-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UOc/A660uEUn1e/sj/kwQD0I2EaQb5JSscVir7RQF0pwwy6HKoTNgOxMTnmtMYzI wE66jiSxHfpYaBmlW+SHxA== 0000950124-00-002674.txt : 20000503 0000950124-00-002674.hdr.sgml : 20000503 ACCESSION NUMBER: 0000950124-00-002674 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALUEVISION INTERNATIONAL INC CENTRAL INDEX KEY: 0000870826 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 411673770 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20243 FILM NUMBER: 616203 BUSINESS ADDRESS: STREET 1: 6740 SHADY OAK RD CITY: MINNEAPOLIS STATE: MN ZIP: 55344-3433 BUSINESS PHONE: 6129475200 MAIL ADDRESS: STREET 1: 6740 SHADY OAK RAOD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-3433 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 ------------------------ VALUEVISION INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) 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)
612-947-5200 (Registrant's Telephone Number, Including Area Code) ------------------------ Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 VALUEVISION INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2000 TABLE OF CONTENTS
PAGE ---- 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
2 3 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 3 4 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. 4 5 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." 5 6 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, 6 7 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 7 8 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 8 9 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. 9 10 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: 10 11 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. 11 12 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 12 13 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 13 14 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. 14 15 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 15 16 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 16 17 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. 17 18 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 18 19 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 19 20 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 20 21 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.
NAME AGE POSITION(S) HELD ---- --- ---------------- 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
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. 21 22 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, 22 23 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. 23 24 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 24 25 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 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. 26 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.
HIGH LOW ---- --- 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
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 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."
YEAR ENDED JANUARY 31, -------------------------------------------------------- 2000(A) 1999(B) 1998 1997(C) 1996 ------- ------- ---- ------- ---- (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) 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
JANUARY 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- 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
YEAR ENDED JANUARY 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- 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
- ------------------------- (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 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 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 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 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. 32 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. 33 34 The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales.
YEAR ENDED JANUARY 31, ----------------------------- 2000 1999 1998 ---- ---- ---- 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% ===== ===== =====
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 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 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 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 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 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.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 ======= ======= ======= ======= ========
- ------------------------- (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 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 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 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 43 ITEM 8. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES
PAGE ---- 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
43 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 45 VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, ---------------------- 2000 1999 ---- ---- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 45 46 VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, ---------------------------------------- 2000 1999 1998 ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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 ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 46 47 VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
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) 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.......... -- -- -- -- -- ---------- ---- -------- -------- ------- NOTES RECEIVABLE TOTAL FROM RETAINED SHAREHOLDERS' SHAREHOLDERS EARNINGS EQUITY ------------ -------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) 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) ------- ------- --------
47 48
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) 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 ========== ==== ======== ======== ======= NOTES RECEIVABLE TOTAL FROM RETAINED SHAREHOLDERS' SHAREHOLDERS EARNINGS EQUITY ------------ -------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 48 49 VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, --------------------------------- 2000 1999 1998 ---- ---- ---- (IN THOUSANDS) 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 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 49 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 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:
GROSS GROSS UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ---- ---------- ---------- ---------- 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 =========== =========== ========== ===========
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 52 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:
ESTIMATED USEFUL LIFE (IN YEARS) 2000 1999 ----------- ---- ---- 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 ============ ===========
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 53 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 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:
2000 1999 ---- ---- 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 =========== ==========
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 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:
JANUARY 31, -------------------------- 2000 1999 ---- ---- 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 =========== ===========
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:
FOR THE YEARS ENDED JANUARY 31, --------------------------------------- 2000 1999 1998 ---- ---- ---- 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 =========== =========== ===========
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 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 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 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):
2000 1999 1998 ---- ---- ---- Net sales........................................... $1,127 $18,862 $74,756 Operating loss...................................... $ (114) $(6,794) $(6,091)
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 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):
2000 1999 1998 ---- ---- ---- Net sales............................................. $4,317 $4,994 $4,748 Operating income (loss)............................... $ (456) $ (416) $ 83
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):
2000 1999 1998 ---- ---- ---- Net sales.......................................... $19,260 $31,674 $31,907 Operating income................................... $ 329 $ 1,946 $ 2,165
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 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 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 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:
2000 1999 1998 ---- ---- ---- 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
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:
1994 1990 EXECUTIVE INCENTIVE STOCK NON-QUALIFIED STOCK OPTION OPTION PLAN STOCK OPTIONS PLAN --------------- ------------- ------------ 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
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 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:
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 --------- -------- --------- -------- --------- -------- 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 ========= ====== ========= ====== ========= ======
The following table summarizes information regarding stock options outstanding at January 31, 2000:
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 ----------- ----------------- ----------- -------- ---------------- ----------- -------- 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 ========= =========
63 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:
JANUARY 31, ------------------------- 2000 1999 ---- ---- 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 =========== ==========
The net deferred tax asset (liability) is classified as follows in the accompanying consolidated balance sheets:
JANUARY 31, ------------------------- 2000 1999 ---- ---- 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 =========== ==========
64 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:
YEARS ENDED JANUARY 31, ----------------------------------------- 2000 1999 1998 ---- ---- ---- 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 =========== =========== ===========
A reconciliation of income taxes computed at the statutory rates to the Company's effective tax rate is as follows:
YEARS ENDED JANUARY 31, ------------------------ 2000 1999 1998 ---- ---- ---- 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% ==== ==== ====
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 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:
