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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<S> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 1-9118
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
HOME SHOPPING NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-2649518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2501 118TH AVENUE NORTH, ST. PETERSBURG, FLORIDA
(Address of registrant's principal executive offices)
33716
(Zip Code)
(813) 572-8585
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF NAME OF EXCHANGE
EACH CLASS ON WHICH REGISTERED
- ---------- -------------------
<C> <C>
None None
</TABLE>
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
HOME SHOPPING NETWORK, INC. 5 7/8% CONVERTIBLE SUBORDINATED DEBENTURES DUE MARCH
1, 2006
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No []
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 28, 1997 there were outstanding 71,989,159 shares of Common
Stock and 20,000,000 shares of Class B Common Stock.
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HOME SHOPPING NETWORK, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
NO. PAGE
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<S> <C> <C>
PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 1
Item 3 Legal Proceedings........................................... 1
Item 4 Submission of Matters to a Vote of Security Holders......... 2
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 2
Item 6 Selected Financial Data..................................... 2
Item 7 Management's Narrative Analysis of the Results of Operations
in Accordance with General Instruction I to Form 10-K....... 2
Item 8 Consolidated Financial Statements and Supplementary Data.... 10
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 34
Item 11 Executive Compensation...................................... 34
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 13 Certain Relationships and Related Transactions.............. 34
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 34
</TABLE>
<PAGE> 3
PART I
ITEM 1 -- BUSINESS
GENERAL
Home Shopping Network, Inc. and its subsidiaries (collectively, the
"Company" or "Home Shopping") is a majority owned subsidiary of HSN, Inc.
("HSNi"), whose securities are registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934 and are traded on the Nasdaq National Market.
HSNi beneficially owns 80.1% of the equity and 90.8% of the voting power of the
Company, and Liberty HSN, Inc. ("Liberty HSN"), an indirect, wholly-owned
subsidiary of Liberty Media Corporation ("Liberty") which in turn, is a
wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), owns the remaining
equity interest and voting power in the Company. The Company is a holding
company, the subsidiaries of which conduct the day-to-day operations of the
Company's various business activities. The Company's primary business, and
principal source of revenue, is electronic sales by Home Shopping Club, Inc.
("HSC"), a wholly-owned subsidiary of the Company and a leader in the electronic
retailing industry.
In addition to the electronic retailing business, the Company's
subsidiaries are involved in Internet shopping, direct response telemarketing
services, and developing and marketing high technology MPEG
compression/decompression products. During 1996, the Company entered into two
international electronic retailing joint ventures in Germany and Japan, in each
case, as a minority participant.
ITEM 2 -- PROPERTIES
The Company owns an approximately 480,000 square foot facility in St.
Petersburg, Florida, which houses its television studios, broadcast facilities,
and many of the Company's administrative offices and training facilities.
The Company owns four warehouse type facilities totaling approximately
115,000 square feet near the Company's main campus in St. Petersburg, Florida.
These facilities are used for returns processing, retail distribution and
general storage.
The Company leases a 21,000 square foot facility in Clearwater, Florida for
its video and post production operations.
The Company owns and operates a warehouse consisting of 163,000 square feet
located in Waterloo, Iowa, which is used as an order fulfillment center.
The Company operates a warehouse located in Salem, Virginia, consisting of
approximately 650,000 square feet which is leased from the City of Salem
Industrial Development Authority. On November 1, 1999, the Company will have the
option to purchase the property for $1.
The Company leases four retail stores in the Tampa Bay, Florida area
totaling approximately 91,925 square feet.
The Company also leases office space in California, Colorado and New
Jersey.
ITEM 3. LEGAL PROCEEDINGS
On August 26, 1996, after the announcement that HSNi, then named Silver
King Communications, Inc. ("Silver King"), House Acquisition Corp., a newly
formed subsidiary of Silver King, Liberty HSN, and the Company had entered into
the Agreement and Plan of Exchange and Merger dated as of August 25, 1996 (the
"Home Shopping Merger Agreement"), a class action complaint titled Andre Engle
v. Leo J. Hindery, et. al. was filed in the Court of Chancery of the State of
Delaware, in and for the County of New Castle (the "Delaware Court"), against
the Company, Leo J. Hindery, Jr., Gen. H. Norman Schwarzkopf, Eli J. Segal,
Peter R. Barton, Robert R. Bennett, Barry Diller, James G. Held, Silver King,
Liberty and TCI by a shareholder of the Company on behalf of a purported class
consisting of all public shareholders of the Company (other than Liberty and its
controlled affiliates). Shortly thereafter, four other class action complaints
were filed against the foregoing defendants with the Delaware Court by
shareholders of the Company on behalf of a purported class consisting of all
public shareholders of the Company (other than
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Liberty and its controlled affiliates); one of these actions also named as
defendants, J. Anthony Forstmann and Victor A. Kaufman. Plaintiffs alleged,
among other things, that the Company's director defendants by approving the Home
Shopping Merger Agreement, and Liberty, by supporting the Home Shopping merger
("Home Shopping Merger"), breached their fiduciary duties to the stockholders
and that the consideration to be paid to stockholders in the Home Shopping
Merger is unfair and inadequate. Plaintiffs sought, among other things, an
injunction preventing the defendants from taking actions toward consummation of
the Home Shopping Merger and related transactions, and now seek recission or
rescissory damages and an award of unspecified compensatory damages to the
members of the plaintiffs class. On October 7, 1996, the five class action
lawsuits were consolidated for all purposes in an action titled In Re: Home
Shopping Network, Inc. Shareholders Litigation, Consolidated Civil Action No.
15179.
The Company believes that the claims in the consolidated action are without
merit, and does not believe it is reasonably possible that the actions will be
successful or otherwise materially adversely affect the Company or its
businesses. There can be no assurance, however, that the plaintiffs will not be
successful, and the Company cannot estimate, based on facts available, the
possible adverse effects of such a result.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction I to Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's common stock, par value
$.01 ("Home Shopping Common Stock"). There are only two holders of Home Shopping
Common Stock. No cash dividends have been paid on the Home Shopping Common
Stock, and none are permitted under the Company's existing and pending loan
facilities.
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction I to Form 10-K.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS IN
ACCORDANCE WITH GENERAL INSTRUCTION I TO FORM 10-K
GENERAL
The Company's primary business is electronic retailing. Home Shopping
operates two retail sales programs, The Home Shopping Network ("HSN") and
America's Store, each twenty-four hours a day, seven days a week (collectively,
the "Programs").
On August 25, 1996, the Company entered into the Home Shopping Merger
Agreement with a newly formed subsidiary of HSNi ("Merger Sub") and Liberty HSN.
On December 20, 1996, pursuant to the Home Shopping Merger Agreement, the Merger
Sub was merged with and into the Company and the Company became a subsidiary of
HSNi. After consummation of the Home Shopping Merger, HSNi owned 80.1% of the
equity and 90.8% of the voting power of the Company, with the remaining 19.9% of
the equity and 9.2% of the voting power owned by Liberty HSN.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new developments, new merchandising strategies and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are
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not limited to, the following: business and general economic conditions,
competitive factors, channel space availability and the cost and availability of
appropriate merchandise.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion presents the material changes in the consolidated
results of operations of the Company which have occurred between the years ended
December 31, 1996 and 1995. Reference should also be made to the Consolidated
Financial Statements included herein.
All financial data is presented on a historical basis, without the effects
of "push down" accounting related to the Merger.
In April 1996, the Company sold a majority of its interest in its
infomercial joint venture, HSN Direct Joint Venture ("HSND"). Due to the then
anticipated sale and associated gain, the results of operations of HSND were not
included in the consolidated results of operations for 1996. During 1995, the
consolidated results of operations included a $4.3 million pre-tax loss related
to HSND. In addition, in the fourth quarter of 1995, the Company sold the assets
of Ortho-Vent, Inc. ("Ortho-Vent"), a subsidiary of HSN Mail Order, Inc. ("Mail
Order"). See Note O to the Consolidated Financial Statements included herein for
the pro forma effects of excluding HSND and Ortho-Vent from the Company's 1995
results of operations.
As discussed in Note A-12 to the Consolidated Financial Statements included
herein, shipping and handling revenues are included as a reduction of cost of
sales to offset the related fulfillment costs incurred by the Company. Prior to
the second quarter of 1996, shipping and handling revenues had been included as
a component of net sales. All amounts and percentages in the following
discussion reflect this reclassification.
All tables and discussion included herein calculate the percentage changes
using actual dollar amounts, versus rounded dollar amounts.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
NET SALES
For the year ended December 31, 1996, net sales for the Company increased
$94.9 million, or 10.3%, to $1.015 billion from $919.8 million for the year
ended December 31, 1995. Net sales of HSC increased $108.3 million, or 13.8%,
for the year ended December 31, 1996, reflecting a 12.0% increase in the number
of packages shipped and a 1.5% decrease in the average price per unit sold
compared to the year ended December 31, 1995. Sales by wholly-owned
subsidiaries, Vela Research, Inc. ("Vela"), Mail Order and Internet Shopping
Network, Inc. ("ISN") increased $9.0 million, $7.8 million and $4.4 million,
respectively, for the year ended December 31, 1996. These increases were
partially offset by decreases related to HSND and Ortho-Vent of $17.7 million
and $15.6 million, respectively.
In November 1995, the Company appointed a new Chairman of the Board of
Directors and a new President and Chief Executive Officer, both with significant
experience in the electronic retailing and programming areas. The Company
believes that the improvement in sales in the year ended December 31, 1996
compared to 1995 was primarily the result of changes made by new management to
the Company's merchandising and programming strategies. In addition, the Company
offered a "no interest-no payment" credit promotion through September 1996 for
certain purchases made during June 1996 using the Company's private label credit
card and offered a similar promotion during the fourth quarter of 1996 with the
payment deferral period extending to March 1997. Management is taking additional
steps designed to attract both first-time and active customers which include
changing the merchandising approach to broaden product assortment, changing the
sales mix, optimizing product variety and value, maintaining the average price
per unit at the desired level, improving inventory management and better
planning of programmed shows. In addition, management reformatted the former
Spree! program to America's Store which was launched in January 1997. Currently
America's Store is primarily devoted to jewelry and related products, as well as
certain other products. This change was designed to distinguish the Programs and
to focus America's Store in popular product areas of electronic retailing. The
Company is continuing to develop this program concept. The Company believes that
its negative performance in the year ended December 31, 1995 which resulted in a
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decrease in consolidated net sales of $95.2 million from 1994, was due in part
to the adverse effects of certain merchandising and programming strategies which
had been implemented in late 1994 and 1995. There can be no assurance that
additional changes to the Company's merchandising and programming strategies
will achieve management's intended results.
For the year ended December 31, 1996, HSC's merchandise return percentage
decreased to 23.5% from 25.7%, in 1995. Management believes that the lower
return rate is primarily attributable to the decrease in the average price per
unit sold. Promotional price discounts remained constant at 2.8% of HSC sales
for the year ended December 31, 1996 compared to 1995.
At December 31, 1996, HSC had approximately 4.7 million active customers
representing a 2.1% decline from December 31, 1995. An active customer is one
who has completed a transaction within the last 18 months or placed an order
within the last seven months. However, 59.6% of active customers have made more
than one purchase in the last 18 months, compared to 59.2% at December 31, 1995.
A subset of this active customer file are those customers who have
completed a transaction within the last twelve months. Since December 1994, this
subset of the active customer file had been declining steadily, however, this
trend reversed beginning in February 1996 and has increased every month since
then for a cumulative total increase of 8.2%. In addition, since January 1996,
repeat buyers in this subset have increased from 49.0% of the total to 50.9% of
the total number of active customers. Management believes that future levels of
net sales of HSC will be dependent on the success of its current efforts to
increase customer activity.
The following table highlights the changes in the estimated unduplicated
television household reach of HSN, the Company's primary program, for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CABLE* BROADCAST SATELLITE TOTAL
- ---------------------------------------------------------------------------------------------
(In thousands of households)
<S> <C> <C> <C> <C>
Households -- December 31, 1995..................... 44,220 21,219 3,750 69,189
Net additions/(deletions)........................... 1,291 (1,081) 38 248
Shift in classification............................. 2,353 (2,353) -- --
Change in Nielsen household counts.................. -- 1,257 -- 1,257
------ ------ ----- ------
Households -- December 31, 1996..................... 47,864 19,042 3,788 70,694
====== ====== ===== ======
</TABLE>
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* Households capable of receiving both broadcast and cable transmissions are
included under cable and therefore are excluded from broadcast to present
unduplicated household reach. Cable households included 2.3 million and 1.3
million direct broadcast satellite ("dbs") households at December 31, 1996 and
1995, respectively, and therefore are excluded from Satellite.
According to industry sources, as of December 31, 1996, there were 96.9
million homes in the United States with a television set, 64.4 million basic
cable television subscribers and 3.8 million homes with satellite dish
receivers, excluding dbs.
In addition to the households in the above table, as of December 31, 1996,
approximately 11.1 million cable television households were reached by America's
Store, of which 4.3 million were on a part-time basis. Of the total cable
television households receiving America's Store, 9.7 million also receive HSN.
During 1997, cable system contracts covering 3.0 million cable subscribers
are subject to termination or renewal. This represents 6.34% of the total number
of unduplicated cable households receiving HSN. The Company is pursuing both
renewals and additional cable television system contracts, but channel
availability, competition, consolidation within the cable industry and cost of
carriage are some of the factors affecting the negotiations for cable television
system contracts. Although management cannot determine the percentage of
expiring contracts that will be renewed or the number of households that will be
added through new contracts, management believes that a majority of these
contracts will be renewed.
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HSNi, through its subsidiaries, owns and operates twelve independent full
power UHF television stations, including one television satellite station (the
"SKTV Stations"). The SKTV Stations serve ten of the sixteen largest
metropolitan television markets in the United States. As of December 31, 1996,
the SKTV Stations reached approximately 28.3 million television households,
which is one of the largest audience reaches of any owned and operated
independent television broadcasting group in the United States.
Each of the SKTV Stations, through the applicable subsidiary, has entered
into a Television Affiliation Agreement (the "Affiliation Agreement(s)") with
Home Shopping pursuant to which each Station broadcasts HSN for 164 hours per
week.
Home Shopping pays each SKTV Station compensation pursuant to the
applicable hourly affiliation rate for such SKTV Station under its Affiliation
Agreement. Hourly rates are based on the number of households in a Station's
service area. The Affiliation Agreements provide for higher compensation to an
SKTV Station if the SKTV Station's compensation amount, which is based upon a
formula involving HSN's net sales credited to the SKTV Station, exceeds the
amount payable pursuant to the hourly affiliation rate. This determination is
made on an annual basis within thirty days of each anniversary of the
Affiliation Agreements. In connection with the Home Shopping Merger, it was
agreed that no amounts other than the hourly affiliation rate were to be paid
for 1996 and all additional compensation amounts previously accrued by the
Company were reversed in the fourth quarter of 1996.
HSNi is continuing to evaluate the status of the Affiliation Agreements
following the Home Shopping Merger. HSNi plans to determine on a market by
market basis whether the SKTV Stations will continue to air HSN, or whether, the
HSNi will instead, disaffiliate HSN and the SKTV Stations and develop and
broadcast programming independently of HSN. Because Home Shopping has obtained
carriage of its programming in many of HSNi's markets through long-term cable
affiliation agreements, HSNi believes an orderly disaffiliation is possible, and
HSNi has initiated preliminary discussions in a number of markets for the
purpose of securing alternative carriage of HSN and/or carriage of the SKTV
Stations' broadcast signals.
Disaffiliation could disrupt the Company's ability to reach existing
customers which may cause a reduction in revenues. In the event of
disaffiliation, the Company may also incur additional expenses and cash outflow
(including the making of up-front payments), which could be substantial, in
connection with entering into cable distribution agreements for the purpose of
securing program carriage. HSNi believes that the process of disaffiliation can
be successfully managed to minimize these adverse consequences.
GROSS PROFIT
For the year ended December 31, 1996, gross profit increased $72.1 million,
or 22.7%, to $389.0 million from $316.9 million for the year ended December 31,
1995. As a percentage of net sales, gross profit increased to 38.3% from 34.5%
compared to the year ended December 31, 1995.
