Exhibit 1
CONFIDENTIAL
December 4, 1994
Montgomery Ward & Co., Incorporated
619 West Chicago Avenue
Chicago, Illinois 60671
Ladies and Gentlemen:
This letter sets forth the material terms and conditions of an agreement
in principle between Montgomery Ward & Co., Incorporated ("MW"), an Illinois
corporation, and ValueVision International Inc., a Minnesota corporation
("VVI"). MW and VVI each agree to promptly proceed in good faith to negotiate,
prepare, and execute the definitive documentation necessary to consummate the
transactions contemplated hereby (the "Agreement").
I. Conditions to the Agreement
A. Board Approval. The Agreement will be subject to approval by the
Board of Directors of MW and the Board of Directors of VVI.
B. VVI Shareholder Approval. The Agreement will be subject to the
approval of VVI's shareholders. VVI will recommend approval of the Agreement to
its Shareholders, subject to satisfaction of the other conditions of this
Section I.
C. Time Warner Agreement. The Agreement will be subject to VVI and Time
Warner Communications, Inc. entering into a cable carriage agreement (the "Time
Warner Agreement").
D. Fairness Opinion. The Agreement will be subject to VVI's receipt of
an opinion from a nationally recognized investment banking firm that the
transactions contemplated hereby are fair from a financial point of view to VVI
and its shareholders.
E. Governmental Approvals. The Agreement will be subject to VVI's
receipt of all required governmental and regulatory approvals.
F. Due Diligence. The Agreement will be subject to satisfactory
completion of due diligence by MW prior to the execution and delivery of the
Agreement. As part of such due diligence investigation, MW may review work
papers relating to the financial statements and tax returns of VVI.
II. Securities Purchase
The Agreement will provide that, on the closing date of the Agreement (the
"Closing Date"), MW will purchase or receive, and VVI will sell or issue, under
substantially the following terms and conditions, the securities described
below, contingent upon the prior satisfaction of the conditions set forth in
Section I and the simultaneous execution of a License and Service Agreement sub-
stantially as described in Section III.
A. Unregistered Common Stock. MW will purchase 1,280,000 unregistered
shares of common stock of VVI (the "Shares") at $6.25 per share, which as of the
date hereof, represents approximately 4.69% of the issued and outstanding shares
of common stock of VVI.
B. Warrants. In consideration of the License and Service Agreement (as
herein defined), MW will receive from VVI non-transferrable Warrants to purchase
up to an aggregate Twenty Five Million (25,000,000) shares of VVI common stock
(the "Warrant Shares") with the following terms.
1. Vesting. The Warrants will vest and become exercisable in
accordance with the Vesting Schedule set forth below. All vested Warrants
will expire on the eighth anniversary of the Closing Date. Warrant vesting
and exercisability shall be subject to the termination and acceleration
provisions of Section II.3 and III.M hereof.
Vesting Schedule
Number of
Warrant Date Exercise
Series Shares Vested Price Per Share
A 4,000,000 Closing Date $6.50
B 3,000,000 First Anniversary $6.75
C 3,000,000 * $7.00
D 3,000,000 Third Anniversary $7.25
E 2,000,000 Fourth Anniversary $7.50
F 1,000,000 Fourth Anniversary $8.00
G 1,000,000 Fifth Anniversary $9.00
H 1,000,000 Fifth Anniversary $10.00
I 1,000,000 Fifth Anniversary $11.00
J 1,000,000 ** $12.00
K 1,000,000 ** $13.00
L 1,000,000 ** $14.00
M 1,000,000 ** $15.00
N 1,000,000 ** $16.00
O 1,000,000 ** $17.00
* Series C Warrants will vest 25 months after the Closing Date.
** Warrants J through O will vest immediately following the exercise of all
of Warrants A through I.
