<PAGE> 1
As Filed with the Securities and Exchange Commission on November 15, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File No. 0-22815
LIBERTY DIGITAL, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
State of Delaware 84-1380293
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
67 Irving Place North, 4th Floor
New York, NY 10003
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (212) 387-7700
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
--- ---
The number of shares outstanding of the Registrant's Series A Common Stock
and Series B Common Stock as of October 31, 1999 were 25,182,776 and
171,950,167, respectively.
<PAGE> 2
PART I - FINANCIAL STATEMENTS
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
Liberty Digital TCI Music
--------------- ------------
(note 1)
September 30, December 31,
1999 1998
--------------- ------------
<S> <C> | <C>
Assets |
Current assets: |
Cash and cash equivalents $ 24,835 | 5,467
Trade receivables: |
Unaffiliated 7,681 | 6,440
Related party (note 5) 2,642 | 2,185
Allowance for doubtful accounts (1,359) | (818)
----------- | -----------
8,964 | 7,807
|
Deferred income tax asset, current (note 5) 18,800 | --
Income tax receivable - related party (notes 4 and 5) 26,447 | --
Prepaid expenses and other current assets 3,073 | 1,811
Equipment inventory 5,122 | 5,556
----------- | -----------
|
Total current assets 87,241 | 20,641
----------- | -----------
|
Net assets of discontinued operations (note 4) -- | 69,774
|
Investment in affiliates, accounted for under the |
equity method, and related receivables (note 2) 44,768 | 378
|
Investment in available for sale securities: (note 2) |
Investment in Priceline.com Inc. 201,562 | --
Investment in ACTV, Inc. 114,709 | --
Other available for sale investments 79,702 | --
|
Investments recorded at cost: (note 2) |
Investment in MTVN Partnership 135,000 | --
Other investments 42,343 | --
|
Deferred tax asset 3,487 | --
|
Property and equipment, at cost: |
Furniture and equipment 15,050 | 12,830
Leasehold improvements 723 | 95
Studio and other support equipment 2,709 | 3,285
----------- | -----------
18,482 | 16,210
Less accumulated depreciation 2,690 | 3,523
----------- | -----------
15,792 | 12,687
|
Intangible assets (note 2) 551,455 | 118,519
Less accumulated amortization 27,206 | 16,487
----------- | -----------
524,249 | 102,032
|
Other assets, net of accumulated amortization 726 | 677
----------- | -----------
|
Total assets $ 1,249,579 | 206,189
=========== | ===========
</TABLE>
(continued)
I-1
<PAGE> 3
PART I - FINANCIAL STATEMENTS
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
Liberty Digital TCI Music
--------------- ------------
(note 1)
September 30, December 31,
1999 1998
--------------- -----------
<S> <C> | <C>
Liabilities and Stockholders' Equity |
|
Current liabilities: |
Accounts payable and accrued expenses $ 12,848 | 10,765
Accrued loss on disposal - DMX-Europe N.V 1,117 | 1,117
Current portion of debt, including related party |
debt (notes 5 and 6) 3,516 | 1,723
Income tax payable - related party (note 5) -- | 4,703
Accrued stock compensation, current (notes 5 and 7) 127,371 | 797
----------- | -----------
Total current liabilities 144,852 | 19,105
|
Debt (note 6) 97,526 | 96,244
Negative investment in DMX-Europe N.V 1,358 | 9,058
Other liabilities 1,855 | 2,332
Other liabilities, related parties (notes 4 and 5) 15,775 | 226
Accrued stock compensation, long term (notes 5 and 7) 61,487 | --
Deferred tax liability (note 5) 265,858 | --
----------- | -----------
|
Total liabilities 588,711 | 126,965
----------- | -----------
Redeemable convertible preferred stock, $.01 par value, |
Authorized 5,000,000 shares (notes 2 and 3) |
Series A, 1,617,574 shares outstanding in 1998 and zero |
shares outstanding in 1999; -- | 34,322
Series B, 150,000 shares issued and outstanding in 1999, |
liquidity value of $150,472,000; 150,472 | --
|
Stockholders' equity (note 2): |
Common stock, $.01 par value: |
Series A; |
Authorized 1,000,000,000 shares; issued and |
outstanding 24,661,167 shares in 1999 and |
18,876,867 shares in 1998 247 | 189
Series B; |
Authorized 755,000,000 shares; issued and |
outstanding 171,950,167 shares in 1999 and |
62,500,000 shares in 1998 1,720 | 625
Paid-in capital 559,205 | 73,665
Accumulated deficit (141,720) | (29,578)
Executive stock compensation adjustment by parent, |
net of taxes (note 7) (5,999) | --
Deferred tax asset to be utilized by parent (note 5) (52,944) | --
Accumulated other comprehensive income, |
net of taxes 149,887 | 1
----------- | -----------
Total stockholders' equity 510,396 | 44,902
----------- | -----------
Commitments and contingencies (note 12) |
|
Total liabilities and stockholders' equity $ 1,249,579 | 206,189
=========== | ===========
</TABLE>
See accompanying notes to consolidated financial statements
I-2
<PAGE> 4
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statements of Operations and Comprehensive Income
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Liberty TCI Liberty TCI TCI
Digital Music Digital Music Music
-------- -------- -------- -------- --------
(note 1)
Three Three Seven Two Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Feb. 28, Sept. 30,
1999 1998 1999 1999 1998
-------- -------- -------- -------- --------
<S> <C> | <C> <C> | <C> <C>
Revenue: | |
Unaffiliated $ 5,660 | 5,184 13,559 | 4,039 14,354
Related party (note 5) 7,775 | 7,840 17,912 | 5,183 23,919
Other revenue 2,227 | 1,421 7,373 | 1,325 3,411
-------- | -------- -------- | -------- --------
15,662 | 14,445 38,844 | 10,547 41,684
Operating expenses: | |
Operating (note 5) 3,925 | 2,696 8,586 | 2,191 9,281
Selling, general and administrative 8,972 | 6,680 20,088 | 4,580 17,890
Stock compensation (note 7) (49,438) | 128 190,283 | 85 369
Merger costs 1,067 | -- 1,067 | -- --
Writedown of inventories -- | -- -- | -- 1,102
Depreciation and amortization 13,380 | 3,800 30,071 | 2,502 10,208
-------- | -------- -------- | -------- --------
Operating income (loss) 37,756 | 1,141 (211,251) | 1,189 2,834
| |
Interest expense: | |
Unaffiliated, net (1,544) | (1,485) (3,610) | (1,036) (3,767)
Related party (note 5) (148) | (21) (254) | -- (131)
-------- | -------- -------- | -------- --------
(1,692) | (1,506) (3,864) | (1,036) (3,898)
| |
Share of earnings (losses) of affiliates (404) | 45 (1,198) | (6) 107
Other, net 26 | (6) 2 | (2) (19)
-------- | -------- -------- | -------- --------
| |
Income (loss) from continuing operations | |
before income taxes 35,686 | (326) (216,311) | 145 (976)
Income tax benefit (expense) (12,552) | (789) 82,713 | (1,049) (2,221)
-------- | -------- -------- | -------- --------
Income (loss) from continuing operations 23,134 | (1,115) (133,598) | (904) (3,197)
-------- | -------- -------- | -------- --------
| |
Income (loss) from discontinued operations, | |
net of income tax benefit (notes 4 and 5) 39 | (4,175) (15,822) | (3,440) (12,568)
-------- | -------- -------- | -------- --------
Income (loss) before extraordinary item 23,173 | (5,290) (149,420) | (4,344) (15,765)
| |
| |
Extraordinary item (note 11) 7,700 | -- 7,700 | -- --
-------- | -------- -------- | -------- --------
Net income (loss) $ 30,873 | (5,290) (141,720) | (4,344) (15,765)
| |
Other comprehensive income, net of tax: | |
Foreign currency translation adjustments 170 | 94 99 | (49) 109
Unrealized holding gains arising during | |
the period, net of reclassification | |
adjustments (94,914) | -- 149,788 | -- --
-------- | -------- -------- | -------- --------
Other comprehensive income (loss) (94,744) | 94 149,887 | (49) 109
-------- | -------- -------- | -------- --------
Comprehensive income (loss) $(63,871) | (5,196) 8,167 | (4,393) (15,656)
======== | ======== ======== | ======== ========
</TABLE>
(continued)
I-3
<PAGE> 5
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statements of Operations and Comprehensive Income
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Liberty TCI Liberty TCI TCI
Digital Music Digital Music Music
----------- -------- -------- ------- --------
(note 1)
Three Three Seven Two Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Feb. 28, Sept. 30,
1999 1998 1999 1999 1998
----------- -------- -------- ------- --------
<S> <C> | <C> <C> | <C> <C>
Net income (loss) $ 30,873 | (5,290) (141,720) | (4,344) (15,765)
| |
Accretion of redeemable convertible | |
preferred stock $ (472) | (363) (829) | (252) (1,111)
----------- | ------- -------- | ------ -------
Net income (loss) attributable to common | |
stockholders $ 30,401 | (5,653) (142,549) | (4,596) (16,876)
----------- | ------- -------- | ------ -------
| |
Basic earnings per share (note 8) | |
Income (loss) from continuing operations $ .12 | (.01) (.71) | (.01) (.04)
=========== | ======= ======== | ====== =======
Income (loss) before extraordinary item $ .12 | (.07) (.79) | (.05) (.19)
=========== | ======= ======== | ====== =======
Income (loss) after extraordinary item $ .16 | (.07) (.75) | (.05) (.19)
=========== | ======= ======== | ====== =======
Income (loss) to common shareholders $ .16 | (.07) (.75) | (.06) (.21)
=========== | ======= ======== | ====== =======
Weighted average common shares | |
outstanding 196,132 | 81,049 189,368 | 81,377 81,049
=========== | ======= ======== | ====== =======
| |
Diluted earnings per share (note 8) | |
Income (loss) from continuing operations $ .10 | (.01) (.71) | (.01) (.04)
=========== | ======= ======== | ====== =======
Income (loss) before extraordinary item $ .10 | (.07) (.79) | (.05) (.19)
=========== | ======= ======== | ====== =======
Income (loss) after extraordinary item $ .13 | (.07) (.75) | (.05) (.19)
=========== | ======= ======== | ====== =======
Income (loss) to common shareholders $ .13 | (.07) (.75) | (.06) (.21)
=========== | ======= ======== | ====== =======
Weighted average common shares and | |
equivalents outstanding 229,252 | 81,049 189,368 | 81,377 81,049
=========== | ======= ======== | ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statement of Stockholders' Equity
(amounts in thousands)
<TABLE>
<CAPTION>
Deferred
tax Accumulated
Common stock assets, Executive other
------------------ to be stock comprehensive
Series Series Paid in Accumulated utilized by compensation, income,
A B capital deficit parent net of taxes net of taxes Total
-------- ------ ------- ----------- ----------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 189 625 73,665 (29,578) -- -- 1 44,902
Net loss -- -- -- (4,344) -- -- -- (4,344)
Accretion of redeemable
convertible preferred
stock -- -- (252) -- -- -- -- (252)
Foreign currency translation
adjustment -- -- -- -- -- -- (49) (49)
-------- ----- ------- -------- ------- ------ ------- -------
Balance at February 28, 1999 $ 189 625 73,413 (33,922) -- -- (48) 40,257
======== ===== ======= ======== ======= ====== ======= =======
Balance at March 1, 1999, (note 1) $ 189 1,720 498,569 -- -- -- -- 500,478
Conversion of preferred stock
(note 2) 48 -- 34,734 -- -- -- -- 34,782
Exercise of stock options 10 -- 26,480 -- -- -- -- 26,490
Stock compensation awards -- -- 251 -- -- -- -- 251
Accretion of redeemable
convertible preferred
stock -- -- (829) -- -- -- -- (829)
Executive stock compensation
adjustment recorded by
parent -- -- -- -- -- (5,999) -- (5,999)
Deferred tax on executive
stock appreciation rights
payable -- -- -- -- (52,944) -- -- (52,944)
Unrealized gain on available
for sale securities, net
of tax -- -- -- -- -- -- 149,788 149,788
Foreign currency translation
adjustment -- -- -- -- -- -- 99 99
Net loss -- -- -- (141,720) -- -- -- (141,720)
-------- ----- ------- -------- ------- ------ ------- -------
Balance at September 30, 1999 $ 247 1,720 559,205 (141,720) (52,944) (5,999) 149,887 510,396
======== ===== ======= ======== ======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statement of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>
Liberty TCI TCI
Digital Music Music
--------- --------- ---------
(note 1)
Seven Two Nine
Months Months Months
Ended Ended Ended
Sept. 30, Feb. 28, Sept. 30,
1999 1999 1998
--------- --------- ---------
(note 9)
<S> <C> | <C> <C>
Cash flows from operating activities: |
Net loss $(141,720) | (4,344) (15,765)
Deduct (add): |
Loss from discontinued operation, net of tax 15,822 | 3,440 12,568
Extraordinary item (7,700) | -- --
--------- | --------- ---------
|
Loss from continuing operations (133,598) | (904) (3,197)
Adjustments to reconcile net loss to net cash used in operating |
activities: |
Depreciation and amortization 30,071 | 2,502 10,208
Share of (earnings) losses of affiliates 1,198 | 6 (107)
Stock compensation 190,283 | 85 369
Provision for doubtful accounts 388 | 153 320
Income tax expense (benefit) (82,713) | 1,049 2,221
Writedown of inventory -- | -- 1,102
Changes in operating assets and liabilities, net of the |
effect of acquisitions: |
Trade receivables, prepaid and other current assets (2,763) | 680 (2,411)
Accounts payable, accrued expenses and other current |
liabilities 4,219 | (1,872) (2,119)
--------- | --------- ---------
Net cash used by continuing operations 7,085 | 1,699 6,386
Net cash used by discontinued operations (12,199) | (2,739) (15,409)
--------- | --------- ---------
|
Net cash used by operating activities (5,114) | (1,040) (9,023)
--------- | --------- ---------
|
Cash flows from investing activities: |
Increase in investments accounted for under the equity method and |
other investments (89,426) | -- 350
Cash paid for acquisitions (3,877) | (155) (12,590)
Capital expended for property and equipment (3,772) | (2,053) (7,191)
Changes in other assets, net (58) | (92) (59)
--------- | --------- ---------
|
Net cash used in investing activities (97,133) | (2,300) (19,490)
--------- | --------- ---------
|
Cash flows from financing activities: |
Proceeds from exercise of stock options 4,334 | -- --
Borrowing on note payable to bank 464 | 4,500 34,300
Borrowing on note payable to a related party 9,637 | -- --
Repayment of principal to related parties (9,223) | (85) (3,553)
Repayment of notes payable to bank (3,000) | -- --
Repayment of principal, others (1,196) | (157) (368)
Redemption of preferred shares (148) | -- --
--------- | --------- ---------
|
Net cash provided by financing activities 868 | 4,258 30,379
--------- | --------- ---------
|
Net increase (decrease) in cash and cash equivalents (101,379) | 918 1,866
|
Cash and cash equivalents, beginning of period 126,214 | 5,467 3,075
--------- | --------- ---------
|
Cash and cash equivalents, end of period $ 24,835 | 6,385 4,941
========= | ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE> 8
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited and
reflect transactions that have materially impacted the financial position and
results of operations for the current period and that required necessary
reclassifications in the corresponding prior year periods to conform with the
current year reporting format as follows:
The transactions under the Contribution Agreement dated April 23, 1999 and
approved by the stockholders in an annual meeting held on September 8, 1999,
among TCI Music, Inc ("the Company"), Liberty Media Corporation (Liberty) and
certain of its affiliates, as described in Note 2 required certain related party
transactions to be recorded and accounted for at predecessor costs in a manner
similar to a pooling of interests ("Contribution Transaction"). The Company also
increased its authorized capitalization in connection with the Contribution
Transaction as described in note 2.
In addition, Liberty applied "push down" accounting and transferred to the
Company the fair value adjustments related to the assets of TCI Music, Inc. as
recorded by Liberty upon completion of its merger with AT&T ("AT&T Merger") on
March 9, 1999. For financial statement purposes, the Contribution Transaction
and the fair value adjustments are deemed to have occurred on March 1, 1999. In
connection with the Contribution Transaction, the Company changed its name to
Liberty Digital, Inc. The accompanying financial statements presented herein
prior to February 28,1999 are referred to as TCI Music and the financial
statements retroactive to March 1, 1999 are referred to as Liberty Digital.
The table below reflects the accounts revalued by the Contribution Transaction
and fair value adjustments recorded retroactively to March 1, 1999 (amounts in
thousands).
<TABLE>
<CAPTION>
Liberty
TCI Music Digital
February 28, Fair Value Contribution March 1,
1999 Adjustment Transaction 1999
------------ ---------- ------------ --------
<S> <C> <C> <C> <C>
Assets accounts
Cash and cash equivalents $ 6,385 -- 119,829 126,214
Net assets of discontinued
operations 63,473 60,444 -- 123,917
Investment in affiliates 372 -- 701 1,073
Other investments -- -- 146,071 146,071
Property and equipment, net 14,075 -- 96 14,171
Intangible and other assets 100,820 181,541 263,971 546,332
Liabilities and Equity accounts
Deferred tax liability $ 11,304 22,600 139,832 173,736
Preferred stock 34,574 -- 150,000 184,574
Common stock 814 -- 1,095 1,909
Paid in Capital 73,413 185,415 239,741 498,569
Retained earnings (deficit) (33,922) 33,922 -- --
Accumulated other comprehensive
earnings (loss) (48) 48 -- --
</TABLE>
Included in intangible and other assets is the Access Agreement transferred to
the Company at a value of $250 million, which is being amortized over a period
of nine years starting on March 1, 1999.
On July 15, 1999 MTV Networks, ("MTVN"), a division of Viacom International,
Inc. and the Company formed MTVN Online L.P., a Delaware limited partnership
(the "MTVN Partnership") pursuant to various arrangements and agreements entered
into pursuant to a binding Letter Agreement dated May 19, 1999. As described in
note 4, this transaction required the contribution of the net assets of the
Company's Video segment and Internet segment to the MTVN Partnership.
Accordingly, for financial statement purposes, such segments are reflected as
discontinued operations in the current and corresponding prior year periods.
I-7
<PAGE> 9
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
After giving effect to the Contribution Transaction and the disposal of the
Company's Video and Internet segments, the results of operations from continuing
operations presented herein reflect the Audio segment and include a new segment
referred to as "Interactive Media".
In the opinion of management, the accompanying financial statements reflect all
adjustments necessary for a fair presentation of the results for such periods.
The results of operations for any interim period are not necessarily indicative
of results for the full year. The accompanying financial information should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report filed on Form 10-K for the year
ended December 31, 1998.
(2) Organization
On March 9, 1999 AT&T acquired Tele-Communications, Inc. ("TCI") in the AT&T
Merger. In the AT&T Merger, (1) TCI became a wholly owned subsidiary of AT&T,
(2) the businesses and assets of the Liberty Media Group and TCI Ventures Group
were combined and (3) the holders of TCI's Liberty Media Group tracking stock
and TCI Ventures Group tracking stock received in exchange for their shares a
new class of tracking stock of AT&T intended to reflect the results of the
combined Liberty Media Group and TCI Ventures Group. Following the AT&T Merger,
AT&T's "Liberty Media Group" consists of the assets and businesses of TCI's
Liberty Media Group and TCI Ventures Group. Liberty Digital is included in
AT&T's "Liberty Media Group". Following the AT&T Merger, TCI became part of the
AT&T Broadband and Internet Services division of AT&T ("AT&T Broadband").
On September 8, 1999 the Company increased the number of authorized shares of
capital stock to 1,755,000,000 from 495,000,000, consisting of an increase in
the authorized number of shares of Series A common stock to 1,000,000,000 from
295,000,000; an increase in the authorized number of shares of Series B common
stock to 755,000,000 from 200,000,000; and authorized 150,000 shares of
Convertible Preferred Stock, Series B ("Series B Preferred Stock").
On May 17, 1999, the Company called for redemption on June 11, 1999 all of the
outstanding shares of its Series A Preferred Stock. In lieu of redemption,
holders could convert each share of Series A Preferred Stock into three shares
of Series A Common Stock. On June 11, 1999, all of the outstanding shares of
Series A Preferred Stock were converted into Series A Common Stock except for
6,404 shares of Series A Preferred Stock which were redeemed. Liberty converted
all of the shares of Series A Preferred Stock beneficially owned by it into
shares of Series A Common Stock prior to the redemption date.
On September 9, 1999, the transactions contemplated by the Contribution
Agreement, as amended, dated April 23, 1999 by and among the Company, Liberty
Media Corporation ("Liberty") and certain of its affiliates were completed.
Pursuant to the Contribution Agreement, Liberty contributed to the Company all
of the outstanding stock of its wholly owned subsidiaries that were formed
solely to hold some of Liberty's investments in interactive programming and
content related assets (the "Contributed Subsidiaries"). In addition, Liberty
assigned to the Company certain of its rights under the Access Agreement
regarding the provision of certain interactive video services over the cable
television systems of AT&T and its controlled affiliates (the "AT&T Systems").
The Access Agreement establishes a framework to negotiate definitive agreements
for digital channel capacity on the AT&T Systems equal to one six-megahertz
channel (which, under current digital compression technology, will enable
carriage of between 12 and 15 video channels) to be used for interactive,
category specific channels providing entertainment, information and merchandise
programming, subject to certain conditions ("Interactive Video Services"). The
material terms of the definitive agreements, other than those included in the
Access Agreement, are subject to negotiation between the Company and AT&T.
Pursuant to this assignment, the Company became subject to certain obligations
imposed by the Access Agreement, including, but not limited to, AT&T's option to
enter into joint ventures with the Company regarding the provision of such
Interactive Video Services on the AT&T Systems, and, if such
I-8
<PAGE> 10
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
ventures are formed, AT&T's right to acquire the Company's interest in such
joint ventures at their fair market value after a three year period. In
connection with the Contribution Agreement, the Board of Directors of Liberty
adopted a policy that the Company will be the primary (but not exclusive)
vehicle for the pursuit of corporate opportunities relating to interactive
programming and content related services in the United States and Canada,
subject to certain limitations.
Liberty has also agreed in the Contribution Agreement that it will use
reasonable efforts to make available to the Company for its Interactive Video
Services the benefits of the "preferred vendor status" to which Liberty is
entitled under the Access Agreement with respect to the access, timing and
placement of new programming services on the AT&T Systems. Both the assignment
of rights with respect to Interactive Video Services and the agreement to make
such benefits available to the Company are subject to the terms, conditions and
obligations set forth in the Access Agreement, the Contribution Agreement and
the assignment.
Liberty also contributed to the Company a combination of cash and notes payable
to Liberty or one or more of its affiliates (which notes were assigned to
Liberty prior to the closing of the Contribution Transaction) by the Contributed
Subsidiaries and the Company equal to $150 million. Cash contributed retroactive
to March 1, 1999 was $120 million, net of notes payable assumed by Liberty.
Finally, the Company adopted the Deferred Compensation and Stock Appreciation
Rights Plan and entered into Deferred Compensation and Stock Appreciation Rights
Agreements with Lee Masters, a director, President and Chief Executive Officer
of the Company and Bruce W. Ravenel, a director and Executive Vice president of
the Company. The Deferred Compensation and Stock Appreciation Rights Plan is
comprised of a deferred compensation component and stock appreciation rights
grants. The deferred compensation component provides Messrs. Masters and Ravenel
with the right to receive an aggregate of 9 1/2% of the appreciation in the
Series A common stock (as reflected by its market price) over a base price,
subject to a maximum amount payable; and the stock appreciation rights provide
them with the appreciation in the market price of the Series A common stock
above the maximum amount payable under the deferred compensation component.
In consideration of the foregoing, the Company issued to Liberty (1) 109,450,167
shares of Series B Common Stock and (2) 150,000 shares of Series B Preferred
Stock having an initial liquidation aggregate preference of $150 million.
The effective issue price of the shares of Series B Common Stock issued pursuant
to the Contribution Agreement was based on the average of the daily closing
prices of the Series A Common Stock on the Nasdaq SmallCap Market for the 30 day
period ended April 5, 1999 (the day before the public announcement of the
Contribution Transaction) rounded down to the nearest cent. That average market
price was $4.66 per share. The conversion price for the Series B Preferred Stock
issued pursuant to the Contribution Agreement was 125% of the average market
price used to calculate the issue price of the Series B Common Stock, or $5.825.
At September 30, 1999, after giving effect to the redemption of Series A
Preferred Stock and the completion of the Contribution Transaction, Liberty
beneficially owns approximately 48.5% of the Series A Common Stock, 100% of the
Series B Common Stock, and 100% of the Series B Preferred Stock. As a result,
Liberty beneficially owns shares representing approximately 99.4% of the voting
power of all outstanding capital stock of the Company. In addition, Liberty will
be able to acquire beneficial ownership of up to an additional 25,751,100 shares
of Series B Common Stock upon conversion of the Series B Preferred Stock.
(3) Liberty Digital Convertible Preferred Stock - Series B
The Company's preferred stock may be divided and issued in one or more series
from time to time as determined by the Board of Directors of the Company. As of
September 30, 1999, the Company is authorized to issue 5,000,000 shares of the
Company's preferred stock of which 150,000 shares were designated as Series B
Preferred Stock and issued to Liberty pursuant to the Contribution
I-9
<PAGE> 11
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
Agreement as described in note 2. The Series B Preferred Stock may be converted
by the holder at any time into shares of Series B Common Stock at the conversion
rate of 171.674 shares of Series A Common Stock for each share of Series B
Preferred Stock, subject to certain adjustments for antidilution, dividends and
distributions. The Series B Preferred Stock accrues dividends at 5% per annum
based on the liquidation preference per share. Such dividends are payable
quarterly when the board of directors of Liberty Digital declares such cash
dividends. Dividends not paid on any dividend payment date are added to the
liquidation preference on such date and remain a part of the liquidation
preference until such dividends are paid. Upon a "default" (as defined), the
rate per annum at which dividends will accrue increases to 7% per annum. Subject
to certain specified exceptions, the Company is prohibited from paying dividends
on any parity securities or any junior securities (including common stock)
during any period in which the Company is in arrears with respect to payment of
dividends on Series B Preferred Stock.
Holders of Series B Preferred Stock are not entitled to vote on any matters
submitted to a vote of the shareholders of Liberty Digital, except as required
by law and other limited exceptions.
The liquidation preference of each share of the Series B Preferred Stock as of
any date of determination is equal to the sum of (a) the stated value per share
of $1,000, plus (b) an amount equal to all dividends accrued on such share which
have been added to and remain a part of the liquidation preference as of such
date, plus (c) for purposes of the liquidation, redemption and conversion
provisions of the Series B Preferred Stock, an amount equal to all unpaid
dividends accrued on the sum of the amounts specified in clauses (a) and (b)
above during the period from and including the immediately preceding dividend
payment date to but excluding the date in question.
Shares of Series B Preferred Stock are redeemable at the option of the Company
at any time after June 30, 2006 at a redemption price per share payable in cash
equal to the liquidation preference of such share on the redemption date. Any
redemptions by the Company are required to be made pro rata if less than all
shares of Series B Preferred Stock are to be redeemed.
At any time on or after June 30, 2006, or prior to that date if a "default" (as
defined) has occurred and is continuing, any holder of Series B Preferred Stock
has the right to require the Company to redeem all or any portion of such
holder's shares for a redemption price per share payable in cash equal to the
liquidation preference of that share on the redemption date.
(4) Discontinued Operations
Video Segment (The Box) and Internet Segment (SonicNet)
On July 15, 1999, MTVN and the Company formed the MTVN Partnership. MTVN
Partnership's business will develop, operate, manage, market, distribute and
license text, audio and video music, music-related and music-themed services
online and engage in reasonably related activities, including e-commerce
applications and consumer oriented commercial transactions (the "MTVN
Partnership Business"). With certain exceptions, the Company contributed to the
MTVN Partnership substantially all of the assets and businesses of SonicNet and
The Box, and the stock of their respective subsidiaries which exclusively
conduct their respective international businesses. MTVN contributed to the MTVN
Partnership the assets and businesses owned or controlled by it that constituted
all of its current or planned assets and businesses engaged, or to be engaged,
exclusively in the MTVN Partnership Business, including those assets and
businesses used exclusively in connection with their MTV.com, VH1.com and
Imagine Radio businesses, and all wholly owned international assets and
businesses engaged exclusively in the MTVN Partnership Business. For their
respective contributions, the Company received an aggregate 10% limited
partnership interest and MTVN received an aggregate 90% general and limited
partnership interest in the MTVN Partnership.
In connection with the negotiation of the Letter Agreement, the Company entered
into an agreement dated May 18, 1999, with AT&T Broadband, as an inducement to
AT&T Broadband to enter into a revised affiliation agreement with MTVN for the
distribution of MTVN's services on AT&T Broadband
I-10
<PAGE> 12
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
cable systems. AT&T Broadband's entering into a revised affiliation agreement
was a condition of MTVN's entering into the Letter Agreement. Pursuant to this
agreement, on the first to occur of the closing of the MTVN Partnership's
initial public offering and the second anniversary of the closing under the
Letter Agreement (or the fifth anniversary of the closing, if extended by AT&T
Broadband because the public offering has not occurred by the second anniversary
of the closing), the Company will become obligated to pay AT&T Broadband an
amount equal to 10% of the Excess Value (as defined below) of its equity
interest in the MTVN Partnership, but in no event more than $30 million, nor
less than $15 million. The Excess Value means the amount by which (a) the
average market price or appraised fair market value of the Company's equity
interest in the MTVN Partnership exceeds (b) the sum of (x) the lesser of $175
million and the value of the Company's interest in the MTVN Partnership as
determined in accordance with certain provisions of the Letter Agreement and (y)
any additional capital contributions made by the Company to MTVN Partnership.
The Company may pay such amount in cash or shares of its Series A common stock
(at market value). At September 30, 1999 the minimum liability to AT&T for $15
million was recorded by the Company as part of its investment in the MTVN
Partnership.
The net assets of the Company's Video and Internet segments contributed to the
MTVN Partnership, after giving effect to the fair value adjustments resulting
from the AT&T Merger are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Video Internet
-------- --------
<S> <C> <C>
Current assets $ 5,768 1,189
Property and equipment 10,736 732
Other assets 6,267 425
Intangible assets 48,008 56,739
Accounts payable and accrued liabilities (6,800) (1,607)
Long term liabilities (1,457) --
-------- --------
Total net assets of discontinued operations $ 62,522 57,478
======== ========
</TABLE>
Giving consideration to the Company's ownership percentage and partnership
governance in the MTVN Partnership, the Company recorded its investment at the
carrying value of the net assets relinquished, which includes the liability to
AT&T, of $135 million and accounts for the MTVN Partnership under the lower of
cost or net realizable value.
As a result of the above transaction, prior to July 15, 1999, the net assets of
the Company's Video and Internet segments were reflected as "net assets of
discontinued operations" in the consolidated balance sheet and its operating
results were reflected as "loss from discontinued operations" for the periods
presented in the consolidated statement of operations and comprehensive income.
Paradigm Associated Labels
On December 21, 1998 the Company decided to discontinue the operations and sell
the assets of Paradigm Associated Labels ("PAL"), which was a separate operating
entity acquired on December 8, 1997 and an integral part of the Internet
segment. In February 1999 the Company executed a letter of intent with Ground
Zero Entertainment ("Ground Zero") for Ground Zero to acquire certain of the
assets of PAL in exchange for assumption of all operating liabilities starting
March 1, 1999. The disposal of PAL was accounted for as a discontinued operation
and its operating assets were fully written off in 1998. As a result of PAL's
disposal and losses incurred, the Company had recorded an income tax benefit
amounting to $1.1 million which is reflected as part of income tax receivable,
related party for the periods presented in the accompanying balance sheet. The
remaining balance of the liabilities accrued by the Company in connection with
PAL's discontinuance in 1998 were $251,000 and $998,000 at September 30, 1999
and December 31, 1998 respectively. This transaction is currently the subject of
litigation as discussed in Note 13. As a result of this litigation, during the
seven months ended September 30, 1999, the Company has accrued an additional
$300,000 reserve for potential cost associated with its disposal.