Gross profit of HSC and Vela increased $91.2 million and $4.0 million,
respectively, for the year ended December 31, 1996, compared to 1995. These
increases were partially offset by decreases related to HSND and Ortho-Vent of
$11.1 million and $6.2 million, respectively, for the year ended December 31,
1996, compared to 1995. As a percentage of HSC's net sales, gross profit
increased to 37.7% for the year ended December 31, 1996, from 31.3% in 1995.
The dollar increases in the Company's and HSC's gross profit relate in part
to the higher sales volume. The comparative increases in the Company's gross
profit percentage in the year ended December 31, 1996, relate in part to
warehouse sales and other promotional events held during 1995 which reduced
gross profit. In addition, the 1996 product sales mix was composed of higher
gross profit merchandise. Also, the Company's and HSC's gross profit for the
year ended December 31, 1996 reflects a $5.4 million decrease and the year ended
December 31, 1995 reflects a $14.5 million increase related to the change in
HSC's inventory carrying adjustment. The 1995 adjustment related primarily to
product which was not consistent with a change made in HSC's sales and
merchandising philosophy. At December 31, 1996, a significant part of the
inventory carrying adjustment relates to inventory purchased for a certain new
format on America's Store, a new concept at
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January 1, 1997, which the Company determined would not meet expected revenue
and profitability objectives. In 1997, management expects a slight increase in
the Company's gross profit percentage from 1996.
OPERATING EXPENSES
The following table highlights the operating expense section from the
Company's Consolidated Statements of Operations:
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Years Ended
December 31,
--------------- $ %
1996 1995 Change Change
- -----------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C>
Selling and marketing................................. $146.9 $167.1 $(20.2) (12.1)%
Engineering and programming........................... 94.6 98.2 (3.6) (3.7)
General and administrative............................ 70.2 77.1 (6.9) (8.9)
Depreciation and amortization......................... 33.5 38.8 (5.3) (13.7)
Other charges......................................... 2.6 16.0 (13.4) (83.8)
------ ------ ------
$347.8 $397.2 $(49.4) (12.4)
====== ====== ======
</TABLE>
As a percentage of net sales, operating expenses decreased to 34.3% from
43.2% compared to the year ended December 31, 1995. In late 1995 and the first
quarter of 1996, management instituted measures aimed at streamlining operations
primarily by reducing the Company's work force and taking other actions to
reduce operating expenses. These changes resulted in reductions in operating
expenses in 1996 compared to 1995.
SELLING AND MARKETING
For the year ended December 31, 1996, selling and marketing expenses, as a
percentage of net sales, decreased to 14.5% from 18.2%, for the year ended
December 31, 1995.
The major components of selling and marketing expenses are detailed below:
<TABLE>
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Years Ended
December 31,
-------------- $ %
1996 1995 Change Change
- --------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C>
Telephone, operator and customer service......... $55.4 $51.8 $ 3.6 6.9%
Fees to cable system operators:
Commissions.................................... 39.8 33.2 6.6 19.9
Performance bonus commissions.................. 10.8 12.8 (2.0) (15.6)
Marketing payments for cable advertising....... 9.5 16.8 (7.3) (43.5)
Mail order catalog expenses...................... 9.6 13.5 (3.9) (28.9)
HSND selling expenses............................ -- 10.0 (10.0) (100.0)
Promotional/media expenses....................... -- 3.1 (3.1) (100.0)
</TABLE>
Telephone, operator and customer service expenses are typically related to
sales, call volume and the number of packages shipped. Telephone expense
increased $2.4 million or 12.6% for the year ended December 31, 1996, compared
to 1995 due to the increase in sales, call and package volume and a $1.4 million
rebate received in the third quarter of 1995 from the Company's long distance
carrier. Operator and customer service payroll expenses increased only $1.2
million, or 3.5%, due to work force reduction measures and volume efficiencies.
Management expects telephone, operator and customer service expenses to remain
at the same percentage of net sales and fluctuate in relation to call and
package volume in 1997.
For the year ended December 31, 1996, compared to 1995, commissions to
cable system operators increased as a result of the increase in net sales.
Commission payments are based on net merchandise sales after giving effect to
customer returns. Additionally, cable operators which have executed affiliation
agreements to carry the Company's programming are generally compensated for all
sales within their franchise area resulting from watching the program via cable
or a broadcast television station. Commissions as a
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percentage of sales increased due to the growth in cable households and the
increase in cable households within broadcast markets. As a result of the above
factors, subject to sales volume, fees paid to cable system operators are
expected to remain at higher levels in future periods.
Performance bonus commissions decreased for the year ended December 31,
1996, compared to 1995, because of higher guaranteed minimum commissions in
1995. Performance bonus commissions are expected to fluctuate in relation to
sales in 1997.
Marketing payments for cable advertising decreased for the year ended
December 31, 1996, compared to 1995, because older agreements requiring such
payments expired or were renegotiated and new cable carriage agreements were
executed. Current contracts generally provide other forms of incentive
compensation to cable operators, including upfront payments of cable
distribution fees or performance bonus commissions which require payments based
upon HSC attaining certain sales levels in the cable operator's franchise area.
Accordingly, marketing payments for cable advertising are expected to decrease
and amortization of cable distribution fees will increase in 1997 as discussed
in "Depreciation and Amortization."
The decrease in mail order catalog expenses relates to the sale of
Ortho-Vent assets in the fourth quarter of 1995. The decrease in
promotional/media expenses related to the Company's change in programming
strategies in the third quarter of 1995. The remaining net decrease in selling
and marketing expenses is attributable to lower advertising and promotional
expenses of the Company's other subsidiary operations. As a result of the
Company's promotional program related to its private label credit card, the
Company incurred selling and marketing expenses in the form of additional
interest charges in 1996 and will incur similar expenses in 1997. Selling and
marketing expenses are expected to remain relatively constant as a percentage of
net sales in 1997, compared to 1996.
ENGINEERING AND PROGRAMMING
For the year ended December 31, 1996, engineering and programming expenses,
as a percentage of net sales, decreased to 9.3% from 10.7% compared to the year
ended December 31, 1995, primarily as a result of the increase in net sales.
Broadcast costs payable to Silver King increased $0.3 million for the year
ended December 31, 1996, compared to 1995. The 1996 expense excludes $3.4
million of performance bonus commissions not payable as a result of the Home
Shopping Merger. In addition, HSC production costs increased $1.7 million for
the year ended December 31, 1996, compared to 1995 primarily due to higher
payroll expense. These increases were partially offset by lower broadcast costs,
other than SKC, of $4.4 million for the year ended December 31, 1996, relating
to fewer broadcast affiliates compared to 1995. In addition, engineering and
programming expenses decreased $2.3 million for the year ended December 31,
1996, compared to 1995, as a result of the sale of a majority of the Company's
interest in HSND. For 1997, engineering and programming expenses are expected to
remain relatively constant in comparison to 1996.
GENERAL AND ADMINISTRATIVE
For the year ended December 31, 1996, general and administrative expenses,
as a percentage of net sales, decreased to 6.9% from 8.4% for the year ended
December 31, 1995.
For the year ended December 31, 1996, decreases in consulting, legal,
repairs and maintenance and other administrative expenses totaled $7.7 million
compared to 1995. General and administrative expenses included a $0.8 million
credit in the year ended December 31, 1995, related to stock appreciation rights
("SAR's") for the Company's former Chief Executive Officer.
Due to savings to be realized in connection with the reduction of the
Company's work force and other expense reduction initiatives, management expects
general and administrative expenses to remain consistent with 1996 levels in
1997.
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DEPRECIATION AND AMORTIZATION
The decrease in depreciation and amortization for the year ended December
31, 1996, compared to 1995, was primarily due to a decrease of $5.8 million
related to assets that became fully depreciated in 1995, the retirement of
certain equipment in the fourth quarter of 1995 and lower capital expenditure
levels in the year ended December 31, 1996, compared to 1995. Depreciation
expense will increase in 1997 compared to 1996 related to increased capital
expenditures in 1997. In addition, amortization expense for name lists decreased
$3.9 million for the year ended December 31, 1996, compared to 1995, relating to
the sale of Ortho-Vent assets in the fourth quarter of 1995. These decreases
were offset by increased amortization of cable distribution fees of $4.4 million
for the year ended December 31, 1996, compared to 1995. Amortization of these
fees is expected to total $19.0 million in 1997 based on existing agreements.
Amortization amounts will increase if additional long-term cable contracts
containing upfront payments of cable distribution fees are entered into during
1997, as discussed in "Selling and Marketing."
OTHER CHARGES
For the year ended December 31, 1996, the other charges of $2.6 million
relate to work force reductions and other asset write downs in conjunction with
the closing of three outlet stores and a fulfillment center.
Other charges for the year ended December 31, 1995, included $4.1 million
which represented management's estimate of costs to be incurred in connection
with the closing of the Company's Reno, Nevada, fulfillment center, which was
accomplished in June 1995. The decision to close the Reno fulfillment center was
based on an evaluation of the Company's overall distribution strategy. An
additional $11.9 million of charges for the year ended December 31, 1995 relate
to severance costs of $4.0 million resulting from a reduction in work force,
$4.8 million of payments to certain executives as provided for under their
employment agreements in connection with the termination of their employment and
the write-off of certain equipment maintenance and contractual fees totaling
$1.8 million related to service contracts which the Company will no longer
utilize. The Company also recorded a write-down of inventory totaling $1.3
million to net realizable value based on the disposition of Ortho-Vent's assets.
OTHER INCOME (EXPENSE)
For the year ended December 31, 1996, the Company had net other expense of
$7.9 million compared to net other expense of $14.9 million for the year ended
December 31, 1995.
Interest expense decreased $0.2 million for the year ended December 31,
1996, compared to 1995, due to a lower level of borrowings by the Company at a
lower average interest rate primarily due to the private placement on March 1,
1996, of $100.0 million of Convertible Subordinated Debentures (the
"Debentures").
For the year ended December 31, 1996, net miscellaneous expenses increased
to $1.9 million compared to $0.4 million for the year ended December 31, 1995.
In 1996, equity losses totaling $5.7 million relating to the Company's
investments in Home Order Television GmbH & Co. ("HOT") and Jupiter Shop Channel
Co;. Ltd ("Shop Channel") were partially offset by a gain on the sale of a
controlling interest in HSND of $1.9 million and a one-time $1.5 million payment
received in the first quarter of 1996 in connection with the termination of the
Canadian Home Shopping Network license agreement. In 1995, $6.0 million in
losses recorded in connection with the retirement of equipment was offset by
receipts from lawsuit settlements, royalty income and other miscellaneous income
totaling $5.6 million.
Litigation settlement income for the year ended December 31, 1996
represents the reversal of amounts accrued in prior years which were in excess
of the actual settlement on certain litigation. Litigation expense for the year
ended December 31, 1995, of $6.4 million, represents litigation settlements and
anticipated costs in connection with the resolution of certain pending
litigation.
INCOME TAXES
The Company's effective tax rate was 38.0% for the year ended December 31,
1996, and a benefit of 35.0% for the year ended December 31, 1995. The Company's
effective tax rate for these periods differed from
8
<PAGE> 11
the statutory rate due primarily to the amortization of goodwill, state income
taxes and the provision for interest on adjustments proposed by the Internal
Revenue Service ("IRS"). The Company anticipates full realization of its net
operating loss carryforward and accordingly no valuation allowance related to
the carry forward has been provided. See Note E to the Consolidated Financial
Statements included herein.
SEASONALITY
The Company believes that seasonality does impact its business but not to
the same extent it impacts the retail industry in general.
9
<PAGE> 12
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
The Board of Directors
Home Shopping Network, Inc.
