrant 10.29 Shareholder Agreement dated April 15, 1999 between the Incorporated by reference Registrant, and GE Equity 10.30 Amendment No. 1 dated March 19, 2004 to Shareholder Agree- Incorporated by reference ment dated April 15, 1999 between the Registrant, NBC and GE Equity 10.31 ValueVision Common Stock Purchase Warrant dated as of April Incorporated by reference 15, 1999 issued to GE Equity 10.32 Registration Rights Agreement dated April 15, 1999 between Incorporated by reference the Registrant, GE Equity and NBC 10.33 ValueVision Common Stock Purchase Warrant dated as of April Incorporated by reference 15, 1999 issued to NBC 10.34 Letter Agreement dated November 16, 2000 between the Incorporated by reference Registrant and NBC 10.35 Warrant Purchase Agreement dated September 13, 1999 between Incorporated by reference the Registrant, Snap!LLC, a Delaware limited liability company and Xoom.com, Inc., a Delaware corporation 10.36 Common Stock Purchase Warrant dated September 13, 1999 to Incorporated by reference purchase shares of the Registrant held by Xoom.com, Inc., a Delaware corporation.(I) 10.37 Registration Rights Agreement dated September 13, 1999 Incorporated by reference between the registrant and Xoom.com, Inc., a Delaware corporation, relating to Xoom.com, Inc.'s warrant to purchase shares of the Registrant 10.38 Amended and Restated Limited Liability Company Agreement of Incorporated by reference Ralph Lauren Media, LLC, a Delaware limited liability company, dated as of February 7, 2000, among Polo Ralph Lauren Corporation, a Delaware corporation, National Broadcasting Company, Inc., a Delaware corporation, the Registrant, CNBC.com LLC, a Delaware limited liability company and NBC Internet, Inc., a Delaware corporation 10.39 Agreement for Services dated February 7, 2000 between Ralph Incorporated by reference Lauren Media, LLC, a Delaware limited liability company, and VVI Fulfillment Center, Inc., a Minnesota corporation
EXHIBIT NUMBER EXHIBIT FILED BY ------- ------- -------- 10.40 Amendment to Agreement for Services dated as of January 31, Incorporated by reference 2003 between Ralph Lauren Media, LLC and VVI Fulfillment Center, Inc 10.41 Trademark License Agreement dated as of November 16, 2000 Incorporated by reference between NBC and the Registrant 10.42 Warrant Purchase Agreement dated as of November 16, 2000 Incorporated by reference between NBC and the Registrant
EXHIBIT NUMBER EXHIBIT FILED BY ------- ------- -------- 10.43 Common Stock Purchase Warrant dated as of November 16, 2000 Incorporated by reference between NBC and the Registrant 10.44 Amendment No. 1 dated March 12, 2001 to Common Stock Incorporated by reference Purchase Warrant dated as of November 16, 2000 between NBC and the Registrant 10.45 ValueVision Common Stock Purchase Warrant dated as of March Incorporated by reference 20, 2001 between NBC and the Registrant 10.46 2004 Omnibus Stock Plan Incorporated by reference 10.47 Form of Stock Option Agreement (Employees) under 2004 Incorporated by reference Omnibus Stock Plan 10.48 Form of Stock Option Agreement (Executive Officers) under Incorporated by reference 2004 Omnibus Stock Plan 10.49 Form of Stock Option Agreement (Executive Officers) under Incorporated by reference 2004 Omnibus Stock Plan 10.50 Form of Stock Option Agreement (Directors -- Annual Grant) Incorporated by reference under 2004 Omnibus Stock Plan 10.51 Form of Stock Option Agreement (Directors -- Other Grants) Incorporated by reference under 2004 Omnibus Stock Plan 10.52 Stock Purchase Agreement dated as of February 9, 2005 Incorporated by reference between GE Capital Equity Investments, Inc. and Delta Onshore, LP, Delta Institutional, LP, Delta Pleiades, LP and Delta Offshore, Ltd. 10.53 Stock Purchase and Registration Agreement dated as of July Incorporated by reference 8, 2005 between GE Capital Equity Investments, Inc. and Janus Investment Fund 10.54 Stock Purchase and Registration Agreement dated as of July Incorporated by reference 8, 2005 between GE Capital Equity Investments, Inc. and Caxton International Limited 10.55 Stock Purchase and Registration Agreement dated as of July Incorporated by reference 8, 2005 between GE Capital Equity Investments, Inc. and Magnetar Investment Management, LLC 10.56 Stock Purchase and Registration Agreement dated as of July Incorporated by reference 8, 2005 between GE Capital Equity Investments, Inc. and RCG Ambrose Master Fund, Ltd., RCG Halifax Fund, Ltd., Ramius Securities, LLC, Starboard Value and Opportunity Fund, LLC, Parche, LLC and Ramius Master Fund, Ltd 10.57 Employment Agreement between the Registrant and Bryan Incorporated by reference Venberg dated May 3, 2004 10.58 Form of Change of Control and Severance Agreement with Incorporated by reference Executive Officers 10.59 Form of Resale Restriction Agreement with Executive Incorporated by reference Officers 10.60 2006 Long Term Incentive Plan Incorporated by reference 10.61 Description of Director Compensation Program Changes Incorporated by reference 10.62 Form of Restricted Stock Agreement (Directors) under 2004 Incorporated by reference Omnibus Stock Plan.
EXHIBIT NUMBER EXHIBIT FILED BY ------- ------- -------- 21 Significant Subsidiaries of the Registrant Filed Herewith 23.1 Consent of Independent Registered Public Accounting Firm Filed Herewith 23.2 Consent of Independent Registered Public Accounting Firm Filed Herewith 23.3 Consent of Independent Registered Public Accounting Firm To be Filed by amendment 24 Powers of Attorney Included with Signatures 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Filed Herewith Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Filed Herewith Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Filed Herewith Officer 32.1 Section 1350 Certification of Chief Executive Officer Filed Herewith 32.2 Section 1350 Certification of Chief ExecutiveFinancial Officer Filed Herewith 32.2 Section 1350 Certification99.1 Audited Financial Statements for Ralph Lauren Media, LLC as Filed Herewith of ChiefApril 1, 2006, and for the fifteen-month period ended April 1, 2006 99.2 Audited Financial OfficerStatements for Ralph Lauren Media, LLC as To be Filed Herewithby amendment of March 31, 2007, and for the year ended March 31, 2007