| VALUEVISION MEDIA INC Item 1A Risk Factors |
| 15 ITEM 1A RISK FACTORS In addition to the general investment risks and those factors set forth throughout this document including those set forth under the caption Cautionary Statement Concerning Forward-Looking Information, "e the following risks should be considered regarding the Company |
| THE COMPANY HAS A HISTORY OF LOSSES AND MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS IN THE FUTURE The Company experienced operating losses from continuing operations of approximately dlra18dtta6 million, dlra44dtta3 million and dlra8dtta0 million in fiscal 2005, 2004 and 2003, respectively |
| The Company reported a net loss per diluted share of dlra0dtta43, dlra1dtta57 and dlra0dtta32 in fiscal 2005, 2004 and 2003, respectively |
| Net losses included pre-tax investment write-downs of approximately dlra1dtta7 million in fiscal 2003 |
| There is no assurance that the Company will be able to achieve or maintain profitable operations in future fiscal years |
| THE COMPANY LICENSES THE SHOPNBC NAME AND CERTAIN LOGOS FROM NBC PURSUANT TO AN AGREEMENT THAT IF TERMINATED WOULD CAUSE THE COMPANY TO PURSUE A NEW BRANDING STRATEGY AT SIGNIFICANT EXPENSE As discussed above, in November 2000, the Company entered into a Trademark License Agreement with NBC pursuant to which NBC granted the Company an exclusive, worldwide license for a term of 10 years to use certain NBC trademarks, service marks and domain names to effectively rebrand the Companyapstas business and corporate name and companion Internet website |
| Under the terms of the agreement, the Companyapstas television home shopping network, previously called ValueVision, and companion Internet website were rebranded to ShopNBC and ShopNBCcom |
| In addition, the License Agreement contains significant restrictions on the Companyapstas ability to use the rights granted to it in connection with businesses other than certain specified permitted businesses |
| This restricts the ability of the Company to take advantage of certain business opportunities |
| NBC has the right to terminate the License Agreement at any time upon certain changes of control of the Company, the failure by NBC in certain circumstances to own, directly or indirectly, 15 a certain minimum percentage of the outstanding capital stock of the Company on a fully diluted basis and certain other related matters |
| In addition, the use of the NBC trademarks, service marks and domain names are limited to the ten-year license term without automatic renewal |
| The non-renewal or termination of the License Agreement would require the Company to pursue a new branding strategy, which would entail significant expense and time to create and could have a negative impact on the Companyapstas presence in the marketplace |
| This may result in a material adverse effect on the Companyapstas sales and results of operations |
| NBC AND GE EQUITY HAVE THE ABILITY TO EXERT SIGNIFICANT INFLUENCE OVER THE COMPANY AND HAVE THE RIGHT TO DISAPPROVE OF CERTAIN ACTIONS BY THE COMPANY As a result of their equity ownership in the Company, NBC and GE Equity together are currently the largest shareholder in the Company and have the ability to exert significant influence over actions requiring shareholder approval, including the election of directors of the Company, adoption of equity-based compensation plans, and approval of mergers or other significant corporate events |
| Through the provisions in the Shareholder Agreement and Certificate of Designation for the Preferred Stock, NBC and GE Equity also have the right to disapprove of certain major corporate actions by the Company (as discussed under "e Strategic Relationships -- Shareholder Agreement "e above) |
| In addition, because NBC has the exclusive right to negotiate for the distribution of the Companyapstas television home shopping programming, a termination of the strategic alliance with NBC could adversely affect the Companyapstas ability to increase its program distribution |
| MANDATORY REDEMPTION OF THE COMPANY &apos S CONVERTIBLE PREFERRED STOCK COULD HAVE A MATERIAL IMPACT ON THE COMPANY &apos S LIQUIDITY AND CASH RESOURCES The Companyapstas Class A Redeemable Convertible Preferred Stock issued to GE Equity may be redeemed upon certain "e changes in control "e of the Company and in any event, any outstanding Preferred Stock must be redeemed in 2009 upon the ten-year anniversary of its issuance |
| If the Company is unable to generate positive cash flow or obtain additional capital prior to any such redemption, the requirement that the Company pay cash in connection with such redemption may have a material impact on the Companyapstas liquidity and cash resources |
| The aggregate redemption cost of all the Preferred Stock is dlra44cmam264cmam000 |
| The Company ended fiscal 2005 with cash and cash equivalents and short-term investments of dlra82cmam350cmam000, no debt and dlra130cmam000 of long-term capital lease obligations |
| The Preferred Stock has a redemption price of dlra8dtta29 per share and is convertible on a one-for-one basis into the Companyapstas common stock, and accordingly, if the market value of the Companyapstas stock is higher than the redemption price immediately prior to the redemption date, GE Equity may choose to convert their shares of Preferred Stock rather than exercise their right to redemption |
| GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING; UNFAVORABLE CHANGES COULD ADVERSELY AFFECT THE COMPANY &apos S BUSINESS The Company has made material investments in anticipation of the growing use of the Internet as an effective medium of commerce by merchants and shoppers |
| The Companyapstas sales over the Internet accounted for approximately 21prca, 20prca and 19prca of consolidated net sales during fiscal 2005, 2004 and fiscal 2003, respectively |
| Additional laws and regulations may be adopted with respect to the Internet or other online services, covering such issues as user privacy, advertising, pricing, content, copyrights and trademarks, access by persons with disabilities, distribution, taxation and characteristics and quality of products and services |
| Such laws or regulations, if enacted, could make it more difficult for the Company to conduct business online, which could, in turn, decrease the demand for the Companyapstas products and services and increase its cost of doing business through the Internet |
| Inherent with the Internet and e-commerce is the risk of unauthorized access to confidential data including consumer credit card information, the risk of computer virus infection or other unauthorized acts of electronic intrusion with the malicious intent to do damage |
| Although the Company has taken precautionary steps to secure and protect its data network from intrusion and acts of hostility, there can be no assurance that unauthorized access to the Companyapstas electronic systems will be prevented entirely |
| 16 INTENSE COMPETITION IN THE GENERAL MERCHANDISE RETAILING INDUSTRY AND PARTICULARLY LIVE HOME SHOPPING COULD LIMIT THE COMPANY &apos S GROWTH AND REDUCE ITS PROFITABILITY As a general merchandise retailer, the Company competes for consumer expenditures with other forms of retail businesses, including department, discount, warehouse and specialty stores, television home shopping, mail order and catalog companies and other direct sellers |
| The Company also competes with retailers who sell and market their products through the highly competitive Internet |
| In addition, as the use of the Internet increases, larger, well-established and well-financed entities may continue to acquire, invest in or form joint ventures with providers of e-commerce and direct marketing solutions |
| Any of these trends would increase the competition with respect to the Company |
| The home shopping industry is also highly competitive, with the two largest competitors being HSN and QVC The Companyapstas television home shopping programming also competes directly with HSN, QVC, SATH and ACN for cable distribution in virtually all of its markets |
| The Company is at a competitive disadvantage compared to QVC and HSN in attracting viewers due to the fact that its programming is not carried full-time in all of its markets, and the Company may have less desirable cable channel locations in many markets |
| QVC and HSN offer home shopping programming similar to the Companyapstas programming, and are well established and reach a significantly larger percentage of US television households than does the Company |
| The television home shopping industry is also experiencing vertical integration |
| QVC, HSN and SATH are all affiliated with cable operators or cable networks serving significant numbers of subscribers nationwide |
| Scripps, the owner of SATH, is a media company with interests in newspaper publishing, broadcast television, national cable television networks and interactive media |
| QVC is owned by Liberty Media Corp |
| HSN is a wholly owned subsidiary of InterActiveCorp |
| Liberty Media, Scripps and InterActiveCorp are larger, more diversified and have greater financial, marketing and distribution resources than the Company |
| THE CONSOLIDATION OF CABLE AND SATELLITE TELEVISION SERVICE PROVIDERS COULD LIMIT THE COMPANY &apos S PROGRAM DISTRIBUTION ALTERNATIVES AND RESTRICT THE COMPANY &apos S ABILITY TO EXECUTE FAVORABLE CABLE AFFILIATION CONTRACTS IN THE FUTURE The television home shopping and cable television industries are undergoing consolidation, with large, well-established enterprises acquiring less well-established, less well-financed entities in the industry |
| The competitive pressures arising as a result of this industry consolidation include greater importance on increasing programming distributions and customer penetration |
| In April 2005, Time Warner Inc |
| and Comcast Corporation, two of the largest cable carriers, announced that they were jointly acquiring and dividing between them (subject to bankruptcy court and regulatory approval) the cable assets of Adelphia Communications Corporation out of bankruptcy |
| The continued consolidation of the television home shopping, cable television and broadcasting industries may result in fewer alternatives for the Companyapstas programming distribution and may also restrict the Companyapstas opportunity to execute economically favorable cable affiliation contracts in the future |
| A NUMBER OF THE COMPANY &apos S CABLE DISTRIBUTION AGREEMENTS MAY NOT BE RENEWED UPON EXPIRATION, WHICH COULD ADVERSELY AFFECT SALES GROWTH IN THE COMPANY &apos S HOME SHOPPING BUSINESS A number of the Companyapstas cable distribution agreements, representing a majority of the cable households who currently receive the Companyapstas programming, are scheduled to expire beginning at the end of 2008 and thereafter |