We have audited the accompanying consolidated balance sheets of Home
Shopping Network, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home
Shopping Network, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
St. Petersburg, Florida
February 25, 1997
10
<PAGE> 13
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
NET SALES................................................. $1,014,705 $919,796 $1,014,981
Cost of sales............................................. 625,697 602,849 618,971
---------- -------- ----------
Gross Profit.................................... 389,008 316,947 396,010
---------- -------- ----------
Operating expenses:
Selling and marketing................................... 146,897 167,063 161,886
Engineering and programming............................. 94,598 98,216 98,835
General and administrative.............................. 70,244 77,087 79,344
Depreciation and amortization........................... 33,483 38,854 29,066
Other charges........................................... 2,600 16,007 --
---------- -------- ----------
347,822 397,227 369,131
---------- -------- ----------
Operating profit (loss)......................... 41,186 (80,280) 26,879
Other income (expense):
Interest income......................................... 1,826 1,961 9,556
Interest expense........................................ (9,918) (10,077) (5,512)
Miscellaneous........................................... (1,937) (426) (403)
Litigation settlements.................................. 2,105 (6,383) --
---------- -------- ----------
(7,924) (14,925) 3,641
---------- -------- ----------
Earnings (loss) before income taxes, minority interest and
extraordinary item...................................... 33,262 (95,205) 30,520
Income tax expense (benefit).............................. 12,641 (33,322) 12,819
Minority interest......................................... 1 -- --
---------- -------- ----------
Earnings (loss) before extraordinary item................. 20,620 (61,883) 17,701
Extraordinary item -- loss on early extinguishment of
long-term obligations (net of tax benefit of $567)...... -- -- (924)
---------- -------- ----------
NET EARNINGS (LOSS)....................................... $ 20,620 $(61,883) $ 16,777
========== ======== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
11
<PAGE> 14
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DECEMBER 31,
-------------------
1996 1995
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 16,274 $ 25,164
Accounts and notes receivable (net of an allowance for
doubtful accounts of $2,291 and $1,685, respectively)..... 33,868 23,634
Related party receivables................................... 4,713 --
Inventories, net............................................ 100,527 101,564
Deferred income taxes....................................... 23,302 24,484
Other current assets, net................................... 5,396 8,149
-------- --------
Total current assets............................... 184,080 182,995
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 91,361 90,581
Buildings and leasehold improvements........................ 70,049 69,843
Furniture and other equipment............................... 47,234 49,561
-------- --------
208,644 209,985
Less accumulated depreciation and amortization..... 129,387 118,710
-------- --------
79,257 91,275
Land........................................................ 16,884 17,093
Construction in progress.................................... 980 406
-------- --------
97,121 108,774
OTHER ASSETS
Cable distribution fees, net ($40,892 and $34,803,
respectively, to related parties)......................... 113,594 99,161
Deferred income taxes....................................... 3,649 23,142
Long-term investments ($10,536 and $10,000, respectively, in
related parties).......................................... 24,981 14,000
Other non-current assets ($1,639 note receivable from a
related party at December 31, 1996)....................... 7,622 8,223
-------- --------
149,846 144,526
-------- --------
$431,047 $436,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 250 $ 1,555
Accounts payable............................................ 65,266 84,297
Investment subscription payable............................. 10,000 --
Income taxes payable........................................ 8,267 4,973
Accrued liabilities:
Programming fees ($9,051 and $2,260 respectively, to
related parties)........................................ 22,683 20,377
Sales returns............................................. 11,672 10,832
Other..................................................... 48,400 53,390
-------- --------
Total current liabilities.......................... 166,538 175,424
LONG-TERM OBLIGATIONS (net of current maturities)........... 97,934 135,810
MINORITY INTEREST........................................... 1 --
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 500,000
shares, no shares issued and outstanding.................. -- --
Common stock -- $.01 par value; authorized 150,000,000
shares, issued and outstanding 71,989,159 and 77,718,379
at December 31, 1996 and 1995, respectively............... 720 777
Class B -- convertible common stock -- $.01 par value;
authorized, issued and outstanding 20,000,000 shares...... 200 200
Additional paid-in capital.................................. 140,062 169,057
Retained earnings........................................... 28,297 7,677
Treasury stock -- 6,986,000 common shares, at cost at
December 31, 1995......................................... -- (48,718)
Unearned compensation....................................... (2,705) (3,932)
-------- --------
166,574 125,061
-------- --------
$431,047 $436,295
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
12
<PAGE> 15
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CLASS B UNEARNED
CONVERTIBLE ADDITIONAL COMPEN-
COMMON COMMON PAID-IN RETAINED TREASURY SATION
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
- ------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993....... $762 $206 $160,371 $ 52,783 $(14,027) $(3,541) $196,554
Issuance of common stock upon
exercise of stock options........ 8 -- 4,517 -- -- -- 4,525
Income tax benefit related to
executive stock award program and
stock options exercised.......... -- -- 2,575 -- -- -- 2,575
Expense related to employee equity
participation plan............... -- -- -- -- -- 810 810
Expense related to executive stock
award program.................... -- -- -- -- -- 2,047 2,047
Unearned compensation related to
employee equity participation
plan............................. -- -- -- -- -- (3,736) (3,736)
Purchases of treasury stock, at
cost............................. -- -- -- -- (13,109) -- (13,109)
Conversion of Class B common stock
to common stock.................. 6 (6) -- -- -- -- --
Net earnings for the year ended
December 31, 1994................ -- -- -- 16,777 -- -- 16,777
---- ---- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1994....... 776 200 167,463 69,560 (27,136) (4,420) 206,443
Issuance of common stock upon
exercise of stock options........ 1 -- 902 -- -- -- 903
Income tax benefit related to
executive stock award program and
stock options exercised.......... -- -- 596 -- -- -- 596
Expense related to employee equity
participation plan............... -- -- -- -- -- 1,020 1,020
Expense related to executive stock
award program.................... -- -- -- -- -- 795 795
Unearned compensation related to
employee equity participation
plan............................. -- -- -- -- -- (1,264) (1,264)
Unearned compensation related to
executive stock award program and
stock options granted............ -- -- 96 -- -- (63) 33
Purchases of treasury stock, at
cost............................. -- -- -- -- (21,582) -- (21,582)
Net loss for the year ended
December 31, 1995................ -- -- -- (61,883) -- -- (61,883)
---- ---- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1995....... 777 200 169,057 7,677 (48,718) (3,932) 125,061
Issuance of common stock upon
exercise of stock options........ 17 -- 18,058 -- -- -- 18,075
Income tax benefit related to
executive stock award program,
stock options exercised and
employee equity participation
plan............................. -- -- 1,591 -- -- -- 1,591
Expense related to employee equity
participation plan............... -- -- -- -- -- 1,020 1,020
Expense related to executive stock
award program and stock
options.......................... -- -- -- -- -- 207 207
Cancellation of treasury and other
shares related to the merger..... (74) -- (48,644) -- 48,718 -- --
Net earnings for the year ended
December 31, 1996................ -- -- -- 20,620 -- -- 20,620
---- ---- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1996....... $720 $200 $140,062 $ 28,297 $ -- $(2,705) $166,574
==== ==== ======== ======== ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
13
<PAGE> 16
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 20,620 $(61,883) $ 16,777
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 16,562 26,162 25,173
Amortization of cable distribution fees................. 17,095 12,692 3,893
Deferred income taxes................................... 20,675 (32,310) 5,649
Equity in (earnings) losses of unconsolidated
affiliates............................................. 5,607 302 (144)
Inventory carrying value adjustment..................... (5,400) 14,468 (6,455)
Gain on sale of controlling interest in joint venture... (1,948) -- --
Loss on sale of assets.................................. 1,797 6,040 106
Common stock and change in Stock Appreciation Rights
("SAR's") issued for services provided................. 1,227 1,911 1,310
Provision for losses on accounts and notes receivable... 624 440 377
Minority interest....................................... 1 -- --
Loss on disposition of wholly-owned subsidiary.......... -- -- 2,854
Loss on retirement of long-term obligations............. -- -- 1,491
Change in current assets and liabilities:
(Increase) decrease in accounts and notes
receivable........................................... (15,408) 12,576 (10,698)
Decrease in interest receivable from related party.... -- -- 1,039
(Increase) decrease in inventories.................... 6,437 1,635 (1,416)
(Increase) decrease in other current assets........... 2,753 3,572 (3,313)
Increase (decrease) in accounts payable............... (19,031) 9,362 (13,594)
Increase (decrease) in accrued liabilities and income
taxes payable........................................ 3,041 (24,303) 24,687
Increase in cable distribution fees..................... (31,529) (43,874) (71,871)
Stock purchases for employee benefit plan............... -- (1,264) (3,736)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.......................................... 23,123 (74,474) (27,871)
-------- -------- --------
Cash flows from investing activities:
Increase in net long-term investments..................... (6,645) (4,000) --
Capital expenditures...................................... (5,381) (13,004) (18,602)
Cash received from sale of controlling interest in joint
venture................................................. 4,924 -- --
Increase in other non-current assets...................... (3,289) (920) (6,185)
Advances on notes receivable.............................. (1,000) -- --
Proceeds from sale of assets.............................. 636 8,727 3,221
Proceeds from long-term notes receivable.................. 48 3,169 133,325
Increase in intangible assets............................. (26) (2,378) (4,338)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.......................................... (10,733) (8,406) 107,421
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term obligations............... (146,555) (11,816) (110,993)
Net proceeds from issuance of Convertible Subordinated
Debentures.............................................. 97,200 -- --
Proceeds from issuance of common stock.................... 18,075 903 4,525
Borrowings from secured credit facility................... 10,000 120,000 --
Payments for purchases of treasury stock.................. -- (34,691) --
Borrowings from unsecured credit facilities............... -- -- 25,000
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.......................................... (21,280) 74,396 (81,468)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (8,890) (8,484) (1,918)
Cash and cash equivalents at beginning of year.............. 25,164 33,648 35,566
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 16,274 $ 25,164 $ 33,648
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
14
<PAGE> 17
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Shopping Network, Inc. (the "Company" or "Home Shopping") is a holding
company, the subsidiaries of which conduct the day-to-day operations of the
Company's various business activities. The Company's primary business is
electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a
wholly-owned subsidiary of the Company.
On December 20, 1996, the Company consummated a merger pursuant to which
the Company became a subsidiary of HSN, Inc. ("HSNi"), formerly known as Silver
King Communications, Inc. ("SKC"). See Note B.
The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying consolidated
financial statements.
1. CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
Investments in which the Company owns a 20%, but not in excess of 50%,
interest and where it can exercise significant control over the operations of
the investee, are accounted for using the equity method. All other investments
are accounted for using the cost method.
2. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
U.S. Treasury Securities, auction preferred shares, U.S. Government agencies and
certificates of deposit with original maturities of less than 91 days.
3. ACCOUNTS RECEIVABLE
Home Shopping has a sales program with a deferred payment arrangement,
"FlexPay", which allows customers to charge their purchases to third party
credit cards in installments, generally over three consecutive months. FlexPay
receivables totaled $20,255,000 and $13,015,000 at December 31, 1996 and 1995,
respectively.
4. INVENTORIES, NET
Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehouse costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Inventories are presented net of an inventory carrying adjustment
of $27,859,000 and $33,259,000 at December 31, 1996 and 1995, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on
dispositions are included in operations.
15
<PAGE> 18
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization are provided on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DEPRECIATION/
ASSET CATEGORY AMORTIZATION PERIOD
- ---------------------------------------------------------------------------------
<S> <C>
Computer and broadcast equipment............................ 3 to 10 Years
Buildings................................................... 30 to 40 Years
Leasehold improvements...................................... 4 to 13 Years
Furniture and other equipment............................... 3 to 10 Years
</TABLE>
Depreciation and amortization expense on property, plant and equipment was
$14,602,000, $20,452,000 and $22,540,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
For income tax purposes, certain assets are depreciated using allowable
accelerated methods which result in different depreciation amounts than would be
calculated for financial statement purposes.
6. CABLE DISTRIBUTION FEES, NET
The Company pays upfront fees for long-term cable contracts for carriage of
the Company's programming. These fees are amortized to expense on a
straight-line basis over the terms of the respective contracts, with original
terms from 5 to 15 years. Amortization expense for cable distribution fees for
the years ended December 31, 1996, 1995 and 1994 was $17,095,000, $12,692,000
and $3,893,000, respectively. Accumulated amortization as of December 31, 1996
and 1995 was $33,680,000 and $16,585,000, respectively.
The Company periodically analyzes the value of its cable distribution fees
to determine if an impairment has occurred. The Company measures the potential
impairment of recorded cable distribution fees by the undiscounted value of
expected future operating cash flows in relation to its net capital investment.
Based on its analysis, the Company does not believe that an impairment of its
cable distribution fees has occurred.
7. NET SALES
Revenues include merchandise sales and are reduced by incentive discounts
and sales returns to arrive at net sales. Revenues are recorded for credit card
sales upon transaction authorization, and for check sales upon receipt of
customer payment, which does not vary significantly from the time goods are
shipped. The Company's sales policy allows merchandise to be returned at the
customer's discretion, generally up to 30 days. Allowances for returned
merchandise and other adjustments are provided based upon past experience.
8. AMORTIZATION OF OTHER NON-CURRENT ASSETS
Amortization expense for other non-current assets was $1,786,000,
$5,710,000 and $2,633,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in amortization expense during 1995 was related to
the write-off of name lists for Ortho-Vent, Inc. ("Ortho-Vent"), a mail order
subsidiary, the assets of which were sold in 1995. See Note H.
The Company no longer incurs costs in connection with mailing lists
developed for the Company's direct response advertising. Direct response
advertising costs included in amortization expense for the year ended December
31, 1995 was $3,868,000, which included the write-off of all previously
capitalized amounts. The amortization expense related to direct response
advertising was $1,982,000 for the year ended December 31, 1994. All non-direct
response advertising is expensed in the period incurred.
16
<PAGE> 19
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes", deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
10. STOCK-BASED COMPENSATION
While the Company would have been subject to the disclosure requirements of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", and would have elected the disclosure only requirements as a
result of the merger discussed in Note B, options to acquire shares of the
Company's common stock are no longer outstanding. Accordingly, this presentation
has been excluded.
11. ACCOUNTING ESTIMATES
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions impact the reported amount of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net income during
any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements and notes include the inventory carrying adjustment, sales return
accrual, allowance for doubtful accounts, recoverability of long lived assets,
and other various operating allowances and accruals.
12. RECLASSIFICATIONS
The Company changed the classification of shipping and handling revenues
from a component of net sales to an offset of the related fulfillment costs
incurred by the Company and recorded in cost of sales. As such, this and certain
other amounts in the prior years' consolidated financial statements have been
reclassified to conform to the 1996 presentation.
NOTE B -- MERGER
On August 25, 1996, the Company entered into an Agreement and Plan of
Exchange and Merger (the "Home Shopping Merger Agreement") with HSNi, a newly
formed subsidiary of HSNi ("Merger Sub") and Liberty HSN, Inc. ("Liberty HSN").
On December 20, 1996, pursuant to the Home Shopping Merger Agreement, the Merger
Sub was merged with and into the Company (the "Home Shopping Merger") and the
Company became a subsidiary of HSNi. Pursuant to the Home Shopping Merger, each
share of Home Shopping common stock ("Home Shopping Common Stock") issued and
outstanding immediately prior to the Home Shopping Merger (except for certain
shares which were cancelled) was converted into the right to receive .45 of a
share (the "Common Conversion Ratio") of HSNi common stock ("HSNi Common
Stock"), and each share of Home Shopping Class B common stock ("Home Shopping
Class B Common Stock") issued and outstanding immediately prior to the Home
Shopping Merger (except for certain shares which were cancelled) was converted
into the right to receive .54 of a share (the "Class B Conversion Ratio") of
HSNi Class B common stock ("HSNi Class B Common Stock" and, together with the
HSNi Common Stock, the "HSNi Securities"), a portion of which with respect to
4,799,540 shares of Home Shopping Class B Common Stock were not issued at the
time of the Home Shopping Merger but are instead represented by HSNi's
contractual obligation to issue to Liberty HSN such shares upon the occurrence
of certain events
17
<PAGE> 20
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(such contractual right, the "Contingent Rights" and such underlying shares, the
"Contingent Rights Shares"). Each outstanding option to acquire or conversion
right to receive Home Shopping Common Stock was assumed by HSNi and converted
into an option to acquire or a conversion right to receive HSNi Common Stock at
a conversion rate equal to the Common Conversion Ratio.
Liberty HSN is an indirect, wholly-owned subsidiary of Liberty Media
Corporation ("Liberty"), which, in turn, is a wholly owned subsidiary of
Tele-Communications, Inc. ("TCI"). Prior to the Home Shopping Merger, TCI,
through Liberty and Liberty HSN, maintained voting control over the Company.
Immediately prior to the Home Shopping Merger, Liberty HSN exchanged all of its
17,566,712 shares of Home Shopping Common Stock and 739,141 shares of Home
Shopping Class B Common Stock, for an equal number of shares of common stock and
class B common stock, respectively, of Merger Sub. As a result of the Home
Shopping Merger, Liberty HSN's shares of common stock and class B common stock
of Merger Sub were converted into shares of Home Shopping Common Stock and Home
Shopping Class B Common Stock, respectively. Home Shopping was the surviving
corporation in the Home Shopping Merger.
Upon consummation of the Home Shopping Merger, and because the Home
Shopping Class B Common Stock is entitled to ten votes per share on matters on
which both classes of common stock vote together as a single class, HSNi owned
80.1% of the equity and 90.8% of the voting power of the Company, and Liberty
HSN owned 19.9% of the equity and 9.2% of the voting power of the Company.
After the Home Shopping Merger, pursuant to an exchange agreement, dated as
of December 20, 1996, between HSNi and Liberty HSN (the "Exchange Agreement"),
at such time from time to time as Liberty HSN or its permitted transferee may be
allowed under applicable Federal Communications Commission ("FCC") regulations
to hold additional shares of HSNi stock, Liberty HSN or its permitted transferee
will exchange its Home Shopping Common Stock and its Home Shopping Class B
Common Stock for shares of HSNi Common Stock and HSNi Class B Common Stock,
respectively, at the applicable conversion ratio. Liberty HSN, however, is
obligated to effect such exchange only after all of the Contingent Rights Shares
have been issued, subject to certain exceptions. Upon completion of such
exchange, the Company will become a wholly owned subsidiary of HSNi.
The Home Shopping Merger does not result in a change in accounting basis of
the net assets of the Company as presented in its December 31, 1996 balance
sheet.
NOTE C -- LONG-TERM INVESTMENTS
Investments accounted for under the equity method include the following:
On October 10, 1996, the Company, Quelle Schickedanz AG & Co. ("Quelle"),
Thomas Kirch ("Kirch") and Dr. Georg Kofler ("Kofler") entered into a binding
Memorandum of Understanding in connection with their joint participation in Home
Order Television GmbH & Co. ("HOT"), Germany's first television shopping
network. Definitive documents were executed during January 1997. The Company
purchased a 29% equity interest in HOT, and its general partner, for $15,000,000
(the "HOT Interest") from Quelle, Kirch and Kofler. The Company has paid
$5,000,000 for the HOT Interest and has recorded a $10,000,000 subscription
payable; $5,000,000 is expected to be paid in each of April 1997 and September
1997. The agreement contains restrictions and other provisions regarding
transfers of equity interests in HOT.
The Company's investment in HOT includes the unamortized excess goodwill of
the Company's investment over its equity in net assets. This goodwill amount was
$10,295,000 at December 31, 1996 and is being amortized on a straight line basis
over ten years.
On November 14, 1996, the Company and Jupiter Programming Co;. Ltd. ("JPC")
entered into a subscription agreement relating to Jupiter Shop Channel Co;. Ltd.
("Shop Channel") for the primary purpose
18
<PAGE> 21
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of broadcasting televised shopping in Japan. The Company paid $1,770,000 for its
30% interest in Shop Channel. The remaining 70% interest is held by JPC.
Through December 31, 1996, the Company's equity in losses of affiliates was
$5,664,000 and is included in other income (expense). The Company has certain
ongoing funding obligations as discussed in Note F.
Investments accounted for under the cost method include the following:
In July 1995, the Company paid $4,000,000 for a 20% interest in Body by
Jake Enterprises, L.L.C. ("BBJ"). Simultaneously, the Company entered into a
long-term joint marketing agreement with BBJ to provide for the sale and
promotion of merchandise.
The Company has a $10,000,000 investment consisting of 100,000 shares of
Series A non-voting preferred stock, $.01 par value, with a liquidation
preference of $100 per share, in The National Registry Inc. ("NRI"). This
investment is convertible into 6,336,154 shares of NRI common stock at the
Company's option; however, conversion to common stock is automatic in the event
that cumulative gross revenues for NRI reach $15,000,000.