I-11
<PAGE> 13
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
The following table presents operating results and cost of disposal of
discontinued operations for the periods presented below:
<TABLE>
<CAPTION>
Video Internet
-------------------------- --------------------------
January 1 January 1 January 1 January 1
thru thru thru thru
July 15 September 30 July 15 September 30
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 14,693 18,593 1,321 2,445
------ ------ ----- -----
Gain (Loss) from
operations and cost
of disposal (19,679) (9,134) (10,230) (8,057)
Income tax benefit 7,005 2,456 3,642 2,167
------- ------- ------- -------
$ (12,674) (6,678) (6,588) (5,890)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Video Internet
-------------------------- --------------------------
July 1 thru July 1 thru July 1 thru July 1 thru
July 15 September 30 July 15 September 30
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 1,268 7,110 1,645 899
------ ------ ------ ------
Gain (Loss) from
operations and cost
of disposal 1,588 (2,887) (299) (3,012)
Income tax benefit
(expense) (1,540) 844 290 880
------ ------ ------ ------
$ 48 (2,043) (9) (2,132)
====== ====== ====== ======
</TABLE>
(5) Related Party Transactions
Pursuant to the Amended Contribution Agreement between the successor to TCI in
the AT&T Merger ("AT&T Sub") and the Company effective since July 1, 1997, AT&T
Sub is required to deliver, or cause certain of its subsidiaries to deliver to
the Company the annual payments, aggregating $18 million, adjusted annually
through 2017 (the "Annual AT&T Payments"). The agreement also requires the
Company to pay AT&T Sub charges for certain services rendered in connection with
the Annual AT&T Payments. Such charges are included in operating expenses in the
accompanying consolidated statements of operations and comprehensive income.
Pursuant to an affiliation agreement between Satellite Services, Inc. ("SSI"), a
wholly-owned subsidiary of AT&T, and the Company (the "SSI Affiliation
Agreement"), effective as of July 1, 1997, SSI has the non-exclusive right to
distribute and subdistribute DMX services to commercial and residential
customers for a 10-year period in exchange for licensing fees paid by SSI to the
Company. Under the SSI Affiliation Agreement, SSI pays an annual fee to the
Company of $8.5 million subject to annual adjustments. In addition, the Company
receives subscriber revenue from AT&T Broadband for the distribution of DMX
services through AT&T Broadband's digital business.
I-12
<PAGE> 14
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
The following table summarizes the related party transactions as described above
for the periods reflected in the accompanying statement of operations and
comprehensive income (amounts in thousands):
<TABLE>
<CAPTION>
Three Three Seven Two Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Feb. 28, Sept. 30,
1999 1998 1999 1999 1998
--------- --------- --------- -------- ---------
<S> <C> | <C> <C> | <C> <C>
Revenue from Annual AT&T | |
Payments $ 4,867 | 4,930 11,406 | 3,296 14,952
Operating charges paid to | |
AT&T Sub (367) | (430) (906) | (296) (1,452)
Revenue from SSI 2,125 | 2,125 4,958 | 1,417 6,375
Revenue from AT&T Broadband 783 | 785 1,548 | 470 2,592
</TABLE>
On March 19, 1999, the Company signed a promissory note with Liberty which
allowed the company to draw funds from time to time up to a total of $15 million
at 9.5% interest per annum payable on June 30, 2006. The Company had drawn funds
of $8.9 million and had recorded interest of $215,000 prior to full payment of
this note on September 9, 1999 from cash received under the Contribution
Transaction with Liberty as described in note 2. In addition, at September 30,
1999, the Company owes Liberty for cash advances amounting to $775,000 which are
reflected as other liabilities, related parties in the accompanying consolidated
balance sheet.
The Company has an outstanding debt obligation of $263,000 to National Digital
Television Center, Inc. (NDTC), a subsidiary of AT&T. Such obligation extends
through the year 2000 and bears interest at 9.5%. At September 30, 1999 and at
December 31, 1998, the debt is reflected as part of the current portion of debt,
including related party debt in the consolidated balance sheet.
The Company leases certain office space, uplinking and satellite services from
NDTC. Total expenses under such lease agreements are reflected in the
consolidated statements of operations and comprehensive income as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Three Three Seven Two Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Feb. 28, Sept. 30,
1999 1998 1999 1999 1998
-------- -------- -------- ------- --------
<S> <C> | <C> <C> | <C> <C>
Operating Expenses $ 1,300 | 1,096 2,942 | 773 3,339
Loss from discontinued | |
operations 82 | 440 656 | 281 1,201
</TABLE>
The Company was included in the consolidated federal income tax return of TCI up
to February 28, 1999. Starting March 1, 1999, the Company is included in the
consolidated tax return of AT&T and is party to a Tax Liability Allocation and
Indemnification Agreement with its parent, Liberty, dated September 9, 1999,
(the "Tax Sharing Agreement"). The income tax provision for the Company is
calculated based on hypothetical tax liability determined as if the Company
filed a separate tax return.
Under the Tax Sharing Agreement, the Company will record a current intercompany
tax benefit from Liberty in periods when it generates taxable losses and such
losses are utilized by Liberty to reduce its income tax liability. In periods
when the Company generates taxable income, the Company will record current
intercompany tax expense. To the extent that the cumulative intercompany tax
expense is
I-13
<PAGE> 15
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
greater than the cumulative benefit, the Company will settle such excess
liability in cash to Liberty.
Further, the Company has agreed to pay Liberty for any income tax benefits
realized with respect to the Deferred Compensation and Stock Appreciation Rights
Plan. At September 30, 1999 the Company has recorded $52.9 million of deferred
tax benefits related to this plan as a separate component of stockholders'
equity.
(6) Debt
On December 30, 1997 the Company entered into a revolving loan agreement (the
"Revolving Loan Agreement") with several banks, which provides for borrowings up
to $100 million. Interest on borrowings under the agreement is tied to London
Interbank Offered Rate ("LIBOR"), plus an applicable margin dependent upon the
Company's leverage ratio, (as defined in the Revolving Loan Agreement), for the
preceding quarter or at the bank's base rate. The Revolving Loan Agreement
matures on June 30, 2005 with principal reductions beginning semi-annually on
June 30, 2000 based on a scheduled percentage of the total commitment. Interest
on the loan has been fully paid as of September 30, 1999. At December 31, 1998
accrued interest of $535,000 was included in accrued liabilities. The
outstanding amounts of borrowings at September 30, 1999 and December 31, 1998
are $97,000,000 and $95,036,000 respectively. The scheduled payment of $1.5
million for June 30, 2000 is reflected as current in the accompanying
consolidated balance sheet at September 30, 1999.
On September 30, 1999, the Company made a $3 million payment and simultaneously
issued a $3,000,000 letter of credit under its existing credit facility to
secure a promissory note issued on October 1, 1999 to the former owner of an
acquisition completed on October 1, 1999. The letter of credit was issued for a
twelve month period with an automatic annual renewal and a monthly reduction of
$50,000 beginning in January, 2000.
The Company assumed debt and issued notes payable to former owners in connection
with acquisitions made in 1998 and during the nine months ended September 30,
1999. The life of the notes vary from 6 months to 36 months and bear interest
that range from 5% to the Prime Rate. The balance of the notes total $3.8
million of which $1.8 million is classified as current in the accompanying
consolidated balance sheet at September 30, 1999.
The fair market value of the Company's debt approximated its carrying value at
September 30, 1999.
(7) Stock Options and Stock Appreciation Rights
Certain officers and key employees of the Company are party to stock based
compensation arrangements, as described below:
Participants under the Company's 1997 Stock Incentive Plan hold options with
tandem stock appreciation rights, which base compensation on the performance of
the Company's stock.
Participants under the Deferred Compensation and Stock Appreciation Rights Plan
(approved on September 9, 1999) hold stock appreciation rights which base
compensation on the performance of the Company's stock. For accounting purposes,
the grants made under this plan have been treated as though they were effective
at the time the participants began providing services to the Company, April 6,
1999.
The participant under Liberty's Internet SAR Plan holds appreciation rights
which base compensation on the fair value of certain investment securities
formerly held by Tele-Communications, Inc. ("the internet securities"). The
participant in this plan performs the majority of services for the Company and
therefore Liberty has allocated compensation expense earned under the plan to
the Company.
Stock compensation expense has been recorded in the accompanying financial
statements pursuant to APB Opinion No. 25. These estimates are subject to future
adjustments based upon vesting and the
I-14
<PAGE> 16
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
market value of the Company's Series A Common Stock and the internet securities
and, ultimately, on the final determination of market value when the rights are
exercised. The consolidated statements of operations and comprehensive income
for the seven months September 30, 1999 included tandem stock appreciation
rights exercised for $22.2 million of which $13.1 million was reflected as stock
compensation expense and $9.1 million was reflected as part of the loss from
discontinued operations. In addition, accrued expenses for tandem stock
appreciation rights based on the market price of the Company's Series A Common
Stock at September 30, 1999, amounted to $178.1 million of which $177.3 million
was reflected as stock compensation expense and $851,000 as part of loss from
discontinued operations for the seven months ended September 30, 1999. The total
tandem stock appreciation rights liability is $188.9 million of which $127.4 is
reflected as current and $61.5 million, is reflected as long term in the
consolidated balance sheet at September 30, 1999.
(8) Earnings (Loss) Per Common and Potential Common Share
The Company computes earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share" and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 (SAB 98). SFAS No. 128 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as the income
or loss available to common shareholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to basic EPS
but presents the dilutive effect on a per share basis of potential common shares
(e.g. convertible securities, options, etc.) as if they had been converted at
the beginning of the periods presented, or at original issuance date, if later.
Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from diluted
EPS.
The following table sets forth the computation of net income (loss) attributable
to common shareholders and weighted average outstanding common shares used in
the computation of basic loss per share and diluted earnings per share in the
accompanying statement of operations and comprehensive income (amounts in
thousands):
<TABLE>
<CAPTION>
Three Three Seven Two Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Feb. 28, Sept. 30,
1999 1998 1999 1999 1998
--------- -------- -------- ------- --------
<S> <C> | <C> <C> | <C> <C>
Net income (loss) on dilutive | |
basis $ 30,873 | (5,290) (141,720) | (4,344) (15,765)
| |
Accretion of redeemable | |
convertible preferred stock (472) | (363) (829) | (252) (1,111)
--------- | ------ -------- | ------ -------
Diluted income (loss) $ 30,401 | (5,653) (142,549) | (4,596) (16,876)
========= | ====== ======== | ====== =======
| |
| |
Weighted average shares | |
outstanding - basic 196,132 | 81,049 189,368 | 81,377 81,049
Series B Preferred Stock 25,751 | -- -- | -- --
Stock appreciation rights 7,369 | -- -- | -- --
--------- | ------ -------- | ------ -------
Weighted average shares | |
outstanding - dilutive 229,252 | 81,049 189,368 | 81,377 81,049
========= | ====== ======== | ====== =======
</TABLE>
(9) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $4.0 million and $2.1 million for the seven months
and two months ended September 30, 1999 and February 28, 1999 respectively and
$3.7 million for the nine months ended September 30, 1998. Cash paid for taxes
for the periods presented was not material.
I-15
<PAGE> 17
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
Significant non-cash investing and related financing activities for the periods
ended February 28, and September 30, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Seven Two Nine
Months Months Months
Ended Ended Ended
Sept. 30, Feb. 28, Sept. 30,
1999 1999 1998
--------- --------- ---------
<S> <C> | <C> <C>
Fair value of investment in MTVN |
Partnership $ 135,000 | -- --
Less: Net assets of discontinued |
operations contributed (120,000) | -- --
Related party liability assumed (15,000) | -- --
Fair value of other business acquired 6,475 | 221 18,430
Other liabilities assumed -- | (6) (1,112)
Debt issued (2,598) | (60) (1,998)
Common stock issued in agreements -- | -- (2,730)
--------- | --------- ---------
|
Cash paid for acquisitions $ 3,877 | 155 12,590
========= | ========= =========
</TABLE>
(10) Derivative Financial Instruments
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures on net investments in foreign operations. As of September 30, 1999,
the Company has not entered into any derivative contracts nor does it hold any
derivative financial instruments.
(11) DMX-Europe N.V.
The Company had a negative investment in DMX-Europe N.V. ("DMX-E"), a 100% owned
entity, prior to December 31, 1997. This negative investment resulted from DMX-E
ceasing operations and being placed into receivership during 1997. Accordingly
the Company wrote off its assets and made accruals for losses and cost of its
disposal netting to $9.1 million, which the Company recorded as a liability
defined as a negative investment in DMX-E.
On September 1, 1999 the Company was notified by its counsel in the United
Kingdom that the liquidation of DMX Europe (UK) Limited was completed. The
completion of the liquidation has resulted in an extraordinary gain of $7.7
million for the seven months ended September 30, 1999. As of September 30, 1999
DMX-Europe N.V. remains in receivership.
(12) Commitments and Contingencies
Parent Guarantees
The Company has guaranteed certain contracts of DMX-E related to DMX-E's uplink
services agreement and subscriber management services agreement. To the extent
DMX-E is unable to perform under the agreements, certain creditors of DMX-E may
pursue claims against the Company under the guarantees. The Company has also
guaranteed certain other obligations of DMX-E under the Subscriber Management
Services Agreement between DMX-E and Selco Servicegesellschaft fur
I-16
<PAGE> 18
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
elektronische Kommunikation GmbH ("Selco"), and the related side letter
agreement (the "Selco Agreement"). The Company cannot estimate the amount of any
potential claims at this time under such guarantee. However, the Company has
received a letter from counsel for Selco requesting that the Company make a
proposal to settle claims alleged by Selco for damages in the amount of
approximately $2.5 million with respect to a guarantee by the Company of
obligations of DMX-E under the Selco Agreement. On April 8, 1999 the Company
made Selco a settlement offer in the amount of $250,000. Selco has responded to
the settlement offer by requesting an increase in the settlement offer amount.
On August 25, 1999 the Company made another settlement offer to Selco in the
amount of $500,000. Selco has not responded to this settlement offer. The
Company has accrued $900,000 based on the facts available as of the date of this
Form 10-Q. Notwithstanding the foregoing settlement offer, no assurance can be
given that Selco will not continue to pursue its claims and, if Selco elects to
initiate formal legal proceedings, whether the Company will be held liable for
an amount in excess of the amount accrued.
(13) Legal Actions
In February 1999 the Company entered into a transaction with Ground Zero
pursuant to which the Company transferred certain assets of PAL to Ground Zero.
Disputes have arisen between the Company and Ground Zero regarding the
obligations imposed on and liabilities assumed or retained by the parties to the
transfer, and Ground Zero and a related entity have commenced a lawsuit against
the Company seeking, among other things, to rescind the transaction. The Company
has filed a motion seeking dismissal of all claims asserted against it. The
Company believes that it has meritorious defenses to the claims and meritorious
counterclaims to assert against Ground Zero. The Company intends vigorously to
defend this litigation.
On or about July 7, 1993, the American Society of Composers, Authors, and
Publishers ("ASCAP") initiated an action against the Company and others in the
United States District Court for the Southern District of New York. The action
is being brought by ASCAP for a determination of a reasonable license fee for
the right to use music in the ASCAP repertory. The Company entered into a
stipulation with ASCAP wherein the Company will not actively participate in the
proceedings, but will be bound by the District Court's findings.
On or about December 8, 1998, Broadcast Music, Inc. ("BMI") initiated an action
against the Company and others in the United States District Court for the
Southern District of New York. The action is being brought by BMI for a
determination of a reasonable license fee for the right to use music in the BMI
repertory. The parties are currently in the discovery process and have submitted
briefs to determine the issues in the case.
From time to time the Company may be a party to legal actions arising in the
ordinary course of business, including claims by former employees. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters are not expected to have a material adverse effect
upon the financial position, results of operations or liquidity of the Company.
(14) Information about the Company's Segments
The Company has two reportable business segments: "Audio", which represents the
operations of DMX, a company engaged in programming, distributing and marketing
a digital music service delivered to homes and businesses via cable or
satellite; and "Interactive Media, a segment engaged in the development of
interactive television businesses that take advantage of the opportunities of
interactive programming content and interactive television.
I-17
<PAGE> 19
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
The Company evaluates performance based on income or loss from operations before
income taxes. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately because
each business requires different technology and marketing strategies. The
Company utilizes the following financial information for the purpose of making
decisions about allocating resources to a segment and assessing a segment's
performance (amounts in thousands):
<TABLE>
<CAPTION>
Seven Months Two Months Nine Months
Ended Ended Ended
Sept. 30, Feb. 28, Sept. 30,
1999 1999 1998
------------------------------------ ---------- ----------
Interactive
Audio Media Total Audio Audio
-------- ----------- -------- ---------- ----------
<S> <C> <C> <C> | <C> <C>
Revenue $ 38,844 -- 38,844 | 10,547 41,684
|
Income (loss) from continuing |
operations before income taxes (73,118) (143,193) (216,311) | 145 (976)
|
Capital expended for property and |
equipment and acquisitions $ 7,610 97 7,707 | 2,300 19,840
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------------------------------------- ------------
Interactive
Audio Media Total Audio
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Segment assets $ 425,134 824,445 1,249,579 136,415
Net assets of discontinued
operations -- -- -- 69,774
--------- --------- --------- ---------
$ 425,134 824,445 1,249,579 206,189
========= ========= ========= =========
</TABLE>
The operations of the Interactive Media segment for 1999 started retroactive on
March 1, 1999.
I-18
<PAGE> 20
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company and should be read
in conjunction with the accompanying consolidated financial statements and notes
thereto of the Company. Additionally, the following discussion and analysis
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and financial statements included
in Part IV of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. The following discussion focuses on material trends, risks
and uncertainties affecting the results of operations and financial condition of
the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company to differ
materially from future results, performance, or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include, among others: general economic and business conditions and
industry trends; the regulatory and competitive environment of the industry in
which the Company has interests or operations; uncertainties inherent in new
business strategies; uncertainties inherent in the changeover to year 2000,
including the Company's projected state of readiness, the projected cost of
remediation, the expected date of completion of each program or phase, the
projected worst case scenarios; and the expected contingency plans associated
with such worst case scenarios; new product launches and development plans;
rapid technological changes; development and provisions of programming for new
television and telecommunications technologies; future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; availability of qualified
personnel; changes in, or failure or inability to comply with, government
regulations; changes in the nature of key strategic relationships with partners
and joint venturers; and competitor responses to the Company's products and
services, and the products and services of the entities in which the Company has
interests, and the overall market acceptance of such products and services.
These forward-looking statements (and such risks, uncertainties and other
factors) speak only as of the date of this Report, and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based. Any statement
contained within Management's Discussion and Analysis of Financial Condition and
Results of Operations related to year 2000 are hereby denominated as "Year 2000
Statements" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Year 2000
During the three months ended September 30, 1999, the Company, in conjunction
with AT&T, continued its enterprise-wide comprehensive efforts to assess and
remediate its computer systems and related software and equipment to ensure such
systems, software and equipment recognize, process and store information in the
year 2000 and thereafter. AT&T's year 2000 remediation efforts include an
assessment of the Company's most critical systems, equipment, and facilities.
AT&T also continued its effort to verify the year 2000 readiness of the
Company's significant suppliers and vendors and continued to communicate with
significant business partners to assess such partners year 2000 status.
AT&T has a year 2000 Program Management Office (the "PMO") to organize and
manage its year 2000 remediation efforts. The PMO is responsible for overseeing,
coordinating and reporting on Liberty Digital's year 2000 remediation efforts.
At September 30, 1999, it was comprised of a 133 member, full time staff
accountable to the executive management of AT&T. The PMO has defined a
four-phase approach to determining the year 2000 readiness of the Company's
systems, software and equipment. Such approach is expected to provide a detailed
method for tracking the evaluation, repair and testing of the Company's critical
systems, software and equipment. Phase 1, Assessment, involves the inventory of
all critical systems, software and equipment and the identification of any year
2000 issues. Phase 1 also includes the preparation
I-19
<PAGE> 21
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
of the work plans needed for remediation. Phase 2, Remediation, involves
repairing, upgrading and/or replacing any non-compliant critical equipment and
systems. Phase 3, Testing involves testing the Company's critical systems,
software and equipment for year 2000 readiness, or in certain cases, relying on
test results provided to the Company. Phase 4, Implementation, involves placing
compliant systems, software and equipment into production or service.
At September 30, 1999, the Company has completed all phases of its remediation
efforts.
The Company has also completed the inventory and assessment of critical systems
with embedded technologies that impact its operations and has determined the
correct remediation approach.
During the three months ended September 30, 1999, AT&T continued its survey of
significant third-party vendors and suppliers whose systems, services or
products are important to the Company's operations. The year 2000 readiness of
such vendors and suppliers is critical to continued provision of the Company's
services. AT&T has examined the public disclosures regarding compliance status
made by vendors of critical systems products utilized by the Company (such as
addressable controllers, accounting systems and other critical hardware and
software), and is in the process of examining the public disclosures regarding
compliance status made by critical suppliers (such as utilities, banking, and
similar critical operational services). The majority is either year 2000 ready,
requires the implementation of an adjustment to the company's systems, or is
expected to be year 2000 ready by year end. Verification of the survey results
may include, as deemed necessary, conducting functionality tests, reviewing
vendors' test data certifications, engaging in regular conferences with vendors'
year 2000 teams, or re-examining public disclosures for changes in statues. For
those vendors and suppliers who do not expect to be year 2000 ready by December
31, 1999, or are deemed to be critical to the Company's operations, contingency
planning efforts are underway to make such changes as are required to continue
critical operations.
Year 2000 expenses and capital expenditures incurred during the three months
ended September 30, 1999 were immaterial. Although no assurances can be given,
management currently expects that (i) cash flow from operations will fund the
costs associated with year 2000 compliance and (ii) the total projected cost
associated with Liberty Digital's year 2000 program will not be material to the
Company's financial position, results of operations or cash flows.
AT&T is a widely distributed enterprise in which allocation of certain
resources, including IT support is decentralized. Accordingly, neither AT&T nor
the Company consolidates an IT budget. Therefore, total estimated year 2000
costs as a percentage of an information technology ("IT") budget are not
available. There are currently no planned IT projects being deferred due to year
2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce the Company's
risks associated with the changeover to the year 2000 and has implemented
certain contingency plans to minimize the effect of any potential year 2000
related disruptions. The risks and the uncertainties discussed below and the
associated contingency plans relate to systems, software, equipment, and
services that the Company has deemed critical in regard to customer service,
business operations, financial impact or safety.
The failure of certain signal origination equipment or software could disrupt
the delivery of digital music services to customers and could necessitate
crediting customers for failure to receive such premium services. In this event,
management expects that it will transmit repetitive programming until the
problem is resolved. Further, a failure of certain hardware and software could
disrupt the delivery of music video programming services. Management anticipates
that it could resolve the issue by manual intervention until the situation could
be corrected.
A failure of the services provided by billing systems service providers could
result in a loss of customer records which could result in a disruption in the
ability to bill customers for a protracted period. The Company plans to prepare
electronic backup records of its customer billing information prior to the year
2000 to allow for data recovery. In addition, the Company continues to monitor
the year 2000 readiness of its key customer billing suppliers.
I-20
<PAGE> 22
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
In the event that the local public utility cannot supply power, the Company
expects to supply power for a limited time to its Denver studio through backup
generators.
The financial impact of any or all of the above worst-case scenarios has not
been and cannot be estimated by the Company due to the numerous uncertainties
and variables associated with such scenarios.
The Company does not presently anticipate that there will be material losses
from any claims of breach of contract due to year 2000 issues.
Summary of Operations
The Company's continuing operations represent the Audio segment and the
Interactive Media segment. The Audio segment (DMX) is engaged in programming,
distributing and marketing a digital music service (DMX Service) delivered to
homes and businesses. The Interactive Media segment was added as a result of the
Contribution Transaction completed on September 9, 1999 as discussed in note 2
to the accompanying financial statements. This new segment is engaged in the
development of interactive businesses that take advantage of the opportunities
of interactive programming content and interactive television. The addition of
the Interactive Media segment was accounted for as an "as-if" pooling of
interest, since the transaction was between entities under common control.
Accordingly, the operations of the Interactive Media segment was recorded
retroactive to March 1, 1999. The Interactive Media segment did not have any
revenue during the seven months ended September 30, 1999.
For purposes of comparison to prior periods, the nine months ended September 30,
1999 represent the operations of the Audio segment for the two months ended
February 28, 1999 and the combined operations of the Audio and Interactive Media
segments for the seven months ended September 30, 1999. The nine months and
three months ended September 30, 1998 represent only the operations of the Audio
segment.
A principal amount of the Audio segment revenues are derived from certain
payments made by the successor to TCI in the AT&T Merger AT&T Sub under the
Amended Contribution Agreement. Pursuant to the Amended Contribution Agreement,
AT&T Sub is required to deliver, or cause certain of its subsidiaries to deliver
to the Company the Annual AT&T Payments (monthly payments aggregating $18
million annually, adjusted annually through 2017). The adjusted Annual AT&T
Payments for the nine months and three months ended September 30, 1999 were
$14.7 million and $4.9 million respectively. The Annual AT&T Payments represent
the revenues received by AT&T Broadband affiliates from the sales of DMX Service
net of an amount equal to 10% of the revenue from such sales to residential
subscribers and net of license fees otherwise payable to the Company.
Revenue
Total revenue resulting from the Audio segment, increased $7.7 million, or
18.5%, and $1.2 million, or 8.4%, for the nine months ended and three months
ended September 30, 1999 respectively, compared to the corresponding periods in
the prior year. Revenue increases were attributable to the continued growth in
DMX's commercial subscriber bases contributed by the nine new markets added
during 1998 and revenues from four acquired markets completed during the first
half of 1999. Revenue increases for the nine months ended included a $2.8
million settlement from Primestar for the loss of future revenues after the DMX
Service was terminated from distribution to Primestar customers on April 28,
1999 as a result of the acquisition of Primestar by Hughes Electronics Corp.
Operating Expenses
Operating expenses increased $1.5 million, or 16.1%, and $1.2 million, or 45.6%,
for the nine months ended and three months ended September 30, 1999
respectively, as compared to the corresponding periods in the prior year. The
increase for each period pertains to the Audio segment and was primarily
attributable to higher music rights and royalty expenses for the nine months and
three months ended September 30, 1999
I-21
<PAGE> 23
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
commensurate with the increase in subscriber fee revenue. Offsetting the
increase in expenses during the nine months ended was sublease income of
$300,000 from the sublease of satellite equipment, which sublease terminated in
April 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.8 million, or 37.9%,
and $2.3 million, or 34.3%, for the nine months ended and three months ended
September 30, 1999 respectively, compared to the corresponding periods in the
prior year. Of the increase, the Audio segment increased by $4.3 million or
29.0% and $1.2 million or 22.1% for the nine months ended and three months ended
September 30, 1999 as a result of increased personnel, occupancy and promotional
expenses associated with DMX's expansion of its commercial business in nine new
markets added during 1998 and four acquired markets in 1999. Also included in
the increase was Interactive Media segment's expenses of $2.1 million and $1.1
million for the seven months ended and three months ended September 30, 1999.
These expenses consist principally of salaries, consulting, professional fees
and travel associated with the management of investment assets and formation of
the interactive media business.
Stock Compensation
Stock compensation expense increased $190 million for the nine months ended
September 30, 1999 compared to the corresponding period in the prior year. This
increase was primarily the result of expense accruals for executive deferred
compensation and tandem stock appreciation rights ("SARs") earned under the
deferred compensation and stock appreciation rights plan pursuant to APB Opinion
No. 25. This accrued expense was $178.1 million, of which $851,000 was reflected
as part of the loss from discontinued operations. During the nine months ended
September 30, 1999, the trading price of the Series A Common Stock increased
from $5.25 on April 6, 1999 to $23.32 per share at September 30, 1999. Such
increase in the share price was due to the April 6, 1999 announcement of a
proposed contribution transaction between the Company, Liberty, and wholly owned
subsidiaries of Liberty that resulted in a definitive Contribution Agreement
dated April 23, 1999 and completed on September 9, 1999 (as described in note 2
and 7 to the accompanying consolidated financial statements),
In addition, during the nine months ended September 30, 1999, there were 941,560
tandem SARs exercised at a weighted average market price of $28.13 per share.
This resulted in total expense of $22.2 million upon exercise of which $13.1
million was reflected as stock compensation expense and $9.1 million as part of
the loss from discontinued operations.
Stock compensation expense decreased $49.4 million for the quarter ending
September 30, 1999 from the quarter ended June 30, 1999 due to the decline in
the trading price of Series A Common Stock from $35.37 at June 30, 1999 down to
$23.32 at September 30, 1999. Accordingly the accruals for SARS earned at June
30, 1999 and still outstanding at September 30, 1999 were adjusted to reflect
the decrease of $12.05 per share or a total adjustment of $55.8 million recorded
as a reduction of stock compensation expense for the quarter. Offsetting this
adjustment is SARs paid during the quarter ended September 30, 1999 for $10.9
million of which $6.4 million is reflected as stock compensation expense and
$4.5 million as part of loss from discontinued operations.
Merger Cost
During the period April 6, 1999 through September 30, 1999, the Company incurred
investment banking fees and professional fees related to the completion of the
Contribution Transaction between the Company and Liberty as discussed in note 2.
Inventory Writedown
During the second quarter of 1998, certain digital commercial tuners were
written down by $1.1 million as a result of physical inventory adjustments at
the field locations and pricing adjustments to lower of cost or market.
I-22
<PAGE> 24
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
Depreciation and Amortization
Depreciation and amortization expense increased $22.4 million and $9.6 million
for the nine months ended and three months ended September 30, 1999
respectively, compared to the corresponding periods in the prior year. Such
increases in each period was attributable to the amortization of the fair value
adjustments and Access Agreement transferred to the Company as a result of the
Contribution Agreement as explained in note 2 to the accompanying financial
statements. This amortization expense amounts to $19.9 million and $8.9 million
for the seven months ended and three months ended September 30, 1999
respectively. The balance of the increase in each period was primarily
attributable to the additions of property and equipment and intangibles
resulting from acquired businesses made by DMX during 1998 and the nine months
ended September 30, 1999.
Interest Expense, unaffiliated
Interest expense and financing cost increased $879,000 and $59,000 for the nine
months ended and three months ended September 30, 1999, respectively compared to
the corresponding periods in the prior year. At September 30, 1999 the Company
had outstanding borrowings from unrelated parties of $99.0 million under
variable-rate debt agreements compared to $88.2 million at September 30, 1998.
Losses from Discontinued Operations
The losses from discontinued operations represent the operating losses and
additional costs of disposal of the Video and Internet segments of the Company
up to July 15, 1999 as a result of the MTVN Partnership in July 1999 and
disposal of PAL in 1998 as described in note 4 to the accompanying consolidated
financial statements. The components of these losses are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
July 1 thru July 1 thru January 1 thru January 1 thru
July 15 September 30 July 15 September 30
1999 1998 1999 1998
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 2,913 8,009 16,014 21,038
Gain (loss) from operations and
cost of disposal 1,289 (5,899) (29,909) (17,191)
Income tax benefit (1,250) 1,724 10,647 4,623
------- ------- ------- -------
Net loss $ 39 (4,175) (19,262) (12,568)
======= ======= ======= =======
</TABLE>
Extraordinary Item - Other income
The Company had a negative investment in DMX-E, a 100% owned entity, prior to
December 31, 1997. This negative investment resulted from DMX-E ceasing
operations and being placed into receivership during 1997. Accordingly the
Company wrote off its assets and made accruals for losses and cost of its
disposal netting to $9.1 million, which the Company recorded as a liability
defined as a negative investment in DMX-E.
On September 1, 1999 the Company was notified by its counsel in the United
Kingdom that the liquidation of DMX Europe (UK) Limited was completed. The
completion of the liquidation has resulted in a reduction in the reserve for
discontinued operation of $7.7 million. As of September 30, 1999 DMX-Europe N.V.
remains in receivership. This reduction was recorded as an extraordinary item
other income in the accompanying consolidated statement of operations and
comprehensive income.
Liquidity and Capital Resources
Prior to the Contribution Transaction, as discussed in note 2 to the
accompanying financial statements, for the two months ending February 28, 1999,
the Company's financing activities generated funds of $4.3 million, through bank
borrowings, for its use in operating activities of $1.0 million and for its
investing activities of $2.3 million, principally in the purchase of property
and equipment.
I-23
<PAGE> 25
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
Pursuant to the Contribution Agreement, Liberty Media and certain of its
subsidiaries transferred cash of $120 million, among other assets and
investments to the Company retroactive to March 1, 1999. On March 1, 1999, the
Company started with a beginning cash balance of $126.2 million. During the
period March 1 through September 30, 1999, the Company's financing activities
increased cash by $900,000. These combined cash balances were used to finance
the Company's operating activities of $5.1 million and investing activities of
$97.1 million. The $97.1 million for investing activities were used for
purchases of interactive media investments, business acquisitions and purchases
of property and equipment. The net change of these activities resulted in a net
decrease in cash of $101.4 million.
