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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NO. 0-20243
VALUEVISION INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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MINNESOTA 41-1673770
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6740 SHADY OAK ROAD, EDEN PRAIRIE, MN 55344-3433
(Address of Principal Executive Offices) (Zip Code)
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612-947-5200
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained here-in, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 20, 1998, 26,780,778 shares of the Registrant's common stock
were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant on such date, based upon the sale price of the
common stock as reported by Nasdaq on April 20, 1998, was approximately
$79,660,000. For purposes of this computation, affiliates of the registrant are
deemed only to be the registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive ValueVision International, Inc. Proxy Statement
for the 1998 Annual Meeting of Shareholders are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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VALUEVISION INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JANUARY 31, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 28
Item 3. Legal Proceedings........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders......... 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 31
Item 6. Selected Financial Data..................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 33
Item 8. Financial Statements........................................ 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 73
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 74
Item 11. Executive Compensation...................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 74
Item 13. Certain Relationships and Related Transactions.............. 74
PART IV
Item 14. Exhibits, Lists and Reports on Form 8-K..................... 75
SIGNATURES.............................................................. 80
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PART I
ITEM 1. BUSINESS
A. GENERAL
ValueVision International, Inc. ("ValueVision" or the "Company") is an
integrated direct marketing company which markets its products directly to
consumers through electronic and print media. The Company is a Minnesota
corporation with principal and executive offices at 6740 Shady Oak Road, Eden
Prairie, Minnesota 55344-3433. The Company was incorporated in the state of
Minnesota on June 25, 1990 and its fiscal year ends on January 31. Fiscal years
are designated by the calendar year in which the fiscal year ends (i.e., the
Company's fiscal year ended January 31, 1998 shall be referred to as "fiscal
1998").
The Company's principal electronic media activity is its television home
shopping network which uses recognized on-air television home shopping
personalities to market brand name merchandise and proprietary and private label
consumer products at competitive or discount prices. The Company's live 24-hour
per day television home shopping programming is distributed primarily through
long-term cable affiliation agreements and the purchase of month-to-month full-
and part-time block lease agreements of cable and broadcast television time. In
addition, the Company distributes its programming through Company owned or
affiliated full power Ultra-High Frequency ("UHF") broadcast television
stations, low power television ("LPTV") stations and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), is a direct-mail marketer of a broad range of
quality general merchandise which is sold to consumers through direct-mail
catalogs and other direct marketing solicitations. Products offered include
domestics, housewares, home accessories, electronics and various apparel wear.
Through VVDM's wholly-owned subsidiary, Catalog Ventures, Inc. ("CVI"), the
Company sells a variety of fashion jewelry, health and beauty aids, books, audio
and video cassettes and other related consumer merchandise through the
publication of five consumer specialty catalogs. The Company also manufactures
and markets, via direct-mail, women's foundation undergarments and other women's
apparel through VVDM's subsidiary Beautiful Images, Inc. ("BII").
Recent Developments
National Media Merger. On January 5, 1998, the Company entered into an
Agreement and Plan of Reorganization and Merger (the "Merger Agreement"), by and
among the Company, National Media Corporation ("National Media") and Quantum
Direct Corporation, formerly known as V-L Holdings Corp. ("Quantum Direct"), a
newly-formed Delaware corporation. If the mergers (the "Mergers") contemplated
by the Merger Agreements were to be consummated, the Company and National Media
would have become wholly-owned subsidiaries of Quantum Direct, with each
outstanding share of the Company's common stock being converted into 1.19 shares
of common stock of Quantum Direct and each outstanding share of common stock of
National Media being converted into one share of common stock of Quantum Direct.
Consummation of the Mergers is subject to the satisfaction of a number of
conditions, including, but not limited to, holders of no more than 5% of the
issued and outstanding shares of common stock of the Company making the demands
and giving the notices required under Minnesota law to assert dissenters'
appraisal rights.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of ValueVision's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
Mergers. The Company also reported that it had advised National Media that it
does not intend to waive the Merger Agreement condition to closing requiring
that holders of not more than 5% of the shares of the Company's common stock
have demanded their dissenter's rights. The Company and National Media had
special meetings of their shareholders scheduled on April 14, 1998 to vote on
the proposed Mergers. In light of the receipt of the dissenters' notice, the
companies mutually agreed to postpone their respective shareholder meetings
while the companies attempted to negotiate a restructuring of the Mergers that
is acceptable to each of the companies and in the best interest of their
shareholders. As of the date hereof, the Company and National Media are still
attempting to negotiate a restructuring of the Mergers
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and have not yet rescheduled their respective special meetings. There can be no
assurances that the companies will successfully be able to negotiate such a
restructuring, or if negotiated, that such Mergers will be consummated. See
"Item 1. Business -- G. National Media Corporation -- 1998 Merger Proposal."
Chief Executive Officer. Mr. Gene McCaffery and Quantum Direct have entered
into a three year employment agreement pursuant to which Mr. McCaffery will
serve as Quantum Direct's Chief Executive Officer with a base salary of $500,000
during the first year, $525,000 during the second year, and $550,000 during the
third year. The agreement also provides for bonus salary of up to 100% of the
base salary, which may be earned only upon Quantum Direct meeting certain
operating income, revenue and stock performance criteria. In addition, pursuant
to the agreement, Mr. McCaffery is being issued stock options to acquire 800,000
shares of Quantum Direct's common stock, $.01 par value, with an exercise price
equal to $3.375 per share, the last trading price of the Company's common stock
on March 30, 1998. The exercise price of such options will be adjusted to the
last trading price of Quantum Direct's common stock on the first day it trades,
to the extent such price is lower than $3.375. In the event the Mergers are not
consummated, the Company and Mr. McCaffery have agreed to enter into an
employment agreement on substantially the same terms pursuant to which Mr.
McCaffery would become the Chief Executive Officer of the Company. See "Item 1.
Business -- G. National Media Corporation -- 1998 Merger Proposal."
Annual Meeting. The Company has scheduled its 1998 Annual Meeting of
Shareholders for June 2, 1998. The Company did not hold an 1997 Annual Meeting
of Shareholders. Accordingly, the 1998 Annual Meeting will address the Company's
performance for both the 1997 and 1998 fiscal years.
Electronic Media
The Company's principal electronic media activity is its live 24-hour per
day television home shopping network program. The Company's home shopping
network is the third largest television home shopping retailer in the United
States. Through its continuous merchandise-focused television programming, the
Company sells a wide variety of products and services directly to consumers.
Sales from the Company's television home shopping network totaled $106,571,000
and $99,419,000, representing 49% and 62% of net sales, for fiscal 1998 and
1997, respectively. Products are presented by on-air television home shopping
personalities and orders are placed directly with the Company by viewers who
call a toll-free telephone number. Orders are processed on-site by the Company's
call center representatives who use the Company's customized computer processing
system which provides real-time feedback to the on-air hosts. The Company's
television programming is produced at the Company's Eden Prairie, Minnesota
facility and is transmitted nationally via satellite to local cable system
operators, broadcast television stations and satellite dish owners.
Products and Product Mix. Products sold on the Company's television home
shopping network include jewelry, giftware, collectibles and related
merchandise, apparel, electronics, housewares, seasonal items and other
merchandise. As part of the ongoing shift in merchandise mix, the Company
continued to devote increasing airtime to non-jewelry merchandise during fiscal
1998. Jewelry accounted for 61% of the programming air time during fiscal 1998
compared with 67% for fiscal 1997. Jewelry is the largest single category of
merchandise, representing 60% of net sales in fiscal 1998, 62% of net sales in
fiscal 1997 and 73% of net sales in fiscal 1996. The Company has developed this
product group to include proprietary lines such as New York Collection(TM),
Ultimate Ice(TM), Vincenza Collections(TM), Brillante(R), C-Band, Daywear and
Illusions(TM) products produced to ValueVision's specifications or designed
exclusively for sale by the Company.
Program Distribution. Since the inception of the Company's television
operations, ValueVision has experienced continued growth in the number of
full-time equivalent cable homes ("FTEs") which receive the Company's
programming. As of January 31, 1998, the Company served a total of 17.4 million
cable homes or 11.7 million FTEs, compared with a total of 16.4 million cable
homes or 11.4 million FTEs as of January 31, 1997 and compared with 223,000
cable homes or 76,000 FTEs at January 31, 1992, the end of the Company's first
fiscal year. Approximately 8.6 million, 7.7 million and 7.2 million cable homes
at January 31, 1998, 1997 and 1996, respectively, received the Company's
television home shopping programming on a full-time basis. As of January 31,
1998, the Company's television home shopping programming was carried by two full
power
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broadcast television stations owned by the Company, 208 cable systems (188 in
fiscal 1997) on a full-time basis and 75 cable systems (77 in fiscal 1997) on a
part-time basis. Homes that receive the Company's television home shopping
programming 24 hours per day are counted as one FTE each and homes that receive
the Company's programming for any period less than 24 hours are counted based
upon an analysis of time of day and day of week. The total number of cable homes
that receive the Company's television home shopping programming represents
approximately 27% of the total number of cable subscribers in the United States.
Satellite Service. The Company's programming is distributed to cable
systems, full and low power television stations and satellite dish owners via a
leased communications satellite transponder. Satellite service may be
interrupted due to a variety of circumstances beyond the Company's control, such
as satellite transponder failure, satellite fuel depletion, governmental action,
preemption by the satellite lessor and service failure. The Company does not
have any agreements from immediate backup satellite services, although it
believes it could arrange for such services from others. However, there can be
no assurance that the Company will be able to make any such arrangements and the
Company may incur substantial additional costs in entering into new
arrangements.
Print Media
The Company is also a direct-mail marketer of a broad range of quality
general merchandise which is sold to consumers through direct-mail catalogs and
other direct marketing solicitations. The Company's involvement in the print
media, direct marketing business is the result of a series of acquisitions made
in fiscal 1997 by VVDM. Sales from the Company's print media, direct marketing
business totaled $111,411,000 and $60,059,000, representing 51% and 38% of net
sales for fiscal 1998 and 1997, respectively.
Effective July 27, 1996, VVDM acquired substantially all of the assets and
assumed certain obligations of Montgomery Ward Direct L.P., a four year old
catalog business operated under the Montgomery Ward Direct name ("MWD"). In
fiscal 1998, the Company changed the name of the MWD catalog to HomeVisions.
HomeVisions' principal direct marketing vehicle is its home decor and
furnishings catalog, a full-color booklet of approximately 50 to 100 pages that
is mailed semi-monthly to its customer list and to individuals whose names are
generated from mailing lists rented by HomeVisions. HomeVisions also produces
and mails special issues during the holiday season and produces inventory
clearance catalogs. Historically, a significant portion of HomeVisions' catalogs
have been targeted mainly to Montgomery Ward & Co., Incorporated ("Montgomery
Ward") credit card account holders. Effective March 31, 1998, overall
circulation of the HomeVisions catalog is expected to be reduced pursuant to the
restructuring of the Montgomery Ward Operating and License Agreement in November
1997, whereby, among other things, the Company agreed to cease the use of the
Montgomery Ward and Montgomery Ward Direct names in its catalog operations in
exchange for Montgomery Ward's return of 3.8 million common stock purchase
warrants. See "Strategic Alliances -- Montgomery Ward Alliance".
On October 22, 1996, VVDM acquired all of the outstanding shares of BII, a
manufacturer and direct marketer of women's foundation undergarments and other
women's apparel. Direct marketing solicitation is through space advertisements
of BII's merchandise in national and regional newspapers and magazines.
Effective November 1, 1996, VVDM acquired substantially all of the assets
and assumed certain obligations of Catalog Ventures, Inc. and Mitchell & Webb,
Inc. (collectively "CVI"), two direct marketing companies which together publish
five consumer specialty catalogs. CVI currently produces five special interest
catalogs which are mailed approximately monthly and include Nature's Jewelry(R),
The Pyramid Collection(TM), Serengeti(R), NorthStyle(R) and The Mind's Eye(R).
The full-color catalogs generally contain approximately 50 to 60 pages and are
mailed to CVI's customer list and to individuals whose names are generated from
mailing lists rented by CVI.
Products and Product Mix. Products offered under the HomeVisions catalog
include domestics, housewares, home accessories and electronics. Products
offered through CVI include a variety of fashion jewelry, health and beauty
aids, books, audio and video cassettes and other related consumer merchandise.
BII manufactures and markets via direct mail, women's foundation undergarments
and other women's apparel designed to provide comfort, support and posture
enhancement.
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Circulation. HomeVisions' catalogs are primarily targeted to educated
middle income women aged 35 to 50. Approximately 42 million HomeVisions catalogs
were mailed in fiscal 1998. At January 31, 1998, HomeVisions had approximately
548,000 "active" customers (defined as individuals that have purchased from the
Company within the preceding 12 months) and combined customer and prospect files
that totaled approximately 3.4 million names. CVI mails each of its five
specialty catalogs on a seasonal basis and primarily targets well-educated,
middle and upper-income women aged 35 to 55. Approximately 35 million CVI
catalogs were mailed in fiscal 1998. At January 31, 1998, CVI had approximately
553,000 active catalog customers and approximately 4.8 million customer names in
its catalog customer list database. During fiscal 1998, BII had approximately
678 million printed space advertisements or "impressions" circulated in national
and regional newspapers and magazines. At January 31, 1998, BII had
approximately 210,000 active customers and approximately 650,000 customer names
in its customer list database.
B. BUSINESS STRATEGY
The Company's primary business strategy is to increase sales and cash flows
from existing direct marketing operations and through the acquisition of
additional direct-mail companies to complement its growing direct marketing
business. In addition, the Company's strategy involves increasing sales and cash
flows by increasing the number of FTEs that receive the Company's television
home shopping programming through (i) affiliation agreements with cable
companies, (ii) block lease agreements and (iii) the use of broadcast television
stations and "must carry" rights. The Company also anticipates growth through
(i) increased penetration of new customers from existing homes served by
television programming and through the Company's recent investment and future
expected growth in direct-to-consumer selling on the Internet, (ii) continued
expansion of repeat sales to existing customers, (iii) increased circulation of
catalog mailings and (iv) the acquisition of additional direct-mail marketing
companies.
Cable Affiliation Agreements
As of January 31, 1998, the Company had entered into long-term cable
affiliation agreements with thirteen multiple system operators ("MSOs"), which
require each MSO to offer the Company's cable television home shopping
programming substantially on a full-time basis to their cable systems. The
aggregate number of cable homes served by these thirteen MSOs is approximately
20.5 million, of which approximately 7.9 million cable homes (7.6 million FTEs)
currently receive the Company's programming. The stated terms of the affiliation
agreements range from two to seven years. Under certain circumstances, the MSOs
may cancel the agreements prior to their expiration. There can be no assurance
that such agreements will not be so terminated or that such termination will not
materially or adversely affect the Company's business. In addition, these MSOs
are also carrying the Company's programming on an additional 690,000 cable homes
(265,000 FTEs) pursuant to short-term cable carriage arrangements. The
affiliation agreements provide that the Company will pay each MSO a monthly
cable access fee and marketing support payments based upon the number of homes
carrying the Company's television home shopping programming. Certain of the
affiliation agreements also require payment of one-time initial launch fees
which are capitalized and amortized on a straight-line basis over the term of
the agreements. The Company has entered into, and currently plans to enter into,
affiliation agreements with other cable television operators providing for full-
or part-time carriage of the Company's television home shopping programming.
Block Lease Agreements
The Company currently leases blocks of cable television time from certain
cable operators, typically for one year periods, with thirty-day cancellation
privileges by either party.
General. Commencing in January 1992, the Company began leasing blocks of
cable television time for its programming. On average, the Company's lease
agreements provide for approximately 120 to 140 hours or more of programming
weekly and are generally terminable by either party on thirty days' notice. This
method of programming distribution, as a component of the Company's overall
distribution strategy, may be significantly expanded in the event of favorable
action or a judicial review of the "leased access" rules pursuant
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to the Cable Act. However, no assurance can be made with respect to the outcome
of these proceedings. See "Federal Regulation."
"Leased Access." Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. See
"Federal Regulation." In May 1993, the Federal Communications Commission ("FCC")
issued rules limiting cable leased access rates that cable systems can charge
nonaffiliated programmers such as the Company. These rules, which used a
"highest implicit fee" proxy for the costs cable operators incurred in carrying
leased access programming, often allowed operators to increase lease rates
dramatically and affected the Company's ability to gain carriage on some
systems. The FCC adopted revised rules in February 1997. These revised rules
include a modified version of the proxy called the "average implicit fee," which
changes the calculation of the proxy in a way that makes it unclear whether or
to what extent lease rates will be affected in any particular case. However, the
Company's preliminary impression has been that the new rates remain largely
unaffordable. The Company has petitioned the D.C. Circuit for review of these
newly revised rate provisions. Both the petition for review and a similar
petition are currently pending. There can be no assurances that the Company will
prevail in this litigation or, if it succeeds, that the rules the FCC would
adopt in place of the challenged ones will be favorable to the Company. The
timing of any FCC or court action is uncertain.
Broadcast Television Stations
The Company currently owns one full power broadcast television station that
carries the ValueVision television home shopping program primarily on a
full-time basis, KVVV (TV), licensed to Baytown, Texas and serving the Houston,
Texas area. The Company's current strategy is to buy or sell broadcast
television stations at appropriate prices when investment opportunities arise.
When purchasing broadcast television stations, the Company does not
consider conventional measures of a station's performance, such as over the air
coverage, advertising revenues, audience share, programming or demographics, to
select stations for acquisition. Rather, the Company focuses on the Area of
Dominant Influence ("ADI") of the market in which the station is located and the
number of cable households within each ADI. The Company generally intends to
broadcast primarily home shopping programming over full power television
stations that it acquires, and does not expect its programming to generate
significant advertising revenues. Accordingly, the preacquisition operating
results of any full power television station will not be predictive of the
operating results following acquisition by the Company.
Summary of Acquisitions and Dispositions. In March 1996, the Company
completed the acquisition of the full power Ultra-High Frequency ("UHF")
independent television station KBGE (TV), Channel 33, serving the
Seattle-Tacoma, Washington market ("KBGE") for approximately $4.6 million.
During fiscal 1995, the Company acquired four full power UHF television stations
(WVVI -- Washington, D.C. ADI; KVVV -- Houston, Texas ADI; WHAI -- New York City
ADI; and WAKC -- Cleveland-Akron, Ohio ADI) for an aggregate purchase price,
including acquisition related costs, of approximately $22.4 million. In February
1998, the Company completed the sale of its television station KBGE, which
serves the Seattle-Tacoma, Washington market. In July 1997, the Company
completed the sale of its television station WVVI (TV), licensed to Manassas,
Virginia. In February 1996, the Company sold two stations serving the New York
City (WHAI) and Cleveland-Akron, Ohio (WAKC) markets. Television station KVVV
(TV) is currently carrying the Company's television home shopping programming
and is located in the Houston, Texas market which has a total of approximately
1.6 million homes, including approximately 894,000 cable homes within its
combined ADI. Approximately 287,000 of these cable homes currently receive
ValueVision's programming.
The Company purchased KBGE, licensed to Bellevue, Washington and serving
Seattle-Tacoma, Washington from NWTV, Inc. for aggregate consideration of
$4,600,000 on March 15, 1996. KBGE commenced broadcast operations during October
1995. The Seattle-Tacoma, Washington market represents the 13th largest ADI in
the nation and ranks ninth among U.S. cable markets, with approximately 1.0
million cable television households and an average cable penetration of almost
70%. On February 27, 1998, the Company completed the sale of KBGE (TV), Channel
33, along with two of the Company's non-cable, low-power stations in Portland,
Oregon and Indianapolis, Indiana and a minority interest in which an entity had
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applied for a new full-power station to Paxson Communications Corporation
("Paxson") for a total of approximately $35 million in cash. Under the terms of
the agreement, Paxson paid the Company approximately $25 million upon closing
and the remaining $10 million is to be paid when KBGE, which is currently
operating at reduced power from downtown Seattle, is able to relocate its
antenna and increase its transmitter power to a level at or near its licensed
full power. The Company will retain and continue to serve the Seattle market via
its recently-launched low-power station K58DP (TV), which transmits from
downtown Seattle. Management believes that the sale will not have a significant
impact on the ongoing operations of the Company. The pre-tax gain to be recorded
on the first cash installment with respect to the sale of this television
station is expected to be approximately $19.8 million and will be recognized in
the first quarter of fiscal 1999.
The Company purchased WVVI (TV), licensed to Manassas, Virginia, from
National Capital Christian Broadcasting, Inc. ("National") for $4,850,000, of
which $4,050,000 was paid at the initial closing on March 28, 1994 and $800,000
was paid at a second closing on April 11, 1996. The Company also purchased at
the WVVI initial closing a five-year secured convertible debenture in the
principal amount of $450,000. The debenture was convertible at the Company's
option into that number of shares of common stock which represented
approximately 19% of the outstanding capital stock of Capital Television
Network, Inc. ("Capital"). In April 1996, the Company received certain studio
and production equipment from National and Capital in lieu of a cash repayment
of the amount outstanding under the secured convertible debenture. On July 31,
1997, the Company completed the sale of WVVI (TV), which serves the Washington,
D.C. market, to Paxson for approximately $30 million in cash and the receipt of
1,197,892 shares of Paxson common stock valued at $11.92 per share as determined
pursuant to an independent financial appraisal. Under the terms of the
agreement, Paxson paid the Company $20 million in cash upon closing and was
required to pay an additional $10 million to the Company as a result of the
United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. WVVI (TV) carried the Company's television home shopping programming
to approximately 874,000 cable television households. The pre-tax gain recorded
on the sale of this television station was approximately $38.9 million and was
recognized in the second fiscal quarter ended July 31, 1997.
The Company acquired WHAI (TV), a full power UHF television station
licensed to Bridgeport, Connecticut and servicing part of the New York City ADI
in December 1994 from Bridgeways Communications Corp. Total consideration for
the acquisition of WHAI was $7,320,000, including $3,900,000 in cash and 720,000
shares of the Company's common stock with a fair market value of $3,420,000. In
April 1994, the Company acquired WAKC, a full power UHF station licensed to
Akron, Ohio, for approximately $6,000,000, including $1,000,000 payable under
the terms of a non-compete agreement in five equal annual installments
commencing in April 1995. Since its acquisition, WAKC had been operated as an
ABC network affiliate and did not carry any of the Company's television home
shopping programming. On February 28, 1996, the Company completed the sale of
these two television stations to Paxson for $40.0 million in cash plus the
assumption of certain obligations. The pre-tax gain on the sale of these two
television stations of approximately $27 million was recognized in the first
fiscal quarter ended April 30, 1996.
The Company purchased KVVV, licensed to Baytown, Texas, from Pray, Inc. for
a purchase price of $5,750,000, of which $4,150,000 was paid at the initial
closing on March 28, 1994. On March 31, 1997, the Supreme Court upheld the "must
carry" provisions of the 1992 Cable Act, and as a result, the Company paid the
remaining $1,600,000 upon a second closing.
"Must Carry." The Company has achieved increased cable distribution of its
programming under the FCC's "must carry" rules through mandatory carriage on
local cable systems of full power television stations it has acquired or intends
to acquire. In general, and subject to the right of a cable operator to seek FCC
relief upon a showing of lack of service or coverage or by other factors, the
current "must carry" rules entitle full power television stations to mandatory
cable coverage, at no charge, in all cable homes located within each station's
ADI or Designated Market Area ("DMA"), provided that the signal is of adequate
strength and the cable system has "must carry" designated channels available.
See "Federal Regulation." Mandatory cable carriage can substantially increase,
at a low cost, the number of homes that a full power television station can
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reach. On March 31, 1997, the Supreme Court, rejecting a constitutional
challenge brought by cable industry plaintiffs, upheld in their entirety the
"must carry" rules applicable to full power television stations.
Other Methods of Program Distribution
The Company's programming is also broadcast full-time to "C"-band satellite
dish owners and homes via thirteen low power television ("LPTV") stations that
the Company owns or with which it has programming lease agreements. The LPTV
stations and satellite dish transmissions were collectively responsible for less
than 8% of the Company's sales in its last fiscal year. LPTV stations reach a
substantially smaller radius of television households than full power television
stations, are generally not entitled to "must carry" rights and are subject to
substantial FCC limitations on their operations. However, LPTV stations can be
constructed and operated at a substantially lower cost than full power
television stations. During fiscal 1998, the Company acquired five LPTV stations
located in Charlotte, North Carolina, Kansas City, Missouri (two LPTV stations),
Cleveland, Ohio, and Houston, Texas. In February 1998, the Company also sold two
LPTV stations located in Portland, Oregon and Indianapolis, Indiana. The Company
now owns and operates ten LPTV stations. The Company is preparing to close on
the acquisition of an additional LPTV station in Seattle, Washington with which
the Company has a programming lease agreement. One other LPTV station, located
in Richmond, Virginia, with which the Company currently has a programming
agreement, is scheduled to be acquired in fiscal 1999.
Internet Website
In April 1997, the Company launched an interactive shopping site address on
the Internet located at WWW.VVTV.COM. The Internet site provides consumers with
access to the general merchandise offered on the Company's television home
shopping program as well as provide consumers the opportunity to view and hear
the live 24-hour per day television home shopping program. This method of
program distribution is in the development stage and, consequently, the Company
cannot predict operating results. In addition, the Company, through CVI, also
uses a different website to liquidate its overstock merchandise.
Print Media Operations
The Company's print media operations provide customers with a broad range
of quality merchandise at competitive or discounted prices through the
convenience of catalog and other direct marketing solicitations. The Company's
objective for print media activities is to expand recently acquired direct
marketing operations while acquiring additional direct-mail marketing companies.
The Company's strategy for print media operations is to (i) perform effective
target marketing and increase catalog circulation to achieve strong sales
growth, (ii) procure products more efficiently and improve pricing to increase
gross margins, (iii) improve order processing and distribution efficiencies
through consolidation of operations, and (iv) share customer lists between
operating units.
C. STRATEGIC RELATIONSHIPS
Montgomery Ward Alliance
During fiscal 1996, the Company entered into a Securities Purchase
Agreement, an Operating Agreement, a Credit Card License and Receivable Sales
Agreement, and a Servicemark License Agreement (collectively, the "MW
Agreements") with Montgomery Ward. Under the MW Agreements, Montgomery Ward
purchased 1,280,000 unregistered shares of common stock of the Company at $6.25
per share, which represented approximately 4.4% of the then issued and
outstanding shares of common stock of the Company, and received warrants to
purchase an additional 25 million shares of common stock of the Company. These
warrants had exercise prices ranging from $6.50 to $17.00 per share, with an
average exercise price of $9.16 per share (the "Warrants"). The value assigned
to the Warrants of $17,500,000 was determined pursuant to an independent
appraisal.
On June 7, 1996, the Company signed a non-binding Memorandum of
Understanding with Montgomery Ward pursuant to which the companies agreed to the
expansion and restructuring of their ongoing operating
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and license agreements as well as the Company's acquisition of substantially all
of the assets and assumption of certain obligations of MWD. Effective July 27,
1996 the companies reached definitive agreements and closed the transaction in
the third quarter ended October 31, 1996. Pursuant to the provisions of the
agreements, the Company's sales promotion rights were expanded beyond television
home shopping to include the full use of the servicemark of Montgomery Ward for
direct-mail catalogs and ancillary promotions. In addition, the strategic
alliance between the companies had been restructured and amended such that (i)
18 million warrants not immediately exercisable granted to Montgomery Ward in
August 1995 and with exercise prices ranging from $7.00 - $17.00 were terminated
in exchange for the issuance by the Company of 1,484,467 new immediately
exercisable warrants exercisable at $0.01 per share, and valued at $5.625 per
warrant, which approximated the book value of the 18,000,000 unvested warrants
returned as of the date of the transaction, (ii) the Company issued 1,484,993
new immediately exercisable warrants, valued at $5.625 per warrant and
exercisable at $0.01 per share, to Montgomery Ward as full consideration for the
acquisition of approximately $4.0 million in net assets, representing
substantially all of the assets and the assumption of certain liabilities of
MWD, (iii) Montgomery Ward committed to provide $20 million in supplemental
advertising support over a five-year period, (iv) the Montgomery Ward operating
agreements and licenses were amended and expanded, as defined in the agreements,
and extended to July 31, 2008 and (v) the Company issued to Montgomery Ward new
immediately exercisable warrants to purchase 2.2 million shares of the Company's
common stock at an exercise price of $.01 per share in exchange for 7 million
immediately exercisable warrants granted to Montgomery Ward in August 1995 which
were exercisable at prices ranging from $6.50 - $6.75 per share. The fair value
of the warrants approximated the book value of the warrants exchanged. The
Operating Agreement has a twelve-year term and may be terminated under certain
circumstances as defined in the agreement.
Effective November 1, 1997, the Company restructured its operating
agreement with Montgomery Ward, which governs the use of the Montgomery Ward
name. In exchange for Montgomery Ward's return to ValueVision of warrants
covering the purchase of 3,842,143 shares of ValueVision common stock
(representing all remaining warrants held by Montgomery Ward), the Company ceded
exclusive use of the Montgomery Ward name for catalog, mail order, catalog
"syndications" and television shopping programming back to Montgomery Ward.
Under the agreement, the Company has ceased the use of the Montgomery Ward name
in all outgoing catalog, syndication, and mail order communication through March
31, 1998, with a wind down of incoming orders and customer service permitted
after March 31, 1998. The agreement also includes the reduction of Montgomery
Ward's minimum commitment to support ValueVision's cable television spot
advertising purchases. Under the new terms, Montgomery Ward's commitment is
reduced from $4 million to $2 million annually, and the time period decreased
from five years to three years effective November 1, 1997. In addition, the
agreement limits the Company to offer the Montgomery Ward credit card only in
conjunction with its various television offers and subject to the normal
approvals by the credit card grantor. The Company has accounted for the
restructuring of the Operating Agreement as an exchange or disposition of assets
at fair value, in accordance with the provisions of Accounting Principles Board
Opinion No. 29. The return of the warrants, which were valued at approximately
$19,211,000, represents consideration given by Montgomery Ward for the assets
relinquished by the Company, which effectively include the remaining goodwill
attributable to the acquisition of MWD, as well as a portion of the Montgomery
Ward Operating Agreement and License asset. The warrants were valued at $5.00
per warrant, which represented the fair market value of the Company's stock on
October 22, 1997, the date on which ValueVision and Montgomery Ward reached
agreement on the terms and consideration of the restructuring agreement and the
date the transaction was effectively announced. The warrant return has been
reflected as a reduction in shareholders' equity for the fair value of the
warrants, and the intangible asset amounts reflecting the assets sold back to
Montgomery Ward have been reduced accordingly to their remaining estimated fair
values as determined through analysis of future cash flows and benefits to be
received. The difference between the consideration given by the Company (the
assets sold back to Montgomery Ward) and the consideration received (the
warrants returned to the Company) was not material. The agreement also called
for the repurchase by the Company of 1,280,000 shares of its common stock owned
by Montgomery Ward, at a price of $3.80 per share. This repurchase was completed
on January 15, 1998. Management does not believe that this restructuring will
have any other material impact on the Company's financial condition, results of
operations or liquidity.
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Net Radio Network
In March 1997, the Company acquired a 15% interest in Net Radio Corporation
("Net Radio") for an aggregate purchase price of $3 million, consisting of $1
million in cash and a commitment to provide $2 million in future advertising.
Net Radio is a music and entertainment site on the Internet. Navarre
Corporation, a leading national distributor of music, computer software and
interactive CD ROM products, owns the remaining 85% of Net Radio. The Company's
24-hour per day shopping program is currently being carried by Net Radio. This
investment allows ValueVision to establish a foothold in providing electronic
commerce on the Internet. Additionally, ValueVision has been granted exclusive
rights for most merchandise categories to be made available in Net Radio's
program marketplace.
D. MARKETING AND MERCHANDISING
Electronic Media
The Company's television revenues are generated from sales of merchandise
offered through its television home shopping programming. ValueVision's
programming features recognizable on-air television home shopping network
personalities, many of whom have built a following on other home shopping
programs. The sales environment is friendly and informal. As a part of its
programming, the Company provides live, on-air telephone interaction between the
on-air host and customers. Such customer testimonials give credibility to the
products and provide entertainment value for the viewers.
The Company's television home shopping network utilizes live television 24
hours per day, seven days a week, to create an interactive and entertaining
atmosphere to effectively describe and demonstrate the Company's merchandise.
Selected customers participate through live conversations with on-air hosts and
occasional celebrity guests. The Company believes its customers make purchases
based primarily on convenience, quality of merchandise and availability of brand
name value.
The Company employs a variety of techniques for marketing the products sold
on the air including, among others, segmented merchandising programs and
merchandise-themed, in-studio and live remote "specials" to supplement the
general merchandise offering format. The Company believes that its customers are
primarily women between the ages of 35 and 55, with household income of
approximately $35,000 to $45,000. The typical viewer is from a household with a
professional or managerial primary wage earner. ValueVision schedules its
special segments at different times of the day and week to appeal to specific
viewer and customer profiles. The Company also produces special theme programs
for events such as Father's Day, Mother's Day and Valentine's Day. The Company
features frequent and occasionally unannounced, special bargain, discount and
inventory-clearance sales in order to, among other reasons, encourage customer
loyalty or add new customers.
The Company produces segmented merchandising programs and
merchandise-themed, in-studio and occasional remote "specials" to supplement the
general merchandise offering format, including The Doll Collector, The Sports
Page, The Coin Collector, Italian Romance, Home Accents, Silver Styles,
Everything Electric, New York Collection, The Personal Jeweler, Brillante,
Ultimate Ice and Estate Collectibles.
In addition to the Company's daily produced television home shopping
programming, the Company may from time to time test other types of strategies,
including localized home shopping programming in conjunction with retailers and
other catalogers. The Company may seek to enter into joint ventures,
acquisitions or similar arrangements with other consumer merchandising
companies, television home shopping companies, television stations, networks or
programmers to complement or expand the Company's television home shopping
business. Most of the Company's cable lease and affiliation agreements provide
for cross channel 30-second promotional spots. The Company purchases advertising
time on other cable channels to advertise specialty shows and other special
promotions. The Company prominently features its on-air hosts in advertising and
promotion of its programming.
The Company's television home shopping merchandise is generally offered at
or below retail prices. Jewelry accounted for approximately 60% of the Company's
net sales in fiscal 1998 compared to 62% in fiscal 1997 and 73% in fiscal 1996.
Giftware, collectibles and related merchandise, apparel, electronics,
housewares,
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seasonal items and other merchandise comprise the remaining sales. The Company
continually introduces new items with additional merchandise selection chosen
from available inventories of previously featured products. Inventory sources
include manufacturers, wholesalers, distributors, inventory liquidators and
importers.
ValueVision has also developed several lines of private label merchandise
that are targeted to its viewer/customer preferences, including Brillante(R),
C-Band, Day Wear, Illusions(TM), New York Collections(TM) and Vincenza
Collections(TM). The Company intends to continue to promote private label
merchandise, which generally has higher than average margins. The Company also
may negotiate with celebrities, including television, motion picture and sports
stars, for the right to develop various licensed products and merchandising
programs which may include occasional on-air appearances by the celebrity.
In 1991, the Company introduced its Video Shopping Cart(SM) service. The
Video Shopping Cart allows customers to order as many items as often as they
wish during a 24-hour period between midnight to midnight each day, and pay a
single shipping and handling charge for the entire order (currently $11.95;
$16.95 to households in Alaska and Hawaii). Substantially all of the Company's
merchandise qualifies for inclusion in a customer's Video Shopping Cart, except
for certain large items, items over $300, items placed on the "ValuePay"
installment payment program or items that are direct-shipped from the vendor.
The Company transmits daily programming instantaneously to cable operators,
full and low power television stations, and satellite dish owners by means of a
communications satellite. In March 1994, the Company entered into a 12-year
satellite lease on a new Hughes Communication cable programming satellite
offering transponders to the cable programming industry, including the Company.
Under certain circumstances, the Company's transponder could be preempted and
the Company currently has not contracted for backup services.
Print Media
VVDM, through HomeVisions, is a direct-mail marketer of a broad range of
quality general merchandise which is sold to consumers through direct-mail
catalogs. Products offered include domestics, housewares, home accessories and
electronics. HomeVisions' principal direct marketing vehicle is its home decor
and furnishings catalog, a full-color booklet of approximately 50 to 100 pages
that is mailed semi-monthly to its customer list and to individuals whose names
are generated from mailing lists rented by HomeVisions. HomeVisions also
produces and mails special issues during the holiday season and produces
inventory clearance catalogs. Historically, a significant portion of
HomeVisions' catalogs have been targeted to Montgomery Ward credit card account
holders.
CVI markets a variety of merchandise through five consumer specialty
catalogs under distinct titles. The catalogs are mailed seasonally and are
targeted to middle and upper-income women aged 35-55 years old. Catalog titles
offered by CVI include: (i) Nature's Jewelry(R) -- offering moderately-priced,
nature-themed jewelry, apparel and gifts; (ii) The Pyramid Collection(TM) --
offering a wide array of self-improvement, spiritually oriented and New Age
books, tapes and CD's as well as jewelry and gifts with related themes; (iii)
Serengeti(R) -- offering jewelry, apparel and gifts based on various wildlife
themes; (iv) NorthStyle(R) -- "America's Nature Gift Catalog", sells
"northwoods" or "log cabin" styled home decor and apparel, as well as books,
videos and audio products on a similar theme; and (v) The Mind's Eye(R) -- a
nostalgia catalog offering audio, video, games and home products from customers'
childhood, some with a collectible component.
BII is a leading direct marketer of women's foundation undergarments and
other women's apparel. Products include the Posture X Bra(TM), cotton jumpers
and other related products that provide comfort, support and posture
enhancement. BII markets its products through newspaper inserts, magazines and
other print media as well as through various syndication offers in the credit
card billing statements of individual consumers.
Favorable Purchasing Terms
The Company obtains products for its electronic and print media, direct
marketing businesses from domestic and foreign manufacturers and is often able
to make purchases on favorable terms based on the
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volume of transactions. Many of the Company's purchasing arrangements with its
television home shopping vendors include inventory terms which allow for return
privileges or stock balancing. The Company is not dependent upon any one
supplier for a significant portion of its inventory.
E. ORDER ENTRY, FULFILLMENT AND CUSTOMER SERVICE
Products offered through all of the Company's selling mediums, except BII,
are available for purchase via toll-free "800" telephone numbers. The Company
maintains on-site telephone response centers in its Eden Prairie, Minnesota and
Chelmsford, Massachusetts facilities, staffed by call center representatives,
each equipped with a terminal on-line with the Company's computerized order
response and fulfillment systems. These order response and fulfillment systems
have approximately 300 dedicated order entry agent stations, approximately 50 to
90 of which are currently staffed at various times and an additional 100 "flex"
order entry stations to handle overflow capacity during peak seasons. The
Company's primary telephone system has a 1,400 line capacity, and its primary
computer system has a 1,500-agent capacity, both of which can be readily
upgraded for additional volume. The Company's telephone systems display
up-to-the-second data on the volume of incoming calls, the number of call center
representatives on duty, the number of calls being handled and the number of
incoming calls, if any, waiting for available call center representatives. The
fulfillment systems automatically report and update available merchandise
quantities as customers place orders and stock is depleted. The Company's
computerized systems handle customer order entry, order fulfillment, customer
service, merchandise purchasing, on-air scheduling, warehousing, customer record
keeping and inventory control. In fiscal 1996, the Company invested in backup
power supply systems to ensure that interruptions to the Company's operations
due to electrical power outages are minimized.
During fiscal 1997, the Company purchased a 262,000 square foot
distribution facility in Bowling Green, Kentucky which is being used in
connection with the fulfillment operations of HomeVisions and the non-jewelry
segment of the Company's television home-shopping business. In addition, during
fiscal 1997, the Company installed a 192-line Automated Voice Response Unit
("VRU") to capture additional ValueVision customer orders quickly without the
assistance of a live call center representative. Customers simply place orders
using the touch-tone pad of their telephone. Approximately 25-30% of daily sales
orders are taken using the VRU system.
The majority of customer purchases are paid by credit card. Commencing in
March 1995, customers were able to use either a Montgomery Ward or a
ValueVision/Montgomery Ward credit card to charge ValueVision purchases. In
accordance with general industry practice, the Company accepts "reservation"
orders from customers who wish to pay by check. The Company does not offer
C.O.D. terms to customers. During fiscal 1995, the Company introduced an
installment payment program called ValuePay which entitles television home
shopping customers to purchase merchandise and generally pay for the merchandise
in two to four equal successive monthly installments. The Company intends to
continue to sell merchandise using the ValuePay program.
Merchandise is shipped to customers via United Parcel Service and the
United States Postal Service, which generally results in delivery to the
customer within seven to ten days after an order is received. United Parcel
Service and the United States Postal Service, through a third-party carrier,
pick up merchandise directly at the Company's distribution centers. Orders are
generally shipped to customers within 48 hours after the order is placed.
The Company's Customer Service departments handle customer inquiries, most
of which consist of inquiries with respect to the status of pending orders or
returns of merchandise. The customer service representatives are on-line with
the Company's computerized order response and fulfillment systems. Being on-line
permits access to a customer's purchase history while on the phone with the
customer, thus enabling most inquiries and requests to be promptly resolved. The
Company considers its order entry, fulfillment and customer service functions as
particularly important functions positioned with open capacity to enable it to
accommodate future growth. The Company designs all aspects of its infrastructure
to meet the needs of the customer and to accommodate future expansion.
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The Company's television home shopping return policy allows a standard
30-day refund period for all customer purchases. The Company's return rates on
its television sales have been approximately 27%, which is slightly higher than
the reported industry average of approximately 24% to 26%. Management attributes
the higher return rate in part to the Video Shopping Cart, as customers are more
likely to order additional items on a trial basis when using the Video Shopping
Cart; and higher than average unit price points of approximately $83 in fiscal
1998 ($85 in fiscal 1997). Management believes that the higher return rate is
acceptable, given the higher net sales generated and the Company's ability to
quickly process returned merchandise at relatively low cost. Generally, the
Company maintains a very liberal return policy for its direct-mail operations.
The return rate for the Company's direct-mail operations for fiscal 1998 was
approximately 11% and the Company believes that this return rate is comparable
to industry averages.
F. COMPETITION
The direct marketing and retail businesses are highly competitive. In both
its television home shopping and direct-mail operations, the Company competes
for consumer expenditures with other forms of retail businesses, including
department, discount, warehouse and specialty stores, other mail order, catalog
and television home shopping companies and other direct sellers.
The television home shopping industry is highly competitive and is
dominated by two companies, QVC Network, Inc. ("QVC") and HSN, Inc. (formerly
known as Home Shopping Network, Inc. ("HSN")). The Company believes that the
home shopping industry is attractive to consumers, cable companies,
manufacturers and retailers. The industry offers consumers convenience, value
and entertainment, and offers manufacturers and retailers an opportunity to test
market new products, increase brand awareness and access additional channels of
distribution. The Company believes the industry is well positioned to compete
with other forms of cable programming for cable air time, as home shopping
networks compensate cable television operators, whereas other forms of cable
programming receive compensation from cable operators for carriage. The Company
competes for cable distribution with all other programmers, including other
television home shopping networks such as QVC and HSN. The Company currently
competes for viewership and sales with QVC, HSN, or both companies, in virtually
all of its markets. The Company is at a competitive disadvantage in attracting
viewers due to the fact that the Company's programming is not carried full time
in approximately one-half of its markets, and that the Company may have less
desirable cable channels in many markets.
The Company expects increasing competition for viewers/customers and for
experienced home shopping personnel from major cable systems, television
networks and retailers that may seek to enter television home shopping. The
Company will also compete to lease cable television time, to enter into cable
affiliation agreements, and to acquire full power broadcast television stations.
Entry and ultimate success in the television home shopping industry is dependent
upon several key factors, the most significant of which is obtaining carriage on
cable systems reaching an adequate number of subscribers. The Company believes
that the number of new entrants into the television home shopping industry will
continue to increase. The Company believes that it is strategically positioned
to compete because of its established relationships with cable operators and its
current intentions to acquire additional television stations in the event that
stations in strategic markets can be acquired at favorable prices, however, no
assurance can be given that the Company will be able to acquire cable carriage
or additional television stations at prices favorable to the Company.
New technological and regulatory developments may also increase competition
and the Company's costs. In April 1997, the FCC adopted rules for digital
television ("DTV") that will allow full power television stations to broadcast
multiple channels of digital data simultaneously on the bandwidth presently used
by one normal analog channel. FCC rules will allow broadcasters to use this
additional capacity to provide new services, including home shopping, video
delivery and interactive data transfer. Every full power television station in
operation has been assigned an additional channel on which to broadcast DTV
until analog transmissions are terminated. Station affiliates of the four major
networks in the top ten markets must be on the air with a DTV signal by May 1,
1999; network affiliates in the top thirty markets must be on the air by
November 1, 1999. In addition, four direct broadcast satellite ("DBS") systems
currently transmit programming to subscribers, and at least three other
companies have been issued licenses to provide DBS service. One foreign company
is also authorized to operate earth stations in the United States that receive
signals from a
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Mexican satellite. As of June 1997, there were nearly 5.1 million DBS
subscribers. The DBS industry is developing antennas to improve over-the-air
broadcast transmission reception for DBS subscribers, and at least one DBS
system has approved plans to transmit local broadcast signals. Furthermore,
satellite master antenna television systems ("SMATV") have begun to deliver
video programming to multiple dwelling units. SMATV systems receive and process
satellite signals at on-site facilities and then distribute the programming to
individual units. It is estimated that there were 1,126,000 SMATV residential
subscribers as of June 30, 1997. Finally, a number of telephone companies have
acquired cable franchises and obtained FCC certification to operate open video
systems ("OVS") in order to provide video programming to customers. These
developments could have the effect of increasing home shopping competitors to
include firms with substantial financial and technical ability.
Developing alternative technologies could in the future provide outlets for
increased competition to the Company's programming. In 1996, the FCC completed
auctions for authorizations to provide multichannel multipoint distribution
services ("MMDS"), also known as wireless cable. Approximately 1.1 million
subscribers now receive traditional video programming through MMDS. Local
multipoint distribution service ("LMDS"), another technology that allows
wireless transmission and reception of video or audio programming or other data,
may also compete with cable and traditional broadcast television in the future.
In March 1998, the FCC completed the auction of 986 LMDS licenses nationwide. An
additional potential competing technology is instructional television fixed
service ("ITFS"). The FCC now allows the educational entities that hold ITFS
licenses to lease their "excess" capacity for commercial purposes. The
multichannel capacity of ITFS could be combined with either an existing single
channel MDS or a new MMDS to increase the number of available channels offered
by an individual operator.
In its direct-mail operations, the Company competes with other major
catalog sales organizations, as well as retail specialty stores and conventional
retailers with substantial catalog operations and other discount retailers and
companies that market via computer technology. Management believes that the
Company is able to compete effectively by offering its customers a broad range
of quality merchandise at competitive or discount prices with a high degree of
convenience and reliability.
Many of the Company's competitors are larger and more diversified than the
Company, or have greater financial, marketing, merchandising and distribution
resources. Therefore, the Company cannot predict the degree of success with
which it will meet competition in the future.
G. NATIONAL MEDIA CORPORATION
1994 Merger Proposal
In January 1994, the Company proposed an acquisition of National Media
Corporation ("National Media"). National Media is a publicly-held direct
marketer of consumer products through the use of direct response transactional
television programming, known as infomercials, and currently makes its
programming available to more than 370 million television households in more
than 70 countries worldwide In February 1994, the Company announced a tender
offer for a majority of the outstanding shares of National Media. In March 1994,
the Company and National Media entered into a Merger Agreement and the Company
modified the terms of its tender offer. In April 1994, the Company terminated
its tender offer and the Merger Agreement with National Media asserting
inaccurate representations and breach of warranties by National Media, and based
upon adverse regulatory developments concerning National Media. Litigation
challenging the Company's termination of the tender offer and Merger Agreement
was subsequently filed by National Media and its former chief executive officer
and president. In addition, shareholders of National Media filed four purported
class action lawsuits against the Company and certain officers of the Company.
Each of these suits alleged deception and manipulative practices by the Company
in connection with the tender offer and Merger Agreement.
In fiscal 1996, the Company, National Media and National Media's former
chief executive officer and president agreed to dismiss all claims, to enter
into joint operating agreements involving telemarketing and post-production
capabilities, and to enter into an international joint venture agreement. Under
the agreement, the Company received ten-year warrants, which vest over three
years, to purchase 500,000 shares of National
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Media's common stock at a price of $8.865 per share. In November 1996, the
Company and National Media amended their agreement by providing for the
additional payment by the Company to National Media of $1.2 million as
additional exercise price for the warrants. As of January 31, 1998, $800,000 has
been paid with a final installment of $400,000 to be paid on September 1, 1998.
In March 1997, the court gave final approval to a $1.0 million settlement,
which was paid by the Company from insurance proceeds, as full settlement in the
matter of the class action suits initiated by certain shareholders of National
Media.
