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Article by DailyStocks_admin    (11-10-08 04:59 AM)

Filed with the SEC from Oct 23 to Oct 29:

ValueVision Media (VVTV)
Cannell Capital sent a letter to VVTV's CEO, suggesting a $1.20-a-share special dividend. Cannell had previously informed ValueVision of its intention to present several nominees to the board of the direct-marketing company. Cannell said it will evaluate its options in calling a special meeting of shareholders to vote on the dividend proposal. Cannell Capital has 1,943,123 shares (5.8%).

BUSINESS OVERVIEW

Business

When we refer to “we,” “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 February 2, 2008 is designated fiscal 2007, our fiscal year ended February 3, 2007 is designated fiscal 2006 and our fiscal year ended February 4, 2006 is designated fiscal 2005.


A. General

We are an integrated direct marketing company that markets, sells and distributes our products directly to consumers through various forms of electronic media and direct-to-consumer mailings otherwise known as multi-channel retailing. Our operating strategy incorporates television home shopping, internet e-commerce, direct mail marketing and fulfillment services. Our principal electronic media activity is our television home shopping business, which uses on-air spokespersons to market brand name merchandise and private label consumer products at competitive prices. Our live 24-hour per day television home shopping programming is distributed primarily through cable and satellite affiliation agreements and the purchase of month-to-month full- and part-time lease agreements of cable and broadcast television time. In addition, we distribute our programming through a company-owned full power television station in Boston, Massachusetts. We also market and sell a broad array of merchandise through our internet retailing websites, www.shopnbc.com and www.shopnbc.tv.

We have an exclusive license from NBC Universal, Inc., known as NBCU, for the worldwide use of an NBC-branded name and the peacock image for a period ending in May 2011. Pursuant to the license, we operate our television home shopping network under the ShopNBC brand name and operate our internet website under the ShopNBC.com brand name.

Television and Internet Retailing

Our principal electronic media activity is our live 24-hour per day television home shopping network program. Our home shopping network is the third largest television home shopping retailer in the United States. Through our merchandise-focused television programming, we sell a wide variety of products and services directly to consumers. Sales from our television and companion internet website business, including shipping and handling revenues, totaled $767,276,000, $755,302,000 and $680,592,000 representing 98% of consolidated net sales for fiscal 2007, 2006 and 2005. Products are presented by on-air television home shopping sales persons and guests; viewers may then call 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 facility and is transmitted nationally via satellite to cable system operators, satellite dish owners and to our full power broadcast television station WWDP TV-46 in Boston, Massachusetts.

Products and Product Mix

Products sold on our television network and internet shopping website include jewelry, watches, computers and other electronics, housewares, apparel, cosmetics, seasonal items and other merchandise. We believe that having a broad diversity of products appeals to a larger segment of potential customers and is important to our growth. Our product diversification 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 hour in our television home shopping and internet operation.

Home products. Home products consist of products for the home, including home electronics such as televisions and computers, mattresses, lamps and other home furnishings.

Watches, apparel and other. Watches, apparel and other consists of clothing and footwear for men and women, as well as watches, cosmetics, health and beauty items, coins, seasonal merchandise and other unique items.


B. Business Strategy

We endeavor to be positioned as a profitable and innovative leader in multi-channel retailing in the United States. The following strategies were pursued during fiscal 2007 to increase revenues and profitability and grow our active customer base, for both television and internet sales: (i) continue to optimize our mix of product categories offered on television and the internet in order to appeal to a broader population of potential customers; (ii) continue the growth of our internet business through the innovative use of technology and marketing efforts, such as advanced search capabilities, personalization, internet video, affiliate agreements and internet-based auction capabilities; (iii) obtain cost-effective distribution agreements for our television programming with cable and satellite operators, as well as pursuing other means of reaching customers such as through webcasting, internet videos and internet-based broadcasting networks; (iv) increase the productivity of each hour of television programming, through a focus on television offers of merchandise that maximizes margin dollars per hour and marketing efforts to increase the number of customers within the households currently receiving our television programming; (v) continue to enhance our television broadcast quality, programming, website features and customer support; (vi) increase the average order size through sales initiatives such as add-on sales, continuity programs and warranty sales; and (vii) leverage the strong brand recognition of the NBC brand name.

At the beginning of fiscal 2008, a new chief executive officer and three new industry-experienced senior executives joined us. These new senior executives are reviewing our strategy for long-term growth in revenues and profits, in conjunction with the board of directors and other members of management, and will develop a plan for improving our strategic focus during fiscal 2008. Some of the key focus areas include: improving the customer experience; retaining and growing the core customer base of repeat customers; shifting the merchandise mix and price points to appeal to the core female customer; broadening the vendor base; and improving business disciplines and execution.


C. Television Program Distribution and Internet Operations

Television Home Shopping Network

Satellite Delivery of Programming. Our programming is presently distributed via a leased communications satellite transponder to cable systems, a full power television station in Boston, certain other broadcast stations and satellite dish owners. On January 31, 2005, we entered into a new 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 February 2006. The agreement provides us with preemptable back-up services if satellite transmission is interrupted.

Cable Affiliation Agreements. As of February 2, 2008, we have entered into affiliation agreements with parties representing approximately 1,400 cable systems that require each operator to offer our television home shopping programming substantially on a full-time basis over their systems. The stated terms of the affiliation



agreements typically ranged originally from three to twelve years. Under certain circumstances, the television operators may cancel the agreements prior to their expiration. The affiliation agreements generally provide that we will pay each operator a monthly access fee and marketing support payments based on the number of homes receiving our programming. Certain of the affiliation agreements also required payment of one-time initial launch fees, which are capitalized and amortized on a straight-line basis over the term of the agreements. We are seeking to enter into affiliation agreements with additional television operators providing for full- or part-time carriage of our programming.

A significant number of cable operators have started to offer cable programming on a digital basis. The use of digital compression technology provides cable companies with greater channel capacity. While greater channel capacity increases the opportunity for distribution and, in some cases, reduces subscriber fees paid by us, it also may adversely impact our ability to compete for television viewers to the extent it results in 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 2007, there were approximately 112 million homes in the United States with at least one television set. Of those homes, there were approximately 66 million basic cable television subscribers and approximately 28 million direct-to-home satellite subscribers or DTH. Homes that receive our television home shopping programming 24 hours per day are each counted as one full-time equivalent, or FTE, and homes that receive our programming for any period less than 24 hours are counted based upon an analysis of time of day and day of week that programming is received. We have continued to experience growth in the number of FTE subscriber homes that receive our programming.

As of February 2, 2008, we served approximately 72.4 million subscriber homes, or approximately 68.9 million average FTEs, compared with approximately 69.2 million subscriber homes, or approximately 65.2 million average FTEs, as of February 3, 2007. As of February 2, 2008, our television home shopping programming was carried by 1,454 broadcasting systems on a full-time basis, compared to 1,320 broadcasting systems on February 3, 2007, and 60 broadcasting systems on a part-time basis for both fiscal years. The total number of cable homes that presently receive our television home shopping programming represents approximately 67% of the total number of cable subscribers in the United States. NBCU has the exclusive right to negotiate on our behalf for the distribution of our television home shopping service pursuant to the terms of the strategic alliance between us, NBCU and GE Capital Equity Investments, Inc. (now known as GE Commercial Finance — Equity, and referred to in this report as GE Equity) entered into in March 1999. See “Strategic Relationships — Strategic Alliance with NBCU and GE Equity Strategic Alliance” discussed below.

Direct Satellite Service Agreements. Our programming is carried on the direct-to-home, or 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 television home shopping programming. As of February 2, 2008, our programming reached approximately 28 million DTH subscribers on a full-time basis.

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, Massachusetts market over the air via a full power television broadcast station owned by us. In fiscal 2007 and fiscal 2006, our Boston, Massachusetts station and “C”-band satellite dish transmissions were responsible for less than 5% of our total consolidated net sales.

Internet Website

Our website, ShopNBC.com, provides customers with a broad array of consumer merchandise, including all products being featured on our television programming. The website includes 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 and clearance and auction sites.

Internet sales for fiscal 2007 increased at a greater rate than television sales over fiscal 2006. Internet net sales in fiscal 2007 increased by 18% over internet net sales in fiscal 2006, while television home shopping net sales in fiscal 2007 decreased by 4% over television home shopping net sales in fiscal 2006. Sales from our website



business, inclusive of shipping and handling revenues, totaled $217,854,000, $184,139,000 and $146,067,000, representing 28%, 24% and 21% of consolidated net sales for fiscal 2007, 2006 and 2005, 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. As the role and importance of e-commerce has grown in the United States in recent years, 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. These laws and regulations could increase the costs and liabilities associated with our e-commerce activities and increase the price of our products to consumers, without an increase in our revenue or net income. On October 31, 2007, the United States enacted a seven-year moratorium on internet access taxes extending a ban on internet taxes that was set to expire on November 1, 2007. In addition, in November 2002, a number of states approved a multi-state agreement to simplify state sales tax laws by establishing one uniform system to administer and collect sales taxes on traditional retailers and electronic commerce merchants. The agreement became effective on October 3, 2005, although fewer than half of the states have become members by enacting implementation legislation. 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. Adding sales tax to our internet transactions could negatively impact consumer demand.

The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, was signed 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. 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.


D. Strategic Relationships

NBC 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.

Strategic Alliance with NBCU and GE Equity

In March 1999, we entered into a strategic alliance with NBCU and GE Equity. Pursuant to the terms of the transaction, NBCU and GE Equity acquired 5,339,500 shares of our Series A Redeemable Convertible Preferred Stock between April 1999 and June 1999, and NBCU was issued a warrant to acquire 1,450,000 shares of our common stock, known as the distribution warrants, with an exercise price of $8.29 per share, under a distribution and marketing agreement discussed below. In addition, we issued to GE Equity a warrant, known as the investment warrant, to increase its potential aggregate equity stake (together with its affiliates, including NBCU) at the time of exercise to approximately 40%. The preferred stock is convertible into an equal number of shares of our common stock, subject to anti-dilution adjustments, has a mandatory redemption on the tenth anniversary of its issuance or upon a change of control at $8.29 per share, participates in dividends on the same basis as the common stock and has a liquidation preference over the common stock and any other junior securities. On July 6, 1999, GE Equity exercised the investment warrant and acquired an additional 10,674,000 shares of our common stock for an aggregate of $178,370,000, or $16.71 per share. Following the exercise of the investment warrant, the combined ownership of our company by GE Equity and NBCU on a diluted basis was approximately 40%. In February 2005, GE Equity sold 2,000,000 shares of our common stock to several purchasers. In July 2005, GE Equity entered into agreements to sell an additional 2,604,932 shares of our common stock in privately negotiated transactions to a number of different purchasers; this sale was completed on September 15, 2005. As of the end of fiscal 2007, GE Equity and NBCU currently have a combined ownership in our company of approximately 29% on a diluted basis.

GE Equity Shareholder Agreement

In March 1999, we also entered into a shareholder agreement with GE Equity, which provides for certain corporate governance and standstill matters. The shareholder agreement (together with the certificate of designation of the preferred stock) initially provided that GE Equity and NBCU would be entitled to designate nominees for two out of seven members of our board of directors so long as their aggregate beneficial ownership was at least equal to 50% of their initial beneficial ownership, and one out of seven members so long as their aggregate beneficial ownership was at least 10% of the “adjusted outstanding shares of common stock,” as defined in the shareholder agreement. The shareholder agreement also requires the consent of GE Equity prior to our entering into any material agreements with certain restricted parties (broadcast networks and internet portals in certain limited circumstances). Finally, we are prohibited from exceeding certain thresholds relating to the issuance of voting securities over a twelve-month period, the payment of quarterly dividends, the repurchase of common stock, acquisitions (including investments and joint ventures) or dispositions, and the incurrence of debt greater than the larger of $40 million or 30% of our total capitalization. We are also prohibited from taking any action that would cause any ownership interest by us in TV broadcast stations from being attributable to GE Equity, NBCU or their affiliates.

The shareholder agreement provides that during the standstill period (as defined in the 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; (iii) making or in any way participating in any solicitation of proxies; (iv) depositing any securities of our company in a voting trust; (v) forming, joining or in any way becoming a member of a “13D Group” with respect to any voting securities of our company; (vi) arranging any financing for, or providing any financing

CEO BACKGROUND

Rene G. Aiu joined us as President and Chief Executive Officer in March 2008. From July 2005 until she accepted her position with ShopNBC, Ms. Aiu served as an independent consultant and provided new business development services in the television shopping and interactive television areas to major corporate clients, including InterActive Corporation and Liberty Global Inc. From January 2004 until June 2007, she also was a director of Jupiter SHOP Channel Japan. From February 2003 through May 2005, Ms. Aiu was the President and Chief Executive Officer of Parti-TV Japan, a venture of Liberty Global Inc. and Sumitomo Corporation through Jupiter TV, Japan. From April 2000 through February 2003, Ms. Aiu was the President and Chief Executive Officer of Jupiter SHOP Channel Japan, and was promoted to the position of Chairman and Chief Executive Officer from February 2003 through December 2003. Before joining Jupiter SHOP Channel Japan, Ms. Aiu worked in various capacities as an international business consultant in the television shopping arena and from February 1992 through July 1995 was Senior Vice President of Marketing, Sales, Programming & Production at Home Shopping Network. Prior to her position at Home Shopping Network, Ms. Aiu held senior level management positions at JCPenney Television Shopping Network, Cable Value Network, which later merged with QVC, and Twentieth Century Fox. From time to time in her professional career, including since July 2005, Ms. Aiu worked on various TV shopping related projects in a consultancy capacity across the globe with TCI International, HSN International and Liberty Global.

Frank P. Elsenbast served as our Vice President of Financial Planning and Analysis from September 2003 to October 2004, when he became Vice President and Chief Financial Officer. Mr. Elsenbast was promoted to Senior Vice President in May 2006. Mr. Elsenbast has over 19 years of corporate finance, operations analysis and public accounting experience. From May 2001 to September 2003, he served as Finance Director and from May 2000 to May 2001 he served as Finance Manager at our company. Prior to joining us, Mr. Elsenbast served in various analytical and operational roles with The Pillsbury Company from May 1995 through May 2000. Mr. Elsenbast is a CPA and began his career with Arthur Andersen, LLP.

Nathan E. Fagre joined us as Senior Vice President, General Counsel and Secretary in May 2000. From 1996 to 2000, Mr. Fagre was Senior Vice President and General Counsel of Occidental Oil and Gas Corporation in Los Angeles, California, the oil and gas operating subsidiary of Occidental Petroleum Corporation. From 1995 to 1996, Mr. Fagre held other positions in the legal department at Occidental. His previous legal experience included corporate and securities law practice with the law firms of Sullivan & Cromwell in New York and Gibson, Dunn & Crutcher in Washington, D.C. Mr. Fagre served on the board of Ralph Lauren Media, L.L.C. as our representative from October 2004 through April 2007. In addition, Mr. Fagre is a director, member of the executive committee and chair-elect of the Electronic Retailing Association, an industry association serving the television home shopping, e-commerce, infomercial and electronic direct-response industry.

Glenn K. Leidahl joined us as Chief Operating Officer in April 2008. Since 1994, Mr. Leidahl served as Managing Director of GLK Management Consulting, LLP, where he and his associates provided consulting and bridge management services in the launch and operation of television and web shopping ventures for QVC, Sportsfair America, HSN, and Liberty Media. Mr. Leidahl also served as Director of Planning and Development and then Vice President of Affiliate Relations for Cable Value Network, a 24-hour television home shopping network, from 1986 through its sale to QVC in 1990. Following the sale, Mr. Leidahl served as a consultant to QVC to integrate the marketing programs of the two stations. Mr. Leidahl also served as the President of MarQuest, Inc., which provides product and fundraising services to the non-profit sector, as General Manager for Genmar, Inc., a marina and restaurant complex, and as Chief Operating Officer of Watkins Inc., a national multilevel marketing company.

Terry T. Curtis joined us in April 2008 as Senior Vice President — Customer Analytics and Sales Planning. From August 2005 to October 2007, Mr. Curtis served as Chief Financial Officer at Liberty Global’s Jupiter SHOP Channel Japan until the company was sold. From June 2004 to August 2005 Mr. Curtis was Senior Vice President of Finance International for HSN and Vice President of Finance International from April 2000 to January 2002. From January 2002 to June 2004, Mr. Curtis served as Chief Financial Officer and Chief Operating Officer of Home Shopping Europe, AG, a German tele-shopping, e-commerce subsidiary of IAC/HSN. Prior to April 2000, Mr. Curtis held senior manager roles at The Timberland Company and Honeywell Bull.

John D. Gunder joined us in April 2008 as Senior Vice President — Media & On-Air Sales. From January 2000 to March 2008, Mr. Gunder operated his own consulting business, offering client services to LiveShop (Netherlands), IAC, Liberty Global, and Jupiter SHOP Channel. From April 1996 to December 1998, Mr. Gunder held senior level positions at TCI International’s Jupiter SHOP Channel Japan, including General Manager of Production and Executive Producer. Prior to April 1996, Mr. Gunder was Vice President of Production Design and Styling for HSN and started his home shopping career with the JCPenney Television Shopping Channel in Hollywood as Creative Director and Special Project Director.

Geoffrey Smith joined us as Vice President of ShopNBC.com in August 2006. Prior to joining, from June 2005 to July 2006 Mr. Smith was Senior Vice President, Interactive Commerce for the Shop At Home network, a division of E.W. Scripps Company where he was responsible for online commerce for Shop At Home, Food Network Store and the HGTV and DIY Stores. From June 2000 to May 2005 Mr. Smith served as President, Internet Division for Creative Catalog Corp. From November 1997 to May 2000 he served as Vice President of Retail for Hickory Farms and from September 1996 to October 1997 served as Director of the AOL Shopping Channel for America Online.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

ValueVision Media, Inc. is an integrated direct marketing company that markets its products to consumers through various forms of electronic media and direct-to-consumer mailings otherwise known as multi-channel retailing. Our operating strategy incorporates television home shopping, internet e-commerce, direct mail and on-line marketing and fulfillment services. Our live 24-hour per day television home shopping programming is distributed primarily through cable and satellite affiliation agreements and on-line through ShopNBC.TV. We have an exclusive license from NBC Universal, Inc., known as NBCU, for the worldwide use of an NBC-branded name and the peacock image for a period ending in May 2011. Pursuant to the license, we operate our television home shopping network under the ShopNBC brand name and operate our internet website under the ShopNBC.com brand name.

Products and Customers

Products sold on our television home shopping network and internet shopping website include jewelry, watches, computers and other electronics, housewares, apparel, cosmetics, seasonal items and other merchandise. Jewelry is our largest single category of merchandise, representing 38% of television home shopping and internet net sales in fiscal 2007, 39% in fiscal 2006 and 43% in fiscal 2005. Home products, including electronics product categories, represented approximately 37% of television home shopping and internet net sales in fiscal 2007, 37% in fiscal 2006 and 36% in fiscal 2005. Watches, apparel and health and beauty product categories represented approximately 25% of television home shopping and internet net sales in fiscal 2007, 24% in fiscal 2006 and 21% in fiscal 2005. Our strategy is to continue to develop new product offerings across multiple merchandise categories as needed in response to both customer demand and in order to maximize margin dollars per minute in our television home shopping and internet operations. Our customers are primarily women over the ages of 35 with an average annual household income in excess of $70,000 and who make purchases based primarily on convenience, unique product offerings, value and quality of merchandise.

Company Strategy

We endeavor to be positioned as a profitable and innovative leader in multi-channel retailing in the United States. The following strategies were pursued during fiscal 2007 to increase revenues and profitability and grow our active customer base, for both television and internet sales: (i) continue to optimize our mix of product categories offered on television and the internet in order to appeal to a broader population of potential customers; (ii) continue the growth of our internet business through the innovative use of technology and marketing efforts, such as advanced search capabilities, personalization, internet video, affiliate agreements and internet-based auction capabilities; (iii) obtain cost-effective distribution agreements for our television programming with cable and satellite operators, as well as pursuing other means of reaching customers such as through webcasting, internet videos and internet-based broadcasting networks; (iv) increase the productivity of each hour of television programming, through a focus on television offers of merchandise that maximizes margin dollars per hour and marketing efforts to increase the number of customers within the households currently receiving our television programming; (v) continue to enhance our television broadcast quality, programming, website features and customer support; (vi) increase the average order size through sales initiatives such as add-on sales, continuity programs and warranty sales; and (vii) leverage the strong brand recognition of the NBC brand name.

At the beginning of fiscal 2008, a new chief executive officer and three new industry-experienced senior executives joined us. These new senior executives are reviewing our strategy for long-term growth in revenues and profits, in conjunction with the board of directors and other members of management, and will develop a plan for improving our strategic focus during fiscal 2008. Some of the key focus areas include: improving the customer experience; retaining and growing the core customer base of repeat customers; shifting the merchandise mix and price points to appeal to the core female customer; broadening the vendor base; and improving business disciplines and execution.

Challenge

Our television home shopping business operates with a high fixed cost base, which is primarily due to fixed contractual fees paid to cable and satellite operators to carry our programming. In order to attain profitability, we must achieve sufficient sales volume through the acquisition of new customers and the increased retention of existing customers to cover our high fixed costs or reduce the fixed cost base for our cable and satellite distribution. Our growth and profitability could be adversely impacted if sales volume does not meet expectations, as we will have limited immediate capability to reduce our fixed cable and satellite distribution operating expenses to mitigate any potential sales shortfall.

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 types of consumer retail businesses, including traditional “brick and mortar” department stores, discount stores, warehouse stores and specialty stores; other television home shopping and e-commerce retailers; infomercial companies; catalog and mail order retailers and other direct sellers.

In the competitive television home shopping sector, we compete with QVC Network, Inc. and HSN, Inc., both of whom are substantially larger than we are in terms of annual revenues and customers, and whose programming is carried more broadly to U.S. households than is our programming. Both QVC and HSN are owned by large, well-capitalized parent companies in the media business, who are also expanding into related e-commerce and web-based businesses. The American Collectibles Network, known as ACN, 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.

The e-commerce sector is also highly competitive, and we are in direct competition with numerous other internet retailers, many of whom are larger, more well-financed and/or have a broader customer base. Certain of our competitors in the television home shopping sector have acquired internet businesses complementary to their existing internet sites, which may pose new competitive challenges for our company.

We anticipate continuing competition for viewers and customers, for experienced home shopping personnel, for distribution agreements with cable and satellite systems, and for vendors and suppliers — not only from television home shopping companies, but also from other companies that seek to enter the home shopping and internet retail industries, including telecommunications and cable companies, television networks, and other established retailers. We believe that our success in the TV home shopping and e-commerce sectors is dependent on a number of key factors, including (i) obtaining more favorable terms in our cable and satellite distribution agreements, (ii) increasing the number of households who purchase products from us, and (iii) increasing the dollar value of sales per customer to our existing customer base.

Results for Fiscal 2007

Consolidated net sales from continuing operations in fiscal 2007 were $781,550,000 compared to $767,275,000 in fiscal 2006, a 2% increase. The increase in consolidated net sales from continuing operations is directly attributable to increased net sales from our television home shopping and internet operations. Effective for fiscal 2005, the results of operations of FanBuzz have been presented as loss from discontinued operations in the accompanying consolidated statements of operations for fiscal 2005. Net sales attributed to our television home shopping and internet operations increased 2% to $767,276,000 in fiscal 2007 from $755,302,000 in fiscal 2006. We reported an operating loss of $23,052,000 and net income of $22,452,000, which included a pretax gain of $40,240,000 from the sale of RLM, in fiscal 2007. We reported an operating loss of $9,479,000 and a net loss of $2,396,000 in fiscal 2006. Operating expenses in fiscal 2007 included a $5,043,000 restructuring charge and CEO termination costs of $2,451,000.



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 long-term investments and 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:


• Accounts receivable. We utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to five equal monthly credit card installments in which we bear the risk for uncollectibility. As of February 2, 2008 and February 3, 2007, we had approximately $99,875,000 and $105,197,000 respectively, due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimates are used in determining the allowance for doubtful accounts and are based on historical write off and delinquency rates, historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. In determining these percentages, we review our historical write-off experience, current trends in the credit quality of the customer base as well as changes in credit policies and our sales mix. While credit losses have historically been within our expectations and the provisions established, during fiscal 2007 we saw a significant increase in bad debt write offs due to the recent deterioration of consumer credit coupled with our mix shift to higher delinquency product categories, increases in our average ValuePay installment length and increased sales to lower credit-score customers. Provision for doubtful accounts receivable (primarily related to our ValuePay program) for fiscal 2007, 2006 and 2005 were $12,613,000, $6,065,000 and $4,542,000, respectively. Based on our fiscal 2007 bad debt experience, a one-half point increase or decrease in our bad debt experience as a percentage of total television home shopping and internet sales would have an impact of approximately $3.8 million on consolidated distribution and selling expense.

• Inventory. We value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or realizable value, and reduce our balance by an allowance for excess and obsolete merchandise. As of February 2, 2008 and February 3, 2007, we had inventory balances of $79,444,000 and $66,622,000, respectively. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on a percentage of the inventory balance as determined by its age and specific product category. In determining these percentages, we look at our historical write-off experience, the specific merchandise categories on hand, our historic recovery percentages on liquidations, forecasts of future product television shows and the current market value of gold. Provision for excess and obsolete inventory for fiscal 2007, 2006 and 2005 were $1,811,000, $2,977,000 and $3,508,000, respectively. Based on our fiscal 2007 inventory write down experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately $181,000 on consolidated net sales less cost of sales (exclusive of depreciation and amortization).

• Product returns. We record a reserve as a reduction of gross sales for anticipated product returns at each month-end and must make estimates of potential future product returns related to current period product revenue. Our return rates on our television and internet sales have been approximately 32% to 33% over the past three fiscal years. We estimate and evaluate the adequacy of our returns reserve by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and

by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the sales returns reserve in any accounting period. Reserves for product returns for fiscal years 2007, 2006 and 2005 were $8,376,000, $8,498,000 and $7,658,000, respectively. Based on our fiscal 2007 sales returns, a one-point increase or decrease in our television and internet sales returns rate would have had an impact of approximately $4.7 million on consolidated net sales less cost of sales (exclusive of depreciation and amortization).


• Long-term investments. As of February 2, 2008 our investment portfolio included auction rate securities with an estimated fair value of $24,346,000 ($26,800,000 cost basis). Our auction rate securities are primarily variable rate debt instruments that have underlying securities with contractual maturities ranging from 17 to 42 years and interest rates that are reset at auction primarily every 28 days. These mostly AAA-rated auction rate securities, which met our investment guidelines at the time the investments were made, have failed to settle in auctions during fiscal 2007. At this time, these investments are not currently liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principle unless a future auction on these investments is successful. As a result, in fiscal 2007, we reduced the carrying value of these investments by $2,454,000 through other comprehensive income (loss) to reflect a temporary impairment on these securities. While we believe that our estimates and assumptions regarding the valuation of our investments are reasonable, different assumptions could have a material affect on our valuations. As of February 3, 2007, we had $4,139,000 of long-term equity investment in RLM recorded in connection with our equity share of RLM income under the equity method of accounting. On March 28, 2007, we sold our 12.5% ownership interest in RLM for approximately $43.8 million. See Note 2 to the consolidated financial statements.

• FCC broadcasting license. As of February 2, 2008 and February 3, 2007, we have recorded an intangible FCC broadcasting license asset totaling $31,943,000 as a result of our acquisition of Boston television station WWDP TV-46 in fiscal 2003. In assessing the recoverability of our FCC broadcasting license asset, which we determined to have an indefinite life, we must make assumptions regarding estimated projected cash flows, recent comparable asset market data and other factors to determine the fair value of the related reporting unit. We performed an impairment test with respect to our FCC broadcasting license in the fourth quarter of fiscal 2007 using resent comparable market data for this asset and a discounted cash flow analysis as stipulated by SFAS No. 142, Goodwill and other Intangible Assets , and determined that an impairment had not occurred. With respect to the FCC broadcasting license asset, the fair value of the reporting unit exceeded its carrying value. While we believe that our estimates and assumptions regarding the valuation of our reporting unit are reasonable, different assumptions or future events could materially affect our valuations.

• Intangible assets. As of February 2, 2008 and February 3, 2007, we had amortizable intangible assets totaling $11,480,000 and $13,993,000, respectively, for the trademark license agreement with NBCU and the distribution and marketing agreement entered into with NBCU. We performed an impairment test with respect to these amortizable intangible assets in the fourth quarter of fiscal 2007 using an undiscounted cash flow analysis as stipulated by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , and determined that an impairment had not occurred. In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets and reporting units.

• Stock-based compensation. We account for stock-based compensation issued to employees in accordance with Statement of Financial Accounting Standards No. 123(R) (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation,” and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). This standard requires compensation costs related to all share-based payment transactions to be recognized in the financial statements at fair value. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for stock volatility, option terms, risk-free interest rates and dividend yields. Expected volatilities are based on the historical volatility of our stock. Expected term is calculated using the simplified method taking into consideration the option’s contractual life and vesting



terms. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Expected dividend yields are not used in the fair value computations as we have never declared or paid dividends on our common stock. While we believe that our estimates and assumptions regarding the valuation of our share-based awards are reasonable, different assumptions could have a material affect on our valuations. See Note 6, Shareholders’ Equity — Stock-Based Compensation, for our disclosure regarding our share-based equity awards.


• Deferred taxes. We account for income taxes under the liability method of accounting whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income (loss). Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of such laws. We assess the recoverability of our deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In accordance with that standard, as of February 2, 2008 and February 3, 2007, we recorded a valuation allowance of approximately $56,530,000 and $63,194,000, respectively, for our net deferred tax assets and net operating and capital loss carryforwards. Based on our recent history of losses, a full valuation allowance was recorded in fiscal 2007, 2006 and 2005 and was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. Although management believes that our recent operating losses were heavily affected by a challenging retail economic environment and slowdown in consumer spending experienced by us and other merchandise retailers, we intend to maintain a full valuation allowance for our net deferred tax assets and loss carryforwards until sufficient positive evidence exists to support reversal of allowances.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
Company Description
We are an integrated multi-channel retailer that markets our products directly to consumers through various forms of electronic media and direct mailings. Our operating strategy incorporates television home shopping, e-commerce, direct mail and on-line marketing. Our live 24-hour per day television home shopping programming is distributed primarily through cable and satellite affiliation agreements and on-line through ShopNBC.TV. We have an exclusive license from NBC Universal, Inc., known as NBCU, for the worldwide use of an NBC-branded name and the peacock image for a period ending in May 2011. Pursuant to the license, we operate our television home shopping network under the ShopNBC brand name and operate our internet website under the ShopNBC.com brand name.
Products and Customers
Products sold on our television home shopping network and internet shopping website include jewelry, watches, computers and other electronics, housewares, apparel, cosmetics, seasonal items and other merchandise. Jewelry is our largest single category of merchandise, representing 39% and 41% of television home shopping and internet net sales for the respective three and six-month periods ended August 2, 2008 and represented 40% of television and internet net sales for the three and six-month periods ended August 4, 2007. Watches, coins & collectibles represented approximately 26% and 23% of television home shopping and internet net sales for the respective three and six-month periods ended August 2, 2008 and approximately 17% and 16% of television home shopping and internet net sales for the respective three and six-month periods ended August 4, 2007. Computers & electronics represented approximately 18% and 17% of television home shopping and internet net sales for the respective three and six-month periods ended August 2, 2008 and approximately 23% of television home shopping and internet net sales for the three and six-month periods ended August 4, 2007. Apparel, fashion accessories and health & beauty represented approximately 9% and 10% of television home shopping and internet net sales for the respective three and six-month periods ended August 2, 2008 and approximately 8% of television home shopping and internet net sales for the three and six-month periods ended August 4, 2007. Our strategy is to continue to develop new product offerings across multiple merchandise categories as needed in response to both customer demand and in order to maximize margin dollars per minute in our television home shopping and internet operations. Our customers are primarily women over the age of 35 with average annual household incomes in excess of $50,000 who make purchases based primarily on convenience, unique product offerings, value and quality of merchandise.
Company Strategy
We endeavor to be positioned as a profitable and innovative leader in multi-channel electronic (television and internet) retailing in the United States. The following strategies were pursued during fiscal 2007 in an effort to increase revenues and profitability and grow our active customer base, for both television and internet sales: (i) continue to optimize our mix of product categories offered on television and the internet in order to appeal to a broader population of potential customers; (ii) continue the growth of our internet business through the innovative use of technology and marketing efforts, such as advanced search capabilities, personalization, internet video, affiliate agreements and internet-based auction capabilities; (iii) obtain cost-effective distribution agreements for our television programming with cable and satellite operators, as well as pursuing other means of reaching customers such as through webcasting, internet videos and internet-based broadcasting networks; (iv) increase the productivity of each hour of television programming, through a focus on television offers of merchandise that maximizes margin dollars per hour and marketing efforts to increase the number of customers within the households currently receiving our television programming; (v) continue to enhance our television broadcast quality, programming, website features and customer support; and (vi) leverage the strong recognition of the NBC brand name.
During fiscal 2008, significant changes have taken place with respect to our chief executive officer position and other senior executive positions. We currently are reviewing our strategy for short-term and long-term profitability, in conjunction with the board of directors and other members of management, and are developing a plan for improving our financial performance during the remainder of fiscal 2008 and beyond.
Challenge
Our television home shopping business operates with a high fixed cost base, which is primarily due to fixed contractual fees paid to cable and satellite operators to carry our programming. In order to attain profitability, we must achieve sufficient sales volume through the acquisition of new customers and the increased retention of existing customers to cover our high fixed costs or reduce the fixed cost base for our cable and satellite distribution. Our growth and profitability could be adversely impacted if sales volume does not meet expectations, as we will have limited immediate capability to reduce our fixed cable and satellite distribution operating expenses to mitigate any potential sales shortfall.
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 types of consumer retail businesses, including traditional “brick and mortar” department stores, discount stores, warehouse stores and specialty stores; other television home shopping and e-commerce retailers; infomercial companies; and catalog and mail order retailers and other direct sellers.
In the competitive television home shopping sector, we compete with QVC Network, Inc. and HSN, Inc., both of whom are substantially larger than we are in terms of annual revenues and customers, and whose programming is carried more broadly to U.S. households than is our programming. In August 2008, HSN announced its debut as an independent, publicly traded company. The American Collectibles Network, known as ACN, 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.

The e-commerce sector also is highly competitive, and we are in direct competition with numerous other internet retailers, many of whom are larger, more well-financed and/or have a broader customer base. Certain of our competitors in the television home shopping sector have acquired internet businesses complementary to their existing internet sites, which may pose new competitive challenges for our company.
We anticipate continuing competition for viewers and customers, for experienced home shopping personnel, for distribution agreements with cable and satellite systems, and for vendors and suppliers — not only from television home shopping companies, but also from other companies that seek to enter the home shopping and internet retail industries, including telecommunications and cable companies, television networks, and other established retailers. We believe that our success in the TV home shopping and e-commerce sectors is dependent on a number of key factors, including (i) obtaining more favorable terms in our cable and satellite distribution agreements, (ii) increasing the number of customers who purchase products from us, and (iii) increasing the dollar value of sales per customer from our existing customer base.
Results for the Second Quarter of Fiscal 2008
Consolidated net sales for the 2008 second quarter were $141,927,000 compared to $190,613,000 for the 2007 second quarter, a 26% decrease. The decrease in consolidated net sales is directly attributable to the decreased net sales from our television home shopping and internet operations. We reported an operating loss of ($16,427,000) and a net loss of ($15,684,000) for the 2008 second quarter. We reported an operating loss of ($6,225,000) and a net loss of ($5,409,000) for the 2007 second quarter.
Sale of Ralph Lauren Media Equity Investment
On March 28, 2007, we entered into a membership interest purchase agreement with Polo Ralph Lauren, NBCU and certain NBCU affiliates, pursuant to which we sold our 12.5% membership interest in Ralph Lauren Media, LLC, known as RLM to Polo Ralph Lauren for an aggregate purchase price of $43,750,000 in cash. As a result of this transaction, we recorded a pre-tax gain of $40,240,000 on the sale of RLM in the first quarter of fiscal 2007.
Restructuring Costs
On May 21, 2007, we announced the initiation of a restructuring of our operations that included a 12% reduction in the salaried workforce, a consolidation of its distribution operations into a single warehouse facility, the exit and closure of a retail outlet store and other cost saving measures. On January 14, 2008, we announced additional organizational changes and cost-saving measures following a formal business review conducted by management and an outside consulting firm. As a result of the business review, our organizational structure was simplified and streamlined to focus on profitability. As part of this restructuring, we reduced our salaried workforce by an additional 10%. As a result, we recorded a $5,043,000 restructuring charge for fiscal 2007 and an additional $330,000 charge for the six-month period ended August 2, 2008. Restructuring costs include employee severance and retention costs associated with the consolidation and elimination of approximately 80 positions across our company including four senior managers. In addition, restructuring costs also include incremental charges associated with the consolidation of our distribution and fulfillment operations into a single warehouse facility, the closure of a retail outlet store, fixed asset impairments incurred as a direct result of the operational consolidation and closures and restructuring advisory service fees.
Chief Executive Officer Transition Costs
On October 26, 2007, we announced that William J. Lansing, at the request of the board of directors, stepped down as president and chief executive officer and had left our board of directors. In conjunction with Mr. Lansing’s resignation, we recorded a charge to income of $2,451,000 during fiscal 2007 and an additional $830,000 for the six-month period ended August 2, 2008 relating primarily to severance payments to Mr. Lansing and costs associated with the hiring of a new chief executive officer.
On August 22, 2008, we announced that our board of directors appointed John D. Buck to serve as our chief executive officer replacing Rene Aiu, who joined our company as president and chief executive officer in March 2008. Mr. Buck was serving as executive chairman of the board and served as interim chief executive officer from November 2007 to March 2008. We also announced that the board appointed Keith R. Stewart, a television home shopping veteran who recently served as a senior executive with QVC, to serve as ShopNBC’s president and chief operating officer. Mr. Buck remains chairman of the board and Mr. Stewart has been appointed to the board. In addition, we also announced the departures of three additional senior officers who were named to their positions in April 2008. At this time we cannot estimate any potential costs that may be associated with the departures of these four officers.

Limitation on Must-Carry Rights
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 3.2 million full-time equivalent households, or FTE’s, receiving our programming. We own the Boston television station and have carriage contracts with the 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 television station ($31.9 million) may become partially impaired. At this time, we cannot predict the timing or the outcome of the FCC’s action to update the public record on this issue.
Strategic Alternatives
On September 11, 2008, our board of directors announced that it had appointed a special committee of independent directors to review strategic alternatives to maximize stockholder value. The committee currently consists of two directors: George Vandeman, who will serve as the committee’s chairman, and Robert Korkowski. We expect to appoint an additional independent director to the board, who we anticipate will serve on the special committee. The special committee retained Piper Jaffray & Co., a nationally-recognized investment banking firm, as its financial advisor. There can be no assurance that the review process will result in the announcement or consummation of a sale of our company or any other strategic alternative. We do not intend to comment publicly with respect to any potential strategic alternatives we may consider pursuing unless or until a specific alternative is approved by our board of directors.
Results of Operations

Program Distribution
Our television home shopping programming was available to approximately 71.7 million average full time equivalent, or FTE, households for the second quarter of fiscal 2008 and approximately 68.9 million average FTE households for the second quarter of fiscal 2007. Average FTE subscribers grew 4% in the second quarter of fiscal 2008, resulting in a 2.7 million increase in average FTE’s versus the prior year comparable quarter. The increase was driven by continued strong growth in satellite distribution of our programming and increased distribution of our programming on digital cable. We anticipate that our cable programming distribution will increasingly shift towards a greater mix of digital as opposed to analog cable tiers, both through growth in the number of digital subscribers and through cable system operators moving programming that is carried on analog channels over to digital channels. Nonetheless, because of the broader universe of programming choices available for viewers in digital systems and the higher channel placements commonly associated with digital tiers, the shift towards digital systems may adversely impact our ability to compete for television viewers even if our programming is available in more homes. Our television home shopping programming is also simulcast live 24 hours a day, 7 days a week through our internet website, www.shopnbc.tv , which is not included in total FTE households. As discussed in more detail under “Cable and Satellite Distribution Agreements,” a majority of our cable and satellite distribution agreements are scheduled to expire at the end of the 2008 calendar year and it may be difficult or costly to renew these agreements.
Cable and Satellite Distribution Agreements
We have entered into cable and satellite distribution agreements that represent approximately 1,400 cable systems that require each operator to offer our television home shopping programming substantially on a full-time basis over their systems. The stated terms of these existing agreements typically range from three to twelve years. Under certain circumstances, the television operators may cancel the agreements prior to their expiration. If these agreements are terminated, the termination may materially or adversely affect our business. Cable and satellite distribution agreements representing a majority of the total cable and satellite households who currently receive our television programming are scheduled to expire at the end of the 2008 calendar year. While we and NBCU, which assists us in our relationships with the cable and satellite distribution operators that carry our programming, have begun discussions with certain cable and satellite system operators regarding extensions or renewals of these agreements, no assurance can be given that we will be successful in negotiating renewal contracts with all the existing systems, or that the financial and other terms of renewal will be on acceptable terms. Failure to successfully renew 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. In addition, unless we and NBCU mutually agree on an extension of the distribution and marketing agreement under which NBCU provides assistance to us with program distribution, this agreement will expire in March 2009 and this could materially adversely affect our ability to increase our program distribution.
Merchandise Mix

During the first half of fiscal 2008, we began changing the way in which we operate our business as part of a strategy that includes focusing on a female, repeat-purchaser core customer. In connection with this strategy, we significantly changed our product mix. For example, we began reducing the airtime devoted to high-ticket items such as consumer electronics that drive product sales from one-time customers, but not necessarily repeat business. We also ran a significant amount of clearance sales in order to make way for new merchandise reflecting a changed merchandise mix.
Shipped Units
The number of units shipped during the 2008 second quarter decreased 23% from the prior year’s comparable quarter to 870,000 from 1,132,000. For the six-month period ended August 2, 2008, shipped units decreased 18% from the prior year’s comparable period to 1,874,000 from 2,281,000. The decrease in shipped units was directly related to the decrease in sales experienced during the first six months of fiscal 2008.
Average Selling Price
The average selling price, or ASP, per unit was $224 in the 2008 second quarter, a 4% decrease from the comparable prior year quarter. For the six-month period ended August 2, 2008, the average selling price was $226, a 1% decrease from the prior year comparable period. The quarter and year-to-date decrease in the 2008 ASP was driven primarily by selling price decreases within the jewelry and home product categories.
Net Sales
Consolidated net sales for the 2008 second quarter were $141,927,000 as compared with consolidated net sales of $190,613,000 for the 2007 second quarter, a 26% decrease. Consolidated net sales for the six-month period ended August 2, 2008 were $298,215,000 as compared with consolidated net sales of $378,722,000 for the comparable prior year period, a 21% decrease. The overall decrease in consolidated net sales from prior year is directly attributed to decreases experienced in net sales from of our television home shopping and internet operations. Net sales attributed to our television home shopping and internet operations decreased to $141,856,000 for the 2008 second quarter from $186,996,000 for the 2007 second quarter, a 24% decrease. Net sales attributed to our television home shopping and internet operations decreased to $296,117,000 for the six-month period ended August 2, 2008 from $372,379,000 for the comparable prior year period, a 20% decrease. These declines in consolidated net sales are due in part to a significant decrease in our number of active customers along with a decrease in their purchasing frequency and the amount spent per customer compared with the comparable prior year periods.
During the first half of fiscal 2008, we began changing the way in which we operate our business as part of a strategy that includes focusing on a female, repeat-purchaser core customer. In connection with this strategy, we significantly changed our product mix. For example, we began reducing the airtime devoted to high-ticket items such as consumer electronics that drive product sales from one-time customers, but not necessarily repeat business. We also ran a significant amount of clearance sales in order to make way for new merchandise reflecting a changed merchandise mix. We made other changes in on-air presentations and promotional efforts. We believe these changes were a major factor in the sales declines we experienced in the first two quarters, and have since taken aggressive steps to reverse these changes and to make other adjustments to stop the decline in sales. In addition, television and internet net sales also decreased due to decreased shipping and handling revenue resulting from decreased sales in the 2008 period compared to the comparable prior year periods and reduced revenue associated with our polo.com fulfillment operations.
Cost of Sales (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) for the 2008 second quarter and 2007 second quarter was $94,046,000 and $123,291,000, respectively, a decrease of $29,245,000, or 24%. Cost of sales (exclusive of depreciation and amortization) for the six months ended August 2, 2008 and for the six months ended August 4, 2007 was $200,378,000 and $245,287,000, respectively, a decrease of $44,909,000, or 18%. The decreases in cost of sales is directly attributable to decreased costs associated with decreased sales volume from our television home shopping and internet businesses and decreases in shipping and handling revenues. Net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of sales for the second quarters of fiscal 2008 and fiscal 2007 quarters were 33.7% and 35.3%, respectively. Net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of sales for the six months ended August 2, 2008 and August 4, 2007 were 32.8% and 35.2%, respectively. The sales margin decrease from the prior year resulted primarily from our effort during the first half of fiscal 2008 to reduce inventory levels of high-priced items by taking aggressive markdowns during our end of quarter and other clearance sale initiatives. In addition, gross margins for fiscal 2008 were impacted by a non-cash inventory write down of $3.8 million recorded in the first quarter as a result of a strategic decision made in the first quarter to significantly reduce our products’ on-air life cycle. As a result of the strategic decision to reduce our product’s on-air life cycle and a significant increase experienced in our greater than 90-day old inventory due to lower sales, year-to-date gross margins were impacted by additional write-downs recorded on inventory not yet sold totaling approximately $8.1 million during the first half of fiscal 2008. Accordingly, our inventory reserve increased to $11.8 million as of August 2, 2008 from $3.7 million as of our fiscal year ended February 2, 2008.
Operating Expenses
Total operating expenses for the 2008 second quarter were $64,308,000 compared to $73,547,000 for the comparable prior year period, a decrease of 13%. Total operating expenses for the six months ended August 2, 2008 were $132,652,000 compared to $147,088,000 for the comparable prior year period, a decrease of 10%. Distribution and selling expense decreased $6,206 , 000, or 10%, to $53,827,000, or 38% of net sales during the 2008 second quarter compared to $60,033,000 or 31% of net sales for the comparable prior year quarter. Distribution and selling expense decreased $9,583 , 000, or 8%, to $110,910,000, or 37% of net sales for the six months ended August 2, 2008 compared to $120,493,000 or 32% of net sales for the comparable prior year period. Distribution and selling expense decreased on a year-to-date basis over the prior year primarily due to a decrease in telemarketing, customer service and fulfillment variable costs of $4,910,000 associated with decreased sales volume and efficiency gains; decreases in salaries and headcount other related personnel costs associated with merchandising, television production and show management personnel and on-air talent of $837,000; decreases in marketing expenses of $3,061,000 and decreases in net collection fees and bad debt expense of $2,388,000 due to the overall decrease in net sales and due to a lower percentage of and our reduced reliance during fiscal 2008 on net sales sold using the ValuePay installment program. These decreases were offset by an increase in net cable and satellite access fees of $1,457,000 as a result of increased subscribers over the prior year and increased stock option expense of $291,000 associated with fiscal 2008 stock option grants.
General and administrative expense for the 2008 second quarter decreased $528,000, or 9%, to $5,682,000, or 4% of net sales, compared to $6,210,000, or 3% of net sales for the 2007 second quarter. General and administrative expense for the six months ended August 2, 2008 decreased $1,688,000, or 12%, to $12,017,000, or 4% of net sales, compared to $13,705,000, or 4% of net sales for the six months ended August 4, 2007. General and administrative expense decreased on a year-to-date basis over the prior year primarily as a result of our restructuring initiative which included reductions in salaries, related benefits and accrued bonuses totaling $1,993,000, offset by increases associated with stock option expense of $291,000.

CONF CALL

Amy Kahlow

Good morning and welcome to today’s conference call. It may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such forward-looking statements. More detailed information about these risks and uncertainties is contained in ValueVision Media’s filings with the SEC.

I would now like to turn the call over to Mr. John Buck, Executive Chairman of the Board.

John D. Buck

Hello, everyone and thank you for joining us today. Let me begin by saying that we are very disappointed with our second quarter results. I want you to know that the board fully recognizes these performance issues and took decisive action to make the organizational leadership changes it felt were necessary without delay to address these trends.

As announced in the press release on Friday, the board appointed me to return as the company’s CEO, replacing Rene Aiu, who left ShopNBC, along with three other executives she had brought with her. As a part of the organizational leadership change, the board appointed a new president and COO for the company. Keith Stewart, who is with us here today, comes to ShopNBC with 20 years of executive retail experience. Keith has excellent leadership skills, a deep understanding of retail operations domestically and internationally, and importantly, he has nearly 15 years of experience in home shopping as an executive at QVC.

Together, Keith and I, along with our dedicated employees and vendor community, will be highly focused on taking action to reverse sales and earnings trends with a shared goal of making this company a more stable and profitable TV shopping business.

I know the company has undergone significant change this past year. I also know that many of our shareholders are upset, frustrated, and losing patience, if not already run out. We understand how you feel. We understand you have questions like what are you doing to fix this business and restore shareholder value? It’s a fair question and we owe you a response. We will address this and others as best we can and during the question-and-answer period.

Please note that the action being taken is what we believe to be right for the company and in the best interest of our shareholders. We continue to be very positive and confident that the challenges before us can be overcome. This company has a wonderful, wonderful set of assets and during the quarter did make progress in a number of core areas.

Before continuing, however, I would like to outline today’s prepared remarks, which will address three main areas: one, a financial review of our second quarter results by Frank Elsenbast, our CFO; two, a discussion of my role as CEO and Keith’s as President and COO, along with our respective near-term priorities; and three, a commentary on our plans for the periods ahead.

With that, I will turn the call over to Frank for a brief financial review of our second quarter results.

Frank P. Elsenbast

Thanks, John. Our second quarter revenues were $142 million. This is 26% below the $191 million reported last year. The shortfall was due to a 23% decline in shipped units and a 3% decline in the average selling price. Gross margin in the second quarter was 33.7%, which is down significantly from 35.3% last year. This reduction was due to lower merchandise margins partially offset by a favorable mix impact as we reduce the volume of consumer electronics sales.

Controlling our operating expenses remains a priority. In the second quarter, operating expenses, excluding equity compensation, were down 11% versus the prior year. Selling and distribution expense was down 11% versus last year, driven by lower variable costs, reduced marketing expense, and lower headcount. In the quarter, the company saw 4% growth in our FTEs and accordingly, our cable distribution fees increased slightly in the quarter.

G&A was down 11% due to lower headcount. EBITDA as adjusted was a negative $10.7 million, compared with the positive $1.8 million last year, resulting from the sales shortfall and lower gross margins, offset somewhat by the reduced operating expenses at the company.

We are focused on maintaining a strong balance sheet. The quarter ended with over $80 million in cash and securities, which is down $5 million from the first quarter balance. Disciplined management of working capital partially offset the EBITDA loss for the quarter.

Working capital generated over $10 million during the quarter as we reduced inventory levels and accounts receivable. Capital spending for the quarter was $2 million.

Our cash balance also reflects an additional temporary impairment of $3.3 million on our portfolio of auction rate securities. There was no stock buy-back activity this quarter. At this time, the company is focused on stabilizing the business and preserving its cash balance. Therefore, the $10 million share repurchase authorization remains unused.

With that, I will turn the call back to John.

John D. Buck

Thank you, Frank. Before introducing Keith and talking about our respective roles and near-term priorities, I think it makes sense to take a moment and talk about why I came back to serve as CEO on a full-time basis. Most of you know me well enough by now to know I care a great deal about this company, its employees, vendors, and shareholders. I have a history with ShopNBC. I’ve been on the board since 2004 and served as interim CEO for five months from November to March of ’08 -- November of ’07 to March of ’08. And so I know the company extremely well, have great relationships inside the organization with the board and with our strategic partners at GE and NBC Universal.

I also admire this company. ShopNBC has tremendous underlying assets -- a powerful brand, a shopping network that reaches 70 million homes, wonderful on-air hosts who have a great relationship with our large customer base, a strong merchandising department with loyal vendors, a thriving e-commerce business, a healthy balance sheet, and a dedicated employee base. So when the board asked me to serve as CEO, I accepted with enthusiasm. I care about what happens to this company and its future and I am committed to leading it significantly to improved performance.

ShopNBC is just an incredible asset and despite our challenges, I remain encouraged by the opportunity within. We have continued to hold productive household distribution negotiations with all our top cable operators. We recently signed an extended carriage agreement with one of the top five. We are pleased with the progress made so far and are seeing a meaningful reduction in our cable distribution carriage fees.

From a management standpoint, the company appointed Chris [Culessa], a retail executive with 23 years of experience and nearly a decade in home shopping, as Senior Vice President and Chief Merchant. And Jeff Lewis, a customer service executive with 25 years of leadership experience in retail and direct marketing, as Vice President of Customer Experience. Both Chris and Jeff are seasoned executives who are hitting the ground running. We are excited about the impact they are making in two critical areas of the company.

As Frank stated, we maintained a strong balance sheet with over $80 million in cash and securities and we continue the disciplined control of operating expenses, which were down year over year by 11% on the quarter.

On the merchandising front, the company continued to partner with its core vendors in areas we are strong, while bringing in new vendors to expand variety and newness. We also lowered our average selling price by layering in new businesses to our core jewelry, watch, and electronic businesses.

For example, we are layering in more women’s watches to our strong watch business. We are asking our high-end jewelry designers to create more affordable pieces without compromising on their design, integrity, and quality. We have done this and have seen good sales results and lower return rates.

We continue to be pleased with our e-commerce business, ShopNBC.com, which now represents 32% of our revenue. During the second quarter, ShopNBC.com also launched several live webcasts exclusively on the Internet to aggressively reach new customers and drive incremental sales by capitalizing on its strong niche categories, such as watches and coins. Presently, over 30% of new customers are being acquired through the web.

These are all positives. I believe ShopNBC can be a winning business model with the right leadership, which is why I’m delighted to now turn your attention to Keith Stewart, our new President and COO, who will be working side-by-side with me to move the company forward and rebuild shareholder value. ShopNBC is very fortunate to have a world-class TV shopping executive like Keith join the company and the board of directors. Keith comes to us from the gold standard in our industry, having been with QVC for 15 years. He started at the bottom, learned from every area in TV shopping, and achieved a high level of success at QVC. Today he possesses a strong understanding of multi-channel retailing and has a proven history of delivering growth and profitability spanning markets in the United States and Germany.

Because of his best-in-class operational background and intimate knowledge of our industry and customers, Keith can immediately take on the role of President and Chief Operating Officer, effectively lead ShopNBC's operations and its team through this transitional period and at this critical juncture. He is a terrific fit for our organization and we look forward to having him with us for many years to come.

In our dual leadership roles, Keith will focus primarily on running the day-to-day operations while I will focus more on the external issues. We will collaborate and support each other on all efforts to rebuild shareholder value.

With that, our immediate priorities for the business will be to: one, concentrate on improving the customer experience and driving sales from existing as well as new customers; two, aggressively focus on extending our carriage agreements and reducing our fee structure; three, efficiently manage our balance sheet to ensure ShopNBC maintains maximum operational flexibility; and four, engage our outstanding vendors to tap their creative and entrepreneurial talents.

We understand that this is a critical time at the company and we will be focused on the biggest opportunities first.

Externally, I plan to work with Keith and the board to: one, explore a wide range of new growth opportunities. There are many opportunities out in the marketplace for ShopNBC to partner with other companies to create significant value. For example, we may form alliances with other companies to leverage their customer base, their unique products, or obtain new distribution. And in fact, we have already begun to explore such avenues of growth.

I will also continue to work with our partners and GE and NBC in a number of areas. First, we are in an ongoing conversation with them regarding their current ownership position and the upcoming redemption of their 5.4 million shares of preferred stock. We need to determine if this will be paid off or extended in some form.

Second, we will continue to identify opportunities where we at ShopNBC can provide valuable commerce capabilities to NBC and their many cable and Internet properties.

Third, GE and NBC have been great partners for this company and we will continue to leverage that relationship going forward.

Finally, I will address most of the issues associated with being an public company, including communications with our board, shareholders, and other external stakeholders.

Keith and I are very excited about the opportunity before us. We clearly understand our individual roles and we’ve already started working on many of these priorities.

At this point, I would like to turn the call briefly over to Keith so that he can tell you a little more about himself and talk about some of his near-term priorities.

Keith R. Stewart

Good morning, everyone. I want you all to know that I am very, very excited to be here and delighted about becoming an integral part of ShopNBC and working closely and collaboratively with the dedicated team of employees to help position this company and its unique assets for improved future performance and success.

As John said, I’ve been in this business most of my retail life and I have a real passion for TV shopping. I’ve had leadership and operational experience in virtually every aspect of the business. Even though my background is largely with QVC, I can tell you that my vision for this company won’t be another QVC.

ShopNBC is the premier lifestyle brand in the home shopping space. Its customers tune in to shop with us because of the wonderful products which we sell, which are unique to our channel. We are going to protect, we’re going to build on our strengths, and we’re going to make it better.

There’s no question it’s a tough economy and I am fully aware of the challenges and work that lie ahead. However, I am confident that these challenges can be overcome. I am fully engaged and committed to bring about the kind of change this organization needs to realize tremendous opportunity from within. I firmly believe in its assets, its people, its brand, and its strength in the industry to be a powerhouse in this space.

As President and COO, my near-term priorities will be to take a deep dive as quickly as possible and right the course. Part of this will involve a qualitative and quantitative customer experience audit. Another priority will be to improve on some of the operational fundamentals of our business based on the best practices I experienced at QVC. I see some immediate short-term opportunities for upside within the company. Meanwhile. ShopNBC has a large and loyal base of customers who we’ll continue to focus on while at the same time taking full action to acquire new customers each and every month. And finally, we are going to continue focusing on cable negotiations and the thriving e-commerce business.

Once again, I couldn’t be happier to be here. I look forward to getting to know you, our shareholders, better in the days and months ahead.

With that, I’ll turn it back over to John.

John D. Buck

Thanks, Keith. Before concluding, I would like all of you to know that Keith has great confidence in the business and what needs to be done and he knows how to get it done. Furthermore, after Keith met with the officer team and all our employees on Friday, he decided not to take any cash compensation the first year. Instead, he is taking all of his pay in equity. My compensation will also be heavily weighted toward equity with my salary substantially reduced compared to the market for CEOs at companies this size.

And as you may recall, when I was interim CEO I took equity only. I think that you will find that our interests are aligned with those of our shareholders. We will disclose the final details of our comp plans later this week.

With that, let me conclude and reiterate that ShopNBC has undergone significant changes this past year. The results for the past six months are unacceptable and that’s why the board took prompt and decisive action with a leadership change.

ShopNBC has strong underlying assets with excellent growth potential. With the continued support and dedication of our employees, ShopNBC made progress in the second quarter in its cable negotiations, diversifying its merchandise mix, and continued success in our e-commerce business. As we enter a new ear of leadership, I remain encouraged by these signs of progress and I look forward to working with Keith and our talented management team to improve performance that will enable us to deliver long-term shareholder value.

Given the changes being implemented, we have decided not to provide guidance at this time.

In conclusion, it’s important that I say that I am sorry for the current situation and our present circumstances were the furthest, furthest thing from my mind earlier this year. But we’ve learned from the past and now we must go forward.

So with that, we’ll take questions.

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