Legacy IMBDS, Inc. - Quarter Report: 2009 May (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 for the quarterly period ended May 2, 2009 |
Commission File Number 0-20243
VALUEVISION MEDIA, INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-1673770 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
6740 Shady Oak Road, Eden Prairie, MN 55344
(Address of Principal Executive Offices, including Zip Code)
952-943-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
As of June 8, 2009, there were 32,229,080 shares of the registrants common stock, $.01 par value
per share, outstanding.
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
May 2, 2009
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
May 2, | January 31, | |||||||
2009 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 37,013 | $ | 53,845 | ||||
Restricted cash |
1,642 | 1,589 | ||||||
Accounts receivable, net |
57,242 | 51,310 | ||||||
Inventories |
44,177 | 51,057 | ||||||
Prepaid expenses and other |
4,963 | 3,668 | ||||||
Total current assets |
145,037 | 161,469 | ||||||
Long-term investments |
15,728 | 15,728 | ||||||
Property & equipment, net |
30,897 | 31,723 | ||||||
FCC broadcasting license |
23,111 | 23,111 | ||||||
NBC trademark license agreement, net |
6,574 | 7,381 | ||||||
Other assets |
522 | 2,088 | ||||||
$ | 221,869 | $ | 241,500 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 51,776 | $ | 64,615 | ||||
Accrued liabilities |
40,574 | 30,657 | ||||||
Deferred revenue |
722 | 716 | ||||||
Total current liabilities |
93,072 | 95,988 | ||||||
Deferred revenue |
1,684 | 1,849 | ||||||
Accrued dividends Series B Preferred Stock |
817 | | ||||||
Series B Mandatory Redeemable Preferred Stock, $.01 per share par value,
4,929,266 shares authorized; 4,929,266 shares issued and outstanding |
11,052 | | ||||||
Commitments and Contingencies |
||||||||
Series A Redeemable Convertible Preferred Stock, $.01 per share par value,
5,339,500 shares authorized |
| 44,191 | ||||||
Shareholders equity: |
||||||||
Common stock, $.01 per share par value, 100,000,000 shares authorized;
32,236,085 and 33,690,266 shares issued and outstanding |
322 | 337 | ||||||
Warrants to purchase 6,029,487 and 29,487 shares of common stock |
671 | 138 | ||||||
Additional paid-in capital |
313,646 | 286,380 | ||||||
Accumulated deficit |
(199,395 | ) | (187,383 | ) | ||||
Total shareholders equity |
115,244 | 99,472 | ||||||
$ | 221,869 | $ | 241,500 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
For the Three Month | ||||||||
Periods Ended | ||||||||
May 2, | May 3, | |||||||
2009 | 2008 | |||||||
Net sales |
$ | 133,802 | $ | 156,288 | ||||
Cost of sales |
91,613 | 106,332 | ||||||
(exclusive of depreciation and amortization shown below) |
||||||||
Operating expense: |
||||||||
Distribution and selling |
45,239 | 57,083 | ||||||
General and administrative |
4,627 | 6,335 | ||||||
Depreciation and amortization |
3,789 | 4,319 | ||||||
Restructuring costs |
104 | 330 | ||||||
CEO transition costs |
77 | 277 | ||||||
Total operating expense |
53,836 | 68,344 | ||||||
Operating loss |
(11,647 | ) | (18,388 | ) | ||||
Other income (expense): |
||||||||
Interest income |
216 | 825 | ||||||
Interest expense |
(743 | ) | | |||||
Total other income (expense) |
(527 | ) | 825 | |||||
Loss before income taxes |
(12,174 | ) | (17,563 | ) | ||||
Income tax (provision) benefit |
162 | (15 | ) | |||||
Net loss |
(12,012 | ) | (17,578 | ) | ||||
Excess of preferred stock carrying value over redemption value |
27,362 | | ||||||
Accretion of Series A redeemable preferred stock |
(62 | ) | (73 | ) | ||||
Net income (loss) available to common shareholders |
$ | 15,288 | $ | (17,651 | ) | |||
Net income (loss) per common share |
$ | 0.46 | $ | (0.53 | ) | |||
Net income (loss) per common share assuming dilution |
$ | 0.46 | $ | (0.53 | ) | |||
Weighted average number of common shares outstanding: |
||||||||
Basic |
33,103,736 | 33,577,899 | ||||||
Diluted |
33,110,074 | 33,577,899 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE THREE-MONTH PERIOD ENDED MAY 2, 2009
FOR THE THREE-MONTH PERIOD ENDED MAY 2, 2009
(Unaudited)
(In thousands, except share data)
(In thousands, except share data)
Common | ||||||||||||||||||||||||||||
Common Stock | Stock | Additional | Total | |||||||||||||||||||||||||
Comprehensive | Number | Par | Purchase | Paid-In | Accumulated | Shareholders | ||||||||||||||||||||||
Loss | of Shares | Value | Warrants | Capital | Deficit | Equity | ||||||||||||||||||||||
BALANCE, January
31, 2009 |
33,690,266 | $ | 337 | $ | 138 | $ | 286,380 | $ | (187,383 | ) | $ | 99,472 | ||||||||||||||||
Net loss |
$ | (12,012 | ) | | | | | (12,012 | ) | (12,012 | ) | |||||||||||||||||
Value assigned to
common stock purchase
warrants |
| | 533 | | | 533 | ||||||||||||||||||||||
Repurchase of common
stock |
(1,622,168 | ) | (16 | ) | | (921 | ) | | (937 | ) | ||||||||||||||||||
Common stock issuances |
167,987 | 1 | | (1 | ) | | | |||||||||||||||||||||
Share-based payment
compensation |
| | | 888 | | 888 | ||||||||||||||||||||||
Excess of preferred
stock carrying value
over redemption value |
| | | 27,362 | | 27,362 | ||||||||||||||||||||||
Accretion of Series A
redeemable preferred
stock |
| | | (62 | ) | | (62 | ) | ||||||||||||||||||||
BALANCE, May 2,
2009 |
32,236,085 | $ | 322 | $ | 671 | $ | 313,646 | $ | (199,395 | ) | $ | 115,244 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share data)
(In thousands, except share data)
For the Three Month | ||||||||
Periods Ended | ||||||||
May 2, | May 3, | |||||||
2009 | 2008 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (12,012 | ) | $ | (17,578 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used for) operating activities: |
||||||||
Depreciation and amortization |
3,789 | 4,319 | ||||||
Share-based payment compensation |
888 | 1,068 | ||||||
Amortization of deferred revenue |
(72 | ) | (72 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(5,932 | ) | 37,669 | |||||
Inventories |
6,880 | 10,190 | ||||||
Prepaid expenses and other |
(1,217 | ) | (879 | ) | ||||
Deferred revenue |
(87 | ) | 37 | |||||
Accounts payable and accrued liabilities |
(2,656 | ) | (27,825 | ) | ||||
Accrued dividends payable Series B Preferred Stock |
743 | | ||||||
Net cash provided by (used for) operating activities |
(9,676 | ) | 6,929 | |||||
INVESTING ACTIVITIES: |
||||||||
Property and equipment additions |
(1,822 | ) | (2,399 | ) | ||||
Proceeds from sale and maturities of investments |
| 17,549 | ||||||
Increase in restricted cash |
(53 | ) | | |||||
Net cash provided by (used for) investing activities |
(1,875 | ) | 15,150 | |||||
FINANCING ACTIVITIES: |
||||||||
Payments for repurchases of common stock |
(937 | ) | (3,317 | ) | ||||
Payments on redemption of Series A Preferred Stock |
(3,400 | ) | | |||||
Payments for Series B Preferred Stock issuance costs |
(944 | ) | | |||||
Net cash used for financing activities |
(5,281 | ) | (3,317 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(16,832 | ) | 18,762 | |||||
BEGINNING CASH AND CASH EQUIVALENTS |
53,845 | 25,605 | ||||||
ENDING CASH AND CASH EQUIVALENTS |
$ | 37,013 | $ | 44,367 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Interest paid |
$ | | $ | | ||||
Income taxes paid |
$ | | $ | 181 | ||||
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
Property and equipment purchases included in accounts payable |
$ | 272 | $ | 478 | ||||
Accretion of redeemable Series A Preferred Stock |
$ | 62 | $ | 73 | ||||
Series B Preferred Stock issuance costs included in accrued liabilities |
$ | 788 | $ | | ||||
Issuance of Series B Preferred Stock |
$ | 12,958 | $ | | ||||
Excess of preferred stock carrying value over redemption value |
$ | 27,362 | $ | | ||||
Redemption of Series A Preferred Stock |
$ | 40,854 | $ | | ||||
Issuance of 6,000,000 common stock purchase warrants |
$ | 533 | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VALUEVISION MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 2009
(Unaudited)
(1) General
ValueVision Media, Inc. and subsidiaries (the Company) is an integrated multi-channel
retailer that markets, sells and distributes its products directly to consumers through various
forms of electronic media. The Companys operating strategy incorporates distribution from
television, internet and mobile devices.
The Companys television home shopping business uses on-air spokespersons to market brand name
and private label consumer products at competitive prices. The Companys live 24-hour per day
television home shopping programming is distributed primarily through 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 and through leased
carriage on full power television stations in Pittsburgh, Pennsylvania and Seattle, Washington. The
Company also markets a broad array of merchandise through its internet shopping websites,
www.ShopNBC.com and www.ShopNBC.TV.
The Company has an exclusive license agreement with NBC Universal, Inc. (NBCU), for the
worldwide use of an NBC-branded name and the peacock image through May 2011. Pursuant to the
license, the Company operates its television home shopping network under the ShopNBC brand name and
operates its internet website under the ShopNBC.com and ShopNBC.TV brand names.
(2) Basis of Financial Statement Presentation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared on a
going concern basis. The Company experienced operating losses of approximately $88.5 million and
$23.1 million in fiscal 2008 and fiscal 2007, respectively. The Company reported a net loss of
$97.8 million in fiscal 2008. As a result of these and other previously reported losses, the
Company has an accumulated deficit of $199.4 million at May 2, 2009. The Company and other
retailers generally are particularly sensitive to adverse global economic and business conditions,
in particular to the extent they result in a loss of consumer confidence and decreases in consumer
spending, particularly discretionary spending. The recent world-wide credit market disruptions and
economic slowdown have negatively impacted consumer confidence, consumer spending and,
consequently, our business. The timing and nature of any recovery in the credit and financial
markets, as well as the general economic climate, continues to remain uncertain, and there is no
assurance that market conditions will improve in the near future or that the Companys results will
not continue to be adversely affected.
