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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20243
VALUEVISION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1673770
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Shady Oak Road, Minneapolis, MN 55344
(Address of principal executive offices)
612-947-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of December 8, 1997, there were 28,035,778 shares of the Registrant's
common stock, $.01 par value, outstanding.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
OCTOBER 31, 1997
PART I FINANCIAL INFORMATION Page of
Form 10-Q
---------
Item 1. Financial Statements
- Condensed Consolidated Balance Sheets as of October 31, 1997 and 3
January 31, 1997
- Condensed Consolidated Statements of Operations for the Three 4
and Nine Months Ended October 31, 1997 and 1996
- Condensed Consolidated Statement of Shareholders' Equity for 5
the Nine Months Ended October 31, 1997
- Condensed Consolidated Statements of Cash Flows for the Nine 6
Months Ended October 31, 1997 and 1996
- Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
OCTOBER 31, JANUARY 31,
1997 1997
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,189,366 $ 28,618,943
Short-term investments 27,529,673 24,239,840
Accounts receivable, net 11,713,784 6,488,094
Inventories, net 27,286,121 28,109,081
Prepaid expenses and other 15,899,879 11,483,394
Deferred taxes 392,000 416,000
------------- ------------
Total current assets 101,010,823 99,355,352
PROPERTY AND EQUIPMENT, NET 21,851,045 24,283,108
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET 5,706,239 6,934,546
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET 14,085,016 15,052,935
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION 9,448,373 -
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 12,297,802 10,764,011
INVESTMENTS AND OTHER ASSETS, NET 8,928,066 10,022,718
------------- ------------
$ 173,327,364 $166,412,670
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 415,915 $ 392,921
Accounts payable 22,336,546 24,887,904
Accrued liabilities 13,928,325 12,398,041
Income taxes payable 2,875,291 45,008
------------- ------------
Total current liabilities 39,556,077 37,723,874
LONG-TERM OBLIGATIONS 1,086,493 1,443,189
------------- ------------
Total liabilities 40,642,570 39,167,063
------------- ------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized;
28,035,778 and 28,842,198 shares issued and outstanding 280,358 288,422
Common stock purchase warrants;
3,842,143 and 5,368,557 18,386,927 26,984,038
Additional paid-in capital 81,714,115 83,309,455
Net unrealized holding gains (losses) on investments available-for-sale (2,922,382) 69,437
Retained earnings 35,225,776 16,594,255
------------- ------------
Total shareholders' equity 132,684,794 127,245,607
------------- ------------
$ 173,327,364 $166,412,670
============= ============
The accompanying notes are an integral part of
these condensed consolidated balance sheets.
3
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------------------- ------------------------------------
1997 1996 1997 1996
------------------ ------------------- ------------------ ----------------
NET SALES $ 58,325,336 $ 47,118,078 $ 157,887,155 $ 94,246,499
COST OF SALES 32,599,365 28,457,339 89,542,591 56,469,049
------------ ------------ ------------- ------------
Gross profit 25,725,971 18,660,739 68,344,564 37,777,450
------------ ------------ ------------- ------------
Margin % 44.1% 39.6% 43.3% 40.1%
OPERATING EXPENSES:
Distribution and selling 23,325,866 15,953,996 64,707,697 31,048,673
General and administrative 2,251,383 1,953,837 7,611,520 4,723,006
Depreciation and amortization 1,833,658 1,513,321 5,542,272 4,243,711
------------ ------------ ------------- ------------
Total operating expenses 27,410,907 19,421,154 77,861,489 40,015,390
------------ ------------ ------------- ------------
OPERATING LOSS (1,684,936) (760,415) (9,516,925) (2,237,940)
------------ ------------ ------------- ------------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations - - 38,850,000 27,050,000
Equity (loss) in earnings of affiliates (17,037) 763,741 (347,612) 668,617
Interest income 599,310 955,198 1,475,103 3,113,255
Other, net (34,111) 54,212 1,295 63,658
------------ ------------ ------------- ------------
Total other income 548,162 1,773,151 39,978,786 30,895,530
------------ ------------ ------------- ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (1,136,774) 1,012,736 30,461,861 28,657,590
PROVISION (BENEFIT) FOR INCOME TAXES (471,000) 404,000 11,830,340 11,450,000
------------ ------------ ------------- ------------
NET INCOME (LOSS) $ (665,774) $ 608,736 $ 18,631,521 $ 17,207,590
============ ============ ============= ============
NET INCOME (LOSS) PER COMMON AND
DILUTIVE COMMON EQUIVALENT SHARE $ (0.02) $ 0.02 $ 0.58 $ 0.55