The Company does not have the ability to exercise significant influence
over the operating or financial activities of BBJ or NRI.
NOTE D -- LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Unsecured $100,000,000 Convertible Subordinated Debentures
("the Debentures") due March 1, 2006, bearing interest at
5 7/8%, convertible into shares of HSNi Common Stock at
anytime after May 1, 1996, at a conversion price of $26.67
per share. The Debentures were sold March 1, 1996, with
net proceeds received of $97,200,000...................... $97,374 $ --
Secured $150,000,000 Revolving Credit Facility, with a
$25,000,000 sub-limit for import letters of credit,
entered into on August 2, 1996, ("New Facility") which
expires August 2, 1999. Borrowings can be used for general
corporate purposes. The interest rate on borrowings is
tied to (i) the prime rate or (ii) the London Interbank
Offered Rate ("LIBOR"), plus an applicable margin. The
interest rate on borrowings ranged from 6.31% to 8.25%.... -- --
Secured $150,000,000 Revolving Credit Facility as amended
February 13, 1996, ("Credit Facility") which was due to
expire April 1, 1997 (unsecured prior to September 28,
1995). Borrowings can be used for general corporate
purposes. The interest rate on borrowings is tied to (i)
the prime rate or (ii) LIBOR, plus an applicable margin.
The interest rate on borrowings ranged from 7.88% to
9.13%..................................................... -- 135,000
Unsecured 7.5% note, plus accrued interest, payable to
related parties, in connection with the business
acquisition of the Internet Shopping Network, Inc., due on
September 1, 1996......................................... -- 1,325
Other long-term obligations................................. 810 1,040
------- --------
Total long-term obligations................................. 98,184 137,365
Less current maturities..................................... 250 1,555
------- --------
Long-term obligations, net of current maturities............ $97,934 $135,810
======= ========
</TABLE>
19
<PAGE> 22
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate contractual maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
YEARS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------
(In thousands)
<S> <C>
1997........................................................ $ 250
1998........................................................ 270
1999........................................................ 290
2000........................................................ --
2001........................................................ --
Thereafter.................................................. 100,000
--------
$100,810
========
</TABLE>
The Debentures are redeemable by the Company for cash at any time on or
after March 1, 1998, at specified redemption prices, plus accrued interest,
except that prior to March 1, 1999, the Debentures may not be redeemed unless
the closing price of common stock equals or exceeds 140% of the conversion price
per share, or $37.33, for a specified period of time. The Debentures are
subordinated to all existing and future senior debt of the Company. In
connection with the Home Shopping Merger, HSNi became a joint and several
obligor with respect to the Debentures.
The New Facility, which replaced the Credit Facility, expires on August 2,
1999, and like the Credit Facility is secured by the stock of HSC and HSN
Realty, Inc. At December 31, 1996, there were no outstanding borrowings under
the New Facility and $138,045,000 was available for borrowing after taking into
account outstanding letters of credit. Under the New Facility, the interest rate
on borrowings is generally tied to the LIBOR plus an applicable margin. The
Company was in compliance with all covenants contained in the New Facility as of
December 31, 1996.
Restrictions contained in the New Facility include, but are not limited to,
limitations on the encumbrance and disposition of assets, certain restrictions
on repurchases of the Company's common stock and the maintenance of various
financial covenants and ratios.
During the year ended December 31, 1994, the Company recognized
extraordinary losses on the early extinguishment of $85,000,000 of its long-term
obligations.
20
<PAGE> 23
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- INCOME TAXES
A reconciliation of total income tax expense (benefit) to the amounts
computed by applying the statutory federal income tax rate to earnings (loss)
before income tax expense (benefit) and extraordinary item is shown as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at the federal statutory
rate of 35%.......................................... $11,641 $(33,322) $10,682
Amortization of goodwill and interest on adjustments
proposed by the Internal Revenue Service ("IRS")..... 612 1,629 2,145
State income tax expense (benefit), net of effect of
federal taxes........................................ 1,209 (1,778) 803
Executive compensation in excess of $1,000,000......... -- (688) --
Sale of wholly-owned subsidiary........................ -- -- (920)
Other, net............................................. (821) 837 109
------- -------- -------
$12,641 $(33,322) $12,819
======= ======== =======
</TABLE>
The components of income tax expense (benefit) attributable to operations
are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT INCOME TAXES:
Federal................................................ $(8,703) $ (1,023) $ 6,586
State.................................................. 669 11 584
------- -------- -------
(8,034) (1,012) 7,170
------- -------- -------
DEFERRED INCOME TAXES:
Net operating loss carry over.......................... 21,928 (23,489) --
Depreciation for tax in excess of (less than) financial
statements........................................... (552) (2,207) 683
Amortization of acquired intangible assets............. -- -- (1,622)
Provision for accrued liabilities...................... (83) (1,407) 956
Inventory costing...................................... 545 (4,421) 1,330
Litigation settlements................................. 1,518 1,859 542
Deferred compensation.................................. (464) 662 275
State income taxes..................................... 775 (1,786) 325
Provision for uncollectible amounts.................... (214) (6) 2,585
Amortization of cable distribution fees................ (2,748) (1,775) (530)
Valuation allowance.................................... 506 240 116
Other, net............................................. (536) 20 989
------- -------- -------
20,675 (32,310) 5,649
------- -------- -------
$12,641 $(33,322) $12,819
======= ======== =======
</TABLE>
21
<PAGE> 24
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31,
-----------------
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT
Deferred tax assets:
Inventory costing......................................... $ 9,794 $10,339
Provision for accrued liabilities......................... 5,265 5,182
Sales returns............................................. 4,087 3,794
Provision for uncollectible amounts....................... 828 614
Deferred compensation..................................... 1,627 1,163
Charitable contribution carryover......................... 744 714
Other..................................................... 957 2,678
------- -------
Net current deferred tax assets................... $23,302 $24,484
======= =======
NON-CURRENT
Deferred tax assets:
Net operating loss carry over............................. $ 1,561 $23,489
State income taxes........................................ 1,644 2,419
Cable distribution fees................................... 5,053 2,305
Equity income on non-consolidated entities................ 432 --
Other..................................................... 1,557 1,759
------- -------
10,247 29,972
Less valuation allowance.................................. (1,741) (1,235)
------- -------
8,506 28,737
Deferred tax liabilities:
Depreciation for tax in excess of financial statements.... (4,857) (5,409)
Other..................................................... -- (186)
------- -------
Net non-current deferred tax assets............... $ 3,649 $23,142
======= =======
</TABLE>
During 1995, the Company incurred a tax net operating loss ("NOL") of
$72,849,000. During 1996, the Company filed to carry back a portion of the NOL
to prior years and claim refunds of $13,999,000, including a refund of
$11,232,000 relating to losses carried back to the year ended August 31, 1986
(the "1986 Carry back"). The 1986 Carry back is based upon an area of tax law
without substantial legal precedent or guidance and, accordingly, the IRS may
challenge the Company's entitlement to this claim. The Company intends to defend
its right to this claim but can give no assurance as to the ultimate resolution.
If the 1986 Carry back is disallowed, in whole or in part, the Company will be
required to repay any disallowed portion of the $11,232,000 plus interest to the
IRS and the disallowed portion of the 1986 Carry back will be subject to the
normal NOL carry forward rules. The remaining amount of NOL carry forward will
be utilized in the Company's final consolidated tax return for the period from
January 1, 1996 to December 20, 1996. The short taxable year, from December 21,
1996 to December 31,1996, created by the Merger, discussed in Note B, resulted
in a NOL carry forward of $4,500,000 which will expire in 2010.
During 1994, the IRS completed its examination of the Company's federal
income tax returns for fiscal years 1986 through 1989 and proposed various
adjustments. The Company paid the assessments, totaling $15,000,000 including
interest, to settle all of the outstanding issues with the exception of royalty
payments made to a then related party for all taxable periods through August 31,
1989. In addition, the payment covered all of the agreed upon issues through
August 31, 1993. The IRS issued a Statutory Notice of Deficiency
22
<PAGE> 25
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disallowing claims related to the royalty payments issue and the Company paid
assessments, totaling $4,600,000 including interest. All assessments were
accrued in years prior to 1994. In 1996, the Company filed amended federal
income tax returns to claim deductions for the amounts disallowed by the IRS for
these royalty payments. The Company continues to maintain that it has
meritorious positions regarding the deductibility of these payments and will
vigorously defend this claim if disallowed by the IRS.
In 1995, the IRS completed its examination of the Company's federal income
tax returns for fiscal years 1990 and 1991, and proposed adjustments resulting
in income tax and interest deficiencies of $4,200,000, primarily related to the
corresponding royalty payments made in those years. On October 31, 1995, the
Company and the IRS agreed to settle all of the outstanding issues, except the
royalty payments issue, and the Company paid the resulting assessment of
$1,100,000, including interest. These assessments had been accrued in years
prior to 1994. The Company has not yet received a Statutory Notice of Deficiency
relating to the royalty payments issue. The Company will protest such assessment
if received.
The Company's federal income tax returns for fiscal years 1992, 1993, and
1994 are currently under examination by the IRS. During 1992, the Company made a
settlement payment pertaining to two class action suits filed for alleged
violations of Section 10(b) of the Securities Exchange Act of 1934. The IRS has
proposed an adjustment to disallow this expense. The Company intends to
vigorously defend this deduction. As in previous years, the IRS also proposed an
adjustment to disallow the royalty payments made in these years. The Company has
made adequate provision for these issues. Other than those discussed above, no
other proposed material adjustments to such years have been made.
NOTE F -- COMMITMENTS AND CONTINGENCIES
The Company leases satellite transponders, computers, warehouse and office
space used in connection with its operations under various operating leases.
Future minimum payments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
YEARS ENDING
DECEMBER 31,
- ------------------------------------------------------------------------------
(In thousands)
<S> <C>
1997........................................................ $12,014
1998........................................................ 6,750
1999........................................................ 5,840
2000........................................................ 5,768
2001........................................................ 7,535
Thereafter.................................................. 23,877
-------
$61,784
=======
</TABLE>
Rent and lease expense charged to operations was $14,184,000, $13,263,000,
and $13,978,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
During June 1995, in connection with the restructuring of its programming,
the Company discontinued use of a satellite transponder which is under a
non-cancellable operating lease calling for monthly payments ranging from
$140,000 to $150,000 through December 2006. The satellite transponder has been
subleased. The sublease which began on December 1, 1996, for a term of ten years
with an option to cancel after four years, is $165,000 monthly.
On December 28, 1992, HSC entered into affiliation agreements with SKC
which provide for SKC's broadcast television stations to air HSC programming on
a full-time basis. HSC pays an affiliation fee to SKC based on hourly rates and,
upon reaching certain sales levels, commissions on net sales. Expense related to
affiliation agreements with SKC for the years ended December 31, 1996, 1995 and
1994 was $41,624,000, $41,332,000 and $42,415,000, respectively. For the years
ended December 31, 1995 and 1994, $778,000 and $1,865,000, respectively,
represents commissions to Silver King and were excluded from the Company's
23
<PAGE> 26
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenses for the year ended December 31, 1996 were. In connection with the
Merger, it was agreed that no commissions would be paid for 1996 and all amounts
previously accrued by the Company were reversed in the fourth quarter of 1996.
In November 1995, the Company entered into a four-year employment agreement
with the Company's President, which is automatically renewable for successive
one-year terms unless either party provides at least 180 days written notice.
The employment agreement provides for an annual base salary of not less than
$500,000, a minimum guaranteed bonus of $150,000 per year, other incentive based
bonuses, if earned, and a $1,000,000 loan, evidenced by a note, bearing interest
at 5.0% per annum, with only interest payable monthly. The loan is for the
purchase or renovation of a residence and is secured by this property. The note,
which was drawn in 1996, will be due upon the first anniversary of the
termination of the President's employment. The employment agreement also
provides options to purchase 2,500,000 shares of the Company's common stock at
$8.50 per share which are now converted into options to purchase 1,125,000
shares of HSNi common stock at $18.89 per share. These options were granted
under the terms of the 1996 Stock Option Plan for Employees ("1996 Employee
Plan"). See Note K.
The Company has also entered into additional employment agreements with key
employees that have terms that range from two to four years. Termination of
these agreements by the Company other than for cause generally will result in
payment of the employee's annual base salary that would have been payable had
employment continued until the expiration of the agreement.
Future minimum payments under key employment agreements are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
YEARS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------
(In thousands)
<S> <C>
1997........................................................ $1,343
1998........................................................ 1,268
1999........................................................ 502
2000........................................................ 235
------
$3,348
======
</TABLE>
The Company has entered into an amended five year agreement for inbound 800
service usage with MCI Telecommunications Corporation ("MCI") ending in August
2000 which requires minimum annual payments of $9,600,000 based on usage. If the
Company terminates the agreement for reasons other than cause, payment of 50% of
the aggregate of the minimum amounts for the remainder of the unexpired term
will be due 30 days after the termination. The Company's payments to MCI for
such services during the years ended December 31, 1996 and 1995 exceeded the
above mentioned minimum.
In addition, the Company has entered into an agreement with MCI covering
equipment maintenance for a term from April 1996 through April 2001, requiring
minimum annual payments of $2,676,000. Upon payment of $13,380,000, under the
terms of the contract, the Company is no longer required to pay any fees for
these services. The Company receives a credit for any annual fees over
$3,211,000. Management expects annual payments under this contract to exceed the
minimum requirements.
The Company is required to provide funding, from time to time, for
operations of Shop Channel and HOT. Future contributions to Shop Channel,
amounting to $8,657,000 in the next two years, are based upon estimated
shareholder contributions set forth in the initial business plan of the venture.
Future contributions to HOT, in addition to the subscribed amounts, are limited
as set forth in the agreement to $11,392,000 over the term of the partnership.
No payments were made under these funding requirements for the year ended
December 31, 1996. The amounts shown above were translated from the respective
foreign currency using conversion rates in effect at December 31, 1996.
24
<PAGE> 27
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- STOCKHOLDERS' EQUITY
Prior to the Home Shopping Merger, as discussed in Note B, the holders of
both classes of the Company's common stock were entitled to receive ratably such
dividends, if any, declared by the Board of Directors out of funds legally
available for the payment of dividends. In the event of the liquidation,
dissolution or winding up of the Company, the holders of both classes of the
Company's common stock would have been entitled to share ratably in all assets
of the Company remaining after provision for payment of liabilities. Shares of
Home Shopping Class B Common Stock were convertible at the option of the sole
holder, Liberty HSN, into shares of Home Shopping Common Stock on a
share-for-share basis. In the event of conversion, Home Shopping Class B Common
Stock so converted would be retired and not subject to reissue.
The holder of the Home Shopping Class B Common Stock voted together with
the holders of Home Shopping Common Stock on all matters submitted to
stockholders, except that it had no vote with the respect to the election of 25%
of the Board of Directors. The holder of the Home Shopping Class B Common Stock
was entitled to cast ten votes per share on all other matters.
As of December 31, 1996, Liberty HSN was the beneficial owner of 19.9% of
the equity and 9.2% of the voting power of the Company.
In connection with the Home Shopping Merger, 6,986,000 treasury shares were
cancelled. See Note B for discussion of other outstanding common stock and
outstanding Class B Common Stock.
NOTE H -- OTHER CHARGES
During 1996 and 1995, the Company recorded total net pre-tax special
charges of $2,194,000 and $42,340,000 respectively, as detailed below.
The $2,600,000 of other charges in 1996 related to work force reductions
and certain other expenses associated with the closings of three outlet stores
and one fulfillment center.
During 1995, in connection with new management's sales and merchandising
philosophy, an overall analysis of the Company's inventory was conducted and it
was determined that certain merchandise was not compatible with this new
philosophy. As a result, such merchandise was liquidated through means other
than the Company's normal retailing channels. Accordingly, management increased
the Company's inventory carrying adjustment by $12,077,000 to $33,259,000 at
December 31, 1995, to reflect the net realizable value of the Company's
inventory.
During 1995, the Company recorded $11,893,000 in other charges. These
consisted of severance pay of $3,978,000 related to a reduction in work force,
$4,800,000 of payments to certain executives as provided for under their
employment agreements in connection with the termination of their employment and
the write-off of certain equipment maintenance and contractual fees totaling
$1,812,000 related to service contracts which the Company no longer utilizes. In
addition, the Company recorded a write-down of inventory totaling $1,303,000 to
net realizable value based on the disposition of Ortho-Vent's assets. An
additional $2,400,000, related to name lists of Ortho-Vent were written off and
included in depreciation and amortization in 1995.