2. Reserved Shares Adjustment. As of the date hereof,
ValueVision had 27,264,426 issued and outstanding shares of common stock, and
an aggregate 8,444,220 shares which are currently reserved for issuance (the
"Reserved Shares"). These Reserved Shares represent shares reserved for
issuance by VVI throughout the term of the Agreement or until all Warrants are
exercised or expire, subject to further negotiation in the Agreement. Upon
the issuance of any of the Reserved Shares during the term of the License and
Service Agreement, the number of additional Warrant Shares that would be
issuable upon exercise of all the Warrants (on a pro rata basis among all
series of Warrants) will be the number determined by solving for "x" in
accordance with the following formula, where R is the number of Reserved
Shares to be issued on the date of determination. "x" will equal the
additional number of Warrant Shares that would be issuable upon exercise of
all of the Warrants upon payment of the additional exercise price for such
additional Warrant Shares:
(R / .5092) - R = X
For example, if 2,500,000 Reserved Shares were to be issued, the Warrants,
after adjustment in accordance with the foregoing formula, would be
exercisable for an additional aggregate 2,409,662 Warrant Shares upon the
payment of an additional $22,072,506 of Warrant exercise price. Prior to
expiration of the Warrants, VVI will reserve a sufficient number of authorized
but unissued shares sufficient to permit the exercise of all Warrants.
3. Acceleration of Vesting. During the term of the License and
Service Agreement, and provided that MW is not in default thereunder, at any
time on or after the second anniversary of the Closing Date, MW may accelerate
the vesting of all unvested Warrants by exercising all (but not less than all)
Warrants. In addition, the License and Service Agreement will provide for
acceleration of Warrant vesting upon the occurrence of a change in control (to
be defined in the Agreement) occurring at any time prior to the expiration of
the Warrants, provided that the License and Service Agreement is then in
effect and MW is not in default thereunder, other than a change of control
resulting from the transactions contemplated hereby.
4. Antidilution. The Warrants will provide for customary
antidilution adjustments in the event of stock splits, stock combinations,
stock dividends or the like.
C. Stand Still. The Agreement will provide that MW and its
affiliates (as defined in Rule 144 of the Securities Act of 1933, as amended)
(for purposes of this Section II.C only, references to "MW" shall be deemed
to include such affiliates of MW) agree not to buy, sell, pledge, transfer,
or in any other manner acquire or convey any direct or indirect interest in
any securities of VVI, including without limitation, to exercise any Warrants,
prior to the second anniversary of the Closing Date; provided, however, that:
(x) this restriction will not apply between the commencement of a tender offer
or announcement of a merger which would result in a change in control of VVI
by a party other than MW, and the termination of such tender offer or
completion of such merger (and for the duration of any tender offer commenced
by MW during such period) and (y) this restriction shall not apply with
respect to the exercise of preemptive rights pursuant to Section II E. After
the expiration of such two year period, in the event that MW's equity
percentage for FCC purposes exceeds 5% by reason of MW's exercise of Warrants,
VVI will work with MW to resolve any FCC cross-ownership and combined
ownership issues that result from General Electric's ownership of MW and NBC,
in a manner to be agreed upon by the parties in the License and Service
Agreement, which may include divestiture of VVI's television stations
under certain circumstances.
D. Registration Rights. The Agreement will provide that MW will have
the right to demand up to an aggregate two registrations of the Shares and/or
the Warrant Shares under certain circumstances for a limited time to be agreed
upon in the Agreement, and will have certain participatory registration rights
subject to underwriter discretion and other conditions to be negotiated by the
parties in the Agreement.
E. Preemptive Rights. The Agreement will provide that during the
term of the License and Service Agreement, and provided that MW is not in
default thereunder, in the event that VVI issues any capital stock, or any
securities convertible into, or exchangeable for, capital stock (except under
certain circumstances to be negotiated in the Agreement) ("New Issuance")
solely for cash consideration, MW will have the preemptive right to purchase,
on the same terms and conditions as the other purchasers of the New Issuance,
that amount of the New Issuance required to preserve MW's equity position
before and after such New Issuance.