| The Companyapstas business could be materially adversely affected at such future time in the event that a significant number of these agreements are not renewed on acceptable terms |
| THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS SATELLITE SERVICES IN CERTAIN SITUATION, BEYOND ITS CONTROL, WHICH MAY CAUSE THE COMPANY &apos S PROGRAMMING TO GO OFF THE AIR FOR A PERIOD OF TIME AND INCUR SUBSTANTIAL ADDITIONAL COSTS The Companyapstas programming is presently distributed to cable systems, full power television stations and satellite dish owners via a leased communications satellite transponder |
| In the future, satellite service may be interrupted due to a variety of circumstances beyond the Companyapstas control, such as satellite transponder failure, satellite fuel depletion, governmental action, preemption by the satellite service provider and service 17 failure |
| The agreement provides the Company with preemptable back-up service if satellite transmission is interrupted |
| However, there can be no assurance if satellite transmission is so interrupted that the Company will be able to utilize existing back-up transponder or satellite capacity |
| In the event of any transmission interruption, the Company may incur substantial additional costs to enter into new arrangements and be unable to broadcast its signal for some period of time |
| THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR ON AIR MISREPRESENTATIONS OR IF PEOPLE OR PROPERTIES ARE HARMED BY PRODUCTS SOLD BY THE COMPANY Products sold by the Company and representations related to such products may expose the Company to potential liability from claims by purchasers of such products, subject to the Companyapstas rights, in certain instances, to seek indemnification against such liability from the manufacturers of such products |
| In addition to potential claims of personal injury, wrongful death or damage to personal property, the live unscripted nature of the Companyapstas television broadcasting may subject the Company to claims of misrepresentation by its customers, the Federal Trade Commission and state attorneys general |
| The Company has generally required the manufacturers and vendors of these products to carry product liability and errors and omissions insurance, although in certain instances the vendor may not be formally required to carry product liability insurance |
| There can be no assurance that these parties will continue to maintain this insurance or that this coverage will be adequate or even available with respect to any particular claims |
| There can be no assurance that the Company will be able to maintain such coverage or obtain additional coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims or even be available with respect to any particular claim |
| Product liability claims could result in a material adverse impact on the Companyapstas financial performance |
| THE COMPANY &apos S VALUEPAY INSTALLMENT PAYMENT PROGRAM COULD LEAD TO SIGNIFICANT UNPLANNED CREDIT LOSSES IF THE COMPANY &apos S CREDIT LOSS RATE WAS TO DETERIORATE The Company utilizes an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to six equal monthly installments |
| As of February 4, 2006 and January 31, 2005, the Company had approximately dlra77cmam447cmam000 and dlra61cmam894cmam000, respectively, due from customers under the ValuePay installment program |
| The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments |
| While credit losses have historically been within the Companyapstas estimates for such losses, there is no guarantee that the Company will continue to experience the same credit loss rate that it has in the past |
| A significant increase in the Companyapstas credit losses could result in a material adverse impact on the Companyapstas financial performance |
| THE COMPANY PLACES A SIGNIFICANT RELIANCE ON TECHNOLOGY AND INFORMATION MANAGEMENT TOOLS TO RUN ITS EXISTING BUSINESSES, THE FAILURE OF WHICH COULD ADVERSELY IMPACT THE COMPANY &apos S OPERATIONS The Companyapstas businesses are dependent, in part, on the use of sophisticated technology, some of which is provided to the Company by third parties |
| Such technologies include, but are not necessarily limited to, satellite based transmission of the Companyapstas programming, use of the Internet in relation to the Companyapstas on-line business, new digital technology used to manage and supplement the Companyapstas television broadcast operations and a network of complex computer hardware and software to manage an ever increasing need for information and information management tools |
| The failure of any of these technologies, or the Companyapstas inability to have this technology supported, updated, expanded or integrated into other technologies, could adversely impact the operations of the Company |
| Although the Company has, when possible, developed alternative sources of technology and built redundancy into its computer networks and tools, there can be no assurance that the Companyapstas effort to date would protect the Company against all potential issues or disaster occurrences related to the loss of any such technologies or their use |