As described in note 6 to the accompanying consolidated financial statements,
the Company is a party to a revolving loan agreement, which provides borrowings
of up to $100 million. At September 30, 1999, the Company had fully utilized its
credit facility of $100 million available under the revolving loan agreement in
the form of an outstanding debt balance of $97 million and for a $3 million
letter of credit issued by the Company to guarantee a debt resulting from a
business acquired on October 1, 1999.
On March 19, 1999 the Company signed a promissory note with Liberty, allowing
the Company to draw funds up to a total of $15 million. As of September 9, 1999,
the Company had drawn funds of $8.9 against the promissory note. This note was
fully paid and extinguished from funds received as a result of the Contribution
Agreement completed on the same date.
The Company believes that net cash provided by operating activities (including
the Annual AT&T Payments), and the contribution by Liberty to the Company, a
combination of cash, other investments and available for sale securities
pursuant to the Contribution Agreement, will provide adequate sources of
liquidity for this year and intermediate future. As previously described, the
Company is entitled to receive the Annual AT&T Payments through 2017. The stock
options and tandem SARs earned of $127.3 million reflected as a current
liability and $61.5 million reflected as a long term liability in the
accompanying consolidated balance sheet at September 30, 1999 may be funded by
the issuance of Series A Common Stock upon exercise by holders of stock options
or tandem SARs.
For additional information concerning other commitments and contingencies of the
company, see note 12 to the accompanying consolidated financial statements.
I-24
<PAGE> 26
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
PART II - OTHER INFORMATION
Item 2(c). Changes in Securities and Use of Proceeds.
On September 9, 1999, the Company completed the previously reported Contribution
Transaction pursuant to which the Company issued to a wholly owned subsidiary of
Liberty (1) 109,450,167 shares of Series B Common Stock and (2) 150,000 shares
of Series B Preferred Stock in a private placement transaction exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
adopted the Deferred Compensation and Stock Appreciation Rights Plan for key
executives of the Company in exchange for the following assets of Liberty:
- all of the outstanding stock of Liberty's wholly owned subsidiaries
that were formed solely to hold some of Liberty's investments in
interactive programming and content related assets;
- Liberty's rights relating to channel capacity on AT&T Corporation's
cable television systems for the provision of interactive video
services under an agreement between Liberty and AT&T entered into in
connection with the merger of AT&T and Tele-Communications, Inc., the
former parent of Liberty; and
- a combination of cash and notes payable to Liberty or one or more of
its wholly owned subsidiaries by the contributed subsidiaries and the
Company equal to $150 million.
The parties valued the Contribution Transaction at $600 million.
The shares of Series B Preferred Stock are convertible into Series B Common
Stock at the initial conversion rate of 171.674 fully paid and non-assessable
shares of Series B Common Stock for each share of Series B Preferred Stock.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders of the Company was held on September
8, 1999.
(b) Not required.
(c) Holders of Series A Common Stock and Series B Common Stock (the "Voting
Securities") voted on the following matters, which were set forth in the
Company's proxy statement dated July 30, 1999.
(i) Approval of the Contribution Transaction
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
A proposal to approve the Contribution
Transaction pursuant to which shares of Series
A Common Stock and Series B Preferred Stock
may be issued to affiliates of Liberty Media
Corporation 70,798,236 447,916 8,248 3,940,172
</TABLE>
Approval of this proposal required the affirmative vote of a majority of the
combined voting power of the outstanding shares of the Voting Securities
represented in person or by proxy and entitled to vote at the annual meeting,
voting together as a single class.
<PAGE> 27
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
(ii) Approve amendments to the Company's Certificate of Incorporation
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
A proposal to approve amendments
to the Company's Certificate of
Incorporation 70,845,477 469,451 9,224 3,870,420
</TABLE>
Approval of this proposal required the affirmative vote of the holders of at
least 66 2/3% of the combined voting power of the outstanding Voting Securities
voting together as a single class.
(iii) Approval of Deferred Compensation and Stock Appreciation Rights
Plan
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
A proposal to approve the Deferred
Compensation Stock Appreciation Rights Plan
and the issuance of shares of common stock
thereunder 71,024,018 216,279 14,103 3,940,172
</TABLE>
Approval of this proposal required the affirmative vote of the holders of a
majority of the combined voting power of the outstanding Voting Securities
represented in person or by proxy and entitled to vote at the annual meeting,
voting together as a single class.
(iv) Election of Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
Robert R. Bennett 74,810,899 383,673
Peter M. Kern 74,809,899 384,673
Bruce W. Ravenel 74,810,374 384,198
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits
<TABLE>
<S> <C>
Exhibit 2.1 Contribution Agreement dated April 23, 1999 by and among TCI Music, Inc., Liberty Media
Corporation and certain affiliates of Liberty Media Corporation (incorporated by reference to
Appendix I to the Company's Proxy Statement dated July 30, 1999 for its 1999 Annual Meeting).
The Exhibits and Schedules of this Exhibit have been omitted pursuant to the rules
promulgated by the Commission and will be provided to the Commission upon request.
Exhibit 2.2 Amendment to Contribution Agreement, dated as of September 7, 1999, among Liberty Media
Corporation, certain affiliates of Liberty Media Corporation and TCI Music, Inc. (incorporated
by reference to Exhibit 2.2 to the Company's Current report on Form 8-K dated September 9, 1999.)
The Exhibits and Schedules of this Exhibit have been omitted pursuant to the rules promulgated
by the Commission and will be provided to the Commission upon request.
Exhibit 3.1 Certificate of Amendment to Certificate of Incorporation of TCI Music
</TABLE>
<PAGE> 28
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
<TABLE>
<S> <C>
Exhibit 4.1 Certificate of Designations of Convertible
Preferred Stock, Series B (incorporated by reference
to Exhibit 4.1 to the Company's Current report on
Form 8-K dated September 9, 1999.)
Exhibit 10.1 Employment Agreement dated as of September 9,
1999, between Liberty Digital, Inc. and Jarl Mohn,
also known as Lee Masters.
Exhibit 10.2 TCI Music Deferred Compensation and Stock
Appreciation Rights Plan.
Exhibit 10.3 Deferred Compensation and Stock Appreciation Right
Agreement dated as of August 12, 1999 between TCI
Music, Inc. Liberty Media Corporation and Jarl Mohn,
also known as Lee Masters.
Exhibit 10.4 Deferred Compensation and Stock Appreciation Right
Agreement dated as of August 12, 1999 between TCI
Music, Inc. Liberty Media Corporation and Bruce W.
Ravenel.
Exhibit 10.5 Tax Liability Allocation and Indemnification
Agreement dated as of September 9, 1999, by and
between Liberty Media Corporation, Liberty Digital,
Inc. for and on behalf of itself and each member of
the Digital Group, and Liberty Media Group LLC.
Exhibit 10.6 Registration Rights Agreement, dated as of September
9, 1999 among Liberty Digital, Inc. and Liberty Media
Corporation.
Exhibit 27. Financial Data Schedule.
</TABLE>
(b.) Reports on Form 8-K filed during the quarter ended September 30, 1999:
During the quarter ended September 30, 1999, the Company filed one reports on
Form 8-K.
o Form 8-K dated 7-30-99, filed under company name: TCI Music, Inc.
<PAGE> 29
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation))
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY DIGITAL, INC.
Date: November 15, 1999 By: /s/ Lee Masters
------------------------------------------
Lee Masters
President and
Chief Executive Officer
Date: November 15, 1999 By: /s/ Ralph J. Sorrentino
------------------------------------------
Ralph J. Sorrentino
Executive Vice President and
Chief Financial Officer
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2.1 Contribution Agreement dated April 23, 1999 by
and among TCI Music, Inc., Liberty Media Corporation
and certain affiliates of Liberty Media Corporation
(incorporated by reference to Appendix I to the
Company's Proxy Statement dated July 30, 1999 for its
1999 Annual Meeting). The Exhibits and Schedules of
this Exhibit have been omitted pursuant to the rules
promulgated by the Commission and will be provided to
the Commission upon request.
2.2 Amendment to Contribution Agreement, dated as of
September 7, 1999, among Liberty Media Corporation,
certain affiliates of Liberty Media Corporation and
TCI Music, Inc. (incorporated by reference to Exhibit
2.2 to the Company's Current report on Form 8-K dated
September 9, 1999.) The Exhibits and Schedules of
this Exhibit have been omitted pursuant to the rules
promulgated by the Commission and will be provided to
the Commission upon request.
3.1 Certificate of Amendment to Certificate of
Incorporation of TCI Music
</TABLE>
<PAGE> 31
<TABLE>
<S> <C>
4.1 Certificate of Designations of Convertible
Preferred Stock, Series B (incorporated by reference
to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated September 9, 1999.)
10.1 Employment Agreement dated as of September 9,
1999, between Liberty Digital, Inc. and Jarl Mohn,
also known as Lee Masters.
10.2 TCI Music Deferred Compensation and Stock
Appreciation Rights Plan.
10.3 Deferred Compensation and Stock Appreciation Right
Agreement dated as of August 12, 1999 between TCI
Music, Inc. Liberty Media Corporation and Jarl Mohn,
also known as Lee Masters.
10.4 Deferred Compensation and Stock Appreciation Right
Agreement dated as of August 12, 1999 between TCI
Music, Inc. Liberty Media Corporation and Bruce W.
Ravenel.
10.5 Tax Liability Allocation and Indemnification
Agreement dated as of September 9, 1999, by and
between Liberty Media Corporation, Liberty Digital,
Inc. for and on behalf of itself and each member of
the Digital Group, and Liberty Media Group LLC.
10.6 Registration Rights Agreement, dated as of September
9, 1999 among Liberty Digital, Inc. and Liberty Media
Corporation.
27. Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
TCI MUSIC, INC.
TCI Music, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of TCI Music, Inc., at a special
meeting of the directors on June 22, 1999, adopted resolutions setting forth
proposed amendments to the Certificate of Incorporation of said corporation. The
resolutions setting forth proposed amendments are as follows:
RESOLVED, that proposed amendments to the Certificate of
Incorporation of the corporation, (i) deleting in its entirety SECTION
B of ARTICLE VIII -- MEETINGS OF STOCKHOLDERS, (ii) amending and
restating ARTICLE I -- NAME to read in its entirety as follows, and
(iii) amending the first two paragraphs of ARTICLE IV -- CAPITALIZATION
to read as follows, are recommended to the stockholders for approval as
being in the best interests of the corporation:
ARTICLE I
NAME
The name of the Corporation is Liberty Digital, Inc.
ARTICLE IV
AUTHORIZED STOCK
The total number of shares of capital stock which the
Corporation shall have authority to issue is one billion seven
hundred and fifty five million (1,755,000,000) shares, of which
one billion seven hundred and fifty million (1,750,000,000) shares
shall be common stock ("Common Stock") and five million
(5,000,000) shares shall be preferred stock with a par value of
$.01 per share ("Preferred Stock"). The Common Stock shall be a
single class designated as Common Stock with a par value of $.01
per share and shall be issuable in series as provided in Section A
of this Article IV. A description of the Common Stock and the
Preferred Stock of the Corporation, and the relative rights,
preferences and limitations thereof, or the method of fixing and
establishing the same, are as
<PAGE> 2
hereinafter in this Article IV set forth:
SECTION A
SERIES A COMMON AND SERIES B COMMON STOCK
One billion (1,000,000,000) shares of Common Stock shall be
of a series designated as Series A Common Stock (the "Series A
Common Stock") and seven hundred and fifty million (750,000,000)
shares of Common Stock shall be of a series designated as Series B
Common Stock (the "Series B Common Stock"). Each share of the
Series A Common Stock and each share of the Series B Common Stock
shall, except as otherwise provided in this Section A, be
identical in all respects and shall have equal rights and
privileges.
SECOND: That the stockholders of said corporation duly adopted the
foregoing resolutions at a meeting of the stockholders held September 8, 1999,
which meeting was called and held in accordance with the provisions of Section
222 of the General Corporation Law of the State of Delaware.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, TCI Music, Inc. has caused this certificate to be
executed by David B. Koff, its Vice President, on this 9th day of September,
1999.
TCI MUSIC, INC.
By: /s/ David B. Koff
------------------------------------
David B. Koff, Vice President
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<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of September 9, 1999,
between LIBERTY DIGITAL, INC., a Delaware corporation (the "Company"), and JARL
MOHN, also known as Lee Masters ("Executive").
WHEREAS, Executive is a party to an Employment Agreement with Liberty
Media Corporation ("Liberty") dated September 28, 1998 (the "Liberty Employment
Agreement"), pursuant to which he is employed as President and Chief Executive
Officer of Liberty Digital LLC (the "LLC");
WHEREAS, concurrently with the execution and delivery of this
Agreement, Liberty, Executive and Company are entering into a Deferred
Compensation and Stock Appreciation Rights Agreement in the form attached as
Exhibit A (the "Compensation Agreement");
WHEREAS, Liberty, the LLC and the Company are parties to a Contribution
Agreement dated April 23, 1999, pursuant to which substantially all of the
assets of the LLC have been contributed to the Company;
WHEREAS, the Executive Committee of the Board of Directors of Liberty
has adopted a policy pursuant to the Compensation Agreement that the Company
shall be the primary (but not exclusive) vehicle for the pursuit of Interactive
Programming Opportunities (as defined in the Contribution Agreement) that are
provided or otherwise made available to Liberty (the "Liberty Policy");
WHEREAS, Executive is President and Chief Executive Officer of the
Company;
WHEREAS, Executive, Liberty and the Company desire to terminate the
Liberty Employment Agreement and enter into this Agreement on substantially the
same terms;
WHEREAS, this Agreement sets forth the terms and conditions of the
employment by the Company of Executive;
WHEREAS, in consideration of the mutual covenants set forth in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, agree as follows:
1. Termination of Liberty Employment Agreement; Term and Termination.
(a) Termination of Liberty Employment Agreement. Upon execution
and delivery of this Agreement the Liberty Employment Agreement is terminated.
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<PAGE> 2
(b) Term. Subject to the terms and conditions of this Agreement,
the Company will employ Executive, and Executive will serve the Company, from
the date of this Agreement until December 15, 2003 (the "Employment Term").
(c) Termination by the Company. Executive's employment may be
terminated by the Company only as follows:
(i) Upon the death of Executive;
(ii) Upon 180 days prior notice from the Company to Executive
(the "Notice Period"), in the event of an illness or other disability
which has incapacitated Executive from performing his duties hereunder,
as defined in a long-term liability insurance policy to be purchased by
Executive, a copy of which will be provided to the Company or, if such
policy is not purchased or a copy thereof is not delivered to the
Company, as determined in good faith by the Board of Directors of the
Company (the "Board"), for at least 180 consecutive days during the
twelve calendar months preceding the month in which such notice is
given; provided, however, that in the event that, prior to the end of
the Notice Period, Executive recovers from such illness or other
disability to an extent permitting him to perform his duties hereunder,
the notice of termination pursuant to this clause (ii) will be of no
further force and effect;
(iii) At any time upon notice of termination of Executive
pursuant to this Section 1(c)(iii) and by paying to Executive in a lump
sum on the effective date of such termination compensation for the
remaining term of this Agreement pursuant to Section 4(a), calculated
at the annual rate then in effect;
(iv) At any time for "cause" (a "Termination for Cause"),
which for purposes of this Agreement will be deemed to have occurred
only on the happening of any of the following:
(A) the plea of guilty to, or conviction for, the
commission of a felony offense by Executive, provided, however,
that after indictment the Company may suspend Executive from the
rendition of services but without limiting or modifying in any
other way the Company's obligations under this Agreement;
(B) a material breach by Executive of a material fiduciary
duty owed to the Company;
(C) a material breach by Executive of any of the covenants
made by him in Sections 8 and 9; or
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<PAGE> 3
(D) the willful and gross neglect by Executive of the
material duties specifically and expressly required by this
Agreement;
provided, however, that any claim that "cause," within the meaning of
clause (B), (C) or (D) above, exists for the termination of Executive's
employment may be asserted on behalf of the Company only by a duly
adopted resolution of the Board and only after 30 days' prior notice to
Executive during which period he may cure the breach or neglect that is
the basis of any such claim, if curable; provided, further, that no
state of facts that, with or without notice to Executive or the passage
of time or both, would give rise to the right of the Company to
terminate Executive's employment pursuant to clause (ii) of this
Section 1(c) may, directly or indirectly, in whole or in part, be the
basis for a claim that "cause," within the meaning of clause (D) above,
exists for the termination of Executive's employment.
(d) Termination by Executive. Executive may terminate his
employment by the Company at any time by giving notice thereof to the Company.
For purposes of this Agreement, any termination by Executive will be deemed to
be a "Voluntary Termination" unless it is a "Termination for Good Reason," which
will be deemed to have occurred if Employee terminates his employment because of
(i) a material diminution of Executive's duties as President and Chief Executive
Officer of the Company, including, without limitation, the appointment by the
Company of a Co-President or Co-Chief Executive Officer, (ii) the imposition by
the Board of a requirement that Executive report to a person other than such
Board, (iii) Executive ceasing to serve as a director of the Company, other than
due to Executive's resignation, refusal to stand for reelection or death, (iv)
the failure of Liberty (as defined in the Compensation Agreement), on or after
January 1, 2002, to follow the Liberty Policy if, and only if, the Per Share
Fair Market Value as of the Valuation Date corresponding to Executive's
termination pursuant to this clause (iv) is greater than the Target Per Share
Value as of such date (with Per Share Fair Market Value, Valuation Date and
Target Per Share Value having the meanings given them in, and being determined
pursuant to, the Compensation Agreement)), (v) an arbitrator's determination
pursuant to Section 11 of the Compensation Agreement that a valuation made by
the Board pursuant to clause (i) of the last paragraph of Section 10.b. of the
Compensation Agreement in connection with the issuance of Common Stock or a
Derivative Security to Liberty or an Affiliate of Liberty (with Common Stock,
Derivative Security, Liberty and Affiliate having the meanings given them in the
Compensation Agreement) was not made in good faith or (vi) the breach by the
Company in any material respect of any of its material obligations under this
Agreement, and, in any such case (but only if correction or cure is possible),
the failure by the Company to correct or cure the circumstance or breach on
which such termination is based within 30 days after receiving notice from
Executive describing such circumstance or breach in reasonable detail.
(e) Effect of Termination. If Executive's employment by the
Company is terminated by Executive or by the Company pursuant to Section 1(c),
all compensation under Section 4 of this Agreement that has accrued in favor of
Executive as of the date of such termination, to the extent unpaid or
undelivered, will be paid or delivered to Executive on the date of termination.
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<PAGE> 4
If Executive's termination of his employment is a Termination for Good Reason,
Executive will be entitled to a lump sum payment in the same amount as would be
payable to Executive if such termination were by the Company pursuant to clause
(iii) of Section 1(c). Upon termination of Executive's employment and payment of
such amount (and, if applicable, the full amount payable pursuant to clause
(iii) of Section 1(c) or the preceding sentence), the Company's obligations
under this Agreement will terminate, except as provided in the fifth, sixth and
seventh sentences of this Section 1(e) (if and to the extent applicable),
Section 5 (as it relates to expenses incurred prior to such termination) and
Section 7 of this Agreement. Executive acknowledges that his obligations under
Sections 8, 9, 10 and 11 will survive any such termination. If Executive dies
while employed by the Company or during the period that he is receiving payments
pursuant to the immediately succeeding sentence, the Company will, as promptly
as practicable following Executive's death, pay to Executive's designated
beneficiary or beneficiaries in a lump sum an amount equal to one year's
compensation under Section 4(a) of this Agreement, calculated at the annual rate
in effect at the time of Executive's death. If Executive's employment is
terminated pursuant to Section 1(c)(ii) of this Agreement, the Company will
continue to pay to Executive his annual salary (at the rate in effect at the
time of termination of his employment) as and when the same would otherwise be
due in accordance with Section 4 of this Agreement for one year from such date
of termination. The phrase "designated beneficiary or beneficiaries" means the
person or persons named from time to time by Executive in a signed instrument
filed with the Company; provided, however, that if a designation made in any
such instrument is for any reason ineffective, or if no such designation has
been made, the phrase "designated beneficiary or beneficiaries" will mean the
Executive's estate.
(f) At least 180 days prior to the end of the initial term of this
Agreement, the Company and Executive will notify the other if such party does
not intend to renew this Agreement beyond such initial term.
2. Services to be Rendered by Executive. Executive will serve as a
director and as President and Chief Executive Officer of the Company. In such
capacities, Executive will perform all reasonable acts customarily associated
with such positions, or necessary or desirable to protect and advance the best
interests of the Company and its subsidiaries. Without limiting the generality
of the foregoing, Executive will be responsible for directing the development
and integration of the Company's business and for developing, in coordination
with Liberty, new media or cable programming businesses that take advantage of
the competencies of the Company, in each case with the goal of maximizing the
value of the Company's stock. If Executive is currently serving as or is elected
a director of Liberty or a director or an officer of any of Liberty's
subsidiaries or affiliates in addition to the Company, Executive will serve in
any such capacities without further compensation except as may be decided by the
Company at the Company's sole election. Executive will perform such acts and
carry out such duties, and will in all other respects serve the Company,
faithfully and to the best of his ability. Executive will, during the Employment
Term, be based in Los Angeles, California, with the understanding that Executive
will travel as reasonably required in the performance of his duties under this
Agreement.
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<PAGE> 5
3. Time to Be Devoted by Executive. Executive will devote substantially
all of his business time, attention, efforts and abilities to the business of
the Company and will use his best efforts to promote the interests of the
Company and not to commit acts detrimental to the Company's interest. Executive
confirms that he has no business interests of any kind which will require a
significant portion of his business time other than his employment by the
Company. Notwithstanding anything to the contrary stated above, but subject to
Section 8, Executive will be permitted to make and manage business investments
and to engage in noncompetitive activities of any nature whatsoever so long as
those activities do not interfere in any material respect with the performance
by Executive of the duties contemplated by this Agreement.
4. Compensation Payable to Executive.
(a) Subject to Section 12, during the Employment Term, the Company
will pay to Executive salary at the rate of $750,000 per annum, such rate to be
increased annually on each January 1, beginning January 1, 2000, by the greater
of (a) the percentage increase, if any, in the Consumer Price Index, All Urban
Consumers (CPI-U), U.S. City Average, All Items, as published by the U.S.
Department of Labor, Bureau of Labor Statistics (or any similar successor index)
from December 31, 1998, in the case of the year beginning January 1, 2000, and
from each December 31 thereafter for each succeeding year or (b) 5%. All
payments under this Agreement will be subject to applicable withholding and
similar taxes. The Board of Directors will review Executive's compensation
annually to determine, in its sole discretion, whether any additional increase
in the Executive's salary is appropriate.
(b) Executive's annual compensation will be paid to Executive in
accordance with the Company's regular policy but not less frequently than once a
month.
5. Expenses. The Company will reimburse Executive for the reasonable
amount of dining, hotel, travel, entertainment and other expenses (consistent
with the Company's reimbursement standards for its most senior officers)
necessarily incurred by Executive in the discharge of his duties hereunder.
6. Executive Benefit Plans and Vacations. Executive will be entitled to
participate in all formal incentive compensation, incentive stock option,
retirement, insurance, hospitalization and disability plans that are in
existence or may be adopted by the Company or in which employees of the Company
are eligible to participate, provided that Executive is eligible by the terms
thereof to participate therein. Executive will be entitled to paid vacation for
a number of weeks per year which Executive reasonably deems appropriate in light
of his duties under this Agreement.
7. Indemnification. The Company will indemnify and hold harmless
Executive, to the fullest extent permitted by applicable law, in respect of any
liability, damage, cost or expense (including reasonable counsel fees) incurred
in connection with the defense of any claim, action, suit or proceeding to which
he is a party, or any threat thereof, by reason of his being or having been an
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<PAGE> 6
officer or director of the Company or any subsidiary of the Company, or his
serving or having served at the request of the Company or Liberty as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust, business organization, enterprise or other entity, including
service with respect to employee benefit plans. Without limiting the generality
of the foregoing, the Company will pay the expenses (including reasonable
counsel fees) of defending any such claim, action, suit or proceeding in advance
of its final disposition, upon receipt of an undertaking by Executive to repay
all amounts advanced if it should ultimately be adjudicated by a court of
competent jurisdiction that Executive is not entitled to be indemnified under
this Section.
8. Noncompetition. So long as Executive is employed by the Company and
for the Applicable Period (as defined below) following the termination of his
employment, Executive will not, directly or indirectly, as principal or agent,
or in any other capacity, own, manage, operate, participate in or be employed by
or otherwise be interested in, or connected in any manner with, any person,
firm, corporation or other enterprise which competes in the United States or
elsewhere in the world in any material respect with any business conducted by
the Company or any of its subsidiaries as such business is conducted while
Executive is employed by the Company. Nothing herein contained will be construed
as denying Executive the right to own securities of any such corporation which
is listed on a national securities exchange or quoted in the NASDAQ system to
the extent of an aggregate of 5% of the amount of such securities outstanding.
For purposes hereof, the term "Applicable Period" will apply only in the case of
a Voluntary Termination or a Termination for Cause and means the period
beginning on the effective date of the termination of Executive's employment
with the Company (the "Effective Date") and ending on the earlier of (i) the
second anniversary of the Effective Date or (ii) December 31, 2003.
9. Confidentiality. Other than in the performance of his duties
hereunder, Executive will not, so long as he is employed by the Company or
thereafter, directly or indirectly make use of, or divulge to any person, firm,
corporation, entity or business organization, and he will use his best efforts
to prevent the publication or disclosure of, any confidential or proprietary
information concerning, the business, accounts or finances of, or any of the
methods of doing business used by the Company or of the dealings, transactions
or affairs of the Company or any of its customers which have or which may have
come to his knowledge during his employment with the Company; but this Section 9
will not prevent Executive from responding to any subpoena, court order or
threat of other legal duress, provided Executive notifies the Company hereof
with reasonable promptness so that the Company may seek a protective order or
other appropriate relief.
10. Delivery of Materials. Upon termination of Executive's employment,
Executive will deliver to the Company all documents, papers, materials and other
property of the Company and of any of its subsidiaries or affiliates relating to
their respective affairs, which may then be in his possession or under his
control.
11. Noninterference. Executive will not, while in the employ of the
Company and for the two-year period following the effective date of the
termination of his employment, solicit the employment of any employee of the
Company or any of its subsidiaries or affiliates on behalf of any
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<PAGE> 7
other person, firm, corporation, entity or business organization or otherwise
interfere with the employment relationship between any employee or officer of
the Company or any of its subsidiaries or affiliates and the Company or any of
its subsidiaries or affiliates.
12. Remedies. In the event of a material breach by Executive of this
Agreement, or termination of his employment by the Company pursuant to Section
1(c)(iv), he will be deemed to have relinquished all rights to any amounts
payable under Section 4 and all other benefits hereunder at and after the time
of such breach or termination, but will be required to comply with the
provisions of Sections 8, 9, 10 and 11 of this Agreement. Upon any such breach
or termination, the Company will be entitled, if it so elects and in addition to
any other lawful remedies that may be available to it, to institute and
prosecute proceedings at law or in equity to obtain damages with respect to such
breach or to enforce the specific performance of this Agreement by Executive or
to enjoin Executive from engaging in any activity in violation thereof.
Executive acknowledges and agrees that any breach or threatened breach by
Executive of any of Sections 8, 9, 10 and 11 hereof will cause immediate,
irreparable injury to the Company and that money damages will not provide an
adequate remedy for any such breach or threatened breach. Accordingly, upon any
such breach or threatened breach by Executive of such Sections the Company will
be entitled, in addition to any other lawful remedies that may be available to
it, to injunctive relief, and no bond or other security will be required.
13. Notices. All notices to be given hereunder will be in writing and
will be deemed duly given when delivered personally or mailed, certified mail,
return receipt requested, postage prepaid and addressed as follows:
(a) If to be given to the Company:
Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
Attention: President
(b) If to be given to Executive:
Lee Masters
c/o Jarl Mohn
12875 Chalon Road
Los Angeles, California 90049
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<PAGE> 8
with a copy to:
Kenneth Doran, Esq.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
or to such other address as a party may furnish to the other in writing in
accordance with this Section 13.
14. Severability. The provisions of this Agreement are severable and if
any such provision or the application thereof to any person or circumstance is
held by a court or governmental authority of competent jurisdiction to be
invalid, void or unenforceable, the remaining provisions hereof, or the
application of such provision to persons or circumstances other than those as to
which it has been held invalid or unenforceable, will remain in full force and
effect and will in no way be affected, impaired or invalidated thereby. Without
limiting the generality of the foregoing, should any court or governmental
authority of competent jurisdiction determine that the provisions of Section 8
are unenforceable in respect of scope, duration, geographic area or any other
matter, such court or governmental authority will be empowered to substitute, to
the extent enforceable, similar provisions or other provisions so as to provide,
to the fullest extent permitted by applicable law, the benefits intended by
Section 8.
15. Waiver. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion will not be considered a waiver of
any other breach of that or any other provision hereof.
16. Withholding. The Company will be entitled to withhold from amounts
or other consideration payable or issuable to Executive hereunder such amounts
as may be required by law.
17. Miscellaneous. This Agreement may not be changed nor can any
provision hereof be waived except by an instrument in writing duly signed by the
party to be charged, and constitutes the entire agreement between the Company
and Executive with respect to the subject matter hereof. Notwithstanding that
the Compensation Agreement provides that it will be constructed and enforced in
accordance with the internal laws of the State of California without regard to
choice of law principles as provided in Section 13.f. thereof, this Agreement
will be interpreted, governed and controlled by the internal laws of the State
of Colorado, without reference to principles of conflict of laws.
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<PAGE> 9
IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
/s/ Jarl Mohn
------------------------------------
Jarl Mohn, a/k/a Lee Masters
LIBERTY DIGITAL, INC.
By: /s/ Charles Y. Tanabe
--------------------------------
Charles Y. Tanabe
Vice President
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<PAGE> 1
EXHIBIT 10.2
TCI MUSIC DEFERRED COMPENSATION
AND STOCK APPRECIATION RIGHTS PLAN
1. Management SARs for an aggregate of 9 1/2% of the appreciation over the
base value of $500 million of Liberty Digital, LLC are replaced by a
bifurcated compensation plan of TCI Music, Inc. ("TCI Music"),
comprised of a deferred compensation plan and stock appreciation rights
grants, of which Lee Masters and Bruce W. Ravenel will be the sole
participants. The new plan is intended to place Mr. Masters and Mr.
Ravenel in substantially the same economic position as they would have
been under the old plan on substantially the same terms as the SARs. In
addition, the employment agreement between Lee Masters and Liberty
Media Corporation ("LMC") will be terminated by mutual consent and Mr.
Masters will enter into a substitute employment agreement with TCI
Music with substantially the same terms and effective as of the
original effective date, except as set forth below. The plan is
conditioned upon the approval by the shareholders of TCI Music.
2. Deferred Compensation.
a. The deferred compensation plan payment will be calculated on
the appreciation of (1) 9 1/2% of the Series A common stock
and Series B Common Stock held by LMC (74,457,196 shares) plus
the 128,755,360 shares LMC would have otherwise been entitled
to under the Contribution Agreement (a total of 203,212,556
shares), or 19,305,193 shares, (2) over $2.46 per share. The
deferred compensation for each participant in the plan will be
capped at the difference between the fair market value of a
share of Series A common stock on the date of grant (the
"Strike Price") and $2.46 per share multiplied by the number
of shares subject to the grant.
b. The valuation date for each grant will be the earlier to occur
of (1) termination of employment, (2) a change of control (as
defined in the award agreements) or sale of TCI Music (as
defined in the award agreements) and (3) December 15, 2003.
Payments, if any, of deferred compensation will be made only
after termination of employment. Interest will accrue on any
fixed portion from the valuation date until the payment date.
c. The deferred compensation is payable only if the Valuation
Price Per Share of a share of the Series A common stock
exceeds $2.46 per share, plus notational interest on that
amount from January 1, 1999 at the rate of 10% per annum,
compounded annually.
d. On payment of deferred compensation, participants will be
entitled to receive the difference between (1) the lesser of
the Strike Price or the Valuation Price Per Share and (2)
$2.46 multiplied by the number of shares subject to the grant.