III. License and Service Agreement
On the Closing Date, MW and VVI will execute a License and Service
Agreement (the "License and Service Agreement") including substantially the
following terms, contingent upon the prior satisfaction of the conditions set
forth in Section I and simultaneous consummation of the transactions
contemplated in Section II.
A. Exclusivity. MW will grant VVI the exclusive right, during the
term of the License and Service Agreement, to offer products and services of
MW and its affiliates via television home shopping (defined as the format
currently used by VVI) and a license to use trade and service marks of MW and
its affiliates in connection therewith during the term of the License and
Service Agreement. MW will not license any other party to use MW's
trademarks, service marks, and other intellectual property for television home
shopping during the term of the License and Service Agreement. VVI will not
conduct television home shopping for any other retailers during the term of
the License and Service Agreement without MW's consent; however, VVI may
conduct television home shopping with products and services from sources other
than MW, which may be similar to, or compete with, MW products and services.
B. Programming Control. VVI will have sole control over television
home shopping, including without limitation, product selection, merchandising,
programming, pricing, and fulfillment.
C. Use of MW Credit Card. The License and Service Agreement will
include a credit card agreement which, during the term of the License and
Service Agreement, will allow MW credit card holders to use their MW credit
card to purchase any product or service offered for sale by VVI, whether or
not from MW, under the same terms and conditions (including criteria for
determining credit limits) offered to such holder for MW store and catalog
purchases, subject to the provisions of MW's credit card agreement with
General Electric Capital Corporation and MW's vendor agreements (to the extent
such vendor agreements pertain to the extension of consumer credit). MW will
charge VVI 3% of VVI net sales using MW credit cards. The parties agree to
renegotiate in good faith the credit card agreement after the first year of
the License and Service Agreement, if necessary. The other terms and
conditions of the credit card agreement will be substantially similar to VVI's
existing bank credit card agreements.
D. MW Credit Card Applications. The License and Service Agreement
will include a credit card application agreement under which VVI's
telemarketing staff will accept MW credit card applications, and will promptly
forward such applications to MW or its designee for processing. MW will apply
the same credit approval criteria that it applies to other credit card
applications. VVI will receive a $5.00 fee for each credit card application
approved by MW, and an additional $5.00 fee for each activated MW charge
account. The parties agree to renegotiate in good faith the credit card
application agreement if the circumstances warrant after the first year of
such Agreement.
E. VVI Acquisition Credit. MW will use commercially reasonable
efforts to assist VVI to obtain a line of credit which will be on terms
satisfactory to VVI and will be in the amount of $25 million for strategic
ventures, including, without limitation, broadcast television station
acquisitions, international expansion, and cable launch fees, but excluding
working capital purposes such as inventory financing.
F. Vendor Relationships. MW will introduce VVI's buyers to MW's
principal vendors and MW's buyers will provide reasonable advice and
assistance to VVI's buyers to obtain product. MW will use commercially
reasonable efforts to ensure that MW's vendors sell product to VVI on terms
and conditions that are as favorable as the terms and conditions under which
such vendors sell similar product to MW. Such terms and conditions shall
include without limitation, price, delivery times, product availability,
return privileges, volume and other discounts, and credit and payment terms.
G. Establishment of Chicago Buyer's Office. MW will provide VVI with
office space in MW's Chicago office at no charge to enable VVI to establish
a buying office for the purpose of working with MW's buyers and vendors. As
needed, VVI will provide MW with use of office space at VVI's Minneapolis
office at no charge.
H. Inventory Purchases and Returns. MW will permit VVI to select
product from MW's inventory for television home shopping, subject to MW's
requirements for catalog and store sales. MW will make such inventory
available to VVI on the same terms and conditions under which MW purchased
such inventory, shall not include in such price to VVI any corporate overhead
charge. Return privileges on such inventory will be determined on a mutually
acceptable basis.
