Legacy IMBDS, Inc. - Annual Report: 2011 (Form 10-K)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-K

 

 

Commission file number 0-20243

 

 

ValueVision Media, Inc.

(Exact name of Registrant as Specified in Its Charter)

 

 

952-943-6000

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of the Exchange Act:

Common Stock, $0.01 par value

 

Name of exchange on which registered: Nasdaq Global Market

Securities registered under Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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):

 

(Do not check if a smaller reporting company)

 

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

 

As of March 15, 2011, 37,831,688 shares of the registrant’s common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant on July 31, 2010, based upon the closing sale price for the registrant’s common stock as reported by the Nasdaq Global Market on July 31, 2010 was approximately $42,274,256. For purposes of determining such aggregate market value, all officers and directors of the registrant are considered to be affiliates of the registrant, as well as shareholders holding 10% or more of the outstanding common stock as reflected on Schedules 13D or 13G filed with the registrant. This number is provided only for the purpose of this annual report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of its fiscal year ended January 29, 2011 are incorporated by reference in Part III of this annual report on Form 10-K.

 

 

VALUEVISION MEDIA, INC.
ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended
January 29, 2011

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

 

This annual report on Form 10-K, as well as other materials filed by us with the Securities and Exchange Commission, and information included in oral statements or other written statements made or to be made by us, contains 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 management’s current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein. Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” section of this annual report on Form 10-K, as well as risks relating 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 company’s liquidity needs; our ability to manage our operating expenses successfully; our management and information systems infrastructure; changes in governmental or regulatory requirements; litigation or governmental proceedings affecting our operations; 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.

 

 

When we refer to “we,” “our,” “us” or the “Company,” we mean ValueVision Media, Inc. and its subsidiaries unless the context indicates otherwise. ValueVision Media, Inc. is a Minnesota corporation with principal and executive offices located at 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433. ValueVision Media, Inc. was incorporated on June 25, 1990. Our fiscal year ended January 29, 2011 is designated fiscal 2010, our fiscal year ended January 30, 2010 is designated fiscal 2009, and our fiscal year ended January 31, 2009 is designated fiscal 2008.

 

 

We are an interactive retailer that markets, sells and distributes products to consumers through TV, telephone, online, mobile and social media. Our principal form of product exposure is our 24-hour television shopping network, ShopNBC, which markets a broad assortment of brand name and private label products in the categories. Orders are taken via telephone, online and mobile channels.

 

ShopNBC is distributed into approximately 78.3 million homes, 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. ShopNBC programming is also streamed live on the Internet at www.ShopNBC.tv. We also distribute our programming through a company-owned full power television station in Boston, Massachusetts and through leased carriage on full power television stations in Pittsburgh, Pennsylvania and Seattle, Washington.

 

We also operate ShopNBC.com, a comprehensive e-commerce platform that sells products appearing on our television shopping channel as well as an extended assortment of online-only merchandise. Our programming and products are also marketed via mobile devices — including smartphones and tablets such as the iPad, and through the leading social networking sites Facebook, Twitter and YouTube.

 

We have an exclusive trademark license from NBCUniversal Media, LLC, formerly known as NBC Universal, Inc., (“NBCU”) for the worldwide use of an NBC-branded name through May 2012. Additionally, the agreement provides for a one-year extension to May 2013 upon the mutual agreement of both parties. Pursuant to the license, we operate our television home shopping network and our Internet websites, ShopNBC.com and ShopNBC.tv.

 

Multi-media Retailing

 

Our primary form of multi-media retailing is on our live 24-hour per day television shopping network. ShopNBC is the third largest television shopping channel in the United States. ShopNBC.com is a comprehensive e-commerce website with complementary and web-only product. Net sales, including shipping and handling revenues, totaled $562.3 million, $527.9 million and $565.4 million for fiscal 2010, fiscal 2009 and fiscal 2008, respectively. Shoppers can interact and shop via a toll-free telephone number and place orders directly with us or enter an order on the ShopNBC.com website. Our television programming is produced at our Eden Prairie, Minnesota headquarters facility and is transmitted nationally via satellite to cable system operators, satellite system operators, broadcast television station operators and to our owned full power broadcast television station WWDP TV-46 in Boston, Massachusetts.

 

Products and Product Mix

 

Products sold on our multi-media platforms include primarily jewelry & watches, home & electronics, beauty, health & fitness, and fashion & accessories. We believe that having a broad base of products appeals to a larger segment of active and new customers and is important to our future growth. Our product diversification strategy is to continue to develop new product offerings across multiple merchandise categories as needed in response to customer demand and to maximize margin dollars across our multi-media retailing platforms.

The following table shows our merchandise mix as a percentage of television shopping and internet net sales during the past three fiscal years by product category:

 

 

Jewelry & Watches.  Our high quality jewelry assortment features fine and fashion jewelry including gold, sterling silver, and platinum along with a variety of gemstone products. Our watch category features a broad assortment of men’s and women’s watches from traditional to modern styling.

 

Home & Electronics.  Our home assortment features home décor, mattresses, bed and bath textiles, kitchen appliances, dining accessories, and a variety of unique furnishings that add functionality and style to any home. Our consumer electronics assortment features the latest innovations from nationally recognized brands in TVs, computers, GPS devices, cameras, camcorders, video game systems and more.

 

Beauty, Health & Fitness.  Our beauty assortment features skincare, cosmetics, and hair care that inspire today’s woman to look and feel great. Our health and fitness assortment features innovative products including nutritional supplements as well as workout gear and accessories to help enjoy a healthy lifestyle.

 

Fashion (apparel, outerwear & accessories).  Our fashion assortment features stylish apparel, outerwear, handbags, accessories, and footwear that fit the lifestyle of today’s woman.

 

 

As a premium interactive retailer, our strategy is to offer our customers differentiated quality brands and products at a compelling value proposition. We also seek to provide today’s consumers with flexible programming formats and access that allow them to view and interact with our content and products at their convenience — whenever and wherever they are able. Our merchandise positioning aims to make us a trusted destination for quality and an authority in a broad category of merchandise. 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 to improve the operational and financial performance of our company: (i) broadening and optimizing our product mix to appeal to more customers and to encourage additional purchases per customer, (ii) increasing new and active customers and improving household penetration, (iii) increasing our gross margin dollars by improving merchandise margins in key product categories while prudently managing inventory levels, (iv) reducing our transactional operating expenses while managing our fixed operating expenses, (v) growing our Internet business with expanded product assortments and Internet-only merchandise offerings, (vi) expanding our Internet, mobile and social networking reach to attract and retain more customers, and (vii) moving cable and satellite carriage contracts to shorter terms of one to two years while seeking cost savings opportunities.

 

 

Television Home Shopping Network

 

Net sales from our television home shopping business, inclusive of shipping and handling revenues, totaled $330 million, $350 million and $384 million, representing 59%, 66% and 68% of consolidated net sales for fiscal 2010, fiscal 2009 and fiscal 2008, respectively. Our television programming continues to be the most significant medium through which we reach our customers.

 

Satellite Delivery of Programming.  Our programming is presently distributed via a leased communications satellite transponder to cable systems and direct-to-home satellite providers, a full power television station in

Boston, and two other leased broadcast stations, and satellite dish operators. On January 31, 2005, we entered into a long-term satellite lease agreement with our present provider of satellite services. Pursuant to the terms of this agreement, we distribute our programming through a satellite that was launched in August 2005. The agreement provides us with preemptible back-up services if satellite transmission is interrupted.

 

Television Distribution.  As of January 29, 2011, we have entered into affiliation agreements with parties representing approximately 1,500 cable systems allowing each operator to offer our television home shopping programming substantially on a full-time basis over their systems. The terms of the affiliation agreements typically range from one to two years. During the fiscal year, certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the television operators or we may cancel the agreements prior to their expiration. The affiliation agreements generally provide that we will pay each operator a monthly access fee and in some cases marketing support payments based on the number of homes receiving our programming. We frequently review distribution opportunities with cable system operators and broadcast stations providing for full- or part-time carriage of our programming.

 

Cable operators serving a large majority of cable households offer cable programming on a digital basis. The use of digital compression technology provides cable companies with greater channel capacity. While greater channel capacity increases the opportunity for distribution and, in some cases, reduces access fees paid by us, it also may adversely impact our ability to compete for television viewers to the extent it results in a higher channel position for us, placement of our programming in separate programming tiers, the broadcast of additional competitive channels or viewer fragmentation due to a greater number of programming alternatives.

 

During fiscal 2010, there were approximately 115 million homes in the United States with at least one television set. Of those homes, there were approximately 60 million basic cable television subscribers and approximately 31 million direct-to-home satellite subscribers or DTH. We include with our cable homes those homes who receive programming through telephone service providers, such as AT&T and Verizon. Homes that receive our television home shopping programming 24 hours per day are each counted as one full-time equivalent, or FTE, and homes that receive our programming for any period less than 24 hours are counted based upon an analysis of time of day and day of week that programming is received. We have continued to experience growth in the number of FTE subscriber homes that receive our programming.

 

Our programming is carried on DTH satellite services DIRECTV and DISH Network. Carriage is full-time and we pay each operator a monthly access fee based upon the number of subscribers receiving our programming. As of January 29, 2011, our programming reached approximately 31 million DTH subscribers on a full-time basis which represents 100% of the total number of DTH satellite subscribers in the United States.

 

As of January 29, 2011, we served approximately 78.3 million subscriber homes, or approximately 76.4 million average FTEs, compared with approximately 76.3 million subscriber homes, or approximately 73.6 million average FTEs, as of January 30, 2010.

 

Other Methods of Program Distribution.  Our programming is also made available full-time to “C”-band satellite dish owners nationwide and is made available to homes in the Boston, Pittsburgh and Seattle markets over the air via television broadcast stations owned by us or where we lease the broadcast time. In fiscal 2010 and fiscal 2009, our Boston, leased access Pittsburgh and Seattle stations and “C”-band satellite dish transmissions were responsible for approximately 5% of our total consolidated net sales. As of January 29, 2011, we also have carriage agreements with companies primarily known for offering telephone services which have recently begun offering video services using internet protocol delivery. In addition, our programming is also available through our internet retailing websites, www.ShopNBC.com and www.ShopNBC.tv.

 

Internet Website

 

Our websites, ShopNBC.com and ShopNBC.tv, provide customers with a broad array of consumer merchandise, including all products being featured on our television programming. The websites include a live webcast feed of our television programming, an archive of recent past programming, videos of many individual products that the customer can view on demand.

Net sales from our internet website business, inclusive of shipping and handling revenues, totaled $232 million, $178 million and $181 million, representing 41%, 34% and 32% of consolidated net sales for fiscal 2010, fiscal 2009 and fiscal 2008, respectively. We believe that our internet business represents an important component of our future growth opportunities, and we will continue to invest in and enhance our internet-based capabilities.

 

Our e-commerce activities are subject to a number of general business regulations and laws regarding taxation and online commerce. There have been continuing efforts to increase the legal and regulatory obligations and restrictions on companies conducting commerce through the internet, primarily in the areas of taxation, consumer privacy and protection of consumer personal information. For example, the Commonwealth of Massachusetts has promulgated regulations that have taken effect on March 1, 2010 that impose a number of data security requirements on companies that collect certain types of information concerning Massachusetts residents. There are indications that other states may adopt similar requirements in the future. A patchwork of state laws imposing differing security requirements depending on the residence of our customers could impose added compliance costs without a compensating increase in income.

 

In November 2002, a number of states approved a multi-state agreement to simplify state sales tax laws by establishing one uniform system to administer and collect sales taxes on traditional retailers and electronic commerce merchants. The agreement became effective on October 3, 2005. To date, 24 of the 44 states that approved the agreement have passed conforming legislation. A number of states and the US Congress are considering legislative initiatives that would impose tax collection obligations on sales made through the internet. No prediction can be made as to whether individual states will enact legislation requiring retailers such as us to collect and remit sales taxes on transactions that occur over the internet. On October 31, 2007, the United States enacted a seven-year moratorium on internet access taxes, extending a ban on internet access taxes and it is set to expire in 2014.