<PAGE> 2
3. Stock Appreciation Rights.
a. Stock appreciation rights with respect to 19,295,193 shares of
TCI Music Series A common stock will be granted at the Strike
Price on the same date as the deferred compensation awards.
Upon exercise (or deemed exercise) of a stock appreciation
right, participants will receive the difference between the
fair market value of a share of Series A common stock on the
date of exercise and the Strike Price multiplied by the number
of shares as to which the exercise relates. Provided however
upon the deemed exercise of the SAR on the Valuation Date, the
participants will receive the difference between the Valuation
Price Per Share (as defined below) of a share of Series A
common stock on the date of exercise and the Strike Price
multiplied by the number of shares as to which the exercise
relates.
b. Stock appreciation rights will be exercisable upon vesting and
all vested but unexercised stock appreciation rights are
automatically deemed exercised (to the extent such stock
appreciation rights are in-the-money) on the valuation date.
All unexercised options expire on the valuation date.
4. Valuation. The "Valuation Price Per Share" means:
a. In the case of a voluntary termination (as defined in the
award agreement) by a participant (other than for good reason
(as defined in the award agreement)) or if the valuation date
is under the conditions described in paragraph 11, the average
closing price of the Series A common stock during the 60
calendar days beginning 120 days after the public announcement
of the participant's termination or the intent not to renew
Mr. Masters' employment agreement, as applicable; or
b. If clause a. does not apply, the fair market value of the
Series A common stock on the valuation date.
5. Payments.
a. Payment of amounts payable under the plan will be made, at TCI
Music's option (subject to clause b. below), in cash or its
Series A common stock. If payment is made in TCI Music
securities, TCI Music will provide registration rights and LMC
will provide price protection (as against the Valuation Price
Per Share or the fair market value on the date of exercise or
the valuation date, as applicable) so long as participant
sells within 180 days of effective date of the registration
statement relating to the shares sold. Participant will have a
duty to sell the securities in a manner that will, in the good
faith judgment of participant and his financial advisors,
maximize the average selling price.
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<PAGE> 3
b. On any payment date, LMC will have the right to purchase from
TCI Music a number of shares of Series B common stock equal to
the amount of cash to be paid to participant divided by the
value of a share of Series A common stock used to determine
the amount of the payment. The purchase price paid by LMC will
be paid in cash in an amount equal to the amount of cash to be
paid to participant by TCI Music. As an alternative to the
foregoing payment procedure, LMC may, in the case of an
exercise of a stock appreciation right, purchase a number of
shares of Series B common stock from TCI Music equal to the
number of shares subject to the stock appreciation right from
TCI Music for the value of a share of Series A common stock
used to determine the amount of the payment, multiplied by the
number of stock appreciation rights exercised. In no event
will LMC have the right to purchase more than an aggregate of
19,295,193 shares of Series B common stock pursuant to this
paragraph.
6. Rights to deferred compensation and stock appreciation rights with
respect to 15,230,942 shares and 4,064,251 shares, will be granted to
Mr. Masters and Mr. Ravenel, respectively, by the Compensation
Committee of the Board of Directors. Pursuant to arrangements with TCI
Music, Mr. Masters has waived the right to receive grants with respect
to 10,000 shares.
7. Mr. Masters and Mr. Ravenel will become vested in their respective
rights to deferred compensation and stock appreciation rights with
respect to 20% of the shares attributable to them on each December 15
beginning December 15, 1999. Upon the sale of the Company (as defined
in the award agreement), a change of control of the Company (as defined
in the award agreement) or termination of the participant's employment
by the Company for any reason other than cause (as defined in the award
agreement) or termination of the participant's employment by him for
good reason (as defined in the award agreement) all such rights will
become fully vested. All rights that have not vested will be forfeited
by the participant if he is terminated for cause (as defined in the
award agreement).
8. TCI Music shareholders will be asked to approve the plan at the annual
meeting of shareholders. The plan, and any grants made pursuant to the
plan prior to shareholder approval, are subject to and conditioned on
such shareholder approval. LMC will cause shares of TCI Music voting
securities beneficially owned by it to be voted in favor of the plan.
9. LMC will hold 183,907,363 shares of Series A and Series B common stock
following the Liberty Digital transaction.
10. Mr. Masters' employment agreement will terminate on 12/15 of the
relevant year.
11. If either party intends not to renew Mr. Masters' employment agreement,
Mr. Masters and TCI Music will provide notice to the other at least 180
days prior to the termination date of Mr. Masters' employment
agreement.
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12. If and to the extent that participant is required to pay income tax on
the deferred compensation or stock appreciation right payments prior to
the expiration of the 180-day period established for selling
securities, TCI Music will loan participant the amount in excess of any
sale proceeds to pay the income tax, with repayment coming out of
additional sale proceeds.
13. The terms and conditions of the awards made pursuant to the plan will
be set forth in award agreements among each participant, TCI Music and
LMC.
14. The maximum number of shares of Series A common stock issuable to
participants is 19,295,193 plus the number of shares determined by
dividing the difference between the Strike Price and $2.46 by the
Valuation Price Per Share of a share of Series A common stock.
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EXHIBIT 10.3
DEFERRED COMPENSATION AND
STOCK APPRECIATION RIGHT AGREEMENT
This DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHT AGREEMENT is
made as of August 12, 1999 (the "Effective Date"), between TCI Music, Inc., a
Delaware corporation, Liberty Media Corporation, a Delaware corporation, and
Jarl Mohn, also known as Lee Masters ("Executive").
RECITALS:
The parties make this Agreement with reference to the following facts:
A. In connection with a Contribution Agreement dated as of April 23,
1999 by and among the Company, Liberty and certain affiliates of Liberty, as
amended (the "Contribution Agreement"), the Company has adopted a Deferred
Compensation and Stock Appreciation Rights Plan (the "Plan").
B. The Plan provides for awards to be granted to Executive in exchange
for the cancellation of awards made to Executive by Liberty prior to the date of
the Contribution Agreement.
C. Concurrently with the execution and delivery of this Agreement, the
Company and Executive are entering into an amendment to the Employment Agreement
dated September 28, 1998 between Liberty and Executive.
In consideration of services rendered or to be rendered to the Company
and its Affiliates by Executive, and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
agree as follows:
1. DEFINITIONS. For purposes of this Agreement, any word or phrase with
initial capital letters will have the meaning set forth below:
a. ACT: the Securities Act of 1933, as amended.
b. AFFILIATE: any Person directly or indirectly Controlling,
Controlled by or under common Control with a Person.
c. AGREEMENT: this Agreement, as it may from time to time be
amended in accordance with its terms.
d. CHANGE IN CONTROL: with respect to the Company, the occurrence
of any transaction as the result of which (i) Liberty ceases to be a beneficial
owner (as defined in Rule 13d-3 under the Exchange Act) of Voting Securities of
the Company representing at least 25% of the total voting power of all Voting
Securities of the Company and (ii) any other person (within the
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meaning of Section 13(d)(3) of the Exchange Act) beneficially owns Voting
Securities of the Company representing more voting power than the Voting
Securities of the Company of which Liberty is a beneficial owner. For purposes
of this definition, "Voting Securities" means, with respect to the Company, the
capital stock or other ownership interests in the Company having general voting
power under ordinary circumstances to elect directors (or similar officials), of
the Company, but will not include any capital stock that has or would have such
voting power solely by reason of the happening of any contingency.
e. COMMON EQUITY: if there is a Per Share Public Market Value,
Common Equity means the Series A Common Stock; if there is no Per Share Public
Market Value, Common Equity means the Series A Common Stock, the Series B Common
Stock and any other class or series of common stock of the Company then
outstanding.
f. COMMON STOCK: the Series A Common Stock.
g. COMPANY: TCI Music, Inc. and its successors and assigns.
h. COMPANY FAIR MARKET VALUE: as of any date of determination, the
Fair Market Value of all shares of Common Equity then outstanding, which Fair
Market Value will be: (i) if there is a Per Share Public Market Value, the
product of the number of the Shares Outstanding and the Per Share Public Market
Value; or (ii) if there is no Per Share Public Market Value, the amount
determined pursuant to Section 8 or Section 11.b. as applicable.
i. COMPANY INDEMNIFIED PARTIES: as defined in Section 7.d(iv).
j. CONTRIBUTION AGREEMENT: as defined in Recital A to this
Agreement.
k. CONTROL: the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
l. DEFERRED COMPENSATION CAP: the difference between the SAR Per
Share Base Value and the Deferred Compensation Per Share Base Value.
m. DEFERRED COMPENSATION PER SHARE APPRECIATION: as of the
Valuation Date, the amount, expressed in U.S. currency rounded to the nearest
cent, equal to any excess in the lesser of (1) the SAR Per Share Base Value and
(2) the Per Share Fair Market Value over the Deferred Compensation Per Share
Base Value.
n. DEFERRED COMPENSATION PER SHARE BASE VALUE: as of any date of
determination, $2.46, subject to adjustment from time to time pursuant to
Section 11.
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o. DERIVATIVE SECURITY: any option, warrant or other right to
acquire, or any security convertible into or exchangeable for, one or more
shares of Common Stock.
p. DISADVANTAGEOUS CONDITION: as defined in Section 7.d(iv).
q. EFFECTIVE DATE: as defined in the preamble to this Agreement.
r. EMPLOYMENT AGREEMENT: the Employment Agreement dated effective
as of September 28, 1998 between Liberty and Executive, as amended, and as it
may from time to time be further amended in accordance with its terms.
s. EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
t. EXECUTIVE: the individual identified as "Executive" in the
preamble to this Agreement, and his permitted assigns.
u. EXERCISE DATE: the date that a notice of exercise is received
by the Company, with respect to an exercise of all or a portion of the SAR by
Executive, other than a deemed exercise on the Valuation Date.
v. FAIR MARKET VALUE: with respect to any asset, the cash price at
which a willing seller would sell and a willing buyer would buy such asset
having full knowledge of the relevant facts, in an arm's-length transaction
without time constraints, and without being under any compulsion to buy or sell.
w. LIBERTY: Liberty Media Corporation, a Delaware corporation, and
its successors and assigns, including for purposes of this definition any Person
to which all or substantially all of Liberty's assets are transferred, whether
by merger or otherwise.
x. LIBERTY POLICY: the policy set forth in Schedule 4.8 to the
Contribution Agreement.
y. LOSSES: as defined in Section 7.d(iv).
z. PER SHARE FAIR MARKET VALUE: as of any date of determination:
(1) if the Common Stock is registered pursuant to Section 12(b) or Section 12(g)
of the Exchange Act, the Per Share Public Market Value; or (2) if the Common
Stock is not then so registered, the Company Fair Market Value divided by the
number of Shares Outstanding.
aa. PER SHARE PUBLIC MARKET VALUE: as of any date of
determination, the average of the reported closing market prices of the Common
Stock for the 20 consecutive trading days ending on the trading day prior to
such date; provided that in the case of a Voluntary Termination or if either
party to the Employment Agreement has given notice pursuant to Section
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ii of the Plan of his or its intention not to renew the Employment Agreement the
Per Share Public Market Value will be the average of the reported closing market
prices of the Common Stock for the 60 calendar days beginning 120 days after the
public announcement by the Company of such Voluntary Termination or that one of
the parties has given notice pursuant to the Employment Agreement of his or its
intention not to renew the Employment Agreement. The closing market price for
each day in question will be the last sale price, regular way or, if no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system of the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
last quoted sale price or, if no such sale price is quoted, the average of the
high bid and low asked prices in the over-the-counter market, as reported by the
NASDAQ Stock Market or such other system then in use or, if on any such trading
day such capital stock is not quoted by any such organization, the average of
the closing bid and asked prices as furnished by the professional market maker
who has been most active in making a market in such capital stock during the
preceding 12 months. The Per Share Public Market Value will be appropriately
adjusted to reflect the effects of any stock dividend, stock split,
reclassification, recapitalization or combination affecting the Common Stock,
the record date, ex-dividend date or similar date of which occurs during the
period of trading days preceding the date of determination.
bb. PERSON: a human being or a corporation, partnership, trust,
limited liability company, unincorporated organization, association or other
entity.
cc. PLAN: as defined in Recital A to this Agreement.
dd. PRIME RATE: at any time, the rate of interest adopted by Bank
of America National Trust and Savings Association, as its reference rate for the
determination of interest rates for loans of varying maturities in United States
dollars to United States residents of varying degrees of creditworthiness and
being quoted at such time by such bank as its "prime rate."
ee. SAR: as defined in Section 2.b.
ff. SAR PER SHARE BASE VALUE: as of any date of determination,
$19.125, subject to adjustment from time to time pursuant to Section 11.
gg. SAR PER SHARE APPRECIATION: as of the Valuation Date or an
Exercise Date, whichever is applicable, the amount, expressed in U.S. currency
rounded to the nearest cent, equal to any excess in Per Share Fair Market Value
over the SAR Per Share Base Value.
hh. SALE OF THE COMPANY: (i) the sale, exchange or other
disposition of all or substantially all of the Company's assets (other than
cash, cash equivalents and marketable securities) to or with one or more Persons
other than any Affiliate of the Company; (ii) the sale, exchange or other
disposition of all or substantially all of the outstanding shares of Common
Equity
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<PAGE> 5
to or with one or more Persons other than any Affiliate of the Company; or (iii)
the merger or consolidation of the Company with or into another Person other
than an Affiliate of the Company, as a result of which merger or consolidation
the holders of shares of outstanding Common Equity receive or become irrevocably
entitled to receive cash, securities or other assets in exchange for those
shares. Notwithstanding the foregoing, no transaction described in clause (ii)
or clause (iii) of the foregoing sentence will be a Sale of the Company unless
such transaction results in a Change in Control of the Company.
ii. SEC: the Securities and Exchange Commission.
jj. SERIES A COMMON STOCK: the Series A common stock, $.01 par
value per share, of the Company or any successor class or series of capital
stock.
kk. SERIES B COMMON STOCK: the Series B common stock, $.01 par
value per share, of the Company or any successor class or series of capital
stock.
ll. SHARES OUTSTANDING: as of any date of determination, the
number of all issued and outstanding shares of Common Equity on a fully diluted
basis.
mm. TARGET PER SHARE VALUE: as of any date of determination, $2.46
plus notional interest on that amount from January 1, 1999 at the rate of 10%
per annum, compounded annually.
nn. TERMINATION DATE: as defined in Section 14.
oo. TERMINATION FOR CAUSE: as defined in the Employment Agreement.
pp. TERMINATION FOR GOOD REASON: as defined in the Employment
Agreement.
qq. VALUATION DATE: as defined in Section 4.
rr. VOLUNTARY TERMINATION: as defined in the Employment Agreement.
The term "Strike Price" in the Plan means "Deferred Compensation Per
Share Base Price" in this Agreement and the term "Valuation Price Per Share" in
the Plan means "Per Share Fair Market Value" in this Agreement.
2. GRANTS.
a. Subject to the terms and conditions of this Agreement, the
Company hereby grants and issues to Executive, as of the Effective Date, a right
to deferred compensation equal to the Deferred Compensation Per Share
Appreciation with respect to an aggregate of 15,230,442 shares of Common Stock.
Subject to the requirement that the Per Share Fair Market
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Value as of the Valuation Date equals or exceeds the Target Per Share Value, the
Company will pay Executive an amount determined on the Valuation Date equal to
the Deferred Compensation Per Share Appreciation multiplied by the number of
Executive's vested shares provided that in no event shall the amount of Deferred
Compensation Per Share Appreciation exceed the amount of the Deferred
Compensation Cap. The value of such deferred compensation is payable only upon
termination of Executive's employment with the Company and in the manner
provided in Section 7.
b. Subject to the terms and conditions of this Agreement, the
Company hereby grants and issues to Executive, as of the Effective Date, a right
(a "SAR") to the SAR Per Share Appreciation with respect to an aggregate of
15,230,442 shares of Common Stock. Upon exercise of a SAR, the Company will pay
Executive an amount determined on the Valuation Date or on an Exercise Date,
whichever is applicable, equal to the SAR Per Share Appreciation multiplied by
the number of shares of Common Stock with respect to which the SAR is exercised.
The value of such right is payable at indeterminate dates and in the manner
provided in Section 7.
c. Each of the foregoing grants are restricted as to
transferability (as provided in Section 9), and are represented by the Company's
unsecured promise (as provided in Section 10).
3. VESTING; FORFEITURE; MANNER OF EXERCISE.
a. The grants will vest as follows: 20% of the rights to each of
the Deferred Compensation Per Share Appreciation and SAR Per Share Appreciation
will vest as of each December 15, beginning December 15, 1999, if on such date
Executive is employed by the Company. In addition, Executive will become fully
vested in his rights to each of the Deferred Compensation Per Share Appreciation
and the SAR Per Share Appreciation upon the occurrence of any of the following
events: (i) a Sale of the Company; (ii) a Change in Control; (iii) termination
of Executive's employment pursuant to any of clauses (i), (ii) or (iii) of
Section 1(c) of the Employment Agreement or (iv) Termination for Good Reason as
defined in Section 1(d) of the Employment Agreement. Upon vesting, a SAR may be
exercised from time to time and will be exercisable, in whole or in part.
b. If Executive ceases to be employed by the Company pursuant to a
Termination for Cause, Executive will forfeit any and all rights to any unvested
Deferred Compensation Per Share Appreciation and SAR Per Share Appreciation.
c. All unexercised rights with respect to each of the Deferred
Compensation Per Share Appreciation and SAR Per Share Appreciation will be
deemed exercised at 4:59 p.m. on the Valuation Date and these rights will become
null and void thereafter; provided however, that the parties' obligations
pursuant to this Agreement will remain in full force and effect until fully
performed.
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4. VALUATION DATE. The Valuation Date will be the day on which the
first of the following events occurs, provided that Executive is employed by the
Company on that day:
a. SALE OF THE COMPANY. The day on which a Sale of the Company is
completed.
b. CHANGE IN CONTROL. The day on which a Change in Control of the
Company occurs.
c. TERMINATION OF EMPLOYMENT. The last day of the Company's fiscal
quarter preceding the date on which Executive ceases to be employed by the
Company for any reason other than a Termination for Cause or Voluntary
Termination. In the case of a Voluntary Termination or a termination as a result
of Employer or the Company's not renewing the Employment Agreement, the date
shall be the date of the public announcement by the Company of such Voluntary
Termination or that one of the parties has given notice pursuant to the Plan of
his or its intention not to renew the Employment Agreement.
d. END OF AWARD TERM. December 15, 2003.
5. FAIR MARKET VALUE.
a. If the Valuation Date is the date of a Sale of the Company,
the determination of Company Fair Market Value and Deferred Compensation Per
Share Appreciation and SAR Per Share Appreciation will reflect the Fair Market
Value of the Company's assets with reference to the consideration (which may
include consideration in the form of the direct or indirect assumption of
liabilities) received by the Company (or, if applicable, by its stockholders, in
exchange for their stock in the Company) in such transaction, as set forth in a
notice by the Company to Executive. Such notice will include a description of
the consideration and, as to any consideration so received other than cash or
cash-equivalents, a statement of the Fair Market Value of such consideration, as
determined in good faith on a reasonable basis by the Board. In establishing the
Fair Market Value of such consideration, the Board, as it reasonably deems
appropriate, may take into account (and any determination of the Fair Market
Value of such consideration pursuant to Section 8 will take into account) the
effect of terms or conditions of the transaction constituting a Sale of the
Company that (i) impose liabilities, contingent or otherwise, on the Company or
its stockholders, or (ii) condition the receipt of all or a portion of the
consideration on the occurrence of one or more events, including, for example,
the lapse of time or the attainment of earnings or other indicia of performance.
If Executive disagrees with the determination of Company Fair Market Value or of
the Fair Market Value of consideration set forth in the notice given to
Executive, Executive must give notice to the Company of his disagreement within
30 days after receipt of notice from the Company and if he fails timely to give
such notice, the determination of value(s) set forth in the Company's notice
will be conclusive and binding on the parties. If Executive gives notice of his
disagreement within the required 30-day period, such disagreement will be
resolved as provided in Section 8, provided that, as to a determination of
Company Fair Market Value, each appraiser
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selected pursuant to Section 8 will be instructed to treat the consideration
received in such transaction as the primary factor to be considered in
establishing Company Fair Market Value.
b. If the Valuation Date is a date prescribed by Section 4.b.
(unless the event constituting a Change in Control is also a Sale of the
Company, in which case Section 5.a. will apply), Section 4.c. or Section 4.d.,
and if there is a Per Share Public Market Value for the Common Stock, within 5
business days after the Valuation Date or as soon as reasonably possible after
financial statements of the Company as of the Valuation Date and for the period
from the end of the Company's most recent fiscal year through the Valuation Date
are completed, whichever is applicable, the Company will give notice to
Executive of Company Fair Market Value, Per Share Market Value, and Deferred
Compensation Per Share Appreciation and SAR Per Share Appreciation, as of the
Valuation Date. If there is no Per Share Public Market Value for the Common
Stock, the Per Share Fair Market Value as of the Valuation Date will be used to
calculate Deferred Compensation Per Share Appreciation and SAR Per Share
Appreciation as soon as reasonably possible after financial statements
(including at least a balance sheet and a statement of operations) of the
Company as of the Valuation Date and for the period from the end of the
Company's most recent fiscal year through the Valuation Date are completed, the
Company will give notice to Executive of Company Fair Market Value, Per Share
Market Value, and Deferred Compensation Per Share Appreciation and SAR Per Share
Appreciation, as of the Valuation Date, as determined by the Board in good faith
on a reasonable basis, including a reasonably detailed description of the bases
for such determinations.
If Executive disagrees with the determination of Company Fair Market
Value, Per Share Fair Market Value or Per Share Appreciation set forth in the
Company's notice, Executive must give notice to the Company of his disagreement
within 30 days after receipt of the Company's notice and if he fails timely to
give such notice, the determination of those amounts set forth in the Company's
notice will be conclusive and binding on the parties. If Executive gives notice
of disagreement within the 30-day period, such disagreement will be resulted in
accordance with Section 8.
6. MANNER OF EXERCISING SARS.
The SARs may be exercised in whole or in part, upon vesting only
by written notice signed by Executive and mailed or delivered to the President
or Secretary of the Company at its principal office which notice will: (i)
specify the number of SARs which are being exercised; and (ii) include such
documentation and representations as may be reasonably requested by the Company
in connection with such exercise. Once exercised a particular SAR may not be
further exercised.
7. PAYMENT.
a. Any payments made by the Company pursuant to this Agreement,
may, at the Company's election, subject to Section 13, be either in (i) cash or
other immediately available funds; (ii) shares of Common Stock; or (iii) a
combination thereof; provided however that the
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Company may elect to make such payments in Common Stock only to the extent that
the Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the
Exchange Act. To the extent that the Company elects to make any or all payments
in the form of Common Stock, such shares of Common Stock will be valued for
purposes of this Agreement, at the Per Share Fair Market Value of the Common
Stock on the Exercise Date or the Valuation Date, whichever is applicable.
b. Subject to the penultimate sentence of this clause b., payments
of Deferred Compensation Per Share Appreciation required to be made pursuant to
this Agreement will be made within 30 days after the Termination Date. Payments
of SAR Per Share Appreciation required to be made upon exercise of a SAR, other
than a deemed exercise with respect to a Valuation Date, will be made by the
Company within 30 days after the Exercise Date. Payments of SAR Per Share
Appreciation or Deferred Compensation Per Share Appreciation (but only if
Executive's employment is terminated as of the Valuation Date) required to be
made as of a Valuation date will be made within 30 days after the Valuation Date
if that date is the date of a Sale of the Company, 120 days after the Valuation
Date if that date is December 15, 2003 or 120 days after the Valuation Date if
that date is the date described in Section 4.c. Notwithstanding the foregoing,
if on any required payment date the determination of Deferred Compensation Per
Share Appreciation or SAR Per Share Appreciation has not been made, the required
payment will be made within five days after such determination is completed. At
the Company's option, the payment date may be accelerated in whole or in part.
Any payment made will be subject to any applicable required income and other
payroll tax withholding.
c. Notwithstanding that (i) the terms or conditions of a Sale of
the Company may provide for the deferral of the payment or delivery of all or a
portion of the consideration to be paid or delivered to the Company or to
holders of outstanding shares of Common Equity or (ii) the payment or delivery
of such consideration may be conditioned on the occurrence of one or more
events, the Company may not defer the payment of a portion of the cash otherwise
payable to Executive in respect of his rights to receive Deferred Compensation
Per Share Appreciation and SAR Per Share Appreciation, but any such deferral or
condition will be taken into account in any determination of the Fair Market
Value of such consideration pursuant to Section 8.
d. (i) If shares of Common Stock are to be delivered and the
Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the
Exchange Act, then the Company will as soon as practicable thereafter, file with
the SEC under the Act a registration statement to register the resale of such
shares of Common Stock by Executive and will use its reasonable best efforts to
have such registration statement declared effective by the SEC as promptly as
possible. In either event, the Company will use its reasonable best efforts to
maintain the effectiveness of such registration statement for a period of 180
days. If the Company was not required to withhold income taxes pursuant to
Section 7, and to the extent that Executive is required to pay income tax on the
payment of Deferred Compensation Per Share Appreciation or SAR Per Share
Appreciation made in shares of Common Stock prior to the expiration of the
180-day period, then prior to the date the payment is required to be made, the
Company will loan Executive an amount equal to the difference between the amount
of such income taxes required to be paid and the
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amount of sale proceeds, if any, received by Executive. The principal amount of
the loan will bear interest at a rate equal to the Prime Rate and all principal
and interest will be payable in full 5 days after the end of the 180-day period.
(ii) Subject to the extensions provided by this Section, the
Company shall not be required to maintain the effectiveness of the registration
statement for more than 180 days. The Company shall be entitled to postpone for
a reasonable period of time the filing of the registration statement if the
Company determines in its judgment, that such registration and offering would
materially interfere with or otherwise adversely affect any financing,
acquisition, corporate reorganization or other material transaction or
development involving the Company or its affiliates or would require disclosure
of information that the Company believes should not be disclosed (a
"Disadvantageous Condition"). If at any time after the filing of a registration
statement or after it is declared effective the Company determines that such
registration and offering would result in a Disadvantageous Condition, then the
Company may require the suspension by Executive of the distribution of any of
the shares registered to be sold by giving notice to such effect to Executive.
In the event of such notice, then until the Company determines that such
registration and offering no longer would result in a Disadvantageous Condition,
the Company's obligation under this Section will be suspended. In the event of a
suspension after the registration statement has become effective, the 180-day
period of effectiveness will be extended by a number of days equal to the total
number of days for which the distribution was suspended.
(iii) The Company will bear all costs and expenses incurred in
connection with such registration and distribution.
(iv) The Company agrees to indemnify and hold harmless, to the
full extent permitted by law, Executive from and against any losses, claims,
damages or liabilities, and any related legal or other fees and expenses
(collectively, "Losses"), joint or several, to which Executive may become
subject, insofar as such Losses (or actions in respect thereof) are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement or prospectus, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, that the Company will not indemnify or hold
harmless Executive from or against any such Losses if the untrue statement,
omission or allegation thereof upon which such Losses are based (x) was made in
reliance upon and in conformity with the information provided by or on behalf of
Executive specifically for use or inclusion in the registration statement or
prospectus or (y) was made in any prospectus used after such time as the Company
advised Executive that the filing of a post-effective amendment or supplement
thereto was required, except the prospectus as so amended or supplemented.
Executive agrees to indemnify and hold harmless, to the full
extent permitted by law, the Company, its officers, directors and agents, and
each person, if any, who controls the Company within the meaning of either the
Securities Act or the Exchange Act (the "Company Indemnified Parties"), from and
against any Losses, joint or several, to which such
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Company Indemnified Parties may become subject, insofar as such Losses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the applicable
registration statement or the prospectus, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, if the statement or omission was made in reliance upon and
in conformity with the information provided by or on behalf of Executive
specifically for use or inclusion in the applicable registration statement or
prospectus; provided, that Executive will not indemnify or hold harmless any
Company Indemnified Party from or against any such Losses to the extent the
untrue statement, omission or allegation thereof upon which such Losses are
based was made in any prospectus used after such time as Executive advised the
Company that the filing of a post-effective amendment or supplement thereto was
required, except the prospectus as so amended or supplemented.
If the indemnification provided for under this Section is
unavailable to or insufficient to hold the indemnified party harmless under the
above paragraphs in respect of any Losses referred to therein for any reason
other than as specified therein, then the indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such Losses
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and such indemnified party, on the other,
in connection with the statements or omissions which resulted in such Losses, as
well as any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by (or omitted to be supplied
by) the indemnifying parties or indemnified parties, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission, the relative benefits received by each party from
the sale of the shares, and any other equitable considerations appropriate under
the circumstances. The amount paid or payable by an indemnified party as a
result of the Losses referred to above in this subsection shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act of 1933, as amended) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
e. Interest on payments of deferred compensation will accrue at a
rate equal to __% per annum from the Valuation Date that occurs other than as a
result of a termination of employment until the date of payment, which amount
will be included in any payment made under this Agreement.
f. Unless the Company is notified in writing of a change of
address, any payment will be made to Executive at the address for notices to
Executive set forth in Section 16.a.
8. DETERMINATION OF FAIR MARKET VALUE. Except as otherwise expressly
provided in this Agreement, wherever this Agreement refers to, or calls for a
determination of, Fair
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<PAGE> 12
Market Value (including, for example, a determination of the Company Fair Market
Value pursuant to Section 1.h. when there is no Per Share Public Market Value or
a determination of the Fair Market Value of consideration received in a Sale of
the Company pursuant to Section 5.a.), the Fair Market Value of the item in
question will be determined in accordance with the following provisions:
a. The Company and Executive may agree on the Fair Market Value of
the item in question.
b. If the Company and Executive are unable to agree on a Fair
Market Value, within 15 days after the date notice of a dispute as to that issue
is given by either party to the other, or if they otherwise determine that an
appraisal should be used to determine Fair Market Value, then they will cause
the Fair Market Value as of the required date of determination to be determined
by a qualified appraiser acceptable to both of them. If they are unable to agree
on a single appraiser within 15 days after the date of notice of the dispute,
each of them will have an additional 10 days to select one appraiser nationally
recognized in valuing items of the kind required to be valued. If either fails
to appoint an appraiser, then the determination of Fair Market Value by the one
appraiser will be binding.
c. Each appraiser will determine the Fair Market Value of the item
in question, taking into account such matters as may be prescribed by this
Agreement and such other matters as the appraiser may deem relevant. The Company
and Executive will use their reasonable best efforts to cause each appraiser to
submit to them a written report indicating that appraiser's determination of
Fair Market Value within 30 days after the date such appraiser is selected.
d. If the higher of the two appraisals is 110% or less of the
lower appraisal, the average of the two will be the Fair Market Value.
e. If the higher of the two appraisals is more than 110% of the
lower appraisal, the Company will immediately notify the two appraisers and
cause them to appoint a third similarly qualified appraiser within 10 days after
such notice. The Company and Executive will use their reasonable best efforts to
cause such third appraiser (who will not be apprised of the determination of the
other appraisers) to submit a written report to each of them indicating such
appraiser's determination of Fair Market Value within 30 days after the date
such third appraiser is selected. If three appraisals are necessary, then the
average of the two appraisals in which the determinations of Fair Market Value
are closest together will be the Fair Market Value or, if the highest and lowest
are equidistant from the middle determination, then the middle determination
will be the Fair Market Value.
f. Each party will use reasonable best efforts to provide each
appraiser with such information as such appraiser may reasonably request for the
purpose of preparing an appraisal pursuant to this Section 8.
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<PAGE> 13
g. A determination of Fair Market Value made pursuant to this
Section 8 will be final, binding and nonappealable. Each party will be
responsible for one-half of all fees and expenses of all appraisers.
h. If the determination of Fair Market Value pursuant to this
Section 8 is a determination of the Company Fair Market Value for the purpose of
determining Per Share Appreciation or SAR Per Share Appreciation or an
adjustment to Deferred Compensation Per Share Base Value or SAR Per Share Base
Value, the Company will make the required determination of such amounts using
the Company Fair Market Value determined pursuant to this Section 8 and will
give notice of such determination to Executive within two business days after
receiving notice of the determination of Company Fair Market Value pursuant to
this Section 8.
9. RESTRICTION ON TRANSFER. Executive may not transfer or grant any
security interest in any of his rights under this Agreement except (i) pursuant
to a qualified domestic relations order as defined by the Internal Revenue Code
of 1986, as amended, or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder (a "Domestic Relations Order"),
(ii) to a living trust in which the beneficiaries are the Executives or members
of Executive's immediate family or (iii) transfers by will or the laws of
intestate succession. Any attempted transfer in violation of this restriction
will be null and void.