I. Cable Carriage Agreements. Each of VVI and, at its option, MW,
will use commercially reasonable efforts to negotiate for long term cable
carriage agreements pursuant to which cable television systems and multiple
cable system operators ("Cable Systems") will agree to carry VVI's television
home shopping programming. Each party will promptly notify the other of the
commencement of negotiations with any Cable System, and will permit the other
party to participate therein. MW shall have the right, but not be obligated,
to assist VVI to obtain long term cable carriage agreements by purchasing
advertising time on such Cable Systems, with cash or non-cash consideration
acceptable to the Cable System (such as MW Signature Group Club services or
vendor co-op advertising dollars), however, MW shall not be obligated to
purchase advertising time except to the extent mutually agreed by MW and VVI.
MW shall advise VVI of its expected level of advertising purchases
("Advertising Commitment") on each Cable System prior to VVI's execution of
a cable carriage agreement with such Cable System.
J. Board Seats. VVI will expand its Board of Directors from the
current five members to seven members, and MW will be entitled to designate
the persons to fill the two new director positions, one of whom will be Gene
McCaffrey, who will be a Vice Chairman of VVI. The parties will establish
conditions under which one of such two directors may be designated as the
Chairman of the Board in the future. For so long as the License and Service
Agreement remains in effect, (i) MW will be entitled to designate two nominees
on management's slate of Board nominees; (ii) VVI will agree to recommend such
nominees to the stockholders, (iii) VVI, Robert Johander and Nicholas Jaksich
each will agree to vote all shares which they respectively control in favor
of the election of such MW nominees, and (iv) MW will agree to vote all shares
which it controls in favor of the election of VVI's nominees. The MW
designees will resign their director positions in the event the License and
Service Agreement is terminated for any reason other than VVI's default.
K. Advisory Committee. A committee consisting of three members
appointed by MW and three appointed by VVI will meet on a quarterly basis to
discuss operational matters, including without limitation, marketing,
merchandising, distribution and strategic issues.
L. Duration. Unless earlier terminated, the term of the License and
Service Agreement shall be no less than 10 years and no more than 20 years,
to be negotiated in the Agreement.
M. Early Termination.
1. VVI shall have the right to terminate the License and
Service Agreement prior to its expiration upon the
occurrence of an event of default as set forth therein.
Such events shall include, but not be limited to, the
following:
a. In the event that the following cumulative New Cable
Homes (hereinafter defined) requirements set forth below
(each, a "Target") are not achieved on each of the dates
set forth below (each, a "Target Date"):
(1) Four million (4,000,000) New Cable Homes during
the period commencing on the Closing Date and ending
on the first anniversary thereof;
(2) Seven million (7,000,000) New Cable Homes in
the period commencing on the Closing Date and ending
on the second anniversary thereof;
(3) Nine million (9,000,000) New Cable Homes in the
period commencing on the Closing Date and ending on
the third anniversary thereof; and
(4) Ten million (10,000,000) New Cable Homes in the
period commencing on the Closing Date and ending on
the fourth anniversary thereof.
b. "New Cable Homes" shall mean cable homes on Cable
Systems that commence carrying VVI's television home
shopping programming for the first time (x) subsequent to
the Closing Date, or (y) pursuant to the Time Warner
Agreement, but shall not include any cable homes on Cable
Systems with respect to which MW has not fulfilled its
Advertising Commitment following the giving of notice and
the expiration of a reasonable cure period. New Cable
Homes that carry VVI television home shopping programming
on a full time basis (24 hours per day, seven days per
week) shall be counted as one New Cable Home, and New Cable
Homes that carry VVI television home shopping programming
on a part time basis shall be counted as a portion of a New
Cable Home, using VVI's full time equivalent homes formula,
which is based upon the number of hours, time of day, and
days of the week that VVI's television home shopping
programming is carried.