 

The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, was signed into law on December 16, 2003 and went into effect on January 1, 2004. The CAN-SPAM Act pre-empts similar laws passed by over thirty states, some of which contain restrictions or requirements that are viewed as stricter than those of the CAN-SPAM Act. The CAN-SPAM Act is primarily an opt-out type law; that is, prior permission to send e-mail solicitations to a recipient is not required, but a recipient may affirmatively opt out of such future e-mail solicitations. The CAN-SPAM Act requires commercial e-mails to contain a clear and conspicuous identification that the message is an advertisement or solicitation for goods or services (unless the sender obtains prior affirmative consent from the recipient to receive such messages), as well as a clear and conspicuous unsubscribe function that allows recipients to alert the sender that they do not desire to receive future e-mail solicitation messages. In addition, the CAN-SPAM Act requires that all commercial e-mail messages include a valid physical postal address. The CAN-SPAM implementing regulations were amended in 2008 by the FTC to include, among other things, a prohibition that e-mail senders make it difficult for a recipient to opt-out of receiving future emails from the sender. We believe the CAN-SPAM Act limits our ability to pursue certain direct marketing activities, thus limiting our sales and potential customers.

 

Changes in consumer protection laws also may impose additional burdens on those companies conducting business online. The adoption of additional laws or regulations may decrease the growth of the internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business through the internet.

 

In addition, since our website is available over the internet in all states, various states may claim that we are required to qualify to do business as a foreign corporation in such state, a requirement that could result in fees and taxes as well as penalties for the failure to qualify. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the internet and other online services could have a material adverse effect on the growth of our business in this area.

 

Strategic Alliance with GE Equity and NBCU

 

In March 1999, we entered into a strategic alliance with GE Capital Equity Investments, Inc. (“GE Equity”) and NBCU, pursuant to which we issued Series A Redeemable Convertible Preferred Stock and common stock warrants, and entered into a shareholder agreement, a registration rights agreement, a distribution and marketing agreement and, the following year, a trademark license agreement. On February 25, 2009, the Company entered into an exchange agreement with the same parties, pursuant to which GE Equity exchanged all outstanding shares of the Company’s Series A Preferred Stock for (i) 4,929,266 shares of the Company’s Series B Redeemable Preferred Stock, (ii) a warrant to purchase up to 6,000,000 shares of the Company’s common stock at an exercise price of $0.75 per share and (iii) a cash payment in the amount of $3.4 million. In connection with the exchange, the parties also amended and restated the 1999 shareholder agreement and registration rights agreement. The outstanding agreements with GE Equity and NBCU are described in more detail below.

 

In January 2011, General Electric Company (“GE”) consummated a transaction with Comcast Corporation (“Comcast”) pursuant to which GE contributed all of its holdings in NBCU to NBCUniversal, LLC, a newly formed entity beneficially owned 51% by Comcast and 49% by GE. As a result of that transaction, NBCU is now a wholly owned subsidiary of NBCUniversal, LLC, and the aggregate equity ownership of GE Equity in the Company is 4,929,266 shares of Series B Preferred Stock and warrants to purchase up to 6,000,000 shares of common stock and the direct ownership of NBCU in the Company consists of 6,452,194 shares of common stock and warrants to purchase 14,744 shares of common stock. The Company is currently making arm’s length negotiated payments to Comcast for cable distribution under a pre-existing contract.

 

In connection with the transfer of its ownership in NBCU, GE also agreed with Comcast that, for so long as GE Equity is entitled to appoint three members of our board of directors, NBCU will be entitled to retain a board seat provided that NBCU beneficially owns at least 5% of our adjusted outstanding common stock. Furthermore, GE agreed to obtain the consent of NBCU prior to consenting to our adoption of any shareholders rights plan or certain other actions that would impede or restrict the ability of NBCU to acquire or dispose of shares of our voting stock or our taking any action that would result in NBCU being deemed to be in violation of Federal Communications Commission multiple ownership regulations.

 

Series B Preferred Stock Issued to GE Equity

 

On February 25, 2009, we issued 4,929,266 shares of Series B Preferred Stock to GE Equity. 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.

 

On February 25, 2013, a $14,667,000 payment is due and will redeem 30% of the Series B Preferred Stock and any unpaid accrued dividends. The remaining unpaid accrued dividends and outstanding shares of preferred stock will be redeemed 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 dispose of assets or incur indebtedness above agreed upon thresholds, must be used to redeem the Series B Preferred Stock and pay accrued and unpaid dividends thereon. Excess cash balance is defined as our Company’s cash and cash equivalents and marketable securities, adjusted to (i) exclude cash pledged to vendors to secure the purchase of inventory, (ii) account for variations that are due to our management of payables, (iii) exclude any operating cash needs for the next twelve months, and (iv) provide us with additional operating cash of $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 class voting rights and rights to designate members of the Company’s board of directors including the right to elect

the GE Equity director-designees described below. On November 16, 2010 and February 18, 2011, the Company made two $2.5 million payments to GE Equity, reducing the outstanding accrued dividends payable on the Series B Preferred Stock.

 

NBCU Trademark License Agreement

 

On November 16, 2000, we entered into a trademark license agreement with NBCU pursuant to which NBCU granted us an exclusive, worldwide license for a term of ten years to use certain NBC trademarks, service marks and domain names to rebrand our business and corporate name and website. We subsequently selected the names ShopNBC and ShopNBC.com.

 

Under the license agreement we have agreed, among other things, to (i) certain restrictions on using trademarks, service marks, domain names, logos or other source indicators owned or controlled by NBCU, (ii) the loss of our rights under the license with respect to specific territories outside of the United States in the event we fail to achieve and maintain certain performance targets in such territories, (iii) not own, operate, acquire or expand our business to include certain businesses without NBCU’s prior consent, (iv) comply with NBCU’s privacy policies and standards and practices, and (v) not own, operate, acquire or expand our business such that one-third or more of our revenues or our aggregate value is attributable to certain services (not including retailing services similar to our existing e-commerce operations) provided over the internet. The license agreement also grants to NBCU the right to terminate the license agreement at any time upon certain changes of control of our Company, in certain situations upon the failure by NBCU to own a certain minimum percentage of our outstanding capital stock on a fully diluted basis, and certain other situations. On March 28, 2007, we and NBCU agreed to extend the term of the license by six months, such that the license would continue through May 15, 2011, and to provide that certain changes of control involving a financial buyer would not provide the basis for an early termination of the license by NBCU.

 

On November 18, 2010, the Company announced a further extension of the license agreement to May 2012, an option to further extend the license agreement to May 2013 upon the mutual agreement of both parties, and an agreement to enter into a separate transition agreement, on the terms and subject to the conditions to be mutually agreed between the parties, relating to the twelve month period following the ultimate expiration of the license agreement. In consideration for the license agreement extension, the Company will issue shares of the Company’s common stock valued at $4 million to NBCU on May 15, 2011.

 

Amended and Restated Shareholder Agreement

 

On February 25, 2009, we entered into an amended and restated shareholder agreement with GE Equity and NBCU, which provides for certain corporate governance and standstill matters. The amended and restated shareholder agreement provides that GE Equity is entitled to designate nominees for three out of nine members of the Company’s board of directors so long as the aggregate beneficial ownership of GE Equity and NBCU (and their affiliates) is at least equal to 50% of their beneficial ownership as of February 25, 2009 (i.e. beneficial ownership of approximately 8.75 million common shares), and two out of nine members so long as their aggregate beneficial ownership is at least 10% of the “adjusted outstanding shares of common stock,” as defined in the amended and restated shareholder agreement. In addition, the amended and restated shareholder agreement provides that GE Equity may designate any of its director-designees to be an observer of the Audit, Human Resources and Compensation, and Corporate Governance and Nominating Committees of our board of directors.

 

The amended and restated shareholder agreement requires the consent of GE Equity prior to our entering into any material agreements with any of CBS, Fox, Disney, Time Warner or Viacom (and their respective affiliates), provided that this restriction will no longer apply when either (i) our trademark license agreement with NBCU (described below) has terminated or (ii) GE Equity is no longer entitled to designate at least two director nominees. In addition, the amended and restated shareholder agreement requires the consent of GE Equity prior to our (i) exceeding certain thresholds relating to the issuance of securities, the payment of dividends, the repurchase or redemption of common stock, acquisitions (including investments and joint ventures) or dispositions, and the incurrence of debt; (ii) entering into any business different than what we and our subsidiaries are currently engaged; and (iii) amending our articles of incorporation to adversely affect GE Equity and NBCU (or their affiliates); provided, however, that these restrictions will no longer apply when both (i) GE Equity is no longer entitled to

designate three director nominees and (ii) GE Equity and NBCU no longer hold any Series B Preferred Stock. We are also prohibited from taking any action that would cause any ownership interest by us in television broadcast stations from being attributable to GE Equity, NBCU or their affiliates.

 

The amended and restated shareholder agreement further provides that during the “standstill period” (as defined in the amended and restated shareholder agreement), subject to certain limited exceptions, GE Equity and NBCU are prohibited from: (i) any asset/business purchases from us in excess of 10% of the total fair market value of our assets; (ii) increasing their beneficial ownership above 39.9% of our shares, treating as outstanding and actually owned for such purpose shares of our common stock issuable to GE Equity upon exercise of the warrant for 6,000,000 shares of our common stock; (iii) making or in any way participating in any solicitation of proxies; (iv) depositing any of our securities in a voting trust; (v) forming, joining or in any way becoming a member of a “13D Group” with respect to any of our voting securities; (vi) arranging any financing for, or providing any financing commitment specifically for, the purchase of any of our voting securities; (vii) otherwise acting, whether alone or in concert with others, to seek to propose to us any tender or exchange offer, merger, business combination, restructuring, liquidation, recapitalization or similar transaction involving us, or nominating any person as a director of the Company who is not nominated by the then incumbent directors, or proposing any matter to be voted upon by our shareholders. If, during the standstill period, any inquiry has been made regarding a “takeover transaction” or “change in control,” each as defined in the amended and restated shareholder agreement, that has not been rejected by our board of directors, or our board of directors pursues such a transaction, or engages in negotiations or provides information to a third party and the board has not resolved to terminate such discussions, then GE Equity or NBCU may propose to us a tender offer or business combination proposal.

 

In addition, unless GE Equity and NBCU beneficially own less than 5% or more than 90% of the adjusted outstanding shares of common stock, GE Equity and NBCU shall not sell, transfer or otherwise dispose of any securities of our Company except for transfers: (i) to certain affiliates who agree to be bound by the provisions of the amended and restated shareholder agreement, (ii) that have been consented to by us, (iii) subject to certain exceptions, pursuant to a third-party tender offer, (iv) pursuant to a merger, consolidation or reorganization to which we are a party, (v) in an underwritten public offering pursuant to an effective registration statement, (vi) pursuant to Rule 144 of the Securities Act of 1933, or (vii) in a private sale or pursuant to Rule 144A of the Securities Act of 1933; provided, that in the case of any transfer pursuant to clause (v), (vi) or (vii), the transfer does not result in, to the knowledge of the transferor after reasonable inquiry, any other person acquiring, after giving effect to such transfer, beneficial ownership, individually or in the aggregate with that person’s affiliates, of more than 10% (or 20% in the case of a transfer by NBCU) of the adjusted outstanding shares of the common stock, as determined in accordance with the amended and restated shareholder agreement.

 

The standstill period will terminate on the earliest to occur of (i) the ten-year anniversary of the amended and restated shareholder agreement, (ii) our entering into an agreement that would result in a “change in control” (subject to reinstatement), (iii) an actual “change in control” (subject to reinstatement), (iv) a third-party tender offer (subject to reinstatement), or (v) six months after GE Equity can no longer designate any nominees to our board of directors. Following the expiration of the standstill period pursuant to clause (i) above and two years in the case of clause (v) above, GE Equity and NBCU’s beneficial ownership position may not exceed 39.9% of our adjusted outstanding shares of common stock, except pursuant to issuances or exercises of any warrants or pursuant to a 100% tender offer for our Company.