============ ============ ============= ============
Weighted average number of common and
common equivalent shares outstanding 32,064,428 33,627,770 32,375,370 31,206,974
============ ============ ============= ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended October 31, 1997
(Unaudited)
NET
UNREALIZED
HOLDING
COMMON STOCK COMMON GAINS (LOSSES)
-------------------------- STOCK ADDITIONAL ON INVESTMENTS
NUMBER PAR PURCHASE PAID-IN AVAILABLE-
OF SHARES VALUE WARRANTS CAPITAL FOR-SALE
------------ ----------- ------------ ------------ ---------------
BALANCE, JANUARY 31, 1997 28,842,198 $ 288,422 $ 26,984,038 $ 83,309,455 $ 69,437
Exercise of stock options and warrants 1,611,080 16,111 - 241,786 -
Common stock repurchases (2,417,500) (24,175) - (10,434,237) -
Value transferred from common stock
purchase warrants - - (8,597,111) 8,597,111 -
Unrealized holding loss on
investments available-for-sale - - - - (2,991,819)
Net income - - - - -
----------- --------- ------------ ------------ -----------
BALANCE, OCTOBER 31, 1997 28,035,778 $ 280,358 $ 18,386,927 $ 81,714,115 $(2,922,382)
=========== ========= ============ ============ ===========
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
----------- --------------
BALANCE, JANUARY 31, 1997 $16,594,255 $ 127,245,607
Exercise of stock options and warrants - 257,897
Common stock repurchases - (10,458,412)
Value transferred from common stock
purchase warrants - -
Unrealized holding loss on
investments available-for-sale - (2,991,819)
Net income 18,631,521 18,631,521
----------- -------------
BALANCE, OCTOBER 31, 1997 $35,225,776 $ 132,684,794
=========== =============
The accompanying notes are an integral part
of this condensed consolidated finacial statement.
5
VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED OCTOBER 31,
------------------------------------------
1997 1996
------------ -------------
OPERATING ACTIVITIES:
Net income $ 18,631,521 $ 17,207,590
Adjustments to reconcile net income to net cash
provided by (used for) operating activities-
Depreciation and amortization 5,542,272 4,243,711
Deferred taxes 24,000 -
(Equity) loss in earnings of affiliates 347,612 (668,617)
Gain on sale of broadcast stations (38,850,000) (27,050,000)
Changes in operating assets and liabilities:
Accounts receivable, net (4,622,488) (3,099,859)
Inventories, net 822,960 (5,731,221)
Prepaid expenses and other (4,468,695) (2,015,553)
Accounts payable and accrued liabilities (2,535,819) 7,211,981
Income taxes payable 2,830,283 2,102,992
------------ ------------
Net cash used for operating activities (22,278,354) (7,798,976)
------------ ------------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements (3,148,495) (7,718,975)
Purchase of broadcast stations - (4,618,743)
Proceeds from sale of broadcast stations 30,000,000 40,000,000
Acquisition of direct-mail companies, net of cash acquired - 1,789,875
Purchase of short-term investments (38,534,148) (76,667,392)
Proceeds from sale of short-term investments 36,555,220 56,137,858
Payment for investments and other assets (5,474,773) (1,518,767)
Proceeds from sale of investments 1,369,006 -
Proceeds from long-term notes receivable 1,603,439 -
------------ ------------
Net cash provided by investing activities 22,370,249 7,403,856
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 257,897 1,150,395
Payments for repurchases of common stock (10,458,412) (1,576,595)
Payment of long-term obligations (320,957) (141,685)
------------ ------------
Net cash used for financing activities (10,521,472) (567,885)
------------ ------------
Net decrease in cash and cash equivalents (10,429,577) (963,005)
BEGINNING CASH AND CASH EQUIVALENTS 28,618,943 20,063,901
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 18,189,366 $ 19,100,896
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 68,000 $ 58,000
============ ============
Income taxes paid $ 8,993,000 $ 9,598,000
============ ============
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
The Company received 1,197,892 shares of Paxson
Communications Corporation common stock as partial
consideration from the sale of a broadcast television station $ 14,284,862 $ -
============ ============
The Company issued 1,484,993 warrants with a fair market
value of $8,353,000 in connection with the acquisition
of substantially all assets of Montgomery Ward Direct, L.P. $ - $ 8,353,000
============ ============
The Company issued 199,097 warrants with a fair market
value of $963,000 as part of a long-term investment contribution $ - $ 963,000
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(Unaudited)
(1) GENERAL
ValueVision International, Inc. and its subsidiaries ("ValueVision" or the
"Company") is an integrated direct marketing company which markets its products
directly to consumers through electronic and print media.