c. VVI's termination rights pursuant to Section III
M.1.a shall be exercised within 30 days immediately
following the applicable Target Date, subject, however, to
the following sentence. In the event that at least 75%
(but less than 100%) of the applicable Target is achieved
on a Target Date, VVI may not terminate the Agreement
solely based upon the failure to achieve such Target until
the next Target Date. VVI may terminate the Agreement
during the 30 day period following such next Target Date,
unless (i) the missed Target has been achieved in full, and
(ii) the current year Target has been at least 75%
achieved.
d. MW's default in its obligations under Sections III F
through H; provided that VVI shall provide notice of such
default and MW shall have 90 days in which to cure such
default.
e. MW defaults in its obligations relating to use of MW
credit card by VVI customers provided in Section III C
hereof, or any breach by MW of such credit card agreement;
provided that VVI shall provide notice of such default and
MW shall have 90 days in which to cure such default.
2. MW shall have the right to terminate the License and
Service Agreement prior to its expiration upon the
occurrence of an event of default by VVI as set forth
therein. Such events of default shall include, without
limitation, VVI's default under the License and Service
Agreement which is not cured within 90 days after notice,
termination of the employment of Robert Johander or
Nicholas Jaksich (except by reason of termination for
cause, death or disability) during a period to be
negotiated in the Agreement, or the bankruptcy or
insolvency of VVI.
3. Upon early termination of the License and Service Agreement
(other than by reason of VVI's default), any Warrants that
are then unvested shall not vest, unless termination is by
VVI based solely upon the failure to achieve a Target, in
which case all unvested Warrants shall immediately become
exercisable for a period of 180 days after such
termination; provided that MW will not be able to exercise
any unvested Warrants during such 180 day period unless MW
has provided VVI with notice of its intent to exercise such
unvested Warrants within 90 days after such termination.
N. Publicity. Except as otherwise required by law, each of the
parties hereto agree that all press releases and other announcements, whether
written or oral, to be made by any of them with respect to the transactions
contemplated hereby shall be subject to mutual agreement and consent prior to
the dissemination thereof.
O. Exclusivity. Between the date hereof and the earliest of the
execution and delivery of, or the abandonment of, the Agreement, or January
15, 1995, VVI will not, without MW's consent, (x) solicit or initiate
negotiations with any merchandiser other than MW with respect to an agreement
under which VVI and such merchandiser would conduct television home shopping,
nor (y) negotiate with any merchandiser other than MW for such an agreement,
except where VVI reasonably believes, on advice of counsel, that the failure
to so negotiate may constitute a breach of VVI's fiduciary duty to its
shareholders.
P. Closing. The parties shall seek to execute the Agreement and
obtain all necessary Board approvals no later than December 23, 1994. This
agreement in principle shall terminate on January 16, 1995 and the parties
shall be under no further obligation to each other (other than for a breach
of Paragraph O, provided, however, that MW shall be deemed to have waived any
breach of Paragraph O to the extent that MW has not notified VVI of an alleged
breach thereof prior to March 1, 1995) unless the Agreement shall have been
executed and delivered and the parties shall have received all necessary Board
approvals on or before January 15, 1995, unless an extension is mutually
agreed to by the parties.
Q. Costs. Each of the parties hereto agree to pay their respective
legal, accounting, investment banking and all other fees and expenses relating
to the transactions contemplated hereby.
If the foregoing sets forth your understanding, please so acknowledge
by signing a copy of this letter and returning it to the undersigned.
"VVI"
VALUEVISION INTERNATIONAL, INC.
By:
Robert L. Johander
Chief Executive Officer
AGREED TO AND ACCEPTED THIS 4TH DAY
OF DECEMBER, 1994:
"MW"
MONTGOMERY WARD & CO., INCORPORATED
By:
Bernard F. Brennan
Chief Executive Officer