1998 Merger Proposal
On January 5, 1998, the Company entered into a Merger Agreement, by and
among the Company, National Media and Quantum Direct Corporation. If the Mergers
were to be consummated, the Company and National Media would have become
wholly-owned subsidiaries of Quantum Direct, with each outstanding share of the
Company's common stock being converted into 1.19 shares of common stock in
Quantum Direct and each outstanding share of common stock of National Media,
being converted into one share of common stock in Quantum Direct.
Concurrently with the execution of the Merger Agreement, the Company agreed
to loan (the "Loan") to National Media, pursuant to a Demand Promissory Note, up
to an aggregate of $10.0 million (the "Demand Note"), $7.0 million of which was
advanced upon signing of the Demand Note on January 5, 1998 and the remaining
$3.0 million of which has subsequently been advanced. The Loan proceeds have
been used by National Media for various purposes, including the funding of
accounts receivable, inventory and media purchases. The Loan bears interest at
prime rate plus 1.5% per annum and is due on the earlier of January 1, 1999 or
upon termination of the Merger Agreement in certain circumstances. In the event
National Media is unable to repay the Loan when due, ValueVision may elect to
receive payment in shares of National Media's common stock at the then present
market value. In consideration for providing the Loan, National Media issued to
ValueVision warrants to acquire 250,000 shares of National Media's common stock
with an exercise price per share equal to $2.74. The warrants are exercisable
until the earlier of (i) January 5, 2003 and (ii) the occurrence of one of the
following termination events: (x) the consummation of the Merger or (y) the
termination by National Media of the Merger Agreement, if such termination
results from a breach of a covenant by ValueVision or in the event ValueVision's
shareholders do not approve the Merger Agreement; provided, however, that if,
within 75 days after the termination event described in clause (y) above,
National Media has not repaid the Loan in full or if during such 75 days,
National Media defaults under its obligations pursuant to the Loan, no
termination event will be deemed to have occurred and the warrants shall remain
exercisable.
Consummation of the Mergers is subject to the satisfaction (or waiver) of a
number of conditions, including, but not limited to: (i) approval by holders of
a majority of the issued and outstanding shares of National Media's common stock
and ValueVision's common stock; (ii) redemption of National Media's Series C
Preferred Stock; (iii) the receipt of certain regulatory and other approvals,
including those from the Federal Trade Commission and the Federal Communication
Commission; and (iv) not more than 5% of the holders of the issued and
outstanding shares of the Company's common stock shall have made demands and
given the notices required under Minnesota law to assert dissenters' appraisal
rights.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it does not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company's common stock have demanded their dissenter's rights. The Company
and National Media had special meetings of their shareholders scheduled on April
14, 1998 to vote on the Mergers. In light of the receipt of the dissenters'
notice, the companies mutually agreed to postpone their respective shareholder
meetings while the companies attempt to negotiate a restructuring of the Mergers
that is acceptable to each of the companies and in the best interest of their
shareholders. As of the date hereof, National Media and the Company are still
attempting to negotiate a
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restructuring of the Mergers and have not rescheduled their respective special
meetings. There can be no assurance that the companies will be able to
successfully negotiate such a restructuring, or if negotiated, that such Mergers
will be consummated.
On March 30, 1998, the Company and National Media announced the selection
of veteran marketing, direct response and retail executive, Gene McCaffery, 50,
as Chief Executive Officer of Quantum Direct. Mr. McCaffery brings to Quantum
Direct 25 years in retail and marketing experience, as well as substantial
executive experience. He most recently served as Chief Executive Officer and
managing partner of Marketing Advocates, a celebrity-driven product and service
development company based in Los Angeles, California. Mr. McCaffery was formerly
Senior executive Vice President of Montgomery Ward, in charge of its
merchandising, strategic planning, advertising and marketing operations before
leaving in 1996 to start Marketing Advocates. While at Montgomery Ward, Mr.
McCaffery also oversaw The Signature Group, one of the nation's largest direct
marketing companies, and also served as Vice-Chairman of the Board of
ValueVision from August 1995 to March 1996. Mr. McCaffery served as an infantry
officer in the Vietnam War and was appointed as Civilian Aide to the Secretary
of the Army by President George Bush in 1991, a position that he still holds.
Mr. McCaffery and Quantum Direct have entered into a three year employment
agreement pursuant to which Mr. McCaffery will become Chief Executive Officer of
Quantum Direct, and receive a base salary of $500,000 during the first year,
$525,000 during the second year, and $550,000 during the third year. The
agreement also provides for bonus salary of up to 100% of the base salary, which
may be earned only upon Quantum Direct meeting certain operating income, revenue
and stock performance criteria. In addition, pursuant to the agreement, Mr.
McCaffery is being issued stock options to acquire 800,000 shares of Quantum
Direct's common stock, $.01 par value, with an exercise price equal to $3.375
per share, the last trading price of ValueVision's common stock on March 30,
1998. The exercise price of such options will be adjusted to the last trading
price of Quantum Direct's common stock on the first day it trades, to the extent
such price is lower than $3.375. Of such options, 200,000 vest monthly on a pro
rata basis over the term of the employment agreement, and 600,000 vest on the
earlier of the fifth anniversary of Mr. McCaffery's start date (provided he is
still an employee of Quantum Direct) or in equal 20% (120,000 share) blocks
based on the average closing price of Quantum's common stock for 20 consecutive
trading days being at $5.00, $6.00, $7.00, $8,00 and $9.00, respectively. Such
options are being issued as a stand-alone plan of Quantum Direct, outside of
Quantum Direct's 1998 Equity Participation Plan. The employment agreement
generally provides for a one year non-compete. In addition, in the event of a
change of control (as defined) of Quantum Direct, Mr. McCaffery's employment can
be terminated by Quantum Direct or Mr. McCaffery in certain circumstances. In
the event of such a termination, Mr. McCaffery would be entitled to receive the
base salary and bonus salary remaining to be paid through the end of the term of
the employment agreement, together with accrued benefits. In the event the
Mergers are not consummated, ValueVision and Mr. McCaffery have agreed to enter
into an employment agreement on substantially the same terms pursuant to which
Mr. McCaffery would become the Chief Executive Officer of ValueVision.
H. FEDERAL REGULATION
The cable television industry, the acquisition, ownership and operation of
full and low power television stations and the broadcasting industry in general
are subject to extensive regulation by the FCC. The following does not purport
to be a complete summary of all of the provisions of the Communications Act of
1934, as amended (the "Communications Act"), the Cable Television Consumer
Protection Act of 1992 (the "Cable Act"), the Telecommunications Act of 1996
(the "Telecommunications Act") or the FCC rules or policies that may affect the
operations of the Company. Reference is made to the Communications Act, the
Cable Act, the Telecommunications Act and regulations and public notices
promulgated by the FCC for further information. The laws and regulations
affecting the industries are subject to change, including through pending
proposals. There can be no assurance that laws, rules or policies that may have
an adverse effect on the Company will not be enacted or promulgated at some
future date.
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Cable Television
The cable industry is regulated by the FCC under the Cable Act and FCC
regulations promulgated thereunder.
"Leased Access." Cable systems are generally required to make up to 15% of
their channel capacity available for lease by nonaffiliated programmers. Little
use has been made of leased access because of the prohibitively high lease rates
charged by cable systems. The Cable Act directs the FCC to establish procedures
to regulate the rates, terms and conditions of cable time leases so as to
encourage leased access.
The maximum leased access rates that cable systems may charge nonaffiliated
programmers such as the Company are unsettled because the rules governing those
rates have recently been amended and are subject to the filing of petitions for
reconsideration and judicial review. In May 1993, the FCC first issued rules
limiting leased access rates to the "highest implicit fee" of any channel on a
cable system, which was calculated by subtracting the license fee the cable
operator paid each programmer on the system to carry its channel from the
system's average subscriber charge for a channel and using the highest of those
differences. These rules often allowed cable operators to increase lease rates
and affected the Company's ability to gain carriage on some systems.
The FCC released its most recent revisions to these rules in February 1997.
These recent revisions adopted an "implicit fee" formula similar to the one
already in place. However, instead of capping lease rates at the "highest
implicit fee," the new rules capped rates at the "average implicit fee" for a
channel on a cable system, which is the difference between the average
subscriber charge for a channel and the average license fee the cable operator
pays to carry programming. The rules have changed the base of cable channels on
which the average is calculated in a way that makes it unclear whether or to
what extent the revised rules will affect the lease rates that the Company must
pay for carriage in any particular case. The FCC also established rules
governing the process of negotiating for carriage, making other changes to the
terms and conditions of leased access carriage and making it easier for
programmers like the Company to lease channels for less than a full 24-hour day.
The Company has petitioned the U.S. Court of Appeals for the District of
Columbia Circuit for review of the rate formula portions of the recent revisions
to the rules. Both the Company's petition for review and a similar petition are
currently pending. There can be no guarantee that the Company will succeed on
its petition for review or, if it does succeed, that the rules that the FCC
would adopt in place of the current formula would not have a material adverse
effect on the Company.
"Must Carry." In general, the FCC's current "must carry" rules under the
Cable Act entitle full power television stations to mandatory cable carriage of
their signals, at no charge, to all cable homes located within each station's
ADI provided that the signal is of adequate strength, and the cable system has
"must carry" designated channels available. In March 1997, the Supreme Court
upheld in their entirety the "must carry" provisions applicable to full power
television stations. The scope of "must carry" rights for future broadcast
transmissions of digital television stations ("DTV") stations is as yet
uncertain. The FCC is expected to begin a proceeding to determine such rights.
The FCC has been asked to reevaluate its July 1993 extension of "must carry"
rights to predominantly home shopping television stations. It has yet to reverse
that decision, but there can be no assurance that home shopping television
stations will continue to have "must carry" rights. In addition, under the Cable
Act, cable systems may petition the FCC to determine that a station is
ineligible for "must carry" rights because of such station's lack of service to
the community, its previous noncarriage, or other factors. An important factor
considered by the FCC in its evaluation of such petitions is whether a given
station places Grade B coverage over the community in question. The
unavailability of "must carry" rights to the Company's existing or future
stations would likely substantially reduce the number of cable homes that could
be reached by any full power television station that the Company may acquire.
The Company's ability to increase the cable distribution of its programming
will be adversely affected in the event of unfavorable judicial, regulatory or
administrative determinations of the validity and application of the "must
carry" and "leased access" provisions of the Cable Act and the FCC rules
promulgated thereunder. The Company believes, however, that even absent
favorable determinations regarding "must carry" and
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"leased access," it will be able to achieve growth through other strategies such
as affiliation agreements, block leasing and broadcast television programming.
However, no assurance can be given that the Company will achieve sufficient
growth through such other strategies, or that cable systems will continue to
carry television stations that broadcast the Company's programming.
Closed Captioning. FCC rules require television stations, cable systems and
other video programming providers to phase in closed captioning for new
programming over an eight-year period, in order to make such programming
accessible to the hearing impaired. Home shopping programming is not exempt from
this requirement. Several parties have filed petitions for reconsideration of
the Commission's order adopting these rules. The rules remain in effect while
these petitions are pending, and no prediction can be made as to the outcome of
the petitions. These requirements could substantially increase the Company's
television programming expenses.
Full Power Television Stations
General. The Company's acquisition and operation of full power television
stations are subject to FCC regulation under the Communications Act. The
Communications Act prohibits the operation of television broadcasting stations
except under a license issued by the FCC. This statute empowers the FCC, among
other things, to issue, revoke and modify broadcasting licenses, determine the
locations of stations, regulate the equipment used by stations, adopt
regulations to carry out the provisions of the Communications Act and impose
penalties for violation of such regulations. Over-the-air coverage of full power
television stations assigned by the FCC to the UHF spectrum, such as the
stations that the Company has acquired, is significantly less extensive than
that of Very High Frequency ("VHF") stations.
FCC Approval of License Transfers. The Company's acquisition and sale of
full power television stations will be subject, in each case, to the prior
approval of the FCC. The Company has previously been found qualified by the FCC
to hold full power television and LPTV licenses, and the Company believes that
it should be found qualified to purchase additional full power television
stations. FCC approval, however, is also subject to other conditions, including
the filing of petitions to deny or other opposition by interested parties and,
accordingly, there can be no assurance of FCC approval.
License Grant and Renewal. The Communications Act provides that a broadcast
license may be granted to any qualified applicant if the public interest,
convenience and necessity will be served thereby, subject to certain
limitations. Under these recent changes, applications for renewal of a broadcast
license must be granted if during the preceding term the station has served the
public interest, convenience and necessity; committed no serious violations of
the Act or the FCC's regulations; and committed no other violations that would
constitute a pattern of abuse. If the licensee cannot satisfy this test, the FCC
may deny the renewal application (if there are no mitigating circumstances) or
grant it subject to terms and conditions, including renewal for a shorter term.
Competing applications for the license at issue are to be accepted only if the
FCC denies the renewal application.
The new FCC rules implementing the renewal provisions of the
Telecommunications Act as yet provide no clear standards for interpretation. A
subsidiary of the Company holds a license for one full power television station,
KVVV (TV), Baytown, Texas, whose license expires August 1, 1998 and which has
pending an application for renewal of license. Television licenses are now
issued for a term of eight years.
The Company and its subsidiaries have pending applications for construction
permits for nine full power television stations in the following locations:
Douglas, Arizona; Rapid City, South Dakota; Provo, Utah; Destin, Florida; Des
Moines, Iowa; Virginia Beach, Virginia; Waterloo, Iowa; Spokane, Washington; and
Tallahassee, Florida. In each of these cases, there are competing applications
for the construction permits. The FCC has proposed to award the construction
permits to the highest bidder in an auction whose rules, proceedings, and
timetable have not been established. The auction will be limited to the mutually
exclusive applicants for the initial licenses. However, the FCC will not conduct
an auction to select an applicant if it approves a settlement agreement that was
filed by February 2, 1998 by the applicants for a construction permit and that
removes the conflict between their applications. The Company has entered into
timely settlement agreements with the applicants for construction permits at
Spokane, Washington; Douglas, Arizona; and
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Waterloo, Iowa. The Company has agreed to dismiss its applications in exchange
for monetary consideration of, respectively, $416,666, $50,000, and $65,000. The
FCC approved the settlement agreement for Spokane, Washington by order which has
not yet become final, and the settlement agreements for Douglas, Arizona and
Waterloo, Iowa are currently pending.
Two of the Company's pending applications propose to operate on channels
above channel 59: Des Moines, Iowa and Destin, Florida. The FCC has recently
concluded that it will not authorize new analog full power television stations
on channel 60-69 and that applications for stations on these channels will be
dismissed if they are not amended to seek a new channel below channel 60, in
accordance with a timetable and procedure not yet established. The Company and
others have filed petitions for reconsideration of this portion of the FCC's
order. The petition is currently pending, and there is no assurance that the FCC
will reconsider its Order or that the Company will be able to find available
channels below channel 60. Accordingly, the Company's applications for these two
stations may be dismissed.
Seven of the Company's pending applications propose to operate below
channel 60: Douglas, Arizona; Rapid City, South Dakota; Provo, Utah; Virginia
Beach, Virginia; Waterloo, Iowa; Spokane, Washington; and Tallahassee, Florida.
The ultimate permittees of these stations may construct either an analog or
digital station on the channel that they are granted. The FCC will not assign
these stations an additional channel on which to broadcast DTV until analog
transmission is terminated. They may convert from analog to digital on their
single channel. If they choose to transmit initially in analog, they may, upon
application to the Commission, convert their analog facility to DTV at any time
during the transition period to DTV, which is currently scheduled to end in
2006.
Paxson Communications Corporation has purchased a 49% interest in the
Company's subsidiary that has a pending application for a construction permit at
Tallahassee, Florida and holds an option to purchase the remaining 51% interest.
Multiple Ownership. Under existing FCC regulations governing multiple
ownership of broadcast stations, a license to operate a television station will
not be granted, unless established waiver standards are met, to any party (or
parties under common control) that has an "attributable interest" in another
television station with an overlapping service area (as specified by FCC
regulations promulgated under the Communications Act). However, the
Telecommunications Act directs the FCC to conduct a rulemaking with regard to
maintaining, modifying, or eliminating local television cross-ownership limits,
which is currently pending. The Commission has recently commenced a biennial
review of other television ownership rules pursuant to Section 202(h) of the
Telecommunications Act, which requires the Commission to review all of its
ownership rules every two years and to repeal or modify regulations that are no
longer in the public interest. The Commission has requested comment on whether
the following rules should be retained, modified, or eliminated: (i) the rule
that prohibits, with certain qualifications, any person or entity from having an
"attributable interest" in television stations that reach markets containing
more than 35% of the national television audience; (ii) the rule that discounts
by 50% the audience reach of UHF stations when calculating the national
television reach of a licensee of UHF stations; (iii) the rule that prohibits
any party or entity with an attributable interest in a television (or radio)
station from owning or controlling a daily newspaper in the same locale, and
(iv) the rule that prohibits any party or entity with an attributable interest
in a television broadcast station from owning or controlling a cable system in
the same local community. No prediction can be made as to the outcome of this
biennial review.
Under FCC regulations, the officers, directors and certain of the equity
owners of a television broadcasting company are deemed to have an "attributable
interest" in the company, so that there would be a violation of FCC regulations
if an officer, director or certain owners of a full power television
broadcasting company together held more than the permitted national audience
reach, or more than one broadcast station serving the same area, or a daily
newspaper or cable system in a television station coverage area. In the case of
a corporation controlling or operating television stations, there is generally
attribution only to directors and officers and to stockholders who own 5% or
more of the outstanding voting stock, except for institutional investors,
including mutual funds, insurance companies and banks acting in a fiduciary
capacity, which may own up to 10% of the outstanding voting stock without being
subject to attribution, provided that such
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stockholders exercise no control over the management or policies of the
television broadcasting company. The FCC's multiple ownership restrictions
currently do not apply to LPTV stations. The FCC is currently proposing changes
to certain aspects of its rules. No prediction can be made as to the outcome of
these proposals.
Foreign Ownership. Foreign governments, representatives of foreign
governments, aliens, representatives of aliens, and corporations and
partnerships organized under the laws of a foreign nation are barred from
holding broadcast licenses. Aliens may own up to 20% of the capital stock of a
licensee corporation, or generally up to 25% of a U.S. corporation which, in
turn, has a controlling interest in a licensee.
Commercial and Other Limitations. The FCC has eliminated many of its former
rules applicable to commercial television stations in order to "deregulate"
broadcasting. Nonetheless, a commercial television station remains under an
obligation to provide non-entertainment programming that is responsive to issues
of concern to its community of license and to provide programming that serves
the informational and educational needs of children. The FCC reimposed
commercial limits on children's television programs, as required by the
Children's Television Act of 1990. In September 1993, the FCC initiated an
inquiry to determine whether to reimpose commercial limits on non-children's
programs on full power television stations including those that predominantly
broadcast home shopping programming (whether on an hourly, daily, weekly, or
some other basis). There can be no assurance as to the outcome of this inquiry.
Low Power Television Stations
Ownership and operation of LPTV stations are subject to FCC licensing
requirements similar to those applicable to full power television stations. LPTV
stations, however, are generally not eligible for "must carry" rights. Like full
power stations, the transfer of ownership of any LPTV station license requires
prior approval by the FCC. LPTV construction permits are granted by the FCC for
an initial term of 18 months, which may be extended for one or more six-month
terms if there is substantial progress towards station construction unless
completion of the station is prevented by causes not under the control of the
permittee. LPTV licenses are now issued for terms of eight years.
LPTV is a secondary broadcast service that is not permitted to interfere
with the broadcast signal of any existing or future full power television
station. Construction of a full power television station on the same channel in
the same region could therefore force a LPTV station off the air if such
interference is not corrected, subject to a right to apply for a replacement
channel. LPTV stations must also accept interference from existing and future
full power television stations.
The advent of DTV is expected to disrupt the operations of the Company's
LPTV stations to an as-yet unknown extent. The DTV proceedings have allocated an
additional channel to be used for DTV to every eligible full power television
station in the nation, effectively doubling the number of channels currently
used by full power television stations during the transition period between
analog and digital transmissions. A number of these new DTV stations have been
allocated to channels currently used by LPTV stations. Construction of these
newly authorized DTV stations will therefore force many LPTV stations off the
air unless they can find substitute channels. It is not known at this time
whether all or some of these "displaced" LPTV stations will be able to modify
their broadcast channel and continue operations.
Alternative Technologies
Alternative technologies could increase the types of systems on which the
Company may seek carriage. Four DBS systems currently provide service to the
public and three additional companies currently hold licenses to provide DBS
services. The number of DBS subscribers has increased to approximately 5.1
million households since July 1996. Approximately 1.1 million households now
subscribe to wireless cable systems, also known as MMDS systems, which provide
traditional video programming and are beginning to provide advanced data
transmission services. The FCC has completed auctions for MMDS licenses
throughout the nation. LMDS is another technology that allows wireless
transmission and reception of video or audio programming or other data; one LMDS
system is presently operational in the New York area and the FCC auctioned 986
LMDS licenses nationwide in March 1998. Similar service can be offered by
instructional
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television fixed service ("ITFS"). The FCC now allows the educational entities
that hold ITFS licenses to lease their "excess" capacity for commercial
purposes. The multichannel capacity of ITFS could be combined with either an
existing single channel MDS or a new MMDS to increase the number of available
channels offered by an individual operator. Lastly, the emergence of home
satellite dish antennas has also made it possible for individuals to receive a
host of video programming options via satellite transmission.
Advanced Television Systems
Technological developments in television transmission will in the near
future make it possible for the broadcast and nonbroadcast media to provide
advanced television services ("ATV") -- television services provided using
digital or other advanced technologies. The FCC in late 1996 approved a DTV
technical standard to be used by television broadcasters, television set
manufacturers, the computer industry and the motion picture industry. This DTV
standard will allow the simultaneous transmission of multiple streams of digital
data on the bandwidth presently used by a normal analog channel. It will be
possible to broadcast one "high definition" channel ("HDTV") with visual and
sound quality superior to present-day television or several "standard
definition" channels ("SDTV") with digital sound and pictures of a quality
slightly better than present television; to provide interactive data services,
including visual or audio transmission, on multiple channels simultaneously; or
to provide some combination of these possibilities on the multiple channels
allowed by DTV.
In April 1997, the FCC announced that it would allocate to every existing
television broadcaster one additional channel to be used for DTV during the
transition between present-day analog television and DTV. Broadcasters will not
be required to pay for this new DTV channel, but will be required to relinquish
their present analog channel when the transition to DTV is complete. The FCC
presently plans for the transition period to end by 2006; broadcasters will at
that time be required to return their present channel to the FCC. Station
affiliates of the four major networks in the top ten markets must be on the air
with a DTV signal by May 1, 1999; network affiliates in the top thirty markets
must be on the air by November 1, 1999. The FCC has begun to issue construction
permits to build DTV stations.
The FCC has recently issued regulations with respect to DTV allocations and
interference criteria which are not yet final, and other aspects of the DTV
regulatory framework have not yet been established. The FCC is expected to apply
to DTV the rules applicable to analogous services in other contexts, including
those rules that require broadcasters to serve the public interest and may seek
to impose additional programming or other requirements on DTV service. While
broadcasters will not have to pay for the additional DTV channel itself, the FCC
has indicated that fees will likely be imposed upon broadcasters if they choose
to use the DTV channel to provide paid subscription services to the public. As
noted above, neither the Telecommunications Act nor the recent Supreme Court
decision resolves the applicability of the "must carry" rules to DTV. The FCC is
expected to begin proceedings on this issue.
It is not yet clear when and to what extent DTV or other digital technology
will become available through the various media; whether and how television
broadcast stations will be able to avail themselves or profit by the transition
to DTV; the extent of any potential interference with analog channels; whether
viewing audiences will make choices among services upon the basis of such
differences; whether and how quickly the viewing public will embrace the cost of
the new digital television sets and monitors; to what extent the DTV standard
will be compatible with the digital standards adopted by cable, DBS, MMDS, LMDS,
IVDS, or ITFS; or whether significant additional expensive equipment will be
required for television stations to provide digital service, including HDTV and
supplemental or ancillary data transmission services. Pursuant to the
Telecommunications Act, the FCC must conduct a ten-year evaluation regarding
public interest in advanced television, alternative uses for the spectrum and
reduction of the amount of spectrum each licensee utilizes. Many segments of the
industry are also intensely studying these advanced technologies. There can be
no assurances as to the answers to these questions or the nature of future FCC
regulation.
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Telephone Companies' Provision of Programming Services
The Telecommunications Act eliminated the previous statutory restriction
forbidding the common ownership of a cable system and telephone company. The
extent of the regulatory obligations that the Telecommunications Act imposes on
a telephone company that selects and provides video programming services to
subscribers depends essentially upon whether the telephone company elects to
provide its programming over an "open video system" or to do so as a cable
operator fully subject to the existing provisions of the Communications Act
regulating cable providers. A telephone company that provides programming over
an open video system will be subject only to new legislative provisions
governing open video systems and to certain specified existing cable provisions
of the Communications Act, including requirements equivalent to the "must carry"
regulations. Such a telephone company will be required to lease capacity to
unaffiliated programmers on a nondiscriminatory basis and may not select the
video programming services for carriage on more than one-third of activated
channel capacity of the system. Generally, a telephone company that provides
video programming but does not operate over an open video platform will be
regulated as a cable operator.
The Company cannot predict how many telephone companies will begin
operation of open video systems or otherwise seek to provide video programming
services, or whether such video providers will be likely to carry the Company's
programming. The FCC has adopted rules that impose on open video systems many of
the obligations imposed upon cable systems, including those pertaining to "must
carry" and retransmission consent. However, open video systems are not subject
to rate regulation and are exempt from local cable franchise requirements. These
rules are still subject to judicial review. The FCC has certified seven OVS
systems for operation and three open video systems are currently operating.
Moreover, a number of local carriers are continuing to plan to provide video
programming as traditional cable systems or through MMDS.
I. SEASONALITY
The Company's businesses are subject to seasonal fluctuation, with the
highest sales activity normally occurring during the fourth calendar quarter of
the year. Seasonal fluctuation in demand is generally associated with the number
of households using television and the direct market and retail industries. In
addition, the Company's businesses are sensitive to general economic conditions
and business conditions affecting consumer spending.
J. EMPLOYEES
At January 31, 1998, the Company, including its wholly-owned subsidiaries,
had approximately 1,100 employees, the majority of whom are employed in
telemarketing, customer service, order fulfillment and production. Approximately
27% of the Company's employees work part-time. The Company is not a party to any
collective bargaining agreement with respect to its employees. Management
considers its employee relations to be good.
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K. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and titles at ValueVision
International, Inc., principal occupations and employment for the past five
years of the persons serving as executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Robert L. Johander................... 52 Chairman of the Board and Chief Executive Officer
Nicholas M. Jaksich.................. 53 President, Chief Operating Officer and Director
Gregory D. Lerman.................... 52 Executive Vice President, General Manager ValueVision
Television
Stuart R. Romenesko.................. 35 Senior Vice President Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
David T. Quinby...................... 37 Vice President, General Counsel and Secretary
Michael L. Jones..................... 40 Vice President, Television Broadcasting
Scott A. Lindquist................... 51 Vice President, Administration
</TABLE>
Robert L. Johander, a founder of the Company, has served as Chairman of the
Board and Chief Executive Officer of the Company since June 1990. Mr. Johander's
experience in television home shopping began in 1984 as president of Telethon
Marketing Company, where he was responsible for the creation, production, and
management of national cable television home shopping programs, which were
subsequently acquired by C.O.M.B. Co. ("C.O.M.B."), a Minneapolis-based
mail-order liquidator of consumer merchandise. In early 1986, Mr. Johander, as
General Manager of C.O.M.B.'s Value Network, conceived and managed the launch of
Cable Value Network, Inc., a joint-venture television home shopping network
formed by C.O.M.B. and several national cable television system operators. In
1987, C.O.M.B. changed its name to CVN Companies, Inc. ("CVN"), which was
subsequently acquired by QVC Network, Inc.
Nicholas M. Jaksich, a founder of the Company, has served as President and
Chief Operating Officer and as a director of the Company since June 1990. From
February 1984 to June 1986, Mr. Jaksich was Vice President, Distribution and
Operations for Lillian Vernon Corporation, a national direct-mail merchandising
firm. In July 1986, Mr. Jaksich joined C.O.M.B. to assist in the launch of its
television activities. His responsibilities included the direct day-to-day
supervision of television production and merchandising activities; the
development of various television order response, inventory, and sales tracking
systems, and supervision of on-air hosts. In 1987, Mr. Jaksich succeeded Mr.
Johander as divisional Senior Vice President of CVN-Television, a division of
CVN.
Gregory D. Lerman joined the Company as Executive Vice President, General
Manager ValueVision Television in January 1998. From February 1997 to October
1997, Mr. Lerman was President and Chief Operating Officer of Kent and Spiegel
Direct, a major television direct marketing and infomercial company. From
November 1989 to December 1994, Mr. Lerman served as Executive Vice President of
Fingerhut Companies.
Stuart R. Romenesko has served the Company as Senior Vice President
Finance, Chief Financial Officer, Treasurer and Assistant Secretary since August
1995. Mr. Romenesko joined the Company in March 1994 as Vice President, Chief
Accounting Officer. From December 1991 to March 1994, Mr. Romenesko, a Certified
Public Accountant, was a Senior Manager in the Accounting and Audit Division of
Shinners, Hucovski & Company, S.C. From July 1985 to November 1991, Mr.
Romenesko served in a variety of capacities at Arthur Andersen LLP, an
international accounting firm ("Arthur Andersen"), leaving in 1991 as an
experienced manager in the firm's Audit and Business Advisory Practice.
David T. Quinby joined the Company as Vice President, General Counsel and
Secretary in February 1997. From May 1993 to February 1997, Mr. Quinby was a
senior associate at the law firm of Maslon Edelman Borman & Brand PLLP and from
August 1990 to May 1993, Mr. Quinby was an associate at the law firm of Faegre &
Benson, LLP, practicing at both firms primarily in the areas of general
corporate, mergers and acquisitions, and securities law. From September 1983
until August 1987, Mr. Quinby served in a variety
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<PAGE> 25
of capacities at Arthur Andersen, leaving for law school in 1987 as an
experienced senior in the firm's Audit and Business Advisory Practice.
Michael L. Jones joined the Company as Vice President, Television
Broadcasting in September 1993. From September 1992 to July 1993, Mr. Jones
served as Vice President, Broadcasting of Corridor Broadcast. From October 1990
to September 1992, Mr. Jones served as Vice President and General Sales Manager
of WDAS AM/FM in Philadelphia.
Scott A. Lindquist has served as the Company's Vice President,
Administration since November 1995. Prior to joining the Company, Mr. Lindquist
served as County Assessor for St. Louis County, Minnesota, from May 1984 to
November 1995.
L. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Forward-looking statements contained herein (as well as statements made in
oral presentations or other written statements made by the Company) are made
pursuant to the "Safe Harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and represent management's expectations or beliefs concerning
future events, including statements regarding the consummation of the merger
between the Company and National Media, the outcome of the Time Warner
litigation, anticipated operating results, revenue growth, capital spending
requirements, potential future acquisitions and the effects of regulation and
competition. There are certain important factors that could cause results to
differ materially from those anticipated by some of the statements made herein.
The factors, among others, that could cause actual results to differ materially
include: the ability to negotiate a restructuring of the proposed National Media
Merger and successful completion of all conditions thereto, including obtaining
shareholder approval, the ability to resolve satisfactorily the disputed issues
in the Time Warner Cable litigation, consumer spending and debt levels, interest
rate fluctuations, seasonal variations in consumer purchasing activities,
increases in postal, paper and outbound shipping costs, competition in the
retail and direct marketing industries, continuity of relationships with or
purchases from major vendors, product mix, competitive pressure on sales and
pricing, the ability of the Company to manage growth and expansion, changes in
the regulatory framework affecting the Company, increases in cable access fees
and other costs which cannot be recovered through improved pricing, the
identification and availability of potential acquisition targets at prices
favorable to the Company and the matters discussed below under "-- Risk
Factors." Investors are cautioned that all forward-looking statements involve
risk and uncertainty.
M. RISK FACTORS
In addition to the general investment risks and those factors set forth
throughout this document (including those set forth under the caption
"Cautionary Statement Concerning Forward-Looking Information"), the following
risks should be considered regarding the Company.
Risks Associated With the National Media Merger. On April 8, 1998, the
Company and National Media announced that each of the companies were postponing
their respective special shareholder meetings while they attempt to negotiate a
restructuring of the Merger. This was a result of the Company receiving
preliminary notification from holders of more than 5% of its common stock that
they intended to exercise their dissenters' rights with respect to the Merger.
Although the Company and National Media are currently negotiating to restructure
the Merger, no assurance can be given that such negotiations will be successful,
or that if successful, that the Merger will be consummated. See "Business --
National Media Corporation." For a discussion of risks associated with National
Media and the combined companies, see "Risk Factors" in the Joint Proxy
Statement/Prospectus of the Company and National Media dated March 16, 1998.
Repayment by National Media of Demand Note. Concurrently with the execution
of the Merger Agreement, the Company agreed to loan to National Media, pursuant
to the Demand Note, up to an aggregate of $10.0 million, $7.0 million of which
was advanced upon signing of the Demand Note on January 5, 1998 and the
remaining $3.0 million of which has subsequently been advanced. The Demand Note
is payable on the earlier of January 1, 1999 and the happening of certain
events. In the event the Merger is consummated, the Loan will become an
intercompany payable between the Company and National Media.
25
<PAGE> 26
However, in the event the Merger is not consummated, there can be no assurance
that National Media will be able to repay the Demand Note when due. Although the
Company would then have the ability to convert the Demand Note into shares of
National Media, no assurance can be given that the Company will be able to
recover any portion of the Loan.
Recent Losses. The Company experienced operating losses of approximately
$1.7 million, $3.7 million, $.8 million, $2.6 million and $11.0 million in
fiscal 1994, 1995, 1996, 1997 and 1998, respectively, and a net loss per diluted
share of $.13 and $.22 in fiscal 1994 and 1995, respectively, and net income per
diluted share of $.38, $.56 and $.57 in fiscal 1996, 1997 and 1998,
respectively. Net profits of approximately $10.5 million, $17.2 million and
$23.6 million and net profits per diluted share of $.36, $.53 and $.74 in fiscal
1996, 1997 and 1998, respectively, were derived from gains on sale of broadcast
stations and other investments, which are not generally expected to occur in the
future. In addition, the Company recently restructured its relationship with
Montgomery Ward regarding the Company's catalog operations. Although the
Company's management anticipates that such restructuring may result in a
reduction of the Company's revenues, it has not yet determined if such
restructuring will have a material adverse impact on the Company's results of
operations or its financial position. There can be no assurance that the Company
will be able to achieve or maintain profitable operations.
Sale of Television Stations to Paxson. On February 27, 1998, the Company
sold to Paxson Television Station KBGE (TV), Channel 33, Bellevue, Washington
along with two of the Company's non-cable, low power television stations in
Portland, Oregon and Indianapolis, Indiana, and a minority interest (and option
to acquire the remaining interest) in an entity which has applied for a new
station for aggregate proceeds of approximately $24.5 million. An additional
$10.0 million (the "Additional Proceeds") will be payable by Paxson to the
Company if and when Television Station KBGE (TV), currently operating at reduced
power from downtown Seattle, Washington, is able to relocate its antenna and
increase its transmitter power to a level at or near its licensed full power.
There can be no assurance that Paxson will ever relocate the station and
increase its transmitter power to a level at or near its licensed full power so
that Paxson will be required to pay the Additional Proceeds.
Competition. As a general merchandise retailer, the Company competes for
consumer expenditures with other forms of retail businesses, including
department, discount, warehouse and specialty stores, television home shopping,
mail order and catalog companies and other direct sellers. The catalog and
direct mail industry includes a wide variety of specialty and general
merchandise retailers and is both highly fragmented and highly competitive. In
addition, the Company competes with a wide variety of department, discount and
specialty stores which have greater financial, distribution and marketing
resources than the Company. The home shopping industry is also highly
competitive and is dominated by two companies, HSN and QVC. The Company's
television home shopping programming competes directly with HSN and QVC in
virtually all of the Company's markets. The Company is at a competitive
disadvantage in attracting viewers due to the fact that the Company's
programming is not carried full-time in many of its markets, and that the
Company may have less desirable cable channels in many markets. QVC and HSN are
well-established and, similar to the Company, offer home shopping programming
through cable systems, owned or affiliated full- and low-power television
stations and directly to satellite dish owners and, accordingly, reach a large
percentage of United States television households. The television home shopping
industry is also experiencing vertical integration. QVC and HSN are both
affiliated with cable operators serving significant numbers of subscribers
nationwide. While the Cable Television Consumer Protection and Competition Act
of 1992 includes provisions designed to prohibit coercion and discrimination in
favor of such affiliated programmers, the FCC has decided that it will rule on
the scope and effect of these provisions on a case-by-case basis.
Potential Termination of Cable Time Purchase Agreements; Media Access;
Related Matters. The Company's television home shopping programming is
distributed primarily through purchased blocks of cable television time. Much of
the Company's cable television affiliation agreements are terminable by either
party upon 30 days, or less notice. The Company's television home shopping
business could be materially adversely affected in the event that a significant
number of its cable television affiliation agreements are terminated or not
renewed on acceptable terms.
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<PAGE> 27
Potential Loss of Satellite Service. The Company's programming is presently
distributed, in the first instance, to cable systems, full- and low-power
television stations and satellite dish owners via a leased communications
satellite transponder. In the future, satellite service may be interrupted due
to a variety of circumstances beyond the Company's control, such as satellite
transponder failure, satellite fuel depletion, governmental action, preemption
by the satellite lessor and service failure. The Company does not have any
agreements for immediate backup satellite services, although it believes it
could arrange for such services from others. However, there can be no assurance
that the Company will be able to make any such arrangements and the Company may
incur substantial additional costs in entering into new arrangements.
Year 2000 Considerations. The Company has reviewed the implications of year
2000 compliance and has taken steps designed to ensure that the Company's
computer systems and applications will manage dates beyond 1999. The Company
believes that it has allocated adequate resources for this purpose and that
planned software upgrades, which are underway and in the normal course of
business, will address the Company's internal year 2000 needs. While the Company
expects that efforts on the part of current employees of the Company will be
required to monitor year 2000 issues, no assurances can be given that these
efforts will be successful. The Company does not expect the cost of addressing
any year 2000 issue to be a material event or uncertainty that would have a
material adverse effect on future operating results or financial condition.
Litigation. On December 17, 1997, Time Warner Entertainment Company, L.P.,
d/b/a Time Warner Cable ("Time Warner Cable"), filed a complaint (the
"Complaint") in the Connecticut Superior Court, Judicial District of
Ansonia/Milford (the "Court"), against Bridgeways Communications Corporation
("Bridgeways"), and the Company, alleging, among other things, tortious
interference with contractual and business relations and breach of contract.
According to the Complaint, Bridgeways and Time Warner Cable have been in
dispute since 1993 regarding Bridgeways' attempt to assert "must-carry" rights
with respect to television station WHAI-TV in the New York City Area of Dominant
Influence. The Company purchased television station WHAI-TV from Bridgeways in
1994 and subsequently sold it in 1996. The Company and Time Warner Cable entered
into a cable affiliation agreement in 1995 (the "Time Warner Cable Agreement"),
pursuant to which the Company agreed not to assert "must-carry" rights with
respect to television station WHAI-TV and pursuant to which the Company's
programming is currently carried by Time Warner Cable in approximately 4.4
million full-time equivalent cable households out of the Company's total
distribution of approximately 11.7 million full-time equivalent cable
households. Time Warner Cable seeks in the Complaint to receive unspecified
damages from the Company and to have the Court declare the Time Warner Cable
Agreement null and void. Responsive pleadings have not yet been filed in this
matter. The Company believes the Complaint is completely without merit and it
intends to vigorously defend itself. However, if Time Warner Cable were to
prevail under the Complaint, such an outcome could have a material adverse
effect on the Company's financial position and/or costs of operations to the
extent it jeopardized access to, or increased the cost of access to, these 4.4
million full-time equivalent households, which represent approximately 38% of
the full-time equivalent households to which the Company currently has access.
Product Liability Claims. Products sold by the Company may expose it to
potential liability from claims by users of such products, subject to the
Company's rights, in certain instances, to indemnification against such
liability from the manufacturers of such products. The Company has instead
generally required the manufacturers and/or vendors of these products to carry
product liability insurance, although in certain instances where a limited
quantity of products are purchased from non-U.S. vendors, the vendor may not be
formally required to carry product liability insurance. Certain of such vendors,
however, may in fact maintain such insurance. There can be no assurance that
such parties will maintain this insurance or that this coverage will be adequate
to cover all potential claims, including coverage in amounts which it believes
to be adequate. There can be no assurance that the Company will be able to
maintain such coverage or obtain additional coverage on acceptable terms, or
that such insurance will provide adequate coverage against all potential claims.
Seasonability. The television home shopping and mail order businesses in
general are somewhat seasonal, with the primary selling season occurring during
the first and last quarters of the calendar year. These businesses are also
sensitive to general economic conditions and business conditions affecting
consumer spending.
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<PAGE> 28
ITEM 2. PROPERTIES
The Company leases approximately 139,000 square feet of space in Eden
Prairie, Minnesota (a suburb of Minneapolis), which includes all corporate
administrative, television production, telemarketing, customer service and
television warehouse operations. During fiscal 1997, the Company purchased a
262,000 square foot distribution facility on a 34 acre parcel of land in Bowling
Green, Kentucky which is being used primarily in connection with the fulfillment
operations of HomeVisions and non-jewelry merchandise for the Company's
television home shopping operations. The Company also purchased approximately 34
acres of land in Eden Prairie, Minnesota during fiscal 1997 which is being held
for future potential expansion and investment purposes. The Company leases
approximately 96,000 square feet of office and warehouse space in Chelmsford,
Massachusetts (a suburb of Boston) and approximately 1,500 square feet of office
space in Tempe, Arizona in connection with the direct-mail operations of CVI and
BII, respectively. Additionally, the Company rents transmitter site and studio
locations used to transmit programming for KVVV (TV), serving the Houston
market. The Company believes that its existing facilities are adequate to meet
its current needs and that suitable additional or alternative space will be
available as needed to accommodate expansion of operations.
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<PAGE> 29
ITEM 3. LEGAL PROCEEDINGS
In a complaint filed December 17, 1997, (Time Warner Entertainment Company,
L.P., d/b/a Time Warner Cable v. Bridgeways Communications Corporation and
ValueVision International, Inc. (U.S. Superior Court, Judicial District of
Ansonia/Milford at Milford, CT)), Time Warner Cable filed a lawsuit against
Bridgeways Communications Corporation and ValueVision alleging, among other
things, tortious interference with contractual and business relations and breach
of contract. According to the complaint, Bridgeways and Time Warner Cable have
been in a dispute since 1993 regarding Bridgeways' attempt to assert "must
carry" rights with respect to television station WHAI-TV in the New York City
Area of Dominant Influence. ValueVision purchased television station WHAI-TV
from Bridgeways in 1994 and subsequently sold it in 1996. ValueVision and Time
Warner Cable entered into a cable affiliation agreement in 1995 pursuant to
which ValueVision agreed not to assert "must carry" rights with respect to
television station WHAI-TV and pursuant to which ValueVision's programming is
currently carried by Time Warner Cable in approximately 4.2 million full time
equivalent cable households. The complaint seeks unspecified damages and for the
court to declare the cable affiliation agreement between Time Warner Cable and
ValueVision null and void. The Company is confident that it remains in full
compliance with the terms and conditions of the cable affiliation agreement and
that it has been inappropriately named in this lawsuit involving Time Warner
Cable and Bridgeways. The Company believes that the lawsuit is completely
without merit and intends to vigorously defend itself. However, if Time Warner
Cable were to prevail under the Complaint, such an outcome could have a material
adverse effect on the Company's financial position and/or costs of operations to
the extent it jeopardized access to, or increased the cost of access to, these
4.4 million full-time equivalent households, which represent approximately 38%
of the full-time equivalent households to which the Company currently has
access.
In addition to the litigation noted above, the Company is involved from
time to time in various other claims and lawsuits in the ordinary course of
business. In the opinion of management, these claims and suits in the aggregate
will not have a material adverse effect on the Company's operations or
consolidated financial statements.
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<PAGE> 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter ended
January 31, 1998.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock symbol is "VVTV" and is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market. The following table sets forth
the range of high and low sales prices of the common stock as quoted by the
Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1997
First Quarter.................................. $8 9/16 $5 5/8
Second Quarter................................. 8 1/2 5 3/8
Third Quarter.................................. 6 7/16 5 3/8
Fourth Quarter................................. 5 7/8 4 5/8
FISCAL 1998
First Quarter.................................. 4 3/4 3 7/16
Second Quarter................................. 5 7/16 3 7/16
Third Quarter.................................. 5 3/8 3 13/16
Fourth Quarter................................. 4 7/8 3 1/8
</TABLE>
HOLDERS
As of April 20, 1998, the Company had approximately 490 shareholders of
record.
DIVIDENDS
The Company has never declared or paid any dividends with respect to its
capital stock. The Company currently expects to retain its earnings for the
development and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination by the Company to
pay cash dividends will be at the discretion of the Board of Directors of the
Company and will be dependent upon the Company's results of operations,
financial condition, any contractual restrictions then existing, and other
factors deemed relevant at the time by the Board of Directors.
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<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
The selected financial data for the five years ended January 31, 1998 have
been derived from the audited consolidated financial statements of the Company.
The selected financial data presented below are qualified in their entirety by,
and should be read in conjunction with, the financial statements and notes
thereto and other financial and statistical information referenced elsewhere
herein including the information referenced under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------
1998 1997(A) 1996 1995 1994
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $217,982 $159,478 $ 88,910 $53,931 $ 37,614
Gross profit................................................ 95,174 67,363 36,641 22,454 14,583
Operating loss.............................................. (10,975) (2,640) (766) (3,712) (1,745)
Income (loss) before income taxes and extraordinary
item(b)................................................... 29,604 29,690 11,120 (6,104) (1,414)
Net income (loss)(b)........................................ 18,104 18,090 11,020 (6,104) (1,925)
PER SHARE DATA:(C)
Net income (loss) per common share.......................... $ 0.57 $ 0.57 $ 0.38 $ (0.22) $ (0.13)
Net income (loss) per common share -- assuming dilution..... $ 0.57 $ 0.56 $ 0.38 $ (0.22) $ (0.13)
Weighted average shares outstanding:
Basic..................................................... 31,745 31,718 28,627 27,265 15,400
Diluted................................................... 31,888 32,342 29,309 27,265 15,400
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments............................. $ 31,866 $ 52,859 $ 46,451 $26,659 $ 48,382
Inventories, net............................................ 20,427 28,109 8,889 7,833 7,226
Current assets.............................................. 79,661 101,029 65,045 39,246 57,684
Property, equipment and other assets........................ 55,103 67,057 51,666 38,258 20,014
Total assets................................................ 134,764 168,086 116,711 77,504 77,698
Current liabilities......................................... 29,590 37,724 13,519 10,124 7,533
Long-term obligations....................................... 2,906 3,708 447 578 147
Shareholders' equity........................................ 102,268 126,654 102,745 66,802 70,018
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Gross margin percentage..................................... 43.7% 42.2% 41.2% 41.6% 38.8%
Working capital............................................. $ 50,071 $ 63,305 $ 51,526 $29,122 $ 50,151
Current ratio............................................... 2.7 2.7 4.8 3.9 7.7
EBITDA (as defined)(b)(d)................................... $ 34,465 $ 31,774 $ 13,790 $(5,553) $ (1,342)
Cash Flows:
Operating................................................. $(19,445) $ (5,779) $ 2,304 $ (463) $ (3,345)
Investing................................................. $ 23,065 $ 19,223 $(11,443) $(5,902) $(39,257)
Financing................................................. $(15,041) $ (4,888) $ 7,547 $ (235) $ 70,007
</TABLE>
- -------------------------
(a) Results of operations for the year ended January 31, 1997, included the
operations of HomeVisions (f/k/a Montgomery Ward Direct), Beautiful Images,
Inc. and Catalog Ventures, Inc. which were acquired by the Company in the
second half of fiscal 1997. See Note 4 of Notes to Consolidated Financial
Statements as of January 31, 1998 and 1997.
(b) Income (loss) before income taxes and extraordinary item, net income (loss)
and EBITDA (as defined) include a pre-tax gain of $38.9 million from the
sale of broadcast properties for fiscal 1998, a $28.2 million pre-tax gain
on sale of broadcast properties and other assets for fiscal 1997, an $8.5
million pre-tax gain on the sale of an investment in National Media
Corporation, $2.0 million equity in earnings of affiliates in fiscal 1996
and $3.7 million of costs associated with the National Media Corporation
tender offer in fiscal 1995. See Notes 2 and 4 of Notes to Consolidated
Financial Statements as of January 31, 1998 and 1997.
(c) The Company computes per share data in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Under this
statement, basic and diluted earnings (loss) per share have replaced primary
and fully diluted earnings (loss) per share.