The Company has taken initiatives to significantly reduce its operating costs, primarily costs
associated with its cable and satellite program distribution that has historically represented
approximately 50% of the Companys recurring operating expenses. Cable and satellite distribution
agreements representing a majority of the total cable and satellite households who currently
receive the Companys television programming were scheduled to expire at the end of the 2008
calendar year. A number of the major agreements have been renegotiated and renewed at this time;
and for other of the major agreements, the Company has obtained temporary extensions while it
continues negotiations. Failure to successfully renew remaining cable agreements covering a
material portion of the existing cable households on acceptable financial terms could adversely
affect future growth, sales revenues, operating cash balances and earnings unless the Company
arranges for alternative means of broadly distributing its television programming. Additionally,
the Company has further reduced other operating expenses as a result of several reductions in its
salaried workforce and significant reductions in all non-revenue-related discretionary spending.
The Company will continue to work to improve product return rates and call center and warehousing
processing to reduce our transactional costs.
On February 25, 2009, the Company restructured and extended its remaining $40.9 million
preferred stock cash redemption commitment to GE Capital out to 2013 and 2014 thus enhancing its
near term liquidity position. The Company anticipates that its existing capital resources and cash
flows from operations will be adequate to satisfy its liquidity requirements through fiscal 2009.
To address future liquidity needs managements plans include pursuing alternative financing
arrangements and further reducing operating expenditures as necessary to meet the Companys cash
requirements. However, there is no assurance that, if required, the Company will be able to raise
additional capital or reduce discretionary spending to provide the required liquidity which, in
turn, may have an adverse effect on results of operations and financial position.
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Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of America have been
condensed or omitted in accordance with these rules and regulations. The information furnished in
the interim condensed consolidated financial statements includes normal recurring accruals and
reflects all adjustments which, in the opinion of management, are necessary for a fair presentation
of these financial statements. Although management believes the disclosures and information
presented are adequate, it is suggested that these interim condensed consolidated financial
statements be read in conjunction with the Companys most recent audited financial statements and
notes thereto included in its annual report on Form 10-K for the fiscal year ended January 31,
2009. Operating results for the three-month period ended May 2, 2009 are not necessarily indicative
of the results that may be expected for the fiscal year ending January 30, 2010.
The accompanying condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year
The Companys most recently completed fiscal year ended on January 31, 2009 and is designated
fiscal 2008. The Companys fiscal year ending January 30, 2010 is designated fiscal 2009. The
Company reports on a 52/53 week fiscal year which ends on the Saturday nearest to January 31. The
52/53 week fiscal year allows for the weekly and monthly comparability of sales results relating to
the Companys television home-shopping and internet businesses.
(3) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with Statement of
Financial Accounting Standards No. 123(R) (revised 2004), Share-Based Payment. Compensation is
recognized for all stock-based compensation arrangements by the Company, including employee and
non-employee stock options granted after February 2, 2006 and all unvested stock-based compensation
arrangements granted prior to February 2, 2006 as of such date, commencing with the quarter ended
May 6, 2006. Stock-based compensation expense in the first quarter of fiscal 2009 and the first
quarter of fiscal 2008 related to stock option awards was $669,000 and $732,000, respectively. 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.
As of May 2, 2009, the Company had two active omnibus stock plans for which stock awards may
be currently granted: the 2004 Omnibus Stock Plan (as amended and restated in fiscal 2006) that
provides for the issuance of up to 4,000,000 shares of the Companys common stock; and the 2001
Omnibus Stock Plan which provides for the issuance of up to 3,000,000 shares of the Companys
stock. These plans are administered by the human resources and compensation committee of the board
of directors and provide for awards for employees, directors and consultants. All employees and
directors of the Company and its subsidiaries are eligible to receive awards under the plans. The
types of awards that may be granted under these plans 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 employees at such exercise prices as
the human resources and 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 may be
granted more than ten years after the effective date of the respective plans inception or be
exercisable more than ten years after the date of grant. Options granted to outside directors 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. Options granted under these plans are exercisable and
generally vest over three years in the case of employee stock options and vest immediately on the
date of grant in the case of director options, and generally have contractual terms of either five
years from the date of vesting or ten years from the date of grant. Prior to the adoption of the
2004 and 2001 plans, the Company had other incentive stock option plans in place in which stock
options were granted to employees under similar vesting terms. The Company has also granted
non-qualified stock options to current and former directors and certain employees with similar
vesting terms.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model that uses assumptions noted in the following table. Expected volatilities are
based on the historical volatility of the Companys stock. Expected term is calculated using the
simplified method taking into consideration the options 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 and
currently intends to retain earnings for use in operations.
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Fiscal 2009 | Fiscal 2008 | |||
Expected volatility |
66% | 41% 56% | ||
Expected term (in years) |
6 years | 6 years | ||
Risk-free interest rate |
2.3% 2.6% | 2.9% 3.7% |
A summary of the status of the Companys stock option activity as of May 2, 2009 and changes
during the three months then ended is as follows:
2004 | 2001 | 1990 | ||||||||||||||||||||||||||||||
Incentive | Weighted | Incentive | Weighted | Incentive | Weighted | Other Non- | Weighted | |||||||||||||||||||||||||
Stock | Average | Stock | Average | Stock | Average | Qualified | Average | |||||||||||||||||||||||||
Option | Exercise | Option | Exercise | Option | Exercise | Stock | Exercise | |||||||||||||||||||||||||
Plan | Price | Plan | Price | Plan | Price | Options | Price | |||||||||||||||||||||||||
Balance outstanding,
January 31, 2009 |
2,690,000 | $ | 8.01 | 2,478,000 | $ | 7.05 | 11,000 | $ | 13.73 | 1,400,000 | $ | 15.46 | ||||||||||||||||||||
Granted |
167,000 | 0.58 | | | | | | | ||||||||||||||||||||||||
Exercised |
| | | | | | | | ||||||||||||||||||||||||
Forfeited or canceled |
(205,000 | ) | 10.18 | (215,000 | ) | 8.63 | (10,000 | ) | 12.94 | | | |||||||||||||||||||||
Balance outstanding,
May 2, 2009 |
2,652,000 | $ | 7.37 | 2,263,000 | $ | 6.90 | 1,000 | $ | 20.55 | 1,400,000 | $ | 15.46 | ||||||||||||||||||||
Options exercisable at: |
||||||||||||||||||||||||||||||||
May 2, 2009 |
1,271,000 | $ | 9.68 | 890,000 | $ | 10.14 | 1,000 | $ | 20.55 | 1,400,000 | $ | 15.46 | ||||||||||||||||||||
The following table summarizes information regarding stock options outstanding at May 2, 2009:
Weighted | Weighted | |||||||||||||||||||||||||||||||
Weighted | Average | Weighted | Average | |||||||||||||||||||||||||||||
Average | Remaining | Aggregate | Vested or | Average | Remaining | Aggregate | ||||||||||||||||||||||||||
Options | Exercise | Contractual Life | Intrinsic | Expected to | Exercise | Contractual Life | Intrinsic | |||||||||||||||||||||||||
Option Type | Outstanding | Price | (Years) | Value | Vest | Price | (Years) | Value | ||||||||||||||||||||||||
2004 Incentive: |
2,652,000 | $ | 7.37 | 7.9 | $ | 25,000 | 2,513,000 | $ | 7.49 | 7.9 | $ | 23,000 | ||||||||||||||||||||
2001 Incentive: |
2,263,000 | $ | 6.90 | 8.1 | $ | 19,000 | 2,126,000 | $ | 7.03 | 7.1 | $ | 18,000 | ||||||||||||||||||||
1990 Incentive: |
1,000 | $ | 20.55 | 0.1 | $ | | 1,000 | $ | 20.55 | 0.1 | $ | | ||||||||||||||||||||
Other Non-qualified: |
1,400,000 | $ | 15.46 | 0.5 | $ | | 1,400,000 | $ | 15.46 | 0.5 | $ | | ||||||||||||||||||||
The weighted average grant-date fair value of options granted in the three months of fiscal
2009 and 2008 was $0.35 and $2.38, respectively. The total intrinsic value of options exercised
during the first three months of fiscal 2009 and 2008 was $-0-. As of May 2, 2009, total
unrecognized compensation cost related to stock options was $4,866,000 and is expected to be
recognized over a weighted average period of approximately 1.2 years.
(4) Short and Long-Term Investments
Short and long-term investments include the following available-for-sale securities at May 2,
2009 and January 31, 2009:
May 2, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Long-term: |
||||||||||||||||
Auction-rate securities |
$ | 15,728,000 | $ | | $ | | $ | 15,728,000 | ||||||||
January 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Long-term: |
||||||||||||||||
Auction-rate securities |
$ | 15,728,000 | $ | | $ | | $ | 15,728,000 | ||||||||
There were no short or long-term investments classified as held-to-maturity securities at May
2, 2009 and January 31, 2009.
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The following table summarizes the contractual maturities of the Companys long-term debt
securities as of May 2, 2009:
Less than one year |
$ | | ||
Mature in 1-2 years |
| |||
Mature after 5 years |
15,728,000 | |||
$ | 15,728,000 | |||
Proceeds from sales and maturities of available-for-sale and held-to-maturity securities were
$-0- and $17,549,000 during the three months ended May 2, 2009 and May 3, 2008, respectively. In
the first quarter of fiscal 2008, the Company sold one of its held-to-maturity securities with a
net carrying amount of $2,910,000 due to the significant deterioration of the issuers
creditworthiness. Sales of available-for-sale securities for the three months ended May 2, 2009
and May 3, 2008 resulted in no gains or losses recorded. The cost of all securities sold is based
on the specific identification method.