During 1995, the Company recorded charges of $4,114,000 covering employee
and other costs related to the closing of its fulfillment center in Reno,
Nevada. The facility was closed by June 30, 1995. During the years ended
December 31, 1996 and 1995, payments totaling $800,000 and $1,214,000
respectively, were made related to this charge leaving $2,100,000 accrued for
future charges at December 31, 1996.
Interest expense in 1995 included $773,000 of bank fees related to the
Credit Facility which were amortized based on the Company's intent to seek
refinancing of this debt prior to its contractual maturity. For the year ended
December 31, 1996, miscellaneous expense included $1,699,000 related to the
write-down of
25
<PAGE> 28
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fulfillment center equipment. Miscellaneous expense in 1995 included the
write-down of computer equipment no longer in use with a net book value of
$4,700,000.
Estimated costs related to pending and settled litigation for the year
ended December 31, 1995 totaled $6,383,000. In 1996, actual settlement costs
related to the pending matters were less than the original estimate, resulting
in a credit of $2,105,000.
NOTE I -- LITIGATION
The Company is involved in various lawsuits including certain class action
lawsuits initiated in connection with the Home Shopping Merger, either as
plaintiff or defendant. In the opinion of management, the ultimate outcome of
these various lawsuits should not have a material impact on the Company's
liquidity, results of operations or financial condition.
NOTE J -- EMPLOYEE BENEFIT PLANS
The Company offers a plan pursuant to Section 401(k) of the Internal
Revenue Code covering substantially all full-time employees. Matching employer
contributions are set at the discretion of the Board of Directors. The Company's
contributions for the years ended December 31, 1996, 1995 and 1994 were
$707,000, $864,000, and $824,000, respectively.
On December 28, 1994, the Board of Directors adopted the Home Shopping
Network, Inc. Employee Equity Participation Plan (the "Equity Plan"), effective
December 31, 1994. In January 1996, the Company received a favorable
determination letter stating that the Equity Plan is a qualified plan for IRS
purposes. The Equity Plan covers all employees who have completed one year of
service, at least 1,000 hours of service during that year, are at least 21 years
of age, are not highly compensated, and do not hold options to purchase shares
of Home Shopping Common Stock.
The Company contributed $5,000,000 which was used to purchase a total of
499,000 shares of Home Shopping Common Stock in 1994 and 1995 to fund the Equity
Plan. Employees who met the eligibility requirements on December 31, 1994 and
June 30, 1995, will receive grants under the Equity Plan. The stock vests
ratably at 20% a year with the first vesting being effective as of the calendar
year in which the eligible employee has worked at least 1,000 hours. The Board
of Directors have not made the decision regarding any additional grants for any
period subsequent to June 30, 1995.
The Home Shopping Common Stock when purchased was recorded as unearned
compensation. For the years ended December 31, 1996, 1995, and 1994, $1,020,000,
$1,020,000 and $810,000, respectively, has been charged to expense based on the
shares authorized for granting and the vesting schedule discussed above. The
fair market value of the shares which were unvested and as yet not authorized
for grants at December 31, 1996 is $805,000. Any future contributions to the
Equity Plan will be subject to the Board of Directors' approval.
NOTE K -- STOCK OPTIONS AND AWARDS
The options granted by the Company prior to the Home Shopping Merger with
HSNi, discussed in Note B, were converted at the date of the Home Shopping
Merger to options in HSNi. However, certain expenses and proceeds related to the
granting and exercise of options prior to the Home Shopping Merger are reflected
in the income or loss for the years ended December 31, 1996, 1995 and 1994.
26
<PAGE> 29
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has granted options to purchase of Home Shopping Common Stock
under option plans as follows (which outstanding options were converted in the
Home Shopping Merger to options to purchase shares of HSNi Common Stock):
The Board of Directors authorized the issuance of a total of 18,700,000
shares for the 1996 Employee Plan and the 1996 Stock Option Plan for Directors
("1996 Director Plan").
The 1996 Employee Plan provided for the grant of options to purchase Home
Shopping Common Stock at fair market value, subject to the discretion of the
Compensation/Benefits Committee of the Board of Directors, as of the date of the
grant. The options vest annually and equally over five years, unless otherwise
specified by the Compensation/Benefits Committee of the Board of Directors,
beginning one year from the date of grant, and expire ten years from the date of
the grant.
The 1996 Director Plan provided for issuance of options to outside
directors. Options for 5,000 shares of Home Shopping Common Stock are
automatically granted upon appointment to the Board of Directors, and options
for an additional 5,000 shares are granted annually thereafter. Options provide
for purchase at fair market value on the date of the grant, vest over three
years, and expire five years from the date of vesting.
The 1987 Cable Operators Stock Option Plan, as amended, provided for the
issuance of options to purchase Home Shopping Common Stock at or above the fair
market value at the date of grant in exchange for entering into affiliation
agreements to carry the Company's programming for up to seven years. All
outstanding options were exercised or cancelled on or before June 1, 1994. The
price of these options ranged between $5.56 and $6.49.
The 1986 Stock Option Plan for Employees, as amended, provided for the
grant of options to purchase Home Shopping Common Stock at the fair market value
at the date of grant. The options generally vest annually and equally over five
years beginning one year from the date of grant, and expire ten years from the
date of grant.
The 1986 Stock Option Plan for Outside Directors, as amended, provided for
the grant of options to purchase Home Shopping Common Stock at fair market value
as of the date of grant. The options vest equally over two years beginning on
the date of grant and expire five years from the date of vesting. During 1992,
the Board of Directors and shareholders approved certain amendments to the plan.
The amendments provide for additional option grants after five years of service
and, in addition, the number of shares of Home Shopping Common Stock subject to
option under the plan was increased to 1,630,000 shares.
27
<PAGE> 30
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of changes in outstanding options under the stock option plans is
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
STOCK OPTION PLANS
-----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
1986 1996
----------------------------------------------- ---------------------
EMPLOYEES OUTSIDE DIRECTORS EMPLOYEES
CABLE ---------------------- ---------------------- ---------------------
OPERATORS PRICE PRICE PRICE
OPTIONS OPTIONS RANGE OPTIONS RANGE OPTIONS RANGE
- ----------------------------------------------------------------------------------------------------------
(In thousands, except price range)
<S> <C> <C> <C> <C> <C> <C> <C>
Total authorized..... 27,500 10,000 -- 1,630 -- 18,685 --
====== ====== ===== ======
Outstanding --
December 31,
1993............... 545 2,101 $ 3.25-14.63 210 $ 5.45-14.75 -- --
Granted............ -- 3,316 $10.25-12.25 -- -- -- --
Exercised.......... (336) (335) $ 3.71- 9.88 (30) $ 5.45 -- --
Cancelled.......... (209) (419) $ 4.41-14.63 -- -- -- --
------ ------ ----- ------
Outstanding --
December 31,
1994............... -- 4,663 $ 3.25-14.63 180 $ 14.75 -- --
------ ------ ----- ------
Granted............ -- 195 $ 6.75- 9.00 90 $ 10.38 15,950 $ 8.50
Exercised.......... -- (165) $ 3.25- 8.50 -- -- -- --
Cancelled.......... -- (755) $ 4.41-14.63 -- -- -- --
------ ------ ----- ------
Outstanding --
December 31,
1995............... -- 3,938 $ 3.25-14.63 270 $10.38-14.75 15,950 $ 8.50
------ ------ ----- ------
Granted............ -- 122 $ 6.38-11.13 -- -- 420 $9.63-14.38
Exercised.......... -- (1,647) $ 3.71-11.75 -- -- -- --
Cancelled.......... -- (678) $ 4.41-12.38 (180) $10.38-14.75 (100) $ 8.50
------ ------ ----- ------
Outstanding --
December 20,
1996............... -- 1,735 $ 3.25-14.63 90 $ 14.75 16,270 $8.50-14.38
====== ====== ===== ======
Options exercisable.. -- 1,112 $ 3.25-14.63 90 $ 14.75 3,960 $ 8.50
====== ====== ===== ======
Available for grant.. -- -- -- 2,415
====== ====== ===== ======
<CAPTION>
- --------------------- -------------------------------
STOCK OPTION PLANS
-------------------------------
- --------------------- -------------------------------
1996
---------------------
OUTSIDE DIRECTORS
---------------------
PRICE TOTAL
OPTIONS RANGE OPTIONS
- --------------------- -------------------------------
<S> <C> <C> <C>
Total authorized..... 15 -- 57,830
===== ======
Outstanding --
December 31,
1993............... -- -- 2,856
Granted............ -- -- 3,316
Exercised.......... -- -- (701)
Cancelled.......... -- -- (628)
----- ------
Outstanding --
December 31,
1994............... -- -- 4,843
-- ------
Granted............ -- -- 16,235
Exercised.......... -- -- (165)
Cancelled.......... -- -- (755)
----- ------
Outstanding --
December 31,
1995............... -- -- 20,158
-- ------
Granted............ 15 $9.63-11.50 557
Exercised.......... -- -- (1,647)
Cancelled.......... -- -- (958)
----- ------
Outstanding --
December 20,
1996............... 15 $9.63-11.50 18,110
===== ======
Options exercisable.. 5 $9.63-11.50 5,167
===== ======
Available for grant.. -- 2,415
===== ======
</TABLE>
As a result of the Home Shopping Merger, as discussed in Note B, all
options outstanding at December 20, 1996 to purchase Home Shopping Common Stock
were converted into options to purchase shares of HSNi at the appropriate
conversion ratio.
In October 1990, the Company adopted the 1990 Executive Stock Award Program
(the "Program") pursuant to which 2,990,000 shares of Home Shopping Common Stock
were granted to certain key employees and consultants. The Program was funded
exclusively by the contribution of shares of Home Shopping Common Stock owned by
a former Chairman of the Board of Directors and a former President of the
Company. The Company did not issue any additional shares of stock in connection
with the Program. The shares granted under the Program were distributed in five
equal annual installments commencing one year from the grant date. Participants
in the Program are entitled to receive dividends, if declared, on their unvested
shares and certain officers are entitled to voting rights with respect to their
unvested shares. Forfeitures are reissued at the discretion of the
Compensation/Benefits Committee of the Board of Directors. Such shares were
converted in the Home Shopping Merger into the right to receive a total of
1,305,000 shares of HSNi Common Stock.
Under this Program and another award of stock, the amount amortized and
expensed relating to the compensation earned was $207,000, $795,000 and
$2,047,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
In 1993, the former President and Chief Executive Officer of Home Shopping
received SAR's with respect to 984,876 shares of Home Shopping Common Stock at
an exercise price of $8.25 per share. The
28
<PAGE> 31
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SAR's vested upon termination of his employment and were exercised during
September 1995, at $10.13 per share.
NOTE L -- RELATED PARTY TRANSACTIONS
Currently, the Company is involved in several agreements with related
parties and has made payments to or received payment from those related parties
as follows:
The Company has a 30% equity interest in Shop Channel, an entity in which
TCI, through its wholly-owned subsidiary, Liberty HSN, has an indirect ownership
interest. In the ordinary course of business, the Company has sold $660,000 of
inventory to Shop Channel and recorded a receivable of $730,000 for those sales
and other services at December 31, 1996. The Company's net investment in Shop
Channel at December 31, 1996 was $536,000.
On September 16, 1996, the Company made a $1,000,000 loan, secured by a
mortgage, to its President and Chief Executive Officer evidenced by a note
bearing interest at 5.0% per annum. Interest only is payable monthly and the
principal is due upon the first anniversary of the termination of the
President's employment.
During April 1996, the Company sold a majority of its interest in HSND to a
company under the control of TCI. See Note O-1.
Effective August 25, 1995, the Chairman and Chief Executive Officer of HSNi
was appointed to the Company's Board of Directors and was appointed Chairman of
the Company's Board of Directors effective November 27, 1995. The Company has
affiliation agreements with Silver King for which the Company expensed
$41,624,000 and $41,332,000 in 1996 and 1995, respectively. See Note F.
HSC has entered into affiliation agreements with cable operators which are
wholly or partially owned by TCI. In addition, certain officers of Liberty HSN
and TCI served on the Company's Board of Directors through December 20, 1996.
The managing general partner of certain cable systems which carry the Company's
programming, was appointed to Home Shopping's Board of Directors in July 1993.
TCI also has an ownership interest in these cable systems. Payments to the above
related parties for cable commissions and advertising were $7,872,000,
$7,150,000 and $7,269,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Cable distribution fees paid to related parties were $4,032,000,
$28,715,000 and $8,673,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Additional commitments for cable distribution fees to related
parties totaled $7,446,000 and $1,630,000 at December 31, 1996 and 1995. In
addition, the Company received $212,000 and $896,000 in payments for rental of a
satellite transponder during the years ended December 31, 1996 and 1995,
respectively, from a wholly-owned subsidiary of TCI.
As of December 31, 1996, Silver King owned a 33.4% membership interest in
Blackstar. The Company currently maintains broadcast affiliation agreements with
stations WBSF-TV, Melbourne, Florida; KBSP-TV, Salem, Oregon; and WBSX-TV, Ann
Arbor, Michigan of which Blackstar is the parent company. Since December 19,
1996, the Chairman and Chief Executive Officer of Blackstar has served on the
Board of Directors of HSNi. During 1996, the Company paid Blackstar
approximately $4,737,000 in affiliation payments relating to those stations.
On April 28, 1992, the Company purchased 100,000 shares of Series A
Preferred Stock of NRI. Home Shopping provided office space to NRI beginning in
1993. The Company charged NRI $68,000, $68,000 and $65,000, respectively, for
rent during the years ended December 31, 1996, 1995 and 1994. The Chairman and
Chief Executive Officer of NRI was a member of the Board of Directors of the
Company from April 1992 until March 1996. At December 31, 1996, one of the
Company's executive officers served as a director of NRI.
29
<PAGE> 32
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M. -- CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest.................................................. $ 9,118 $ 6,896 $ 5,899
Income taxes.............................................. 1,017 1,707 25,922
CASH RECEIVED FOR:
Income tax refund......................................... 14,648 11,258 3,492
</TABLE>
Supplemental information of non-cash investing and financing activities.
- - During November 1996, in connection with the purchase of the HOT Interest, the
Company recorded a liability of $10,000,000 for investment subscription.
- - During April 1996, in connection with the sale of the Company's controlling
interest in HSND, the Company recorded a note receivable of $1,000,000. See
Note O-1.
- - During 1995 and 1994, the Company purchased 1,335,000 and 2,545,000 shares,
respectively, of treasury stock for which the Company paid $34,691,000 in
1995.
- - During the year ended December 31, 1994, 559,456 shares of Home Shopping Class
B Common Stock were converted into shares of Home Shopping Common Stock.
- - On March 27, 1995, Precision Systems, Inc. ("PSi") repaid $2,700,000, plus
accrued interest, of its $5,000,000 loan from the Company. Under an agreement
between the Company and PSi, the remaining principal balance of the loan was
recorded as a prepayment of future monthly software maintenance payments
through December 1995.
NOTE N -- QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Net sales(a)............................ $255,613 $243,988 $234,321 $280,783
Gross profit............................ 90,801 92,309 97,329 108,569
Net earnings............................ 2,243 4,966 7,060 6,351(b)
</TABLE>
30
<PAGE> 33
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Net sales(a)............................ $219,864 $221,410 $217,567 $260,955
Gross profit............................ 81,675 80,503 77,583 77,186(e)
Net loss................................ (8,799)(c) (9,736) (17,701)(d) (25,647)(f)
</TABLE>
- ---------------
(a) Net sales reflects the reclassification of shipping and handling revenues
from a component of net sales to an offset of the related fulfillment costs
incurred and recorded in cost of sales.
(b) During the quarter ended December 31, 1996, the Company recorded other
charges of $2,600,000 related to work force reduction and the closing of
three outlet stores and a fulfillment center. In addition, in connection
with the Home Shopping Merger, $3,433,000 of commissions related to the SKC
affiliation agreements which had been accrued in 1996 by the Company were
reversed during the fourth quarter of 1996.