 

Registration Rights Agreement

 

On February 25, 2009, we entered into an amended and restated registration rights agreement providing GE Equity, NBCU and their affiliates and any transferees and assigns, an aggregate of four demand registrations and unlimited piggy-back registration rights. In addition, NBCU was subsequently granted one additional demand registration right pursuant to the second amendment of the NBCU Trademark License Agreement.

 

Television and Internet Retailing

 

Our television and internet revenues are generated from sales of merchandise and services offered through our “ShopNBC Anywhere” initiative, which includes cable and satellite television, online at www.ShopNBC.com, live streaming at www.ShopNBC.tv, mobile devices and social networking sites. Our television home shopping business utilizes live television 24 hours a day, seven days a week, to create an interactive and entertaining atmosphere to describe and demonstrate our merchandise. Selected customers participate through live conversations with on-air sales hosts and occasional on-air guests. We believe our customers are primarily women between the ages of 40 and 69, married, with average annual household incomes of $50,000 or more. Our customers make purchases based on our unique products, quality merchandise and value. Over the past fiscal year, we have changed our product mix in order to diversify our product offerings, which we believe will continue to drive new and active customer development and the retention of repeat customers. We schedule special programming at different times of the day and week to appeal to specific viewer and customer profiles. We feature announced and unannounced promotions to drive interest and incremental sales, including “Today’s Top Value,” a sales program that features one special offer every day. We also feature other major and special promotional events and inventory-clearance sales.

 

Our merchandise is generally offered at or below comparable retail values. We continually introduce new products on our television home shopping program and website. Inventory sources include manufacturers, wholesalers, distributors and importers. We intend to continue to promote private label merchandise, which generally has higher margins than branded merchandise.

 

ShopNBC Private Label and Co-Brand Credit Card Program

 

The Company has 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 provides a number of benefits to customers including deferred billing options and free shipping promotions throughout the year. During fiscal 2010 and fiscal 2009, customer use of the private label and co-branded cards accounted for approximately 15% and 16% of our television and internet sales, respectively. We believe that the use of the ShopNBC credit card furthers customer loyalty and reduces our overall bad debt exposure since the credit card issuing bank bears the risk of bad debt on ShopNBC credit card transactions that do not utilize our ValuePay installment payment program.

 

Purchasing Terms

 

We obtain products for our direct marketing businesses from domestic and foreign manufacturers and suppliers and are often able to make purchases on favorable terms based on the volume of products purchased or sold. Some of our purchasing arrangements with our vendors include inventory terms that allow for return privileges for a portion of the order or stock balancing. We generally do not have long-term commitments with our vendors, and a variety of sources are available for each category of merchandise sold. During fiscal 2010 products purchased from one vendor accounted for approximately 18% of our consolidated net sales. We believe that we could find alternative sources for this vendor’s products if this vendor ceased supplying merchandise; however, the unanticipated loss of any large supplier could impact our sales and earnings on a temporary basis.

 

 

Our products are available for purchase via toll-free telephone numbers or on our websites. We maintain agreements with West Corporation, 24-7 INtouch as well as other call surge providers to support us with telephone order-entry operators and automated order-processing services for the taking of customer orders. We process orders with our own home based phone agents and with agents at our Bowling Green, Kentucky and Eden Prairie, Minnesota facilities. At the present time, we do not utilize any call center services based overseas.

 

We own a 262,000 square foot distribution facility in Bowling Green, Kentucky, which we use for the fulfillment of all merchandise purchased and sold by us and for certain call center operations. We also lease

approximately 136,000 square feet of additional warehouse space in Bowling Green, Kentucky under an 18-month lease agreement, which includes an extension option.

 

The majority of customer purchases are paid by credit or debit cards. As discussed above, we maintain a private label and a co-brand credit card program using the ShopNBC name. Purchases made with the ShopNBC private label credit card are non-recourse to us. We also utilize an installment payment program called ValuePay, which entitles customers to pay by credit card for certain merchandise in two or more equal monthly installments. We intend to continue to sell merchandise using the ValuePay program due to its significant promotional value. It does, however, create a credit collection risk for us from the potential inability to collect outstanding balances.

 

We maintain a product inventory, which consists primarily of consumer merchandise held for resale. The product inventory is valued at the lower of average cost or realizable value. As of January 29, 2011 and January 30, 2010, we had inventory balances of $39.8 million and $44.1 million, respectively. We do not have any material amounts of backlog orders.

 

Merchandise is shipped to customers by the United States Postal Service, UPS, Federal Express or other recognized carriers. We also have arrangements with certain vendors who ship merchandise directly to our customers after an approved customer order is processed.

 

We perform all customer service functions at our Eden Prairie, Minnesota and Bowling Green, Kentucky facilities.

 

Our return policy allows a standard 30-day refund period from the date of invoice for all customer purchases. Our return rate was 20% in fiscal 2010 compared to 21% in fiscal 2009. We attribute the decrease in the 2010 and 2009 return rates primarily to operational improvements in our delivery time and customer service, our overall product quality and quality control enhancements and our lower price points. Prior to fiscal 2009, our return rates have historically been in the range of approximately 31% to 33%. These historical return rates have been higher than the average return rates reported by our larger competitors in the television home shopping industry. Management believes that historically our return rates were high partially as a result of (i) the significantly higher historic average selling prices of our products as compared to the average selling prices of our competitors, and (ii) the fact that we have had a higher percentage of sales attributable to high-priced jewelry products. Both of these characteristics are associated with higher product return rates. We continue to manage our return rates and adjust our product mix accordingly to maintain lower average selling price points in an effort to continue to reduce the overall return rates related to our television home shopping and internet businesses.

 

 

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 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 our major competitors 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. At ShopNBC’s current sales level, our distribution costs as a percentage of total consolidated net sales are higher than our competition.

 

The e-commerce sector is also highly competitive, and we are in direct competition with other internet retailers, many of whom are larger, better financed and/or have broader customer bases.

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) increasing the number of customers who purchase products from us and (ii) increasing the dollar value of sales per customer from our existing customer base.

 

 

The cable television industry and the broadcasting industry in general are subject to extensive regulation by the Federal Communications Commission, or FCC. The following does not purport to be a complete summary of all of the provisions of the Communications Act of 1934, as amended, known as the Communications Act; the Cable Television Consumer Protection Act of 1992, known as the Cable Act; the Telecommunications Act of 1996, known as the Telecommunications Act; or other laws and FCC rules or policies that may affect our operations.

 

Cable Television

 

The cable industry is regulated by the FCC under the Cable Act and FCC regulations promulgated thereunder, as well as by state or local governments with respect to certain franchising matters.

 

Must Carry.  In general, the FCC’s “must carry” rules under the Cable Act entitle full power television stations to mandatory cable carriage of the primary video and program-related material in their signals, at no charge, to all cable homes located within each station’s broadcast market provided that the signal is of adequate strength, and the must carry signals occupy no more than one-third of the cable system’s capacity.

 

Broadcast Television

 

General.  Our acquisition and operation of television stations is subject to FCC regulation under the Communications Act. The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC. The statute empowers the FCC, among other things, to issue, revoke and modify broadcasting licenses, adopt regulations to carry out the provisions of the Communications Act and impose penalties for violation of such regulations. Such regulations impose certain obligations with respect to the programming and operation of television stations, including requirements for carriage of children’s educational and informational programming, programming responsive to local problems, needs and interests, advertising upon request by legally qualified candidates for federal office, closed captioning, and other matters. In addition, FCC rules prohibit foreign governments, representatives of foreign governments, aliens, representatives of aliens and corporations and partnerships organized under the laws of a foreign nation from holding broadcast licenses. Aliens may own up to 20% of the capital stock of a licensee corporation, or generally up to 25% of a U.S. corporation, which, in turn, has a controlling interest in a licensee.

 

Full Power Television Stations.  In April 2003, one of our wholly owned subsidiaries acquired a full power television station serving the Boston, Massachusetts market. On April 11, 2007, the FCC granted our application for renewal of the station’s license. We also distribute our programming via leased carriage on full power television stations in Pittsburgh, Pennsylvania and Seattle, Washington. Our Boston station, WWDP-DT, currently broadcasts in a digital format on channel 10.

 

The FCC has begun proceedings to consider reclaiming portions of the electro-magnetic spectrum now used for broadcast television service with the goal of reallocating some of that spectrum for wireless broadband service. The FCC has proposed to use “incentive auctions” that would permit broadcasters on a voluntary basis to agree to give up some or all of their spectrum and obtain a portion of the proceeds the FCC would collect from auctioning that spectrum. The FCC may also consider “repacking” broadcast television channels to clear spectrum. Legislation would be required for the FCC to conduct these incentive auctions. There can be no assurance that Congress will give the FCC that authority. Similarly, there can be no assurance of the impact of any “repacking” on existing ability of television stations to reach their audience.

Telephone Companies’ Provision of Programming Services

 

The Telecommunications Act eliminated the previous statutory restriction forbidding the common ownership of a cable system and telephone company. Verizon, AT&T, and a number of other local telephone companies are planning to provide or are providing video services through fiber to the home or fiber to the neighborhood technologies, while other local exchange carriers are using video digital subscriber loop technology, known as VDSL, to deliver video programming, high-speed internet access and telephone service over existing copper telephone lines or new fiber optic lines. In March 2007 and November 2007, the FCC released orders designed to streamline entry by carriers by preempting the imposition by local franchising authorities of unreasonable conditions on entry. A number of franchising authorities have sought judicial review of the March 2007 order, and those cases were consolidated before the U.S. Court of Appeals for the Sixth Circuit. On June 27, 2008, the United States Court of Appeals for the Sixth Circuit denied the petitions for review of the FCC’s decision. In addition, a number of parties have requested that the FCC reconsider various aspects of the March 2007 and November 2007 orders, and those requests remain pending. A number of states have also enacted franchise reform legislation to make it easier for telephone companies to provide video services. Both Verizon and AT&T have deployed video delivery systems in many markets across the country, and other telephone companies are also entering the market as a result of these FCC and state decisions. As of September 2010, Verizon and AT&T, respectively, were the seventh and ninth largest multi-channel video programming distributors. No prediction can be made as to their further deployment or success in attracting customers.

 

Regulations Affecting Multiple Payment Transactions

 

The antitrust settlement between MasterCard, VISA and approximately 8 million retail merchants raises certain issues for retailers who accept telephonic orders that involve consumer use of debit cards for multiple or continuity payments. A condition of the settlement agreement provided that the code numbers or other means of distinguishing between debit and credit cards be made available to merchants by VISA and MasterCard. Under Federal Reserve Board regulations, this may require merchants to obtain consumers’ written consent for preauthorized transfers where the merchant is aware that the method of payment is a debit card as opposed to a credit card. We believe that debit cards are currently being offered as the payment vehicle in approximately 36% of our transactions with VISA and MasterCard. Effective February 9, 2006, the Federal Reserve Board amended language in its official commentary to Regulation E by removing an express prohibition on the use of taped verbal authorization from consumers as evidence of a written authorization for purposes of the regulation. There can be no assurance that compliance with the authorization procedures under this regulation will not adversely affect the customer experience in placing orders or adversely affect sales.

 

Fair and Accurate Credit Transactions Act

 

In an attempt to combat identity theft, in 2003, Congress enacted the Fair and Accurate Credit Transactions Act. (“FACTA”). In 2008, the federal bank regulatory agencies and the Federal Trade Commission finalized a joint rule implementing FACTA. Compliance with the rule became mandatory on June 1, 2010. FACTA requires companies to take steps to prevent, detect and mitigate the occurrences of identity theft. Pursuant to FACTA, covered companies are required to, among other things, develop an identity theft prevention program to identify and respond appropriately to “red flags” that may be indicative of possible identity theft. We adopted our FACTA policy on May 14, 2009.

 

 

Our business is subject to seasonal fluctuation, with the highest sales activity normally occurring during our fourth fiscal quarter of the year, primarily November through January. Our business is also sensitive to general economic conditions and business conditions affecting consumer spending. Additionally, our television audience (and therefore sales revenue) can be significantly impacted by major world or domestic events which attract television viewership and diverts audience attention away from our programming.