(d) EBITDA (as defined) represents net income (loss) before interest income
(expense), income taxes and depreciation and amortization expense. EBITDA
(as defined) is viewed by management as an important alternative measure of
cash flows because it is commonly used by analysts and institutional
investors in analyzing the financial performance of companies in the
broadcast and television home shopping sectors. However, EBITDA (as defined)
should not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of operating performance or as a measure of liquidity. EBITDA (as defined),
as presented, may not be comparable to similarly entitled measures reported
by other companies.
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<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of financial condition and results of
operations are qualified by reference to and should be read in conjunction with
the financial statements and notes thereto included elsewhere herein.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations and other materials filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain various "forward looking statements" within the meaning of federal
securities laws which represent management's expectations or beliefs concerning
future events, including statements regarding the consummation of the merger
between the Company and National Media, the outcome of the Time Warner
litigation, anticipated operating results, revenue growth, capital spending
requirements, potential future acquisitions and the effects of regulation and
competition. These, and other forward looking statements made by the Company,
must be evaluated in the context of a number of important factors that may
effect the Company's financial position and results of operations including: the
ability to negotiate a restructuring of the proposed National Media Merger and
successful completion of all conditions thereto, including obtaining shareholder
approval, the ability to resolve satisfactorily the disputed issues in the Time
Warner Cable litigation, consumer spending and debt levels, interest rate
fluctuations, seasonal variations in consumer purchasing activities, increases
in postal, paper and outbound shipping costs, competition in the retail and
direct marketing industries, continuity of relationships with or purchases from
major vendors, product mix, competitive pressure on sales and pricing, the
ability of the Company to manage growth and expansion, changes in the regulatory
framework affecting the Company, increases in cable access fees and other costs
which cannot be recovered through improved pricing and the identification and
availability of potential acquisition targets at prices favorable to the
Company. Investors are cautioned that all forward looking statements involve
risk and uncertainty.
NATIONAL MEDIA CORPORATION PROPOSED MERGER
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media is a publicly-held direct marketer of consumer
products through the use of direct response transactional television
programming, known as infomercials, and currently makes its programming
available to more than 370 million television households in more than 70
countries worldwide. If the mergers (the "Mergers") contemplated by the Merger
Agreement were to be consummated, the Company and National Media would have
become wholly-owned subsidiaries of Quantum Direct, with each outstanding share
of the Company's common stock being converted into 1.19 shares of common stock
in Quantum Direct and each outstanding share of common stock of National Media,
being converted into one share of common stock in Quantum Direct.
Concurrently with the execution of the Merger Agreement, the Company agreed
to loan to National Media, pursuant to a Demand Promissory Note, up to an
aggregate of $10.0 million, $7.0 million of which was advanced upon signing of
the Demand Note on January 5, 1998 and the remaining $3.0 million of which has
subsequently been advanced. The Loan proceeds have been used by National Media
for various purposes, including the funding of accounts receivable, inventory
and media purchases. The Loan bears interest at prime rate plus 1.5% per annum
and is due on the earlier of January 1, 1999 or upon termination of the Merger
Agreement in certain circumstances. In the event National Media is unable to
repay the Loan when due, ValueVision may elect to receive payment in shares of
National Media's common stock at the then present market value. In consideration
for providing the Loan, National Media issued to ValueVision warrants to
33
<PAGE> 34
acquire 250,000 shares of National Media's common stock with an exercise price
per share equal to $2.74. The warrants are exercisable until the earlier of (i)
January 5, 2003 and (ii) the occurrence of one of the following termination
events: (x) the consummation of the Merger or (y) the termination by National
Media of the Merger Agreement, if such termination results from a breach of a
covenant by ValueVision or in the event ValueVision's shareholders do not
approve the Merger Agreement; provided, however, that if, within 75 days after
the termination event described in clause (y) above, National Media has not
repaid the Loan in full or if during such 75 days, National Media defaults under
its obligations pursuant to the Loan, no termination event will be deemed to
have occurred and the warrants shall remain exercisable.
Consummation of the Mergers is subject to the satisfaction (or waiver) of a
number of conditions, including, but not limited to: (i) approval by holders of
a majority of the issued and outstanding shares of National Media's common stock
and the Company's common stock; (ii) redemption of National Media's Series C
Preferred Stock; (iii) the receipt of certain regulatory and other approvals,
including those from the Federal Trade Commission and the Federal Communication
Commission; and (iv) not more than 5% of the holders of the issued and
outstanding shares of the Company's common stock shall have made demands and
given the notices required under Minnesota law to assert dissenters' appraisal
rights.
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it does not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company common stock have demanded their dissenter's rights. The Company and
National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenters' notice,
the companies mutually agreed to postpone their respective shareholder meetings
while the companies attempt to negotiate a restructuring of the Mergers that is
acceptable to each of the companies and in the best interest of their
shareholders. As of the date hereof, National Media and the Company are still
attempting to negotiate a restructuring of the Mergers and have not reschedule
their respective special meetings. There can be no assurance that the companies
will be able to successfully negotiate such a restructuring, or if negotiated,
that such Mergers will be consummated.
ACQUISITIONS AND DISPOSITIONS
MONTGOMERY WARD DIRECT CATALOG OPERATIONS
Effective July 27, 1996, the Company acquired, through ValueVision Direct
Marketing Company, Inc. ("VVDM"), substantially all of the assets and assumed
certain obligations of Montgomery Ward Direct, L.P. ("MWD"), a four year old
catalog business, by issuing 1,484,993 vested warrants with an exercise price of
$.01 per share, to Montgomery Ward & Co., Incorporated ("Montgomery Ward") as
full consideration for the acquisition of approximately $4.0 million in net
assets of MWD.
The Company's acquisition of MWD was for an aggregate purchase price of
$8,497,000, which included approximately $4.0 million in net assets, including
acquired cash of $5,764,000. Acquisition related costs approximated $144,000.
The acquisition was accounted for using the purchase method of accounting and
accordingly, the net assets of MWD were recorded at their estimated fair values.
The excess of the purchase price over the net assets acquired was
$4,531,000, had been recorded as goodwill and other intangible assets and was
being amortized on a straight-line basis over 5-12 years. As discussed in Notes
2 and 3 of Notes to Consolidated Financial Statements as of January 31, 1998 and
1997, intangible assets recorded in connection with this acquisition were
reduced to zero in fiscal 1998 in connection with the restructuring transaction
with Montgomery Ward. The operating results of MWD have been included in the
fiscal 1997 consolidated statement of operations from the date of acquisition.
Unaudited pro forma consolidated net sales of the Company for the years ended
January 31, 1997 and 1996, as if the acquisition had occurred as of the
beginning of the respective periods were $194,284,000 and $240,850,000
respectively. Unaudited pro forma net income was $17,151,000, or $.52 per
diluted share, in fiscal 1997 and $4,341,000, or $.14 per diluted share, in
fiscal 1996. Such pro forma amounts are not necessarily indicative of what the
actual
34
<PAGE> 35
consolidated results of operations would have been had the acquisition been
effective at the beginning of the respective periods. In fiscal 1998, the
Company changed the name of the MWD catalog to HomeVisions.
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of Beautiful Images, Inc. ("BII"), a manufacturer and direct
marketer of women's foundation undergarments and other women's apparel. The
Company paid $4,253,000 in cash, which included acquired cash of $423,000,
$500,000 relating to a non-compete agreement and acquisition costs of
approximately $75,000, and assumed certain obligations totaling $109,000. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon estimated fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets acquired
was $3,310,000, of which $2,810,000 has been recorded as goodwill, which is
being amortized on a straight-line basis over 15 years and $500,000 assigned to
the non-compete agreement, which is being amortized on a straight-line basis
over the 6 year term of the agreement. The operating results of BII have been
included in the fiscal 1997 consolidated statement of operations from the date
of acquisition. Pro forma results of operations have not been presented because
the effects were not significant.
CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. (collectively "CVI"), two direct
marketing companies which together publish five consumer specialty catalogs. The
Company paid $7,369,000 in cash which included acquired cash of $1,465,000 and
acquisition costs of approximately $100,000. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair values of the net assets acquired was $1,953,000, and has been recorded
as goodwill, which is being amortized on a straight-line basis over 15 years.
The operating results of CVI have been included in the fiscal 1997 consolidated
statement of operations from the date of acquisition. Pro forma results of
operations have not been presented because the effects were not significant.
ACQUISITION OF BROADCAST STATIONS
During the first quarter of fiscal 1995, the Company completed the
acquisitions of three full power television broadcast stations serving the
Washington, D.C. ("WVVI"); Houston, Texas ("KVVV"); and Cleveland -- Akron, Ohio
("WAKC") Areas of Dominant Influence ("ADI"). On December 28, 1994 the Company
completed the acquisition of one full power television broadcast station serving
part of the New York City ADI and licensed to Bridgeport, Connecticut ("WHAI").
The aggregate purchase price for the four stations was approximately $22.4
million in cash, Company common stock and non-compete obligations. The
acquisitions were accounted for under the purchase method of accounting.
Accordingly, the net assets of the four stations were recorded at their
estimated fair values at the time of acquisition, as determined by independent
appraisals.
On March 15, 1996, the Company completed the acquisition of independent
television station KBGE (TV), Channel 33, serving the Seattle-Tacoma, Washington
market, for approximately $4.6 million including the assumption of certain debt
obligations and acquisition related costs. This acquisition was completed in
accordance with the terms of a five-year programming affiliation and financing
agreement with the station which was signed on July 21, 1995. Pursuant to this
agreement, the Company provided financing of up to $1,450,000 related to a
working capital loan for channel operations.
On April 11, 1996, the Company completed a second closing with respect to
its acquisition of independent television station WVVI whereby the Company paid
$800,000 to the former owner of WVVI as a final payment in exchange for not
having to pay $1,600,000 in the event the "must carry" provisions of the Cable
Act are upheld by a final decision. The Company had previously paid $4,050,000
to National Capital
35
<PAGE> 36
Christian Broadcasting, WVVI=s former owners, at an initial closing on March 28,
1994. The $800,000 additional payment had been classified as excess purchase
price and was amortized over 25 years on a straight-line basis. In addition, the
Company received certain studio and production equipment from the former owner
of WVVI, in lieu of a cash payment, for the balance outstanding under a secured
convertible debenture in the face amount of $450,000.
On March 31, 1997, the United States Supreme Court upheld the "must carry"
provisions of the 1992 Cable Act and as a result, the Company paid an additional
$1,600,000 for the Houston, Texas station upon a second closing. The additional
payment has been classified as unallocated excess purchase price and is being
amortized over 25 years on a straight-line basis. Pro forma results of
operations have not been presented because the effects were not significant. The
Company views and treats the acquisition of its television broadcast stations as
a "purchase of assets" rather than as a purchase of a stand alone operating
business unit. This treatment is due to the fact that planned revenues of
acquired television broadcast stations do not constitute either a separate
business of ValueVision or represent a significant portion of the Company=s
operating businesses.
SALE OF BROADCAST STATIONS
On February 28, 1996, the Company completed the sale of two television
stations to Paxson Communications Corporation ("Paxson") for $40.0 million in
cash plus the assumption of certain obligations. The stations sold were ABC
affiliate WAKC (TV), Channel 23, licensed to Akron, Ohio, and independent
station WHAI (TV), Channel 43, licensed to Bridgeport, Connecticut. WAKC (TV)
was acquired by the Company in April 1994 for approximately $6.0 million and
WHAI (TV) was acquired by the Company in December 1994 for approximately $7.3
million. The pre-tax gain recorded on the sale of these two television stations
was approximately $27 million and was recognized in the first fiscal quarter
ended April 30, 1996.
On July 31, 1997, the Company completed the sale of its television
broadcast station WVVI (TV), which serves the Washington, D.C. market, to Paxson
for approximately $30 million in cash and the receipt of 1,197,892 shares of
Paxson common stock valued at $11.92 per share as determined pursuant to an
independent financial appraisal. Under the terms of the agreement, Paxson paid
the Company $20 million in cash upon closing and was required to pay an
additional $10 million to the Company as a result of the United States Supreme
Court upholding the "must carry" provision of the 1992 Cable Act. WVVI (TV) was
acquired by the Company in March 1994 for $4,850,000. The pre-tax gain recorded
on the sale of the television station was $38.9 million and was recognized in
the second fiscal quarter ended July 31, 1997.
On February 27, 1998, the Company completed the sale of its television
broadcast station, KBGE-TV Channel 33, which serves the Seattle, Washington
market along with two of the Company=s non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
is to be paid when KBGE, which is currently operating at reduced power from
downtown Seattle, is able to relocate its antenna and increase its transmitter
power to a level at or near its licensed full power. The Company will retain and
continue to serve the Seattle market via its recently-launched low-power station
K58DP-TV, which transmits from downtown Seattle. The pre-tax gain to be recorded
on the first installment with respect to the sale of this television station is
expected to be approximately $19.8 million and will be recognized in the
financial statements in the first quarter of fiscal 1999.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
RESULTS OF OPERATIONS
Results of operations for the year ended January 31, 1997 include the
direct-mail operations of HomeVisions effective July 27, 1996, BII effective
October 31, 1996 and CVI effective November 1, 1996, which were acquired by the
Company in fiscal 1997.
36
<PAGE> 37
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES...................................... 100.0 % 100.0 % 100.0 %
====== ====== ======
GROSS MARGIN................................... 43.7 % 42.2 % 41.2 %
------ ------ ------
OPERATING EXPENSES:
Distribution and selling....................... 40.8 % 35.6 % 31.7 %
General and administrative..................... 4.7 % 4.5 % 5.0 %
Depreciation and amortization.................. 3.2 % 3.8 % 5.4 %
------ ------ ------
Total operating expenses..................... 48.7 % 43.9 % 42.1 %
------ ------ ------
OPERATING LOSS:................................ (5.0)% (1.7)% (.9)%
Other income (expense), net.................... 18.6 % 20.3 % 13.4 %
------ ------ ------
INCOME BEFORE INCOME TAXES..................... 13.6 % 18.6 % 12.5 %
Income taxes................................... (5.3)% (7.3)% (.1)%
------ ------ ------
NET INCOME..................................... 8.3 % 11.3 % 12.4 %
====== ====== ======
</TABLE>
NET SALES
Net sales for the year ended January 31, 1998 (fiscal 1998), were
$217,982,000 compared to $159,478,000 for the year ended January 31, 1997
(fiscal 1997), a 36.7% increase. The majority of the increase in net sales is
attributed to revenues associated with the Company's acquisition of the direct
marketing businesses in the second half of fiscal 1997. Sales attributed to
direct marketing operations totaled $111,411,000 or 51.1% of total net sales for
the year ended January 31, 1998 and totaled $60,059,000 or 37.7% of total net
sales for the year ended January 31, 1997. The increase in net sales is also
attributable to the increase in full-time equivalent ("FTE") cable homes able to
receive the Company's television home shopping programming, which increased
approximately 300,000 or 2.6% from 11.4 million at January 31, 1997 to 11.7
million at January 31, 1998. During fiscal 1998, the Company added approximately
900,000 full-time cable homes, an 11.7% increase. In addition to new homes,
sales increased due to the continued addition of new customers from households
already receiving the Company's television home shopping programming and an
increase in repeat sales to existing customers. The increase in repeat sales to
existing customers experienced in fiscal 1998 was due, in part, to the effects
of continued testing of certain merchandising and programming strategies in the
second half of fiscal 1998. The Company intends to continue to test and change
its merchandising and programming strategies with the intent of improving its
television home shopping sales results. However, while the Company is optimistic
that results will continue to improve, there can be no assurance that such
changes in strategy will achieve intended results. As a result of the increased
number of households able to receive the Company's programming and continued
growth in direct mail-order operations, the Company anticipates that net sales
and operating expenses will continue to increase in fiscal 1999.
Net sales for the year ended January 31, 1997, were $159,478,000 compared
to fiscal 1996 net sales of $88,910,000, a 79.4% increase. The increase in net
sales was primarily attributed to revenues associated with the Company's direct
marketing businesses which were acquired in the second half of fiscal 1997.
Sales attributed to direct marketing operations totaled $60,059,000 or 37.7% of
total net sales for the year ended January 31, 1997. The increase in net sales
was also attributed to an increase in total number of full-time and FTE cable
homes able to receive the Company's programming, which increased from 7.2
million (10.5 million FTEs) at January 31, 1996 to 7.7 million (11.4 million
FTEs) at January 31, 1997, a 6.9% increase in full-time cable homes and an 8.6%
increase in FTEs.
The Company records a reserve as a reduction of gross sales for anticipated
product returns at each month-end based upon historical product return
experience. The return rates for fiscal years 1998, 1997 and 1996 were
approximately 19.4%, 21.9% and 26.8%, respectively. The lower return rates in
fiscal 1998 and fiscal
37
<PAGE> 38
1997 are directly attributable to the effect of the Company's recently acquired
direct marketing businesses which typically experience lower average return
rates. The fiscal 1998 return rate for the Company's television home shopping
operations was 26.6% compared to 27.8% in fiscal 1997 and 26.8% in fiscal 1996.
The return rate for the television home shopping operations is slightly higher
than the average industry return rate of 24% to 26% and is attributable in part
to the Company's Video Shopping Cart service, which allows for multiple items to
be shipped in one order for a single shipping and handling fee. The slightly
higher return rate is also attributed to the average unit selling price for the
Company of approximately $83 in fiscal 1998 ($85 in fiscal 1997) as compared to
the industry average selling price per unit of approximately $40 to $50. The
Company is continuing to manage return rates and is adjusting average selling
price points and product mix in an effort to reduce the overall return rate
related to its home shopping business. The returns rate for the Company's direct
marketing operations were 11.2% and 9.8% in fiscal 1998 and 1997, respectively,
and the Company believes that this return rate is comparable to industry
averages.
GROSS PROFIT
Gross profits for fiscal 1998 and 1997 were $95,174,000 and $67,363,000,
respectively, an increase of $27,811,000 or 41.3%. Gross margins for fiscal 1998
were 43.7% compared to 42.2% for fiscal 1997. The principal reason for the
increase in gross profits was increased sales volume primarily as a result of
the direct mail operations included in the fiscal 1998 results. Television home
shopping gross margins for fiscal 1998 and 1997 were 39.9% and 40.1%,
respectively. Gross margins for the Company's direct mail operations were 47.3%
and 45.9% for the same respective periods. Television home shopping gross
margins between comparable periods remained consistent, primarily as a result of
an increase in gross margin percentages in the jewelry and houseware product
categories and a greater proportion of higher margin non-jewelry products such
as houseware products, offset by a decline in volume of higher margin jewelry
products. During fiscal 1998, the Company continued to broaden its merchandise
mix as compared to the same period last year by expanding the range and quantity
of non-jewelry merchandise. As part of the ongoing shift in merchandise mix, the
Company continued to devote increasing program air time to non-jewelry
merchandise during the past fiscal year. Jewelry products accounted for 61% of
air time during fiscal 1998, compared with 67% for fiscal 1997. Gross margins
for the Company's direct mail operations increased primarily due to the
acquisition of CVI which generally has higher margins and was included in prior
year's results of operations only in the fourth quarter. In addition, there was
also a slight change in merchandise mix to higher margin home accessories
(furniture, giftware and wall decor) which also contributed to the improvement
in direct-mail margins.
Gross profits for fiscal 1997 and 1996 were $67,363,000 and $36,641,000,
respectively, which represented an increase of $30,722,000 or 83.8%. Gross
margins for the respective years were 42.2% and 41.2%. The increase in gross
profit was a direct result of increased sales volume primarily due to the 1997
direct mail acquisitions. Television home shopping gross margins for fiscal 1997
were 40.1% and gross margins on the Company's direct mail operations were 45.9%.
Television home shopping gross margins declined slightly as a result of
increased sales of traditionally lower margin electronic merchandising
categories, offset partially by an increase in gross margin percentages in
jewelry, giftware and apparel product categories and by the mix of a greater
proportion of higher margin non-jewelry products, such as housewares and
seasonal products.
OPERATING EXPENSES
Total operating expenses were $106,149,000, $70,003,000 and $37,408,000 for
the years ended January 31, 1998, 1997 and 1996, respectively, representing
increases of $36,146,000 or 51.6% from fiscal 1997 to fiscal 1998 and
$32,595,000 or 87.1% from fiscal 1996 to fiscal 1997.
Distribution and selling expenses for fiscal 1998 increased $32,199,000 or
56.7% to $89,018,000 or 40.8% of net sales compared to $56,819,000 or 35.6% of
net sales in fiscal 1997. Distribution and selling costs increased primarily as
a result of additional distribution and selling expenses associated with the
Company's direct marketing businesses, which were acquired in the second half of
fiscal 1997, increases in cable access fees resulting from the growth in the
number of cable homes receiving the Company's television home shopping
programming, additional personnel costs associated with increased staffing
levels and labor rates and additional costs associated with handling increased
sales volume. Distribution and selling expenses for fiscal
38
<PAGE> 39
1998 increased as a percentage of net sales over prior year primarily as a
result of increases in cable access fees on a full-time equivalent basis with
respect to the Company's television home shopping operations, a softening of
sales on front-end acquisition and sale/clearance catalogs, sales softening on
books mailed to customers in the Montgomery Ward & Co., Incorporated
("Montgomery Ward" or "MW") credit file as a direct result of the MW bankruptcy
announcement in July 1997, increased mail promotion costs, the experience of
slightly higher than historical return rates with respect to the Company's
direct-mail operations and additional unusual costs incurred by the Company
during the first quarter of fiscal 1998 in connection with the conversion and
integration of the Company's direct-mail operations and start-up costs
associated with the Company's new fulfillment and warehouse facility located in
Bowling Green, Kentucky.
Distribution and selling expenses for fiscal 1997 increased $28,641,000 or
101.6%, to $56,819,000 or 35.6% of net sales compared to $28,178,000 or 31.7% of
net sales in fiscal 1996, primarily due to additional distribution and selling
expenses associated with the Company's acquired direct marketing businesses,
increases in cable access fees as a result of the growth in the number of cable
homes, additional personnel costs associated with increased staffing levels and
additional costs associated with handling increased sales volumes.
General and administrative expenses for fiscal 1998 increased $2,966,000 or
41.3% to $10,154,000 or 4.7% of net sales compared to $7,187,000 or 4.5% of net
sales in fiscal 1997. General and administrative costs increased as a result of
increased costs associated with the Company's direct-mail operations which were
acquired in the second half of fiscal 1997, increased personnel in support of
expanded operations and additional legal costs incurred relative to
clarification of certain cable regulations. General and administrative costs
remained relatively consistent between fiscal years as a percentage of net sales
as the Company continues to leverage its existing operating infrastructure.
General and administrative expenses for fiscal 1997 increased $2,765,000 or
62.5% to $7,187,000 or 4.5% of net sales compared to $4,422,000 or 5.0% of net
sales in fiscal 1996. General and administrative costs increased primarily as a
direct result of increased costs associated with the Company's acquired
direct-mail operations, increased personnel costs and additional legal costs
incurred relative to cable regulations.
Depreciation and amortization costs were $6,978,000, $5,996,000 and
$4,808,000 for the years ended January 31, 1998, 1997 and 1996, respectively,
representing an increase of $981,000 or 16.4% from fiscal 1997 to fiscal 1998
and $1,189,000 or 24.7% from fiscal 1996 to fiscal 1997. Depreciation and
amortization costs as a percentage of net sales were 3.2% in fiscal 1998, 3.8%
in fiscal 1997 and 5.4% in fiscal 1996. The dollar increase is primarily due to
additional depreciation and amortization of approximately $989,000 relating to
assets associated with the Company's acquired direct-mail operations,
depreciation on property and equipment additions, particularly with respect to
the Company's fulfillment facility, offset by a reduction in amortization
associated with the Montgomery Ward operating agreement and licenses entered
into in August 1995 and amended in November 1997. Depreciation and amortization
expense increased from fiscal 1996 to fiscal 1997 primarily due to additional
amortization expense of $690,000 relating to the Montgomery Ward operating
agreement and licenses and depreciation and amortization of $640,000 relating to
direct-mail acquisition assets offset by reductions associated with the sale of
WAKC and WHAI in February 1996.
OPERATING LOSS
The operating loss was $10,975,000, $2,640,000 and $766,000 for the years
ended January 31, 1998, 1997 and 1996, respectively. The increase in the
operating loss for fiscal 1998 resulted primarily from increases in distribution
and selling costs over the prior year largely due to increases in front-end
cable access fees associated with new cable distribution, expansion of
operations, lower than anticipated response rates from catalog solicitations and
television home-shopping offerings as a result of the Montgomery Ward bankruptcy
notification in July 1997, higher than historical return rates on catalog
operations and certain unusual costs incurred by the Company in the first
quarter of fiscal 1998 in connection with the conversion and integration of the
Company's acquired direct-mail operations, as well as start-up costs associated
with the Company's new fulfillment and warehouse facility located in Bowling
Green, Kentucky. These increases were offset by increased sales volume, margins
and a corresponding increase in gross profits. The increase in the operating
39
<PAGE> 40
loss for fiscal 1997 resulted primarily from decreases in gross margin
percentages relating to the Company's television home shopping business over
fiscal 1996, as well as increases in distribution and selling costs, general and
administrative and depreciation and amortization expenses due to expanded
operations. These increases were offset by increased sales volume and a
corresponding increase in gross profits.
OTHER INCOME (EXPENSE)
Total other income was $40,579,000 in fiscal 1998, $32,330,000 in fiscal
1997 and $11,886,000 in fiscal 1996. Total other income for fiscal 1998 resulted
primarily from a $38,850,000 gain recorded on the sale of television station
WVVI (TV), Channel 66, in July 1997, gains of $215,000 recorded from sales of
other investments and interest income of $2,116,000 earned on cash and cash
equivalents and short-term investments. These gains were offset by equity in
losses of affiliates of $431,000 recorded for the year. The equity in losses of
affiliates represents amounts lost on a 13% ownership interest in a limited
partnership accounted for under the equity method of accounting. Interest income
decreased $1,796,000 from fiscal 1997 due to decreases in cash and cash
equivalents and short-term investments from fiscal 1997 to fiscal 1998. Total
other income for the year ended January 31, 1997 resulted primarily from a
$27,050,000 gain recorded on the sale of television stations WAKC and WHAI in
February 1996, equity in earnings of affiliates of $419,000, gains of $808,000
recorded from sales of other investments and interest income of $3,912,000
earned on cash and cash equivalents and short-term investments. Total other
income for the year ended January 31, 1996 resulted primarily from an $8,480,000
gain on the sale of the Company's investment in National Media Corporation
("National Media"), equity in earnings of affiliates of $1,983,000 and interest
income of $2,138,000 earned on cash and cash equivalents and short-term
investments. These items were partially offset by a $617,000 provision for
estimated litigation costs associated with settling the shareholder litigation
arising from the Company's terminated tender offer for National Media.
NET INCOME
Net income was $18,104,000 or $.57 per diluted share ($.57 per basic share)
for the year ended January 31, 1998. Excluding the gain on the sale of
television station WVVI, the gain on the sale of investments and loss on
earnings from affiliates, the Company had a net loss of $9,030,000 or $.28 per
diluted share ($.28 per basic share). Net income was $18,090,000 or $.56 per
diluted share ($.57 per basic share) for the year ended January 31, 1997.
Excluding the gain on the sale of the two television stations, the gain on the
sale of investments and equity in earnings from affiliates, the Company had net
income of $847,000, or $.03 per diluted share ($.03 per basic share). Net income
was $11,020,000 or $.38 per diluted share ($.38 per basic share) for the year
ended January 31, 1996. Excluding the gain on sale of investments, equity in
earnings of affiliates and the provision for litigation costs, the Company had
net income for fiscal 1996 of $1,173,000 or $.04 per diluted share ($.04 per
basic share). For the years ended January 31, 1998, 1997 and 1996, respectively,
the Company had approximately 31,888,000, 32,342,000 and 29,309,000, diluted
weighted average common shares outstanding and 31,745,000, 31,718,000 and
28,627,000 basic weighted average common shares outstanding.
For the years ended January 31, 1998 and 1997, net income reflects an
income tax provision of $11,500,000 and $11,600,000, respectively, which results
in an effective tax rate of 39% for each year. For the year ended January 31,
1996, net income reflects an income tax provision of $100,000. As of January 31,
1998 all net tax carryforwards available to offset future taxable income had
been utilized.
PROGRAM DISTRIBUTION
The Company's television home shopping program was available to
approximately 17.4 million cable homes as of January 31, 1998 as compared to
16.4 million cable homes as of January 31, 1997 and to 13.6 million cable homes
as of January 31, 1996. The Company's programming is currently available through
affiliation and time-block purchase agreements with approximately 285 cable
systems and one wholly-owned full power UHF television broadcast station. In
addition, the Company's programming is broadcast full-time over thirteen owned
or affiliated low power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of January 31, 1998,
1997 and 1996, the Company's programming
40
<PAGE> 41
was available to approximately 11.7 million, 11.4 million and 10.5 million
full-time equivalent cable homes ("FTE"), respectively. Approximately 8.6
million, 7.7 million and 7.2 million cable homes at January 31, 1998, 1997 and
1996, respectively, received the Company's programming on a full-time basis.
Homes that receive the Company's programming 24 hours a day are counted as one
FTE each and homes that receive the Company's television home shopping
programming for any period less than 24 hours are counted based upon an analysis
of time of day and day of week.
CIRCULATION
With respect to the Company's direct marketing operations, approximately 42
and 40 million HomeVisions catalogs were mailed in fiscal 1998 and 1997,
respectively. At January 31, 1998, HomeVisions had approximately 548,000
"active" customers (defined as individuals that have purchased from the Company
within the preceding 12 months) and combined customer and prospect files that
totaled approximately 3.4 million names. Approximately 35 and 26 million CVI
catalogs were mailed in fiscal 1998 and 1997, respectively. At January 31, 1998,
CVI had approximately 553,000 active catalog customers and approximately 4.8
million customer names in its catalog customer list database. During fiscal 1998
and 1997, BII had approximately 678 million printed space advertisements or
"impressions" circulated in national and regional newspapers and magazines. At
January 31, 1998, BII had approximately 210,000 active customers and
approximately 650,000 customer names in its customer list database.
YEAR 2000 CONSIDERATIONS
The Company has reviewed the implications of year 2000 compliance and has
taken steps designed to ensure that the Company's computer systems and
applications will manage dates beyond 1999. The Company believes that it has
allocated adequate resources for this purpose and that planned software
upgrades, which are underway and in the normal course of business, will address
the Company's internal year 2000 needs. While the Company expects that efforts
on the part of current employees of the Company will be required to monitor year
2000 issues, no assurances can be given that these efforts will be successful.
The Company does not expect the cost of addressing any year 2000 issue to be a
material event or uncertainty that would have a material adverse effect on
future operating results or financial condition.
41
<PAGE> 42
QUARTERLY RESULTS
The following summarized unaudited results of operations for the quarters
in the fiscal years ended January 31, 1998 and 1997 have been prepared on the
same basis as the annual financial statements and reflect adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of results of operations for the periods
presented. The Company's results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of operations in any
period should not be considered indicative of the results to be expected for any
future period.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
Net sales..................................... $51,062 $48,500 $58,325 $60,095 $217,982
Gross profit.................................. 22,695 19,924 25,726 26,829 95,174
Gross margin.................................. 44.4% 41.1% 44.1% 44.6% 43.7%
Operating expenses............................ 25,819 24,632 27,411 28,287 106,149
Operating loss................................ (3,124) (4,708) (1,685) (1,458) (10,975)
Other income, net............................. 212 39,219 548 600 40,579
Net income (loss)............................. $(1,761) $21,059 $ (666) $ (528) $ 18,104
======= ======= ======= ======= ========
Net income (loss) per share:.................. $(.05) $.66 $(.02) $(.02) $.57
======= ======= ======= ======= ========
Net income (loss) per share -- assuming
dilution.................................... $(.05) $.66 $(.02) $(.02) $.57
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 32,949 31,829 31,874 30,330 31,745
======= ======= ======= ======= ========
Diluted..................................... 33,109 31,953 32,064 30,427 31,888
======= ======= ======= ======= ========
FISCAL 1997:
Net sales..................................... $22,788 $24,341 $47,118 $65,231 $159,478
Gross profit.................................. 9,388 9,728 18,661 29,586 67,363
Gross margin.................................. 41.2% 40.0% 39.6% 45.4% 42.2%
Operating expenses............................ 10,071 10,523 19,421 29,988 70,003
Operating loss................................ (683) (795) (760) (402) (2,640)
Other income, net............................. 28,086 1,036 1,773 1,435 32,330
Net income.................................... $16,453 $ 145 $ 609 $ 883 $ 18,090
======= ======= ======= ======= ========
Net income per share(a)....................... $.56 $-- $.02 $.03 $.57
======= ======= ======= ======= ========
Net income per share -- assuming
dilution(a)................................. $.54 $-- $.02 $.03 $.56
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 29,352 29,577 33,628 34,317 31,718
======= ======= ======= ======= ========
Diluted..................................... 30,416 30,266 34,060 34,626 32,342
======= ======= ======= ======= ========
</TABLE>
- -------------------------
(a) The sum of quarterly per share amounts does not equal the annual amount due
to changes in the average common and dilutive shares outstanding, as well as
the effects of rounding.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998 and 1997, cash and cash equivalents and short-term
investments were $31,866,000 and $52,859,000, respectively, a $20,993,000
decrease. For the year ended January 31, 1998, working capital decreased
$13,234,000 to $50,071,000 compared to an increase of $11,779,000 to $63,305,000
for the year ended January 31, 1997. The current ratio was 2.7 at January 31,
1998 and 1997. At January 31, 1998, short-term investments and cash equivalents
were primarily invested in debt securities with original maturity dates of less
than 270 days.
42
<PAGE> 43
Total assets at January 31, 1998 were $134,764,000 compared to $168,086,000
at January 31, 1997. Shareholders' equity was $102,268,000 at January 31, 1998,
compared to $126,654,000 at January 31, 1997, a decrease of $24,386,000. The
decrease in shareholders' equity for fiscal 1998 primarily relates to an
$18,387,000 reduction in equity recorded in connection with the Company's
restructuring of its Operating and License Agreement with Montgomery Ward. As
discussed further in Note 3 to the consolidated financial statements, the
Company restructured its operating agreement in an equity transaction whereby,
among other matters, the Company agreed to cease the use of the Montgomery Ward
and Montgomery Ward Direct names in its catalog operations in exchange for
Montgomery Ward's return of 3.8 million common stock purchase warrants. In
addition, shareholders' equity decreased as a result of the following:
$17,360,000 relating to the purchase of 2,417,000 shares of Company common stock
made in connection with the Company's authorized stock repurchase program and
the repurchase of 1,280,000 shares from Montgomery Ward; unrealized holding
losses of $6,345,000 on available-for-sale investments; increased notes to
officers of $369,000; and a $366,000 tax effect relating to the repurchase of
warrants. The decreases in shareholders' equity were offset primarily by
reported net income of $18,104,000 and proceeds received on the exercise of
stock options of $299,000. The increase in shareholders' equity from fiscal 1996
to fiscal 1997 resulted primarily from net income of $18,090,000 for the year,
$9,484,000 of value assigned to common stock purchase warrants issued in
connection with the acquisition of MWD, proceeds received on the exercise of
stock options and warrants of $1,150,000, a $790,000 income tax benefit relating
to stock options exercised and an unrealized holding gain of $254,000 on
investments available-for-sale, offset by $5,826,000 relating to the repurchase
of 1,047,000 shares of Company common stock made in connection with the
Company's authorized stock repurchase program. As of January 31, 1998, the
Company's long-term obligations consisted of a ten-year $600,000 note due and
payable in 2006 related to the purchase of land, capital lease obligations of
$284,000 related to one of the Company's acquisitions and a five-year
non-compete obligation totaling $153,000 related to the acquisition of WAKC,
Akron, Ohio. The Company has no other long-term debt obligations.
For the year ended January 31, 1998, net cash used for operating activities
totaled $19,445,000 compared to net cash used of $5,779,000 in fiscal 1997. Net
cash provided by operating activities totaled $2,304,000 in fiscal 1996. Cash
flows from operations before consideration of changes in working capital items
and investing and financing activities was a negative $3,998,000 in fiscal 1998
compared to a positive $3,357,000 in fiscal 1997 and a positive $4,042,000 in
fiscal 1996. Net cash used for operating activities for fiscal 1998 reflects net
income, as adjusted for depreciation and amortization, equity in losses of
affiliates and gain on sale of broadcast station and investments, increased
accounts payable and accrued liabilities, increased net taxes receivable and
funding required to support a higher level of accounts receivable, offset by a
decrease in inventories and prepaid expenses. Accounts receivable primarily
increased due to the timing relative to receipt of funds from credit card
companies, increased sales volume and increased receivables due from customers
for merchandise sales made pursuant to the "ValuePay" installment program.
Inventories decreased from prior year as a result of tighter inventory
management and changes in merchandise mix. Net cash used for operating
activities for fiscal 1997 reflects net income, as adjusted for depreciation and
amortization and gain on sale of broadcast stations and investments, increased
accounts payable and accrued liabilities, decreased prepaid expenses and other,
offset by funding required to support higher levels of accounts receivable and
inventories as a result of increased sales volume and merchandise mix.
During fiscal 1995, the Company introduced an installment payment program
called ValuePay which entitles customers to purchase merchandise and generally
pay for the merchandise in two to four equal monthly installments. As of January
31, 1998, the Company had approximately $2,756,000 due from customers under the
ValuePay installment program compared to $1,847,000 at January 31, 1997.
ValuePay was introduced to increase sales while at the same time reducing return
rates on merchandise with above-normal average selling prices. The Company
intends to continue to sell merchandise using the ValuePay installment program.
Receivables generated from the ValuePay program will be funded in fiscal 1999
from the Company's present capital resources and future operating cash flows.
Net cash provided by investing activities totaled $23,065,000 in fiscal
1998 compared to $19,223,000 for fiscal 1997 and net cash used of $11,443,000
for fiscal 1996. Expenditures for property and equipment approximated $3,543,000
in fiscal 1998 compared to $14,365,000 for fiscal 1997 and $3,041,000 for fiscal
1996.
43
<PAGE> 44
Expenditures for property and equipment for fiscal 1998 and 1997 primarily
include (i) the upgrade of broadcast station and production equipment, studios
and transmission equipment, (ii) the upgrade of computer software and related
equipment, and (iii) increased leasehold improvements as a result of expanded
operations. The increases in property and equipment in fiscal 1998 were offset
by a decrease of approximately $3,000,000 of transmission and production
equipment and other fixed assets resulting from the sale of its television
broadcast station WVVI. In addition, fiscal 1997 expenditures include a $4.7
million land purchase which is being held for future expansion and investment
purposes. Principal future capital expenditures will be for upgrading television
production and transmission equipment, studio expansions and order fulfillment
equipment to support expanded operations, especially with respect to the
Company's direct-mail operations. During the second quarter of fiscal 1998, the
Company received approximately $30 million in cash proceeds from the sale of
television station WVVI. During fiscal 1998, the Company disbursed $6,632,000
relating to certain strategic investments and other long-term assets, granted a
$7 million working capital loan in the form of a Demand Note to National Media
Corporation bearing interest at prime plus 1.5%, received $1,381,000 in net
proceeds from sales and distributions of certain long-term investments and
received proceeds of $1,603,000 in collection of a long-term note receivable.
Subsequent to January 31, 1998, the Company had loaned National Media the
remaining $3 million available under the Demand Note.
During fiscal 1997, the Company used net cash of approximately $4,114,000
in connection with the acquisition of three direct-mail companies and received
$40.0 million in proceeds from the sale of two television stations; Akron ABC
affiliate WAKC (TV) and independent station WHAI (TV). The Company paid
approximately $3.8 million toward the acquisition of independent television
station KBGE (TV), including acquisition costs and paid $800,000 at a second
closing relative to broadcast station WVVI (TV). During fiscal 1997, the Company
also received $6,104,000 in net proceeds from the sale of certain long-term
investments and disbursed $6,534,000 for investments and other long-term assets.
Net cash used for financing activities totaled $15,041,000 for fiscal 1998
and $4,888,000 for fiscal 1997. Net cash used for financing activities primarily
relates to common stock repurchases made under the Company's common stock
repurchase program, installment payments made under a five year non-compete
obligation entered into upon the acquisition of a broadcast station and capital
lease obligation payments offset by proceeds received from the exercise of stock
options and warrants. Net cash provided by financing activities totaled
$7,547,000 for fiscal 1996 and was primarily due to proceeds received from
Montgomery Ward for its initial investment of $8.0 million, offset by the
payment of related offering costs.
Management believes funds currently held by the Company will be sufficient
to fund the Company's operations, the repurchase of any additional Company
common stock pursuant to an authorized repurchase plan, anticipated capital
expenditures and cable launch fees through fiscal 1999 and costs and expenses
associated with the proposed National Media Merger. Additional capital may be
required in the event the Company is able to identify additional direct-mail
company acquisition targets and television stations in strategic markets at
favorable prices, and if the Company decides to acquire up to the maximum number
of full power television stations that it may own under current regulations.
44
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF VALUEVISION INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 46
Consolidated Balance Sheets as of January 31, 1998 and
1997...................................................... 47
Consolidated Statements of Operations for the Years Ended
January 31, 1998, 1997 and 1996........................... 48
Consolidated Statements of Shareholders' Equity for the
Years Ended January 31, 1998, 1997 and 1996............... 49
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1998, 1997 and 1996........................... 50
Notes to Consolidated Financial Statements.................. 51
Financial Statement Schedule -- Schedule II -- Valuation and
Qualifying Accounts....................................... 72
</TABLE>
45
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ValueVision International, Inc.:
We have audited the accompanying consolidated balance sheets of ValueVision
International, Inc. (a Minnesota corporation) and Subsidiaries as of January 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ValueVision International,
Inc. and Subsidiaries as of January 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 16, 1998
46
<PAGE> 47
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JANUARY 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 17,198,074 $ 28,618,943
Short-term investments.................................... 14,667,669 24,239,840
Accounts receivable, net.................................. 8,694,293 6,446,649
Inventories, net.......................................... 20,426,862 28,109,081
Prepaid expenses and other................................ 10,478,848 10,933,394
Note receivable -- National Media Corporation............. 7,000,000 --
Income taxes receivable................................... 748,319 --
Deferred income taxes..................................... 447,000 2,681,000
------------ ------------
Total current assets................................... 79,661,065 101,028,907
PROPERTY AND EQUIPMENT, NET................................. 21,403,724 24,283,108
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET............. 5,807,187 6,934,546
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET....... 2,073,360 15,052,935
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION............. 9,847,688 --
GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 6,892,454 10,764,011
INVESTMENTS AND OTHER ASSETS, NET........................... 9,078,826 10,022,718
------------ ------------
$134,764,304 $168,086,225
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ 410,648 $ 392,921
Accounts payable.......................................... 17,643,895 24,887,904
Accrued liabilities....................................... 11,535,551 12,398,041
Income taxes payable...................................... -- 45,008
------------ ------------
Total current liabilities.............................. 29,590,094 37,723,874
------------ ------------
LONG-TERM OBLIGATIONS....................................... 1,036,821 1,443,189
DEFERRED INCOME TAXES....................................... 1,869,660 2,265,000
------------ ------------
Total liabilities...................................... 32,496,575 41,432,063
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 9, and 10)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 26,780,778 and 28,842,198 shares issued and
outstanding............................................ 267,808 288,422
Common stock purchase warrants; 0 and 5,368,557 shares.... -- 26,984,038
Additional paid-in capital................................ 74,538,225 83,309,455
Net unrealized holding gains (losses) on investments
available-for-sale..................................... (6,275,652) 69,437
Notes receivable from officers............................ (960,476) (591,445)
Retained earnings......................................... 34,697,824 16,594,255
------------ ------------
Total shareholders' equity............................. 102,267,729 126,654,162
------------ ------------
$134,764,304 $168,086,225
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
47
<PAGE> 48
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES........................................... $217,981,886 $159,477,917 $88,909,853
COST OF SALES....................................... 122,807,613 92,114,663 52,268,398
------------ ------------ -----------
Gross profit...................................... 95,174,273 67,363,254 36,641,455
------------ ------------ -----------
OPERATING EXPENSES:
Distribution and selling.......................... 89,018,303 56,819,304 28,177,953
General and administrative........................ 10,153,565 7,187,377 4,421,924
Depreciation and amortization..................... 6,977,594 5,996,357 4,807,735
------------ ------------ -----------
Total operating expenses....................... 106,149,462 70,003,038 37,407,612
------------ ------------ -----------
OPERATING LOSS...................................... (10,975,189) (2,639,784) (766,157)
------------ ------------ -----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations................ 38,850,000 27,050,000 --
Gain on sale of investments....................... 214,694 808,449 8,480,453
Litigation costs.................................. -- -- (617,000)
Equity in earnings (losses) of affiliates......... (431,241) 419,430 1,983,226
Interest income................................... 2,116,352 3,912,231 2,137,720
Other, net........................................ (171,047) 139,396 (98,677)
------------ ------------ -----------
Total other income............................. 40,578,758 32,329,506 11,885,722
------------ ------------ -----------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 29,603,569 29,689,722 11,119,565
Provision for income taxes 11,500,000 11,600,000 100,000
------------ ------------ -----------
NET INCOME.......................................... $ 18,103,569 $ 18,089,722 $11,019,565
============ ============ ===========
NET INCOME PER COMMON SHARE......................... $ 0.57 $ 0.57 $ 0.38
============ ============ ===========
NET INCOME PER COMMON SHARE -- ASSUMING DILUTION.... $ 0.57 $ 0.56 $ 0.38
============ ============ ===========
Weighted average number of common shares
outstanding:
Basic............................................. 31,745,437 31,718,390 28,627,356
============ ============ ===========
Diluted........................................... 31,888,229 32,342,082 29,308,692
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 49
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK COMMON HOLDING NOTES
--------------------- STOCK ADDITIONAL GAINS (LOSSES) RECEIVABLE
NUMBER PAR PURCHASE PAID-IN ON INVESTMENTS FROM
OF SHARES VALUE WARRANTS CAPITAL AVAILABLE-FOR-SALE OFFICERS
--------- ----- -------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 31, 1995......... 27,986,426 $279,864 $ -- $ 79,651,718 $ (614,526) $ --
Exercise of stock options......... 77,322 773 -- 141,071 --
Issuance of common stock.......... 1,280,000 12,800 -- 7,987,200 -- --
Value assigned to common stock
purchase warrants................ -- -- 17,500,000 -- -- --
Offering expenses................. -- -- -- (590,050) -- --
Unrealized holding gain on
investments available-for-sale... -- -- -- -- 429,756 --
Issuance of note to officers...... -- -- -- -- -- (558,670)
Net income........................ -- -- -- -- -- --
---------- -------- ------------ ------------ ----------- ---------
BALANCE, January 31, 1996......... 29,343,748 293,437 17,500,000 87,189,939 (184,770) (558,670)
Exercise of stock options and
warrants......................... 545,150 5,452 -- 1,144,943 -- --
Repurchases of common stock....... (1,046,700) (10,467) -- (5,815,427) -- --
Value assigned to common stock
purchase warrants................ -- -- 9,484,038 -- -- --
Income tax benefit from stock
options exercised................ -- -- -- 790,000 -- --
Unrealized holding gain on
investments available-for-sale... -- -- -- -- 254,207 --
Increase in notes receivable from
officers......................... -- -- -- -- -- (32,775)
Net income........................ -- -- -- -- -- --
---------- -------- ------------ ------------ ----------- ---------
BALANCE, January 31, 1997......... 28,842,198 288,422 26,984,038 83,309,455 69,437 (591,445)
Exercise of stock options and
warrants......................... 1,636,080 16,361 -- 282,161 -- --
Repurchases of common stock and
warrants......................... (3,697,500) (36,975) (18,386,927) (17,323,502) -- --
Value transferred from common
stock purchase warrants.......... -- -- (8,597,111) 8,597,111 -- --
Income tax effect of warrants
repurchased...................... -- -- -- (366,000) -- --
Income tax benefit from stock
options exercised................ -- -- -- 39,000 -- --
Unrealized holding loss on
investments available-for-sale... -- -- -- -- (6,345,089) --
Increase in notes receivable from
officers......................... -- -- -- -- -- (369,031)
Net income........................ -- -- -- -- -- --
---------- -------- ------------ ------------ ----------- ---------
BALANCE, January 31, 1998......... 26,780,778 $267,808 $ -- $ 74,538,225 $(6,275,652) $(960,476)
========== ======== ============ ============ =========== =========
<CAPTION>
RETAINED TOTAL
EARNINGS SHAREHOLDERS'
(DEFICIT) EQUITY
--------- -------------
<S> <C> <C>
BALANCE, January 31, 1995......... $(12,515,032) $ 66,802,024
Exercise of stock options......... -- 141,844
Issuance of common stock.......... -- 8,000,000
Value assigned to common stock
purchase warrants................ -- 17,500,000
Offering expenses................. -- (590,050)
Unrealized holding gain on
investments available-for-sale... -- 429,756
Issuance of note to officers...... -- (558,670)
Net income........................ 11,019,565 11,019,565
------------ ------------
BALANCE, January 31, 1996......... (1,495,467) 102,744,469
Exercise of stock options and
warrants......................... -- 1,150,395
Repurchases of common stock....... -- (5,825,894)
Value assigned to common stock
purchase warrants................ -- 9,484,038
Income tax benefit from stock
options exercised................ -- 790,000
Unrealized holding gain on
investments available-for-sale... -- 254,207
Increase in notes receivable from
officers......................... -- (32,775)
Net income........................ 18,089,722 18,089,722
------------ ------------
BALANCE, January 31, 1997......... 16,594,255 126,654,162
Exercise of stock options and
warrants......................... -- 298,522
Repurchases of common stock and
warrants......................... -- (35,747,404)
Value transferred from common
stock purchase warrants.......... -- --
Income tax effect of warrants
repurchased...................... -- (366,000)
Income tax benefit from stock
options exercised................ -- 39,000
Unrealized holding loss on
investments available-for-sale... -- (6,345,089)
Increase in notes receivable from
officers......................... -- (369,031)
Net income........................ 18,103,569 18,103,569
------------ ------------
BALANCE, January 31, 1998......... $ 34,697,824 $102,267,729
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE> 50
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................... $ 18,103,569 $ 18,089,722 $ 11,019,565
Adjustments to reconcile net income to net cash
provided by (used for) operating activities --
Depreciation and amortization................. 6,977,594 5,996,357 4,807,735
Deferred taxes................................ 1,838,660 (236,668) (250,000)
Gain on sale of broadcast stations............ (38,850,000) (27,050,000) --
Gain on sale of investments................... (214,694) (808,449) (8,480,453)
Equity in (earnings) losses of affiliates..... 431,241 (419,430) (1,983,226)
Other non-cash charges........................ -- -- 646,268
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable, net.................... (3,762,629) (555,925) (2,064,405)
Inventories, net............................ 5,682,219 (4,479,713) (1,056,425)
Prepaid expenses and other.................. 627,401 1,889,663 (3,230,141)
Accounts payable and accrued liabilities.... (9,157,557) 1,433,867 2,894,713
Income taxes payable (receivable), net...... (1,120,327) 361,481 --
------------ ------------ ------------
Net cash provided by (used for) operating
activities............................. (19,444,523) (5,779,095) 2,303,631
------------ ------------ ------------
INVESTING ACTIVITIES:
Property and equipment additions, net of effect
of acquisitions............................... (3,543,054) (14,364,600) (3,040,865)
Purchase of broadcast stations................... -- (4,618,743) --
Acquisition of direct-mail companies, net of cash
acquired...................................... -- (4,113,984) --
Proceeds from sale of broadcast stations......... 30,000,000 40,000,000 --
Proceeds from sale of investments................ 1,381,162 6,103,541 16,438,979
Purchase of short-term investments............... (43,866,856) (84,506,099) (55,094,124)
Proceeds from sale of short-term investments..... 51,121,965 87,256,886 33,710,220
Loan to National Media........................... (7,000,000) -- --
Payment for investments and other assets......... (6,631,791) (6,534,383) (3,457,071)
Proceeds from long-term notes receivable......... 1,603,439 -- --
------------ ------------ ------------
Net cash provided by (used for) investing
activities............................. 23,064,865 19,222,618 (11,442,861)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and
warrants...................................... 298,522 1,150,395 141,844
Payments for repurchases of common stock......... (14,963,837) (5,825,894) --
Proceeds from sale of common stock............... -- -- 8,000,000
Payment of offering costs........................ -- -- (464,167)
Payment of long-term obligations................. (375,896) (212,982) (130,500)
------------ ------------ ------------
Net cash provided by (used for) financing
activities............................. (15,041,211) (4,888,481) 7,547,177
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................ (11,420,869) 8,555,042 (1,592,053)
BEGINNING CASH AND CASH EQUIVALENTS................ 28,618,943 20,063,901 21,655,954
------------ ------------ ------------
ENDING CASH AND CASH EQUIVALENTS................... $ 17,198,074 $ 28,618,943 $ 20,063,901
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE> 51
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1997
1. THE COMPANY:
ValueVision International, Inc. and Subsidiaries ("the Company") is an
integrated direct marketing company which markets its products directly to
consumers through electronic and print media.