At May 2, 2009, the Companys investment portfolio included auction rate securities with an
estimated fair value of $15,728,000 ($26,800,000 original cost basis). The Companys auction rate
securities are primarily variable rate debt instruments that have underlying securities with
contractual maturities greater than ten years. Holders of auction rate securities can either sell
through the auction or bid based on a desired interest rate or hold and accept the reset rate. If
there are insufficient buyers, then the auction fails and holders are unable to liquidate their
investment through the auction. A failed auction is not a default of the debt instrument, but does
set a new interest rate in accordance with the original terms of the debt instrument. The result of
a failed auction is that the auction rate security continues to pay interest in accordance with its
terms. Auctions continue to be held as scheduled until the auction rate security matures or until
it is called. These investment-grade auction rate securities have failed to settle in auctions
beginning in fiscal 2007 and through the current quarter of fiscal 2009. At this time, these
investments are not available to settle current obligations, are not liquid, and in the event the
Company needs to access these funds, the Company would not be able to do so without a loss of
principal. The loss of principal could be significant if the Company needed to access the funds
within a short time horizon and the market for auction rate securities had not returned at the time
the Company sought to sell such securities.
The Company will continue to monitor the market for auction rate securities and consider the
impact, if any, on the fair value of its investments. If current market conditions deteriorate
further the Company may be required to record an additional other than temporary impairment in
future periods. Due to the current lack of liquidity of these investments, they are classified as
long-term investments on the Companys balance sheet.
(5) Fair Value Measurements
The Company adopted Statement of Financial Accounting Standard No. 157. Fair Value
Measurements (SFAS No. 157), prospectively effective February 3, 2008, with respect to fair value
measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the Companys financial statements on a recurring basis (at least annually) and (b) all
financial assets and liabilities. The Company adopted the remaining aspects of SFAS No. 157
relative to nonfinancial assets and liabilities that are measured at fair value, but are recognized
and disclosed at fair value on a nonrecurring basis, prospectively effective February 1, 2009.
SFAS No. 157 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The fair value hierarchy gives the highest
priority to observable quoted prices (unadjusted) in active markets for identical assets and
liabilities and the lowest priority to unobservable inputs. The following is a brief description of
those three levels:
| Level 1Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
| Level 2Inputs based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. |
| Level 3Unobservable inputs for the asset or liability that are significant to the fair value measurement. |
Measured at Fair Value Recurring Basis
Available-for-sale Auction Rate Securities:
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The Company holds available-for-sale marketable securities that are subject to fair valuation
under SFAS No. 157. These investments were previously and will continue to be marked-to-market at
each reporting period; however, the definition of fair value used for these investments is now
applied using SFAS No. 157. The information in the following tables primarily addresses matters
relative to these
financial assets. The Company uses various valuation techniques, which are primarily based
upon the market and income approaches, with respect to its financial assets. Investments in
available-for-sale auction rate securities are valued utilizing a discounted cash flow analysis.
The assumptions used in preparing the discounted cash flow model include estimates for interest
rates, timing and amount of cash flows and expected holding periods of auction rate securities. The
Company concluded that the inputs used in its auction rate securities fair valuation model are
Level 3 inputs.
The following table provides information by level for assets and liabilities that are measured at
fair value, as defined by SFAS No. 157, on a recurring basis:
Fair Value at | ||||||||||||||||
Description | January 31, 2009 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Available-for-sale: |
||||||||||||||||
Marketable securities auction rate securities |
$ | 15,728,000 | $ | | $ | | $ | 15,728,000 | ||||||||
Fair Value at | ||||||||||||||||
Description | May 2, 2009 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Available-for-sale: |
||||||||||||||||
Marketable securities auction rate securities |
$ | 15,728,000 | $ | | $ | | $ | 15,728,000 |
The following table provides a reconciliation of the beginning and ending balances of items
measured at fair value on a recurring basis in the table above that used significant unobservable
inputs (Level 3).
Marketable | ||||
securities | ||||
auction rate | ||||
securities | ||||
Beginning balance (January 31, 2009) |
$ | 15,728,000 | ||
Total gains or losses: |
||||
Included in earnings |
| |||
Included in other comprehensive loss |
| |||
Purchases, issuances, and settlements |
| |||
Transfers in and/or out of Level 3 |
| |||
Ending balance (May 2, 2009) |
$ | 15,728,000 | ||
Measured at Fair Value Nonrecurring Basis
During the quarter ended May 2, 2009, the Company measured the fair value of the Series B
Preferred Stock issued in connection with the preferred stock exchange described in Note 16. The
Company estimated the fair value of the Series B Preferred Stock of $12,959,000 utilizing a
discounted cash flow model estimating the projected future cash payments over the life of the
five-year redemption term. The assumptions used in preparing the discounted cash flow model
include estimates for discount rate and expected timing of repayment of the Series B Preferred
Stock. The Company concluded that the inputs used in its Series B Preferred Stock valuation are
Level 3 inputs.
(6) Net Income (Loss) Per Common Share
Basic earnings per share is computed by dividing reported earnings by the weighted average
number of common shares outstanding for the reported period following the two-class method. The
effect of the Companys participating convertible preferred stock is included in basic earnings per
share under the two-class method if dilutive for fiscal 2008. Diluted earnings per share 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.
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A reconciliation of earnings per share calculations and the number of shares used in the
calculation of basic earnings per share under the two-class method and diluted earnings per share
is as follows:
Three Month Periods Ended | ||||||||
May 2, | May 3, | |||||||
2009 | 2008 | |||||||
Net income (loss) available to common shareholders |
$ | 15,288,000 | $ | (17,651,000 | ) | |||
Weighted average number of common shares
outstanding using two-class method |
33,104,000 | 33,578,000 | ||||||
Effect of participating convertible preferred stock |
| | ||||||
Weighted average number of common shares
outstanding using two-class method Basic |
33,104,000 | 33,578,000 | ||||||
Dilutive effect of stock options, non-vested shares
and warrants |
6,000 | | ||||||
Weighted average number of common shares
outstanding Diluted |
33,110,000 | 33,578,000 | ||||||
Net income (loss) per common share |
$ | 0.46 | $ | (0.53 | ) | |||
Net income (loss) per common share-assuming dilution |
$ | 0.46 | $ | (0.53 | ) | |||
For the three-month period ended May 3, 2008, approximately 114,000 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 the effect of their
inclusion would be antidilutive.
(7) Comprehensive Loss
For the Company, comprehensive loss is computed as net earnings plus other items that are
recorded directly to shareholders equity. Total comprehensive loss was $(12,012,000) and
$(18,122,000) for the three-month periods ended May 2, 2009 and
May 3, 2008, respectively.
(8) Sales by Product Group
Information on net sales by significant product groups are as follows (in thousands):
Three-Month Periods Ended | ||||||||
May 2, 2009 | May 3, 2008 | |||||||
Jewelry |
$ | 27,825 | $ | 66,296 | ||||
Watches, coins & collectibles |
42,136 | 30,686 | ||||||
Consumer electronics |
33,190 | 22,238 | ||||||
Apparel, fashion accessories and health & beauty |
13,908 | 13,579 | ||||||
Home |
7,174 | 13,482 | ||||||
All other revenue, less than 10% each |
9,569 | 10,007 | ||||||
Total |
$ | 133,802 | $ | 156,288 | ||||
(9) Restricted Stock
On August 27, 2008, the Company granted a total of 326,087 shares of restricted stock from the
Companys 2004 Omnibus Stock Plan to its president as compensation for his first year of service as
the Companys president and chief operating officer. The restricted stock vests monthly over the
first year of service with respect to 217,391 shares and on April 1, 2009 with respect to the
remaining 108,696 shares. The aggregate market value of the restricted stock at the date of the
award was $750,000 and is being amortized as compensation expense over the respective vesting
periods. During the third and fourth quarters of fiscal 2008, the Company also granted a total of
20,856 shares of restricted stock to certain consultants and newly appointed board members as
compensation for services. The restricted stock vests over periods ranging from nine to twelve
months from the date of grant. The aggregate market value of the restricted stock at the date of
award was $28,000 and is being amortized as compensation expense over the respective vesting
periods. On June 11, 2008, the Company granted a total of 32,000 shares of restricted stock from
the Companys 2004 Omnibus Stock Plan to four non-management directors elected by the holders of
the Companys common stock (in contrast to the three directors elected by the holders of the
Companys preferred stock) as part of the Companys annual director compensation program. The
restricted stock vests on the day immediately preceding the next annual meeting of shareholders
following the date of grant. The aggregate market value of the restricted stock at the date of
award was $112,000 and is being amortized as director compensation expense over the twelve-month
vesting period.
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Compensation expense recorded in the first three months of fiscal 2009 and the first three
months of fiscal 2008 relating to restricted stock grants was $219,000 and $336,000, respectively.
As of May 2, 2009, there was $180,000 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
0.3 years. The total fair value of restricted stock vested during the first three months of fiscal
2009 and 2008 was $100,000 and $205,000, respectively.
A summary of the status of the Companys non-vested restricted stock activity as of May 2,
2009 and changes during the three-month period then ended is as follows:
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Non-vested outstanding, January 31, 2009 |
268,000 | $ | 2.52 | |||||
Granted |
| | ||||||
Vested |
(166,000 | ) | $ | 2.28 | ||||
Forfeited |
| | ||||||
Non-vested outstanding, May 2, 2009 |
102,000 | $ | 2.91 | |||||
(10) Common Stock Repurchase Program
On February 25, 2009, the Companys board of directors authorized $1.5 million for stock
repurchases under a new stock repurchase program. During the first quarter of fiscal 2009, the
Company repurchased a total of 1,622,000 shares of common stock for a total investment of $937,000
at an average price of $0.58 per share.