 

At January 29, 2011, we had approximately 905 employees, the majority of whom are employed in customer service, order fulfillment and television production. Approximately 16% of our employees work part-time. We are not a party to any collective bargaining agreement with respect to our employees.

 

 

Set forth below are the names, ages and titles of the persons serving as our executive officers.

 

 

Keith R. Stewart was named our President and Chief Executive Officer in January 2009 after having joined ShopNBC as President and Chief Operating Officer in August 2008. Mr. Stewart retired from QVC in July 2007 where he served the majority of his retail career, most recently as Vice President — Merchandising of QVC (USA), and Vice President — Global Sourcing of QVC (USA) from April 2004 to June 2007. Previously, Mr. Stewart was General Manager of QVC’s large and profitable German business unit from 1998 to March 2004. Mr. Stewart first joined QVC as a consumer electronics buyer in 1992 and through a series of progressively responsible positions developed expertise in all areas of TV shopping, including merchandising, programming, cable distribution, strategic planning, organizational development, and international sourcing.

 

Robert Ayd joined ShopNBC in February 2010 as President, overseeing Merchandising, Planning, Programming, Broadcast Operations, and On-Air Talent. Mr. Ayd brings an extensive background and proven track record of success to ShopNBC, including executive leadership roles at QVC and Macy’s. Most recently, Mr, Ayd served as Executive Vice President and Chief Merchandising Officer at QVC (U.S.) from 2006 to 2008. During his tenure at QVC, Mr. Ayd also served as Senior Vice President, Design Development & Global Sourcing and Brand Development from 2005 to 2006, and Senior Vice President of Jewelry and Fashion from 2000 to 2004. Prior to joining QVC in 1995 as Vice President of Fashion, Mr. Ayd held numerous executive leadership positions for Macy’s, culminating with Senior Vice President in Women’s Sportswear from 1991 to 1995. Mr. Ayd began his career at Macy’s in 1975 as a buyer of handbags, bodywear and footwear.

 

William McGrath was named Senior Vice President and Chief Financial Officer in August 2010 after having joined ShopNBC in January 2010 as Vice President of Quality Assurance and being named interim Chief Financial Officer in February 2010. Most recently, Mr. McGrath served as Vice President Global Sourcing Operations and Finance at QVC in 2008. During his tenure at QVC, he also served as Vice President Corporate Quality Assurance and Quality Control from 1999 — 2008; Vice President Merchandise Operations and Inventory Control from 1995-1999; Vice President Market Research and Sales Analysis from 1992 — 1995; and Director Financial Planning and Analysis from 1990-1992. Prior to QVC, Mr. McGrath held a variety of leadership positions at Subaru of America from 1983-1990 and Arthur Andersen from 1979-1983. He holds an MBA in finance from Drexel University and a BS in Accounting from Saint Joseph’s University.

Carol Steinberg joined ShopNBC as Senior Vice President, E-Commerce, Marketing and Business Development in June 2009. Previously she was Vice President at David’s Bridal from September 2006 to June 2009 where she expanded its internet presence by designing and implementing marketing and merchandising strategies that drove traffic in store and online. Prior to this position, Ms. Steinberg spent 12 years at QVC from July 1994 to September 2006, most recently having served as the Director of Online Marketing and Business Development.

 

Jean-Guillaume Sabatier joined ShopNBC as Senior Vice President, Sales & Product Planning and Programming in November 2008. Most recently, Mr. Sabatier served as Director, Sales and Product Planning for QVC, Inc., from July 2007 to October 2008. Prior to that time, Mr. Sabatier held various positions in QVC’s German business unit, including Director, Programming and Planning from July 2003 to July 2007. He began his QVC career as a sales and product planner in June 1997.

 

Michael A. Murray joined ShopNBC as Vice President of Operations in May 2004. Mr. Murray has over 25 years of operations and business management experience. Prior to joining ShopNBC, Mr. Murray was Senior Vice President of Operations for the Fingerhut Companies and Federated Department Stores direct to consumer divisions primarily from May 1991 to October 2002. While at Fingerhut, Mr. Murray also led FBSI operations, Fingerhut’s 3rd party direct to consumer arm serving Walmart.com, Intuit, Levi’s, Wet Seal and others. Mr. Murray has held executive leadership positions in various direct to consumer and retail companies including Merrill Corporation, Lieberman Enterprises, and Associated Wholesale Grocers. Mr. Murray began his career with John Deere as an Industrial Engineer.

 

Mark A. Ahmann has served as Senior Vice President, Human Resources and TV Sales since January 2009, after joining ShopNBC in September 2008 as Senior Vice President, Human Resources. Prior to ShopNBC Mr. Ahmann served as an independent consultant with HR Connection from October 2007 to August 2008 and as Senior Vice President of Operations and Human Resources at Prime Therapeutics, a pharmacy benefit management services provider, from August 2005 to September 2007. Previously, Mr. Ahmann was Vice President of Human Resources at Cargill, a global agricultural and trading company from November 2003 to March 2005. Prior to that time he served as Vice President of Administration and Human Resources at FSI International and as Vice President of Human Resources — Acquisitions and Divestitures at Aetna. He began his career in human resources with Honeywell.

 

Nicholas J. Vassallo has served as Vice President and Corporate Controller since 2000. He first joined ValueVision Media as director of financial reporting in October 1996. During that time he also had responsibility for direct-mail acquisitions and other corporate business development ventures. Mr. Vassallo was named corporate controller in 1999 and the following year was promoted to vice president. Prior to ValueVision he served as corporate controller for Fourth Shift Corporation, a software development company. Mr. Vassallo began his career with Arthur Anderson, LLP where he spent eight years in their audit practice group. Mr. Vassallo is a CPA and holds a BS in Accounting from Saint John’s University in New York.

 

Beth K. McCartan has served as Vice President Financial Planning & Analysis since 2006. She first joined ValueVision Media as Finance Manager in January 2001. She was promoted to Finance Director in 2003 and to Vice President three years later. Prior to ValueVision she worked for The Pillsbury Company in several finance positions including Sr. Financial Analyst for Green Giant and Progresso brands and as a plant controller. She began her career with Pillsbury in February 1993. Ms. McCartan holds an MBA in finance from the University of Minnesota and has undergraduate degrees in Finance, Marketing and Advertising from The University of St. Thomas.

 

Ashish G. Akolkar has served as Vice President of IT Operations since June 2007. Mr. Akolkar joined ShopNBC in November 2000 and has held director and managerial positions at ShopNBC overseeing enterprise architecture, software development, application support & maintenance and technology infrastructure functions. Prior to joining ShopNBC Mr. Akolkar served as a technology consultant for ERP applications while working for companies including netbriefings.com and Sunflower Information Technologies. Mr. Akolkar has an MBA in finance and BS in Electronics engineering from Mumbai University, India.

 

Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports if applicable, are available, without charge, on our Investor Relations website as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission. Copies also are available, without charge, by contacting the General Counsel, ValueVision Media, Inc., 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433.

 

Our Investor Relations internet address is www.valuevisionmedia.com. The information contained on and connected to our Investor Relations website is not incorporated into this report.

 

 

In addition to the general investment risks and those factors set forth throughout this document, including those set forth under the caption “Cautionary Statement Concerning Forward-Looking Information,” the following risks should be considered regarding our Company.

 

We have a history of losses and a high fixed cost operating base and may not be able to achieve or maintain profitable operations in the future.

 

We experienced operating losses of approximately $15.5 million, $41.2 million and $88.5 million in fiscal 2010, fiscal 2009 and fiscal 2008, respectively. We reported a net loss of $25.9 million, $42.0 million and $97.8 million in fiscal 2010, fiscal 2009 and fiscal 2008, respectively. There is no assurance that we will be able to achieve or maintain profitable operations in future fiscal years.

 

Our television home shopping business operates with a high fixed cost base, primarily driven by fixed fees under distribution agreements with cable and direct-to-home satellite providers to carry our programming. In order to operate on a profitable basis, we must reach and maintain sufficient annual sales revenues to cover our high fixed cost base and/or negotiate a reduction in this cost structure. If our sales levels are not sufficient to cover our operating expenses, our ability to reduce operating expenses in the near term will be limited by the fixed cost base. In that case, our earnings, cash balance and growth prospects could be materially and adversely affected.

 

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.

 

As of January 29, 2011, we had approximately $46.5 million in unrestricted cash, with an additional $5.0 million of restricted cash used to secure letters of credit. We expect to 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, which primarily includes payments for cable and satellite program distribution obligations, including a deferred payment obligation to a service provider of approximately $24 million, $12 million of which was paid in February 2011 and $12 million of which is due in March 2012; Redemption of our Series B redeemable preferred stock for $40.9 million; and repayment of our $25 million term loan. Based on our current projections for fiscal 2011, we believe that our existing cash balances will be sufficient to maintain liquidity to fund our normal business operations over the next twelve months. However, our amended and restated shareholder agreement with GE Equity and NBCU requires the consent of GE Equity in order for us to issue new equity securities and to incur indebtedness above certain thresholds, and there can be no assurance that we would receive such consent if we made a request. Furthermore, our term loan facility includes certain restrictions on our ability to incur additional debt, as well as restrictions on our ability to make material changes in the nature of our business, both of which may be necessary in times of liquidity constraints. Therefore, there can be no assurance that, if required, we would be able to raise additional capital or reduce spending to have sufficient liquidity to meet our ongoing cash commitments and obligations to continue operating our business. Any issuances of additional equity, which could include GE Equity’s exercise of its warrant for six million shares of our common stock, and which will include the issuance of shares of our common stock valued at $4 million to NBCU on May 15, 2011, are dilutive to our existing shareholders.

The failure to secure suitable placement for our television programming and the expansion of digital cable systems could adversely affect our ability to attract and retain television viewers and could result in a decrease in revenue.

 

We are dependent upon our ability to compete for television viewers. Effectively competing for television viewers is dependent on our ability to secure placement of our television programming within a suitable programming tier at a desirable channel position. The majority of cable operators now offer cable programming on a digital basis. While the growth of digital cable systems may over time make it possible for our programming to be more widely distributed, there are several risks as well. The primary risks associated with the growth of digital cable are demonstrated by the following:

 

 

Failure to adapt to these risks will result in lower revenue and may harm our results of operations. In addition, failure to anticipate and adapt to technological changes in a cost-effective manner that meets customer demands and evolving industry standards will also reduce our revenue, harm our results of operations and financial condition and have a negative impact on our business.

 

We may not be able to expand or could lose some of our existing programming distribution if we cannot negotiate profitable distribution agreements.

 

We are seeking to continue to reduce the costs associated with our cable and satellite distribution agreements. However, while we were able to achieve reductions in such costs during fiscal 2010 on a per unit level without a loss in households, there can be no assurance that we will achieve comparable cost reductions in the future or that we will be able to maintain or grow our households on financial terms that are profitable to us. It is possible that we may need to reduce our programming distribution in certain systems if we are unable to obtain appropriate financial terms. Failure to successfully renew agreements covering a material portion of our existing cable and satellite households on acceptable financial and other terms could adversely affect our future growth, sales revenues and earnings unless we are able to arrange for alternative means of broadly distributing our television programming.

 

NBCU, GE Equity and Comcast as the majority owner of NBCU, have the ability to exert significant influence over us and have the right to disapprove of certain actions by us.

 

As a result of their equity ownership in our Company, NBCU (and Comcast, as the majority owner of NBCU) and GE Equity together are currently our largest shareholder and have the ability to exert significant influence over actions requiring shareholder approval, including the election of directors, adoption of equity-based compensation plans and approval of mergers or other significant corporate events. Through the provisions in the amended and restated shareholder agreement and certificate of designation for the Series B redeemable preferred stock, NBCU (and Comcast, as the majority owner of NBCU) and GE Equity also have the right to block us from taking certain actions that might otherwise be in the interests of our other shareholders (as discussed in greater detail under “Business — Strategic Relationships — Amended and Restated Shareholder Agreement” above).