The Company's principal electronic media activity is its television home
shopping network which uses recognized on-air television home shopping
personalities to market brand name merchandise and proprietary and private label
consumer products at competitive or discount prices. The Company's 24-hour per
day television home shopping programming is distributed primarily through
long-term cable affiliation agreements and the purchase of month-to-month full-
and part-time block lease agreements of cable and broadcast television time. In
addition, the Company distributes its programming through Company owned or
affiliated full power Ultra-High Frequency ("UHF") broadcast television
stations, low power television ("LPTV") stations and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc., d/b/a Montgomery Ward Direct ("VVDM"), is a direct-mail
marketer of a broad range of quality general merchandise which is sold to
consumers through direct-mail catalogs and other direct marketing solicitations.
Products offered include domestics, housewares, home accessories and
electronics. Through its wholly-owned subsidiary, Catalog Ventures, Inc.
("CVI"), the Company sells a variety of fashion jewelry, health and beauty aids,
books, audio and video cassettes and other related consumer merchandise through
the publication of five consumer specialty catalogs. The Company also
manufactures and markets, via direct-mail, women's foundation undergarments
through its wholly-owned subsidiary Beautiful Images, Inc. ("BII").
Results of operations for the three and nine months ended October 31, 1997
include the direct- mail operations of VVDM, BII, and CVI, which were acquired
by the Company effective July 27, 1996, October 22, 1996 and November 1, 1996,
respectively.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments which, in the opinion of management, are necessary for
a fair presentation of such financial statements. Although management believes
the disclosures and information presented are adequate to make the information
not misleading, it is suggested that these interim condensed consolidated
financial statements be read in conjunction with the Company's most recent
audited financial statements and notes thereto included in its fiscal 1997
Annual Report on Form 10-K. Operating results for the nine-month period
7
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(Unaudited)
ended October 31, 1997, are not necessarily indicative of the results that may
be expected for the fiscal year ending January 31, 1998.
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform to the fiscal 1998 presentation with no impact on
previously reported net income (loss) or shareholders' equity.
(3) NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share based on the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding, if any, during the period. The difference between primary and fully
diluted net income (loss) per share and weighted average number of shares
outstanding was not material or was antidilutive, and therefore not presented
separately.
(4) SALE OF BROADCAST STATIONS
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI (TV) Channel 66, which serves the Washington, D.C.
market, to Paxson Communications Corporation ("Paxson"). The station was sold
for approximately $30 million in cash and 1,197,892 shares of Paxson
Communications Corporation common stock. WVVI (TV) was acquired by the Company
in March 1994 for approximately $4,850,000. The pre-tax gain recorded on the
sale of this television station was $38,850,000 and was recognized in the second
quarter ended July 31, 1997.
On November 17, 1997, the Company signed a definitive agreement to sell to
Paxson Communications Corporation its television broadcast station, KBGE-TV,
Channel 33, which serves the Seattle, Washington market along with two of
ValueVision's non-cable, low-power stations in Portland, Oregon and
Indianapolis, Indiana and minority interests in entities which have applied for
two new full-power stations for a total of $35 million in cash. Under the terms
of the agreement, Paxson will pay the Company $25 million upon closing and the
remaining $10 million is to be paid when KBGE, which is currently operating at
reduced power from downtown Seattle, is able to relocate and increase its
transmitter/antenna power to a level at or near its licensed full power. The
transaction is anticipated to close in the Spring of 1998 and is subject to
obtaining certain consents and regulatory approval. ValueVision will retain and
continue to serve the Seattle market via its recently-launched low-power station
K58DP-TV, which transmits from downtown Seattle. The effects of the disposition
will be reflected in the financial statements at the date of closing. Management
believes that the sale will not have a significant impact on the operations of
the Company.
The Company has filed applications for seven additional full-power stations, all
of which include multiple applicants, and expects to participate in
FCC-permitted private auctions to determine the grantee.