The Company's television home shopping network uses recognized on-air
television home shopping personalities to market brand name merchandise and
proprietary and private label consumer products at competitive or discount
prices. The Company's 24-hour per day television home shopping programming is
distributed primarily through long-term cable affiliation agreements and the
purchase of month-to-month full-and part-time block lease agreements of cable
and broadcast television time. In addition, the Company distributes its
programming through Company owned or affiliated full power Ultra-High Frequency
("UHF") broadcast television stations, low power television ("LPTV") stations
and to satellite dish owners.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), is a direct-mail marketer of a broad range of
quality general merchandise which is sold to consumers through direct-mail
catalogs and other direct marketing solicitations. Products offered include
domestics, housewares, home accessories and electronics. Through its
wholly-owned subsidiary, Catalog Ventures, Inc. ("CVI"), the Company sells a
variety of fashion jewelry, health and beauty aids, books, audio and video
cassettes and other related consumer merchandise through the publication of five
consumer specialty catalogs. The Company also manufactures and markets, via
direct-mail, women's foundation undergarments and other women's apparel through
its wholly-owned subsidiary, Beautiful Images, Inc. ("BII").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ValueVision International, Inc. ("ValueVision") and its wholly-owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Results of operations for the year ended January 31, 1997 include the
direct-mail operations of HomeVisions (formerly known as Montgomery Ward Direct)
effective July 27, 1996, BII effective October 22, 1996 and CVI effective
November 1, 1996, which were acquired by the Company in fiscal 1997.
FISCAL YEAR
The Company's fiscal year ends on January 31. Fiscal years are designated
in the accompanying consolidated financial statements and related notes by the
calendar year in which the fiscal year ends.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue is recognized at the time merchandise is shipped. Shipping and
handling fees collected from customers are recognized as merchandise is shipped
and are offset against actual shipping expenses as a component of distribution
and selling costs. Returns are estimated and provided for at the time of sale
based on historical experience. Payments received for unfilled orders are
reflected as a component of accrued liabilities.
Accounts receivable consist primarily of amounts due from customers for
merchandise sales and from credit card companies, and are reflected net of
reserves for estimated uncollectible amounts of $453,000 at January 31, 1998 and
$529,000 at January 31, 1997.
51
<PAGE> 52
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds and
commercial paper with an original maturity of 90 days or less.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of commercial paper with a
remaining maturity of less than 12 months and are stated at cost, which
approximates market value due to the short maturities of these instruments.
INVESTMENTS IN EQUITY SECURITIES
The Company classifies certain investments in equity securities as
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115"), and reports these investments at fair value. Under
SFAS No. 115, unrealized holding gains and losses on available-for-sale
securities are excluded from income and are reported as a separate component of
shareholders' equity. Realized gains and losses from securities classified as
available-for-sale are included in income and are determined using the average
cost method for ascertaining the cost of securities sold.
Information on investments in equity securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
January 31, 1998 equity securities............ $21,044,000 $ -- $6,276,000 $14,768,000
=========== ======= ========== ===========
January 31, 1997 equity securities............ $ 181,000 $69,000 $ -- $ 250,000
=========== ======= ========== ===========
</TABLE>
As of January 31, 1998 and 1997 respectively, $4,920,000 and $0 of
available-for-sale investments were classified as short-term investments in the
accompanying consolidated balance sheets.
Proceeds from sales of investment securities available-for-sale were
$3,084,000, $4,608,000 and $16,439,000 in fiscal 1998, 1997 and 1996,
respectively, and related net realized gains included in income were $215,000,
$808,000 and $8,480,000 in fiscal 1998, 1997 and 1996, respectively.
INVENTORIES
Inventories, which consist primarily of consumer merchandise held for
resale, are stated at the lower of first-in, first-out cost or realizable value.
ADVERTISING COSTS
Promotional advertising expenditures are expensed in the period the
advertising initially takes place. Direct response advertising costs, consisting
primarily of catalog preparation, printing and postage expenditures, are
deferred and amortized over the period during which the benefits are expected,
generally three to six months. Advertising costs of $44,894,000, $21,164,000 and
$2,013,000 for the years ended January 31, 1998, 1997 and 1996, respectively,
are included in the accompanying consolidated statements of operations. Prepaid
expenses and other includes deferred advertising costs of $6,114,000 at January
31, 1998 and $6,268,000 at January 31, 1997, which will be reflected as an
expense during the quarterly period benefited.
52
<PAGE> 53
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Betterments and renewals that
extend the life of an asset are capitalized and depreciated. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts, and any residual values are charged or
credited to operations. Depreciation and amortization for financial reporting
purposes are provided principally on the straight-line method based upon
estimated useful lives.
Property and equipment consisted of the following at January 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
(IN YEARS) 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Land and improvements.................................... -- $ 6,564,000 $ 7,151,000
Buildings and improvements............................... 40 4,326,000 4,630,000
Transmission and production equipment.................... 5-20 7,744,000 10,226,000
Office and warehouse equipment........................... 3-10 4,033,000 2,962,000
Computer and telephone equipment......................... 3-5 4,267,000 3,726,000
Leasehold improvements................................... 3-10 2,074,000 1,720,000
Less -- Accumulated depreciation and amortization........ (7,604,000) (6,132,000)
----------- -----------
$21,404,000 $24,283,000
=========== ===========
</TABLE>
FEDERAL COMMUNICATIONS COMMISSION LICENSES
Federal Communications Commission ("FCC") licenses are stated at
acquisition cost as determined based upon independent appraisals and are
amortized on a straight-line basis over their estimated useful lives of 25
years. Accumulated amortization was $653,000 at January 31, 1998 and $529,000 at
January 31, 1997.
Although the FCC has established eight year license terms for television
stations, the Telecommunications Act of 1996 requires the FCC to grant
applications for renewal of such licenses upon a finding that (i) the station
has served the public interest, convenience, and necessity; (ii) there have been
no serious violations by the licensee of the Communications act or the FCC's
rules and regulations; and (iii) there have been no other violations by the
licensee of such Act or rules and regulations which, taken together, would
constitute a pattern of abuse. The Company has met and continues to meet the
requirements set forth above, and based further on standard industry practice,
the Company has determined that 25 years is a reasonable estimated useful life
for its FCC licenses, considering the future periods to be benefited.
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES
As discussed further in Note 3, during fiscal 1996, the Company issued
common stock purchase warrants in exchange for various agreements entered into
with Montgomery Ward & Co., Incorporated ("Montgomery Ward") including an
Operating Agreement, a Credit Card License and Receivable Sales Agreement, and a
Servicemark License Agreement. The value assigned to the agreements of
$17,500,000 was determined pursuant to an independent appraisal and is being
amortized on a straight-line basis over the amended term of the agreements (see
discussion below and Note 3). The Operating Agreement expires July 31, 2008 and
may be terminated under certain circumstances, as defined in the agreement. The
Credit Card License and Receivable Sales Agreement and Servicemark License
Agreement automatically terminate upon termination of the Operating Agreement.
53
<PAGE> 54
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
In the fourth quarter of fiscal 1998, the Company and Montgomery Ward
restructured the Operating Agreement in an equity transaction whereby certain
rights and arrangements with respect to both the Company's television home
shopping and catalog operations were modified and amended and, among other
matters, the Company agreed to cease the use of the Montgomery Ward and
Montgomery Ward Direct names in its catalog operations in exchange for
Montgomery Ward's return of 3.8 million common stock purchase warrants. As a
result of the restructuring, the Montgomery Ward Operating Agreement and License
asset was reduced to $2,115,000 which represents the asset's remaining fair
value assigned to the Company's non-catalog operations. The value assigned to
the asset was determined through an analysis of the future cash flows and
benefits expected to be received and is being amortized on a straight-line basis
over the remaining term of the agreement.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired in purchase transactions, and is being amortized on a
straight-line basis over periods ranging from 15 to 25 years. Other intangible
assets represent costs allocated to customer lists arising from business
acquisitions and are amortized on a straight-line basis over 5 years. The
carrying values of goodwill are evaluated periodically by the Company in
relation to the operating performance and future undiscounted net cash flows of
the related acquired businesses.
As discussed further in Note 3, in the fourth quarter of fiscal 1998, the
Company restructured its operating agreement with Montgomery Ward in an equity
transaction whereby, among other matters, the Company agreed to cease the use of
the Montgomery Ward and Montgomery Ward Direct names in its catalog operations
in exchange for Montgomery Ward's return of 3.8 million common stock purchase
warrants. As a result of the restructuring, $5,259,000, representing the
remaining balance of goodwill and other intangible assets relating to the
acquisition of Montgomery Ward Direct were reduced to zero through equity in the
transaction. Accumulated amortization was $671,000 at January 31, 1998 and
$660,000 at January 31, 1997.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following at January 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Investments........................................ $4,211,000 $ 4,444,000
Prepaid cable launch fees, net..................... 1,622,000 2,382,000
Other, net......................................... 3,246,000 3,197,000
---------- -----------
$9,079,000 $10,023,000
========== ===========
</TABLE>
Included in these investments are certain nonmarketable investments in
private companies and other enterprises which are carried at the lower of cost
or net realizable value. The fair values of these investments are estimated
based primarily on recent financing and securities transactions, present value
and other pricing models, and, to a lesser extent, other pertinent information,
including financial condition and operating results.
At January 31, 1998, investments also include approximately $1,179,000
related to a 13% interest in a venture capital limited partnership. The purpose
of the limited partnership is to invest in and assist new and emerging
growth-oriented businesses and leveraged buyouts in the consumer services,
retailing and direct marketing industries. In addition to the Company, Merchant
Advisors, L.P. is the only other limited partner in the limited partnership. The
investment in this partnership is accounted for using the equity method of
accounting. In fiscal 1996, the Company received a distribution of certain
investment securities from the
54
<PAGE> 55
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
limited partnership, including common stock and common stock purchase warrants,
valued at $2,744,000, as determined pursuant to an independent financial
appraisal. During fiscal 1998, the Company received cash distributions of
approximately $1,101,000 from the limited partnership.
At January 31, 1998, investments also include approximately $1,030,000
related to the Company's investment interest in Net Radio Corporation ("Net
Radio") which was purchased in March 1997 for an aggregate purchase price of $3
million, consisting of $1 million in cash and a commitment to provide $2 million
in future advertising. Net Radio is a music and entertainment site on the
Internet where the Company's 24-hour per day shopping program is currently being
carried. The investment is being accounted for under the cost method.
Prepaid cable launch fees represent amounts paid to cable operators upon
entering into cable affiliation agreements. These fees are capitalized and
amortized over the lives of the related cable affiliation contracts, which range
from 2-7 years.
Other assets consist principally of non-compete agreements, prepaid
satellite transponder launch fees, long-term deposits, notes receivable,
deferred acquisition costs, and software development costs, all of which are
carried at cost, net of accumulated amortization. Costs are amortized on a
straight-line basis over the estimated useful lives of the assets, ranging from
3 to 25 years. Accumulated amortization was $685,000 at January 31, 1998 and
$433,000 at January 31, 1997.
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting under which deferred tax assets are recognized for deductible
temporary differences, and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
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.
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"),
which established new guidelines for computing and presenting earnings per share
data ("EPS"). SFAS No. 128 replaces primary EPS with basic EPS. Basic EPS is
computed by dividing reported earnings by weighted average shares outstanding,
excluding potentially dilutive securities. Fully diluted EPS, termed diluted EPS
under SFAS No. 128, is also to be disclosed. The Company adopted SFAS No. 128 in
the fourth quarter of fiscal 1998. The adoption of SFAS No. 128 did not have a
significant effect on previously reported earnings per share information.
55
<PAGE> 56
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income.......................................... $18,104,000 $18,090,000 $11,020,000
=========== =========== ===========
Weighted average number of common shares
outstanding -- Basic.............................. 31,745,000 31,718,000 28,627,000
Dilutive effect of stock options.................... 143,000 624,000 682,000
----------- ----------- -----------
Weighted average number of common shares
outstanding -- Diluted............................ 31,888,000 32,342,000 29,309,000
=========== =========== ===========
Net income per common share......................... $0.57 $0.57 $0.38
=========== =========== ===========
Net income per common share -- assuming dilution.... $0.57 $0.56 $0.38
=========== =========== ===========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair values for financial instruments:
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities, due to the short
maturities of those instruments.
Fair values for long-term investments are based on quoted market prices,
where available. For equity securities not actively traded, fair values are
estimated by using quoted market prices of comparable instruments or, if there
are no relevant comparables, on pricing models or formulas using current
assumptions.
The fair value for the Company's long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates, for similar types of borrowing arrangements, and approximated
carrying value at January 31, 1998 and 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during reporting
periods. These estimates relate primarily to the carrying amounts of accounts
receivable and inventories, the realizability of certain long-term assets and
the recorded balances of certain accrued liabilities and reserves. Ultimate
results could differ from the use of these estimates.
56
<PAGE> 57
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
RECLASSIFICATIONS
Certain 1997 and 1996 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 1998 presentation,
with no impact on previously reported net income.
3. MONTGOMERY WARD ALLIANCE:
During fiscal 1996, the Company entered into a Securities Purchase
Agreement, an Operating Agreement, a Credit Card License and Receivable Sales
Agreement, and a Servicemark License Agreement (collectively, the "MW
Agreements") with Montgomery Ward. Under the MW Agreements, Montgomery Ward
purchased 1,280,000 unregistered shares of common stock of the Company at $6.25
per share, which represented approximately 4.4% of the then issued and
outstanding shares of common stock of the Company, and received warrants to
purchase an additional 25 million shares of common stock of the Company. These
warrants had exercise prices ranging from $6.50 to $17.00 per share, with an
average exercise price of $9.16 per share (the "Warrants"). The value assigned
to the Warrants of $17,500,000 was determined pursuant to an independent
appraisal.
On June 7, 1996, the Company signed a non-binding Memorandum of
Understanding with Montgomery Ward pursuant to which the companies agreed to the
expansion and restructuring of their ongoing operating and license agreements as
well as the Company's acquisition of substantially all of the assets and
assumption of certain obligations of Montgomery Ward Direct L.P. ("MWD"), a four
year old catalog business. Effective July 27, 1996 the companies reached
definitive agreements and closed the transaction in the third quarter ended
October 31, 1996. Pursuant to the provisions of the agreements, the Company's
sales promotion rights were expanded beyond television home shopping to include
the full use of the service mark of Montgomery Ward for direct-mail catalogs and
ancillary promotions. In addition, the strategic alliance between the companies
had been restructured and amended such that (i) 18,000,000 warrants not
immediately exercisable granted to Montgomery Ward in August 1995 and with
exercise prices ranging from $7.00 - $17.00 were terminated in exchange for the
issuance by the Company of 1,484,467 new immediately exercisable warrants
exercisable at $0.01 per share and valued at $5.625 per warrant, which
approximated the book value of the 18,000,000 warrants not immediately
exercisable returned as of the date of the transaction, (ii) the Company issued
1,484,993 new immediately exercisable warrants, valued at $5.625 per warrant and
exercisable at $0.01 per share, to Montgomery Ward as full consideration for the
acquisition of approximately $4.0 million in net assets, representing
substantially all of the assets and the assumption of certain liabilities of
MWD, (iii) Montgomery Ward committed to provide $20 million in supplemental
advertising support over a five-year period, (iv) the Montgomery Ward operating
agreements and licenses were amended and expanded, as defined in the agreements,
and extended to July 31, 2008 and (v) the Company issued to Montgomery Ward new
immediately exercisable warrants to purchase 2.2 million shares of the Company's
common stock at an exercise price of $.01 per share in exchange for 7,000,000
immediately exercisable warrants granted to Montgomery Ward in August 1995 which
were exercisable at prices ranging from $6.50 - $6.75 per share. The fair value
of the warrants approximated the book value of the warrants exchanged. The
Operating Agreement has a twelve-year term and may be terminated under certain
circumstances as defined in the agreement.
Effective November 1, 1997, the Company restructured its operating
agreement with Montgomery Ward, which governs the use of the Montgomery Ward
name. In exchange for Montgomery Ward's return to ValueVision of warrants
covering the purchase of 3,842,143 shares of ValueVision common stock
(representing all remaining warrants held by Montgomery Ward), the Company ceded
exclusive use of the Montgomery Ward name for catalog, mail order, catalog
"syndications" and television shopping programming back to Montgomery Ward.
Under the agreement, the Company has ceased the use of the Montgomery Ward name
in all outgoing catalog, syndication, and mail order communication through March
31, 1998, with a wind down of incoming orders and customer service permitted
after March 31, 1998. The agreement also includes the
57
<PAGE> 58
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
reduction of Montgomery Ward's minimum commitment to support ValueVision's cable
television spot advertising purchases. Under the new terms, Montgomery Ward's
commitment is reduced from $4 million to $2 million annually, and the time
period decreased from five years to three years effective November 1, 1997. In
addition, the agreement limits the Company to offer the Montgomery Ward credit
card only in conjunction with its various television offers and subject to the
normal approvals by the credit card grantor. The Company has accounted for the
restructuring of the Operating Agreement as an exchange or disposition of assets
at fair value, in accordance with the provisions of Accounting Principles Board
Opinion No. 29. The return of the warrants, which were valued at approximately
$19,211,000, represents consideration given by Montgomery Ward for the assets
relinquished by the Company, which effectively include the remaining goodwill
attributable to the acquisition of MWD, as well as a portion of the Montgomery
Ward Operating Agreement and License asset (see Note 2). The warrants were
valued at $5.00 per warrant, which represented the fair market value of the
Company's stock on October 22, 1997, the date on which ValueVision and
Montgomery Ward reached agreement on the terms and consideration of the
restructuring agreement and the date the transaction was effectively announced.
The warrant return has been reflected as a reduction in shareholders' equity for
the fair value of the warrants, and the intangible asset amounts reflecting the
assets sold back to Montgomery Ward have been reduced accordingly to their
remaining estimated fair values as determined through analysis of future cash
flows and benefits to be received. The difference between the consideration
given by the Company (the assets sold back to Montgomery Ward) and the
consideration received (the warrants returned to the Company) was not material.
The agreement also called for the repurchase by the Company of 1,280,000 shares
of its common stock currently owned by Montgomery Ward, at a price of $3.80 per
share. This repurchase was completed on January 15, 1998. Management does not
believe that this restructuring will have any other material impact on the
Company's financial condition, results of operations or liquidity.
Montgomery Ward purchased approximately $3.3 million and $4.2 million of
advertising spot time on cable systems affiliated with the Company pursuant to
cable affiliation agreements for the years ended January 31, 1998 and 1997,
respectively. Under the terms of the Credit Card License and Receivable Sales
Agreement, the Company incurred $1,123,000 and $596,000 of processing fees
during fiscal 1998 and 1997, respectively as a result of customers using
Montgomery Ward/ValueVision credit cards. In addition, during fiscal 1998 and
1997, the Company earned $831,000 and $793,000 for administering and processing
Montgomery Ward credit card applications. As of January 31, 1998 and 1997, the
Company had $2,218,000 and $830,000 included in accounts receivable from
Montgomery Ward for merchandise sales made on Montgomery Ward/Value Vision
credit cards, advertising spot time acquired and administrative and processing
fees, net of processing fees due Montgomery Ward for use of its credit card.
4. ACQUISITIONS AND DISPOSITIONS:
MONTGOMERY WARD DIRECT
As discussed further in Note 3, effective July 27, 1996, the Company,
through VVDM, acquired substantially all of the assets and assumed certain
obligations of MWD by issuing 1,484,993 vested warrants with an exercise price
of $.01 per share to Montgomery Ward as full consideration for the acquisition
of approximately $4.0 million in net assets of MWD. The value of the warrants
issued in the acquisition of MWD was based on the market price of the Company's
common stock during the period in which the agreement was reached (i.e., signing
of the letter of intent) to undertake the relevant transaction which the Company
believes is indicative of the fair value of the acquired business.
The Company's acquisition of MWD was for an aggregate purchase price of
$8,497,000, which included approximately $4.0 million in net assets, including
acquired cash of $5,764,000. Acquisition related costs approximated $144,000.
The acquisition was accounted for using the purchase method of accounting and
58
<PAGE> 59
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
accordingly, the net assets of MWD were recorded at their estimated fair values.
The allocation is summarized as follows:
<TABLE>
<S> <C>
Cash............................................. $ 5,764,000
Inventories...................................... 9,140,000
Other current assets............................. 2,861,000
Property and equipment........................... 557,000
Intangible assets................................ 4,531,000
Liabilities assumed.............................. (14,356,000)
------------
$ 8,497,000
============
</TABLE>
The excess of the purchase price over the net assets acquired was
$4,531,000, had been recorded as goodwill and other intangible assets in the
accompanying balance sheet and was being amortized on a straight-line basis over
5-12 years. As discussed in Notes 2 and 3, intangible assets recorded in
connection with this acquisition were reduced to zero in fiscal 1998 in
connection with the restructuring transaction with Montgomery Ward. The
operating results of MWD have been included in the fiscal 1997 consolidated
statement of operations from the date of acquisition. Unaudited pro forma
consolidated net sales of the Company for the years ended January 31, 1997 and
1996, as if the acquisition had occurred as of the beginning of the respective
periods were $194,284,000 and $240,850,000 respectively. Unaudited pro forma net
income was $17,151,000, or $.52 per diluted share, in fiscal 1997 and
$4,341,000, or $.14 per diluted share, in fiscal 1996. Such pro forma amounts
are not necessarily indicative of what the actual consolidated results of
operations would have been had the acquisition been effective at the beginning
of the respective periods. In fiscal 1998, the Company changed the name of the
MWD catalog to HomeVisions.
BEAUTIFUL IMAGES, INC.
On October 22, 1996, the Company, through VVDM, acquired all of the
outstanding shares of BII, a manufacturer and direct marketer of women's
foundation undergarments and other women's apparel. The Company paid $4,253,000
in cash, which included acquired cash of $423,000, $500,000 relating to a non-
compete agreement and acquisition costs of approximately $75,000, and assumed
certain obligations totaling $109,000. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase price was
allocated to the assets purchased and the liabilities assumed based upon
estimated fair values at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired was $3,310,000, of which
$2,810,000 has been recorded as goodwill, which is being amortized on a
straight-line basis over 15 years, and $500,000 assigned to the non-compete
agreement, which is being amortized on a straight-line basis over the 6 year
term of the agreement. The operating results of BII have been included in the
fiscal 1997 consolidated statement of operations from the date of acquisition.
Pro forma results of operations have not been presented because the effects were
not significant.
CATALOG VENTURES, INC.
Effective November 1, 1996, the Company, through VVDM, acquired
substantially all of the assets and assumed certain obligations of Catalog
Ventures, Inc. and Mitchell & Webb, Inc. ("Webb"), two direct marketing
companies which together publish five consumer specialty catalogs. The Company
paid $7,369,000 in cash which included acquired cash of $1,465,000 and
acquisition costs of approximately $100,000. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair values of the net assets acquired was $1,953,000, and has been recorded
as goodwill, which is being amortized on a straight-line basis over 15 years.
The
59
<PAGE> 60
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
operating results of CVI have been included in the fiscal 1997 consolidated
statement of operations from the date of the acquisition. Pro forma results of
operations have not been presented because the effects were not significant.
BROADCAST STATIONS
During the first quarter of fiscal 1995, the Company completed the
acquisitions of three full power television broadcast stations serving the
Washington D.C. ("WVVI"); Houston, Texas ("KVVV"); and Cleveland -- Akron, Ohio
("WAKC") Areas of Dominant Influence ("ADI"). On December 28, 1994 the Company
completed the acquisition of one full power television broadcast station serving
the New York City ADI and licensed to Bridgeport, Connecticut ("WHAI"). The
aggregate purchase price for the four stations was approximately $22,374,000 in
cash, Company common stock and non-compete obligations. The acquisitions were
accounted for under the purchase method of accounting. Accordingly, the net
assets of the four stations were recorded at their estimated values at the time
of acquisition, as determined by independent appraisals.
On March 15, 1996, the Company completed the acquisition of independent
television station KBGE (TV), Channel 33 serving the Seattle-Tacoma, Washington
market, for approximately $4.6 million including the assumption of certain debt
obligations and acquisition related costs. This acquisition was completed in
accordance with the terms of a five-year programming affiliation and financing
agreement with the station which was signed on July 21, 1995. Pursuant to this
agreement, the Company provided financing of up to $1,450,000 related to a
working capital loan for channel operations.
On April 11, 1996, the Company completed a second closing with respect to
its acquisition of independent television station WVVI whereby the Company paid
$800,000 to the former owner of WVVI as a final payment in exchange for not
having to pay $1,600,000 in the event the "must carry" provisions of the 1992
Cable Act are upheld by a final decision. The Company had previously paid
$4,050,000 to National Capital Christian Broadcasting, WVVI's former owners, at
an initial closing on March 28, 1994. The $800,000 additional payment had been
classified as excess purchase price and was amortized over 25 years on a
straight-line basis. In addition, the Company received certain studio and
production equipment from the former owner of WVVI, in lieu of a cash payment,
for the balance outstanding under a secured convertible debenture in the face
amount of $450,000.
On March 31, 1997, the United States Supreme Court upheld the "must carry"
provisions of the 1992 Cable Act and as a result, the Company paid an additional
$1,600,000 in connection with its 1995 acquisition of television station
KVVV(TV) in Houston, Texas upon a second closing. The additional payment has
been classified as excess purchase price and is being amortized over 25 years on
a straight-line basis. Pro forma results of operations have not been presented
because the effects were not significant. The Company views and treats the
acquisition of its television broadcast stations as a "purchase of assets"
rather than as a purchase of a stand alone operating business unit. This
treatment is due to the fact that planned revenues of acquired television
broadcast stations do not constitute either a separate business of ValueVision
or represent a significant portion of the Company's operating businesses.
The Company has filed applications for nine additional full-power stations,
all of which include multiple applicants, and expects to participate in
FCC-permitted private auctions to determine the grantee.
SALE OF BROADCAST STATIONS
On February 28, 1996, the Company completed the sale of two television
stations to Paxson Communications Corporation ("Paxson") for $40.0 million in
cash plus the assumption of certain obligations. The stations sold were ABC
affiliate WAKC (TV), Channel 23, licensed to Akron, Ohio, and independent
station WHAI
60
<PAGE> 61
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
(TV), Channel 43, licensed to Bridgeport, Connecticut. WAKC (TV) was acquired by
the Company in April 1994 for approximately $6.0 million and WHAI (TV) was
acquired by the Company in December 1994 for approximately $7.3 million. The net
gain on the sale of these two television stations of approximately $27 million
was recognized in the first fiscal quarter ended April 30, 1996.
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI (TV) to Paxson for approximately $30 million in cash and
the receipt of 1,197,892 shares of Paxson common stock valued at $11.92 per
share as determined pursuant to an independent financial appraisal. Under the
terms of the agreement, Paxson paid the Company $20 million in cash upon closing
and was required to pay an additional $10 million to the Company as a result of
the United States Supreme Court upholding the "must carry" provision of the 1992
Cable Act. WVVI (TV) was acquired by the Company in March 1994 for $4,850,000.
The pre-tax gain recorded on the sale of the television station was
approximately $38.9 million and was recognized in the second fiscal quarter
ended July 31, 1997.
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE-TV Channel 33, which serves the Seattle, Washington
market, along with two of the Company's non-cable, low-power stations in
Portland, Oregon and Indianapolis, Indiana and a minority interest in an entity
which had applied for a new full-power station to Paxson for a total of
approximately $35 million in cash. Under the terms of the agreement, Paxson paid
the Company approximately $25 million upon closing and the remaining $10 million
is to be paid when KBGE, which is currently operating at reduced power from
downtown Seattle, is able to relocate its antenna and increase its transmitter
power to a level at or near its licensed full power. The Company will retain and
continue to serve the Seattle market via its recently-launched low-power station
K58DP-TV, which transmits from downtown Seattle. The pre-tax gain to be recorded
on the first installment with respect to the sale of this television station is
expected to be approximately $19.8 million and will be recognized in the first
quarter of fiscal 1999.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
5. LOW-POWER TELEVISION STATIONS:
The licensing of LPTV stations' transmission authority is regulated by the
FCC through the Communications Act of 1934. LPTV construction permits and the
licensing rights that result upon definitive FCC operating approval are awarded
solely at the discretion of the FCC and are subject to periodic renewal
requirements. As of January 31, 1998, the Company held licenses for ten LPTV
stations, and had pending before the FCC an application to acquire an eleventh
LPTV station from a former officer and shareholder of the Company for which an
application has since been granted but the acquisition has not yet been
consummated.
The Company's President and Chief Operating Officer also holds a
construction permit for an additional LPTV station in Richmond, Virginia. The
Company has entered into an agreement with this permittee whereby the Company
has the option to enter into a secured financing arrangement to support the
construction of transmission equipment for the LPTV station and to provide its
programming to the station. The agreement contains a fixed price purchase option
of $5,000 in favor of the Company, effective 12 months from the FCC licensing
date, as defined. Under the agreement this permittee could receive maximum
annual programming fees of approximately $48,000.
61
<PAGE> 62
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
6. SHAREHOLDERS' EQUITY:
COMMON STOCK
The Company currently has authorized 100,000,000 shares of undesignated
capital stock, of which approximately 26,780,778 shares were issued and
outstanding as Common Stock as of January 31, 1998. The Board of Directors can
establish new classes and series of capital stock by resolution without
shareholder approval.
WARRANTS
As discussed further in Note 3, in fiscal 1996, the Company issued
Montgomery Ward warrants to purchase 25 million shares of common stock of the
Company, subject to adjustment, with exercise prices ranging from $6.50 to
$17.00 per share, with an average price of $9.16 per share.
In July 1996, in connection with the acquisition of MWD, the Company's
strategic alliance with Montgomery Ward was restructured and amended whereby new
immediately exercisable warrants to purchase 3,684,467 shares of the Company's
common stock at an exercise price of $.01 per share were issued to Montgomery
Ward in exchange for the 25 million warrants held. In addition, the Company
issued 1,484,993 new immediately exercisable warrants with a fair market value
of $8,353,000 and exercisable at $.01 per share to Montgomery Ward as full
consideration for the acquisition of MWD. See Note 3 for further discussion.
In July 1996, the Company issued 199,097 new immediately exercisable
warrants with a fair market value of $1,131,000 and exercisable at $.01 per
share as a limited partnership investment contribution.
In February 1997, vested warrants to purchase 1,526,414 shares of the
Company's common stock at an exercise price of $.01 per share and originally
valued at $8,597,000, were exercised in full and their value was transferred to
paid in capital.
As discussed further in Note 3, in November 1997, 3,842,143 immediately
exercisable warrants owned by Montgomery Ward at an exercise price of $.01 per
share were exchanged and returned to the Company as consideration in the
transaction relating to the restructuring of the Company's operating agreement
with Montgomery Ward. In addition, the Company repurchased 1,280,000 shares of
its common stock held by Montgomery Ward for aggregate consideration of
approximately $4,505,000.
UNDERWRITER OPTIONS
In connection with the Company's fiscal 1992 initial public offering, the
Company issued options to purchase up to an aggregate 72,000 units for $5.23 per
unit. Each unit consisted of three shares of common stock, three Class A
Warrants and one-quarter of a Class B Warrant, subject to adjustment pursuant to
antidilution provisions as defined. At the beginning of fiscal 1997, 20,400
units had been previously exercised. During the year ended January 31, 1997,
options to purchase the remaining 51,600 units were exercised in full and
resulted in the issuance of 509,550 shares of common stock. The Company received
proceeds of approximately $1,051,000 relating to this exercise. No unit purchase
options were exercised in fiscal 1996.
The underwriters of the fiscal 1994 common stock offering were given
options to purchase up to 400,000 shares of common stock at an initial exercise
price of $16.41 per share, subject to certain specified adjustments, as defined,
exercisable until November 15, 1998. No underwriter options were exercised in
fiscal 1998, 1997 or 1996.
62
<PAGE> 63
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
STOCK OPTIONS
The Company has adopted an incentive stock option plan ("the 1990 Plan"),
as amended, which provides for the grant of options to employees to purchase up
to 2,150,000 shares of the Company's common stock. In addition to options
granted under the 1990 Plan, the Company has also granted non-qualified stock
options to purchase shares of the Company=s common stock to current and former
directors, a consultant and certain employees. The exercise price for options
granted under the 1990 Plan are determined by the stock option committee of the
Board of Directors, but shall not be less than the fair market value of the
shares on the date of grant. The options= maximum term may not exceed 10 years
from the date of grant. Options are exercisable in whole or in installments, as
determined by the stock option committee, and are generally exercisable in
annual installments of 20% to 33% commencing one year after grant. The exercise
price of the non-qualified stock options equaled the market value of the
Company's common stock at the date of grant and the maximum term of such options
does not exceed 10 years from the date of grant.
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25 and has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized in the accompanying consolidated statements of operations. Had
compensation cost related to these options been determined based on the fair
value at the grant date for awards granted in fiscal 1998 and 1997, consistent
with the provisions of SFAS No. 123, the Company=s net income and net income per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported......................... $18,104,000 $18,090,000 $11,020,000
Pro forma........................... 17,805,000 17,794,000 10,775,000
Net income per share:
Basic: As reported......................... $0.57 $0.57 $0.38
Pro forma........................... 0.56 0.56 0.38
Diluted: As reported......................... $0.57 $0.56 $0.38
Pro forma........................... 0.57 0.56 0.37
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to February 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted were as follows:
<TABLE>
<CAPTION>
1990 1994
INCENTIVE STOCK NON-QUALIFIED EXECUTIVE STOCK
OPTIONS PLAN STOCK OPTIONS OPTION PLAN
--------------- ------------- ---------------
<S> <C> <C> <C>
Fiscal 1998 grants..................... $2.49 $2.77 $2.14
Fiscal 1997 grants..................... 3.36 3.46 --
Fiscal 1996 grants..................... 3.20 1.78 --
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997 and 1996, respectively:
risk-free interest rates of 6.0, 6.0 and 6.2 percent; expected volatility of 47,
46 and 45 percent; and expected lives of 7.5 years. 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.
63
<PAGE> 64
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
A summary of the status of the Company's stock option plan as of January
31, 1998, 1997, and 1996 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1990 1994
INCENTIVE WEIGHTED WEIGHTED EXECUTIVE WEIGHTED
STOCK AVERAGE NON-QUALIFIED AVERAGE STOCK AVERAGE
OPTION EXERCISE STOCK EXERCISE OPTION EXERCISE
PLAN PRICE OPTIONS PRICE PLAN PRICE
--------- -------- ------------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance outstanding, January 31, 1995.... 1,191,336 $4.20 365,000 $3.82 1,500,000 $9.50
Granted................................ 344,322 5.50 190,000 5.08 -- --
Exercised.............................. (27,322) 2.90 (50,000) 1.25 -- --
Forfeited or canceled (6,500) 4.37 -- -- -- --
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31, 1996.... 1,501,836 4.52 505,000 4.55 1,500,000 9.50
Granted................................ 151,000 5.74 325,000 5.62 -- --
Exercised.............................. (35,600) 2.79 -- -- -- --
Forfeited or canceled.................. (9,400) 4.84 -- -- -- --
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31, 1997.... 1,607,836 4.67 830,000 4.97 1,500,000 9.50
Granted................................ 160,000 4.23 150,000 4.56 100,000 3.63
Exercised.............................. (84,667) 2.93 (25,000) 1.25 -- --
Forfeited or canceled.................. (223,333) 5.47 -- -- -- --
--------- ----- ------- ----- --------- -----
Balance outstanding, January 31, 1998.... 1,459,836 $4.60 955,000 $5.00 1,600,000 $9.13
========= ===== ======= ===== ========= =====
Options exercisable at:
January 31, 1998....................... 938,000 $4.37 538,000 $4.82 600,000 $9.50
========= ===== ======= ===== ========= =====
January 31, 1997....................... 971,000 $4.24 505,000 $4.55 450,000 $9.50
========= ===== ======= ===== ========= =====
January 31, 1996....................... 759,000 $3.97 315,000 $4.20 300,000 $9.50
========= ===== ======= ===== ========= =====
</TABLE>
The following table summarizes information regarding stock options
outstanding at January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING
RANGE OF OPTIONS AVERAGE CONTRACTUAL LIFE
OPTION TYPE EXERCISE PRICES OUTSTANDING EXERCISE PRICE (YEARS)
----------- --------------- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Incentive:................... $1.00 - $2.53 165,336 $1.43 2.1
$3.88 - $7.50 1,294,500 $5.00 5.3
---------
$1.00 - $7.50 1,459,836 $4.60 4.9
=========
Non-qualified:............... $4.13 - $6.19 955,000 $5.00 5.3
=========
<CAPTION>
OPTIONS EXERCISABLE
-----------------------------
WEIGHTED
OPTIONS AVERAGE
OPTION TYPE EXERCISABLE EXERCISE PRICE
----------- ----------- --------------
<S> <C> <C>
Incentive:................... 165,000 $1.41
773,000 $5.00
-------
938,000 $4.37
=======
Non-qualified:............... 538,000 $4.82
=======
</TABLE>
STOCK OPTION TAX BENEFIT
The exercise of stock options granted under the Company's stock option plan
gives rise to compensation which is includable in the taxable income of the
applicable employees and deductible by the Company for federal and state income
tax purposes. Such compensation results from increases in the fair market value
of the Company's common stock subsequent to the date of grant of the applicable
exercised stock options and is not recognized as an expense for financial
accounting purposes, as the options were originally granted at the fair market
value of the Company's common stock on the date of grant. The related tax
benefits are recorded as additional paid-in capital when realized, and totaled
$39,000 and $790,000 in fiscal 1998 and 1997, respectively.
64
<PAGE> 65
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a stock repurchase program whereby
the Company may repurchase shares of its common stock, up to a maximum of $10
million, in the open market and through negotiated transactions, at prices and
times deemed to be beneficial to the long-term interests of shareholders and the
Company. In March 1997, the Company's Board of Directors authorized an
additional repurchase of up to $10 million of the Company's common stock. During
fiscal 1998, the Company repurchased 2,417,000 common shares under the program
for a total cost of $10,458,000. During fiscal 1997, the Company repurchased
1,047,000 common shares for a total cost of $5,826,000. No shares were
repurchased in fiscal 1996.
7. LONG-TERM OBLIGATIONS:
In conjunction with the acquisition of WAKC in fiscal 1995, the Company
entered into three covenant not-to-compete agreements with former employees and
majority stockholders of WAKC involving aggregate consideration of $1,000,000 to
be paid in five equal annual installments commencing in April 1995. Obligations
under these non-compete agreements were initially reflected in the accompanying
consolidated balance sheets at a present value of approximately $778,000 based
upon an 8% imputed interest rate and are being amortized on a straight-line
basis over the term of the agreements. The long-term and current portions of
this obligation at January 31, 1998 were $153,000 and $200,000, respectively.
The Company leases computer and telephone equipment under noncancelable
capital leases and includes these assets in property and equipment in the
accompanying consolidated balance sheets. At January 31, 1998, the capitalized
cost of leased equipment was approximately $539,000 and the related accumulated
depreciation was approximately $245,000.
Future minimum lease payments for assets under capital leases at January
31, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999...................................................... $242,000
2000...................................................... 225,000
2001...................................................... 76,000
--------
Total minimum lease payments.............................. 543,000
Less: Amounts representing interest....................... (48,000)
--------
495,000
Less: Current portion..................................... (211,000)
--------
Long-term capital lease obligation........................ $284,000
========
</TABLE>
The Company has entered into a $600,000, 10 year note payable arrangement
in connection with the purchase of land to be used in the Company=s fulfillment
operations. The note bears interest, payable in monthly installments, at 7.5%
for the first five years and at prime interest thereafter until maturity. The
principal amount matures and is payable in December 2006. The note is
collateralized by the underlying related property.
65
<PAGE> 66
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
8. INCOME TAXES:
The Company records deferred taxes for differences between the financial
reporting and income tax bases of certain assets and liabilities, computed in
accordance with tax laws in effect at that time. The differences which give rise
to deferred taxes were as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Accruals and reserves not currently deductible for
tax purposes...................................... $ 2,134,000 $ 2,579,000
Inventory capitalization............................ 363,000 541,000
Deferred catalog costs.............................. (766,000) (667,000)
Basis differences in intangible assets.............. (575,000) 30,000
Net tax carryforwards............................... -- 198,000
Differences in depreciation lives and methods....... (1,341,000) (1,237,000)
Difference in investments and other items........... (1,238,000) (1,028,000)
----------- -----------
Net deferred tax asset (liability).................. $(1,423,000) $ 416,000
=========== ===========
</TABLE>
The net deferred tax asset (liability) is classified as follows in the
accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Current deferred taxes.............................. $ 447,000 $ 2,681,000
Noncurrent deferred taxes........................... (1,870,000) (2,265,000)
----------- -----------
Net deferred tax asset (liability).................. $(1,423,000) $ 416,000
=========== ===========
</TABLE>
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current................................... $ 9,661,000 $11,766,000 $ 350,000
Deferred.................................. 1,839,000 (166,000) (250,000)
----------- ----------- ---------
$11,500,000 $11,600,000 $ 100,000
=========== =========== =========
</TABLE>
A reconciliation of income taxes computed at the statutory rates to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rates................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit..... 3.8% 4.1% 5.0%
Effect of recognition of previously unrecorded
deferred tax assets.............................. -- -- (39.1)%
---- ---- -----
Effective tax rate................................. 38.8% 39.1% 0.9%
==== ==== =====
</TABLE>
66
<PAGE> 67
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
9. COMMITMENTS AND CONTINGENCIES:
CABLE AFFILIATION AGREEMENTS
As of January 31, 1998, the Company had entered into 2 to 7 year
affiliation agreements with thirteen multiple systems operators ("MSOs") which
require each MSO to offer the Company's cable television home shopping
programming on a full-time basis over their cable systems. Under certain
circumstances, these cable television operators may cancel their agreements
prior to expiration. The affiliation agreements provide that the Company will
pay each MSO a monthly cable access fee and marketing support payment based upon
the number of homes carrying the Company's television home shopping programming.
For the years ended January 31, 1998, 1997 and 1996, the Company paid
approximately $17,431,000, $15,182,000 and $12,078,000, under these long-term
cable affiliation agreements.
The Company has entered into, and will continue to enter into, affiliation
agreements with other cable television operators providing for full- or
part-time carriage of the Company's television home shopping programming. Under
certain circumstances the Company may be required to pay the cable operator a
one time initial launch fee which is capitalized and amortized on a
straight-line basis over the term of the agreement.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its chief executive
officer and chief operating officer which expire on January 31, 1999. The
employment agreements provide that each officer, in addition to a base salary,
be granted options to purchase 375,000 shares of common stock at $8.50 per share
and 375,000 shares of common stock at $10.50 per share. The options vest and
become exercisable at the earlier of the Company achieving certain net income
goals, as defined, or in September 2003. The aggregate commitment for future
base compensation for these officers at January 31, 1998 was $700,000.
In addition, the Company has entered into employment agreements with a
number of officers of the Company and its subsidiaries for terms ranging from 24
to 36 months. These agreements specify, among other things, the term and duties
of employment, compensation and benefits, termination of employment (including
for cause, which would reduce the Company's total obligation under these
agreements), severance payments and non-disclosing and non-compete restrictions.
The aggregate commitment for future base compensation at January 31, 1998 was
approximately $2,592,000.
OPERATING LEASE COMMITMENTS
The Company leases certain property and equipment under non-cancelable
operating lease agreements. Property and equipment covered by such operating
lease agreements include the Company's main corporate office and warehousing
facility, offices and warehousing facilities at subsidiary locations, satellite
transponder and certain tower site locations.
Future minimum lease payments at January 31, 1998 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1999............................................... $4,023,000
2000............................................... 3,711,000
2001............................................... 3,393,000
2002............................................... 2,329,000
2003 and thereafter................................ 9,030,000
</TABLE>
67
<PAGE> 68
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
Total lease expense under such agreements was approximately $4,227,000 in
1998, $4,222,000 in 1997, and $3,348,000 in 1996.
RETIREMENT AND SAVINGS PLAN
During fiscal 1995, the Company implemented a qualified 401(k) retirement
savings plan covering substantially all employees. The plan allows the Company's
employees to make voluntary contributions to the plan. The Company's
contribution, if any, is determined annually at the discretion of the Board of
Directors. There were no Company contributions made to the plan in fiscal 1998,
1997 or 1996.
10. LITIGATION:
In December 1997, the Company was named in a lawsuit filed by Time Warner
Cable against Bridgeways Communications Corporation ("Bridgeways") and the
Company alleging, among other things, tortious interference with contractual and
business relations and breach of contract. According to the complaint,
Bridgeways and Time Warner Cable have been in a dispute since 1993 regarding
Bridgeways' attempt to assert "must carry" rights with respect to television
station WHAI-TV in the New York City Area of Dominant Influence.
ValueVision purchased television station WHAI-TV from Bridgeways in 1994
and subsequently sold it in 1996. ValueVision and Time Warner Cable entered into
cable affiliation agreement in 1995 pursuant to which ValueVision agreed not to
assert "must carry" rights with respect to television station WHAI-TV and
pursuant to which ValueVision's programming is currently carried by Time Warner
Cable in approximately 4.2 million full-time equivalent cable households. The
complaint seeks unspecified damages and for the court to declare the cable
affiliation agreement between Time Warner Cable and ValueVision null and void.