(c) The quarter ended March 31, 1995 included $2,041,000 of other charges.
(d) During the quarter ended September 30, 1995, the Company recorded other
charges of $5,427,000, litigation expense of $3,200,000, and $2,400,000 of
additional depreciation and amortization.
(e) During the quarter ended December 31, 1995, cost of sales included an
additional inventory carrying value adjustment of $12,077,000.
(f) The quarter ended December 31, 1995 included $8,539,000 of other charges and
$8,656,000 of other expense items, including $3,183,000 of litigation
expense.
The Company believes that seasonality does impact its business but not to
the same extent it impacts the retail industry in general.
NOTE O -- PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
1. SALE OF HSND
During April 1996, the Company sold a majority of its interest in HSND for
$5,900,000 to a company under the control of TCI. The Company received
$4,900,000 in cash at closing and is due in four equal annual installments of
$250,000 each, commencing on February 1, 1997. The Company will retain a 15%
interest in both HSND and a related company. In connection with the sale of its
controlling interest in HSND, the Company recorded a $1,900,000 gain which is
included in miscellaneous income for the year ended December 31, 1996.
The following table reports the unaudited pro forma results of the Company
for 1995 after reclassifying shipping and handling, which conforms to the 1996
presentation, and giving effect to the sale of HSND as if it occurred on January
1, 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
QUARTERS ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales........................... $210,098 $216,956 $215,390 $259,681
Cost of sales....................... 135,494 139,380 138,629 182,774
-------- -------- -------- --------
Gross profit...................... 74,604 77,576 76,761 76,907
Operating expenses.................. 89,274 91,604 96,219 103,691
-------- -------- -------- --------
Operating loss.................... (14,670) (14,028) (19,458) (26,784)
Other income (expense).............. 1,119 (676) (5,138) (11,413)
-------- -------- -------- --------
Loss before income taxes............ $(13,551) $(14,704) $(24,596) $(38,197)
======== ======== ======== ========
</TABLE>
31
<PAGE> 34
Due to the anticipated sale and gain associated therewith, the results of
operations of HSND were not included in the consolidated results of operations
for 1996.
2. SALE OF ORTHO-VENT ASSETS
During the fourth quarter of 1995, the Company sold the assets of
Ortho-Vent, one of the Company's mail order subsidiaries. The following table
reports the unaudited pro forma results of the Company for 1995, after
reclassifying shipping and handling, which conforms to the 1996 presentation,
and giving effect to the sales of HSND and Ortho-Vent as if they occurred on
January 1, 1995:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
QUARTERS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net sales................................. $206,229 $212,337 $211,244 $256,712
Cost of sales............................. 133,219 136,634 136,033 180,990
-------- -------- -------- --------
Gross profit............................ 73,010 75,703 75,211 75,722
Operating expenses........................ 87,786 89,919 90,785 102,472
-------- -------- -------- --------
Operating loss.......................... (14,776) (14,216) (15,574) (26,750)
Other income (expense).................... 1,089 (719) (5,173) (11,465)
-------- -------- -------- --------
Loss before income taxes.................. $(13,687) $(14,935) $(20,747) $(38,215)
======== ======== ======== ========
</TABLE>
NOTE P -- FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial
instruments was made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies, when available.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 16,274 $ 16,274 $ 25,164 $ 25,164
Long-term investments............................... 24,981 31,202 14,000 21,424
Other non-current assets............................ 7,622 7,622 8,223 8,223
Long-term obligations............................... (98,184) (107,810) (137,365) (137,365)
</TABLE>
The carrying value of cash and cash equivalents and other non-current
assets are a reasonable estimate of their fair value.
Due to the private and closely-held nature of BBJ, Shop Channel and HOT,
there are no current market prices available for these investments. Management
believes that the carrying value of these investments is a reasonable
representation of the investment's fair values and as such a total of
$14,981,000 and $4,000,000 are included as the fair value of long-term
investments at December 31, 1996 and 1995, respectively.
32
<PAGE> 35
The fair value of the long-term investment in NRI at December 31, 1996 and
December 31, 1995 was determined using the trading price of NRI's common stock
on those dates. Management is of the opinion, however, that the fair value of
this investment is not readily determinable. The Company's investment is in the
preferred stock of NRI which is not publicly traded and, therefore, does not
have an established market price. In addition, if the Company were to convert
its investment to common stock, its investment would represent 16% of NRI's
outstanding common stock at December 31, 1996. It is not anticipated that the
Company would be able to sell its entire holdings without adversely affecting
the market price of the NRI common stock and the amount realized in the event of
a sale.
The fair value of long-term obligations at December 31, 1996 has been
estimated using recent trading prices of the securities. At December 31, 1995,
the fair value of long-term obligations approximated the carrying value as the
underlying instrument was a variable rate note that repriced frequently.
33
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction I to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction I to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted in accordance with General Instruction I to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction I to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report:
(1) Financial Statement Schedule
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER NUMBER
- -------- ------
<S> <C> <C> <C>
II -- Valuation and Qualifying Accounts........................... 39
</TABLE>
The report of the Company's independent auditors with respect to the above
listed financial statement schedule appears on page 38.
All other financial statements and schedules not listed have been omitted
since the required information is included in the Consolidated Financial
Statements or the notes thereto, or is not applicable or required.
(2) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
2.0 -- Agreement and Plan of Exchange and Merger by and among
Silver King Communications, Inc., House Acquisition Corp.,
Home Shopping Network, Inc. and Liberty HSN, Inc. as of
August 25, 1996 filed as Appendix B to the Company's
Definitive Proxy Statement, November 20, 1996 is hereby
incorporated by reference.
3.1 -- Restated Certificate of Incorporation of the Company filed
as Exhibit 3.1 to the Company's Form 10-K, August 31, 1987,
is incorporated herein by reference.
3.2 -- Amendment to Restated Certificate of Incorporation of the
Company filed as Exhibit 3.2 to the Company's Form 10-K,
August 31, 1987, is incorporated herein by reference.
3.3 -- Amendment filed December 17, 1986, to the Restated
Certificate of Incorporation of the Company filed as Exhibit
3.3 to the Company's Form 10-K, August 31, 1987, is
incorporated herein by reference.
3.4 -- By-Laws of the Company.
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
4.0 -- Indenture dated as of March 1, 1996, as amended, for Home
Shopping and United States Trust Company of New York, as
Trustee relating the Company's 5.87% Convertible
Subordinated Debentures due March 1, 2006, filed as Exhibit
4.0 to the Company's Form S-3 Registration Statement No.
333-10511, dated August 20, 1996, is incorporated herein by
reference.
4.1 -- First Supplemental Indenture dated as of December 20, 1996,
among Home Shopping Network, Inc., Silver King
Communications, Inc. and United States Trust Company of New
York, as Trustee, filed as Exhibit 4.1 to the Company's Form
8-K/A, December 19, 1996, is incorporated herein by
reference.
10.1 -- Distribution Agreement by and between Home Shopping Network,
Inc. and Precision Systems, Inc. dated as of July 31, 1992,
filed as Exhibit 10.1 to the Precision Systems, Inc. Form
10, Registration Statement No. 0-20068 and filed April 14,
1992, is incorporated herein by reference.
10.2 -- Tax Sharing Agreement by and between Home Shopping Network,
Inc. and Precision Systems, Inc. dated as of July 31, 1992,
filed as Exhibit 10.3 to the Precision Systems, Inc. Form
10, Registration Statement No. 0-20068 and filed April 14,
1992, is incorporated herein by reference.
10.3 -- Stock Purchase Agreement by and between Home Shopping
Network, Inc. and The National Registry Inc. dated April 28,
1992, filed as Exhibit 10.29 to Home Shopping's Annual
Report on Form 10-K, August 31, 1992, is incorporated herein
by reference.
10.4 -- Form of Amendment dated as of July 28, 1994, to Affiliation
Agreements between Home Shopping Club, Inc. and SKC, filed
as Exhibit 10.19 to the Company's Form 10-K, December 31,
1994, is incorporated herein by reference.
10.5 -- Credit Card Program Agreement, dated as of February 16,
1994, by and among Home Shopping Network, Inc.,
participating subsidiaries and General Electric Capital
Corporation, filed as Exhibit 10.30 to the Company's Form
10-K, December 31, 1993, is incorporated herein by
reference.
10.6 -- Letter Agreement dated April 3, 1996 between Home Shopping
Network, Inc. and Gen. H. Norman Schwarzkopf.
10.7 -- Shareholders Agreement dated December 12, 1996 Relating to
Jupiter Shop Channel Co;. Ltd among Jupiter Programming Co;.
Ltd, Home Shopping Network, Inc. and Jupiter Shop Channel
Co;. Ltd.
10.8 -- Services and Trademark Licence Agreement dated as of
December 12, 1996 between Home Shopping Network, Inc. and
Jupiter Shop Channel Co;. Ltd.
10.9 -- Purchase and Sale Agreement among Home Shopping Network
GmbH, Home Shopping Network, Inc., Quelle Schickedanz AG &
Co, Mr. Thomas Kirch and Dr. Georg Kofler dated January 16,
1997.
10.10 -- Joint Venture Agreement Between Quelle Schickedanz AG & Co.,
Home Shopping Network, Inc., Home Shopping Network GmbH, Mr.
Thomas Kirch and Dr. Georg Kofler, filed as Exhibit 5.3 to
the Purchase and Sale Agreement.
10.11 -- License Agreement dated as of January 1, 1996 between Ronald
A. Katz Technology Licensing, L.P. and Home Shopping
Network, Inc.
10.12 -- Credit Agreement dated as of August 2, 1996, among Home
Shopping Network, Inc., as borrower, Home Shopping Club,
Inc. and HSN Realty, Inc., as guarantors, the Chase
Manhattan Bank, as Administrative Agent, LTCB Trust Company,
as Collateral Agent, the Bank of New York Company, Inc., as
Documentation Agent and the Lenders filed as Exhibit 10.38
to Home Shopping's Form 10-Q, June 30, 1996, is incorporated
herein by reference.
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
10.13 -- Pledge Agreement dated as of August 2, 1996, made by Home
Shopping Network, Inc., a Delaware corporation, in favor of
LTCB Trust Company, a New York trust company, as collateral
agent for the Secured Parties under the Credit Agreement
dated as of August 2, 1996, among the Pledgor, as borrower,
Home Shopping Club, Inc. and HSN Realty, Inc., as
guarantors, The Chase Manhattan Bank, as Administrative
Agent, LTCB Trust Company, as Collateral Agent, The Bank of
New York Company, Inc., as Documentation Agent, and the
Lenders, filed as Exhibit 10.39 to Home Shopping's Form
10-Q, June 30, 1996, is incorporated herein by reference.
27 -- Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
(b) Reports on Form 8-K
(i) On October 15, 1996, the Company filed a report on Form 8-K which filed
the Agreement and Plan of Exchange and Merger by and among Silver King
Communications, Inc., House Acquisition Corp., Home Shopping Network, Inc. and
Liberty HSN, Inc. as of August 25, 1996.
(ii) On December 20, 1996, the Company filed a report on Form 8-K setting
forth the approval by the shareholders of the Company, Silver King
Communications, Inc. and Savoy Pictures Entertainment, Inc. of the merger of the
three companies on December 19, 1996 and the completion of the merger of the
three companies on December 20, 1996. The Company also reported that in
connection with the merger, the Company, Silver King Communications, Inc. and
United States Trust Company of New York, as Trustee (the "Trustee") entered into
a supplement, dated as of December 20, 1996, to the Indenture relating to the
Company's 5 7/8% Convertible Subordinated Debentures, dated as of March 1, 1996,
between the Company and the Trustee.
36
<PAGE> 39
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
March 31, 1997 HOME SHOPPING NETWORK, INC.
By: /s/ JAMES G. HELD
------------------------------------
James G. Held
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES G. HELD President and Chief Executive March 31, 1997
- ----------------------------------------------------- Officer
James G. Held
/s/ JED B. TROSPER Executive Vice President, March 31, 1977
- ----------------------------------------------------- Chief Financial Officer and
Jed B. Trosper Treasurer (Principal
Financial Officer)
/s/ BRIAN J. FELDMAN Vice President and Controller March 31, 1997
- ----------------------------------------------------- (Chief Accounting Officer)
Brian J. Feldman
/s/ BARRY DILLER Chairman of the Board of March 31, 1997
- ----------------------------------------------------- Directors
Barry Diller
/s/ MICHAEL DRAYER Director March 31, 1997
- -----------------------------------------------------
Michael Drayer
</TABLE>
37
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Home Shopping Network, Inc.
Under date of February 25, 1997, we reported on the consolidated balance
sheets of Home Shopping Network, Inc. and subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1996, as contained in Item 8 of the Company's 1996 Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in Item 14. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
St. Petersburg, Florida
February 25, 1997
38
<PAGE> 41
SCHEDULE II
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE CHARGED CHARGED BALANCE
AT TO TO OTHER AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) OF PERIOD
- ----------- --------- --------- ---------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996................ $1,685 $2,241 $ -- $(1,635) $2,291
====== ====== ====== ======= ======
Year ended December 31, 1995................ $1,738 $2,851 $ -- $(2,904) $1,685
====== ====== ====== ======= ======
Year ended December 31, 1994................ $1,627 $1,866 $ -- $(1,755) $1,738
====== ====== ====== ======= ======
Allowance for doubtful other current assets:
Year ended December 31, 1996................ $ -- $ -- $ -- $ -- $ --
====== ====== ====== ======= ======
Year ended December 31, 1995................ $ -- $ -- $ -- $ -- $ --
====== ====== ====== ======= ======
Year ended December 31, 1994................ $6,200 $ -- $ -- $(6,200) $ --
====== ====== ====== ======= ======
</TABLE>
- ---------------
(1) Accounts written off as uncollectible.
39
<PAGE> 1
EXHIBIT 3.4
BY-LAWS
OF
HOME SHOPPING NETWORK, INC.
------------------------------
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE -- The registered office of Home Shopping
Network, Inc. (the "Corporation") shall be established and maintained at the
office of The Corporation Trust Company at The Corporation Trust Center, 1209
Orange Street in the City of Wilmington, County of New Castle, State of
Delaware, and said Corporation Trust Company shall be the registered agent of
the Corporation in charge thereof.
SECTION 2. OTHER OFFICES -- The Corporation may have other offices, either
within or without the State of Delaware, at such place or places as the Board of
Directors may from time to time select or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS -- Annual meetings of stockholders for the
election of directors, and for such other business as may be stated in the
notice of the meeting, shall be held at such place, either within or without the
State of Delaware, and at such time and date as the Board of Directors, by
resolution, shall determine and as set forth in the notice of the meeting. If
the Board of Directors fails so to determine the time, date and place of
meeting, the annual meeting of stockholders shall be held at the registered
office of the Corporation on the first Tuesday in April. If the date of the
annual meeting shall fall upon a legal holiday, the meeting shall
<PAGE> 2
be held on the next succeeding business day. At each annual meeting, the
stockholders entitled to vote shall elect a Board of Directors and they may
transact such other corporate business as shall be stated in the notice of the
meeting.
SECTION 2. SPECIAL MEETINGS -- Special meetings of the stockholders for any
purpose or purposes may be called by the President or the Secretary, or by
resolution of the Board of Directors.
SECTION 3. VOTING -- Each stockholder entitled to vote in accordance with
the terms of the Certificate of Incorporation of the Corporation and these
By-Laws may vote in person or by proxy, but no proxy shall be voted after three
years from its date unless such proxy provides for a longer period. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the meeting,
arranged in alphabetical order, with the address of each, and the number of
shares held by each, shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is entitled to be present.
SECTION 4. QUORUM -- Except as otherwise required by law, by the
Certificate of Incorporation of the Corporation or by these By-Laws, the
presence, in person or by proxy, of stockholders holding shares constituting a
majority of the voting power of the Corporation shall constitute a quorum at all
meetings of the stockholders. In case a quorum shall not be present at any
meeting, a majority in interest of the stockholders entitled to vote thereat,
present in person or by proxy, shall have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until the
requisite amount of stock entitled to vote shall be present. At any such
adjourned meeting at which the requisite amount of stock entitled to vote
<PAGE> 3
shall be represented, any business may be transacted that might have been
transacted at the meeting as originally noticed; but only those stockholders
entitled to vote at the meeting as originally noticed shall be entitled to vote
at any adjournment or adjournments thereof.