(11) Intangible Assets
Intangible assets in the accompanying consolidated balance sheets consisted of the following:
Weighted | May 2, 2009 | January 31, 2009 | ||||||||||||||||||
Average | Gross | Gross | ||||||||||||||||||
Life | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Amortizable intangible assets: |
||||||||||||||||||||
NBC trademark license agreement |
10.5 | $ | 34,437,000 | $ | (27,863,000 | ) | $ | 34,437,000 | $ | (27,056,000 | ) | |||||||||
Cable distribution and marketing agreement |
9.5 | 8,278,000 | (8,278,000 | ) | 8,278,000 | (8,122,000 | ) | |||||||||||||
$ | 42,715,000 | $ | (36,141,000 | ) | $ | 42,715,000 | $ | (35,178,000 | ) | |||||||||||
Unamortized intangible assets: |
||||||||||||||||||||
FCC broadcast license |
$ | 23,111,000 | $ | 23,111,000 | ||||||||||||||||
Amortization expense was $963,000 and $1,003,000 for the quarters ended May 2, 2009 and May 3,
2008, respectively. Estimated amortization expense for the next three years is as follows:
$3,383,000 in fiscal 2009, $3,227,000 in fiscal 2010 and $927,000 in fiscal 2011.
In the fourth quarter of fiscal 2008, the Company estimated the fair value of its FCC
broadcast license by using an income-based discounted cash flow model with the assistance of an
independent outside fair value consultant. The discounted cash flow model included certain
assumptions including revenues, operating profit and a discount rate. Further, the Company also
considered recent comparable asset market data to assist in determining fair value. As a result of
its fair value estimate, the Company recorded an intangible asset impairment of $8,832,000 in the
fourth quarter of fiscal 2008 and reduced the carrying value of the intangible FCC broadcast
license asset as of January 31, 2009.
During the third and fourth quarters of fiscal 2008, the Company experienced a significant
decline in the price of its publicly-traded common stock and, accordingly, a significant decline in
its market capitalization. In the fourth quarter, the Company evaluated whether the decline in its
market capitalization resulting from a record low market value of the Companys stock was an
indicator of impairment. The Company performed an undiscounted cash flow analysis based on a
forecasted cash flow model that included certain significant cost saving assumptions with respect
to cable and satellite distribution cost structure as well as other cost-saving initiatives such as
headcount reductions and reduced discretionary spending and based on that analysis concluded there
had not been an impairment as of January 31, 2009. However, if the Company is unable to
successfully execute its plans to significantly reduce its remaining cable and satellite
distribution costs, achieve other cost-saving initiatives or successfully meet its fiscal 2009
operating plan, the Company may be required to write down the carrying amount of some or all of its
intangible and other long-lived assets to fair value in a future period.
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(12) ShopNBC Private Label and Co-Brand Credit Card Program
During fiscal 2006, the Company introduced and established a private label and co-brand
revolving consumer credit card program (the 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 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 credit card and the
card is activated, the customer is eligible to participate in the Companys credit card
rewards program. Under the original rewards program, points were earned on purchases made with the
credit cards at ShopNBC and other retailers where the co-branded card is accepted. Cardholders who
accumulated the requisite number of points were issued a $50 certificate award towards the future
purchase of ShopNBC merchandise. These certificate awards expire after twelve months if unredeemed.
Beginning in the second quarter of fiscal 2008, the rewards program was modified such that newly
activated card holders obtain an immediate $25 credit upon activation and first purchase and later,
upon the accumulation of the requisite number of points, card holders are issued a $25 certificate
award towards the future purchase of ShopNBC merchandise. These certificate awards expire after
90 days if unredeemed. The Company accounts for the rewards program in accordance with Emerging
Issues Task Force 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 value of points earned is included 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 be redeemed. The Company accounts for the Private Label and Co-Brand Credit Card Agreement in
accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. In connection with
the introduction of the Program, 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. The Company received a million dollar signing bonus as
an incentive for the Company to enter into the agreement. The signing bonus has been recorded as
deferred revenue in the accompanying financial statements and is being recognized as revenue over
the six-year term of the agreement.
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 NBCU and GE Equity. NBCU and GE Equity
have a substantial percentage ownership in the Company and together have the right to select three
members of the Companys board of directors.
(13) Restructuring Costs
On May 21, 2007, the Company announced the initiation of a restructuring of its operations
that included a 12% reduction in the salaried workforce, a consolidation of its distribution
operations into a single warehouse facility, the exit and closure of a retail outlet store and
other cost saving measures. On January 14, 2008, the Company announced additional organizational
changes and cost-saving measures following a formal business review conducted by management and an
outside consulting firm and again reduced its headcount in the fourth quarter of fiscal 2007. The
Companys organizational structure was simplified and streamlined to focus on profitability. As a
result of these restructuring initiatives, the Company recorded a $5,043,000 restructuring charge
for the year ended February 2, 2008, restructuring charges totaling $4,299,000 for the year ended
January 31, 2009 and additional restructuring charges of $104,000 for the three-month period ended
May 2, 2009. Restructuring costs include primarily employee severance and retention costs
associated with the consolidation and elimination of approximately 300 positions across the Company
including ten officers. In addition, restructuring costs also include incremental charges
associated with the Companys consolidation of its distribution and fulfillment operations into a
single warehouse facility, the closure of a retail outlet store, fixed asset impairments incurred
as a direct result of the operational consolidation and closures, restructuring advisory service
fees and costs associated with a strategic alternative initiative.
The table below sets forth for the three months ended May 2, 2009, the significant components
and activity under the restructuring program:
Balance at | Cash | Balance at | ||||||||||||||||||
January 31, 2009 | Charges | Write-offs | Payments | May 2, 2009 | ||||||||||||||||
Severance and retention |
$ | 1,509,000 | $ | 104,000 | $ | | $ | (978,000 | ) | $ | 635,000 | |||||||||
Incremental restructuring charges |
95,000 | | | (10,000 | ) | 85,000 | ||||||||||||||
$ | 1,604,000 | $ | 104,000 | $ | | $ | (988,000 | ) | $ | 720,000 | ||||||||||
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(14) Chief Executive Officer Transition Costs
On October 26, 2007, the Company announced that William Lansing, at the request of the board
of directors, stepped down as president and chief executive officer and left the Companys board of
directors. In conjunction with Mr. Lansings resignation, the Company recorded a charge to income
of $2,451,000 during fiscal 2007 relating primarily to severance payments to Mr. Lansing and
incurred additional costs of $1,101,000 during fiscal 2008 associated with the hiring of Rene Aiu
as the chief executive officer and three other senior executives in March and April 2008.
On August 22, 2008, the Companys board of directors terminated Ms. Aius employment with the
Company. The Companys board appointed Keith Stewart, to serve as ShopNBCs president and chief
operating officer. The Company also announced the departures of three other senior officers who had
been named to their positions in April 2008 by Ms. Aiu. During the third and fourth quarters of
fiscal 2008, the
Company recorded costs totaling $1,580,000 and an additional $77,000 for the three-month
period ended May 2, 2009 relating primarily to accrued severance and other costs associated with
the departures of the three senior officers and costs associated with hiring of Mr. Stewart.
(15) Legal Proceedings
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 have not had a material adverse effect on the Companys operations or consolidated
financial statements.
On November 21, 2008, a lawsuit against ValueVision Media was filed by its former chief
executive officer, Rene Aiu in Hennepin County District Court, Minnesota. Her claims include money
damages for breach of contract for nonpayment of severance equal to two years of salary and of
targeted incentive compensation, fraud and misrepresentation, and violation of certain Minnesota
statutes. The Company filed a response on November 25, 2008, denying Ms. Aius claims. Discovery
has commenced and the court has set the trial to commence in 2010. The Company believes that
Ms. Aiu was properly dismissed for cause as defined in her employment agreement, intends to
defend the suit vigorously and at this time cannot estimate a dollar amount of liability, if any.
(16) Preferred Stock Exchange
On February 25, 2009, GE Equity exchanged all outstanding shares of the Companys Series A
Preferred Stock for (i) 4,929,266 shares of the Companys Series B Redeemable Preferred Stock,
(ii) warrants to purchase up to 6,000,000 shares of the Companys common stock at an exercise price
of $0.75 per share and (iii) a cash payment in the amount of $3,400,000.
The shares of Series B Preferred Stock are redeemable at any time by the Company for the
initial redemption amount of $40,900,000, plus accrued dividends. The Series B Preferred Stock
accrues cumulative dividends at a base annual rate of 12%, subject to adjustment. All payments on
the Series B Preferred Stock will be applied first to any accrued but unpaid dividends, and then to
redeem shares. 30% of the Series B Preferred Stock (including accrued but unpaid dividends) is
required to be redeemed on February 25, 2013, and the remainder on February 25, 2014. In addition,
the Series B Preferred Stock includes a cash sweep mechanism that may require accelerated
redemptions if the Company generates excess cash above agreed upon thresholds. Specifically, the
Companys excess cash balance at the end of each fiscal year, and at the end of any fiscal quarter
during which the Company sells auction rate securities or disposes of assets or incurs indebtedness
above agreed upon thresholds, will trigger a calculation to determine whether the Company needs to
redeem a portion of the Series B Preferred Stock and pay accrued and unpaid dividends thereon. Excess cash
balance is defined as the Companys cash and cash equivalents and marketable securities, adjusted
to (i) exclude auction rate securities, (ii) exclude cash pledged to vendors to secure purchase
price of inventory, (iii) account for variations that are due to the Companys management of
payables, and (iv) provide the Company a cash cushion of at least $20,000,000. Any redemption as a
result of this cash sweep mechanism will reduce the amounts required to be redeemed on February 25,
2013 and February 25, 2014. The Series B Preferred Stock (including accrued but unpaid dividends)
is also required to be redeemed, at the option of the holders, upon a change in control. The
Series B Preferred Stock is not convertible into common stock or any other security, but initially
will vote with the common stock on a one-for-one basis on general corporate matters other than the
election of directors. In addition, the holders of the Series B Preferred Stock have the class
voting rights and rights to designate members of the Companys board of directors previously held
by the holders of the Series A Preferred Stock.
On February 25, 2009, the Company, GE Equity, and NBCU also amended and restated the
shareholder agreement and registration rights agreement. The terms of the amended and restated
shareholder agreement are generally consistent with the terms of the prior shareholder agreement,
and the terms of the amended and restated registration rights agreement are generally consistent
with the terms of the prior registration rights agreement.