 

Expiration or termination of the NBC branding license would require us to pursue a new branding strategy that may not be successful.

 

We have branded our television home shopping network and internet site as ShopNBC and ShopNBC.com, respectively, under an exclusive, worldwide licensing agreement with NBCU for the use of NBC trademarks, service marks and domain names. The license agreement continues through May 2012, with an option to extend the term through May 2013 upon the mutual agreement of both parties. We do not have the right to automatic renewal at

the end of the extension period, and consequently may choose or be required to pursue a new branding strategy in the next 12-24 months which may not be as successful as the NBC brand with current or potential customers. NBCU also has the right to terminate the license prior to the end of the license term in certain circumstances, including without limitation in the event of a breach by us of the terms of the license agreement, upon certain changes of control, upon our inability to pay our debts as they become due, and upon NBCU’s failure to own a certain percentage of our outstanding capital stock on a fully diluted basis (as discussed in greater detail under “Business — Strategic Relationships — NBCU Trademark License Agreement” above).

 

Our directors, executive officers and principal shareholders have substantial control over us and could delay or prevent a change in corporate control.

 

Our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, over 38% of our outstanding common stock. As a result, these shareholders, acting together, would have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these shareholders, acting together, would have the ability to control the management and affairs of our Company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

 

 

Competition in the general merchandise retailing industry and particularly the live home shopping and e-commerce sectors could limit our growth and reduce our profitability.

 

As a general merchandise retailer, we compete for consumer expenditures with other forms of retail businesses, including 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, specialty stores, catalog and mail order retailers and other direct sellers. In the competitive television home shopping sector, we compete with QVC Network, Inc., HSN, Inc. and Jewelry Television, as well as a number of smaller “niche” home shopping competitors. QVC Network, Inc and HSN, Inc. both are substantially larger than we are in terms of annual revenues and customers, their programming is more broadly available to U.S. households than is our programming and in many markets they have more favorable channel locations than we have. The internet retailing industry is also highly competitive, with numerous e-commerce websites competing in every product category we carry, in addition to the websites operated by the other television home shopping companies. This competition in the internet retailing sector makes it more challenging and expensive for us to attract new customers, retain existing customers and maintain desired gross margin levels.

 

We may not be able to maintain our satellite services in certain situations, beyond our control, which may cause our programming to go off the air for a period of time and cause us to incur substantial additional costs.

 

Our programming is presently distributed to cable systems, full power television stations and satellite dish operators via a leased communications satellite transponder. Satellite service may be interrupted due to a variety of circumstances beyond our control, such as satellite transponder failure, satellite fuel depletion, governmental action, preemption by the satellite service provider, solar activity and service failure. The agreement provides us with preemptible back-up service if satellite transmission is interrupted under certain conditions. In the event of a serious transmission interruption where back-up service is not available, we may need to enter into new arrangements, resulting in substantial additional costs and the inability to broadcast our signal for some period of time.

The FCC could limit must-carry rights, which would impact distribution of our television home shopping programming and might impair the value of our Boston FCC license.

 

The Federal Communications Commission, known as the FCC, issued a public notice on May 4, 2007 stating that it was updating the public record for a petition for reconsideration filed in 1993 and still pending before the FCC. The petition challenges the FCC’s prior determination to grant the same mandatory cable carriage (or “must-carry”) rights for TV broadcast stations carrying home shopping programming that the FCC’s rules accord to other TV stations. The time period for comments and reply comments regarding the reconsideration closed in August 2007, and we submitted comments supporting the continuation of must-carry rights for home shopping stations. If the FCC decides to change its prior determination and withdraw must-carry rights for home shopping stations as a result of this updating of the public record, we could lose our current carriage distribution on cable systems in three markets: Boston, Pittsburgh and Seattle, which currently constitute approximately 3.4 million full-time equivalent households, or FTE’s, receiving our programming. We own our Boston television station and have carriage contracts with the third party Pittsburgh and Seattle television stations. In addition, if must-carry rights for home shopping stations are withdrawn, it may not be possible to replace these FTE’s on commercially reasonable terms and the carrying value of our Boston FCC license ($23.1 million as of January 29, 2011) may become impaired.

 

We may be subject to product liability claims for on-air misrepresentations or if people or properties are harmed by products sold by us.

 

Products sold by us and representations related to these products may expose us to potential liability from claims by purchasers of such products, subject to our rights, in certain instances, to seek indemnification against this liability from the suppliers or manufacturers of the products. In addition to potential claims of personal injury, wrongful death or damage to personal property, the live unscripted nature of our television broadcasting may subject us to claims of misrepresentation by our customers, the Federal Trade Commission and state attorneys general. We maintain, and have generally required the manufacturers and vendors of these products to carry, product liability and errors and omissions insurance. There can be no assurance that we will maintain this coverage or obtain additional coverage on acceptable terms, or that this insurance will provide adequate coverage against all potential claims or even be available with respect to any particular claim. There also can be no assurance that our suppliers will continue to maintain this insurance or that this coverage will be adequate or available with respect to any particular claims. Product liability claims could result in a material adverse impact on our financial performance.

 

Our ValuePay installment payment program could lead to significant unplanned credit losses if our credit loss rate was to materially deteriorate.

 

We utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two or more equal monthly installments. As of January 29, 2011 we had approximately $82.7 million due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. There is no guarantee that we will continue to experience the same credit loss rate that we have in the past or that losses will be within current provisions. A significant increase in our credit losses above what we have been experiencing could result in a material adverse impact on our financial performance.

 

Failure to comply with existing laws, rules and regulations, or to obtain and maintain required licenses and rights, could subject us to additional liabilities.

 

We market and provide a broad range of merchandise through multiple channels. As a result, we are subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions which are subject to change at any time, including laws regarding consumer protection, privacy, the regulation of retailers generally, the importation, sale and promotion of merchandise and the operation of warehouse facilities, as well as laws and regulations applicable to the internet and businesses engaged in e-commerce. Our failure to comply with these laws and regulations could result in fines and proceedings against us by governmental agencies and consumers, which could adversely affect our business, financial condition and results of operations. Moreover, unfavorable changes in the laws, rules and regulations applicable to us could decrease demand for merchandise offered by us, increase costs and subject us to additional liabilities. Finally, certain of these regulations impact our marketing efforts.

We may be subject to claims by consumers and state and federal authorities for security breaches involving customer information, which could materially harm our reputation and business.

 

In order to operate our business we take orders for our products from customers. This requires us to obtain personal information from these customers including credit card numbers. Although we take reasonable and appropriate security measures to protect customer information, there is still the risk that external or internal security breaches could occur. In addition, new tools and discoveries by third parties in computer or communications technology or software or other developments may facilitate or result in a future compromise or breach of our computer systems. Such compromises or breaches could result in significant liability or costs to us from consumer lawsuits for monetary redress, state and federal authorities for fines and penalties, and could also lead to interruptions in our operations and negative publicity causing damage to our reputation and limiting customers’ willingness to purchase products from us. In the recent past, a major discount retailer and a credit reporting agency experienced theft of credit card numbers of millions of consumers resulting in multi-million dollar fines and consumer settlement costs, FTC audit requirements, and significant internal administrative costs.

 

Nearly all of our sales are paid for by customers using credit or debit cards and the increasingly heightened Payment Card Industry (“PCI”) standards regarding the storage and security of customer information could potentially impact our ability to accept card brands

 

Nearly all of ShopNBC’s customers pay for purchases via a credit or debit card. Credit and debit card brand issuers continue to heighten PCI standards that are applicable to all merchants who accept these cards. These standards primarily pertain to the processes and procedures for secure storage of customer data. Failure to comply with PCI standards, as required by card issuers, could result in card brand fines and/or the possible inability for us to accept a card brand. Our inability to accept one or all card brands could materially affect sales in a negative manner.

 

We depend on relationships with numerous domestic and foreign manufacturers and suppliers; a decrease in product quality or an increase in product cost, or the unanticipated loss of several of our larger suppliers, could impact our sales.

 

We procure merchandise from numerous domestic and foreign manufacturers and suppliers generally pursuant to short-term contracts and purchase orders. Our ability to identify and establish relationships with these parties, as well as access quality merchandise in a timely and efficient manner on acceptable terms and at acceptable costs, can be challenging. We depend on the ability of these parties in the U.S. and abroad to timely produce and deliver goods that meet applicable quality standards, which is impacted by a number of factors not within the control of these parties, such as political or financial instability, trade restrictions, tariffs, currency exchange rates and transport capacity and costs, among others, and to deliver products that meet or exceed our customers’ expectations.

 

Our failure to identify new vendors and manufacturers, maintain relationships with a significant number of existing vendors and manufacturers and/or access quality merchandise in a timely and efficient manner could cause us to miss customer delivery dates or delay scheduled promotions, which would result in the failure to meet customer expectations and could cause customers to cancel orders or cause us to be unable to source merchandise in sufficient quantities, which could result in lost sales.

 

It is possible that one or more of our larger suppliers could experience financial difficulties, including bankruptcy, or otherwise could determine to cease doing business with us. During fiscal 2010, products purchased from one vendor accounted for approximately 18% of our consolidated net sales. While we have periodically experienced the loss of a major vendor, if a number of our larger vendors ceased doing business with us, this could materially and adversely impact our sales and profitability on a short term basis.

 

Many of our key functions are concentrated in a single location, and a natural disaster could seriously impact our ability to operate.

 

Our television broadcast studios, internet operations, IT systems, merchandising team, inventory control systems, executive offices and finance/accounting functions, among others, are centralized in our adjacent offices at 6740 and 6690, Shady Oak Road in Eden Prairie, Minnesota. In addition, our only fulfillment and distribution facility is centralized at a location in Bowling Green, Kentucky. A natural disaster, such as a tornado, could

seriously disrupt our ability to continue or resume normal operations for some period of time. While we have certain business continuity plans in place, no assurances can be given as to how quickly we would be able to resume operations and how long it may take to return to normal operations. We could incur substantial financial losses above and beyond what may be covered by applicable insurance policies, and may experience a loss of customers, vendors and employees during the recovery period.

 

We could be subject to additional sales tax collection obligations and claims for uncollected amounts.

 

A number of states have adopted new legislation that would require the collection of state and/or local taxes on transactions originating on the internet or by other out-of-state retailers, such as home shopping, infomercial and catalog companies. In some cases these new laws seek to establish grounds for asserting “nexus” by the out-of-state retailer in the applicable state, and are being challenged by internet and other retailers under federal constitutional grounds. Adding sales tax to our internet transactions could negatively impact consumer demand. ShopNBC partners with numerous affiliate companies across the country to publicize links from different websites to our website, ShopNBC.com. In 2008, the state of New York enacted legislation which required certain sellers like us to collect sales tax on our New York sales if we utilized New York “resident representatives”, which term was intended to include internet companies that publicize e-commerce retailers through links from different websites to the e-commerce retailer’s website. Court challenges to this tax have, to date, been unsuccessful. North Carolina and Rhode Island have passed similar laws and several other state legislatures, including California, are considering similar legislation. As a result of this legislation as well as other legislation passed, we registered and started collecting sales tax in New York, North Carolina and Colorado. If this trend continues and the laws are upheld after legal challenges, we could be required to collect additional state and local taxes which could negatively impact sales as well as creating an additional administrative burden which could be costly to the business.

 

We place a significant reliance on technology and information management tools to run our existing businesses, the failure of which could adversely impact our operations.

 

Our businesses are dependent, in part, on the use of sophisticated technology, some of which is provided to us by third parties. These technologies include, but are not necessarily limited to, satellite based transmission of our programming, use of the internet in relation to our on-line business, new digital technology used to manage and supplement our television broadcast operations and a network of complex computer hardware and software to manage an ever increasing need for information and information management tools. The failure of any of these technologies, or our inability to have this technology supported, updated, expanded or integrated into other technologies, could adversely impact our operations. Although we have, when possible, developed alternative sources of technology and built redundancy into our computer networks and tools, there can be no assurance that these efforts to date would protect us against all potential issues or disaster occurrences related to the loss of any such technologies or their use.