SECTION 5. NOTICE OF MEETINGS -- Written notice, stating the place, date
and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat, at his
or her address as it appears on the records of the Corporation, not less than
ten nor more than sixty days before the date of the meeting. No business other
than that stated in the notice shall be transacted at any meeting without the
unanimous consent of all the stockholders entitled to vote thereat.
SECTION 6. ACTION WITHOUT MEETING -- Unless otherwise provided by the
Certificate of Incorporation of the Corporation, any action required or
permitted to be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM -- The business and affairs of the Corporation
shall be managed under the direction of a Board of Directors which shall consist
of not less than one persons. The exact number of directors shall initially be
one and may thereafter be fixed from time to time by the Board of Directors.
Directors shall be elected at the annual meeting of stockholders and each
director shall be elected to serve until his or her successor shall be elected
and shall qualify. A director need not be a stockholder.
<PAGE> 4
SECTION 2. RESIGNATIONS -- Any director may resign at any time. Such
resignation shall be made in writing, and shall take effect at the time
specified therein, and if no time be specified, at the time of its receipt by
the President or the Secretary. The acceptance of a resignation shall not be
necessary to make it effective.
SECTION 3. VACANCIES -- If the office of any director becomes vacant, the
remaining directors in the office, though less than a quorum, by a majority
vote, may appoint any qualified person to fill such vacancy, who shall hold
office for the unexpired term and until his or her successor shall be duly
chosen. If the office of any director becomes vacant and there are no remaining
directors, the stockholders, by the affirmative vote of the holders of shares
constituting a majority of the voting power of the Corporation, at a special
meeting called for such purpose, may appoint any qualified person to fill such
vacancy.
SECTION 4. REMOVAL -- Except as hereinafter provided, any director or
directors may be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of the voting power entitled to
vote for the election of directors, at an annual meeting or a special meeting
called for the purpose, and the vacancy thus created may be filled, at such
meeting, by the affirmative vote of holders of shares constituting a majority of
the voting power of the Corporation.
SECTION 5. COMMITTEES -- The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more directors of the
Corporation.
Any such committee, to the extent provided in the resolution of the Board
of Directors, or in these By-Laws, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
SECTION 6. MEETINGS -- The newly elected directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum be present, immediately after the annual meeting of the stockholders; or
the time and place of such meeting may be fixed by consent of all the Directors.
<PAGE> 5
Regular meetings of the Board of Directors may be held without notice at
such places and times as shall be determined from time to time by resolution of
the Board of Directors.
Special meetings of the Board of Directors may be called by the President
or by the Secretary on the written request of any director, on at least one
day's notice to each director (except that notice to any director may be waived
in writing by such director) and shall be held at such place or places as may be
determined by the Board of Directors, or as shall be stated in the call of the
meeting.
Unless otherwise restricted by the Certificate of Incorporation of the
Corporation or these By-Laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in any meeting
of the Board of Directors or any committee thereof by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
SECTION 7. QUORUM -- A majority of the directors shall constitute a quorum
for the transaction of business. If at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at the meeting which
shall be so adjourned. The vote of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors
unless the Certificate of Incorporation of the Corporation or these By-Laws
shall require the vote of a greater number.
SECTION 8. COMPENSATION -- Directors shall not receive any stated salary
for their services as directors or as members of committees, but by resolution
of the Board of Directors a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
SECTION 9. ACTION WITHOUT MEETING -- Any action
<PAGE> 6
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if a written consent
thereto is signed by all members of the Board of Directors or of such committee,
as the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or such committee.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS -- The officers of the Corporation shall be a
President, one or more Vice Presidents, a Treasurer and a Secretary, all of whom
shall be elected by the Board of Directors and shall hold office until their
successors are duly elected and qualified. In addition, the Board of Directors
may elect such Assistant Secretaries and Assistant Treasurers as they may deem
proper. The Board of Directors may appoint such other officers and agents as it
may deem advisable, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors. An individual may hold more than one office at
any time.
SECTION 2. PRESIDENT -- The President shall be the Chief Executive Officer
of the Corporation. He or she shall preside at all meetings of the Board of
Directors and shall have and perform such other duties as may be assigned to him
or her by the Board of Directors. He or she shall have the general powers and
duties of supervision and management usually vested in the office of President
of a corporation. The President shall have the power to execute bonds, mortgages
and other contracts on behalf of the Corporation, and to cause the seal of the
Corporation to be affixed to any instrument requiring it, and when so affixed
the seal shall be attested to by the signature of the Secretary or the Treasurer
or an Assistant Secretary or an Assistant Treasurer.
SECTION 3. VICE PRESIDENTS -- Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him or her by the Board of
Directors.
SECTION 4. TREASURER -- The Treasurer shall be the Chief Financial Officer
of the Corporation. He or she shall have
<PAGE> 7
the custody of the Corporate funds and securities and shall keep full and
accurate account of receipts and disbursements in books belonging to the
Corporation. He or she shall deposit all moneys and other valuables in the name
and to the credit of the Corporation in such depositaries as may be designated
by the Board of Directors. He or she shall disburse the funds of the Corporation
as may be ordered by the Board of Directors or the President, taking proper
vouchers for such disbursements. He or she shall render to the President and
Board of Directors at the regular meetings of the Board of Directors, or
whenever they may request it, an account of all his or her transactions as
Treasurer and of the financial condition of the Corporation. If required by the
Board of Directors, he or she shall give the Corporation a bond for the faithful
discharge of his or her duties in such amount and with such surety as the Board
of Directors shall prescribe.
SECTION 5. SECRETARY -- The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and of the Board of Directors and all
other notices required by law or by these By-Laws, and in case of his or her
absence or refusal or neglect so to do, any such notice may be given by any
person thereunto directed by the President or by the Board of Directors, upon
whose request the meeting is called as provided in these By-Laws. He or she
shall record all the proceedings of the meetings of the Board of Directors, any
committees thereof and the stockholders of the Corporation in a book to be kept
for that purpose, and shall perform such other duties as may be assigned to him
or her by the Board of Directors or the President. He or she shall have the
custody of the seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the Board of Directors or the
President, and attest to the same.
SECTION 6. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES --Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the Board of Directors.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK -- A certificate of
<PAGE> 8
stock shall be issued to each stockholder certifying the number of shares owned
by such stockholder in the Corporation. Certificates of stock of the Corporation
shall be of such form and device as the Board of Directors may from time to time
determine.
SECTION 2. LOST CERTIFICATES -- A new certificate of stock may be issued in
the place of any certificate theretofore issued by the Corporation, alleged to
have been lost or destroyed, and the Board of Directors may, in its discretion,
require the owner of the lost or destroyed certificate, or such owner's legal
representatives, to give the Corporation a bond, in such sum as they may direct,
not exceeding double the value of the stock, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss of
any such certificate, or the issuance of any such new certificate.
SECTION 3. TRANSFER OF SHARES -- The shares of stock of the Corporation
shall be transferable only upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificates shall be surrendered to the Corporation by the delivery
thereof to the person in charge of the stock and transfer books and ledgers, or
to such other person as the Board of Directors may designate, by whom they shall
be cancelled, and new certificates shall thereupon be issued. A record shall be
made of each transfer and whenever a transfer shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer.
SECTION 4. STOCKHOLDERS RECORD DATE -- In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and which
record date: (1) in the case of determination of stockholders entitled to vote
at any meeting of stockholders or adjournment thereof, shall, unless otherwise
required by law, not be more than sixty nor less than ten days before the date
of such meeting; (2) in the case of determination of stockholders entitled to
express consent
<PAGE> 9
to corporate action in writing without a meeting, shall not be more than ten
days from the date upon which the resolution fixing the record date is adopted
by the Board of Directors; and (3) in the case of any other action, shall not be
more than sixty days prior to such other action. If no record date is fixed: (1)
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action of
the Board of Directors is required by law, shall be the first day on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (3) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 5. DIVIDENDS -- Subject to the provisions of the Certificate of
Incorporation of the Corporation, the Board of Directors may, out of funds
legally available therefor at any regular or special meeting, declare dividends
upon stock of the Corporation as and when they deem appropriate. Before
declaring any dividend there may be set apart out of any funds of the
Corporation available for dividends, such sum or sums as the Board of Directors
from time to time in their discretion deem proper for working capital or as a
reserve fund to meet contingencies or for equalizing dividends or for such other
purposes as the Board of Directors shall deem conducive to the interests of the
Corporation.
SECTION 6. SEAL -- The corporate seal of the Corporation shall be in such
form as shall be determined by resolution of the Board of Directors. Said seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise imprinted upon the subject document or
<PAGE> 10
paper.
SECTION 7. FISCAL YEAR -- The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 8. CHECKS -- All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers, or agent or agents, of
the Corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE -- Whenever any notice is required
to be given under these By-Laws, personal notice is not required unless
expressly so stated, and any notice so required shall be deemed to be sufficient
if given by depositing the same in the United States mail, postage prepaid,
addressed to the person entitled thereto at his or her address as it appears on
the records of the Corporation, and such notice shall be deemed to have been
given on the day of such mailing. Stockholders not entitled to vote shall not be
entitled to receive notice of any meetings except as otherwise provided by law.
Whenever any notice is required to be given under the provisions of any law, or
under the provisions of the Certificate of Incorporation of the Corporation or
of these By-Laws, a waiver thereof, in writing and signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to such required notice.
ARTICLE VI
AMENDMENTS
These By-Laws may be altered, amended or repealed at any annual meeting of
the stockholders (or at any special meeting thereof if notice of such proposed
alteration, amendment or repeal to be considered is contained in the notice of
such special meeting) by the affirmative vote of the holders of shares
constituting a majority of the voting power of the Corporation. Except as
otherwise provided in the Certificate of Incorporation of the Corporation, the
Board of Directors may by majority vote of those present at any meeting at which
a quorum is present alter, amend or repeal these By-Laws, or enact such other
By-Laws as in their judgment may be advisable for the regulation and conduct of
the affairs of the Corporation.
<PAGE> 1
EXHIBIT 10.6
April 3, 1996
Honorable H. Norman Schwarzkopf
400 N. Ashley, Suite 3050
Tampa, Florida 33602
Re: Consulting Agreement
Dear General Schwarzkopf:
This letter constitutes the agreement between you and Home Shopping
Network, Inc. (the "Company") regarding consulting services that you have agreed
to provide to the Company.
You have agreed to consult with and advise senior executive officers of the
Company, from time to time, on matters relating to the Company's business, both
domestic and international. It is understood that you will not be required to
devote any specific time to your services as a consultant hereunder, but shall
respond to requests from the Company on a reasonable basis based upon your other
time commitments. You will not be expected to travel or attend meetings with
third parties unless you specifically agree to do so. Any travel undertaken at
the Company's request will be reimbursed by the Company.
In consideration of your services as consultant to the Company, you will be
granted options to purchase 50,000 shares of the Company's common stock under
the 1996 Stock Option Plan for Employees. Your options will vest in equal
installments over a three year period from the date of this letter, and
otherwise will conform to the provisions of the Stock Option Plan. The exercise
price for your options will be based on the closing price of the Company's
common stock on the day action is taken by the Compensation/Benefits Committee
of the Board of Directors to approve the grant of the options.
This agreement will continue in force for three years from the date set
forth above.
We are delighted to have the benefit of your assistance and counsel and
look forward to working with you. Please sign and return a copy of this letter
to confirm the terms of this consulting agreement.
Very truly yours,
--------------------------------------
James G. Held
President and Chief Executive Officer
Accepted and agreed to:
- ---------------------------------------------------------
H. Norman Schwarzkopf
<PAGE> 1
EXHIBIT 10.7
DATED 12TH DECEMBER 1996
(1) JUPITER PROGRAMMING CO;. LTD
(2) HOME SHOPPING NETWORK, INC.
(3) JUPITER SHOP CHANNEL CO;. LTD
---------------------------
SHAREHOLDERS AGREEMENT
Relating to
Jupiter Shop Channel Co;. Ltd
---------------------------
<PAGE> 2
THIS AGREEMENT is made the 12th day of December 1996
BETWEEN
(1) JUPITER PROGRAMMING CO;. LTD a company incorporated in Japan whose
principal place of business is at Tokyo Opera City Tower 35F, 20-2,
3-chome, Nishi-Shinjuku, Shinjuku-ku Tokyo 163-14 Japan ("JPC").
(2) HOME SHOPPING NETWORK INC., a company incorporated in the State of
Delaware United States of America whose principal place of business is
at 2501 118th Avenue North, St. Petersburg, Florida 33716, USA ("HSN").
(3) JUPITER SHOP CHANNEL CO;. LTD a company incorporated in Japan whose
principal place of business is at Tokyo Opera City Tower 35F, 20-2,
3-Chome, Nishi-Shinjuku, Shinjuku-ku Tokyo 163-14 Japan ("the
Company").
WHEREAS:
(A) JPC and HSN are from the date of this Agreement the owners of all the
issued share capital of the Company.
(B) JPC and HSN propose that the Company will carry on the Business (as
hereinafter defined).
(C) JPC and HSN are entering into this Agreement in order to record the
basis of their relationship as shareholders in the Company and to
establish the manner in which the business affairs of the Company will
be conducted.
NOW IT IS HEREBY AGREED as follows:
1. DEFINITIONS
1.1 In this Agreement and the recitals hereto the following words and
expressions shall save as otherwise specifically provided have the
following meanings:
"Applicable Law": with respect to a Party, any domestic or foreign,
federal, state or local statute, law, ordinance, rule, administrative
interpretation, regulation, order, writ, injunction, directive,
judgement, decree or other requirement of any Governmental Authority
applicable to such Party or its properties, business or assets;
"Approved Public Company": a company or its subsidiary whose securities
are either publicly traded on the Nasdaq National Market (USA), the New
York Stock Exchange (NYSE), the American Stock Exchange (ASE), the
Tokyo Stock Exchange (TSE), the Osaka Stock Exchange (OSE), Nagoya
Stock Exchange (NSE) or the London Stock Exchange (LSE) (other than an
electronic retailing company whose principal place of business is in
the United States of America) and which is approved where necessary
pursuant to Clause 8.1(b);
"the Articles": the articles of incorporation of the Company prepared
by JPC so as to make them as simple as possible and so as only to
include minimum mandatory legal requirements in the agreed form as set
out in Schedule I (Japanese and its English
1
<PAGE> 3
translation) or as they may be altered from time to time in accordance with this
Agreement;
"Associate": in relation to any Shareholder, another company in which the
Shareholder owns at least ten per cent (10%) of the issued voting shares of that
company;
"the Board": the board of Directors of the Company from time to time acting by
quorate meeting or as otherwise empowered in this Agreement or in the Articles;
"the Business": the ownership management and operation of a television shopping
business in the Territory of which the principal element will be a live shopping
television channel;
"Business Plan": any total macro (annual or longer) business plan (other than
the Initial Business Plan) in a form substantially similar to the Initial
Business Plan prepared for the Company on an annual basis and reviewed prior to
the period to which it relates and then approved by the Board on an annual
basis;
"Capital Expenditure": the total amount of capital expenditure as set out in the
Initial Business Plan or any Business Plan (as the case may be);
"Closing": as defined in the Subscription Agreement;
"Control": a person shall be taken to have control of a Shareholder if it
exercises, or is able to exercise or is entitled to exercise or is entitled to
acquire direct or indirect control over the Shareholder's affairs including if
it possesses or is entitled to:
(1) a majority of the share capital or voting rights of the Shareholder; or
(2) a majority of any distributions from the Shareholder or assets on a
winding up of the Shareholder.