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As a result of the preferred stock exchange transaction, the Company recorded the Series B
Preferred Stock at a fair value upon issuance and the excess of the carrying amount of the Series A
Preferred Stock over the fair value of the Series B Preferred Stock as an addition to earnings to
arrive at net earnings available to common shareholders. The Company estimated the fair value of
the Series B Preferred Stock at $12,959,000 utilizing the assistance of an independent fair value
consultant and using a discounted cash flow model estimating the projected future cash payments
over the life of the five-year redemption term. The excess of the Series B Preferred Stock
redemption value over its carrying value (discount) is being amortized and charged to interest
expense over the five-year redemption period using the effective interest method. Due to the
mandatory redemption feature, the Company has classified the carrying value of the Series B
Preferred Stock, and related accrued dividends, as long-term liabilities on its consolidated
balance sheet.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our accompanying unaudited condensed consolidated financial statements
and notes included herein and the audited consolidated financial statements and notes included in
our annual report on Form 10-K for the fiscal year ended January 31, 2009.
Cautionary Statement Regarding Forward-Looking Statements
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations and other materials we file with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made or to be made by us)
contain certain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements other than statements of historical fact, including statements
regarding guidance, industry prospects or future results of operations or financial position made
in this report are forward looking. We often use words such as anticipates, believes, expects,
intends and similar expressions to identify forward-looking statements. These statements are based
on managements current expectations and accordingly are 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; the
general economic and credit environment; interest rates; seasonal variations in consumer purchasing
activities; changes in the mix of products sold by us; competitive pressures on sales; pricing and
sales margins; the level of cable and satellite distribution for our programming and the associated
fees; our ability to continue to manage our cash, cash equivalents and investments to meet our
companys liquidity needs; our ability to obtain liquidity with respect to our auction-rate
securities; our ability to manage our operating expenses successfully; changes in governmental or
regulatory requirements; litigation or governmental proceedings affecting our operations; the risks
identified under Item 1A in this report and under Risk Factors in our Form 10-K for our fiscal
year ended January 31, 2009; 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 our ability to obtain and retain key executives and employees. Investors are
cautioned that all forward-looking statements involve risk and uncertainty. The facts and
circumstances that exist when any forward-looking statements are made and on which those
forward-looking statements are based may significantly change in the future, thereby rendering the
forward-looking statements obsolete. We are under no obligation (and expressly disclaim any
obligation) to update or alter our forward-looking statements whether as a result of new
information, future events or otherwise.
Overview
Company Description
We are an integrated multi-channel retailer that markets our products directly to consumers
through various forms of electronic media. Our operating strategy incorporates distribution from
television, internet and mobile devices. Our live 24-hour per day television home shopping
programming is distributed primarily through cable and satellite affiliation agreements and on-line
through ShopNBC.com and ShopNBC.TV. We have an exclusive license from NBC Universal, Inc., known as
NBCU, for the worldwide use of an NBC-branded name and the peacock image for a period ending in May
2011. Pursuant to the license, we operate our television home shopping network under the ShopNBC
brand name and operate our internet website under the ShopNBC.com and ShopNBC.TV brand names.
Products and Customers
Products sold on our television home shopping network and internet shopping website include
jewelry, watches, consumer electronics, housewares, apparel, cosmetics, seasonal items and other
merchandise. Historically, jewelry has been our largest single category of merchandise, followed by
watches, coins and collectibles and apparel, consumer electronics, fashion accessories and health &
beauty. More recently in fiscal 2009, this product mix has shifted such that watches, coins and &
collectibles are the largest single category, followed by consumer electronics, jewelry and
apparel, fashion accessories, and health & beauty. The following table shows our merchandise mix
as a
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percentage of television home shopping and internet net sales for the periods indicated by
product category:
Three-Month Periods Ended | ||||||||
May 2, | May 3, | |||||||
Merchandise Mix | 2009 | 2008 | ||||||
Jewelry |
21 | % | 44 | % | ||||
Watches, Coins & Collectibles |
33 | % | 20 | % | ||||
Consumer Electronics |
29 | % | 17 | % | ||||
Apparel, Fashion Accessories and Health & Beauty |
10 | % | 10 | % | ||||
Home and All Other |
7 | % | 9 | % |
Our product strategy is to continue to develop new product offerings across multiple
merchandise categories as needed in response to both customer demand and in order to maximize
margin dollars per minute in our television home shopping operations. We have been recently
changing our product mix and product make up within existing categories in order to diversify our
product offerings with the focus of achieving an optimal balance between jewelry and non-jewelry
merchandise to maximize the acquisition of new and the retention of repeat customers. Our customers
are primarily women over the ages of 35 with average annual household incomes in excess of $50,000
who make purchases based primarily on convenience, unique product offerings, value and quality of
merchandise.
Company Strategy
We endeavor to be the premium lifestyle brand in the TV shopping and internet retailing
industry. As an integrated, multi-channel retailer, our strategy is to offer our current and new
customers brands and products that are meaningful, unique and relevant. Our merchandise brand
positioning aims to be the destination and authority for home, fashion and jewelry shoppers. We
focus on creating a customer experience that builds strong loyalty and a growing customer base.
In support of this strategy, we are pursuing the following actions in our ongoing efforts to
improve the operational and financial performance of our company: (i) materially reduce the cost of
our current distribution agreements for our television programming with cable and satellite
operators, as well as pursuing other means of reaching customers such as through webcasting,
internet videos and mobile devices, (ii) broaden and optimize our mix of product categories offered
on television and the internet in order to appeal to a broader population of potential customers,
(iii) lower the average selling price of our products in order to increase the size and purchase
frequency of our customer base, (iv) grow our internet business by providing a broader,
internet-only merchandise offering, and (v) improve the shopping experience and customer service in
order to retain and attract more customers.
Primary 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 our programming. In
order to attain profitability, we must achieve sufficient sales volume through the acquisition of
new customers and the increased retention of existing customers to cover our high fixed costs or
reduce the fixed cost base for our cable and satellite distribution. Our growth and profitability
could be adversely impacted if sales volume decreases, as we have limited capability to reduce our
fixed cable and satellite distribution operating expenses to mitigate a sales shortfall. Our
near-term primary challenge is to continue our cost-control efforts while growing margins and sales
in order to reach profitability.
Our Competition
The direct marketing and retail businesses are highly competitive. In our television home
shopping and e-commerce operations, we compete for customers with other television home shopping
and e-commerce retailers; infomercial companies; other types of consumer retail businesses,
including traditional brick and mortar department stores, discount stores, warehouse stores and
specialty stores; catalog and mail order retailers and other direct sellers.
In the competitive television home shopping sector, we compete with QVC Network, Inc. and HSN,
Inc., both of whom are substantially larger than we are in terms of annual revenues and customers,
and whose programming is carried more broadly to U.S. households than is our programming. The
American Collectibles Network, which operates Jewelry Television, also competes with us for
television home shopping customers in the jewelry category. In addition, there are a number of
smaller niche players and startups in the television home shopping arena who compete with our
company. We believe that QVC and HSN incur cable and satellite distribution fees representing a
significantly lower percentage of their sales attributable to their television programming than do
we; and that their fee arrangements are substantially on a commission basis (in some cases with
minimum guarantees) rather than on the predominantly fixed-cost basis that we currently have. This
difference in programming distribution fee structures represents a material competitive
disadvantage for our company.
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The e-commerce sector also is highly competitive, and we are in direct competition with
numerous other internet retailers, many of whom are larger, better financed and/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 poses additional
competitive challenges for our company.
We anticipate continuing competition for viewers and customers, for experienced home shopping
personnel, for distribution agreements with cable and satellite systems and for vendors and
suppliers not only from television home shopping companies, but also from other companies that
seek to enter the home shopping and internet retail industries, including telecommunications and
cable companies, television networks, and other established retailers. We believe that our ability
to be successful in the television home shopping and e-commerce sectors will be dependent on a
number of key factors, including (i) obtaining more favorable terms in our cable and satellite
distribution agreements, (ii) increasing the number of customers who purchase products from us and
(iii) increasing the dollar value of sales per customer from our existing customer base.
Results for the First Quarter of Fiscal 2009
Consolidated
net sales for the fiscal 2009 first quarter were $133,802,000 compared to $156,288,000
for the 2008 first quarter, a 14% decrease. We reported an operating loss of ($11,647,000) and a
net loss of ($12,012,000) for the 2009 first quarter. We reported an operating loss of
($18,388,000) and a net loss of ($17,578,000) for the 2008 first quarter.
Preferred Stock Exchange
On February 25, 2009, GE Equity exchanged all outstanding shares of our Series A Preferred
Stock for (i) 4,929,266 shares of our Series B Redeemable Preferred Stock, (ii) warrants to
purchase up to 6,000,000 shares of our common stock at an exercise price of $0.75 per share and
(iii) a cash payment in the amount of $3.4 million.
The shares of Series B Preferred Stock are redeemable at any time by us for the initial
redemption amount of $40.9 million, plus accrued dividends. The Series B Preferred Stock accrues
cumulative dividends at a base annual rate of 12%, subject to adjustment. All payments on the
Series B Preferred Stock will be applied first to any accrued but unpaid dividends, and then to
redeem shares. 30% of the Series B Preferred Stock (including accrued but unpaid dividends) is
required to be redeemed on February 25, 2013, and the remainder on February 25, 2014. In addition,
the Series B Preferred Stock includes a cash sweep mechanism that may require accelerated
redemptions if we generate excess cash above agreed upon thresholds. Specifically, our excess cash
balance at the end of each fiscal year, and at the end of any fiscal quarter during which we sell
auction rate securities or dispose of assets or incur indebtedness above agreed upon thresholds,
will trigger a calculation to determine whether the Company needs to
redeem a portion of the Series B Preferred
Stock and pay accrued and unpaid dividends thereon. Excess cash balance is defined as our cash and
cash equivalents and marketable securities, adjusted to (i) exclude auction rate securities,
(ii) exclude cash pledged to vendors to secure purchase price of inventory, (iii) account for
variations that are due to our management of payables, and (iv) provide us a cash cushion of at
least $20 million. Any redemption as a result of this cash sweep mechanism will reduce the amounts
required to be redeemed on February 25, 2013 and February 25, 2014. The Series B Preferred Stock
(including accrued but unpaid dividends) is also required to be redeemed, at the option of the
holders, upon a change in control. The Series B Preferred Stock is not convertible into common
stock or any other security, but initially will vote with the common stock on a one-for-one basis
on general corporate matters other than the election of directors. In addition, the holders of the
Series B Preferred Stock have the class voting rights and rights to designate members of our board
of directors previously held by the holders of the Series A Preferred Stock. In addition, as a
result of the preferred stock exchange transaction, we recorded the excess of the carrying amount
of the Series A Preferred Stock over the fair value of the Series B Preferred Stock as an addition
to earnings to arrive at net earnings available to common shareholders. Due to the mandatory
redemption feature of the preferred stock, the Company has classified the carrying value of the
Series B Preferred Stock, and related accrued dividends, as long-term liabilities on its
consolidated balance sheet.