8
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(Unaudited)
(5) MONTGOMERY WARD RESTRUCTURING
On October 23, 1997, the Company announced the restructuring of its
operating agreement with Montgomery Ward & Co., Incorporated ("Montgomery Ward"
or "MW"), which governs the use of the Montgomery Ward name. In exchange for
Montgomery Ward's return to ValueVision of warrants covering the purchase of 3.8
million shares of ValueVision common stock, the Company will cede exclusive use
of the Montgomery Ward name for catalog, mail order, catalog "syndications" and
television shopping programming back to Montgomery Ward. Under the agreement,
which requires the approval of the U.S. Bankruptcy court of Delaware, the
Company will cease the use of the Montgomery Ward name in all outgoing catalog,
syndication, and mail order communication by March 31, 1998, with a wind down of
incoming orders and customer service permitted after March 31, 1998. The
agreement also includes the reduction of Montgomery Ward's minimum commitment to
support ValueVision's cable television spot advertising purchases. Under the new
terms, Montgomery Ward's commitment is reduced from $4 million to $2 million
annually, and the time period decreased from five years to three years
commencing effective November 1, 1997. In addition, the agreement limits the
Company to offer the Montgomery Ward credit card only in conjunction with its
various television offers and subject to the normal approvals by the credit card
grantor. The agreement also calls for the repurchase by the Company of 1,280,000
of its common stock currently owned by Montgomery Ward, at a price of $3.80 per
share.
(6) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128")
in February 1997. SFAS No. 128 establishes accounting standards for computing
and presenting earnings per share ("EPS") and is effective for reporting
periods ending after December 15, 1997. Management believes that the adoption
of SFAS No. 128 will not have a material impact on the Company's calculation of
EPS.
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") in June 1997. SFAS No. 131 requires that public business enterprises
report information about operating segments in annual financial statements and
requires selected information in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers and is effective
for fiscal years beginning after December 15, 1997.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's accompanying
unaudited condensed consolidated financial statements and notes thereto included
elsewhere herein and the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1997.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF NET SALES PERCENTAGE OF NET SALES
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
----------------- -----------------
1997 1996 1997 1996
------- -------- -------- --------
NET SALES 100.0% 100.0% 100.0% 100.0%
======= ======== ======== ========
GROSS MARGIN 44.1% 39.6% 43.3% 40.1%
------- -------- -------- --------
Operating expenses:
Distribution and selling 40.0% 33.9% 41.0% 32.9%
General and administrative 3.9% 4.1% 4.8% 5.0%
Depreciation and amortization 3.1% 3.2% 3.5% 4.5%
------- -------- -------- --------
47.0% 41.2% 49.3% 42.5%
------- -------- -------- --------
Operating loss (2.9%) (1.6%) (6.0%) (2.4%)
======= ======== ======== ========
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ValueVision International, Inc. and its subsidiaries ("ValueVision" or
the "Company") is an integrated direct marketing company which markets its
products directly to consumers through electronic and print media. Prior to July
1996, the Company's business operations consisted primarily of its 24-hour per
day television home-shopping program. Through a series of strategic acquisitions
in the second half of fiscal 1997, the Company has expanded its business
operations to include the direct-mail catalog business and other forms of direct
marketing. The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc., d/b/a Montgomery Ward Direct ("VVDM"), is a direct-mail
marketer of a broad range of quality general merchandise which is sold to
consumers through direct-mail catalogs. Through its wholly-owned subsidiary,
Catalog Ventures, Inc. ("CVI"), the Company sells a variety of fashion jewelry
and other consumer merchandise through the publication of five consumer
specialty catalogs. The Company also manufactures and markets, via direct-mail,
women's foundation undergarments through its wholly-owned subsidiary, Beautiful
Images, Inc. ("BII").