The Company is confident that it remains in full compliance with the terms and
conditions of the cable affiliation agreement and that it has been
inappropriately named in this lawsuit involving Time Warner Cable and
Bridgeways. The Company claims that the lawsuit is completely without merit,
plans to defend it vigorously, and believes that the ultimate disposition of
this legal proceeding will not have a materially adverse effect on the Company's
consolidated financial position or future results of operations. However, if
Time Warner Cable were to prevail under the Complaint, such an outcome could
have a material adverse effect on the Company's financial position and/or costs
of operations to the extent it jeopardized access to, or increased the cost of
access to, these 4.4 million full-time equivalent households, which represent
approximately 38% of the full-time equivalent households to which the Company
currently has access.
In January 1994, the Company proposed an acquisition of National Media
Corporation ("National Media"). In February 1994, the Company announced a tender
offer for a majority of the outstanding shares of National Media. In March 1994,
the Company and National Media entered into a Merger Agreement and the Company
modified the terms of its tender offer. In April 1994, the Company terminated
its tender offer and the Merger Agreement with National Media asserting
inaccurate representations and breach of warranties by National Media, and based
upon adverse developments concerning National Media. Litigation challenging the
Company's termination of the tender offer and Merger Agreement was subsequently
filed by National Media and its former chief executive officer and president. In
addition, shareholders of National Media filed four purported class action
lawsuits against the Company and certain officers of the Company. Each of these
suits alleged deception and manipulative practices by the Company in connection
with the tender offer and Merger Agreement.
In fiscal 1996, the Company, National Media and National Media's former
chief executive officer and president agreed to dismiss all claims, to enter
into joint operating agreements involving telemarketing and post-production
capabilities, and to enter into an international joint venture agreement. Under
the agreement, the Company received ten-year warrants, which vest over three
years, to purchase 500,000 shares of National
68
<PAGE> 69
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
Media's common stock at a price of $8.865 per share. In November 1996, the
Company and National Media amended their agreement by providing for the
additional payment by the Company to National Media of $1.2 million as
additional exercise price for the warrants. As of January 31, 1998, $800,000 has
been paid with a final installment of $400,000 to be paid on September 1, 1998.
In March 1997, the court gave final approval to a $1.0 million settlement,
which was paid by the Company from insurance proceeds, in the matter of the
class action suit initiated by certain shareholders of National Media. During
the year ended January 31, 1996, the Company recorded a provision of $617,000
for estimated costs associated with settling the National Media shareholder
class action suit.
In addition to the litigation noted above, the Company is involved from
time to time in various other claims and lawsuits in the ordinary course of
business. In the opinion of Management, the claims and suits in the aggregate
will not have a material adverse effect on the Company's operations or
consolidated financial statements.
11. RELATED PARTY TRANSACTIONS:
At January 31, 1998 and 1997, the Company had approximately $960,000 and
$591,000, respectively, of notes receivable from certain officers of the
Company. These notes range in the principal amount of $10,000 to $500,000, bear
interest at 5.6% to 6.8%, and with payment terms ranging from due on demand to
November 2002. The notes have been reflected as a reduction of shareholders'
equity in the accompanying consolidated balance sheets, as the notes are
partially collateralized by shares of the Company's common stock owned by the
officers.
69
<PAGE> 70
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information and noncash investing and financing
activities were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid....................................... $ 89,000 $ 83,000 $ 69,000
=========== =========== ===========
Income taxes paid................................... $11,482,000 $10,051,000 $ --
=========== =========== ===========
Supplemental non-cash investing and financing
activities:
Reduction of Montgomery Ward operating license asset
and other assets in exchange for the return of
warrants......................................... $19,211,000 $ -- $ --
=========== =========== ===========
Receipt of 1,197,892 shares of Paxson Communications
Corporation common stock as partial consideration
from the sale of a broadcast television station..... $14,285,000 $ -- $ --
=========== =========== ===========
Issuance of 1,484,993 warrants in connection with the
acquisition of Montgomery Ward Direct, L.P.......... $ -- $ 8,353,000 $ --
=========== =========== ===========
Issuance of 199,097 warrants as part of a long-term
investment contribution............................. $ -- $ 1,131,000 $ --
=========== =========== ===========
Issuance of note payable in connection with the
purchase of land.................................... $ -- $ 600,000 $ --
=========== =========== ===========
Issuance of warrants to Montgomery Ward & Co.,
Incorporated........................................ $ -- $ -- $17,500,000
=========== =========== ===========
Receipt of a capital distribution from an investment
in a limited partnership............................ $ -- $ -- $ 2,744,000
=========== =========== ===========
</TABLE>
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131") in June 1997. SFAS No. 131 requires that
public business enterprises report information about operating segments in
annual financial statements and requires selected information in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers and is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the impact of SFAS No. 131 and will adopt
the disclosure requirements in fiscal 1999 when required.
14. NATIONAL MEDIA CORPORATION PROPOSED MERGER:
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
National Media Corporation ("National Media") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. National Media Corporation is a publicly-held direct marketer of
consumer products through the use of direct response transactional television
programming, known as infomercials, and currently makes its programming
available to more than 370 million television households in more than 70
countries worldwide. If the mergers (the "Mergers") contemplated by the Merger
Agreement were to be
70
<PAGE> 71
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 1998 AND 1997
consummated, the Company and National Media would have become wholly-owned
subsidiaries of Quantum Direct, with each outstanding share of the Company's
common stock being converted into 1.19 shares of common stock in Quantum Direct
and each outstanding share of common stock of National Media, being converted
into one share of common stock in Quantum Direct.
Concurrently with the execution of the Merger Agreement, the Company agreed
to loan to National Media, pursuant to a Demand Promissory Note, up to an
aggregate of $10.0 million, $7.0 million of which was advanced upon signing of
the Demand Note on January 5, 1998 and the remaining $3.0 million of which has
subsequently been advanced. The Loan proceeds have been used by National Media
for various purposes, including the funding of accounts receivable, inventory
and media purchases. The Loan bears interest at prime rate plus 1.5% per annum
and is due on the earlier of January 1, 1999 or upon termination of the Merger
Agreement in certain circumstances. In the event National Media is unable to
repay the Loan when due, the Company may elect to receive payment in shares of
National Media's common stock at the then present market value. In consideration
for providing the Loan, National Media issued to the Company warrants to acquire
250,000 shares of National Media's common stock with an exercise price per share
equal to $2.74. The warrants are exercisable until the earlier of (i) January 5,
2003 and (ii) the occurrence of one of the following termination events: (x) the
consummation of the Merger or (y) the termination by National Media of the
Merger Agreement, if such termination results from a breach of a covenant by the
Company or in the event the Company's shareholders do not approve the Merger
Agreement; provided, however, that if, within 75 days after the termination
event described in clause (y) above, National Media has not repaid the Loan in
full or if during such 75 days, National Media defaults under its obligations
pursuant to the Loan, no termination event will be deemed to have occurred and
the warrants shall remain exercisable.
Consummation of the Mergers is subject to the satisfaction (or waiver) of a
number of conditions, including, but not limited to: (i) approval by holders of
a majority of the issued and outstanding shares of National Media's common stock
and ValueVision common stock; (ii) redemption of National Media's Series C
Preferred Stock; (iii) the receipt of certain regulatory and other approvals,
including those from the Federal Trade Commission and the Federal Communication
Commission; and (iv) not more than 5% of the holders of the issued and
outstanding shares of the Company's common stock shall have made demands and
given the notices required under Minnesota law to assert dissenters' appraisal
rights.
15. UNAUDITED SUBSEQUENT EVENT:
On April 8, 1998, it was announced that the Company received preliminary
notification from holders of more than 5% of the Company's common stock that
they intended to exercise their dissenter's rights with respect to the proposed
merger of the Company and National Media. The Company also reported that it had
advised National Media that it does not intend to waive the Merger Agreement
condition to closing requiring that holders of not more than 5% of the shares of
the Company common stock have demanded their dissenter's rights. The Company and
National Media had special meetings of their shareholders scheduled on April 14,
1998 to vote on the Mergers. In light of the receipt of the dissenters' notice,
the companies mutually agreed to postpone their respective shareholder meetings
while the companies attempt to negotiate a restructuring of the Mergers that is
acceptable to each of the companies and in the best interest of their
shareholders. As of the date hereof, National Media and the Company are still
attempting to negotiate a restructuring of the Mergers and have not reschedule
their respective special meetings. There can be no assurance that the companies
will be able to successfully negotiate such a restructuring, or if negotiated,
that such Mergers will be consummated.
71
<PAGE> 72
SCHEDULE II
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- ------------------------------------ ------------ ----------------------- ------------ -----------
BALANCES AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES OTHER DEDUCTIONS END OF YEAR
------------ ---------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31, 1998:
Allowance for doubtful accounts..... $ 529,000 $ 561,000 $ -- $ (637,000)(1) $ 453,000
========== =========== ======== ============ ==========
Reserve for returns................. $1,690,000 $50,837,000 $ -- $(51,084,000)(2) $1,443,000
========== =========== ======== ============ ==========
FOR THE YEAR ENDED JANUARY 31, 1997:
Allowance for doubtful accounts..... $ 181,000 $ 413,000 $224,000(3) $ (289,000)(1) $ 529,000
========== =========== ======== ============ ==========
Reserve for returns................. $1,046,000 $44,202,000 $918,000(3) $(44,476,000)(2) $1,690,000
========== =========== ======== ============ ==========
FOR THE YEAR ENDED JANUARY 31, 1996:
Allowance for doubtful accounts..... $ 142,000 $ 99,000 $ -- $ (60,000)(1) $ 181,000
========== =========== ======== ============ ==========
Reserve for returns................. $ 642,000 $32,793,000 $ -- $(32,389,000)(2) $1,046,000
========== =========== ======== ============ ==========
</TABLE>
- -------------------------
(1) Write off of uncollectible receivables, net of recoveries.
(2) Refunds or credits on products returned.
(3) Assumed through acquisitions.
72
<PAGE> 73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
73
<PAGE> 74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
74
<PAGE> 75
PART IV
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<C> <S> <C> <C>
2 -- Agreement and Plan of Reorganization and Merger, dated
January 5, 1998, by and among the Registrant, National Media
Corporation and Quantum Direct Corporation (formerly known
as V-L Holdings Corp.) (A)..................................
3.1 -- Sixth Amended and Restated Articles of Incorporation, as
amended. (B)................................................
3.2 -- Bylaws, as amended. (B).....................................
10.1 -- Amended 1990 Stock Option Plan of the Registrant. (C)+......
10.2 -- Form of Option Agreement under the Amended 1990 Stock Option
Plan of the Registrant. (A)+................................
10.3 -- 1994 Executive Stock Option and Compensation Plan of the
Registrant. (I)+............................................
10.4 -- Form of Option Agreement under the 1994 Executive Stock
Option and Compensation Plan of the Registrant. (G)+........
10.5 -- Option Agreement between the Registrant and Marshall Geller
dated as of June 24, 1993. (D)..............................
10.6 -- Option Agreement between the Registrant and Marshall Geller
dated as of June 3, 1994. (A)+..............................
10.7 -- Option Agreement between the Registrant and Marshall Geller
dated August 8, 1995. (E)+..................................
10.8 -- Option Agreement between the Registrant and Marshall Geller
dated as of March 3, 1997. (A)+.............................
10.9 -- Option Agreement between the Registrant and Robert Korkowski
dated as of June 24, 1993. (D)+.............................
10.10 -- Option Agreement between the Registrant and Robert Korkowski
dated June 3, 1994. (A)+....................................
10.11 -- Option Agreement between the Registrant and Robert Korkowski
dated August 8, 1995. (E)+..................................
10.12 -- Option Agreement between the Registrant and Robert Korkowski
dated March 3, 1997. (A)+...................................
10.13 -- Employment Agreement between the Registrant and Robert
Johander dated as of September 1, 1993. (D)+................
10.14 -- Amendment to Employment Agreement between the Registrant and
Robert Johander dated January 5, 1998. (A)..................
10.15 -- Promissory Note payable to the Registrant dated December 31,
1997 for $25,000 executed by Robert L. Johander. (A)........
10.16 -- Promissory Note payable to the Registrant dated April 24,
1997 for $140,000 executed by Robert L. Johander. (A).......
10.17 -- Promissory Note payable to the Registrant dated April 29,
1997 for $35,000 executed by Robert L. Johander. (A)........
10.18 -- Promissory Note payable to the Registrant dated May 2, 1997
for $58,000 executed by Robert L. Johander. (A).............
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<C> <S> <C> <C>
10.19 -- Promissory Note payable to the Registrant dated May 13, 1997
for $15,000 executed by Robert L. Johander. (A).............
10.20 -- Promissory Note payable to the Registrant dated March 21,
1997 for $50,000 executed by Robert L. ohander. (A).........
10.21 -- Employment Agreement between the Registrant and Nicholas
Jaksich dated as of September 1, 1993. (D)+.................
10.22 -- Amendment to Employment Agreement between the Registrant and
Nicholas Jaksich dated January 5, 1998. (A).................
10.23 -- Term Promissory Note payable to the Registrant dated
November 20, 1995 for $500,000 executed by Nicholas M.
Jaksich. (A)................................................
10.24 -- Mortgage dated November 20, 1995 between Nicholas M. Jaksich
and the Registrant. (A).....................................
10.25 -- Form of Mortgage Subordination Agreement dated as of
November, 1997 by and among LaSalle Bank F.S.B. and the
Registrant. (A).............................................
10.26 -- Promissory Note payable to the Registrant dated May 15, 1995
for $50,000 executed by Nicholas M Jaksich. (A).............
10.27 -- Transponder Lease Agreement between the Registrant and
Hughes Communications Galaxy, Inc. dated as of July 23, 1993
as supplemented by letters dated as of July 23, 1993. (D)...
10.28 -- Transponder Service Agreement between the Registrant and
Hughes Communications Satellite Services, Inc. (D)..........
10.29 -- Industrial Space Lease Agreement between Registrant and
Shady Oak Partners dated August 31, 1994. (B)...............
10.30 -- Employment Agreement between the Registrant and Stuart R.
Romenesko dated January 5, 1998. (A)+.......................
10.31 -- Option Agreement between the Registrant and Paul Tosetti
dated September 4, 1996. (A)+...............................
10.32 -- Option Agreement between the Registrant and Paul Tosetti
dated March 3, 1997. (A)+...................................
10.33 -- Employment Agreement between the Registrant and Scott
Lindquist dated November 30, 1995. (E)+.....................
10.34 -- Employment Agreement between the Registrant and Scott
Lindquist dated January 5, 1998. (G)+.......................
10.35 -- Employment Agreement between the Registrant and David T.
Quinby dated February 1, 1997. (F)+.........................
10.36 -- Employment Agreement dated January 5, 1998 by and between
the Registrant and David T. Quinby. (G)+....................
10.37 -- Asset and Stock Purchase and Option Grant Agreement dated as
of November 14, 1997 by and among the Registrant, VVI
Seattle, Inc., VVILPTV, Inc., VVI Spokane, Inc., VVI
Tallahassee, Inc. and Paxson Communications Corporation.
(A).........................................................
10.38 -- Amendment to Asset and Stock Purchase Agreement dated
February 27, 1998. (A)......................................
10.39 -- Employment Agreement dated January 12, 1998 by and between
the Registrant and Gregory Lerman. (G)+.....................
10.40 -- Employment Agreement dated March 30, 1998 by and among
Quantum Direct Corporation, the Registrant and Gene
McCaffery. (H)+.............................................
</TABLE>
76
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<C> <S> <C> <C>
10.41 -- Stipulation made as of November 1, 1997 between Montgomery
Ward & Co., Incorporated ("Montgomery Ward") and the
Registrant Regarding the Assumption and Modification of
Executory Contracts and Related Agreements. (G).............
10.42 -- Second Amended and Restated Operating Agreement made as of
November 1, 1997 between Montgomery Ward and the Registrant.
(G).........................................................
10.43 -- Amended and Restated Credit Card License Agreement made as
of November 1, 1997 between Montgomery Ward and the
Registrant. (G).............................................
10.44 -- Second Amended and Restated Servicemark License Agreement
made as of November 1, 1997 between Montgomery Ward and the
Registrant. (G).............................................
10.45 -- Stock Option Agreement (ValueVision) dated as of January 5,
1998 between the Registrant and National Media. (J).........
10.46 -- Stock Option Agreement (National Media) dated as of January
5, 1998 between National Media and the Registrant. (J)......
10.47 -- Redemption and Consent Agreement dated January 5, 1998 by
and between National Media, the Registrant, Capital Ventures
International and RGC International Investors, LDC. (J).....
10.48 -- $10,000,000 Demand Promissory Note dated January 5, 1998
issued by National Media to the Registrant. (J).............
10.49 -- Subsidiary Guarantee dated as of January 5, 1998 by Quantum
North America, Inc., Quantum International Limited, Quantum
Far East Ltd., Quantum Marketing International, Inc.,
Quantum International Japan Company Ltd., DirectAmerica
Corporation, Positive Response Television, Inc., Quantum
Productions AG, Suzanne Paul (Australia) Pty Limited, and
National Media Holdings, Inc., for the benefit of the
Registrant. (J).............................................
10.50 -- Warrant Agreement by and between National Media and the
Registrant dated as of January 5, 1998. (J).................
10.51 -- Warrant Certificate No. 1 dated January 5, 1998, issued by
National Media to the Registrant to purchase 250,000 shares
of National Media common stock. (J).........................
10.52 -- Registration Rights Agreement by and between National Media
and the Registrant dated as of January 5, 1998. (J).........
11 -- Computation of Net Income Per Share. (G).................... 87
21 -- Significant Subsidiaries of the Registrant. (G)............. 88
23 -- Consent of Arthur Andersen LLP. (G)......................... 89
27 -- Financial Data Schedule (for SEC use only). (G).............
</TABLE>
- -------------------------
(A) Incorporated herein by reference to Quantum Direct Corporation's
Registration Statement on Form S-4, filed on March 13, 1998, File No.
333-47979.
(B) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-QSB, for the quarter ended August 31, 1994, filed on September 13,
1994.
(C) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1, filed on December 20, 1994, No. 33-38374, as amended on Form
SB-2.
(D) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-3 filed on October 13, 1993, as amended, File No. 33-70256.
(E) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K, for the year ended January 31, 1996, filed April 29, 1996, as
amended, File No. 0-20243.
77
<PAGE> 78
(F) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1997, filed on May 1, 1997, as amended,
File No. 0-20243.
(G) Filed herewith.
(H) Incorporated herein by reference to the Registrant's Current Report on Form
8-K dated March 26, 1998, filed on March 31, 1998, File No. 0-20243.
(I) Incorporated herein by reference to the Registrant's Proxy Statement in
connection with its annual meeting of shareholders held on August 17, 1994,
filed on July 19, 1994, File No. 0-20243.
(J) Incorporated herein by reference to the Registrant's Current Report on Form
8-K dated January 5, 1998, filed on January 8, 1998, File No. 0-20243.
+ Management compensatory plan/arrangement.
b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on November 17, 1997 reporting under
Item 5 that the Registrant and Paxson Communications Corporation ("Paxson")
signed a definitive agreement under which Paxson will acquire, for total
consideration of $35 million in cash, the Registrant's television station
KBGE-TV, Channel 33, Seattle, Washington along with two of the Registrant's
non-cable, low-power stations in Portland, Oregon and Indianapolis, Indiana and
minority interests in entities which have applied for two new stations.
(ii) The company filed a Form 8-K on December 22, 1997 reporting under Item
5, the Registrant's Press Release dated December 19, 1997 announcing that the
Registrant was named in a lawsuit filed by Time Warner Cable against Bridgeways
Communications Corporation and the Registrant alleging, among other things,
tortious interference with contractual and business relations and breach of
contract.
(iii) The Registrant filed a Form 8-K on January 8, 1998 reporting under
Item 5, the Registrant's Press Release dated January 5, 1998 announcing the
National Media Corporation and ValueVision Agreement and Plan of Reorganization
and Merger dated January 5, 1998 by and among the Registrant, National Media
Corporation and Quantum Direct Corporation (formerly known as V-L Holdings
Corp).
(iv) The Registrant filed a Form 8-K on March 31, 1998 reporting under Item
5, the Registrant's Press Release dated March 26, 1998 announcing the
Registrant's fourth quarter and year end earnings for the three and twelve
months ended January 31, 1998. The Registrant also reported under Item 5 the
selection of veteran marketing, direct response and retail executive, Gene
McCaffery, as Chief Executive Officer of Quantum Direct Corporation, the
international electronic commerce company to be formed by the proposed merger of
the Registrant and National Media Corporation.
(v) The Registrant filed a Form 8-K on April 9, 1998 reporting under Item
5, the Registrant's Press Release dated April 8, 1998 announcing the
postponement of the special shareholder meetings of the Registrant's and
National Media Corporation to vote on their proposed merger in light of the
Registrant's dissenting shareholders.
78
<PAGE> 79
This Page Intentionally Left Blank
79
<PAGE> 80
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 29, 1998.
ValueVision International, Inc.
By: /s/ ROBERT L. JOHANDER
------------------------------------
Robert L. Johander
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on April 29, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ ROBERT L. JOHANDER Chairman of the Board, Chief Executive
- --------------------------------------------- Officer (Principal Executive Officer) and
Robert L. Johander Director
/s/ NICHOLAS M. JAKSICH Chief Operating Officer, President and
- --------------------------------------------- Director
Nicholas M. Jaksich
/s/ STUART R. ROMENESKO Senior Vice President Finance and Chief
- --------------------------------------------- Financial Officer (Principal Financial and
Stuart R. Romenesko Accounting Officer)
/s/ MARSHALL S. GELLER Director
- ---------------------------------------------
Marshall S. Geller
/s/ PAUL D. TOSETTI Director
- ---------------------------------------------
Paul D. Tosetti
/s/ ROBERT J. KORKOWSKI Director
- ---------------------------------------------
Robert J. Korkowski
</TABLE>
80
<PAGE> 1
EXHIBIT 10.4
OPTION AGREEMENT
VALUEVISION INTERNATIONAL, INC.
TO
_________________
OPTION AGREEMENT made as of the ___ day of ________, 199_, between
ValueVision International, Inc., a Minnesota corporation ("ValueVision"), and
_____________________, an employee of ValueVision ("Employee").
WHEREAS, ValueVision desires, by affording Employee an opportunity to
purchase its shares of Common Stock, $0.01 par value ("Shares"), reserved under
and pursuant to the ValueVision International, Inc. 1994 Executive Stock Option
and Compensation Plan ("Plan"), as hereinafter provided, to carry out the
resolutions of the Board of Directors of ValueVision granting an option to
Employee as partial compensation for his efforts on behalf of ValueVision as its
employee.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Grant of Option. ValueVision hereby irrevocably grants to Employee
the right and option, hereinafter called the Option, to purchase all or any part
of an aggregate of __________ (_____) Shares (such number being subject to
adjustment as provided in paragraph 7 hereof) on the terms and conditions herein
set forth. This grant is intended to qualify as an Incentive Stock Option
pursuant to the Plan.
2. Purchase Price. The purchase price of the Shares covered by the
Option shall be $_______, which is equal to the last price on the NASDAQ System
of one share of ValueVision's Common Stock on the last trade date prior to the
date hereof day first written above.
3. Exercise of Option. The right to exercise the Option in whole or in
part, shall be effective, except as otherwise specifically limited herein, as
follows: _________________________, or such earlier date in the sole discretion
of the Employer's Chief Executive Officer. Each of the rights to purchase Shares
granted in the preceding sentence shall expire five (5) years after the right to
purchase the Shares became effective, except as otherwise specifically limited
herein. The purchase price of Shares acquired through exercise of any part of
the Option shall be paid in full in cash at the time of exercise. Employee, as
holder of the Option, shall not have any of the rights of a Shareholder with
respect to the Shares covered by the Option except to the extent that one or
more certificates for such Shares shall be delivered to him upon the due
exercise of all or any part of the Option.
4. Non-Transferability. The Option shall not be transferable otherwise
than by will or the laws of descent and distribution, and the Option may be
exercised, during the lifetime of Employee, only by Employee. More particularly
(but without limiting the generality of the foregoing), the Option may not be
assigned, transferred (except as provided above), pledged, or hypothecated in
any way, shall not be assignable by operation of law, and shall not be subject
to execution, attachment, or similar process. Any attempted assignment,
transfer, pledge, hypothecation, or other disposition of the Option contrary to
the provisions hereof, and the levy of any execution, attachment, or similar
process upon the Option shall be null and void and without effect.
1
<PAGE> 2
5. Exercise Upon Termination. If Employee ceases to serve as an
employee of ValueVision, while the Option remains in effect, whether as a result
of resignation or termination, with or without cause, the Option may be
exercised (to the extent that Employee shall have been entitled to do so on the
last day in which he served as an employee of ValueVision) by Employee at
anytime within ninety (90) days of the day in which he ceased to serve as an
employee of ValueVision. Upon the expiration of such ninety (90) day period, or,
if earlier, upon the expiration date of the Option as set forth in Paragraph 3
hereof, the Option shall become null and void.
6. Exercise Upon Death. If Employee dies while the Option remains in
effect, the Option may be exercised (to the extent that Employee shall have been
entitled to do so at the date of his death) by the legatee or legatees of
Employee under his will, or by his personal representatives or distributees, at
any time within ninety (90) days after his death. Upon the expiration of such
ninety (90) day period, or, if earlier, upon the expiration date of the Option
as set forth in paragraph 3 hereof, the Option shall become null and void.
7. Changes in Capital Structure. If all or any portion of the Option
shall be exercised subsequent to any Share dividend, split-up, recapitalization,
merger, consolidation, combination or exchange of Shares, separation,
reorganization, or liquidation occurring after the date hereof, as a result of
which Shares of any class shall be issued in respect of outstanding Shares, or
Shares shall be changed into the same or a different number of Shares of the
same or another class or classes, the person or persons so exercising the Option
shall receive, for the aggregate price paid upon such exercise, the aggregate
number and class of Shares which, if Shares (as authorized at the date hereof)
had been purchased at the date hereof for the same aggregate price (on the basis
of the price per Share set forth in paragraph 2 hereof) and had not been
disposed of, such person or persons would be holding, at the time of such
exercise, as a result of such purchase and all such shared dividends, split-ups,
recapitalizations, mergers, consolidations, combinations or exchanges of Shares,
separations, reorganizations, or liquidations; provided, however, that no
fractional Share shall be issued upon any such exercise, and the aggregate price
paid shall be appropriately reduced on account of any fractional Share not
issued.
8. Method of Exercising Option. Subject to the terms and conditions of
this Agreement, the Option may only be exercised by written notice to
ValueVision. Such notice shall state the election to exercise the Option and the
number of Shares in respect of which it is being exercised, and shall be signed
by the person or person so exercising the Option. Such notice shall either: (a)
be accompanied by payment of the full purchase price of such Shares, in which
event ValueVision shall deliver a certificate or certificates representing such
Shares as soon as practicable after the notice shall be received; or (b) fix a
date (not less than five (5) nor more than ten (10) business days from the date
such notice shall be received by ValueVision) for the payment of the full
purchase price of such Shares against delivery of a certificate or certificates
representing such Shares. Payment of such purchase price shall, in either case,
be made by certified or cashier's check payable to the order of ValueVision. All
Shares that shall be purchased upon the exercise of the Option as provided
herein shall be fully paid and non-assessable.
9. Investment Certificate and Registration. Prior to the receipt of the
certificates pursuant to the exercise of the Option granted hereunder, Employee
shall agree to hold the Shares acquired by exercise of the Option for investment
and not with a view to resale or distribution thereof to the public, and shall
deliver to ValueVision a certificate to that effect. Nothing in this Agreement
shall require ValueVision to register the Option or the Shares purchased upon
the exercise of said Option.
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10. General. ValueVision shall at all times during the term of the
Option reserve and keep available such number of Shares as will be sufficient to
satisfy the requirements of this Option Agreement. This Option shall be
construed in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, ValueVision and Employee have executed this
Agreement as of the date first written above.
VALUEVISION INTERNATIONAL, INC.
By
--------------------------------
Robert L. Johander,
Chief Executive Officer
Employee:
----------------------------------
Employee Name
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<PAGE> 1
EXHIBIT 10.34
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 5th day of January, 1998, by and between
ValueVision International, Inc., a Minnesota corporation (hereinafter referred
to as "Employer"), and Scott A. Linquist (hereinafter referred to as
"Employee").
WITNESSETH:
WHEREAS, Employee and Employer have agreed that Employee shall continue
as an employee of Employer following consummation of the transactions (the
"Transactions"), contemplated by that certain Agreement and Plan of
Reorganization and Merger (the "Merger Agreement") dated of even date herewith,
by and among Employer, National Media Corporation ("NMC") and V-L Holdings,
Corp. ("Holdings Corp."), whereby Employer and NMC shall each become
wholly-owned subsidiaries of Holdings Corp.;
WHEREAS, Employer desires to assure itself of the services of Employee
following consummation of the Transactions and Employee desires to continue to
be employed by Employer as an employee following consummation of the
transactions on the terms and conditions set forth below, which Employee
acknowledges to constitute an increase in Employee's existing compensation
package; and
WHEREAS, Employer and Employee agree that the terms of this Agreement
shall only become effective immediately preceding consummation of the
Transactions.
NOW, THEREFORE, in consideration of the premises and mutual promises
contained in this Agreement, the parties hereto agree as follows:
A. EMPLOYMENT. Employer agrees, following consummation of the
Transactions, to continue to employ Employee and Employee agrees,
following consummation of the Transactions, to continue his employment
with Employer on the terms and conditions set forth in this Agreement.
B. TERM. The term of Employee's employment hereunder shall commence on,
the Closing Date (as defined in the Merger Agreement), and shall
continue on a full-time basis for a period of twenty-four (24) months
(the "Term"). The "Employment Period" for purposes of this Agreement
shall be the period beginning on the Closing Date and ending at the
time Employee shall cease to act as an employee of Employer. In the
event the Transactions are not consummated, this Agreement shall be of
no further force or effect.
C. DUTIES. Employee shall serve as Vice President Administration of
Employer and shall perform the duties as assigned by Employer, from
time to time, and shall faithfully, and to the best of his ability,
perform such reasonable duties and services of an active, executive,
administrative and managerial nature as shall be specified and
designated, from time to time, by Employer. Employee agrees to devote
his full time and skills to such employment while he is so employed,
subject to a vacation allowance of not less than three (3) weeks during
each year of the term, or such additional vacation allowance as may be
granted in the sole discretion of Employer. Employer's Chief Executive
Officer shall provide Employee with a performance review at least
annually.
D. COMPENSATION. Employee's compensation for the services performed under
this Agreement shall be as follows:
<PAGE> 2
1. Base Salary. Employee shall receive a base salary of at least
One Hundred Seventy Thousand and No/100 Dollars ($170,000.00) per year for
the term of this Agreement ("Base Salary").
2. Bonus Salary. Employee may receive bonus salary ("Bonus
Salary"), from time to time, based upon Employee's job performance.
Employer's Chief Executive Officer and Employee shall establish job
performance criteria for Employee at least annually, which shall be the
basis of such Bonus Salary.
c. Automobile Allowance. Employer shall pay Employee a monthly
automobile allowance of $450.00 per month ("Auto Allowance").
E. OTHER BENEFITS DURING THE EMPLOYMENT PERIOD.
1. Employee shall receive all other benefits made available to
executive officers of Employer, from time to time, at its discretion
("Benefits"). It is understood and agreed that Employer may terminate such
Benefits or change any benefit programs at its sole discretion, as they
are not contractual for the term hereof.
2. Employer shall reimburse Employee for all reasonable and
necessary out-of-pocket business expenses incurred during the regular
performance of services for Employer, including, but not limited to,
entertainment and related expenses so long as Employer has received proper
documentation of such expenses from Employee.
3. Employer shall furnish Employee with such working facilities and
other services as are suitable to Employee's position with Employer and
adequate to the performance of his duties under this Agreement.
F. TERMINATION OF EMPLOYMENT.
1. Death. In the event of Employee's death, this Agreement shall
terminate and Employee shall cease to receive Base Salary, Bonus Salary,
Auto Allowance, and Benefits as of the date on which his death occurs.
2. Disability. If Employee becomes disabled such that Employee
cannot perform the essential functions of his job, and the disability
shall have continued for a period of more than one hundred twenty (120)
consecutive days, then Employer may, in its sole discretion, terminate
this Agreement and Employee shall then cease to receive Base Salary, Bonus
Salary, Auto Allowance, and all other Benefits, on the date this Agreement
is so terminated; provided however, Employee shall then be entitled to
such disability, medical, life insurance, and other benefits as may be
provided generally for disabled employees of Employer when payments and
benefits hereunder ceases.
3. Voluntary Termination. In the event that Employee voluntarily
terminates his employment, he shall cease to receive Base Salary, Bonus
Salary, Auto Allowance, and all other Benefits as of the date of such
termination.
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4. TERMINATION WITH CAUSE. Employer shall be entitled to terminate
this Agreement and Employee's employment hereunder for Cause (as herein
defined), and in the event that Employer elects to do so, Employee shall
cease to receive Base Salary, Bonus Salary, Auto Allowance, and Benefits
as of the date of such termination specified by Employer. For purposes of
this Agreement, "Cause" shall mean: (i) a material act or act of fraud
which results in or is intended to result in Employee's personal
enrichment at the direct expense of Employer, including without
limitation, theft or embezzlement from Employer; (ii) public conduct by
Employee substantially detrimental to the reputation of Employer, (iii)
material violation by Employee of any Employer policy, regulation or
practice; (iv) conviction of a felony; or (v) habitual intoxication, drug
use or chemical substance use by any intoxicating or chemical substance.
Notwithstanding the forgoing, Employee shall not be deemed to have been
terminated for Cause unless and until Employee has received thirty (30)
days prior written notice (a "Dismissal Notice") of such termination. In
the event Employee does not dispute such determination within thirty (30)
days after receipt of the Dismissal Notice, Employee shall not have the
remedies provided pursuant to Section 6.g. of this Agreement.
e. By Employee for Employer Cause. Employee may terminate this
Agreement upon thirty (30) days written notice to Employer (the "Employee
Notice") upon the occurrences without Employee's express written consent,
of any one or more of the following events, provided, however, that
Employee shall not have the right to terminate this Agreement if Employer
is able to cure such event within thirty (30) days (ten (10) days with
regard to Subsection (ii) hereof) following delivery of such notice:
(i) Employer substantially diminishes Employee's duties such
that they are no longer of an executive nature as contemplated by Section
3 hereof or Employer requires Employee to relocate his offices and perform
his duties hereunder more than 25 miles from Employer's current corporate
offices located at 6740 Shady Oak Road, Eden Prairie, Minnesota 55344 or
(ii) Employer materially breaches its obligations to pay
Employee as provided for herein and such failure to pay is not a result of
a good faith dispute between Employer and Employee.
f. Other. If Employer terminates this Agreement for any reason
other than as set forth in Sections 6.a, 6.b., 6.c or 6.d. above, or if
Employee terminates this Agreement pursuant to Section 6.e. above,
Employer shall immediately pay Employee in a lump sum payment, an amount
equal to Base Salary, Bonus Salary and Auto Allowance and which would
otherwise be payable until the end of the Term (collectively, the
"Severance Payment"). In addition, Employer shall continue to provide
Employee with Benefits until the end of the Term. For purposes of
calculating Bonus Salary payable pursuant to this Section 6.f., Employee
shall receive Bonus Salary equal to the last Bonus Salary actually paid
the Employee, prorated for the number of months to be covered by the
Severance Payment. Notwithstanding the foregoing, following a Change of
Control (as hereinafter defined), the number of months upon which the
calculation of the Severance Payment shall be based and for which Employer
shall be obligated to provide Employee with the Benefits pursuant to this
Section 6.f. shall be the greater of (i) the remaining number of months
left in the Term and (ii) eight (8) months.
g. Arbitration. In the event that Employee disputes a determination
that Cause exists for terminating his employment pursuant to Section 6.d.
of this Agreement, or Employer disputes the determination that cause
exists for Employee's termination of his employment pursuant to Section
6.e
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<PAGE> 4
of this Agreement, either such disputing party may, in accordance with the
Rules of the American Arbitration Association ("AAA"), and within 30 days
of receiving a Dismissal Notice or Employee Notice, as applicable, file a
petition with the AAA for arbitration of the dispute, the costs thereof
(including legal fees and expenses) to be shared equally by the Employer
and Employee unless an order of the AAA provides otherwise. Such
proceeding shall also determine all other items then in dispute between
the parties relating to this Agreement, and the parties covenant and agree
that the decision of the AAA shall be final and binding and hereby waive
their rights to appeal thereof.
G. CONFIDENTIAL INFORMATION. Employee acknowledges that the confidential
information and data obtained by him during the course of his performance
under this Agreement concerning the business or affairs of Employer, or
any entity related thereto, are the property of Employer and will be
confidential to Employer. Such confidential information may include, but
is not limited to, specifications, designs, and processes, product
formulae, manufacturing, distributing, marketing or selling processes,
systems, procedures, plans, know-how, services or material, trade secrets,
devices (whether or not patented or patentable), customer or supplier
lists, price lists, financial information including, without limitation,
costs of materials, manufacturing processes and distribution costs,
business plans, prospects or opportunities, and software and development
or research work, but does not include Employee's general business or
direct marketing knowledge (the "Confidential Information"). All the
Confidential Information shall remain the property of Employer and
Employee agrees that he will not disclose to any unauthorized persons or
use for his own account or for the benefit of any third party any of the
Confidential Information without Employer's written consent. Employee
agrees to deliver to Employer at the termination of this employment, all
memoranda, notes, plans, records, reports, video and audio tapes and any
and all other documentation (and copies thereof) relating to the business
of Employer, or any entity related thereto, which he may then possess or
have under his direct or indirect control. Notwithstanding any provision
herein to the contrary, the Confidential Information shall specifically
exclude information which is publicly available to Employee and others by
proper means, readily ascertainable from public sources known to Employee
at the time the information was disclosed or which is rightfully obtained
from a third party, information required to be disclosed by law provided
Employee provides notice to Employer to seek a protective order, or
information disclosed by Employee to his attorney regarding litigation
with Employer.
H. INVENTIONS AND PATENTS. Employee agrees that all inventions, innovations
or improvements in the method of conducting Employer's business or
otherwise related to Employer's business (including new contributions,
improvements, ideas and discoveries, whether patentable or not) conceived
or made by him during the Employment Period belong to Employer. Employee
will promptly disclose such inventions, innovations and improvements to
Employer and perform all actions reasonably requested by Employer to
establish and confirm such ownership.
I. NONCOMPETE AND RELATED AGREEMENTS.
1. Employee agrees that during the Noncompetition Period (as herein
defined), he will not: (i) directly or indirectly own, manage, control,
participate in, lend his name to, act as consultant or advisor to or
render services alone or in association with any other person, firm,
corporation or other business organization for any other person or entity
engaged in the television home shopping business, any mail order business
that directly competes with Employer or any of its affiliates by selling
merchandise primarily of the type offered in and using a similar theme as
any of Employer's or its affiliates' catalogs during the term of this
Agreement or any business which Employer (upon authorization of its board
of directors) has invested significant research and development funds or
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<PAGE> 5
resources and contemplates entering into during the next twelve (12)
months (the "Restricted Business"), anywhere that Employer or any of its
affiliates operates during the term of this Agreement within the
continental United States (the "Restricted Area"); (ii) have any interest
directly or indirectly in any business engaged in the Restricted Business
in the Restricted Area other than Employer (provided that nothing herein
will prevent Employee from owning in the aggregate not more than one
percent (1%) of the outstanding stock of any class of a corporation
engaged in the Restricted Business in the Restricted Area which is
publicly traded, so long as Employee has no participation in the
management or conduct of business of such corporation), (iii) induce or
attempt to induce any employee of Employer or any entity related to
Employer to leave his, her or their employ, or in any other way interfere
with the relationship between Employer or any entity related to Employer
and any other employee of Employer or any entity related to Employer, or
(iv) induce or attempt to induce any customer, supplier, franchisee,
licensee, other business relation of any member of Employer or any entity
related to Employer to cease doing business with Employer or any entity
related to Employer, or in any way interfere with the relationship between
any customer, franchisee or other business relation and Employer or any
entity related to Employer, without the prior written consent of Employer.
For purposes of this Agreement, "Noncompetition Period" shall mean the
period commencing as of the Closing Date and ending on the last day of the
sixth (6th) month following the date on which Employee is terminated
during the term of this Agreement.
2. If, at the time of enforcement of any provisions of Section 9, a
court of competent jurisdiction holds that the restrictions stated therein
are unreasonable under circumstances then existing, the parties hereto
agree that the maximum period, scope or geographical area reasonable under
such circumstances will be substituted for the stated period, scope or
area.
3. Employee agrees that the covenants made in this Section 9 shall
be construed as an agreement independent of any other provision of this
Agreement and shall survive the termination of this Agreement.
J. TERMINATION OF EXISTING AGREEMENTS. This Agreement, effective on the
Closing Date and upon consummation of the Transactions, supersedes and
preempts any prior understandings, agreements or representations, written
or oral, by or between Employee and Employer, which may have related to
the employment of Employee, Employee's Agreement Not to Compete with
Employer, or the payment of salary or other compensation by Employer to
Employee, and upon this Agreement becoming effective, all such
understandings, agreements and representations shall terminate and shall
be of no further force or effect.
K. SPECIFIC PERFORMANCE. Employee and Employer acknowledge that in the event
of a breach of this Agreement by either party, money damages would be
inadequate and the nonbreaching party would have no adequate remedy at
law. Accordingly, in the event of any controversy concerning the rights or
obligations under this Agreement, such rights or obligations shall be
enforceable in a court of equity by a decree of specific performance. Such
remedy, however, shall be cumulative and nonexclusive and shall be in
addition to any other remedy to which the parties may be entitled.
L. SALE, CONSOLIDATION OR MERGER. In the event of a sale of the stock, or
substantially all of the stock, of Employer or Holdings Corp., or
consolidation or merger of Employer or Holdings Corp. with or into another
corporation or entity, or the sale of substantially all of the operating
assets of Employer or Holdings Corp. to another corporation, entity or
individual, Employer may assign its rights and
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<PAGE> 6
obligations under this Agreement to its successor-in-interest and such
successor-in-interest shall be deemed to have acquired all rights and
assumed all obligations of Employer hereunder.
M. STOCK OPTIONS. Immediately preceding the Closing, (as defined in the
Merger Agreement) Employee shall be granted incentive stock options in
accordance with the Second Amended 1990 Stock Option Plan of Employer (the
"Plan") for 20,000 shares of ValueVision International, Inc. common stock
("Stock Options") subject to the provisions thereof and exercisable at the
time or times established by the Stock Option Agreement. The Stock Options
shall vest in equal amounts, one-third each, for the next successive three
(3) years as measured from the anniversary of the Closing Date, or such
earlier date in the sole discretion of the Employer's Chief Executive
Officer. All such Stock Options shall automatically vest upon a
termination of this Agreement prior to the end of the Term (unless
pursuant to Sections 6.c or 6.d.) or upon a Change of Control.
Notwithstanding the forgoing or anything contained in the Plan or the
Stock Option Agreement, the consummation of the Transactions shall not be
deemed a Change of Control for purposes of vesting of the Stock Options,
although any transaction in the future similar to the Transactions
involving either Employer or Holdings Corp. shall constitute a Change of
Control. In the event the Transactions are not consummated, the Stock
Options shall terminate.
N. CHANGE OF CONTROL. For purposes of this Agreement, a "Change of Control"
shall mean an event as a result of which: (i) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities and Exchange Act of
1934 (the "Exchange Act")), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, except that a person shall
be deemed to have "beneficial ownership" of all securities that such
person has a right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 20% of the total voting power of the voting stock of either
Employer or Holdings Corp. (or their successors and assigns); (ii)
Employer or Holdings Corp. consolidates with, or merges with or into
another corporation or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any
person, or any corporation consolidates with, or merges with or into,
Employer or Holdings Corp., in any such event pursuant to a transaction in
which the outstanding voting stock of Employer or Holdings Corp. is
changed into or exchanged for cash, securities or other property, other
than any such transaction where (A) the outstanding voting stock of
Employer or Holdings Corp. is changed into or exchanged for (x) voting
stock of the surviving or transferee corporation or (y) cash, securities
(whether or not including voting stock) or other property, and (B) the
holders of the voting stock of Employer or Holdings Corp. immediately
prior to such transaction own, directly or indirectly, not less than 80%
of the voting power of the voting stock of the surviving corporation
immediately after such transaction; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of Employer or Holdings Corp. (together
with any new directors whose election by such Board or whose nomination
for election by the stockholders of Employer or Holdings Corp. was
approved by a vote of 66-2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election ro
nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Employer or Holdings Corp.,
respectively, then in office, or (iv) Employer or Holdings Corp. is
liquidated or dissolved or adopts a plan of liquidation.
O. NO OFFSET - NO MITIGATION. Employee shall not be required to mitigate
damages under this Agreement by seeking other comparable employment. The
amount of any payment or benefit provided for in this Agreement, including
welfare benefits, shall not be reduced by any compensation or benefits
earned by or provided to Employee as the result of employment by another
employer.
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<PAGE> 7
P. WAIVER. The failure of either party to insist, in any one or more
instances, upon performance of the terms or conditions of this Agreement
shall not be construed as a waiver or relinquishment of any right granted
hereunder or of the future performance of any such term, covenant or
condition.
Q. ATTORNEY'S FEES. In the event of any action for breach of, to enforce the
provisions of, or otherwise arising out of or in connection with this
Agreement, the prevailing party in such action, as determined by a court
of competent jurisdiction in such action, shall be entitled to receive its
reasonable attorney fees and costs from the other party. If a party
voluntarily dismisses an action it has brought hereunder, it shall pay to
the other party its reasonable attorney fees and costs.
R. NOTICES. Any notice to be given hereunder shall be deemed sufficient if
addressed in writing, and delivered by registered or certified mail or
delivered personally: (i) in the case of Employer, to Employer's principal
business office; and (ii) in the case of Employee, to his address
appearing on the records of Employer, or to such other address as he may
designate in writing to Employer.
S. SEVERABILITY. In the event that any provision shall be held to be invalid
or unenforceable for any reason whatsoever, it is agreed such invalidity
or unenforceability shall not affect any other provision of this Agreement
and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction
may so modify the objectionable provisions as to make it valid, reasonable
and enforceable.
T. AMENDMENT. This Agreement may be amended only by an agreement in writing
signed by the parties hereto.
U. BENEFIT. This Agreement shall be binding upon and inure to the benefit of
and shall be enforceable by and against Employee's heirs, beneficiaries
and legal representatives. It is agreed that the rights and obligations of
Employee may not be delegated or assigned except as specifically set forth
in this Agreement.
V. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day, month and year first above written.
EMPLOYER: VALUEVISION INTERNATIONAL, INC.
By /s/ Robert L.Johander
-----------------------------
Robert L. Johander
Its: Chief Executive Officer
EMPLOYEE: /s/ Scott A. Lindquist
--------------------------------
Scott A. Lindquist
7
<PAGE> 1
EXHIBIT 10.36
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 5th day of January, 1998, by and between
ValueVision International, Inc., a Minnesota corporation (hereinafter referred
to as "Employer"), and David T. Quinby (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, Employee and Employer have agreed that Employee shall continue
as an employee of Employer following consummation of the transactions (the
"Transactions"), contemplated by that certain Agreement and Plan of
Reorganization and Merger (the "Merger Agreement") dated of even date herewith
by and among Employer, National Media Corporation ("NMC") and V-L Holdings,
Corp. ("Holdings Corp."), whereby Employer and NMC shall each become
wholly-owned subsidiaries of Holdings Corp.;
WHEREAS, Employer desires to assure itself of the services of Employee
following consummation of the Transactions and Employee desires to continue to
be employed by Employer as an employee following consummation of the
transactions on the terms and conditions set forth below, which Employee
acknowledges to constitute an increase in Employee's existing compensation
package; and
WHEREAS, Employer and Employee agree that the terms of this Agreement
shall only become effective immediately preceding consummation of the
Transactions.
NOW, THEREFORE, in consideration of the premises and mutual promises
contained in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT. Employer agrees, following consummation of the
Transactions, to continue to employ Employee and Employee agrees,
following consummation of the Transactions, to continue his employment
with Employer on the terms and conditions set forth in this Agreement.
B. TERM. The term of Employee's employment hereunder shall commence on the
Closing Date (as defined in the Merger Agreement), and shall continue
on a full-time basis for a period of twenty-four (24) months (the
"Term"). The "Employment Period" for purposes of this Agreement shall
be the period beginning on the Closing Date and ending at the time
Employee shall cease to act as an employee of Employer. In the event
the Transactions are not consummated, this Agreement shall be of no
further force or effect.