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Results of Operations
Selected Condensed Consolidated Financial Data
Continuing Operations
(Unaudited)
Continuing Operations
(Unaudited)
Dollar Amount as a | ||||||||
Percentage of Net Sales for | ||||||||
the | ||||||||
Three-Month Periods | ||||||||
Ended | ||||||||
May 2, | May 3, | |||||||
2009 | 2008 | |||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Cost of sales |
||||||||
(exclusive of depreciation and amortization) |
68.5 | % | 68.0 | % | ||||
Operating expenses: |
||||||||
Distribution and selling |
33.8 | % | 36.5 | % | ||||
General and administrative |
3.5 | % | 4.1 | % | ||||
Depreciation and amortization |
2.8 | % | 2.8 | % | ||||
Restructuring costs |
0.1 | % | 0.2 | % | ||||
CEO transition costs |
0.0 | % | 0.2 | % | ||||
40.2 | % | 43.8 | % | |||||
Operating loss |
(8.7 | )% | (11.8 | )% | ||||
Key Performance Metrics*
(Unaudited)
(Unaudited)
For the Three Month | ||||||||||||
Periods Ended | ||||||||||||
May 2, | May 3, | |||||||||||
2009 | 2008 | % Change | ||||||||||
Program Distribution |
||||||||||||
Cable FTEs (Average 000s) |
43,739 | 42,361 | 3 | % | ||||||||
Satellite FTEs (Average 000s) |
29,190 | 28,394 | 3 | % | ||||||||
Total FTEs (Average 000s) |
72,929 | 70,755 | 3 | % | ||||||||
Net Sales per FTE (Annualized) |
$ | 7.34 | $ | 8.72 | (16 | %) | ||||||
Customer Counts (Year-to-date) |
||||||||||||
New |
113,027 | 70,591 | 60 | % | ||||||||
Active |
343,137 | 279,547 | 23 | % | ||||||||
Merchandise Metrics |
||||||||||||
Net Shipped Units (000s) |
852 | 774 | 10 | % | ||||||||
Average Selling Price Net Shipped Units |
$ | 144 | $ | 195 | (26 | %) | ||||||
Return Rate |
21.7 | % | 36.0 | % | (14.3 | ) ppt |
* | Includes television home shopping and Internet sales only. |
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Program Distribution
Our television home shopping programming was available to approximately 72.9 million average
full time equivalent, or FTE, households for the first quarter of fiscal 2009 and approximately
70.8 million average FTE households for the first quarter of fiscal 2008. Average FTE subscribers
grew 3% in the first quarter of fiscal 2009, resulting in a 2.1 million increase in average FTEs
versus the prior year comparable quarter. The increase was driven by continued strong growth in
satellite distribution of our programming and increased distribution of our 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 in the number of
digital subscribers and through cable system operators moving programming that is carried on analog
channels over to digital channels. Nonetheless, 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 even if our programming is available in more homes. Our
television home shopping programming is also simulcast live 24 hours a day, 7 days a week through
our internet websites, www.ShopNBC.com and www.ShopNBC.TV, which is not included in total FTE
households.
Cable and Satellite Distribution Agreements
We have entered into cable and satellite distribution agreements that represent approximately
1,400 cable systems that require each operator to offer our television home shopping programming
substantially on a full-time basis over their systems. The terms of these existing agreements
typically range from one to four years. Under certain circumstances, the television operators or we
may cancel the agreements prior to their expiration. If certain of these agreements are terminated,
the termination may materially or adversely affect our business. Cable and satellite distribution
agreements representing a majority of the total cable and satellite households who currently
receive our television programming were scheduled to expire at the end of the 2008 calendar year.
Most of the major agreements have been renegotiated and renewed at this time; and for other of the
major agreements, we have obtained temporary extensions while we continue our negotiations. We
expect to preserve all of our distribution footprint and with regard to negotiations completed to
date, we expect to realize a 33% rate reduction which will result in a cost savings in the range of
$22 million to $25 million in fiscal 2009. Failure to successfully renew remaining cable
agreements covering a material portion of our existing cable households on acceptable financial and
other terms could adversely affect our future growth, sales revenues and earnings unless we are
able to arrange for alternative means of broadly distributing our television programming. In
addition, many cable operators are moving to transition our programming (and other cable content
providers as well) in many of their local cable systems to digital instead of analog programming
tiers. As this occurs, we may experience temporary reductions in cable households in certain
markets.
Customer Counts
During the first quarter of fiscal 2009, customer trends improved with new and active
customers up 60% and 23%, respectively over the prior year first quarter. We attribute the
increase in new and active customers during the quarter to our merchandise strategy of lower price
points and new products, brands and concepts that proved successful in driving increased customer
activity.
Net Shipped Units
The number of net shipped units during the fiscal 2009 first quarter increased 10% from the
prior years comparable quarter to 852,000 from 774,000. The increase in net shipped units was
directly related to an increase in unit sales to customers during the first quarter of fiscal 2009.
We believe that the decline in average selling prices, discussed below, was a major contributing
factor to the increase in unit sales.
Average Selling Price
The average selling price, or ASP, per net unit was $144 in the 2009 first quarter, a 26%
decrease from the comparable prior year quarter. The quarter decrease in the fiscal 2009 ASP was
driven primarily by unit selling price decreases within the jewelry and across almost all other
product categories. We have intentionally made an effort to reduce our average selling price
points in order to reduce our return rates, to appeal to a broader audience and to allow for a
broader merchandise assortment.
Return Rates
Our return rate was 21.7% in the fiscal 2009 first quarter as compared to 36.0% for the
comparable prior year quarter, a 14.3 percentage point decrease. We attribute the decrease in the
2009 quarterly return rate primarily to operational improvements in our delivery time and customer
service, a change in our merchandise mix, our overall product quality and our lower price points.
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Net Sales
Consolidated net sales for the fiscal 2009 first quarter were $133,802,000 as compared with
consolidated net sales of $156,288,000 for the fiscal 2008 first quarter, a 14% decrease. The
decrease in consolidated net sales from prior year is directly attributed to decreases experienced
in net sales from of our television home shopping and internet operations. These declines in
consolidated net sales are directly attributed to an approximate 26% decline in our average selling
price offset by a 10% increase in net shipped units. The remaining change in net sales is
attributable to an increase in shipping and handling revenue and a decrease in promotional
discounts offered over prior year. Our consolidated net sales are still feeling the effect of the
continued challenging overall environment experienced by retailers. From a product category
perspective, our gemstone and gold categories experienced significant declines as these businesses
are being repositioned at lower price points in order to broaden their appeal and reduce return
rates. Our watch and consumer electronics sales off-set some of the decline experienced in our
jewelry business. As part of our strategic merchandise transition, we have also been working
through a significant amount of aged and lower-performing inventory which has contributed to the
sales decreases experienced during the first quarter of fiscal 2009. In addition, television and
internet net sales decreased due to reduced total revenues associated with our discontinued
polo.com fulfillment operations.
Cost of Sales (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) for the fiscal 2009 first quarter
and fiscal 2008 first quarter was $91,613,000 and $106,332,000, respectively, a decrease of
$14,719,000, or 14%. The decrease in cost of sales is directly attributable to decreased costs
associated with decreased sales volume from our television home shopping and internet businesses.
Net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of sales
for the first quarters of fiscal 2009 and fiscal 2008 quarters were 31.5% and 32.0%, respectively.
The decrease in gross margins experienced during the quarter was driven primarily by a negative
mix impact from increased sales in lower margin consumer electronics and lower margin rates
achieved across all major product categories during the current fiscal year. Margin decreases also
resulted from our effort to reduce aged inventory levels by taking aggressive markdowns during the
first quarter of fiscal 2009 as we reposition our mix of new inventory purchases. We expect our
margins to gradually improve as we shift and grow our merchandise mix in the key product categories
of home, fashion and health & beauty. We will also continue to reposition our core jewelry
business with more moderate price points and higher margins. First quarter fiscal 2008 margins
were impacted by a non-cash inventory write down of $3.8 million recorded as a result of strategic
decisions made in prior year to significantly reduce our products on-air life cycle.
Operating Expenses
Total operating expenses for the fiscal 2009 first quarter were $53,836,000 compared to
$68,344,000 for the comparable prior year period, a decrease of 21%. Distribution and selling
expense decreased $11,844,000, or 21%, to $45,239,000, or 34% of net sales during the 2009 first
quarter compared to $57,083,000 or 37% of net sales for the comparable prior year quarter.
Distribution and selling expense decreased on a year-to-date basis over the prior year primarily
due to a $6,298,000 first quarter savings resulting from decreases in net cable and satellite rates
in the first quarter due to the successful renegotiating of our cable and satellite contracts; a
decrease in telemarketing, customer service and fulfillment variable costs of $777,000 associated
with decreased sales volume and efficiency gains; decreases in salaries, headcount and other
related personnel costs associated with merchandising, television production and show management
personnel and on-air talent of $1,633,000; decreases in marketing expenses of $870,000 and
decreases in credit card fees and bad debt expense of $901,000 due to the overall decrease in net
sales during the quarter.
General and administrative expense for the fiscal 2009 first quarter decreased $1,708,000, or
27%, to $4,627,000, or 3% of net sales, compared to $6,335,000, or 4% of net sales for the fiscal
2008 first quarter. General and administrative expense decreased on a year-to-date basis over the
prior year primarily as a result of our restructuring initiatives that included reductions in
salaries, related benefits and consulting fees totaling $1,636,000, offset by increases associated
with share-based compensation expense of $69,000.