Results of operations for the three and nine months ended October 31, 1997
include the direct-mail operations of VVDM, BII and CVI, which were acquired by
the Company effective July 22, 1996, October 22, 1996 and November 1, 1996,
respectively.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended October 31, 1997 (fiscal 1998), were
$58,325,000 compared with $47,118,000 for the three months ended October 31,
1996 (fiscal 1997), a 24% increase. Net sales for the nine months ended October
31, 1997 were $157,887,000 compared with $94,246,000 for the nine months ended
October 31, 1996 a 68% increase. Sales attributed to direct mail-order
operations totaled $31,033,000 or 53% of net sales for the quarter ended October
31, 1997 and totaled $22,290,000 or 47% of net sales for the nine months ended
October 31, 1996. The majority of the increase in net sales is attributed to the
acquisition of the direct marketing businesses in the second half of fiscal
1997. The increase in net sales is also attributable to an increase in full-time
equivalent cable homes able to receive the Company's television home-shopping
programming, which increased approximately 600,000 or 5% from 11.0 million at
October 31, 1996 to 11.6 million at October 31, 1997. During the twelve-month
period ended October 31, 1997 the Company added approximately 700,000 full-time
cable homes, a 9% increase. In addition to new homes, television home-shopping
sales increased due to the continued addition of new customers from households
already receiving the Company's television home shopping programming and an
increase in repeat sales to existing customers. The increase in repeat sales to
existing customers experienced during the first nine months of fiscal 1998 was
due, in part, to the effects of continued testing of certain merchandising and
programming strategies during the third quarter of fiscal 1998. The Company
intends to continue to test and change its merchandising and programming
strategies with the intent of improving its television home-shopping sales
results. However, while the Company is optimistic that results may improve,
there can be no assurance that such changes in strategy will achieve the
intended results. As a result of the increased number of households able to
receive the Company's programming, continued growth in direct mail-order
operations, as well as seasonality factors, the Company anticipates net sales
and operating expenses will continue to increase for the balance of fiscal 1998.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
Gross profits for the third quarter ended October 31, 1997 and 1996 were
$25,726,000 and $18,661,000, respectively, an increase of $7,065,000 or 38%.
Gross margins for the three months ended October 31, 1997 were 44.1% compared to
39.6% for the same period last year. Gross profits for the nine months ended
October 31, 1997 and 1996 were $68,344,000 and $37,777,000, respectively, an
increase of $30,567,000 or 81%. Gross margins for the nine months ended October
31, 1997 were 43.3% compared to 40.1% for the same period last year. The
principal reason for the increase in gross profits was increased sales volume
primarily as a result of the direct mail operations included in the fiscal 1998
results. Television gross margins for the three and nine months ended October
31, 1997 were 40.7% and 40.5%, respectively. Gross margins for the Company's
direct mail operations were 47.1% and 46.0% for the same respective periods.
Television gross margins for the three and nine months ended October 31, 1996
were 40.0% and 40.4%, respectively. Gross margins for the Company's direct mail
operations were 39.1% for the same respective prior year periods. Television
gross margins between comparable periods remained consistent, primarily as a
result of an increase in gross margin percentages in the jewelry and houseware
product categories and a greater proportion of higher margin non-jewelry
products such as houseware products, offset by a decline in volume of higher
margin jewelry products. During the third quarter of fiscal 1998, the Company
continued to broaden its merchandise mix as compared to the same period last
year by expanding the range and quantity of non-jewelry items. As part of the
ongoing shift in merchandise mix, the Company continued to devote additional
program air time to non-jewelry merchandise. Jewelry products accounted for
approximately 59% of air time during the first nine months of fiscal 1998,
compared with 68% for the same period last year. Gross margins for the Company's
direct mail operations increased primarily due to the acquisition of CVI which
has higher margins and was not included in prior year's results of operations.
In addition, there was also a slight change in merchandise mix to higher margin
home accessories (furniture, giftware and wall decor) which also contributed to
the improvement in direct mail margins.
OPERATING EXPENSES
Total operating expenses for the three and nine months ended October 31,
1997 were $27,411,000 and $77,861,000, respectively, versus $19,421,000 and
$40,015,000 for the comparable prior-year periods. Total distribution and
selling expenses increased $7,372,000 or 46% and $33,659,000 or 108% for the
three and nine months ended October 31, 1997 over the comparable prior-year
periods. Distribution and selling expense as a percentage of net sales for the
three and nine months ended October 31, 1997 were 40% and 41%, respectively,
versus 34% and 33% for the comparable prior-year periods. Distribution and
selling costs increased primarily as a result of additional distribution and
selling expenses associated with the Company's recently acquired direct-mail
marketing businesses, which were acquired in the second half of fiscal 1997,
increases in cable access fees resulting from the growth in the number of cable
homes receiving the company's programming and overall rate increases, additional
personnel costs associated with increased staffing levels and labor rates and
increased costs associated with handling increased sales volume. Distribution
and selling expenses for the nine-month period ended October 31, 1997 increased
as a percentage of net sales over prior year primarily as a result of increases
in cable access fees on a full-time equivalent basis with respect to the
Company's television home shopping operations, a softening of sales on front-end
acquisition and sale/clearance catalogs, sales softening on books mailed
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to customers in the Montgomery Ward & Co., Incorporated ("Montgomery Ward" or
"MW") credit file as a direct result of the recent MW Bankruptcy announcement,
increased mail promotion costs, the experience of slightly higher than
historical return rates with respect to the Company's direct-mail operations and
additional unusual costs incurred by the Company during the first quarter of
fiscal 1998 in connection with converting and integrating the Company's newly
acquired direct-mail operations and start-up costs associated with the Company's
new fulfillment and warehouse facility located in Bowling Green, Kentucky.