 

 

None

 

 

We own two commercial buildings occupying approximately 209,000 square feet in Eden Prairie, Minnesota (a suburb of Minneapolis). These buildings are used for office space including executive offices, television studios, broadcast facilities and administrative offices. We own a 262,000 square foot distribution facility on a 34-acre parcel of land in Bowling Green, Kentucky. We also lease approximately 136,000 square feet of additional warehouse space in Bowling Green, Kentucky under an 18-month lease agreement, which includes an extension option. Additionally, we rent transmitter site and studio locations in Boston, Massachusetts for our full power television station. We believe that our existing facilities are adequate to meet our current needs and that suitable additional alternative space will be available as needed to accommodate expansion of operations.

 

We are involved from time to time in various claims and lawsuits in the ordinary course of business. In the opinion of management, these claims and suits individually and in the aggregate have not had a material adverse effect on our operations or consolidated financial statements.

 

In the third quarter of fiscal 2009, the U.S. Customs and Border Protection agency commenced an investigation into an undervaluation and corresponding underpayment of the customs duty owed by one of our vendors relating to a particular shipment of goods to the United States. We notified the vendor and have withheld certain funds from the vendor under contractual indemnification obligations to cover any potential costs, penalties or fees that may result from the investigation. We made a formal request for indemnification from the vendor but the request was refused. As a result, in December 2009, through the U.S. District Court of Minnesota, we commenced litigation against the vendor for breach of contract. The vendor filed counterclaims for payments it claims were owed by us. We believe that the funds we are withholding from the vendor will be sufficient to cover any costs or possible liabilities against us that may result from the investigation.

 

 

 

Market Information for Common Stock

 

Our common stock is traded on the Nasdaq Global Market under the symbol “VVTV.” The following table sets forth the range of high and low sales prices of our common stock as quoted by the Nasdaq Global Market for the periods indicated.

 

 

Holders

 

As of March 15, 2011 we had approximately 519 common shareholders of record.

 

Dividends

 

We have never declared or paid any dividends with respect to our common stock. Pursuant to the amended and restated shareholder agreement with GE Equity and NBCU, we are prohibited from paying dividends on our common stock without GE Equity’s prior consent. Except as required in connection with the Series B Preferred Stock, we currently expect to retain our earnings for the development and expansion of our business and do not anticipate paying cash dividends on the common stock in the foreseeable future. The Company is further restricted from paying dividends on its common and preferred stock by its Credit Agreement. Any future determination by us to pay cash dividends on the common stock will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, any contractual restrictions then existing and other factors deemed relevant at the time by the board of directors.

 

Issuer Purchases of Equity Securities

 

During fiscal 2009, we 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. During fiscal 2008, we repurchased a total of 556,000 shares of common stock for a total investment of $3.3 million at an average price of $5.96 per share. As of January 29, 2011, all authorizations for repurchase programs have expired.

Stock Performance Graph

 

The graph below compares the cumulative five-year total return to our shareholders (based on appreciation or depreciation of the market price of our common stock) on an indexed basis with (i) a broad equity market index and (ii) two published industry indices. The presentation compares the common stock price in the period from February 4, 2006 to January 29, 2011, to the Nasdaq Composite Index, the S&P 500 Retailing Index and the Morningstar Specialty Retail Index. The cumulative return is calculated assuming an investment of $100 on February 4, 2006, and reinvestment of all dividends. You should not consider shareholder return over the indicated period to be indicative of future shareholder returns.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among ValueVision Media, Inc. The NASDAQ Composite Index,
S&P 500 Retailing Index, and the Morningstar Specialty Retail Index

 

 

ASSUMES $100 INVESTED ON FEB. 05, 2006

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING JAN. 29, 2011

 

Equity Compensation Plan Information

 

The following table provides information as of January 29, 2011 for our compensation plans under which securities may be issued:

 

 

 

 

The selected financial data for the five years ended January 29, 2011 have been derived from our audited consolidated financial statements. The selected financial data presented below are qualified in their entirety by, and should be read in conjunction with, the financial statements and notes thereto and other financial and statistical information referenced elsewhere herein including the information referenced under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

A reconciliation of Adjusted EBITDA to its comparable GAAP measurement, net income (loss), follows:

 

 

 

Introduction

 

The following discussion and analysis of financial condition and results of operations is qualified by reference to and should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this annual report.

 

Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

 

This Annual Report on Form 10-K, including the following Management’s 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 annual report on Form 10-K 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 management’s current expectations and are accordingly subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): consumer spending and debt levels; 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 manage our operating expenses successfully; our management and information systems infrastructure; changes in governmental or regulatory requirements; litigation or governmental proceedings affecting our operations; the risks identified under “Risk Factors” in this report; 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 interactive retailer that markets, sells and distributes products to consumers through TV, telephone, online, mobile and social media. Our principal form of product exposure is our 24-hour television shopping network, ShopNBC, which is distributed primarily through cable and satellite affiliation agreements, and markets brand name and private label products in the categories of Jewelry & Watches; Home and Electronics; Beauty, Health & Fitness; and Fashion & Accessories. We also operate ShopNBC.com, a comprehensive e-commerce platform that sells products appearing on our television shopping channel as well as an extended assortment of online-only merchandise. Our programming and products are also marketed via mobile devices — including smartphones and tablets such as the iPad, and through the leading social networking sites Facebook, Twitter and YouTube. We have an exclusive trademark license from NBCUniversal Media, LLC, formerly known as NBC Universal, Inc. (“NBCU”), for the worldwide use of an NBC-branded name for a period ending in May 2012. 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 multi-media platforms include primarily jewelry & watches, home & electronics, beauty, health & fitness, and fashion & accessories. Historically jewelry and watches have been our largest merchandise categories. More recently, our product mix has been shifting to include a more diversified product assortment in order to continue growing our new and active customer base. The following table shows our merchandise mix as a percentage of television home shopping and internet net sales for the years indicated by product category group:

 

 

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 and internet shopping operations. Our multichannel customers are primarily women between the ages of 40 and 69, married, with average annual household incomes of $50,000 or more. We believe our customers make purchases based on our unique products, quality merchandise and value. Over the past fiscal year, we have changed our product mix in order to diversify our product offerings, which we believe will continue to drive new and active customer development and the retention of repeat customers.

 

Company Strategy

 

As a premium interactive retailer, our strategy is to offer our customers differentiated quality brands and products at a compelling value proposition. We also seek to provide today’s consumers with flexible programming formats and access that allow them to view and interact with our content and products at their convenience —

whenever and wherever they are able. Our merchandise positioning aims to make us a trusted destination for quality and an authority in a broad category of merchandise. 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 to improve the operational and financial performance of our Company: (i) broadening and optimizing our product mix to appeal to more customers and to encourage additional purchases per customer, (ii) increasing new and active customers and improving household penetration, (iii) increasing our gross margin dollars by improving merchandise margins in key product categories while prudently managing inventory levels, (iv) reducing our transactional operating expenses while managing our fixed operating expenses, (v) growing our Internet business with expanded product assortments and Internet-only merchandise offerings, (vi) expanding our Internet, mobile and social networking reach to attract and retain more customers, and (vii) moving cable and satellite carriage contracts to shorter terms of one to two years while seeking cost savings opportunities.

 

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 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 our major competitors 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. At ShopNBC’s current sales level, our distribution costs as a percentage of total consolidated net sales are higher than our competition.

 

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 than we do.

 

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) increasing the number of customers who purchase products from us and (ii) increasing the dollar value of sales per customer from our existing customer base.

 

Results for Fiscal 2010, 2009 and 2008

 

Consolidated net sales from continuing operations in fiscal 2010 were $562.3 million compared to $527.9 million in fiscal 2009, a 7% increase. Consolidated net sales in fiscal 2009 were $527.9 million compared to $567.5 million in fiscal 2008, a 7% decrease. We reported an operating loss of $15.5 million and net loss of $25.9 million for fiscal 2010. Operating expenses in fiscal 2010 included $1.1 million of restructuring charges and our net loss in fiscal 2010 included a $1.2 million debt extinguishment charge. We reported an operating loss of $41.2 million and net loss of $42.0 million for fiscal 2009, which included a pretax gain of $3.6 million from the sale of our auction rate securities. Operating expenses in fiscal 2009 included $2.3 million of restructuring charges and CEO transition costs of $1.9 million. We reported an operating loss of $88.5 million and net loss of $97.8 million for fiscal 2008, which included a pretax loss of $11.1 million related to an impairment write-down of

our auction rate securities. Operating expenses in fiscal 2008 included $4.3 million of restructuring charges, an $8.8 million FCC license intangible asset write-down and CEO transition costs of $2.7 million.

 

Term Loan Credit Agreement

 

On November 17, 2010, the Company entered into a credit agreement with Crystal Financial LLC, as agent for the lending group, which provides for a term loan of $25 million (the “Credit Agreement”). The Credit Agreement has a five-year maturity and bears interest on the outstanding principal amount based on fixed interest rates and floating interest rates based on LIBOR plus variable margins. The interest rate calculated for the fourth quarter was 11%. The term loan is subject to a minimum borrowing base of $25 million and is based on eligible accounts receivable, eligible inventory, certain real estate and certain eligible cash and is secured by substantially all of the Company’s personal property, as well as the Company’s real property located in Bowling Green, Kentucky. Under certain circumstances, the borrowing base may be adjusted if there were to be a significant deterioration in value of the Company’s accounts receivable and inventory. The term loan is subject to mandatory prepayment in certain circumstances. In addition, any voluntary or mandatory prepayments made prior to November 18, 2013 would require an early termination fee of the greater of the first year’s yield revenue or 3% if terminated in year one; 2% if terminated in year two; and 1% if terminated in year three. The Credit Agreement contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash of $5,000,000 at all times. In addition, the Credit Agreement places restrictions on the Company’s ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to our common and preferred shareholders. As of January 29, 2011, the Company was in compliance with the applicable covenants of the facility and was in compliance with its minimum borrowing base requirement and expects to be in compliance in the near and long term. In connection with the execution of this new credit agreement, the Company terminated its revolving credit and security agreement with PNC Bank.

 

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 early 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. Due to the mandatory redemption feature of the preferred stock, we classified the carrying value of the Series B Preferred Stock, and related accrued dividends, as long-term liabilities on our consolidated balance sheet. In November 2010, the Company agreed to a $2.5 million payment to GE Equity in connection with obtaining a consent for the execution of the Crystal term loan reducing the outstanding accrued dividend payable on the Series B Preferred Stock. In February 2011, the Company made an additional $2.5 million payment to GE Equity, in connection with obtaining a consent for our common stock equity offering, reducing the outstanding accrued dividend payable on the Series B Preferred Stock.

Results of Operations

 

The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales.

 

 

Key Performance Metrics

 

 

Program Distribution

 

Average FTE subscribers grew 4% in fiscal 2010, resulting in a 2.8 million increase in average FTE’s compared to fiscal 2009. Average FTE subscribers grew 3% in fiscal 2009, resulting in a 1.9 million increase in average FTE’s compared to fiscal 2008. The annual increases were driven by continued 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 DTH distribution agreements 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 two 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. Failure to maintain our cable agreements covering a material portion of our existing cable households on acceptable financial and other terms could materially and adversely affect our future growth, sales revenues and earnings unless we are able to arrange for alternative means of broadly distributing our television programming.

 

Customer Counts

 

During fiscal 2010, customer trends, on a 12 month rolling basis, improved with new and active customers up 11% and 12%, respectively, over fiscal 2009. During fiscal 2009, new and active customers were up 63% and 36%, respectively, over fiscal 2008. We attribute the increases in new and active customers to our merchandise strategy of a broader assortment, a change in our merchandise mix, lower price points and new products, brands and concepts that proved successful in driving increased customer activity.

 

Net Shipped Units

 

The number of units shipped during fiscal 2010 increased 14% from fiscal 2009 to 5.2 million from 4.5 million. The number of units shipped during fiscal 2009 increased 47% from fiscal 2008 to 4.5 million from 3.1 million. The decline in average selling prices, discussed below, along with our increased customer counts and productivity were major contributing factors to the increase in unit sales during fiscal 2010 and fiscal 2009.