C. DUTIES. Employee shall serve as Vice President, General Counsel and
Secretary of Employer and shall perform the duties as assigned by
Employer, from time to time, and shall faithfully, and to the best of
his ability, perform such reasonable duties and services of an active,
executive, administrative and managerial nature as shall be specified
and designated, from time to time, by Employer. Employee agrees to
devote his full time and skills to such employment while he is so
employed, subject to a vacation allowance of not less than three (3)
weeks during each year of the term, or such additional vacation
allowance as may be granted in the sole discretion of Employer.
Employer's Chief Executive Officer shall provide Employee with a
performance review at least annually.
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<PAGE> 2
D. COMPENSATION. Employee's compensation for the services performed under
this Agreement shall be as follows:
1. Base Salary. Employee shall receive a base salary of at least
One Hundred Seventy-Five Thousand and No/100 Dollars ($ 175,000.00) per
year for the term of this Agreement ("Base Salary").
2. Bonus Salary. Employee may receive bonus salary ("Bonus
Salary"), from time to time, based upon Employee's job performance.
Employer's Chief Executive Officer and Employee shall establish job
performance criteria for Employee at least annually, which shall be the
basis of such Bonus Salary.
c. Automobile Allowance. Employer shall pay Employee a monthly
automobile allowance of $450.00 per month ("Auto Allowance").
d. Professional Fees. Employer shall pay all of Employee's
professional fees, including without limitation, professional
association fees and memberships, and all of Employee's continuing
legal education fees and expenses, up to $5,000 annually ("Professional
Fees").
E. OTHER BENEFITS DURING THE EMPLOYMENT PERIOD.
1. Employee shall receive all other benefits made available to
executive officers of Employer, from time to time, at its discretion
("Benefits"). It is understood and agreed that Employer may terminate
such Benefits or change any benefit programs at its sole discretion, as
they are not contractual for the term hereof.
2. Employer shall reimburse Employee for all reasonable and
necessary out-of-pocket business expenses incurred during the regular
performance of services for Employer, including, but not limited to,
entertainment and related expenses so long as Employer has received
proper documentation of such expenses from Employee.
3. Employer shall furnish Employee with such working facilities
and other services as are suitable to Employee's position with Employer
and adequate to the performance of his duties under this Agreement.
F. TERMINATION OF EMPLOYMENT.
1. Death. In the event of Employee's death, this Agreement shall
terminate and Employee shall cease to receive Base Salary, Bonus
Salary, Auto Allowance, Professional Fees and Benefits as of the date
on which his death occurs.
2. Disability. If Employee becomes disabled such that Employee
cannot perform the essential functions of his job, and the disability
shall have continued for a period of more than one hundred twenty (120)
consecutive days, then Employer may, in its sole discretion, terminate
this Agreement and Employee shall then cease to receive Base Salary,
Bonus Salary, Auto Allowance, Professional Fees and all other Benefits,
on the date this Agreement is so terminated; provided however, Employee
shall then be entitled to such disability, medical, life insurance, and
other
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benefits as may be provided generally for disabled employees of
Employer when payments and benefits hereunder ceases.
3. Voluntary Termination. In the event that Employee voluntarily
terminates his employment, he shall cease to receive Base Salary, Bonus
Salary, Auto Allowance, Professional Fees and all other Benefits as of
the date of such termination.
4. Termination With Cause. Employer shall be entitled to
terminate this Agreement and Employee's employment hereunder for Cause
(as herein defined), and in the event that Employer elects to do so,
Employee shall cease to receive Base Salary, Bonus Salary, Auto
Allowance, Professional Fees and Benefits as of the date of such
termination specified by Employer. For purposes of this Agreement,
"Cause" shall mean: (i) a material act or act of fraud which results in
or is intended to result in Employee's personal enrichment at the
direct expense of Employer, including without limitation, theft or
embezzlement from Employer; (ii) public conduct by Employee
substantially detrimental to the reputation of Employer, (iii) material
violation by Employee of any Employer policy, regulation or practice;
(iv) conviction of a felony; or (v) habitual intoxication, drug use or
chemical substance use by any intoxicating or chemical substance.
Notwithstanding the forgoing, Employee shall not be deemed to have been
terminated for Cause unless and until Employee has received thirty (30)
days' prior written notice (a "Dismissal Notice") of such termination.
In the event Employee does not dispute such determination within thirty
(30) days after receipt of the Dismissal Notice, Employee shall not
have the remedies provided pursuant to Section 6.g. of this Agreement.
e. By Employee for Employer Cause. Employee may terminate this
Agreement upon thirty (30) days written notice to Employer (the
"Employee Notice") upon the occurrences without Employee's express
written consent, of any one or more of the following events, provided,
however, that Employee shall not have the right to terminate this
Agreement if Employer is able to cure such event within thirty (30)
days (ten (10) days with regard to Subsection (ii) hereof) following
delivery of such notice:
(i) Employer substantially diminishes Employee=s
duties such that they are no longer of an executive nature as
contemplated by Section 3 hereof or Employer requires Employee to
relocate his offices and perform his duties hereunder more than 25
miles from Employer's current corporate offices located at 6740 Shady
Oak Road, Eden Prairie, Minnesota 55344 or
(ii) Employer materially breaches its obligations to
pay Employee as provided for herein and such failure to pay is not a
result of a good faith dispute between Employer and Employee.
f. Other. If Employer terminates this Agreement for any reason
other than as set forth in Sections 6.a, 6.b., 6.c or 6.d. above, or if
Employee terminates this Agreement pursuant to Section 6.e. above,
Employer shall immediately pay Employee in a lump sum payment, an
amount equal to Base Salary, Bonus Salary, Auto Allowance and
Professional Fees which would otherwise be payable until the end of the
Term (collectively, the "Severance Payment"). In addition, Employer
shall continue to provide Employee with Benefits until the end of the
Term. For purposes of calculating Bonus Salary payable pursuant to this
Section 6.f., Employee shall receive Bonus Salary equal to the last
Bonus Salary actually paid the Employee, prorated for the number of
months to be covered by the Severance Payment. Notwithstanding the
foregoing, following a Change of Control (as hereinafter defined), the
number of months upon which the calculation of the Severance Payment
shall be based and for which Employer
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shall be obligated to provide Employee with the Benefits pursuant to
this Section 6.f. shall be the greater of (i) the remaining number of
months left in the Term and (ii) eight (8) months.
g. Arbitration. In the event that Employee disputes a
determination that Cause exists for terminating his employment pursuant
to Section 6.d. of this Agreement, or Employer disputes the
determination that cause exists for Employee's termination of his
employment pursuant to Section 6.e of this Agreement, either such
disputing party may, in accordance with the Rules of the American
Arbitration Association ("AAA"), and within 30 days of receiving a
Dismissal Notice or Employee Notice, as applicable, file a petition
with the AAA for arbitration of the dispute, the costs thereof
(including legal fees and expenses) to be shared equally by the
Employer and Employee unless an order of the AAA provides otherwise.
Such proceeding shall also determine all other items then in dispute
between the parties relating to this Agreement, and the parties
covenant and agree that the decision of the AAA shall be final and
binding and hereby waive their rights to appeal thereof.
G. CONFIDENTIAL INFORMATION. Employee acknowledges that the confidential
information and data obtained by him during the course of his
performance under this Agreement concerning the business or affairs of
Employer, or any entity related thereto, are the property of Employer
and will be confidential to Employer. Such confidential information may
include, but is not limited to, specifications, designs, and processes,
product formulae, manufacturing, distributing, marketing or selling
processes, systems, procedures, plans, know-how, services or material,
trade secrets, devices (whether or not patented or patentable),
customer or supplier lists, price lists, financial information
including, without limitation, costs of materials, manufacturing
processes and distribution costs, business plans, prospects or
opportunities, and software and development or research work, but does
not include Employee's general business or direct marketing knowledge
(the "Confidential Information"). All the Confidential Information
shall remain the property of Employer and Employee agrees that he will
not disclose to any unauthorized persons or use for his own account or
for the benefit of any third party any of the Confidential Information
without Employer's written consent. Employee agrees to deliver to
Employer at the termination of this employment, all memoranda, notes,
plans, records, reports, video and audio tapes and any and all other
documentation (and copies thereof) relating to the business of
Employer, or any entity related thereto, which he may then possess or
have under his direct or indirect control. Notwithstanding any
provision herein to the contrary, the Confidential Information shall
specifically exclude information which is publicly available to
Employee and others by proper means, readily ascertainable from public
sources known to Employee at the time the information was disclosed or
which is rightfully obtained from a third party, information required
to be disclosed by law provided Employee provides notice to Employer to
seek a protective order, or information disclosed by Employee to his
attorney regarding litigation with Employer.
H. INVENTIONS AND PATENTS. Employee agrees that all inventions,
innovations or improvements in the method of conducting Employer's
business or otherwise related to Employer's business (including new
contributions, improvements, ideas and discoveries, whether patentable
or not) conceived or made by him during the Employment Period belong to
Employer. Employee will promptly disclose such inventions, innovations
and improvements to Employer and perform all actions reasonably
requested by Employer to establish and confirm such ownership.
I. NONCOMPETE AND RELATED AGREEMENTS.
1. Employee agrees that during the Noncompetition Period (as
herein defined), he will not: (i) directly or indirectly own, manage,
control, participate in, lend his name to, act as consultant or
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advisor to or render services (alone or in association with any other
person, firm, corporation or other business organization; provided
however, that the parties hereto agree that this provision may not be
used to prohibit employee for working for an law firm which so provides
such services, so long as Employee does not specifically provide legal
services to a Restricted Business as defined herein) for any other
person or entity engaged in the television home shopping business, any
mail order business that directly competes with Employer or any of its
affiliates by selling merchandise primarily of the type offered in and
using a similar theme as any of Employer's or its affiliates' catalogs
during the term of this Agreement or any business which Employer (upon
authorization of its board of directors) has invested significant
research and development funds or resources and contemplates entering
into during the next twelve (12) months (the "Restricted Business"),
anywhere that Employer or any of its affiliates operates during the
term of this Agreement within the continental United States (the
"Restricted Area"); (ii) have any interest directly or indirectly in
any business engaged in the Restricted Business in the Restricted Area
other than Employer (provided that nothing herein will prevent Employee
from owning in the aggregate not more than one percent (1%) of the
outstanding stock of any class of a corporation engaged in the
Restricted Business in the Restricted Area which is publicly traded, so
long as Employee has no participation in the management or conduct of
business of such corporation), (iii) induce or attempt to induce any
employee of Employer or any entity related to Employer to leave his,
her or their employ, or in any other way interfere with the
relationship between Employer or any entity related to Employer and any
other employee of Employer or any entity related to Employer, or (iv)
induce or attempt to induce any customer, supplier, franchisee,
licensee, other business relation of any member of Employer or any
entity related to Employer to cease doing business with Employer or any
entity related to Employer, or in any way interfere with the
relationship between any customer, franchisee or other business
relation and Employer or any entity related to Employer, without the
prior written consent of Employer. For purposes of this Agreement,
"Noncompetition Period" shall mean the period commencing as of the
Closing Date and ending on the last day of the sixth (6th) month
following the date on which Employee is terminated during the term of
this Agreement.
2. If, at the time of enforcement of any provisions of Section
9, a court of competent jurisdiction holds that the restrictions stated
therein are unreasonable under circumstances then existing, the parties
hereto agree that the maximum period, scope or geographical area
reasonable under such circumstances will be substituted for the stated
period, scope or area.
3. Employee agrees that the covenants made in this Section 9
shall be construed as an agreement independent of any other provision
of this Agreement and shall survive the termination of this Agreement.
J. TERMINATION OF EXISTING AGREEMENTS. This Agreement, effective on the
Closing Date and upon consumption of the Transactions supersedes and
preempts any prior understandings, agreements or representations,
written or oral, by or between Employee and Employer, which may have
related to the employment of Employee, Employee's Agreement Not to
Compete with Employer, or the payment of salary or other compensation
by Employer to Employee, and upon this Agreement becoming effective,
all such understandings, agreements and representations shall terminate
and shall be of no further force or effect.
K. SPECIFIC PERFORMANCE. Employee and Employer acknowledge that in the
event of a breach of this Agreement by either party, money damages
would be inadequate and the nonbreaching party would have no adequate
remedy at law. Accordingly, in the event of any controversy concerning
the rights or obligations under this Agreement, such rights or
obligations shall be enforceable in a court of equity by
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a decree of specific performance. Such remedy, however, shall be
cumulative and nonexclusive and shall be in addition to any other
remedy to which the parties may be entitled.
L. SALE, CONSOLIDATION OR MERGER. In the event of a sale of the stock, or
substantially all of the stock, of Employer or Holdings Corp., or
consolidation or merger of Employer or Holdings Corp. with or into
another corporation or entity, or the sale of substantially all of the
operating assets of Employer or Holdings Corp. to another corporation,
entity or individual, Employer may assign its rights and obligations
under this Agreement to its successor-in-interest and such
successor-in-interest shall be deemed to have acquired all rights and
assumed all obligations of Employer hereunder.
M. STOCK OPTIONS. Immediately preceding the Closing (as defined in the
Merger Agreement) Employee shall be granted incentive stock options in
accordance with the Second Amended 1990 Stock Option Plan of Employer
(the "Plan") for 25,000 shares of ValueVision International, Inc.
common stock ("Stock Options") subject to the provisions thereof and
exercisable at the time or times established by the Stock Option
Agreement. The Stock Options shall vest in equal amounts, one-third
each, for the next successive three (3) years as measured from the
anniversary of the Closing Date, or such earlier date in the sole
discretion of the Employer's Chief Executive Officer. All such Stock
Options shall automatically vest upon a termination of this Agreement
prior to the end of the Term (unless pursuant to Sections 6.c or 6.d.)
or upon a Change of Control. Notwithstanding the forgoing or anything
contained in the Plan or the Stock Option Agreement, the consummation
of the Transactions shall not be deemed a Change of Control for
purposes of vesting of the Stock Options, although any transaction in
the future similar to the Transactions involving either Employer or
Holdings Corp. shall constitute a Change of Control. In the event the
Transactions are not consummated, the Stock Options shall terminate.
N. CHANGE OF CONTROL. For purposes of this Agreement, a "Change of
Control" shall mean an event as a result of which: (i) any Aperson" (as
such term is used in Sections 13(d) and 14(d) of the Securities and
Exchange Act of 1934 (the "Exchange Act")), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of
all securities that such person has a right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 20% of the total voting power of
the voting stock of either Employer or Holdings Corp. (or their
successors and assigns); (ii) Employer or Holdings Corp. consolidates
with, or merges with or into another corporation or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any corporation
consolidates with, or merges with or into, Employer or Holdings Corp.,
in any such event pursuant to a transaction in which the outstanding
voting stock of Employer or Holdings Corp. is changed into or exchanged
for cash, securities or other property, other than any such transaction
where (A) the outstanding voting stock of Employer or Holdings Corp. is
changed into or exchanged for (x) voting stock of the surviving or
transferee corporation or (y) cash, securities (whether or not
including voting stock) or other property, and (B) the holders of the
voting stock of Employer or Holdings Corp. immediately prior to such
transaction own, directly or indirectly, not less than 80% of the
voting power of the voting stock of the surviving corporation
immediately after such transaction; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of Employer or Holdings Corp.
(together with any new directors whose election by such Board or whose
nomination for election by the stockholders of Employer or Holdings
Corp. was approved by a vote of 66-2/3% of the directors then still in
office who were either directors at the beginning of such period or
whose election ro nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Employer
or Holdings Corp., respectively, then in office, or (iv) Employer or
Holdings Corp. is liquidated or dissolved or adopts a plan of
liquidation.
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O. NO OFFSET - NO MITIGATION. Employee shall not be required to mitigate
damages under this Agreement by seeking other comparable employment.
The amount of any payment or benefit provided for in this Agreement,
including welfare benefits, shall not be reduced by any compensation or
benefits earned by or provided to Employee as the result of employment
by another employer.
P. WAIVER. The failure of either party to insist, in any one or more
instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or relinquishment of any
right granted hereunder or of the future performance of any such term,
covenant or condition.
Q. ATTORNEY'S FEES. In the event of any action for breach of, to enforce
the provisions of, or otherwise arising out of or in connection with
this Agreement, the prevailing party in such action, as determined by a
court of competent jurisdiction in such action, shall be entitled to
receive its reasonable attorney fees and costs from the other party. If
a party voluntarily dismisses an action it has brought hereunder, it
shall pay to the other party its reasonable attorney fees and costs.
R. NOTICES. Any notice to be given hereunder shall be deemed sufficient if
addressed in writing, and delivered by registered or certified mail or
delivered personally: (i) in the case of Employer, to Employer's
principal business office; and (ii) in the case of Employee, to his
address appearing on the records of Employer, or to such other address
as he may designate in writing to Employer.
S. SEVERABILITY. In the event that any provision shall be held to be
invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of
this Agreement and the remaining covenants, restrictions and provisions
hereof shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provisions as to make it
valid, reasonable and enforceable.
T. AMENDMENT. This Agreement may be amended only by an agreement in
writing signed by the parties hereto.
U. BENEFIT. This Agreement shall be binding upon and inure to the benefit
of and shall be enforceable by and against Employee's heirs,
beneficiaries and legal representatives. It is agreed that the rights
and obligations of Employee may not be delegated or assigned except as
specifically set forth in this Agreement.
V. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of Minnesota.
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IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day, month and year first above written.
EMPLOYER: VALUEVISION INTERNATIONAL, INC.
By /s/ Robert L. Johander
----------------------------
Robert L. Johander
Its: Chief Executive Officer
EMPLOYEE: /s/ David T. Quinby
-------------------------------
David T. Quinby
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EXHIBIT 10.39
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 12th day of January, 1998, by and between
ValueVision International, Inc., a Minnesota corporation (hereinafter referred
to as "Employer"), and Gregory Lerman (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, Employee and Employer have fully discussed to the satisfaction
of Employee the transactions (the "Transactions") contemplated by that certain
Agreement and Plan of Reorganization and Merger (the "Merger Agreement"), dated
January 5, 1998, by and among Employer, National Media Corporation ("NMC") and
V-L Holdings, Corp. ("Holdings Corp."), whereby Employer and NMC shall each
become wholly-owned subsidiaries of Holdings Corp.;
WHEREAS, Employer desires to obtain the services of Employee and
Employee desires to be employed by Employer as an employee on the terms and
conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual promises
contained in this Agreement, the parties hereto agree as follows:
A. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to
be employed by Employer on the terms and conditions set forth in this
Agreement.
B. TERM. The term of Employee's employment hereunder shall commence on the
date hereof and shall continue on a full-time basis for a period of
twenty-four (24) months (the "Term"). The "Employment Period" for
purposes of this Agreement shall be the period beginning on the date
hereof and ending at the time Employee shall cease to act as an
employee of Employer.
C. DUTIES. Employee shall serve as Executive Vice President General
Manager ValueVision Television of Employer and shall perform the duties
as assigned by Employer, from time to time, and shall faithfully, and
to the best of his ability, perform such reasonable duties and services
of an active, executive, administrative and managerial nature as shall
be specified and designated, from time to time, by Employer. Employee
agrees to devote his full time and skills to such employment while he
is so employed, subject to a vacation allowance of not less than three
(3) weeks during each year of the term, or such additional vacation
allowance as may be granted in the sole discretion of Employer.
Employer's Chief Executive Officer shall provide Employee with a
performance review at least annually.
D. COMPENSATION. Employee's compensation for the services performed under
this Agreement shall be as follows:
1. Base Salary. Employee shall receive a base salary of One
Hundred Ninety Thousand and No/100 Dollars ($190,000.00) per year for
the first twelve months of the term of this Agreement and Two Hundred
Ten Thousand and No/100 Dollars ($210,000.00) per year for the second
twelve months of the term of this Agreement ("Base Salary").
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2. Bonus Salary. Employee may receive bonus salary ("Bonus
Salary"), based upon Employee's job performance and the criteria set
forth on Exhibit A hereto.
c. Automobile Allowance. Employer shall pay Employee a
monthly automobile allowance of $450.00 per month ("Auto Allowance").
d. Initial Bonus. Employer shall pay Employee an initial bonus
(the "Initial Bonus") equal to Twenty Thousand and No/100 Dollars
($20,000.00) on the ninetieth (90th) day following the date hereof,
unless prior to such date, Employee's employment shall be terminated
pursuant to Sections 6.c. or 6.d. hereof.
e. Moving and Living Expenses. Employer shall pay for the
normal household moving expenses associated with Employee's move to
Minneapolis from California ("Moving Expenses"), including moving two
automobiles. Such moving expenses shall be the lowest of three bids to
be presented to Employer. Employer further agrees to pay Employee's
reasonable temporary housing expenses in the Minneapolis area from the
date hereof through April 1, 1998 ("Housing Expenses"), unless prior to
such date, Employee's employment shall be terminated pursuant to
Sections 6.c. or 6.d. hereof.
E. OTHER BENEFITS DURING THE EMPLOYMENT PERIOD.
1. Employee shall receive all other benefits made available to
executive officers of Employer, from time to time, at its discretion
("Benefits"). It is understood and agreed that Employer may terminate
such Benefits or change any benefit programs at its sole discretion, as
they are not contractual for the term hereof.
2. Employer shall reimburse Employee for all reasonable and
necessary out-of-pocket business expenses incurred during the regular
performance of services for Employer, including, but not limited to,
entertainment and related expenses so long as Employer has received
proper documentation of such expenses from Employee.
3. Employer shall furnish Employee with such working
facilities and other services as are suitable to Employee's position
with Employer and adequate to the performance of his duties under this
Agreement.
F. TERMINATION OF EMPLOYMENT.
1. Death. In the event of Employee's death, this Agreement
shall terminate and Employee shall cease to receive Base Salary, Bonus
Salary, Auto Allowance, Housing Expenses (if any) and Benefits as of
the date on which his death occurs, except that, Employee shall receive
Bonus Salary prorated for the number of months to date of death.
2. Disability. If Employee becomes disabled such that Employee
cannot perform the essential functions of his job, and the disability
shall have continued for a period of more than one hundred twenty (120)
consecutive days, then Employer may, in its sole discretion, terminate
this Agreement and Employee shall then cease to receive Base Salary,
Bonus Salary, Auto Allowance, and all other Benefits, on the date this
Agreement is so terminated except that, Employee shall
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receive Bonus Salary prorated for the number of months to date of
disability; provided however, Employee shall then be entitled to such
disability, medical, life insurance, and other benefits as may be
provided generally for disabled employees of Employer when payments and
benefits hereunder ceases.
3. Voluntary Termination. In the event that Employee
voluntarily terminates his employment, he shall cease to receive Base
Salary, Bonus Salary, Auto Allowance, and all other Benefits as of the
date of such termination. In addition, Employee shall repay Employer on
a pro-rata basis (calculated based on the remaining months in the
Term), the Moving Expenses.
4. Termination With Cause. Employer shall be entitled to
terminate this Agreement and Employee's employment hereunder for Cause
(as herein defined), and in the event that Employer elects to do so,
Employee shall cease to receive Base Salary, Bonus Salary, Auto
Allowance, and Benefits as of the date of such termination specified by
Employer. For purposes of this Agreement, "Cause" shall mean: (I) a
material act or act of fraud which results in or is intended to result
in Employee's personal enrichment at the direct expense of Employer,
including without limitation, theft or embezzlement from Employer; (ii)
public conduct by Employee substantially detrimental to the reputation
of Employer, (iii) material violation by Employee of any Employer
policy, regulation or practice; (iv) conviction of a felony; or (v)
habitual intoxication, drug use or chemical substance use by any
intoxicating or chemical substance. Notwithstanding the forgoing,
Employee shall not be deemed to have been terminated for Cause unless
and until Employee has received thirty (30) days' prior written notice
(a "Dismissal Notice") of such termination. In the event Employee does
not dispute such determination within thirty (30) days after receipt of
the Dismissal Notice, Employee shall not have the remedies provided
pursuant to Section 6.g. of this Agreement. In addition, Employee shall
repay Employer on a pro-rata basis (calculated based on the remaining
months in the Term), the Moving Expenses.
e. By Employee for Employer Cause. Employee may terminate this
Agreement upon thirty (30) days written notice to Employer (the
"Employee Notice") upon the occurrences without Employee's express
written consent, of any one or more of the following events, provided,
however, that Employee shall not have the right to terminate this
Agreement if Employer is able to cure such event within thirty (30)
days (ten (10) days with regard to Subsection (ii) hereof) following
delivery of such notice:
(I) Employer substantially diminishes Employee's
duties such that they are no longer of an executive nature as
contemplated by Section 3 hereof or
(ii) Employer materially breaches its obligations to
pay Employee as provided for herein and such failure to pay is not a
result of a good faith dispute between Employer and Employee.
f. Other. If Employer terminates this Agreement for any reason
other than as set forth in Sections 6.a, 6.b., 6.c or 6.d. above, or if
Employee terminates this Agreement pursuant to Section 6.e. above,
Employer shall immediately pay Employee in a lump sum payment, an
amount equal to Base Salary, Bonus Salary and Auto Allowance and which
would otherwise be payable until the end of the Term (collectively, the
"Severance Payment"). In addition, Employer shall continue to provide
Employee with Benefits until the end of the Term. For purposes of
calculating Bonus Salary payable pursuant to this Section 6.f.,
Employee shall receive Bonus Salary equal to the last Bonus Salary
actually paid the Employee, prorated for the number of months to be
covered by the Severance Payment. Notwithstanding
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the foregoing, following a Change of Control (as hereinafter defined),
the number of months upon which the calculation of the Severance
Payment shall be based and for which Employer shall be obligated to
provide Employee with the Benefits pursuant to this Section 6.f. shall
be the greater of (I) the remaining number of months left in the Term
and (ii) eight (8) months.
g. Arbitration. In the event that Employee disputes a
determination that Cause exists for terminating his employment pursuant
to Section 6.d. of this Agreement, or Employer disputes the
determination that cause exists for Employee's termination of his
employment pursuant to Section 6.e of this Agreement, either such
disputing party may, in accordance with the Rules of the American
Arbitration Association ("AAA"), and within 30 days of receiving a
Dismissal Notice or Employee Notice, as applicable, file a petition
with the AAA for arbitration of the dispute, the costs thereof
(including legal fees and expenses) to be shared equally by the
Employer and Employee unless an order of the AAA provides otherwise.
Such proceeding shall also determine all other items then in dispute
between the parties relating to this Agreement, and the parties
covenant and agree that the decision of the AAA shall be final and
binding and hereby waive their rights to appeal thereof.
G. CONFIDENTIAL INFORMATION. Employee acknowledges that the confidential
information and data obtained by him during the course of his
performance under this Agreement concerning the business or affairs of
Employer, or any entity related thereto, are the property of Employer
and will be confidential to Employer. Such confidential information may
include, but is not limited to, specifications, designs, and processes,
product formulae, manufacturing, distributing, marketing or selling
processes, systems, procedures, plans, know-how, services or material,
trade secrets, devices (whether or not patented or patentable),
customer or supplier lists, price lists, financial information
including, without limitation, costs of materials, manufacturing
processes and distribution costs, business plans, prospects or
opportunities, and software and development or research work, but does
not include Employee's general business or direct marketing knowledge
(the "Confidential Information"). All the Confidential Information
shall remain the property of Employer and Employee agrees that he will
not disclose to any unauthorized persons or use for his own account or
for the benefit of any third party any of the Confidential Information
without Employer's written consent. Employee agrees to deliver to
Employer at the termination of this employment, all memoranda, notes,
plans, records, reports, video and audio tapes and any and all other
documentation (and copies thereof) relating to the business of
Employer, or any entity related thereto, which he may then possess or
have under his direct or indirect control. Notwithstanding any
provision herein to the contrary, the Confidential Information shall
specifically exclude information which is publicly available to
Employee and others by proper means, readily ascertainable from public
sources known to Employee at the time the information was disclosed or
which is rightfully obtained from a third party, information required
to be disclosed by law provided Employee provides notice to Employer to
seek a protective order, or information disclosed by Employee to his
attorney regarding litigation with Employer.
H. INVENTIONS AND PATENTS. Employee agrees that all inventions,
innovations or improvements in the method of conducting Employer's
business or otherwise related to Employer's business (including new
contributions, improvements, ideas and discoveries, whether patentable
or not) conceived or made by him during the Employment Period belong to
Employer. Employee will promptly disclose such inventions, innovations
and improvements to Employer and perform all actions reasonably
requested by Employer to establish and confirm such ownership.
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I. NONCOMPETE AND RELATED AGREEMENTS.
1. Employee agrees that during the Noncompetition Period (as
herein defined), he will not: (I) directly or indirectly own, manage,
control, participate in, lend his name to, act as consultant or advisor
to or render services alone or in association with any other person,
firm, corporation or other business organization for any other person
or entity engaged in the television home shopping and infomercial
business, any mail order business that directly competes with Employer
or any of its affiliates by selling merchandise primarily of the type
offered in and using a similar theme as any of Employer's or its
affiliates' catalogs during the term of this Agreement or any business
which Employer (upon authorization of its board of directors) has
invested significant research and development funds or resources and
contemplates entering into during the next twelve (12) months (the
"Restricted Business"), anywhere that Employer or any of its affiliates
(including without limitation, Holdings) operates during the term of
this Agreement within the continental United States (the "Restricted
Area"); (ii) have any interest directly or indirectly in any business
engaged in the Restricted Business in the Restricted Area other than
Employer (provided that nothing herein will prevent Employee from
owning in the aggregate not more than one percent (1%) of the
outstanding stock of any class of a corporation engaged in the
Restricted Business in the Restricted Area which is publicly traded, so
long as Employee has no participation in the management or conduct of
business of such corporation), (iii) induce or attempt to induce any
employee of Employer or any entity related to Employer to leave his,
her or their employ, or in any other way interfere with the
relationship between Employer or any entity related to Employer and any
other employee of Employer or any entity related to Employer, or (iv)
induce or attempt to induce any customer, supplier, franchisee,
licensee, other business relation of any member of Employer or any
entity related to Employer to cease doing business with Employer or any
entity related to Employer, or in any way interfere with the
relationship between any customer, franchisee or other business
relation and Employer or any entity related to Employer, without the
prior written consent of Employer. For purposes of this Agreement,
"Noncompetition Period" shall mean the period commencing as of the
Closing Date and ending on the last day of the sixth (6th) month
following the date on which Employee is terminated during the term of
this Agreement.
2. If, at the time of enforcement of any provisions of Section
9, a court of competent jurisdiction holds that the restrictions stated
therein are unreasonable under circumstances then existing, the parties
hereto agree that the maximum period, scope or geographical area
reasonable under such circumstances will be substituted for the stated
period, scope or area.
3. Employee agrees that the covenants made in this Section 9
shall be construed as an agreement independent of any other provision
of this Agreement and shall survive the termination of this Agreement.
4. Employee represents and warrants to Employer that he is not
subject to any existing noncompetition or confidentiality agreements
which would in any way limit him from working in the television home
shopping, catalog or infomercial businesses, or from performing his
duties hereunder or subject Employer or Holdings to any liability as a
result of his employment hereunder, including following consummation of
the Transactions. Employee agrees to indemnify and hold Employer,
Holdings and their affiliates harmless from and against any and all
claims, liabilities, losses, costs, damages and expenses (including
reasonable attorneys' fees) arising as a result of any noncompete or
confidentiality agreements applicable to Employee.
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J. TERMINATION OF EXISTING AGREEMENTS. This Agreement supersedes and
preempts any prior understandings, agreements or representations,
written or oral, by or between Employee and Employer, which may have
related to the employment of Employee, Employee's Agreement Not to
Compete with Employer, or the payment of salary or other compensation
by Employer to Employee, and upon this Agreement becoming effective,
all such understandings, agreements and representations shall terminate
and shall be of no further force or effect.
K. SPECIFIC PERFORMANCE. Employee and Employer acknowledge that in the
event of a breach of this Agreement by either party, money damages
would be inadequate and the nonbreaching party would have no adequate
remedy at law. Accordingly, in the event of any controversy concerning
the rights or obligations under this Agreement, such rights or
obligations shall be enforceable in a court of equity by a decree of
specific performance. Such remedy, however, shall be cumulative and
nonexclusive and shall be in addition to any other remedy to which the
parties may be entitled.
L. SALE, CONSOLIDATION OR MERGER. In the event of a sale of the stock, or
substantially all of the stock, of Employer or Holdings Corp., or
consolidation or merger of Employer or Holdings Corp. with or into
another corporation or entity, or the sale of substantially all of the
operating assets of Employer or Holdings Corp. to another corporation,
entity or individual, Employer may assign its rights and obligations
under this Agreement to its successor-in-interest and such
successor-in-interest shall be deemed to have acquired all rights and
assumed all obligations of Employer hereunder.
M. STOCK OPTIONS. Employee shall be granted incentive stock options in
accordance with the 1994 Executive Stock Option and Compensation Plan
of Employer (the "Plan") for 100,000 shares of ValueVision
International, Inc. common stock ("Stock Options") subject to the
provisions thereof and exercisable at the time or times established by
the stock option agreement representing the Stock Options (the "Stock
Option Agreement"). The Stock Options shall vest in equal amounts,
one-seventh each, for the next successive seven (7) years as measured
from the anniversary of the date hereof, or such earlier date in the
sole discretion of the Employer's Chief Executive Officer. All such
Stock Options shall automatically vest upon a termination of this
Agreement prior to the end of the Term (unless pursuant to Sections 6.c
or 6.d.) or upon a Change of Control. Notwithstanding the forgoing or
anything contained in the Plan or the Stock Option Agreement, the
consummation of the Transactions shall not be deemed a Change of
Control for purposes of vesting of the Stock Options, although any
transaction in the future similar to the Transactions involving either
Employer or Holdings Corp. shall constitute a Change of Control.
N. CHANGE OF CONTROL. For purposes of this Agreement, a "Change of
Control" shall mean an event as a result of which: (I) any 'person" (as
such term is used in Sections 13(d) and 14(d) of the Securities and
Exchange Act of 1934 (the "Exchange Act")), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of
all securities that such person has a right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 20% of the total voting power of
the voting stock of either Employer or Holdings Corp. (or their
successors and assigns); (ii) Employer or Holdings Corp. consolidates
with, or merges with or into another unaffiliated corporation or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any unaffiliated
corporation consolidates with, or merges with or into, Employer or
Holdings Corp., in any such event pursuant to a transaction in which
the outstanding voting stock of Employer or Holdings Corp. is changed
into or exchanged for cash, securities or other property, other than
any such transaction where (A) the outstanding voting stock of Employer
or Holdings Corp. is changed into or
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exchanged for (x) voting stock of the surviving or transferee
corporation or (y) cash, securities (whether or not including voting
stock) or other property, and (B) the holders of the voting stock of
Employer or Holdings Corp. immediately prior to such transaction own,
directly or indirectly, not less than 80% of the voting power of the
voting stock of the surviving corporation immediately after such
transaction; or (iii) during any period of two consecutive years,
following consummation of the Transactions, individuals who at the
beginning of such period constituted the Board of Directors of Employer
or Holdings Corp. (together with any new directors whose election by
such Board or whose nomination for election by the stockholders of
Employer or Holdings Corp. was approved by a vote of 66-2/3% of the
directors then still in office who were either directors at the
beginning of such period or whose election ro nomination for election
was previously so approved) cease for any reason to constitute a
majority of the Board of Employer or Holdings Corp., respectively, then
in office, or (iv) Employer or Holdings Corp. is liquidated or
dissolved or adopts a plan of liquidation.
O. NO OFFSET - NO MITIGATION. Employee shall not be required to mitigate
damages under this Agreement by seeking other comparable employment.
The amount of any payment or benefit provided for in this Agreement,
including welfare benefits, shall not be reduced by any compensation or
benefits earned by or provided to Employee as the result of employment
by another employer.
P. WAIVER. The failure of either party to insist, in any one or more
instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or relinquishment of any
right granted hereunder or of the future performance of any such term,
covenant or condition.
Q. ATTORNEY'S FEES. In the event of any action for breach of, to enforce
the provisions of, or otherwise arising out of or in connection with
this Agreement, the prevailing party in such action, as determined by a
court of competent jurisdiction in such action, shall be entitled to
receive its reasonable attorney fees and costs from the other party. If
a party voluntarily dismisses an action it has brought hereunder, it
shall pay to the other party its reasonable attorney fees and costs.
R. NOTICES. Any notice to be given hereunder shall be deemed sufficient if
addressed in writing, and delivered by registered or certified mail or
delivered personally: (I) in the case of Employer, to Employer's
principal business office; and (ii) in the case of Employee, to his
address appearing on the records of Employer, or to such other address
as he may designate in writing to Employer.
S. SEVERABILITY. In the event that any provision shall be held to be
invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of
this Agreement and the remaining covenants, restrictions and provisions
hereof shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provisions as to make it
valid, reasonable and enforceable.
T. AMENDMENT. This Agreement may be amended only by an agreement in
writing signed by the parties hereto.
U. BENEFIT. This Agreement shall be binding upon and inure to the benefit
of and shall be enforceable by and against Employee's heirs,
beneficiaries and legal representatives. It is agreed that the rights
and obligations of Employee may not be delegated or assigned except as
specifically set forth in this Agreement.
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V. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day, month and year first above written.
EMPLOYER: VALUEVISION INTERNATIONAL, INC.
By /s/ Robert L. Johander
-------------------------------
Robert L. Johander
Its: Chief Executive Officer
EMPLOYEE: /s/ Gregory Lerman
----------------------------------
Gregory Lerman
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EXHIBIT 10.41
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
- ------------------------------------
IN RE: CHAPTER 11
MONTGOMERY WARD HOLDING
CORP., ET AL., CASE NO. 97-1409 (PJW)
DEBTORS.
JOINTLY ADMINISTERED
- ------------------------------------
STIPULATION BETWEEN MONTGOMERY WARD & CO., INCORPORATED AND
VALUEVISION INTERNATIONAL, INC. REGARDING THE ASSUMPTION AND
MODIFICATION OF EXECUTORY CONTRACTS AND RELATED AGREEMENTS
This Stipulation is made as of November 1, 1997, by and among Montgomery
Ward & Co., Incorporated, an Illinois corporation as debtor and
debtor-in-possession ("Montgomery Ward"), Montgomery Ward Direct, L.P., a
Delaware limited partnership ("MWD"), ValueVision International, Inc., a
Minnesota corporation ("ValueVision") and ValueVision Direct Marketing Company,
Inc., a Minnesota corporation ("VVDM").
R E C I T A L S
A. The Parties. Montgomery Ward and certain affiliated entities including MWD
filed for Chapter 11 reorganization in the Bankruptcy Court for the
District of Delaware on July 7, 1997 (the "Petition Date"). Montgomery Ward
and those affiliates are currently operating their businesses as
debtors-in-possession pursuant to 11 U.S.C. Section 1107. ValueVision is
headquartered in Eden Prairie, Minnesota and operates a television home
shopping network serving 40 states. ValueVision is the owner of 100% of the
stock of VVDM. VVDM purchased the MWD catalog business in July 1996 by
purchasing
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substantially all of the assets of MWD, pursuant to that certain Asset
Purchase Agreement, dated July 26, 1996 (the "Asset Purchase Agreement").
B. The Prepetition Contracts. In addition to the Asset Purchase Agreement
between their wholly owned subsidiaries, Montgomery Ward and ValueVision
are each parties to the following prepetition agreements and contracts
(together, the "Prepetition Contracts"):
(i) Restructuring Agreement, dated as of July 27, 1996;
(ii) Amended and Restated Operating Agreement, dated as of
July 27, 1996, between Montgomery Ward and ValueVision ("Operating
Agreement");
(iii) Amended and Restated Servicemark License Agreement,
dated as of July 26, 1996, by and between Montgomery Ward and
ValueVision ("Servicemark Agreement");
(iv) Credit Card License and Receivables Sale Agreement, dated
March 13, 1995, by and between Montgomery Ward and ValueVision as
amended by that certain Letter Agreement dated September 27, 1996
("Credit Card Agreement");
(v) That certain Pledge Agreement, dated as of July 27, 1996,
by and between Montgomery Ward as debtor and ValueVision as secured
party granting a security interest to ValueVision in warrants of
Montgomery Ward to purchase 1,642,143 shares of common stock of
ValueVision for one cent per share;
(vi) That certain Amended and Restated Warrant Agreement dated
as of September 28, 1996 by and among ValueVision, Montgomery Ward and
Montgomery Ward Direct, L.P.;
(vii) That certain Second Amended and Restated Registration
Rights Agreement dated as of July 27, 1996 by and among ValueVision,
Montgomery Ward and Merchant Advisors Limited Partnership;
(viii) Warrant Certificate, dated September 24, 1996, to MWD for
1,484,993 shares of common stock of ValueVision;
(ix) Warrant Certificate, dated September 24, 1996, to
Montgomery Ward for 1,484,467 shares of common stock of ValueVision;
(x) Warrant Certificate, dated September 24, 1996, to
Montgomery Ward for 2,200,000 shares of common stock of ValueVision;
(xi) Assignment by MWD to Montgomery Ward of warrant
certificate for 1,484,993; and
(vii) Related and incidental agreements and delivery items.
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True copies of the Prepetition Contracts are available from the Debtor to any
party upon request.
C. The Initial T.V. Agreements. The Prepetition Contracts evidence two related
transactions between ValueVision and Montgomery Ward. The first was the
formation of a strategic relationship between ValueVision and Montgomery
Ward in 1995 relating to ValueVision's television home shopping business
(the "T.V. Agreements"). Under earlier versions of these T.V. Agreements,
entered into in March 1995, ValueVision was granted exclusive rights to use
certain Montgomery Ward servicemarks and Montgomery Ward's private label
credit card in the field of television home shopping. These T.V. Agreements
also required Montgomery Ward to purchase television advertising time over
a period of years from ValueVision at agreed upon rates. In consideration
of Montgomery Ward's various undertakings in the T.V. Agreements,
ValueVision issued 1,280,000 shares of unregistered ValueVision common
stock (the "Purchased Shares") and a total of 25,000,000 warrants to
Montgomery Ward, the latter being subject to various restrictions and
prices (the "Original Warrants").
D. The Asset Purchase Agreement and Restructure of the T.V. Agreements in
1996. In July 1996, ValueVision and Montgomery Ward amended and restated
the T.V. Agreements, redefining their strategic relationship. At that time,
Montgomery Ward also caused its affiliate MWD to sell substantially all of
its assets to VVDM, a subsidiary of ValueVision. MWD had in the past
operated the catalog marketing business relating to Montgomery Ward's
retail business. In connection with the sale of MWD's assets, Montgomery
Ward granted to ValueVision and VVDM an exclusive right to use the
Montgomery Ward servicemark and the Montgomery Ward Direct servicemark in
its newly acquired direct mail business. In addition, ValueVision and VVDM
acquired the right to solicit retail sales by mail from the millions of
holders of the Montgomery Ward private label credit cards who were
permitted to purchase VVDM merchandise with their cards. Since July 1996,
VVDM has been preparing and mailing "Montgomery Ward Direct" catalogs and
solicitation materials for VVDM merchandise to Montgomery Ward credit card
holders. In connection with the restructuring of the relationship in 1996,
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the Original Warrants were canceled in exchange for 5,169,455 one cent
warrants and Montgomery Ward retained the Purchased Stock.
E. Montgomery Ward Stock in ValueVision. As of the date of this Stipulation,
Montgomery Ward still owns the Purchased Shares, (i.e. 1,280,000 shares of
common stock of ValueVision) and is also the holder of warrant certificates
for 3,842,134 shares of ValueVision common stock at a price of one cent per
share (the "New Warrants"). The balance of the warrants that were held by
Montgomery Ward have been assigned and exercised and are not the subject of
this Stipulation. Under the terms of the Pledge Agreement, 1,642,143 of the
New Warrants have been pledged to ValueVision to secure performance of
Montgomery Ward's obligation to purchase advertising under the terms of the
Operating Agreement.
F. The Advertising Commitment. Under the terms of the Operating Agreement,
Montgomery Ward has agreed to purchase $20,000,000 worth of advertising
time from ValueVision to be placed with television stations and cable
operators with whom ValueVision has contractual agreements to purchase
advertising time. As of the petition date, Montgomery Ward had previously
purchased and paid for $2,421,542.31 of advertising time in the ordinary
course of business pursuant to its commitment and then owed ValueVision
$1,022,975.73 for prepetition advertising time that it had used but had not
yet paid for. This latter prepetition debt has not been paid. Following the
petition date, Montgomery Ward has continued to use advertising provided by
ValueVision pursuant to the Operating Agreement and is currently indebted
to ValueVision in the approximate amount of $622,000 for post-petition
advertising actually used through September 30, 1997.
G. The Credit Card Relationship. The Operating Agreement and the Credit Card
Agreement each provide that ValueVision is authorized to offer the
Montgomery Ward private label credit card to its customers as a means for
the payment of ValueVision merchandise in its home television shopping
business and VVDM merchandise purchased in the catalog business. Pursuant
to the Credit Card Agreement, ValueVision is an "authorized licensee" under
the terms of that certain Credit Card Agreement between
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the Debtor and Monogram Credit Card Bank of Georgia ("Monogram"), dated
April 1, 1996 (the "Monogram Agreement"). Under the terms of the Credit
Card Agreement and the Monogram Agreement, ValueVision and VVDM have
continued since April 1, 1996, to sell their merchandise and accept payment
with the Montgomery Ward private label credit card. The Credit Card
Agreement provides for daily payments to ValueVision from Montgomery Ward
based upon evidence of credit card charges for the daily period ending
three days before each settlement date. As a consequence of this delay in
settlement and the mechanics of the relationship, Montgomery Ward retained
possession of certain settlements relating to the period immediately
preceding the Petition Date that it received from Monogram attributable to
ValueVision sales in the aggregate amount of $358,569.61 (the "Retained
Settlements"). Under the terms of the Monogram Agreement, Montgomery Ward
is required to pay the Retained Settlements to ValueVision as "authorized
licensee." The Retained Settlements have not been paid. During the
post-petition period prior to the date of this Stipulation, ValueVision has
continued to offer the Montgomery Ward private label credit card as a means
for payment of merchandise purchased in its television home shopping
business and its direct mail catalog business, and Montgomery Ward has been
making settlements in accordance with the Credit Card Agreement and the
Monogram Agreement in the ordinary course of business.
H. Credit Card Applications. ValueVision is entitled to payments of $15.00
each for Montgomery Ward credit card approved applications that are
obtained by ValueVision and VVDM. As of the petition date, ValueVision and
VVDM were owed $732,340.00 for approved credit card applications.
ValueVision also has a related agreement with Signature Financial/Marketing
Inc., a Delaware corporation that is an affiliate of Montgomery Ward that
is not in bankruptcy reorganization proceedings. The agreement with
Signature is not affected by this Stipulation.
I. Uncertain Effect of Bankruptcy Rejection. The parties acknowledge
uncertainty and litigation risks about the extent to which the Debtor is
authorized under 11 U.S.C. Section 365 to reject the Prepetition
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Contracts as "executory contracts." The parties further acknowledge
uncertainty and litigation risks about the legal effect of the attempted
rejection of the Prepetition Contracts pursuant to 11 U.S.C. Section 365,
especially upon the continuing rights of ValueVision and VVDM to the
exclusive use of the Montgomery Ward mark and Montgomery Ward Direct mark
in connection with the direct mail catalog business.
J. Desire of Montgomery Ward to Recover Servicemark Rights. As part of its
bankruptcy reorganization, Montgomery Ward has made a business
determination that it needs to control its marketing image with its
customers, especially the millions of Montgomery Ward private label credit
card holders. It has also determined that ValueVision's and VVDM's future
rights to use the Montgomery Ward and Montgomery Ward Direct servicemarks
in the direct mail business will interfere with Montgomery Ward's marketing
efforts. Montgomery Ward has further concluded that repeated solicitations
by VVDM to Montgomery Ward credit card holders using the Montgomery Ward or
Montgomery Ward Direct name will make them less receptive to Montgomery
Ward's own marketing efforts. For these and other reasons, Montgomery Ward
has concluded that it is in the best interests of the bankruptcy estate for
it to reach an agreement with ValueVision and VVDM for ValueVision and VVDM
to phase out their use of the Montgomery Ward servicemark, the Montgomery
Ward Direct servicemark and the Montgomery Ward credit card in connection
with the direct mail catalog business.
K. ValueVision and VVDM Dependent Upon Servicemark Rights. Montgomery Ward
acknowledges that it received substantial consideration in 1996 for selling
its catalog business to VVDM, and that VVDM has made very substantial
investments in the development and expansion of that business in reliance
upon its ability to use the Montgomery Ward servicemark and the Montgomery
Ward Direct servicemark in accordance with the Prepetition Contracts.
Montgomery Ward further acknowledges that ValueVision's agreement to phase
out use of the Montgomery Ward servicemark, the Montgomery Ward Direct
servicemark and the Montgomery Ward credit card in connection with the VVDM
direct catalog business will have very substantial adverse economic affect
on VVDM.
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L. Assumption and Amendment. Montgomery Ward and ValueVision desire to retain
the benefits of the portion of the Prepetition Contracts considered
mutually beneficial and to evidence their agreement as to the issues
surrounding the direct mail catalog business. To effect this agreement,
Montgomery Ward has offered to assume certain of the Prepetition Contracts
as amended in accordance with the terms of this Stipulation, subject to
Bankruptcy Court approval.
A G R E E M E N T
THEREFORE THE PARTIES HEREBY STIPULATE AND AGREE AS FOLLOWS:
1. The Amended Operating Agreement is hereby assumed as modified in
the Second Amended and Restated Operating Agreement attached as Exhibit A
hereto (the "Second Amended Operating Agreement").
2. The Amended and Restated Servicemark License Agreement is hereby
assumed as modified in the form of Exhibit B hereto.
3. The Credit Card License and Receivables Sale Agreement is hereby
assumed as modified in the form of Exhibit C hereto.
4. The Amended and Restated Warrant Agreement and Second Amended
and Restated Warrant Agreement are hereby terminated.
5. The Amended and Restated Registration Rights Agreement is hereby
terminated as it relates to the rights and obligations of Montgomery Ward
and ValueVision to each other.
6. The Pledge Agreement is hereby terminated.
7. The 3,842,134 of New Warrants for the stock of ValueVision are
hereby canceled. Montgomery Ward represents that none of these New Warrants
have been exercised or transferred and that the original New Warrant
certificates will be returned to ValueVision on the Effective Date. If
Montgomery Ward is unable to return the Original New Warrants at said time
by reason of their being
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lost, missing or destroyed, it shall in lieu of the original New
Warrants indemnify ValueVision and deliver a surety bond or letter of
credit acceptable to ValueVision and its legal counsel.
8. Montgomery Ward shall transfer the Retained Settlements to
ValueVision on the Effective Date.
9. Notwithstanding anything herein to the contrary, ValueVision
shall have an allowed prepetition claim in the amount of $1,755,315.73 by
reason of prepetition amounts owing to it from Montgomery Ward for approved
credit card applications and for advertising time that was purchased
prepetition but not paid for. All post-petition obligations of Montgomery
Ward under any of the assumed contracts shall be cured by payment of the
past due amounts owing thereunder to ValueVision on the Effective Date.
10. Montgomery Ward acknowledges (i) receipt from ValueVision of
nonpublic information regarding ValueVision and (ii) that Montgomery Ward
has been given access to full and complete information regarding
ValueVision and such nonpublic information and utilized such access to its
satisfaction to verify any information it may have sought relating to
ValueVision and relevant to Montgomery Ward's investment decision.
Montgomery Ward further agrees to keep such nonpublic information
confidential in accordance with Section 10 of the Second Amended Operating
Agreement. Both ValueVision and Montgomery Ward agree to obtain the other
parties approval of all announcements regarding the transactions
contemplated hereby, which approval will not be unreasonably withheld.
11. Except for the claims of ValueVision and VVDM expressly
reserved by this Stipulation and the post-petition and ongoing obligations
of the parties with respect to the agreements assumed and modified in
accordance with this Stipulation, Montgomery Ward and MWD on the one hand
and ValueVision and VVDM on the other hand each hereby mutually release
each of the other of and from all claims, known or unknown, contingent or
liquidated, accrued or unaccrued, sounding in tort or
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contract arising or based upon facts occurring or omissions failing to
occur prior to the date of this Stipulation. The scope of this mutual
release shall include the respective officers, directors, affiliates,
employees and agents of each respective organization. ValueVision and VVDM
represent and warrant to Montgomery Ward and MWD that they own and have not
assigned any of the claims to be released hereunder. Montgomery Ward and
MWD represent and warrant to ValueVision and VVDM that they own and have
not assigned any of the claims to be released hereunder.
12. Notwithstanding anything herein to the contrary, ValueVision
and VVDM shall retain all rights to enforce all of the provisions of the
Prepetition Contracts for the period from the Petition Date through the
Effective Date of this Stipulation and shall be entitled to administrative
expense priority for Montgomery Ward's ongoing obligations thereunder.
Without limitation of the foregoing, Montgomery Ward agrees to pay for all
post-petition advertising and to make all credit card settlements with
ValueVision and VVDM in accordance with the Prepetition Contracts and the
Monogram Credit Agreement and agrees that all settlements received by
Montgomery Ward from Monogram arising out of the sale of ValueVision or
VVDM merchandise shall constitute the property of ValueVision and shall not
constitute property of the bankruptcy estate.
13. ValueVision and VVDM shall have the right to continue to use
the Montgomery Ward servicemarks and the Montgomery Ward Direct
servicemarks in accordance with the Second Amended and Restated Servicemark
License Agreement. As set forth in said Second Amended and Restated
Servicemark License Agreement, ValueVision and VVDM hereby agree that
neither shall make any mailings or other solicitations for Television Home
Shopping (other than to communicate to its Television Home Shopping
customers that the Card can be obtained and/or used) or for Catalog
Activities using the Montgomery Ward servicemark or the Montgomery Ward
Direct servicemark after March 31, 1998, but they shall be authorized to
use those servicemarks in connection with the consummation of sales and
regular customer service activity after March 31, 1998 to the extent that
it
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relates to mailings and solicitations made prior to March 31, 1998. VVDM
shall discontinue accepting the Montgomery Ward credit card as means for
payment in the catalog business after March 31, 1998 except for a
reasonable time thereafter with respect to mailings made prior to March 31,
1998, provided that ValueVision shall retain the right to use the
Montgomery Ward credit card in the Television Home Shopping business as
defined in the Second Amended Operating Agreement. ValueVision shall also
retain the right to solicit credit card applications on behalf of
Montgomery Ward in accordance with the Second Amended Operating Agreement.
14. ValueVision shall purchase and Montgomery Ward shall sell the
Purchased Shares to ValueVision on the Effective Date for the sum of
$4,864,000.
15. The Effective Date of this Stipulation shall be the date of the
entry of an order of the Bankruptcy Court authorizing the Debtor to enter
into the Stipulation. In the event that approval of this Stipulation is
contested, at the option of ValueVision this Agreement shall become
effective only in the event that the Bankruptcy Court order authorizing the
Debtor to enter into the Stipulation and the Agreements attached hereto
have become a final, nonappealable order.
16. Performance by Montgomery Ward of its obligations under this
Stipulation and the assumed contracts shall satisfy the requirements of 11
U.S.C. Section 365(b).
17. Subject to the provisions hereof, this Stipulation and the
revised Agreements attached hereto shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, and
without limitation shall be binding upon the bankruptcy estates of
Montgomery Ward and to the extent relevant to its affiliated entities.
18. This Stipulation and the assumed agreements described herein
contain the entire agreement between the parties hereto with respect to the
matters contained herein and supersede all prior oral or written
agreements, commitments or understandings with respect to the matters
provided for
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herein. This Stipulation is subject to Bankruptcy Court approval, which
Montgomery Ward agrees to seek promptly.
IN WITNESS WHEREOF the parties have executed this Stipulation.
MONTGOMERY WARD CO. & INCORPORATED
By: /s/ John Workman
----------------------------------------------
Its: Executive Vice President
-------------------------------------
MONTGOMERY WARD DIRECT, L.P.,
a Delaware Limited Partnership
By: /s/ John Workman
----------------------------------------------
Its: President, MW Direct General, Inc.
-------------------------------------
Its General Partner
------------------------------------
VALUEVISION INTERNATIONAL, INC.
By: /s/ Stuart R. Romenesko
----------------------------------------------
Its: SVP Finance and CFO
-------------------------------------
VALUEVISION DIRECT MARKETING COMPANY,
INC.
By: /s/ Stuart R. Romenesko
----------------------------------------------
Its: SVP Finance and CFO
------------------------------------
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EXHIBIT 10.42
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
THIS AGREEMENT is made as of November 1, 1997, or the Effective Date of the
Stipulation (defined below), if later, between Montgomery Ward & Co.,
Incorporated, an Illinois corporation ("MW") and ValueVision International,
Inc., a Minnesota corporation (together with its Affiliates as hereinafter
defined "VVI").
R E C I T A L S
A. MW and VVI were parties to a certain Operating Agreement, dated March
13, 1995 (the "Original Agreement"), pursuant to which MW granted to VVI certain
rights, and agreed to certain restrictions on its activities, in connection with
Television Home Shopping (as herein defined).
B. The parties amended and restated the Original Agreement in connection
with the purchase by VVI of substantially all of the assets of Montgomery Ward
Direct, L.P., a Delaware limited partnership which is wholly owned by MW
("MWD"), by entering into the Amended and Restated Operating Agreement dated
July 27, 1996 (the "Second Agreement"). MWD was engaged in the business of
selling Products (as herein defined) through direct-mail specialty catalogs.
C. By virtue of MW having filed for protection under the U.S. Bankruptcy
Act, the parties desire to amend and restate the Second Agreement to (i) provide
for the termination of the use of the MWD Marks after March 31, 1998 for Catalog
Activities and Television Home Shopping (other than to communicate to its
Television Home Shopping customers that the Card may be used to purchase
merchandise and that Card applications are available), except as reasonably
necessary to wind down Catalog Activities, and (ii) revise certain provisions of
the Second Agreement to reflect understandings reached by the parties. The
parties intend that, except as provided for in the Stipulation between MW and
VVI of even date herewith (the "Stipulation"), the rights of the parties with
respect to any activities or lack thereof prior to the date hereof shall be
governed by the terms of the Second Agreement and that the activities or lack
thereof on and after the date hereof shall be governed by this Agreement.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby amend and
restate the Original Agreement to read as follows:
A. Certain Definitions. For the purposes of this Agreement:
(a) "Affiliate" shall mean any Person which directly or indirectly
is controlled by the Person in question. "Control" means the possession,
directly or indirectly, of the power to direct or to cause the direction of
the management and policies of a Person whether through ownership of voting
securities, through the power to appoint directors, by contract or
otherwise. For purposes of this Agreement, neither the General Electric
Company ("GE"), nor General Electric Capital Corporation ("GECC"), nor any
subsidiary of GE or GECC, shall be deemed to be an Affiliate of MW.
(b) "Amended and Restated Credit Card Agreement" shall mean that
certain Amended and Restated Credit Card License Agreement between MW and
VVI of even date herewith.
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(c) "Cable Systems" shall mean individual cable television systems.
Each cable television system shall be considered to be an individual Cable
System, regardless of whether such cable television system is operated by
an operator of more than one Cable System.
(d) "Card" shall mean any private-label credit card offered by any
member of the MW Group or its designee to customers of any member of the MW
Group, including but not limited to the Montgomery Ward credit card.
(e) "Catalog Activities" shall mean the conduct of the following
activities:
(i) the offer and sale of Products through mail order
catalog offers (the "Primary Catalog Activity");
(ii) the offer and sale of Products through direct mail
syndications and reverse syndications (as such terms are commonly used
in the catalog and direct-mail industry);
(iii) the offer and sale of Products through telemarketing to
customers derived through the Primary Catalog Activity;
(iv) prospecting for new customers using a combination
catalog and pre-approved credit offer;
(v) use of 30, 60 and 120 second television commercials for
promotion of the Primary Catalog Activity;
(vi) the offer and sale of Products through solo and multi-
solo mailings to customers derived through the Primary Catalog
Activity; and
(vii) the use of the Internet and on-line services to promote
the Primary Catalog Activity.
(f) "Effective Date" shall mean November 1, 1997 or the Effective
Date of the Stipulation which ever is later.
(g) "Excluded Products" shall mean unique, proprietary products (as
herein defined) such as the PowerGrower, that (x) are developed or promoted
by a member of the MW Group for the primary benefit of the MW Group, and
(y) are not marketed through the use of any of the Marks.
(h) "Force Majeure" shall have the meaning set forth in Section 28
of this Agreement.
(i) "HSN" shall mean Home Shopping Network, Inc., a Delaware
corporation.
(j) "HSN Agreements" shall mean (I) that certain Agreement, dated
as of October 12, 1988 among Signature Agency, Inc., HSN and HSN Insurance,
Inc., (ii) that certain Agreement, dated as of October 31, 1987, between
Signature's Nationwide Auto Club, Inc., HSN and Home Shopping Insurance,
Inc., (iii) that certain Agreement, dated as of October 12, 1987, between
Montgomery Ward Life Insurance Company, HSN and Home Shopping Insurance,
Inc., and (iv) that certain
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Agreement, dated as of October 10, 1991, among Montgomery Ward Enterprises,
Inc., The Signature Life Insurance Company of America, Home Shopping Club,
Inc. and HSN Insurance, Inc.
(k) "Marks" shall have the meaning ascribed to such term in the
Second Amended and Restated Servicemark License Agreement.
(l) "MW" shall have the meaning set forth in the first paragraph of
this Agreement.
(m) "MWD" shall have the meaning set forth in Recital B above.
(n) "MW Group" shall mean, collectively, MW and its Affiliates.
(o) "MW Products" shall mean Products offered for sale by any
member of the MW Group.
(p) "MW Services" shall mean services offered from time to time by
Signature (as herein defined).
(q) "Original Agreement" shall have the meaning set forth in
Recital A above.
(r) "Person" shall mean a natural person, corporation, general or
limited partnership, limited liability company or partnership,
proprietorship, association, joint venture, governmental agency, trust,
estate, unincorporated organization, or other entity or organization
whether acting in an individual, fiduciary, or other capacity.
(s) "Product" or "Products" shall mean any consumer merchandise
other than Excluded Products.
(t) "QVC" shall mean QVC Network, Inc., a Delaware corporation.
(u) "Related Agreements" shall mean the Stipulation, the Amended
and Restated Credit Card Agreement (as herein defined) and the Second
Restated Servicemark License Agreement (as herein defined).
(v) "Retailer" shall mean a Person principally engaged in the
retail merchandising of consumer goods within the United States, other than
a member of the MW Group or VVI. By way of example and not of limitation,
"Retailer" includes merchandisers such as Sears, J.C. Penney, Macys,
Target, and the like.
(w) "Retained Catalog Rights" shall mean the following:
(i) the right of MW to conduct its existing special-offers
business through statement inserts, solo and multi-solo mailings and
through syndications;
(ii) the right of Signature (as herein defined) to market a
membership-based shopping service and to do catalog or solo mailings
to potential members to solicit memberships and to encourage members
to purchase merchandise through such service; and
(iii) the right of Signature to conduct continuity businesses.
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(x) "Second Agreement" shall have the meaning set forth in Recital
B above.
(y) "Second Amended and Restated Servicemark License Agreement"
shall mean that certain Second Amended and Restated Servicemark License
Agreement between MW and VVI, of even date herewith.
(z) "Signature" shall mean Signature Financial/Marketing, Inc. and
its Affiliates, all of which presently are members of the MW Group.
(aa) "Stipulation" shall have the meaning set forth in Recital C
above.
(bb) "Syndicated Programs" shall mean syndicated/transactional
television programming intended for broadcast over multiple broadcast or
cable television networks, using a format other than that described in the
first sentence of the definition of Television Home Shopping.
(cc) "Taxes" shall mean sales, use, service and similar taxes.
(dd) "Television Home Shopping" shall mean Product-focused
television programming whereby Products are sold by "on-air" hosts and
orders are placed by viewers directly with the party providing said
television programming or its agents or representatives, using
substantially the format used as of the date hereof by VVI, HSN and QVC.
Without limiting the generality of the preceding sentence, Television Home
Shopping does not include commercials or Syndicated Programs, but does
include so-called "infomercials" of any length not exceeding 30 minutes.
(ee) "ViaTV" shall mean RSTV, Inc., a Florida corporation.
(ff) "VVI" shall have the meaning set forth in the first paragraph
of this Agreement.
(gg) "VVI Cataloging Business" shall mean the conduct by VVI of
Catalog Activities, through the use of one or more of the Marks and/or
offering customers the use of the Card.
Other definitions are contained in the body of this Agreement.
B. Exclusivity. Except as otherwise specifically provided for herein, prior to
April 1, 2003 as it relates to Television Home Shopping and April 1, 2000
as it relates to Catalog Activities:
(a) No member of the MW Group will, directly or indirectly:
(i) sell or offer for sale any Product through Television
Home Shopping or Catalog Activities within the United States, except
through VVI; provided, however that this Section 2(a)(i) shall not
apply to (w) Excluded Products, (x) Retained Catalog Rights, or (y)
Products offered for sale by any business that is acquired from a
third party after the Effective Date by any member of the MW Group;
(ii) start up a Television Home Shopping business or a
Catalog Activities business;
(iii) acquire 10% or more of the outstanding equity
securities (or securities representing 10% or more of the aggregate
voting power of the outstanding securities) of a
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Person principally engaged in Television Home Shopping, including,
without limitation, HSN, QVC, and ViaTV, or Catalog Activities; or
(iv) enter into, or assist any Person (i) to obtain,
arrangements for Cable System carriage of Television Home Shopping,
including, without limitation, by purchasing advertising time on any
such Cable System for the purpose of so assisting such Person, or
purchase advertising time on Television Home Shopping programming on
any Cable System, except with VVI pursuant to this Agreement, or (ii)
in starting up, developing or conducting any Catalog Activities (other
than the Retained Catalog Rights).
This Section 2 (a) shall not prevent any member of the MW Group from
acquiring a voting or equity interest in, or the operating assets of, a
Person that engages in Television Home Shopping or Catalog Activities other
than as a principal business; provided, however, that if the MW Group shall
acquire a Person, or the assets of a Person, engaged in Catalog Activities
other than as a principal business, MW shall notify VVI, and, if VVI shall
desire to purchase the portion of such Person which is engaged in Catalog
Activities, MW shall negotiate in good faith with VVI with a view to
selling such portion to VVI.
C. Marks. Prior to April 1, 2003, MW shall not license or permit any Person,
other than VVI, to use the Marks (or marks confusingly similar thereto) in
Television Home Shopping nor shall MW license or permit any Person other
than VVI engaged primarily in Television Home Shopping, including without
limitation QVC, HSN and ViaTV, to use the Marks (or marks confusingly
similar thereto) for any purpose prior to April 1, 2003. MW shall not
license or permit any Person other than VVI to use the Mark for Catalog
Activities prior to April 1, 2000.
D. Card. Prior to April 1, 2003, MW shall not license or permit any Person,
other than VVI, to use the Card to sell or offer for sale any Products
through Television Home Shopping or Catalog Activities, nor shall MW
license or permit any Person other than VVI engaged primarily in Television
Home Shopping (including without limitation QVC, HSN, and ViaTV) to use the
Card for any purpose prior to April 1, 2003, provided, however, that
notwithstanding the foregoing, the Card may be used for any purpose other
than to sell or offer for sale any Products through Television Home
Shopping by (i) any member of the MW Group, and (ii) any person that was
using the Card prior to such time as MW obtained actual knowledge that such
Person was controlled by a company engaged primarily in Television Home
Shopping.
E. Programming and Catalog Content. VVI shall have exclusive control over all
television programming for Television Home Shopping, and catalog and
mailing content for Catalog Activities, including without limitation,
product selection, method and form of presentation and content; provided,
however, that any Television Home Shopping programming, and any Catalog
Activity, employing any of the Marks, or using the Card, shall be subject
to the provisions of the Second Restated Servicemark License Agreement and
the Amended and Restated Credit Card Agreement. Nothing contained herein
shall preclude VVI from offering television programming in formats other
than Television Home Shopping.
F. Fulfillment. VVI shall have sole responsibility for, and exclusive control
over, fulfillment except as provided herein. Without limiting the
generality of the preceding sentence:
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(a) Except as provided in this paragraph, VVI shall have sole
responsibility for and exclusive control over inbound telemarketing and
fulfillment of viewer orders generated through Television Home Shopping,
and fulfillment of sales generated through Catalog Activities, either from
VVI's inventory or through drop-shipments arranged by VVI with other
drop-ship vendors.
(b) Except as provided in this paragraph, VVI shall bear the sole
risk of loss with respect to all merchandise, including MW Products,
including the loss of risk in transit and the risk of theft.
(c) VVI shall bear the sole credit risk with respect to all
Products, including MW Products, and MW Services, which VVI shall sell on
credit, excluding, however, any Product sold through use of the Card,
except as otherwise provided in the Amended and Restated Credit Card
Agreement.
(d) Except as provided in this paragraph, VVI will be solely
responsible for collecting from its customers any Taxes which may be due on
any sales of Product (including MW Products) or MW Services to its
customers and shall remit all such amounts to the appropriate taxing
authorities. Notwithstanding the foregoing, MW shall be solely responsible
for collection of Taxes from its customers who buy Product or MW Services
using the Card, except as provided in the Amended and Restated Credit Card
Agreement. Nevertheless, MW shall remit to VVI, pursuant to the Amended and
Restated Credit Card Agreement, an amount equal to the Taxes charged to
customers by VVI on each purchase using the Card, which amount VVI shall
remit to the appropriate taxing authority.
(e) VVI and MW shall instruct customers to return Product purchased
from VVI through Television Home Shopping or Catalog Activities to VVI, and
not to MW stores. In the event that MW accepts returns of Product purchased
from VVI through Television Home Shopping or Catalog Activities in
accordance with VVI's return policy, MW shall promptly ship such product to
VVI. If such return was accepted in accordance with VVI's return policy,
VVI will bear the freight cost associated with such return; otherwise, VVI
and MW will each bear 50% of such cost.
G. Cable Carriage Agreements and Advertising Commitments. MW and VVI
agree that:
(a) VVI shall, and MW may at its option, use commercially
reasonable efforts to negotiate for long term cable carriage agreements
pursuant to which Cable Systems will agree to carry VVI's Television Home
Shopping programming. Each party will use its best efforts to promptly
notify the other of the commencement of negotiations with any Cable System,
and will permit the other party to participate therein. MW shall have the
right, but not be obligated, to assist VVI to obtain long term cable
carriage agreements by purchasing advertising time on such Cable Systems,
with cash or non-cash consideration acceptable to the Cable System (such as
MW Services);
(b) subject to the remainder of this Section 7, MW shall not be
obligated to purchase advertising time except to the extent it expressly
agrees in writing with the Cable System or VVI to be so obligated (an
"Advertising Commitment"). Notwithstanding the preceding sentence, and
except as provided below, MW hereby makes an Advertising Commitment that
the MW Group will, collectively, purchase not less than $10,000,000 of
advertising time on Cable Systems through VVI during the five year period
commencing October 31, 1997, at the rate of not less than $2,000,000.00 per
twelve-month period commencing November 1, 1997. The MW Group will have
sole control of (i) the nature and extent of all advertising it places with
Cable Systems, (ii) the content of all advertisements, and (iii) the
selection of the specific Cable Systems on which it intends to place
advertising; provided, however, that during the 180-day period ending
October 31, 2000, MW may elect to terminate any obligation to
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purchase advertising after October 31, 2000, provided further that such
termination shall not limit or extinguish MW's obligation to purchase
advertising before November 1, 2000 of not less than $6,000,000.
Notwithstanding the foregoing, upon six (6) months prior written notice to
VVI, MW may terminate its obligation to provide Advertising Commitment in
excess of the greater of $6,000,000 or the amount of Advertising Commitment
made by MW as of the time the notice is sent to VVI.
(c) VVI shall not be obligated to enter into any cable carriage
agreement except to the extent that VVI has determined, in its sole
discretion, that such cable carriage agreement is in the best interests of
VVI. If at any time VVI is required to pay additional amounts to a Cable
System solely because of MW's failure to purchase advertising time that MW
had committed to purchase in an Advertising Commitment (other than by
reason of a breach of such Advertising Commitment by such Cable System), MW
will reimburse VVI for such additional amount that VVI is required to pay
the Cable System, not to exceed the difference between the amount MW
committed to expend on advertising with such Cable System pursuant to such
Advertising Commitment, and the amount paid by MW for advertising under
such Advertising Commitment. In addition to all other rights and remedies
otherwise provided by law, except as specifically limited hereunder, in the
event that MW breaches an Advertising Commitment, VVI shall have the
termination right provided in subparagraph 22(b) (ii).
H. Board of Directors. After the date hereof, MW shall not have any right to
designate any nominee on the management's slate of nominees for the Board
of Directors.
I. Inspection of Records. Each party will have the right to inspect the
other's books, records, and premises with regard to any transaction under
this Agreement and the Related Agreements. In order to verify the accuracy
of all the above accounts and records, each party will have the right at
its sole cost to copy said books and records. All information in such
books, records, or revealed by such inspection, shall be deemed to be
confidential information subject to the provisions of Sections 10 (except
to the extent provided in Section 10(a) (i), (ii) and (iii) and 10 (b) (i),
(ii) and (iii) and 11 hereof).
J. Confidentiality.
(a) In the performance of this Agreement and the Related
Agreements, VVI may be exposed to the confidential information or trade
secrets of the MW Group and others. VVI shall not disclose to anyone not
employed by the MW Group or MW's designee under the Amended and Restated
Credit Card Agreement nor use except on behalf of the MW Group or MW's
designee under the Amended and Restated Credit Card Agreement any such
confidential information acquired by VVI in the performance of this
Agreement or the Related Agreements, except as authorized by MW by prior
writing. Information regarding all aspects of the MW Group's business,
either directly or indirectly disclosed to VVI or developed by VVI in the
performance of this Agreement and the Related Agreements shall be presumed
to be confidential except to the extent that such information (i) shall
have been published or otherwise made freely available to the general
public without restriction through no wrongdoing of VVI, (ii) shall have
been obtained from a third party not reasonably known by VVI after
reasonable inquiry, to be subject to a confidentiality agreement with MW or
any of its Affiliates or (iii) is required (in the reasonable opinion of
VVI's legal counsel) to be disclosed pursuant to law or legal process.
Except as provided hereinafter with respect to Cardholder Data (as defined
below) with regard to all of such confidential information, VVI agrees that
it shall: (a) forever hold in strict confidence such information; (b) not
alter, copy, misappropriate, misuse, transfer, sell, deliver or divulge,
under any circumstances, any of such confidential information to anyone
other than an employee or agent of VVI whose duties require access to such
information and then only in the course of VVI's performance under
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this Agreement and such employee or agent shall be bound by the terms of
this Section 10 (a); and (c) upon the termination of this Agreement, return
all such confidential information to MW or to destroy same together with
all additional copies thereof.
(b) In the performance of this Agreement and the Related
Agreements, the MW Group (which, for the purposes of this Section 10(b)
shall include MW's designee under the Amended and Restated Credit Card
Agreement) may be exposed to confidential information or trade secrets of
VVI and others. The MW Group shall not disclose to anyone not employed by
VVI nor use except on behalf of VVI any such confidential information
acquired by the MW Group in the performance of this Agreement and the
Related Agreements, except as authorized by VVI by prior writing.
Information regarding all aspects of VVI's business either directly or
indirectly disclosed to the MW Group or developed by any member of the MW
Group in the performance of this Agreement and the Related Agreements shall
be presumed to be confidential except to the extent that such information
(i) shall have been published or otherwise made freely available to the
general public without restriction through no wrongdoing of the MW Group,
(ii) shall have been obtained. from a third party not reasonably known by
the MW Group, after reasonable inquiry, to be subject to a confidentiality
agreement with VVI or any of its Affiliates or (iii) is required (in the
reasonable opinion of MW's legal counsel) to be disclosed pursuant to law
or legal process. With regard to all of such confidential information, the
MW Group shall: (a) forever hold in strict confidence such information; (b)
not alter, copy, misappropriate, misuse, transfer, sell, deliver or
divulge, under any circumstances, any of such confidential information to
anyone other than an employee or agent of the MW Group whose duties require
access to such information and then only in the course of the MW Group's
performance under this Agreement and such employee or agent shall be bound
by the terms of this Section 10(b); and (c) upon the termination of this
Agreement, return all such confidential information to VVI or to destroy
same together with all additional copies thereof.
(c) The obligations of the parties under Sections 10 (a) and 10 (b)
shall survive the termination or expiration of this Agreement for a period
of five years after such termination or expiration.
K. Cardholder Data.
(a) Prior to the Effective Date and through and including March 31,
1998, VVI and its predecessors in interest (collectively, the "VVI Group")
and MW have come into, or will come into, possession of the names,
addresses and other data and information ("Cardholder Data") with respect
to VVI Group's viewers or customers who are or become holders of the Card
and who purchase Product from the VVI Group using the Card ("Cardholders").
Cardholder Data already in MW's or the VVI Group's possession as of the
Effective Date and March 31, 1998, or which MW or the VVI Group acquires
from sources other than the other party do not constitute Cardholder Data.
Customers who have purchased Product from the VVI Group by use of the Card
(regardless of whether such customers have also used any other credit card)
are referred to herein as "Cardholder Customers."
(b) The parties agree that (i) all Cardholder Data provided by MW
to the VVI Group with respect to persons who are not Cardholder Customers
shall remain the sole property of MW, and (ii) Cardholder Data with respect
to Cardholder Customers will be the joint property of MW and the VVI Group.
Each of MW and the VVI Group may exercise all rights of ownership with
respect to Cardholder Data with respect to Cardholder Customers. In any
sale or lease of Cardholder Data pertaining to Cardholder Customers,
neither MW nor the VVI Group shall make available any Cardholder Data
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pertaining to the Cardholder Costumer's creditworthiness, to the extent any
such information was obtained from the other party hereto.
(c) The obligations of the parties under Sections 11(a) and 11(b)
shall survive the termination or expiration of this Agreement for a period
of five (5) years after such termination or expiration.
L. Representations and Warranties. The parties make the following
representations and warranties to each other:
(a) MW makes the following representations and warranties to VVI:
(i) MW is a corporation duly organized, existing and in good
standing under the laws of the State of Illinois;
(ii) MW has all necessary corporate authority, and it has
obtained all required consents (other than the consent of the U.S.
Bankruptcy Court), to enter into this Agreement and the Related
Agreements, and that such entry shall not constitute a breach of any
other material agreement to which MW is a party or may be bound;
(iii) MW has obtained all necessary consents, authorizations,
orders or approvals, if any, of any governmental authority (other than
the consent of the U.S. Bankruptcy Court) or other person required on
the part of MW for the performance by MW or its agents of its
obligations under this Agreement and the Related Agreements;
(iv) MW possesses all material permits and licenses, if any,
necessary to the performance of its obligations under this Agreement
and the Related Agreements;
(v) No member of the MW Group is subject to, or obligated
under, any provision of (i) their respective articles of incorporation
or by-laws, (ii) any agreement, arrangement or understanding,
including, without limitation, the HSN Agreements, (iii) any license,
franchise or permit, or (iv) any law, regulation, order, judgment or
decree; that would be breached or violated, or in respect of which a
right of termination or acceleration or any encumbrances on any of
their respective assets would be created, by the execution, delivery
and performance of this Agreement and the Related Agreements by MW;
(vi) neither the execution and delivery of this Agreement or
the Related Agreements by MW and VVI, nor their performance thereof in
accordance with the terms thereof, will result in a violation of any
applicable law, regulations, orders, rulings or agreements which
violation would have a material adverse effect on either MW or VVI;
(vii) MW is the user and owner of the entire right, title and
interest in and to the Marks in the United States subject to any
licenses that have previously been granted;
(viii) MW has no knowledge of any infringement in the United
States of the rights granted under the Second Restated Servicemark
License Agreement by any third party; and
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(ix) MW has not granted any rights to any third party that
conflict with the rights granted under the Second Restated Servicemark
License Agreement.
(b) VVI makes the following representations and warranties to MW:
(i) VVI is a corporation duly organized, existing and in
good standing under the laws of the State of Minnesota;
(ii) VVI has all necessary corporate authority, and has
obtained all required consents, to enter into this Agreement and the
Related Agreements and that such entry shall not constitute the breach
of any other material agreement to which VVI is a party or may be
bound;
(iii) VVI has obtained all necessary consents,
authorizations, orders or approvals, if any, of any governmental
authority or other person required on the part of VVI for the
performance by VVI or its agents of its obligations under this
Agreement and the Related Agreements;
(iv) VVI possesses all material permits and licenses, if any,
necessary to the performance of its obligations under this Agreement
and the Related Agreements; and
(v) VVI is not subject to, or obligated under, any
provision of (i) its articles of incorporation or by-laws, (ii) any
agreement, arrangement or understanding, (iii) any license, franchise
or permit, or (iv) any law, regulation, order, judgment or decree;
that would be breached or violated, or in respect of which a right of
termination or acceleration or any encumbrances on any of its assets
would be created, by the execution and delivery of this Agreement and
the Related Agreements by VVI or the performance of this Agreement or
the Related Agreements.
(c) The representations and warranties of the parties made
in this Section 12 shall survive the execution of this Agreement for
an eighteen-month period.
M. Other Obligations of the Parties. The parties make the following
affirmative covenants to each other:
(a) MW makes the following affirmative covenants to VVI:
(i) MW will comply in all material respects with all
applicable laws and regulations which affect the performance in any
material respect of MW's obligations under this Agreement and the
Related Agreements.
(ii) MW shall not grant any rights to any third party that
conflict with the rights granted under the Second Restated Servicemark
License Agreement.
(b) VVI covenants with MW that it will comply in all material
respects with all applicable laws and regulations which affect the
performance in any material respect of VVI's obligations under this
Agreement and the Related Agreements; provided, however, that this covenant
shall not be deemed to apply to laws and regulations with respect to the
legality of the proposed use of the Card or the Revolving Charge Plan (as
defined in the Amended and Restated Credit Card Agreement) in accordance
with the Amended and Restated Credit Card Agreement;
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N. Term. Unless sooner terminated pursuant to Section 16 hereof, the term of
this Second Amended and Restated Operating Agreement shall commence on the
date hereof and end on July 31, 2008.
O. Events of Default.
(a) The occurrence of any of the following circumstances shall be
an Event of Default by MW:
(i) MW or any member of the MW Group, as applicable, shall
be in material default of its material obligations under this
Agreement or the Related Agreements, and such material default shall
not have been cured within 90 days after notice thereof is given by
VVI to MW; or
(ii) any of MW's representations and warranties contained
herein shall have been untrue in a material respect when made.
(b) It shall be an Event of Default by VVI upon the occurrence of
any of the following circumstances:
(i) VVI shall be in material default of its material
obligations under this Agreement or the Related Agreements and such
material default shall not have been cured within 90 days after
written notice thereof is given by MW to VVI; or
(ii) any of VVI's representations and warranties contained
herein shall have been untrue in a material respect when made.
P. Termination Rights. The parties shall have the following rights to
terminate this Agreement, or portions thereof, prior to the expiration of
the term set forth in Section 14:
(a) MW shall have the right to terminate those portions of this
Agreement which pertain to Television Home Shopping if VVI shall cease to
engage in Television Home Shopping, or in substantially similar Product
merchandising-focused television programming. Termination pursuant this
Section 16(a) shall be effective on the date such notice is given;
(b) VVI may terminate this Agreement upon the occurrence of any of
the following events:
(i) if during any month, MW fails to pay to VVI or to Cable
Systems (where such failure to pay Cable Systems results ` in VVI
being required to pay an additional amount to the Cable System, and MW
has not reimbursed VVI for such additional amount) a minimum of 75% of
the aggregate dollar amount required to be paid by MW during said
month pursuant to all outstanding Advertising Commitments, other than
by reason of a breach or default by such Cable System, and such
failure is not cured by MW within 60 days after written notice thereof
is given to MW by VVI, then VVI may terminate this Agreement upon
written notice to MW given at any time during the 30 day period
immediately following the expiration of such 60 day cure period; or
(ii) an Event of Default with respect to MW shall occur and
be continuing.
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Termination pursuant to any subparagraph of this Section 16(b) shall be
effective on the date such notice is given;
(c) MW may terminate this Agreement upon the occurrence of any of
the following events:
(i) a petition shall be filed by or against VVI under any
chapter of the Bankruptcy Code (and, if filed against VVI, such
petition shall not be dismissed within sixty days thereafter) , VVI
shall make an assignment for the benefit of creditors or a composition
with creditors, VVI shall admit in writing its inability to pay its
debts as they become due, or a receiver shall be appointed for VVI or
any of its material assets; or
(ii) an Event of Default with respect to VVI shall occur
and be continuing.
Termination pursuant to any subparagraph of this Section 16(c) shall be
effective 60 days after the date on which such notice is given.
Q. Effects of Termination. Neither party shall have any liability to the other
party solely by reason of the termination of this Agreement in accordance
with Section 16, other than by reason of an Event of Default. No
termination of this Agreement or the Related Agreements shall affect any
obligation of a party under such documents which arose prior to
termination, except as provided therein, or any obligations of VVI or MW
under the Amended and Restated Credit Card Agreement in respect of credit
authorizations or Credit Sales arising prior to termination, and Customer
Credits and chargebacks relating to such credit authorizations or Credit
Sales. Notwithstanding any other provision of this Agreement to the
contrary, the termination of this Agreement shall terminate each party's
obligations hereunder, with the exception of obligations under SECTIONS 7,
10, 11, 12, 17, 18, 19, 20, 21, 22 AND 23, all of which shall survive any
termination of this Agreement for the periods (if any) set forth therein
and, in the absence of a stated survival period, indefinitely.
R. VVI Indemnification Covenants.
(a) VVI shall indemnify, defend and hold harmless the MW Group, and
their respective officers, directors, employees, agents, representatives,
successors and assigns (collectively, "MW Indemnitees") from and against
all liability, demands, claims, actions or causes of action, assessments,
losses, fines, penalties, costs, damages and expenses, including, without
limitation, reasonable fees and disbursements of counsel and witness fees,
(collectively, "MW Claims") which are sustained or incurred by such Person
as a result of, or arising out of or by virtue of:
(i) the failure of VVI to comply in all material respects
with, or the material breach by VVI of any representation or warranty
of VVI or of any of the material covenants of this Agreement or the
Related Agreements to be performed by VVI (including, without
limitation, this Section 18);
(ii) product liability claims relating to any Product
purchased by a viewer or customer from VVI, other than Products sold
by MW to VVI which were defective or dangerous at the time of delivery
to VVI or, if the Product was drop-shipped directly to the customer by
MW, delivery to the customer;
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(iii) material dilution, disparagement, or loss of good
will to any of the Marks as a result of VVI's material breach of the
Second Restated Servicemark License Agreement; or
(iv) VVI's failure to comply in all material respects with
all applicable laws and regulations materially affecting the
performance by VVI of its obligations under this Agreement and the
Related Agreements; provided, however, that this paragraph (iv) shall
not apply with respect to the Amended and Restated Credit Card
Agreement to the extent it would, but for this proviso, apply to the
legality of the proposed use of the Card or the Revolving Charge Plan
(as defined in the Amended and Restated Credit Card Agreement) in
accordance with the Restated Amended and Restated Credit Card
Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, VVI
shall be liable to indemnify the MW Indemnitees only if the aggregate
amount of MW Claims exceeds $100,000, in which event MW shall be entitled
to indemnification for all MW Claims.
(c) The indemnification covenants provided in this Section 18 shall
survive the termination of this Agreement until two years after the
termination hereof, except with respect to claims made by governmental
entities or other third parties, with respect to which the indemnification
covenants shall survive until four years after the termination hereof. Any
indemnification claim which is asserted by an MW Indemnitee during the
applicable survival period shall survive until the final disposition
thereof.
S. MW Indemnification Covenants.
(a) MW shall indemnify, defend and hold harmless VVI, its
Affiliates, and their respective officers, directors, employees, agents,
representatives, successors and' assigns (collectively, "VVI Indemnitees")
from and against all liability, demands, claims, actions or causes of
action, assessments, losses, fines, penalties, costs, damages and expenses,
including, without limitation, fees and disbursements of counsel and
witness fees, (collectively, "VVI Claims") which are sustained or incurred
by any such Person as a result of, or arising out of or by virtue of:
(i) the failure of MW to comply in all material respects
with, or the material breach by MW of any representation or warranty
of MW or any of the material covenants of this Agreement or the
Related Agreements to be performed by MW (including, without
limitation, this Section 19);
(ii) any challenge to the validity of any of the Marks in the
United States or right to the limited license of any of the Marks, or
any claim that any of the Marks infringe in the United States on the
rights of a third party, as a result of any authorized use by VVI of
any of the Marks pursuant to the Restated Servicemark License
Agreement;
(iii) product liability claims relating to any Products sold
by VVI to its viewers or customers which were sold by MW to VVI and
were defective or dangerous at the time of delivery to VVI, or, if the
Product was drop-shipped directly to the customer by MW, delivery to
the customer;
(iv) MW's failure to comply in all material respects with all
applicable laws and regulations materially affecting the performance
by MW of its obligations under this Agreement or the Related
Agreements, including, without limitation, any failure of the Card or
transactions
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under the Amended and Restated Credit Card Agreement to comply with
all applicable laws, regulations, orders, rulings or agreements if
used in compliance with the Amended and Restated Credit Card
Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, MW
shall be liable to indemnify VVI only if the aggregate amount of VVI Claims
exceeds $100,000, in which event VVI shall be entitled to indemnification
for all VVI Claims.
(c) The indemnification covenants provided in this Section 19 shall
survive the termination of this Agreement until two years after the
termination hereof, except with respect to claims made by governmental
entities or other third parties, with respect to which the indemnification
covenants shall survive until four years after the termination hereof. Any
indemnification claim which is asserted by a VVI Indemnitee during the
applicable survival period shall survive until the final disposition
thereof.
T. Rights Upon Indemnification. The rights of the MW Indemnitees and the VVI
Indemnitees with respect to claims asserted by any Person other than the MW
Indemnitees and the VVI Indemnitees shall be governed by the following:
(a) For the purposes of this Section 20, an "Indemnified Party"
shall be an MW Indemnitee or VVI Indemnitee (as the case may be), who is
entitled to indemnification pursuant to Section 18 or 19, and an
"Indemnifying Party" shall be either MW or VVI, to the extent MW or VVI
shall have an obligation of indemnification pursuant to Section 18 or 19.
(b) Promptly after receipt by an Indemnified Party of notice of the
commencement of any action which may result in a claim for indemnification
pursuant to either Section 18 or 19, the Indemnified Party will notify the
Indemnifying Party thereof within a reasonable time thereafter. The failure
so to notify any Indemnifying Party will not relieve it of any liability
for indemnification hereunder as to the particular item for which
indemnification may then be sought except to the extent that the failure to
give notice shall have been prejudicial to the Indemnifying Party.
(c) An Indemnified Party shall have the right (i) to employ
separate counsel in any action as to which indemnification shall be sought
under Section 18 or 19 of this Agreement and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless (x) the Indemnifying Party has agreed in
writing to pay such fees and expenses, (y) the Indemnifying Party has
failed to assume the defense thereof and employ counsel within a reasonable
period of time after being given the notice required above, and as a
consequence thereof, the Indemnified party has employed separate counsel to
protect its rights, or (z) the named parties to any such action (including
any impleaded parties) include both such Indemnified Party and the
Indemnifying Party and such Indemnified Party shall have reasonably
concluded that representation of the Indemnified Party and the Indemnifying
Party by the same counsel would be inappropriate under applicable standards
of professional conduct (whether or not such representation by the same
counsel has been proposed) due to actual or reasonably anticipated
conflicts of interest between the Indemnified Party and the Indemnifying
Party in the conduct of the defense of such action (in which case the
Indemnifying Party shall not have the right to direct the defense on behalf
of the Indemnified Party). It is understood, however, that the Indemnifying
Party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of only one separate firm of attorneys
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(in addition to any local counsel) at any time for all such Indemnified
Parties having actual or reasonably anticipated conflicts of interest with
the Indemnifying Party.
(d) In any case in which the Indemnifying Party has assumed the
defense of the claim or has agreed to pay the fees and expenses of counsel
for the Indemnified Party, the Indemnifying Party shall not be liable for
any settlement of such action effected by the Indemnified Party without the
written consent of the Indemnifying Party, which consent shall not
unreasonably be withheld. No failure of an Indemnifying Party to assume the
defense of a claim or agree to pay the fees and expenses of counsel for the
Indemnified Party shall relieve the Indemnifying Party of any obligation of
indemnification which such party shall have under Section 18 or 19 hereof.
(e) The indemnification provided in Sections 18 and 19 is for the
benefit of the MW Indemnitees and the VVI Indemnitees only, and shall not
be deemed to create any right (to indemnification or otherwise) for any
other Person.
U. Non-Solicitation. For a period of two years following termination of this
Agreement for any reason, no member of the MW Group shall (without the
prior written consent of VVI) employ or solicit the employment of any
officers, executive employees, or on-air hosts of VVI, or any of the other
persons named in Exhibit A to that certain confidentiality letter, dated
December 4, 1994 (or persons performing similar functions).
V. Prevailing Party. If the parties hereto become parties to any litigation,
commenced by or against one another involving the enforcement of any rights
or remedies under this Agreement or any of the Related Agreements, or
arising on account of a default of the other party in its performance of
such party's obligations under any of the foregoing, the prevailing party
in such litigation shall be entitled to reimbursement of all of its
reasonable legal fees, costs, and expenses incurred in connection with such
litigation, (including allocated costs of internal counsel) and interest
accrued thereof from the date of judgment, at the maximum rate permitted by
law.
W. Relationship. This Agreement and the Related Agreements are not and shall
not be construed as an agreement of lease, partnership, agency or
employment of (x) VVI or of any of VVI's employees or agents by MW, or (y)
MW or any of MW's employees or agents by VVI. The parties acknowledge and
agree that the parties are independent contractors whose operations are
independent, separate and apart from that of the other. Neither shall order
any merchandise, incur any indebtedness, enter into any undertaking or make
any commitment in the other party's name or purporting to be on the other
party's behalf, except with the other party's prior written approval.
Neither party will represent, suggest or indicate in any way to any of its
customers, suppliers, printers, service companies or other business
entities that it is financially affiliated with, backed, supported,
maintained or assisted by the other in any manner, except as may be
required to implement the terms of this Agreement and with the other
party's prior written approval.
X. Publicity. VVI and MW will jointly be responsible for initiating news
releases and related announcements concerning this Agreement and the
Related Agreements. Disclosures required by applicable law or regulation
for either VVI or MW will be exempt from prior approval but will be
provided. in advance to the other party.
Y. Additional Actions and Documents. Each of the parties hereto agrees to take
or cause to be taken such further actions, to execute, acknowledge, deliver
and file or cause to be executed, acknowledged,
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delivered and filed such further documents and instruments, and to use all
reasonable efforts to obtain such consents, as may be necessary or as may
be reasonably requested in order to fully effectuate the purposes, terms
and conditions of this Agreement and the Related Agreements.
Z. Notices. All notices, demands, requests or other communications which may
be or are required to be given pursuant to this Agreement or any of the
Related Agreements shall be in writing and shall be personally delivered,
mailed by first-class, registered or certified mail, postage prepaid, or
sent by electronic or facsimile transmission, addressed as follows:
If to VVI:
ValueVision International, Inc.
6740 Shady Oak Road
Minneapolis, Minnesota 55344
Attention: Chief Executive Officer
with a copy to:
Maslon, Edelman, Borman & Brand, a
limited liability partnership
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4140
Attention: William M. Mower
If to MW:
Montgomery Ward & Co., Incorporated
619 West Chicago Avenue
Chicago, Illinois 60671
Attention: General Counsel
with a copy to:
Altheimer & Gray
Suite 4000
10 South Wacker Drive
Chicago, Illinois 60606
Attention: Myron Lieberman
Each party may designate by notice in writing a new address to be so given,
served or sent. Each notice, demand, request or communication which shall be
delivered, mailed or transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes at such time as it
is delivered to the addressee or at such time as delivery is refused by the
addressee upon presentation.
AA. Severability. Whenever possible, each provision of this Agreement and the
Related Agreements shall be interpreted in such a manner as to be effective
and valid under applicable law, but if one or more of the provisions of any
of such documents are subsequently declared invalid or unenforceable, such
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<PAGE> 17
invalidity or unenforceability shall not in any way affect the validity or
enforceability of the remaining provisions of such documents, which shall
be applied and construed so as to reflect substantially the intent of the
parties and achieve the same economic effect as originally intended by the
terms hereof, unless those provisions which are invalidated or
unenforceable are material to the performance of either party's affirmative
or negative obligations under the relevant agreement, in which case the
entire such agreement shall be terminable, at the option of the party whose
rights thereunder have been adversely affected thereby, provided that such
party must exercise its option to terminate such agreement within ninety
(90) days following the date on which such provision is declared or
determined to be invalid, voidable or unenforceable and the other party
must be given sixty (60) days in which to agree to a valid modification of
such agreement which would substantially eliminate such adverse effects.
BB. Force Majeure. No party shall be liable for any failure of or delay in the
performance of this Agreement or the Related Agreements for the period that
such failure or delay is due to acts of God, public enemy, war, strikes or
labor disputes, or any other cause beyond the parties' reasonable control
("Force Majeure"), it being understood that lack of financial resources is
not to be deemed a cause beyond a party's control. If the delay or failure
caused by such force majeure condition shall continue for more than ninety
(90) days, the party which did not suffer the event shall have the right,
in its sole discretion, to terminate this Agreement, by giving notice to
the other party of its election to terminate. Each party shall notify the
other party promptly of the occurrence of any such cause and carry out this
Agreement or any of the Related Agreements as promptly as practicable after
such cause is terminated; provided, however, that the existence of any
such cause shall not extend the term of any agreement.
CC. Waivers. Neither the waiver by any party hereto of a breach of or a default
under any of the provisions of this Agreement or any of the Related
Agreements, nor the failure of any party hereto, on one or more occasions,
to enforce any of the provisions of any of said documents or to exercise
any right, remedy or privilege hereunder shall thereafter be construed as a
waiver, of any such provisions, rights, remedies or privileges hereunder.
Any of the terms, covenants, representations, warranties, or conditions
hereof and thereof may be waived only by a written instrument executed by
the party waiving compliance.
DD. Exercise of Rights. No failure or delay on the part of any party hereto in
exercising any right, power or privilege under this Agreement or any of the
Related Agreements, and no course of dealing between the parties hereto
shall operate as a waiver thereof, nor shall any single or partial exercise
of any right, power or privilege under any of such documents preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege.
EE. Binding Effect. Subject to the provisions hereof and thereof restricting
assignment, this Agreement and the Related Agreements shall be binding upon
and shall inure to the benefit of the parties and their respective
successors and permitted assigns.
FF. Entire Agreement. This Agreement and the Related Agreements contain the
entire agreement between the parties heretowith respect to the matters
contained herein and therein, and supersede all prior oral or written
agreements, commitments or understandings with respect to the matters
provided for herein.
GG. Pronouns. All pronouns and any variations thereof used in this Agreement
and the Related Agreements shall be deemed to refer to the masculine,
feminine, neuter, singular or plural, as the identity of the Person or the
context may require.
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HH. Headings. Section headings contained in this Agreement and the Related
Agreements are inserted for convenience of reference only, shall not be
deemed to be a part of such Agreement for any purpose, and shall not in any
way define or affect the meaning, construction or scope of any of the
provisions hereof.
II. Governing Law. This Agreement and the Related Agreements, the rights and
obligations of the parties hereto and thereto, and any claim or disputes
relating to any thereof, shall be governed by and construed in accordance
with the internal laws of the State of Illinois, without giving effect to
the principles of conflicts of laws thereof.
JJ. Execution in Counterparts. To facilitate execution, this Agreement and the
Related Agreements may each be executed in as many counterparts as may be
required, and it shall not be necessary that the signatures of, or on
behalf of, each party, or that the signatures of all Persons required to
bind any party, appear on each counterpart; but it shall be sufficient that
the signature of, or on behalf of, each party, or that the signatures of
the Persons required to bind any party, appear on one or more of the
counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement or
any of the Related Agreements to produce or account for more than the
number of counterparts containing the respective signatures of, or on
behalf of, all of the parties hereto.
KK. Assignment. Neither party may assign its rights under this Agreement or any
of the Related Agreements without the consent of the other party, which
consent may be granted or withheld in the sole discretion of such other
party. No permitted assignment shall which may be discharged in whole or in
part by the assignee) under this Agreement or the Related Agreements. Any
unauthorized assignment and any assignment made in contravention of this
Section 37 shall be null and void.
LL. Time. Time is to be considered of the essence for the purposes of this
Agreement and the Related Agreements.
MM. Amendments and Modification. This Agreement and the Related Agreements may
only be amended or modified by a subsequent written agreement by the
parties hereto.
NN. Construction. This Agreement and the Related Agreements shall not be
construed more strictly against one party than against the other merely by
virtue of the fact that such document may have been prepared primarily by
counsel for one of the parties, it being recognized that both parties have
contributed substantially and materially to the preparation of such
documents.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.
MONTGOMERY WARD & VALUEVISION INTERNATIONAL, INC.
CO., INCORPORATED
By: /s/ John Workman By: /s/ Stuart R. Romenesko
----------------------------------- -----------------------------
Title: Executive Vice President Title: SVP Finance and CFO
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EXHIBIT 10.43
AMENDED AND RESTATED
CREDIT CARD LICENSE AGREEMENT
This Amended and Restated Credit Card License Agreement is made as of
this 1st day of November, 1997 or the Effective Date of the Stipulation
(defined below), if later, by and between Montgomery Ward & Co., Incorporated,
an Illinois corporation ("Montgomery Ward"), and ValueVision International,
Inc., a Minnesota corporation, and ValueVision Direct Marketing, Inc., a
Minnesota corporation and affiliates (together "ValueVision").
R E C I T A L S
A. Montgomery Ward and ValueVision are parties to that certain Second
Amended and Restated Operating Agreement dated as of November 1,
1997, pursuant to which ValueVision is authorized to offer the
Montgomery Ward's Private Label Credit Card (the "Card") as a means
for ValueVision's customers to purchase products from ValueVision in
its television home shopping business. For a limited period of time
the Second Amended and Restated Operating Agreement also authorizes
ValueVision to offer the Montgomery Ward Private Label Credit Card for
Catalog Activities as defined therein.
B. Prior to April 1, 1996 the Card was subject to that certain Account
Purchase Agreement dated as of June 24, 1988 by and between Montgomery
Ward and Montgomery Ward Credit Corporation.
C. As of April 1, 1996 Montgomery Ward and Monogram Credit Card Bank of
Georgia ("Monogram") entered into that certain Bank Credit Card
Program Agreement (the "Monogram Agreement") replacing the earlier
Account Purchase Agreement with respect to the administration of
charges and settlements and other matters relating to the Montgomery
Ward Private Label Credit Card.
D. In a letter agreement dated September 27, 1996, ValueVision and
Montgomery Ward acknowledged that the 1988 Account Purchase Agreement
had been replaced with the Monogram Agreement and the parties agreed
to make such changes to the March 13, 1995 Credit Card License &
Receivables Sale Agreement as were required or reasonably desired to
reflect and comply with and can be consistent with the Monogram
Agreement.
E. Under the terms of the Monogram Agreement, ValueVision is identified
as an "authorized licensee", entitled to use the Card.
F. On July 7, 1997 Montgomery Ward filed for Chapter 11 bankruptcy in the
Bankruptcy Court for the District of Delaware.
G. In connection with those bankruptcy proceedings, Montgomery Ward and
ValueVision have entered into that certain Stipulation Between
Montgomery Ward & Co., Incorporated and ValueVision International,
Inc. Regarding the Assumption and Modification of Executory Contracts
and Related Agreements, the Second Amended and Restated Operating
Agreement and the Second Amended and Restated Servicemark License
Agreement significantly modifying their business relationship as set
forth in earlier agreements.
H. At this time, the parties desire to amend and restate the March 13,
1995 Credit Card License & Receivables Sale Agreement to reflect
appropriate modifications necessitated by the Monogram
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Agreement and also to reflect changes in their business relationship
as evidenced by the Second Amended and Restated Operating Agreement
and Second Amended and Restated Servicemark License Agreement and the
Stipulation.
Accordingly, the parties here agree as follows:
A G R E E M E N T
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, the parties hereby agree as follows:
I. GENERAL
1.1 Additional Definitions
A. "CARD" shall have the meaning set forth in Recital A
above.
B. "CATALOG ACTIVITIES" shall have the meaning set forth
in the Operating Agreement.
C. "CREDIT AUTHORIZATION" shall mean approval of a
Credit Sale by Montgomery Ward or its designee (which
shall initially be Monogram) following the receipt of
electronically transmitted information from
ValueVision regarding such credit sale in accordance
with this Agreement.
D. "CREDIT SALE" shall mean any sale made by ValueVision
in the ordinary course of its Television Home
Shopping (as defined in the Operating Agreement) or
the Catalog Activities (as defined in the Operating
Agreement) for the Wind Down Period to one or more of
its retail customers in which the Card is offered and
accepted as the means for the payment of the
merchandise or services being sold.
E. "CUSTOMER CREDIT" shall mean a monetary credit or
purchase price refund granted by ValueVision to a
retail customer for all or a portion of the amount
charged on the Card in a Credit Sale, which has the
effect of reducing the outstanding balance on the
individual's customer account payable under the
Revolving Charge Plan.
F. "CUSTOMER CREDIT AMOUNTS" shall be as of each
Settlement Date the aggregate dollar amount of
Customer Credits granted by ValueVision to its
customers since the most recent prior Settlement
Date, minus the product of such Customer Credits in
question and the Specified Percentage that was
originally used to determine the Receivables Purchase
Price for the Credit Sales as to which the Customer
Credits in question are granted.
G. "LICENSEE" shall mean any person who now or hereafter
pursuant to any existing or future agreement with
Montgomery Ward or an affiliate of Montgomery Ward,
is permitted from time to time by Montgomery Ward or
such affiliate to make credit sales of merchandise or
services to account debtors pursuant to the Card.
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H. "MONOGRAM" shall have the meaning set forth in
Recital C above.
I. "MONOGRAM AGREEMENT" shall have the meaning set forth
in Recital C above.
J. "MONTGOMERY WARD" shall have the meaning set forth in
the first paragraph of this Agreement.
K. "OPERATING AGREEMENT" shall mean that certain Second
Amended and Restated Operating Agreement, of even
date herewith, by and between Montgomery Ward and
ValueVision pursuant to which ValueVision will offer
products in connection with the Permitted Business.
L. "OPERATING PROCEDURES" shall mean for a Credit Sale
originated by a ValueVision customer (i) electronic
or written recordation by ValueVision of the name,
address, credit card number of the Card used by such
Customer and the dollar amount of the transaction
being charged; (ii) transmission of all or such
portion of the above information as is requested by
Montgomery Ward or its designee in order to request
Credit Authorization; (iii) receipt of Credit
Authorization; (iv) shipment of the merchandise; and
(v) the policies, procedures, and requirements set
forth on Exhibit A attached hereto, together with
such additional or modified procedures as are
provided for in Section 2.2 hereof.
M. "PERMITTED BUSINESS" shall mean ValueVision's
business of selling goods and services to retail
customers by means of Television Home Shopping for
the term of this Agreement and in Catalog Activities
for the Wind Down Period in accordance with the
Operating Agreement and utilizing the Montgomery Ward
servicemark as provided for in the Servicemark
License Agreement.
N. "RECEIVABLES PURCHASE PRICE" shall be the gross
amount of Credit Sales purchased by Montgomery Ward
or its designee since the most recent prior
Settlement Date minus an operating expense charge
equal to the Specified Percentage times such gross
Credit Sales provided, however, that the Receivables
Purchase Price shall be reduced by the dollar amount
of the Customer Credit Amounts applicable to that
period.
O. "REVOLVING CHARGE PLAN" shall mean the payment terms,
finance charges and other aspects of the agreement
between users of the Card and Montgomery Ward or its
designee under the terms of the Monogram Agreement or
any applicable agreement in effect from time to time.
P. "SERVICEMARK LICENSE AGREEMENT" shall mean that
certain Second Amended and Restated Servicemark
License Agreement, of even date herewith, by and
between ValueVision and Montgomery Ward pursuant to
which Montgomery Ward has licensed the use of certain
Montgomery Ward servicemarks to ValueVision for use
in the conduct of television home shopping (and
Catalog Activities during the Wind Down Period.)
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Q. "SETTLEMENT DATE" shall mean each day except Saturday
or Sunday or a day on which banks are required or
permitted to be closed in the State of New York.
R. "SPECIFIED PERCENTAGE" shall mean one and one-half
percent (1 1/2%) from and after the date of this
Agreement.
S. "SUSPENSION PERIOD" shall have the meaning set forth
in Section 3.1.
T. "TELEVISION HOME SHOPPING" shall have the meaning
ascribed to it in the Operating Agreement.
U. "VALUEVISION" shall mean ValueVision International,
Inc., a Minnesota corporation and ValueVision Direct
Marketing, Inc., a Minnesota corporation and its
affiliates.
V. "WIND DOWN PERIOD" shall mean the period during which
ValueVision is authorized to use the Montgomery Ward
servicemark for the Catalog Business pursuant to the
Servicemark License Agreement and the Operating
Agreement.
1.2 Use of Card.
A. License Grant. Montgomery Ward hereby grants to
ValueVision, as Licensee, a nonexclusive,
nonassignable right to use the Card in the ordinary
course of its Television Home Shopping business from
the date hereof until this Agreement is terminated in
accordance with the terms hereof and for Catalog
Activities for the Wind Down Period.
B. Advances on Behalf of Customer. ValueVision shall
furnish to Montgomery Ward evidence of a customer
purchase, and Montgomery Ward shall pay ValueVision
on behalf of the Cardholder with respect to those
customer purchases that are authorized and legal
Credit Sales and that comply with the requirements,
warranties and representations of this Agreement.
Each Credit Sale shall be evidenced by the recording
by Monogram of the sale on its records maintained for
the customer to whom such Credit Sale was made or who
authorized said Credit Sale, as set forth in the
Operating Procedures. All Credit Sales and Customer
Credits of ValueVision shall be subject to audit by
Montgomery Ward and/or Monogram. ValueVision agrees
that in the case of any inaccuracies, chargebacks or
breaches, Montgomery Ward may deduct such amount from
any payment to ValueVision, with notice to
ValueVision, that will correct any deficiencies or
overages in the erroneously reported Credit Sales and
Customer Credits or to reflect the amount of
chargebacks or Credit Sales submitted in breach of
the Agreement. In the event of any inaccuracy,
deficiency or overage with respect to Customer Sales
or Customer Credits, ValueVision shall send notice,
as specified in the Operating Procedures, of such
inaccuracy, deficiency or overage, in order that
Monogram may make appropriate adjustments in the
amount advanced on behalf of the Customer by Monogram
to Montgomery Ward. All Credit Sales for which
Monogram advances funds to Montgomery Ward on behalf
of the customer shall be without recourse to
ValueVision, except as noted in this Agreement and in
the Operating Procedures providing for chargebacks.
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C. No Authority to Change Revolving Charge Plan. All
sales of merchandise or services by ValueVision
utilizing the Card shall be made under the terms of
the Revolving Charge Plan and ValueVision shall not
be authorized to modify, change, amend or alter the
applicable terms of the Revolving Charge Plan with
respect to any customer for any Credit Sale.
II. SALES AND CREDITS
2.1 Operating Procedures for Honoring the Card. ValueVision
agrees to comply with the Operating Procedures as defined
herein and as modified in accordance with Section 2.2
hereinbelow.
2.2 Modification to Operating Procedure. Montgomery Ward shall
have the right to make modifications or additions to the
Operating Procedures that are reasonably designed to verify
the information provided to ValueVision by customers
purporting to use a Card or to make the Operating Procedures
comply with any aspect of the Monogram Agreement following
notification to ValueVision of such modifications or
additions, provided that Montgomery Ward shall not make
modifications or additions that will have a material adverse
effect on ValueVision. Montgomery Ward shall provide thirty
(30) days written notice of any modifications or additions to
the Operating Procedures to ValueVision prior to the date that
they become effective, unless earlier effectiveness is
required by law or to avoid a breach of the Monogram
Agreement. Notwithstanding anything contained in this
Agreement to the contrary, Montgomery Ward shall not be
required to take any actions under this Agreement or otherwise
that are prohibited by, or which may constitute a breach of
the Monogram Agreement.
2.3 Credit Sales. ValueVision agrees to comply with the following
in connection with Credit Sales:
A. ValueVision shall honor all Cards when properly
offered in compliance with the Operating Procedures
as payment for goods or services in connection with
the Permitted Business, subject to Credit
Authorization, and ValueVision shall not discriminate
against use of the Card, as opposed to any other
credit card, by its customers or impose any finance
charge on any Credit Sale made by use of the Card or
charge a higher price for such Credit Sale over a
listed price, but ValueVision may permit a discount
for payments for goods and services by means other
than a credit card.
B. ValueVision shall request Credit Authorization for
each Credit Sale and each new applicant for a Card
through an electronic authorization system acceptable
to Montgomery Ward or its designee and ValueVision,
provided ValueVision approves the system currently
used by Montgomery Ward or its designee and any
modifications to such system that will not materially
adversely affect ValueVision's operations.
2.4 Title. Monogram shall have title to and the sole right to
receive payments on all Credit Sales from the Customer unless
and until assigned by Monogram. Except for the assignment
mentioned above, ValueVision shall not receive any payments
from Customers for Credit Sales made with the Card other than
from Montgomery Ward or its designee.
2.5 Customer Credits. If merchandise is accepted for return by
ValueVision, or any price adjustment is allowed by ValueVision
for merchandise originally purchased by use of the Card,
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ValueVision shall make the refund or adjustment to the
customer by promptly transmitting notice of the Customer
Credit to Montgomery Ward or its designee.
III. SALE OF CUSTOMER RECEIVABLES
3.1 Settlements. The amount payable in respect of each Settlement
Date will be an amount equal to the Receivables Purchase Price
for all receivables purchased since the prior Settlement Date
as to which the required information has been transmitted to
Montgomery Ward or its designee prior to 11:00 a.m. Eastern
Time on the Settlement Date in question. (Information
received after 11:00 a.m. Eastern Time on a Settlement Date
will be deemed to be received at the beginning of the next
Settlement Date). Payment will be by wire transfer of
immediately available same day federal funds into a bank
account in the United States designated by ValueVision.
Montgomery Ward shall pay, or cause to be paid, to ValueVision
the applicable Receivables Purchase Price in respect of each
Settlement Date in question on or prior to the end of the next
Settlement Date; provided, however, that if Montgomery Ward
does not receive funds in payment of the Credit Sales
reflected in such applicable Receivables Purchase Price from
Monogram at least two hours prior to the deadline on such next
Settlement Date for transmitting funds over the federal wire
from the bank at which Montgomery Ward received the funds from
Monogram, it shall wire such funds to ValueVision on the next
Settlement Date. ValueVision agrees that in the case of any
chargebacks Montgomery Ward or its designee may deduct such
amount from payments to ValueVision. Montgomery Ward or its
designee may also (i) in lieu of deducting any such amounts,
(ii) in lieu of deducting Customer Credit Amounts in
determining the Receivables Purchase Price, and (iii) if the
Customer Credit Amounts exceed the Receivables Purchase Price
from which they are being deducted, require ValueVision to
make payment of such other amounts or such Customer Credit
Amounts directly to Montgomery Ward or its designee within
seven (7) days after request. Montgomery Ward shall deliver
reports and accounting to ValueVision when and as Montgomery
Ward receives the same from Monogram under the Account
Purchase Agreement for Montgomery Ward's own receivable sales.
Notwithstanding anything contained in this Agreement to the
contrary, if Montgomery Ward has ceased to receive from
Monogram full payments for the purchase of receivables for
Credit Sales, and Montgomery Ward reasonably expects such
cessation of payments to continue, Montgomery Ward may notify
ValueVision that it is suspending its obligation to issue
Credit Authorizations and purchase receivables from
ValueVision pursuant to this Agreement. As soon as possible
after receipt of such notice, and in any event within 24 hours
after receipt of such notice (the "Effective Time"),
ValueVision will cease accepting the Card. Montgomery Ward
shall have no obligation to issue Credit Authorizations or
purchase customer receivables in respect of Credit Sales from
the Effective Time of such notice until such time, if any,
that Montgomery Ward notifies ValueVision that such suspension
period has ended (the period of such suspension referred to as
the "Suspension Period"), provided, however, that such
suspension shall not affect Montgomery Ward's obligation to
purchase customer receivables in respect of Credit
Authorizations or Credit Sales resulting from orders received
by ValueVision prior to the Effective Time. With Monogram's
consent, ValueVision and Monogram shall have the right to
conduct settlements directly.
3.2 Audits. Montgomery Ward or its designee shall have the right
to audit all Credit Sales and Customer Credits in any manner
during regular business hours that does not unduly interfere
with the operations of ValueVision.
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3.3 No Recourse. All customer receivables purchased by Montgomery
Ward or its designee shall be purchased without recourse
except with respect to the right of Montgomery Ward or its
designee to chargeback certain purchases in accordance with
Section 3.4. Montgomery Ward or its designee shall have title
to and the sole right to receive payments on all Credit Sales
and customer receivables purchased and assigned to it unless
and until reassigned to ValueVision, in which latter event
ValueVision may enforce collection for the balance thereof.
Except for the reassignment mentioned above, ValueVision shall
not receive any payments from Card holders for Credit Sales or
customer receivables made with the Card and shall immediately
forward any such payments received to Montgomery Ward or its
designee.
3.4 Chargebacks/Resale. Montgomery Ward, or its designee, is
hereby authorized by ValueVision to chargeback the amount of
any Credit Sale purchased pursuant to this Agreement only if
both (i) during such time as the Monogram Agreement is in
effect, such Credit Sale has been charged back against
Montgomery Ward by Monogram or its successor in interest under
the terms of the Monogram Agreement, and (ii) one of the
following has occurred: (a) ValueVision has not complied with
the Operating Procedures with respect to the Credit Sale in
question; (b) ValueVision has granted a Customer Credit that
it has failed to electronically transmit to Montgomery Ward or
its designee in accordance with this Agreement; (c)
ValueVision failed to obtain Credit Authorization for the
Credit Sale in question from Montgomery Ward or its designee;
(d) without any limitation to the right of ValueVision to
resubmit improperly transmitted information, required
information failed to be successfully transmitted to
Montgomery Ward or its designee with respect to a Credit Sale;
(e) ValueVision has violated an applicable law, ruling, order
or regulation with respect to a Credit Sale other than laws,
rulings, orders or regulations pertaining to ValueVision's use
of the Card or offering the Card to its customers in
accordance with this Agreement; (f) ValueVision is unable to
successfully resolve a request for merchandise adjustment or a
customer dispute with respect to merchandise or services sold
within the period of time allowed to Montgomery Ward by
Monogram for Montgomery Ward's customers under the Monogram
Agreement (whether or not the Monogram Agreement is then in
effect); or (g) ValueVision's employees have transmitted data
to Montgomery Ward or its designee fraudulently for the
purpose of misleading Montgomery Ward or its designee about
the existence of a Credit Sale or a Customer Credit or the
amount thereof. In the event that Montgomery Ward's designee
charges back against ValueVision under the terms of the
Monogram Agreement under circumstances where Montgomery Ward
is not entitled to charge back against ValueVision pursuant to
Section 3.4(ii), Montgomery Ward shall promptly pay such
amount to ValueVision on the next Settlement Date following
written demand for payment and submission to Montgomery Ward
of evidence regarding the unauthorized charge back.
Immediately upon charge back title to the receivable that is
the subject of the charge back shall become the sole property
of ValueVision and ValueVision shall have the right to collect
the same.
3.5 Representations and Warranties of ValueVision. At the time of
each Credit Sale, ValueVision hereby represents, warrants, and
agrees with respect to such Credit Sale that receives a Credit
Authorization:
A. Such Credit Sale and related customer receivable sold
and assigned to Montgomery Ward or its designee under
this Agreement was at the time of the sale thereof to
Montgomery Ward or its designee a valid and legally
enforceable obligation of ValueVision's customer in
the amount indicated by ValueVision, and that such
sale is
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a bona fide sale by ValueVision in connection with
the Permitted Business, subject to returns,
allowances and other adjustments in the ordinary
course of the Permitted Business.
B. Such Credit Sale and related customer receivable is
free and clear of all liens and encumbrances
whatsoever and is not subject to any legitimate
defense.
C. ValueVision generated such Credit Sale in accordance
with all applicable laws, rulings, orders and
regulations, except that ValueVision makes no
representations or warranties with respect to the
legality of the proposed use of the Card or Revolving
Charge Plan in accordance with this Agreement.
D. All obligations to be performed by ValueVision or by
another person under ValueVision's contractual
control underlying a Credit Sale or related customer
receivable, including the obligation to deliver the
merchandise or services purchased by ValueVision's
customer, have been fulfilled or will be fulfilled.
E. ValueVision shall comply with the Operating
Procedures.
3.6 Representations and Warranties of Montgomery Ward. Montgomery
Ward hereby represents, warrants, and agrees that Montgomery
Ward has received no notice of default under the Monogram
Agreement and that the terms of the Monogram Agreement as of
the date hereof are set forth in the Agreement and amendments
that have been furnished by Montgomery Ward to ValueVision
prior to the date hereof. Montgomery Ward agrees to notify
ValueVision promptly in writing of any change in the terms of
the Monogram Agreement that affect the procedures or rights
set forth in this Agreement.
3.7 Retrieval Requests. ValueVision shall retain a computer
record of the name, address, Card number, date and item or
items purchased for each Credit Sale. ValueVision shall also
make available to Montgomery Ward upon request delivery
information with respect to specific shipments including,
where available, signatures of customers confirming receipt.
3.8 Financing Statements. ValueVision shall execute such
financing statements, continuation statements and other
instruments relating to Credit Sales and related customer
receivables sold and assigned to Montgomery Ward, or its
designee, as Montgomery Ward, or its designee, shall request,
and shall file or record any such documents in any public
office or offices that Montgomery Ward or its designee may
specify, all at the expense of Montgomery Ward or its
designee.
3.9 Credit Card Applications. ValueVision will during the term of
this Agreement, as part of its television programming,
periodically advertise the availability of the Card to
ValueVision's customers, and in addition utilize the
Montgomery Ward servicemark in its programming independently
of the promotion of the Card. ValueVision and Montgomery Ward
shall agree to the frequency and format of such promotions and
utilization of the servicemark (provided the Card shall be
promoted at least as frequently and prominently as any other
credit cards or facilities), and may agree to any direct mail
promotions to customers of ValueVision as to the availability
of the Card (including agreement as to the allocation of the
expenses incurred in any such mailing). Moreover, Montgomery
Ward and ValueVision shall agree to an acceptable
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process in accordance with the Operating Procedures for the
distribution and acceptance of Card applications, and process
for the execution and delivery thereof by ValueVision
customers at the expense of Montgomery Ward. If an applicant
obtained by ValueVision pursuant to a customer's telephone
request (but not, except as may be agreed to by ValueVision
and Montgomery Ward, a telephone request made in response to
any mailing to a customer inviting them to apply for a Card)
is approved for issuance of a Card by Montgomery Ward, or its
designee, Montgomery Ward will pay $15.00 to ValueVision for
each such new Card issued and an additional $5.00 in the event
such Card is activated and results in the creation of a Credit
Sale. Such payments shall be made to ValueVision within
fifteen (15) days after the end of the fiscal month in which
the event which is the basis of the payment occurs.
IV. TERM AND TERMINATION
4.1 Termination. This Agreement shall take effect upon the date
first written above and shall remain in effect until the
earlier to occur of the following:
A. April 1, 2008;
B. At the election of Montgomery Ward, upon notice to
ValueVision of the termination of the Monogram
Agreement by Monogram, unless Montgomery Ward enters
into a substantially similar contract following the
termination thereof; or
C. At the election of ValueVision, upon notice by
ValueVision to Montgomery Ward given during a
Suspension Period, provided such notice can only be
given after the first Suspension Period has lasted
more than forty-five (45) consecutive days, or at any
time during any subsequent Suspension Period.
IN WITNESS WHEREOF the parties hereto have executed this Agreement
effective as of the date first set forth above.
MONTGOMERY WARD & CO., INCORPORATED,
an Illinois corporation
By /s/ John Workman
-----------------------------------
Its: Executive Vice President
----------------------------
VALUEVISION INTERNATIONAL, INC.,
a Minnesota corporation
By: /s/ Stuart R. Romenesko
----------------------------------
Its: SVP Finance and CFO
----------------------------
VALUEVISION DIRECT MARKETING, INC.,
a Minnesota corporation
By: /s/ Stuart R. Romenesko
----------------------------------
Its: SVP Finance and CFO
----------------------------
9
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EXHIBIT 10.44
SECOND AMENDED AND RESTATED SERVICEMARK LICENSE AGREEMENT
THIS SECOND AMENDED AND RESTATED SERVICEMARK LICENSE AGREEMENT is made
as of this 1st day of November, 1997, or the Effective Date of the Stipulation
(as defined below), if later, by and between Montgomery Ward & Co.,
Incorporated, an Illinois corporation ("MW"), and ValueVision International,
Inc., a Minnesota corporation ("VVI").
RECITALS
A. MW and VVI are parties to a Servicemark License Agreement,
dated as of March 13, 1995 (the "Original Servicemark Agreement"). The
Original Servicemark Agreement was entered into in connection with an Operating
Agreement of even date therewith (the "Original Operating Agreement"). The
Original Servicemark Agreement granted to VVI a license to use the "Marks" (as
defined in the Original Servicemark Agreement) in connection with VVI's
television home shopping business.
B. Pursuant to a Restructuring Agreement dated July 27, 1996 (the
"Restructuring Agreement"), a wholly owned subsidiary of VVI purchased
substantially all of the assets of Montgomery Ward Direct, L.P., a Delaware
limited partnership which is wholly owned by MW ("MWD"). MWD had been engaged
in the direct-mail catalog business.
C. Pursuant to the Restructuring Agreement, the Original
Servicemark Agreement was amended and restated, effective as of the date
thereof (the "Amended and Restated Servicemark Agreement"), and the Original
Operating Agreement referred to therein was amended and restated, effective as
of the date thereof (the "Amended and Restated Operating Agreement") to take
into account the acquisition of substantially all of the assets of MWD and
VVI's entry into the direct-mail catalog business (referred to sometimes as
"Catalog Activities").
D. MW has filed for protection under the U.S. Bankruptcy Code.
As a result of MW's filing, as contemplated by the Stipulation entered into
between MW and VVI of even date herewith (the "Stipulation"), the parties have
amended the Amended and Restated Operating Agreement effective as of the date
hereof (the "Second Amended and Restated Operating Agreement") and the parties
desire to amend and restate the Amended and Restated Servicemark Agreement as
set forth herein to reflect the future termination of VVI's right to use the
Marks in connection with Catalog Activities.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, the Amended and
Restated Servicemark Agreement is hereby amended and restated to read as
follows:
I. LICENSE GRANT
Section 1.1 The License. During the term of this Second Amended and
Restated Servicemark License Agreement, and subject to the terms and conditions
hereof, MW hereby grants to VVI the non-exclusive (except to the extent set
forth in the Second Amended and Restated Operating Agreement), nontransferable,
nonassignable and royalty-free right and license, without the right to grant
sublicenses to any party, to use the "Marks," as hereinafter defined, solely in
the conduct of the "Permitted Business," as herein
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defined, throughout the "Territory," as hereinafter defined. For the purposes
hereof, the term "Marks" shall include any future stylized versions of any of
the Marks that MW may hereafter adopt. In connection with VVI's television
home shopping business, MW authorizes any cable system, television station, or
other cable or broadcast television outlet to which VVI provides programming in
accordance with this Servicemark License Agreement to transmit such programming
to its subscribers or viewers. For purposes of this Servicemark License
Agreement:
(a) the capitalized term "Marks" shall mean, collectively
and individually as the context may require, the MW Mark, as herein
defined;
(b) the capitalized term "MW Mark" shall mean the
servicemark "Montgomery Ward", which is registered with the United
States Patent Office as No. 1,170,705 and Montgomery Ward Direct;
(c) the capitalized term "Permitted Business" shall mean
(i) "Television Home Shopping" and (ii) "Catalog Activities," as such
terms are defined in the Second Amended and Restated Operating
Agreement; provided however, that after March 31, 1998, the use of the
MW Mark in connection with Catalog Activities and Television Home
Shopping will be permitted only as provided in the Stipulation, and
(iii) promotion of and use of the Card as defined in the Second
Amended and Restated Operating Agreement and the Amended and Restated
Credit Card Agreement between the parties of even date herewith; and
(d) the capitalized term "Territory" shall mean (x), with
respect to Television Home Shopping, the United States of America,
its territories and possessions, and (y) with respect to Catalog
Activities, the world.
Notwithstanding anything to the contrary contained herein or in the Second
Amended and Restated Operating Agreement, MW acknowledges that because of the
satellite footprint, VVI's Television Home Shopping programming may be received
outside of the Territory in portions of Canada and Mexico, and MW further
acknowledges and agrees that VVI shall not be in violation hereof simply by
virtue of the reception of VVI's programming in such locations outside of the
Territory.
Section 1.2 Use of the MW Mark. The MW Mark shall be used in any
case in which VVI promotes to its viewers or customers the use of the Card for
the making of purchases in connection with the Permitted Business or the
availability of Card applications.
Section 1.3 Use of "Direct". Nothing in this Agreement shall limit,
and MW specifically acknowledges and agrees to, VVI's right to use the stylized
bar and word "Direct" similar to that used in the Mark "Montgomery Ward
Direct."
II. OWNERSHIP
Section 2.1 VVI Acknowledgment. VVI acknowledges (i) that MW is the
owner of the entire right, title and interest to and in the Marks, including
any inurements thereto, subject to any licenses that MW has previously granted;
and (ii) the validity of MW's title to the Marks. VVI agrees not to challenge
or cooperate in challenging MW's rights in the Marks, and, in connection
therewith, VVI further covenants and agrees that it shall not do any of the
following:
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(a) use the Marks or marks confusingly similar thereto,
in connection with the packaging, use, advertising, sale or
distribution of any merchandise or services other than as permitted by
this Agreement in connection with the conduct of the Permitted
Business;
(b) apply for or seek registration anywhere at any time
of the Marks or marks, confusingly similar thereto or assist any third
party in doing so (it being agreed that, when called upon in writing
by MW within a reasonable time after MW first learns of the
registration or use by VVI of words or marks that are confusingly
similar to the Marks, VVI shall, at the election and expense of MW,
either assign to MW in writing any rights which it might have therein
or release and cancel any rights of record which it might have
therein); or
(c) use the Marks or any components or any words or marks
confusingly similar thereto, in any corporate, partnership or trade
name.
Nothing in this Section 2.1 is intended to give MW greater rights to the Marks
than are otherwise available to it under the Lanham Act, or any other statutory
or common law relating to marks or trade names.
Section 2.2 MW Acknowledgment. MW shall not use or claim any rights
in any mark used by VVI in connection with the Permitted Business, other than
the Marks, other marks to which MW has rights, and marks that are confusingly
similar to the foregoing.
III. LABELING
Section 3.1 Legends. VVI shall, to the extent reasonably specified
by MW, accompany the use of the Marks with such legends as may be reasonably
required or desired for protecting the Marks or other purposes relating to this
Second Amended and Restated Servicemark License Agreement.
Section 3.2 Specifications. VVI shall comply with MW's reasonable
written specifications as to VVI's affixation, colors, and means of displaying
the Marks. MW shall contemporaneously herewith provide VVI with MW's written
specifications as to VVI's affixation, colors and means of displaying the
Marks. MW shall provide VVI with not less than forty-five (45) days advance
written notice of any changes to said specifications. VVI may continue to
follow prior specifications during said forty-five (45) days or until VVI has
consumed all materials prepared in accordance with said prior specifications,
whichever first occurs; provided, however, that MW may purchase said materials
from VVI at VVI's cost for said materials. The cost of preparation of any
items required to comply with revised MW specifications which are not
consumable shall be borne as agreed by the parties.
IV. QUALITY CONTROL AND COVENANTS OF VVI
Section 4.1 Standards. In connection with the use by VVI of the
Marks in the Permitted Business, VVI expressly recognizes the importance to MW
of MW's reputation and goodwill and of maintaining high, uniformly applied
standards of quality in the selection, provision, advertising, marketing and
distribution of merchandise. Accordingly, VVI agrees that it shall:
(a) offer customer service (via a toll-free telephone
number for Television Home Shopping) for use by customers during VVI's
normal business hours, which currently are 8:30 a.m. to 5:00 p.m.
Minneapolis, Minnesota time, Monday through Friday;
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(b) on average, fulfill customer orders (other than so
called "reservation orders" where the delay in shipping is disclosed
to the customer as part of the programming) within ten (10) days of
receipt, except for merchandise that is drop-shipped or that is
subject to back order or other delay on an exception basis, or for
which shipment will be delayed due to a Force Majeure condition (as
defined in the Second Amended and Restated Operating Agreement) it
being expressly understood and agreed that for purposes of this
Agreement, orders shall be deemed fulfilled when they leave the
warehouse/fulfillment facility and are loaded onto trucks for delivery
to customers;
(c) offer merchandise of a quality that is substantially
similar to that offered in the television home shopping industry and
the direct-mail marketing industry in general;
(d) provide customers the right to return merchandise
purchased from VVI for a refund, on terms generally consistent with
the return policies of VVI, as provided in the Second Amended and
Restated Operating Agreement;
(e) provide order placement and order tracing services on
a timely basis, consistent with industry practices in the television
home shopping industry and the direct-mail industry;
(f) provide courteous customer service with respect to
customer inquiries on a timely basis, consistent with industry
practices in the television home shopping industry and the direct-mail
industry;
(g) comply in all material respects with all applicable
laws and regulations which specifically relate to consumer rights or
the performance in any material respect of VVI's obligations under
this Second Amended and Restated Servicemark License Agreement, the
Second Amended and Restated Operating Agreement, or the Amended and
Restated Credit Card Amendment between the parties of even date
herewith; and
(h) not offer to take or accept orders for merchandise in
quantities that materially exceed the quantities that VVI can arrange
to promptly ship within a reasonable time after the order is taken
consistent with practices in the television home shopping industry and
the direct-mail industry unless the delay in shipping is disclosed to
the customer as part of the VVI programming, including without
limitation so called "reservation orders," or unless the delay in
shipping is caused by MW.
Section 4.2 Provision of Materials for Inspection. Upon written
request of MW, VVI will provide copies or samples of the following materials
(the "Materials") to MW for its prior review and approval, which approval shall
not be unreasonably withheld or delayed:
(a) proposed written materials for use in connection with
merchandise or services offered in programming, catalogs or other
materials that utilize any of the Marks; and
(b) all advertising and promotional material and scripts
of any kind intended for use in connection with programming or
direct-mail marketing that utilizes any of the Marks.
All Materials shall be deemed to be confidential information of VVI that is
subject to Section 10 of the Second Amended and Restated Operating Agreement.
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Section 4.3 MW Objections to the Use of the Marks. In the event that
MW reasonably objects to any of the Materials, or the merchandise or services
offered on programming or through direct-mail that utilizes the Marks
("Objectionable Products"), MW will notify VVI in writing of the specific
objectionable portions of the documents or scripts or Objectionable Products,
and VVI agrees not to (i) use the objectionable portions of the documents or
scripts to market or offer for sale merchandise or services, or (ii) offer the
Objectionable Products, in programming or through sale by direct-mail that in
any way utilizes the Marks. MW agrees that its objections will not be
arbitrary or capricious, but will be based on MW's good faith belief that the
Materials or Objectionable Products could reasonably be believed to be
detrimental to MW, its reputation, image or goodwill.
Section 4.4 Right to Inspect. VVI hereby agrees, upon reasonable
request, to permit MW, at all reasonable times, to inspect (i) the merchandise
to be marketed or sold by VVI in connection with the Marks and (ii) the methods
of VVI relating to the standards described in Section 4.1 (the "Section 4.1
Standards"), and VVI also agrees that any such inspection may occur on the
premises of VVI. Any information obtained by MW as a result of such inspection
shall be deemed to be confidential information of VVI that is subject to
Section 10 of the Second Amended and Restated Operating Agreement.
Section 4.5 Certain Assurances. During the term of this Servicemark
License Agreement, VVI covenants and agrees to provide MW, upon MW's reasonable
request, reasonable assurances of its material compliance with the Section 4.1
Standards.
Section 4.6 Governmental Actions. During the term of this Agreement,
VVI hereby agrees that it will promptly provide MW copies of all complaints or
inquiries received by VVI from any governmental agency relating to or in
connection with the merchandise or services offered and sold in programming or
through direct-mail that in any way utilizes the Marks, including those
relating to any and all advertising or the terms and conditions with respect to
the sale of such merchandise or services to the public, provided that copies of
such complaints that are received from a governmental agency in response to
isolated customer complaints need only be so provided if they are material.
VVI agrees that, except to the extent a response is required by a governmental
agency or by applicable law, regulation or policy before it is reasonably
possible to obtain MW's comments or approval, it will not respond to any such
complaint or inquiry without submitting such response to MW for (i) MW's
comments, not to be unreasonably delayed, on the form and substance of VVI's
response, and (ii) MW's approval, not to be unreasonably withheld or delayed,
of any response that specifically relates to MW's Products, MW's Services, the
Card or the Marks. In no event shall VVI enter into any settlement agreement,
consent decree, or other arrangement with any governmental agency specifically
relating to MW's merchandise, services, credit card or Marks without the
express written consent of MW, which shall not be unreasonably withheld.
V. REGISTRATION, MAINTENANCE, POLICING AND PROTECTION
Section 5.1 Infringements or Challenges to the Marks. VVI shall
promptly advise MW of any infringements or challenges to its use of the Marks
or package simulations that shall come to WI's attention. MW agrees to
prosecute any infringer of the MW Mark, or any infringer of any of the
Auxiliary Marks if such infringement of an Auxiliary Mark is reasonably likely
to adversely affect the Permitted Business. VVI will not sue any such
infringer either in its own or in the name of MW. Any recovery from a
proceeding attributable to infringement by a third party using a mark
confusingly similar to any of the Marks, whether by judgment or settlement,
shall be paid to MW, except to the extent that such damages specifically arise
from the lost profits or similar damages to the Permitted Business and the
judgment entered specifically allocates a portion of the judgment, after
recovery of all of MW's costs and expenses, to VVI's lost profits or damages to
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the Permitted Business. VVI shall not enter into a settlement regarding an
infringement involving the use of the Marks without the prior written approval
of MW. MW will obtain WI's consent, not to be unreasonably withheld or
delayed, to any such settlement if it permits a continuing use by the alleged
infringer of the Marks that could reasonably have an adverse impact on VVI's
rights under this Amended and Restated Servicemark License Agreement.
Section 5.2 Control of Litigation. To the extent that MW initiates
any lawsuit to abate such infringement, as described in Section 5.1, MW shall
control such litigation, and MW shall pay all of the costs and expenses of said
lawsuit, and shall have the right to select counsel with respect thereto. VVI
agrees to cooperate in any such litigation, at MW's expense, to the extent
reasonably required by MW.
VI. TERM AND TERMINATION
Section 6.1 Term. This Second Amended and Restated Servicemark
License Agreement shall take effect upon the date first written above, and
shall remain in effect until July 31, 2008.
Section 6.2 Termination of Use of the Marks. In the event of the
termination of this Second Amended and Restated Servicemark License Agreement,
VVI shall forthwith cease to use, and not thereafter resume the use, of the
Marks or any confusingly similar marks, alone or in combination with any
letters, other words, or designs, in any manner.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Servicemark License Agreement effective as of the date first set forth
above.
VALUEVISION INTERNATIONAL, INC.,
a Minnesota corporation
By: /s/ Stuart R. Romenesko
----------------------------------
Its: SVP Finance and CFO
------------------------------
MONTGOMERY WARD & CO., INCORPORATED,
an Illinois corporation
By /s/ John Workman
----------------------------------
Its: Executive Vice President
------------------------------
6
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Exhibit 11
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
Computation of Net Income Per Share
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ --------------------
<S> <C> <C> <C>
Net income $ 18,103,569 $ 18,089,722 $ 11,019,565
================== ================== ====================
Weighted average number of common shares
outstanding 31,745,437 31,718,390 28,627,356
Shares assumed to be issued upon the exercise of
common stock options and warrants under the
treasury stock method 142,792 623,692 681,336
------------------ ------------------ --------------------
Weighted average number of common and dilutive
shares outstanding 31,888,229 32,342,082 29,308,692
================== ================== ====================
Net income per common share $ 0.57 $ 0.57 $ 0.38
================== ================== ====================
Net income per common share - assuming dilution $ 0.57 $ 0.56 $ 0.38
================== ================== ====================
</TABLE>
<PAGE> 1
Exhibit 21
Significant Subsidiaries of the Registrant
All of the Company's subsidiaries listed below are wholly owned and
incorporated in the state of Minnesota, except for Beautiful Images, Inc.,
which is incorporated in the state of Delaware.
ValueVision Acquisition I Corp.
VVI Baytown, Inc.
VVI Seattle, Inc.
VVILPTV, Inc.
ValueVision Direct Marketing Company, Inc. (d/b/a "HomeVisions")
Beautiful Images, Inc.
Catalog Ventures, Inc.
VVI Fulfillment Center, Inc.
Packer Capital, Inc.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statements File Nos. 33-60549, 33-68646, 33-68648, 33-86616,
33-93006, 33-96950, 33-40973 and 33-40981.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VALUEVISION
INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED JANUARY
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS AS FILED ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 17,198,074
<SECURITIES> 14,667,669
<RECEIVABLES> 8,694,293<F1>
<ALLOWANCES> 0
<INVENTORY> 20,426,862
<CURRENT-ASSETS> 79,661,065
<PP&E> 21,403,724<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 134,764,304
<CURRENT-LIABILITIES> 29,590,094
<BONDS> 0
0
0
<COMMON> 267,808
<OTHER-SE> 101,999,921
<TOTAL-LIABILITY-AND-EQUITY> 134,764,304
<SALES> 217,981,886
<TOTAL-REVENUES> 217,981,886
<CGS> 122,807,613
<TOTAL-COSTS> 228,957,075
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,603,569
<INCOME-TAX> 11,500,000
<INCOME-CONTINUING> 18,103,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,103,569
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VALUEVISION INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31,
1997 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED
OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AS FILED ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 18,189,366
<SECURITIES> 27,529,673
<RECEIVABLES> 11,713,784<F1>
<ALLOWANCES> 0
<INVENTORY> 27,286,121
<CURRENT-ASSETS> 101,010,823
<PP&E> 21,851,045<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 173,327,364
<CURRENT-LIABILITIES> 39,556,077
<BONDS> 0
0
0
<COMMON> 280,358
<OTHER-SE> 132,404,436
<TOTAL-LIABILITY-AND-EQUITY> 173,327,364
<SALES> 157,887,155
<TOTAL-REVENUES> 157,887,155
<CGS> 89,542,591
<TOTAL-COSTS> 167,404,080
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,461,861
<INCOME-TAX> 11,830,340
<INCOME-CONTINUING> 18,631,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,631,521
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VALUEVISION
INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JULY 31 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS AS FILED ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 43,943,696
<SECURITIES> 14,210,200
<RECEIVABLES> 11,134,985<F1>
<ALLOWANCES> 0
<INVENTORY> 28,885,513
<CURRENT-ASSETS> 112,802,930
<PP&E> 22,279,932<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 191,590,856
<CURRENT-LIABILITIES> 51,517,435
<BONDS> 0
0
0
<COMMON> 280,208
<OTHER-SE> 138,657,910
<TOTAL-LIABILITY-AND-EQUITY> 191,590,856
<SALES> 99,561,819
<TOTAL-REVENUES> 99,561,819
<CGS> 56,943,226
<TOTAL-COSTS> 107,393,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,598,635
<INCOME-TAX> 12,301,340
<INCOME-CONTINUING> 19,297,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,297,295
<EPS-PRIMARY> .60
<EPS-DILUTED> .59
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VALUEVISION INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF APRIL 30,
1997 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED
APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AS FILED ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 11,174,298
<SECURITIES> 24,340,094
<RECEIVABLES> 9,988,624<F1>
<ALLOWANCES> 0
<INVENTORY> 29,899,610
<CURRENT-ASSETS> 87,716,710
<PP&E> 24,914,825<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 155,027,475
<CURRENT-LIABILITIES> 38,660,740
<BONDS> 0
0
0
<COMMON> 279,761
<OTHER-SE> 114,723,274
<TOTAL-LIABILITY-AND-EQUITY> 155,027,475
<SALES> 51,061,796
<TOTAL-REVENUES> 51,061,796
<CGS> 28,366,858
<TOTAL-COSTS> 54,185,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,912,237)
<INCOME-TAX> (1,151,000)
<INCOME-CONTINUING> (1,761,237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,761,237)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VALUEVISION INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF JANUARY 31,
1997 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED
JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AS FILED ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 28,618,943
<SECURITIES> 24,239,840
<RECEIVABLES> 6,446,649<F1>
<ALLOWANCES> 0
<INVENTORY> 28,109,081
<CURRENT-ASSETS> 101,028,907
<PP&E> 24,283,108<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 168,086,225
<CURRENT-LIABILITIES> 37,723,874
<BONDS> 0
0
0
<COMMON> 288,422
<OTHER-SE> 126,365,740
<TOTAL-LIABILITY-AND-EQUITY> 168,086,225
<SALES> 159,477,917
<TOTAL-REVENUES> 159,477,917
<CGS> 92,114,663
<TOTAL-COSTS> 162,117,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,689,722
<INCOME-TAX> 11,600,000
<INCOME-CONTINUING> 18,089,722
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,089,722
<EPS-PRIMARY> .57
<EPS-DILUTED> .56
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VALUEVISION INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31,
1996 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED
OCTOBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AS FILED ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 19,100,896
<SECURITIES> 46,916,960
<RECEIVABLES> 8,809,550<F1>
<ALLOWANCES> 0
<INVENTORY> 24,586,394
<CURRENT-ASSETS> 109,074,270
<PP&E> 16,915,524<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 168,500,790
<CURRENT-LIABILITIES> 38,210,743
<BONDS> 0
0
0
<COMMON> 296,189
<OTHER-SE> 129,688,113
<TOTAL-LIABILITY-AND-EQUITY> 168,500,790
<SALES> 94,246,499
<TOTAL-REVENUES> 94,246,499
<CGS> 56,469,049
<TOTAL-COSTS> 96,484,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,657,590
<INCOME-TAX> 11,450,000
<INCOME-CONTINUING> 17,207,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,207,590
<EPS-PRIMARY> .56
<EPS-DILUTED> .54
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENTS AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