General and administrative expenses increased $298,000 or 15% and
$2,889,000 or 61% for the three and nine-month periods ended October 31, 1997
over the comparable prior-year periods. General and administrative expenses as a
percentage of net sales for the three and nine months ended October 31, 1997
were 4% and 5%, respectively, versus 4% and 5% for the comparable prior-year
periods. General and administrative costs increased as a result of increased
costs associated with the Company's newly acquired direct-mail operations,
increased personnel in support of expanded operations, additional travel and
related costs associated with evaluating potential acquisition opportunities and
additional legal and consulting costs incurred relative to clarification of
certain cable regulations.
Depreciation and amortization for the three and nine months ended October
31, 1997 were $1,834,000 and $5,542,000 versus $1,513,000 and $4,244,000 for the
comparable prior-year periods. Depreciation and amortization costs increased
$320,000 or 21% and $1,299,000 or 31% for the three and nine months ended
October 31, 1997 over the comparable prior-year periods. Depreciation and
amortization costs as a percentage of net sales for the three and nine months
ended October 31, 1997 were 3% and 4%, respectively, versus 3% and 5% for the
comparable prior-year periods. The dollar increase is primarily due to
additional depreciation and amortization of approximately $1,101,000 relating to
assets associated with the Company's recently acquired direct-mail operations,
depreciation on property and equipment additions offset by a reduction in
amortization associated with the Montgomery Ward operating agreement and
licenses entered into in August 1995.
OPERATING LOSS
The operating loss was $1,685,000 and $760,000 for the three months ended
October 31, 1997 and 1996, respectively, and $9,517,000 and $2,238,000 for the
nine months ended October 31, 1997 and 1996, respectively. The increase in the
operating loss resulted primarily from increases in distribution and selling
costs over prior year largely due to increases in front-end cable access fees
associated with new cable distribution, expansion of operations, lower than
anticipated response rates from catalog solicitations and television
home-shopping offerings as a result of the Montgomery Ward Bankruptcy
notification, higher than historical return rates and certain unusual costs
incurred by the Company in the first quarter of fiscal 1998 in connection with
the conversion and integration of the Company's recently acquired direct-mail
operations, as well as start-up costs associated with the Company's new
fulfillment and warehouse facility located in Bowling Green, Kentucky. These
increases were offset by increased sales volumes, margins and a corresponding
increase in gross profits.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INCOME (LOSS)
For the three months ended October 31, 1997, the Company reported a net
loss of $666,000 or $.02 per share on 32,064,000 weighted average common and
common-equivalent shares outstanding compared with net income of $609,000, or
$.02 per share on 33,628,000 weighted average shares outstanding for the third
quarter of fiscal 1997. For the quarter ended October 31, 1997, the net loss
reflects an income tax benefit of $471,000.
For the nine months ended October 31, 1997, net income was $18,632,000 or
$.58 per share on 32,375,000 weighted average common and common-equivalent
shares outstanding compared with net income of $17,208,000 or $.55 per share on
31,207,000 weighted average common and common- equivalent shares outstanding for
the prior year period. Results for the nine-month period ended October 31, 1997
include a pre-tax gain of $38,850,000 from the sale of television station WVVI
in July 1997. For the nine months ended October 31, 1997, excluding the gain on
the sale of the television station, the Company had a net loss of $5,117,000 or
$.16 per share. Results for the nine-month period ended October 31, 1996
included a pre-tax gain of $27,050,000 from the sale of television stations WAKC
and WHAI in February 1996. For the nine months ended October 31, 1996, excluding
the gain on the sale of the two television stations, the Company had net income
of $965,000, or $0.03 per share. For the nine months ended October 31, 1997, net
income reflects an income tax provision of $11,830,000, which results in an
effective tax rate of 39%.
PROGRAM DISTRIBUTION
The Company's television home-shopping programming was available to
approximately 17.8 million cable homes as of October 31, 1997, as compared to
16.4 million cable homes as of January 31, 1997 and to 13.7 million cable homes
as of October 31, 1996. The Company's programming is currently available through
affiliation and time-block purchase agreements with approximately 280 cable
systems and two wholly-owned full power television broadcast stations. In
addition, the Company's programming is broadcast full-time over thirteen owned
or affiliated low power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of October 31, 1997 and
1996, the Company's programming was available to approximately 11.6 million and
11.0 million full-time equivalent cable homes ("FTE"), respectively, an
approximate 5% increase. As of January 31, 1997, the Company's programming was
available to 11.4 million FTE cable homes. Approximately 8.5 million and 7.8
million cable homes at October 31, 1997 and 1996, respectively, received the
Company's programming on a full-time basis. Homes that receive the Company's
television home shopping programming 24 hours per day are counted as one FTE
each and homes that receive the Company's programming for any period less than
24 hours are counted based upon an analysis of time-of day and day-of week.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, cash and cash equivalents and short-term
investments were $45,719,000, compared to $52,859,000 as of January 31, 1997, a
$7,140,000 decrease. For the nine months ended October 31, 1997, working capital
decreased $177,000 to $61,455,000. The current ratio was 2.6 at October 31, 1997
and at January 31, 1997. At October 31, 1997 all short-term investments and cash
equivalents were invested in securities with original maturity dates of less
than two hundred and seventy (270) days.
Total assets at October 31, 1997 were $173,327,000, compared to
$166,413,000 at January 31, 1997. Shareholders' equity was $132,685,000 at
October 31, 1997, compared to $127,246,000 at January 31, 1997, a $5,439,000
increase. The increase in shareholders' equity for the nine-month period ended
October 31, 1997 resulted primarily from net income of $18,632,000 for the
nine-month period and proceeds received on the exercise of stock options and
warrants of $258,000. The equity increases were offset by $10,458,000 related
to the repurchase of 2,418,000 shares of Company common stock made in
connection with the Company's authorized stock repurchase program and
unrealized holding losses of $2,992,000 on investments available-for-sale.
For the nine-month period ended October 31,1997, net cash used for
operating activities totaled $22,278,000 compared to net cash used for operating
activities of $7,799,000 for the nine-month period ended October 31, 1996. Cash
flows from operations before consideration of changes in working capital items
and investing and financing activities was a negative $3,975,000 for the nine
months ended October 31, 1997, compared to a positive $2,006,000 for the same
prior-year period. Net cash used for operating activities for the nine months
ended October 31, 1997 reflects net income, as adjusted for depreciation and
amortization, loss in earnings of affiliates and gain on sale of broadcast
station, increased prepaid expenses and funding required to support higher
levels of accounts receivable, decreases in accounts payable and accrued
liabilities offset by a decrease in inventories and an increase in income taxes
payable. Accounts receivable increased primarily due to timing relative to
receipt of funds from credit card companies and increased sales volume. Prepaid
expenses primarily increased as a result of increased deferred catalog costs as
the Company's direct-mail operations prepared for the holiday season.
Inventories decreased from year end as a result of tighter inventory management
and changes in merchandise mix.
Net cash provided by investing activities totaled $22,370,000 for the nine
months ended October 31, 1997 compared to $7,404,000 for the same period of
fiscal 1997. For the nine months ended October 31, 1997 and 1996, expenditures
for property and equipment were $3,148,000 and $7,719,000, respectively.
Expenditures for property and equipment during the periods ended October 31,
1997 and 1996 include (i) the upgrade of broadcast station and production
equipment, studios and transmission equipment (ii) the upgrade of computer
software and related equipment and (iii) a $4.7 million land purchase in fiscal
1997, which is being held for future expansion and investment purposes.
Principal future capital expenditures will be for upgrading television
production and transmission equipment, studio expansions and order fulfillment
equipment in support of expanded operations, especially with respect to the
Company's recently acquired direct-mail operations. During the second quarter of
fiscal 1998, the Company received approximately $30.0 million in cash proceeds
from the sale of television station WVVI. For the nine months ended October 31,
1997, the Company disbursed $5,454,000 relating to certain strategic investments
and other long-term assets, received $1,369,000 in net proceeds from sales and
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
distributions of certain long-term investments and received proceeds of
$1,603,000 in collection of a long-term note receivable. During the third
quarter of fiscal 1997, the Company assumed net cash of approximately $1,790,000
in connection with the acquisition of two direct-mail companies. During the
first quarter of fiscal 1997, the Company received $40.0 million in proceeds
from the sale of two television stations; Akron ABC affiliate WAKC-TV and
independent station WHAI-TV. In addition, during the first quarter of fiscal
1997, the Company paid approximately $3.8 million toward the acquisition of
independent television station KBGE (TV), including acquisition costs and paid
$800,000 at a second closing relative to broadcast station WVVI (TV). The
Company also disbursed $1,519,000 for investments and other long-term
investments.
Net cash used for financing activities totaled $10,521,000 for the nine
months ended October 31, 1997 and $568,000 for the nine months ended October 31,
1996, and primarily related to repurchases of the Company's common stock under
its stock repurchase program and capital lease payments offset by proceeds
received from the exercise of stock options and warrants.
Management believes funds currently held by the Company will be sufficient
to fund the Company's operations, the repurchase of any additional Company
common stock pursuant to an authorized repurchase plan, anticipated capital
expenditures and cable launch fees through fiscal 1998. Additional capital may
be required in the event the Company is able to identify additional acquisition
targets and television stations in strategic markets at favorable prices.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report on Form 10-Q and other materials filed by the Company
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by the Company)
contain various "forward looking statements" within the meaning of federal
securities laws which represent management's expectations or beliefs concerning
future events. Such statements include, among others, those statements regarding
management restructurings, strategic investments, acquisitions and other
business combinations, anticipated operating results, revenue growth, capital
spending requirements, the effects of regulation and competition, the
restructuring of the Montgomery Ward relationship and the sale of the Seattle
television station. These, and other forward looking statements made by the
Company, must be evaluated in the context of a number of important factors that
may affect the Company's financial position and results of operations including,
without limitation: the availability of experienced managers for a management
restructuring, consumer spending and debt levels, interest rate fluctuations,
seasonal variations in consumer purchasing activities, increases in postal,
paper and outbound shipping costs, competition in the retail and direct
marketing industries, continuity of relationships with or purchases from major
vendors, product mix, competitive pressure on sales and pricing, the ability of
the Company to manage growth and expansion, changes in the regulatory framework
affecting the Company, increases in cable access fees and other costs which
cannot be recovered through improved pricing, the identification and
availability of potential strategic investments, acquisition or business
combination candidates at prices favorable to the Company, bankruptcy court
approval of the Montgomery Ward restructuring and obtaining certain consents and
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
regulatory approvals for the sale of the Seattle television station. Investors
are cautioned that all forward looking statements involve risk and uncertainty
and that actual results may differ materially from such statements.
In addition to any specific risks and uncertainties discussed in this Form
10-Q, the risks and uncertainties discussed in detail in the Company's Form 10-K
for the fiscal year ended January 31, 1997 provide information which should be
considered in evaluating any of the Company's forward looking statements. In
addition, investors should be aware that the facts and circumstances which exist
when any forward looking statements are made and on which those forward looking
statements are based, may significantly change in the future, thereby rendering
obsolete the forward looking statements on which such facts and circumstances
were based.
17
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net Income (Loss) Per Share.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
(i) The Company filed a Form 8-K on October 24, 1997
reporting under Item 5 the Company's Press Release dated
October 23, 1997 announcing the Montgomery Ward and
ValueVision Restructure Agreement on the use of the
Montgomery Ward name.
(ii) The Company filed a Form 8-K on November 17, 1997
reporting under Item 5 that the Company and Paxson
Communications Corporation ("Paxson") signed a definitive
agreement under which Paxson will acquire, for total
consideration of $35 million in cash, the Company's
television station KBGE-TV, Channel 33, Seattle, Washington
along with two of the Company's non-cable, low-power stations
in Portland, Oregon and Indianapolis, Indiana and minority
interests in entities which have applied for two new
stations.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
/s/ Robert L. Johander
-------------------------------------------
Robert L. Johander
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Stuart R. Romenesko
-------------------------------------------
Stuart R. Romenesko
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
December 8, 1997
19