Depreciation and amortization expense for the fiscal 2009 first quarter was $3,789,000
compared to $4,319,000 for the fiscal 2008 quarter, representing a decrease of $530,000, or 12%,
from the comparable prior year period. Depreciation and amortization expense as a percentage of net
sales for the three month periods ended May 2, 2009 and May 3, 2008 was constant at 3% for each
period. The quarterly decrease in depreciation and amortization expense relates to the timing of
fully depreciated assets year over year, offset by increased depreciation and amortization as a
result of assets placed in service in connection with our various application software development
and functionality enhancements and new digital transmission equipment.
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Operating Loss
For the fiscal 2009 first quarter, our operating loss was $11,647,000 compared to an operating
loss of $18,388,000 for the fiscal 2008 first quarter. Our operating loss decreased during fiscal
2009 from the comparable prior year periods primarily as a result of decreases in our
overall operating expenses year over year, particularly the cable and satellite fees within
our distribution and selling expenses. These expense decreases were offset by the first quarter
decrease in net sales and gross profit margin due to the factors noted above.
Net Income (Loss)
For the fiscal 2009 first quarter, we reported net income available to common shareholders of
$15,288,000 or $.46 per share on 33,104,000 weighted average common shares outstanding ($.46 per
share on 33,110,000 weighted diluted shares) compared with a net loss available to common
shareholders of ($17,651,000) or ($.53) per share on 33,578,000 weighted average common shares
outstanding for the fiscal 2008 first quarter. The primary factor contributing to the increase in
our net income available to common shareholders for the first quarter of fiscal 2009 is a
$27,362,000 addition to earnings related to the recording of the excess of the carrying amount of
the Series A Preferred Stock over the fair value of the Series B Preferred Stock. Other factors
affecting our net income in the first quarter of fiscal 2009 include interest expense of $743,000
related to the Series B preferred stock and interest income totaling $216,000 earned on our cash
and investments. Net loss available to common shareholders for the first quarter of fiscal 2008
includes interest income totaling $825,000 earned on our cash and investments.
For the first three months of fiscal 2009, we recorded an income tax net benefit of $162,000
relating to certain amended state returns for which tax refunds have been received or are currently
due, offset by the recording of state income taxes payable on income for which there is no loss
carryforward benefit available. For the first quarter of fiscal 2008, we recorded state income
taxes payable on certain income for which there is no loss carryforward benefit available.
We have not recorded any income tax benefit on the net loss recorded in the first three months
of 2009 due to the uncertainty of realizing income tax benefits in the future as indicated by our
recording of an income tax valuation reserve. We will continue to maintain a valuation reserve
against our net deferred tax assets until we believe it is more likely than not that these assets
will be realized in the future.
Adjusted EBITDA Reconciliation
Adjusted EBITDA (as defined below) for the fiscal 2009 first quarter was a loss of
$(6,789,000) compared with an Adjusted EBITDA loss of $(12,394,000) for the fiscal 2008 first
quarter.
A reconciliation of Adjusted EBITDA to its comparable GAAP measurement, net loss follows, in
thousands:
For the Three-Month | ||||||||
Periods Ended | ||||||||
May 2, | May 3, | |||||||
2009 | 2008 | |||||||
Adjusted EBITDA |
$ | (6,789 | ) | $ | (12,394 | ) | ||
Less: |
||||||||
Restructuring costs |
(104 | ) | (330 | ) | ||||
CEO transition costs |
(77 | ) | (277 | ) | ||||
Non-cash share-based compensation expense |
(888 | ) | (1,068 | ) | ||||
EBITDA (as defined) |
(7,858 | ) | (14,069 | ) | ||||
A reconciliation of EBITDA to net loss is as follows: |
||||||||
EBITDA as defined |
(7,858 | ) | (14,069 | ) | ||||
Adjustments: |
||||||||
Depreciation and amortization |
(3,789 | ) | (4,319 | ) | ||||
Interest income |
216 | 825 | ||||||
Interest expense |
(743 | ) | | |||||
Income taxes |
162 | (15 | ) | |||||
Net loss |
$ | (12,012 | ) | $ | (17,578 | ) | ||
EBITDA represents net loss for the respective periods excluding depreciation and amortization
expense, interest income (expense) and income taxes. We define Adjusted EBITDA as EBITDA excluding
non-recurring non-operating gains (losses); non-cash impairment charges and write-downs;
restructuring and chief executive officer transition costs; and non-cash share-based compensation
expense.
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We have included the term Adjusted EBITDA in our EBITDA reconciliation in order to adequately
assess the operating performance of our core television and internet businesses and in order to
maintain comparability to our analysts coverage and financial guidance when given. Management
believes that Adjusted EBITDA allows investors to make a more meaningful comparison between our
core business operating results over different periods of time with those of other similar
companies. In addition, management uses Adjusted EBITDA as a metric measure to evaluate operating
performance under its management and executive incentive compensation programs. Adjusted EBITDA
should not be construed as an alternative to operating income (loss) or to cash flows from
operating activities as determined in accordance
with generally accepted accounting principles and should not be construed as a measure of
liquidity. Adjusted EBITDA may not be comparable to similarly entitled measures reported by other
companies.
Critical Accounting Policies and Estimates
A discussion of the critical accounting policies related to accounting estimates and
assumptions are discussed in detail in our fiscal 2008 annual report on Form 10-K under the caption
entitled Critical Accounting Policies and Estimates.
Financial Condition, Liquidity and Capital Resources
As of May 2, 2009, cash and cash equivalents were $37,013,000, compared to $53,845,000 as of
January 31, 2009, a $16,832,000 decrease. For fiscal 2009, working capital decreased $13,516,000 to
$51,965,000. The current ratio was 1.6 at May 2, 2009 compared to 1.7 at January 31, 2009.
Sources of Liquidity
Our principal sources of liquidity are our available cash and cash equivalents, accrued
interest earned from our short and long-term investments and our 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 our
ValuePay installment program and the extent to which we extend credit to our customers is important
to our short-term liquidity and cash resources. A significant increase in our accounts receivable
aging or credit losses could negatively impact our source of cash from operations in the short
term. For the year ended January 31, 2009, and first quarter of fiscal 2009, we have not
experienced a significant change or deterioration in our accounts receivable historical write off
rate, which has remained relatively stable at approximately 2% 3% of our ValuePay sales. While
credit losses have historically been within our estimates for these losses, there is no guarantee
that we will continue to experience the same credit loss rate that we have had in the past.
Historically, we have also been able to generate additional cash sources from the proceeds of stock
option exercises and from the sale of equity investments and other properties; however, these
sources of cash are neither relied upon nor controllable by us. At May 2, 2009, our cash
equivalents were invested in money market funds primarily for the preservation of cash liquidity.
Interest earned on money market funds is subject to interest rate fluctuations. At May 2, 2009, we
had restricted cash of $1.6 million pledged as collateral for our issuances of standby and
commercial letters of credit.
At May 2, 2009, our investment portfolio included auction rate securities with an estimated
fair value of $15.7 million ($26.8 million original cost basis). Our auction rate securities are
primarily variable rate debt instruments that have underlying securities with contractual
maturities greater than ten years. Holders of auction rate securities can either sell through the
auction or bid based on a desired interest rate or hold and accept the reset rate. If there are
insufficient buyers, then the auction fails and holders are unable to liquidate their investment
through the auction. A failed auction is not a default of the debt instrument, but does set a new
interest rate in accordance with the original terms of the debt instrument. The result of a failed
auction is that the auction rate security continues to pay interest in accordance with its terms.
Auctions continue to be held as scheduled until the auction rate security matures or until it is
called. These investment-grade auction rate securities have failed to settle in auctions beginning
in fiscal 2007 and through the current quarter of fiscal 2009. At this time, these investments are
not available to settle current obligations, are not liquid, and in the event we need to access
these funds, we would not be able to do so without a loss of principal. The loss of principal could
be significant if we need to access the funds within a short time horizon and the market for
auction rate securities had not returned at the time we seek to sell these securities.
In the fourth quarter of fiscal 2008, we recorded an other-than-temporary impairment charge of
$11.1 million to reflect a permanent impairment on these securities due to the continued
illiquidity of these investments and uncertainty regarding what period of time they might be
settled and their ultimate value. If current market conditions deteriorate further we may be
required to record an additional other than temporary impairment in future periods. Due to the
current lack of liquidity of these investments, they are classified as long-term investments on our
balance sheet.
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Cash Requirements
Our principal use of cash is to fund our business operations, which consist primarily of
purchasing inventory for resale, funding accounts receivable growth in support of sales growth and
funding operating expenses, particularly our contractual commitments for cable and satellite
programming and the funding of capital expenditures. Expenditures made for property and equipment
in fiscal 2009 and 2008 and for expected future capital expenditures include the upgrade and
replacement of computer software and front-end merchandising systems, expansion of capacity to
support our business, and the upgrade and digitalization of television production and transmission
equipment and related computer equipment associated with our home shopping and e-commerce
businesses. Historically, we have also used our cash
resources for various strategic investments and for the repurchase of stock under stock
repurchase programs but are under no obligation to continue doing so if protection of liquidity is
desired. In January 2009, we authorized a repurchase of an additional $1.5 million under our stock
repurchase program of which $563,000 remains available and have the discretion to repurchase stock
under the program and make strategic investments consistent with our business strategy.
We ended May 2, 2009 with cash and cash equivalents of $37,013,000. In addition, we have
$15,700,000 of auction rate security investments ($26.8 million original cost basis) that are
currently illiquid and classified as long-term investments. It is possible that our existing cash
and cash equivalent balances may not be sufficient to fund obligations and commitments as they come
due in fiscal 2009 and beyond. Given the impaired nature of our auction rate security investments,
we do not consider these securities to have substantial short-term usefulness in funding our
business. We may need to raise additional financing to fund potential foreseeable and unforeseeable
contingencies. There is no assurance that we will be able to successfully raise funds if necessary
or that the terms of any financing will be acceptable to us.