 

Average Selling Price

 

Our average selling price, or ASP, per net unit was $101 in fiscal 2010, a 6% decrease over fiscal 2009. The decrease in the fiscal 2010 ASP, which is part of our overall merchandise strategy, was driven primarily by unit selling price decreases within almost all product categories. We intentionally modified our product mix to reduce our average selling price points in order to appeal to a broader audience, to allow for a broader merchandise assortment and to reduce our return rates. For fiscal 2009, the average selling price per net unit was $108, a 39% decrease over fiscal 2008. The decrease in the 2009 ASP was driven primarily by selling price decreases within almost all product categories.

 

Return Rates

 

Our return rate was 19.8% in fiscal 2010 compared to 21.0% in fiscal 2009, a 6% decrease or a 120 basis point decrease. We attribute the decrease in the 2010 return rate primarily to operational improvements in our delivery time and customer service, our overall product quality and quality control enhancements, and our lower price points. Our return rate was 21.0% in fiscal 2009 compared to 31.2% in fiscal 2008, a 33% decrease or a 1020 basis point decrease. We will continue to monitor our return rates in an effort to continue to reduce the overall return rates related to our television home shopping and internet businesses.

Net Sales

 

Consolidated net sales, inclusive of shipping and handling revenue, for fiscal 2010 were $562.3 million compared to $527.9 million for fiscal 2009, a 7% increase. The increase in consolidated net sales are primarily attributed to higher net sales in the categories of jewelry, health & beauty and home as we continue to modify our product mix. Consolidated net sales also increased as a result of higher shipping and handling revenues due to fewer free shipping promotions offered. Our internet net sales increased 31% over prior fiscal year and our e-commerce sales penetration was 41% during fiscal 2010 compared to 34% for fiscal 2009 driven primarily by strong cross-channel promotions from our core television channel, online marketing efforts and mobile and social media platforms.

 

Consolidated net sales, inclusive of shipping and handling revenue, for fiscal 2009 were $527.9 million compared to $567.5 million for fiscal 2008, a 7% decrease. The decline in consolidated net sales were directly attributed to an approximate 39% decrease in our average selling price offset by a 47% increase in net shipped units. The reduction in our selling price during fiscal 2009 was an essential part of our strategy to increase viewership, rebuild our customer base and increase unit volume. Sales during fiscal 2009 were also negatively impacted by a change in our on-air merchandise mix as we allocated more airtime to categories such as health & beauty and certain home categories and away from higher priced consumer electronics and jewelry. From a product category perspective, our gemstone and gold categories experienced significant declines as these businesses were being repositioned at lower price points in order to broaden their appeal and reduce return rates. During fiscal 2009, our watch and health & beauty sales off-set some of the decline experienced in our jewelry business. In addition, total net sales decreased during fiscal 2009 due to reduced total revenues associated with our discontinued polo.com fulfillment operations.

 

Gross Profit

 

Gross profit for fiscal 2010 was $199.5 million compared to $173.8 million for fiscal 2009, an increase of 15%. Gross profit for fiscal 2009 was $173.8 million compared to $182.7 million for fiscal 2008, a decrease of 5%. The increase in the gross profits experienced during fiscal 2010 was driven primarily by merchandise margin improvements targeted in a majority of our key product categories and increased shipping and handling margins resulting from fewer promotions.

 

Gross margin as a percentage of sales (sales margin) for fiscal 2010, fiscal 2009 and fiscal 2008 was 35.5%, 32.9% and 32.2%, respectively. The increase in the gross margin percentages experienced during fiscal 2010 was driven primarily by merchandise margin improvements targeted in a majority of our key product categories, increased shipping and handling margins resulting from fewer promotions and due to the impact of having a lower consumer electronics product mix during fiscal 2010, offset partially by increased cost of inventory liquidations during fiscal 2010. The increase in gross margins experienced during fiscal 2009 was driven primarily by a shift in our merchandise mix away from low margin consumer electronics to higher margin product categories, such as watches and health & beauty, and as a result of reduced charges during fiscal 2009 for inventory obsolescence. During fiscal 2008, we recorded inventory obsolescence charges of $3.3 million relating to unsold aged inventory items which impacted our gross margins.

 

Operating Expenses

 

Total operating expenses were $215.0 million, $214.9 million and $271.2 million for fiscal 2010, fiscal 2009 and fiscal 2008, respectively, representing an increase of $0.1 million, or less than 0.1% from fiscal 2009 to fiscal 2010, and a decrease of $56.3 million, or 21% from fiscal 2008 to fiscal 2009. Fiscal 2010 total operating expenses includes $1.1 million of restructuring charges. Fiscal 2009 total operating expenses included $2.3 million of restructuring charges and $1.9 million of chief executive officer transition costs. Fiscal 2008 total operating expenses included $4.3 million of restructuring charges, a $2.7 million charge relating to the termination and transition of our chief executive officer and an $8.8 million intangible asset impairment charge relating to our Boston FCC license.

 

Distribution and selling expense for fiscal 2010 increased $3.5 million, or 2%, to $181.5 million, or 32% of net sales compared to $178.1 million, or 34% of net sales in fiscal 2009. Distribution and selling expense increased

from fiscal 2009 primarily due to a $2.6 million increase in cable and satellite fees resulting from an increase in the number of homes broadcasted to during the fiscal year 2010 and certain contractual rate increases, partially offset by third quarter fiscal 2010 favorable retroactive billing adjustments from certain carriers. Distribution and selling expense also increased during fiscal 2010 as a result of increased credit card fees and bad debt expense of $3.8 million due to the overall increase in net sales and order transactions over fiscal 2009 and increased salaries, bonuses and consulting costs of $400,000. Distribution and selling expense increases were offset by: decreases in customer service and telecommunication expenses of $2.0 million resulting primarily from efficiencies gained during the fiscal year in the areas of increased order process automation as well as reductions achieved in our average talk time for both order capture and customer service; decreases in advertising and promotion expense of $1.7 million and a decrease in third-party cable affiliation fees of $100,000. Distribution and selling expense for fiscal 2009 decreased $36.9 million, or 17%, to $178.1 million, or 34% of net sales compared to $215.0 million, or 38% of net sales in fiscal 2008. Distribution and selling expense decreased from fiscal 2008 primarily due to a $23.5 million decrease in net cable and satellite rates; a decrease in third-party cable affiliation fees of $848,000; decreases in salaries, headcount and other related personnel costs associated with merchandising, television production and show management personnel and on-air talent of $4.4 million; decreases in marketing expenses of $2.5 million; decreases in stock option expense of $159,000 and decreases in credit card fees and bad debt expense of $6.6 million due to the overall decrease in net sales during the year and a decrease in net write-offs experienced during fiscal 2009.

 

General and administrative expense for fiscal 2010 increased $798,000, or 4%, to $19.2 million, or 3.4% of net sales compared to $18.4 million, or 3.5% of net sales in fiscal 2009. General and administrative expense increased from fiscal 2009 primarily as a result of an increase in salaries and related benefits and consulting fees totaling $1.0 million, increased share-based compensation expense of $220,000 and decreased cash payment discounts received of $246,000, offset by decreases in legal expenses of $708,000. General and administrative expense for fiscal 2009 decreased $4.8 million, or 21%, to $18.4 million, or 3.5% of net sales compared to $23.1 million, or 4.1% of net sales in fiscal 2008. General and administrative expense decreased from fiscal 2008 primarily as a result of our restructuring initiatives that included reductions in salaries, related benefits and consulting fees totaling $3.0 million; decreases in our board of director related expenses of $319,000; increased cash payment discounts received of $418,000 and a $545,000 decrease associated with share-based compensation expense.

 

Depreciation and amortization expense was $13.2 million, $14.3 million and $17.3 million for fiscal 2010, fiscal 2009 and fiscal 2008, respectively, representing a decrease of $1.1 million, or 8%, from fiscal 2009 to fiscal 2010 and a decrease of $3.0 million, or 17%, from fiscal 2008 to fiscal 2009. Depreciation and amortization expense as a percentage of net sales was 2.3%, 2.7% and 3.0% for fiscal 2010, fiscal 2009 and fiscal 2008, respectively. The fiscal 2010 and fiscal 2009 decreases in depreciation and amortization expense relates to reduced capital spending and the timing of fully depreciated assets year over year, reduced amortization of our NBC distribution agreement due to the expiration of this agreement, 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.

 

Restructuring Costs

 

As a result of a number of restructuring initiatives taken by us in order to simplify and streamline our organizational structure, reduce operating costs and pursue and evaluate strategic alternatives, we recorded restructuring charges of $1,130,000 in fiscal 2010, $2,303,000 in fiscal 2009 and $4,299,000 in fiscal 2008. Restructuring costs primarily include employee severance and retention costs associated with the consolidation and elimination of positions across the Company and costs associated with strategic alternative initiatives.

 

Chief Executive Officer Transition Costs

 

During fiscal 2009, we recorded a $1.9 million charge relating primarily to settlement and legal costs associated with the termination of our former chief executive officer. During fiscal 2008, we recorded a $2.7 million charge relating primarily to accrued severance and other costs associated with the departures of four senior officers and costs associated with hiring our current chief executive officer, Mr. Stewart, in August 2008.

Operating Loss

 

We reported an operating loss of $15.5 million for fiscal 2010 compared with an operating loss of $41.2 million for fiscal 2009, a decrease of $25.7 million. Our operating loss decreased during fiscal 2010 primarily as a result of increased gross profit dollars achieved, which resulted from increased sales and improved margins attained during the year, as noted above, and reduced CEO transition costs. The increased gross profit dollars were offset by a slight increase in our overall operating expenses year over year, particularly our cable and satellite fees within our distribution and selling expenses as a result of increased subscriber homes.

 

We reported an operating loss of $41.2 million for fiscal 2009 compared with an operating loss of $88.5 million for fiscal 2008, a decrease of $47.3 million. Our operating loss decreased during fiscal 2009 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 and decreases in operating expenses associated with our restructuring efforts and CEO transition. In addition, total operating expenses decreased in fiscal 2009 from fiscal 2008 due to our recording an $8.8 million FCC license asset impairment in fiscal 2008. These expense decreases were offset by decreases in net sales and gross profit margin due to the factors noted above.

 

Net Loss

 

For fiscal 2010, we reported a net loss available to common shareholders of $25.9 million, or $0.78 per basic and dilutive share, on 33,326,000 weighted average common shares outstanding. For fiscal 2009, we reported a net loss available to common shareholders of $14.7 million, or $0.45 per basic and dilutive share, on 32,538,000 weighted average common shares outstanding. For fiscal 2008, we reported a net loss available to common shareholders of $98.1 million, or $2.92 per basic and dilutive share, on 33,598,000 weighted average common shares outstanding. Net loss available to common shareholders for fiscal 2010 includes interest expense of $9.8 million, relating primarily to accrued interest and debt discount amortization on our Series B Preferred Stock, bank term loan interest expense and the amortization of fees paid to obtain our bank credit facilities. Net loss available to common shareholders for fiscal 2010 also included a $1.2 million debt extinguishment charge relating to a $2.5 million Series B preferred stock dividend payment made in the fourth quarter in connection with the execution of our Crystal term loan and interest income totaling $51,000 earned on our cash and investments. The decrease in our net loss available to common shareholders from fiscal 2008 to fiscal 2009 is primarily due to a $27.4 million 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 loss during fiscal 2009 include interest expense of $4.9 million primarily related to the Series B preferred stock, the recording of a pre-tax gain of $3.6 million from the sale of our auction rate investments and interest income totaling $382,000 earned on our cash and investments. Net loss available to common shareholders for fiscal 2008 includes an $11.1 million other-than-temporary impairment charge related to a write down of our auction rate securities, investment losses totaling $969,000 relating to the sale of three held-to-maturity securities due to the significant deterioration at the time of sale of the issuer’s creditworthiness and interest income totaling $2.7 million earned on our cash and investments.