| 18 THE EXPANSION OF DIGITAL CABLE COMPRESSION TECHNOLOGY MAY ADVERSELY IMPACT THE COMPANY &apos S ABILITY TO COMPETE FOR TELEVISION VIEWERS A significant number of cable operators have started to offer cable programming on a digital basis |
| The use of digital compression technology provides cable companies with greater channel capacity |
| While greater channel capacity increases the opportunity for the Company to be more widely distributed, it also may adversely impact the Companyapstas ability to compete for television viewers to the extent it results in (i) higher channel position; (ii) placement of the Companyapstas programming in separate programming tiers, or (iii) an expanding universe of programming choices all competing for the same audience viewership |
| THE UNANTICIPATED LOSS OF ONE OF THE COMPANY &apos S LARGER VENDORS COULD IMPACT THE COMPANY &apos S SALES ON A TEMPORARY BASIS The Company obtains products from domestic and foreign manufacturers and suppliers and is often able to make purchases on favorable terms based on the volume of its transactions |
| Many of the Companyapstas purchasing arrangements with its vendors include inventory terms that allow for return privileges of a portion of the order or stock balancing |
| The Company has not historically entered into long term supply arrangements that would require vendors to provide products on an ongoing basis |
| In fiscal 2005, products purchased from one vendor accounted for approximately 19prca of the Companyapstas consolidated net sales |
| The Company believes that it could find alternative sources for this vendorapstas products if this vendor ceased supplying merchandise; however, the unanticipated loss of any large supplier could impact the Companyapstas sales on a temporary basis |
| THE COMPANY &apos S INABILITY TO RECRUIT AND RETAIN KEY EMPLOYEES MAY ADVERSELY IMPACT THE COMPANY &apos S ABILITY TO SUSTAIN GROWTH The Companyapstas continued growth is contingent, in part, on its ability to retain and recruit employees that have the unique skills necessary for a business that demands knowledge of the general retail industry, television production, direct-to-consumer marketing and fulfillment and the Internet |
| The marketplace for such employees is very competitive and limited, particularly for on-air hosts |
| The Companyapstas growth may be adversely impacted if the Company is unable to attract and retain these key employees |
| During fiscal 2004, the Company experienced the loss of a number of experienced television hosts |
| THE COMPANY &apos S GROWTH AND PROFITABILITY COULD BE ADVERSELY AFFECTED IF ITS SALES VOLUME DOES NOT MEET EXPECTATIONS TO COVER THE COMPANY &apos S HIGH FIXED COST INFRASTRUCTURE The Companyapstas television home shopping business operates with a high fixed cost base, which is primarily driven by fixed contractual fees paid to cable and satellite operators to carry the Companyapstas programming |
| In addition, in fiscal 2004 the Company embarked on a series of new investment initiatives that required significant up-front investment |
| These new initiatives included: increased marketing support, improved customer experience, enhanced on-air quality and improved business intelligence |
| In order to attain profitability, the Company must achieve sufficient sales volume by acquiring new customers and retaining existing customers to cover these high fixed costs and new spending initiatives |
| The Companyapstas growth and profitability could be adversely impacted if sales volume does not meet expectations, as the Company will have limited immediate capability to reduce its fixed operating expenses to mitigate any potential sales shortfall |
| THE COMPANY &apos S TELEVISION HOME SHOPPING AND INTERNET BUSINESSES ARE SENSITIVE TO ECONOMIC CONDITIONS AND MAJOR NEWS EVENTS, WHICH COULD ADVERSELY AFFECT VIEWERSHIP AND CONSUMER CONFIDENCE AND ULTIMATELY NET SALES The Companyapstas businesses are sensitive to general economic conditions and business conditions affecting consumer spending |
| The Companyapstas two major categories of sales merchandise are jewelry and electronics, which due to their nature and relatively higher price points are more economically sensitive to consumer demand than other product categories |
| Unfavorable economic conditions and/or a loss of consumer confidence may lead to a reduction in consumer spending generally and in home shopping specifically, and may lead to a reduction in consumer spending on the types of merchandise the Company currently offers on its television 19 programming and over the Internet |
| Although the Companyapstas current plan and effort is to further diversify its product mix away from primarily jewelry and computers, future revenue growth could be adversely affected if overall consumer spending or the demand for jewelry and computers decline |
| Additionally, the Companyapstas television audience and sales revenue can be significantly impacted by major world or domestic events, which divert audience attention away from the Companyapstas programming |
| Economic conditions may also have a material adverse impact on the financial strength of the Companyapstas vendors and suppliers, some of whom are focused on a limited range of product categories or who are dependent on home shopping as a primary outlet for their sales |