Executive may designate a beneficiary or beneficiaries to whom the
rights under this Agreement shall pass upon Executive's death and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Company on the form annexed hereto as
Exhibit A or such other form as may be prescribed by the Company; provided that
no such designation shall be effective unless so filed prior to the death of
Executive. If no such designation is made or if the designated beneficiary does
not survive Executive's death, the rights under this Agreement shall pass by
will or the laws of descent and distribution. Following Executive's death, the
rights under this Agreement, if otherwise exercisable, may be exercised by the
person to whom the rights under this Agreement pass according to the foregoing,
and such person shall be deemed to be Executive for purposes of any applicable
provisions of this Agreement.
10. ACKNOWLEDGMENTS.
a. Executive acknowledges and agrees that the obligations of the
Company under this Agreement are not funded in any way, and that he will have
rights only of a creditor based solely on the Company's unsecured promise to
pay. Because Executive has not made an investment in shares of Common Stock,
Executive acknowledges and agrees that the he has a right to benefit from
further appreciation in Shares without risking any capital and without the risk
of a beneficial owner that the value of property may decline substantially.
Executive further acknowledges and agrees that the grants of Deferred
Compensation Per Share Appreciation and SAR Per Share Appreciation right under
this Agreement are not an assurance of continued employment by the Company or
any of its Affiliates, and nothing in this Agreement will affect in any way the
rights and obligations of either party under the Employment Agreement.
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<PAGE> 14
b. Executive represents and warrants that (i) by virtue of his
position with the Company or based on information furnished by the Company he is
familiar with the business, earnings, condition, properties and business
prospects of the Company, (ii) he has had the opportunity to ask questions and
request additional information concerning the business, earnings, condition,
properties and business prospects of the Company and that his questions have
been answered and that he has received the additional information requested,
(iii) he has such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of entering into this
Agreement, (iv) he is an "accredited investor" (as such term is defined in
Regulation D promulgated under the Act and (v) he understands that the Company
is entering into this Agreement in reliance on the acknowledgments, agreements,
representations and warranties of Executive set forth in this Agreement. To the
extent the issuance of the shares of Common Stock are not then registered
pursuant to the Act, Executive acknowledges and agrees that he will make such
additional representations and warranties that the Company may reasonably
request to support an exemption pursuant to Section 4(2) of such Act, including
with respect to Executive's investment intent, investor status and restrictions
on transfer.
11. ADJUSTMENTS.
a. Appropriate and equitable adjustment will be made to the
Deferred Compensation Per Share Base Value and the SAR Per Share Base Value in
the event of any stock dividend, stock split, reverse stocks split,
reclassification, recapitalization or other analogous change affecting the
outstanding shares of Common Stock. This Agreement will not affect the right of
the Company or any Affiliate to take any action affecting its capital stock
whether described in the preceding sentence or otherwise.
b. If after the Effective Date the Company issues Common Stock for
a consideration per share less than the Per Share Fair Market Value as of the
date such Common Stock is issued or if the Company issues a Derivative Security
having a per share exercise, conversion or exchange price less than the Per
Share Fair Market Value as of the date such Derivative Security is issued (any
such issuance of Common Stock or a Derivative Security being referred to as a
"Subject Issuance"), then each of the Deferred Compensation Per Share Base Value
and the SAR Per Share Base Value in effect immediately before such issuance will
be adjusted in accordance with the following formula:
BV2 = BV1 x O + A
-----------
O + A x M
-----
P
Where:
BV2 = the new Deferred Compensation Per Share Base
Value or SAR Per Share Base Value, as applicable.
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<PAGE> 15
BV1 = the Deferred Compensation Per Share Base Value or
SAR Per Share Base Value, as applicable,
immediately prior to the Subject Issuance.
O = the total number of Shares Outstanding.
A = the number of additional shares of Common Stock
issued (or issuable upon exercise, conversion or
exchange of a Derivative Security issued) in the
Subject Issuance.
P = the price per share of the Common Stock issued
(or issuable upon exercise, conversion or exchange
of a Derivative Security issued) in the Subject
Issuance.
M = the Per Share Fair Market Value of Common Stock on
the date of the Subject Issuance.
If an adjustment pursuant to this Section 11.b. is made on account of the
issuance of a Derivative Security, (i) no further adjustment will be made upon
exercise, conversion or exchange of such Derivative Security and (ii) such
adjustment will be reversed to the extent such Derivative Security shall not
have been exercised, converted or exchanged at the time it ceases to be
outstanding or to be exercisable, convertible or exchangeable. Within 30 days
after each issuance of shares of Common Stock or a Derivative Security by the
Company, the Company will give notice of such issuance to Executive, including a
reasonably detailed description of the terms of such issuance, the Per Share
Fair Market Value as of the date of such issuance and the amount of
consideration per share received by the Company in such transaction (or the
exercise, conversion or exchange price of any Derivative Security issued in such
issuance), as determined by the Board in accordance with the following
paragraph.
Notwithstanding anything to the contrary in this Agreement: (i) any
determination of value contemplated by this Section 11.b., including, for
example, any determination of Per Share Fair Market Value or of the Fair Market
Value of any consideration received by the Company for Common Stock or a
Derivative Security, will be made by the Board in the exercise of its good faith
judgment, and such determination will be final, binding and nonappealable so
long as the Board determination is in good faith, and if such determination is
made in connection with the issuance of Common Stock or a Derivative Security to
any Person other than Liberty or an Affiliate of Liberty such determination will
be deemed to have been made in good faith if neither Liberty nor any Affiliate
of Liberty (other than the Company) shall have received any material
consideration on account of such issuance; (ii) shares of Common Stock and
Derivative Securities issued by the Company to any Person other than Liberty or
any Affiliate of Liberty will be deemed for all purposes under this Agreement to
have been sold for a per share price, or a per share exercise, conversion or
exchange price in the case of a Derivative Security, at least equal to the Per
Share Fair Market Value
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<PAGE> 16
on the date of issue, unless Liberty or any Affiliate of Liberty (other than the
Company) shall have received any material consideration on account of such
issuance; and (iii) shares of Common Stock issued by the Company to any Person
before December 31, 1999 for a per share price at least equal to the initial Per
Share Base Value or that are issuable upon exercise, conversion or exchange of a
Derivative Security issued by the Company to any Person before December 31, 1999
(which Derivative Security has a per share exercise, conversion or exchange
price at least equal to the initial Per Share Base Value), will be deemed to
have been sold for a per share price at least equal to the Per Share Fair Market
Value on the date of issue.
12. ARBITRATION. If any controversy or claim arising out of this
Agreement cannot be settled by the parties (other than any disagreement that is
subject to resolution pursuant to Section 8, as to which the provisions of such
Section 8 will be exclusive), the dispute will be settled by arbitration before
a single arbitrator in Los Angeles, California, which arbitrator will be a
natural person having experience in financial and business matters appointed by,
and which arbitration will be conducted in accordance with the then applicable
provisions of the Commercial Arbitration Rules of, the American Arbitration
Association. Each party will bear its or his own costs of such arbitration,
including attorneys' fees and expenses, except that the fees and expenses of the
arbitrator and the American Arbitration Association will be paid by the Company
and Executive in equal shares. Judgment on any award resulting from such
arbitration may be entered in any court having jurisdiction. In consideration of
the anticipated expedition of dispute resolution and minimization of expenses,
each party agrees that arbitration will be the exclusive remedy to resolve
disputes under this Agreement, and each party expressly waives any right such
party might have to seek redress in any other forum. The parties further agree
that an arbitrator will be empowered to assess no remedy other than the payments
provided under this Agreement.
13. LIBERTY OBLIGATIONS RE PRICE; LIBERTY RIGHTS TO PURCHASE SHARES.
a. If payment is made in shares of Common Stock and the resale of
such shares is registered under the Act pursuant to Section 7.d., Liberty will
pay to Executive, in cash or other immediately available funds, the difference,
if any, between (i) the product of the Per Share Public Market Value on the
Valuation Date or Exercise Date, whichever is applicable, and the number of
shares sold by Executive pursuant to the registration statement received by
Executive from the sale of such number of shares plus interest thereon from the
date the Common Stock was issued to the payment date at the Prime Rate and (ii)
the net proceeds. Executive will use his reasonable best efforts to sell the
shares pursuant to the registration statement in a manner that will, in the good
faith judgment of Executive and his financial advisors maximize the average
selling price. Such payment shall be made by Liberty within five business days
after receipt by Liberty from Executive of a certificate from the broker or
underwriter effecting such sales setting forth the net proceeds received by
Executive from the sale of such shares.
b. At any time a payment is to be made to Executive pursuant to
this Agreement, Liberty will have the right to purchase from the Company a
number of shares of Series B Common Stock equal to the number of shares of
Common Stock that would have been issued to
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<PAGE> 17
Executive if the Company had elected to make the required payment in Common
Stock at a price per share equal to (i) the Deferred Compensation Per Share
Appreciation on the Valuation Date, with respect to the payment of Deferred
Compensation Per Share Appreciation, or (ii) the SAR Per Share Appreciation on
the Valuation Date or an Exercise Date, whichever is applicable, with respect to
the payment of SAR Per Share Appreciation.
Notwithstanding the foregoing, in the case of an exercise of a SAR
other than on a Valuation Date, Liberty may elect to purchase the number of
shares as to which the SAR is exercised at a price per share equal to the Per
Share Fair Market Value on the Exercise Date.
If Liberty exercises its right to purchase shares of Series B Common
Stock pursuant to this clause b., the Company shall be required to pay the
Deferred Compensation Per Share Appreciation or the SAR Per Share Appreciation
in cash.
The maximum number of shares of Series B Common Stock that Liberty may
purchase pursuant to this Agreement is 19,296,193 shares. In connection with any
such purchase of Series B Common Stock, the Company and Liberty will enter into
a stock purchase agreement having customary terms which are reasonably
acceptable to the Company and Liberty. Any such stock purchase agreement shall
contain customary representations and warranties of the parties, including
representations of the Company with respect to the due authorization and valid
issuance of the shares being purchased and that such shares are fully paid and
not accessible.
14. ANNOUNCEMENT. The Company will publicly announce a Voluntary
Termination of Executive or notice by the Company or Executive of its or his
intention not to renew the Employment Agreement within five business days after
notice thereof.
15. COMPANY LOAN OF DEFERRED COMPENSATION. At any time after a
determination of the amount of Deferred Compensation after a Valuation Date, if
Executive is still employed by the Company, the Company, upon request of
Executive, will loan Executive any amount up to the total amount of Deferred
Compensation Share Appreciation payable to Executive pursuant to this Agreement.
Such loan shall be payable upon receipt by Executive of the Deferred
Compensation Share Appreciation and shall bear interest at the Prime Rate.
16. MISCELLANEOUS PROVISIONS.
a. NOTICES. All notices to be given hereunder will be in writing
and will be deemed duly given when delivered personally or mailed, certified
mail, return receipt requested, postage prepaid and addressed as follows:
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<PAGE> 18
If to be given to Liberty:
Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
If to be given to the Company:
TCI Music, Inc.
67 Irving Place North, 4th Floor
New York, New York 10003
If to be given to Executive:
Lee Masters
c/o Jarl Mohn
12875 Chalon Road
Los Angeles, California 90049
with a copy to:
Kenneth Doran, Esq.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
or to such other address as a party may furnish to the other in writing in
accordance with this Section 16.a.
b. BINDING EFFECT. This Agreement is binding upon, and inures to
the benefit of, the Company and its successors and assigns, and upon Executive
and his personal representatives and other permitted successors and assigns.
c. AMENDMENT. This Agreement may not be changed orally, but only
by a writing signed by the party against whom enforcement of any change is
sought.
d. ENTIRE AGREEMENT. This Agreement represents the entire
agreement of the Company and Executive with respect to its subject matter, and
it supersedes all prior and contemporaneous understandings and agreements, both
oral and written.
e. ORIGINALS. This Agreement will be signed in two originals, one
to be delivered to the Company and one to Executive.
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f. GOVERNING LAW. This Agreement will be construed and enforced in
accordance with the internal laws of the State of California without regard to
the choice-of-law principles thereof.
IN WITNESS WHEREOF, we have signed this Agreement on the dates
indicated, to be effective as of the Effective Date.
EXECUTIVE:
/s/ Jarl Mohn
------------------------------
Jarl Mohn, a/k/a Lee Masters
LIBERTY MEDIA CORPORATION
By: /s/ Charles Y. Tanabe
--------------------------
Name: Charles Y. Tanabe
Title: Senior Vice President
TCI MUSIC, INC.
By: /s/ Ralph J. Sorrentino
--------------------------
Name: Ralph J. Sorrentino
Title: Executive Vice President
and Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.4
DEFERRED COMPENSATION AND
STOCK APPRECIATION RIGHT AGREEMENT
This DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHT AGREEMENT is
made as of August 12, 1999 (the "Effective Date"), between TCI Music, Inc., a
Delaware corporation, Liberty Media Corporation, a Delaware corporation, and
Bruce W. Ravenel ("Executive").
RECITALS:
The parties make this Agreement with reference to the following facts:
A. In connection with a Contribution Agreement dated as of April 23,
1999 by and among the Company, Liberty and certain affiliates of Liberty, as
amended (the "Contribution Agreement"), the Company has adopted a Deferred
Compensation and Stock Appreciation Rights Plan (the "Plan").
B. The Plan provides for awards to be granted to Executive in exchange
for the cancellation of awards made to Executive by Liberty prior to the date of
the Contribution Agreement.
In consideration of services rendered or to be rendered to the Company
and its Affiliates by Executive, and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
agree as follows:
1. DEFINITIONS. For purposes of this Agreement, any word or phrase with
initial capital letters will have the meaning set forth below:
a. ACT: the Securities Act of 1933, as amended.
b. AFFILIATE: any Person directly or indirectly Controlling,
Controlled by or under common Control with a Person.
c. AGREEMENT: this Agreement, as it may from time to time be
amended in accordance with its terms.
d. CHANGE IN CONTROL: with respect to the Company, the occurrence
of any transaction as the result of which (i) Liberty ceases to be a beneficial
owner (as defined in Rule 13d-3 under the Exchange Act) of Voting Securities of
the Company representing at least 25% of the total voting power of all Voting
Securities of the Company and (ii) any other person (within the meaning of
Section 13(d)(3) of the Exchange Act) beneficially owns Voting Securities of the
Company representing more voting power than the Voting Securities of the Company
of which Liberty is a beneficial owner. For purposes of this definition, "Voting
Securities" means, with respect to the Company, the capital stock or other
ownership interests in the Company having general voting power under ordinary
circumstances to elect directors (or similar officials), of the
<PAGE> 2
Company, but will not include any capital stock that has or would have such
voting power solely by reason of the happening of any contingency.
e. COMMON EQUITY: if there is a Per Share Public Market Value,
Common Equity means the Series A Common Stock; if there is no Per Share Public
Market Value, Common Equity means the Series A Common Stock, the Series B Common
Stock and any other class or series of common stock of the Company then
outstanding.
f. COMMON STOCK: the Series A Common Stock.
g. COMPANY: TCI Music, Inc. and its successors and assigns.
h. COMPANY FAIR MARKET VALUE: as of any date of determination, the
Fair Market Value of all shares of Common Equity then outstanding, which Fair
Market Value will be: (i) if there is a Per Share Public Market Value, the
product of the number of the Shares Outstanding and the Per Share Public Market
Value; or (ii) if there is no Per Share Public Market Value, the amount
determined pursuant to Section 8 or Section 11.b. as applicable.
i. COMPANY INDEMNIFIED PARTIES: as defined in Section 7.d(iv).
j. CONTRIBUTION AGREEMENT: as defined in Recital A to this
Agreement.
k. CONTROL: the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
l. DEFERRED COMPENSATION CAP: the difference between the SAR Per
Share Base Value and the Deferred Compensation Per Share Base Value.
m. DEFERRED COMPENSATION PER SHARE APPRECIATION: as of the
Valuation Date, the amount, expressed in U.S. currency rounded to the nearest
cent, equal to any excess in the lesser of (1) the SAR Per Share Base Value and
(2) the Per Share Fair Market Value over the Deferred Compensation Per Share
Base Value.
n. DEFERRED COMPENSATION PER SHARE BASE VALUE: as of any date of
determination, $2.46, subject to adjustment from time to time pursuant to
Section 11.
o. DERIVATIVE SECURITY: any option, warrant or other right to
acquire, or any security convertible into or exchangeable for, one or more
shares of Common Stock.
p. DISABILITY: means the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment that (a) can be
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<PAGE> 3
expected to result in death or (b) has lasted or can be expected to last for a
continuous period of not less than 12 months.
q. DISADVANTAGEOUS CONDITION: as defined in Section 7.d(iv).
r. EFFECTIVE DATE: as defined in the preamble to this Agreement.
s. EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
t. EXECUTIVE: the individual identified as "Executive" in the
preamble to this Agreement, and his permitted assigns.
u. EXERCISE DATE: the date that a notice of exercise is received
by the Company, with respect to an exercise of all or a portion of the SAR by
Executive, other than a deemed exercise on the Valuation Date.
v. FAIR MARKET VALUE: with respect to any asset, the cash price at
which a willing seller would sell and a willing buyer would buy such asset
having full knowledge of the relevant facts, in an arm's-length transaction
without time constraints, and without being under any compulsion to buy or sell.
w. LIBERTY: Liberty Media Corporation, a Delaware corporation, and
its successors and assigns, including for purposes of this definition any Person
to which all or substantially all of Liberty's assets are transferred, whether
by merger or otherwise.
x. LIBERTY POLICY: the policy set forth in Schedule 4.8 to the
Contribution Agreement.
y. LOSSES: as defined in Section 7.d(iv).
z. PER SHARE FAIR MARKET VALUE: as of any date of determination:
(1) if the Common Stock is registered pursuant to Section 12(b) or Section 12(g)
of the Exchange Act, the Per Share Public Market Value; or (2) if the Common
Stock is not then so registered, the Company Fair Market Value divided by the
number of Shares Outstanding.
aa. PER SHARE PUBLIC MARKET VALUE: as of any date of
determination, the average of the reported closing market prices of the Common
Stock for the 20 consecutive trading days ending on the trading day prior to
such date; provided that in the case of a Voluntary Termination the Per Share
Public Market Value will be the average of the reported closing market prices of
the Common Stock for the 60 calendar days beginning 120 days after the public
announcement by the Company of such Voluntary Termination. The closing market
price for each day in question will be the last sale price, regular way or, if
no such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal
3
<PAGE> 4
consolidated transaction reporting system of the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange, the last quoted sale price or, if no such sale price is quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the NASDAQ Stock Market or such other system then in use or, if on
any such trading day such capital stock is not quoted by any such organization,
the average of the closing bid and asked prices as furnished by the professional
market maker who has been most active in making a market in such capital stock
during the preceding 12 months. The Per Share Public Market Value will be
appropriately adjusted to reflect the effects of any stock dividend, stock
split, reclassification, recapitalization or combination affecting the Common
Stock, the record date, ex-dividend date or similar date of which occurs during
the period of trading days preceding the date of determination.
bb. PERSON: a human being or a corporation, partnership, trust,
limited liability company, unincorporated organization, association or other
entity.
cc. PLAN: as defined in Recital A to this Agreement.
dd. PRIME RATE: at any time, the rate of interest adopted by Bank
of America National Trust and Savings Association, as its reference rate for the
determination of interest rates for loans of varying maturities in United States
dollars to United States residents of varying degrees of creditworthiness and
being quoted at such time by such bank as its "prime rate."
ee. SAR: as defined in Section 2.b.
ff. SAR PER SHARE BASE VALUE: as of any date of determination,
$19.125, subject to adjustment from time to time pursuant to Section 11.
gg. SAR PER SHARE APPRECIATION: as of the Valuation Date or an
Exercise Date, whichever is applicable, the amount, expressed in U.S. currency
rounded to the nearest cent, equal to any excess in Per Share Fair Market Value
over the SAR Per Share Base Value.
hh. SALE OF THE COMPANY: (i) the sale, exchange or other
disposition of all or substantially all of the Company's assets (other than
cash, cash equivalents and marketable securities) to or with one or more Persons
other than any Affiliate of the Company; (ii) the sale, exchange or other
disposition of all or substantially all of the outstanding shares of Common
Equity to or with one or more Persons other than any Affiliate of the Company;
or (iii) the merger or consolidation of the Company with or into another Person
other than an Affiliate of the Company, as a result of which merger or
consolidation the holders of shares of outstanding Common Equity receive or
become irrevocably entitled to receive cash, securities or other assets in
exchange for those shares. Notwithstanding the foregoing, no transaction
described in clause (ii) or clause (iii) of the foregoing sentence will be a
Sale of the Company unless such transaction results in a Change in Control of
the Company.
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ii. SEC: the Securities and Exchange Commission.
jj. SERIES A COMMON STOCK: the Series A common stock, $.01 par
value per share, of the Company or any successor class or series of capital
stock.
kk. SERIES B COMMON STOCK: the Series B common stock, $.01 par
value per share, of the Company or any successor class or series of capital
stock.
ll. SHARES OUTSTANDING: as of any date of determination, the
number of all issued and outstanding shares of Common Equity on a fully diluted
basis.
mm. TARGET PER SHARE VALUE: as of any date of determination, $2.46
plus notional interest on that amount from January 1, 1999 at the rate of 10%
per annum, compounded annually.
nn. TERMINATION DATE: as defined in Section 14.
oo. TERMINATION FOR CAUSE: will be deemed to have occurred only on
the happening of any of the following:
(1) the plea of guilty to, or conviction for, the commission
of a felony offense by Executive, provided, however, that after indictment the
Company may suspend Executive from the rendition of services but without
limiting or modifying in any other way the Company's obligations under this
Agreement;
(2) a material breach by Executive of a material fiduciary
duty owed to the Company;
(3) a material breach by Executive of any of the covenants
made by him in Section 14 or Section 15 of this Agreement; or
(4) the willful and gross neglect by Executive of the material
duties specifically and expressly required by this Agreement;
provided, however, that any claim that "cause," within the meaning of clause
(2), (3) or (4) above, exists for the termination of Executive's employment may
be asserted on behalf of the Company only by a duly adopted resolution of the
Board and only after 30 days' prior notice to Executive during which period he
may cure the breach or neglect that is the basis of any such claim, if curable;
provided, further, if at the time Executive is terminated he has contracted an
illness or other disability that has incapacitated Executive from performing his
duties as an Executive of the Company, as determined in good faith by the Board
of Directors of the Company, for at least 180 consecutive days during the 12
calendar months preceding such termination, such conditions may
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not, directly or indirectly, in whole or in part, be the basis for a claim that
"cause," within the meaning of clause (4) above, exists for the termination of
Executive's employment.
pp. TERMINATION FOR GOOD REASON: will be deemed to have occurred
if Executive terminates his employment because of (i) a material diminution of
Executive's duties as Executive Vice President of the Company, (ii) a reduction
in Executive's annual rate of salary (other than a reduction to which Executive
consents), (iii) the imposition by the Board of a requirement that Executive
report to a person other than the Board of Directors or the President and Chief
Executive Officer, (iv) the transfer of such Executive to a geographic area
other than Denver, Colorado or (v) Executive ceasing to serve as a director of
the Company, other than due to Executive's resignation, refusal to stand for
reelection or death.
qq. VALUATION DATE: as defined in Section 4.
rr. VOLUNTARY TERMINATION: a voluntary termination of employment
initiated by employee other than a Termination for Good Reason.
The term "Strike Price" in the Plan means "Deferred Compensation Per
Share Base Price" in this Agreement and the term "Valuation Price Per Share" in
the Plan means "Per Share Fair Market Value" in this Agreement.
2. GRANTS.
a. Subject to the terms and conditions of this Agreement, the
Company hereby grants and issues to Executive, as of the Effective Date, a right
to deferred compensation equal to the Deferred Compensation Per Share
Appreciation with respect to an aggregate of 4,064,251 shares of Common Stock.
Subject to the requirement that the Per Share Fair Market Value as of the
Valuation Date equals or exceeds the Target Per Share Value, the Company will
pay Executive an amount determined on the Valuation Date equal to the Deferred
Compensation Per Share Appreciation multiplied by the number of Executive's
vested shares provided that in no event shall the amount of Deferred
Compensation Per Share Appreciation exceed the amount of the Deferred
Compensation Cap. The value of such deferred compensation is payable only upon
termination of Executive's employment with the Company and in the manner
provided in Section 7.
b. Subject to the terms and conditions of this Agreement, the
Company hereby grants and issues to Executive, as of the Effective Date, a right
(a "SAR") to the SAR Per Share Appreciation with respect to an aggregate of
4,064,251 shares of Common Stock. Upon exercise of a SAR, the Company will pay
Executive an amount determined on the Valuation Date or on an Exercise Date,
whichever is applicable, equal to the SAR Per Share Appreciation multiplied by
the number of shares of Common Stock with respect to which the SAR is exercised.
The value of such right is payable at indeterminate dates and in the manner
provided in Section 7.
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<PAGE> 7
c. Each of the foregoing grants are restricted as to
transferability (as provided in Section 9), and are represented by the Company's
unsecured promise (as provided in Section 10).
3. VESTING; FORFEITURE; MANNER OF EXERCISE.
a. The grants will vest as follows: 20% of the rights to each of
the Deferred Compensation Per Share Appreciation and SAR Per Share Appreciation
will vest as of each December 15, beginning December 15, 1999, if on such date
Executive is employed by the Company. In addition, Executive will become fully
vested in his rights to each of the Deferred Compensation Per Share Appreciation
and the SAR Per Share Appreciation upon the occurrence of any of the following
events: (i) a Sale of the Company; (ii) a Change in Control; (iii) termination
of Executive's employment for any reason other than a Termination for Cause;
(iv) death; (v) Disability; or (vi) a Termination for Good Reason. Upon vesting,
a SAR may be exercised from time to time and will be exercisable, in whole or in
part.
b. If Executive ceases to be employed by the Company pursuant to a
Termination for Cause, Executive will forfeit any and all rights to any unvested
Deferred Compensation Per Share Appreciation and SAR Per Share Appreciation.
c. All unexercised rights with respect to each of the Deferred
Compensation Per Share Appreciation and SAR Per Share Appreciation will be
deemed exercised at 4:59 p.m. on the Valuation Date and these rights will become
null and void thereafter; provided however, that the parties' obligations
pursuant to this Agreement will remain in full force and effect until fully
performed.
4. VALUATION DATE. The Valuation Date will be the day on which the
first of the following events occurs, provided that Executive is employed by the
Company on that day:
a. SALE OF THE COMPANY. The day on which a Sale of the Company is
completed.
b. CHANGE IN CONTROL. The day on which a Change in Control of the
Company occurs.
c. TERMINATION OF EMPLOYMENT. The last day of the Company's fiscal
quarter preceding the date on which Executive ceases to be employed by the
Company for any reason other than a Termination for Cause or Voluntary
Termination. In the case of a Voluntary Termination the date shall be the date
of the public announcement by the Company of such Voluntary Termination.
d. END OF AWARD TERM. December 15, 2003.
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<PAGE> 8
5. FAIR MARKET VALUE.
a. If the Valuation Date is the date of a Sale of the Company, the
determination of Company Fair Market Value and Deferred Compensation Per Share
Appreciation and SAR Per Share Appreciation will reflect the Fair Market Value
of the Company's assets with reference to the consideration (which may include
consideration in the form of the direct or indirect assumption of liabilities)
received by the Company (or, if applicable, by its stockholders, in exchange for
their stock in the Company) in such transaction, as set forth in a notice by the
Company to Executive. Such notice will include a description of the
consideration and, as to any consideration so received other than cash or
cash-equivalents, a statement of the Fair Market Value of such consideration, as
determined in good faith on a reasonable basis by the Board. In establishing the
Fair Market Value of such consideration, the Board, as it reasonably deems
appropriate, may take into account (and any determination of the Fair Market
Value of such consideration pursuant to Section 8 will take into account) the
effect of terms or conditions of the transaction constituting a Sale of the
Company that (i) impose liabilities, contingent or otherwise, on the Company or
its stockholders, or (ii) condition the receipt of all or a portion of the
consideration on the occurrence of one or more events, including, for example,
the lapse of time or the attainment of earnings or other indicia of performance.
If Executive disagrees with the determination of Company Fair Market Value or of
the Fair Market Value of consideration set forth in the notice given to
Executive, Executive must give notice to the Company of his disagreement within
30 days after receipt of notice from the Company and if he fails timely to give
such notice, the determination of value(s) set forth in the Company's notice
will be conclusive and binding on the parties. If Executive gives notice of his
disagreement within the required 30-day period, such disagreement will be
resolved as provided in Section 8, provided that, as to a determination of
Company Fair Market Value, each appraiser selected pursuant to Section 8 will be
instructed to treat the consideration received in such transaction as the
primary factor to be considered in establishing Company Fair Market Value.
b. If the Valuation Date is a date prescribed by Section 4.b.
(unless the event constituting a Change in Control is also a Sale of the
Company, in which case Section 5.a. will apply), Section 4.c. or Section 4.d.,
and if there is a Per Share Public Market Value for the Common Stock, within 5
business days after the Valuation Date or as soon as reasonably possible after
financial statements of the Company as of the Valuation Date and for the period
from the end of the Company's most recent fiscal year through the Valuation Date
are completed, whichever is applicable, the Company will give notice to
Executive of Company Fair Market Value, Per Share Market Value, and Deferred
Compensation Per Share Appreciation and SAR Per Share Appreciation, as of the
Valuation Date. If there is no Per Share Public Market Value for the Common
Stock, the Per Share Fair Market Value as of the Valuation Date will be used to
calculate Deferred Compensation Per Share Appreciation and SAR Per Share
Appreciation as soon as reasonably possible after financial statements
(including at least a balance sheet and a statement of operations) of the
Company as of the Valuation Date and for the period from the end of the
Company's most recent fiscal year through the Valuation Date are completed, the
Company will give notice to Executive of Company Fair Market Value, Per Share
Market Value, and Deferred Compensation Per Share Appreciation and SAR Per Share
Appreciation, as of the Valuation Date, as determined by the
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<PAGE> 9
Board in good faith on a reasonable basis, including a reasonably detailed
description of the bases for such determinations.
If Executive disagrees with the determination of Company Fair Market
Value, Per Share Fair Market Value or Per Share Appreciation set forth in the
Company's notice, Executive must give notice to the Company of his disagreement
within 30 days after receipt of the Company's notice and if he fails timely to
give such notice, the determination of those amounts set forth in the Company's
notice will be conclusive and binding on the parties. If Executive gives notice
of disagreement within the 30-day period, such disagreement will be resulted in
accordance with Section 8.
6. MANNER OF EXERCISING SARS.
The SARs may be exercised in whole or in part, upon vesting only
by written notice signed by Executive and mailed or delivered to the President
or Secretary of the Company at its principal office which notice will: (i)
specify the number of SARs which are being exercised; and (ii) include such
documentation and representations as may be reasonably requested by the Company
in connection with such exercise. Once exercised a particular SAR may not be
further exercised.
7. PAYMENT.
a. Any payments made by the Company pursuant to this Agreement,
may, at the Company's election, subject to Section 13, be either in (i) cash or
other immediately available funds; (ii) shares of Common Stock; or (iii) a
combination thereof; provided however that the Company may elect to make such
payments in Common Stock only to the extent that the Common Stock is registered
pursuant to Section 12(b) or Section 12(g) of the Exchange Act. To the extent
that the Company elects to make any or all payments in the form of Common Stock,
such shares of Common Stock will be valued for purposes of this Agreement, at
the Per Share Fair Market Value of the Common Stock on the Exercise Date or the
Valuation Date, whichever is applicable.
b. Subject to the penultimate sentence of this clause b., payments
of Deferred Compensation Per Share Appreciation required to be made pursuant to
this Agreement will be made within 30 days after the Termination Date. Payments
of SAR Per Share Appreciation required to be made upon exercise of a SAR, other
than a deemed exercise with respect to a Valuation Date, will be made by the
Company within 30 days after the Exercise Date. Payments of SAR Per Share
Appreciation or Deferred Compensation Per Share Appreciation (but only if
Executive's employment is terminated as of the Valuation Date) required to be
made as of a Valuation date will be made within 30 days after the Valuation Date
if that date is the date of a Sale of the Company, 120 days after the Valuation
Date if that date is December 15, 2003 or 120 days after the Valuation Date if
that date is the date described in Section 4.c. Notwithstanding the foregoing,
if on any required payment date the determination of Deferred Compensation Per
Share Appreciation or SAR Per Share Appreciation has not been made, the required
payment will be made within five days after such determination is completed. At
the Company's option, the payment date
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<PAGE> 10
may be accelerated in whole or in part. Any payment made will be subject to any
applicable required income and other payroll tax withholding.
c. Notwithstanding that (i) the terms or conditions of a Sale of
the Company may provide for the deferral of the payment or delivery of all or a
portion of the consideration to be paid or delivered to the Company or to
holders of outstanding shares of Common Equity or (ii) the payment or delivery
of such consideration may be conditioned on the occurrence of one or more
events, the Company may not defer the payment of a portion of the cash otherwise
payable to Executive in respect of his rights to receive Deferred Compensation
Per Share Appreciation and SAR Per Share Appreciation, but any such deferral or
condition will be taken into account in any determination of the Fair Market
Value of such consideration pursuant to Section 8.
d. (i) If shares of Common Stock are to be delivered and the
Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the
Exchange Act, then the Company will as soon as practicable thereafter, file with
the SEC under the Act a registration statement to register the resale of such
shares of Common Stock by Executive and will use its reasonable best efforts to
have such registration statement declared effective by the SEC as promptly as
possible. In either event, the Company will use its reasonable best efforts to
maintain the effectiveness of such registration statement for a period of 180
days. If the Company was not required to withhold income taxes pursuant to
Section 7, and to the extent that Executive is required to pay income tax on the
payment of Deferred Compensation Per Share Appreciation or SAR Per Share
Appreciation made in shares of Common Stock prior to the expiration of the
180-day period, then prior to the date the payment is required to be made, the
Company will loan Executive an amount equal to the difference between the amount
of such income taxes required to be paid and the amount of sale proceeds, if
any, received by Executive. The principal amount of the loan will bear interest
at a rate equal to the Prime Rate and all principal and interest will be payable
in full 5 days after the end of the 180-day period.
(ii) Subject to the extensions provided by this Section, the
Company shall not be required to maintain the effectiveness of the registration
statement for more than 180 days. The Company shall be entitled to postpone for
a reasonable period of time the filing of the registration statement if the
Company determines in its judgment, that such registration and offering would
materially interfere with or otherwise adversely affect any financing,
acquisition, corporate reorganization or other material transaction or
development involving the Company or its affiliates or would require disclosure
of information that the Company believes should not be disclosed (a
"Disadvantageous Condition"). If at any time after the filing of a registration
statement or after it is declared effective the Company determines that such
registration and offering would result in a Disadvantageous Condition, then the
Company may require the suspension by Executive of the distribution of any of
the shares registered to be sold by giving notice to such effect to Executive.
In the event of such notice, then until the Company determines that such
registration and offering no longer would result in a Disadvantageous Condition,
the Company's obligation under this Section will be suspended. In the event of a
suspension after the registration statement has become
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<PAGE> 11
effective, the 180-day period of effectiveness will be extended by a number of
days equal to the total number of days for which the distribution was suspended.
(iii) The Company will bear all costs and expenses incurred in
connection with such registration and distribution.
(iv) The Company agrees to indemnify and hold harmless, to the
full extent permitted by law, Executive from and against any losses, claims,
damages or liabilities, and any related legal or other fees and expenses
(collectively, "Losses"), joint or several, to which Executive may become
subject, insofar as such Losses (or actions in respect thereof) are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement or prospectus, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, that the Company will not indemnify or hold
harmless Executive from or against any such Losses if the untrue statement,
omission or allegation thereof upon which such Losses are based (x) was made in
reliance upon and in conformity with the information provided by or on behalf of
Executive specifically for use or inclusion in the registration statement or
prospectus or (y) was made in any prospectus used after such time as the Company
advised Executive that the filing of a post-effective amendment or supplement
thereto was required, except the prospectus as so amended or supplemented.
Executive agrees to indemnify and hold harmless, to the full
extent permitted by law, the Company, its officers, directors and agents, and
each person, if any, who controls the Company within the meaning of either the
Securities Act or the Exchange Act (the "Company Indemnified Parties"), from and
against any Losses, joint or several, to which such Company Indemnified Parties
may become subject, insofar as such Losses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the applicable registration statement or the
prospectus, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, if the
statement or omission was made in reliance upon and in conformity with the
information provided by or on behalf of Executive specifically for use or
inclusion in the applicable registration statement or prospectus; provided, that
Executive will not indemnify or hold harmless any Company Indemnified Party from
or against any such Losses to the extent the untrue statement, omission or
allegation thereof upon which such Losses are based was made in any prospectus
used after such time as Executive advised the Company that the filing of a
post-effective amendment or supplement thereto was required, except the
prospectus as so amended or supplemented.
If the indemnification provided for under this Section is
unavailable to or insufficient to hold the indemnified party harmless under the
above paragraphs in respect of any Losses referred to therein for any reason
other than as specified therein, then the indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such Losses
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one
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<PAGE> 12
hand, and such indemnified party, on the other, in connection with the
statements or omissions which resulted in such Losses, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by (or omitted to be supplied by) the
indemnifying parties or indemnified parties, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, the relative benefits received by each party from the
sale of the shares, and any other equitable considerations appropriate under the
circumstances. The amount paid or payable by an indemnified party as a result of
the Losses referred to above in this subsection shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigation or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act of 1933, as amended) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
e. Interest on payments of deferred compensation will accrue at a
rate equal to __% per annum from the Valuation Date that occurs other than as a
result of a termination of employment until the date of payment, which amount
will be included in any payment made under this Agreement.
f. Unless the Company is notified in writing of a change of
address, any payment will be made to Executive at the address for notices to
Executive set forth in Section 17.a.
8. DETERMINATION OF FAIR MARKET VALUE. Except as otherwise expressly
provided in this Agreement, wherever this Agreement refers to, or calls for a
determination of, Fair Market Value (including, for example, a determination of
the Company Fair Market Value pursuant to Section 1.h. when there is no Per
Share Public Market Value or a determination of the Fair Market Value of
consideration received in a Sale of the Company pursuant to Section 5.a.), the
Fair Market Value of the item in question will be determined in accordance with
the following provisions:
a. The Company and Executive may agree on the Fair Market Value of
the item in question.
b. If the Company and Executive are unable to agree on a Fair
Market Value, within 15 days after the date notice of a dispute as to that issue
is given by either party to the other, or if they otherwise determine that an
appraisal should be used to determine Fair Market Value, then they will cause
the Fair Market Value as of the required date of determination to be determined
by a qualified appraiser acceptable to both of them. If they are unable to agree
on a single appraiser within 15 days after the date of notice of the dispute,
each of them will have an additional 10 days to select one appraiser nationally
recognized in valuing items of the kind required to be valued. If either fails
to appoint an appraiser, then the determination of Fair Market Value by the one
appraiser will be binding.
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<PAGE> 13
c. Each appraiser will determine the Fair Market Value of the item
in question, taking into account such matters as may be prescribed by this
Agreement and such other matters as the appraiser may deem relevant. The Company
and Executive will use their reasonable best efforts to cause each appraiser to
submit to them a written report indicating that appraiser's determination of
Fair Market Value within 30 days after the date such appraiser is selected.
d. If the higher of the two appraisals is 110% or less of the
lower appraisal, the average of the two will be the Fair Market Value.
e. If the higher of the two appraisals is more than 110% of the
lower appraisal, the Company will immediately notify the two appraisers and
cause them to appoint a third similarly qualified appraiser within 10 days after
such notice. The Company and Executive will use their reasonable best efforts to
cause such third appraiser (who will not be apprised of the determination of the
other appraisers) to submit a written report to each of them indicating such
appraiser's determination of Fair Market Value within 30 days after the date
such third appraiser is selected. If three appraisals are necessary, then the
average of the two appraisals in which the determinations of Fair Market Value
are closest together will be the Fair Market Value or, if the highest and lowest
are equidistant from the middle determination, then the middle determination
will be the Fair Market Value.
f. Each party will use reasonable best efforts to provide each
appraiser with such information as such appraiser may reasonably request for the
purpose of preparing an appraisal pursuant to this Section 8.
g. A determination of Fair Market Value made pursuant to this
Section 8 will be final, binding and nonappealable. Each party will be
responsible for one-half of all fees and expenses of all appraisers.
h. If the determination of Fair Market Value pursuant to this
Section 8 is a determination of the Company Fair Market Value for the purpose of
determining Per Share Appreciation or SAR Per Share Appreciation or an
adjustment to Deferred Compensation Per Share Base Value or SAR Per Share Base
Value, the Company will make the required determination of such amounts using
the Company Fair Market Value determined pursuant to this Section 8 and will
give notice of such determination to Executive within two business days after
receiving notice of the determination of Company Fair Market Value pursuant to
this Section 8.
9. RESTRICTION ON TRANSFER. Executive may not transfer or grant any
security interest in any of his rights under this Agreement except (i) pursuant
to a qualified domestic relations order as defined by the Internal Revenue Code
of 1986, as amended, or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder (a "Domestic Relations Order"),
(ii) to a living trust in which the beneficiaries are the Executives or members
of Executive's immediate family or (iii) transfers by will or the laws of
intestate succession. Any attempted transfer in violation of this restriction
will be null and void.
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Executive may designate a beneficiary or beneficiaries to whom the
rights under this Agreement shall pass upon Executive's death and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Company on the form annexed hereto as
Exhibit A or such other form as may be prescribed by the Company; provided that
no such designation shall be effective unless so filed prior to the death of
Executive. If no such designation is made or if the designated beneficiary does
not survive Executive's death, the rights under this Agreement shall pass by
will or the laws of descent and distribution. Following Executive's death, the
rights under this Agreement, if otherwise exercisable, may be exercised by the
person to whom the rights under this Agreement pass according to the foregoing,
and such person shall be deemed to be Executive for purposes of any applicable
provisions of this Agreement.
10. ACKNOWLEDGMENTS.
a. Executive acknowledges and agrees that the obligations of the
Company under this Agreement are not funded in any way, and that he will have
rights only of a creditor based solely on the Company's unsecured promise to
pay. Because Executive has not made an investment in shares of Common Stock,
Executive acknowledges and agrees that the he has a right to benefit from
further appreciation in Shares without risking any capital and without the risk
of a beneficial owner that the value of property may decline substantially.
Executive further acknowledges and agrees that the grants of Deferred
Compensation Per Share Appreciation and SAR Per Share Appreciation right under
this Agreement are not an assurance of continued employment by the Company or
any of its Affiliates.
b. Executive represents and warrants that (i) by virtue of his
position with the Company or based on information furnished by the Company he is
familiar with the business, earnings, condition, properties and business
prospects of the Company, (ii) he has had the opportunity to ask questions and
request additional information concerning the business, earnings, condition,
properties and business prospects of the Company and that his questions have
been answered and that he has received the additional information requested,
(iii) he has such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of entering into this
Agreement, (iv) he is an "accredited investor" (as such term is defined in
Regulation D promulgated under the Act and (v) he understands that the Company
is entering into this Agreement in reliance on the acknowledgments, agreements,
representations and warranties of Executive set forth in this Agreement. To the
extent the issuance of the shares of Common Stock are not then registered
pursuant to the Act, Executive acknowledges and agrees that he will make such
additional representations and warranties that the Company may reasonably
request to support an exemption pursuant to Section 4(2) of such Act, including
with respect to Executive's investment intent, investor status and restrictions
on transfer.
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11. ADJUSTMENTS.
a. Appropriate and equitable adjustment will be made to the
Deferred Compensation Per Share Base Value and the SAR Per Share Base Value in
the event of any stock dividend, stock split, reverse stocks split,
reclassification, recapitalization or other analogous change affecting the
outstanding shares of Common Stock. This Agreement will not affect the right of
the Company or any Affiliate to take any action affecting its capital stock
whether described in the preceding sentence or otherwise.
b. If after the Effective Date the Company issues Common Stock for
a consideration per share less than the Per Share Fair Market Value as of the
date such Common Stock is issued or if the Company issues a Derivative Security
having a per share exercise, conversion or exchange price less than the Per
Share Fair Market Value as of the date such Derivative Security is issued (any
such issuance of Common Stock or a Derivative Security being referred to as a
"Subject Issuance"), then each of the Deferred Compensation Per Share Base Value
and the SAR Per Share Base Value in effect immediately before such issuance will
be adjusted in accordance with the following formula:
BV2 = BV1 x O + A
-----------
O + A x M
-----
P
Where:
BV2 = the new Deferred Compensation Per Share Base
Value or SAR Per Share Base Value, as applicable.
BV1 = the Deferred Compensation Per Share Base Value or
SAR Per Share Base Value, as applicable,
immediately prior to the Subject Issuance.
O = the total number of Shares Outstanding.
A = the number of additional shares of Common Stock
issued (or issuable upon exercise, conversion or
exchange of a Derivative Security issued) in the
Subject Issuance.
P = the price per share of the Common Stock issued
(or issuable upon exercise, conversion or
exchange of a Derivative Security issued) in the
Subject Issuance.
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M = the Per Share Fair Market Value of Common Stock
on the date of the Subject Issuance.
If an adjustment pursuant to this Section 11.b. is made on account of the
issuance of a Derivative Security, (i) no further adjustment will be made upon
exercise, conversion or exchange of such Derivative Security and (ii) such
adjustment will be reversed to the extent such Derivative Security shall not
have been exercised, converted or exchanged at the time it ceases to be
outstanding or to be exercisable, convertible or exchangeable. Within 30 days
after each issuance of shares of Common Stock or a Derivative Security by the
Company, the Company will give notice of such issuance to Executive, including a
reasonably detailed description of the terms of such issuance, the Per Share
Fair Market Value as of the date of such issuance and the amount of
consideration per share received by the Company in such transaction (or the
exercise, conversion or exchange price of any Derivative Security issued in such
issuance), as determined by the Board in accordance with the following
paragraph.
Notwithstanding anything to the contrary in this Agreement: (i) any
determination of value contemplated by this Section 11.b., including, for
example, any determination of Per Share Fair Market Value or of the Fair Market
Value of any consideration received by the Company for Common Stock or a
Derivative Security, will be made by the Board in the exercise of its good faith
judgment, and such determination will be final, binding and nonappealable so
long as the Board determination is in good faith, and if such determination is
made in connection with the issuance of Common Stock or a Derivative Security to
any Person other than Liberty or an Affiliate of Liberty such determination will
be deemed to have been made in good faith if neither Liberty nor any Affiliate
of Liberty (other than the Company) shall have received any material
consideration on account of such issuance; (ii) shares of Common Stock and
Derivative Securities issued by the Company to any Person other than Liberty or
any Affiliate of Liberty will be deemed for all purposes under this Agreement to
have been sold for a per share price, or a per share exercise, conversion or
exchange price in the case of a Derivative Security, at least equal to the Per
Share Fair Market Value on the date of issue, unless Liberty or any Affiliate of
Liberty (other than the Company) shall have received any material consideration
on account of such issuance; and (iii) shares of Common Stock issued by the
Company to any Person before December 31, 1999 for a per share price at least
equal to the initial Per Share Base Value or that are issuable upon exercise,
conversion or exchange of a Derivative Security issued by the Company to any
Person before December 31, 1999 (which Derivative Security has a per share
exercise, conversion or exchange price at least equal to the initial Per Share
Base Value), will be deemed to have been sold for a per share price at least
equal to the Per Share Fair Market Value on the date of issue.
12. ARBITRATION. If any controversy or claim arising out of this
Agreement cannot be settled by the parties (other than any disagreement that is
subject to resolution pursuant to Section 8, as to which the provisions of such
Section 8 will be exclusive), the dispute will be settled by arbitration before
a single arbitrator in Denver, Colorado, which arbitrator will be a natural
person having experience in financial and business matters appointed by, and
which arbitration will be conducted in accordance with the then applicable
provisions of the Commercial Arbitration Rules
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of, the American Arbitration Association. Each party will bear its or his own
costs of such arbitration, including attorneys' fees and expenses, except that
the fees and expenses of the arbitrator and the American Arbitration Association
will be paid by the Company and Executive in equal shares. Judgment on any award
resulting from such arbitration may be entered in any court having jurisdiction.
In consideration of the anticipated expedition of dispute resolution and
minimization of expenses, each party agrees that arbitration will be the
exclusive remedy to resolve disputes under this Agreement, and each party
expressly waives any right such party might have to seek redress in any other
forum. The parties further agree that an arbitrator will be empowered to assess
no remedy other than the payments provided under this Agreement.
13. LIBERTY OBLIGATIONS RE PRICE; LIBERTY RIGHTS TO PURCHASE SHARES.
a. If payment is made in shares of Common Stock and the resale of
such shares is registered under the Act pursuant to Section 7.d., Liberty will
pay to Executive, in cash or other immediately available funds, the difference,
if any, between (i) the product of the Per Share Public Market Value on the
Valuation Date or Exercise Date, whichever is applicable, and the number of
shares sold by Executive pursuant to the registration statement received by
Executive from the sale of such number of shares plus interest thereon from the
date the Common Stock was issued to the payment date at the Prime Rate and (ii)
the net proceeds. Executive will use his reasonable best efforts to sell the
shares pursuant to the registration statement in a manner that will, in the good
faith judgment of Executive and his financial advisors maximize the average
selling price. Such payment shall be made by Liberty within five business days
after receipt by Liberty from Executive of a certificate from the broker or
underwriter effecting such sales setting forth the net proceeds received by
Executive from the sale of such shares.
b. At any time a payment is to be made to Executive pursuant to
this Agreement, Liberty will have the right to purchase from the Company a
number of shares of Series B Common Stock equal to the number of shares of
Common Stock that would have been issued to Executive if the Company had elected
to make the required payment in Common Stock at a price per share equal to (i)
the Deferred Compensation Per Share Appreciation on the Valuation Date, with
respect to the payment of Deferred Compensation Per Share Appreciation, or (ii)
the SAR Per Share Appreciation on the Valuation Date or an Exercise Date,
whichever is applicable, with respect to the payment of SAR Per Share
Appreciation.
Notwithstanding the foregoing, in the case of an exercise of a SAR
other than on a Valuation Date, Liberty may elect to purchase the number of
shares as to which the SAR is exercised at a price per share equal to the Per
Share Fair Market Value on the Exercise Date.
If Liberty exercises its right to purchase shares of Series B Common
Stock pursuant to this clause b., the Company shall be required to pay the
Deferred Compensation Per Share Appreciation or the SAR Per Share Appreciation
in cash.
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The maximum number of shares of Series B Common Stock that Liberty may
purchase pursuant to this Agreement is 19,296,193 shares. In connection with any
such purchase of Series B Common Stock, the Company and Liberty will enter into
a stock purchase agreement having customary terms which are reasonably
acceptable to the Company and Liberty. Any such stock purchase agreement shall
contain customary representations and warranties of the parties, including
representations of the Company with respect to the due authorization and valid
issuance of the shares being purchased and that such shares are fully paid and
not accessible.
14. CONFIDENTIALITY. Other than in the performance of his duties
hereunder, Executive will not, so long as he is employed by the Company or
thereafter, directly or indirectly make use of, or divulge to any person, firm,
corporation, entity or business organization, and he will use his reasonable
best efforts to prevent the publication or disclosure of, any confidential or
proprietary information concerning, the business, accounts or finances of, or
any of the methods of doing business used by the Company or of the dealings,
transactions or affairs of the Company or any of its customers which have or
which may have come to his knowledge during his employment with the Company; but
this Section 15 will not prevent Executive from responding to any subpoena,
court order or threat of other legal duress, provided Executive notifies the
Company thereof with reasonable promptness so that the Company may seek a
protective order or other appropriate relief and the Company will reimburse
Executive for any out-of-pocket expenses incurred by him in connection
therewith.
15. ANNOUNCEMENT. The Company will publicly announce a Voluntary
Termination of Executive.
16. COMPANY LOAN OF DEFERRED COMPENSATION. At any time after a
determination of the amount of Deferred Compensation after a Valuation Date, if
Executive is still employed by the Company, the Company, upon request of
Executive, will loan Executive any amount up to the total amount of Deferred
Compensation Share Appreciation payable to Executive pursuant to this Agreement.
Such loan shall be payable upon receipt by Executive of the Deferred
Compensation Share Appreciation and shall bear interest at the Prime Rate.
17. MISCELLANEOUS PROVISIONS.
a. NOTICES. All notices to be given hereunder will be in writing
and will be deemed duly given when delivered personally or mailed, certified
mail, return receipt requested, postage prepaid and addressed as follows:
If to be given to Liberty:
Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
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If to be given to the Company:
TCI Music, Inc.
67 Irving Place North, 4th Floor
New York, New York 10003
If to be given to Executive:
Bruce W. Ravenel
c/o Liberty Digital, Inc.
9197 South Peoria Street
Englewood, Colorado 80112
or to such other address as a party may furnish to the other in writing in
accordance with this Section 17.a.
b. BINDING EFFECT. This Agreement is binding upon, and inures to
the benefit of, the Company and its successors and assigns, and upon Executive
and his personal representatives and other permitted successors and assigns.
c. AMENDMENT. This Agreement may not be changed orally, but only
by a writing signed by the party against whom enforcement of any change is
sought.
d. ENTIRE AGREEMENT. This Agreement represents the entire
agreement of the Company and Executive with respect to its subject matter, and
it supersedes all prior and contemporaneous understandings and agreements, both
oral and written.
e. ORIGINALS. This Agreement will be signed in two originals, one
to be delivered to the Company and one to Executive.
f. GOVERNING LAW. This Agreement will be construed and enforced in
accordance with the internal laws of the State of Colorado without regard to the
choice-of-law principles thereof.
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<PAGE> 20
IN WITNESS WHEREOF, we have signed this Agreement on the dates
indicated, to be effective as of the Effective Date.
EXECUTIVE:
/s/ Bruce W. Ravenel
------------------------------------
Bruce W. Ravenel
LIBERTY MEDIA CORPORATION
By: /s/ Charles Y. Tanabe
--------------------------------
Name: Charles Y. Tanabe
Title: Senior Vice President
TCI MUSIC, INC.
By: /s/ Ralph J. Sorrentino
--------------------------------
Name: Ralph J. Sorrentino
Title: Executive Vice President
and Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.5
TAX LIABILITY ALLOCATION AND
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into as of the 9th day of September,
1999, by and between LIBERTY MEDIA CORPORATION, a Delaware corporation
("Liberty"), LIBERTY DIGITAL, INC., a Delaware corporation ("Digital"), for and
on behalf of itself and each member of the Digital Group (as defined below), and
LIBERTY MEDIA GROUP LLC, a Delaware limited liability company ("Liberty Group
LLC").
WITNESSETH:
WHEREAS, AT&T Corp., a New York corporation ("AT&T"), Liberty, for and
on behalf of each member of the Liberty Group (as defined below) and Digital
Group, Tele-Communications, Inc., a Delaware corporation ("TCI"), Liberty
Ventures Group LLC, a Delaware limited liability company, Liberty Group LLC, TCI
Starz, Inc., a Colorado corporation, TCI CT Holdings, Inc., a Delaware
corporation, each Covered Entity (as defined therein), and certain other
entities which may become parties thereto pursuant to Section 23 thereof, have
entered into a Tax Sharing Agreement dated as of March 9, 1999, as amended (the
"AT&T/Liberty TSA"), which allocates and settles (i) the consolidated federal
income Tax liability of the AT&T Affiliated Group and the TCI Affiliated Group
and (ii) the state, local and foreign Tax liability in connection with all
combined, consolidated and unitary state, local and foreign Tax returns which
include members of the Liberty Group and either the Common Stock Group or the
TCI Group; and
WHEREAS, Liberty has incurred obligations under the AT&T/Liberty TSA
for and on behalf of the Digital Group; and
WHEREAS, it is deemed equitable that with respect to each Taxable
period for which a Joint Return (as defined below) is filed in any Tax
jurisdiction, Digital pay to Liberty an amount equal to the Digital Group's
Separate Return Tax Liability (as defined below) in each such Tax jurisdiction;
and
WHEREAS, it is deemed equitable that with respect to each Taxable
period for which a Joint Return is filed in any Tax jurisdiction and in which
the Affiliated Group for such Tax jurisdiction utilizes a net operating loss or
credit of Digital, Liberty shall, in the manner prescribed hereinafter, credit
against the future liability of Digital to Liberty hereunder an amount equal to
the Tax benefit obtained by such Affiliated Group as a result of the utilization
of such net operating loss or credit of Digital; and
WHEREAS, it is deemed equitable that in the event that Digital or its
Subsidiaries for any reason become disaffiliated from any Affiliated Group, the
portion of the economic
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<PAGE> 2
burdens and benefits of Tax payments, deficiencies and refunds of such
Affiliated Group which are attributable to the period in which disaffiliation
occurs and for prior Joint Return periods in which Digital or any other member
of the Digital Group was included in such Affiliated Group, are to be allocated
to Liberty and Digital as hereinafter provided.
NOW, THEREFORE, the parties signatory hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
shall be defined as follows:
(a) "Affiliated Group" shall mean, for any federal, state, local
or foreign Tax jurisdiction, the consolidated, combined or unitary group that
files a Joint Return.
(b) "AT&T" shall have the meaning set forth in the recitals
hereto.
(c) "AT&T Tax Proceedings" shall have the meaning given to such
term in Section 12(b) hereof.
(d) "AT&T/Liberty TSA" shall have the meaning set forth in the
recitals hereto.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Common Stock Group" shall have the meaning given to such term
in the AT&T/Liberty TSA.
(g) "Consolidated Return Regulations" shall mean the Treasury
Regulations promulgated under Chapter 6 of Subtitle A of the Code, including, as
applicable, any predecessors or successors thereto.
(h) "Contested Digital Group Item" shall have the meaning given to
such term in Section 12(b) hereof.
(i) "Contributed Entities" shall mean each of the "Contributed
Subsidiaries" and each "Additional Contributed Subsidiary," as such terms are
defined in the Contribution Agreement.
(j) "Contribution Agreement" shall mean the Agreement dated
______, 1999, by and among Liberty, LMC Capital, LLC, a Delaware limited
liability company, Liberty DMX, Inc., a Colorado corporation, TCI Interactive,
Inc., a Delaware corporation, ETC w/tci, Inc., a Delaware corporation, and
Digital.
(k) "Digital" shall have the meaning set forth in the first
paragraph hereof.
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<PAGE> 3
(l) "Digital Group" shall mean Digital and each of the other Legal
Entities that is or was at any time owned directly or indirectly by Digital,
including, without limitation, each of the Contributed Entities and any of their
direct or indirect Subsidiaries for all Taxable periods covered by this
Agreement.
(m) "DIT" shall mean any "deferred intercompany transaction" or
"intercompany transaction" within the meaning of the Treasury Regulations (or
predecessors thereto), or any similar transaction under state, local or foreign
Tax law.
(n) "Final Determination" shall mean a closing agreement with the
Internal Revenue Service or the relevant state, local or foreign Taxing
authorities, an agreement contained in Internal Revenue Service Form 870AD or
other similar form, an agreement that constitutes a determination under Section
1313(a)(4) of the Code, a claim for refund which has been allowed, a deficiency
notice with respect to which the period for filing a petition with the Tax Court
or the relevant state, local or foreign tribunal has expired or a decision of
any court of competent jurisdiction that is not subject to appeal or as to which
the time for appeal has expired.
(o) "Governmental Authority" shall have the meaning set forth in
the definition of "Tax."
(p) "Group" shall mean either the Liberty Group or the Digital
Group.
(q) "Joint Return" shall mean any federal, state, local or foreign
Tax Return that includes at least two Legal Entities, of which one Legal Entity
is a member of the Digital Group and the other Legal Entity is a member of the
Liberty Group, the TCI Group or the Common Stock Group.
(r) "Legal Entity" shall mean a corporation, partnership, limited
liability company or other legal entity under the corporation, partnership,
limited liability company or other organizational laws of a state or other
jurisdiction.
(s) "Liberty" shall have the meaning set forth in the first
paragraph hereof.
(t) "Liberty Group" shall have the meaning given to such term in
the AT&T/Liberty TSA; provided, however, that such term shall not include any
Legal Entity for such period as and to the extent that such Legal Entity is a
member of the Digital Group.
(u) "Liberty Group Contribution Agreement" shall mean the
Contribution Agreement, dated as of March 9, 1999, by and among Liberty, Liberty
Media Management LLC, Liberty Group LLC and Liberty Ventures Group LLC.
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<PAGE> 4
(v) "Liberty Group LLC" shall have the meaning set forth in the
first paragraph hereof.
(w) "Liberty Tax Proceedings" shall have the meaning given to such
term in Section 12(b) hereof.
(x) "Losses" shall mean costs, expenses, fees, liabilities,
obligations and losses.
(y) "Merger Agreement" shall mean the Agreement and Plan of
Restructuring and Merger dated as of June 23, 1998, by and among AT&T, Italy
Merger Corp. and TCI.
(z) "Parent" shall mean, as the context may require, the common
parent of any consolidated, combined, or unitary group that has filed, or is
required to file, any Joint Return.
(aa) "Redetermination" shall mean any redetermination as the
result of an audit by the Internal Revenue Service (or the relevant state, local
or foreign Governmental Authority), a claim for refund, an amended Tax Return or
otherwise.
(bb) "Separate Return" shall mean any Tax Return that is not a
Joint Return.
(cc) "Separate Return Tax Liability" shall have the meaning given
to such term in Section 3 hereof.
(dd) "Subsidiary" means, as to any Legal Entity, any other Legal
Entity of which at least (i) 50% of the equity and (ii) 50% of the voting
interests are owned, directly or indirectly, by such first Legal Entity.
(ee) "Tax" shall mean any tax, wherever created or imposed, and
whether of the United States or elsewhere, and whether imposed by a local,
municipal, governmental, state, foreign, federation or other body (a
"Governmental Authority"), and, without limiting the generality of the
foregoing, shall include income, gross receipts, property, sales, use, license,
excise, franchise, employment, payroll, unemployment insurance, social security,
stamp, environmental, value added, alternative or added minimum, ad valorem,
trade, recording, withholding, occupation or transfer tax, custom or duty or
other like governmental assessment or charge of any kind whatsoever, together
with any related interest, penalties and additions imposed by any Governmental
Authority.
(ff) "Tax Item" shall mean any item of income, gain, loss,
deduction, credit, recapture of credit or any other item which increases or
decreases Taxes paid or payable, including an adjustment under Code Section 481
resulting from a change in accounting method.
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<PAGE> 5
(gg) "Tax Proceeding" shall mean any Tax audit, examination,
controversy or litigation.
(hh) "Tax Return" shall mean any Tax report, return or other
information (including any attached schedules or any amendments to such report,
return or other information) required to be supplied to or filed with a
Governmental Authority, including an information return, claim for refund,
amended return or declaration or estimated Tax return.
(ii) "TCI" shall have the meaning set forth in the recitals
hereto.
(jj) "TCI Group" shall have the meaning given to such term in the
AT&T/Liberty TSA.
(kk) "Treasury Regulations" shall mean the Treasury Regulations
promulgated under the Code.
2. Payment of Separate Return Tax Liability by Digital to Liberty. With
respect to each Taxable period for which a Joint Return is filed in any Tax
jurisdiction, Digital shall pay to Liberty an amount equal to the Separate
Return Tax Liability of the Digital Group, determined in accordance with Section
3 hereof, such payment by Digital, including installments of estimated Tax
payments, to be made to Liberty at least five business days prior to the due
dates thereof (including extensions), whether or not the Affiliated Group is
obligated to pay a Tax liability for the applicable period. The amount of
estimated Tax payments to be made by Digital to Liberty shall be reasonably
determined by Liberty.
3. Determination of Separate Return Tax Liability. For each Taxable
period during which a Joint Return is filed in any Tax jurisdiction, the
Separate Return Tax Liability of the Digital Group for such Tax jurisdiction
shall mean the hypothetical federal, state, local or foreign Tax liability
(computed without regard to any credit or net operating loss deduction)
determined as if the Digital Group had filed a separate consolidated, combined
or unitary Tax return for the applicable period in such Tax jurisdiction and its
income were taxable at the highest corporate tax rate in effect for such period;
provided, however, that the Consolidated Return Regulations (or any similar
provisions of state, local or foreign Tax law) and the Joint Returns filed by
the Affiliated Group in such Tax jurisdiction shall determine the timing of the
recognition of Tax Items with respect to DITS and the determination of which
Legal Entity shall bear the Tax benefit or burden of such Tax Items, and the
Digital Group shall be responsible for the Tax Items recognized by its
respective members with respect to any DITS. If the computation of the Separate
Return Tax Liability of the Digital Group pursuant to this Section 3 for a
Taxable period does not result in positive Tax liability, then for purposes of
Section 2 hereof the Separate Return Tax Liability of the Digital Group shall be
deemed to be zero, and any net operating loss or Tax credit of the Digital Group
for such period shall be taken into account only as otherwise provided herein.
The determination of the Separate Return Tax Liability of the Digital Group
shall be made by Liberty and such determination shall be conclusive for purposes
hereof.
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<PAGE> 6
4. Credit to Separate Return Tax Liability of Digital. If the Digital
Group is entitled to a Tax credit or would incur a net operating loss during a
Taxable period if it filed a separate consolidated, combined or unitary Tax
return for such period, or would, if it filed a separate consolidated, combined
or unitary Tax return for all periods covered by this Agreement computed as
described in Section 3, be entitled to a credit or a net operating loss
deduction with respect to net operating losses or credits carried forward or
back to such period (exclusive of net operating losses or credits utilized by
any Affiliated Group for prior or subsequent periods for which the Digital Group
has previously received credit because of the Tax benefit to such Affiliated
Group as described below), and if it is determined by Liberty that such credit,
net operating loss or deduction will be utilized by the Affiliated Group in
filing its Joint Return for the current Taxable period or for any previous
period and that such credit, net operating loss or deduction will provide a Tax
benefit in any such period, Liberty shall credit against the Separate Return Tax
Liability owed by Digital to Liberty pursuant to this Agreement for the current
Taxable period and all future Taxable periods until the credit fully utilizes an
amount equal to the net Tax benefit which Liberty, in its reasonable judgement,
determines the Affiliated Group will obtain. Liberty shall apply such credit
against the Separate Return Tax Liability of the Digital Group as provided above
with respect to any Taxable period as of the first installment date for such
year. Liberty shall have the right to adjust, as of the last day of succeeding
quarters the amount credited pursuant to this Section 4 based upon the
determination of Liberty that the amount credited in preceding quarters was
incorrect.
5. Tax Liability of Digital in the Event of Disaffiliation. In the
event that Digital becomes disaffiliated from any Affiliated Group for any
reason, Digital shall remain liable under this Agreement for the Tax liability
of the Digital Group for the Taxable period during which disaffiliation occurs
and for prior Taxable periods in which Digital was a member of the Affiliated
Group, in accordance with Section 1.1502-6 of the Consolidated Return
Regulations or any similar provision of state, local or foreign Tax law, and
Digital shall be required to pay Liberty those amounts for the period of
disaffiliation that are determined pursuant to this Agreement. Payment of such
Tax liability by Digital shall be made to Liberty at least five business days
prior to the due date of the applicable Tax return. Moreover, should a Tax
Proceeding ultimately result in assessment of a Tax deficiency against any
Affiliated Group for years in which Digital was affiliated with such Affiliated
Group, Digital shall remain liable for Digital's portion of such Tax deficiency
determined pursuant to this Agreement, plus interest and penalties as provided
in Section 9, if any. In addition to the foregoing, Digital shall remain liable
in all periods following disaffiliation for any payments required to be made
pursuant to Section 7(b) hereof.
6. Payment of Tax Refunds and Utilized Tax Benefits to Digital in the
Event of Disaffiliation.
(a) If, after the disaffiliation of Digital from any Affiliated
Group, Parent receives from a Governmental Authority any refund of Tax (and
interest, if any) paid by such
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<PAGE> 7
Affiliated Group, any amount of which in the sole judgment of Liberty should be
regarded as a refund of amounts paid by Digital pursuant to Section 2 hereof,
such amount shall be paid by Liberty to Digital within sixty business days after
receipt by Parent.
(b) If, upon the disaffiliation of Digital from any Affiliated
Group, Digital has not received a credit against its Separate Return Tax
Liability in any Tax jurisdiction pursuant to Section 4 hereof for any net
operating losses or credits of the Digital Group that have been utilized by such
Affiliated Group (the "Unpaid Benefits"), Liberty shall pay to Digital, at such
times that, and only to the extent that, the Digital Group has a Separate Return
Tax Liability for such Tax jurisdiction (or if the Digital Group actually files
a separate consolidated, combined or unitary federal, state, local, or foreign
Tax Return, its actual Tax liability shown on such Tax Return), an amount equal
to the net Tax benefit which Liberty, in its reasonable judgement, determines
the Affiliated Group has obtained from the Unpaid Benefits in such Tax
jurisdiction. Notwithstanding the previous sentence Liberty shall not make a
payment for any net operating loss or credit which would have expired at the
time that the Digital Group has a Separate Return Tax Liability (or actual Tax
liability for any separate consolidated, combined, or unitary federal, state,
local, or foreign Tax Return). Digital shall provide Liberty with a written
calculation of the Separate Return Tax Liability of the Digital Group (or a copy
of the actual Tax Return filed by the Digital Group) at such time that the Tax
Return is due for such Tax jurisdiction, or if earlier, is filed by the Digital
Group. Liberty shall make any payment required by this Section 6(b) within 30
business days after receipt from Digital of the written calculation of the
Digital Group's Separate Return Tax Liability or receipt of a copy of the
applicable Tax Return that has been filed.
(c) Notwithstanding Section 6(b) hereof, at such time that the
members of the Liberty Group which are part of an affiliated group (as defined
in Section 1504 of the Code) including Liberty for U.S. federal income tax
purposes, do not continue to own stock of Digital constituting 20% of the voting
power of Digital (a "Loss of Control"), Liberty shall pay to Digital an amount
equal to the net Tax benefit which Liberty, in its reasonable judgement,
determines the Affiliated Group has obtained from the Unpaid Benefits (which
Digital has not previously received credit or payment for pursuant to Sections 4
or 6(b) of this Agreement) in such Tax jurisdiction, and Digital shall have no
further rights with respect to such Unpaid Benefits following such payment.
Notwithstanding the previous sentence, Liberty shall not make a payment for any
net operating loss or credit which would have expired at the time of a Loss of
Control. Liberty shall make any payment required by this Section 6(c) within 30
business days following a Loss of Control.
7. Special Rules.
(a) Convertible Preferred Stock Treatment. Solely for purposes of
determining the amount of any Separate Return Tax Liability or any Tax credit,
loss, or deduction of the Digital Group hereunder, the Convertible Preferred
Stock, Series B of Digital
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<PAGE> 8
shall be treated as if, for tax purposes, it is indebtedness of Digital. The
previous sentence shall not apply in any period following the disaffiliation of
Digital from any Affiliated Group.
(b) Deferred Compensation and Stock Appreciation Rights Plan. For
purposes of this Agreement (including, without limitation, the determination of
the Separate Return Tax Liability of Digital pursuant to Section 3 hereof and
the Credit to Separate Return Tax Liability of Digital pursuant to Section 4
hereof), any deduction or loss allowed with respect to the Deferred Compensation
and Stock Appreciation Rights Plan set forth on Schedule 4.14 to the
Contribution Agreement (the "Deferred Compensation and Stock Appreciation Rights
Plan") shall be considered a deduction or loss of Liberty (and not a deduction
of the Digital Group) for all Joint Returns. With respect to each Separate
Return filed by the Digital Group (including, without limitation, all Separate
Returns of the Digital Group for Taxable periods beginning after the
disaffiliation of the Digital Group from any Affiliated Group), Digital shall
pay to Liberty an amount equal to the net Tax benefit which the Digital Group
has obtained in any such Taxable period from any deduction or loss resulting
from the Deferred Compensation and Stock Appreciation Rights Plan that is
utilized by the Digital Group on such Separate Return. Digital shall make the
payment required by the preceding sentence within 30 business days following the
date the applicable Tax Return is filed.
8. Adjustments.
(a) In the event of any Redetermination of any Joint Return which
affects the calculation of the Digital Group's Separate Return Tax Liability for
any Taxable period, the amounts required to be paid pursuant to Section 2 shall
be recomputed for such Taxable period to take into account such Redetermination,
and payments pursuant to Section 2, and the credits and payments to the Digital
Group pursuant to Sections 4 and 6 hereof, shall be appropriately adjusted.
Digital shall pay Liberty or Liberty shall pay Digital an amount equal to the
difference between the payment or payments previously made between the parties
in respect of such redetermined Joint Return and the amount that would have been
paid pursuant to this Agreement in respect of such redetermined Joint Return if
such redetermined Joint Return had been filed on the basis of the
Redetermination. In the event Parent is required to pay to any Governmental
Authority any amount for additional Taxes due to the disallowance of all or part
of any item utilized by the Affiliated Group and for which Digital received a
credit or payment for pursuant to Sections 4 or 6 hereof (or if Parent would
have been so required to pay any Governmental Authority but for other
adjustments), Digital shall pay to Liberty the amount of such additional Tax
paid by Parent (or which Parent would have been required to pay but for other
adjustments); provided, however, the amount so paid by Digital to Liberty shall
not exceed the cumulative amount credited or paid to Digital pursuant to
Sections 4 and 6 hereof with respect to such item (except as provided in Section
9 below).
(b) In the event that AT&T is not required to take any Package
Position (as defined in the AT&T/Liberty TSA) of the Liberty Group pursuant to
the procedures set forth in Section 9(c) of the AT&T/Liberty TSA, and if such
Package Position affects any Tax Item of the
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<PAGE> 9
Digital Group, the amounts required to be paid pursuant to Section 2 shall be
recomputed for such Taxable period to take into account the position actually
taken by AT&T on such Joint Return, and payments pursuant to Section 2, and the
credits and payments to the Digital Group pursuant to Sections 4 and 6 hereof,
shall be appropriately adjusted. Digital shall pay Liberty or Liberty shall pay
Digital an amount equal to the difference between the payment or payments
previously made between the parties in respect of the Digital Group's Separate
Return Tax Liability and the amount that would have been paid pursuant to this
Agreement in respect of the Digital Group's Separate Return Tax Liability if
such original calculation of the Digital Group's Separate Return Tax Liability
had been made on the basis of the position actually taken by AT&T on such Joint
Return.
(c) Any payment by Liberty or Digital required by any
Redetermination shall be paid within seven days after the date of a Final
Determination with respect to such Redetermination.
9. Payment of Interest, Penalties and Expenses. Interest, penalties and
expenses incurred by Parent in connection with the amendment of any Joint
Return, and/or any Tax Proceeding, shall be borne equitably by those parties
whose Tax liability may be affected by such amendment, examination or subsequent
proceedings. No interest shall be charged in connection with any allocation
under this Agreement, however, unless interest is payable to a Governmental
Authority or to a member of the Common Stock Group pursuant to the AT&T/Liberty
TSA.
10. Indemnification.
(a) Each Legal Entity that is a member of the Liberty Group shall
indemnify and hold harmless each Legal Entity that is a member of the Digital
Group and their respective directors, officers, employees, affiliates, agents,
successors and assigns (the "Digital Group Indemnitees") from and against (i)
any Taxes which such member of the Liberty Group is required to pay to a
Governmental Authority (except for Taxes which Liberty has a right of
reimbursement from Digital), or in respect of which Liberty is required to make
a payment hereunder to Digital, (ii) any amount Digital is required to pay to
any Governmental Authority or to AT&T with respect to any Joint Return in excess
of the Digital Group's Separate Return Tax Liability for such Tax jurisdiction,
as such may be redetermined pursuant to Section 8 hereof, and (iii) any Losses
incurred by any Digital Group Indemnitee by reason of a breach by any member of
the Liberty Group of its obligations or covenants hereunder.
(b) Each Legal Entity that is a member of the Digital Group shall
indemnify and hold harmless each Legal Entity that is a member of the Liberty
Group and their respective directors, officers, employees, affiliates, agents,
successors and assigns (the "Liberty Indemnitees") from and against (i) any
Taxes which such member of the Digital Group is required to pay to a
Governmental Authority (except for Taxes which Digital has a right of
reimbursement from Liberty) or in respect of which Digital is required to make a
payment
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hereunder to Liberty and (ii) any Losses incurred by any Liberty Indemnitee by
reason of a breach by any member of the Digital Group of its obligations or
covenants hereunder.
11. Appointment of Agent. Digital agrees to the appointment of AT&T as
agent for the members of the Digital Group for all matters described in Section
10 of the AT&T/Liberty TSA and consents to the filing of any Tax Returns and to
the making of any elections that AT&T is permitted to make pursuant thereto. For
all other matters, Digital consents to the appointment of Liberty as agent for
the members of the Digital Group, and agrees that Liberty shall have full
authority to prepare the calculation of the Digital Group's Separate Return Tax
Liability (subject to Digital's right to review such calculation), to file Joint
Returns and to make any elections that Liberty has the authority to make under
the AT&T/Liberty TSA on behalf of the Digital Group. The agency power of AT&T
and Liberty, as described in this Section, shall extend to all periods during
which Digital or any member of the Digital Group is a member of any Affiliated
Group, and, in the event of Digital's disaffiliation, AT&T and Liberty shall
retain their agency powers described herein to make or change on behalf of
Digital, or any member of the Digital Group, any election or other decision
affecting Tax liabilities for such periods that Digital was affiliated with the
Affiliated Group under the provisions of the Code providing for elections.
12. Filing of Returns and Contests.
(a) Digital shall provide Liberty with all information necessary
for Liberty to properly and timely prepare its Tax Package pursuant to Section
9(c) of the AT&T/Liberty TSA or to properly and timely file any Joint Returns
that any member of the Liberty Group is permitted to file. In the event Digital
fails to provide information in the form requested by Liberty and within
sufficient time to permit the timely preparation of such Tax Package or the
timely filing of any such Joint Return, any penalties, interest, or other
payment obligation assessed against the Liberty Group (either by a Governmental
Authority or by AT&T) by reason of a delay in submitting such Tax Package to
AT&T or in filing such Tax Return shall be payable by Digital. If Digital
provides information in the form requested by Liberty and within sufficient time
to permit the timely preparation of such Tax Package or the timely filing of a
particular Tax Return, any penalties, interest, or other payments assessed
against the Liberty Group (either by a Governmental Authority or by AT&T) by
reason of a delay in submitting such Tax Package to AT&T or in filing such Tax
Return shall not be payable by Digital.
(b) AT&T shall have the right to control all Tax Proceedings
described in Section 9(d) of the AT&T/Liberty TSA ("AT&T Tax Proceedings"), and
Liberty shall have the right to control all Tax Proceedings described in Section
9(b) of the AT&T/Liberty TSA ("Liberty Tax Proceedings"). In any AT&T Tax
Proceeding or Liberty Tax Proceeding in which any Tax Item of the Digital Group
is a subject of such Tax Proceeding (a "Contested Digital Group Item"), Digital
shall be entitled to participate in such Tax Proceeding at its expense, insofar
as the Tax liabilities of the Digital Group are concerned, and Liberty shall
consult with Digital with respect to any Contested Digital Group Item. In any
AT&T Tax Proceeding involving a Contested Digital Group Item, Liberty shall keep
Digital updated and informed with
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respect to such Contested Digital Group Item to the extent that Liberty is so
informed by AT&T, and in any Liberty Tax Proceeding, Liberty shall keep Digital
updated and informed with respect to such Contested Digital Group Item.
13. Separate Returns. Any Separate Return that includes only a member
or members of the Digital Group and any Taxes with respect to such Separate
Return shall be the responsibility of the Digital Group, provided that the
Digital Group timely files such Separate Returns and pays the Taxes due with
respect thereto. In the event that the Digital Group does not so file such a
Separate Return or does not pay the Taxes due with respect thereto, Digital
shall indemnify Liberty with respect to such Separate Return as provided in
Section 10 and, notwithstanding any other provision hereof, Liberty (or AT&T, if
required under the AT&T/Liberty TSA) shall be entitled to file such Separate
Return in any manner it chooses so long as it files such Separate Return in good
faith.
14. Cooperation. The parties shall cooperate with one another in all
matters relating to Taxes. The Digital Group shall provide Liberty with such
cooperation and information as is necessary in order to enable Liberty to
satisfy its tax, accounting and other legitimate requirements, including
obligations of Liberty under the AT&T/Liberty TSA. Such cooperation and
information by the members of the Digital Group shall include making their
respective knowledgeable employees available during normal business hours,
providing the information required by reasonable AT&T Tax and accounting
questionnaires (at the times and in the format required by AT&T or Liberty),
maintaining such books and records and providing such information as may be
necessary or useful in the filing of Joint Returns and Separate Returns, and
executing any documents and taking any actions which AT&T or Liberty may
reasonably request in connection therewith. Liberty shall provide Digital, upon
request, with copies of any Joint Returns filed by Liberty and with copies of
Joint Returns received by AT&T that include any member of the Digital Group,
promptly after such Joint Returns are filed (or, in the event filed by AT&T,
after receipt of such Joint Returns from AT&T) and with copies of schedules and
workpapers in Liberty's possession that were used to prepare such Joint Returns
or determine payments pursuant to this Agreement.
15. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of Liberty, Digital, Liberty Group LLC, and each other
party hereto and each other Subsidiary that becomes a party hereto pursuant to
Section 25 hereof. This Agreement shall inure to the benefit of, and be binding
upon, any successors or assigns of the parties hereto (including, without
limitation, any Subsidiary that becomes a party hereto pursuant to Section 25).
Liberty and Digital may assign their right to receive payments under this
Agreement but may not assign or delegate their obligations hereunder; provided,
however, that concurrently with the Liberty Media Corporation Contribution (as
defined in the Liberty Group Contribution Agreement) which will occur as soon as
practicable after the occurrence of a Triggering Event (as defined in the
Liberty Group Contribution Agreement), Liberty Group LLC shall assume all the
obligations of Liberty and each other member of the Liberty Group hereunder (and
which obligations thereafter shall be exercisable against Liberty Group LLC for
all purposes of this
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Agreement), and Liberty shall assign all of the rights of Liberty under this
Agreement to Liberty Group LLC (and which rights thereafter shall be exercisable
by Liberty Group LLC for all purposes of this Agreement, on behalf of Liberty or
otherwise).
16. Application of Agreement. This Agreement shall be applicable to all
Taxable periods ending after July 11, 1997, and to each Taxable period
thereafter, so long as a Joint Return is filed by Parent.
17. Interpretation. This Agreement is intended to calculate, allocate
and settle certain federal, state, local and foreign Tax liabilities of the
members of the Liberty Group and the Digital Group, and any situation or
circumstance concerning such calculation and allocation that is not specifically
contemplated hereby or provided for herein shall be dealt with in a manner
consistent with the underlying principles of calculation and allocation in this
Agreement. This Agreement shall not be interpreted to require any payment by
Digital to Liberty that is duplicative of any amount that is required to be
paid, and has been paid, by Digital directly to AT&T pursuant to the
AT&T/Liberty TSA.
18. Legal and Accounting Fees. Unless otherwise specified herein, any
fees or expenses (including internal expenses) for legal, accounting or other
professional services rendered in connection with tax research relating to
Digital, the preparation of a Joint Return or financial statement or the conduct
of any Tax Proceeding (whether incurred directly by the Liberty Group or for
which Liberty is required to reimburse AT&T under the AT&T/Liberty TSA) shall be
allocated between Liberty and Digital in a manner resulting in Liberty and
Digital, respectively, bearing a reasonable approximation of the actual amount
of such fees or expenses hereunder reasonably related to, and for the benefit
of, their respective Groups.
19. Effect of the Agreement. This Agreement shall determine the
liability of Liberty and Digital to each other as to the matters provided for
herein, whether or not such determination is effective for purposes of the Code
or of state, local or foreign Tax laws, or for financial reporting purposes or
for any other purposes.
20. Allocation Among Digital and Its Included Subsidiaries. Nothing
herein shall be deemed to preclude or require any allocation of the Separate
Return Tax Liability of Digital among or between Digital and its Subsidiaries,
if any.
21. Modifications. This Agreement may be modified or amended only
pursuant to an instrument in writing executed by all the parties signatory
hereto.
22. Entire Agreement. Except with respect to the AT&T/Liberty TSA, this
Agreement embodies the entire understanding among the parties relating to its
subject matter and supersedes and terminates any prior agreements and
understandings among the parties with respect to such subject matter, and no
party to this Agreement shall have any right, responsibility, obligation or
liability thereunder. This Agreement shall supersede the AT&T/Liberty TSA
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<PAGE> 13
insofar as the allocation and settlement of Taxes between the parties hereto;
however, this Agreement shall not be deemed to supersede the AT&T/Liberty TSA in
any other respect. Any and all prior correspondence, conversations and memoranda
are merged herein and shall be without effect hereon. No promises, covenants or
representations of any kind, other than those expressly stated herein, have been
made to induce either party to enter into this Agreement. This Agreement,
including this provision against oral modification, shall not be modified or
terminated except by a writing duly signed by each of the parties hereto, and no
waiver of any provisions of this Agreement shall be effective unless in a
writing duly signed by the party sought to be bound.
23. Code References. Any references to the Code or Treasury Regulations
shall be deemed to refer to the relevant provisions of any successor statute or
regulation and shall refer to such provisions as in effect from time to time.
24. Notices. Any payment, notice or communication required or permitted
to be given under this Agreement shall be in writing (including telecopy
communication) and mailed, telecopied or delivered:
If to Liberty or any member of the Liberty Group:
Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
Attention: Peter Zolintakis
Facsimile: (720) 875-5447
with a copy to:
Baker & Botts, L.L.P.
599 Lexington Avenue
New York, New York 10022
Attention: Elizabeth M. Markowski, Esq.
Frederick H. McGrath, Esq.
Facsimile: (212) 705-5125
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<PAGE> 14
If to Digital or any member of the Digital Group:
Liberty Digital, Inc.
c/o Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
Attention:
Facsimile:
with a copy to:
Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
Attention: Deborah Land Buckley, Esq.
Facsimile: (303) 298-0940
or to any other address as Liberty or Digital shall furnish in writing to one
another. All such notices and communications shall be effective when received.
25. New Members. Each of the parties to this Agreement recognizes that
from time to time, new Subsidiaries of Digital may be added to the Digital
Group. Each of the parties agree that any new Subsidiary that is part of the
Digital Group shall, without the express written consent of the other parties,
become a party to this Agreement for all purposes of this Agreement with respect
to Taxable periods ending after such Subsidiary was added to the Digital Group.
26. Termination. This Agreement shall terminate at such time as all
obligations and liabilities of the parties hereto have been satisfied. The
obligations and liabilities of the parties arising under this Agreement shall
continue in full force and effect until all such obligations have been met and
such liabilities have been paid in full, whether by expiration of time,
operation of law, or otherwise. The obligations and liabilities of each party
are made for the benefit of, and shall be enforceable by, the other parties and
their successors and permitted assigns.
27. Headings. The headings used in this Agreement are for convenience
only and shall not in any way affect the meaning or interpretation of any
provision hereof.
28. Copies. This Agreement may be executed in multiple counterparts
each of which shall be deemed an original, but all of which shall together
constitute one Agreement.
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IN WITNESS WHEREOF, each of the parties have caused this Agreement to
be executed by its respective duly authorized officer as of the date first set
forth above.
LIBERTY MEDIA CORPORATION
BY /s/ Charles Y. Tanabe
------------------------------
Charles Y. Tanabe
Senior Vice President
LIBERTY DIGITAL, INC., for itself and on behalf
of each member of the Digital Group
BY /s/ Charles Y. Tanabe
------------------------------
Charles Y. Tanabe
Vice President
LIBERTY MEDIA GROUP LLC
BY /s/ Charles Y. Tanabe
-------------------------------
Charles Y. Tanabe
Senior Vice President
15
<PAGE> 1
EXHIBIT 10.6
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of September 9, 1999 (this
"Agreement"), among Liberty Digital, Inc., a Delaware corporation (the
"Company"), and Liberty Media Corporation, a Delaware corporation ("Liberty ").
WITNESSETH
WHEREAS, pursuant to the terms of the Contribution Agreement, dated as
of April 23, 1999, as amended (the "Contribution Agreement"), among the Company,
Liberty, and certain direct and indirect subsidiaries of Liberty, the Company
has issued to Liberty DMX, Inc., a wholly owned subsidiary of Liberty, an
aggregate of (i) 109,450,167 shares of the Company's Series B Common Stock, par
value $.01 per share (the "Series B Common Stock"), and (ii) 150,000 shares of
the Company's Series B Convertible Preferred Stock, par value $.01 per share
(the "Series B Preferred Stock");
WHEREAS, each share of Series B Preferred Stock is initially
convertible at the option of the holder into 171.674 shares of Series B Common
Stock (subject to adjustment);
WHEREAS, each share of Series B Common Stock is convertible into one
share of the Company's Series A Common Stock, par value $.01 per share (the
"Series A Common Stock" and together with the shares of Series B Common Stock,
the "Common Stock");
WHEREAS, in addition to the shares being issued to it pursuant to the
Contribution Agreement, as of the date hereof Liberty is also the beneficial
owner of shares of Series A Common Stock and shares of Series B Common Stock;
and
WHEREAS, in accordance with the Contribution Agreement, the Company and
Liberty desire to enter into this Agreement to provide Liberty and the members
of the Liberty Group (as defined below) with certain registration rights with
respect to its shares of Common Stock (including any shares of Common Stock
issuable upon conversion of shares of Series B Preferred Stock).
NOW THEREFORE, in consideration of the premises and of the mutual
agreements and covenants hereinafter set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE> 2
1. Certain Definitions.
Agreement: As defined in the Preamble.
Business Day: Any day other than a Saturday, Sunday or other day on
which commercial banking institutions in New York, New York are required or
authorized by law to be closed.
Commission: The Securities and Exchange Commission, or any other
federal agency at the time administering the Securities Act or the Exchange Act.
Company: As defined in the Preamble.
Company Indemnified Parties: As defined in Section 6(b).
Company Notice: As defined in Section 2(b)(i).
Control: means, with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether by the ownership of voting securities, by
contract or otherwise.
Controlled Affiliate means, with respect to any Person, any other
Person Controlled by such first Person.
Demand Notice: As defined in Section 2(a).
Demand Registration: As defined Section 2(a).
Disadvantageous Condition: As defined in Section 2(e).
Exchange Act: The Securities and Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, as they each may, from time to time, be in effect.
Incidental Registration: As defined in Section 3(a).
Indemnified Party: As defined in Section 6(c).
Indemnifying Party: As defined in Section 6(c).
Liberty Group: Liberty and its direct and indirect Controlled
Affiliates (other than the Company and the Company's Controlled Affiliates).
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<PAGE> 3
Losses: As defined in Section 6(a).
Market Value: As defined in Section 2(b)(ii).
Other Stockholders: As defined in Section 2(b)(i).
Person: means a human being or a corporation, general or limited
partnership, limited or unlimited liability company, trust, association,
unincorporated organization, governmental authority or other entity.
Prospectus: The prospectus included in a Registration Statement as of
the date it becomes effective under the Securities Act and, in the case of
references to the Prospectus as of a date subsequent to the effective date of
the Registration Statement, as amended or supplemented as of such date,
including all documents incorporated by reference therein, each as amended, and
each applicable prospectus supplement relating to the offering and sale of any
of the Registrable Shares pursuant to such Registration Statement.
Registrable Shares: Shares of Series A Common Stock and Series B Common
Stock, and any other shares of capital stock of the Company issued in respect of
(or that become issuable upon conversion of shares of Series B Preferred Stock
or Series B Common Stock) shares of Series A Common Stock or Series B Common
Stock as a result of stock splits, stock dividends or other distributions,
reclassifications, recapitalizations, mergers, consolidations, reorganizations
or similar events. References in this Agreement to amounts or percentages of
Registrable Shares as of or on any particular date shall be deemed to refer to
amounts or percentages after giving effect to any applicable events contemplated
by the preceding sentence. Any Registrable Share will cease to be a Registrable
Share when (i) a registration statement covering such Registrable Share has been
declared effective by the Commission and such Registrable Share has been
disposed of pursuant to such effective registration statement; (ii) such
Registrable Share is sold by a Stockholder in a transaction in which
registration under the Securities Act is not required and such Stockholders'
rights hereunder with respect to such Registrable Share are not assigned to the
transferee thereof in accordance with the terms and provisions hereof; or (iii)
two years after the date of a transfer of Registrable Shares to any person other
than (x) a member of the Liberty Group or (y) a Person who immediately after
such transfer Controls the Company.
Registrable Shares then outstanding: The sum of, without duplication,
(i) the number of shares of Common Stock (or other securities of the Company)
outstanding that are Registrable Shares and (ii) the number of shares of Common
Stock (or other securities of the Company) that would be Registrable Shares upon
the exercise or conversion of other outstanding securities of the Company for or
into shares of such Common Stock (or other securities of the Company),
including, without limitation, upon conversion of shares of Series B Preferred
Stock.
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<PAGE> 4
Registration Expenses: As defined in Section 5(a).
Registration Statement: A registration statement of the Company under
the Securities Act on any form for which the Company then qualifies and which
permits the sale thereunder of the number and type of Registrable Shares (and
any other securities of the Company) to be included therein in accordance with
this Agreement by the applicable sellers in the manner described therein. The
term "Registration Statement" shall also include all exhibits and financial
statements and schedules and documents incorporated by reference in such
Registration Statement when it becomes effective under the Securities Act, and
in the case of the references to the Registration Statement as of a date
subsequent to the effective date, as amended or supplemented as of such date.
Requesting Stockholder: As defined in Section 2(a).
Securities Act: The Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, as they each may, from time to time, be in effect.
Selling Stockholder: Any Stockholder whose Registrable Shares are
included at the request of such Stockholder in any Registration Statement
pursuant to Section 2 or Section 3.
Series A Common Stock: As defined in the Preamble.
Series B Common Stock: As defined in the Preamble.
Series B Preferred Stock: As defined in the Preamble.
Stockholder: Liberty, any member of the Liberty Group owning
Registrable Shares, any transferee to which Registrable Shares have been
transferred in a transaction in which rights hereunder have been assigned
(provided that such transferee has executed an instrument, in form and substance
reasonably acceptable to the Company, assuming the obligations of a Stockholder
hereunder), and any other Person (x) to which Registrable Shares have been
pledged or (y) which has a security or other interest in Registrable Shares, in
each case, in connection with or as a result of any financing or hedging
transaction.
Stockholder Indemnified Parties: As defined in Section 6(a).
2. Demand Registration.
(a) Subject to Section 2(b)(ii) each Stockholder shall at any time
have the right to request (a "Demand Registration") that the Company
register under the Securities Act any and all of its Registrable Shares
upon the terms and subject to the conditions set forth in this
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<PAGE> 5
Agreement. One or more Stockholders (each, a "Requesting Stockholder")
holding Registrable Shares may elect to exercise the right to request a
Demand Registration pursuant to this Section 2 by furnishing the
Company with notice of such request, (a "Demand Notice") which sets
forth the type (Series A Common Stock or Series B Common Stock) and
number of Registrable Shares requested to be so registered and such
Stockholder(s) preferred method of distribution of such Registrable
Shares, and upon receipt of such Demand Notice, the Company shall as
soon as practicable after the date on which the Company Notice is given
(and in any event within 45 days thereafter), file with the Commission
and use its commercially reasonable efforts to cause to become
effective as promptly as practicable, a Registration Statement which
shall cover the Registrable Shares requested to be registered in the
manner set forth above. If the Requesting Stockholder is a member of
the Liberty Group, such Requesting Stockholder's Demand Notice may
specify shares of Series B Common Stock as the Registrable Shares for
which it is requesting registration, and the Company's obligations in
respect thereof shall include its obligation to use its commercially
reasonable efforts to cause such shares of Series B Common Stock to be
registered under the Securities Act in accordance with the Agreement
and to cause the shares of Series B Common Stock to be listed for
trading on the same national securities exchange or interdealer
quotation system or other market as the shares of Series A Common Stock
are then listed or quoted. In the event that a Requesting Holder which
is not a member of the Liberty Group requests registration of
Registrable Shares which are shares of Series B Common Stock, the
Company shall, unless otherwise notified by Liberty, require that any
such shares of Series B Common Stock be converted into shares of Series
A Common Stock in connection with the registration and sale hereunder.
(b) (i) Upon receipt by the Company of a Demand Notice, the
Company shall promptly notify each other Stockholder (the "Other
Stockholders") of such request for registration and the Requesting
Stockholder(s)' preferred method of distribution. Upon receipt of such
notice from the Company (the "Company Notice"), each such Other
Stockholder may deliver to the Company a request to register any or all
of such Other Stockholder's Registrable Shares in the registration
described in the Company Notice; provided, that such notice is given
within ten (10) Business Days after the date on which the Company
Notice is given (with such request stating (i) the amount of
Registrable Shares to be so included, (ii) such Other Stockholder's
preferred method of distribution of such Registrable Shares, and (iii)
any other information that the Company Notice reasonably requests be
included in such notice from such Other Stockholder).
(ii) Notwithstanding the provisions of Section 2(a) hereof,
the Company shall not be required to effect any registration pursuant
to this Section 2 if (A) the request or requests for registration cover
an aggregate number of Registrable Shares having a Market Value of less
than $25,000,000 as of the date of the last of such requests (unless
such Demand Registration is in respect of all remaining Registrable
Shares owned by the Stockholders, in which case
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<PAGE> 6
such dollar threshold shall not apply), (B) the Company has previously
filed six (6) registration statements under the Securities Act pursuant
to Section 2(a) of this Agreement, and such Registration Statements
were declared effective by the Commission and remained effective for
the period set forth in Section 4(a) hereof, (C) each Selling
Stockholder requesting registration could sell, in a single
transaction, under Rule 144 promulgated under the Securities Act or any
similar successor rule, the number of Registrable Shares such Selling
stockholder proposes to have registered pursuant to this Agreement, (D)
such request for registration is made prior to the earlier of the date
that is three (3) months after the effective date of the Company's most
recent Registration Statement pursuant to which Registrable Shares were
to be or were sold pursuant to this Section 2 or the date that is 45
days after the effective date of the Company's most recent registration
statement pursuant to which any Stockholders were entitled to request
that Registrable Shares be sold pursuant to Section 3, or (E) the
Company, in order to comply with such request, would be required to (1)
undergo a special interim audit or (2) prepare and file with the
Commission, sooner than would otherwise be required, pro forma or other
financial statements relating to any proposed or probable transaction.
"Market Value" as used in this Agreement shall mean, as to each
Registrable Share at any date, the average of the daily closing prices
for the Series A Common Stock for the twenty (20) consecutive trading
days before the day in question. The closing price for shares of Series
A Common Stock for each day shall be the last reported sale price or,
in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case on the
composite tape, or if such shares are not quoted on the composite tape,
on the principal United States securities exchange registered under the
Exchange Act, on which such shares are listed or admitted to trading,
or if they are not listed or admitted to trading on any such exchange,
the closing sale price (or the average of the quoted closing bid and
asked prices if no sale is reported) as reported by The Nasdaq Stock
Market, or any comparable system, or if such shares are not quoted on
The Nasdaq Stock Market, or any comparable system, the average of the
closing bid and asked prices as furnished by any market maker in the
securities of such class who is a member of the National Association of
Securities Dealers, Inc.
(c) If so requested by Stockholders requesting participation in a
public offering or distribution of Registrable Shares (each a "Selling
Stockholder") who own a majority of the Registrable Shares for which
registration is being requested, the public offering or distribution of
Registrable Shares under this Agreement shall be pursuant to a firm
commitment underwriting, the managing underwriter of which shall be an
investment banking firm selected and engaged by the Selling
Stockholders and approved by the Company, which approval shall not be
unreasonably withheld. The Company shall enter into the same
underwriting agreement as shall the Selling Stockholders, containing
representations, warranties, indemnities and agreements reasonably
satisfactory to the Company and not substantially different from those
customarily made by an issuer in underwriting agreements with respect
to secondary distributions. The Company, as a
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<PAGE> 7
condition to fulfilling its obligations under this Agreement, may
require the underwriters to enter into an agreement in customary form
indemnifying the Company against any Losses that arise out of or are
based upon an untrue statement or an alleged untrue statement or
omission or alleged omission in the Registration Statement or the
Prospectus made in reliance upon and in conformity with written
information furnished to the Company by the underwriters specifically
for use in the preparation thereof.
(d) If the lead managing underwriter of any underwritten public
offering in connection with a Demand Registration determines in good
faith that the aggregate number of Registrable Shares to be offered
exceeds the number of shares that could be sold without having an
adverse effect on such offering (including the price at which the
Registrable Shares may be sold), then the number of Registrable Shares
to be offered for the accounts of the Selling Stockholders in such
offering shall be reduced or limited on such basis as the Selling
Stockholders shall agree or, absent such an agreement, on a pro rata
basis in proportion to the respective numbers of Registrable Shares
requested to be included in such offering by such Selling Stockholders,
to the extent necessary to reduce the total number of shares to be
included in such offering to the amount recommended by such lead
managing underwriter; provided, that if in connection with such Demand
Registration securities other than Registrable Shares are being offered
(whether for the account of the Company or for any stockholder of the
Company not exercising rights under this Section 2), such reduction
shall be made (i) first, from such securities of the Company other than
Registrable Shares and (ii) second, from the number of Registrable
Shares requested to be included in such offering by the applicable
Selling Stockholders, on such basis as such Stockholders shall agree,
or absent such an agreement, on a pro rata basis.
(e) The Company shall be entitled to postpone, for a reasonable
period of time, but in no event in excess of 90 days (subject to
reduction as provided below) after its receipt of a Demand Notice, the
filing of any Registration Statement, if at any time prior to the
filing of such Registration Statement the Board of Directors of the
Company determines, in its reasonable business judgment, that such
registration and offering would materially interfere with or otherwise
adversely affect in any material respect any financing, acquisition,
corporate reorganization, or other material transaction or development
involving the Company or its Controlled Affiliates or would require
disclosure of information that the Board of Directors determined in its
reasonable business judgment should not be disclosed (a
"Disadvantageous Condition") and gives the Selling Stockholders notice
of such determination; provided, that the Company may postpone its
obligations under this Agreement (including in reliance on Section
4(b)) by reason of the existence of one or more Disadvantageous
Conditions only twice during any twelve month period. In the event of
such postponement, the Company shall file such Registration Statement
as soon as practicable after the Board of Directors of the Company
shall determine, in its reasonable business judgment, that such
registration and offering would not result in such
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<PAGE> 8
Disadvantageous Condition (but in no event later than ninety (90) days
after the date of the applicable Demand Notice; provided, that the
aggregate period during which the Company's obligations shall be so
suspended as a result of all determinations of Disadvantageous
Conditions and pursuant to Section 4(b) in any twelve month period
shall not exceed 180 days). If the Company shall postpone the filing of
any Registration Statement, Selling Stockholders holding in the
aggregate 50% or more of the Registrable Shares requested to be
included in such Registration Statement shall have the right to
withdraw the Selling Stockholders' request for such Demand Registration
by giving notice to the Company at any time following said notice by
the Company. Such withdrawal request shall be deemed to apply to all
Selling Stockholders that had requested to participate in such
registration.
(f) A Demand Registration shall not be deemed to have been
effected until the applicable Registration Statement shall have become
effective under the Securities Act (and not subject to any stop order,
injunction or other order or requirement of the Commission or other
governmental agency or court for any reason) for the period specified
in Section 4(a)(i). Each Selling Stockholder may, before any
Registration Statement becomes effective, withdraw its Registrable
Shares from inclusion therein, should the terms of the proposed
distribution not be satisfactory to such Selling Stockholder. If
Selling Stockholders holding in the aggregate 50% or more of the
Registrable Shares requested to be included in such Demand Registration
elect to withdraw such Registration Statement, such Registration
Statement shall be withdrawn (if necessary) and such registration shall
not be deemed to have been a Demand Registration for purposes of the
limitations on the number of Demand Registrations hereunder contained
in this Section 2; provided, that the Selling Stockholders shall
reimburse the Company for their pro rata portion of the Registration
Expenses incurred by the Company in connection with such Demand
Registration with 30 days after such withdrawal (unless at the time of
such withdrawal, the Selling Stockholder's have learned of a material
adverse change in the operating results, financial condition or
business of the Company of which such Selling Stockholders were not
aware as of the time of the Demand Notice and have withdrawn such
request promptly following the disclosure by the Company of such
material adverse change, in which case, the Selling Stockholders shall
not be obligated to reimburse the Company for such Registration
Expenses in order to preserve their respective rights under this
Section 2).
3. Incidental Registration.
(a) Each time the Company proposes to register under the
Securities Act any shares of Series A Common Stock or other equity
securities of the Company (whether in an underwritten public offering
or otherwise and whether or not for the account of the Company or for
any selling stockholder) (other than (x) in a transaction to which Rule
145 or any other similar rule of the Commission under the Securities
Act is applicable or (y) a registration statement on Form S-4 or Form
S-8 or any successor or comparable forms) in a manner
8
<PAGE> 9
which would permit the registration under the Securities Act of
Registrable Shares for sale to the public, the Company shall give
notice to each Stockholder of its intention to do so not later than
twenty (20) days prior to the anticipated filing date of the applicable
Registration Statement. Upon receipt of any such notice, each
Stockholder may elect to participate in such registration by giving the
Company notice requesting it to register any or all of such
Stockholder's Registrable Shares in connection with the registration
described in such notice from the Company within ten (10) days after
such notice has been given by the Company (with such request stating
(i) the type and amount of Registrable Shares to be included in such
registration by such Stockholder and the intended method of
distribution and (ii) any other information that the Company reasonably
requests be included in such registration statement) (such
registration, an "Incidental Registration"). Upon receipt of such
request, the Company will use its commercially reasonable efforts to
cause all such Registrable Shares requested to be included in such
Incidental Registration to be so included (in accordance with the
intended methods of disposition set forth in such Selling Stockholder's
notice) and to file the applicable Registration Statement with the
Commission promptly and cause such Registration Statement to be
declared effective under the Securities Act as promptly as practicable.
(b) If the proposed method of distribution in connection with such
an Incidental Registration is an underwritten public offering and the
lead managing underwriter thereof determines reasonably and in good
faith that the number of such Registrable Shares to be included in such
offering would materially adversely affect such offering, the number of
Registrable Shares to be offered for the account of the Selling
Stockholders shall be reduced or limited in proportion to the number of
Registrable Shares to be so offered by such Selling Stockholders to the
extent necessary to reduce the total number of shares to be included in
such offering to the amount recommended by such managing underwriter;
provided, that if securities are being offered for the account of other
persons or entities (other than, or in addition to, the Company), such
reduction shall be made pro rata from the securities intended to be
offered by such other persons or entities and the Selling Stockholders,
but no such reduction shall be made from the securities to be offered
for the account of the Company.
(c) The Company may, without the consent of any Stockholder,
delay, suspend, abandon or withdraw any Incidental Registration and any
related proposed offering or other distribution in which any
Stockholder has requested inclusion of such Stockholder's Registrable
Shares pursuant to this Section 3; provided, that the applicable
Selling Stockholders shall be entitled to continue such registration as
a Demand Registration pursuant to Section 2 following any such
withdrawal by the Company to the extent that such registration by the
Selling Stockholders making such election would otherwise satisfy the
requirements of Section 2.
9
<PAGE> 10
(d) Any Selling Stockholder may elect to withdraw its respective
Registrable Shares from inclusion in an Incidental Registration at any
time prior to five (5) Business Days prior to the then anticipated
effective date of the applicable Registration Statement; provided,
however, that the withdrawing Selling Stockholders shall reimburse the
Company for the portion of the Commission fees payable with respect to
the Registrable Shares so withdrawn.
(e) In connection with any Incidental Registration involving an
underwritten public offering of securities of the Company for the
account of the Company, each Selling Stockholder electing to
participate in such underwritten public offering shall, as a condition
to the Company's obligation hereunder with respect to such Selling
Stockholder's Registrable Shares, enter into and perform its
obligations under an underwriting agreement or other similar
arrangement in customary form with the managing underwriter of such
offering.
4. Obligations with Respect to Registration.
(a) Whenever the Company is obligated by the provisions of this
Agreement to effect the registration of any Registrable Shares under
the Securities Act, the Company shall:
(i) subject to Section 4(b), use its commercially reasonable
efforts to cause the applicable Registration Statement to remain
effective, and to prepare and file with the Commission any
amendments and supplements to the Registration Statement and to
the Prospectus used in connection therewith as may be necessary to
keep the Registration Statement and the Prospectus current and in
compliance with the provisions of the Securities Act, until the
sooner to occur of (A) the sale of all of the Registrable Shares
covered by such Registration Statement in accordance with the
intended methods of distribution thereof or (B) the one hundred
twentieth (120th) day following the effective date of such
Registration Statement;
(ii) promptly notify each Selling Stockholder of Registrable
Shares covered by such Registration Statement of the effectiveness
thereof and of any stop order issued or threatened by the
Commission and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered and promptly
notify such Selling Stockholder of such lifting or withdrawal of
such order;
(iii) promptly notify each Selling Stockholder holding
Registrable Shares covered by the applicable Registration
Statement at any time when a Prospectus relating thereto is
required to be delivered under the Securities Act, of the
occurrence of an event requiring the preparation of a supplement
or amendment to such Prospectus so that, as thereafter delivered
to the purchasers of such Registrable Shares, such Prospectus will
not contain an untrue statement of a material fact or
10
<PAGE> 11
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and
promptly make available to each such Selling Stockholder any such
supplement or amendment, and the Company will promptly prepare and
furnish to each such Selling Stockholder a supplement to or an
amendment of such Prospectus so that, as thereafter delivered to
the purchasers of such Registrable Shares, such Prospectus will
not contain any untrue statement of material fact or omit to state
a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which
they were made, not misleading;
(iv) in the case of an underwritten public offering, enter
into customary agreements (including an underwriting agreement in
customary form) and perform its obligations under any such
agreement(s) and shall take such other actions as are reasonably
required in order to expedite or facilitate the disposition of
such Registrable Shares;
(v) in the case of an underwritten public offering, make
available for inspection by any Selling Stockholder covered by
such Registration Statement, any underwriter participating in any
disposition pursuant to such Registration Statement and any
attorney, accountant or other professional retained by any such
Selling Stockholder or underwriter, all financial and other
records, pertinent corporate documents and properties of the
Company as shall be reasonably necessary to enable them to
exercise their due diligence responsibility in connection
therewith, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any of
such persons in connection with such Registration Statement.
Information which the Company determines, in good faith, to be
confidential and which it notifies such persons is confidential
shall not be disclosed to such persons unless such persons agree
to enter into a mutually acceptable confidentiality agreement
having customary terms (which shall permit the disclosure of such
information in the Registration Statement to the extent such
information is necessary to avoid or correct a misstatement or
omission in such Registration Statement or the release of such
information is ordered pursuant to a subpoena or other order from
a court of competent jurisdiction). Each such Selling Stockholder
agrees that information obtained by it as a result of such
inspections shall be deemed confidential and shall not be used by
it as the basis for any market transactions in the securities of
the Company unless and until such information is made generally
available to the public;
(vi) in the case of an underwritten public offering, use
commercially reasonable efforts to furnish to each Selling
Stockholder and to each underwriter a signed counterpart of (A) an
opinion or opinions of counsel to the Company
11
<PAGE> 12
addressed to such Selling Stockholder and underwriter (on which
opinion both such Selling Stockholder and such underwriter are
entitled to rely) and (B) a comfort letter or comfort letters from
the Company's independent public accountants, each in customary
form and covering such matters of the type customarily covered by
opinions or comfort letters, as the case may be, as the holders of
a majority of the Registrable Shares included in such Registration
Statement or the managing underwriter therefor reasonably
requests;
(vii) prepare and file with the Commission promptly upon the
request of any Selling Stockholder, any amendments or supplements
to such Registration Statement or the applicable Prospectus which,
in the reasonable opinion of counsel for such Selling
Stockholders, is required under the Securities Act or the rules
and regulations thereunder in connection with the distribution of
the Registrable Shares by such Selling Stockholders;
(viii) use commercially reasonable efforts to register or
qualify the Registrable Shares covered by a Registration Statement
under the securities or blue sky laws of such jurisdictions in the
United States as the Selling Stockholders shall reasonably
request, and do any and all other acts and things which may be
necessary to enable each Selling Stockholder to consummate the
disposition in such jurisdictions of such Registrable Shares in
accordance with a method of distribution described in such
Registration Statement; provided, however, that the Company shall
in no event be required to qualify to do business as a foreign
corporation or as a dealer in any jurisdiction where it is not
otherwise required to be so qualified, to conform its
capitalization or the composition of its assets at the time to the
securities or blue sky laws of such jurisdiction, to execute or
file any general consent to service of process under the laws of
any jurisdiction, to take any action that would subject it to
service of process in suits other than those arising out of the
offer and sale of the Registrable Shares covered by such
Registration Statement, or to subject itself to taxation in any
jurisdiction where it has not theretofore done so;
(ix) use commercially reasonable efforts to cause such
Registrable Shares covered by a Registration Statement to be
listed on the principal exchange or exchanges or qualified for
trading on the principal over the counter market on which the
Series A Common Stock is then listed or traded upon the sale of
such Registrable Shares pursuant to such Registration Statement;
and
(x) make and keep information publicly available relating to
the Company so as to satisfy the corresponding requirements of
Rule 144 under the Securities Act (or any successor or
corresponding rule) and to file with the Commission all reports
and
12
<PAGE> 13
other documents required of the Company under the Securities Act
and the Exchange Act in a timely manner.
(b) Notwithstanding anything to the contrary contained herein, if
at any time after the filing of a Registration Statement or after it is
declared effective by the Commission the Company determines, in its
reasonable business judgment, that such registration and offering would
result in a Disadvantageous Condition, then the Company may require the
suspension by each Selling Stockholder of the distribution of any of
the Registrable Shares by giving notice to such effect to each Selling
Stockholder. In the event that such notice is given, then until the
Board of Directors of the Company has determined, in its reasonable
business judgment, that such registration and offering no longer would
result in a Disadvantageous Condition, the Company's obligations under
Section 2(a), if the Registration Statement has not become effective,
or under Section 4(a)(i), if the Registration Statement has become
effective, will be suspended. In the event of a suspension pursuant to
this Section 4(b) after a Registration Statement has been declared
effective, the one hundred twenty (120)-day period of effectiveness of
such Registration Statement referred to in Section 4(a)(i) will be
extended by a number of days equal to the total number of days for
which the distribution of Registrable Shares included in such
Registration Statement by the Selling Stockholder was suspended under
this Section 4(b); provided that if during the period of any suspension
pursuant to this Section 4(b) there occurs a suspension under Section
4(c)(ii), the number of days of suspension pursuant to Section 4(c)(ii)
shall be included within the suspension period under this Section 4(b)
for purposes of calculating the extension of the Company's obligation
under Section 4(a)(i). Notwithstanding anything to the contrary set
forth herein, the total period of time during which the Company's
registration obligation or sales of Registrable Securities may be
suspended during any twelve month period pursuant to Section 2(d) and
this Section 4(b) shall not exceed 180 days in the aggregate.
(c) The Company's obligations under this Agreement to a Selling
Stockholder shall be conditioned upon such Selling Stockholder's
compliance with the following:
(i) such Selling Stockholder shall cooperate with the Company
in connection with the preparation of the Registration Statement,
and for so long as the Company is obligated to keep the
Registration Statement effective, such Selling Stockholder will
provide to the Company for use in the Registration Statement, all
information regarding such Selling Stockholder, its intended
method of disposition of the applicable Registrable Shares, and
such other information as the Company may reasonably request to
prepare the Registration Statement and Prospectus covering the
Registrable Shares and to maintain the currency and effectiveness
thereof;
(ii) each Selling Stockholder agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind
described in Section 4(a)(iii),
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<PAGE> 14
such Selling Stockholder will forthwith discontinue disposition of
Registrable Shares pursuant to the applicable Registration
Statement until such Selling Stockholder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section
4(a)(iii), and, if so directed by the Company, such Stockholder
will deliver to the Company all copies in its possession of the
most recent Prospectus covering such Registrable Shares at the
time of receipt of such notice. In the event the Company gives
such notice, the Company shall extend the period during which the
effectiveness of such registration statement shall be maintained
pursuant to Section 4(a)(i) hereof by the number of days during
the period from and including the date of the giving of notice
pursuant to Section 4(a)(iii) to the date when the Company shall
make available to such Stockholder a Prospectus supplemented or
amended to conform with the requirements of Section 4(a)(iii);
provided that if during the period of any suspension pursuant to
this Section 4(c)(ii) there occurs a suspension under Section
4(b), the number of days of suspension pursuant to Section 4(b)
shall be included within the suspension period under this Section
4(c)(ii) for purposes of calculating the extension of the
Company's obligation under Section 4(a)(i); and
(iii) during such time as such Selling Stockholder may be
engaged in a distribution of the Registrable Shares, such Selling
Stockholder shall comply with all applicable laws relating to such
distribution, including Regulation M promulgated under the
Exchange Act and pursuant thereto it shall: (A) not engage in any
stabilization activity in connection with the securities of the
Company in contravention thereof; (B) distribute the Registrable
Shares solely in the manner described in the Registration
Statement; (C) cause to be furnished to each broker through whom
the Registrable Shares may be offered, or to the offeree if an
offer is not made through a broker, such copies of the Prospectus
covering the Registrable Shares and any amendment or supplement
thereto and documents incorporated by reference therein as may be
required by law; and (D) not bid for or purchase any securities of
the Company or attempt to induce any person to purchase any
securities of the Company other than as permitted under the
Exchange Act.
(d) Each holder of Registrable Shares agrees, so long as the
Company and its controlling stockholders and their respective directors
and executive officers agree to be similarly bound, not to effect any
sale or distribution through or into the public markets of any equity
securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, including a sale
pursuant to rule 144 under the Securities Act (or any similar provision
then in force), during the 30 day period before the effective date of
any registration statement (except as part of such registration
statement) or during the period after such effective date that such
managing underwriter or the Board, in their reasonable judgement, shall
agree (but not to exceed 180 days). Each Stockholder agrees that, in
connection with any assignment of registration rights hereunder, it
will cause its assignee to
14
<PAGE> 15
agree to be bound by the terms of this Section 4(d). The Company agrees
that any agreement entered into after the date of this Agreement
pursuant to which the Company agrees to register or to permit the
participation in the registration of any securities of the Company
shall contain a provision under which holders of any such securities
agree not to effect any public sale or distribution of any such
securities during the periods described in clause (i) above, in each
case including a sale pursuant to Rule 144.
(e) Neither the Company nor any Selling Stockholder may
participate in any underwritten public offering in connection with a
Demand Registration or an Incidental Registration unless such person or
entity (i) agrees to sell its securities on the basis provided in any
underwriting arrangements approved by the party selecting the managing
underwriter for such offering and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of
such underwriting arrangements and this Agreement.
5. Expenses of Registration.
(a) Except as provided in paragraph (b) below, all Registration
Expenses incurred in connection with any Demand Registration or
Incidental Registration and the distribution of any Registrable Shares
in connection therewith shall be borne by the Company. For purposes of
this Agreement, the term "Registration Expenses" shall mean all (i)
registration, qualification and filing fees, (ii) fees and expenses of
compliance with securities or blue sky laws, (iii) printing expenses
(or comparable duplication expenses) and escrow fees, (iv) fees and
disbursements of counsel for the Company, (v) customary fees and
expenses for independent certified public accountants retained by the
Company (including the expenses of any comfort letters or costs
associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters), (vi) fees and
expenses of any special experts retained by the Company in connection
with such registration, (vii) fees and expenses of listing the
Registrable Shares on a securities exchange, and (viii) in the case of
a Demand Registration only, the reasonable fees and expenses of a
single counsel for the Selling Stockholders acceptable to the Company.
(b) Each Selling Stockholder shall pay all stock transfer fees or
expenses (including the cost of all transfer tax stamps), if any, and
all underwriting or brokerage discounts, commissions and fees relating
to the distribution of the Registrable Shares of such Selling
Stockholder, and in connection with an Incidental Registration only,
its pro rata share of the incremental filing fee under the Securities
Act attributable to the applicable Registrable Shares.
(c) Notwithstanding any other provision of this Agreement, the
Company shall be obligated to bear all internal expenses of the Company
in connection with any Demand
15
<PAGE> 16
Registration or Incidental Registration (including, without limitation,
all salaries of its officers and employees performing accounting and
legal functions and related expenses).
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless, to the full
extent permitted by law, each Selling Stockholder, its officers,
directors and agents, and each person (if any) who controls such
Selling Stockholder within the meaning of either the Securities Act or
the Exchange Act (collectively, the "Stockholder Indemnified Parties")
from and against any losses, claims, damages or liabilities, and any
related legal or other fees and expenses (collectively, "Losses"),
joint or several, to which such Stockholder Indemnified Parties may
become subject, insofar as such Losses (or actions in respect thereof)
are based upon any untrue statement or alleged untrue statement of a
material fact contained in the applicable Registration Statement or
Prospectus, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, that the Company will not indemnify or
hold harmless any Stockholder Indemnified Party from or against any
such Losses if the untrue statement, omission or allegation thereof
upon which such Losses are based (x) was made in reliance upon and in
conformity with the information provided by or on behalf of the
applicable Selling Stockholder specifically for use or inclusion in the
applicable Registration Statement or Prospectus or (y) was made in any
Prospectus used after such time as the Company advised such Selling
Stockholder that the filing of a post-effective amendment or supplement
thereto was required, except the Prospectus as so amended or
supplemented.
(b) Each Selling Stockholder, individually and not jointly, agrees
to indemnify and hold harmless, to the full extent permitted by law,
the Company, its officers, directors and agents, and each person, if
any, who controls the Company within the meaning of either the
Securities Act or the Exchange Act (the "Company Indemnified Parties"),
from and against any Losses, joint or several, to which such Company
Indemnified Parties may become subject, insofar as such Losses (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the applicable Registration Statement or the Prospectus, or any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading,
if the statement or omission was made in reliance upon and in
conformity with the information provided by or on behalf of such
Selling Stockholder or any person who controls such Selling Stockholder
specifically for use or inclusion in the applicable Registration
Statement or Prospectus; provided, that such Selling Stockholder will
not indemnify or hold harmless any Company Indemnified Party from or
against any such Losses (i) to the extent the untrue statement,
omission or allegation thereof upon which such Losses are based was
made in any
16
<PAGE> 17
Prospectus used after such time as such Selling Stockholder notified
the Company that the filing of a post-effective amendment or supplement
thereto was required, except the Prospectus as so amended or
supplemented, or (ii) in an amount that exceeds the net proceeds
received by such Selling Stockholder from the sale of Registrable
Shares pursuant to such Registration Statement.
(c) Each Person claiming a right to indemnification under this
Section 6 (the "Indemnified Party") shall give notice to the Person
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and the Indemnifying Party may
participate at its own expense in the defense, or if it so elects,
assume the defense of any such claim and any action or proceeding
resulting therefrom, including the employment of counsel and the
payment of all expenses. The failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party from
its obligations to indemnify such Indemnified Party, except to the
extent the Indemnified Party's failure to so notify actually prejudices
the Indemnifying Party's ability to defend against such claim, action
or proceeding. In the event that the Indemnifying Party elects to
assume the defense in any action or proceeding, an Indemnified Party
shall have the right to employ separate counsel in any such action or
proceeding and to participate in the defense thereof, but such
Indemnified Party shall pay the fees and expenses of such separate
counsel unless (i) the Indemnifying Party has agreed to pay such fees
and expenses or (ii) the named parties to any such action or proceeding
(including any impleaded parties) include such Indemnified Party and
the Indemnifying Party, and such Indemnified Party shall have been
advised by counsel that there may be a conflict of interest between
such Indemnified Party and the Indemnifying Party in the conduct of the
defense of such action (in which case, if such Indemnified Party
notifies the Indemnifying Party that it elects to employ separate
counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not assume the defense of such action or proceeding on such
Indemnified Party's behalf, it being understood, however, that the
Indemnifying Party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more
than one separate firm of attorneys at any time for all Indemnified
Parties, which firm shall be designated in writing by the applicable
Indemnified Parties). No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of the Indemnified
Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. No Indemnifying
Party shall settle or compromise any such claim or litigation in which
any relief other than the payment or money damages is sought against
any Indemnified Party unless the Indemnified Party consents in writing
to such settlement or compromise.
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<PAGE> 18
(d) If the indemnification provided for under this Section 6 is
unavailable to or insufficient to hold the Indemnified Party harmless
under subparagraphs (a) or (b) above in respect of any Losses referred
to therein for any reason other than as specified therein, then the
Indemnifying Party shall contribute to the amount paid or payable by
such Indemnified Party as a result of such Losses in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party,
on the one hand, and such Indemnified Party, on the other, in
connection with the statements or omissions which resulted in such
Losses, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by (or omitted to be supplied by) the Indemnifying
Parties or Indemnified Parties, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission, the relative benefits received by each
party from the sale of the Registrable Shares, and any other equitable
considerations appropriate under the circumstances. The amount paid or
payable by an Indemnified Party as a result of the Losses referred to
above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such Indemnified party in
connection with investigation or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent
misrepresentation.
(e) The parties hereto acknowledge and agree that the
indemnification provided herein shall supersede the indemnification
provisions set forth in Section 10 of the Contribution Agreement, and
that the Minimum Amount and Maximum Amount (each as defined in the
Contribution Agreement) shall not be applicable to claims under this
Section 6.
7. Notices. All notices, requests, demands, waivers and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally or mailed, certified or registered mail with postage
prepaid, or sent by telex, telegram or telecopier, as follows:
(a) if to the Company:
Liberty Digital, Inc.
9197 South Peoria Street
Englewood, CO 80112
Attention: Lee Masters
Facsimile:
18
<PAGE> 19
(b) if to Liberty:
Liberty Media Corporation
9197 South Peoria Street
Englewood, CO 80112
Attention: Charles Y. Tanabe
Facsimile: (720) 875-5382
or to such other person or address as any party shall specify by notice in
writing to the other party. All notices and other communications given to a
party in accordance with the provisions of this Agreement shall be deemed to
have been given (i) three Business Days after the same are sent by certified or
registered mail, postage prepaid, return receipt requested, (ii) when delivered
by hand or transmitted by telecopy (confirmation received) or (iii) one Business
Day after the same are sent by a reliable overnight courier service, with
acknowledgment of receipt requested. Notwithstanding the preceding sentence,
notice of change of address shall be effective only upon actual receipt thereof.
8. Amendment. Any provision of this Agreement may be amended or modified in
whole or in part at any time by an agreement in writing among each of the
parties hereto, executed in the same manner as this Agreement. No consent,
waiver or similar act shall be effective unless in writing.
9. Entire Agreement. This Agreement constitutes the entire agreement among the
parties hereto and supersedes all prior agreements and understandings, oral and
written, among the parties hereto with respect to the subject matter hereof.
10. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
11. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the State of Delaware, without giving
effect to principles of conflicts of laws.
12. Assignment; Binding Effect; Benefit. Liberty shall be entitled to assign its
rights hereunder to any member of the Liberty Group, and Liberty or any member
of the Liberty Group to which such rights are assigned shall be entitled to
further assign such rights to any person or entity to which Registrable Shares
are transferred, and to any Person acquiring a pledge of, security interest in,
or other rights to any Registrable Shares in connection with any hedging or
financing transaction, in each case without the consent or approval of the
Company or any other Person, and upon such assignment the assignor will be
relieved from its obligations hereunder. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, other than rights conferred
upon Indemnified Parties under Section 6.
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
LIBERTY DIGITAL, INC.
By: /s/ Charles Y. Tanabe
-------------------------------
Name: Charles Y. Tanabe
Title: Vice President
LIBERTY MEDIA CORPORATION
By: /s/ Charles Y. Tanabe
-------------------------------
Name: Charles Y. Tanabe
Title: Senior Vice President
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,835,000
<SECURITIES> 0
<RECEIVABLES> 10,323,000
<ALLOWANCES> 1,359,000
<INVENTORY> 5,122,000
<CURRENT-ASSETS> 87,241,000
<PP&E> 18,482,000
<DEPRECIATION> 2,690,000
<TOTAL-ASSETS> 1,249,579,000
<CURRENT-LIABILITIES> 144,852,000
<BONDS> 97,526,000
150,472,000
0
<COMMON> 1,967,000
<OTHER-SE> 508,429,000
<TOTAL-LIABILITY-AND-EQUITY> 1,249,579,000
<SALES> 38,844,000
<TOTAL-REVENUES> 38,844,000
<CGS> 0
<TOTAL-COSTS> 250,095,000
<OTHER-EXPENSES> (2,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,864,000
<INCOME-PRETAX> (216,311,000)
<INCOME-TAX> (82,713,000)
<INCOME-CONTINUING> (133,598,000)
<DISCONTINUED> (15,822,000)
<EXTRAORDINARY> 7,700,000
<CHANGES> 0
<NET-INCOME> (141,720,000)
<EPS-BASIC> (.75)
<EPS-DILUTED> (.75)
</TABLE>