FISCAL YEAR AMOUNT - ----------- ------ 2001.................................................... $3,255,000 2002.................................................... 3,245,000 2003.................................................... 3,291,000 2004.................................................... 3,291,000 2005 and thereafter..................................... 4,399,000
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 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 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:
FOR THE YEARS ENDED JANUARY 31, ---------------------------------------- 2000 1999 1998 ---- ---- ---- 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 =========== ========== ===========
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 69 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:
ELECTRONIC PRINT YEARS ENDED JANUARY 31, (IN THOUSANDS) MEDIA MEDIA CORPORATE TOTAL - -------------------------------------- ---------- ----- --------- ----- 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 -------------------------------------------------
- ------------------------- (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 70 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 70 71 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 72 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 73 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. 73 74 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 74 75 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. 75 76 SCHEDULE II VALUEVISION INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
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 ----------- ------------ ----- ---------- ---------- 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 ========== ============ ========= ============= ==========
- ------------------------- (1) Write off of uncollectible receivables, net of recoveries. (2) Refunds or credits on products returned. (3) Reduced through divestiture. 76 77 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 77 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 79 PART IV ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K EXHIBIT INDEX a) Exhibits
EXHIBIT NUMBER - ------- 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)
79 80
EXHIBIT NUMBER - ------- 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)
80 81
EXHIBIT NUMBER - ------- 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)
- ------------------------- (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.
81 82 (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
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 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.
NAME TITLE ---- ----- /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
83 EX-10.36 2 AMENDED & RESTATED EMPLOYMENT AGREEMENT 12/2/99 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 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 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 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 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 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 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 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 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 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 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 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 EX-10.39 3 OPTION AGREEMENT DATED 10/19/99 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 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 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 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 ------------------------------------ EX-10.46 4 AMENDED & RESTATED LIMITED LIABILITY AGREEMENT 1 EXHIBIT 10.46 EXECUTION COPY AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of RALPH LAUREN MEDIA, LLC Dated as of February 7, 2000 2 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF RALPH LAUREN MEDIA, LLC TABLE OF CONTENTS
Page ---- 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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Page ---- (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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Page ---- 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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Page ---- 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
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Page ---- 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
iv 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 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 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 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 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 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 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 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 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 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 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 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 12 19 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; 13 20 (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). 14 21 "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). 15 22 "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. 16 23 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 17 24 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 18 25 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 19 26 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 20 27 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: 21 28 (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 22 29 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) 23 30 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 24 31 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. 25 32 (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 26 33 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 27 34 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 28 35 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 29 36 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). 30 37 (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 31 38 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 32 39 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 33 40 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 34 41 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 35 42 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 36 43 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. 37 44 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. 38 45 (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; 39 46 (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; 40 47 (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. 41 48 (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 42 49 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. 43 50 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 44 51 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 45 52 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. 46 53 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 47 54 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 48 55 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. 49 56 (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. 50 57 (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. 51 58 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 52 59 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' 53 60 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) 54 61 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 55 62 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 56 63 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. 57 64 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 58 65 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. 59 66 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, 60 67 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. 61 68 (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 62 69 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 63 70 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 64 71 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 65 72 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 66 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. 67 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. 68 75 (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. 69 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, 70 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 71 78 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. 72 79 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 73 80 EXHIBIT A
Name and Address of Member Initial Membership Interest and Sharing Ratio - --------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------
74 EX-10.47 5 AGREEMENT FOR SERVICES DATED 2/7/2000 1 EXHIBIT 10.47 AGREEMENT FOR SERVICES BETWEEN RALPH LAUREN MEDIA, LLC AND VVI FULFILLMENT CENTER, INC. Table of Contents 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
2 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
ii 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 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. 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- 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- 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 -4- 8 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. -5- 9 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 -6- 10 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: -7- 11 (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: -8- 12 (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 -9- 13 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. -10- 14 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. -11- 15 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 -12- 16 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 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. - ---------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------
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- 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- 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- 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- EX-21 6 SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT 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. EX-23 7 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR JAN-31-2000 FEB-01-1999 JAN-31-2000 138,221 156,422 49,070 0 22,677 382,854 14,350 0 471,855 51,587 0 41,622 0 382 371,539 471,855 274,927 274,927 168,399 270,931 0 0 0 46,771 17,441 29,330 0 0 0 29,330 0.89 0.73 ACCOUNTS RECEIVABLE REPRESENTS AMOUNTS NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS. PROPERTY AND EQUIPMENT REPRESENT AMOUNTS NET OF ACCUMULATED DEPRECIATION.
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