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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, 2000
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
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VALUEVISION INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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MINNESOTA 41-1673770
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6740 SHADY OAK ROAD, EDEN PRAIRIE, MN
"WWW.VVTV.COM" 55344-3433
(Address of Principal Executive Offices) (Zip Code)
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612-947-5200
(Registrant's Telephone Number, Including Area Code)
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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 herein, 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 24, 2000, 38,517,158 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 the Nasdaq Stock Market on April 24, 2000 was
approximately $549,496,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's 2000 fiscal year are incorporated
by reference in Part III of this Form 10-K.
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VALUEVISION INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JANUARY 31, 2000
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
PART II
Item 5. Market For Registrant's Common Equity and Related
Shareholder Matters......................................... 27
Item 6. Selected Financial Data..................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements........................................ 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 77
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 78
Item 11. Executive Compensation...................................... 78
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 78
Item 13. Certain Relationships and Related Transactions.............. 78
PART IV
Item 14. Exhibits, Lists and Reports on Form 8-K..................... 79
SIGNATURES.............................................................. 83
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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 various forms of electronic 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, 2000 shall be referred to as "fiscal
2000").
The Company's principal electronic media activity is its television home
shopping business which uses recognized on-air television home shopping
personalities to market brand name 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 low
power television ("LPTV") stations and to satellite dish owners. The Company
also complements its television home shopping business by the sale of
merchandise through its Internet shopping website (www.vvtv.com).
The Company's growing home shopping network and companion Internet shopping
website will be re-branded as SnapTV and SnapTV.com, respectively, as part of a
wide-ranging direct e-commerce strategy the Company is pursuing with NBC
Internet, Inc. ("NBCi"), a subsidiary of the National Broadcasting Company, Inc.
("NBC"). These moves are intended to position SnapTV and NBCi as leaders in the
evolving convergence of television and the Internet, combining the promotional
and selling power of television with the purely digital world of e-commerce.
NBCi is a new entity formed as a result of the merger of Snap! LLC, XOOM.com,
Inc. and several Internet assets of NBC. In mid-1999, the Company founded
ValueVision Interactive, Inc. as a wholly owned subsidiary of the Company, to
manage and develop the Company's Internet e-commerce initiatives using the
SnapTV.com brand, as well as to manage the Company's e-commerce investment
strategies and portfolio.
The Company, through its wholly-owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), was a direct-mail marketer of a broad range of
quality general merchandise which was sold to consumers through direct-mail
catalogs and other direct marketing solicitations. In the second half of fiscal
2000, the Company sold its remaining direct-mail catalog subsidiaries and exited
from the direct marketing catalog business.
Recent Development Since the End of Fiscal 2000
Ralph Lauren Media, LLC, Electronic Commerce Alliance. Effective February
7, 2000, the Company entered into a new electronic commerce strategic alliance
with Polo Ralph Lauren Corporation ("Polo Ralph Lauren"), NBC, NBCi and CNBC.com
LLC ("CNBC") whereby the parties created Ralph Lauren Media, LLC ("Ralph Lauren
Media"), a joint venture formed for the purpose of bringing the Polo Ralph
Lauren American lifestyle experience to consumers via multiple media platforms,
including the Internet, broadcast, cable and print. Each of the members of Ralph
Lauren Media contributes a critical business asset to Ralph Lauren Media in
exchange for which each such member has received an ownership interest in the
venture. See "Strategic Relationships -- Ralph Lauren Media, Electronic Commerce
Alliance" for a detailed discussion of this alliance.
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
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Company sells a wide variety of products and services directly to consumers.
Sales from the Company's television home shopping and companion Internet website
business totaled $250,223,000 and $148,198,000 representing 91% and 73% of net
sales, for fiscal 2000 and 1999, respectively. Products are presented by on-air
television home shopping personalities and viewers who call a toll-free
telephone number and place orders directly with the Company. Orders are taken
primarily 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
cable system operators, broadcast television stations and satellite dish owners.
See "Business Strategy -- Internet Website".
Products and Product Mix. Products sold on the Company's television home
shopping network include jewelry, giftware, collectibles, apparel, electronics,
housewares, seasonal items and other merchandise. The Company devoted a
significant amount of airtime to its higher margin jewelry merchandise during
fiscal 2000 and fiscal 1999. Jewelry accounted for 72% of the programming
airtime during fiscal 2000 and fiscal 1999. Jewelry represents the network's
largest single category of merchandise, representing 74% of television home
shopping net sales in fiscal 2000, 74% of net sales in fiscal 1999 and 60% of
net sales in fiscal 1998. The Company has developed this product group to
include proprietary lines such as New York Collection(TM), Ultimate Ice(TM),
Gems at Large(TM), Treasures D'Italia(TM), Brilliante(TM), Trader Jack(TM),
C-Band(TM), Daywear(TM), Dreams of India(TM) 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 ("FTE") subscriber homes, which receive the Company's
programming. As of January 31, 2000, the Company served a total of 33.1 million
cable homes, or 25.0 million FTE's, compared with a total of 21.8 million
subscriber homes, or 14.9 million FTE's as of January 31, 1999. Approximately
17.3 million, 10.6 million and 8.6 million subscriber homes at January 31, 2000,
1999 and 1998, respectively, received the Company's television home shopping
programming on a full-time basis. As of January 31, 2000 and 1999, the Company's
television home shopping programming was carried by 230 cable systems on a
full-time basis and 140 cable systems (106 in fiscal 1999) 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 34% 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 has an
agreement for preemptable immediate back-up satellite service and believes it
could arrange for such back-up service if satellite transmission is interrupted.
However, there can be no assurance that the Company will be able to maintain
such arrangements and the Company may incur substantial additional costs to
enter into new arrangements.
Print Media
From July 1996 to December 1999, the Company was a direct-mail marketer of
a broad range of quality general merchandise, which was sold to consumers
through direct-mail catalogs and other direct marketing solicitations. The
Company's involvement in the print media, direct marketing business was the
result of a series of acquisitions made in fiscal 1997 by VVDM. Sales from the
Company's print media, direct marketing business totaled $24,704,000 and
$55,530,000, representing 9% and 27% of net sales for fiscal 2000 and 1999,
respectively. The decrease in net sales is directly attributable to the decline
in catalog sales resulting from the downsizing and eventual divestiture of the
Company's unprofitable HomeVisions catalog operations in fiscal 1999 and the
divestiture of the Company's remaining direct-mail catalog subsidiaries, Catalog
Ventures, Inc. and Beautiful Images, Inc. in fiscal 2000.
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B. BUSINESS STRATEGY
The Company's primary business strategy is to leverage its core television
home shopping business and its Internet website, www.vvtv.com, positioning the
Company to become a principal player in the evolving convergence and development
of electronic commerce media. The Company's recent strategic alliance with NBC
and GE Equity, along with the strategic alliances of NBCi and other partners,
positions the Company for the future as transactional abilities become
increasingly important in the world of electronic commerce. As convergence of
the television and personal computer continues to evolve, access to electronic
revenue streams, like home shopping through cable and the Internet, are expected
to become extremely valuable. In addition, the Company's strategy entails
leveraging the alliance with NBC to increase the number of FTE's that receive
the Company's television home shopping programming through (i) affiliation
agreements with cable companies, (ii) block lease agreements, and (iii) direct
satellite service agreements. The Company also anticipates growth through
increased penetration to new customers from existing homes served by television
programming through the Company's investment and future expected growth in
direct-to-consumer selling on its Internet shopping website located at
(www.vvtv.com), the sale of airtime to strategic business partners in connection
with the Company's SnapTV initiative and continued expansion of repeat sales to
existing customers.
Cable Affiliation Agreements
As of January 31, 2000, the Company had entered into long-term cable
affiliation agreements with fourteen multiple system operators ("MSO's"), which
require each MSO to offer the Company's television home shopping programming
substantially on a full-time basis to their systems. The aggregate number of
homes served by these fourteen MSO's is approximately 35.9 million, of which
approximately 17.4 million cable homes (16.7 million FTE's) currently receive
the Company's programming. The stated terms of the affiliation agreements range
from three to eight years. Under certain circumstances, the MSO's may cancel the
agreements prior to their expiration. There can be no assurance that such
agreements will not be so terminated, that such termination will not materially
or adversely affect the Company's business or that the Company will be able to
successfully negotiate acceptable terms with respect to any renewal of such
contracts. In addition, these MSO's are also carrying the Company's programming
on an additional 3,205,000 cable homes (1,593,000 FTE's) 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 plans to
enter into affiliation agreements with other television operators providing for
full-or part-time carriage of the Company's television home shopping
programming.
Cable 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.
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 1997, the Federal Communications Commission ("FCC")
issued rules generally limiting cable leased access rates that cable systems can
charge nonaffiliated programmers such as the Company to the "average implicit
fee" received by the cable operator for a channel. See "Federal Regulations."
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Direct Satellite Service Agreements
In July 1999, the Company's programming was launched on the direct-to-home
("DTH") satellite services DIRECTV(TM) and DISH Network(TM). Carriage on DIRECTV
is full-time under a long-term distribution agreement. Carriage on DISH Network
is pre-emptible by the satellite lessor and subject to mutual early termination
rights. Additionally, the Company's programming is broadcast on a part-time
basis to subscribers of the medium-powered satellite service called Primestar,
which has been recently purchased by DIRECTV. As of January 31, 2000, the
Company served a total of approximately 9.8 million DTH homes or 8.6 million FTE
homes.
Sale of Broadcast Television Stations
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI-TV, which served the Washington D.C. market, to Paxson
Communications Corporation ("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. The Company acquired WVVI-TV 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 quarter of fiscal 1998.
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
was payable by the first quarter of fiscal 2000. The Company continues to serve
the Seattle market via its low-power station K58DP-TV, which transmits from
downtown Seattle. The Company acquired KBGE-TV in March 1996 for approximately
$4.6 million. The pre-tax gain recorded on the first installment with respect to
the sale of this television station was approximately $19.8 million and was
recognized in the first quarter of fiscal 1999. On April 12, 1999, the Company
received the contingent payment of $10 million relating to the sale of KBGE-TV
and as a result, the Company recognized a $10 million pre-tax gain, net of
applicable closing fees, in the first quarter of fiscal 2000. The $10 million
contingent payment finalized the agreement between the two companies.
On September 27, 1999, the Company completed the sale of its KVVV-TV
full-power television broadcast station, Channel 33, and K53 FV low-power
station, serving the Houston, Texas market, for a total of $28 million to
Visalia, California-based Pappas Telecasting Companies. The Company acquired
KVVV-TV in March 1994 for approximately $5.8 million. The pre-tax gain recorded
on the sale of the television station was approximately $23.3 million and was
recognized in the third quarter of fiscal 2000.
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 carriage of that signal, 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."
Other Methods of Program Distribution
The Company's programming is also broadcast full-time to "C"-band satellite
dish owners and homes via eleven LPTV stations that a subsidiary of the Company
owns. The LPTV stations and satellite dish transmissions were collectively
responsible for less than 10% 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,
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are generally not entitled to must carry rights and are subject to substantial
FCC limitations on their operations.
Internet Website
In April 1997, the Company launched an interactive, retail Internet site
located at www.vvtv.com, which will be rebranded as snaptv.com later this year.
The Internet site provides consumers with the opportunity to view and hear the
live 24-hour per day television home shopping program via the Company's
state-of-the-art webcasting technologies. In addition, there are pure Internet
webcasts of ValueVision programming on the website. The website also provides
viewers with an opportunity to purchase general merchandise offered on the
Company's television home shopping program as well as bid and purchase items on
the auction portion of the website. Although still a small portion of total
sales, Internet sales for the year ended January 31, 2000 increased at a far
greater percentage than television home shopping sales over the year ended
January 31, 1999. The growth trends being realized on the Internet support not
only the continuing emergence of e-commerce, but also the Company's Internet
opportunities, which are both contemporary and complement the Company's base
television home shopping business. As an industry leader in the convergence of
television and Internet, the Company continues to position itself at the
forefront of this technology. This method of program distribution is currently
being more fully developed and, consequently, the Company cannot predict the
impact it will have on future operating results.
At this time, the Company is subject to a number of general business
regulations and laws regarding taxation and online commerce. However, due to the
increasing popularity and use of the Internet and other online services, it is
possible that additional laws and regulations may be adopted with respect to the
Internet or other online services, covering such issues as user privacy,
advertising, pricing, content, copyrights and trademarks, distribution,
taxation, and characteristics and quality of products and services. A moratorium
on Internet taxation is set to expire in October 2001. In April 2000, a federal
advisory commission, formed pursuant to the Internet Tax Freedom Act, submitted
recommendations on Internet taxation issues to Congress, including a
recommendation that the moratorium be extended until 2006. However, these
recommendations were adopted by less than the two-thirds majority of the
commission's members required by the Internet Tax Freedom Act, and a number of
states have opposed them. No prediction can be made as to the outcome of the
commission's recommendations or any future congressional action. Changes in
consumer protection laws also may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or other online services, which could,
in turn, decrease the demand for the Company's products and services and
increase its cost of doing business through the Internet. Moreover, it is not
fully clear how existing laws governing issues such as property ownership, sales
and other taxes, libel and personal privacy would apply to the Internet and
online commerce. In addition, governments in foreign jurisdictions may regulate
the Internet or other online services in such areas as content, privacy, network
security, encryption or distribution. This may affect the Company's ability to
conduct business internationally through its website.
In addition, as the Company's website is available over the Internet in all
states, and as it sells to numerous consumers residing in such states, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state, a requirement that could result in
taxes and penalties for the failure to qualify. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business or the application of
existing laws and regulations to the Internet and other online services could
have an adverse effect on the growth of the Company's business in this area.
C. STRATEGIC RELATIONSHIPS
NBC and GE Equity Strategic Alliance
On March 8, 1999, the Company entered into a strategic alliance with NBC
and GE Capital Equity Investments, Inc. ("GE Equity"). Pursuant to the terms of
the transaction, GE Equity acquired 5,339,500 shares of the Company's Series A
Redeemable Convertible Preferred Stock (the "Preferred Stock"), and
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NBC was issued a warrant to acquire 1,450,000 shares of the Company's Common
Stock (the "Distribution Warrant") under a Distribution and Marketing Agreement
discussed below. The Preferred Stock was sold for aggregate consideration of
$44,265,000 (or approximately $8.29 per share) and the Company will receive an
additional approximately $12.0 million upon exercise of the Distribution
Warrant. In addition, the Company agreed to issue to GE Equity a warrant to
increase its potential aggregate equity stake (together with its affiliates,
including NBC) at the time of exercise to 39.9%. NBC also has the exclusive
right to negotiate on behalf of the Company for the distribution of its
television home shopping service.
INVESTMENT AGREEMENT
Pursuant to the Investment Agreement between the Company and GE Equity
dated March 8, 1999 (as amended, the "Investment Agreement"), the Company sold
to GE Equity the Preferred Stock for an aggregate of $44,265,000. The Preferred
Stock is convertible into an equal number of shares of the Company's Common
Stock, subject to customary anti-dilution adjustments, has a mandatory
redemption on the 10th anniversary of its issuance or upon a "change of control"
at its stated value ($8.29 per share), participates in dividends on the same
basis as the Common Stock and has a liquidation preference over the Common Stock
and any other junior securities. So long as NBC or GE Equity is entitled to
designate a nominee to the Board of Directors (the "Board") of the Company (see
discussion under "Shareholder Agreement" below), the holders of the Preferred
Stock are entitled to a separate class vote on the directors subject to
nomination by NBC and GE Equity. During such period of time, such holders will
not be entitled to vote in the election of any other directors, but will be
entitled to vote on all other matters put before shareholders of the Company.
Consummation of the sale of 3,739,500 shares of the Preferred Stock was
completed on April 15, 1999. Final consummation of the transaction regarding the
sale of the remaining 1,600,000 Preferred Stock shares was completed on June 2,
1999. The Preferred Stock was recorded at fair value on the date of issuance
less issuance costs of $2,850,000. The excess of the redemption value over the
carrying value is being accreted by periodic charges to retained earnings over
the ten-year redemption period.
The Investment Agreement also provided that the Company issue GE Equity the
Investment Warrant. On July 6, 1999, GE Equity exercised the Investment Warrant
and acquired an additional 10,674,000 shares of the Company's Common Stock for
an aggregate of $178,370,000, or $16.71 per share, representing the 45-day
average closing price of the underlying Common Stock ending on the trading day
prior to exercise. Following the exercise of the Investment Warrant, the
combined ownership of the Company by GE Equity and NBC on a fully diluted basis
was approximately 39.9%.
SHAREHOLDER AGREEMENT
Pursuant to the Investment Agreement, the Company and GE Equity entered
into a Shareholder Agreement (the "Shareholder Agreement"), which provides for
certain corporate governance and standstill matters. The Shareholder Agreement
(together with the Certificate of Designation of the Preferred Stock) provides
that GE Equity and NBC will be entitled to designate nominees for an aggregate
of 2 out of 7 board seats so long as their aggregate beneficial ownership is at
least equal to 50% of their initial beneficial ownership, and 1 out of 7 board
seats so long as their aggregate beneficial ownership is at least 10% of the
"adjusted outstanding shares of Common Stock". GE Equity and NBC have also
agreed to vote their shares of Common Stock in favor of the Company's nominees
to the Board in certain circumstances.
All committees of the Board will include a proportional number of directors
nominated by GE Equity and NBC. The Shareholder Agreement also requires the
consent of GE Equity prior to the Company entering into any substantial
agreements with certain restricted parties (broadcast networks and internet
portals in certain limited circumstances, as defined), as well as taking any of
the following actions: (i) issuance of more than 15% of the total voting shares
of the Company in any 12-month period (25% in any 24-month period), (ii) payment
of quarterly dividends in excess of 5% of the Company's market capitalization
(or repurchases and redemption of Common Stock with certain exceptions), (iii)
entry by the Company into any business not ancillary, complementary or
reasonably related to the Company's current business, (iv) acquisitions
(including investments and joint ventures) or dispositions exceeding the greater
of $35.0 million or 10% of the
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Company's total market capitalization, or (v) incurrence of debt exceeding the
greater of $40.0 million or 30% of the Company's total capitalization.
Pursuant to the Shareholder Agreement, so long as GE Equity and NBC have
the right to name at least one nominee to the Board, the Company will provide
them with certain monthly, quarterly and annual financial reports and budgets.
In addition, the Company has agreed not to take actions, which would cause the
Company to be in breach of or default under any of its material contracts (or
otherwise require a consent thereunder) as a result of acquisitions of the
Common Stock by GE Equity or NBC. The Company is also prohibited from taking any
action that would cause any ownership interest of certain FCC regulated entities
from being attributable to GE Equity, NBC or their affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the Shareholder Agreement), and with certain limited exceptions, GE
Equity and NBC shall be prohibited from: (i) any asset/business purchases from
the Company in excess of 10% of the total fair market value of the Company's
assets, (ii) increasing their beneficial ownership above 39.9% of the Company's
shares, (iii) making or in any way participating in any solicitation of proxies,
(iv) depositing any securities of the Company in a voting trust, (v) forming,
joining, or in any way becoming a member of a "13D Group" with respect to any
voting securities of the Company, (vi) arranging any financing for, or providing
any financing commitment specifically for, the purchase of any voting securities
of the Company, (vii) otherwise acting, whether alone or in concert with others,
to seek to propose to the Company any tender or exchange offer, merger, business
combination, restructuring, liquidation, recapitalization or similar transaction
involving the Company, or nominating any person as a director of the Company who
is not nominated by the then incumbent directors, or proposing any matter to be
voted upon by the shareholders of the Company. If during the Standstill Period
any inquiry has been made regarding a "takeover transaction" or "change in
control" which has not been rejected by the Board, or the Board pursues such a
transaction, or engages in negotiations or provides information to a third party
and the Board has not resolved to terminate such discussions, then GE Equity or
NBC may propose to the Company a tender offer or business combination proposal.
In addition, unless GE Equity and NBC beneficially own less than 5% or more
than 90% of the adjusted outstanding shares of Common Stock, GE Equity and NBC
shall not sell, transfer or otherwise dispose of any securities of the Company
except for transfers: (i) to certain affiliates who agree to be bound by the
provisions of the Shareholder Agreement, (ii) which have been consented to by
the Company, (iii) pursuant to a third party tender offer, provided that no
shares of Common Stock may be transferred pursuant to this clause (iii) to the
extent such shares were acquired upon exercise of the Investment Warrant on or
after the date of commencement of such third party tender offer or the public
announcement by the offeror thereof or that such offeror intends to commence
such third party tender offer, (iv) pursuant to a merger, consolidation or
reorganization to which the Company is a party, (v) in a bona fide public
distribution or bona fide underwritten public offering, (vi) pursuant to Rule
144 of the Securities Act of 1933, as amended (the "Securities Act"), or (vii)
in a private sale or pursuant to Rule 144A of the Securities Act; provided that,
in the case of any transfer pursuant to clause (v) or (vii), such transfer does
not result in, to the knowledge of the transferor after reasonable inquiry, any
other person acquiring, after giving effect to such transfer, beneficial
ownership, individually or in the aggregate with such person's affiliates, of
more than 10% of the adjusted outstanding shares of the Common Stock.
The Standstill Period will terminate on the earliest to occur of (i) the 10
year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), and (v) six months after GE Equity and NBC can
no longer designate any nominees to the Board. Following the expiration of the
Standstill Period pursuant to clause (i) or (v) above (indefinitely in the case
of clause (i) and two years in the case of clause (v)), GE Equity and NBC's
beneficial ownership position may not exceed 39.9% of the Company on
fully-diluted outstanding stock, except pursuant to issuance or exercise of any
warrants or pursuant to a 100% tender offer for the Company.
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REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, ValueVision and GE Equity entered
into a Registration Rights Agreement providing GE Equity, NBC and their
affiliates and any transferees and assigns, an aggregate of four demand
registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company entered into the Distribution and Marketing Agreement
dated March 8, 1999 (the "Distribution Agreement") which provides that NBC shall
have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television programming service. The agreement
has a 10-year term and NBC has committed to delivering an additional 10 million
FTE subscribers over the first 42 months of the term. In compensation for such
services, the Company will pay NBC an annual fee of $1.5 million (increasing no
more than 5% annually) and issue NBC the Distribution Warrant. The exercise
price of the Distribution Warrant is approximately $8.29 per share. Of the
aggregate 1,450,000 shares subject to the Distribution Warrant, 200,000 shares
vested immediately, with the remainder vesting 125,000 shares annually over the
10-year term of the Distribution Agreement. The Distribution Warrant is
exercisable for five years after vesting. The value assigned to the Distribution
Agreement and Distribution Warrant of $6,931,000 was determined pursuant to an
independent appraisal and is being amortized on a straight-line basis over the
term of the agreement. Assuming certain performance criteria above the 10
million FTE homes are met, NBC will be entitled to additional warrants to
acquire Common Stock at the then current market price. The Company has a right
to terminate the Distribution Agreement after the twenty-fourth, thirty-sixth
and forty-second month anniversary if NBC is unable to meet the performance
targets. If terminated by the Company in such circumstance, the unvested portion
of the Distribution Warrant will expire. In addition, the Company will be
entitled to a $2.5 million payment from NBC if the Company terminates the
Distribution Agreement as a result of NBC's failure to meet the 24-month
performance target.
NBC may terminate the Distribution Agreement if the Company enters into
certain "significant affiliation" agreements or a transaction resulting in a
"change of control."
LETTER AGREEMENT
The Company, GE Equity and NBC have also entered into a non-binding letter
of intent dated March 8, 1999 providing for certain cooperative business
activities which the parties contemplate pursuing, including but not limited to,
development of a private label credit card, development of electronic commerce
and other internet strategies, development of programming concepts for the
Company and cross channel promotion.
NBCi Re-branding and Electronic Commerce Alliance
Effective September 13, 1999, the Company entered into a new strategic
alliance with Snap! LLC ("Snap") and Xoom.com, Inc. ("Xoom") whereby the parties
entered into major re-branding and e-commerce agreements, spanning television
home shopping, Internet shopping and direct e-commerce initiatives. Under the
terms of the agreements, the Company's television home shopping network,
currently called ValueVision, will be re-branded as SnapTV. The re-branding will
be phased in during the latter half of fiscal 2001. The network, which will
continue to be owned and operated by the Company, will continue to feature its
present product line as well as offer new categories of products and brands. The
Company, along with Snap.com, NBC's Internet portal services company, will
roll-out a new companion Internet shopping service, SnapTV.com featuring online
purchasing opportunities that spotlight products offered on-air along with
online-only e-commerce opportunities offered by Snap TV and its merchant
partners. The new SnapTV.com online store will be owned and operated by the
Company and featured prominently within SnapTV.com's shopping area. Xoom.com, a
leading direct e-commerce services company, will become the exclusive direct
e-commerce partner for SnapTV, managing all such initiatives, including database
management, e-mail marketing and other sales endeavors. Direct online shopping
offers will include SnapTV merchandise, as well as Xoom.com products and
services. Pursuant to this new strategic alliance, the following agreements were
executed:
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TRADEMARK LICENSE AGREEMENT
Snap and the Company entered into a ten-year Trademark License Agreement
dated as of September 13, 1999 (the "Trademark Agreement"). Pursuant to the
agreement, Snap granted the Company an exclusive license to Snap's "SnapTV"
trademark (the "SnapTV Mark") for the purpose of operating a television home
shopping service and for the purpose of operating an Internet website at
"www.snaptv.com" (the "SnapTV Site"). The agreement also obligates the Company
to rebrand its television home shopping service using the SnapTV Mark. In
compensation for the license, the Company will pay to Snap a royalty of 2% of
revenues received from Internet users in connection with commerce transactions
on the SnapTV Site.
INTERACTIVE PROMOTION AGREEMENT
Snap, Xoom and the Company entered into a ten-year Interactive Promotion
Agreement dated as of September 13, 1999 (the "Interactive Promotion
Agreement"). Pursuant to the agreement: (a) the Company will pay Snap or Xoom,
as applicable, 20% of the gross revenue received from advertising on the
Company's television home shopping service where Snap or Xoom referred the
advertiser to the Company or materially assisted the Company with respect to the
sale of such advertising; (b) the Company will pay Xoom 50% of the gross revenue
received from e-mail campaigns conducted by Xoom on behalf of the Company for
the Company's products; and (c) the Company will pay Snap 20% of the gross
revenue generated from airtime on the Company's television home shopping service
which promotes any uniform resource locater ("URL") (excluding up to 15% of such
airtime to the extent used to promote URLs which do not include the
"www.snaptv.com" URL). Also under the agreement, Snap and Xoom shall have an
exclusive right to use the Company's user data for the purpose of conducting
e-mail marketing campaigns. Snap or Xoom, as applicable, will pay the Company
50% of the gross revenue generated from such campaigns. Snap will also be
granted the exclusive right to use or sell all Internet advertising on the
SnapTV Site, and Snap will pay the Company 50% of the gross revenue generated
from such use or sales. The agreement also provides that Snap and the Company
will provide certain cross-promotional activities. Specifically, commencing when
the Company's television home shopping program reaches 30 million full-time
equivalent subscribers and continuing through the fourth anniversary of the
effective date of the agreement, Snap will spend $1 million per quarter
promoting the SnapTV Mark on NBC's television network, and the Company will
spend $1 million per quarter promoting Snap, Snap's products or "www.snaptv.com"
on cable television advertising other than on the Company's television home
shopping program.
WARRANT PURCHASE AGREEMENT AND WARRANTS
Effective September 13, 1999, in connection with the transactions
contemplated under the Interactive Promotion Agreement, the Company issued a
warrant (the "ValueVision Warrant") to Xoom to acquire 404,760 shares of the
Company's Common Stock at an exercise price of $24.706 per share. In
consideration, Xoom issued a warrant (the "Xoom Warrant," and collectively with
the ValueVision Warrant, the "Warrants") to the Company to acquire 244,004
shares of Xoom's common stock, $.0001 par value, at an exercise price of $40.983
per share. Both Warrants are subject to customary anti-dilution features and
have a five-year term. Effective November 24, 1999, Xoom and Snap, along with
several Internet assets of NBC, were merged into NBCi and, as a result, the Xoom
Warrant is deemed converted to the right to purchase shares of Class A Common
Stock of NBCi.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the ValueVision Warrant to Xoom, the
Company agreed to provide Xoom certain customary piggyback registration rights
with no demand registration rights. Xoom also provided the Company with similar
customary piggyback registration rights with no demand registration rights with
respect to the Xoom Warrant.
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Polo Ralph Lauren/Ralph Lauren Media Electronic Commerce Alliance
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren, NBC, NBCi and CNBC whereby
the parties created Ralph Lauren Media, a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for their interest in Ralph
Lauren Media, NBC agreed to contribute $110 million of television and online
advertising on NBC and CNBC properties, NBCi agreed to contribute $40 million in
online distribution and promotion and the Company has contributed a cash funding
commitment of up to $50 million. Ralph Lauren Media's premier initiative will be
Polo.com, an internet web site dedicated to the American lifestyle that will
include original content, commerce and a strong community component. Polo.com is
expected to launch in the third quarter of fiscal 2001 and will initially
include an assortment of men's, women's and children's products across the Ralph
Lauren family of brands as well as unique gift items. Polo.com will also receive
anchor-shopping tenancies on NBCi's Snap portal service. In connection with the
formation of Ralph Lauren Media, the Company entered into various agreements
setting forth the manner in which certain aspects of the business of Ralph
Lauren Media are to be managed and certain of the members' rights, duties and
obligations with respect to Ralph Lauren Media, including the following:
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF RALPH LAUREN MEDIA
Each of Polo Ralph Lauren, NBC, NBCi, CNBC and the Company executed the
Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"),
pursuant to which certain terms and conditions regarding operations of Ralph
Lauren Media and certain rights and obligations of its members are set forth,
including but not limited to: (a) certain customary demand and piggyback
registration rights with respect to equity of Ralph Lauren Media held by the
members after its initial public offering, if any; (b) procedures for resolving
deadlocks among managers or members of Ralph Lauren Media; (c) rights of each of
Polo Ralph Lauren on the one hand and NBC, the Company, NBCi and CNBC, on the
other hand, to purchase or sell, as the case may be, all of their membership
interests in Ralph Lauren Media to the other in the event of certain material
deadlocks and certain changes of control of either Polo Ralph Lauren and/or its
affiliates or NBC or certain of its affiliates, at a price and on terms and
conditions set forth in the agreement; (d) rights of Polo Ralph Lauren to
purchase all of the outstanding membership interests of Ralph Lauren Media from
and after its 12th anniversary, at a price and on terms and conditions set forth
in the agreement; (e) rights of certain of the members to require Ralph Lauren
Media to consummate an initial public offering of securities; (f) restrictions
on Polo Ralph Lauren from participating in the business of Ralph Lauren Media
under certain circumstances; (g) number and composition of the management
committee of Ralph Lauren Media, and certain voting requirements; (h)
composition and duties of officers of Ralph Lauren Media; (i) requirements
regarding meetings of members and voting requirements; (j) management of capital
contributions and capital accounts; (k) provisions governing allocations of
profits and losses and distributions to members; (l) tax matters; (m)
restrictions on transfers of membership interests; (n) rights and
responsibilities of the members in connection with the dissolution, liquidation
or winding up of Ralph Lauren Media; and (o) certain other customary
miscellaneous provisions.
AGREEMENT FOR SERVICES
Ralph Lauren Media and VVI Fulfillment Center, Inc., a Minnesota
corporation and wholly owned subsidiary of the Company ("VVIFC"), entered into
an Agreement for Services under which VVIFC agreed to provide to Ralph Lauren
Media certain telemarketing services, order and record services, and merchandise
and warehouse services. The telemarketing services to be provided by VVIFC
consist of receiving and processing telephone orders and telephone inquiries
regarding merchandise, and developing and maintaining a related telemarketing
system. The order and record services to be provided by VVIFC consist of
receiving and processing orders for merchandise by telephone, mail, facsimile
and electronic mail, providing records of such orders and related
customer-service functions, and developing and maintaining a records system for
such purposes. The merchandise and warehouse services consist of receiving and
shipping merchandise, providing
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warehousing functions and merchandise management functions and developing a
system for such purposes. The term of this agreement continues until June 30,
2010, subject to renewal periods, under certain conditions, of one year each.
D. MARKETING AND MERCHANDISING
Electronic Media
The Company's television revenues are generated from sales of merchandise
and services 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 business utilizes live television 24
hours a 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 and quality of merchandise.
The Company produces targeted, themed, and general merchandise programs, in
studio, including Gems En Vogue, The Coin Collector, Weight Perfect, Italian
Romance, The Computer Store, Electronics Today, The New York Collection,
Brilliante, Ultimate Ice, It's About Time, Gems at Large and others. The Company
supplements its studio programming with occasional live on-location programs,
which in the last year included shows from the New York garment district and the
gold producing region of Arezzo, Italy. 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.
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, e-commerce and other 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 74% of the Company's
television home shopping net sales in fiscal 2000 and fiscal 1999 and 60% in
fiscal 1998. Giftware, collectibles and related merchandise, apparel,
electronics, housewares, 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,
and importers.
ValueVision has also developed several lines of private label merchandise
that are targeted to its viewer/customer preferences, including Brilliante(TM),
C-Band(TM), Day Wear(TM), Dreams of India(TM), Illusions(TM), New York
Collection(TM) and Gems at Large(TM). The Company intends to continue to promote
private label merchandise, which generally has higher than average margins. The
Company also may negotiate with
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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.
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. The
Company has an agreement for immediate back-up satellite service if satellite
transmission is interrupted. However, there can be no assurance that the Company
will be able to continue transmission of its programming in the event of
satellite transmission failure, and the Company may incur substantial additional
costs to enter into new back-up service arrangements.
Favorable Purchasing Terms
The Company obtains products for its electronic direct marketing businesses
from domestic and foreign manufacturers and is often able to make purchases on
favorable terms based on the 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 are available
for purchase via toll-free "800" telephone numbers. In fiscal 2000, the Company
entered into an agreement with West Teleservices Corporation to provide the
Company with telephone order entry operators and automated voice response
systems for the taking of television home shopping customer orders. West
Teleservices Corporation provides teleservices to the Company from two service
sites located in Baton Rouge, Louisiana and Tulsa, Oklahoma. The facilities
provide call representatives that exclusively handle the Company's order calls
on the Company's on-line order entry, fulfillment computer system. The order
response and fulfillment system currently has 140 dedicated agent stations and
428 voice response ports with the ability to expand capacity within 30 days.
Currently, approximately 30-40% of all telephone orders are completed in the
voice response system. The Company's 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. The Company maintains back-up power supply systems to ensure
that interruptions to the Company's operations due to electrical power outages
are minimized.
In fiscal 1997, the Company purchased a 262,000 square foot distribution
facility in Bowling Green, Kentucky which, until recently, was being used in
connection with the fulfillment operations of its HomeVisions catalog operations
and for the non-jewelry merchandise segment of the Company's television home
shopping business. The Company currently plans to use the Bowling Green,
Kentucky distribution facility, after certain capital improvements have been
made, to fulfill its service obligations under the service agreements with Ralph
Lauren Media.
The majority of customer purchases are paid by credit card. In November
1998, the Company initiated a "Direct Check" program for customers who wish to
pay by personal check. Under the program, customer payment information is taken
online and processed electronically. The Company does not offer C.O.D. terms to
customers. In fiscal 1995, the Company introduced an installment payment program
called ValuePay, which entitles television home shopping customers to purchase
merchandise and pay for the merchandise in two to six equal successive monthly
installments. The Company intends to continue to sell merchandise using the
ValuePay program.
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Merchandise is shipped to customers via the United States Postal Service
and United Parcel Service, which generally results in delivery to the customer
within seven to ten days after an order is received. The United States Postal
Service and United Parcel Service pick up merchandise directly at the Company's
distribution center. Orders are generally shipped to customers within 48 hours
after the order is placed. The Company also offers Express Mail delivery via the
United States Postal Service upon request. The Company also has arrangements
with certain vendors who ship merchandise directly to its customers after an
approved customer order is processed.
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.
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% to 30% over the past three
fiscal years, which is slightly higher than the reported historical industry
average of approximately 24% to 26%. Management attributes the higher return
rate in part to the fact that it generally maintains higher than average unit
price points of approximately $124 in fiscal 2000 ($93 in fiscal 1999).
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.
F. COMPETITION
The direct marketing and retail businesses are highly competitive. In its
television home shopping and Internet (e-commerce) 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 Company also competes with retailers involved with the evolving
convergence and development of electronic commerce mediums as well as other
retailers who sell and market their products through the highly competitive
Internet medium. The number of companies providing these types of services over
the Internet is large and increasing at a rapid rate. The Company expects that
additional companies, including media companies and conventional retailers that
to date have not had a substantial commercial presence on the Internet, will
offer services that directly compete with the Company. In addition, as the use
of the Internet and other online services increases, larger, well-established
and well-financed entities may continue to acquire, invest in or form joint
ventures with providers of e-commerce and direct marketing solutions, and
existing providers of e-commerce and direct marketing solutions may continue to
consolidate.
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 Shop at Home, Inc. ("SATH"), QVC
and HSN. The Company currently competes for viewership and sales with SATH, QVC
and HSN, 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
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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, e-commerce and other retailers that may seek to enter television home
shopping. The continued evolution and consolidation of retailers on the
Internet, together with strategic alliances being formed by other television
home shopping networks and Internet companies, will also result in increased
competition. The Company will also compete to lease cable television time and
enter into cable affiliation agreements. 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 new strategic
relationship with NBC and GE Equity pursuant to which NBC will provide the
Company with cable affiliation and distribution services. No assurance can be
given however, that the Company will be able to acquire cable carriage at prices
favorable to the Company.
New technological and regulatory developments also may increase competition
and the Company's costs. The FCC has 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 allow broadcasters to use this additional
capacity to provide conventional programming, including home shopping
programming, as well as ancillary or supplemental services, including
interactive data transfer. The FCC has determined to charge a fee for the
provision of ancillary or supplemental services, but not for traditional home
shopping programming. See "Federal Regulation". Every full power television
station in operation has been assigned an additional channel on which to
broadcast DTV until analog transmissions are terminated. In addition, as of
December 1999, three direct broadcast satellite ("DBS") systems were
transmitting programming to subscribers and one additional company had been
issued licenses to provide DBS service. As of June 1999, there were more than 10
million DBS subscribers. Congress has authorized DBS operators to provide access
to broadcast television stations in their local markets, and DBS equipment
prices and other "up-front costs", such as installation, continue to decline
significantly. 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 as of
June 1999, there were approximately 1.5 million SMATV residential subscribers.
Additionally, a number of telephone companies have acquired cable franchises,
and one local exchange carrier is using very high-speed digital subscriber line
technology to deliver video programming, high-speed Internet access, and
telephone service over existing copper telephone lines in Phoenix, Arizona. The
FCC has also certified 13 operators to offer open video systems ("OVS") in order
to provide video programming to customers. Currently, only three OVS systems are
operating. Finally, in 1996, the FCC completed auctions for authorizations to
provide multichannel multipoint distribution services ("MMDS"), also known as
wireless cable, using Multipoint Distribution Service ("MDS") and leased excess
capacity on Instructional Television Fixed Service ("ITFS") channels. In June
1999, there were approximately 821,000 MMDS subscribers.
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. FEDERAL REGULATION
In 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
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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.
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 FCC released its most recent revisions to these rules in February 1997.
These revisions 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. It is unclear whether or to what extent the revised rules will
affect the maximum lease rates that the Company must pay for carriage in any
particular case. The Company's limited experience has been that the rates remain
largely unaffordable, although the rules do permit cable operators to charge
less than the maximum rates. 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 FCC has left open the question of whether video content transmitted
over the Internet qualifies as video programming for purposes of the leased
access requirements. However, the FCC recently concluded that Internet service
providers (ISPs) are not eligible to obtain leased access channel capacity for
purposes other than providing video programming.
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 ("DTV") stations is as yet uncertain. In
July 1998, the FCC began a proceeding to determine such rights. No prediction
can be made as to the outcome of this proceeding, which is not anticipated until
later this year. The FCC has also been asked to reevaluate its July 1993
extension of "must carry" rights to predominantly home shopping television
stations. It has yet to act on that request, and 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 or on which it might provide 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 beginning January 2000, in order to make
such programming accessible to the hearing impaired. Home shopping programming
is not exempt from these requirements, which could substantially increase the
Company's television programming expenses. The FCC has indicated that
programmers, cable operators and TV stations can petition the FCC for an
exemption for programming if complying with the closed captioning requirements
would impose an undue burden, and Home Shopping Network has requested such an
exemption. The request has been opposed and the Company cannot predict whether
the FCC will grant such requests.
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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. The 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.
The Company and its subsidiaries currently have pending before the FCC
applications for construction permits for full power television stations in
Destin, Florida, and Des Moines, Iowa. In each case, these applications are the
subject of mutually exclusive applications, and thus to the possibility of an
FCC auction at which the licenses will be awarded to the highest bidder. Both of
these applications originally proposed to operate above channel 59. The FCC has
concluded, however, that it will not authorize new analog full power television
stations on such channels and that applications for stations on these channels
will be dismissed if they are not amended to seek a new channel below channel
60. This decision currently is on appeal, and no prediction can be made as to
the outcome of this litigation. The FCC has established a filing window during
which applicants for channels above channel 59 may jointly propose a single
replacement channel to which all applicants could agree to modify their
applications. That window expires on July 15, 2000. There can be no assurance
that any acceptable channels will be found or that the Company will prevail as
against other applicants for the stations. At this time, the Company has no
plans to apply for or purchase additional full power television stations.
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.
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. The FCC grants LPTV construction permits 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.
Three of the Company's LPTV stations are currently licensed to UHF channels
between 60 and 69. Pursuant to a 1997 law requiring it to do so, the FCC has
determined that no low power (or full power) television stations will be
permitted to operate on these channels following the transition to DTV, which is
now
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not scheduled to be completed until 2006 at the earliest. Two of the Company's
LPTV stations are currently licensed to UHF channels between 52 and 59. The FCC
also intends to reallocate these channels to other uses at the end of the DTV
transition. While the FCC has permitted LPTV stations operating on these
channels to relocate to other channels when available, there can be no assurance
that these five of the Company's stations will be able to find suitable
alternate channels.
In November 1999, Congress enacted the Community Broadcasters Protection
Act, which required the FCC to adopt regulations under which certain LPTV
licensees may apply for a Class A television license. Unlike existing LPTV
licensees, which are accorded secondary status compared to full power television
licensees, Class A licensees will be accorded protection from certain future
changes to full power facilities (both analog and digital) so long as they
continue to meet the requirements for eligibility set forth in the statute and
FCC rules. Licensees qualifying for Class A status generally will be subject to
the same regulatory obligations as full power television licensees, including
children's television, other programming, and main studio requirements. In April
2000, the FCC released rules establishing specific eligibility and application
requirements for LPTV licensees seeking Class A status. Although these rules are
subject to further administrative and judicial review, they generally limit
eligibility for Class A status to those stations that previously have provided
locally produced programming, and continue to do so. While the Company's two
LPTV stations licensed to Minneapolis may meet this requirement, the others do
not appear to do so. Only LPTV applicants that meet the FCC's eligibility
criteria will be granted Class A licenses. There can be no guarantees that the
Company will obtain Class A licenses with respect to any of its LPTV stations,
should it seek Class A status. No Class A licenses may be issued to any of the
Company's five LPTV stations on channels 52-69 unless they are first able to
relocate to lower channels. As noted above, there can be no assurance that any
of these stations will be able to find such suitable channels.
Alternative Technologies
Alternative technologies could increase the types of systems on which the
Company may seek carriage. Three DBS systems currently provide service to the
public and one additional company currently holds a license to provide DBS
services. The number of DBS subscribers has increased to more than 10 million
households, and Congress has recently enacted legislation designed to facilitate
the delivery by DBS operators of local broadcast signals and thereby to promote
DBS competition with cable systems. Approximately 821,000 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. 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 -- 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 allows
the simultaneous transmission of multiple streams of digital data on the
bandwidth presently used by a normal analog channel. It is 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.
The Company and its subsidiaries currently have pending applications for
construction permits for full power television stations in Destin, Florida and
Des Moines, Iowa. As discussed above, there is no assurance that the FCC will
approve the Company's applications. If the FCC were to grant the applications,
however, the Company would receive a license for one channel in each market, for
which the Company could choose to construct either an analog or a digital
station. If the Company were to construct an analog channel, it would be
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permitted to convert to DTV at any time before the close of the period for
transition to DTV. This transition period currently is set to end in 2006; at
that time, subject to certain possibilities for extension, broadcasters
operating analog channels will be required to return such channels to the FCC.
While broadcasters do not have to pay to obtain digital channels, the FCC
has ruled that a television station that receives compensation from a third
party for the ancillary or supplementary use of its DTV spectrum (e.g., data
transmission or paging services) must pay a fee of five percent of gross
revenues received. The FCC has rejected a proposal that fees be imposed when a
DTV broadcaster receives payment for transmitting home shopping programming,
although it left open the question whether interactive home shopping programming
might be treated differently. As noted above, neither the Telecommunications Act
nor the Supreme Court decision upholding the constitutionality of "must carry"
rules for analog stations addresses the question whether to apply the "must
carry" rules to DTV. The FCC began proceedings on this issue in 1998, and a
decision is expected this year.
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 and other
services; 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.
The Telecommunications Act requires that the FCC 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. In March 2000, the FCC began its periodic review of the progress
of conversion to digital television. Among other issues, the FCC sought comment
on possible rules that would require that DTV stations elect the channel on
which they intend to operate following the transition to DTV before the close of
the DTV transition period. Adoption of such rules could negatively affect the
Company's operations. There can be no assurance as to the outcome of this or
other future FCC proceedings addressing the DTV transition.
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. The FCC has certified thirteen OVS operators
to offer OVS service in 28 areas and three open video systems are currently
operating. Moreover, a number of local carriers are planning to provide or are
providing video programming as traditional cable systems or through MMDS, and
one local exchange carrier is using
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very high speed digital subscriber line technology to deliver video programming,
high-speed Internet access, and telephone service over existing copper telephone
lines in Phoenix, Arizona.
H. 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.
I. EMPLOYEES
At January 31, 2000, the Company, including its wholly-owned subsidiaries,
had approximately 520 employees, the majority of whom are employed in customer
service, order fulfillment and television production. Approximately 84% 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.
J. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and titles at ValueVision, 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>
Gene C. McCaffery......................... 52 Chairman of the Board, President and Chief
Executive Officer
Stuart Goldfarb........................... 45 Vice Chairman
Cary Deacon............................... 48 President of Marketing
Steve Jackel.............................. 64 President -- TV Home Shopping Operations
Richard D. Barnes......................... 43 Senior Vice President, Chief Financial
Officer
</TABLE>
Gene C. McCaffery joined the Company in March 1998, was named Chief
Executive Officer in June 1998 and was appointed President and Chairman of the
Board in February 1999. Mr. McCaffery spent 14 years at Montgomery Ward & Co.,
Incorporated, a department store retailer, most recently through 1995 as Senior
Executive Vice President of Merchandising Marketing; Strategic Planning and
Credit Services. During this period, Mr. McCaffery also served as Vice Chairman
of Signature Group. From March 1996 to March 1998, Mr. McCaffery served as Chief
Executive Officer and managing partner of Marketing Advocates, a
celebrity-driven product and service development company based in Los Angeles,
California and Chicago, Illinois. He also served as Vice-Chairman of the Board
of ValueVision from August 1995 to March 1996. Mr. McCaffery served as an
infantry officer in Vietnam and was appointed as Civilian Aide to the Secretary
of the Army by President George Bush in 1991.
Stuart Goldfarb joined the Company as Vice Chairman in August 1999. From
1995 to 1999, Mr Goldfarb was Executive Vice President of Worldwide Business
Development for NBC, where he was responsible for coordinating much of NBC's
United States and international business development activities. Mr. Goldfarb
was a principal architect of NBC's strategic alliances with ValueVision, Dow
Jones & Company, and National Geographic. From 1992 to 1995, Mr. Goldfarb was
Managing Director, Asia Pacific Region at Communications Equity Associates, a
media investment-banking firm. From 1988 to 1992, Mr. Goldfarb was President of
Heartland Ventures, a media consulting and investment firm. From 1986 until the
sale of the company in 1987, Mr. Goldfarb was Vice President, cofounder, and
principal of James Communications, Inc., a cable television operator serving
approximately 95,000 subscribers. From 1984 to 1986, Mr. Goldfarb was
responsible for all legal, regulatory, administrative, and governmental affairs
for the Cable Television Division of Capital Cities Communications, Inc., a
media company.
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Cary Deacon joined the Company as Vice President General Marketing in
September 1998 and held several key management positions before assuming
President of Marketing in March 2000. From January 1998 to June 1998, Mr. Deacon
served as the Chicago based General Partner of Marketing Advocates, a
celebrity-driven product and service development firm based in Los Angeles,
California and Chicago, Illinois. From March 1995 to January 1998, Mr. Deacon
served as Senior Vice President Marketing/Special Events/ Public Relations for
Macy's Department Stores in New York. From February 1993 to January 1995, Mr.
Deacon served as Senior Vice President Marketing for Montgomery Ward & Co.,
Incorporated. From June 1988 to June 1991, Mr. Deacon served as President of
Saffer USA, a $60 million advertising agency. Prior to Saffer USA, Mr. Deacon
was an Executive Vice President with the Hudson's Bay Company, Canada's largest
retailer. Mr. Deacon held various senior positions spanning a ten-year career
including Vice President of Merchandising, Vice President of Marketing and Vice
President of Stores.
Steve Jackel joined the Company as President -- TV Home Shopping Operations
in August 1999. From 1995 to 1999, Mr. Jackel served as President and Chief
Operating Officer of Florida-based Concord Camera Corporation Corp., a designer,
manufacturer and worldwide distributor of a broad range of cameras with global
annual sales exceeding $100 million. From 1990 to 1994, Mr. Jackel was President
of California-based McCrory Corporation and Chairman and Chief Executive Officer
of McCrory Stores, a retail mass merchandiser. His extensive experience in the
retail field also includes being founder and President of a consulting
corporation that provided services to a wide variety of leading retailers.
Richard D. Barnes joined the Company as Senior Vice President and Chief
Financial Officer in November 1999. From 1996 to November 1999, Mr. Barnes was a
key financial executive with Bell Canada in Toronto, serving as Senior Vice
President, Operations, and Financial Management. At Bell Canada, a premier
telecommunications supplier, Barnes also was a Group Vice President of Finance,
Planning, and Strategy. From 1993 to 1996, Mr. Barnes was Vice President &
Controller at The Pillsbury Company, a consumer food product manufacturer and
marketer. His previous business experience was principally in the consumer
products industry holding CFO and/or other key financial, development and
strategic management positions with Bristol-Myers Squibb, The Drackett Company
(a Bristol-Myers subsidiary), Bristol-Myers Products Canada Inc., Bristol-Myers
Pharmaceutical Group, and Procter & Gamble Inc.
K. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Certain information contained herein 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) contains various "forward-looking statements" within the meaning of
federal securities laws which represent management's expectations or beliefs
concerning future events. Such "forward-looking statements" include, but are not
limited to, improved and growing television home shopping operations, general
expansion and profitability of the Company, new initiatives and the continuing
success in developing new strategic alliances (including the GE Equity, NBC,
NBCi and Ralph Lauren Media alliances), the Company's success in developing its
e-commerce business, the launching of the Company's Internet initiative,
SnapTV.com, the timing of the SnapTV rebranding, the success of the Ralph Lauren
Media joint venture, 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 affect the Company's financial
position, results of operations and the ability to remain profitable, including:
the ability of the Company to continue improvements in its home shopping
operations, the ability to increase revenues, maintain strong gross profit
margins and increase subscriber home distribution, the ability to develop new
initiatives or enter strategic relationships, the rate at which customers accept
solicitations for club membership, the ability of the Company to develop a
successful e-commerce business, the ability of the Company to successfully
rebrand as SnapTV, the successful performance of the Company's equity
investments, 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,
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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 and the matters discussed
below under "Risk Factors". Investors are cautioned that all forward-looking
statements involve risk and uncertainty.
L. 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.
Recent Losses. The Company experienced operating losses of approximately
$.8 million, $2.6 million, $11.0 million and $8.6 million in fiscal 1996, 1997,
1998 and 1999, respectively, operating income of $4.0 million in fiscal 2000,
and net income per diluted share of $.38, $.56, $.57, $.18 and $.73 in fiscal
1996, 1997, 1998, 1999 and 2000, respectively. Net profits of approximately
$10.5 million, $17.2 million, $23.6 million, $8.3 million and $20.4 million and
net profits per diluted share of $.36, $.53, $.74, $.32 and $.51 in fiscal 1996,
1997, 1998, 1999 and 2000, respectively, were derived from gains on sale of
broadcast stations and other investments, offset by other non-operating charges
in fiscal 1999, which are not generally expected to occur in the future. There
can be no assurance that the Company will be able to achieve or maintain
profitable operations in future fiscal years.
NBC and GE Equity Strategic Alliance. No assurance can be given that the
alliance among the Company, GE Equity and NBC will be successful. As a result of
its equity ownership of the Company, GE Equity can exert substantial influence
over the election of directors and the management and affairs of the Company.
Accordingly, GE Equity may have sufficient voting power to determine the outcome
of various matters submitted to the Company's shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
the Company's assets. Such control may result in decisions that are not in the
best interests of the Company or its shareholders.
Ralph Lauren Media Joint Venture. As discussed above, the Company entered
into a strategic alliance with Polo Ralph Lauren, NBC, NBCi, and CNBC.com that
created Ralph Lauren Media, a 30-year joint venture formed for the purpose of
bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the internet, broadcast, cable and print. In
connection with forming this strategic alliance, the Company has committed to
provide up to $50 million of cash, representing a 12.5% ownership in the joint
venture, for operating activities as well as certain telemarketing services,
order and record services, and merchandise and warehouse services for Ralph
Lauren Media. No assurance can be given that this alliance will be successful or
that the Company will ever be able to realize any return on its ownership
interest in Ralph Lauren Media. In preparation for delivering such services, the
Company has committed significant resources to develop facilities to allow the
Company to fulfill its service obligations to Ralph Lauren Media. There can be
no assurance that the Company will recover its costs for developing and
constructing these facilities and, if the alliance is not successful, the
Company would have limited ability to recover such costs.
NBCi, Re-branding and Electronic Commerce Alliance. As discussed above, the
Company entered into a new strategic alliance with Snap and Xoom whereby the
parties entered into major re-branding and e-commerce agreements, spanning
television home shopping, Internet shopping and direct e-commerce initiatives.
Effective November 24, 1999, Xoom.com, Inc. and Snap! LLC along with several
Internet assets of NBC, were merged into NBCi. Under the terms of the
agreements, the Company's television home shopping network, currently called
ValueVision, will be re-branded as SnapTV. There can be no assurance that this
alliance will be successful. Additionally, if the Company's efforts to rebrand
its network as SnapTV are ineffective, the Company's current growth expectations
could be substantially reduced. The Company's online marketplace initiatives
through its current website have achieved only limited market acceptance to date
and the Company must continue to attract new merchants in order to increase its
attractiveness to consumers, however, there can be no assurance that its efforts
in this regard will be successful or profitable.
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Dependence on the Internet. Sales of consumer goods using the Internet
currently do not represent a significant portion of overall sales of consumer
goods. The Company has made material investments in anticipation of the growing
use and acceptance of the Internet as an effective medium of commerce by
merchants and shoppers. Rapid growth in the use of and interest in the Internet
and other online services is a recent development. No one can be certain that
acceptance and use of the Internet and other online services will continue to
develop or that a sufficiently broad base of merchants and shoppers will adopt
and continue to use the Internet and other online services as a medium of
commerce. The Internet may fail as a commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies, including
security technology and performance improvements. Additionally, because material
may be downloaded from websites hosted by or linked from the Company and
subsequently distributed to others, there is a potential that claims will be
made against the Company for negligence, copyright or trademark infringement or
other theories based on the nature and content of this material. Negligence and
product liability claims also potentially may be made against the Company due to
the Company's role in facilitating the purchase of certain products. The
Company's liability insurance may not cover claims of these types, or may not be
adequate to indemnify the Company against this type of liability. There is a
possibility that such liability could have a material adverse effect on the
Company's reputation or operating results.
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. The
Company also competes with retailers involved with the evolving convergence and
development of electronic commerce as well as other retailers who sell and
market their products through the highly competitive Internet medium. The number
of companies providing these types of services over the Internet is large and
increasing at a rapid rate. The Company expects that additional companies,
including media companies and conventional retailers that to date have not had a
substantial commercial presence on the Internet, will offer services that
directly compete with the Company. In addition, as the use of the Internet and
other online services increases, larger, well-established and well-financed
entities may continue to acquire, invest in or form joint ventures with
providers of e-commerce and direct marketing solutions, and existing providers
of e-commerce and direct marketing solutions may continue to consolidate.
Providers of Internet browsers and other Internet products and services who are
affiliated with providers of Web directories and information services that
compete with the Company's website may more tightly integrate these affiliated
offerings into their browsers or other products or services. Any of these trends
would increase the competition with respect to the Company. The Company also
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. Many 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
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affected in the event that a significant number of its cable television
affiliation agreements are terminated or not renewed on acceptable terms.
Strategic Investments by the Company. During the fourth quarter of fiscal
2000, the Company began to enter into transactions with companies that it views
as emerging leaders in industries and markets complementary to the Company's
business strategy. In general, each such transaction involves an equity
investment by the Company in such entity as well as a production and marketing
component pursuant to which the third party also markets and sells its products
through the Company's television programming and Internet website. Most of these
companies are emerging-stage entities with a limited history of operating
results. There can be no assurance that the Company will realize a return on any
investment in such entities. Each such investment involves a high degree of risk
by the Company.
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 has an agreement for
preemptable immediate back-up satellite service and believes it could arrange
for such back-up service if satellite transmission is interrupted. However,
there can be no assurance that the Company will be able to continue transmission
of its programming in the event of satellite transmission failure and the
Company may incur substantial additional costs to enter into new arrangements.
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.
Seasonality. The television home shopping and e-commerce businesses in
general are somewhat seasonal, with the primary selling season occurring during
the last quarter of the calendar year. These businesses are also sensitive to
general economic conditions and business conditions affecting consumer spending.
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, 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, until recently, was being used primarily in connection with the
fulfillment operations of non-jewelry merchandise for the Company's television
home shopping operations. The Company currently plans to use its Bowling Green,
Kentucky distribution facility to fulfill service obligations made in connection
with the Services Agreement recently entered into with Ralph Lauren Media.
Additionally, the Company rents transmitter site and studio locations in
connection with its LPTV stations. 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.
25
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various claims and lawsuits in
the ordinary course of business. In the opinion of management, these claims and
suits individually and in the aggregate will not have a material adverse effect
on the Company's operations or consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of the Company during the fourth
quarter ended January 31, 2000.
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<PAGE> 27
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 1999
First Quarter............................................. $ 3 31/32 $ 3
Second Quarter............................................ 4 3/8 3 3/8
Third Quarter............................................. 5 3 1/8
Fourth Quarter............................................ 15 1/4 3 11/16
FISCAL 2000
First Quarter............................................. 15 3/8 8 1/8
Second Quarter............................................ 27 3/4 13 1/2
Third Quarter............................................. 33 21
Fourth Quarter............................................ 62 32 5/8
</TABLE>
HOLDERS
As of April 28, 2000 the Company had approximately 350 shareholders of
record.
DIVIDENDS
The Company has never declared or paid any dividends with respect to its
capital stock. Pursuant to the Shareholder Agreement between the Company and GE
Equity, the Company is prohibited from paying dividends in excess of 5% of the
Company's market capitalization in any quarter. 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 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended January 31, 2000 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
27
<PAGE> 28
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,
--------------------------------------------------------
2000(A) 1999(B) 1998 1997(C) 1996
------- ------- ---- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $274,927 $203,728 $217,982 $159,478 $ 88,910
Gross profit.............................. 106,528 85,971 95,174 67,363 36,641
Operating income (loss)................... 3,996 (8,569) (10,975) (2,640) (766)
Income before income taxes (d)............ 46,771 7,491 29,604 29,690 11,120
Net income (d)............................ 29,330 4,639 18,104 18,090 11,020
PER SHARE DATA:
Net income per common share............... $ 0.89 $ 0.18 $ 0.57 $ 0.57 $ 0.38
Net income per common share -- assuming
dilution................................ $ 0.73 $ 0.18 $ 0.57 $ 0.56 $ 0.38
Weighted average shares outstanding:
Basic................................... 32,603 25,963 31,745 31,718 28,627
Diluted................................. 40,427 26,267 31,888 32,342 29,309
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments........... $294,643 $ 46,870 $ 31,866 $ 52,859 $ 46,451
Current assets............................ 382,854 98,320 79,661 101,029 65,045
Property, equipment and other assets...... 89,001 43,450 55,618 67,057 51,666
Total assets.............................. 471,855 141,770 135,279 168,086 116,711
Current liabilities....................... 51,587 32,684 29,590 37,724 13,519
Long-term obligations..................... -- 675 1,036 3,734 447
Redeemable preferred stock................ 41,622 -- -- -- --
Shareholders' equity...................... 371,921 108,411 104,653 126,628 102,745
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Gross margin percentage.................. 38.7% 42.2% 43.7% 42.2% 41.2%
Working capital.......................... $ 331,267 $ 65,636 $ 50,071 $63,305 $ 51,526
Current ratio............................ 7.4 3.0 2.7 2.7 4.8
EBITDA (as defined)(d)(e)................ $ 41,608 $ 9,586 $ 34,465 $31,774 $ 13,790
CASH FLOWS:
Operating................................ $ (1,469) $(18,091) $(19,445) $(5,779) $ 2,304
Investing................................ $(135,897) $ 48,131 $ 23,065 $19,223 $(11,443)
Financing................................ $ 231,323 $ (2,974) $(15,041) $(4,889) $ 7,547
</TABLE>
- -------------------------
(a) In the second half of fiscal 2000, the Company divested the catalog
operations of Catalog Ventures, Inc. and Beautiful Images, Inc. See Note 4
of Notes to Consolidated Financial Statements.
(b) In fiscal 1999, the Company divested its HomeVisions catalog operations and
recorded a $2.9 million restructuring and asset impairment charge in
connection with this decision.
(c) Results of operations for the year ended January 31, 1997, included the
operations of HomeVisions, Beautiful Images, Inc. and Catalog Ventures, Inc.
from the respective acquisition dates in the second half of fiscal 1997. See
Note 4 of Notes to Consolidated Financial Statements.
(d) Income before income taxes, net income and EBITDA (as hereinafter defined)
include a net pre-tax gain of $32.7 million from the sale and holdings of
broadcast properties and other assets in fiscal 2000, a net pre-tax gain of
$22.8 million from the sale and holdings of broadcast properties and other
assets and pre-tax charges totaling $9.5 million associated with a
litigation settlement and terminated acquisition costs in fiscal 1999, a
pre-tax gain of $38.9 million from the sale of broadcast properties in
fiscal 1998, a $28.3 million pre-tax gain on sale of broadcast properties
and other assets in fiscal 1997 and an
28
<PAGE> 29
$8.5 million pre-tax gain on the sale of an investment in National Media
Corporation and $2.0 million equity in earnings of affiliates in fiscal
1996. See Notes 2 and 4 of Notes to Consolidated Financial Statements.
(e) EBITDA represents net income before interest income (expense), income taxes
and depreciation and amortization expense. Management views EBITDA 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 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
presented, may not be comparable to similarly entitled measures reported by
other companies.
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 is 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. Such "forward-looking statements" include, but are not limited
to, improved and growing television home shopping operations, general expansion
and profitability of the Company, new initiatives and the continuing success in
developing new strategic alliances (including the GE Equity, NBC, NBCi and Ralph
Lauren Media alliances), the Company's success in developing its e-commerce
business, the launching of the Company's Internet initiative, SnapTV.com, the
timing of the SnapTV rebranding, the success of the Ralph Lauren Media joint
venture, 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 affect the Company's financial position, results of
operations and the ability to remain profitable, including: the ability of the
Company to continue improvements in its home shopping operations, the ability to
increase revenues, maintain strong gross profit margins and increase subscriber
home distribution, the ability to develop new initiatives or enter new strategic
relationships, the rate at which customers accept solicitations for club
membership, the ability of the Company to develop a successful e-commerce
business, the ability of the Company to successfully rebrand as SnapTV, the
successful performance of the Company's equity investments, consumer spending
and debt levels, interest rate fluctuations, seasonal variations in consumer
purchasing activities, increases in postal 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.
NBC AND GE EQUITY STRATEGIC ALLIANCE
On March 8, 1999 the Company entered into a strategic alliance with
National Broadcasting Company, Inc. ("NBC") and GE Capital Equity Investments,
Inc. ("GE Equity"). Pursuant to the terms of the transaction, NBC and GE Equity
acquired 5,339,500 shares of the Company's Series A Redeemable
29
<PAGE> 30
Convertible Preferred Stock (the "Preferred Stock"), and NBC was issued a
warrant to acquire 1,450,000 shares of the Company's Common Stock ("the
Distribution Warrant") under the Distribution Agreement. The Preferred Stock was
sold for aggregate consideration of $44,265,000 and the Company will receive an
additional approximately $12.0 million upon the exercise of the Distribution
Warrant. In addition, the Company issued to GE Equity a warrant to increase its
potential aggregate equity stake (together with the Distribution Warrant issued
to NBC) to 39.9% (the "Investment Warrant"). NBC has the exclusive right to
negotiate on behalf of the Company for the distribution of its television home
shopping service. The sale of 3,739,500 shares of the Preferred Stock was
completed on April 15, 1999. Final consummation of the transaction regarding the
sale of the remaining 1,600,000 Preferred Stock shares and the exercisability of
the Investment Warrant was completed on June 2, 1999. On July 6, 1999, GE Equity
exercised the Investment Warrant acquiring an additional 10,674,000 shares of
the Company's Common Stock for an aggregate of $178,370,000, or $16.71 per
share, representing the 45-day average closing price of the underlying Common
Stock ending on the trading day prior to exercise. Proceeds received from the
issuance of the Preferred Stock and the Investment Warrant (and to be received
from the exercise of the Distribution Warrant) are for general corporate
purposes. Following the exercise of the Investment Warrant, the combined
ownership of the Company by GE Equity and NBC was approximately 39.9%. See Item
1 -- Business Section under "Strategic Relationships" for a detailed discussion
of the NBC and GE Equity strategic alliance.
NBCI RE-BRANDING AND ELECTRONIC COMMERCE ALLIANCE
Effective September 13, 1999, the Company entered into a new strategic
alliance with Snap and Xoom whereby the parties entered into major re-branding
and electronic commerce agreements, spanning television home shopping, Internet
shopping and direct e-commerce initiatives. Effective November 24, 1999, Xoom
and Snap along with several Internet assets of NBC, were merged into NBC
Internet, Inc. ("NBCi"). Under the terms of the agreements, the Company's
television home shopping network, currently called ValueVision, will be
re-branded as SnapTV ("SnapTV"). The re-branding will be phased in during the
second half of fiscal 2001. The network, which will continue to be owned and
operated by ValueVision, will continue to feature its present product line as
well as offer new categories of products and brands. The Company, along with
Snap.com, NBC's Internet portal services company, will roll-out a new companion
Internet shopping service, SnapTV.com, featuring online purchasing opportunities
that spotlight products offered on-air along with online-only e-commerce
opportunities offered by SnapTV and its merchant partners. The new SnapTV.com
online store will be owned and operated by the Company and be featured
prominently within SnapTV.com's shopping area. Xoom, a leading direct e-commerce
services company, will become the exclusive direct e-commerce partner for
SnapTV, managing all such initiatives, including database management, e-mail
marketing and other sales endeavors. Direct online shopping offers will include
SnapTV merchandise, as well as Xoom products and services. See Item
1 -- Business Section under "Strategic Relationships" for a detailed discussion
of the NBCi strategic alliance and the agreements entered into by the Company,
Snap and Xoom.
POLO RALPH LAUREN/RALPH LAUREN MEDIA ELECTRONIC COMMERCE ALLIANCE
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), NBC, NBCi and CNBC.com LLC ("CNBC") whereby the parties created Ralph
Lauren Media, LLC ("Ralph Lauren Media"), a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for their interest in Ralph
Lauren Media, NBC agreed to contribute $110 million of television and online
advertising on NBC and CNBC properties, NBCi agreed to contribute $40 million in
online distribution and promotion and the Company has contributed a cash funding
commitment of up to $50 million. Ralph Lauren Media's premier initiative will be
Polo.com, an internet web site dedicated to the American lifestyle that will
include original content, commerce and a strong community component. Polo.com is
expected to launch in the fourth quarter of fiscal 2001 and will initially
include an assortment of men's, women and children's products across the Ralph
Lauren family of brands as well as unique gift items. Polo.com will also receive
anchor shopping tenancies on NBCi's Snap portal service. In connection with the
formation of Ralph Lauren Media,
30
<PAGE> 31
the Company entered into various agreements setting forth the manner in which
certain aspects of the business of Ralph Lauren Media are to be managed and
certain of the members' rights, duties and obligations with respect to Ralph
Lauren Media. In addition, Ralph Lauren Media and VVI Fulfillment Center, Inc.
("VVIFC"), a wholly-owned subsidiary of the Company, entered into an Agreement
for Services under which VVIFC agreed to provide all telemarketing, fulfillment
and distribution services to Ralph Lauren Media. See Item 1 -- Business Section
under "Strategic Relationships" for a detailed discussion of the Ralph Lauren
Media strategic alliance.
STRATEGIC INVESTMENTS
Beginning in December 1999, the Company has entered into transactions with
a number of companies that it views as emerging leaders in industries and
markets complementary to the Company's business strategy. While each of these
transactions is unique, in general, each consists of both an equity investment
by the Company in the third party and a production and marketing component in
which the Company markets and sells the third party's products through the
Company's television programming and Internet website. The Company views each of
these third parties as strategic partners.
TIME WARNER CABLE LITIGATION SETTLEMENT
On December 23, 1998 the Company announced that it settled the lawsuit that
was filed by Time Warner Cable against the Company and Bridgeways Communications
Corporation in 1997. The lawsuit alleged, among other things, tortious
interference with contractual and business relations and breach of contract.
Under the terms of the settlement, ValueVision paid Time Warner Cable $7.0
million in cash which was recognized by ValueVision in the fourth quarter of
fiscal 1999, resulting in an after tax charge of approximately $4.3 million. In
settling this matter, ValueVision did not admit any wrongdoing or liability.
ValueVision, however, determined to enter into this settlement to avoid the
uncertainty and costs of litigation, as well as to avoid disruption of its
relationship with a key business partner providing a substantial portion of
ValueVision's program distribution.
WRITE-DOWN OF INVESTMENT IN CML GROUP, INC.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, the Company wrote off its investment in CML Group, Inc.
("CML") in fiscal 1999. The decline in the investment's fair value was judged by
management to be other than temporary following CML's announcement that its
NordicTrack subsidiary had filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The write-off totaled approximately $6,113,000. Subsequently,
CML also filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
RESTRUCTURING AND IMPAIRMENT OF ASSETS
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective divestiture of its HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
continuing operating losses and the deteriorating financial performance of the
catalog's operations since Montgomery Ward & Co., Incorporated's announcement of
its bankruptcy filing in the summer of 1997. Operating losses for HomeVisions
further increased as a result of the subsequent termination of HomeVisions'
right to use the Montgomery Ward private label credit card in March 1998. As a
result of the decision to divest HomeVisions, the Company mailed its last
HomeVisions catalog in the fourth quarter of fiscal 1999 and effectively wound
down the catalog operation as of January 31, 1999.
In connection with the restructuring plan and divestiture of HomeVisions,
the Company recorded a $2,950,000 restructuring and asset impairment charge in
the third quarter ended October 31, 1998. The restructuring charge included
severance costs and the write-down of certain assets including inventory,
property and equipment, capitalized software and capitalized catalog costs that
were deemed impaired as a direct result of the decision to divest HomeVisions.
31
<PAGE> 32
NATIONAL MEDIA CORPORATION
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. On April 8, 1998, it was announced that the Company received
preliminary notification from holders of more then 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 and the Company did 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. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and conditions regarding a
transaction with National Media were unsuccessful and the Merger Agreement was
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and wrote off these amounts in the second quarter of fiscal 1999.
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. 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 amortized on a straight-line basis over 5-12 years.
Intangible assets recorded in connection with this acquisition were reduced to
zero in fiscal 1998 in connection with the restructuring transaction with
Montgomery Ward. In fiscal 1998, the Company changed the name of the MWD catalog
to HomeVisions and in fiscal 1999 decided to wind down and divest the
HomeVisions operations, as discussed above.
Also, in connection with the decision to divest HomeVisions, the Company
entered into an agreement to license and sell the exclusive marketing rights to
the "HomeVisions" name and related customer list database to Direct Marketing
Services, Inc. ("DMSI"), a direct-mail marketer and catalog distributor
headquartered in Chicago, Illinois. The Company recorded a $1,443,000 gain in
fiscal 1999 related to the sale of these assets.
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 and
$500,000 relating to a non-compete agreement 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 was recorded as
goodwill, and amortized on a straight-line basis over 15 years, and $500,000 was
assigned to a non-compete agreement, and amortized on a straight-line basis over
the 6-year term of the agreement. Effective December 31, 1999, the Company
completed the sale of BII for a total of $5,000,000 which was received in the
form of a promissory note, representing the net book value of BII on the date of
sale. Accordingly, no gain or loss was recorded on the closing of the sale. The
note is payable over a seven-year period and bears interest at 6 1/4% payable
quarterly. Management believes that the sale will not have a significant impact
on the ongoing operations of the Company.
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<PAGE> 33
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. 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, was recorded as goodwill, and was amortized on a straight-line
basis over 15 years. On October 31, 1999, the Company completed the sale of CVI
to privately held Massachusetts-based Potpourri Holdings, Inc. for approximately
$7,300,000 cash and up to an additional $5,500,000 contingent upon CVI's
performance over the twelve months following the sale. A pre-tax loss of
approximately $128,000 was recorded on the initial closing of the sale of CVI
and was recognized in the third quarter ended October 31, 1999. Any contingent
consideration received by the Company will be recorded as a gain when received.
Management believes that the sale will not have a significant impact on the
ongoing operations of the Company.
SALE OF BROADCAST STATIONS
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
Communications Corporation ("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. The Company acquired WVVI-TV 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 quarter of fiscal 1998.
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
was payable by the first quarter of fiscal 2000. The Company continues to serve
the Seattle market via its low-power station K58DP-TV, which transmits from
downtown Seattle. The Company acquired KBGE-TV in March 1996 for approximately
$4.6 million. The pre-tax gain to be recorded on the first installment with
respect to the sale of this television station was approximately $19.8 million
and was recognized in the financial statements in the first quarter of fiscal
1999. On April 12, 1999, the Company received the contingent payment of $10
million relating to the sale of KBGE-TV and as a result, the Company recognized
a $10 million pre-tax gain, net of applicable closing fees, in the first quarter
of fiscal 2000. The $10 million contingent payment finalized the agreement
between the two companies.
On September 27, 1999, the Company completed the sale of its KVVV-TV
full-power television broadcast station, Channel 33, and K53 FV low-power
station, serving the Houston, Texas market, for a total of $28 million to
Visalia, California-based Pappas Telecasting Companies. The Company acquired
KVVV-TV in March 1994 for approximately $5.8 million. The pre-tax gain recorded
on the sale of the television station was approximately $23.3 million and was
recognized in the third quarter of fiscal 2000.
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 years ended January 31, 2000, 1999 and 1998
include the direct-mail operations of Home Visions, which was effectively wound
down and sold as of January 31, 1999, CVI, which was sold effective October 31,
1999 and BII, which was sold effective December 31, 1999.
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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,
-----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
NET SALES........................................... 100.0% 100.0% 100.0%
===== ===== =====
GROSS MARGIN........................................ 38.7% 42.2% 43.7%
----- ----- -----
OPERATING EXPENSES:
Distribution and selling............................ 31.3% 36.6% 40.8%
General and administrative.......................... 4.2% 5.9% 4.7%
Depreciation and amortization....................... 1.8% 2.5% 3.2%
Restructuring and impairment of assets.............. -- 1.4% --
----- ----- -----
Total operating expenses....................... 37.3% 46.4% 48.7%
----- ----- -----
OPERATING INCOME (LOSS)............................. 1.4% (4.2)% (5.0)%
Other income, net................................... 15.6% 7.9% 18.6%
----- ----- -----
INCOME BEFORE INCOME TAXES.......................... 17.0% 3.7% 13.6%
Income taxes........................................ (6.3)% (1.4)% (5.3)%
----- ----- -----
NET INCOME.......................................... 10.7% 2.3% 8.3%
===== ===== =====
</TABLE>
SALES
Net sales for the year ended January 31, 2000 (fiscal 2000) were
$274,927,000 compared to $203,728,000 for the year ended January 31, 1999
(fiscal 1999), a 35% increase. The increase in net sales is directly
attributable to the continued improvement and increased sales from the Company's
television home shopping operations, which have reported greater than 30% sales
increases (quarter over quarter) for the past seven quarters in a row and
recently reported its largest revenue quarter in the Company's history. Sales
attributed to the Company's television home shopping operations increased 69% to
$250,223,000 for the year ended January 31, 2000 from $148,198,000 for the year
ended January 31, 1999. The growth in home shopping net sales is primarily
attributable to the growth in full-time equivalent ("FTE") homes able to receive
the Company's television home shopping programming. During the 12-month period
ended January 31, 2000, the Company added approximately 10.1 million FTE
subscriber homes, an increase of 68%, going from 14.9 million FTE subscriber
homes at January 31, 1999 to 25.0 million FTE subscriber homes at January 31,
2000. The average number of FTE subscriber homes was 19.6 million for fiscal
2000 and 12.6 million for fiscal 1999, a 56% increase. In addition to new FTE
subscriber homes, television home shopping sales increased due to the continued
addition of new customers from households already receiving the Company's
television home shopping programming, an increase in the average customer dollar
order size over fiscal 1999, as well as an increase in repeat sales to existing
customers. The increase in repeat sales to existing customers experienced during
fiscal 2000 was due, in part, to a strengthened merchandising effort under the
leadership of ValueVision television operation's new general management and the
effects of continued testing of certain merchandising and programming
strategies. The improvement in television home shopping net sales is also due,
in part, to various sales initiatives that emphasized, among other things, the
increased use of the Company's ValuePay installment payment program. The Company
will 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 the
intended results. Sales attributed to direct-mail marketing operations totaled
$24,704,000 or 9% of total net sales for the year ended January 31, 2000 and
totaled $55,530,000 or 27% of total net sales for the year ended January 31,
1999. The decrease in direct-mail revenues is a result of the Company's
divestiture of its catalog operations during fiscal 2000 and fiscal 1999.
Net sales for the year ended January 31, 1999 were $203,728,000 compared to
fiscal 1998 net sales of $217,982,000, a 7% decrease. The decrease in net sales
was directly attributable to the decline in catalog sales resulting from the
downsizing and eventual divestiture of the Company's HomeVisions (formerly known
as
34
<PAGE> 35
Montgomery Ward Direct) direct-mail operations following the November 1997
restructuring of the Company's operating agreements with Montgomery Ward & Co.,
Incorporated ("Montgomery Ward"). Sales attributed to direct marketing
operations totaled $55,530,000 or 27% of total net sales for the year ended
January 31, 1999 and totaled $111,411,000 or 51% of total net sales for the year
ended January 31, 1998. Sales attributed to the Company's television home
shopping programming increased 39% to $148,198,000 for the year ended January
31, 1999 from $106,571,000 for the year ended January 31, 1998. The increase in
television home shopping net sales was primarily attributable to the increase in
FTE subscriber homes able to receive the Company's television home shopping
programming, which increased approximately 3.2 million or 27% from 11.7 million
at January 31, 1998 to 14.9 million at January 31, 1999. The average number of
FTE subscriber homes was 12.6 million for fiscal 1999 and 11.9 million for
fiscal 1998, a 6% increase.
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 2000, 1999 and 1998 were
approximately 29%, 24% and 19%, respectively. The increase in the return rate
for fiscal 2000 is a direct result of the divestiture of the Company's
direct-mail catalog operations. Direct-mail operations, which represented 27% of
total sales in fiscal 1999 and only 9% of total sales in fiscal 2000, typically
experienced lower average return rates than the Company's television operations.
The lower return rate in fiscal 1998 was directly attributable to the effect of
the Company's HomeVisions catalog business, which was acquired in the second
half of fiscal 1997 and significantly downsized in fiscal 1999. The fiscal 2000
return rate for the company's television home shopping operations was 30%,
compared to 28% in fiscal 1999 and 27% in fiscal 1998. The return rate for the
television home shopping operations is slightly higher than prior year and
historic industry averages and is attributable in part to higher average unit
selling price points for the Company (approximately $124 in fiscal 2000 versus
$93 in fiscal 1999), which typically result in higher return rates. Historic
industry average selling prices per unit have been 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 average return rate for the Company's
direct marketing operations was 11% in fiscal 2000, 1999 and 1998.
GROSS PROFIT
Gross profits for fiscal 2000 and 1999 were $106,528,000 and $85,971,000,
respectively, an increase of $20,557,000 or 24%. Gross margins for fiscal 2000
were 38.7% compared to 42.2% for fiscal 1999. The principal reason for the
increase in gross profit dollars was the increased sales volume from the
Company's television home shopping business offset by a decrease in direct-mail
order gross profits resulting from the divestiture of the CVI and BII's catalog
operations in the second half of fiscal 2000 and the divestiture of the
HomeVisions catalog operations in fiscal 1999. Television home shopping gross
margins for fiscal 2000 and 1999 were 36.8% and 38.0%, respectively. Gross
margins for the Company's direct mail operations were 58.3% and 53.5% for the
same respective periods. Television home shopping gross margins decreased
slightly from the prior year primarily as a result of changes made to the
Company's merchandise mix in an effort to increase television home shopping
sales while at the same time increasing inventory turns. Specifically, in fiscal
2000 there was a substantial increase in the sales volume of lower margin
electronics merchandise over fiscal 1999. Also, and as a result of the mix
change, additional inventory reserves were established in the second quarter of
fiscal 2000, which put further pressure on television home shopping margins. In
addition, television home shopping gross margins also decreased from the prior
year as a result of decreased gross margin percentages in the electronic product
category. Jewelry gross margin percentages remained relatively flat over the
prior year. Jewelry products accounted for approximately 72% of airtime during
fiscal 2000 and fiscal 1999. Gross margins for the Company's direct mail-order
operations increased primarily as a result of the decrease in catalog sales due
to the fiscal 1999 divestiture of the HomeVisions catalog operations.
Gross profits for fiscal 1999 and 1998 were $85,971,000 and $95,174,000,
respectively, a decrease of $9,203,000 or 10%. Gross margins for fiscal 1999
were 42.2% compared to 43.7% for fiscal 1998. The principal reason for the
decrease in gross profits was the decreased sales volume resulting from the
downsizing and eventual divestiture of the HomeVisions catalog operations.
Television home shopping gross margins for fiscal 1999 and 1998 were 38.0% and
39.8%, respectively. Gross margins for the Company's direct mail
35
<PAGE> 36
operations were 53.5% and 47.3% for the same respective periods. Television home
shopping gross margin percentages decreased from 1998 to 1999 as a result of
changes in merchandise mix and on-air promotions to enhance net gross margin
contributions. Specifically, television home shopping gross margins decreased
from the prior year primarily as a result of a decrease in gross margin
percentages in the jewelry, giftware and houseware product categories offset by
an increase in the sales volume of the higher margin jewelry category. In
addition, during fiscal 1999, the Company promoted the movement of a significant
amount of aging inventory, which further reduced television home shopping
margins. Gross margins for the Company's direct mail-order operations increased
primarily as a result of the decrease in HomeVisions sales due to the downsizing
and divestiture of the HomeVisions catalog operations, which had considerably
lower margins than the Company's other catalog operating entities and as a
result of the exclusion of two lower margin catalog titles from the fiscal 1999
summer mailing.
OPERATING EXPENSES
Total operating expenses were $102,532,000, $94,540,000 and $106,149,000
for the years ended January 31, 2000, 1999 and 1998, respectively, representing
an increase of $7,992,000 or 8% from fiscal 1999 to fiscal 2000, and a decrease
of $11,609,000 or 11% from fiscal 1998 to fiscal 1999. For fiscal 1999, total
operating expenses include a $2,950,000 one-time restructuring and asset
impairment charge recorded as a result of the Company's decision to divest its
HomeVisions catalog operations. The restructuring charge included severance
costs and the write-down of certain assets, including inventory, property and
equipment, capitalized software and catalog costs that were deemed impaired as a
direct result of the decision to divest HomeVisions.
Distribution and selling expenses for fiscal 2000 increased $11,485,000 or
15% to $86,134,000 or 31% of net sales compared to $74,649,000 or 37% of net
sales in fiscal 1999. Distribution and selling expense increased from the prior
year primarily as a result of increases in net cable access fees due to a 56%
annual increase in the number of average FTE subscriber homes over the prior
year, an increase in the rate per FTE subscriber home, increased marketing and
advertising fees, and increased costs associated with credit card processing,
telemarketing and the Company's ValuePay program due to increases in television
home shopping sales volumes, offset by decreases in distribution and selling
expenses associated with the divestiture of the Company's catalog operations,
specifically HomeVisions. Distribution and selling expense for fiscal 2000
decreased as a percentage of net sales over fiscal 1999 as a result of the
increase in net sales over the prior year.
Distribution and selling expenses for fiscal 1999 decreased $14,369,000 or
16% to $74,649,000 or 37% of net sales compared to $89,018,000 or 41% of net
sales in fiscal 1998. The decrease in distribution and selling expense from
fiscal 1998 was a direct result of the downsizing of the HomeVisions catalog
operations, offset by increases in net cable access fees due to an increase in
the average rate per FTE cable home, increased marketing and advertising fees as
a result of absorbing additional advertising costs which were previously resold
to Montgomery Ward, costs associated with increased staff levels, recruitment
and labor rates due to increases in television home shopping sales volumes.
Distribution and selling expense for fiscal 1999 decreased as a percentage of
net sales over fiscal 1998 primarily due to the Company's focus on cost
efficiencies, the increase in television home shopping net sales over the prior
year and as a result of additional costs incurred by the Company and included in
fiscal 1998 in connection with the conversion, integration and start-up of the
Company's acquired direct-mail operations and warehouse facility.
General and administrative expenses for fiscal 2000 decreased $510,000 or
4% to $11,432,000 or 4% of net sales compared to $11,942,000 or 6% of net sales
in fiscal 1999. General and administrative costs decreased primarily as a result
of decreased costs due to the Company's recent catalog divestitures. This
decrease was offset by general and administrative expense increases in salaries
and other related personnel costs, including increased headcounts, and increases
in information systems costs and consulting fees incurred in connection with the
Company's e-commerce initiative and operating systems enhancements. General and
administrative expense decreased as a percentage of net sales primarily as a
result of the increase in net sales from year to year.
36
<PAGE> 37
General and administrative expenses for fiscal 1999 increased $1,788,000 or
18% to $11,942,000 or 6% of net sales compared to $10,154,000 or 5% of net sales
in fiscal 1998. General and administrative costs increased primarily as a result
of additional costs associated with increased administrative personnel and
salaries, particularly the hiring of several senior level executives, increased
rent and increased legal costs associated with settling certain merchandising
litigation. General and administrative costs increased as a percentage of net
sales from fiscal 1998 to fiscal 1999 as a result of increased general and
administrative costs and the decrease in net sales from year to year.
Depreciation and amortization costs were $4,966,000, $4,999,000 and
$6,977,000 for the years ended January 31, 2000, 1999 and 1998, respectively,
representing a decrease of $33,000 or 1% from fiscal 1999 to fiscal 2000 and a
decrease of $1,978,000 or 28% from fiscal 1998 to fiscal 1999. Depreciation and
amortization costs as a percentage of net sales were 2% in fiscal 2000, 2% in
fiscal 1999 and 3% in fiscal 1998. The dollar decrease is primarily due to a
reduction in depreciation expense in connection with the divestiture of the
Company's catalog operations and reduced amortization with respect to FCC
licenses offset by increased amortization associated with the Company's NBC
cable distribution and marketing agreement. The dollar decrease from fiscal 1998
to fiscal 1999 was primarily due to a reduction in amortization expense of
approximately $1,363,000 relating to intangible assets reduced in connection
with the November 1997 amended Montgomery Ward operating and license agreement.
In addition, depreciation and amortization expense decreased from fiscal 1998 as
a result of the Company's sale of its Seattle, Washington television station
(KBGE-TV, Channel 33) in February 1998.
OPERATING INCOME (LOSS)
The Company reported operating income of $3,996,000 for the year ended
January 31, 2000 compared with an operating loss of $8,569,000 for the year
ended January 31, 1999, an improvement of $12,565,000 over the prior year. The
Company reported an operating loss of $10,975,000 for the year ended January 31,
1998. The improvement in operating results over fiscal 1999 is directly
attributed to the overall operating improvements of the Company's television
home shopping business, which improved by approximately $7,543,000 while the
prior years' results included significant catalog operating losses. The Company
also experienced a modest improvement in operating income over prior year from
its catalog operations primarily resulting from the fiscal 1999 divestiture of
its unprofitable HomeVisions catalog operations. Overall, operating income
increased as a result of increased sales volumes and gross profits, a decrease
in general and administrative costs as a result of the divestiture and
downsizing of the Company's catalog business segment and a reduction of
depreciation and amortization expense over prior year. This was offset by
increases in distribution and selling costs largely due to increases in
front-end cable access fees associated with new cable distribution, increased
general and administrative costs associated with the Company's e-commerce
initiatives and increased amortization associated with the Company's NBC cable
distribution and marketing agreement.
The fiscal 1999 operating loss included a one-time restructuring and asset
impairment charge of $2,950,000 recorded in connection with the Company's
decision to divest its HomeVisions catalog operations. Excluding the one-time
HomeVisions restructuring charge, the operating loss was $5,619,000 for the year
ended January 31, 1999, an improvement of $5,356,000 or 49% over fiscal 1998.
The improvement in the operating loss from fiscal 1998 to fiscal 1999 resulted
primarily from an improvement in the Company's television home shopping
business, decreased distribution and selling costs due to the downsizing of the
HomeVisions catalog operations and because the first half of fiscal 1998
included certain additional costs incurred by the Company in connection with the
conversion and integration of the Company's fulfillment and warehouse facility.
Also contributing to the operating loss improvement in fiscal 1999 was a
reduction in amortization expense compared to fiscal 1998 which related
primarily to the November 1997 amended Montgomery Ward operating and license
agreement. These operating improvements were offset by increased general and
administrative costs, decreased sales volumes in the Company's direct mail
operations and a corresponding decrease in gross profits.
37
<PAGE> 38
OTHER INCOME (EXPENSE)
Total other income was $42,775,000 in fiscal 2000, $16,060,000 in fiscal
1999 and $40,579,000 in fiscal 1998. Total other income for fiscal 2000 included
the following: pre-tax gains of $23,250,000 from the sale of two television
stations serving the Houston, Texas market; a pre-tax gain of $9,980,000
relating to a payment received from a prior year television station sale; net
pre-tax gains of $1,457,000 recorded on the sale and holdings of property and
security investments; a pre-tax loss of $1,991,000 related to an investment made
in 1997; and interest income of $10,129,000. Total other income for fiscal 1999
included the following: a pre-tax gain of $19,750,000 from the sale of
television station KBGE-TV Channel 33 in Seattle, Washington along with two low
power television stations and a minority interest in an entity which had applied
for a new full power station; pre-tax gains on the sale and holdings of property
and security investments of $9,452,000; and interest income of $2,904,000. These
gains were offset by the following charges: a $7,100,000 charge related to the
litigation settlement with Time Warner Cable; the $6,113,000 write-down of the
Company's investment in CML Group, Inc. following its announcement of
bankruptcy; the write-off of $2,350,000 of acquisition related costs associated
with the terminated merger with National Media Corporation; and equity in losses
of affiliates of $323,000. 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. These gains were offset by equity
in losses of affiliates of $431,000 recorded in fiscal 1998. Interest income
increased $7,225,000 from fiscal 1999 due to increases in cash and cash
equivalents and short-term investments from fiscal 1999 to fiscal 2000.
NET INCOME
Net income available to common shareholders was $29,123,000 or $.89 per
basic share and $.73 per diluted share for the year ended January 31, 2000.
Excluding the net gains/losses recorded on the sale and holdings of property and
investments and other one-time charges, discussed above, the Company recorded
net income available to common shareholders of $8,590,000, or $.26 per basic
share and $.21 per diluted share for the year ended January 31, 2000. Net income
available to common shareholders was $4,639,000 or $.18 per basic and diluted
share for the year ended January 31, 1999. Excluding the one-time pretax gains
and charges, discussed above, the Company had a net loss available to common
shareholders of $1,783,000 or $.07 per basic and diluted share. Net income
available to common shareholders was $18,104,000 or $.57 per basic and diluted
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 available to common
shareholders of $5,508,000 or $.17 per basic and diluted share. For the years
ended January 31, 2000, 1999 and 1998, respectively, the Company had
approximately 40,427,000, 26,267,000 and 31,888,000 diluted weighted average
common shares outstanding and 32,603,000, 25,963,000 and 31,745,000 basic
weighted average common shares outstanding.
For the years ended January 31, 2000, 1999 and 1998, net income reflects an
income tax provision of $17,441,000, $2,852,000 and $11,500,000, respectively,
which results in an effective tax rate of 37% in fiscal 2000, 38% in fiscal 1999
and 39% in fiscal 1998. As of January 31, 2000, 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 33.1 million homes as of January 31, 2000 as compared to 21.8
million homes as of January 31, 1999 and to 17.4 million homes as of January 31,
1998. The Company's programming is currently available through affiliation and
time-block purchase agreements with approximately 370 cable and or satellite
systems. In addition, the Company's programming is broadcast full-time over
eleven owned low power television stations in major markets, and is available
unscrambled to homes equipped with satellite dishes. As of January 31, 2000,
1999 and 1998, the Company's programming was available to approximately 25.0
million, 14.9 million and 11.7 million FTE households, respectively.
Approximately 17.3 million, 10.6 million and 8.6 million households at January
31,
38
<PAGE> 39
2000, 1999 and 1998, 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.
QUARTERLY RESULTS
The following summarized unaudited results of operations for the quarters
in the fiscal years ended January 31, 2000 and 1999 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 2000:
Net sales..................................... $53,142 $57,875 $76,575 $87,335 $274,927
Gross profit.................................. 22,479 22,514 30,610 30,925 106,528
Gross margin.................................. 42.3% 38.9% 40.0% 35.4% 38.7%
Operating expenses............................ 22,137 22,203 29,508 28,684 102,532
Operating income.............................. 342 311 1,102 2,241 3,996
Other income, net............................. 10,100 1,418 27,140 4,117 42,775
Net income.................................... $ 6,368 $ 1,048 $17,235 $ 4,679 $ 29,330
======= ======= ======= ======= ========
Net income per share (a)...................... $ .24 $ .03 $ .46 $ .12 $ .89
======= ======= ======= ======= ========
Net income per share -- assuming
dilution(a)................................. $ .22 $ .03 $ .37 $ .10 $ .73
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 26,016 29,651 37,044 37,700 32,603
======= ======= ======= ======= ========
Diluted..................................... 28,615 38,908 46,295 47,889 40,427
======= ======= ======= ======= ========
FISCAL 1999:
Net sales..................................... $43,676 $44,082 $50,027 $65,943 $203,728
Gross profit.................................. 18,654 18,130 20,497 28,690 85,971
Gross margin.................................. 42.7% 41.1% 41.0% 43.5% 42.2%
Operating expenses............................ 20,942 21,267 25,721 26,610 94,540
Operating income (loss)....................... (2,288) (3,137) (5,224) 2,080 (8,569)
Other income (expense), net................... 20,484 1,974 (5,005) (1,393) 16,060
Net income (loss)............................. $11,280 $ (721) $(6,341) $ 421 $ 4,639
======= ======= ======= ======= ========
Net income (loss) per share (a)............... $ .42 $ (.03) $ (.25) $ .02 $ .18
======= ======= ======= ======= ========
Net income (loss) per share -- assuming
dilution(a)................................. $ .42 $ (.03) $ (.25) $ .02 $ .18
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic....................................... 26,781 25,979 25,467 25,626 25,963
======= ======= ======= ======= ========
Diluted..................................... 26,877 25,979 25,467 26,491 26,267
======= ======= ======= ======= ========
</TABLE>
- -------------------------
(a) The sum of quarterly per share amounts does not equal the annual amount due
to changes in the calculation of average common and dilutive shares
outstanding required under Statement of Financial Accounting Standards No.
128, "Earnings per Share".
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000 and 1999, cash and cash equivalents and short-term
investments were $294,643,000 and $46,870,000, respectively, a $247,773,000
increase. For the year ended January 31, 2000,
39
<PAGE> 40
working capital increased $265,631,000 to $331,267,000 compared to an increase
of $15,565,000 to $65,636,000 for the year ended January 31, 1999. The current
ratio was 7.4 at January 31, 2000 compared to 3.0 at January 31, 1999. At
January 31, 2000 and 1999, all short-term investments and cash equivalents were
invested in money market funds, high quality commercial paper with original
maturity dates of less than two hundred and seventy (270) days and investment
grade corporate and municipal bonds with original maturity dates and/or tender
option terms ranging from two months to two years. In addition, at January 31,
2000, short-term investments included certain equity investments in the amount
of $96,000 classified as "trading securities".
Total assets at January 31, 2000 were $471,855,000 compared to $141,770,000
at January 31, 1999. Shareholders' equity was $371,921,000 at January 31, 2000,
compared to $108,411,000 at January 31, 1999, an increase of $263,510,000. The
increase in common shareholders' equity for fiscal 2000 resulted primarily from
the issuance of 10,674,000 shares of common stock at $16.71 per share, or
$178,370,000, to GE Equity upon the exercise of the Investment Warrant, net
income of $29,330,000 for the year, the issuance of 1,450,000 common stock
purchase warrants valued at $6,931,000 in connection with the NBC and GE Equity
strategic alliance, the issuance of 404,760 common stock purchase warrants
valued at $6,679,000 in connection with the NBCi strategic alliance, other
comprehensive income on investments available-for-sale of $11,732,000, proceeds
of $11,693,000 related to the exercise of stock options, proceeds of $1,059,000
related to the payoff of notes receivable from shareholders and a $17,923,000
income tax benefit relating to stock options exercised, offset by accretion of
redeemable preferred stock of $207,000. The increase in shareholders' equity
from fiscal 1998 to fiscal 1999 resulted primarily from reported net income of
$4,639,000, proceeds received on the exercise of stock options of $1,729,000,
other comprehensive income on available-for-sale investments of $1,050,000 and a
$731,000 income tax benefit relating to stock options exercised, offset by
$4,292,000 relating to the repurchase of 1,327,000 shares of Company common
stock made in connection with the Company's authorized stock repurchase program.
As of January 31, 2000, the Company had no long-term debt obligations.
For the year ended January 31, 2000, net cash used for operating activities
totaled $1,469,000 compared to net cash used of $18,091,000 in fiscal 1999 and
$19,445,000 in fiscal 1998. Cash flows from operations before consideration of
changes in working capital items and investing and financing activities was a
positive $8,962,000 in fiscal 2000 compared to a negative $3,570,000 in fiscal
1999 and a negative $3,998,000 in fiscal 1998. Net cash used for operating
activities for fiscal 2000 reflects net income, as adjusted for depreciation and
amortization, gains on the sale of property, investments and broadcast stations,
unrealized losses on trading securities and the write-down of an investment. In
addition, net cash used for operating activities for fiscal 2000 reflects
increases in accounts receivable, inventories and net income taxes receivable,
offset by increases in accounts payable and accrued liabilities and a decrease
in prepaid expenses. Accounts receivable increased primarily due to increased
receivables from customers for merchandise sales made pursuant to the "ValuePay"
installment program, the timing of credit card receivable payments and increased
interest receivable resulting from higher cash balances. Inventories increased
from fiscal 1999 to support increased sales volume offset by decreases resulting
from the divestiture of the Company's direct-mail catalog operations. The
increase in accounts payable and accrued liabilities is a direct result of the
increase in inventory levels and the timing of vendor payments. Prepaid expenses
decreased primarily as a result of decreased prepaid catalog costs as a result
of the divestiture of the Company's direct-mail catalog operations. Income taxes
receivable increased as a direct result of benefits recorded in the connection
with the exercise of employee stock options offset by an increase in income
taxes payable resulting from increased earnings.
Net cash used for operating activities for fiscal 1999 reflects net income,
as adjusted for depreciation and amortization, equity in losses of affiliates,
gains on the sale of property, investments and broadcast stations, unrealized
gains on trading securities, the write-down of an investment, a restructuring
and asset impairment charge and a write-off of terminated acquisition costs. Net
cash used for operating activities for fiscal 1999 also reflects increases in
accounts receivable and inventories, offset by decreases in prepaid expenses,
income taxes receivable and increases in accounts payable and accrued
liabilities. Accounts receivable increased primarily due to increased
receivables from merchandise sales made pursuant to the "ValuePay" installment
program. Inventories increased from fiscal 1998 to support increased sales
volumes primarily with respect to the
40
<PAGE> 41
Company's television home shopping business, offset by decreases resulting from
the downsizing and divestiture of the HomeVisions catalog operations. Prepaid
expenses increased primarily as a result of the timing of contract payments for
cable access fees and satellite rentals. The increase in accounts payable and
accrued liabilities was primarily the result of increased inventory levels and
the timing of related invoice payments offset by decreases resulting from the
HomeVisions divestiture.
The Company utilizes an installment payment program called "ValuePay" which
entitles customers to purchase merchandise and generally pay for the merchandise
in two to six equal monthly installments. As of January 31, 2000, the Company
had approximately $42,212,000 due from customers under the ValuePay installment
program, compared to $16,554,000 at January 31, 1999. The increase in ValuePay
receivables from fiscal 1999 is primarily the result of the significant increase
in television home shopping sales over prior year and sales incentive programs
initiated during 2000, which emphasized the increased use of the installment
payment program. 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 2001 from the Company's present capital resources and future
operating cash flows.
Net cash provided by (used for) investing activities totaled ($135,897,000)
in fiscal 2000 compared to $48,131,000 in fiscal 1999 and $23,065,000 in fiscal
1998. Expenditures for property and equipment were $4,036,000 in fiscal 2000
compared to $1,565,000 in fiscal 1999 and $3,543,000 in fiscal 1998.
Expenditures for property and equipment in fiscal 2000 and 1999 included (i) the
upgrade of computer software, related computer equipment and other office
equipment, (ii) webpage development costs associated with the Company's
e-commerce initiative, (iii) warehouse equipment and (iv) expenditures on
leasehold improvements. The increases in property and equipment in fiscal 2000
were offset by a decrease of approximately $1,091,000 related to the divestiture
of the Company's direct-mail catalog businesses and the sale of television
broadcast station KVVV-TV. The increases in property and equipment in fiscal
1999 were offset by a decrease of approximately $5,100,000 related to the sale
of land which had been held for investment purposes and decreases of
approximately $594,000 of transmission and production equipment and other fixed
assets resulting from the sale of television broadcast station KBGE-TV. 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.
Principal future capital expenditures will be for upgrading television
production and transmission equipment, and the upgrade and replacement of
computer software, systems and related computer equipment associated with the
expansion of the home shopping business and the Company's e-commerce initiative.
In addition, during fiscal 2001, the Company plans to make capital expenditures
in its Bowling Green, Kentucky distribution facility and to develop additional
call center capabilities to prepare for fulfillment and service obligations made
in connection with the services agreements recently entered into with Ralph
Lauren Media, LLC. During fiscal 2000, the Company received $28,130,000 in
proceeds from the sale of its full power television station KVVV-TV and K53 FV
low power stations and received a $10,000,000 contingent payment relating to the
sale of its television station KBGE-TV. In addition, during fiscal 2000, the
Company invested $202,107,000 in various short-term investments, received
proceeds of $46,884,000 from the sale of short-term investments, received
proceeds of $12,403,000 from the sale of property and other investments,
received $1,436,000 in connection with the repayment of outstanding notes
receivable and made disbursements of $28,607,000 for certain investments and
other long-term assets.
During fiscal 1999, the Company received $9,548,000 of proceeds from the
sale of real property in Eden Prairie, Minnesota and other investments, received
$24,483,000 in proceeds from the sale of its broadcast television station
KBGE-TV, invested $12,394,000 in various short-term investments and received
proceeds of $25,056,000 from the sale of short-term investments. In addition,
during fiscal 1999, the Company disbursed $3,997,000 relating to certain
investments and other long-term assets of which $1,818,000 related to costs
associated with the terminated National Media Merger Agreement, advanced an
additional $3,000,000 working capital loan in the form of a demand note to
National Media Corporation and received $10,000,000 from National Media
Corporation in connection with the repayment of the demand note.
41
<PAGE> 42
During fiscal 1998, the Company received approximately $30,000,000 in cash
proceeds from the sale of television station WVVI, invested $43,867,000 in
various short-term investments and received proceeds of $51,122,000 from the
sale of short-term investments. The Company also disbursed $6,631,000 relating
to certain strategic investments and other long-term assets, granted a
$7,000,000 working capital loan in the form of a demand note to National Media
Corporation, 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.
Net cash provided by financing activities totaled $231,323,000 for fiscal
2000 and related primarily to $178,370,000 of proceeds received from GE Equity
on the issuance of 10,674,000 shares of Common Stock in conjunction with the
exercise of the Investment Warrant and $41,415,000 of net proceeds received from
the issuance of Series A Redeemable Preferred Convertible Stock in conjunction
with the Company's new strategic alliance with GE Equity. In addition, the
Company also received proceeds of $11,693,000 from the exercise of stock options
and made payments of $155,000 on capital leases. Net cash used for financing
activities totaled $2,974,000 for fiscal 1999 and $15,041,000 for fiscal 1998.
Net cash used for financing activities for fiscal 1999 and fiscal 1998 primarily
related 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.
Management believes that funds currently held by the Company should be
sufficient to fund the Company's operations, anticipated capital expenditures or
strategic investments and cable launch fees through fiscal 2001.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 is effective for the Company's fiscal quarter ending
April 30, 2000. SAB No. 101 is not expected to have a material effect on the
Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued in
June 1998 and amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133" to
require adoption at the beginning of the Company's fiscal year ending January
31, 2002. The standard requires every derivative to be recorded on the balance
sheet as either an asset or liability measured at fair value with changes in the
derivative's fair value recognized in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is not expected to have a material effect on the
Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the United
States and as such are not subject to foreign currency exchange rate risk. The
Company has no long-term debt, and accordingly, is not significantly exposed to
interest rate risk.
42
<PAGE> 43
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.................... 44
Consolidated Balance Sheets as of January 31, 2000 and
1999...................................................... 45
Consolidated Statements of Operations for the Years Ended
January 31, 2000, 1999 and 1998........................... 46
Consolidated Statements of Shareholders' Equity for the
Years Ended January 31, 2000, 1999 and 1998............... 47
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2000, 1999 and 1998........................... 49
Notes to Consolidated Financial Statements.................. 50
Financial Statement Schedule -- Schedule II -- Valuation and
Qualifying Accounts....................................... 76
</TABLE>
43
<PAGE> 44
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,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly state
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 13, 2000
44
<PAGE> 45
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JANUARY 31,
----------------------
2000 1999
---- ----
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $138,221 $ 44,264
Short-term investments.................................... 156,422 2,606
Accounts receivable, net.................................. 49,070 19,466
Inventories, net.......................................... 22,677 21,101
Prepaid expenses and other................................ 4,888 8,576
Income taxes receivable................................... 9,626 500
Deferred income taxes..................................... 1,950 1,807
-------- --------
Total current assets................................. 382,854 98,320
PROPERTY AND EQUIPMENT, NET................................. 14,350 14,069
FEDERAL COMMUNICATIONS COMMISSION LICENSES, NET............. 124 2,019
CABLE DISTRIBUTION AND MARKETING AGREEMENT, NET............. 6,394 --
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES, NET....... 1,679 1,876
INVESTMENT IN PAXSON COMMUNICATIONS CORPORATION............. 3,911 9,713
GOODWILL, NET............................................... 64 5,962
INVESTMENTS AND OTHER ASSETS, NET........................... 62,479 9,160
DEFERRED INCOME TAXES....................................... -- 651
-------- --------
$471,855 $141,770
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ -- $ 393
Accounts payable.......................................... 34,937 20,736
Accrued liabilities....................................... 16,650 11,555
-------- --------
Total current liabilities............................ 51,587 32,684
LONG-TERM OBLIGATIONS....................................... -- 675
DEFERRED INCOME TAXES....................................... 6,725 --
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.01 PAR VALUE, 5,339,500 SHARES AUTHORIZED; 5,339,500
AND 0 ISSUED AND OUTSTANDING........................... 41,622 --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 38,192,164 and 25,865,466 shares issued and
outstanding............................................ 382 259
Common stock purchase warrants; 1,854,760 and 0 shares.... 13,610 --
Additional paid-in capital................................ 280,578 72,715
Accumulated other comprehensive income (losses)........... 8,891 (2,841)
Notes receivable from shareholders........................ -- (1,059)
Retained earnings......................................... 68,460 39,337
-------- --------
Total shareholders' equity........................... 371,921 108,411
-------- --------
$471,855 $141,770
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
45
<PAGE> 46
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------
2000 1999 1998
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
NET SALES.......................................... $ 274,927 $ 203,728 $ 217,982
COST OF SALES...................................... 168,399 117,757 122,808
---------- ----------- -----------
Gross profit.................................. 106,528 85,971 95,174
---------- ----------- -----------
OPERATING EXPENSES:
Distribution and selling......................... 86,134 74,649 89,018
General and administrative....................... 11,432 11,942 10,154
Depreciation and amortization.................... 4,966 4,999 6,977
Restructuring and impairment of assets........... -- 2,950 --
---------- ----------- -----------
Total operating expenses...................... 102,532 94,540 106,149
---------- ----------- -----------
OPERATING INCOME (LOSS)............................ 3,996 (8,569) (10,975)
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of broadcast stations............... 33,230 19,750 38,850
Gain on sale of property and investments......... 2,347 8,102 215
Time Warner litigation settlement................ -- (7,100) --
Write-down of investments........................ (1,991) (6,113) --
National Media Corporation terminated acquisition
costs......................................... -- (2,350) --
Unrealized gain (loss) on trading securities..... (890) 1,350 --
Equity in losses of affiliates................... -- (323) (431)
Interest income.................................. 10,129 2,904 2,116
Other, net....................................... (50) (160) (171)
---------- ----------- -----------
Total other income............................ 42,775 16,060 40,579
---------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES........... 46,771 7,491 29,604
Provision for income taxes.................... 17,441 2,852 11,500
---------- ----------- -----------
NET INCOME......................................... 29,330 4,639 18,104
ACCRETION OF REDEEMABLE PREFERRED STOCK............ (207) -- --
---------- ----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS........ $ 29,123 $ 4,639 $ 18,104
========== =========== ===========
NET INCOME PER COMMON SHARE........................ $ 0.89 $ 0.18 $ 0.57
========== =========== ===========
NET INCOME PER COMMON SHARE -- ASSUMING DILUTION... $ 0.73 $ 0.18 $ 0.57
========== =========== ===========
Weighted average number of common shares
outstanding:
Basic............................................ 32,602,536 25,963,341 31,745,437
========== =========== ===========
Diluted.......................................... 40,426,925 26,266,814 31,888,229
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE> 47
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK COMMON OTHER
------------------ STOCK ADDITIONAL COMPREHENSIVE
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN INCOME
INCOME OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31,
1997.................. 28,842,198 $288 $ 26,984 $ 83,310 $ 43
Comprehensive income:
Net income............ $18,104 -- -- -- -- --
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $2,411..... (3,934) -- -- -- -- (3,934)
-------
Comprehensive
income:........ $14,170
=======
Exercise of stock
options and
warrants.............. 1,636,080 16 -- 282 --
Repurchases of common
stock and warrants.... (3,697,500) (36) (18,387) (17,324) --
Value transferred from
common stock purchase
warrants.............. -- -- (8,597) 8,597 --
Income tax effect of
warrants
repurchased........... -- -- -- (366) --
Income tax benefit from
stock options
exercised............. -- -- -- 39 --
Increase in notes
receivable from
shareholders.......... -- -- -- -- --
---------- ---- -------- -------- -------
BALANCE, JANUARY 31,
1998.................. 26,780,778 268 -- 74,538 (3,891)
Comprehensive income:
Net income............ $ 4,639 -- -- -- -- --
Other comprehensive
income (losses),
net of tax:
Unrealized losses on
securities, net of
tax of $1,550..... (2,529)
Write-down of
securities to net
realizable value,
net of tax of
$1,499............ 3,579
-------
Other comprehensive
income.............. 1,050 -- -- -- -- 1,050
-------
Comprehensive
income:........ $ 5,689
=======
Exercise of stock
options............... 412,118 4 -- 1,725 --
Repurchases of common
stock................. (1,327,430) (13) -- (4,279) --
Income tax benefit from
stock options
exercised............. -- -- -- 731 --
Increase in notes
receivable from
shareholders.......... -- -- -- -- --
---------- ---- -------- -------- -------
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
SHAREHOLDERS EARNINGS EQUITY
------------ -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE, JANUARY 31,
1997.................. $ (591) $16,594 $126,628
Comprehensive income:
Net income............ -- 18,104 18,104
Other comprehensive
losses, net of tax:
Unrealized losses on
securities, net of
tax of $2,411..... -- -- (3,934)
Comprehensive
income:........
Exercise of stock
options and
warrants.............. -- -- 298
Repurchases of common
stock and warrants.... -- -- (35,747)
Value transferred from
common stock purchase
warrants.............. -- -- --
Income tax effect of
warrants
repurchased........... -- -- (366)
Income tax benefit from
stock options
exercised............. -- -- 39
Increase in notes
receivable from
shareholders.......... (369) -- (369)
------- ------- --------
BALANCE, JANUARY 31,
1998.................. (960) 34,698 104,653
Comprehensive income:
Net income............ -- 4,639 4,639
Other comprehensive
income (losses),
net of tax:
Unrealized losses on
securities, net of
tax of $1,550.....
Write-down of
securities to net
realizable value,
net of tax of
$1,499............
Other comprehensive
income.............. -- -- 1,050
Comprehensive
income:........
Exercise of stock
options............... -- -- 1,729
Repurchases of common
stock................. -- -- (4,292)
Income tax benefit from
stock options
exercised............. -- -- 731
Increase in notes
receivable from
shareholders.......... (99) -- (99)
------- ------- --------
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK COMMON OTHER
------------------ STOCK ADDITIONAL COMPREHENSIVE
COMPREHENSIVE NUMBER PAR PURCHASE PAID-IN INCOME
INCOME OF SHARES VALUE WARRANTS CAPITAL (LOSSES)
------------- --------- ----- -------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31,
1999.................. 25,865,466 259 -- 72,715 (2,841)
Comprehensive income:
Net income............ $29,330 -- -- -- -- --
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
tax of $7,193..... 11,732 -- -- -- -- 11,732
-------
Comprehensive
income:........ $41,062
=======
Proceeds received on
officer notes......... -- -- -- -- --
Value assigned to common
stock purchase
warrants.............. -- -- 13,610 -- --
Exercise of stock
warrants.............. 10,674,418 107 -- 178,263 --
Exercise of stock
options............... 1,652,280 16 -- 11,677 --
Income tax benefit from
stock options
exercised............. -- -- -- 17,923 --
Accretion of redeemable
preferred stock....... -- -- -- -- --
---------- ---- -------- -------- -------
BALANCE, JANUARY 31,
2000.................. 38,192,164 $382 $ 13,610 $280,578 $ 8,891
========== ==== ======== ======== =======
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM RETAINED SHAREHOLDERS'
SHAREHOLDERS EARNINGS EQUITY
------------ -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE, JANUARY 31,
1999.................. (1,059) 39,337 108,411
Comprehensive income:
Net income............ -- 29,330 29,330
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
tax of $7,193..... -- -- 11,732
Comprehensive
income:........
Proceeds received on
officer notes......... 1,059 -- 1,059
Value assigned to common
stock purchase
warrants.............. -- -- 13,610
Exercise of stock
warrants.............. -- -- 178,370
Exercise of stock
options............... -- -- 11,693
Income tax benefit from
stock options
exercised............. -- -- 17,923
Accretion of redeemable
preferred stock....... -- (207) (207)
------- ------- --------
BALANCE, JANUARY 31,
2000.................. $ -- $68,460 $371,921
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 49
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 29,330 $ 4,639 $ 18,104
Adjustments to reconcile net income to net cash provided
by
(used for) operating activities-
Depreciation and amortization.......................... 4,966 4,999 6,977
Deferred taxes......................................... (55) (1,408) 1,840
Gain on sale of broadcast stations..................... (33,230) (19,750) (38,850)
Gain on sale of property and investments............... (2,347) (8,102) (215)
Write-down of investments.............................. 250 6,113 --
Restructuring and impairment of assets................. -- 2,950 --
National Media Corporation terminated acquisition
costs................................................ -- 2,350 --
Unrealized loss (gain) on trading securities........... 890 (1,350) --
Equity in losses of affiliates......................... -- 323 431
Changes in operating assets and liabilities, net of
effect of divestitures:
Accounts receivable, net............................. (22,836) (11,021) (3,763)
Inventories, net..................................... (7,515) (2,255) 5,682
Prepaid expenses and other........................... (1,646) 1,553 627
Accounts payable and accrued liabilities............. 21,927 2,620 (9,158)
Income taxes payable (receivable), net............... 8,797 248 (1,120)
--------- -------- --------
Net cash used for operating activities............ (1,469) (18,091) (19,445)
--------- -------- --------
INVESTING ACTIVITIES:
Property and equipment additions, net of retirements...... (4,036) (1,565) (3,543)
Proceeds from sale of broadcast stations.................. 38,130 24,483 30,000
Proceeds from sale of investments and property............ 12,403 9,548 1,381
Purchase of short-term investments........................ (202,107) (12,394) (43,867)
Proceeds from sale of short-term investments.............. 46,884 25,056 51,122
Loan to National Media Corporation........................ -- (3,000) (7,000)
Payment for investments and other assets.................. (28,607) (3,997) (6,631)
Proceeds from notes receivable............................ 1,436 10,000 1,603
--------- -------- --------
Net cash provided by (used for) investing
activities...................................... (135,897) 48,131 23,065
--------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Series A Preferred Stock, net... 41,415 -- --
Proceeds from exercise of stock options and warrants...... 190,063 1,729 299
Payments for repurchases of common stock.................. -- (4,292) (14,964)
Payment of long-term obligations.......................... (155) (411) (376)
--------- -------- --------
Net cash provided by (used for) financing
activities...................................... 231,323 (2,974) (15,041)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 93,957 27,066 (11,421)
BEGINNING CASH AND CASH EQUIVALENTS......................... 44,264 17,198 28,619
--------- -------- --------
ENDING CASH AND CASH EQUIVALENTS............................ $ 138,221 $ 44,264 $ 17,198
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE> 50
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
1. THE COMPANY:
ValueVision International, Inc. and Subsidiaries ("the Company") is an
integrated direct marketing company which markets its products directly to
consumers through various forms of electronic media.
The Company's television home shopping business 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 low power television ("LPTV") stations and to
satellite dish owners. The Company also complements its television home shopping
business by the sale of merchandise through its Internet shopping website
(www.vvtv.com).
The Company's growing home shopping network and companion Internet shopping
website will be re-branded as SnapTV and SnapTV.com, respectively, as part of a
wide-ranging direct e-commerce strategy the Company is pursuing with NBC
Internet, Inc. ("NBCi"), a subsidiary of the National Broadcasting Company, Inc.
("NBC"). These moves are intended to position SnapTV and NBCi as leaders in the
evolving convergence of television and the Internet, combining the promotional
and selling power of television with the purely digital world of e-commerce.
NBCi is a new entity formed as a result of the merger of Snap! LLC, XOOM.com,
Inc. and several Internet assets of NBC. In mid-1999, the Company founded
ValueVision Interactive, Inc. as a wholly owned subsidiary of the Company, to
manage and develop the Company's Internet e-commerce initiatives using the
SnapTV.com brand, as well as to manage the Company's e-commerce investment
strategies and portfolio.
The Company, through its wholly owned subsidiary, ValueVision Direct
Marketing Company, Inc. ("VVDM"), was a direct-mail marketer of a broad range of
quality general merchandise which was sold to consumers through direct-mail
catalogs and other direct marketing solicitations. In the second half of fiscal
2000, the Company sold its remaining direct-mail catalog subsidiaries and exited
from the direct marketing catalog business.
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.
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.
50
<PAGE> 51
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
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 $4,314,000 at January 31, 2000
and $1,726,000 at January 31, 1999.
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 high quality commercial paper
with original maturity dates of less than two hundred and seventy (270) days and
investment grade corporate and municipal bonds with original maturity dates
and/or tender option terms ranging from two months to two years. These
investments are stated at cost, which approximates market value due to the short
maturities of these instruments. Short-Term Investments also include certain
equity investments classified as "trading securities".
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 regarding available-for-sale 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, 2000 equity securities......... $24,929,000 $15,781,000 $1,438,000 $39,272,000
=========== =========== ========== ===========
January 31, 1999 equity securities......... $14,295,000 $ -- $4,582,000 $ 9,713,000
=========== =========== ========== ===========
</TABLE>
As of January 31, 2000 and 1999, all available-for-sale investments were
classified as long-term investments in the accompanying consolidated balance
sheets. Also see "Investments and Other Assets."
Proceeds from sales of investment securities available-for-sale were
$12,043,000, $662,000 and $3,084,000 in fiscal 2000, 1999 and 1998,
respectively, and related gross realized gains included in income were
$2,206,000, $26,000 and $215,000 in fiscal 2000, 1999 and 1998, respectively.
As of January 31, 2000 and 1999, respectively, the Company had $96,000 and
$2,606,000 of investments classified as trading securities in the accompanying
consolidated balance sheets. Net unrealized holding gains (losses) on trading
securities included in income during fiscal 2000 and 1999 totaled $(890,000) and
$1,350,000, respectively. See additional discussion in Note 14 regarding these
trading securities. There were no unrealized holding gains or losses recorded
with respect to trading securities during fiscal 1998 as the Company did not
have any equity investments classified as such in that year.
In accordance with the provisions of SFAS No. 115, the Company wrote off
its investment in CML Group, Inc. ("CML") in fiscal 1999. The decline in the
investment's fair value was judged by management to be other than temporary
following CML's announcement that its NordicTrack subsidiary had
51
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The write-off
totaled approximately $6,113,000. Subsequently, CML also filed for protection
under Chapter 11 of the U.S. Bankruptcy Code.
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 $18,719,000, $31,729,000 and
$44,894,000 for the years ended January 31, 2000, 1999 and 1998, respectively,
are included in the accompanying consolidated statements of operations. Prepaid
expenses and other includes deferred advertising costs of $2,242,000 at January
31, 2000 and $4,538,000 at January 31, 1999, which will be reflected as an
expense during the quarterly period benefited.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements 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. During fiscal 1999, the Company sold real property held
for investment purposes and recognized a $3,471,000 gain on the sale.
Property and equipment consisted of the following at January 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
(IN YEARS) 2000 1999
----------- ---- ----
<S> <C> <C> <C>
Land and improvements.................... -- $ 1,405,000 $ 1,405,000
Buildings and improvements............... 40 4,270,000 4,267,000
Transmission and production equipment.... 5-20 5,920,000 7,734,000
Office and warehouse equipment........... 3-10 5,806,000 4,332,000
Computer and telephone equipment......... 3-5 5,451,000 4,849,000
Leasehold improvements................... 3-5 2,033,000 2,120,000
Less -- Accumulated depreciation and
amortization........................... (10,535,000) (10,638,000)
------------ -----------
$ 14,350,000 $14,069,000
============ ===========
</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 $11,000 at January 31, 2000 and $452,000 at
January 31, 1999.
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
52
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
(i) the station has served the public interest, convenience, and necessity; (ii)
there have been no serious violations by the licensee of the Telecommunications
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.
CABLE DISTRIBUTION AND MARKETING AGREEMENT
As discussed further in Note 15, in March 1999, the Company entered into a
Distribution and Marketing Agreement with NBC, which provides that NBC shall
have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television service. Under the ten-year
agreement, NBC has committed to deliver 10 million full-time equivalent ("FTE")
subscribers over a forty-two month period. In compensation for these services,
the Company pays NBC a $1.5 million annual fee and issued NBC a Distribution
Warrant to purchase 1,450,000 shares of the Company's common stock at an
exercise price of $8.29 per share. The value assigned to the Distribution and
Marketing Agreement and related warrant of $6,931,000 was determined pursuant to
an independent appraisal and is being amortized on a straight-line basis over
the term of the agreement. As of January 31, 2000, accumulated amortization
related to this asset totaled $537,000.
MONTGOMERY WARD OPERATING AGREEMENT AND LICENSES
As discussed further in Note 3, in 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 was
determined pursuant to an independent appraisal and was being amortized on a
straight-line basis over the term of the agreements. The Operating Agreement has
a twelve-year term, expiring 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.
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. As a result of the
restructuring, the Montgomery Ward Operating Agreement and License asset was
reduced to $2,115,000, which represented the asset's remaining fair value
assigned to the Company's non-catalog operations. The value assigned to the
asset as of the date of the restructuring 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. As
of January 31, 2000, accumulated amortization related to this asset totaled
$436,000.
53
<PAGE> 54
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following at January 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Investments.......................................... $53,129,000 $3,348,000
Long-term note....................................... 5,000,000 --
Prepaid cable launch fees, net....................... 1,042,000 1,575,000
Other, net........................................... 3,308,000 4,237,000
----------- ----------
$62,479,000 $9,160,000
=========== ==========
</TABLE>
At January 31, 2000, investments include approximately $35,361,000 related
to equity investments made in Internet companies whose shares are traded on a
public exchange. These equity investments were made primarily in conjunction
with the Company's recent e-commerce, Internet strategic alliances and the
launching and re-branding of the Company's SnapTV shopping network. These
investments are classified as "available-for-sale" investments and are accounted
for under the provisions of SFAS No. 115. Also, included in investments at
January 31, 2000 are certain nonmarketable equity investments in private
companies and other enterprises totaling approximately $17,768,000 which are
carried at the lower of cost or net realizable value. The carrying values of
these investments are evaluated periodically by the Company using 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, 2000, investments include approximately $842,000 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. During
fiscal 2000 and 1999, the Company received cash distributions of approximately
$826,000 and $1,061,000, respectively, from the limited partnership.
As discussed further in Note 4, in December 1999, the Company recorded a
$5,000,000 long-term promissory note in connection with the sale of one of its
direct-mail subsidiaries. The principal on the note is payable quarterly over a
seven-year period starting in March 2002 and bears interest at 6 1/4%, payable
quarterly starting in June 2000. The note is collateralized by substantially all
of the operating assets of the former subsidiary.
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 3-7 years.
Other assets consist principally of prepaid satellite transponder launch
fees, long-term deposits, notes receivable and deferred acquisition 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 12 to 25 years. Accumulated amortization was $553,000 at
January 31, 2000 and $747,000 at January 31, 1999. At January 31, 2000, other
assets also include a $1,075,000 long-term receivable related to the third-party
sale of the Company's HomeVisions catalog trade name and customer lists. The
sale was made in conjunction with the divestiture of the HomeVisions catalog
operations as discussed in Note 4. The receivable was recorded at its net
present value and payments are being received in quarterly installments through
2003.
54
<PAGE> 55
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Accrued marketing fees.............................. $ 3,960,000 $ 3,688,000
Reserve for product returns......................... 3,710,000 2,291,000
Other............................................... 8,980,000 5,576,000
----------- -----------
$16,650,000 $11,555,000
=========== ===========
</TABLE>
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 carry forwards 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
The Company calculates earnings per share ("EPS") in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Basic EPS is computed by dividing reported earnings by
the weighted average number of common shares outstanding for the reported
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock of the Company during reported periods.
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income available to common
shareholders............................ $29,123,000 $ 4,639,000 $18,104,000
=========== =========== ===========
Weighted average number of common shares
outstanding -- Basic.................... 32,602,000 25,963,000 31,745,000
Dilutive effect of convertible Preferred
Stock................................... 4,019,000 -- --
Dilutive effect of stock options and
warrants................................ 3,806,000 304,000 143,000
----------- ----------- -----------
Weighted average number of common shares
outstanding -- Diluted.................. 40,427,000 26,267,000 31,888,000
=========== =========== ===========
Net income per common share............... $ 0.89 $ 0.18 $ 0.57
=========== =========== ===========
Net income per common share -- assuming
dilution................................ $ 0.73 $ 0.18 $ 0.57
=========== =========== ===========
</TABLE>
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting in the financial
statements all changes in equity during a period, except those resulting from
investments by and distributions to owners. For the Company, comprehensive
income includes net income and other comprehensive income (loss), which consists
of unrealized holding gains and losses from
55
<PAGE> 56
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
equity investments, classified as "available-for-sale". Total comprehensive
income was $41,062,000, $5,689,000 and $14,170,000 for the years ended January
31, 2000, 1999 and 1998, respectively.
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 amounts reported in the accompanying consolidated balance
sheets approximate 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, 1999.
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 these estimates.
RECLASSIFICATIONS
Certain 1999 and 1998 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 2000 presentation,
with no impact on previously reported net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 is effective for the Company's fiscal quarter ending
April 30, 2000. SAB No. 101 is not expected to have a material effect on the
Company's financial position or results of operations.
56
<PAGE> 57
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued in
June 1998 and amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133" to
require adoption at the beginning of the Company's fiscal year ending January
31, 2002. The standard requires every derivative to be recorded on the balance
sheet as either an asset or liability measured at fair value with changes in the
derivative's fair value recognized in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is not expected to have a material effect on the
Company's financial position or results of operations.
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. In June 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 November 1, 1997, the Company restructured its operating
agreement with Montgomery Ward, which governed 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, 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 ceased the use of the Montgomery Ward
name in all outgoing catalog, syndication, and mail order communication through
March 31, 1998. The agreement also included 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 was reduced from $4
million to $2 million annually, and the time period was decreased from five to
three years effective November 1, 1997. In addition, the agreement limited 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 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.
Montgomery Ward purchased approximately $2.0 million, $1.8 million and $3.3
million of advertising spot time on cable systems affiliated with the Company
pursuant to cable affiliation agreements for the years ended January 31, 2000,
1999 and 1998, respectively. Under the terms of the Credit Card License and
Receivable Sales Agreement, the Company incurred $167,000, $301,000 and
$1,123,000 of processing fees during fiscal 2000, 1999 and 1998, respectively,
as a result of customers using Montgomery Ward/ValueVision credit cards. In
addition, during fiscal 2000, 1999 and 1998, respectively, the Company earned
$147,000, $135,000 and $831,000 for administering and processing Montgomery Ward
credit card applications. As of January 31, 2000 and 1999, the Company had
$1,940,000 and $1,171,000 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.
57
<PAGE> 58
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
4. ACQUISITIONS AND DISPOSITIONS:
MONTGOMERY WARD DIRECT
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 believed was 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. 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 amortized on a
straight-line basis over 5-12 years. Intangible assets recorded in connection
with this acquisition were reduced to zero in fiscal 1998 in connection with the
restructuring transaction with Montgomery Ward. In fiscal 1998, the Company
changed the name of the MWD catalog to HomeVisions and in fiscal 1999 decided to
wind down and divest the HomeVisions operations.
In connection with the decision to divest HomeVisions, ValueVision entered
into an agreement to license and sell the exclusive marketing rights to the
"HomeVisions" name and related customer list database to Direct Marketing
Services, Inc. ("DMSI"), a direct-mail marketer and catalog distributor
headquartered in Chicago, Illinois. The Company recorded a $1,443,000 gain in
fiscal 1999 related to the sale of these assets.
Net sales and operating results for HomeVisions for the years ended January
31, 2000, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales........................................... $1,127 $18,862 $74,756
Operating loss...................................... $ (114) $(6,794) $(6,091)
</TABLE>
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 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 was recorded as goodwill and amortized on a
straight-line basis over 15 years, and $500,000 was assigned to a non-compete
agreement and amortized on a straight-line basis over the 6-year term of the
agreement.
Effective December 31, 1999, the Company completed the sale of BII for a
total of $5,000,000 which was received in the form of a promissory note,
representing the net book value of BII on the date of sale. Accordingly, no gain
or loss was recorded on the closing of the sale. The principal on the note is
payable quarterly, starting in March 2002, over a seven-year period and bears
and interest at 6 1/4%, payable quarterly starting in June 2000. Management
believes that the sale will not have a significant impact on the ongoing
operations of the Company.
58
<PAGE> 59
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
Net sales and operating results for BII for the years ended January 31,
2000, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales............................................. $4,317 $4,994 $4,748
Operating income (loss)............................... $ (456) $ (416) $ 83
</TABLE>
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. 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, was recorded as goodwill, and was amortized on a straight-line
basis over 15 years.
On October 31, 1999 the Company completed the sale of CVI to privately held
Massachusetts-based Potpourri Holdings, Inc. for approximately $7,300,000 cash
and up to an additional $5,500,000 contingent upon CVI's performance over the
twelve months following the sale. A pre-tax loss of approximately $128,000 was
recorded on the initial closing of the sale of CVI and was recognized in the
third quarter ended October 31, 1999. Any contingent consideration received by
the Company will be recorded as a gain when received. Management believes that
the sale will not have a significant impact on the ongoing operations of the
Company.
Net sales and operating income for CVI for the years ended January 31,
2000, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales.......................................... $19,260 $31,674 $31,907
Operating income................................... $ 329 $ 1,946 $ 2,165
</TABLE>
SALE OF BROADCAST STATIONS
On July 31, 1997, the Company completed the sale of its television
broadcast station, WVVI-TV, which served the Washington D.C. market, to Paxson
Communications Corporation ("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. The Company acquired WVVI-TV 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 quarter of fiscal 1998.
On February 27, 1998, the Company completed the sale of its television
broadcast station KBGE-TV Channel 33, which served 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
was payable by the first quarter of fiscal 2000. The Company continues to serve
the Seattle market
59
<PAGE> 60
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
via its low-power station K58DP-TV, which transmits from downtown Seattle. The
Company acquired KBGE-TV in March 1996 for approximately $4.6 million. The
pre-tax gain recorded on the first installment with respect to the sale of this
television station was approximately $19.8 million and was recognized in the
first quarter of fiscal 1999. On April 12, 1999, the Company received the
contingent payment of $10 million relating to the sale of KBGE-TV and as a
result, the Company recognized a $10 million pre-tax gain, net of applicable
closing fees, in the first quarter of fiscal 2000. The $10 million contingent
payment finalized the agreement between the two companies.
On September 27, 1999, the Company completed the sale of its KVVV-TV
full-power television broadcast station, Channel 33, and K53 FV low-power
station, serving the Houston, Texas market, for a total of $28 million to
Visalia, California-based Pappas Telecasting Companies. The Company acquired
KVVV-TV in March 1994 for approximately $5.8 million. The pre-tax gain recorded
on the sale of the television station was approximately $23.3 million and was
recognized in the third quarter of fiscal 2000.
Management believes that sales of its television stations will not have a
significant impact on the ongoing operations of the Company.
5. RESTRUCTURING AND IMPAIRMENT OF ASSETS:
In the third quarter of fiscal 1999, the Company approved a restructuring
plan and the effective divestiture of its HomeVisions catalog operations. The
decision to restructure and divest HomeVisions was made primarily as a result of
continuing operating losses and the deteriorating financial performance of the
catalog's operations since Montgomery Ward's announcement of its bankruptcy
filing in the summer of 1997. Operating losses for HomeVisions further increased
as a result of the subsequent termination of HomeVisions' right to use the
Montgomery Ward private label credit card in March 1998. As a result of the
decision to divest HomeVisions, the Company mailed its last HomeVisions catalog
in the fourth quarter of fiscal 1999 and effectively wound down the catalog
operation as of January 31, 1999. In connection with the restructuring plan and
divestiture of HomeVisions, the Company recorded a $2,950,000 restructuring and
asset impairment charge in the third quarter of fiscal 1999. The restructuring
charge included severance costs and the write-down of certain assets including
inventory, property and equipment, capitalized software and capitalized catalog
costs that were deemed impaired as a direct result of the decision to divest
Home Visions. As of January 31, 2000, all accrued restructuring reserves had
been utilized.
6. LOW POWER TELEVISION STATIONS:
The FCC through the Communications Act of 1934 regulates the licensing of
LPTV stations' transmission authority. 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, 2000, the Company held licenses for eleven LPTV
stations.
7. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK:
COMMON STOCK
The Company currently has authorized 100,000,000 shares of undesignated
capital stock, of which approximately 38,192,000 shares were issued and
outstanding as Common Stock as of January 31, 2000. The Board of Directors can
establish new classes and series of capital stock by resolution without
shareholder approval.
60
<PAGE> 61
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
REDEEMABLE PREFERRED STOCK
As discussed further in Note 15, in fiscal 2000, pursuant to an Investment
Agreement between the Company and GE Capital Equity Investments, Inc., the
Company sold to GE Equity 5,339,500 shares of Series A Redeemable Convertible
Preferred Stock, $0.01 par value for aggregate proceeds of $44,265,000 less
issuance costs of $2,850,000. The Preferred Stock is convertible into an equal
number of shares of the Company's Common Stock and has a mandatory redemption
after ten years from date of issuance at $8.29 per share, its stated value. The
excess of the redemption value over the carrying value is being accreted by
periodic charges to retained earnings over the ten-year redemption period.
WARRANTS
As discussed further in Note 15, in fiscal 2000, the Company issued to NBC
warrants to purchase 1,450,000 shares of the Company's common stock at an
exercise price of $8.29 per share. The warrants were issued in connection with
the Company's execution of a Distribution and Marketing Agreement with NBC.
As discussed further in Note 16, in fiscal 2000, the Company issued to
Xoom.com, Inc. warrants to purchase 404,760 shares of the Company's common stock
at an exercise price of $24.706 per share. The warrants were issued in
consideration for the Company's receipt of 244,004 warrants to acquire shares of
Xoom.com, Inc.'s $0.0001 par value common stock at an exercise price of $40.983
per share. The exchange of warrants was made pursuant to the Company's
re-branding and strategic electronic commerce alliance with NBCi.
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 3,250,000 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 Company also adopted an
executive incentive stock option plan ("the 1994 Executive Plan"), which
provides for the grant of options to certain executives to purchase up to
2,400,000 shares of the Company's common stock. The exercise price for options
granted under the 1990 Plan and the 1994 Executive 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%. 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 2000, 1999 and 1998,
consistent with the provisions of SFAS No. 123, the Company's net income
available to common
61
<PAGE> 62
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
shareholders and net income per common share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income available to common
shareholders:
As reported........................... $29,123,000 $ 4,639,000 $18,104,000
Pro forma............................. 23,644,000 3,729,000 17,805,000
Net income per share:
Basic:
As reported........................ $ 0.89 $ 0.18 $ 0.57
Pro forma.......................... 0.73 0.14 0.56
Diluted:
As reported........................ $ 0.73 $ 0.18 $ 0.57
Pro forma.......................... 0.60 0.15 0.57
</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>
1994
1990 EXECUTIVE
INCENTIVE STOCK NON-QUALIFIED STOCK OPTION
OPTION PLAN STOCK OPTIONS PLAN
--------------- ------------- ------------
<S> <C> <C> <C>
Fiscal 2000 grants...................... $12.85 $16.45 $31.84
Fiscal 1999 grants...................... 2.90 -- 2.21
Fiscal 1998 grants...................... 2.49 2.77 2.14
</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 2000, 1999 and 1998, respectively:
risk-free interest rates of 6.5, 5.0 and 6.0 percent; expected volatility of 65,
56 and 47 percent; and expected lives of 6 to 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.
62
<PAGE> 63
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
A summary of the status of the Company's stock option plan as of January
31, 2000, 1999, and 1998 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1990 1994
INCENTIVE WEIGHTED NON- WEIGHTED EXECUTIVE WEIGHTED
STOCK AVERAGE 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,
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
Granted............................. 650,266 5.13 -- -- 800,000 3.38
Exercised........................... (336,167) 4.15 (32,000) 5.50 (44,000) 3.63
Forfeited or canceled............... (435,500) 5.38 (28,000) 5.50 (356,000) 8.58
--------- ------ --------- ------ --------- ------
Balance outstanding, January 31,
1999................................ 1,338,435 4.69 895,000 4.97 2,000,000 7.05
Granted............................. 1,166,500 19.67 925,000 25.19 100,000 40.56
Exercised........................... (712,280) 4.68 (340,000) 5.45 (600,000) 9.50
Forfeited or canceled............... (90,916) 6.59 (63,000) 5.81 -- --
--------- ------ --------- ------ --------- ------
Balance outstanding January 31,
2000................................ 1,701,739 $14.87 1,417,000 $18.01 1,500,000 $ 8.30
========= ====== ========= ====== ========= ======
Options exercisable at:
January 31, 2000.................... 765,000 $10.74 751,000 $13.01 1,500,000 $ 8.30
========= ====== ========= ====== ========= ======
January 31, 1999.................... 729,000 $ 4.24 585,000 $ 4.88 1,719,000 $ 7.65
========= ====== ========= ====== ========= ======
January 31, 1998.................... 938,000 $ 4.37 538,000 $ 4.82 600,000 $ 9.50
========= ====== ========= ====== ========= ======
</TABLE>
The following table summarizes information regarding stock options
outstanding at January 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL LIFE OPTIONS EXERCISE
OPTION TYPE PRICES OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
----------- ----------------- ----------- -------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Incentive:.................. $1.00- $4.88 321,867 $ 4.40 4.0 297,000 $ 4.36
$5.38- $10.31 483,700 $ 8.49 6.4 262,000 $ 7.33
$16.00- $24.69 896,172 $22.07 6.6 206,000 $24.27
--------- ---------
$1.00- $24.69 1,701,739 $14.87 6.1 765,000 $10.74
========= =========
Non-qualified:.............. $4.13- $6.19 495,000 $ 4.67 2.6 445,000 $ 4.68
$23.81- $42.13 922,000 $25.17 6.7 306,000 $25.13
--------- ---------
$4.13- $42.13 1,417,000 $18.01 5.2 751,000 $13.01
========= =========
Executive:.................. $3.38- $9.50 1,400,000 $ 6.00 6.5 1,400,000 $ 6.00
$40.56 100,000 $40.56 6.5 100,000 $40.56
--------- ---------
$3.38- $40.56 1,500,000 $ 8.30 6.5 1,500,000 $ 8.30
========= =========
</TABLE>
63
<PAGE> 64
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
STOCK OPTION TAX BENEFIT
The exercise of certain stock options granted under the Company's stock
option plans 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 $17,923,000, $731,000 and $39,000 in fiscal 2000, 1999 and 1998,
respectively.
COMMON STOCK REPURCHASE PROGRAM
In fiscal 1996, the Company established a stock repurchase program whereby
the Company may repurchase shares of its common stock 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 June 1998, the
Company's Board of Directors authorized an additional repurchase of up to $6
million of the Company's common stock. As of January 31, 2000, the Company was
authorized to repurchase an aggregate of $26 million of its common stock of
which approximately $21.6 million in stock had been repurchased. During fiscal
1999, the Company repurchased 1,327,000 common shares under the program for a
total net cost of $4,292,000. During fiscal 1998, the Company repurchased
2,417,000 common shares for a total cost of $10,458,000.
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,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Accruals and reserves not currently deductible for
tax purposes....................................... $ 1,528,000 $3,153,000
Inventory capitalization............................. 433,000 600,000
Deferred catalog costs............................... -- (507,000)
Basis differences in intangible assets............... (684,000) (250,000)
Differences in depreciation lives and methods........ (635,000) (517,000)
Differences in investments and other items........... (5,417,000) (21,000)
----------- ----------
Net deferred tax asset (liability)................... $(4,775,000) $2,458,000
=========== ==========
</TABLE>
The net deferred tax asset (liability) is classified as follows in the
accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Current deferred taxes............................... $ 1,950,000 $1,807,000
Noncurrent deferred taxes............................ (6,725,000) 651,000
----------- ----------
Net deferred tax asset (liability)................... $(4,775,000) $2,458,000
=========== ==========
</TABLE>
64
<PAGE> 65
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current................................. $17,401,000 $ 4,590,000 $ 9,661,000
Deferred................................ 40,000 (1,738,000) 1,839,000
----------- ----------- -----------
$17,441,000 $ 2,852,000 $11,500,000
=========== =========== ===========
</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,
------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rates........................ 35.0% 34.0% 35.0%
State income taxes, net of federal tax benefit.......... 2.0 3.1 3.8
Amortization and other permanent items.................. 0.3 1.0 --
---- ---- ----
Effective tax rate...................................... 37.3% 38.1% 38.8%
==== ==== ====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
CABLE AND SATELLITE AFFILIATION AGREEMENTS
As of January 31, 2000, the Company had entered into 3 to 8 year
affiliation agreements with fourteen multiple systems operators ("MSO's") which
require each operator to offer the Company's television home shopping
programming on a full-time basis over their systems. Under certain
circumstances, these television operators may cancel their agreements prior to
expiration. The affiliation agreements provide that the Company will pay each
operator a monthly 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, 2000, 1999 and 1998, the Company paid approximately
$28,134,000, $19,494,000 and $17,431,000 under these long-term affiliation
agreements.
As of January 31, 2000, the Company had entered into an eight-year
affiliation agreement with DIRECTV, which requires DIRECTV to offer the
Company's television home shopping programming on a full-time basis over its
systems. The affiliation agreement provides that the Company will pay a monthly
access fee based upon the number of homes carrying the programming.
The Company has entered into, and will continue to enter into, affiliation
agreements with other 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 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
On December 2, 1999, the Company entered into an employment agreement with
its Chief Executive Officer, which expires on March 31, 2001. The employment
agreement specifies, among other things, the term and duties of employment,
compensation and benefits, termination of employment and non-compete
restrictions. In addition, the employment agreement also provides for a
$1,000,000 retention bonus payable by the Company if the officer remains
employed through the end of the contract period.
The Company had entered into employment agreements with its former chief
executive officer and chief operating officer, which expired on January 31,
1999. The employment agreements provided that each officer,
65
<PAGE> 66
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
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 were to vest and become exercisable at the earlier of the
Company achieving certain net income goals, as defined, or in September 2003. As
of January 31, 2000, 600,000 of these options were exercisable, 600,000 had been
exercised and 300,000 options had been forfeited. Payments for future base
compensation for these former officers were terminated as of January 31, 1999.
In addition, the Company has entered into employment agreements with a
number of officers of the Company and its subsidiaries for original terms
ranging from 12 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, 2000 was approximately $9,220,000.
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, 2000 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- ------
<S> <C>
2001.................................................... $3,255,000
2002.................................................... 3,245,000
2003.................................................... 3,291,000
2004.................................................... 3,291,000
2005 and thereafter..................................... 4,399,000
</TABLE>
Total lease expense under such agreements was approximately $4,028,000 in
2000, $4,145,000 in 1999 and $4,227,000 in 1998.
RETIREMENT AND SAVINGS PLAN
The Company maintains 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. Starting in
January 1999, the Company has elected to make matching contributions to the
plan. The Company will match $.25 for every $1.00 contributed by eligible
participants up to a maximum of 6% of eligible compensation. The Company made
plan contributions totaling approximately $72,000 and $6,000 during fiscal 2000
and 1999, respectively. There were no Company contributions made to the plan in
fiscal 1998.
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 had 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 Designated Market Area. ValueVision
purchased television station WHAI-TV from Bridgeways in 1994 and subsequently
sold it
66
<PAGE> 67
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
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.
On December 23, 1998 the Company announced that it settled the lawsuit
filed by Time Warner Cable. Under the terms of the settlement, ValueVision paid
Time Warner Cable $7.0 million in cash which was recognized by ValueVision in
the fourth quarter of fiscal 1999, resulting in an after tax charge of
approximately $4.3 million. In settling this matter, ValueVision did not admit
any wrongdoing or liability. ValueVision, however, determined to enter into this
settlement to avoid the uncertainty and costs of litigation, as well as to avoid
disruption of its relationship with a key business partner providing a
substantial portion of ValueVision's program distribution.
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 individually and 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, 1999 the Company had approximately $1,059,000 of notes
receivable from certain former officers of the Company that were repaid in
fiscal 2000. The notes were reflected as a reduction of shareholders' equity in
the January 31, 1999 consolidated balance sheet, as the notes were partially
collateralized by shares of the Company's common stock owned by the former
officers.
67
<PAGE> 68
VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
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,
----------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid........................................ $ 58,000 $ 107,000 $ 89,000
=========== ========== ===========
Income taxes paid.................................... $ 8,456,000 $3,889,000 $11,482,000
=========== ========== ===========
Supplemental non-cash investing and financing
activities:
Increase in additional paid-in capital resulting from
income tax benefit recorded on stock option
exercises......................................... $17,923,000 $ 731,000 $ 39,000
=========== ========== ===========
Issuance of 1,450,000 warrants in connection with NBC
Distribution and Marketing Agreement.............. $ 6,931,000 $ -- $ --
=========== ========== ===========
Issuance of 244,044 warrants in connection with NBCi
investment........................................ $ 6,679,000 $ -- $ --
=========== ========== ===========
Receipt of interest bearing note in connection with
the sale of BII................................... $ 5,000,000 $ -- $ --
=========== ========== ===========
Accretion of redeemable preferred stock.............. $ 207,000 $ -- $ --
=========== ========== ===========
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
=========== ========== ===========
</TABLE>
13. SEGMENT DISCLOSURES AND RELATED INFORMATION:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
requires the disclosure of certain information about operating segments in
financial statements. The Company's reportable segments are based on the
Company's method of internal reporting, which generally segregates the strategic
business units into two segments: electronic media, consisting primarily of the
Company's television home shopping business, and print media, whereby
merchandise is sold to consumers through direct-mail catalogs and other direct
marketing solicitations. See Note 4 regarding the disposition of the Company's
catalog operations. Segment information
68
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
included in the accompanying consolidated balance sheets as of January 31 and
included in the consolidated statements of operations for the years then ended
is as follows:
<TABLE>
<CAPTION>
ELECTRONIC PRINT
YEARS ENDED JANUARY 31, (IN THOUSANDS) MEDIA MEDIA CORPORATE TOTAL
- -------------------------------------- ---------- ----- --------- -----
<S> <C> <C> <C> <C>
2000
Revenues........................................... $250,223 $ 24,704 $ -- $274,927
Operating income (loss)............................ 4,237 (241) -- 3,996
Depreciation and amortization...................... 4,369 597 -- 4,966
Interest income, net............................... 9,869 260 -- 10,129
Income taxes....................................... 17,806 (365) -- 17,441
Net income (loss).................................. 29,882 (552) -- 29,330
Identifiable assets................................ 401,737 11,705 58,413(a) 471,855
Capital expenditures............................... 4,001 35 -- 4,036
-------------------------------------------------
1999
Revenues........................................... $148,198 $ 55,530 $ -- $203,728
Operating loss..................................... (3,305) (5,264) -- (8,569)
Depreciation and amortization...................... 3,970 1,029 -- 4,999
Interest income, net............................... 2,724 180 -- 2,904
Income taxes....................................... 4,823 (1,971) -- 2,852
Net income (loss).................................. 7,870 (3,231) -- 4,639
Identifiable assets................................ 107,385 19,941 14,444(a) 141,770
Capital expenditures............................... 1,339 226 -- 1,565
-------------------------------------------------
1998
Revenues........................................... $106,571 $111,411 $ -- $217,982
Operating loss..................................... (7,132) (3,843) -- (10,975)
Depreciation and amortization...................... 5,350 1,627 -- 6,977
Interest income, net............................... 1,817 299 -- 2,116
Income taxes....................................... 13,482 (1,982) -- 11,500
Net income (loss).................................. 21,076 (2,972) -- 18,104
Identifiable assets................................ 70,314 38,460 26,505(a) 135,279
Capital expenditures............................... 3,166 377 -- 3,543
-------------------------------------------------
</TABLE>
- -------------------------
(a) Corporate assets consist of long-term investment assets not directly
assignable to a business segment.
14. NATIONAL MEDIA CORPORATION:
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. 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 and the Company did 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. On June 2, 1998, the Company announced that attempts
to renegotiate new, mutually acceptable terms and conditions regarding a
transaction with National Media were unsuccessful and the Merger Agreement was
69
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
terminated. The Company had incurred approximately $2,350,000 of acquisition
related costs and wrote off these amounts in fiscal 1999.
Concurrently with the execution of the proposed 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, with the remaining $3.0 million
subsequently advanced in fiscal 1999. The loan proceeds were used by National
Media for various purposes, including the funding of accounts receivable,
inventory and media purchases. The loan included interest at the prime rate plus
1.5% per annum and was due on the earlier of January 1, 1999 or upon termination
of the Merger Agreement in certain circumstances. In consideration for providing
the Loan, National Media issued to the Company warrants to acquire 250,000
shares of National Media's common stock at an exercise price of $2.74 per share
and amended the exercise price of previously issued warrants to purchase 500,000
shares of common stock from $8.865 per share to $2.74 per share.
In December 1998, National Media repaid the $10 million Demand Note, plus
accrued interest, and the Company exercised warrants to purchase 750,000 shares
of National Media common stock for an aggregate purchase price of $3,255,000.
During fiscal 2000 and fiscal 1999, respectively, the Company sold 252,000 and
460,000 shares of National Media common stock and recognized gains of $145,000
and $2,972,000, respectively, on the sale. In addition, fiscal 2000 and fiscal
1999 earnings include unrealized holding gains (losses) of $(891,000) and
$1,350,000, respectively, related to National Media shares held by the Company.
Remaining shares held are classified as "trading securities" in the accompanying
January 31, 2000 consolidated balance sheet, as it is the Company's intent to
sell these securities in the near future.
15. NBC AND GE EQUITY STRATEGIC ALLIANCE:
On March 8, 1999, the Company entered into a strategic alliance with NBC
and GE Capital Equity Investments, Inc. ("GE Equity"). Pursuant to the terms of
the transaction, GE Equity acquired 5,339,500 shares of the Company's Series A
Redeemable Convertible Preferred Stock (the "Preferred Stock"), and NBC was
issued a warrant to acquire 1,450,000 shares of the Company's Common Stock (the
"Distribution Warrant") under a Distribution and Marketing Agreement discussed
below. The Preferred Stock was sold for aggregate consideration of approximately
$44.0 million (or approximately $8.29 per share) and the Company will receive an
additional approximately $12.0 million upon exercise of the Distribution
Warrant. In addition, the Company agreed to issue to GE Equity a warrant to
increase its potential aggregate equity stake (together with its affiliates,
including NBC) at the time of exercise to 39.9%. NBC also has the exclusive
right to negotiate on behalf of the Company for the distribution of its
television home shopping service.
INVESTMENT AGREEMENT
Pursuant to the Investment Agreement between the Company and GE Equity
dated March 8, 1999 (the "Investment Agreement"), the Company sold to GE Equity
the Preferred Stock for an aggregate of $44,265,000. The Preferred Stock is
convertible into an equal number of shares of the Company's Common Stock,
subject to customary anti-dilution adjustments, has a mandatory redemption on
the 10th anniversary of its issuance or upon a "change of control" at its stated
value ($8.29 per share), participates in dividends on the same basis as the
Common Stock and has a liquidation preference over the Common Stock and any
other junior securities. So long as NBC or GE Equity is entitled to designate a
nominee to the Board of Directors (the "Board") of the Company (see discussion
under "Shareholder Agreement" below), the holders of the Preferred Stock are
entitled to a separate class vote on the directors subject to nomination by NBC
and GE Equity. During such period of time, such holders will not be entitled to
vote in the election of any other directors, but will be entitled to vote on all
other matters put before shareholders of the Company. Consummation of the sale
of 3,739,500 shares of the Preferred Stock was completed on April 15, 1999.
Final
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
consummation of the transaction regarding the sale of the remaining 1,600,000
Preferred Stock shares was completed on June 2, 1999. The Preferred Stock was
recorded at fair value on the date of issuance less issuance costs of
$2,850,000. The excess of the redemption value over the carrying value is being
accreted by periodic charges to retained earnings over the ten-year redemption
period.
The Investment Agreement also provided that the Company issue GE Equity the
Investment Warrant. On July 6, 1999, GE Equity exercised the Investment Warrant
and acquired an additional 10,674,000 shares of the Company's Common Stock for
an aggregate of $178,370,000, or $16.71 per share, representing the 45-day
average closing price of the underlying Common Stock ending on the trading day
prior to exercise. Following the exercise of the Investment Warrant, the
combined ownership of the Company by GE Equity and NBC on a fully diluted basis
was approximately 39.9%.
SHAREHOLDER AGREEMENT
Pursuant to the Investment Agreement, the Company and GE Equity entered
into a Shareholder Agreement (the "Shareholder Agreement"), which provides for
certain corporate governance and standstill matters. The Shareholder Agreement
(together with the Certificate of Designation of the Preferred Stock) provides
that GE Equity and NBC will be entitled to designate nominees for an aggregate
of 2 out of 7 board seats so long as their aggregate beneficial ownership is at
least equal to 50% of their initial beneficial ownership, and 1 out of 7 board
seats so long as their aggregate beneficial ownership is at least 10% of the
"adjusted outstanding shares of Common Stock". GE Equity and NBC have also
agreed to vote their shares of Common Stock in favor of the Company's nominees
to the Board in certain circumstances.
All committees of the Board will include a proportional number of directors
nominated by GE Equity and NBC. The Shareholder Agreement also requires the
consent of GE Equity prior to the Company entering into any substantial
agreements with certain restricted parties (broadcast networks and internet
portals in certain limited circumstances, as defined), as well as taking any of
the following actions: (i) issuance of more than 15% of the total voting shares
of the Company in any 12-month period (25% in any 24-month period), (ii) payment
of quarterly dividends in excess of 5% of the Company's market capitalization
(or repurchases and redemption of Common Stock with certain exceptions), (iii)
entry by the Company into any business not ancillary, complementary or
reasonably related to the Company's current business, (iv) acquisitions
(including investments and joint ventures) or dispositions exceeding the greater
of $35.0 million or 10% of the Company's total market capitalization, or (v)
incurrence of debt exceeding the greater of $40.0 million or 30% of the
Company's total capitalization.
Pursuant to the Shareholder Agreement, so long as GE Equity and NBC have
the right to name at least one nominee to the Board, the Company will provide
them with certain monthly, quarterly and annual financial reports and budgets.
In addition, the Company has agreed not to take actions, which would cause the
Company to be in breach of or default under any of its material contracts (or
otherwise require a consent thereunder) as a result of acquisitions of the
Common Stock by GE Equity or NBC. The Company is also prohibited from taking any
action that would cause any ownership interest of certain FCC regulated entities
from being attributable to GE Equity, NBC or their affiliates.
The Shareholder Agreement provides that during the Standstill Period (as
defined in the Shareholder Agreement), and with certain limited exceptions, GE
Equity and NBC shall be prohibited from: (i) any asset/business purchases from
the Company in excess of 10% of the total fair market value of the Company's
assets, (ii) increasing their beneficial ownership above 39.9% of the Company's
shares, (iii) making or in any way participating in any solicitation of proxies,
(iv) depositing any securities of the Company in a voting trust, (v) forming,
joining, or in any way becoming a member of a "13D Group" with respect to any
voting securities of the Company, (vi) arranging any financing for, or providing
any financing commitment specifically for, the purchase of any voting securities
of the Company, (vii) otherwise acting, whether alone or
71
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
in concert with others, to seek to propose to the Company any tender or exchange
offer, merger, business combination, restructuring, liquidation,
recapitalization or similar transaction involving the Company, or nominating any
person as a director of the Company who is not nominated by the then incumbent
directors, or proposing any matter to be voted upon by the shareholders of the
Company. If during the Standstill Period any inquiry has been made regarding a
"takeover transaction" or "change in control" which has not been rejected by the
Board, or the Board pursues such a transaction, or engages in negotiations or
provides information to a third party and the Board has not resolved to
terminate such discussions, then GE Equity or NBC may propose to the Company a
tender offer or business combination proposal.
In addition, unless GE Equity and NBC beneficially own less than 5% or more
than 90% of the adjusted outstanding shares of Common Stock, GE Equity and NBC
shall not sell, transfer or otherwise dispose of any securities of the Company
except for transfers: (i) to certain affiliates who agree to be bound by the
provisions of the Shareholder Agreement, (ii) which have been consented to by
the Company, (iii) pursuant to a third party tender offer, provided that no
shares of Common Stock may be transferred pursuant to this clause (iii) to the
extent such shares were acquired upon exercise of the Investment Warrant on or
after the date of commencement of such third party tender offer or the public
announcement by the offeror thereof or that such offeror intends to commence
such third party tender offer, (iv) pursuant to a merger, consolidation or
reorganization to which the Company is a party, (v) in a bona fide public
distribution or bona fide underwritten public offering, (vi) pursuant to Rule
144 of the Securities Act of 1933, as amended (the "Securities Act"), or (vii)
in a private sale or pursuant to Rule 144A of the Securities Act; provided that,
in the case of any transfer pursuant to clause (v) or (vii), such transfer does
not result in, to the knowledge of the transferor after reasonable inquiry, any
other person acquiring, after giving effect to such transfer, beneficial
ownership, individually or in the aggregate with such person's affiliates, of
more than 10% of the adjusted outstanding shares of the Common Stock.
The Standstill Period will terminate on the earliest to occur of (i) the 10
year anniversary of the Shareholder Agreement, (ii) the entering into by the
Company of an agreement that would result in a "change in control" (subject to
reinstatement), (iii) an actual "change in control," (iv) a third party tender
offer (subject to reinstatement), and (v) six months after GE Equity and NBC can
no longer designate any nominees to the Board. Following the expiration of the
Standstill Period pursuant to clause (i) or (v) above (indefinitely in the case
of clause (i) and two years in the case of clause (v)), GE Equity and NBC's
beneficial ownership position may not exceed 39.9% of the Company on
fully-diluted outstanding stock, except pursuant to issuance or exercise of any
warrants or pursuant to a 100% tender offer for the Company.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Investment Agreement, ValueVision and GE Equity entered
into a Registration Rights Agreement providing GE Equity, NBC and their
affiliates and any transferees and assigns, an aggregate of four demand
registrations and unlimited piggy-back registration rights.
DISTRIBUTION AND MARKETING AGREEMENT
NBC and the Company entered into the Distribution and Marketing Agreement
dated March 8, 1999 (the "Distribution Agreement") which provides that NBC shall
have the exclusive right to negotiate on behalf of the Company for the
distribution of its home shopping television programming service. The agreement
has a 10-year term and NBC has committed to delivering an additional 10 million
FTE subscribers over the first 42 months of the term. In compensation for such
services, the Company will pay NBC an annual fee of $1.5 million (increasing no
more than 5% annually) and issue NBC the Distribution Warrant. The exercise
price of the Distribution Warrant is approximately $8.29 per share. Of the
aggregate 1,450,000 shares subject to the Distribution Warrant, 200,000 shares
vested immediately, with the remainder vesting 125,000
72
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
shares annually over the 10-year term of the Distribution Agreement. The
Distribution Warrant is exercisable for five years after vesting. The value
assigned to the Distribution Agreement and Distribution Warrant of $6,931,000
was determined pursuant to an independent appraisal and is being amortized on a
straight-line basis over the term of the agreement. Assuming certain performance
criteria above the 10 million FTE homes are met, NBC will be entitled to
additional warrants to acquire Common Stock at the then current market price.
The Company has a right to terminate the Distribution Agreement after the
twenty-fourth, thirty-sixth and forty-second month anniversary if NBC is unable
to meet the performance targets. If terminated by the Company in such
circumstance, the unvested portion of the Distribution Warrant will expire. In
addition, the Company will be entitled to a $2.5 million payment from NBC if the
Company terminates the Distribution Agreement as a result of NBC's failure to
meet the 24-month performance target.
NBC may terminate the Distribution Agreement if the Company enters into
certain "significant affiliation" agreements or a transaction resulting in a
"change of control."
LETTER AGREEMENT
The Company, GE Equity and NBC have also entered into a non-binding letter
of intent dated March 8, 1999 providing for certain cooperative business
activities which the parties contemplate pursuing, including but not limited to,
development of a private label credit card, development of electronic commerce
and other internet strategies, development of programming concepts for the
Company and cross channel promotion.
16. NBC INTERNET, INC. RE-BRANDING AND ELECTRONIC COMMERCE ALLIANCE:
Effective September 13, 1999, the Company entered into a new strategic
alliance with Snap! LLC ("Snap") and Xoom.com, Inc. ("Xoom") whereby the parties
entered into major re-branding and e-commerce agreements, spanning television
home shopping, Internet shopping and direct e-commerce initiatives. Under the
terms of the agreements, the Company's television home shopping network,
currently called ValueVision, will be re-branded as SnapTV. The re-branding will
be phased in during the latter half of fiscal 2001. The network, which will
continue to be owned and operated by the Company, will continue to feature its
present product line as well as offer new categories of products and brands. The
Company, along with Snap.com, NBC's Internet portal services company, will
roll-out a new companion Internet shopping service, SnapTV.com featuring online
purchasing opportunities that spotlight products offered on-air along with
online-only e-commerce opportunities offered by Snap TV and its merchant
partners. The new SnapTV.com online store will be owned and operated by the
Company and featured prominently within SnapTV.com's shopping area. Xoom.com, a
leading direct e-commerce services company, will become the exclusive direct
e-commerce partner for SnapTV, managing all such initiatives, including database
management, e-mail marketing and other sales endeavors. Direct online shopping
offers will include SnapTV merchandise, as well as Xoom.com products and
services. Pursuant to this new strategic alliance, the following agreements were
executed:
TRADEMARK LICENSE AGREEMENT
Snap and the Company entered into a ten-year Trademark License Agreement
dated as of September 13, 1999 (the "Trademark Agreement"). Pursuant to the
agreement, Snap granted the Company an exclusive license to Snap's "SnapTV"
trademark (the "SnapTV Mark") for the purpose of operating a television home
shopping service and for the purpose of operating an Internet website at
"www.snaptv.com" (the "SnapTV Site"). The agreement also obligates the Company
to rebrand its television home shopping service using the SnapTV Mark. In
compensation for the license, the Company will pay to Snap a royalty of 2% of
revenues received from Internet users in connection with commerce transactions
on the SnapTV Site.
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
INTERACTIVE PROMOTION AGREEMENT
Snap, Xoom and the Company entered into a ten-year Interactive Promotion
Agreement dated as of September 13, 1999 (the "Interactive Promotion
Agreement"). Pursuant to the agreement: (a) the Company will pay Snap or Xoom,
as applicable, 20% of the gross revenue received from advertising on the
Company's television home shopping service where Snap or Xoom referred the
advertiser to the Company or materially assisted the Company with respect to the
sale of such advertising; (b) the Company will pay Xoom 50% of the gross revenue
received from e-mail campaigns conducted by Xoom on behalf of the Company for
the Company's products; and (c) the Company will pay Snap 20% of the gross
revenue generated from airtime on the Company's television home shopping service
which promotes any uniform resource locater ("URL") (excluding up to 15% of such
airtime to the extent used to promote URLs which do not include the
"www.snaptv.com" URL). Also under the agreement, Snap and Xoom shall have an
exclusive right to use the Company's user data for the purpose of conducting
e-mail marketing campaigns. Snap or Xoom, as applicable, will pay the Company
50% of the gross revenue generated from such campaigns. Snap will also be
granted the exclusive right to use or sell all Internet advertising on the
SnapTV Site, and Snap will pay the Company 50% of the gross revenue generated
from such use or sales. The agreement also provides that Snap and the Company
will provide certain cross-promotional activities. Specifically, commencing when
the Company's television home shopping program reaches 30 million full-time
equivalent subscribers and continuing through the fourth anniversary of the
effective date of the agreement, Snap will spend $1 million per quarter
promoting the SnapTV Mark on NBC's television network, and the Company will
spend $1 million per quarter promoting Snap, Snap's products or "www.snaptv.com"
on cable television advertising other than on the Company's television home
shopping program.
WARRANT PURCHASE AGREEMENT AND WARRANTS
Effective September 13, 1999, in connection with the transactions
contemplated under the Interactive Promotion Agreement, the Company issued a
warrant (the "ValueVision Warrant") to Xoom to acquire 404,760 shares of the
Company's Common Stock, at an exercise price of $24.706 per share. In
consideration, Xoom issued a warrant (the "Xoom Warrant," and collectively with
the ValueVision Warrant, the "Warrants") to the Company to acquire 244,004
shares of Xoom's common stock, $.0001 par value, at an exercise price of $40.983
per share. Both Warrants are subject to customary anti-dilution features and
have a five-year term. Effective November 24, 1999, Xoom and Snap, along with
several Internet assets of NBC, were merged into NBCi and, as a result, the Xoom
Warrant is deemed converted to the right to purchase shares of Class A Common
Stock of NBCi.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the ValueVision Warrant to Xoom, the
Company agreed to provide Xoom certain customary piggyback registration rights
with no demand registration rights. Xoom also provided the Company with similar
customary piggyback registration rights with no demand registration rights with
respect to the Xoom Warrant.
17. UNAUDITED SUBSEQUENT EVENT:
Effective February 7, 2000, the Company entered into a new electronic
commerce strategic alliance with Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), NBC, NBCi and CNBC.com LLC ("CNBC") whereby the parties created Ralph
Lauren Media, LLC ("Ralph Lauren Media"), a joint venture formed for the purpose
of bringing the Polo Ralph Lauren American lifestyle experience to consumers via
multiple media platforms, including the Internet, broadcast, cable and print.
Ralph Lauren Media is owned 50% by Polo Ralph Lauren, 25% by NBC, 12.5% by the
Company, 10% by NBCi and 2.5% by CNBC. In exchange for
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VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, 2000 AND 1999
their interest in Ralph Lauren Media, NBC agreed to contribute $110 million of
television and online advertising on NBC and CNBC properties, NBCi agreed to
contribute $40 million in online distribution and promotion and the Company has
contributed a cash funding commitment of up to $50 million. Ralph Lauren Media's
premier initiative will be Polo.com, an internet web site dedicated to the
American lifestyle that will include original content, commerce and a strong
community component. Polo.com is expected to launch in the third quarter of 2001
and will initially include an assortment of men's, women's and children's
products across the Ralph Lauren family of brands as well as unique gift items.
Polo.com will also receive anchor-shopping tenancies on NBCi's Snap portal
service. In connection with the formation of Ralph Lauren Media, the Company
entered into various agreements setting forth the manner in which certain
aspects of the business of Ralph Lauren Media are to be managed and certain of
the members' rights, duties and obligations with respect to Ralph Lauren Media,
including the following:
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF RALPH LAUREN MEDIA
Each of Polo Ralph Lauren, NBC, NBCi, CNBC and the Company executed the
Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"),
pursuant to which certain terms and conditions regarding operations of Ralph
Lauren Media and certain rights and obligations of its members are set forth,
including but not limited to: (a) certain customary demand and piggyback
registration rights with respect to equity of Ralph Lauren Media held by the
members after its initial public offering, if any; (b) procedures for resolving
deadlocks among managers or members of Ralph Lauren Media; (c) rights of each of
Polo Ralph Lauren on the one hand and NBC, the Company, NBCi and CNBC, on the
other hand, to purchase or sell, as the case may be, all of their membership
interests in Ralph Lauren Media to the other in the event of certain material
deadlocks and certain changes of control of either Polo Ralph Lauren and/or its
affiliates or NBC or certain of its affiliates, at a price and on terms and
conditions set forth in the agreement; (d) rights of Polo Ralph Lauren to
purchase all of the outstanding membership interests of Ralph Lauren Media from
and after its 12th anniversary, at a price and on terms and conditions set forth
in the agreement; (e) rights of certain of the members to require Ralph Lauren
Media to consummate an initial public offering of securities; (f) restrictions
on Polo Ralph Lauren from participating in the business of Ralph Lauren Media
under certain circumstances; (g) number and composition of the management
committee of Ralph Lauren Media, and certain voting requirements; (h)
composition and duties of officers of Ralph Lauren Media; (i) requirements
regarding meetings of members and voting requirements; (j) management of capital
contributions and capital accounts; (k) provisions governing allocations of
profits and losses and distributions to members; (l) tax matters; (m)
restrictions on transfers of membership interests; (n) rights and
responsibilities of the members in connection with the dissolution, liquidation
or winding up of Ralph Lauren Media; and (o) certain other customary
miscellaneous provisions.
AGREEMENT FOR SERVICES
Ralph Lauren Media and VVI Fulfillment Center, Inc., a Minnesota
corporation and wholly owned subsidiary of the Company ("VVIFC"), entered into
an Agreement for Services under which VVIFC agreed to provide to Ralph Lauren
Media certain telemarketing services, order and record services, and merchandise
and warehouse services. The telemarketing services to be provided by VVIFC
consist of receiving and processing telephone orders and telephone inquiries
regarding merchandise, and developing and maintaining a related telemarketing
system. The order and record services to be provided by VVIFC consist of
receiving and processing orders for merchandise by telephone, mail, facsimile
and electronic mail, providing records of such orders and related
customer-service functions, and developing and maintaining a records system for
such purposes. The merchandise and warehouse services consist of receiving and
shipping merchandise, providing warehousing functions and merchandise management
functions and developing a system for such purposes. The term of this agreement
continues until June 30, 2010, subject to renewal periods, under certain
conditions, of one year each.
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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 BALANCE AT
BEGINNING COSTS END OF
OF YEAR AND EXPENSES OTHER DEDUCTIONS YEAR
----------- ------------ ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
2000:
Allowance for doubtful accounts... $1,726,000 $ 6,184,000 $ (53,000)(3) $ (3,543,000)(1) $4,314,000
========== ============ ========= ============= ==========
Reserve for returns............... $2,291,000 $103,653,000 $(591,000)(3) $(101,643,000)(2) $3,710,000
========== ============ ========= ============= ==========
Restructuring-related severance
accrual......................... $ 300,000 $ -- $ -- $ (300,000) $ --
========== ============ ========= ============= ==========
FOR THE YEAR ENDED JANUARY 31,
1999:
Allowance for doubtful accounts... $ 453,000 $ 1,934,000 $ -- $ (661,000)(1) $1,726,000
========== ============ ========= ============= ==========
Reserve for returns............... $1,443,000 $ 60,295,000 $ -- $ (59,447,000)(2) $2,291,000
========== ============ ========= ============= ==========
Restructuring-related severance
accrual......................... $ -- $ 556,000 $ -- $ (256,000) $ 300,000
========== ============ ========= ============= ==========
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
========== ============ ========= ============= ==========
</TABLE>
- -------------------------
(1) Write off of uncollectible receivables, net of recoveries.
(2) Refunds or credits on products returned.
(3) Reduced through divestiture.
76
<PAGE> 77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
77
<PAGE> 78
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item with respect to certain information
relating to the Company's executive officers is contained in paragraph J of Item
I and with respect to other information relating to the Company's executive
officers and its directors 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.
78
<PAGE> 79
PART IV
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
3.1 -- Sixth Amended and Restated Articles of Incorporation, as
Amended.(B)
3.2 -- Certificate of Designation of Series A Redeemable
Convertible Preferred Stock.(H)
3.3 -- Bylaws, as amended.(B)
10.1 -- Amended 1990 Stock Option Plan of the Registrant.(I)+
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.(E)+
10.4 -- Form of Option Agreement under the 1994 Executive Stock
Option and Compensation Plan of the Registrant.(F)+
10.5 -- Option Agreement between the Registrant and Marshall Geller
dated as of June 3, 1994.(A)+
10.6 -- Option Agreement between the Registrant and Marshall Geller
dated August 8, 1995.(D)+
10.7 -- Option Agreement between the Registrant and Marshall Geller
dated as of March 3, 1997.(A)+
10.8 -- Option Agreement between the Registrant and Robert Korkowski
dated as of June 3, 1994.(A)+
10.9 -- Option Agreement between the Registrant and Robert Korkowski
dated August 8, 1995.(D)+
10.10 -- Option Agreement between the Registrant and Robert Korkowski
dated March 3, 1997.(A)+
10.11 -- Form of Mortgage Subordination Agreement dated as of
November, 1997 by and among LaSalle Bank F.S.B. and the
Registrant.(A)
10.12 -- 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.(C)
10.13 -- Transponder Service Agreement between the Registrant and
Hughes Communications Satellite Services, Inc.(C)
10.14 -- Industrial Space Lease Agreement between Registrant and
Shady Oak Partners dated August 31, 1994.(B)
10.15 -- Option Agreement between the Registrant and Paul Tosetti
dated September 4, 1996.(A)+
10.16 -- Option Agreement between the Registrant and Paul Tosetti
dated March 3, 1997.(A)+
10.17 -- 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)
10.18 -- Amendment to Asset and Stock Purchase Agreement dated
February 27, 1998.(A)
10.19 -- 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.(F)
</TABLE>
79
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
10.20 -- Second Amended and Restated Operating Agreement made as of
November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.21 -- Amended and Restated Credit Card License Agreement made as
of November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.22 -- Second Amended and Restated Servicemark License Agreement
made as of November 1, 1997 between Montgomery Ward and the
Registrant.(F)
10.23 -- Employment Agreement between the Registrant and Cary Deacon
dated December 30, 1998.(N)+
10.24 -- Investment Agreement by and between ValueVision and GE
Equity dated as of March 8, 1999.(G)
10.25 -- First Amendment and Agreement dated as of April 15, 1999 to
the Investment Agreement, dated as of March 8, 1999, by and
between the Registrant and GE Equity.(H)
10.26 -- Distribution and Marketing Agreement dated as of March 8,
1999 by and between NBC and the Registrant.(G)
10.27 -- Letter Agreement dated March 8, 1999 between NBC, GE Equity
and the Registrant.(G)
10.28 -- Shareholder Agreement dated April 15, 1999 between the
Registrant, and GE Equity.(H)
10.29 -- ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to GE Equity.(H)
10.30 -- Registration Rights Agreement dated April 15, 1999 between
the Registrant, GE Equity and NBC.(H)
10.31 -- ValueVision Common Stock Purchase Warrant dated as of April
15, 1999 issued to NBC.(H)
10.32 -- Asset Purchase Agreement by and among VVI Baytown, Inc.,
VVILPTV, Inc. and Pappas Telecasting of Houston, a
California limited partnership, dated as of May 3, 1999.(K)
10.33 -- Employment Agreement between the Registrant and Steve Jackel
dated June 4, 1999.(L)+
10.34 -- Employment Agreement between the Registrant and Stuart
Goldfarb dated July 28, 1999.(L)+
10.35 -- Employment Agreement between the Registrant and Richard D.
Barnes dated October 19, 1999.(M)+
10.36 -- Amended and Restated Employment Agreement between the
Registrant and Gene McCaffery dated December 2, 1999.(O)+
10.37 -- Option Agreement between the Registrant and Stuart Goldfarb
dated July 28, 1999.(L)+
10.38 -- Option Agreement between the Registrant and Stuart Goldfarb
dated July 28, 1999.(L)+
10.39 -- Option Agreement between the Registrant and Richard D.
Barnes dated October 19, 1999.(O)+
10.40 -- Interactive Promotion Agreement dated September 13, 1999,
among the Registrant, Snap!LLC, a Delaware limited liability
company and Xoom.com, Inc., a Delaware corporation.(L)
10.41 -- Trademark License Agreement dated September 13, 1999 between
the Registrant and Snap!LLC, a Delaware limited liability
company.(L)
10.42 -- Warrant Purchase Agreement dated September 13, 1999 between
the Registrant, Snap!LLC, a Delaware limited liability
company and Xoom.com, Inc., a Delaware corporation.(L)
10.43 -- Common Stock Purchase Warrant dated September 13, 1999 to
purchase shares of the Registrant held by Xoom.com, Inc., a
Delaware corporation.(L)
</TABLE>
80
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
10.44 -- Registration Rights Agreement dated September 13, 1999
between the registrant and Xoom.com, Inc., a Delaware
corporation, relating to Xoom.com, Inc.'s warrant to
purchase shares of the Registrant.(L)
10.45 -- Stock Purchase Agreement dated October 8, 1999 by and among
Potpourri Holdings, Inc., a Delaware corporation,
ValueVision Direct Marketing Company, Inc., a Minnesota
corporation, and the Registrant.(J)
10.46 -- Amended and Restated Limited Liability Company Agreement of
Ralph Lauren Media, LLC, a Delaware limited liability
company, dated as of February 7, 2000, among Polo Ralph
Lauren Corporation, a Delaware corporation, National
Broadcasting Company, Inc., a Delaware corporation, the
Registrant, CNBC.com LLC, a Delaware limited liability
company and NBC Internet, Inc., a Delaware corporation.(O)
10.47 -- Agreement for Services dated February 7, 2000 between Ralph
Lauren Media, LLC, a Delaware limited liability company, and
VVI Fulfillment Center, Inc., a Minnesota corporation.(O)
21 -- Significant Subsidiaries of the Registrant.(O)
23 -- Consent of Arthur Andersen LLP.(O)
27 -- Financial Data Schedule.(O)
</TABLE>
- -------------------------
<TABLE>
<S> <C>
(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-3 filed on October 13,
1993, as amended, File No 33-70256.
(D) 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.
(E) 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.
(F) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1998,
filed on April 30, 1998, File No. 0-20243.
(G) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated March 8, 1999, filed on March 18,
1999, File No. 0-20243.
(H) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated April 15, 1999, filed on April 29,
1999, File No. 0-20243.
(I) Incorporated herein by reference to the Registrant's
Schedule 14A dated April 29, 1999, filed on April 29, 1999.
(J) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated October 12, 1999, filed on October
12, 1999, File No. 0-20243.
(K) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated May 3, 1999, filed on May 3, 1999,
File No. 0-20243.
(L) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999, filed on September 14, 1999, File No. 0-20243.
(M) Incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October
31, 1999, filed on December 15, 1999, File No. 0-20243.
</TABLE>
81
<PAGE> 82
<TABLE>
<S> <C>
(N) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1999,
filed on April 6, 1999, File No. 0-20243.
(O) Filed herewith.
+ Management compensatory plan/arrangement
</TABLE>
b) Reports on Form 8-K
(i) The Registrant filed a Form 8-K on February 8, 2000 reporting under Item 5,
that the Registrant announced that effective February 7, 2000, the Company
entered into a new electronic commerce strategic alliance with Polo Ralph
Lauren Corporation, NBC, NBC Internet, Inc. and CNBC.com LLC whereby the
parties created Ralph Lauren Media, LLC, a 30-year joint venture formed for
the purpose of bringing the Polo Ralph Lauren American lifestyle experience
to consumers via multiple media platforms, including the Internet,
broadcast, cable and print.
82
<PAGE> 83
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 28, 2000.
ValueVision International, Inc.
(Registrant)
By: /s/ GENE MCCAFFERY
------------------------------------
Gene McCaffery
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 28, 2000.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ GENE MCCAFFERY Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer)
Gene McCaffery President and Director
/s/ STUART GOLDFARB Vice Chairman
- --------------------------------------------------------
Stuart Goldfarb
/s/ RICHARD BARNES Senior Vice President Finance and Chief
- -------------------------------------------------------- Financial Officer (Principal Financial
Richard Barnes and 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
/s/ JOHN FLANNERY Director
- --------------------------------------------------------
John Flannery
/s/ MARK W. BEGOR Director
- --------------------------------------------------------
Mark W. Begor
</TABLE>
83
<PAGE> 1
EXHIBIT 10.36
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement") is dated as of the 2nd day of December, 1999, by and between
ValueVision International, Inc., a Minnesota corporation ("Employer"), and Gene
McCaffery ("Employee").
WITNESSETH:
WHEREAS, Employer and Employee previously have entered into
that Employment Agreement, dated as of March 30, 1998 (the "Original
Agreement"), pursuant to which Employer currently employs Employee pursuant to
the terms and conditions of the Original Agreement;
WHEREAS, Employer and Employee each have determined that it
would be to the advantage and best interest of Employer and Employee to enter
into this Agreement and modify certain of Employee's and Employer's obligations
and responsibilities under the Original Agreement; and
WHEREAS, this Agreement amends and restates the Original
Agreement in its entirety and shall supersede the Original Agreement in all
respects, except that Section 4.e. of the Original Agreement, which granted to
Employee options to acquire 800,000 shares of common stock of Employer (the
"Original Options"), shall not be superseded by this Agreement and shall be in
effect as provided in the Original Agreement, such Original Options being
heretofore vested for all purposes of Section 4.e. of the Original Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
promises contained in this Agreement, the parties hereto agree as follows:
1. Employment. Employer hereby agrees to employ Employee, and Employee
hereby agrees to be employed by Employer, on the terms and conditions set forth
herein.
2. Term. Employee's employment under this Agreement in lieu of the
Original Agreement shall commence on the date of this Agreement and shall
continue on a full-time basis through March 31, 2001 (the "Term"), unless
earlier terminated as hereinafter provided. 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.
3. Duties. Employee shall serve as the President and Chief Executive
Officer of Employer, and Employee shall serve as a member of the Board of
Directors of Employer (the "Board") during the Employment Period, provided that
if Employee's employment with Employer is earlier terminated in accordance with
the provisions herein, Employee shall immediately resign from the Board upon
request by Employer. Employee shall perform the duties as assigned by the Board
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
the Board. As President and Chief Executive Officer, Employee's duties shall
include, without limitation, making recommendations to the Compensation
Committee of Employer with respect to awards
<PAGE> 2
made under Employer's incentive stock option plans. The executive officers of
Employer shall report directly to Employee, as President and Chief Executive
Officer. 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 to other senior executives of Employer.
4. Compensation. During the Employment Period, Employee's compensation
for the services performed under this Agreement shall be as follows:
a. Base Salary. Employee shall receive a base salary of Seven
Hundred Fifty Thousand and no/100 Dollars ($750,000), payable in accordance with
Employer's normal payment schedule for its executive employees (the "Base
Salary").
b. Signing Bonus. Upon the execution of this Agreement,
Employee shall receive a payment of Three Hundred Thousand and no/100 Dollars
($300,000) (the "Signing Bonus").
c. Bonus Salary. Employee may receive bonus salary with
respect to any year in an aggregate amount not to exceed 100% of the Base Salary
applicable with respect to such year (the "Bonus Salary"). Until Employer and
Employee mutually agree upon a new bonus plan for the senior executives of
Employer, the Bonus Salary shall be calculated as follows:
(i) Up to 50% of the applicable Base Salary (the "50%
Goal"), if Employer's Operating Income (as defined below) equals 1% of
Employer's Net Sales (as defined below), then Employee shall receive a bonus
payment equal to 25% of the 50% Goal, which payment shall increase on a pro rata
basis to 100% of the 50% Goal if the Operating Income equals or exceeds 3% of
Employer's Net Sales (the "Operating Income Bonus"). As used in this Agreement,
"Operating Income" shall mean earnings before interest, taxes and unusual items,
and "Net Sales" shall mean gross sales, net of returns and related reserves, and
excludes shipping, handling, sales taxes and insurance revenues, each as
determined with respect to any fiscal year and pursuant to generally accepted
accounting principles by Employer, consistently applied.
(ii) Up to 30% of the applicable Base Salary (the
"30% Goal") if the Average Price (defined as the greater of (a) the average
closing price of Employer's common stock for 20 consecutive trading days
immediately prior to the last day of Employer's fiscal year or (b) the average
daily closing price for the final four months of Employer's fiscal year) meets
the following target prices (the "Stock Price Bonus"):
If (A) the Average Price increases at least 25% but
not 50% over the Base Price (defined as $4.40 with respect to the fiscal year of
the Company ended on January 31, 1999, which Base Price shall be adjusted at the
end of each succeeding fiscal year to the Average Price with respect to such
fiscal year, provided that in no event shall the Base Price, as adjusted, exceed
133% of the Base Price of the previous fiscal year), the Stock Price Bonus shall
be equal to 25% of the 30% Goal, (B) the Average Price increases at least 50%
but not 75% over the Base Price, the Stock Price Bonus shall be equal to
one-half of the 30% Goal, (C) the Average Price increases at least 75% but not
100% over the Base Price, the Stock Price Bonus shall be equal to
2
<PAGE> 3
three-quarters of the 30% Goal, and (D) the Average Price increases 100% or more
over the Base Price, the Stock Price Bonus shall be equal to 200% of the 30%
Goal.
(iii) Up to 20% of the applicable Base Salary (the
"20% Goal"), if Employer has positive Operating Income and Employer's Net Sales
(exclusive of sales of any acquisitions during the then current fiscal year)
increases over the prior fiscal year's Net Sales ("Base Sales") as follows (the
"Sales Bonus"):
If (A) Employer's Net Sales for any fiscal year
increase at least 4% but less than 5% over the Base Sales, the Sales Bonus shall
be equal to one-quarter of the 20% Goal, (B) Employer's Net Sales increase at
least 5% but not 6% over the Base Sales, the Sales Bonus shall be equal to
one-half of the 20% Goal, (C) Employer's Net Sales increase at least 6% but not
7% over the Base Sales, the Sales Bonus shall be equal to three-quarters of the
20% Goal, and (D) Employer's Net Sales increase at least 7% over the Base Sales,
the Sales Bonus shall be equal to 100% of the 20% Goal.
In the event any new bonus plan is adopted by Employer for its
senior executives and approved by the stockholders of Employer, then the Bonus
Salary provisions in this Section 4.c. shall no longer apply and Employee shall
be subject to the terms of the new bonus plan adopted by Employer.
d. Automobile Allowance. Employer shall pay Employee a monthly
automobile allowance of $600.00 per month ("Auto Allowance").
e. Stock Options.
(i) As of the date hereof, Employer shall grant to
Employee, employee stock options to purchase an aggregate of 100,000 shares of
the common stock, par value $.01 per share (the "Common Stock"), of Employer
(collectively, the "Options"). The Options shall be granted under an option
agreement between Employer and Employee dated as of the date hereof, which
option agreement shall be on terms consistent with the terms of this Agreement.
The Options shall have a term of ten years, provided that upon the termination
of Employee's employment with Employer, Employee shall have six months from the
date of such termination to exercise any such Options. The Options shall have a
per share exercise price equal to Forty and Five Thousand Six Hundred
Twenty-Five Ten-Thousandths Dollars ($40.5625). The Options shall be immediately
and fully vested and exercisable as of the date hereof.
(ii) On the date Employee exercises any of such
Options, Employer shall register in the name of Employee the number of shares of
Common Stock to be acquired by Employee upon his exercise of such Options (the
"Shares"); provided that Employer may retain possession of certificates relating
to such Shares and any other shares of Common Stock or other securities that
shall be pledged, as necessary, by Employee to Employer as security for the Loan
(as defined below) on the terms and conditions set forth in Section 4.g. herein.
f. Retention Bonus. As an additional incentive to retain
Employee, Employer shall pay Employee an additional amount equal to One Million
and no/100 Dollars ($1,000,000) (the "Retention Bonus") if (i) Employee remains
employed with Employer through the last day
3
<PAGE> 4
of the Term, (ii) Employee is discharged without Cause pursuant to Sections 6.f.
or 6.g., (iii) Employee resigns following a Change of Control pursuant to
Section 6.f., or (iv) Employee resigns for Employer cause pursuant to Section
6.e.
g. Loan. During the Employment Period, Employer shall grant to
Employee a line of credit in the principal amount of Five Million and no/100
Dollars ($5,000,000) (the "Loan"). Any amounts borrowed by Employee shall be due
and payable on the fifth anniversary of the date hereof; provided, however, that
if Employee's employment with Employer is terminated for any reason, any amounts
borrowed shall become due and payable 60 days following the date of termination
of Employee's employment. Employee's obligation to repay the Loan shall be
evidenced by a promissory note and pledge in such form agreed to by Employer and
Employee, with interest to accrue on the outstanding Loan amount at the minimum
rate of interest required in order to avoid imputed interest under the Code (as
defined below), compounded annually. To secure payment of the principal and all
interest on the Loan, Executive shall assign, pledge and grant a security
interest in the Shares and in shares of Common Stock subject to acquisition by
Employee upon exercise of the Original Options (and/or in other equity
securities of the Company owned by Employee) (collectively, the "Pledged
Shares"), and such Pledged Shares evidencing the security interest shall at all
times have a fair market value of at least 150% of the outstanding Loan amount.
On the last day of each quarter of the Employment Period, an adjustment shall be
made by Employer and Employee either increasing or reducing the number of
Pledged Shares pledged by Employee to maintain the security interest value
requirement for the Loan provided in the foregoing sentence. Certificates
evidencing the Shares and any additional Pledged Shares shall remain in the
physical custody of Employer or its designee at all times until payment in full
of all principal and interest on the Loan. The Loan shall constitute a full
recourse obligation of Employee.
h. Section 162(m). Anything to the contrary contained herein
notwithstanding, if the aggregate compensation payable to Employee under this
Agreement exceeds the amount that is deductible under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), then any such excess
amount shall be deferred and credited by Employer to an account for the benefit
of Employee, which shall be paid to Employee, with interest at a per annum rate
equal to 1.5% plus the prime rate (as announced by Employer's primary financial
lender from time to time), compounded annually, at such time within five (5)
days after the first date on which Employee no longer constitutes a "covered
employee" within the meaning of Section 162(m) of the Code. Notwithstanding the
foregoing, neither the Retention Bonus nor the Signing Bonus shall be subject to
any deferral for purposes of Section 162(m) of the Code.
5. Other Benefits During the Employment Period. During the Employment
Period, Employer shall provide Employee with the following benefits:
a. Employee shall receive all 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.
b. Employer shall reimburse Employee for all reasonable and
necessary out-of-pocket business expenses incurred during the regular
performance of services for Employer,
4
<PAGE> 5
including, but not limited to, entertainment and related expenses so long as
Employer has received proper documentation of such expenses from Employee.
c. 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.
6. Termination of Employment.
a. Death. In the event of Employee's death, the Employment
Period 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.
Employer shall provide Employee with a term life insurance policy (of which
Employee shall be the owner) for $1.0 million at standard rates applicable to a
person of Employee's age who is in good health at the time of application for
such a policy. In addition, Employee's estate shall be entitled to receive any
payments or Benefits provided herein that have accrued (but have not been paid)
prior to the date of Employee's death.
b. 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 the Employment Period,
provided that a physical to be selected by Employer, subject to the reasonable
satisfaction of Employee, shall have determined the existence of such
disability. Upon the date of such termination, 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. In addition, Employee shall be entitled to receive
any payments or Benefits provided in this Agreement that have accrued (but have
not been paid) prior to the date of such termination.
c. Voluntary Termination. In the event that Employee
voluntarily terminates his employment other than pursuant to Section 6.c. or
Section 6.f., the Employment Period shall terminate and Employee shall cease to
receive Base Salary, Bonus Salary, Auto Allowance, and all other Benefits as of
the date of such termination. Employee shall be entitled to receive any payments
or Benefits provided herein that have accrued (but have not been paid) prior to
the date of such termination.
d. Termination With Cause. Employer shall be entitled to
terminate the Employment Period and Employee's employment hereunder for Cause
(as defined below), 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 improper 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) material violation by Employee of any material policy,
regulation or practice of Employer; (iii) conviction of a felony; or (iv)
habitual intoxication, drug use or chemical substance abuse by any
5
<PAGE> 6
intoxicating or chemical substance. Notwithstanding the foregoing, Employee
shall not be deemed to have been terminated for Cause unless and until (A)
Employee has received thirty (30) days' prior written notice (a "Dismissal
Notice") of such termination and (B) if such "Cause" event is capable of being
cured, Employee has not cured such "Cause" event within ten (10) days following
delivery of such notice. 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. Employee shall be entitled to receive any payments or Benefits
provided herein that have accrued (but have not been paid) prior to the date of
such termination.
e. By Employee for Employer Cause. Employee may terminate the
Employment Period upon thirty (30) days' written notice to Employer (the
"Employee Notice") upon the occurrence, 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 the Employment Period 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;
(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; or
(iii) Any purported termination of this Agreement by
Employer not effected in accordance with the provisions set forth herein.
In the event of a termination of Employee's employment with Employer under this
Section 6.e., Employee shall be entitled to receive the payments and Benefits as
set forth in Section 6.g.
f. Termination After Change of Control. If Employee is
terminated by Employer without Cause within one year after the consummation of a
transaction constituting a Change of Control, Employee shall receive a payment
in an amount equal to Base Salary and Bonus Salary (based upon the last paid
Bonus Salary received in the previous year, if any, and pro rated for the number
of remaining months until the end of the Term) which would otherwise be payable
until the end of the Term. Any payments made by Employer to Employee under this
Section 6.f. shall be paid on a pro rata basis over the remaining portion of the
Noncompetition Period (as defined below). In addition, during the 30 day period
immediately following the second month anniversary of the consummation of a
transaction constituting a Change of Control, Employee may terminate this
Agreement for any reason by providing written notice to Employer and receive the
benefits provided in the first sentence of this paragraph, and any such
termination by Employee under this Section 6.f. shall not also be deemed to be a
termination by Employee under Section 6.c. In the event that Employee's
employment with Employer is terminated by either Employer or Employee pursuant
to this Section 6.f., Employee shall be entitled to any payments or Benefits
provided in this Agreement that have accrued (but have not been paid) prior to
the date of such termination. Notwithstanding the foregoing, the consummation of
the transactions to date between Employer and GE Capital Equity Investments,
6
<PAGE> 7
Inc., General Electric Capital Corporation, General Electric Capital Services,
Inc., General Electric Company, National Broadcasting Company, Inc., and
National Broadcasting Company Holding, Inc. (the "Companies") and any further
acquisitions of Employer's securities by the Companies which the Companies are
entitled to acquire as of the date hereof by written agreement between Employer
and the Companies, subject to the limitation that the total voting power of the
voting stock of Employer acquired by the Companies shall not exceed 50% of the
total voting power of the voting stock of Employer (the "Transaction"), shall
not be deemed a Change of Control for purposes of this Section 6.f.
g. Other Termination. Employer reserves the right to terminate
the Employment Period and Employee's employment hereunder at any time (and
without Cause), in its sole and absolute discretion. If Employer terminates the
Employment Period under this Section 6.g. 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 which would
otherwise be payable until the end of the Term (the "Severance Payment"),
provided that if such remaining Term exceeds 12 months, the Severance Payment
attributable to the last twelve months of the Term shall not be included in the
lump sum payment and instead shall be paid over the remaining portion of the
Noncompetition Period on a pro rata basis in accordance with Employer's normal
payment schedule for its executive employees. In addition, Employer shall
continue to provide Employee with Benefits until the end of the Term. Employee
shall be entitled to receive any payments or Benefits provided herein that have
accrued (but have not been paid) prior to the date of such termination.
h. 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 in any city in which Employer's corporate executive offices are
located for arbitration of the dispute, the costs thereof (including legal fees
and expenses) to be shared equally by 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, except with
respect to enforcement of the agreements contained in Sections 7 and 9 of this
Agreement if either party seeks injunctive relief, 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.
7. 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, pans, 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
7
<PAGE> 8
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.
8. 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 reasonable requested by Employer to establish and confirm
such ownership.
9. Noncompete and Related Agreements.
a. Employee agrees that during the Noncompetition Period, 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 (a) the
television home shopping business, or (b) subject to the limitation set forth in
the next sentence, any business in which Employer competes as of the date of
termination of the Employment Period or in which Employer (upon authorization of
its Board) has invested significant research and development funds or resources
and contemplates entering into during the following twelve (12) months (the
"Restricted Business"), in any country that Employer or any of its affiliates
operates during the term of this Agreement (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 any and 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 affiliate 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
8
<PAGE> 9
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, a "Restricted
Business" shall not include an Internet- or e-commerce-related business that is
not also engaged in the television home shopping business. In addition, for
purposes of this Agreement, the "Noncompetition Period" shall commence as of the
date hereof and end on the last day of the period that is equal to six (6)
months following the date on which Employee's employment is terminated under
this Agreement for any reason.
b. If, at the time of enforcement of any provisions of this
Section 9, a court of competent jurisdiction holds that the restrictions stated
herein 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.
c. 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.
10. Termination of Existing Agreements. This Agreement, effective as of
the date hereof, and except as may be provided in the third "Whereas" clause
above, 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.
11. 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.
12. Sale, Consolidation or Merger. In the event of a sale of the
capital stock, or substantially all of the capital stock, of Employer or
consolidation or merger of Employer with or into another corporation or entity,
or the sale of substantially all of the operating assets of Employer to another
corporation, entity or individual, Employer shall 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.
13. Change of Control. For purposes of this Agreement, a "Change of
Control" shall mean an event as a result of which: (i) any "person" (for the
purposes of this Section 13, 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" (for the purposes of this Section 13, as defined in Rule
13d-3 under the Exchange Act, except that a person shall be deemed for such
purposes to have "beneficial ownership" of all securities that such person has a
right to acquire,
9
<PAGE> 10
whether such right is exercisable immediately or only after the passage of time
or upon the satisfaction of performance criteria or other conditions), directly
or indirectly, of more than 50% of the total voting power of the voting stock of
Employer (or its successors and assigns); (ii) Employer consolidates with, or
mergers 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,
in any such event pursuant to a transaction in which the outstanding voting
stock of Employer is changed into or exchanged for cash, securities or other
property, other than any such transaction where (A) the outstanding voting stock
of Employer is changed into or exchanged for (x) voting stock or 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 immediately prior to such transaction own, directly or indirectly, not
less than 50% of the voting power of the voting stock of the surviving
corporation immediately after such transaction; (iii) any person or group, other
than the stockholders of Employer as a whole, has a right to designate or has
designated the majority of the Board or the designees/affiliates of such person
or group constitute a majority of the Board, (iv) Employer is liquidated or
dissolved or adopts a plan of liquidation; (v) the Companies and their
affiliates (collectively, the "GE Entities") sell, assign, pledge or otherwise
transfer beneficial ownership of more than 75% of the total voting power of the
voting stock of Employer beneficially owned by the GE Entities as of the date
hereof to any person or entity other than one or more other GE Entities; (vi)
individuals designated for membership on the Board by the GE Entities pursuant
to either (A) the Shareholder Agreement dated as of April 15, 1999 among the
Company, GE Capital Equity Investments, Inc. and National Broadcasting Company,
Inc. (the "Shareholder Agreement") or (B) the Certificate of Designation
creating the Company's Series A Redeemable Convertible Preferred Stock (the
"Certificate of Designation") shall constitute more than either (x) two
individuals or (y) 30% of the entire authorized membership of the Board (such
authorized number of members not being reduced for a period of 60 days by any
vacancy arising from the resignation, retirement, death, removal or similar
departure from the Board of any individual Board member); (vii) the GE Entities
assign to a person or entity that is not a GE Entity their right pursuant to the
Shareholder Agreement or the Certificate of Designation to designate two
individuals for membership on the Board, and two individuals so designated by
such person join the Board as members; or (viii) the GE Entities (A) sell,
assign, pledge or otherwise transfer beneficial ownership of more than 25% of
the total voting power of the voting stock of Employer (or its successors and
assigns) to any person or entity other than one or more other GE Entities, and
(B) assign to such person or entity the right pursuant to the Shareholder
Agreement or the Certificate of Designation to designate a single individual for
membership on the Board, and one individual so designated by such person or
entity joins the Board as a member. Notwithstanding anything to the contrary
herein, the Transactions shall not constitute a Change of Control.
14. 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.
15. Waiver. The failure of either party to insist, in any one or more
instances, upon performance of the terms and conditions of this Agreement shall
not be construed as a waiver or
10
<PAGE> 11
relinquishment of any right granted hereunder or of the future performance of
any such term, covenant or condition.
16. Indemnification. Employee shall be entitled to indemnification to
the fullest extent permitted under the laws of the State of Minnesota.
17. 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.
18. Severability. In the event that any provision shall be held to be
invalid or unenforceable for any reason whatsoever, it is agreed that 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.
19. Amendment. This Agreement may be amended only by an agreement in
writing signed by the parties hereto.
20. 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.
21. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of Minnesota.
[Signature Page Follows]
11
<PAGE> 12
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/ Marshall Geller
--------------------------------------------------
Name: MARSHALL GELLER
Its: Board Member, Authorized Representative and
Chairman of the Compensation Commission
EMPLOYEE: /s/ Gene McCaffery
--------------------------------------------------
GENE MCCAFFERY
12
<PAGE> 1
EXHIBIT 10.39
OPTION AGREEMENT
VALUEVISION INTERNATIONAL, INC.
TO
RICHARD BARNES
OPTION AGREEMENT made as of the 19th day of October, 1999, between
ValueVision International, Inc., a Minnesota corporation ("ValueVision"), and
Richard Barnes, 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"), as hereinafter
provided, to carry out the resolutions of the Board of Directors of ValueVision
granting a non-qualified stock 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 two hundred thousand (200,000) Shares (such number being subject
to adjustment as provided in paragraph 7 hereof) on the terms and conditions
herein set forth.
2. Purchase Price. The purchase price of the Shares covered by the Option
shall be $26.688, 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:
on and after the date hereof, Employee may purchase up to 66,666 Shares; on and
after the first anniversary of the date hereof, Employee may purchase up to an
additional 66,667 Shares; and on and after the second anniversary of the date
hereof, Employee may purchase up to an additional 66,667 Shares. Each of the
rights to
<PAGE> 2
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. ValueVision and Employee agree that accelerated
vesting under paragraph 19 of the Plan shall not apply to this Option. 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 Employee 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.
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
<PAGE> 3
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
<PAGE> 4
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.
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
effective as of the date first written above.
VALUEVISION INTERNATIONAL, INC.
By /s/ Gene McCaffery
---------------------------------
Gene McCaffery
Chief Executive Officer
Employee:
/s/ Richard Barnes
------------------------------------
<PAGE> 1
EXHIBIT 10.46
EXECUTION COPY
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
of
RALPH LAUREN MEDIA, LLC
Dated as of February 7, 2000
<PAGE> 2
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF
RALPH LAUREN MEDIA, LLC
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
DEFINITIONS.................................................................................................. 2
ARTICLE II FORMATION AND CONDUCT.............................................................................17
2.1 Formation and Purpose.......................................................................17
2.2 Name........................................................................................17
2.3 Principal Office and Place of Business......................................................18
2.4 Term........................................................................................18
2.5 Registered Office and Agent.................................................................18
2.6 Qualification in Other Jurisdictions........................................................18
2.7 No Liability to Third Parties...............................................................18
2.8 Business Purpose............................................................................18
2.9 Business Launch.............................................................................19
2.10 Initial Activities..........................................................................19
2.11 Authorization of Actions Taken by the Company...............................................19
(a) Ancillary Agreements...................................................................19
(b) Formation..............................................................................19
(c) Bank Accounts..........................................................................19
ARTICLE III
OPERATIONS...........................................................................................20
3.1 Books and Records...........................................................................20
(a) Books and Accounts......................................................................20
(b) Other Records...........................................................................20
3.2 Financial Statements; Information; Bank Accounts............................................21
(a) Preparation in Accordance with GAAP.....................................................21
(b) Monthly Reports.........................................................................21
(c) Quarterly Report........................................................................21
(d) Annual Reports..........................................................................21
(e) Other Reports...........................................................................21
(f) Bank Accounts...........................................................................22
3.3 Auditors .................................................................................22
3.4 Fiscal Year.................................................................................22
3.5 Demand Registration.........................................................................22
3.6 Piggyback Registrations.....................................................................25
3.7 Lock-Up Provision...........................................................................27
3.8 Employees and Benefit Matters...............................................................27
3.9 [Reserved .................................................................................28
3.10 Expense Reimbursement.......................................................................28
3.11 The Members as Third Party Beneficiaries....................................................28
3.12 Deadlocks .................................................................................28
(a) Deadlocks of Managers...................................................................28
(b) Deadlocks of Members....................................................................28
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(c) Continuation of Business................................................................29
(d) Polo Deadlock Call......................................................................29
(e) Media Members Sale Right................................................................30
3.13 Change of Control...........................................................................32
(a) Change of Control of a Member...............................................................32
(b) Continuation of Business....................................................................32
(c) NBC Change of Control Call..................................................................32
(d) Polo Change of Control Sale.................................................................33
3.14 Polo Buyout Right...........................................................................33
3.15 Material Deadlock, Change of Control and Polo Buyout Right, Pricing,........................
Deferred Compensation and Closing...........................................................34
(a) Price of the Media Members Membership Interests.............................................34
(b) [Reserved]..................................................................................34
(c) Closing.....................................................................................34
(d) Services Agreement..........................................................................35
3.16 Media Members IPO Right.....................................................................35
3.17 Certain Restrictions........................................................................36
ARTICLE IV
RIGHTS AND REPRESENTATIONS AND WARRANTIES OF MEMBERS.................................................36
4.1 Members' Rights.............................................................................36
4.2 Representations and Warranties..............................................................36
(a) Due Organization........................................................................37
(b) Authorization and Validity of Agreement.................................................37
(c) No Breach or Government Approvals.......................................................37
(d) Certain Fees............................................................................37
(e) Legal Proceedings.......................................................................37
(f) Employee Benefits Programs..............................................................38
(g) SEC Filings.............................................................................38
(h) Acknowledgment..........................................................................39
4.3 Title to Company Assets.....................................................................39
ARTICLE V
MANAGEMENT...........................................................................................39
5.1 Management by Managers......................................................................39
5.2 Management Committee........................................................................39
(a) Number; Composition.....................................................................39
(b) Appointment of Managers.................................................................39
(c) Voting..................................................................................40
(d) Quorum..................................................................................40
(e) Required Vote for Action................................................................40
(f) Term....................................................................................40
(g) Vacancy.................................................................................40
(h) Removal.................................................................................40
(i) Resignation.............................................................................40
5.3 Action Requiring Unanimous Vote of Polo Managers and the Media Managers;
Unanimous Vote of the Members...............................................................40
(a) Unanimous Vote of the Managers..........................................................40
(b) Unanimous Vote of the Members...........................................................43
5.4 Business Plan...............................................................................43
5.5 Limitation on Management Committee Authority................................................44
5.6 Meetings of the Management Committee........................................................44
5.7 Methods of Voting; Proxies..................................................................44
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5.8 Order of Business...........................................................................44
5.9 Actions Without a Meeting...................................................................45
5.10 Telephone and Similar Meetings..............................................................45
5.11 Compensation of Managers....................................................................45
5.12 Media Representative........................................................................45
5.13 Waiver of Certain Claims....................................................................45
ARTICLE VI
OFFICERS............................................................................................46
6.1 Designation Term; Qualifications............................................................46
6.2 Chief Executive Officer.....................................................................46
6.3 Chief Financial Officer.....................................................................47
6.4 Vice President..............................................................................47
6.5 Secretary...................................................................................47
6.6 Treasurer...................................................................................47
6.7 Other Officers..............................................................................47
6.8 Removal and Resignation.....................................................................47
6.9 Vacancies...................................................................................48
6.10 Duties......................................................................................48
ARTICLE VII
MEETINGS OF MEMBERS..................................................................................48
7.1 Meetings of Members.........................................................................48
7.2 Place of Meetings of Members................................................................48
7.3 Notice of Meetings of Members...............................................................48
7.4 Fixing of Record Date.......................................................................48
7.5 Quorum......................................................................................49
7.6 Methods of Voting; Proxies..................................................................49
7.7 Conduct of Meetings.........................................................................49
7.8 Voting on Matters...........................................................................49
7.9 Registered Members..........................................................................50
7.10 Actions Without a Meeting...................................................................50
7.11 Telephone and Similar Meetings..............................................................50
ARTICLE VIII
CONTRIBUTIONS; CAPITAL ACCOUNTS......................................................................51
8.1 Initial Contributions.......................................................................51
8.2 Additional Contributions....................................................................51
8.3 Enforcement of Commitments..................................................................51
8.4 Maintenance of Capital Accounts.............................................................52
8.5 No Obligation to Restore Deficit Balance....................................................53
8.6 Withdrawal; Successors......................................................................53
8.7 Interest....................................................................................53
8.8 Investment of Capital Contributions.........................................................53
8.9 Advances to the Company.....................................................................53
8.10 Initial Public Offering.....................................................................53
ARTICLE IX
ALLOCATIONS AND DISTRIBUTIONS........................................................................54
9.1 Profits and Losses..........................................................................54
9.2 Profits.....................................................................................54
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9.3 Losses......................................................................................54
9.4 Special Allocations.........................................................................55
(a) Qualified Income Offset.................................................................55
(b) Gross Income Allocation.................................................................55
(c) Curative Allocations....................................................................55
(d) Elective Gross Allocations..............................................................55
(e) Subsequent Adjustments to Income........................................................56
9.5 Other Allocation Rules..................................................................56
9.6 Tax Allocations.............................................................................57
(a) General Rules...........................................................................57
(b) Mandatory Allocations Under Code Section 704(c).........................................57
(c) Tax Allocations Binding.................................................................57
(d) Contributions...........................................................................57
9.7 Distributions to Members....................................................................58
(a) Amounts and Timing......................................................................58
(b) Amounts Withheld........................................................................58
(c) Draws for Payment of Estimated Taxes....................................................58
ARTICLE X
TAXES................................................................................................58
10.1 Tax Characterization........................................................................58
10.2 Tax Matters Partner, Etc....................................................................58
10.3 Tax Returns.................................................................................60
ARTICLE XI
TRANSFER OF MEMBERSHIP INTEREST......................................................................60
11.1 Compliance with Securities Laws.............................................................60
11.2 Transfer of Membership Interest.............................................................60
11.3 Obligations of a Withdrawing Member.........................................................61
(a) Generally...............................................................................61
(b) Non-Disclosure by a Withdrawing Member..................................................61
(c) Survival................................................................................61
11.4 Encumbrances................................................................................61
11.5 Effect of Unauthorized Transfer.............................................................62
11.6 Standstill Agreement........................................................................62
ARTICLE XII
DISSOLUTION..........................................................................................63
12.1 Events of Dissolution.......................................................................63
12.2 Liquidation and Distribution Following Dissolution..........................................64
12.3 Final Accounting............................................................................65
12.4 Winding Up and Certificate of Dissolution...................................................65
12.5 Use of the Company Name, Etc. Upon Dissolution, Winding Up and Termination..................65
12.6 Payments Upon Certain Dissolutions..........................................................66
ARTICLE XIII
[RESERVED]...........................................................................................67
</TABLE>
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<TABLE>
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<S> <C>
ARTICLE XIV
INDEMNIFICATION OF MEMBERS, MANAGERS AND OFFICERS....................................................67
14.1 Indemnification by a Member.................................................................67
14.2 Indemnification by the Company..............................................................67
14.3 Survival; Limitations; Procedures...........................................................68
14.4 Third-Party Dealings With Members...........................................................69
14.5 Insurance...................................................................................69
14.6 Report to Members...........................................................................70
ARTICLE XV CLOSING DELIVERIES................................................................................70
15.1 Closing Deliveries of Polo..................................................................70
15.2 Closing Deliveries of the Original Media Members............................................70
ARTICLE XVI MISCELLANEOUS....................................................................................71
16.1 Notices.....................................................................................71
16.2 Public Announcements and Other Disclosure...................................................71
16.3 Headings and Interpretation.................................................................72
16.4 Entire Agreement............................................................................72
16.5 Binding Agreement...........................................................................72
16.6 Saving Clause...............................................................................72
16.7 Counterparts................................................................................72
16.8 Governing Law...............................................................................73
16.9 No Membership Intended for Nontax Purposes..................................................73
16.10 No Rights of Creditors and Third Parties under Agreement....................................73
16.11 Amendment or Modification of Agreement......................................................73
16.12 Specific Performance........................................................................73
16.13 General Interpretive Principles.............................................................73
16.14 Consent to Jurisdiction.....................................................................74
16.15 Certain Obligations.........................................................................74
</TABLE>
iv
<PAGE> 7
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
of
RALPH LAUREN MEDIA, LLC
THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
(this "Agreement") of Ralph Lauren Media, LLC, a Delaware limited liability
company (the "Company"), dated as of February 7, 2000, by and among Polo Ralph
Lauren Corporation, a Delaware corporation ("Polo"), National Broadcasting
Company, Inc., a Delaware corporation ("NBC"), ValueVision International, Inc.
("ValueVision"), a Minnesota corporation, CNBC.com LLC, a Delaware limited
liability company ("CNBC.com"), and NBC Internet, Inc., a Delaware corporation
("NBCi" and together with NBC, CNBC.com and ValueVision, the "Original Media
Members"). Certain capitalized terms used herein are defined in Article I of
this Agreement and, if not otherwise defined herein, shall have the meanings
ascribed to such terms in the Operating Agreement, dated as of the date hereof,
by and among Polo, the Original Media Members and the Company (the "Operating
Agreement").
WHEREAS, Polo filed a Certificate of Formation on February 2,
2000 for the Company on behalf of itself and the Original Media Members pursuant
to the provisions of the Act;
WHEREAS, a Limited Liability Agreement for the Company was
duly adopted by Polo pursuant to and in accordance with the Act on February 2,
2000 (the "Original Agreement");
WHEREAS, Polo and the Original Media Members wish to amend and
restate in its entirety the Original Agreement in accordance with the further
provisions of this Agreement;
WHEREAS, Polo and the Original Media Members desire to
organize a joint venture which will, subject to the terms and conditions set
forth herein and in the Ancillary Agreements, among other things, establish,
design and manage the Online activities and Catalogs, and engage in direct
marketing, sales and other activities incidental to the sale in the Territory
through Catalogs and Online of Apparel, Accessories and Home Products bearing
the Polo and Ralph Lauren Brands as more specifically set forth herein;
WHEREAS, simultaneously with the execution of this Agreement,
Polo, the Original Media Members and the Company will execute the Operating
Agreement;
WHEREAS, simultaneously with the execution of this Agreement
(i) PRL USA Holdings, Inc., a wholly-owned Subsidiary of Polo ("Licensor"), and
the Company will enter
<PAGE> 8
into the License Agreement dated as of the date hereof (the "License
Agreement"), (ii) ValueVision and the Company will enter into the Services
Agreement dated as of the date hereof (the "Services Agreement"), (iii) Polo and
the Company will enter into the Supply Agreement dated as of the date hereof
(the "Supply Agreement"), (iv) the Company and NBCi will enter into a Promotion
Agreement pursuant to which NBCi will provide to the Company, at no cost to the
Company, $40 million in aggregate credits for Online promotions (the "Promotion
Agreement") and (v) NBC and the Company will enter into an Advertising Agreement
pursuant to which NBC will provide to the Company, at no cost to the Company,
$100 million in aggregate credits for advertising time on the NBC Properties
(the "Advertising Agreement", together with the Supply Agreement, the Services
Agreement, the License Agreement, the Promotion Agreement and the Operating
Agreement, the "Ancillary Agreements");
WHEREAS, CNBC.com has agreed to provide to the Company at no
cost to the Company $10 million in aggregate credits for Online promotions; and
WHEREAS, Polo and the Original Media Members desire to set
forth their respective rights and obligations as members of the Company and to
provide for the operation and governance of the Company.
NOW, THEREFORE, in consideration of the agreements and
obligations set forth herein and for other good and valuable consideration, the
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, unless the context clearly
indicates otherwise, the following terms shall have the following meanings:
"Accessories": Eyewear, jewelry, watches, leather goods,
handbags, luggage, golf bags, fragrances, skin care, cosmetics and
other beauty products and any other similar products, in each case that
bear or are otherwise marketed, advertised or promoted under any of the
Polo and Ralph Lauren Brands.
"Act": The Delaware Limited Liability Company Act, Title 6,
Chapter 18, ss. 101 et seq. of the Delaware Code, and all amendments to
the Act.
"Additional Contribution": An additional Capital Contribution
(other than a ValueVision Additional Contribution) payable by the
Members to the Company pursuant to Article VIII.
"Additional Contribution Share": A Member's proportionate
share of an Additional Contribution equal to the product of (i) such
Member's Sharing Ratio and (ii) such Additional Contribution, or as
otherwise agreed by the Members under Section 8.2.
2
<PAGE> 9
"Adjusted Capital Account Deficit": With respect to any
Member, the deficit balance, if any, in such Member's Capital Account
as of the end of the relevant Fiscal Year, after giving effect to the
following adjustments:
(i) credit to such Capital Account the minimum gain
chargeback that such Member is deemed to be obligated to
restore pursuant to the penultimate sentences of Sections
1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and
(ii) debit to such Capital Account the items
described in Sections 1.704-l(b)(2)(ii)(d)(4),
1.704-l(b)(2)(ii)(d)(5), and 1.704-l(b)(2)(ii)(d)(6) of the
Regulations.
The foregoing definition of Adjusted Capital Account Deficit
is intended to comply with the provisions of Section 1.704-l(b)(2)(ii)(d) of the
Regulations and shall be interpreted consistently therewith.
"Advertising Agreement": As defined in the Preamble.
"Affiliate": A Person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by or under common
control with, the Person specified, for so long as such Person remains
so associated to the specified Person. Control means, with respect to a
specified Person, the possession, directly or indirectly, of the power
to direct or cause the direction of the affairs or management of a
Person, whether through the ownership of voting securities, by contract
or otherwise.
"Aggregate Contributions": As defined in Section 12.6.
"Agreement": This Amended and Restated Limited Liability
Company Agreement, as the same may be amended, modified or otherwise
supplemented from time to time, all in accordance with this Agreement
and the Act.
"Ancillary Agreements": As defined in the Preamble.
"Annual Advertising Obligation": As defined in the Operating
Agreement.
"Apparel": Clothing products, including, men's, women's,
children's apparel, swimwear, loungewear, intimate apparel, underwear,
socks, hosiery, sports specialty apparel, outerwear, footwear and all
other items included in International Trademark Class 25, in each case
that bear or are otherwise marketed, advertised or promoted under any
of the Polo and Ralph Lauren Brands.
"Auditors": As defined in Section 3.3.
"Budget": The capital and operating budgets of the Company for
any quarterly period or Fiscal Year, prepared by the management of the
Company and approved by the Management Committee in accordance with
Section 5.4, including all amendments, modifications and revisions
thereto, as approved in accordance with Section 5.4.
3
<PAGE> 10
"Business": Any business that the Company operates in
accordance with the Business Purpose set forth in Section 2.8.
"Business Day": Any day other than Saturday, Sunday or any
legal holiday observed in the State of Delaware or New York.
"Business Plan": As defined in Section 5.4(a), including the
Initial Business Plan.
"Business Purpose": As defined in Section 2.8.
"Capital Account": The account maintained for a Member
determined in accordance with Article VIII.
"Capital Contribution": Any contribution of Property or
services made by or on behalf of a Member in accordance with the terms
of this Agreement.
"Catalog": One or more direct marketing publications developed
and produced, or subcontracted to a third party, by the Company for the
promotion and sale of Polo Products under the Licensed Brands.
"CEO": As defined in Section 6.1.
"Certificate of Formation": The Certificate of Formation of
the Company, as amended from time to time, and filed with the Secretary
of State of Delaware.
"CFO": As defined in Section 6.1.
"Change of Control": Either a Polo Change of Control or an NBC
Change of Control.
"Closing": The initial transfer of the ValueVision Initial
Capital Contribution to the Company as contemplated by Section 8.1(a)
and the consummation of the other transactions contemplated by this
Agreement and the Operating Agreement to be consummated on the Closing
Date and the delivery of all certificates and other documents necessary
in connection therewith. The Closing will take place at such time and
place as Polo and the Media Representative shall agree.
"Closing Date": The date on which this Agreement and the
Ancillary Agreements are executed and delivered.
"CNBC.com": CNBC.com LLC, a Delaware limited liability
company, and any successor thereof.
"Code": The Internal Revenue Code of 1986, as amended from
time to time.
4
<PAGE> 11
"Collection Brands": Purple Label, Black Label and Collection
and other similarly positioned premier, high-end, limited distribution
Polo and Ralph Lauren Brands that may be developed or acquired in the
future.
"Commitment": The Capital Contributions that a Member is
obligated to make, including the ValueVision Additional Contributions
and any Additional Contribution Share of a Member.
"Company": Ralph Lauren Media, LLC, a limited liability
company formed under the laws of the State of Delaware, and any
successor limited liability company.
"Company Assets": Any rights or assets, whether tangible or
intangible, acquired by the Company pursuant to this Agreement or any
Ancillary Agreement, contributed by the Members in accordance with the
terms of this Agreement or any Ancillary Agreement or otherwise
acquired by the Company.
"Company Customer Data": As defined in Section 3.1(b).
"Company Securities": As defined in Section 3.5(d).
"Continuing Member": As defined in Section 11.2.
"Cumulative Losses": As defined in Section 12.6.
"Damages": As defined in Section 14.1.
"Default Interest Rate": The prime rate published by the Wall
Street Journal for the last Business Day on which a Commitment is
payable.
"Delinquent Member": A Member who has failed to meet the
Commitment of that Member.
"Demand Registration": As defined in Section 3.5.
"Disposition or Dispose": Any sale, assignment, exchange,
mortgage, pledge, grant, hypothecation, lease or other transfer,
absolute or as security or encumbrance (including dispositions by
operation of law).
"Distribution": A transfer of Property of the Company to a
Member on account of a Membership Interest as described in Article IX.
"Exchange Act": the Securities Exchange Act of 1934, as
amended.
"Fair Market Value":
(i) Fair Market Value of a Membership Interest means, as of
any date (the "Computation Date"), the value of a Membership Interest
as mutually determined by the
5
<PAGE> 12
Media Representative and Polo, or if the Media Representative and Polo
cannot agree, then the Fair Market Value of any Membership Interest
shall be (A) determined by (x) calculating the aggregate realizable
value of all Membership Interests as of the Computation Date (the
"Total Value"), assuming a sale of the Company in its entirety in a
transaction or a series of related transactions to a third party on an
arm's length basis in a controlled auction process designed to maximize
membership value by attracting all possible bidders and (y) dividing
the Total Value by the Membership Interest (the "Auction Value FMV") or
(B) that which would be negotiated in an arm's length transaction
(effected as of the Computation Date) between two willing parties
determined in accordance with the procedure set forth in clause (ii) of
this definition after giving effect to any increased cost of
ValueVision's services as provided in Section 3.15(d) (the "Private
Value FMV"), as applicable. For all determinations of Fair Market
Value, the License Agreement and the Supply Agreement shall be deemed
to run for the remaining balance of their respective terms.
(ii) If Polo and the Media Representative cannot agree on a
Fair Market Value of a Membership Interest as set forth in paragraph
(i) above within 30 days after the date of notice of the event giving
rise to such Fair Market Value determination, the Media Representative
and Polo shall each appoint a nationally recognized investment bank as
promptly as practicable and in any event within seven days following
the expiration of such 30-day period to determine the Fair Market Value
of such Membership Interest as of the Computation Date as promptly as
possible thereafter and in any event within 30 days of such
appointment. In the event that the higher of the two values determined
by the investment banks is equal to or less than 110% of the lower
value, then the Fair Market Value of such Membership Interest shall be
the average of the two. In the event that the higher value is greater
than 110% of the lower value, then the two investment banks shall
promptly appoint a third investment bank of nationally recognized
standing to determine the Fair Market Value of such Membership
Interest. The third investment bank shall have 30 days to render its
determination of the Fair Market Value and the average of the two
closest such determinations (of the three investment banks) shall be
the Fair Market Value of such Membership Interest. The third investment
bank will not be permitted to see or otherwise have access to, or be
informed of, the results of the determinations made by the first two
investment banks. Each investment bank engaged pursuant to this clause
(ii) shall promptly deliver to each of Polo and the Media
Representative a written notice in reasonable detail of its
determination of the Fair Market Value made pursuant to the foregoing.
In the event that the determination made by the third investment bank
is higher than the higher of the two previous determinations, the costs
of the third investment bank shall be borne by the Member whose
investment bank submitted the lower of the two previous determinations.
In the event that the determination made by the third investment bank
is lower than the lower of the two previous determinations, the costs
of the third investment bank shall be borne by the Member whose
investment bank submitted the higher of the two previous
determinations. Except as set forth in the two immediately preceding
sentences, each Member shall be responsible for the percentage
represented by such Member's Membership Interest of all costs incurred
in connection with the determination of the Fair Market Value set forth
herein.
6
<PAGE> 13
"Family Controlled Entity" means (i) any not-for-profit
corporation if at least a majority of its board of directors is
composed of Ralph Lauren Family Members; (ii) any other corporation if
at least a majority of its outstanding voting power is held by Ralph
Lauren Family Members; (iii) any partnership if at least a majority of
the outstanding voting interest of its partnership interests are owned
by Ralph Lauren Family Members; and (iv) any limited liability or
similar company if at least a majority of the outstanding voting
interest of the company is owned by Ralph Lauren Family Members.
"Fiscal Quarter".: As defined in Section 3.2(c).
"Fiscal Year": As defined in Section 3.4.
"GAAP": As defined in Section 3.1(a).
"Governmental Authority": Any nation or government, any state
or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Holder Request": As defined in Section 3.5(a).
"Home Products": Products to furnish and/or decorate the home,
including bedding and bath products, interior decor/furniture and
tabletop items, paints, wallpaper, fabrics, curtains, home fragrance
products and other decorative accessories, in each case bearing or
otherwise marketed, advertised or promoted under any of the Polo and
Ralph Lauren Brands.
"Indemnified Party": As defined in Section 14.3(d).
"Indemnifying Member": As defined in Section 14.1.
"Indemnitee": As defined in Section 14.2.
"Initial Business Plan": The Business Plan to be agreed among
the parties hereto.
"Initial Membership Interest": With respect to any Member, the
Initial Membership Interest of such Member set forth in Exhibit A.
"Initial Public Offering": The initial offer for sale of
capital stock of the Company pursuant to an effective registration
statement filed under the "Securities Act," which results in an active
trading market in such shares of capital stock (it being understood
that such an active trading market shall be deemed to exist if, among
other things, such shares are listed on the New York Stock Exchange or
the Nasdaq Stock Market, Inc. National Market System or another
national securities exchange). In connection with an Initial Public
Offering, the Members agree to take all actions necessary and
appropriate to convert the form of the Company to an appropriate form
required for such purpose and make such other adjustments as are
necessary in connection therewith.
7
<PAGE> 14
"Lauren Family Trust": includes trusts the primary
beneficiaries of which are Ralph Lauren, the spouse of Ralph Lauren,
Lauren Descendants, Ralph Lauren's siblings, spouses of Lauren
Descendants and their respective estates, guardians, conservators or
committees and/or charitable organizations, provided that if the trust
is a wholly charitable trust, at least a majority of the trustees of
such trust consists of Ralph Lauren, the spouse of Ralph Lauren and/or
Ralph Lauren Family Member.
"License Agreement": As defined in the Preamble.
"Licensed Brands": "Polo by Ralph Lauren," "Ralph (Polo Player
Design) Lauren," "Polo," "Ralph," "Polo (Polo Player Design) Ralph
Lauren," "Ralph Lauren," "RLX," "Polo Sport," "Polo Jeans Co," "Ralph
Lauren Home Collection," the Polo Player Design and such other
trademarks which Licensor licenses to the Company pursuant to the
License Agreement. The term "Licensed Brands" shall specifically
exclude the mark "Club Monaco."
"Licensed Materials": Any text, artwork, photographs,
transfers, transparencies, designs, graphic or pictorial or other
similar material (i) furnished to the Company by or on behalf of
Licensor for use by the Company in connection with any Catalog or the
Site pursuant to the terms of this Agreement, the Operating Agreement
or the License Agreement or (ii) created by or on behalf of the Company
during the term of the License Agreement specifically for use in
connection with any Catalog or the Site in the exercise of the
Company's rights under the License Agreement, all of which shall be
owned exclusively by Licensor, except to the extent it contains marks
or materials owned or licensed by NBC or its Affiliates.
"Licensor": PRL USA Holdings, Inc.
"Lien": As defined in Section 11.4.
"Liquidation Payment": As defined in Section 12.6.
"Litigation": As defined in Section 5.3(xx).
"Majority-Owned Affiliates": With respect to any Person, means
any Affiliate of such Person with respect to which such Person owns at
least a majority of the total voting power. For the avoidance of doubt,
NBCi shall not be considered a Majority-Owned Affiliate of NBC except,
for purposes of Section 11.6 hereof only, in the event that NBC shall
actually own a majority of the outstanding voting stock of NBCi.
"Management Committee": As defined in Section 5.1.
"Manager": Any person appointed as a Manager of the Company by
any Member as provided in Section 5.2(b), but does not include any
person who has ceased to be a Manager of the Company.
"Marks": As defined in the License Agreement.
8
<PAGE> 15
"Material Adverse Effect": Any material adverse effect on (A)
the assets, business, results of operations or condition (financial or
otherwise) of the Company or (B) when used with respect to any Member
or the Company, the ability of such Member or the Company to perform
its obligations hereunder or under the Ancillary Agreements to which it
is a party.
"Material Deadlock": Failure by the Members or the Management
Committee to reach agreement on any matter (i) that is of such
magnitude and is so fundamental to the Business and the Business
Purpose that failure to resolve such issue could reasonably be expected
to have a Material Adverse Effect, (ii) that is so fundamental to the
business of Polo or any Original Media Member that failure to resolve
such issue could reasonably be expected to have a material adverse
effect on the assets, business, results of operations or condition
(financial or otherwise) of Polo or any Original Media Member or (iii)
which disagreement is of such a nature that continuance of operation of
the Company as a jointly owned entity by the Members would be
unworkable as a result of the breakdown in the communications and
business relationship of the Members. For the avoidance of doubt, the
Members agree that a failure by the Managers appointed by either Polo
or the Media Members to approve an Initial Public Offering, in
accordance with Section 5.3(x), recommended in good faith by either
Polo or the Media Members, as the case may be, at any time following
the fifth anniversary of the Closing Date shall constitute a Material
Deadlock.
"Material Deadlock Event": As defined in Section 3.12(d).
"Media Competitor": Any media, telecommunications or Internet
company or similar company, or any Majority-Owned Affiliate thereof, a
significant business of which is any of the three primary businesses of
NBC and its Affiliates at the time of determination; provided, however,
that Media Competitor shall not include any Person identified by Polo
in writing to the Media Representative (a "Request Notice") that the
Media Representative does not identify as a Media Competitor in writing
to Polo within thirty (30) days of such Request Notice.
"Media Manager": Any Manager appointed by the Media Members in
accordance with Section 5.2(b).
"Media Member IPO Right": As defined in Section 3.16.
"Media Members": The Original Media Members and their
transferees.
"Media Members' Membership Interests": As defined in Section
3.12(d).
"Media Members Sale Notice": As defined in Section
3.12(e)(i).
"Media Members Sale Right": As defined in Section 3.12(e).
9
<PAGE> 16
"Media Representative": Initially NBC, or such other party as
is designated as representative by all of NBC, ValueVision, CNBC.com
and NBCi or their permitted transferees by written notice to Polo.
"Member": A Person executing this Agreement when acting in its
capacity as a member of the Company and any Person admitted as an
additional or substitute member of the Company pursuant to this
Agreement.
"Member Plans": As defined in Section 4.2(f)(iii).
"Membership Interest": The interest of a Member in the
Company, including a Member's (i) right to receive allocations of
Profit and Loss, Distributions, returns of capital and distribution of
assets upon a dissolution of the Company, (ii) right, if any, to vote
on, or to consent to, or approve or disapprove, certain actions or
decisions regarding the Company as provided in this Agreement and the
Operating Agreement or under the Act and (iii) Initial Membership
Interest.
"NBC": National Broadcasting Company, Inc., a Delaware
corporation, and any successor thereof.
"NBCi": NBC Internet, Inc., a Delaware corporation, and any
successor thereof.
"NBC Change of Control": The occurrence of any of the
following: (a) (i) the acquisition of ownership, directly or
indirectly, beneficially or of record, by any Person, of 25% or more of
the voting equity or equity value of NBC, and General Electric Company
and its Affiliates own 25% or less of the voting equity or equity value
of NBC, as applicable, followed within 180 days by (ii) an event or a
series of events which results in those officers of NBC which are
actively involved in making decisions regarding the Company and this
Agreement (and the Operating Agreement), including as of the date of
this Agreement the Chief Executive Officer of NBC, the President of NBC
West Coast and the President of NBC Interactive Business Development,
who are Bob Wright, Scott Sassa and Martin Yudkovitz (collectively the
"NBC Executives"), respectively, as of the date of this Agreement, or
comparable positions at the relevant time, shall no longer be employees
of NBC and such persons shall be replaced by persons who were not
employees of NBC at least two months prior to the earlier of the entry
into an agreement with respect to, or consummation of, the transaction
described in clause (i) or (b) any sale, lease, exchange or transfer
(in one transaction or a series of related transactions) of control of,
whether by transfer of all or substantially all of the assets
comprising, or otherwise, the NBC Television Network other than in a
Permitted NBC Transfer.
"NBC Change of Control Call": As defined in Section 3.13(c).
"NBC Properties": The NBC Television Network, CNBC and
NBC-owned and operated television stations, and other NBC-owned
properties as they emerge in the future.
"Nonrecourse Liability": As defined in Section 1.704-2(b)(3)
of the Regulations.
10
<PAGE> 17
"Notice of Material Deadlock": As defined in Section 3.12(d).
"Officer": As defined in Section 6.1.
"Online": Any electronic interactive service, system, network
or medium that is available via (a) public or private computer networks
such as the Internet (including the World Wide Web), (b) proprietary
online services such as America Online and Compuserve, (c) hybrid
Internet services such as WebTV and @Home, (d) interactive cable,
satellite or broadcast television and (e) any successor technology to
any of the foregoing. "Online" does not mean traditional
person-to-person voice only telephone communications.
"Online Identifier": Any URL, keyword, logo or other
identifier selected by the Company, subject to the License Agreement,
for identifying Online the Company, the Business or any of its
services.
"Operating Agreement": As defined in the Preamble.
"Operations Manual": As defined in Section 5.4(c).
"Organization": A Person other than a natural person. The term
Organization includes corporations (both non-profit and other
corporations), partnerships (both limited and general), joint ventures,
limited liability companies, and unincorporated associations, but the
term does not include joint tenancies and tenancies by the entirety.
"Original Agreement": As defined in the Preamble.
"Original Media Members": As defined in the Preamble.
"Other Indemnified Persons": As defined in Section 14.1.
"Permitted NBC Transfer": Any sale, lease, exchange or
transfer (in one transaction or a series of related transactions) of
the NBC Television Network in which (x) NBC's Membership Interest and
all of NBC's rights and obligations hereunder are transferred to the
transferee in such transaction and (y) any NBC Executive or other
executive officer of NBC who was an officer of NBC for at least two
months prior to the public announcement or execution of a definitive
agreement regarding the transaction is employed by the transferee
following such transaction as Chief Executive Officer of NBC, President
of the NBC Television Network or in a similar (or higher) capacity for
a period of at least six months after the consummation of such
transaction.
"Person": Any natural person, corporation, partnership, joint
venture, trust, incorporated organization, limited liability company,
other form of business or legal entity or Governmental Authority.
11
<PAGE> 18
"Polo": Polo Ralph Lauren Corporation, a Delaware corporation,
and any successor thereof.
"Polo and Ralph Lauren Brands": (i) The Licensed Brands and
Tradenames, (ii) any brands that are owned or licensed by Polo or an
Affiliate of Polo or any other Person bound by the License Agreement on
or after the date of this Agreement that are (A) marketed, advertised
or promoted under the Polo or Ralph Lauren name or any part thereof or
(B) related for purposes of Polo's marketing, advertising or
promotional strategies to the Polo or Ralph Lauren names or any part
thereof (including initials or any other derivatives) or, as a result
of Polo's marketing, advertising or promotional strategies, are
reasonably likely to be associated by customers with the Polo and Ralph
Lauren Brands and (iii) any other brands that may from time to time be
licensed to the Company pursuant to the License Agreement. The term
Polo and Ralph Lauren Brands shall specifically exclude the trademark
"Club Monaco" and shall include the trademarks "Chaps," "Lauren" and
"American Living."
"Polo Buyout Right": As defined in Section 3.14(a).
"Polo Change of Control": The occurrence of any of the
following: (a) there shall be consummated (i) any consolidation,
merger, recapitalization or other similar transaction involving Polo in
which Polo is not the continuing or surviving corporation, or pursuant
to which the shares of common stock or other equity securities of Polo
(the "Polo Equity") would be converted in whole or in part into cash,
other securities or other property, other than any such transaction in
which (1) Ralph Lauren and his estate, guardian, conservator or
committee , (2) the spouse of Ralph Lauren and her estate, guardian,
conservator or committee, (3) each descendant of Ralph Lauren and their
respective estates, guardians, conservators or committees (a "Lauren
Descendant"), (4) each Family Controlled Entity and (5) the trustees,
in their respective capacities as such, of each Lauren Family Trust
(the "Ralph Lauren Family Members") beneficially hold at least a
majority of the voting equity of the continuing or surviving company
immediately after such transaction, (ii) any consolidation, merger,
recapitalization or other similar transaction in which Polo is the
continuing or surviving company, other than any such transaction in
which Ralph Lauren and/or any Ralph Lauren Family Member beneficially
holds at least a majority of the voting equity of the continuing or
surviving company immediately after such transaction, or (iii) any
sale, lease, exchange or transfer (in one transaction or a series of
related transactions) of all or substantially all of the Licensed
Brands or assets of Polo; (b) any person, other than a Ralph Lauren
Family Member, shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) of the Polo Equity representing 50%
or more of the combined voting equity of Polo as a result of a tender
offer or exchange offer, open market purchases, privately negotiated
purchases or otherwise; (c) the acquisition of ownership, directly or
indirectly, beneficially or of record, by any Media Competitor, of 25%
or more of the voting equity of Polo, and Ralph Lauren and/or Ralph
Lauren Family Members collectively own 25% or less of the voting equity
of Polo; or (d) the acquisition of ownership, directly or indirectly,
beneficially or of record, by any Media Competitor from Polo, of 10% or
more of the total equity of Polo in a negotiated transaction in which
Polo has not offered NBC a right to acquire such equity not less than
30 or more than 180 days prior to the acquisition of ownership on the
same terms and conditions; provided, however, that any transfer of Polo
Equity that occurs by
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reason of the laws of inheritance or through any bona fide testamentary
or inter vivos device to a Ralph Lauren Family Member shall not
constitute a Polo Change of Control.
"Polo Change of Control Sale": As defined in Section 3.13(d).
"Polo Deadlock Call": As defined in Section 3.12(d).
"Polo Manager": The Manager appointed by Polo in accordance
with Section 5.2(b).
"Polo Members": Polo and its permitted transferees.
"Polo Offer Notice": As defined in Section 3.12(e)(ii).
"Polo Products": Apparel, Accessories and Home Products which
are manufactured by or under license from Polo, any Affiliate of Polo
or any other Person bound by the License Agreement or any combination
of the foregoing. The definition of Polo Products will be automatically
amended to include any additional products and services as may be
determined in accordance with Section 2.6(c) of the Operating
Agreement.
"Preservation Notice": As defined in Section 3.14(b).
"Principal Office": The principal office of the Company as set
forth in Section 2.3.
"Proceeding": Any administrative, judicial, or other adversary
proceeding, including litigation, arbitration, administrative
adjudication, mediation, and appeal or review of any of the foregoing.
"Profits or Losses": For each Fiscal Year, an amount equal to
the Company's taxable income or loss for such Fiscal Year, determined
in accordance with Section 703(a) of the Code (for this purpose, all
items of income, gain, loss, or deduction required to be stated
separately pursuant to Section 703(a)(1) of the Code will be included
in taxable income or loss), with the following adjustments:
(i)Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or
Losses pursuant to this definition will be added to such taxable income
or loss;
(ii)Any expenditures of the Company described in Section
705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code
expenditures pursuant to Section 1.704-l(b)(2)(iv)(i) of the
Regulations, and not otherwise taken into account in computing Profits
or Losses pursuant to this definition, will be subtracted from such
taxable income or loss;
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(iii)Notwithstanding any other provisions of this definition,
any items which are specially allocated pursuant to paragraph 9.4 shall
not be taken into account in computing Profits or Losses.
"Promotion Agreement": As defined in the Preamble.
"Property": Any property, real or personal, tangible or
intangible, including cash, and any legal or equitable interest in such
property, but excluding services and promises to perform services in
the future.
"Purchase Price Notice": As defined in Section 3.14(b).
"Qualified Buyer": Any Person that satisfies as of the date of
determination each of the following requirements: (a) the stockholders'
equity or the market capitalization of such Person is or was, as of the
end of the most recently completed Fiscal Quarter of such Person prior
to the date of entering into any agreement for the transfer to such
Person of any interest in the Company in excess of U.S. $100 million or
U.S. $1 billion, respectively; (b) neither such Person nor any
Affiliate of such Person has been convicted within the prior five years
of any criminal violation of law in any country; (c) neither such
Person nor any Subsidiary of such Person directly or indirectly
manages, operates, owns any equity interest in excess of 10% in or has
agreed to purchase a Person listed on Schedule 1; (d) the admission of
such Person as a Member or such Person being, acting or otherwise
exercising the rights of a Member will not have a Material Adverse
Effect on Polo or the Company, or make it illegal or impossible for the
Company or Polo to do business in any country where the Company or Polo
at that time does business; (e) there is not pending any material
litigation against such Person which would be reasonably expected to
have a material adverse effect on the assets, business, results of
operations or condition (financial or otherwise) of such Person; and
(f) such Person is not bankrupt, insolvent or in similar financial
condition.
"Quiet Period": The period commencing on the date the Change
of Control notice required by Section 3.13(a) is received and ending on
the date that is 180 days thereafter.
"Regulations": The federal income tax regulations promulgated
by the United States Treasury Department under the Code as such
Regulations may be amended from time to time. All references herein to
a specific section of the Regulations will be deemed to also refer to
any corresponding provision of succeeding Regulations.
"Regulatory Allocations": As defined in Section 9.4(c).
"Requesting Holder": As defined in Section 3.5(a)(i).
"ROFR Notice": As defined in Section 3.12(e)(iii).
"SEC": The Securities and Exchange Commission.
"SEC Reports": As defined in Section 4.2(g).
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"Secretary": As defined in Section 6.5.
"Securities": As defined in Section 11.6(a).
"Securities Act": Securities Act of 1933, as amended.
"Services Agreement": As defined in the Preamble.
"Sharing Ratio": With respect to any Member, the Sharing Ratio
of each Member set forth in Exhibit A. Exhibit A will be amended as
necessary to conform to any changes agreed to by the Members. In the
event that a Membership Interest is transferred in accordance with the
terms of this Agreement, the transferee will succeed to the Membership
Interest and Sharing Ratio of the Withdrawing Member.
"Site": With respect to the World Wide Web, the website and
pages developed, produced and maintained by, or at the direction of,
the Company located at or operated under the domain name Polo.com,
ralphlauren.com or any subdomains of either thereof, or any other
domain names agreed by the Members, and successors or extensions
thereof, or any comparable area, site or pages designed to promote the
Business in other Online media or services.
"Subsidiary": Any corporation, partnership, limited liability
company, joint venture or other legal entity of which a Person (either
alone, through or together with any other Subsidiary) that owns or has
the right to acquire, directly or indirectly, more than 50% of the
stock or other equity interests the holder of which is generally
entitled to vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
"Supply Agreement": As defined in the Preamble.
"Tax Matters Partner": As defined in Section 10.2.
"Territory" As defined in the License Agreement.
"Third Party Claim": As defined in Section 14.3(d).
"Tradename": As defined in the License Agreement.
"Transfer": As defined in Section 11.2.
"Treasurer": As defined in Section 6.6.
"United States": The United States of America (including the
District of Columbia), its possessions and territories and other areas
subject to its jurisdiction (including the Commonwealth of Puerto Rico,
the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the
Northern Mariana Islands).
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"ValueVision": ValueVision International, Inc., a Minnesota
corporation and any successor thereof.
"ValueVision Additional Contributions": As defined in Section
8.2(a).
"ValueVision Commitment": $50,000,000.
"ValueVision Initial Capital Contribution": As defined in
Section 8.1(a).
"Vice President": As defined in Section 6.4.
"Withdrawing Member": As defined in Section 11.2.
ARTICLE II
FORMATION AND CONDUCT
2.1 Formation and Purpose. The Members hereby
authorize and ratify the formation of the Company as a Delaware limited
liability company pursuant to the provisions of the Act. The original
Certificate of Formation was filed with the Secretary of State of the
State of Delaware on February 2, 2000. On the Closing Date, upon
satisfaction of the conditions contained in Section 8.1 and Article XV,
the Original Media Members and Polo will be deemed admitted as Members.
The purposes of the Company are to engage in the following activities:
(i) to conduct the Business;
(ii) to acquire, hold, own, operate, manage, finance,
encumber, sell, or otherwise Dispose of or otherwise use the Company
Assets;
(iii) to enter into any lawful transaction and engage
in any lawful activities as may be necessary, incidental or convenient
to carry out the business of the Company as contemplated by this
Agreement, the Ancillary Agreements and the Business Purpose.
The Company may do any and all acts and things
necessary, appropriate, proper, advisable, or convenient for the
furtherance and accomplishment of the purposes of the Company,
including to engage in any kind of activity and to enter into and
perform obligations of any kind necessary to or in connection with, or
incidental to, the accomplishment of the purposes of the Company, so
long as such activities and obligations may be lawfully engaged in or
performed by a limited liability company under the Act. In furtherance
of its purposes, the Company shall have and may exercise all of the
powers now or hereafter conferred by Delaware law on limited liability
companies formed under the Act.
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2.2 Name. The name of the Company is "Ralph Lauren
Media, LLC". All business of the Company will be conducted under the
name of the Company and title to all property, real, personal or mixed,
owned by or leased to the Company will be held in such name.
2.3 Principal Office and Place of Business. The
principal office and place of business of the Company will be located
at such place or places as Polo and the Media Representative may from
time to time designate by mutual agreement.
2.4 Term. The term of the Company commenced on the
date the Certificate of Formation was filed with the Secretary of State
of the State of Delaware in accordance with the Act and will continue
until the Company is dissolved as provided in Article XII.
2.5 Registered Office and Agent. The registered agent
for the service of process and the registered office will be that
Person and location reflected in the Certificate of Formation as filed
in the office of the Secretary of State of the State of Delaware. At
any time and from time to time the Company may designate another
registered office or agent.
2.6 Qualification in Other Jurisdictions. The Company
will be qualified or registered under foreign qualification or assumed
or fictitious name statutes or similar laws in any jurisdiction in
which the Company transacts business and in which such qualification or
registration is determined by the Company to be necessary or advisable.
2.7 No Liability to Third Parties. No Member, Manager
or Officer, solely by reason of being a Member or acting as a Manager
or Officer, will be subject to any liability in connection with the
Company Assets, debts, obligations, liabilities, acts or affairs of the
Company, including under any Proceeding. The debts, obligations and
liabilities of the Company, whether arising in contract, tort or
otherwise, will be solely the debts, obligations and liabilities of the
Company.
2.8 Business Purpose. The Members hereby agree that
the following statement sets forth the purpose of the Company (the
"Business Purpose"): () the development of the Company into a world
class direct marketer of Polo and Ralph Lauren Brands; () the
establishment, articulation and definition of Polo and Ralph Lauren
Brands' identity Online and, to the extent applicable, in the Catalog
and the creation of an appropriate level of awareness for both; () the
positioning of Online activities and the Catalog as integral components
of new and existing customers' shopping channels; () providing consumer
value through product sales, content and service to the same level that
Polo delivers in free-standing retail stores, but with elimination or
reduction of negative aspects of shopping in a store; () providing
format and content that promotes () the Business, () Polo's business
generally with respect to the Licensed Brands, () Collection Brands and
() in accordance with Section 2.3(a) of the Operating Agreement, any
other Polo and Ralph Lauren Brands provided that such promotions are
not materially competitive with the Business Online; () focusing on the
customer and developing lasting one-to-one relationships; () providing
an interactive shopping experience, comprised of
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different shopping modes and customer rapport; () the creation of a
direct-to-customer upscale shopping environment Online, offering
products and services at traditional retail prices, as distinguished
from an outlet store or other price-driven shopping facility; ()
providing entertaining and engaging experiences Online itself through
means of experience-rich promotional events that are interwoven into
the merchandising and product presentations; and () the development and
promotion, as applicable, of new products and services under the Polo
and Ralph Lauren Brands in accordance with Section 2.6 of the Operating
Agreement.
2.9 Business Launch. The Members recognize the
competitive imperative of launching the Business as promptly as
practicable. Pursuant to a phased market entry outlined in the Initial
Business Plan, the Members shall use all commercially reasonable
efforts to launch the Site no later than October 15, 2000. With respect
to a Catalog, if the Company does not launch, or sub-contract with a
third party to launch, a Catalog by January 1, 2003, Polo shall have
the right to enter into arrangements with a third party to develop and
promote a Catalog; provided, to the extent such failure to launch was
not due to an action on the part of the Media Members or the failure on
the part of any Media Members to act and the terms of any such
arrangement with a third party are materially more favorable than those
offered to the Company, Polo shall offer the Company the opportunity to
agree to launch the Catalog in a reasonable period of time on such
terms and the Company shall have 60 days to advise Polo in writing that
it agrees to all such terms.
2.10 Initial Activities. On the Closing Date, (i)
Polo, the Original Media Members and the Company shall enter into the
Operating Agreement, (ii) Licensor and the Company shall enter into the
License Agreement, (iii) ValueVision and the Company shall enter into
the Services Agreement, (iv) Polo and the Company shall enter into the
Supply Agreement, (v) NBC and the Company shall enter into the
Advertising Agreement and (vi) NBCi and the Company shall enter into
the Promotion Agreement.
2.11 Authorization of Actions Taken by the Company.
(a) Ancillary Agreements. The Members hereby ratify,
confirm, authorize and approve the execution and delivery by any
officer or other Person duly authorized by the Company, including Polo,
on behalf of the Company of the Ancillary Agreements and the execution
and delivery of such other instruments, agreements, assignments,
certificates or other documents as any such officer or other Person
deems necessary or appropriate in connection therewith.
(b) Formation. The Members hereby ratify, confirm,
authorize and approve the formation of the Company and the
contemporaneous filing of the Certificate of Formation of the Company
with the Delaware Secretary of State. The Members hereby ratify the
designation of Polo as an authorized person, within the meaning of the
Act, to execute, deliver and file the Certificate of Formation and any
amendments and/or restatements of the Certificate of Formation and any
other certificates necessary for the Company to qualify to do business
in a jurisdiction in which the Company may wish to
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conduct business. The execution by Polo alone of any of the foregoing
certificates (and any amendments and/or restatements thereof) shall be
sufficient.
(c) Bank Accounts. The Members hereby ratify,
confirm, authorize and approve the opening of whatever bank accounts
shall be deemed necessary by Polo for the expeditious conduct of the
Company's affairs by Polo or any officer on behalf of the Company in
the name of the Company with such financial institutions selected by
Polo or any such officers from time to time, and the adoption of any
and all resolutions required to be adopted by any such financial
institution as a condition to the opening of such accounts are hereby
ratified, confirmed, authorized and approved. Any and all actions
described in this Section 2.11 heretofore taken by Polo on behalf of
the Company or by the Company's officers and agents on behalf of the
Company are approved, ratified and confirmed as the acts of the Company
without the necessity of further evidence.
ARTICLE III
OPERATIONS
3.1 Books and Records.
(a) Books and Accounts. The Company will keep, or
cause to be kept, accurate, full and complete books and accounts
showing assets, liabilities, income, operations, transactions and the
financial condition of the Company. The books, accounts and records of
the Company at all times will be maintained at the Company's principal
office. Such books and accounts will be prepared in accordance with
generally accepted accounting principles in effect in the United States
at the time of preparation of such books and accounts, consistently
applied ("GAAP"). Any Member or its designee and any Manager will have
access to the physical premises, the operations, the books, accounts
and records of the Company at any time during regular business hours
and will have the right to copy any records at its expense. No charges
will be made to such Member, its designee or Manager by the Company for
such inspection and audit other than for out-of-pocket costs of the
Company occasioned thereby. The Company will maintain all such records
for a period of three years from the date of the making or receipt
thereof, except for those records, if any, required to be kept for a
longer period under applicable law or which a Member reasonably
requests be maintained for a longer period.
(b) Other Records. The Company will provide, or will
cause to be provided, to the Members real time access to all sales,
inventory and operational data relating to the Business, any and all
information relating to customers and potential customers of the
Business or otherwise relating to Online or Catalog marketing and sales
activities of the Company, including data relating to the volume of
traffic generated by the Site, the persons visiting the Site, the
length of time spent at the Site, inventory control, sales records,
history of inventory as well as individual categories of inventory and
such other related information that is or may become available
(collectively, the "Company Customer Data"), provided that the use and
disclosure of such Company Customer Data
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shall be subject to the confidentiality and use restrictions set forth
in the Operating Agreement.
3.2 Financial Statements; Information; Bank Accounts.
(a) Preparation in Accordance with GAAP. All
financial statements prepared pursuant to this Section 3.2 will present
fairly the financial position and operating results of the Company and
will be prepared in accordance with GAAP.
(b) Monthly Reports. Within 15 Business Days after
the end of each calendar month during the term of this Agreement,
commencing with the first calendar month after the date of this
Agreement, the Company shall prepare and submit or cause to be prepared
and submitted to the Members and the Management Committee an unaudited
statement of profit and loss of the Company for such month, an
unaudited balance sheet of the Company dated as of the end of such
calendar month and an unaudited statement of cash flows for the Company
for such calendar month, in each case, certified by the CFO as true and
correct and prepared in accordance with GAAP consistently applied.
(c) Quarterly Report. Within 15 days after the end of
each quarterly period (the "Fiscal Quarter") of each Fiscal Year,
commencing with the first Fiscal Quarter after the date of this
Agreement, the Company shall prepare and submit or cause to be prepared
and submitted to the Members and the Management Committee an unaudited
statement of profit and loss for the Company for such Fiscal Quarter,
an unaudited balance sheet of the Company dated as of the end of such
Fiscal Quarter, and an unaudited statement of cash flows for the
Company for such Fiscal Quarter, in each case, certified by the CFO as
true and correct and prepared in accordance with GAAP consistently
applied.
(d) Annual Reports. Within 30 days after the end of
each Fiscal Year during the term of this Agreement, the Company shall
prepare and submit or cause to be prepared and submitted to the Members
and the Management Committee () the following audited statements: a
balance sheet, together with a statement of profit and loss, a
statement of cash flows for the Company during such Fiscal Year, a
statement of any amounts contributed and/or distributed to the Members
during such Fiscal Year and a statement of Members' equity, in each
case, prepared in accordance with GAAP consistently applied and () a
report of the activities of the Company during the Fiscal Year.
(e) Other Reports. Subject to the confidentiality and
use restrictions set forth in the Operating Agreement and elsewhere
herein, the Company shall provide to each Member and the Management
Committee such other reports and information concerning the business
and affairs of the Company as may be required by the Act or by any
other law or regulation of any regulatory body applicable to the
Company and such other information as may be reasonably requested by
any Member, it being understood that any information provided to any
Member in accordance with this Section 3.2(e) shall be simultaneously
provided to the other Members. Any Member requesting additional reports
or information in accordance with this Section 3.2(e) not otherwise
contemplated
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by this Agreement or the Operating Agreement shall be required to
reimburse the Company for any out-of-pocket costs associated with
producing such additional reports or providing such additional
information. Any such information may be used only by such Member and
its Majority-Owned Affiliates in the ordinary course of its own
business and in connection with its investment in the Company.
(f) Bank Accounts. All funds of the Company will be
deposited in the Company's name in such checking and savings accounts,
time deposits, certificates of deposit or other accounts at the banks
designated by the CEO from time to time, and the CEO will arrange for
the appropriate conduct of such account or accounts.
3.3. Auditors. The Company's independent public
accountants and auditors will be Deloitte & Touche LLP or such other
nationally recognized accounting firm as Polo and the Media
Representative may approve from time to time (the "Auditors"). The
Auditors will initially be appointed pursuant to an engagement letter
between the Company and the Auditors approved by both Polo and the
Media Representative, which letter will provide that () a copy of any
Management or Accounting Control Letters of Recommendation or Comment
from the Auditors to the Company will be delivered to the Members
approximately contemporaneously with delivery thereof to the Company,
and () the Auditors and their work papers will be available to any
Member at reasonable times and upon reasonable advance notice to the
Auditors and the Company.
3.4 Fiscal Year. The fiscal year of the Company for
financial, accounting and Federal, state and local income tax purposes
initially will be the calendar year (the "Fiscal Year"). Upon the
consent of Polo and the Media Representative as provided in Section
5.3, the beginning and ending dates of the Fiscal Year may be changed.
3.5 Demand Registration.
(a) Subject to the conditions and limitations
hereinafter set forth in this Section 3.5, at any time and from time to
time after the effectuation of an Initial Public Offering by the
Company or in accordance with and as required by Section 3.16, either
the Media Representative or Polo may request in writing that the
Company effect the registration under the Securities Act of all or part
of Polo's or the Media Members', as the case may be, registrable
securities specifying in the request the number and type of registrable
securities to be registered by each such requesting holder and the
intended method of disposition thereof (such notice is hereinafter
referred to as a "Holder Request"). Registrations requested pursuant to
this Section 3.5 are collectively referred to herein as "Demand
Registrations." Upon receipt of such Holder Request, the Company will,
within 10 days, give written notice of such requested Demand
Registration to all other holders of registrable securities, including
Polo or the Media Representative, which other holders shall have the
right (subject to the limitations set forth in subsection (f) of this
Section 3.5) to include the registrable securities held by them in such
registration and thereupon the Company will, as expeditiously as
possible and subject to the terms of this Agreement, use its best
efforts to effect the registration under the Securities Act of the
following:
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(i) the registrable securities that the Company has
been so requested to register by the holder that submitted the Holder
Request (the "Requesting Holder"); and
(ii) all other registrable securities that the
Company has been requested to register by any other holder thereof by
written request given to the Company within 30 calendar days after the
giving of such written notice by the Company (which request shall
specify the intended method of disposition of such registrable
securities), all to the extent necessary to permit the disposition (in
accordance with the intended methods thereof as aforesaid) of the
registrable securities so to be registered.
(b) Subject to the provision set forth in subsection
(f) of this Section 3.5, () the Company shall not be obligated to
effect more than (A) four (4) Demand Registrations (of which no more
than two may be shelf registrations) pursuant to this Section 3.5 at
the request of the Media Representative and (B) four (4) Demand
Registrations (of which no more than two may be shelf registrations)
pursuant to this Section 3.5 at the request of Polo, and () the Company
shall not be obligated to file a registration statement under Section
3.5(a) unless the Company shall have received requests for such
registration with respect to at least 5% of the fully diluted equity of
the Company at such time or shares having a market value of at least
$50 million.
(c) The Company shall not be obligated to file a
registration statement relating to any Holder Request under Section
3.5(a) within a period of one year after the effective date of any
registration statement relating to any previous Demand Registration or
an Initial Public Offering.
(d) In connection with any offering pursuant to this
Section 3.5, the only shares that may be included in such offering are
() registrable securities and () shares of authorized but unissued
equity that the Company elects to include in such offering ("Company
Securities").
(e) If the Company or Polo reasonably determines that
() the filing of a registration statement or the compliance by the
Company with its disclosure obligations in connection with a
registration statement would require the disclosure of material
information regarding the Company or Polo, as the case may be, that the
Company or Polo, as the case may be, has a bona fide business purpose
for preserving as confidential or () such registration would be likely
to have an adverse effect on any proposal or plan by the Company or
Polo, as the case may be, to engage in any financing transaction,
acquisition of assets (other than in the ordinary course of business)
or any merger, consolidation, tender offer or similar transaction, the
Company may delay (or Polo may instruct the Company to delay, as
applicable) the filing of a registration statement and shall not be
required to maintain the effectiveness thereof or amend or supplement a
registration statement for a period expiring upon the earlier to occur
of (A) the date on which such material information is disclosed to the
public or ceases to be material, in the case of clause (i), (B) the
date on which such transaction is completed or abandoned, in the case
of clause (ii), or (C) 120 days after the Company or Polo makes such
good faith determination, in the case of either clauses (i) or (ii);
provided that in such event, the
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holders of registrable securities initiating the request for such
registration will be entitled to withdraw such request, and if such
request is withdrawn such registration will not count as one of the
permitted registrations under this Section 3.5. In any event, the
Company will pay all registration expenses in connection with any
registration initiated under this Section 3.5, except as provided in
Section 3.5(i) below.
(f) If, in connection with any underwritten offering,
the managing underwriter shall advise the Company and any holder of
registrable securities that has requested registration that, in its
judgment, the number of securities proposed to be included in such
offering should be limited due to market conditions, the Company will
so advise each holder of registrable securities that has requested
registration, and shares shall be excluded from such offering in the
following order until such limitation has been met: first, the
registrable securities requested to be included by the Company shall be
excluded until all such registrable securities shall have been so
excluded; second, the registrable securities requested to be included
in such offering pursuant to Section 3.5(a)(ii) shall be excluded pro
rata, based on the respective number of registrable securities as to
which registration has been so requested by all such holders until all
such registrable securities have been so excluded; and thereafter, the
registrable securities requested to be included in such offering
pursuant to Section 3.5(a)(i) by the Requesting Holder shall be
excluded; provided, however, that if, in any case where registration
has been requested pursuant to Section 3.5(a)(i) by Polo or the Media
Representative, by reason of the application of this subsection (f)
more than 25% of the registrable securities requested by the Requesting
Holder to be included in such registration shall be excluded therefrom,
then such registration will not count as a Demand Registration
requested by the Requesting Holder pursuant to Section 3.5(a).
(g) A Demand Registration will not be deemed to have
been effected unless the registration statement relating thereto has
become effective; provided that if after it has become effective, the
offering of registrable securities pursuant to such registration is
interfered with by any stop order, injunction or other order or
requirement of the SEC or other governmental agency or court, such
registration will be deemed not to have been effected. Additionally, a
Demand Registration shall not be deemed to have been effected if:
(i) the registration statement relating thereto does
not remain effective, current and usable by the Requesting Holder until
the earlier of (A) three (3) months following the date on which such
registration statement became effective, subject to the last sentence
of Section 3.5(a) herein and (B) the date on which all of the
registrable securities requesting in the Demand Registration to be sold
pursuant to such registration statement are sold;
(ii) after the registration statement relating
thereto has become effective, such registration statement is interfered
with by any stop order, injunction or other order or requirement of the
Commission or other governmental agency or court for any reason prior
to the earlier of (A) the four (4) months following the date on which
such registration statement became effective, subject to the last
sentence of Section 3.5(a)
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herein and (B) the date on which all of the registrable securities
requested in the Demand Registration to be sold pursuant to such
registration statement are sold; and
(iii) the conditions to closing specified in any
purchase agreement or underwriting agreement entered into in connection
with such Demand Registration are not satisfied, unless the failure to
satisfy such conditions to closing is due to some act or failure to act
of the Requesting Holder.
(h) If the Requesting Holder specifies in the Holder
Request an underwritten offering, such party or parties shall have the
right, with the approval of the Company, which approval shall not be
unreasonably withheld, to select the managing underwriter; provided,
however, in the event that the Company has elected to include Company
Securities in such offering, the Company shall have the right, with the
approval of a majority of the holders of registrable securities that
have requested to be included in such offering, which approval shall
not be unreasonably withheld, to select the managing underwriter.
(i) The Company will pay all registration expenses
incurred in connection with each Demand Registration effected by it
pursuant to this Section 3.5. The Requesting Holder will be responsible
for underwriters discounts, selling commissions and fees and
disbursements of counsel for the Requesting Holder with respect to the
registrable shares being sold by it.
(j) The Requesting Holder, upon the approval of the
Company, which shall not unreasonably be withheld, shall have the sole
right to determine the offering price per share and underwriting
discounts, if applicable, in connection with a Demand Registration
pursuant to this Section 3.5.
3.6 Piggyback Registrations.
(a) In connection with or after an Initial Public
Offering, if the Company at any time proposes to register any of its
equity securities under the Securities Act (other than a registration
on Form S-4 or S-8 or any successor or similar forms thereto), whether
or not for sale for its own account, on a form and in a manner that
would permit registration of registrable securities for sale to the
public under the Securities Act, it will, within ten days, give written
notice to all the holders of registrable securities of its intention to
do so, describing such securities and specifying the form and manner
and the other relevant facts involved in such proposed registration,
including, without limitation, (x) the intended method to dispose of
the securities offered, including whether or not such registration will
be effected through an underwriter in an underwritten offering or on a
"best efforts" basis, and, in any case, the identity of the managing
underwriter, if any, and (y) the price at which the registrable
securities are reasonably expected to be sold. Upon the written request
of any holder of registrable securities delivered to the Company within
20 calendar days after the receipt of any such notice (which request
shall specify the registrable securities intended to be disposed of by
such holder), the Company will use its commercially reasonable efforts
to effect the registration
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under the Securities Act of all the registrable securities that the
Company has been so requested to register; provided, however, that:
(i) if, at any time after giving such written notice
of its intention to register any securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to each holder of registrable
securities who shall have made a request for registration as
hereinabove provided and thereupon the Company shall be relieved of its
obligation to register any registrable securities in connection with
such registration (but not from its obligation to pay the registration
expenses in connection therewith);
(ii) if the Company has determined in good faith (A)
that the Company then is unable to comply with its disclosure
obligations (because it would otherwise need to disclose material
information which the Company has a bona fide business purpose for
preserving as confidential) or the SEC requirements in connection with
a registration statement or (B) that the registration and distribution
of registrable securities (or the use of the registration statement or
related prospectus) would interfere with any pending material
financing, acquisition, corporate reorganization or any other material
corporate development involving the Company, the Company may, at its
election, give written notice of such determination to each holder of
registrable securities included in such registration and thereupon the
Company shall be relieved of any obligation to maintain the
effectiveness thereof or amend or supplement such registration
statement; and
(iii) if such registration involves an underwritten
offering, all holders of registrable securities requesting to be
included in the Company's registration must sell their registrable
securities to the underwriters selected by the Company on the same
terms and conditions as apply to the Company and the Requesting Holders
shall enter into the underwriting agreement agreed to between the
Company and such managing underwriter.
(b) The Company shall not be obligated to effect any
registration of registrable securities under this Section 3.6
incidental to the registration of any of its securities in connection
with mergers, acquisitions, exchange offers, dividend reinvestment
plans or stock option or other employee benefit plans.
(c) If a registration pursuant to this Section 3.6
involves an underwritten offering and the managing underwriter advises
the issuer that, in its opinion, the number of securities proposed to
be included in such registration should be limited due to market
conditions, the Company will so advise each holder of registrable
securities that has requested registration pursuant to Section 3.6(a),
and shares shall be excluded from such offering in the following order
until such limitation has been met: first, the registrable securities
requested to be included in such offering by Polo, the Media
Representative and any other holder of registrable securities
requesting to participate therein shall be excluded pro rata, based on
the respective number of registrable securities as to which
registration has been so requested by such parties, until all such
registrable securities shall have been so excluded; and thereafter, the
securities requested to be registered by the Company shall be excluded.
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(d) In connection with any underwritten offering with
respect to which holders of registrable securities shall have requested
registration pursuant to this Section 3.6, the Company shall have the
right to select the managing underwriter with respect to the offering;
provided that such managing underwriter shall be a nationally
recognized investment bank and the Company shall have the right to
choose a co-managing underwriter.
(e) The Company will pay all registration expenses
incurred in connection with each of the registrations of registrable
securities effected by it pursuant to this Section 3.6. In addition,
the Company shall have the sole right to determine the offering price
per share and underwriting discounts in connection with any resale of
registrable shares pursuant to an underwritten offering in connection
with a registration pursuant to this Section 3.6, after consultation
with the selling stockholders and due regard for their view relating
thereto.
3.7 Lock-Up Provision. The Members agree that in
connection with an Initial Public Offering or any subsequent offering
of the Company's equity (other than a demand registration) they will
each agree not to sell any shares of the Company's capital stock for a
180-day period following the consummation of such offering. In
addition, in connection with any demand registrations effected pursuant
to Sections 3.5 and 3.6, respectively, the Members shall each agree to
customary restrictions on the sale of shares of the Company's capital
stock as are determined by the lead underwriters of any such offering
to be necessary in connection therewith.
3.8 Employees and Benefit Matters.
(a) Generally. The Members will use all commercially
reasonable efforts to examine and determine the needs of the Company in
respect of employees and employee benefit matters and to reach a
written agreement on such matters at the earliest practicable date. The
Company shall provide for its management an equity incentive pool of up
to 10% of the fully diluted equity of the Company for the grant of
options, restricted units or interests or any other similar incentive
plan.
(b) Member Responsibility. Each Member will be
responsible for any rights of its (or its respective Affiliates')
respective employees who become employees of the Company which rights
accrued prior to employment by the Company and by virtue of employment
with the Member (or its respective Affiliates), as the case may be,
including any rights accrued under any pension or other benefit plan.
(c) Non-Solicitation. No Member may, directly or
indirectly, solicit the employment of, or hire, any employee of the
Company or of any other Member with whom it has had contact or who
became known to it in connection with the Business, this Agreement or
the Operating Agreement without the prior consent of Polo, in the case
of the Media Members, or the applicable Media Member, in the case of
Polo; provided, however, that the foregoing provisions will not prevent
any Member from employing any such Person (i) who contacts such Member
on his or her own initiative without any direct
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or indirect solicitation by or encouragement from such Member and who
has not been employed by such Member or the Company during the
preceding six months, (ii) who is referred to such Member by a bona
fide employee search firm not specifically directed to contact such
employee or other employees of such Member or the Company or (iii) as
a result of general solicitation, including solicitation in trade
magazines.
3.9 [Reserved]
3.10 Expense Reimbursement. Except as otherwise
provided herein or in the Operating Agreement, the Company will be
responsible for the payment of all its own expenses. The Company will
not be obligated to reimburse the Members for any expenses paid by them
on behalf of the Company, whether out-of-pocket or direct overhead,
except for such items as are agreed to by the Management Committee to
be provided by one of the Members. This provision shall not apply to
any products supplied under the Supply Agreement or services provided
under the Services Agreement.
3.11 The Members as Third Party Beneficiaries. The
Company shall ensure to the extent commercially practicable that each
contract, agreement or other arrangement the Company enters into with
any third party for the purposes of providing services to the Company
shall provide each Member with rights as a third party beneficiary to
enforce such third party contract to the extent that any party to such
third party contract shall act in a manner inconsistent with the terms
of this Agreement or any Ancillary Agreement.
3.12 Deadlocks.
(a) Deadlocks of Managers. In the event that the
Management Committee fails to agree on any matter as to which unanimous
agreement of the Managers is required under this Agreement, the
Operating Agreement or by law, and such deadlock is not resolved within
30 days of the date the Management Committee reaches such deadlock,
Polo and the Media Representative shall use their commercially
reasonable best efforts to resolve such deadlock. In the event that
Polo and the Media Representative fail to agree on any issue, and such
deadlock is not resolved within 30 days following the giving of written
notice of the existence of such deadlock (including a Material
Deadlock) from the Management Committee to the Members or by Polo to
the Media Representative, or vice versa, either Polo or the Media
Representative may request that the Chief Executive Officer of Polo and
the Chief Executive Officer of NBC, or their respective designees, seek
to resolve such deadlock. Within 30 days of the initial request, such
persons or their designees shall meet and use their reasonable best
efforts to resolve the deadlock.
(b) Deadlocks of Members. In the event that the
unanimous consent of Polo and the Media Representative is not received
on any matter as to which such consent is so required in accordance
with the terms of this Agreement, the Operating Agreement or by law,
including Section 5.3, either Polo or the Media Representative may
provide the other party with notice that a deadlock (including, if
applicable, a Material Deadlock) has occurred. Following the delivery
of such notice, Polo and the Media Representative shall
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negotiate in good faith, and shall use their commercially reasonable
best efforts, to resolve such deadlock, and shall include their senior
management in such negotiation process. In the event that Polo and the
Media Representative fail to reach agreement after a period of 30 days
following the giving of written notice of the existence of such
deadlock by Polo to the Media Representative, or vice versa, either
Polo or the Media Representative may request that the Chief Executive
Officer of Polo and the Chief Executive Officer of NBC, or their
respective designees, seek to resolve such deadlock. Within 30 days of
the initial request, such persons or their designees shall meet and
use their reasonable best efforts to negotiate in good faith to
resolve the deadlock (including Material Deadlock).
(c) Continuation of Business. While any deadlock
(including a Material Deadlock) referred to in Section 3.12(a) or
3.12(b) is pending, the Business shall continue to be operated without
interruption consistent with prudent management practices and in a
manner most likely to continue its operations in the ordinary course of
business consistent with the Business Plan and Budget most recently in
effect.
(d) Polo Deadlock Call. It is understood and agreed
that the rights provided to Polo and the Media Members in Sections
3.12(d) and 3.12(e) shall not be exercisable unless the respective
Chief Executive Officers of NBC and Polo (or designees of each) shall
have attempted in good faith to resolve matters that are the subject of
a Material Deadlock. In the event that (i) on or prior to the fifth
anniversary of the date of this Agreement, a Material Deadlock has
occurred and has been continuing uninterrupted for a period of 365 days
and (ii) after the fifth anniversary of the date of this Agreement, in
the event that a Material Deadlock has occurred and has been continuing
uninterrupted for a period of 180 days, in each case, from the date
notice (a "Notice of Material Deadlock") is first provided pursuant to
Section 3.12(b) by either Polo or the Media Representative, as the case
may be, to the other Members that a deadlock has occurred (the
expiration of either such period a "Material Deadlock Event"), Polo
shall have the right (the "Polo Deadlock Call") to purchase from the
Media Members all, but not less than all, of the Media Members'
aggregate Membership Interests in the Company (the "Media Members'
Membership Interests"). If Polo wishes to exercise the Polo Deadlock
Call, then Polo (no later than 60 days following a Material Deadlock
Event) shall provide written notice to the Media Representative, which
notice shall (A) state that Polo proposes to exercise the Polo Deadlock
Call and (B) set forth in reasonable detail the purchase price as
calculated in accordance with Section 3.15(a) and all the material
terms and conditions of the proposed purchase. For purposes of the
foregoing, a Material Deadlock shall be deemed to have occurred if the
party receiving the Notice of Material Deadlock does not dispute such
Material Deadlock by seeking a determination of an arbitrator on or
prior to the 15th day following receipt of such Notice of Material
Deadlock. The closing of such sale will take place as set forth in
Section 3.15(c). If Polo fails to give notice within 60 days following
a Material Deadlock Event, then Polo shall be deemed to have waived the
Polo Deadlock Call and shall have no further right to exercise the Polo
Deadlock Call with respect to such Material Deadlock Event.
(e) Media Members Sale Right. In the event of a
Material Deadlock Event, the Media Members shall have the right (the
"Media Members Sale Right"), at the
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election of the Media Representative, to sell or cause to be sold all,
but not less than all, of the Media Members' Membership Interests in
accordance with the following procedures:
(i) The Media Representative shall give written
notice to Polo no later than 90 days following a Material Deadlock
Event which notice shall state that Media Members propose to effect a
sale of all, but not less than all, their Membership Interest (the
"Media Members Sale Notice"). If the Media Representative fails to give
the Media Members Sale Notice within 90 days following a Material
Deadlock Event, the Media Members shall be deemed to have waived the
Media Members Sale Right and have no further right to exercise the
Media Members Sale Right with respect to such Material Deadlock Event.
The Media Members Sale Notice shall state which of the following rights
the Media Members have determined to give Polo: (x) a right to purchase
the Media Members' Membership Interests at the Fair Market Value as
determined in accordance with clause (B) of the definition of such term
or (y) a right of first refusal in connection with such sale (the
"Election Notice").
(ii) In the event that the Media Representative
elects to provide Polo a right to purchase the Media Members'
Membership Interests at the Fair Market Value as determined in
accordance with clause (B) of the definition of such term, Polo shall,
within 30 days after receiving its Election Notice, deliver to the
Media Representative a written notice stating that Polo would be
willing to buy all, but not less than all, of the Media Members'
Membership Interests at the Fair Market Value as determined in
accordance with clause (B) of the definition of such term (the "Polo
Offer Notice"). If Polo delivers such Polo Offer Notice, the closing of
such sale will take place as set forth in Section 3.15(c). If Polo
determines not to acquire the Media Members' Membership Interests at
the Fair Market Value as determined in accordance with clause (B) of
the definition of such term or does not respond to the Election Notice
within the 30-day period mentioned above, the Media Representative may
then sell to one or more Qualified Buyers (but not more than four) so
long as one of such Qualified Buyers (x) acquires at least 26% of the
Company's voting equity, (y) has an unfettered right to vote on behalf
of all the other Qualified Buyers and (z) the terms of agreement among
such Qualified Buyers are reasonably satisfactory to Polo, subject to
the provisions in this Section 3.12(e)(ii), all but not less than all,
of the Media Members' Membership Interest for any price and for any
type of consideration; provided, however, that such sale is bona fide
and that a bona fide written, binding agreement with respect to such
sale has been reached with one or more Qualified Buyers and delivered
to Polo prior to 180 days from the date of the earlier of the date on
which Polo notifies the Media Representative that it does not wish to
purchase the Media Members' Membership Interests in accordance with
this Section 3.12(e)(ii) or the expiration of the 30-day period
described above. If an agreement of sale is not reached within the
period provided for in this clause (ii), or if an agreement is reached
but the sale is not consummated, then the Media Members shall be deemed
to have waived the Media Members Sale Right with respect to such
Material Deadlock Event. The closing of any sale made in accordance
with the foregoing will take place as set forth in Section 3.15(c).
(iii) In the event that the Media Representative
elects to provide Polo a right of first refusal, the Media
Representative shall, within 180 days after giving its Election Notice,
deliver to Polo an additional written notice stating the purchase price
in
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cash at which the Media Members would be willing to sell all, but not
less than all, of their Membership Interests to a Qualified Buyer or
Buyers (as described below) and all the material terms and conditions
of the proposed sale (the "ROFR Notice"). If the Media Representative
does not deliver to Polo the ROFR Notice within such 180-day period,
the Media Members shall be deemed to have waived the Media Members
Sale Right and have no further right to exercise the Media Members
Sale Right with respect to such Material Deadlock Event. If the Media
Representative does deliver such notice, Polo shall have 30 days from
the date of receipt of the ROFR Notice to elect to acquire all, but
not less than all, of the Media Members' Membership Interests at the
price set forth in the ROFR Notice. If Polo makes such election, the
closing of such sale will take place as set forth in Section 3.15(c).
If Polo fails to notify Media Representative that it wishes to acquire
the Media Members' Membership Interests within the 30-day period
mentioned above, the Media Members, at the election of the Media
Representative, may sell to one or more Qualified Buyers (but not more
than four) so long as one of such Qualified Buyers (x) acquires at
least 26% of the Company's voting equity, (y) has an unfettered right
to vote on behalf of all the other Qualified Buyers and (z) the terms
of agreement among such Qualified Buyers are reasonably satisfactory
to Polo, subject to the provisions in this Section 3.12(e)(iii), all
but not less than all, of their Membership Interests (1) for a
purchase price in cash or marketable securities that is no less than
the aggregate purchase price payable in cash set forth in the ROFR
Notice and (2) upon terms and conditions no more favorable to any
Qualified Buyer than those stated in the ROFR Notice; provided,
however, that such sale is bona fide and that a bona fide written
agreement with respect to such sale has been reached with one or more
Qualified Buyers and delivered to Polo within 30 days from the earlier
of the date on which Polo notifies the Media Representative that it
does not wish to exercise its rights in accordance with this Section
3.12(e)(iii) or the expiration of the 30-day period described above.
If an agreement of sale is not reached within the period provided for
in this clause (iii), or if an agreement is reached but the sale is
not consummated, then the Media Members shall be deemed to have waived
the Media Members Sale Right with respect to such Material Deadlock
Event.
(iv) So long as a Qualified Buyer complies with the
last sentence of Section 3.15(c), any Qualified Buyer's purchase of the
Media Members' Membership Interests under Sections 3.12(e)(ii) and
3.12(e)(iii) shall be deemed to have been authorized by Polo for
purposes of Article XI, in which case such Qualified Buyer shall
automatically succeed to the Media Members' rights as a Member or
otherwise under this Agreement and the Operating Agreement
notwithstanding anything to the contrary that may be contained in
Article XI and the Media Members shall be released from all obligations
under this Agreement and the Operating Agreement other than Section 2.4
of the Operating Agreement (Non-Disclosure) and NBC's obligations to
provide $100 million aggregate credits for advertising time and the
obligations of NBCi and CNBC.com in respect of $40 million and $10
million, respectively, of credits in Online Advertising. The closing of
any sale made in accordance with the foregoing will take place as set
forth in Section 3.15(c).
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(v) In the event that the Media Members shall
exercise the Media Members Sale Right, the Company and Polo shall
cooperate with all reasonable requests of the Media Representative to
facilitate such sale.
(f) Notwithstanding the provisions in this Section
3.12 providing for the waiver of the Polo Deadlock Call or the Media
Members Sale Right if notice is not provided on a timely basis, if the
parties continue to be deadlocked with respect to a particular issue
following the occurrence of a Material Deadlock Event, after taking
into account a significant change in the facts and circumstances
surrounding such Material Deadlock Event, such continuing deadlock can
result in a subsequent Material Deadlock Event if the standards set
forth in this Section 3.12 are satisfied and, as a result of such
Material Deadlock, the Polo Deadlock Call and the Media Members Sale
Right would otherwise be exercisable.
3.13 Change of Control.
(a) Change of Control of a Member. Polo or the Media
Representative, as the case may be, shall give written notice to the
other Member no later than ten days after the earlier to occur of (i)
the event constituting a Change of Control and (ii) the execution of a
definitive agreement to effect a Change of Control. Such notice shall
set forth in reasonable detail the circumstances and terms of the
Change of Control, including the identity of the Person acquiring
control of Polo or NBC, as the case may be.
(b) Continuation of Business. Notwithstanding that a
Change of Control has occurred or an agreement to effect a Change of
Control has been executed, the Business shall continue to be operated
without interruption consistent with prudent management practices and
in a manner most likely to continue its operations in the ordinary
course of business consistent with the Business Plan and Budget most
recently in effect.
(c) NBC Change of Control Call. It is understood and
agreed that the rights provided to Polo and the Media Members in
Section 3.13(c) and (d) shall not be exercisable during the Quiet
Period. In the event of a NBC Change of Control, Polo shall have the
right (the "NBC Change of Control Call"), exercisable upon expiration
of the Quiet Period and for 365 days thereafter, to purchase all, but
not less than all, of the Media Members' Membership Interests at a
purchase price determined in accordance with Section 3.15(a). If Polo
wishes to exercise the NBC Change of Control Call, then Polo (no later
than 365 days following expiration of the Quiet Period) shall provide
written notice to the Media Representative, which notice shall (A)
state that Polo proposes to exercise the NBC Change of Control Call and
(B) set forth in reasonable detail the purchase price as calculated in
accordance with Section 3.15(a) and all the material terms and
conditions of such purchase. The closing of such sale will take place
as set forth in Section 3.15(c). If Polo fails to give notice within
365 days following expiration of the Quiet Period, then Polo shall be
deemed to have waived the NBC Change of Control Call.
(d) Polo Change of Control Sale. In the event of a
Polo Change of Control, the Media Members shall have the right (the
"Polo Change of Control Sale"), at
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the election of the Media Representative, to sell all, but not less
than all, of their Membership Interest in accordance with the
following procedures:
(i) The Media Representative shall give written
notice to Polo no later than 365 days following expiration of the Quiet
Period, which notice shall state that the Media Members propose to
effect a sale of their Membership Interest and that Polo shall have the
right to purchase all, but not less than all, the Media Members'
Membership Interests at the Fair Market Value as determined in
accordance with clause (B) of the definition of such term (the "Change
of Control Notice"). If the Media Representative fails to give the
Change of Control Notice within 365 days following expiration of the
Quiet Period, then the Media Members shall be deemed to have waived the
Polo Change of Control Sale.
(ii) Polo shall, within 60 days after receiving the
Change of Control Notice, deliver to the Media Representative a written
notice stating that Polo would be willing to buy all, but not less than
all, of the Media Members' Membership Interests at the Fair Market
Value as determined in accordance with clause (B) of the definition of
such term. If Polo delivers such notice, the closing of such sale will
take place as set forth in Section 3.15(c). If Polo notifies the Media
Representative that it has determined not to acquire the Media Members'
Membership Interests at the Fair Market Value as determined in
accordance with clause (B) of the definition of such term or does not
respond to the Change of Control Notice within the 60-day period
mentioned above, the Media Representative may then sell all but not
less than all of the Media Members' Membership Interests for any price
and for any type of consideration to one or more Qualified Buyers (but
not more than four) so long as one of such Qualified Buyers (x)
acquires at least 26% of the Company's voting equity, (y) has an
unfettered right to vote on behalf of all the other Qualified Buyers
and (z) the terms of agreement among such Qualified Buyers are
reasonably satisfactory to Polo.
3.14 Polo Buyout Right.
(a) For a 90-day period commencing upon the date of
delivery of the first set of audited financial statements after the
twelfth anniversary of this Agreement, and thereafter every three years
for a 90-day period commencing upon the date of delivery of the audited
financial statements in respect of the fifteenth and every third Fiscal
Year of the Company thereafter, Polo shall have the right (the "Polo
Buyout Right") to purchase all, but not less than all, of the Media
Members' Membership Interests at a purchase price in cash determined in
accordance with Section 3.15(a).
(b) If Polo wishes to exercise the Polo Buyout Right,
then Polo shall provide (i) a written notice to the Media
Representative within the 90-day period prior to the tenth anniversary
of the date of this Agreement and on each successive three year
anniversary of such date (the "Preservation Notice"), which notice
shall state that Polo wishes to preserve the Polo Buyout Right and (ii)
a written exercise notice to the Media Representative within the period
referred to in Section 3.14(a) (the "Purchase Price Notice"), which
notice shall set forth in reasonable detail the purchase price as
calculated in accordance with Section 3.15(a) and all the material
terms and conditions of such
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purchase. If Polo fails to give either the Preservation Notice or the
Purchase Price Notice to the Media Representative within the
applicable time period, then Polo shall be deemed to have waived the
Polo Buyout Right until the commencement of the next applicable
period. The closing of such sale will take place as set forth in
Section 3.15(c). In the event that Polo gives the Media Representative
the Preservation Notice, the Media Members shall have no further
obligations under Section 3.2 of the Operating Agreement, provided,
however, that if Polo does not give the Purchase Price Notice, or
advises the Media Representative that it has waived its right to give
the Purchase Price Notice, then Section 3.2 of the Operating Agreement
shall be reinstated except that any bona fide arrangements entered
into by any Media Member prior to the earlier of the date on which the
Polo Buyout Right Notice may be exercised or 90 days from the date of
such advice by Polo shall not be deemed to be a violation of Section
3.2 of the Operating Agreement.
3.15 Material Deadlock, Change of Control and
Polo Buyout Right, Pricing, Deferred Compensation and Closing.
(a) Price of the Media Members Membership Interests.
(i) In the event of the exercise of a Polo Deadlock Call, an NBC Change
of Control Call or a Polo Buyout Right where the purchase price is
determined by reference to Fair Market Value, the purchase price for
the Media Members' Membership Interests, which shall be payable as set
forth in Section 3.15(c), shall be equal to the Fair Market Value of
the Media Members' Membership Interests, as determined in accordance
with clause (A) of the definition of such term, as of the date of
Polo's notice of exercise of such Polo Deadlock Call, the NBC Change of
Control Call or the Polo Buyout Right; and (ii) in the event of the
exercise of the Media Members Sale Right or Polo Change of Control
Sale, the purchase price for the Media Members' Membership Interests,
which shall be payable as set forth in Section 3.15(c), shall be equal
to the Fair Market Value of the Media Members' Membership Interests as
determined in accordance with clause (B) of the definition of such
term, as of the date of the Media Representative's notice of the
exercise of the Media Members Sale Right or the Polo Change of Control
Sale.
(b) [Reserved]
(c) Closing. The closing with respect to any exercise
of the Polo Deadlock Call, the Media Members Sale Right, the NBC Change
of Control Call, the Polo Change of Control Sale or the Polo Buyout
Right shall take place at the principal office of the Company on the
later to occur of (i) the tenth Business Day after final determination
of Fair Market Value or the entering into by the Media Representative
and a Qualified Buyer of a definitive purchase agreement, whichever is
later, or (ii) the date that all orders, consents and approvals of
Governmental Authorities legally required for the closing of such sale
have been obtained and are in effect, it being understood that the
Members shall use their commercially reasonable best efforts to obtain
all such orders, consent and approvals as promptly as practicable. At
such closing, to the extent that Polo is purchasing the Media Members'
Membership Interests, Polo shall deliver cash or a certified check or
checks in the appropriate amount against the delivery of a duly
executed assignment of the Membership Interest so purchased. Such
Membership Interest shall be delivered to Polo free and clear of all
Liens of any nature whatsoever. In the case of a
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Qualified Buyer, the Qualified Buyer shall agree to be bound by, and
become a party to, all the terms of this Agreement and the Operating
Agreement.
(d) Services Agreement. The Services Agreement shall
remain in full force and effect in accordance with its terms following
the consummation of any sale pursuant to the exercise of the Polo
Deadlock Call, the Media Members Sale Right, the NBC Change of Control
Call, the Polo Change of Control Sale or the Polo Buyout Right, except
that (i) at ValueVision's option, the cost of the services provided by
ValueVision thereunder shall be modified to provide ValueVision with
payment for such services at the fair market value thereof, as would be
negotiated in an arm's length transaction between two willing parties,
(ii) the term of such continuation shall not exceed two years and (iii)
the renewal of the Services Agreement thereafter shall be subject to
the mutual consent of the Company and ValueVision.
3.16 Media Members IPO Right. In the event that (i)
the Media Representative provides Polo with a Notice of Material
Deadlock on account of the failure of Polo and the Media Representative
to agree to an Initial Public Offering after the fifth anniversary, the
tenth anniversary, the 12th anniversary and every third anniversary
thereafter, in each case of the Closing Date, (ii) after the requisite
time period has elapsed, the Media Representative exercises the Media
Members Sale Right, and (iii) neither Polo nor a Qualified Buyer
purchases the Media Members' Membership Interests at Fair Market Value
(as defined in clause (A) of the definition of such term) or greater
for a one-year period commencing on the date of the Media
Representative's notice of the exercise of the Media Members Sale
Right, the Media Representative, after such a one-year period, shall
have the right (the "Media Member IPO Right") to require the Company to
consummate an Initial Public Offering in accordance with the Demand
Registration provisions of Section 3.5 and in a manner consistent with
the prestige of the Members' brands, which the Company shall use its
reasonable best efforts to consummate within 180 days of such request
on the part of the Media Representative. The lead underwriter for any
such Initial Public Offering shall be a nationally recognized (i.e.
"bulge bracket") investment bank. Any Initial Public Offering in
connection with this Section 3.16 or otherwise shall be subject to (a)
conversion of a portion of the royalty under the License Agreement in
accordance with Section 8.10 and (b) conversion of the Company into
corporate form and the adoption of mutually acceptable governance
provisions to Polo and the Members, the approval of such governance
provisions by each Member not to be unreasonably withheld. In
connection with the conversion of the Company to a corporation for
purposes of effecting an Initial Public Offering, the Members shall
receive equity in the Company in proportion to their respective Sharing
Ratios at the time of such conversion.
3.17 Certain Restrictions. In the event that (a) (i)
one or more Members reasonably and in good faith believes that
Additional Capital Contributions are required in order to fund the
Company's reasonably anticipated capital and operating needs for the
twelve months following the request of such Member therefor (after
having exhausted the ValueVision Commitment, giving effect to any
ValueVision Additional Contributions to be made concurrently with such
proposed Additional Capital Contributions) or (ii) the Company is in
default under the License Agreement as a result of a failure to pay the
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royalties due thereunder and Additional Capital Contributions would be
required in order to provide the Company with sufficient cash to cure
such default and avoid the termination by the Licensor of the License
Agreement in accordance with its terms, (b) the Company is unable to
raise the required capital plus sufficient capital to fund its capital
and operating needs for an additional twelve months on a prudent basis
and on commercially reasonable terms through bank borrowings or
otherwise in the capital markets and (c) Polo is unwilling or unable to
commit to fund its share of any such Additional Capital Contributions
but one or more of the Original Media Members is willing and able to
fund the aggregate amount of all such Additional Capital Contributions
required of the Original Media Members, as evidenced by appropriate
supporting documentation, including all necessary corporate and
shareholder action of the Original Media Members and their shareholders
to authorize such funding and, as a result of the foregoing, in the
case of clause (a) (i), a liquidation, dissolution, winding up,
voluntary bankruptcy or insolvency of the Company occurs, or the
Company shall have ceased to have any substantial ongoing operations,
and in the case of clause (a) (ii), Licensor shall terminate the
License Agreement in accordance with its terms, neither Polo nor its
Affiliates will be permitted to engage in the Business, directly or
indirectly, or license or otherwise authorize any third party to engage
in the Business, for a period of three years following such termination
without the prior written consent of the Media Representative, and Polo
shall be relieved of its obligations under Section 2.6 of the Operating
Agreement.
ARTICLE IV
RIGHTS AND REPRESENTATIONS AND WARRANTIES OF MEMBERS
4.1 Members' Rights. No Member will have any actual,
implied or apparent authority to enter into contracts on behalf of, or
to otherwise bind, the Company, nor take any action in the name of, or
on behalf of, the Company or conduct any business of the Company other
than by action of both Polo and the Media Representative.
4.2 Representations and Warranties. Each Member
represents and warrants to the Company and the other Members as
follows:
(a) Due Organization. Such Member is a corporation
duly organized, validly existing and in good standing under the laws of
the state of its incorporation. Such Member is duly qualified to
transact business and is in good standing as a foreign corporation in
each jurisdiction where its ownership or leasing of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified would not have, individually or in the
aggregate, a Material Adverse Effect. Such Member has the requisite
power and authority to own, lease and operate its properties and to
conduct its business as presently conducted;
(b) Authorization and Validity of Agreement. Such
Member has all requisite power and authority to enter into this
Agreement and the Ancillary Agreements to which it is a party and to
perform its obligations hereunder and thereunder. The execution,
delivery and performance by such Member of this Agreement and the
Ancillary Agreements to which it is a party and the consummation by
such Member of the
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transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate action on the part of such Member. This
Agreement and the Ancillary Agreements to which such Member is a party
have been duly executed and delivered by such Member and constitute
valid and legally binding obligations of such Member, enforceable
against such Member in accordance with their respective terms;
(c) No Breach or Government Approvals. The execution,
delivery and performance by such Member of this Agreement and the
Ancillary Agreements to which such Member is a party and the
consummation by such Member of the transactions contemplated hereby and
thereby will not (i) conflict with or result in a breach of any
provision of the charter or bylaws of such Member, (ii) require any
consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, (iii) require the consent
or approval of any Person (other than a Governmental Authority) or
violate or conflict with, or result in a breach of any provision of,
constitute a default (or an event which with notice or lapse of time or
both would become a default) or give to any third party any right of
termination, cancellation, amendment or acceleration under, or result
in the creation of a lien under, any of the terms, conditions or
provisions of any contract or license to which such Member is a party
or by which it or its assets or properties are bound, or (iv) violate
or conflict with any law, order, writ, injunction, decree, statute,
rule or regulation applicable to such Member, except, in the case of
items (ii), (iii) and (iv) above only, for those which, individually or
in the aggregate, would not have a Material Adverse Effect;
(d) Certain Fees. Neither such Member nor its
officers, directors or employees, on behalf of such Member, has
employed any broker or finder or incurred any other liability for any
brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby or by the Ancillary Agreements, except
in the case of Polo, for Credit Suisse First Boston Corporation, all of
whose fees shall be borne by Polo;
(e) Legal Proceedings. There is no litigation,
proceeding or governmental investigation to which such Member or any of
its Affiliates is a party pending or, to the knowledge of such Member
and its Affiliates, threatened against any of them that relates to the
Business or to the Capital Contribution of such party or the
transactions contemplated by this Agreement or by the Ancillary
Agreements which could, either individually or in the aggregate, result
in a Material Adverse Effect or which seeks to restrain or enjoin the
consummation of any of the transactions contemplated hereby or by the
Ancillary Agreements. Neither such Member nor any of its Affiliates is
in violation of any term of any judgment, writ, decree, injunction or
order entered by any court or Governmental Authority (domestic or
foreign) and outstanding against such Member or its Affiliates or with
respect to the Business or to the Capital Contribution of such Member,
except for such violations which could not, individually or in the
aggregate, have a Material Adverse Effect;
(f) Employee Benefits Programs.
(i) The Member Plans (as defined below) are in
compliance in all material respects with all applicable requirements of
Section 3(3) of the Employee
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Retirement Income Security Act of 1974, as amended ("ERISA"), the
Code, and other applicable laws and have been administered in all
material respects in accordance with their terms and such laws. Each
Member Plan which is intended to be qualified within the meaning of
Section 401 of the Code has received a favorable determination letter
as to its qualification, and nothing has occurred that could
reasonably be expected to cause the loss of such qualification;
(ii) There are no pending or, to the knowledge of
each of the Members, threatened claims and no pending or, to the
knowledge of each of the Members, threatened litigation with respect to
any Member Plans, other than ordinary and usual claims for benefits by
participants and beneficiaries; and
(iii) No event has occurred and no condition exists
that could reasonably be expected to result in material liability to
the Company under Title IV of ERISA. "Member Plans" shall mean each
material "employee benefit plan" (within the meaning of ERISA),
severance, change in control or employment plan, program or agreement,
and vacation, incentive, bonus, stock option, stock purchase, and
restricted stock plan, program or policy sponsored or maintained by
each Member or its Subsidiaries, in which any present or former
employee of such Member has any present or future right to benefits or
under which each Member or its Subsidiaries has any present or future
liability.
(g) SEC Filings. Polo has filed all forms, reports,
statements, schedules, registration statements and other documents
required to be filed with the SEC since April 3, 1999 (the "SEC
Reports"). Except to the extent revised or superseded by a subsequent
filing with the SEC, none of the SEC Reports filed prior to the date
hereof contains any untrue statement of a material fact or omits to
state a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. Each of the Media Members and Polo confirms that as of the
date hereof, the Ancillary Agreements do not constitute material
agreements required to be publicly filed by any Member with the SEC as
exhibits pursuant to Item 601 of Regulation S-K.
(h) Acknowledgment. Such Member acknowledges that it
is acquiring its Membership Interest for its own account as an
investment and without an intent to distribute such Membership Interest
and that its Membership Interest has not been registered under the
Securities Act, as amended, or any state securities laws, and may not
be resold or transferred without appropriate registration or the
availability of an exemption from such requirements.
4.3 Title to Company Assets. Except as otherwise set
forth herein or in any Ancillary Agreement all Company Assets, wherever
located, will be owned by the Company as an entity, and no Member,
individually, will have, by reason of being a Member, any ownership of
such assets. The Company may hold the Company Assets in its own name or
in the name of a nominee, which may be a Member or an Affiliate thereof
or any trustee or agent, agreed upon by the Members.
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ARTICLE V
MANAGEMENT
5.1 Management by Managers. Except for situations in
which the approval of Polo and the Media Representative is expressly
required by Section 5.3, this Agreement, the Operating Agreement or by
nonwaivable provisions of applicable law, (i) the powers of the Company
will be exercised by or under the authority of, and the business and
affairs of the Company will be managed under the direction of, a
committee of Managers (the "Management Committee"), and (ii) the
day-to-day activities of the Company will be conducted by the CEO and
the other Officers, who will be agents of the Company.
5.2 Management Committee.
(a) Number; Composition. The number of Managers of
the Company will be a number agreed upon by Polo and the Media
Representative from time to time. Initially, the number of Managers
will be six. No Manager may be an Officer or employee of the Company.
(b) Appointment of Managers. Polo, on the one hand,
and the Media Members, collectively, on the other hand, shall appoint
an equal number of individuals to serve as their representative
Managers. The Media Members hereby initially appoint James H. Schwab,
Stuart Goldfarb and Marc Sznajderman as Managers (collectively, the
"Media Managers"), and Polo hereby initially appoints F. Lance Isham,
Douglas L. Williams and Victor Cohen as Managers (collectively, the
"Polo Managers"). In addition, the CEO shall have a non-voting seat on
the Management Committee.
(c) Voting. For purposes of taking any action or
voting on any matter coming before the Management Committee, the Media
Managers will collectively have one vote and the Polo Managers will
collectively have one vote.
(d) Quorum. At all meetings of the Management
Committee, the presence in person, by telephone or by proxy at a
meeting of at least one Media Manager and at least one Polo Manager
will constitute a quorum at any meeting for the transaction of
business, unless a greater number is required by law.
(e) Required Vote for Action. All Management
Committee actions will require the unanimous affirmative vote of the
Media Managers and the Polo Managers voting in accordance with clause
(c) above.
(f) Term. Each Manager will hold office until his or
her successor has been appointed and qualified, or until the earlier of
his or her death, resignation or removal as provided in this Agreement.
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(g) Vacancy. Any vacancy occurring in the Managers
may be filled only by the Member, or by the Media Representative on
behalf of the Media Members, that originally appointed such Manager.
(h) Removal. Any Manager may be removed at any time,
with or without cause, only by the Member, or by the Media
Representative on behalf of the Media Members, that appointed such
Manager.
(i) Resignation. Any Manager may resign at any time
upon written notice to the Management Committee and Polo and the Media
Representative. Such resignation will take effect at the time specified
in the written notice or, if no time is specified therein, at the time
of its receipt by Polo and the Media Representative; provided, however,
that acceptance of a resignation will not be necessary to make it
effective, unless so expressly provided in the resignation.
5.3 Action Requiring Unanimous Vote of Polo
Managers and the Media Managers; Unanimous Vote of the Members.
(a) Unanimous Vote of the Managers. The following
actions may be taken only upon the unanimous affirmative vote of the
Polo Managers and the Media Managers (voting in accordance with Section
5.2(c)) and upon such unanimous vote, the right, power and authority to
take any of such actions may be delegated to one or more Managers or
Officers:
(i) any act by the Company in contravention of this
Agreement, any Ancillary Agreement or the Business Purpose;
(ii) amendment or modification to this Agreement, the
Certificate of Formation or any Ancillary Agreement other than as set
forth in Section 2.6 of the Operating Agreement;
(iii) admission of additional Members or issuance of
additional Membership Interests or other equity securities, including
any award of equity to the Company's employees, excluding permitted
transfers of Membership Interests in accordance with Sections 3.12,
3.13, 3.14, 3.15 or Article XI;
(iv) approval of any Business Plan (other than the
Initial Plan) as provided in Section 5.4 and any amendments to, or
material deviations from, or commitments that would cause material
deviations therefrom, including the making of, or any commitment to
make, any individual or related group of capital expenditures in excess
of $75,000 above the amount(s) specified in the then current Business
Plan;
(v) declaration of Distributions to Members;
(vi) merger or consolidation into or with, or
acquisition of all or part of the business of, another Person;
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(vii) liquidation, dissolution, winding up, voluntary
bankruptcy or insolvency of the Company;
(viii) sale, lease, transfer or other Disposition of
any Company Asset or group of Company Assets having a fair market value
or a book value in excess of $100,000 in any single transaction or
series of related transactions;
(ix) other actions which materially affect all or a
substantial portion of the Company Assets or the Business;
(x) issuance, purchase or redemption by the Company
of any securities of the Company and any change, increase or reduction
in the capitalization of the Company, including any Initial Public
Offering;
(xi) incurrence or guarantee by the Company of
indebtedness for money borrowed, or incurrence of any obligation on
behalf of the Company, or the grant of any pledge, mortgage, security
interest or other encumbrance of any Company Asset, which would cause
the aggregate of all such indebtedness, obligations and security
interests (without duplication of amounts) to exceed $1,000,000, except
for obligations incurred pursuant to the then current Business Plan;
(xii) guarantee, assurance or undertaking of the
performance of any contract by any third party, any Member or any
Affiliate of any Member;
(xiii) transactions between the Company, on the one
hand, and the Company's Affiliates (other than the Company's
wholly-owned subsidiaries), a Member or a Member's Affiliates, on the
other hand, which involves an aggregate amount in excess of $100,000 in
any single transaction or series of related transactions and which is
not pursuant to the then current Business Plan;
(xiv) entrance into, amendment, modification or
termination of any agreement or group of related agreements of the
Company involving consideration in excess of $100,000 other than in the
ordinary course of business or pursuant to the then current Business
Plan or in accordance with Section 2.6 of the Operating Agreement;
(xv) employment actions with respect to the hiring,
termination and compensation of the CEO and any other senior level
officers other than those referred to in Section 6.1, and approving,
amending, modifying, waiving, renewing, extending or terminating any
employment agreement with any employee (including Officers) of the
Company which provides for annual total compensation (including payment
in kind and in equity interests) in excess of $200,000;
(xvi) change of the Fiscal Year;
(xvii) change of the Auditors;
(xviii) requiring Additional Contributions by the
Members as provided in Section 8.2;
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(xix) approval of the annual audited and unaudited
quarterly financial statements of the Company;
(xx) the initiation, commencement or settlement of
any material claim, litigation or arbitration to which the Company is,
or is to be, a party ("Litigation") involving or potentially involving
an amount in excess of $250,000, except that (A) any Litigation
relating to the Marks shall not require the consent of, and cannot be
brought by, the Media Representative, subject to Section 3.1 of the
Operating Agreement and Section 5.3 of the License Agreement, and (B)
any Litigation brought by a Member to enforce the rights of the Company
against another Member shall not require the consent of the Member
against whom the Litigation is brought, it being understood that in the
event that the Company has a claim against Polo or one of the Media
Members, the Media Representative (in the case of a claim against Polo)
or Polo (in the case of a claim against any of the Media Members),
shall have the right to control the Company's enforcement of such
claim;
(xxi) amending the Business Purpose or otherwise
entering a line of business not expressly contemplated by the terms of
this Agreement or the Operating Agreement; and
(xxii) any decision, or the entering into of any
agreement, commitment or arrangement, to effect any of the foregoing.
(b) Unanimous Vote of the Members. The following
actions may be taken only upon the unanimous affirmative vote of the
Members, and upon such unanimous vote, the right, power and authority
to take any of such actions may be delegated to one or more Managers or
Officers:
(i) amendment or modification to this Agreement, the
Certificate of Formation or any Ancillary Agreement other than
as set forth in Section 2.6 of the Operating Agreement; and
(ii) merger or consolidation into or with, or
acquisition of all or part of the business of, another Person.
5.4 Business Plan.
(a) Not later than 45 days prior to the end of each
Fiscal Year, the CEO shall present to the Management Committee a
written business plan for the Company for the following Fiscal Year
(the "Business Plan"), which will include a Budget for the following
Fiscal Year, advertising and marketing plan and three-year strategic
plan with projected capital requirements. The Management Committee
shall review such Business Plan and its adoption will be subject to the
approval of the Management Committee in accordance with Section 5.2(e).
The Members shall use commercially reasonable efforts to agree to and
adopt an "Initial Business Plan" within 90 days of the date of this
Agreement.
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(b) In the event that Polo and the Media
Representative are unable to reach agreement on the Budget for any
Fiscal Year, the Members agree that the Company shall operate without
interruption consistent with prudent management practices and in a
manner most likely to continue its operations in the ordinary course of
business consistent with past practice.
(c) In addition, the Management Committee shall adopt
an operations manual, which will set forth, in reasonable detail,
procedures relating to sales processing, billing, returns and other
similar matters, including ticketing information, purchase orders,
invoices and sales slips (the "Operations Manual"). To the extent any
business materials utilize a Mark, use of such Mark shall be in
accordance with the standards referred to in Sections 2.1(a) and 2.3(d)
of the Operating Agreement.
(d) Notwithstanding anything else set forth in this
Section 5.4 or elsewhere in this Agreement or the Operating Agreement,
the Budget for each year shall be required to include, and the Company
shall be authorized to spend, all amounts required by the Annual
Advertising Obligation and all amounts required by the License
Agreement.
5.5 Limitation on Management Committee Authority.
Except as otherwise specifically provided in this Agreement or the
Operating Agreement or by agreement of Polo and the Media
Representative, (i) no Manager or group of Managers will have any
actual, implied or apparent authority to enter into contracts on behalf
of, or to otherwise bind, the Company, nor take any action or incur any
obligation, liability, debt, cost or expense in the name of or on
behalf of the Company or conduct any business of the Company other than
by action of the Management Committee taken in accordance with the
provisions of this Agreement, and (ii) no Manager will have the power
or authority to delegate to any Person such Manager's rights and powers
as a Manager to manage the business and affairs of the Company.
5.6 Meetings of the Management Committee. The
Management Committee may meet from time to time but will meet at least
quarterly to discuss generally the business of the Company. Meetings of
the Management Committee may be called by either Polo or the Media
Representative. The Member calling any meeting will cause notice to be
given of such meeting, including therein the time, date and place of
such meeting, to each Manager at least two Business Days before such
meeting. The business to be transacted at, or the purpose of, any
meeting of the Management Committee will be specified in the notice.
Attendance of a Manager at any meeting will constitute a waiver of
notice of such meeting, except where a Manager attends a meeting for
the express purpose of objecting to the transaction of any business on
the ground that the meeting is not lawfully called or convened. All
meetings of the Management Committee may be held either within or
without the State of Delaware at such place or places as determined
from time to time by the Managers. If a quorum is not present in
person, by telephone or by proxy at any meeting of the Management
Committee, the Managers present in person, by telephone or by proxy at
the meeting may adjourn the meeting from time to time, without
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notice other than announcement at the meeting, until a quorum shall be
present in person, by telephone or by proxy.
5.7 Methods of Voting; Proxies. A Manager may vote
either in person, by telephone or by proxy executed in writing by such
Manager, provided, however, that the Person designated to act as proxy
is a Manager. A photocopy, facsimile or similar reproduction of a
writing executed by a Manager will be treated as an execution in
writing for purposes of this Section 5.7. Proxies for use at any
meeting of the Management Committee or in connection with the taking of
any action by written consent will be filed with the Management
Committee, before or at the time of the meeting or execution of the
written consent, as the case may be. No proxy will be valid after 30
calendar days from the date of its execution unless otherwise provided
in the proxy. A proxy will be revocable unless the proxy form
conspicuously states that the proxy is irrevocable and the proxy is
coupled with an interest. A proxy may designate only one Manager to act
as proxy.
5.8 Order of Business. The Management Committee may
adopt such rules and procedures relating to its activities as it may
deem appropriate, provided that such rules and procedures are not
inconsistent with or do not violate the provisions of this Agreement,
and provided that such rules and procedures permit telephonic meetings
and provided that one Media Manager and one Polo Manager will be
required to attend Management Committee meetings for a quorum to be
present. The secretary of the meeting shall prepare minutes of the
meeting and place a copy thereof in the minute books of the Company. A
copy of the minutes of the meeting will be delivered promptly to each
Manager and each Member.
5.9 Actions Without a Meeting. Any action required or
permitted to be taken at a meeting of the Management Committee may be
taken without a meeting, without notice and without a vote, if a
consent in writing, setting forth the action so taken, is signed by one
Media Manager and one Polo Manager. Such consent will have the same
force and effect, as of the date stated therein, as a vote of the
Managers and may be stated as such in any document or instrument filed
with the Secretary of State of the State of Delaware or in any
certificate or other document delivered to any person or entity. The
signed consent will be placed in the minute book of the Company.
5.10 Telephone and Similar Meetings. The Managers may
participate in and hold meetings by means of conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other. Such participation in
any such meeting will constitute presence in person at such meeting,
except where a Person participates in such meeting for the express
purpose of objecting to the transaction of any business on the ground
that such meeting is not lawfully called or convened.
5.11 Compensation of Managers. Managers will not
receive any salary for their services.
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5.12 Media Representative. No action required to be
taken (including the granting or denial of any required consent or
approval) by the Media Representative hereunder shall be unreasonably
delayed because of the need of the Media Representative to consult with
the Media Members. The Media Representative has delivered (or will
deliver, to the extent any such agreements, arrangements or
understandings are entered into or modified after the date of this
Agreement) to Polo copies or summaries of the provisions of any
agreements, arrangements or understandings in place among any of the
Media Members and/or the Media Representative with respect to the
exercise of any of their respective governance or consent rights or
obligations hereunder.
5.13 Waiver of Certain Claims. Each Member hereby
agrees, on behalf of itself and its Affiliates, to waive and to release
and hold harmless any officers or employees of any of the Members, or
any individuals serving at the request of any of the foregoing, who
serve as Managers of the Company from any liability whatsoever in
respect of any alleged breach of fiduciary duty in the discharge of
such persons' duties as Managers of the Company.
ARTICLE VI
OFFICERS
6.1 Designation Term; Qualifications. Subject to
Section 5.3, Polo and the Media Representative together, or the
Management Committee may, from time to time, designate and appoint the
chief executive officer of the Company ("CEO"). The CEO so designated
will have the authority to retain executive-level officers and
employees of the Company (the "Officers"); provided, however, that with
respect to the Vice President of Public Relations, the Vice President
of Advertising & Marketing and the Vice President of Merchandising (i)
Polo shall propose to the CEO a number of qualified individuals for
those positions (which may involve combining two positions), (ii) the
CEO shall then choose among the nominated individuals the persons most
qualified for the positions of Vice President of Public Relations, Vice
President of Advertising & Marketing and Vice President of
Merchandising that he will then recommend to the Media Representative,
and (iii) the Media Representative's consent shall be required for each
such individual's appointment, which consent shall not be unreasonably
withheld; provided, further, that with respect to the chief financial
officer ("CFO") (A) the Media Representative shall propose to the CEO a
number of qualified individuals for the position of CFO, (B) the CEO
shall then choose among the nominated individuals the persons most
qualified for the position of CFO that he will then recommend to Polo,
and (C) Polo's consent shall be required for such individual's
appointment, which consent shall not be unreasonably withheld. Any
Officer so designated will have such authority and perform such duties
as Polo and the Media Representative together or the Management
Committee may, from time to time, delegate to them. Polo and the Media
Representative together or the Management Committee may assign titles
to particular Officers, and the assignment of such title will
constitute the delegation to such Officer of the authority and duties
that are normally associated with such office in a corporation for
profit incorporated under the General Corporation Law of the State of
Delaware, subject to any specific delegation of
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authority and duties made to such Officer by Polo and the Media
Representative together or the Management Committee pursuant to this
Section 6.1. Each Officer will hold office for the term for which such
Officer is designated and until such Officer's successor is duly
designated and qualified or until the earlier of such Officer's death,
resignation or removal as provided in this Agreement. Any person may
hold any number of offices. No Officer may be a Manager or a Member,
and an Officer need not be a Delaware resident or a United States
citizen. All Officers will be natural persons. Designation of a person
as an Officer of the Company will not of itself create any contract
rights.
6.2 Chief Executive Officer. Subject to the
supervision and authority of Polo, the Media Representative and the
Management Committee, the CEO (i) will be the chief executive officer
of the Company, (ii) will have responsibility and authority for
management of the day-to-day operations of the Company in a manner
generally consistent with the Business Plan and the Business Purpose
and in the best interests of the Company, independent of the separate
business interests of the Members, (iii) will keep the Members informed
of the affairs of the Company, (iv) subject to Section 6.1, will retain
and terminate Officers and (v) will be empowered to and will engage in
all appropriate and necessary activities to accomplish the purposes of
the Company as set forth herein. Polo and the Media Representative
shall cause the Company to employ at all times as Chief Executive
Officer an individual with suitable qualifications and experience in
the operation of an e-commerce operation such as the Site, and, if
reasonably possible, in the operation of a direct marketing vehicle
such as the Catalog, it being understood that if the CEO does not have
sufficient experience in the operation of a direct marketing vehicle,
the Company shall hire an executive to be responsible for such
operations who does.
6.3 Chief Financial Officer. Subject to the
supervision and authority of Polo, the Media Representative and the
CEO, the CFO will keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts, of the
properties and business transactions of the Company, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses,
capital and Membership Interests. The CFO will perform all the duties
incident to the office of chief financial officer and such other duties
as from time to time may be assigned to the CFO.
6.4 Vice President. The CEO shall appoint one or more
Vice Presidents of the Company (a "Vice President"), except as provided
in Sections 5.3(xv) and 6.1. Each Vice President will have such powers
and duties as generally pertain to the office of Vice President and as
the CEO or the Management Committee may from time to time prescribe.
6.5 Secretary. The CEO shall appoint a secretary of
the Company (the "Secretary"). The Secretary, at the direction of the
CEO and the Management Committee, will prepare and distribute to each
Manager an agenda in advance of each meeting and will prepare and
distribute to each Manager and each Member written minutes of all
meetings of the Management Committee and the Members. The Secretary
also will be responsible for preparing and distributing to the
Managers and the Members
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any notices received by the Company or otherwise called for by this Agreement or
the Operating Agreement to be given by the Company.
6.6 Treasurer. The CEO shall appoint a treasurer of the Company (the
"Treasurer"). Subject to the supervision and authority of the CEO and the
Management Committee, the Treasurer will (i) have charge of and be responsible
for the receipt, disbursement and safekeeping of funds and securities of the
Company, (ii) deposit all funds of the Company in the name of the Company in
such banks, trust companies or other depositories as directed by the Management
Committee and (iii) perform all the duties incident to the office of treasurer
and such other duties as from time to time may be assigned to the Treasurer.
6.7 Other Officers. The Management Committee may designate any other
Officers of the Company, including one or more Assistant Secretaries and one or
more Assistant Treasurers, who will exercise the powers and will perform the
duties incident to their offices, subject to the direction of the Management
Committee.
6.8 Removal and Resignation. Any Officer may be removed as such, with
or without cause, by the CEO or the Management Committee whenever in his or
their judgment the best interests of the Company will be served thereby. Any
Officer may resign as such at any time upon written notice to the Management
Committee, and in the case of the CEO only, to Polo and the Media
Representative. Such resignation will take effect at the time specified in the
written notice or, if no time is specified therein, at the time of its receipt
by Polo and the Media Representative or the CEO, as the case may be. The
acceptance of a resignation will not be necessary to make it effective, unless
expressly so provided in the resignation.
6.9 Vacancies. Subject to Section 6.1, any vacancy occurring in any
office of the Company may be filled by the CEO.
6.10 Duties. The Officers shall manage the Company's business
activities in the Company's best interests.
ARTICLE VII
MEETINGS OF MEMBERS
7.1 Meetings of Members. A meeting of the Members may be called at any
time by Polo or the Media Representative to vote on, or to obtain consent for,
any action which, pursuant to this Agreement or the Operating Agreement, permits
or requires a vote or consent of Polo and the Media Representative or Polo and
the Media Members. The Members will meet at least once in each Fiscal Year.
7.2 Place of Meetings of Members. Unless the date, time, and place of
the meeting is designated by either Polo or the Media Representative calling a
meeting, such meeting will be held at the principal office of the Company.
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7.3 Notice of Meetings of Members.
(a) Except as otherwise provided by law, written or printed notice
stating the date, time and place of each meeting of the Members, and the purpose
or purposes for which the meeting is called, will be given to each Member not
less than five Business Days before the date of the meeting.
(b) Any notice to be given to the Members for any Meeting will be
deemed to be waived by any party who (i) attends such Meeting without protesting
prior thereto or at its commencement the lack of notice to such Member or (ii)
submits a signed waiver of notice whether before or after such Meeting, which
waiver of notice may be delivered by proxy.
7.4 Fixing of Record Date. For purposes of determining the Members
entitled to notice of or to vote at any meeting of Members or any adjournment
thereof, or Members entitled to receive payment of any Distribution, or in order
to make a determination of Members for any other proper purpose, the date on
which notice of the meeting is delivered or mailed or the date on which the
resolution declaring such Distribution or relating to such other purpose is
adopted, as the case may be, will be the record date for such determination of
Members. When a determination of Members entitled to vote at any meeting of
Members has been made as provided in this Section, such determination will apply
to any adjournment thereof.
7.5 Quorum. A quorum will be present at any meeting of the Members if
the holders of 80% of Membership Interests are represented at the meeting in
person or by proxy. Once a quorum is present at the meeting of the Members, the
Members represented in person or by proxy and entitled to vote at the meeting
may conduct such business as properly may be brought before the meeting until it
is adjourned, and the subsequent withdrawal from the meeting of any Member prior
to adjournment or the refusal of any Member to vote will not affect the presence
of a quorum at the meeting. If, however, such quorum is not present at any
meeting of the Members, the Members represented in person or by proxy and
entitled to vote at such meeting will have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until all
Members are present or represented.
7.6 Methods of Voting; Proxies. A Member, or the Media Representative
on behalf of the Media Members, may vote either in person, by telephone or by
proxy executed in writing by the Member or the Media Representative on behalf of
the Media Members. A photocopy, facsimile or similar reproduction of a writing
executed by a Member, or the Media Representative on behalf of the Media
Members, will be treated as an execution in writing for purposes of this Section
7.6. Proxies for use at any meeting of Members or in connection with the taking
of any action by written consent will be filed with the Management Committee,
before or at the time of the meeting or execution of the written consent, as the
case may be. All proxies will be received and taken charge of and all ballots
will be received and canvassed by the Management Committee, which will decide
all questions touching upon the qualification of voters, the
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validity of the proxies, and the acceptance or rejection of votes. No proxy will
be valid after 11 months from the date of its execution unless otherwise
provided in the proxy. A proxy will be revocable unless the proxy form
conspicuously states that the proxy is irrevocable and the proxy is coupled with
an interest. A proxy may designate only one Person to act as proxy.
7.7 Conduct of Meetings. Meetings of the Members may be presided over
by a chairman of the meeting, who may be designated by the Member who called
such meeting. Such chairman of the meeting shall determine the order of business
and the procedure at the meeting, including regulation of the manner of voting
and the conduct of discussion.
7.8 Voting on Matters. Each Member will be entitled to vote at any
meeting of the Members in person or by proxy. Each Member shall be entitled to
vote its percentage interest in the Company in accordance with its Sharing Ratio
as set forth in Exhibit A. For purposes of voting on matters, at any meeting of
the Members at which a quorum is present, the act of the Members will be the
affirmative vote of 80% of the Membership Interests represented in person, by
telephone or by proxy at such meeting.
7.9 Registered Members. The Company will be entitled to treat the
holder of record of any Membership Interest as the holder in fact of such
Membership Interest for all purposes, and, accordingly, will not be bound to
recognize any equitable or other claim to interest in such Membership Interest
on the part of any other Person, whether or not the Company has express or other
notice of such claim or interest, except as expressly provided in this Agreement
or the laws of the State of Delaware.
7.10 Actions Without a Meeting.
(a) Except as otherwise provided by law or by the Certificate of
Formation, any action required or permitted to be taken, or which may be taken,
by law or the Certificate of Formation or this Agreement or the Operating
Agreement, at any meeting of Members, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, is signed by the holder or holders of Membership
Interests constituting not less than the minimum amount of Membership Interests
that would be necessary to authorize or take such action at a meeting at which
the holders of all Membership Interests entitled to vote on the action were
present and voted. Every written consent will bear the date of signature of each
Member who signs the consent. The signed consent or consents of Members will be
placed in the minute book of the Company. The record date for determining
Members entitled to take action without a meeting will be the date the first
Member signs a written consent. A photocopy, facsimile or similar reproduction
of a writing signed by a Member will be regarded as signed by the Member for
purposes of this Section 7.10.
(b) If any action by Members is taken by written consent, any articles
or documents filed with the Secretary of State of the State of Delaware as a
result of the taking of the action will state, in lieu of any statement required
by applicable law concerning any vote of Members, that written consent has been
given in accordance with
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the provisions of applicable law and that any written notice required by
applicable law has been given.
7.11 Telephone and Similar Meetings. The Members may participate in and
hold meetings by means of conference telephone or similar communications
equipment by means of which all Persons participating in the meeting can hear
each other. Participation in any such meeting will constitute presence in person
at such meeting, except where a Person participates in such meeting for the
express purpose of objecting to the transaction of any business on the ground
that such meeting is not lawfully called or convened.
ARTICLE VIII
CONTRIBUTIONS; CAPITAL ACCOUNTS
8.1 Initial Contributions.
(a) Subject to the terms and conditions contained herein, on the
Closing Date, concurrently with the execution of this Agreement, ValueVision
shall contribute to the Company and the Company shall receive an amount in cash
equal to $10,000,000 (the "ValueVision Initial Capital Contribution").
No Member will have the right to withdraw or be repaid any Capital
Contribution, except as provided in this Agreement.
(b) The initial Sharing Ratio of each Member in the Company shall be as
set forth on Exhibit A.
8.2 Additional Contributions.
(a) ValueVision shall make additional Capital Contributions in cash, in
addition to the ValueVision Initial Capital Contribution ("ValueVision
Additional Contributions"), consistent with the Business Plan (except as may
otherwise be agreed to by the Members) as may be requested by the CEO in writing
(stating that in the CEO's business judgment further cash contributions in the
amount specified are reasonably required by the Company under the current
Business Plan and that such amounts will be used in accordance with the current
Business Plan) at any time and from time to time upon not less than 20 days
prior notice to ValueVision; provided, however, that in no event shall the
ValueVision Initial Capital Contribution and the aggregate ValueVision
Additional Contribution(s) total more than $50 million. If the Members agree to
make any Additional Contributions to the Company, the Members' respective amount
of the proposed Additional Contribution shall be funded by the Members in
proportion to their respective Sharing Ratios on the fifth Business Day
following such agreement. Any such Additional Contribution agreed to by the
Members shall not reduce the ValueVision Commitment.
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(b) None of the Members will be obligated to make Additional
Contributions other than as set forth herein.
8.3 Enforcement of Commitments. In the event any Member fails to
perform its Commitment, the Management Committee shall give such Delinquent
Member a notice of such failure. If the Delinquent Member fails to perform the
Commitment (including the payment of any costs associated with the failure and
interest at the Default Interest Rate) within ten Business Days of the giving of
such notice, the Management Committee and/or the non-delinquent Member may take
such action as deemed appropriate, including enforcing the Commitment in the
court of appropriate jurisdiction in the state in which the Principal Office is
located or the state of the Delinquent Member's address as reflected in this
Agreement. Each Member expressly agrees to the jurisdiction of such courts but
only for purposes of such enforcement.
8.4 Maintenance of Capital Accounts.
A separate capital account shall be maintained for each Member
throughout the term of the Company in accordance with the rules of Section
1.704-1(b)(2)(iv) of the Regulations as in effect from time to time, and, to the
extent not inconsistent therewith, to which the following provisions apply:
(a) To each Member's Capital Account there will be credited (i) the
amount of money contributed by such Member to the Company (including liabilities
of the Company assumed by such Member as provided in Section
1.704-1(b)(2)(iv)(c) of the Regulations); (ii) the fair market value of any
property contributed to the Company by such Member (net of liabilities secured
by such contributed property that the Company is considered to assume or take
subject to under Section 752 of the Code); and (iii) such Member's share of
Profits and items of income and gain that are specially allocated to such Member
pursuant to Section 9.4 hereof or otherwise pursuant to this Agreement (other
than items of income or gain allocated pursuant to Section 9.6(b)).
(b) To each Member's Capital Account there will be debited (i) the
amount of money distributed by the Company to such Member other than amounts
which are in repayment of debt obligations of the Company to such Member; (ii)
the fair market value of property distributed to such Member (net of liabilities
secured by such distributed property that such Member is considered to assume or
take subject to under Section 752 of the Code); (iii) such Member's share of
Losses or items of loss or deduction that are specially allocated pursuant to
Section 9.4 hereof or otherwise pursuant to this Agreement (other than items of
loss or deduction allocated pursuant to Section 9.6(b)); and (iv) such Member's
share of any excess of depreciation or amortization expense reflected in the
Company's financial statements prepared in accordance with generally accepted
accounting principles over such Member's share under Section 9.6(b) of the
corresponding depreciation or amortization expense allowable for federal income
tax purposes with respect to the related property.
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(c) The Capital Account of a transferee Member will include the
appropriate portion of the Capital Account of the Members from whom the
transferee Member's interest was obtained.
(d) The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Section 1.704-1(b) of the Regulations, and will be interpreted and applied in a
manner consistent with such Regulations. Consistent with the Members' intention
of maintaining Capital Accounts in a manner consistent with the principles of
Section 1.704-1(b) of the Regulations, the value of any Property (other than
cash) (i) contributed to the Company by a Member, (ii) distributed to a Member
from the Company or (iii) owned by the Company and subject to a revaluation upon
the occurrence of certain events shall be the fair market value of such Property
(net of liabilities secured by such property that the Company or such Member, as
the case may be, is considered to assume or take subject to under Section 752 of
the Code) on the date of contribution, distribution or revaluation, as
applicable.
8.5 No Obligation to Restore Deficit Balance. Except as required by law
or as otherwise provided in this Agreement, no Member will be required to
restore any deficit balance in its Capital Account.
8.6 Withdrawal; Successors. A Member will not be entitled to withdraw
any part of its Capital Account or to receive any distribution from the Company,
except as specifically provided in this Agreement, and no Member will be
entitled to or required to make any capital contribution to the Company other
than the Commitments. Any Member, including any additional or substitute Member,
who receives an interest in the Company or whose interest in the Company is
increased by means of a transfer to it of all or part of the interest of another
Member, will have a Capital Account with respect to such interest initially
equal to the Capital Account with respect to such interest of the Member from
whom such interest is acquired.
8.7 Interest. No Member will be entitled to interest on such Member's
Capital Contribution or on any Profits retained by the Company.
8.8 Investment of Capital Contributions. The cash portion of the
Capital Contributions of the Members will be invested by the Management
Committee in demand, money market or time deposits, obligations, securities,
investments or other instruments constituting cash equivalents, until such time
as such funds are used by the Management Committee for Company purposes. Such
investments will be made by the Management Committee for the benefit of the
Company.
8.9 Advances to the Company. Except with the express written consent of
Polo, in the case of the Media Members, or the Media Representative, in the case
of Polo, no Member may make loans or advance funds to the Company other than the
ValueVision Initial Capital Contribution, the ValueVision Additional
Contributions and any Additional Contributions required to be contributed to the
Company pursuant to this Agreement.
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8.10 Initial Public Offering. In the event that Polo and the Media
Representative agree in accordance with Section 5.3, or the Media Representative
determines in accordance with Section 3.16, to conduct an Initial Public
Offering, Polo shall have the right to increase its total equity investment in
the Company by contribution, by way of conversion, of a portion of its royalty
under the License Agreement into additional equity in the Company. The amount of
such additional equity shall be calculated, taking into account the valuation of
the Company for purposes of the Initial Public Offering and the totality of the
circumstances, by a reputable, nationally recognized investment banking firm
chosen by Polo and the Media Representative in good faith at the time of such
conversion; provided, however, if Polo and the Media Representative are unable
to agree on the selection of an investment banking firm, each party shall
appoint one nationally recognized investment banking firm, each of which shall
select a third investment banking firm, which shall calculate the amount of
additional equity. All costs associated with the valuation process shall be paid
by the Company.
In order to effect the foregoing, Polo shall have the right to require
the Company to agree to an amendment of the License Agreement in which the
royalty is reduced in accordance with the foregoing procedure. Polo shall have
30 days after the determination by the Company or, in the case of Section 3.16,
the Media Representative, to conduct an Initial Public Offering in accordance
with this Agreement to exercise its conversion option. If Polo exercises its
conversion option, the closing with respect to such exercise shall take place no
earlier than the consummation of the Initial Public Offering.
ARTICLE IX
ALLOCATIONS AND DISTRIBUTIONS
9.1 Profits and Losses. Profits and Losses, and each item of Company
income, gain, loss, deduction, credit and tax preference with respect thereto,
for each Fiscal Year (or shorter period in respect of which such items are to be
allocated) will be allocated among the Members as provided in Sections 9.1
through 9.5 for tax accounting purposes.
9.2 Profits. After giving effect to the special allocations set forth
in Section 9.4, the allocation of Profits for any Fiscal Year will be allocated
among the Members, pro rata, in proportion to their respective Sharing Ratios;
provided, however, that if there is an Initial Public Offering, sale or other
disposition of substantially all of the assets of the Company or a liquidation
of the Company pursuant to Article XII, Profits shall be allocated (i) first, to
Polo until the ratio of Polo's Capital Account balance to the sum of the
Members' Capital Account balances equals Polo's Sharing Ratio and (ii) second,
to the Members in accordance with their respective Sharing Ratios (provided
that, for purposes of this clause (ii), Profits shall be reallocated among NBC,
NBCi, CNBC.com and ValueVision so as to cause, as nearly as possible, the
balances in such
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entities' Capital Accounts to bear the same ratios to one another as do such
entities' respective Sharing Ratios).
9.3 Losses. After giving effect to the special allocations set forth in
Section 9.4, Losses will be allocated (i) first, so as to cause, as nearly as
possible, the balances in the Members' respective Capital Accounts to bear the
same ratios to one another as do the Members' respective Sharing Ratios and (ii)
second, pro rata in accordance with the Members' respective Sharing Ratios.
9.4 Special Allocations. The following special allocations will be
made:
(a) Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations or distributions described in Section
1.704-l(b)(2)(ii)(d)(4), Section 1.704-l(b)(2)(ii)(d)(5), or Section
1.704-l(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain
will be specially allocated to the Member in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of the Member as quickly as possible, provided that an
allocation pursuant to this Section 9.4(a) will be made only if and to the
extent that the Member would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Article IX have been tentatively made as
if this Section 9.4(a) were not in this Agreement.
(b) Gross Income Allocation. In the event any Member has a deficit
Capital Account at the end of any Fiscal Year which is in excess of the sum of
the amounts such Member is deemed to be obligated to restore pursuant to the
penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the
Regulations, each such Member will be specially allocated items of Company
income and gain in the amount of such excess as quickly as possible, provided
that an allocation pursuant to this Section 9.4(b) will be made only if and to
the extent that such Member would have a deficit Capital Account in excess of
such sum after all other allocations provided for in this Article IX have been
made as if Section 9.4(a) and this Section 9.4(b) were not in this Agreement.
(c) Curative Allocations. The allocations set forth in Sections 9.4 (a)
and (b) (the "Regulatory Allocations") are intended to comply with certain
requirements of the Regulations. It is the intent of the Members that, to the
extent possible, all Regulatory Allocations will be offset either with other
Regulatory Allocations or with special allocations of other items of Company
income, gain, loss, or deduction pursuant to this Section 9.4(c). Therefore,
notwithstanding any other provision of this Article IX (other than the
Regulatory Allocations), the Managers may make such offsetting special
allocations of Company income, gain, loss or deduction in any manner they
determine appropriate so that, after such offsetting allocations are made, each
Member's Capital Account balance is, to the extent possible, equal to the
Capital Account balance such Member would have had if the Regulatory Allocations
were not part of this Agreement.
(d) Elective Gross Allocations. The Members will have the ability to
make reasonable allocations of Company income and expense (including, without
limitation, amortization deductions under Section 195 of the Code) pursuant to
Section 9.3 and the proviso of Section 9.2 in order to cause the balances in the
Members'
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respective Capital Accounts to bear the same ratio to one another as do
the Members' respective Sharing Ratios.
(e) Subsequent Adjustments to Income.
(i) To the extent, if any, that the taxable income of a Member is
deemed to be increased by any taxing authority pursuant to Section 482 of the
Code or other similar provision (other than an increase described in subsection
(ii) below), then the correlative deduction shall be specially allocated to such
Member.
(ii) To the extent, if any that the taxable income of Polo arising out
of a transfer of inventory to the Partnership is increased, directly or
indirectly, by any taxing authority pursuant to Section 482 of the Code or other
similar provision and such adjustment or reallocation results in increased
cost-of-goods-sold with respect to such inventory, then income or gain of the
Partnership upon the sale or disposition of such inventory shall be specially
allocated to NBC to the extent of such deemed increase. If there are
insufficient items of income or gain attributable to such inventory sale or
disposition to specially allocate to NBC an amount of income or gain equal to
the amount of such Section 482 adjustment, then any other Company items of
income or gain for such taxable year shall be specially allocated to NBC to the
extent of such shortfall.
9.5 Other Allocation Rules.
(a) The allocation provisions set forth in this Article IX are intended
to comply with Regulations Section 1.704-1(b) and shall be interpreted and
applied in a manner consistent with such Regulations (including the "minimum
gain chargeback" provisions set forth in Regulations Sections 1.704-2(f) and
1.704-2(i)(4)).
(b) For purposes of determining the Profits, Losses, or any other item
allocable to any period (including allocations to take into account any changes
in any Member's Sharing Ratio during a Fiscal Year and any transfer of any
interest in the Company), Profits, Losses, and any such other item will be
determined on a daily, monthly, or other basis, as determined by the Managers
using any permissible method under Section 706 of the Code and the Regulations
thereunder.
(c) Except as otherwise provided in this Article IX, an allocation of
Profits or Losses to a Member will be treated as an allocation to such Member of
the same share of each item of income, gain, loss and deduction taken into
account in computing such Profits or Losses.
(d) For purposes of determining the character (as ordinary income or
capital gain) of any Profits allocated to the Members pursuant to this Article
IX, such portion of Profits that is treated as ordinary income attributable to
the recapture of depreciation, to the extent possible, will be allocated among
the Members in the proportion which (i) the amount of depreciation previously
allocated to each Member bears to (ii) the total of such depreciation allocated
to all Members. This Section 9.5(d)
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will not alter the amount of allocations among the Members pursuant to this
Article IX, but merely the character of income so allocated. (e) The allocation
of Profits and Losses to any Member will appropriately reflect adjustments
required as a result of any Section 754 election filed on behalf of the Company.
9.6 Tax Allocations.
(a) General Rules. Except as otherwise provided in Section 9.6(b), for
each fiscal period, items of the Company's income, gain, loss, deduction and
expense shall be allocated, for federal, state and local income tax purposes,
among the Members in the same manner as the Profits (and items thereof) or
Losses (and items thereof) of which such items are components were allocated
pursuant to this Article IX.
(b) Mandatory Allocations Under Code Section 704(c). Income, gains,
losses and deductions with respect to any property (other than cash) contributed
or deemed contributed to the capital of the Company shall, solely for income tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its fair market value at the time of the contribution or deemed
contribution in accordance with Section 704(c) of the Code and the Treasury
regulations promulgated thereunder. If there is a revaluation of property
pursuant to Section 8.4(d) hereof, subsequent allocations of income, gains,
losses or deductions with respect to such property shall be allocated among the
Members so as to take account of any variation between the adjusted tax basis of
such property to the Company for federal income tax purposes and its fair market
value in accordance with Section 704(c) of the Code and the Regulations
promulgated thereunder. Except as otherwise agreed by the Members, such
allocations shall be made using the "traditional method" described in Section
1.704-3(b) of the Regulations.
(c) Tax Allocations Binding. The Members are aware of the income tax
consequences of the allocations made by this Article IX and hereby agree to be
bound by the provisions of this Article IX in reporting their shares of the
Company's income and loss for income tax purposes.
(d) Contributions. The Members agree to treat contributions made
pursuant to this Agreement as governed by Section 721 of the Code, unless a
final determination (which shall include the execution of a Form 870-AD or
successor form) requires a different treatment for U.S. Federal income tax
purposes. In the event that any taxing authority contests such agreed treatment
of the contributions or the treatment of any other item as agreed to by the
Members in this Agreement, a Member receiving notice of such contest from such
taxing authority shall promptly give written notice of such contest to each
other Member. Such other Members may, at their own expense, participate in the
defense of such contest. The Members shall reasonably cooperate in defending any
such contest, and no Member shall settle or otherwise compromise such a contest
without the written consent of the other Members (which shall not be
unreasonably delayed or withheld). In the event of a Member's refusal to consent
to a settlement, such Member shall, to the extent permitted by law, assume
control of the
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defense of such contest, and such Member shall bear any legal fees incurred by
such Member in undertaking such defense to the extent incurred after the
assumption.
9.7 Distributions to Members.
(a) Amounts and Timing. If decided by the Members in accordance with
Section 5.3, Distributions will be made to the Members in proportion to their
respective Sharing Ratios. Such Distributions will be made from time to time to
those Persons recognized on the books of the Company as Members as of the
applicable record date.
(b) Amounts Withheld. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment,
distribution, or allocation to the Company or the Members will be treated as
amounts distributed to the Members pursuant to this Section 9.7 for all purposes
under this Agreement. The Company is authorized to withhold from Distributions
to the Members and to pay over to any federal, state, or local government any
amounts required to be so withheld pursuant to the Code or any provisions of any
other federal, state, or local law, and shall allocate any such amounts to the
Members with respect to which such amount was withheld.
(c) Draws for Payment of Estimated Taxes. Unless Polo and the Media
Representative otherwise agree, the Company shall pay to each Member a quarterly
draw, not to exceed the amount reasonably necessary to provide for payment by
the Members of any federal, state and local estimated taxes with respect to
Profits allocated to the Members pursuant to this Article IX. All draws
hereunder will be made to the Members pro rata based on their estimated
respective shares of Profits allocated to each of them for such Fiscal Year
under this Article IX. Any draw by any Member made pursuant to this Section
9.7(c) will not result in any decrease in the Sharing Ratio of such Member.
ARTICLE X
TAXES
10.1 Tax Characterization. It is intended that the Company be
characterized and treated as a partnership for, and solely for, federal, state
and local income tax purposes. For such purposes, (i) the Company will be
subject to all of the provisions of Subchapter K of Chapter 1 of Subtitle A of
the Code, (ii) all references to a "Partner," to "Partners" and to the
"Partnership" in this Agreement (including Article IX) and in the provisions of
the Code and Regulations cited in this Agreement will be deemed to refer to a
Member, the Members and the Company, respectively.
10.2 Tax Matters Partner, Etc. (a) NBC is hereby appointed the "Tax
Matters Partner" within the meaning of Section 6231(a)(7) of the Code. NBC will
act in good faith in fulfilling the responsibilities of a Tax Matters Partner
under the Code, the
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Regulations and pursuant to this Agreement and in fulfilling any similar role
under state, local or foreign law.
(b) NBC shall promptly take such action as may be necessary to cause
NBC to become a "Notice Partner" within the meaning of Section 6231(a)(8) of the
Code. NBC shall keep the other Members informed of all material matters that may
come to its attention in its capacity as Tax Matters Partner by giving the other
Members notice thereof within five Business Days after it becomes informed of
any such matter or within such shorter period as may be required to comply with
any appropriate statutory or regulatory provisions NBC shall furnish the other
Members copies of all written communications from the Internal Revenue Service
within ten Business Days after the receipt thereof or within such shorter period
as may be required to comply with any appropriate statutory or regulatory
provisions. NBC also shall provide the other Members with reasonable advance
notice of meetings and conferences with the Internal Revenue Service so that the
other Members will have a reasonable opportunity to participate in such meetings
and conferences. Without limiting the generality of the foregoing, NBC and the
other Members shall each give to the other prompt notice of receipt of any
written notice that the Internal Revenue Service or any other taxing authority
intends to examine any federal, state, local or foreign tax return, or the books
and records, of the Company.
(c) NBC, in its capacity as Tax Matters Partner, shall not take any
action contemplated by Section 6222 through Section 6233, inclusive, of the Code
without the approval of Polo; provided, however, that nothing contained herein
will be construed to limit the ability of Polo or NBC to take any action under
Section 6222 through Section 6233, inclusive, of the Code that is left to the
determination of a Member so long as such action is not legally binding on the
other Member or the Company. Without limiting the generality of the foregoing,
NBC shall not, and will have no power to, enter into any extension of the period
of limitations for making assessments on behalf of another Member, or any
settlement agreement that binds another Member.
(d) If any Member enters into a written settlement or closing agreement
with the Internal Revenue Service with respect to any partnership tax item in
respect of the Company, it shall notify the other Member of such agreement and
its terms at least ten Business Days prior to the execution of such written
agreement.
(e) In the event that NBC ceases to be a Member, Polo will become the
Tax Matters Partner, unless NBC has transferred its Membership Interest to a
wholly-owned Affiliate in accordance with the terms of this Agreement, in which
case such Affiliate will become the Tax Matters Partner.
(f) The provisions of this Section 10.2 will survive the termination of
the Company, and will remain binding on the Members for a period of time
necessary to resolve with the Internal Revenue Service or the Department of the
Treasury or other taxing authority any and all matters regarding the Federal
income taxation of the Company and any state, local, or foreign tax matters.
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10.3 Tax Returns. As soon as practicable after the end of each Fiscal
Year, the Company shall cause to be prepared and filed, to the extent required,
tax returns for the Company and shall supply copies of all United States
Federal, state and local income tax returns to the Members for their review 30
days prior to the filing thereof with the appropriate governmental agencies. In
preparing and filing such tax returns, the Company shall reasonably consult with
the Members. All returns filed by the Company in respect of Federal income taxes
will be filed on the basis that the Company is a partnership for Federal income
tax purposes.
ARTICLE XI
TRANSFER OF MEMBERSHIP INTEREST
11.1 Compliance with Securities Laws. No Membership Interest has been
registered under the Securities Act or under any applicable state securities
laws. A Member may not transfer (a transfer, for purposes of this Agreement,
shall be deemed to include, but not be limited to, any sale, transfer,
assignment, pledge, creation of a security interest or other disposition) all or
any part of such Member's Membership Interest, except upon compliance with the
applicable federal and state securities laws and the provisions of this Article
XI; provided further, however, each of the Original Media Members may freely
transfer their respective Membership Interests amongst themselves without regard
to the restrictions in Section 11.2. The Managers will have no obligation to
register any Member's interest under the Securities Act, as amended, or under
any applicable state securities laws, or to make any exemption therefrom
available to any Member.
11.2 Transfer of Membership Interest. A Member may not sell, transfer,
assign or otherwise dispose, directly or indirectly, of all or any portion of
its Membership Interest, except in accordance with the provisions of Sections
3.12, 3.13, 3.14 and 3.15 or this Article XI. Except as otherwise provided
below, a Member may sell, transfer, assign or otherwise dispose of all or any
portion of its Membership Interest (a "Transfer") only if such Member (the
"Withdrawing Member") obtains the prior written consent of Polo, in the case of
transfers by any Media Member, or the Media Representative on behalf of the
Media Members, in the case of transfers by Polo (the "Continuing Member"), which
consent may be given or withheld in the sole and absolute discretion of the
Continuing Member; provided, however, that no prior written consent of the
Continuing Member shall be required in the case of any transfer specifically
contemplated by this Agreement as not requiring consent. Upon any acquisition of
a Withdrawing Member's Membership Interest by a transferee in accordance with
this Article XI, such transferee will be admitted as a Member of the Company for
purposes of this Agreement, with the same rights, privileges, duties and
obligations of the Withdrawing Member and immediately following such admission,
the Withdrawing Member will cease to be a Member of the Company; provided,
however, that no Transfer shall be made if such Transfer would, in the opinion
of counsel to the Company, jeopardize the status of the Company as a partnership
for United States federal income tax purposes. A Transfer by a Withdrawing
Member of its entire Membership Interest to a Majority-Owned Affiliate of such
Member may be made
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without the prior written consent of the Continuing Member if (i) the
Withdrawing Member executes and delivers to the Continuing Member a guaranty of
the performance by such Majority-Owned Affiliate of its obligations under this
Agreement and the Operating Agreement in form and substance reasonably
satisfactory to the Continuing Member, (ii) such Majority-Owned Affiliate
executes an instrument pursuant to which it agrees to adopt and to be bound by,
and to perform, all the obligations of the Withdrawing Member under this
Agreement and the Operating Agreement, (iii) the Withdrawing Member agrees to
indemnify the Continuing Member for any Damages suffered by the Continuing
Member if such Transfer results in a termination of the status of the Company as
a partnership for United States federal income tax purposes and (iv) the other
owners of such Majority-Owned Affiliate do not include, in the case of a
Transfer by Polo, a Media Competitor, and in the case of a Transfer by any of
the Media Members, any of Polo's competitors (as agreed to by the parties
hereto); provided, however, that in no event shall Polo transfer its Membership
Interest to a Majority-Owned Affiliate and subsequently transfer its interest in
such Majority-Owned Affiliate to a Media Competitor nor shall any Media Member
transfer its Membership Interest to a Majority-Owned Affiliate and subsequently
transfer its interest in such Majority-Owned Affiliate to any of Polo's
competitors (as agreed to by the parties hereto). Notwithstanding any of the
foregoing, no Transfer shall relieve NBC of its obligations to provide $100
million aggregate credits for advertising time or NBCi and CNBC.com of their
obligations to provide $40 million and $10 million, respectively, of credits in
Online services as provided in the Operating Agreement and, where applicable,
the other applicable Ancillary Agreement.
11.3 Obligations of a Withdrawing Member.
(a) Generally. No disposition by a Withdrawing Member of its Membership
Interest will relieve such Withdrawing Member of any of its liabilities and
obligations, including those to the Company or to the Continuing Member, which
arose or accrued from events, acts or omissions occurring prior to the effective
date of such disposition. The Withdrawing Member will be responsible for all
costs incurred by the Company in connection with any Transfer.
(b) Non-Disclosure by a Withdrawing Member. In the case of a sale or
other transfer of a Withdrawing Member's Membership Interest pursuant to this
Article XI, the Withdrawing Member will continue to be subject to the provisions
of Section 2.4 of the Operating Agreement (Non-Disclosure).
(c) Survival. The rights and obligations of the Members under this
Section 11.3 will survive any termination of this Agreement and the Operating
Agreement.
11.4 Encumbrances. No Member will at any time mortgage, pledge, charge
or encumber, or create or suffer to exist a mortgage, pledge, lien, charge,
encumbrance or security interest ("Lien"), with respect to all or any part of
its Membership Interest. If a Lien attaches to a Member's Membership Interest,
such Member agrees to cause such Lien to be discharged promptly at its own
expense.
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11.5 Effect of Unauthorized Transfer. No transfer or other disposition
of any Membership Interest in violation of any provision of this Agreement will
be effective to pass any title to, or create any interest in favor of, any
Person, but the Member which attempted to so effect such transfer or other
disposition will be deemed to have committed a material breach of its
obligations to the other Member hereunder.
11.6 Standstill Agreement.
(a) From the date hereof and continuing until one year after the
earlier of the termination of this Agreement or, with respect to any Original
Media Member, the date on which such Original Media Member ceases to be a
Member, none of the Original Media Members, their Majority-Owned Affiliates and
their representatives (to the extent such representatives are acting on behalf
of any of the Original Media Members or their Majority-Owned Affiliates) will,
except as expressly set forth in this Agreement and except in accordance with
the terms of a specific written approval or request made by Polo, initiate
contact with any director, officer, employee, or Person or group or Persons
known by such Original Media Member or who reasonably should be known by such
Original Media Members, to beneficially own (within the meaning of Rule 13d-3 of
the General Rules and Regulations under the Exchange Act as in effect on the
date of this Agreement) Securities (as hereinafter defined) of Polo representing
in excess of 10% of the total voting power or total equity value of Polo in
connection with any matter relating to the purchase, sale or voting of such
Securities representing 10% of the total voting power of Polo or total equity
value of Polo. For purposes of this Section 11.6, the term "Securities" means
any equity securities of Polo or any Affiliate of Polo, and any direct or
indirect options or other rights to acquire any equity securities of Polo,
including any securities that are exercisable or exchangeable for or convertible
into, such equity securities.
(b) As of the date of this Agreement and for so long as any Original
Media Member is a Member, each Original Media Member confirms to Polo that it
does not beneficially own any Securities of Polo representing in excess of 10%
of the total voting power or total equity power of Polo. Each Original Media
Member agrees that for the duration of this Agreement, except in accordance with
the terms of a specific request or approval by Polo, it will not:
(i) propose or publicly announce or otherwise disclose an intent to
propose or enter into or agree to enter into, singly or with any other Person,
directly or indirectly, (A) any form of business combination, acquisition, or
other transaction relating to Polo or any of its Majority-Owned Affiliates,
excluding the Company and the Business, (B) any form of restructuring,
recapitalization, or similar transaction with respect to Polo or any
Majority-Owned Affiliate thereof, excluding the Company and the Business or (C)
make, initiate, or participate in any demand, request or proposal to amend,
waive or terminate any provision of this Section 11.6, or
(ii) (A) acquire, or offer, propose or agree to acquire, by purchase or
otherwise, any Securities of Polo (now existing or hereafter created)
representing in excess of 10% of the total voting power or total equity value of
Polo, (B) make, initiate,
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or in any way participate in, any solicitation of proxies with respect to any
Securities of Polo (now existing or hereafter created) (including by the
execution of action by written consent), (C) become a participant in any
election contest with respect to Polo, (D) seek to influence any Person with
respect to any Securities of Polo, (E) demand a copy of a list of stockholders
of Polo or other books and records, (F) participate in or encourage the
formation of any partnership, syndicate, or other group which owns or seeks or
offers to acquire beneficial ownership of any Securities of Polo or which seeks
to effect control of Polo for the purpose of circumventing any provision of this
Agreement or (G) otherwise act, alone or in concert with others (including by
providing financing for another Person), to seek or to offer to control or
influence, in any manner, the management, board of directors, or policies of
Polo, except with respect to the Company and the Business in accordance with
this Agreement and the Operating Agreement.
(c) The provisions of this Section 11.6 shall survive with respect to
the Original Media Members until one year after the earlier of the termination
of this Agreement and the date on which any Original Media Member ceases to be a
Member. This Section 11.6 shall also apply to any transferee of any of the
Original Media Members in accordance with the terms of this Agreement mutatis
mutandis.
(d) Notwithstanding any other provisions of this Agreement, nothing
herein shall restrict any pension or other employee benefit plan of any of the
Media Members or their Affiliates from acquiring or beneficially owning any
Securities of Polo and otherwise taking any actions with respect to such
Securities, except to the extent done with an intent to circumvent the
provisions of this Section 11.6.
ARTICLE XII
DISSOLUTION
12.1 Events of Dissolution. (a) The Company will be dissolved and this
Agreement and the Operating Agreement will terminate upon the occurrence of any
of the following events:
(i) the written agreement of Polo and the Media Representative to
dissolve the Company;
(ii) the Delaware Court of Chancery has entered a final
decree pursuant to Section 18-802 of the Act;
(iii) the sale of all or substantially all of the Company's assets; or
(iv) the termination of the License Agreement in accordance with its
terms.
(b) The withdrawal, resignation, expulsion, bankruptcy or dissolution
of a Member or the occurrence of any other event which terminated the Member's
continued membership in the Company shall not result in the dissolution of the
Company.
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(c) As soon as possible after the occurrence of any of the events
specified in Section 12.1(a) above, the Company shall make any filings required
by the Act and shall cease to carry on its business, except insofar as may be
necessary for the winding-up of its business, but the Company's separate
existence will continue until the certificate of cancellation of the Certificate
of Formation has been filed by the Secretary of State or until a decree
dissolving the Company has been entered by a court of competent jurisdiction, as
the case may be.
12.2 Liquidation and Distribution Following Dissolution. If an event of
dissolution has occurred pursuant to Section 12.1, the Company will be wound up
and liquidated in accordance with applicable law and the following provisions
(unless the Company is continued on a basis mutually acceptable to Polo and the
Media Representative):
(a) each Member shall pay to the Company all amounts owed by it to the
Company, if any;
(b) the CFO shall be directed to prepare a balance sheet of the Company
in accordance with GAAP as of the date of dissolution, which balance sheet shall
be reported upon by the Company's Auditors;
(c) the Company Assets, including any monies received pursuant to
Section 12.2(a), will be applied in the following order:
First, to the payment of creditors of the Company, including Members
who are creditors, in the order of priority provided by law;
Second, to the establishment of any reserves that the Members, in
accordance with sound business judgment, deem reasonably necessary to provide
for the payment when due of any contingent liabilities or obligations of the
Company (which reserves may be paid over by the Members to a trustee or escrow
agent selected by them to be held by such trustee or escrow agent for purposes
of (i) distributing such reserves in payment of the aforementioned
contingencies, and (ii) distributing the balance of such reserves in the manner
provided herein upon the expiration of such period as the Members may deem
advisable).
Third, to the Members in accordance with their positive Capital Account
balances.
Consistent with the regulations pursuant to Section 704 of the Code, in
the event of a liquidation, as defined in Treasury Regulations Section
1.704-1(b)(2)(ii)(g), the value of all property of the Company to be distributed
will be, or will have been, appropriately reflected in the Capital Accounts.
(d) In the event of any liquidation pursuant to this Section 12.2, the
Company Assets (other than as may otherwise be provided in this Agreement or any
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Ancillary Agreement) will be sold or otherwise liquidated as promptly as
possible without material sacrifice, and any receivables will be collected or
sold, all in an orderly and businesslike manner. Notwithstanding the foregoing,
the Members may agree not to sell all or any portion of the Company Assets, in
which event such Company Assets will be distributed in kind.
(e) Notwithstanding anything to the contrary in this Agreement or the
Operating Agreement, upon a liquidation (within the meaning of Treasury
Regulations ss. 1.704-1(b)(2)(ii)(g)), if any Member has a deficit Capital
Account (after giving effect to all contributions, distributions, allocations
and other Capital Account adjustments for all Fiscal Years, including the year
in which such liquidation occurs), such Member will have no obligation solely as
a result of such deficit to make any capital contribution, and the negative
balance of such Capital Account will not be considered a debt owed by the Member
to the Company or to any other Person for any purpose whatsoever.
(f) Any distributions to the Members in respect of their Capital
Accounts pursuant to this Section 12.2 will be made in accordance with the time
requirements set forth in Treasury Regulations ss. 1.704-1(b)(2)(ii)(b)(2).
12.3 Final Accounting. Upon the liquidation of the Company, the
Auditors shall prepare a final accounting statement as soon as reasonably
practicable after all of the business of the Company has been concluded, all
monies payable to the Company have been received and all expenses and
obligations of the Company have been paid, satisfied or otherwise provided for.
12.4 Winding Up and Certificate of Dissolution. The winding up of the
Company will be completed when all debts, liabilities, and obligations of the
Company have been paid and discharged or reasonably adequate provision therefor
has been made, and all of the remaining Company Assets have been distributed to
the Members. Upon the completion of the winding up of the Company, a certificate
of dissolution will be delivered to the Secretary of State of the State of
Delaware for filing. The certificate of dissolution will set forth the
information required by the Act.
12.5 Use of the Company Name, Etc. Upon Dissolution, Winding Up and
Termination. Each Media Member hereby agrees that neither it nor any of its
Affiliates shall, after dissolution of the Company in accordance with this
Article XII, without the prior written consent of Polo, use or exploit the
Company name or any Polo and Ralph Lauren Brand or other intellectual property
that is or has been provided or licensed to the Company under the License
Agreement, and in the case of Polo, Polo agrees not to use or exploit any Media
Member's trademarks or any other of the Media Members' intellectual property
that is or has been provided or licensed to the Company; provided, however, that
this Section shall not apply in the context of a separate commercial
relationship between Polo and any Media Member, such as an advertising
relationship.
12.6 Payments Upon Certain Dissolutions. In the event that, any time
prior to the fourth anniversary of the Closing Date, (a) the Members shall agree
to a liquidation, dissolution, winding up, bankruptcy, insolvency or similar
event involving the
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Company or (b) the Company shall be the subject of an involuntary liquidation,
dissolution, winding up, bankruptcy, insolvency or similar event, or the Company
shall have ceased to have any substantial ongoing operations, in either of cases
(a) or (b) following the refusal or inability of Polo to commit to fund its
share of any Additional Capital Contributions (after having exhausted the
ValueVision Commitment, giving effect to any ValueVision Additional
Contributions to be made concurrently with such proposed Additional Capital
Contributions) that are required in order to fund the Company's reasonably
anticipated capital and operating needs (including, without limitation, any
amounts needed to avoid or cure a payment default under the License Agreement)
for the twelve months following any request of the Company or the Media
Representative for such Additional Capital Contributions but only in the event
that (i) the Company is unable to raise the required capital plus sufficient
capital to fund its capital and operating needs for an additional 12 months on a
prudent basis and on commercially reasonable terms through bank borrowings or
otherwise in the capital markets and (ii) one or more of the Original Media
Members is willing and able to fund the aggregate amount of all such Additional
Capital Contributions required of the Original Media Members, as evidenced by
appropriate supporting documentation, including all necessary corporate and
shareholder action of the Original Media Members and their shareholders to
authorize such funding, Polo agrees to pay to ValueVision 50% of the excess of
the aggregate amount of actual cash Capital Contributions ("Aggregate
Contributions") made by the Original Media Members to the Company, net of
distributions made to ValueVision with respect to which, and only to the extent
that, Polo does not receive a corresponding distribution in proportion to its
Sharing Ratio, over the Aggregate Contributions made by Polo to the Company, net
of distributions made to Polo with respect to which, and only to the extent
that, ValueVision does not receive a corresponding distribution in proportion to
its Sharing Ratio, which payment by Polo shall not exceed $25 million (the
"Liquidation Payment"). In consideration for the Liquidation Payment,
ValueVision or any permitted transferee of ValueVision shall, if requested by
Polo in its sole discretion, transfer to Polo that percentage of ValueVision's
Membership Interest equal to (a) the Liquidation Payment, divided by (b) the
aggregate cash Capital Contributions made to the Company by ValueVision and such
permitted transferees (the "ValueVision Contributions"). In the event that, for
U.S. federal income tax purposes, the Liquidation Payment is treated as a
contribution by Polo to the Company and a distribution to ValueVision, the
Liquidation Payment shall be treated as a "guaranteed payment" under section
707(c) of the Code and any deduction taken by the Company in respect of such
payment shall be specially allocated to Polo. This Section 12.6 shall be binding
upon any transferee of ValueVision's or Polo's Membership Interest.
ARTICLE XIII
[RESERVED]
ARTICLE XIV
INDEMNIFICATION OF MEMBERS, MANAGERS AND OFFICERS
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14.1 Indemnification by a Member. Subject to Section 14.3, each Member
(the "Indemnifying Member") shall indemnify, defend and hold harmless the
Company, the other Members, the other Members' Affiliates, and the other
Members' and each such Affiliate's officers, directors, employees, agents and
representatives, and the Company's Managers and officers (collectively the
"Other Indemnified Persons") from and against any and all claims, demands,
actions, suits, damages, liabilities, losses, costs and expenses (including
reasonable attorneys' fees and out-of-pocket disbursements), judgments, fines,
settlements and other amounts (collectively "Damages"), to the extent caused by,
resulting from or arising out of or in connection with any of the following:
(a) the material breach of, or material misrepresentation contained in,
any written representation or warranty made by the Indemnifying Member or its
Affiliate in this Agreement or any Ancillary Agreement, or in any officer's
certificate delivered hereunder;
(b) the breach or default in any material respect in performance of any
covenant or agreement required to be performed by the Indemnifying Member or its
Affiliate contained in this Agreement or in any Ancillary Agreement; or
(c) any claim, action, suit or proceeding or threat thereof, made or
instituted as a result of acts or omissions of the Indemnifying Member or its
Affiliates unrelated to the business and operations of the Company or outside
the scope of the Indemnifying Member's rights or authority conferred by this
Agreement, any Ancillary Agreement or any other understanding, agreement or
arrangement between the Members and/or the Company and in which the Company,
such Member, such Member's Affiliates or such Other Indemnified Persons may be
involved or be made a party by reason of such Member being, or having been in
the past, a Member.
14.2 Indemnification by the Company. Subject to Section 14.3, the
Company shall indemnify, defend and hold harmless each Member (including any
Person who has been but is no longer a Member), each Member's Affiliates and the
officers, directors, employees, agents and representatives and the heirs,
executors, successors and assigns of each of the foregoing (individually an
"Indemnitee") from and against all Damages to the extent caused by, resulting
from or arising out of or in connection with any of the following:
(a) any claim, action, suit or proceeding or threat thereof, made or
instituted in which such Member, such Member's Affiliates or Indemnitee may be
involved or be made a party by reason of such Member being, or having been in
the past, a Member, or by reason of any action alleged to have been taken or
omitted by such Member in such capacity, or by such Member's Affiliates or
Indemnitees acting on behalf of the Company, provided that a Member, Member's
Affiliate or Indemnitee shall only be entitled to indemnification hereunder to
the extent such Indemnitee's conduct did not constitute bad faith, willful
misconduct, gross negligence or a material breach of this Agreement or the
Operating Agreement. The termination of any proceeding by settlement, judgment,
order, conviction or upon a plea of nolo contendere or its equivalent
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shall not, of itself, create a presumption that such Member's, Member's
Affiliate's or Indemnitee's conduct constituted bad faith, willful misconduct,
gross negligence or a material breach of this Agreement or the Operating
Agreement, such Member's Affiliate or such Indemnitee;
(b) any guarantees or promises of performance of any obligations of the
Company; and
(c) any actions or omissions to act by the Company in connection with
its business or operations, or the ownership of its assets and properties;
provided, however, that nothing in this Section 14.2 will be construed to
require the Company to reimburse, defend, indemnify or hold harmless any Member,
its Affiliates, or Indemnitee with respect to any Damages in any circumstance in
which this Agreement or any Ancillary Agreement requires such Member to
reimburse, defend, indemnify or hold harmless any other Member, its Affiliates
or Indemnitee or the Company in respect of such Damages.
14.3 Survival; Limitations; Procedures.
(a) The indemnification obligations contained in Section 14.1 will
survive any termination of this Agreement and the Operating Agreement or the
dissolution and winding up of the Company. The indemnification obligations
contained in Section 14.2 will survive any dissolution of the Company until its
affairs have been fully wound up and all of its properties and assets
distributed in accordance with this Agreement.
(b) The rights and remedies provided to the Members and the Company in
this Agreement and the Operating Agreement are cumulative and non-exclusive and
will not preclude any other right or remedy available to any Member or the
Company at law or in equity.
(c) Notwithstanding any other provision hereof, neither the Company nor
any Member will be liable to any other Member or its Affiliates, the Company, or
any Other Indemnified Person for special, indirect, punitive or consequential
damages, including but not limited to loss of profit.
(d) If a Member or the Company is obligated hereunder to indemnify any
other Member, the Company, a Member's Affiliate or any Other Indemnified Person
or Indemnitee (in any case the "Indemnified Party") from any claim, suit, action
or proceeding brought by any other Person (a "Third Party Claim"), the
Indemnified Party shall give notice as promptly as is reasonably practicable to
the Indemnifying Party of such Third Party Claim; provided that the failure of
the Indemnified Party to give notice shall not relieve the Indemnifying Party of
its obligations under this Article XIV except to the extent (if any) that the
Indemnifying Party shall have been prejudiced thereby. Such Indemnifying Member
or the Company, as the case may be, will have the right to control the defense
and settlement of such Third Party Claim with counsel reasonably acceptable to
the Indemnified Party, provided that (i) such Indemnified Party may retain
counsel at its expense to assist in the defense and settlement of such Third
Party Claim and (ii) no settlement of any Third Party Claim will contain terms
or provisions requiring the
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<PAGE> 73
Indemnified Party to take any action or perform any undertaking, or prohibit or
restrain the Indemnified Party from taking any action, without the written
consent of the Indemnified Party.
(e) Without the prior written consent of the Indemnifying Party, the
Indemnified Party shall not accept any settlement or compromise of any claim,
suit, action or proceeding of the nature referred to in paragraph (d) above;
provided that if such proposed settlement or compromise is rejected by the
Indemnifying Party, from and after such rejection, at the request of the
Indemnified Party, the Indemnifying Party shall assume the defense of and full
and complete liability and responsibility for such claim, suit, action or
proceeding, including any and all losses in connection therewith in excess of
the amount of losses which would have been payable under the proposed settlement
or compromise.
14.4 Third-Party Dealings With Members. Except as permitted by this
Agreement or the Operating Agreement, no Member will have any right or authority
to take any action on behalf of the Company with respect to third parties.
14.5 Insurance.
(a) Generally. The Company may purchase and maintain insurance or other
arrangements or both, at its expense, on behalf of itself or any Person who is
or was serving as a Manager, Officer, employee or agent of the Company, or is or
was serving at the request of the Company as a manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic limited liability company, partnership,
corporation, partnership, joint venture sole proprietorship, trust, employee
benefit plan or other enterprise, against any liability, expense or loss,
whether or not the Company would have the power to indemnify such Person against
such liability under the provisions of this Article XIV. In addition, the
Company shall purchase such other insurance, in such amounts and with such
deductibles as is customary and prudent for Persons involved in conducting the
same business as the Company (i.e., Internet high-end apparel and other goods).
(b) Liability Insurance. The Company shall obtain, as soon as possible
after the execution of this Agreement, and maintain in full force and effect for
the duration of this Agreement, liability insurance naming each Member as an
additional insured in the minimum amount, in addition to defense costs, of
$25,000,000 per occurrence and $25,000,000 per Person in order to protect each
Indemnified Party, including the Company, against any obligations, liabilities
or damages with which it or he may be charged in connection with Internet and
network activities, including the conduct of the business contemplated
hereunder. The maximum deductible with respect to such insurance shall be
$25,000. The Company shall cause each Indemnified Party to be entered in such
policy as additional named insureds and deliver to each Member a certificate of
insurance with respect thereto. Said insurance shall provide that it cannot be
amended or canceled without the insurer first giving each Member, not less than
thirty (30) days' advance notice thereof.
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<PAGE> 74
14.6 Report to Members. Any indemnification of or payment of expenses
to a Person in accordance with this Article XIV will be reported in writing to
the Members with or before the notice or waiver of notice of the next Members'
meeting or with or before the next submission to Members of a consent to action
without a meeting pursuant to this Agreement and, in any case, within the
twelve-month period immediately following the date of the indemnification or
payment.
ARTICLE XV
CLOSING DELIVERIES
15.1 Closing Deliveries of Polo.
(a) At the Closing, Polo shall deliver to the Original Media Members a
certificate, dated the Closing Date, from an authorized officer of Polo to the
effect that, to the best of such officer's knowledge, (i) Polo has performed in
all material respects its obligations under this Agreement and the Operating
Agreement required to be performed by it at the Closing or prior to the Closing
Date; and (ii) the representations and warranties applicable to Polo in this
Agreement and the Operating Agreement and to Licensor in the License Agreement
are true and correct in all material respects at and as of the Closing Date,
except to the extent that any such representation or warranty is made as of a
specified date, in which case such representation or warranty was true and
correct as of such date.
(b) Concurrently with the Closing, the Operating Agreement and the
Supply Agreement are to be executed and delivered by Polo, and Polo shall cause
the License Agreement to be executed and delivered by PRL USA Holdings, Inc.
15.2 Closing Deliveries of the Original Media Members.
(a) At the Closing, each Original Media Member shall deliver to Polo a
certificate, dated the Closing Date, from an authorized officer of such Media
Member to the effect that, to the best of such officer's knowledge, (i) such
Media Member has performed in all material respects its obligations under this
Agreement and the Operating Agreement required to be performed by it at the
Closing or prior to the Closing Date and (ii) the representations and warranties
applicable to such Media Member in this Agreement and the Operating Agreement
and each other applicable Ancillary Agreement are true and correct in all
material respects at and as of the Closing Date, except to the extent that any
such representation or warranty is made as of a specified date, in which case
such representation or warranty was true and correct as of such date.
(b) Concurrently with the Closing, the Operating Agreement shall be
executed and delivered by the Media Members.
(c) Concurrently with the Closing, the Services Agreement shall be
executed and delivered by ValueVision.
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(d) Concurrently with the Closing, the Advertising Agreement shall be
executed and delivered by NBC.
(e) Concurrently with the Closing, the Promotion Agreement shall be
executed and delivered by NBCi.
ARTICLE XVI
MISCELLANEOUS
16.1 Notices. Notices to the Managers (i) appointed by the Media
Members will be sent to the principal office of NBC and (ii) appointed by Polo
will be sent to the principal office of Polo. Notices to the Members will be
sent to their addresses set forth on Exhibit A. Any Member may require notices
to be sent to a different address by giving notice to the other Members in
accordance with this Section 16.1. Any notice or other communication required or
permitted hereunder will be in writing, and will be deemed to have been given
upon receipt if and when delivered personally, sent by facsimile transmission
(the confirmation being deemed conclusive evidence of such delivery) or by
courier service or three Business Days after being sent by registered or
certified mail (postage prepaid, return receipt requested), to such Members at
such address.
16.2 Public Announcements and Other Disclosure. None of the Members
will make any press release, public announcement or other disclosure (including
any SEC filings referred to below) with respect to this Agreement or any
Ancillary Agreement or the business operations and plans of the Company without
obtaining the prior written consent of either Polo or the Media Representative,
as the case may be, except as may be required by law or by the regulations of
any securities exchange or national market system upon which the securities of
such Member shall be listed or quoted.
16.3 Headings and Interpretation. All Article and Section headings in
this Agreement are for convenience of reference only and are not intended to
qualify the meaning of any Article or Section. Both parties have participated
substantially in the negotiation and drafting of this Agreement and each party
hereby disclaims any defense or assertion in any litigation or arbitration that
any ambiguity herein should be construed against the draftsman.
16.4 Entire Agreement. This Agreement, together with the Ancillary
Agreements (including all schedules and exhibits hereto and thereto), contain
the entire and only agreements between the parties concerning the subject matter
hereof, and any oral statements or representations or prior written matter with
respect thereto not contained herein or therein shall have no force and effect.
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<PAGE> 76
16.5 Binding Agreement. This Agreement will be binding upon, and inure
to the benefit of, the parties hereto, their successors, heirs, legatees,
devisees, assigns, legal representatives, executors and administrators, except
as otherwise provided herein, including any successor in interest to the
Licensed Brands. Other than in accordance with the terms hereof, including
Sections 3.12, 3.13, 3.14 and 3.15, this Agreement and the rights hereunder
shall not be assignable or transferable, in whole or in part, by any of the
Media Members or Polo (including by operation of law in connection with a
merger, or sale of all or substantially all the assets, of the Media Members or
Polo) without the prior written consent of the other parties hereto; provided,
however, that either party may assign or transfer this Agreement and the rights
hereunder to a wholly-owned Affiliate in accordance with Section 11.2 so long as
such wholly-owned Affiliate is not subsequently sold to a Media Competitor, in
the case of Polo, or any of Polo's competitors (as agreed by the parties
hereto), in the case of the Media Members; provided, further, that such
transferor party will remain jointly and severally liable for any of its and its
wholly-owned Affiliate's obligations under this Agreement. Any actual or
purported transfer or assignment not complying with the requirements of Article
XI and this Section 16.5 will be void and will not bind any party hereto.
16.6 Saving Clause. If any provision of this Agreement, or the
application of such provision to any Person or circumstance, is held invalid,
the remainder of this Agreement, or the application of such provision to Persons
or circumstances other than those as to which it is held invalid, will not be
affected thereby. If the operation of any provision of this Agreement would
contravene the provisions of the Act, such provision will be void and
ineffectual. In the event that the Act is subsequently amended or interpreted in
such a way to make any provision of this Agreement that was formerly invalid
valid, such provision will be considered to be valid from the effective date of
such interpretation or amendment.
16.7 Counterparts. This Agreement may be executed in several
counterparts, and all so executed will constitute one agreement, binding on all
the parties hereto, even though all parties are not signatory to the original or
the same counterpart.
16.8 Governing Law. The construction and interpretation of this
Agreement shall be governed by the laws of the State of New York. The internal
affairs of the Company shall be governed by the Act.
16.9 No Membership Intended for Nontax Purposes. The Members have
formed the Company under the Act, and expressly do not intend hereby to form a
partnership under either the Delaware Uniform Partnership Act or the Delaware
Uniform Limited Partnership Act. The Members do not intend to be partners one to
another, or partners as to any third party. To the extent any Member, by word or
action, represents to another person that any Member is a partner or that the
Company is a partnership, the Member making such wrongful representation will be
liable to any other Members who incur personal liability by reason of such
wrongful representation.
16.10 No Rights of Creditors and Third Parties under Agreement. This
Agreement is entered into among the Members for the exclusive benefit of the
Company,
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<PAGE> 77
its Members, and their successors and assigns. This Agreement is expressly not
intended for the benefit of any creditor of the Company or any other Person
except as set forth below. Except and only to the extent provided by applicable
statute, no such creditor or any third party except as set forth below will have
any rights under this Agreement or any agreement between the Company and any
Member with respect to any Capital Contribution or otherwise. The Licensor shall
be a third party beneficiary of all provisions hereof that relate to any of the
Marks or the Licensed Brands.
16.11 Amendment or Modification of Agreement. This Agreement may be
amended or modified from time to time only by a written instrument executed and
agreed to by all of the Members.
16.12 Specific Performance. The Members agree that irreparable damage
would occur in the event the provisions of this Agreement were not performed in
accordance with the terms hereof and that Polo, the Media Members and the
Management Committee will be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
16.13 General Interpretive Principles. For purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Agreement include the plural as well as
the singular, and the use of any gender herein shall be deemed to include the
other gender;
(b) accounting terms not otherwise defined herein have the meanings
given to them in the United States in accordance with GAAP;
(c) references herein to "Sections", "paragraphs", and other
subdivisions without reference to a document are to designated Sections,
paragraphs and other subdivisions of this Agreement;
(d) a reference to a paragraph without further reference to a Section
is a reference to such paragraph as contained in the same Section in which the
reference appears, and this rule will also apply to other subdivisions;
(e) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision; and
(f) the term "include", "includes" or "including" will be deemed to be
followed by the words "without limitation".
16.14 Consent to Jurisdiction. Each Member irrevocably submits to the
exclusive jurisdiction of (i) the Courts of the State of New York and (ii) the
United States District Court for the Southern District of New York, for the
purposes of any suit, action or other proceeding (including appeals to their
respective appellate courts) arising out of this Agreement or any transaction
contemplated hereby (and agrees not to commence any action, suit or proceeding
relating hereto except in such courts). Each Member
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irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in (i) the Courts of the State of New York or (ii) the
United States District Court for the Southern District of New York, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
16.15 Certain Obligations. Whenever this Agreement or any Ancillary
Agreement requires that any Affiliate of Polo or any Media Member take any
action, including in the case of Polo, Licensor under the License Agreement,
this Agreement and such Ancillary Agreement will be deemed to include an
undertaking on the part of Polo or such Media Member to cause such Affiliate to
take such action.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
POLO RALPH LAUREN CORPORATION
By: /s/ Lance Isham
------------------------------------------------
Name: Lance Isham
Title:
NATIONAL BROADCASTING COMPANY, INC.
By: /s/ Richard Cotton
------------------------------------------------
Name: Richard Cotton
Title: Executive Vice President &
General Counsel
VALUEVISION INTERNATIONAL, INC.
By: /s/ Stuart Goldfarb
------------------------------------------------
Name: Stuart Goldfarb
Title: Vice Chairman
NBC INTERNET, INC.
By: /s/ Edmond Sanctis
------------------------------------------------
Name: Edmond Sanctis
Title:
CNBC.COM LLC
By: /s/ Pamela Thomas-Graham
------------------------------------------------
Name: Pamela Thomas-Graham
Title: President & CEO
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<PAGE> 80
EXHIBIT A
<TABLE>
<CAPTION>
Name and Address of Member Initial Membership
Interest and
Sharing Ratio
<S> <C>
- ---------------------------------------------------------------------------------------
National Broadcasting Company, Inc. 25%
30 Rockefeller Plaza
New York, New York 10112
Telephone: (212) 664-4444
Fax: (212) 977-7165
- ---------------------------------------------------------------------------------------
Polo Ralph Lauren Corporation 50%
650 Madison Avenue
New York, New York 10022
Telephone: (212) 318-7000
Fax: (212) 318-7183
- ---------------------------------------------------------------------------------------
ValueVision International, Inc. 12 1/2%
6740 Shady Oak Road
Eden Prairie, Minnesota 55344
Telephone: (612) 947-5200
Fax: (612) 947-0188
- ---------------------------------------------------------------------------------------
NBC Internet, Inc. 10%
1 Beach Street
San Francisco, California 94133
Telephone: (415) 875-7907
Fax: (415) 392-9088
- ---------------------------------------------------------------------------------------
CNBC.com 2 1/2%
2200 Fletcher Avenue
Fort Lee, New Jersey 07024
Telephone: (201) 585-2622
Fax: (201) 346-5834
- ---------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 1
EXHIBIT 10.47
AGREEMENT FOR SERVICES
BETWEEN
RALPH LAUREN MEDIA, LLC
AND
VVI FULFILLMENT CENTER, INC.
Table of Contents
<TABLE>
<S> <C> <C>
ARTICLE 1 SERVICES......................................................................................1
Section 1.1 Providing and Purchasing Services.............................................................1
Section 1.2 Services Defined..............................................................................1
ARTICLE 2 PREPARATION AND OPERATIONS....................................................................2
Section 2.1 Preparation and Soft Launch...................................................................2
Section 2.2 Initial Operations............................................................................4
Section 2.3 Continuing Operations.........................................................................4
Section 2.4 Year Two Service..............................................................................4
Section 2.5 Merchandise...................................................................................4
Section 2.6 Shrinkage or Damage to Goods on the Premises..................................................5
ARTICLE 3 PAYMENT FOR SERVICES..........................................................................5
Section 3.1 Payments......................................................................................5
Section 3.2 Costs.........................................................................................6
Section 3.3 Invoices......................................................................................6
Section 3.4 Taxes on Payments.............................................................................6
Section 3.5 Unpaid Amounts................................................................................6
Section 3.6 Audit Rights..................................................................................6
ARTICLE 4 TERM AND TERMINATION..........................................................................7
Section 4.1 Term..........................................................................................7
Section 4.2 Early Termination.............................................................................7
ARTICLE 5 REPRESENTATIONS, WARRANTIES AND COVENANTS.....................................................9
Section 5.1 Representations, Warranties and Covenants of Contractor.......................................9
Section 5.2 Representations, Warranties and Covenants of the Company.....................................10
ARTICLE 6 OTHER TERMS AND CONDITIONS...................................................................11
Section 6.1 Force Majeure................................................................................11
Section 6.2 Compliance with Law..........................................................................11
Section 6.3 Confidentiality..............................................................................11
Section 6.4 Indemnification..............................................................................12
Section 6.5 Insurance....................................................................................13
Section 6.6 Dispute Resolution...........................................................................14
Section 6.7 Assignment...................................................................................14
Section 6.8 Notices......................................................................................14
Section 6.9 Counterparts.................................................................................15
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Section 6.10 Relationship.................................................................................15
Section 6.11 Severability.................................................................................15
Section 6.12 Waiver.......................................................................................16
Section 6.13 Publicity....................................................................................16
Section 6.14 Headings; References of Inclusion............................................................16
Section 6.15 Entire Agreement.............................................................................16
Section 6.16 Survival.....................................................................................16
Section 6.17 Third Party Beneficiaries....................................................................16
Section 6.18 Governing Law................................................................................16
Section 6.19 No Jury Trial................................................................................16
Section 6.20 Negotiated Terms.............................................................................16
Section 6.21 Amendment....................................................................................16
</TABLE>
ii
<PAGE> 3
Exhibits and Schedules
EXHIBIT 1 TELEMARKETING SERVICES: SPECIFICATIONS
A. Telephone Orders
B. Non-Direct Sales Related Calls
C. Security
D. Sub-contractors
EXHIBIT 2 ORDER AND RECORD SERVICES: SPECIFICATIONS
A. General requirements
B. Mail, E-mail and Fax Orders
C. Shipping and Handling (S&H) Charges
D. Reporting and Collection of Taxes, Duties, etc.
E. Special Services
F. Credit Card Authorization and Settlement
G. Drop Ship Item Processing
H. Customer Service
I. Fulfillment of Catalog Requests
J. Fraud Control
K. List Maintenance and Marketing Database
Schedule A Customer Master Records: Minimum Data Elements
Schedule B Order Master Records: Minimum Data Elements
Schedule C Returns Master Records: Minimum Data Elements
Schedule D Inventory Master Records: Minimum Data Elements
EXHIBIT 3 MERCHANDISE AND WAREHOUSE SERVICES: SPECIFICATIONS
A. Receipt and Storage
B. Quality Control
C. intentionally omitted
D. Pick/Pack/Ship Orders
E. Gift Orders and Related Services
F. Monogramming Services
G. Backorder Processing
H. Merchandise Returns and Exchanges
I. Inventory Management
J. Supplies and Consumables
K. Security
L. Special Projects
M. Reporting Requirements
EXHIBIT 4 COSTS
A. Direct Distribution Costs
B. Direct Call Receipt and Customer Service Costs
C. Direct System Costs
D. Shipping Costs
E. Credit Card and Check Processing Fees
F. Acknowledgment Regarding Travel and Consulting Expenses
iii
<PAGE> 4
AGREEMENT FOR SERVICES
This Agreement for Services (this "Agreement") is made and entered into this
7th day of February, 2000, by and between Ralph Lauren Media, LLC, a limited
liability company organized under the laws of the State of Delaware (the
"Company"), and VVI Fulfillment Center, Inc., a corporation organized under the
laws of the State of Minnesota ("Contractor").
WHEREAS, the Company is engaged in the business of establishing, designing and
managing catalogs and online sales activities, and engaging in direct marketing
and other activities incident to the sale of apparel, accessories and home
products under the Polo and Ralph Lauren Brands (as such term is defined in that
certain Amended and Restated Limited Liability Company Agreement, dated as of
the date hereof, by and among Polo Ralph Lauren Corporation, a Delaware
corporation ("Polo"), National Broadcasting Company, Inc., a Delaware
corporation, ValueVision International, Inc., a Minnesota corporation, CNBC.com
LLC, a Delaware limited liability company, and NBC Internet, Inc., a Delaware
corporation) and other names owned and licensed to the Company by Polo; and
WHEREAS, the Company desires to obtain telemarketing services so as to receive
and process telephone orders and receive and respond to catalog inquiries and
other pre-order inquiries regarding products information and availability, and
Contractor wishes to provide such services to the Company in accordance with the
terms hereof; and
WHEREAS, the Company desires to obtain fulfillment services so as to receive,
process and fill orders by mail, facsimile and electronic mail, and Contractor
wishes to provide such services to the Company in accordance with the terms
hereof;
NOW, THEREFORE, in consideration of the agreements and obligations set forth
herein and for other good and valuable consideration, the parties hereby agree
as follows:
ARTICLE 1
SERVICES
Section 1.1 Providing and Purchasing Services. During the Term (as hereinafter
defined), Contractor shall provide the Services (as hereinafter defined) to the
Company, and the Company shall purchase the Services from Contractor, in each
case on the terms, and subject to the conditions, set forth in this Agreement.
During the Term, the Company shall obtain the Services from Contractor as the
Company's sole and exclusive provider of such services and shall not at any time
during the Term obtain or contract for the Services or similar services from any
other source; provided, however, that the foregoing shall not limit the right of
the Company to enter into any other contract or agreement with any person or
entity other than Contractor to obtain any category of Services if and to the
extent Contractor is unable in any material respect to satisfy quality standards
stated in this Agreement relating to such category of Services.
Section 1.2 Services Defined.
(a) The "Services" consist of the Telemarketing Services, the Order and
Record Services and the Merchandise and Warehouse Services, each as defined
below.
(i) The "Telemarketing Services" consist of receiving and processing
telephone orders and telephone inquiries regarding merchandise, and developing
and maintaining a telemarketing system for such purposes, as specified in
Exhibit 1 to this Agreement.
<PAGE> 5
(ii) The "Order and Record Services" consist of receiving and
processing orders for merchandise by mail, facsimile and electronic mail,
providing records of such orders and related customer-service functions, and
developing and maintaining a records system for such purposes, as specified in
Exhibit 2 to this Agreement.
(iii) The "Merchandise and Warehouse Services" consist of receiving and
shipping merchandise, providing warehousing functions and merchandise management
functions and developing a system for such purposes, as specified in Exhibit 3
to this Agreement.
(b) A "Year Two Service" is any Service identified as a "Year Two
Service" in the Exhibits hereto.
ARTICLE 2
PREPARATION AND OPERATIONS
Section 2.1 Preparation and Soft Launch.
(a) The "Preparation Period" shall be the period commencing on the date
hereof and ending on the Launch Date (as hereinafter defined). The "Launch Date"
shall be (i) November 1, 2000, or (ii) such later date as the Company may
establish by written notice to Contractor given before September 1, 2000;
provided, however, that in no event shall the Launch Date be later than December
1, 2000.
(b) During the Preparation Period, Contractor shall take all such
reasonable action as is necessary to enable it to provide substantially all of
the Services (other than any Year Two Service) by the Soft Launch Date (as
hereinafter defined), including acquiring or otherwise obtaining the rights to
use (by lease, purchase or such other means as Contractor may determine) such
space, furniture, fixtures and equipment as necessary or desirable for
developing, completing and testing the systems and facilities to be utilized in
rendering the Services. During the Preparation Period, Contractor shall report
to the Company, no less frequently than once each month, all important items and
events, including the dates of arrival of fixtures and equipment and the testing
of key systems.
(c) During the Preparation Period, Contractor shall hire or otherwise
obtain the services of such personnel as needed for providing the Services,
which personnel may include newly hired personnel as well as persons currently
employed by Contractor. During the Preparation Period, Contractor shall allow
the Company reasonable input in the selection and hiring of senior officers of
Contractor to be responsible for providing the Services. Contractor shall train
and schedule such personnel so as to be capable and available to provide
substantially all of the Services (other than any Year Two Service) not later
than the Soft Launch Date.
(d) During the Preparation Period, Contractor shall test the equipment,
software and systems that Contractor intends to utilize in rendering the
Services to ensure that each has the capability of providing substantially all
of the Services (other than any Year Two Service) by the Soft Launch Date. In
connection with such testing and otherwise in preparation for the Soft Launch
Date, the Company will provide to Contractor such customer lists, databases,
policies, product information, forecasts and other information as the Company
owns (or has access to and is not prohibited from providing) and such other
assistance as Contractor may reasonably request for purposes of commencing
operations on the Launch Date and for performing the operations required during
the Soft Launch Period (as hereinafter defined).
-2-
<PAGE> 6
(e) The "Soft Launch Date" shall be 30 days prior to the Launch Date.
During the period between the Soft Launch Date and the Launch Date (the "Soft
Launch Period"), Contractor shall provide, on a trial basis, substantially all
of the Services (other than any Year Two Service) to specially selected
employees of the Company in order to test the ability of Contractor to provide
such Services. During the Soft Launch Period, Contractor shall respond to all
reasonable requests of the Company to correct or modify the provision of the
Services to conform to the specifications set forth in Exhibits 1, 2 and 3
hereto and to such other corrections and modifications as the Company may
reasonably request and to which Contractor consents (which consent shall not be
unreasonably withheld or delayed). During the Soft Launch Period, Contractor
shall take all necessary actions to ensure that substantially all of the
Services (other than any Year Two Service) are operational by the Launch Date.
(f) Without limiting Contractor's obligations to attempt to meet the
requirements of this Section, including the actions to be performed during the
Soft Launch Period, the Company acknowledges and agrees that it will not be a
breach of this Agreement if Contractor is prevented from meeting the
requirements of this Section due to delays, actions or omissions by third
parties that are beyond the control of Contractor.
(g) If Contractor is unable to provide all or any portion of the
Services by the date required hereunder, then Contractor shall engage one or
more third parties (each a "Subcontractor") to provide such Services
("Subcontracted Services"), and Contractor, while providing the remaining
Services, shall continue to develop its capability to provide the Subcontracted
Services. Contractor shall include in its regular reports to the Company
(pursuant to Section 2.1(b) above) information about any need for any
Subcontractor and about the status of negotiations with any potential
Subcontractor. The parties hereby acknowledge that any potential inability of
Contractor to provide all of the Services by November 1, 2000 may require
negotiations with potential Subcontractors as early as May 2000. The final
selection of any Subcontractor (but not the terms of any agreement therewith)
shall be subject to the Company's consent (which consent shall not be
unreasonably withheld or delayed). Notwithstanding the foregoing, Contractor
shall provide the Company with the terms of any agreement with any Subcontractor
at the time Contractor seeks the consent of the Company described in the
immediately preceding sentence. As between Contractor and the Company,
Contractor shall be responsible for the performance of Subcontracted Services
(as specified in the Exhibits hereto), subject to the limitations on liability
in Section 6.4 below. Contractor shall ensure that all standards and
specifications attached as Exhibits hereto which relate to the Services to be
performed by any Subcontractor shall become part of the terms and conditions of
any agreement with such Subcontractor. Contractor shall be responsible for any
Services performed (or failed to be performed, as the case may be) by each
Subcontractor and shall be liable for any Losses (as hereinafter defined)
arising from any such performance or non-performance to the same extent that
Contractor would be liable if it were providing such Services (e.g., the bad
faith, gross negligence, willful misconduct or fraud of any Subcontractor would
be attributed to Contractor). Contractor shall provide prompt notice to the
Company of the date on which Contractor shall have the capability to provide any
Subcontracted Services to facilitate the smooth transition of such Subcontracted
Services to Contractor. The parties acknowledge and agree that the engagement of
any Subcontractor under this Section shall not cause the Company to incur
additional payment obligations hereunder; therefore, any Costs for Subcontracted
Services shall not exceed the Costs that would have been incurred if Contractor
(rather than such Subcontractor) had provided such Subcontracted Services, and
any excess Costs for the Subcontracted Services shall be borne solely by
Contractor. In the event Contractor fails to perform all or any portion of the
Services hereunder (except any Year Two Service) or to secure any Subcontractor
in accordance with this Section 2.1(g) by December 1, 2000, then the Company
shall have the right to terminate this Agreement and may pursue such remedies as
are available to it at law or in equity.
-3-
<PAGE> 7
Section 2.2 Initial Operations.
(a) Prior to the Soft Launch Date, each of the Company and Contractor
shall designate in writing an individual as the designating party's
representative (the "Company Representative" and the "Contractor
Representative", respectively), with each such individual having the authority
to represent his or her designating party with respect to matters relating to
this Agreement, including making decisions for and executing documents on behalf
of such party, performing the actions described in Section 2.2(c) below and
executing amendments to this Agreement. Each party may from time to time name a
replacement for its representative by written notice to the other pursuant to
the notice provisions herein.
(b) During the period commencing on the next day following the Launch
Date and continuing through the last day of the sixth full calendar month
following such next day (the "Initial Operations Period"), Contractor shall
provide all of the Services (other than any Year Two Service).
(c) Within five days after the end of each full calendar month during
the Initial Operations Period, the Company Representative and the Contractor
Representative shall meet at the principal place of business of the Company or
Contractor to (i) review the Services as provided during that portion of the
Initial Operations Period then elapsed, (ii) identify any alleged deficiencies
in such Services and any alleged failure by Contractor or the Company to fulfill
its obligations hereunder, (iii) determine such actions, if any, that each party
shall take to remedy any such deficiency or failure, and (iv) prepare and sign a
report describing such actions (an "Adjustment Report").
Section 2.3 Continuing Operations. Commencing on the next day following the
termination of the Initial Operations Period, Contractor shall provide all the
Services (other than Year Two Services) in accordance with this Agreement, as
adjusted in accordance with each Adjustment Report (as applicable). Within 30
days following the end of each calendar quarter, the Company Representative and
the Contractor Representative shall meet at the principal place of business of
the Company or Contractor, review the Services during the preceding calendar
quarter, and determine any adjustments needed to cause each party to fulfill its
obligations under this Agreement.
Section 2.4 Year Two Service. Commencing on the first anniversary of the Launch
Date, Contractor shall provide each Year Two Service (in addition to the other
Services).
Section 2.5 Merchandise; Forecasts.
(a) Throughout the Term, the Company shall provide to Contractor
sufficient inventory of merchandise to allow Contractor to perform the Services
in accordance with the terms hereof. Contractor shall have no liability to the
Company or otherwise for any loss caused directly or indirectly by the Company's
failure to provide sufficient inventory of merchandise. The Company shall cause
all merchandise to be such that it does not include or contain any hazardous,
controlled or regulated substances, or any substance or material that is
perishable or otherwise subject to expiration or deterioration, it being
understood that the merchandise may include fragrances and any other merchandise
that is stored in the ordinary course of business in Polo's distribution center
in Greensboro, North Carolina. The Company shall not ship to Contractor (or
permit any other person to ship to Contractor) any merchandise unless it is
prepaid. Contractor may reject any shipment of merchandise which does not comply
in all material respects with the requirements of this Agreement.
(b) Within 90 days after the date of this Agreement, the Company shall
provide Contractor with a business plan that sets forth forecasts of future
sales and orders (the "Original Forecast"), and Contractor shall take such
actions as are necessary to meet the demand reflected in the Original Forecast
plus an additional 20% of all forecasted amounts. Throughout the Term, the
Company shall provide to
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Contractor from time to time updated forecasts of future sales and orders
("Updated Forecasts" and together with the Original Forecast, the "Forecasts").
The timing and scope of the Forecasts shall be as mutually agreed by the Company
and Contractor from time to time. The Company and Contractor acknowledge and
agree that the Forecasts will be the basis for Contractor's retention of
personnel and other resources to support the Services. Contractor shall
(i) take such actions as are necessary to meet any demand for
Services anticipated in the then-applicable Updated Forecast to the
extent that such demand for any three-month period does not exceed 120%
of the actual demand for the preceding three-month period (the "120%
Limit"),
(ii) take such actions as are necessary to meet any demand for
Services exceeding the 120% Limit so long as the Company shall have
provided a Forecast predicting such demand to Contractor at least 180
days in advance of the date on which such demand is experienced, and
(iii) use its reasonable best efforts to meet any demand for
Services in excess of any demand described in the immediately preceding
clauses (i) or (ii); provided, however, that if Contractor shall have
used such reasonable best efforts, then Contractor shall not be liable
for any reduction in the quality or speed of Services caused by such
additional demand, and such reduction shall not be a breach of this
Agreement.
Section 2.6 Shrinkage or Damage to Goods on the Premises.
(a) Shrinkage. Contractor is permitted (i) a zero allowance for
shrinkage on Collection Brands (as defined in the LLC Agreement), to the extent
shipped to Contractor and (ii) shrinkage of one-tenth of one percent of total
units shipped for all other goods measured against the Company's perpetual
inventory. Contractor will be charged costs for shrinkage in excess of this
allowance at the Company's cost unless the excess shrinkage is due to damaged
goods, which will be handled as described below.
(b) Damages Due to Negligence. In addition to the above, Contractor is
liable for damage to the goods when the goods are in Contractor's possession,
custody or control in the course of performing the services under this
Agreement, including the receipt, handling, storage, picking and packing of the
goods for shipment, if such damage is caused by Contractor's negligent errors or
omission or its failure to exercise reasonably prudent care under the
circumstances. Contractor is not an insurer and is not liable for damage which
was unforeseeable and which could not have been prevented by Contractor's
exercise of reasonable care.
ARTICLE 3
PAYMENT FOR SERVICES
Section 3.1 Payments.
(a) In consideration of Contractor's undertaking to provide the
Services hereunder, the Company shall pay to Contractor in accordance with
Section 3.3 each amount determined in accordance with this Article 3 (each a
"Payment").
(b) For each calendar month during the Term of this Agreement, the
Payment shall be an amount (computed in United States dollars) equal to 110% of
all Costs (as hereinafter defined) incurred by Contractor during such month.
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Section 3.2 Costs. For each calendar month, the "Costs" shall consist of all
reasonable direct costs and expenses paid or incurred by Contractor to provide
Services during or with respect to such month, including those listed in Exhibit
4, in each case determined by the accrual method of accounting, in accordance
with generally accepted accounting principles consistently applied ("GAAP"). For
purposes of this Agreement, any reasonable cost or expense of any type listed in
Exhibit 4 hereto shall be included as a Cost.
Section 3.3 Invoices.
(a) For each calendar month, Contractor shall provide to the Company an
invoice showing in reasonable detail all Costs for such month and the Payment
for such month. Such Payment will be due 30 days after submission of such
invoice to the Company.
(b) If Contractor receives, after submitting an invoice to the Company,
any refund, rebate or other reduction of any Costs reflected on such invoice,
then Contractor shall take such refund, rebate or reduction into account and
shall credit the Company on the next invoice following Contractor's receipt of
such refund, rebate or other reduction. If Contractor determines, after
submitting an invoice to the Company, that any Cost was overstated or
understated on such invoice or was included on or omitted therefrom in error, or
that the Payment shown thereon was otherwise erroneously stated, then Contractor
shall correct such Payment by a credit or charge (as the case may be) and state
such credit or charge on the next invoice following such determination, and the
amount of such credit or charge shall be included in the Payment shown on such
next invoice (provided, however, that no Payment shall be increased without the
Company's consent unless such increase is reflected on an invoice received by
the Company within 90 days of the invoice originally stating such payment). No
later than 120 days after the end of the Term, Contractor shall provide a final
invoice settling any such understatements or overstatements.
Section 3.4 Taxes on Payments. If any Payment is subject to any sales tax,
service tax, use tax, gross-receipts tax, value-added tax or other tax of a
similar nature or having similar effect, Contractor shall compute such tax
according to the applicable legal requirements, shall state the amount of such
tax on each invoice to which it applies, and the amount of such tax shall become
part of the Payment shown thereon.
Section 3.5 Unpaid Amounts. If any Payment or part thereof is not paid when due,
interest shall accrue on the unpaid principal amount of such Payment from and
after the date which is 10 days after the date the same became due at the lower
of (a) the highest rate permitted by law in New York and (b) 2% per annum above
the prime rate of interest in effect from time to time at The Chase Manhattan
Bank, New York, New York, or any successor bank.
Section 3.6 Audit Rights. No later than 90 days after the end of each fiscal
year of the Company, Contractor shall deliver to the Company a statement of the
Services provided and related Costs in such fiscal year (the "Servicing
Statement"). The Company shall have 90 days to review the Servicing Statement.
Contractor shall grant the Company and the Company's accountants and
representatives such access as may be reasonably requested to the books, records
or other information relating to such Services and Costs in Contractor's
possession or control that may be used or is useful in such review, it being
understood that such information shall be subject to the confidentiality
obligations herein. Unless the Company delivers a written notice of objection to
Contractor on or prior to the 90th day after the Company's receipt of the
Servicing Statement, specifying in reasonable detail all disputed items (an
"Objection Notice"), the Company shall be deemed to have accepted and agreed to
such Servicing Statement for and all Services provided by Contractor. If the
Company delivers an Objection Notice, the Company and Contractor shall resolve
such dispute pursuant to Section 6.6 of this Agreement. If the
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Company and Contractor fail to resolve such dispute pursuant to Section 6.6, any
disputed amounts shall be submitted for resolution to a neutral arbitrator. Each
of the Company and Contractor agrees to execute, if so requested by such
arbitrator, a reasonable engagement letter. The costs, expenses and fees of such
arbitrator shall be borne by the Company and Contractor based upon the ratio of
(a) that portion of the disputed amount not awarded to each party, to (b) the
total disputed amount (e.g., if the Company demanded a refund of $100,000, all
of which Contractor disputed, and the arbitrator awarded $40,000 to the Company,
then the Company would pay 60% of the costs, expenses and fees and Contractor
would pay 40%).
ARTICLE 4
TERM AND TERMINATION
Section 4.1 Term. The term of this Agreement shall commence on the date of this
Agreement and shall continue until June 30, 2010 (the "Initial Term"), and shall
thereafter automatically renew for successive periods of one year (each a
"Renewal Term") unless either party gives notice of non-renewal not less than
120 days before the expiration of the Initial Term or any Renewal Term (as
applicable). The "Term" of this Agreement consists of the Initial Term plus each
Renewal Term.
Section 4.2 Early Termination.
(a) Notwithstanding any other remedy available to Contractor, in the
event that the Company materially breaches this Agreement and:
(i) Contractor notifies the Company in writing (with
specificity) that the Company has materially breached this Agreement
and the Company has not cured such alleged breach within 30 days of its
receipt of such notice (or, if such breach is not capable of being
totally cured due to the nature of such breach and the Company fails to
take all reasonable actions to prevent recurrence of such breach within
60 days of such notice and has not in fact prevented the recurrence of
such breach by such 60th day); or
(ii) the Company admits in writing its inability to pay its
debts generally; makes a general assignment for the benefit of
creditors; has any proceeding instituted by or against it seeking to
adjudicate it as bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief or
composition of the Company or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a
receiver, trustee or similar official for it or any substantial part of
its property; provided, however, that in the case where such proceeding
is involuntarily instituted against the Company, such proceeding
remains undismissed after 30 days,
then, in any such case, Contractor shall have the right, but not the obligation,
to terminate this Agreement, without prejudice to the rights of the parties
hereunder, by written notice to the Company given within 30 days after the
30-day or 60-day period (as applicable) described in the preceding clause (a)(i)
or within 30 days after any event described in the preceding clause (a)(ii).
Such termination shall be effective on the 120th day after the date such notice
of termination is given.
(b) Notwithstanding any other remedy available to the Company, in the
event that Contractor materially breaches this Agreement and:
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(i) the Company notifies Contractor in writing (with
specificity) that Contractor has materially breached this Agreement and
Contractor has not cured such alleged breach within 30 days of its
receipt of such notice (or, if such breach is not capable of being
totally cured due to the nature of such breach and Contractor has not
taken all reasonable actions to prevent recurrence of such breach
within 60 days of such notice and has not in fact prevented the
recurrence of such breach by such 60th day); or
(ii) Contractor admits in writing its inability to pay its
debts generally; makes a general assignment for the benefit of
creditors; has any proceeding instituted by or against it seeking to
adjudicate it as bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or
composition of Contractor or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a
receiver, trustee or similar official for it or any substantial part of
its property; provided, however, that in the case where such proceeding
is involuntarily instituted against Contractor, such proceeding remains
undismissed after 30 days,
then, in any such case, the Company shall have the right, but not the
obligation, to terminate this Agreement, without prejudice to the rights of the
parties hereunder, by written notice to Contractor given within 30 days after
the 30-day or 60-day period (as applicable) described in the preceding clause
(b)(i) or within 30 days after any event described in the preceding clause
(b)(ii). Such termination shall be effective on the 120th day after the date
such notice of termination is given.
(c) Notwithstanding clauses (a)(i) and (b)(i) above, if a party
believes in good faith that it has not breached this Agreement, it shall so
inform the other party within 10 days of receipt of notice of the alleged
breach, and the time periods set forth in clause (a)(i) or (b)(i), as the case
may be, shall be tolled for 60 days or such longer period as the parties may
reasonably agree (the "Tolling Period") in order to allow representatives from
each party to meet to resolve the disagreement. Promptly after commencement of
the Tolling Period, the non-breaching party shall provide the breaching party
(if any) with a reasonable written proposal in reasonable detail for curing the
alleged breach, and a termination right shall occur only if the breaching party
fails to comply with the terms of such proposal. The time periods set forth in
clauses a(i) or b(i), as the case may be, shall resume if no resolution is
reached during the Tolling Period.
(d) The parties acknowledge and agree that certain failures of
performance that may be breaches of this Agreement (including, for example,
failure to pay an amount on or before the due date thereof, failure to provide a
report on or before the due date thereof, or shipping an order to a destination
outside the Territory) cannot be totally cured due to the expiration of the time
period or the irrevocability of the act and that such a failure is not intended
to give rise to a right of termination hereunder if such failure is not chronic
or frequent and the failing party does remedy such failure to the extent
possible (by, for example, paying such amount or delivering such report) and
takes all actions necessary to prevent recurrence of such failure.
ARTICLE 5
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 5.1 Representations, Warranties and Covenants of Contractor. Contractor
represents, warrants and covenants to the Company as follows:
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(a) Contractor is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Minnesota.
(b) Contractor has all requisite corporate power and authority to
execute and deliver this Agreement and perform all of its obligations under this
Agreement.
(c) Contractor is duly authorized or qualified to do business and is in
good standing in each jurisdiction in which authorization or qualification is
required for the ownership or leasing of its assets or the transaction of
business of the character transacted by it, except where the failure to be so
authorized or qualified would not have any material adverse effect on
Contractor's ability to fulfill its obligations under this Agreement.
(d) Execution, delivery and performance of this Agreement have been
duly authorized by Contractor, and this Agreement constitutes a valid and
binding agreement of Contractor, enforceable in accordance with its terms.
(e) Contractor is in compliance in all material respects with all laws
applicable to Contractor, except where the failure to be in such compliance
would not impair in any material respect Contractor's ability to fulfill its
obligations under this Agreement.
(f) As of the date of this Agreement, there is no outstanding
litigation or other legal dispute to which Contractor is a party which, if
decided unfavorably to Contractor, would reasonably be expected to have a
material adverse effect on Contractor's ability to fulfill its obligations under
this Agreement.
(g) The Services provided by Contractor shall be performed in a good,
workmanlike, timely and professional manner by adequate numbers of qualified
persons fully familiar with the requirements for the Services, and Contractor
shall use all necessary and desirable computer software, technology, databases,
networks, systems and other automated, computerized or related equipment
("Software") and other materials in connection with such performance.
(h) Contractor's performance of the Services and use of all Software
created by or on behalf of Contractor in connection therewith shall not
infringe, misappropriate or otherwise violate any intellectual property of the
Company, Polo or any other third party.
(i) With respect to any Software used by Contractor that interfaces,
interacts or connects in any manner ("Contractor Interfacing Software") to any
Software owned or otherwise used by the Company ("Company Software"), Contractor
Interfacing Software shall not communicate, transmit or cause any bugs, design
errors, defects, Trojan Horses, viruses or other corruptions or impairments to
the Company Software. If Contractor becomes aware of or receives notice from the
Company or otherwise of any of the foregoing circumstances, Contractor shall, if
applicable, immediately notify the Company of same and shall use its best
efforts, at Contractor's expense, to remedy such circumstances and repair all
harm as soon as possible.
(j) Contractor shall cause sales of merchandise hereunder to be
fulfilled only for orders placed by customers with addresses within the
Territory (as hereinafter defined) and shall cause such merchandise to be
shipped only to destinations within the Territory. The "Territory" shall mean
the United States of America (including the District of Columbia) and its
possessions and territories and other areas subject to its jurisdiction
(including the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam,
American Samoa, Wake Island and the Northern Mariana Islands). Notwithstanding
the foregoing, the Company may from time to time expand the Territory to include
any additional country by providing written notice to Contractor of such
expansion; provided, however, that such expansion shall
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not be effective until Contractor shall have had a reasonable period to
integrate such expansion into the Services.
(k) Contractor shall be responsible for all risk of direct physical
loss of any inventory while it is in Contractor's possession or control during
the term of this Agreement.
Section 5.2 Representations, Warranties and Covenants of the Company. The
Company represents, warrants and covenants to Contractor as follows:
(a) The Company is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(b) The Company has all requisite corporate power and authority to
execute and deliver this Agreement and perform all of its obligations under this
Agreement.
(c) The Company is duly authorized or qualified to do business and is
in good standing in each jurisdiction in which authorization or qualification is
required for the ownership or leasing of its assets or the transaction of
business of the character transacted by it, except where the failure to be so
authorized or qualified would not have any material adverse effect on the
Company's ability to fulfill its obligations under this Agreement.
(d) Execution, delivery and performance of this Agreement have been
duly authorized by the Company, and this Agreement constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms.
(e) The Company is in compliance in all material respects with all laws
applicable to the Company, except where the failure to be in such compliance
would not impair in any material respect the Company's ability to fulfill its
obligations under this Agreement.
(f) As of the date of this Agreement, there is no outstanding
litigation or other legal dispute to which the Company is a party which, if
decided unfavorably to the Company, would reasonably be expected to have any
material adverse effect on the Company's ability to fulfill its obligations
under this Agreement.
(g) The Company's performance of its obligations pursuant to this
Agreement and use of all Software created by or on behalf of the Company in
connection therewith shall not infringe, misappropriate or otherwise violate any
intellectual property of Contractor, Polo or any other third party.
(h) With respect to any Company Software that interfaces, interacts or
connects in any manner ("Company Interfacing Software") to any Software owned or
otherwise used by Contractor ("Contractor Software"), the Company Interfacing
Software shall not communicate, transmit or cause any bugs, design errors,
defects, Trojan Horses, viruses or other corruptions or impairments to the
Contractor Software. If the Company becomes aware of or receives notice from
Contractor or otherwise of any of the foregoing circumstances, the Company
shall, if applicable, immediately notify Contractor of same and shall use its
best efforts, at the Company's expense, to remedy such circumstances and repair
all harm as soon as possible.
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ARTICLE 6
OTHER TERMS AND CONDITIONS
Section 6.1 Force Majeure. If and to the extent that a party's performance of
any of its obligations under this Agreement is limited, hindered or delayed by
fire, flood, earthquake, or other similar acts of God, acts of war, terrorism,
riots, civil disorders, rebellions or revolutions, or any other cause beyond the
reasonable control of such party (each a "Force Majeure Event"), then such party
shall be excused for such limitation, hindrance or delay as is caused by the
Force Majeure Event, while (a) such Force Majeure Event continues to be the
cause and (b) such party continues to use its best efforts to fully perform,
whenever and to whatever extent reasonably practicable under the circumstances
(including through the use of alternate sources, workaround plans or other
means). Such party shall promptly notify the other party of the occurrence of
the Force Majeure Event and describe in reasonable detail the nature of the
Force Majeure Event and how such party plans to mitigate its effect. However, if
the Force Majeure Event is a catastrophic loss or other loss that as a result of
which a party fails to perform any substantial portion of its obligation
hereunder and such failure continues for more than 10 days, the party whose
ability to perform has not been so affected may, by written notice given within
60 days after the end of such 10-day period, terminate this Agreement with
respect to (i) the portion of this Agreement that the affected party is unable
to perform, and (ii) any additional portion of this Agreement that is integrated
with such terminated portion to such an extent that it is not reasonably
feasible for the affected party to continue providing such additional portion
(in each case giving consideration to factors such as the practical grouping of
various portions of the Services, the affected party's ability to continue
providing such portions and the other party's ability to replace such portions).
Section 6.2 Compliance with Law.
(a) At all times while this Agreement is in effect, Contractor shall
comply in all material respects with all laws applicable to Contractor, except
where the failure to be in such compliance would not impair in any material
respect Contractor's ability to fulfill its obligations under this Agreement.
(b) At all times while this Agreement is in effect, the Company shall
comply in all material respects with all laws applicable to the Company, except
where the failure to be in such compliance would not impair in any material
respect the Company's ability to fulfill its obligations under this Agreement.
Section 6.3 Confidentiality. Each party shall hold in confidence all
confidential information relating to or obtained from the other party, and
neither party shall disclose, publish, release, transfer or otherwise make
available to any person any confidential information of the other party in any
form. Each party may, however, disclose to its officers, directors, contractors
and employees the other party's confidential information to the extent that such
disclosure is reasonably necessary for the performance of the disclosing party's
obligations under this Agreement; provided, however, that the disclosing party
shall cause such officers, directors, contractors and employees to comply with
this Section and to preserve the confidentiality of such confidential
information in accordance with this Section. The obligations in this Section do
not prohibit disclosure of information to the extent it (a) is required by
applicable law, regulation or legal process, (b) is or becomes generally known
to the public other than through the disclosing party or its officers,
employees, agents or affiliates, (c) is lawfully obtained from a third party
under no duty of confidentiality, known to the disclosing party, to the party to
whom the confidentiality obligation is owed, (d) was otherwise in the possession
of the disclosing party prior to disclosure, or (e) was independently developed
by a third party.
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Section 6.4 Indemnification.
(a) Indemnification by Contractor. Subject to Section 6.4(d) below,
Contractor shall indemnify the Company and its affiliates, and each of their
respective officers, directors, employees, agents and representatives
(collectively, the "Company Indemnified Parties") from, and defend and hold the
Company Indemnified Parties harmless from and against, any damages, liabilities,
claims, judgments and expenses, including reasonable attorneys' fees, ("Losses")
suffered, incurred or sustained by the Company Indemnified Parties resulting
from or arising out of:
(i) any breach of this Agreement by Contractor;
(ii) the inaccuracy, untruthfulness or breach of any
representation or warranty made by Contractor under this Agreement; or
(iii) any claim for damages (whether for personal injury,
property damage or otherwise) resulting from any act or omission by
Contractor (including any of Contractor's personnel).
(b) Indemnification by the Company. Subject to Section 6.4(d) below,
the Company shall indemnify Contractor and its affiliates, and each of their
respective officers, directors, employees, agents and representatives
(collectively, the "Contractor Indemnified Parties") from, and defend and hold
Contractor Indemnified Parties harmless from and against, any Losses suffered,
incurred or sustained by Contractor Indemnified Parties resulting from or
arising out of
(i) any breach of this Agreement by the Company;
(ii) the inaccuracy, untruthfulness or breach of any
representation or warranty made by the Company under this Agreement; or
(iii) any claim for damages (whether for personal injury,
property damage or otherwise) resulting from any act or omission by the
Company (including any of the Company's personnel).
(c) Procedures for Third-Party Claims. If any third-party claim is
asserted against a party entitled to indemnification hereunder (the "Indemnified
Party"), then the Indemnified Party shall promptly (in any event within 30 days)
give notice thereof to the party that is obligated to provide indemnification
(the "Indemnifying Party"). Upon receipt of such notice, if the Indemnifying
Party elects to defend such third party claim, the Indemnified Party shall
cooperate in all reasonable respects with the Indemnifying Party and its
attorneys in the investigation and defense of such claim and any appeal arising
therefrom, and so long as the Indemnifying Party is defending such third party
claim in good faith, the Indemnified Party shall not pay, settle or compromise
such third party claim. If the Indemnifying Party elects to defend such third
party claim, the Indemnified Party shall have the right to participate in the
defense of such third party claim, at the Indemnified Party's sole cost and
expense. In the event, however, that representation by counsel to the
Indemnifying Party of both the Indemnifying Party and the Indemnified Party
creates a conflict of interest for such counsel, then such Indemnified Party may
employ separate counsel to represent or defend it in any such action or
proceeding and the Indemnifying Party will, subject to the provisions of this
Article 6, pay the reasonable fees and disbursements of such counsel. The
Indemnifying Party shall not, without the written consent of the Indemnified
Party, (i) settle or compromise any third party claim or consent to the entry of
any judgment which does not include as an unconditional term thereof the
delivery by the claimant or plaintiff to the Indemnified Party of a written
release from all liability in respect of such third party claim or (ii) settle
or compromise any third party
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claim in any manner other than by payment of money damages or other money
payments (and in such case only so long as the Indemnifying Party has
acknowledged in writing its obligation to indemnify). If the Indemnifying Party
does not elect to defend such third party claim or does not defend such third
party claim in good faith, the Indemnified Party shall have the right, in
addition to any other right or remedy it may have hereunder, at the Indemnifying
Party's expense, to defend such third party claim; provided, however, that (i)
such Indemnified Party shall not have any obligation to participate in the
defense of, or defend, any such third party claim; (ii) such Indemnified Party's
defense of or its participation in the defense of any such third party claim
shall not in any way diminish or lessen the indemnification obligations of the
Indemnifying Party under this Article 6; and (iii) such Indemnified Party may
not settle any claim without the prior written consent of the Indemnifying
Party, which will not be unreasonably withheld.
(d) Limitations on Liability. In no event shall either party's
liability hereunder include any special, indirect, incidental or consequential
Losses or damages, even if such party shall have been advised of the possibility
of such potential Losses or damages, except in the case of bad faith, gross
negligence, willful misconduct or fraud or in the event such damages are awarded
against an Indemnified Party by a court of competent jurisdiction in a third
party claim. Contractor's liability for Losses arising from any act or omission
related to Services shall be limited to the amount actually paid to Contractor
by the Company for such Services, and Contractor's total liability shall be
limited to the aggregate amount actually paid by the Company for Services
through the date the applicable claim was first made by the Company, except in
the case of bad faith, gross negligence, willful misconduct or fraud or in the
event such damages are awarded against an Indemnified Party by a court of
competent jurisdiction in a third party claim. Each party shall diligently
pursue any claims it may have against insurance companies or third parties in
respect of any Losses suffered by such party. Any monetary amounts recovered
from insurance companies or third parties shall be excluded in calculating
Contractor's total liability for purposes of the second preceding sentence.
Section 6.5 Insurance.
(a) At all times while this Agreement is in effect, Contractor shall
maintain policies of insurance providing coverage of the types and in the
respective amounts set forth below:
(i) statutory workers' compensation insurance in accordance
with all Federal, state and local requirements;
(ii) commercial general liability insurance in an amount not
less than $5,000,000 (which may be satisfied by either primary or
excess coverage);
(iii) comprehensive automobile liability covering all vehicles
used in connection with providing Services in an amount not less than
$1,000,000 per occurrence (combined single limit for bodily injury and
property damage);
(iv) the same levels of insurance coverage on the Company's
inventory in Contractor's possession as Contractor maintains with
respect to its own inventory in the same or similar warehouses.
(b) Contractor shall, upon the Company's request from time to time,
furnish to the Company certificates of insurance evidencing all such coverage.
Section 6.6 Dispute Resolution. For any dispute arising under this Agreement
that is not resolved informally, either party may give to the other party notice
of the dispute, including reasonable detail
13
<PAGE> 17
concerning the alleged deficiency in performance of the other party. The Company
Representative and the Contractor Representative shall then meet in person at
the principal place of business of Contractor and attempt in good faith to reach
an agreement resolving the dispute. If they do not reach such an agreement
within seven days after such notice is given, then each of them shall produce a
detailed report about the dispute for his or her immediate supervisor, who shall
meet in person at the principal place of business of Contractor and attempt in
good faith to reach an agreement. If they do not reach such an agreement within
the period specified below, then each party shall refer the dispute to higher
levels of management as shown below. In each case, the parties' specified
respective representatives shall meet in person at the principal place of
business of Contractor, shall attempt in good faith to reach an agreement and,
if they do not do so within the period specified, shall refer the dispute to the
next level at the end of such period.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Period of Resolution
Management Level Company Management Level Contractor Management Level Efforts
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
First Level Representative's Supervisor Representative's Supervisor 14 days
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Second Level Chief Financial Officer Chief Financial Officer 7 days
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Third Level President/CEO President/CEO 7 days
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
If the parties have not signed a written agreement resolving the dispute by the
end of the period specified for the Third Level, then either party may pursue
such remedies as are available to it at law or in equity.
Section 6.7 Assignment. Neither party may, without the consent of the other
party, assign this Agreement or any rights or obligations hereunder, except that
either party may assign this Agreement without such consent to an entity that
succeeds to all or substantially all of the assigning party's business and
assets, provided such entity assumes the assigning party's rights and
obligations hereunder. The consent of a party to any assignment of this
Agreement does not constitute such party's consent to any further assignment.
Any assignment in violation of this Section is void.
Section 6.8 Notices. Any notice or other communication required or permitted
hereunder shall be in writing, and shall be deemed to have been given upon
receipt if and when delivered personally, sent by facsimile transmission (the
confirmation being deemed conclusive evidence of such delivery) or by courier
service or three business days after being sent by registered or certified mail
(postage prepaid, return receipt requested) as follows:
If to the Company: Ralph Lauren Media, LLC
c/o Polo Ralph Lauren Corporation
650 Madison Avenue
New York, NY 10022
Attention: Jeffrey D. Morgan
Facsimile No.: (212) 318-7183
with a copy to: Polo Ralph Lauren Corporation
650 Madison Avenue
New York, NY 10022
Attention: General Counsel
Facsimile No.: (212) 318-7183
-14-
<PAGE> 18
and a copy to: Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3954
Attention: Caroline Gottschalk
(Facsimile No.: (212) 455-2502
If to Contractor: VVI Fulfillment Center, Inc.
c/o ValueVision International, Inc.
6740 Shady Oak Road
Eden Prairie, MN 55344
Attention: Edwin Pohlmann,
Chief Operating Officer and
Executive Vice President
Facsimile No.: (612) 947-0188
with a copy to: National Broadcasting Company, Inc.
30 Rockefeller Plaza
New York, NY 10112
Attention: Legal Department
(Corporate & Transactions Group)
Facsimile No.: (212) 977-7165
and a copy to: Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Attention: William R. Busch, Jr.
Facsimile No.: (612) 336-3026
Either party may change its address or facsimile number for notice purposes by
giving the other party notice (pursuant to this Section) of the new address or
facsimile number and the date upon which it will become effective.
Section 6.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which taken
together shall constitute one single agreement.
Section 6.10 Relationship. Contractor is engaged by the Company only for the
purposes and to the extent set forth in this Agreement, and its relationship to
the Company shall be that of an independent contractor, and nothing contained in
this Agreement is to be construed to make either party a partner, joint
venturer, principal, agent or employee of the other. Neither party hereto shall
have the right or authority to act for or to bind the other in any way or to
sign the name of the other or to represent that the other is in any way
responsible for the acts or omissions of the other.
Section 6.11 Severability. If any term or provision of this Agreement, or the
application thereof to any person or circumstances, is held by a court of
competent jurisdiction to be invalid or unenforceable, then each remaining
provision of this Agreement shall nonetheless remain in full force and effect.
Section 6.12 Waiver. No delay or omission by either party to exercise any right
or power it has under this Agreement shall impair or be construed as a waiver of
such right or power. A waiver by any party of any breach or covenant shall not
be construed to be a waiver of any succeeding breach or any other covenant. Any
waiver must be signed by the party waiving its rights.
-15-
<PAGE> 19
Section 6.13 Publicity. Neither party shall publish any advertising, promotion,
press release or other public statement relating to this Agreement in which the
other party's name or mark is mentioned (or which contains language from which
such name or mark is implied or may be inferred) without the other party's prior
written consent; provided, however, that either party may disclose the existence
of this Agreement in connection with any discussion of its business generally.
The obligations in this Section do not prohibit such disclosure to the extent
required by law, rule, regulation or stock exchange rule, but any party making
any such required disclosure shall use its reasonable best efforts to provide to
the other party advance notice of such requirement and an opportunity to seek a
court order or other relief preventing such disclosure.
Section 6.14 Headings; References of Inclusion. The headings of the sections and
paragraphs in this Agreement are for convenience only and do not affect the
construction or interpretation of the Agreement. Each reference herein to
"including" or "includes" shall be deemed to be followed by the words "without
limitation."
Section 6.15 Entire Agreement. This Agreement is the entire agreement between
the parties with respect to its subject matter, and there are no other
representations, understandings or agreements between the parties relating to
such subject matter.
Section 6.16 Survival. This Article 6 and each provision hereof shall survive
the expiration or termination of this Agreement and shall remain in full force
and effect notwithstanding any such expiration or termination.
Section 6.17 Third Party Beneficiaries. This Agreement shall not inure to the
benefit, or create any right or cause of action in or on behalf of, any person
or entity other than the parties and Polo.
Section 6.18 Governing Law. This Agreement and the rights and obligations of the
parties under this Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
Section 6.19 No Jury Trial. Each party hereby knowingly, voluntarily and
irrevocably waives its right to any trial by jury and agrees that any dispute in
a court shall be decided solely by a judge (without the use of a jury).
Section 6.20 Negotiated Terms. The parties agree that the terms and conditions
of this Agreement are the result of negotiations between the parties and that
this Agreement may not be construed in favor of or against any party by reason
of the extent to which any party or its professional advisors participated in
the drafting or other preparation of this Agreement.
Section 6.21 Amendment. No amendment to any provision of this Agreement is valid
unless in writing and signed by an authorized representative of each party.
* * * * *
-16-
<PAGE> 20
IN WITNESS WHEREOF, each party has caused this Agreement to be signed and
delivered by its duly authorized representative, effective as of the date first
above written.
RALPH LAUREN MEDIA, LLC
By: /s/ Jeffrey D. Morgan
-----------------------------------------
Its: President
-----------------------------------------
VVI FULFILLMENT CENTER, INC.
By: /s/ Stuart Goldfarb
-----------------------------------------
Its:
-----------------------------------------
GUARANTY
Effective as of the date of the foregoing Agreement for Services (the
"Agreement") between Contractor and the Company (each as defined in the
Agreement), ValueVision International, Inc., a Minnesota corporation and parent
corporation of Contractor ("ValueVision"), in consideration of the execution by
the Company of the Agreement, does hereby unconditionally guaranty to the
Company the full and timely performance of all obligations of Contractor under
the Agreement. ValueVision further agrees that this Guaranty shall be
irrevocable and shall continue in effect notwithstanding any extension or
modification of any guarantied obligation, or any act or thing (except full and
timely performance of all guarantied obligations) which might otherwise operate
as a legal or equitable discharge of ValueVision.
VALUEVISION INTERNATIONAL, INC.
By: /s/ Stuart Goldfarb
------------------------------------
Its: Vice Chairman
-------------------------------------
-17-
<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.
ValueVision Interactive, Inc.
VVI LPTV, Inc.
ValueVision Direct Marketing Company, 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 Statement File Nos. 33-60549, 33-68646, 33-68648, 33-86616,
33-93006, 33-96950, 333-40973, 333-40981, 333-75803 and 333-84705.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) VALUE
VISION INTERNATIONAL, INC.'S CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 2000,
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED
JANUARY 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
CONSOLIDATED FINANCIAL STATEMENTS AS FILED ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 138,221
<SECURITIES> 156,422
<RECEIVABLES> 49,070
<ALLOWANCES> 0
<INVENTORY> 22,677
<CURRENT-ASSETS> 382,854
<PP&E> 14,350
<DEPRECIATION> 0
<TOTAL-ASSETS> 471,855
<CURRENT-LIABILITIES> 51,587
<BONDS> 0
41,622
0
<COMMON> 382
<OTHER-SE> 371,539
<TOTAL-LIABILITY-AND-EQUITY> 471,855
<SALES> 274,927
<TOTAL-REVENUES> 274,927
<CGS> 168,399
<TOTAL-COSTS> 270,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 46,771
<INCOME-TAX> 17,441
<INCOME-CONTINUING> 29,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,330
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.73
<FN>
<F1>ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS.
<F2>PROPERTY AND EQUIPMENT REPRESENT AMOUNTS NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