We have additional long-term contractual cash obligations and commitments with respect to our
cable and satellite agreements and operating leases totaling approximately $191 million over the
next five fiscal years with average annual cash payments of approximately $50 million from fiscal
2009 through fiscal 2012.
For the three months ended May 2, 2009, net cash used for operating activities totaled
$9,676,000 compared to net cash provided by operating activities of $6,929,000 for the three months
ended May 3, 2008. Net cash provided by (used for) operating activities for the fiscal 2009 and
2008 periods reflects net loss, as adjusted for depreciation and amortization, share-based payment
compensation and the amortization of deferred revenue. In addition, net cash used for operating
activities for the three months ended May 2, 2009 reflects an increase in accounts receivable and
prepaid expenses and other, decreases in deferred revenue and accounts payable and accrued
liabilities, offset by a decrease in inventories and an increase in dividends payable. Accounts
receivable increased primarily as a result of our increased use of our ValuePay extended credit as
a promotional tool to stimulate sales. Inventories decreased during the first quarter as we
continue to aggressively manage our inventory balance down as we begin to grow new merchandise
categories and reinvest in new jewelry inventory in an effort to reposition our merchandise
offerings to improve sales performance. The increase in prepaid expenses and other relates
primarily to increases in cash deposits made, maintenance fees and income taxes receivable, offset
by a decrease in prepaid insurance. The decrease in accounts payable and accrued liabilities
relates to decreases associated with the timing of merchandise receipts and processed returns;
payments made in association with our restructuring liability; decreased private label reward
points accrual as a result of a reduced redemption period and lower private label sales and a
decrease in our 401k accrual due to the halting of our company match starting in fiscal 2009.
Net cash used for investing activities totaled $1,875,000 for the first three months of fiscal
2009 compared to net cash provided by investing activities of $15,150,000 for the first three
months of fiscal 2008. For the three months ended May 2, 2009 and May 3, 2008, expenditures for
property and equipment were $1,822,000 and $2,399,000, respectively. Expenditures for property and
equipment during the fiscal 2009 and 2008 periods primarily include capital expenditures made for
the development, upgrade and replacement of computer software, customer care management and
merchandising systems, related computer equipment, digital broadcasting equipment and other office
equipment, warehouse equipment and production equipment. Principal future capital expenditures are
expected to include the development, upgrade and replacement of various enterprise software
systems, the expansion of warehousing capacity and security in our Bowling Green distribution
facility, the upgrade and digitalization of television production and transmission equipment and
related computer equipment associated with the expansion of our home shopping business and
e-commerce initiatives. In the three months ended May 2, 2009, we increased our restricted cash by
$53,000. In the three months ended May 3, 2008, we received proceeds of $17,549,000 from the sale
of short-term investments.
Net cash used for financing activities totaled $5,281,000 for the three months ended May 2,
2009 and related primarily to a $3,400,000 cash payment made in conjunction with our Series A
preferred stock redemption, payments made totaling $937,000 in conjunction with the repurchase of
1,622,000 shares of our common stock and payments of $944,000 made in conjunction with our Series B
preferred stock issuance. Net cash used for financing activities totaled $3,317,000 for the
comparable prior year period and related primarily to payments made in conjunction with the
repurchase of 556,000 shares of our common stock.
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The Company anticipates that its existing capital resources and cash flows from operations
will be adequate to satisfy our liquidity requirements through fiscal 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into financial instruments for trading or speculative purposes and do not
currently utilize derivative financial instruments as a hedge to offset market risk. In past years,
we 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,
Accounting for Derivative Instruments and Hedging Activities. We no longer have investments of that
nature. Our operations are conducted primarily in the United States and are not subject to foreign
currency exchange rate risk. However, some of our products are sourced internationally and may
fluctuate in cost as a
result of foreign currency swings. We currently have no long-term debt other than our Series B
preferred stock long-term obligation, and accordingly, are not significantly exposed to interest
rate risk, although changes in market interest rates do impact the level of interest income earned
on our substantial cash and short and long-term investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the periods covered by this report, management conducted an evaluation, under
the supervision and with the participation of our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the
officers concluded that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit 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, and to ensure that information
required to be disclosed by us in the reports we file or submit under the Securities Exchange Act
of 1934 is accumulated and communicated to management, including our principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosures.
Changes in Internal Controls over Financial Reporting
Our management, with the participation of the chief executive officer and 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 periods covered by this report. Based on that evaluation, the chief executive
officer and chief 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 were
reasonably likely to materially affect, the internal controls over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 21, 2008, a lawsuit against our company was filed by our former chief executive
officer, Rene Aiu in Hennepin County Court, Minnesota. Her claims include money damages for breach
of contract for nonpayment of severance equal to two years of salary and of targeted incentive
compensation, fraud and misrepresentation, and violation of certain Minnesota statutes. We filed a
response on November 25, 2008, denying Ms. Aius claims. Discovery has commenced and the Hennepin
County District Court has set the trial to commence in 2010. We believe that Ms. Aiu was properly
dismissed for cause as defined in her employment agreement, intend to defend the suit vigorously
and at this time cannot estimate a dollar amount of liability, if any.
We are also 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
have not had a material adverse effect on our operations or consolidated financial statements.
ITEM 1A. RISK FACTORS
If we do not reverse our current trend of operating losses, we could reduce our operating cash
resources to the point where we will not have sufficient liquidity to meet the ongoing cash
commitments and obligations to continue operating our business.
We have limited cash to fund our business, $37.0 million as of May 2, 2009, as a result of our
continued trend of operating losses. We need and use our cash to fund any further operating losses,
to finance our working capital requirements and to make necessary capital expenditures in order to
operate our business. We also have significant future commitments for our cash, primarily payments
for our cable and satellite program distribution obligations. In addition, if our vendors or
service providers were to demand a shift from our current payment terms to upfront prepayments or
require cash reserves, this will have a significant adverse impact on our available cash balance
and our ability to meet the ongoing commitments and obligations of our business. If we are not able
to attain profitability and generate positive cash flows from operations or obtain cash from other
sources (such as the sale of our auction rate securities, the sale of our Boston television station
or other real estate assets, and/or obtaining a secured line of credit from a financial
institution), we may not have sufficient liquidity to continue operating.
If our common trades below $1.00 per share, we could cease to be in compliance with the continued
listing standards set forth by Nasdaq.
Our stock was recently trading below $1.00 per share, which was in violation of Nasdaqs
continued listing requirements. Although Nasdaq has suspended the enforcement of rules requiring a
minimum $1.00 closing bid price and the rules requiring a minimum market value of publicly held
shares, this suspension is currently only in effect through July 19, 2009. While our stock is
trading above $1.00 per share as of the date of this report, there is no guarantee that we will be
in compliance with Nasdaqs continued listing requirements when this suspension is lifted. If our
stock were to be trading below $1.00 when the temporary suspension is lifted, Nasdaq could commence
delisting procedures against us. If we were delisted, the market liquidity of our common stock
could be adversely affected and the market price of our common stock could decrease. A delisting
could also adversely affect our ability to obtain financing for the continuation of our operations
and could result in a loss of confidence by investors, suppliers and employees. In addition, our
shareholders ability to trade or obtain quotations on our shares could be severely limited because
of lower trading volumes and transaction delays. These factors could contribute to lower prices and
larger spreads in the bid and ask price for our common stock.
Current negative economic conditions have adversely affected our business and a continued
weakening of the macroeconomic environment could further adversely affect our business.
Retailers generally are particularly sensitive to adverse global economic and business
conditions, in particular to the extent they result in a loss of consumer confidence and decreases
in consumer spending, particularly discretionary spending. The current world-wide credit market
disruptions and economic slowdown have negatively impacted consumer confidence, consumer spending
and, since September 2008, our business. The timing and nature of any recovery in the credit and
financial markets remains uncertain, and there can be no assurance that market conditions and
consumer confidence will improve in the near future or that our results will not continue to be
adversely affected. If these economic and market conditions persist, spread or deteriorate further,
it will have a negative impact on our business, financial condition and results of operations.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases of our common stock made
during the three months ended May 2, 2009, by our company or by any affiliated purchaser of our
company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934:
Approximate | ||||||||||||||||
Total Number of | Dollar Value of | |||||||||||||||
Shares | Shares that May | |||||||||||||||
Purchased as | Yet Be | |||||||||||||||
Total Number of | Average Price | Part of a Publicly | Purchased | |||||||||||||
Shares | Paid per | Announced | Under the | |||||||||||||
Period | Purchased | Share | Program | Program (1) | ||||||||||||
February 1, 2009 through February 28, 2009 |
| | | $ | 1,500,000 | |||||||||||
March 1, 2009 through April 4, 2009 |
969,000 | $ | 0.46 | 969,000 | $ | 1,057,000 | ||||||||||
April 5, 2009 through May 2, 2009 |
653,000 | $ | 0.76 | 1,622,000 | $ | 563,000 | ||||||||||
Total |
1,622,000 | $ | 0.58 | 1,622,000 | $ | 563,000 | ||||||||||
(1) | On February 25, 2009, our board of directors authorized $1.5 million for stock repurchases under a new stock repurchase program. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits filed with this Quarterly Report on Form 10-Q are set forth on the Exhibit Index
filed as a part of this report beginning immediately following the signatures.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VALUEVISION MEDIA, INC. AND SUBSIDIARIES |
||||
June 11, 2009 | /s/ KEITH R. STEWART | |||
Keith R. Stewart | ||||
Chief Executive Officer and President (Principal Executive Officer) |
||||
June 11, 2009 | /s/ FRANK P. ELSENBAST | |||
Frank P. Elsenbast | ||||
Senior Vice President Finance, Chief Financial Officer (Principal Financial Officer) |
||||
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EXHIBIT INDEX
Exhibit | ||||
Number | Exhibit | Filed by | ||
3.1
|
Articles of Incorporation of the Registrant | Incorporated by reference (1) | ||
3.2
|
Bylaws of the Registrant | Incorporated by reference (1) | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer | Filed Electronically | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer | Filed Electronically | ||
32
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | Filed Electronically |
(1) | Incorporated herein by reference to the similarly titled exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended May 3, 2008, filed on June 12, 2008, File No. 000-20243. |
29