 

For fiscal 2010, net loss reflects an income tax benefit of $577,000 relating to a federal income tax carryback refund claim filed and received during fiscal 2010, offset in part by state income tax expense on certain income for which there is no loss carryforward benefit available. For fiscal 2009, net loss reflects an income tax benefit of $91,000 relating to certain amended state returns for which tax refunds have been received, offset by the recording of state income taxes payable on income for which there is no loss carryforward benefit available. For fiscal 2008, net loss reflects an income tax provision of $33,000 relating to 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 losses recorded during fiscal 2010 due to the uncertainty of realizing income tax benefits in the future as indicated by our recording of an income tax valuation allowance. Based on our recent history of losses, a full valuation allowance has been recorded and was calculated in accordance with GAAP, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. We intend to maintain a full valuation allowance for our net deferred tax assets and net operating loss carryforwards until we believe it is more likely than not that these assets will be realized in the future.

Quarterly Results

 

The following summarized unaudited results of operations for the quarters in fiscal 2010 and 2009 have been prepared on the same basis as the annual financial statements and reflect adjustments (consisting of normal recurring adjustments) that we consider necessary for a fair presentation of results of operations for the periods presented. Our results of operations have varied and may continue to fluctuate significantly from quarter to quarter. Results of operations in any period should not be considered indicative of the results to be expected for any future period.

 

Financial Condition, Liquidity and Capital Resources

 

As of January 29, 2011, we had cash and cash equivalents of $46.5 million and had restricted cash of $5.0 million pledged as collateral for our issuances of standby and commercial letters of credit. Our restricted cash is generally restricted for a period ranging from 30-60 days and / or to the extent that standby and commercial letters of credit remain outstanding. As of January 30, 2010 we had cash and cash equivalents of $17.0 million and had restricted cash of $5.1 million pledged as collateral for our issuances of standby and commercial letters of credit. During fiscal 2010 working capital increased $28.3 million to $81.6 million compared to working capital of $53.4 million for fiscal 2009. The current ratio was 1.8 at January 29, 2011 compared to 1.6 at January 30, 2010.

 

Sources of Liquidity

 

Our principal source of liquidity is our available cash and cash equivalents of $46.5 million as of January 29, 2011. Our $5.0 million restricted cash and investment balance is used as collateral for our issuances of standby and commercial letters of credit and is expected to fluctuate in relation to the level of our seasonal overseas inventory purchases. At January 29, 2011, our cash and cash equivalents were held in bank depository accounts primarily for the preservation of cash liquidity.

 

On November 17, 2010, we entered into a credit agreement with Crystal Financial LLC, as agent for the lending group, which provides for an initial term loan of $25 million. Net proceeds of approximately $22 million from the credit agreement with Crystal Financial were received and deposited enhancing our near-term liquidity. In connection with entering into this new credit agreement, we terminated the revolving credit and security agreement with PNC Bank.

 

On December 22, 2010, we completed a public equity offering of 4,900,000 common shares at a price to the public of $3.75 per share. Net proceeds from the offering were approximately $17.0 million after deducting underwriting discount and other offering expenses. Cash proceeds from the offering are being used to fund our working capital needs. On February 23, 2011, we filed a $75 million shelf registration statement on Form S-3 to offer common stock, preferred stock, stock purchase contracts, securities warrants, rights and/or units in one or more offerings and in amounts, at prices and on terms that we will determine at the time of such offerings.

 

Another source of near-term liquidity is our ability to increase our cash flow resources by reducing the percentage of our sales offered under our ValuePay installment program or by decreasing the length of time we extend credit to our customers under this installment program.

 

Cash Requirements

 

Currently, our principal cash requirements are to fund our business operations, which consist primarily of purchasing inventory for resale, funding accounts receivable growth in support of sales growth, funding our basic operating expenses, particularly our contractual commitments for cable and satellite programming and, to a lesser extent, the funding of necessary capital expenditures. We are closely managing our cash resources and our working capital in an effort to preserve our cash resources in order to sustain our ongoing operations during our efforts to sustain profitability. We manage our inventory receipts and reorders through a system that minimizes our inventory investment commensurate with our sales levels. We also monitor the collection of our credit card and ValuePay installment receivables and manage our vendor payment terms in order to more effectively manage our working capital which includes matching cash receipts from our customers with related cash payments to our vendors.

 

We also have significant future commitments for our cash, primarily payments for cable and satellite program distribution obligations, redemption obligations related to our Series B preferred stock and repayment of our $25 million term loan. These future commitments also include a deferred payment obligation to a service provider of approximately $24 million, $12 million of which was paid in February 2011 and $12 million is due in March 2012. Based on our current projections for fiscal 2011, we believe that our existing cash balances will be sufficient to maintain liquidity to fund our normal business operations over the next twelve months. We have total contractual cash obligations and commitments primarily with respect to our cable and satellite agreements, Series B Preferred Stock, term loan and operating leases totaling approximately $285 million over the next five fiscal years with average annual cash payments of approximately $57 million from fiscal 2011 through fiscal 2015.

For fiscal 2010, net cash provided by operating activities totaled $327,000 compared to net cash used for operating activities of $37.9 million in fiscal 2009 and net cash provided by operating activities of $7.1 million in fiscal 2008. Net cash provided by operating activities for fiscal 2010 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, amortization of deferred revenue, amortization of debt discount, debt extinguishment and asset write-offs. In addition, net cash provided by operating activities for fiscal 2010 reflects primarily an increase in accounts receivable, offset by an increase in accounts payable and accrued liabilities, an increase in accrued dividends, a decrease in inventories and a decrease in prepaid expenses and other. Accounts receivable increased primarily as a result of our increased use of our ValuePay extended credit program as a promotional tool to stimulate fourth quarter 2010 sales. Accounts payable and accrued liabilities increased primarily due to deferred payments for accrued cable and satellite fees, increases in accrued salaries due to merit increases and accrued dividends related to the Series B preferred stock. Inventories decreased primarily as a result of our strong fourth quarter 2010 sales activity and our effort to manage inventory levels and our product assortments as we continue to introduce new merchandise categories to improve sales performance and to ensure our inventory levels remain commensurate with our sales levels.

 

Net cash used for operating activities for fiscal 2009 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, amortization of deferred revenue, amortization of debt discount, gain on sale of investments and asset impairments and write-offs. In addition, net cash used for operating activities for fiscal 2009 reflects primarily an increase in accounts receivable and prepaid expenses and other, a decrease in accounts payable and accrued liabilities, offset by a decrease in inventories and an increase in accrued 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. Accounts payable and accrued liabilities decreased primarily due to decreased inventory purchases, decreased cable and satellite accruals resulting from lower cable and satellite rates effective in fiscal 2009, decreases in accrued salaries and 401(k) payable due to reduced vacation accruals and the cessation of our Company matching policy in fiscal 2009 and payments made in connection with our restructuring liability. We extended payment terms during fiscal 2009 with certain service providers in an effort to more effectively manage our working capital and match cash receipts from our customers with the related cash payments. Our day’s payable outstanding (DPO) increased by approximately 2% compared to the same quarter last year. Inventories decreased primarily as a result of our strong fiscal 2009 fourth quarter sales activity and management’s focused effort to aggressively manage our inventory balance down as we introduce new merchandise categories and reinvest in new jewelry inventory in an effort to reposition our merchandise offerings to improve sales performance.

 

Net cash provided by operating activities for fiscal 2008 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, amortization of deferred revenue, loss on sale of investments and asset impairments and write-offs. In addition, net cash provided by operating activities for fiscal 2008 reflects primarily a decrease in accounts receivable and inventories, offset by an increase in prepaid expenses and other expenses, a decrease in deferred revenue and a decrease in accounts payable and accrued liabilities. Accounts receivable decreased primarily as a result of our overall decreased sales volume experienced and due to a reduction in the use of extended credit as a promotional tool. In addition, certain credit scoring criteria were tightened during the year in an effort to avoid increased bad debt expense. Inventories decreased during fiscal 2008 as a result of our clearance promotions and increased inventory obsolescence charges taken during the fiscal year due to aged inventory. The decrease in accounts payable and accrued liabilities relates directly to our overall year-to-date reduction in merchandise inventory and reductions in accrued operating expenses driven by our decreased sales during fiscal 2008. In addition, we experienced reductions in accrued liabilities associated with salaries, our restructuring effort, internet marketing fees and the reserve for product returns due to lower sales.

 

Net cash used for investing activities totaled $7.4 million in fiscal 2010, compared to net cash provided by investing activities of $8.3 million in fiscal 2009 and net cash provided by investing activities of $24.6 million in fiscal 2008. Expenditures for property and equipment were $7.6 million in fiscal 2010 compared to $7.6 million in fiscal 2009 and $8.3 million in fiscal 2008. Expenditures for property and equipment during fiscal 2010, fiscal 2009 and fiscal 2008 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 fulfillment network, 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. During fiscal 2010, we decreased our restricted cash and investments by $99,000 and received net cash proceeds totaling $55,000 in connection with the sale of property and equipment. During fiscal 2009, we increased our restricted cash and investments by $3.5 million and received net cash proceeds totaling $19.4 million in connection with the sale of our auction rate securities. During fiscal 2008, we received proceeds of $34.5 million from the sale of short and long-term investments and increased our restricted cash collateral balance by $1.6 million.

 

Net cash provided by financing activities totaled $36.6 million in fiscal 2010 and related primarily to proceeds from the issuance of a $25.0 million long-term debt agreement, net proceeds of $17.0 million as a result of our common stock equity offering and cash proceeds received of $357,000 from the exercise of stock options, offset by deferred debt issuance payments totaling $3.3 million made in connection with obtaining our debt facilities and a $2.5 million Series B preferred stock dividend payment made in connection with the execution of the Crystal term loan. Net cash used for financing activities totaled $7.3 million in fiscal 2009 and related primarily to a $3.4 million cash payment made in conjunction with our Series A preferred stock redemption, payments made totaling $937,000 in conjunction with the purchase of 1,622,000 shares of our common stock and payments of $3.6 million made in conjunction with obtaining a secured bank line of credit, the Series B preferred stock issuance, and an equity offering initiative, offset by cash proceeds received of $729,000 from the exercise of stock options. Net cash used for financing activities totaled $3.4 million in fiscal 2008 and related primarily to payments of $3.3 million made in conjunction with the repurchase of 556,000 shares of our common stock and deferred offering cost payments of $100,000.

 

Contractual Cash Obligations and Commitments

 

The following table summarizes our obligations and commitments as of January 29, 2011, and the effect these obligations and commitments are expected to have on our liquidity and cash flow in future periods:

 

 

 

 

Impact of Inflation

 

We believe that inflation has not had a material impact on our results of operations for each of the fiscal years in the three-year period ended January 29, 2011. We cannot assure you that inflation will not have an adverse impact on our operating results and financial condition in future periods.

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and assumptions, including those related to the realizability of deferred tax assets, intangible assets, accounts receivable, inventory and product returns. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions.

 

Management believes the following critical accounting policies affect the more significant assumptions and estimates used in the preparation of the consolidated financial statements:

 

 

 

 

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. Our operations are conducted primarily in the United States and are not subject to foreign currency exchange rate risk. Some of our products are sourced internationally and may fluctuate in cost as a result of foreign currency swings, however, we believe these fluctuations have not been significant. We currently have long-term debt that has exposure to interest rate risk, changes in market interest rates could impact the level of interest expense and income earned on our cash and cash equivalents portfolio.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION MEDIA, INC.
AND SUBSIDIARIES

 

 

To the Shareholders and Board of Directors of

ValueVision Media, Inc. and Subsidiaries

Eden Prairie, Minnesota

 

We have audited the accompanying consolidated balance sheets of ValueVision Media, Inc. and subsidiaries (the “Company”) as of January 29, 2011 and January 30, 2010 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of ValueVision Media, Inc. and subsidiaries as of January 29, 2011 and January 30, 2010, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 29, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 21, 2011, expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

Minneapolis, MN

March 21, 2011

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS