EVLV Evolv Technologies Holdings Inc

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 for the quarterly period ended August 2, 2008

Commission File Number 0-20243

VALUEVISION MEDIA, INC.

(Exact name of registrant as specified in its charter)

Minnesota		41-1673770
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

6740 Shady Oak Road, Eden Prairie, MN 55344

952-943-6000

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

As of September 8, 2008, there were 33,582,834 shares of the registrant’s common stock, $.01 par value per share, outstanding.

 

 

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

FORM 10-Q TABLE OF CONTENTS
August 2, 2008

		Page
Part I. Financial Information			3
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets as of August 2, 2008 and February 2, 2008			3
Condensed Consolidated Statements of Operations for the Three and Six-Month Periods Ended August 2, 2008 and August 4, 2007			4
Condensed Consolidated Statement of Shareholders’ Equity for the Six-Month Period Ended August 2, 2008			5
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended August 2, 2008 and August 4, 2007			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
Part II. Other Information			28
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			30
Item 6. Exhibits			30
Signatures			31
Exhibit Index			32
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

		August 2,				February 2,
		2008				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	48,829			$	25,605
Short-term investments			10,892				33,473
Accounts receivable, net			55,730				109,489
Inventories			55,634				79,444
Prepaid expenses and other			5,646				4,172
Total current assets			176,731				252,183
Long-term investments			20,486				26,306
Property & equipment, net			34,695				36,627
FCC broadcasting license			31,943				31,943
NBC trademark license agreement, net			8,994				10,608
Cable distribution and marketing agreement, net			502				872
Other assets			615				541
		$	273,966			$	359,080
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	36,543			$	73,093
Accrued liabilities			34,598				44,609
Deferred revenue			692				648
Total current liabilities			71,833				118,350
Deferred revenue			2,132				2,322
Series A Redeemable Convertible Preferred Stock, $.01 per share par value, 5,339,500 shares authorized; 5,339,500 shares issued and outstanding			44,045				43,898
Shareholders’ equity:
Common stock, $.01 per share par value, 100,000,000 shares authorized; 33,590,834 and 34,070,422 shares issued and outstanding			336				341
Warrants to purchase 2,036,858 shares of common stock			12,041				12,041
Additional paid-in capital			272,745				274,172
Accumulated other comprehensive losses			(6,314	)			(2,454	)
Accumulated deficit			(122,852	)			(89,590	)
Total shareholders’ equity			155,956				194,510
		$	273,966			$	359,080

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

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)

		For the Three Month Periods Ended								For the Six Month Periods Ended
		August 2,				August 4,				August 2,				August 4,
		2008				2007				2008				2007
Net sales		$	141,927			$	190,613			$	298,215			$	378,722
Cost of sales			94,046				123,291				200,378				245,287
(exclusive of depreciation and amortization shown below)
Operating expense:
Distribution and selling			53,827				60,033				110,910				120,493
General and administrative			5,682				6,210				12,017				13,705
Depreciation and amortization			4,246				5,261				8,565				10,847
Restructuring costs			—				2,043				330				2,043
CEO transition costs			553				—				830				—
Total operating expense			64,308				73,547				132,652				147,088
Operating loss			(16,427	)			(6,225	)			(34,815	)			(13,653	)
Other income:
Other expense			—				(119	)			—				(119	)
Interest income			761				1,575				1,586				2,815
Total other income			761				1,456				1,586				2,696
Loss before income taxes and equity in income of affiliates			(15,666	)			(4,769	)			(33,229	)			(10,957	)
Gain on sale of RLM investment			—				—				—				40,240
Equity in income of affiliates			—				—				—				609
Income tax provision			(18	)			(640	)			(33	)			(921	)
Net income (loss)			(15,684	)			(5,409	)			(33,262	)			28,971
Accretion of redeemable preferred stock			(73	)			(73	)			(146	)			(145	)
Net income (loss) available to common shareholders		$	(15,757	)		$	(5,482	)		$	(33,408	)		$	28,826
Net income (loss) per common share		$	(0.47	)		$	(0.15	)		$	(0.99	)		$	0.67
Net income (loss) per common share — assuming dilution		$	(0.47	)		$	(0.15	)		$	(0.99	)		$	0.68
Weighted average number of common shares outstanding:
Basic			33,574,131				37,366,541				33,576,015				42,822,333
Diluted			33,574,131				37,366,541				33,576,015				42,846,686

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

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE SIX-MONTH PERIOD ENDED AUGUST 2, 2008

(Unaudited)

(In thousands, except share data)

														Common								Accumulated
						Common Stock								Stock				Additional				Other								Total
		Comprehensive				Number				Par				Purchase				Paid-In				Comprehensive				Accumulated				Shareholders’
		Loss				of Shares				Value				Warrants				Capital				Losses				Deficit				Equity
BALANCE, February 2, 2008							34,070,422			$	341			$	12,041			$	274,172			$	(2,454	)		$	(89,590	)		$	194,510
Net loss		$	(33,262	)			—				—				—				—				—				(33,262	)			(33,262	)
Other comprehensive loss, net of tax:
Unrealized loss on securities			(3,860	)			—				—				—				—				(3,860	)			—				(3,860	)
Comprehensive loss		$	(37,122	)
Repurchase of common stock							(556,330	)			(6	)			—				(3,311	)			—				—				(3,317	)
Exercise of stock options and common stock issuances							76,742				1				—				(1	)			—				—				—
Share-based payment compensation							—				—				—				2,031				—				—				2,031
Accretion on redeemable preferred stock							—				—				—				(146	)			—				—				(146	)
BALANCE, August 2, 2008							33,590,834			$	336			$	12,041			$	272,745			$	(6,314	)		$	(122,852	)		$	155,956

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

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

		For the Six Month
		Periods Ended
		August 2,				August 4,
		2008				2007
OPERATING ACTIVITIES:
Net income (loss)		$	(33,262	)		$	28,971
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization			8,565				10,847
Share-based payment compensation			2,031				1,276
Common stock issued to employees			—				12
Equity in earnings of affiliates			—				(609	)
Amortization of deferred revenue			(144	)			(144	)
Gain on sale of investments			—				(40,240	)
Changes in operating assets and liabilities:
Accounts receivable, net			53,759				7,997
Inventories			23,810				(5,998	)
Prepaid expenses and other			(1,856	)			365
Deferred revenue			(2	)			730
Accounts payable and accrued liabilities			(46,201	)			(5,722	)
Net cash provided by (used for) operating activities			6,700				(2,515	)
INVESTING ACTIVITIES:
Property and equipment additions			(4,702	)			(4,347	)
Purchase of investments			—				(75,070	)
Proceeds from sale of investments			24,543				24,014
Proceeds from sale of Ralph Lauren Media, Inc.			—				43,750
Net cash provided by (used for) investing activities			19,841				(11,653	)
FINANCING ACTIVITIES:
Payments for repurchases of common stock			(3,317	)			(6,722	)
Proceeds from exercise of stock options			—				527
Net cash used for financing activities			(3,317	)			(6,195	)
Net increase (decrease) in cash and cash equivalents			23,224				(20,363	)
BEGINNING CASH AND CASH EQUIVALENTS			25,605				41,496
ENDING CASH AND CASH EQUIVALENTS		$	48,829			$	21,133
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid		$	—			$	2
Income taxes paid		$	181			$	470
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchases included in accounts payable		$	162			$	78
Accretion of redeemable preferred stock		$	146			$	145

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

VALUEVISION MEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 2, 2008
(Unaudited)

(1) General

     ValueVision Media, Inc. and subsidiaries (the “Company”) is an integrated multi-channel retailer that markets, sells and distributes its products directly to consumers through various forms of electronic media and direct mailings. The Company’s operating strategy incorporates television home shopping, e-commerce, direct mail and on-line marketing.

     The Company’s television home shopping business uses on-air spokespersons to market brand name and private label consumer products at competitive prices. The Company’s live 24-hour per day television home shopping programming is distributed primarily through cable and satellite affiliation agreements and the purchase of month-to-month full and part-time lease agreements of cable and broadcast television time. In addition, the Company distributes its programming through one Company-owned full power television station in Boston, Massachusetts. The Company also markets a broad array of merchandise through its internet shopping websites, www.shopnbc.com and www.shopnbc.tv.

     The Company has an exclusive license agreement with NBC Universal, Inc. (“NBCU”), for the worldwide use of an NBC-branded name and the peacock image through May 2011. Pursuant to the license, the Company operates its television home shopping network under the ShopNBC brand name and operates its internet website under the ShopNBC.com brand name.

     The Company, through its wholly owned subsidiary, VVI Fulfillment Center, Inc. provides fulfillment and warehousing services for the fulfillment of merchandise sold by the Company.

(2) Basis of Financial Statement Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with these rules and regulations. The information furnished in the interim condensed consolidated financial statements includes normal recurring accruals and reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of these financial statements. Although management believes the disclosures and information presented are adequate, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s most recent audited financial statements and notes thereto included in its annual report on Form 10-K for the fiscal year ended February 2, 2008. Operating results for the six-month period ended August 2, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2009.

     The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

      Fiscal Year

     The Company’s most recently completed fiscal year ended on February 2, 2008 and is designated “fiscal 2007”. The Company’s fiscal year ending January 31, 2009 is designated “fiscal 2008.” The Company reports on a 52/53 week fiscal year which ends on the Saturday nearest to January 31. The 52/53 week fiscal year allows for the weekly and monthly comparability of sales results relating to the Company’s television home-shopping and internet businesses.

(3) Stock-Based Compensation

     The Company accounts for stock-based compensation arrangements in accordance with Statement of Financial Accounting Standards No. 123(R) (revised 2004), Share-Based Payment . Compensation is recognized for all stock-based compensation arrangements by the Company, including employee and non-employee stock options granted after February 2, 2006 and all unvested stock-based compensation arrangements granted prior to February 2, 2006 as of such date, commencing with the quarter ended May 6,

2006. Stock-based compensation expense in the second quarter of fiscal 2008 and the second quarter of fiscal 2007 related to stock option awards was $861,000 and $553,000, respectively. Stock-based compensation expense in the first half of fiscal 2008 and the first half of fiscal 2007 related to stock option awards was $1,593,000 and $1,012,000, respectively. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future.

     As of August 2, 2008, the Company had two active omnibus stock plans for which stock awards can be currently granted: the 2004 Omnibus Stock Plan (as amended and restated in fiscal 2006) which provides for the issuance of up to 4,000,000 shares of the Company’s common stock; and the 2001 Omnibus Stock Plan which provides for the issuance of up to 3,000,000 shares of the Company’s stock. These plans are administered by the human resources and compensation committee of the board of directors (“Compensation Committee”) and provide for awards for employees, directors and consultants. All employees and directors of the Company and its affiliates are eligible to receive awards under the plans. The types of awards that may be granted under these plans include restricted and unrestricted stock, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the Compensation Committee may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. No incentive stock option may be granted more than ten years after the effective date of the respective plan’s inception or be exercisable more than ten years after the date of grant. Options granted to outside directors are nonstatutory stock options with an exercise price equal to 100% of the fair market value of the underlying stock as of the date of grant. Options granted under these plans are exercisable and generally vest over three years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and generally have contractual terms of either five years from the date of vesting or ten years from the date of grant. Prior to the adoption of the 2004 and 2001 plans, the Company had other incentive stock option plans in place in which stock options were granted to employees under similar vesting terms. The Company has also granted non-qualified stock options to current and former directors and certain employees with similar vesting terms.

     The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s 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 were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.

		Fiscal 2008				Fiscal 2007
Expected volatility			41% – 42	%			33% – 40	%
Expected term (in years)		6 years				6 years
Risk-free interest rate			3.0% – 3.7	%			4.5% – 5.06	%

     A summary of the status of the Company’s stock option activity as of August 2, 2008 and changes during the six months then ended is as follows:

		2004								2001								1990
		Incentive				Weighted				Incentive				Weighted				Incentive				Weighted				Other Non-				Weighted
		Stock				Average				Stock				Average				Stock				Average				Qualified				Average
		Option				Exercise				Option				Exercise				Option				Exercise				Stock				Exercise
		Plan				Price				Plan				Price				Plan				Price				Options				Price
Balance outstanding, February 2, 2008			2,951,000			$	8.86				1,456,000			$	13.12				36,000			$	13.83				1,437,000			$	15.35
Granted			470,000				5.12				1,016,000				5.24				—				—				—				—
Exercised			—				—				—				—				—				—				—				—
Forfeited or canceled			(417,000	)			10.80				(386,000	)			13.27				(25,000	)			14.79				(37,000	)			11.24
Balance outstanding, August 2, 2008			3,004,000			$	8.01				2,086,000			$	9.26				11,000			$	13.73				1,400,000			$	15.46
Options exercisable at:
August 2, 2008			1,028,000			$	11.73				748,000			$	13.91				11,000			$	13.73				1,400,000			$	15.46

     The following table summarizes information regarding stock options outstanding at August 2, 2008:

										Weighted																Weighted
						Weighted				Average												Weighted				Average
						Average				Remaining				Aggregate				Vested or				Average				Remaining				Aggregate
		Options				Exercise				Contractual Life				Intrinsic				Expected to				Exercise				Contractual Life				Intrinsic
Option Type		Outstanding				Price				(Years)				Value				Vest				Price				(Years)				Value
2004 Incentive:			3,004,000			$	8.01			8.5				$	—				2,806,000			$	8.15			8.4				$	—
2001 Incentive:			2,086,000			$	9.26			7.8				$	—				1,952,000			$	9.43			6.2				$	—
1990 Incentive:			11,000			$	13.73			0.7				$	—				11,000			$	13.73			0.7				$	—
Other Non—qualified:			1,400,000			$	15.46			0.2				$	—				1,400,000			$	15.46			0.2				$	—

     The weighted average grant-date fair value of options granted in the first half of fiscal 2008 and 2007 was $2.30 and $4.50, respectively. The total intrinsic value of options exercised during the first half of fiscal 2008 and 2007 was $-0- and $52,000, respectively. As of August 2, 2008, total unrecognized compensation cost related to stock options was $5,488,000 and is expected to be recognized over a weighted average period of approximately 1.5 years.

(4) Short and Long-Term Investments

     Short and long-term investments include the following available-for-sale securities at August 2, 2008 and February 2, 2008:

		August 2, 2008
						Gross				Gross
						Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Long-term:
Auction-rate securities		$	26,800,000			$	—			$	6,314,000			$	20,486,000

		February 2, 2008
						Gross				Gross
						Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Short-term:
Auction-rate securities		$	6,502,000			$	—			$	—			$	6,502,000
Corporate bonds			4,088,000				—				—				4,088,000
		$	10,590,000			$	—			$	—			$	10,590,000
Long-term:
Auction-rate securities		$	26,800,000			$	—			$	2,454,000			$	24,346,000

     Short and long-term investments include the following held-to-maturity securities at August 2, 2008 and February 2, 2008:

August 2, 2008

Gross

Gross

Carrying

Unrecognized

Unrecognized

Estimated

Amount

Holding Gains

Holding Losses

Fair Value

Short-term:

Corporate bonds

$

10,892,000

$

22,000

$

370,000

$

10,544,000

		February 2, 2008
						Gross				Gross
		Carrying				Unrecognized				Unrecognized				Estimated
		Amount				Holding Gains				Holding Losses				Fair Value
Short-term:
Corporate bonds		$	22,883,000			$	122,000			$	87,000			$	22,918,000
Long-term:
Corporate bonds		$	1,960,000			$	—			$	28,000			$	1,932,000

     The following table summarizes the contractual maturities of the Company’s short and long-term debt securities as of August 2, 2008:

Less than one year		$	10,892,000
Mature in 1-2 years			—
Mature after 5 years			20,486,000
		$	31,378,000

     Proceeds from sales of available-for-sale and held-to-maturity securities were $24,543,000 and $24,014,000 during the six months ended August 2, 2008 and August 4, 2007, respectively. Sales of available-for-sale securities for the six months ended August 2, 2008 and August 4, 2007 resulted in no gains or losses recorded. The cost of all securities sold is based on the specific identification method. In the first quarter of fiscal 2008, the Company sold one of its held-to-maturity securities with a net carrying amount of $2,910,000 due to the significant deterioration at the time of sale of the issuer’s creditworthiness. The Company accrued and recorded a $72,000 loss on the sale in the fourth quarter of fiscal 2007. As of August 2, 2008, all gross unrealized losses on the Company’s auction rate security investments deemed to be temporarily impaired have been in an unrealized position for less than twelve months.

     At August 2, 2008, the Company’s investment portfolio included auction rate securities with an estimated fair value of $20,486,000 ($26,800,000 cost basis). The Company’s auction rate securities are variable rate debt instruments that have underlying securities with contractual maturities greater than ten years. Holders of auction rate securities can either sell through the auction or bid based on a desired interest rate or hold and accept the reset rate. If there are insufficient buyers, then the auction fails and holders are unable to liquidate their investment through the auction. A failed auction is not a default of the debt instrument, but does set a new interest rate in accordance with the original terms of the debt instrument. The result of a failed auction is that the auction rate security continues to pay interest in accordance with its terms. Auctions continue to be held as scheduled until the auction rate security matures or until it is called. These mostly AA-rated auction rate securities have failed to settle in auctions during fiscal 2007 and the first half of fiscal 2008. At this time, these investments are not liquid, and in the event the Company needs to access these funds, the Company will not be able to do so without a loss of principal.

     The Company has reduced the carrying value of these investments by $6,314,000, or by 24%, through other comprehensive income (loss) to reflect a temporary impairment on these securities. Currently, the Company believes these investments are temporarily impaired, but it is not clear in what period of time they will be settled. Due to the current lack of liquidity of these investments, they are classified as long-term investments on the Company’s balance sheet.

(5) Fair Value Measurements

     In the first quarter of fiscal 2008, the Company adopted Statement of Financial Accounting Standards No. 157. Fair Value Measurements (SFAS No. 157) with respect to the fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis and (b) all financial assets and liabilities. SFAS No. 157 establishes a single definition of fair value. It also provides a framework for measuring fair value and expands the disclosures of assets and liabilities measured at fair value. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.

SFAS No. 157 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable quoted prices (unadjusted) in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The following is a brief description of those three levels:

•		Level 1—Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
•		Level 2—Inputs based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
•		Level 3—Unobservable inputs for the asset or liability that are significant to the fair value measurement.

      Assets Measured at Fair Value — Recurring Basis

     The Company holds available-for-sale marketable securities that are subject to fair valuation under SFAS No. 157. The Company does not have any liabilities subject to fair valuation under this statement. These investments were previously and will continue to be marked-to-market at each reporting period; however, the definition of fair value used for these investments are now applied using SFAS No. 157. The information in the following tables primarily addresses matters relative to these financial assets. The Company uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to its financial assets. Available-for-sale marketable securities — except auction rate securities — are valued utilizing quoted prices in active markets. Investments in available-for-sale auction rate securities are valued utilizing a discounted cash flow analysis. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of auction rate securities. The Company concluded that the inputs used in its auction rate securities fair valuation model are Level 3 inputs.

The following table provides information by level for assets that are measured at fair value, as defined by SFAS No. 157, on a recurring basis.

						Fair Value Measurements
		Fair Value at				Using Inputs Considered as
Description		August 2, 2008				Level 1				Level 2				Level 3
Assets:
Available-for-sale:
Marketable securities — auction rate securities only		$	20,486,000			$	—			$	—			$	20,486,000

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

		Marketable
		securities —
		auction rate
		securities only
Beginning balance (February 2, 2008)		$	24,346,000
Total gains or losses:
Included in earnings			—
Included in other comprehensive income			3,860,000
Purchases, issuances, and settlements			—
Transfers in and/or out of Level 3			—
Ending balance (August 2, 2008)		$	20,486,000

      Assets Measured at Fair Value — Nonrecurring Basis

     During the quarter ended August 2, 2008, the Company had no significant measurements of assets at fair value as defined in SFAS No. 157 on a nonrecurring basis subsequent to their initial recognition. The aspects of SFAS No. 157 for which the effective date for the Company was deferred under FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157 , until January 2009 relate to non financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or non financial long-lived asset groups measured at fair value for an impairment assessment.

(6) Net Income (Loss) Per Common Share

     Basic earnings per share is computed by dividing reported earnings by the weighted average number of common shares outstanding for the reported period following the two-class method. The effect of the Company’s participating convertible preferred stock is included in basic earnings per share under the two-class method if dilutive. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods.

     A reconciliation of earnings per share calculations and the number of shares used in the calculation of basic earnings per share under the two-class method and diluted earnings per share is as follows:

		Three Month Periods Ended								Six Month Periods Ended
		August 2,				August 4,				August 2,				August 4,
		2008				2007				2008				2007
Net income (loss) available to common shareholders		$	(15,757,000	)		$	(5,482,000	)		$	(33,408,000	)		$	28,826,000
Weighted average number of common shares outstanding using two-class method			33,574,000				37,367,000				33,576,000				37,482,000
Effect of participating convertible preferred stock			—				—				—				5,340,000
Weighted average number of common shares outstanding using two-class method — Basic			33,574,000				37,367,000				33,576,000				42,822,000
Dilutive effect of stock options, non-vested shares and warrants			—				—				—				25,000
Weighted average number of common shares outstanding — Diluted			33,574,000				37,367,000				33,576,000				42,847,000
Net income (loss) per common share		$	(0.47	)		$	(0.15	)		$	(0.99	)		$	0.67
Net income (loss) per common share-assuming dilution		$	(0.47	)		$	(0.15	)		$	(0.99	)		$	0.68

     For the three-month period ended August 2, 2008, approximately 13,000 in-the-money potentially dilutive common share stock options and warrants and 5,340,000 shares of convertible preferred stock have been excluded from the computation of diluted earnings per share, as the effect of their inclusion would be antidilutive. For the six-month period ended August 2, 2008, approximately 10,000 in-the-money potentially dilutive common share stock options and warrants and 5,340,000 shares of convertible preferred stock have been excluded from the computation of diluted earnings per share, as the effect of their inclusion would be antidilutive.

(7) Comprehensive Income (Loss)

     For the Company, comprehensive income (loss) is computed as net earnings plus other items that are recorded directly to shareholders’ equity. Total comprehensive loss was $(19,000,000) and $(5,409,000) for the three-month periods ended August 2, 2008 and August 4, 2007, respectively. Total comprehensive income (loss) was $(37,122,000) and $28,971,000 for the six-month periods ended August 2, 2008 and August 4, 2007, respectively.

(8) Segment Disclosures

     The Company’s reportable segments are based on the Company’s method of internal reporting. The Company’s primary business segment is its electronic media segment, which consists of the Company’s television home shopping business and internet shopping website business. Management has determined that the Company’s television and internet home shopping businesses meet the aggregation criteria since these two businesses have similar customers, products, economic characteristics and sales processes. Products sold through the Company’s electronic media segment primarily include jewelry, watches, computers and other electronics, housewares, apparel, health and beauty aids, fitness products, giftware, collectibles, seasonal items and other merchandise. The Company’s segments currently operate in the United States and no one customer represents more than 5% of the Company’s overall revenue. There are no material intersegment product sales. Segment information as of and for the three and six-month periods ended August 2, 2008 and August 4, 2007 are as follows:

		ShopNBC &				Fulfillment				Equity
Three-Month Periods Ended (in thousands)		ShopNBC.com				Services (a)				Investments (b)				Total
August 2, 2008
Revenues		$	141,856			$	71			$	—			$	141,927
Operating (loss) income			(16,311	)			(116	)			—				(16,427	)
Depreciation and amortization			4,127				119				—				4,246
Interest income			761				—				—				761
Income taxes			(18	)			—				—				(18	)
Net loss			(15,568	)			(116	)			—				(15,684	)
Identifiable assets			268,975				4,991				—				273,966
August 4, 2007
Revenues		$	186,996			$	3,617			$	—			$	190,613
Operating (loss) income			(7,034	)			809				—				(6,225	)
Depreciation and amortization			5,113				148				—				5,261
Interest income			1,575				—				—				1,575
Income taxes			(640	)			—				—				(640	)
Net income (loss)			(6,128	)			719				—				(5,409	)
Identifiable assets, as of February 2, 2008			352,745				6,335				—				359,080

		ShopNBC &				Fulfillment				Equity
Six-Month Periods Ended (in thousands)		ShopNBC.com				Services (a)				Investments (b)				Total
August 2, 2008
Revenues		$	296,117			$	2,098			$	—			$	298,215
Operating (loss) income			(34,842	)			27				—				(34,815	)
Depreciation and amortization			8,326				239				—				8,565
Interest income			1,586				—				—				1,586
Income taxes			(33	)			—				—				(33	)
Net loss			(33,199	)			(63	)			—				(33,262	)
Identifiable assets			268,975				4,991				—				273,966
August 4, 2007
Revenues		$	372,379			$	6,343			$	—			$	378,722
Operating (loss) income			(14,697	)			1,044				—				(13,653	)
Depreciation and amortization			10,529				318				—				10,847
Interest income			2,815				—				—				2,815
Income taxes			(149	)			(12	)			(760	)			(921	)
Net income (loss)			(11,970	)			852				40,089				28,971
Identifiable assets, as of February 2, 2008			352,745				6,335				—				359,080

Information on net sales from continuing operations by significant product groups are as follows (in thousands):

		Three-Month Periods Ended								Six-Month Periods Ended
		August 2, 2008				August 4, 2007				August 2, 2008				August 4, 2007
Jewelry		$	51,227			$	72,429			$	117,523			$	148,896
Watches, coins & collectibles			35,453				30,559				66,139				55,832
Computers and electronics			22,988				40,823				45,226				76,062
Apparel and health & beauty			12,719				12,812				26,298				26,195
Home and all other merchandise categories			10,516				21,147				23,998				47,627
All other revenue, less than 10% each			9,024				12,843				19,031				24,110
Total		$	141,927			$	190,613			$	298,215			$	378,722

(9) Related Party Transactions

     The Company entered into a Private Label Credit Card and Co-Brand Credit Card Consumer Program Agreement with GE Money Bank for the financing of private label credit card purchases from ShopNBC and for the financing of co-brand credit card purchases of products and services from other non-ShopNBC retailers. GE Money Bank, the issuing bank for the program, is indirectly wholly-owned by the General Electric Company (“GE”), which is also the parent company of NBCU and GE Commercial Finance — Equity. NBCU and GE Commercial Finance — Equity have a substantial percentage ownership in the Company and together have the right to select three members of the Company’s board of directors.

     The Company and NBCU are partners in a ten-year Distribution and Marketing Agreement dated March 8, 1999 that provides that NBC shall have the exclusive right to negotiate on behalf of the Company for the distribution of its home shopping television programming service. As compensation for these services, the Company currently pays NBCU an annual fee of approximately $930,000 and is obligated to issue warrants to purchase shares of the Company’s common stock to NBCU for the successful negotiation of cable and satellite agreements, or successful renewals and extensions of existing agreements, for the distribution of the Company’s television programming. The number of shares subject to these warrants is determined by numerous factors that results in a greater number of warrants issuable to NBCU when our share price declines and a smaller number of warrants when our share price increases. The Company is currently seeking to renegotiate the terms of the formula with NBCU; however, no assurances can be made that the Company will be successful in this regard.

(10) Restricted Stock

     On June 11, 2008, the Company granted a total of 32,000 shares of restricted stock from the Company’s 2004 Omnibus Stock Plan to four non-management directors elected by the holders of the Company’s common stock (in contrast to the three directors elected by the holders of the Company’s preferred stock) as part of the Company’s annual director compensation program. The restricted stock vests on the first anniversary of the date of grant. The aggregate market value of the restricted stock at the date of award was $112,000 and is being amortized as director compensation expense over the twelve-month vesting period. The Company also granted a total of 36,742 shares of restricted stock to its chairman of the board during the period of November 2007 through March 2008 as compensation for services he performed as the Company’s interim chief executive officer. The aggregate market value of the restricted stock was $223,000 and was amortized as compensation expense over the service period. In the second quarter of fiscal 2004, the Company awarded 25,000 shares of restricted stock to certain employees. This restricted stock grant vests over different periods ranging from 17 to 53 months. The aggregate market value of the restricted stock at the award dates was $308,000 and is being amortized as compensation expense over the respective vesting periods. Compensation expense recorded in the first half of fiscal 2008 and the first half of fiscal 2007 relating to restricted stock grants was $438,000 and $132,000, respectively. As of August 2, 2008, there was $99,000 of total unrecognized compensation cost related to non-vested restricted stock granted. That cost is expected to be recognized over a weighted average period of 0.8 years. The total fair value of restricted stock vested during the first half of fiscal 2008 and 2007 was $383,000 and $457,000, respectively.

     A summary of the status of the Company’s non-vested restricted stock activity as of August 2, 2008 and changes during the six-month period then ended is as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Non-vested outstanding, February 2, 2008			82,000			$	9.88
Granted			41,000			$	3.90
Vested			(86,000	)		$	9.27
Forfeited			—				—
Non-vested outstanding, August 2, 2008			37,000			$	4.62

(11) Common Stock Repurchase Program

     In August 2006 the Company’s board of directors authorized a common stock repurchase program. The program authorizes the Company’s management, acting through an investment banking firm selected as the Company’s agent, to repurchase up to $10 million of the Company’s common stock by open market purchases or negotiated transactions at prices and amounts as determined by the Company from time to time. In May 2007, the Company’s board of directors authorized the repurchase of an additional $25 million of the Company’s common stock under its stock repurchase program. During the first quarter of fiscal 2008, the Company repurchased a total of 556,000 shares of common stock for a total investment of $3,317,000 at an average price of $5.96 per share. There were no repurchases of common stock under the program during the second quarter of fiscal 2008. During fiscal 2007, the Company repurchased a total of 3,618,000 shares of common stock for a total investment of $26,985,000 at an average price of $7.46 per share. In March 2008, the Company’s board of directors authorized the repurchase of an additional $10 million of the Company’s common stock under its stock repurchase program of which no shares have been purchased to date.

(12) Intangible Assets

     Intangible assets have been recorded in connection with the Company’s acquisition of the ShopNBC license and with the issuance of distribution warrants to NBCU. Intangible assets have also been recorded by the Company as a result of the acquisition of television station WWDP TV-46. Intangible assets in the accompanying consolidated balance sheets consist of the following:

		Weighted				August 2, 2008								February 2, 2008
		Average				Gross								Gross
		Life				Carrying				Accumulated				Carrying				Accumulated
		(Years)				Amount				Amortization				Amount				Amortization
Amortizable intangible assets
NBC trademark license agreement		10.5				$	34,437,000			$	(25,443,000	)		$	34,437,000			$	(23,829,000	)
Cable distribution and marketing agreement		9.5					8,278,000				(7,776,000	)			8,278,000				(7,406,000	)
						$	42,715,000			$	(33,219,000	)		$	42,715,000			$	(31,235,000	)
Unamortized intangible assets:
FCC broadcast license						$	31,943,000							$	31,943,000

     Amortization expense for the NBCU intangible assets was $981,000 and $1,984,000, respectively for the quarter and six-month period ended August 2, 2008 and $1,031,000 and $2,061,000, respectively, for the quarter and six-month periods ended August 4, 2007. Estimated amortization expense for the next five years is as follows: $3,943,000 in fiscal 2008, $3,383,000 in fiscal 2009, $3,227,000 in fiscal 2010 and $928,000 in fiscal 2011.

     The FCC broadcasting license, which relates to the Company’s acquisition of television station WWDP TV-46, is not subject to amortization as a result of its indefinite useful life. The Company tests the FCC license asset for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. There was no impairment as of February 2, 2008.

(13) ShopNBC Private Label and Co-Brand Credit Card Program

     In the third quarter of fiscal 2006, the Company introduced and established a new private label and co-brand revolving consumer credit card program (the “Program”). The Program is made available to all qualified consumers for the financing of purchases of products from ShopNBC and for the financing of purchases of products and services from other non-ShopNBC retailers. The Program is intended to be used by cardholders for purchases made primarily for personal, family or household use. The issuing bank is the sole owner of the account issued under the Program and absorbs losses associated with non-payment by cardholders. The issuing bank pays fees to the Company based on the number of credit card accounts activated and on card usage. Once a customer is approved to receive a ShopNBC private label or co-branded credit card and the card is activated, the customer is eligible to participate in the Company’s credit card rewards program. Under the original rewards program, points are earned on purchases made with the credit cards at ShopNBC and other retailers where the co-branded card is accepted. Cardholders who accumulate the requisite number of points are issued a $50 certificate award towards the future purchase of ShopNBC merchandise. These certificate awards expire after twelve months if unredeemed. Beginning in the second quarter of fiscal 2008, the rewards program was modified whereby newly activated customers will obtain an immediate $25 statement credit upon activation and first purchase and upon the accumulation of the requisite number of points card holders will be issued a $25 certificate award towards the future purchase of ShopNBC merchandise. These certificate awards will expire after 90 days if unredeemed. The Company accounts for the rewards program in accordance with Emerging Issues Task Force issue No. 00-22, Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future . The value of points earned is included in accrued liabilities and recorded as a reduction in revenue as points are earned, based on the retail value of points that are projected to be redeemed. The Company accounts for the Private Label and Co-Brand Credit Card Agreement in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables . In conjunction with the signing of the ShopNBC Private Label and Co-Brand Credit Card Agreement, the Company received from the issuing bank a non-refundable signing bonus as an incentive for the Company to enter into the agreement. The bonus has been recorded as deferred revenue in the accompanying financial statements and is being recognized as revenue over the term of the agreement.

(14) Sale of RLM Equity Investment

     On March 28, 2007, the Company entered into a Membership Interest Purchase Agreement with Polo Ralph Lauren, NBCU and certain NBCU affiliates, pursuant to which the Company sold its 12.5% membership interest in RLM to Polo Ralph Lauren for an aggregate purchase price of $43,750,000 in cash. As a result of this sales transaction, the Company recorded a pre-tax gain of $40,240,000 on the sale of RLM in the first quarter of fiscal 2007.

(15) Restructuring Costs

     On May 21, 2007, the Company announced the initiation of a restructuring of its operations that included a 12% reduction in the salaried workforce, a consolidation of its distribution operations into a single warehouse facility, the exit and closure of a retail outlet store and other cost saving measures. On January 14, 2008, the Company announced additional organizational changes and cost-saving measures following a formal business review conducted by management and an outside consulting firm. As a result of the business review, the Company’s organizational structure was simplified and streamlined to focus on profitability. As part of this restructuring, the Company reduced its salaried workforce by an additional 10%. As a result, the Company recorded a $5,043,000 restructuring charge for the year ended February 2, 2008 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 the Company including four officers. In addition, restructuring costs also include incremental charges associated with the Company’s consolidation of its distribution and fulfillment operations into a single warehouse facility, the closure of a retail outlet store, fixed asset impairments incurred as a direct result of the operational consolidation and closures and restructuring advisory service fees.

     The table below sets forth for the six months ended August 2, 2008, the significant components and activity under the restructuring program:

		Balance at												Cash				Balance at
		February 2, 2008				Charges				Write-offs				Payments				August 2, 2008
Severance and retention		$	874,000			$	310,000			$	—			$	(1,011,000	)		$	173,000
Asset impairments			—				—				—				—				—
Incremental restructuring charges			294,000				20,000				—				(313,000	)			1,000
		$	1,168,000			$	330,000			$	—			$	(1,324,000	)		$	174,000

(16) Chief Executive Officer Transition Costs

     On October 26, 2007, the Company announced that William J. Lansing, at the request of the board of directors, stepped down as president and chief executive officer and left the Company’s board of directors. In conjunction with Mr. Lansing’s resignation, the Company 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 the Company’s new chief executive officer.

     On August 22, 2008, the Company announced that its board of directors appointed John D. Buck to serve as the Company’s chief executive officer replacing Rene Aiu, who joined the Company as president and chief executive officer in March 2008. Mr. Buck was executive chairman of the board and served as interim chief executive officer of the Company from November 2007 to March 2008. The Company 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, the Company also announced the departures of three additional senior officers who were named to their positions in April 2008. At this time the Company cannot estimate any potential costs that may be associated with the departures of these four officers.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes included herein and the audited consolidated financial statements and notes included in our annual report on Form 10-K for the fiscal year ended February 2, 2008.

Cautionary Statement Regarding Forward-Looking Statements

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward looking. We often use words such as anticipates, believes, expects, intends and similar expressions to identify forward-looking statements. These statements are based on management’s current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): consumer spending and debt levels; the general economic and credit environment; interest rates; seasonal variations in consumer purchasing activities; changes in the mix of products sold by us; competitive pressures on sales; pricing and sales margins; the level of cable and satellite distribution for our programming and the associated fees; our ability to continue to manage our cash, cash equivalents and investments to meet our company’s liquidity needs; our ability to obtain liquidity with respect to our auction-rate securities; the success of our e-commerce initiatives; the success of our strategic alliances and relationships; our ability to manage our operating expenses successfully; risks associated with acquisitions; our ability to satisfy any mandatory obligations to redeem our existing preferred stock; changes in governmental or regulatory requirements; litigation or governmental proceedings affecting our operations; the risks identified under Item 1A in this report and in our quarterly report on Form 10-Q for the period ended May 3, 2008 and under “Risk Factors” and “Critical Accounting Policies and Estimates” in our Form 10-K for our fiscal year ended February 2, 2008; significant public events that are difficult to predict, such as widespread weather catastrophes or other significant television-covering events causing an interruption of television coverage or that directly compete with the viewership of our programming; and our ability to obtain and retain key executives and employees. Investors are cautioned that all forward-looking statements involve risk and uncertainty. The facts and circumstances that exist when any forward-looking statements are made and on which those forward-looking statements are based may significantly change in the future, thereby rendering the forward-looking statements obsolete. We are under no obligation (and expressly disclaim any obligation) to update or alter our forward-looking statements whether as a result of new information, future events or otherwise.

Overview

Company Description

     We are an integrated multi-channel retailer that markets our products directly to consumers through various forms of electronic media 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

Selected Condensed Consolidated Financial Data
Continuing Operations
(Unaudited)

		Dollar Amount as a								Dollar Amount as a
		Percentage of Net Sales for								Percentage of Net Sales for
		the								the
		Three-Month Periods								Six-Month Periods
		Ended								Ended
		August 2,				August 4,				August 2,				August 4,
		2008				2007				2008				2007
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales (exclusive of depreciation and amortization)			66.3	%			64.7	%			67.2	%			64.8	%
Operating expenses:
Distribution and selling			37.9	%			31.4	%			37.2	%			31.8	%
General and administrative			4.0	%			3.3	%			4.0	%			3.6	%
Depreciation and amortization			3.0	%			2.8	%			2.9	%			2.9	%
Restructuring costs			—	%			1.1	%			0.1	%			0.5	%
CEO transition costs			0.4	%			—	%			0.3	%			—	%
			45.3	%			38.6	%			44.5	%			38.8	%
Operating loss			(11.6	)%			(3.3	)%			(11.7	)%			(3.6	)%

Key Performance Metrics*
(Unaudited)

		For the Three Month												For the Six Month
		Periods Ended												Periods Ended
		August 2,				August 4,								August 2,				August 4,
		2008				2007				%				2008				2007				%
Program Distribution
Cable FTE’s (Average 000’s)			42,988				41,446				4%				42,673				40,901				4%
Satellite FTE’s (Average 000’s)			28,676				27,486				4%				28,528				27,292				5%
Total FTEs (Average 000’s)			71,664				68,932				4%				71,201				68,193				4%
Net Sales per FTE (Annualized)		$	7.92			$	10.85				(27%)			$	8.32			$	10.92				(24%)
Merchandise Metrics
Shipped Units (000’s)			870				1,132				(23%)				1,874				2,281				(18%)
Average Selling Price — Shipped Units		$	224			$	233				(4%)			$	226			$	229				(1%)