and "Controlled" shall be construed accordingly;
"Deed of Adherence": the deed substantially in the form of the draft set out in
Schedule III;
"Directors": the directors (full time and part time) appointed by the
Shareholders for the time being of the Company;
"Encumbrance": any mortgage, charge, pledge, option, attachment, restriction,
assignment, security interest, title retention, preferential right, equity or
trust arrangement, lien, right of set-off, hypothecation, encumbrance or any
security interest whatsoever howsoever created or arising, including any
analogous security interest under local law (other than arising solely by the
operation of law);
"Fair Value": in respect of each Share the same proportion of the fair market
value of the Company as a whole on the date of service of the Transfer Notice
(or deemed date thereof) as it bears to the whole of the issued ordinary share
capital of the Company stated as a price per Share as certified by the Referees
on the basis of a sale thereof as between a willing vendor and a willing
purchaser on the assumption that the Shares will be purchased in one lot by a
purchaser contracting on arm's length terms, who has no other interest in the
Company and (if the Company is then continuing as a going
2
<PAGE> 4
concern) on the assumptions that all the Shares were ordinary shares of the same
class and that the Company will continue in business as a going concern and
having regard to any goodwill attaching to the Company, but without taking
account (if that be the case) that the relevant Shares represent a minority,
majority or controlling interest in the Company;
"Foreign Shareholder": HSN and any other non-Japanese Shareholder from time to
time;
"Governmental Authority": any foreign, domestic, federal, territorial, state or
local governmental authority, quasi-governmental authority, court, government or
self regulatory organisation, commission, tribunal, organisation or any
regulatory, administrative or other agency, or any political or other
subdivision, department or branch of any of the foregoing;
"HSN Directors": the Directors nominated by HSN;
"HSN Trademarks": those of the HSN registered trademarks licensed to the Company
from tune to time by HSN;
"HSN Shares": those Shares beneficially owned by HSN including any held by a
lawful nominee on behalf of HSN;
"Initial Business Plan": the five year business plan as agreed between the
Shareholders and set out in Schedule II;
"in writing" or "written": includes any communication made by letter or
facsimile;
"JPC Directors": the Directors nominated by JPC;
"Last Business Plan": the last Business Plan approved by the Board;
"Management Agreement": the management agreement to be entered into between the
Company (1) and JPC (2) in the form agreed by the Shareholders as set out in
Schedule 1 of the Subscription Agreement;
"Operating Cash Flow": the total amount of operating cash flow as set out in the
Initial Business Plan or any Business Plan (as the case may be);
"Operating Expenses": the items of expenditure as set out in Section 3 headed
"Expenses" of the Initial Business Plan;
"Party" or "Parties": a party or the parties to this Agreement;
"person": any individual, firm, company or other incorporated or unincorporated
body;
"Prescribed Price":
(a) in relation to a voluntary Transfer of Shares in respect of which a
Transfer Notice shall have been served pursuant to Clause 10.6.1, the
price per Share offered by the Proposed Transferee (as defined in
Clause l0.6.1(a))
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(b) in relation to a Transfer of Shares in respect of which a Transfer
Notice shall be deemed to have been served pursuant to Clause 11,
such price as the Shareholders may agree per Share, or in default of
agreement within 30 days after the date on which the Transfer Notice is
deemed to be served, following a reference by any of the Shareholders,
such price per Shares as the Referees (acting as experts and not
arbitrators and whose determination shall be final and binding on the
Shareholders) shall determine to be:
(i) in the case of Clause 11.1(a) the Fair Value; and
(ii) in the case of Clause 11.1(b) the Fair Value less a
discount of 30%;
"President": the president from time to time of the Company nominated by JPC;
"Referees": One reputable outside firm of professional accountants knowledgeable
about the Business appointed by the Company acting as experts and not as
arbitrators who decision shall be final and binding;
"Representative Director": the Representative Director of the Company from time
to time appointed by JPC;
"Services and Trademark Licence Agreement": the serices agreement to be entered
into between the Company (1) and HSN (2) in the form agreed by the Shareholders
as set out in Schedule II of the Subscription Agreement;
"Shareholder": a holder of a Share or Shares being JPC and/or HSN or any other
Shareholder who may execute a Deed of Adherence;
"Shares": ordinary shares of the Company, as authorised by the Articles;
"Subscription Agreement": the subscription agreement dated 14th November 1996
and entered into between JPC and HSN;
"Subsidiary": in relation to any Shareholder, another company in which the
Shareholder owns at least fifty per cent (50%) of the issued voting shares of
that Company;
"Territory": the country of Japan and such other countries as the Board may from
time to time unanimously determine;
"Transfer": any sale, assignment, transfer or grant of lease; and
"Yen" and "Y": the lawful currency of Japan;
1.2 References in this Agreement to Clauses, sub-Clauses, paragraphs and
Schedules are references to those contained in this Agreement.
1.3 The Schedules to this Agreement are an integral part of this Agreement
and references to this Agreement include references to such Schedules.
1.4 Clause headings are for ease of reference only and shall not be taken
into account in construing this Agreement.
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<PAGE> 6
2. PURPOSE OF THE COMPANY
The primary object of the Company shall be to carry on the Business.
The Business shall be conducted in the best interests of the Company
and its Shareholders collectively on sound commercial principles so as
to generate the maximum achievable value for the Shareholders.
3 SHARES IN THE COMPANY
Pursuant to the terms of the Subscription Agreement, the capital of the
Company is held at the date of this Agreement as follows:
<TABLE>
<CAPTION>
Number of Shares Percentage
---------------- ----------
<S> <C> <C>
JPC 9,100 70%
HSN 3,900 30%
Total 13,000 100%
</TABLE>
4. FINANCE
4.1 The Shareholders agree that the funding requirements for the Company
will be as determined by the Board from time to time in accordance with
any Business Plan and the Shareholders shall provide funding in
proportion to their prevailing shareholding ratios on terms and at
times such funding is required as so determined by the Board.
4.2 Notwithstanding Clause 4.1, JPC and HSN agree that in so far as they
may have the right to approve a Business Plan pursuant to Clause 8.1(a)
neither of them will withhold their consent to the funding
requirements in such Business Plan where they are for amounts (in
aggregate or otherwise) up to and including those set out in the
Initial Business Plan and JPC and HSN confirm that they are obligated
to provide funding in proportion to their prevailing shareholding
ratios for amounts (in aggregate or otherwise) up to and including
those set out in the Initial Business Plan irrespective of when funding
is required.
4.3 Without prejudice to the obligations of HSN under Clauses 4.1 and 4.2
at any time after HSN loses its right of approval pursuant to Clause
8.4 HSN shall remain obligated to provide funding (in proportion to its
prevailing shareholding ratio) for:
(a) the Operating Cash Flow in any Business Plan which provides
that the total amount of the Operating Expenses in such
Business Plan has not increased by more than ten per cent
(10%) over:
(i) the total amount of the Operating Expenses in the
Initial Business Plan (or if greater the total amount
of the Operating Expenses in the Last Business Plan
for which HSN is obliged to provide its share of
funding of Operating Cash Flow); and
(ii) after the expiration of the Initial Business Plan,
the total amount of the Operating Expenses in the
Last Business Plan for which HSN is obliged to
provide its share of funding of Operating Cash Flow;
and
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<PAGE> 7
(b) the total amount of the Capital Expenditure in the Initial
Business Plan (or if greater the total amount of the Capital
Expenditure for which HSN is obliged to provide its share of
funding in the Last Business Plan) and after the expiration of
the Initial Business Plan the Capital Expenditure for the
particular year for which HSN is obliged to provide its share
of funding in the Last Business Plan.
4.4 In the event that the increase in the total amount of the Operating
Expenses pursuant to Clause 4.3 is more than ten per cent (10%), HSN
shall remain obligated to provide funding (in proportion to its
prevailing shareholding ratio) for:
(a) the Operating Cash Flow but adjusted for the difference
between the total amount of the Operating Expenses in the
Business Plan for the particular year and the total amount of
the Operating Expenses in the Initial Business Plan (or if
greater the total amount of the Operating Expenses in the Last
Business Plan for which HSN is obliged to provide its share of
funding of Operating Cash Flow) or (after the expiration of
the Initial Business Plan ) in the Last Business Plan
increased by ten per cent (10% (which based on the
shareholding ratios at the date of this Agreement can as an
example be expressed by way of the formula: "HSN funding = 30%
[0CFact - (OEact - OE110) + CAPEXlbp"); and
(b) the total amount of the Capital Expenditure in the Initial
Business Plan (or if greater the total amount of the Capital
Expenditure in the Last Business Plan) and after the
expiration of the Initial Business Plan the Capital
Expenditure for the particular year for which HSN is obliged
to provide its share of funding in the Last Business Plan;
but for additional funding above and beyond the funding that HSN is
obliged to provide as set out above HSN may elect whether to
participate or not.
4.5 Notwithstanding Clause 12 in the event HSN so elects not to participate
in the additional funding pursuant to Clause 4.4, the relevant Business
Plan shall remain in full force and effect (and HSN shall continue to
have no right of approval) and the Board and management of the Company
shall have the right to decide in their sole discretion how best to
fund such shortfall and whether this should be through internal working
capital or external finance and should the Board decide to fund either
by:
(a) requesting additional capital from the other existing
Shareholder(s) (other than HSN), then such Shareholders shall
receive Shares proportionate to the additional capital it or
they contribute (and HSN's equity percentage will be diluted
accordingly); or
(b) introducing new capital from one or more new Shareholders,
then solely in such circumstances HSN will have no right of
approval in respect of such new Shareholders pursuant to
Clause 8.1(b) and Clause 10.6.1(a) shall not apply.
5. THE BOARD, AUDITORS AND MANAGEMENT
5.1 Subject to Clause 5.2 the Board shall initially comprise six (6)
Directors. On the date of this Agreement JPC shall have the right to
nominate four (4) Directors and HSN shall have the right to nominate
two (2) Directors (subject to Clause 5.8) and to remove and replace any
such appointees and, to the extent that Japanese law and regulations
permit, such Directors appointed by JPC and HSN need not be
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<PAGE> 8
Japanese nationals or resident in Japan. Such rights shall be
exercisable at a Shareholders Meeting and the Shareholders shall be
required to vote in favour of resolutions proposed by JPC or HSN
appointing or removing directors nominated by JPC and HSN respectively
so that such persons may be properly appointed or removed. Any
appointee so removed shall automatically cease to hold the office and
status to which he or she had been appointed.
5.2 The Company shall (where necessary) have three (3) statutory auditors
of which one (1) shall be full time and the other two (2) part time and
JPC shall have the right to appoint all of them.
5.3 The Board shall act by majority vote only. JPC and HSN shall use their
reasonable endeavours to procure that a quorum is present at any
meeting of the Board. The quorum necessary for the transaction of the
business of the Board shall consist of four (4) Directors of which at
least three (3) must be JPC Directors. The business to be conducted
shall be limited to that referred to in the agenda accompanying the
notice of meeting unless it is in the proper commercial interests of
the Company for any new business to be considered. In the event that a
quorum is not present on a first call of a Board Meeting as prescribed
in Clause 5.5(b), the Board Meeting shall be reconvened on the day
being three weeks thereafter (which may be shortened by the written
consent of all JPC and HSN Directors) and any matter on the agenda can
be decided by those Directors attending and Clause 8.1 shall be
construed accordingly. Notice of any such reconvened meeting shall be
given to all Directors not in attendance at the original inquorate
meeting.
5.4 One JPC Director shall be the President and the Representative Director
and shall be responsible for conducting delegating and managing the day
to day business and affairs of the Company subject to the provisions of
this Agreement and the Articles and to those other matters which are
otherwise required to be decided by the Board or general meeting of the
Company.
5.5 Save as otherwise provided in this Agreement, the Company (so far as it
is legally able) shall and JPC and HSN shall exercise their respective
powers and rights in relation to the Company so as to ensure that the
Company shall:
(a) convene and hold a formal meeting of the Board at least once
in every period of three months;
(b) procure that not less than two weeks' prior written notice of
any meeting of the Board shall be given to the Directors, that
every such notice shall be accompanied by a written agenda (in
Japanese and English) specifying the business of such meeting
(provided, however, that such fourteen day period may be
shortened with the consent of all JPC and HSN Directors);
(c) provide each Director with a management report and quarterly
financials (in Japanese and English) at least seven days prior
to every meeting of the Board;
(d) carry on and conduct the Business and its affairs on a
commercial basis, in a proper, lawful and efficient manner and
for its own benefit and in accordance with and within the
parameters prescribed by Clause 2;
(e) transact all its business on arm's length terms;
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<PAGE> 9
(f) ensure that all the Business and affairs of the Company are
undertaken and transacted by the Company in accordance with
this Agreement;
(g) at all times observe and duly perform its obligations under
the Articles and this Agreement.
5.6 A synopsis of each Board meeting shall be prepared in both Japanese and
English by the Company which shall distribute them to JPC and HSN.
5.7 Immediately preceding formal meetings of the Board, there will be
informal discussions in English between those JPC Directors and HSN
Directors attending the relevant Board Meeting on all the matters which
are the subject of such Board Meeting and all Directors attending such
Board Meeting shall participate. All Board Meetings shall be conducted
in the English language.
5.8 For whatever reason other than pursuant to Clause 10.4 but without
prejudice to the obligations of the Shareholders in this Agreement,
each time a Shareholder's equity interest declines by at least fifteen
per cent (15%) of the total number of the Shares it shall procure the
resignation from the Board of one Director (per fifteen percent (15%)
of the Shares) it has nominated to the Board or where it does not own
at least fifteen percent (15%) of the total number of the Shares then
it shall not be entitled to nominate any Directors and shall procure
the resignation from the Board of all Directors it has nominated to the
Board. Such Shareholder shall procure that, in his or her resignation,
such Director shall deliver to the Company a letter acknowledging that
he or she has no claim outstanding for director's fees or compensation
for wrongful dismissal or unfair dismissal or entitlement to any
payment for redundancy or in respect of any other moneys or benefits
due to him or her from the Company arising out of such resignation
other than those arising or accrued due prior to the effective date
of such resignation. If the Company pays any amount to a Director
resulting from a claim by such Director in connection with the
resignation of such Director then the Shareholder who nominated such
Director shall reimburse such amount to the Company.
5.9 JPC shall have the right to nominate the Chief Operating Officer, the
Chief Financial Officer and any other executive officers and staff of
the Company.
6. AGREEMENT TO PERFORM
6.1 Each Shareholder undertakes with the other or others generally to use
its reasonable endeavours to promote (and not do anything detrimental
to) the Business and the Company in accordance with Clause 2.
6.2 Each Shareholder shall at all times exercise its respective powers and
votes as a shareholder of the Company to ensure that (to the extent
that the same is within such powers and voting rights) the Company
will comply with all of its obligations under this Agreement and the
Articles.
7. INFORMATION
7.1 Each Shareholder shall exercise its rights and powers so far as it is
able to procure that the Company shall:
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<PAGE> 10
(a) at all times keep true, accurate and up to date books and
records of all the affairs of the Company;
(b) subject to Clause 9, at all times make available to each other
and their duly authorised representatives full and complete
access (including copying facilities) to the books, records,
accounts, documents, data, information and premises of the
Company.
7.2 Without prejudice to Clause 7.1 the Company shall at its own cost
prepare and send to JPC and HSN and each Director:
(a) within four (4) weeks from the end of each calendar month
unaudited financial statements of the Company for that month
and cumulative financial statements for the current accounting
period up to and including the end of each six calendar month
period all in a form agreed by the Board but prepared in
accordance with Japanese GAAP (generally accepted accounting
principles); and
(b) within ninety (90) days from the end of each financial year
audited accounts of the Company prepared in accordance with
Japanese GAAP and certified by the auditors of the Company.
7.3 HSN may at its own cost (reimbursing the Company where necessary) have
periodic partial or full audited accounts for the Company prepared for
its own use in accordance with US GAAP so long as it notifies the
Company of its intention to do so and ensures that HSN and its auditors
and representatives at all times cooperate with the Company and the
Company's auditors and that HSN and its employees, representatives and
auditors do not materially interfere with or interrupt the Company's
business and operations.
8. IMPORTANT MATTERS
8.1 For so long as any Shareholder owns directly or indirectly fifteen per
cent (15%) or more of the total number of the Shares a decision
relating to any of the following matters shall require the unanimous
approval (which is not to be unreasonably withheld) of such
Shareholder's Directors at the relevant Board meeting (and when
necessary the unanimous approval (which is not to be unreasonably
withheld) of such Shareholders at a Shareholders meeting) and the
Shareholders shall exercise all voting rights and other powers of
control available to them in relation to the Company and the Directors
so as to procure (insofar as they are able by the exercise of such
rights) that the Company shall not without such approval:
(a) approve any Business Plan for the Company or implement any
material amendment to or material departure from the same save
that no approval shall be necessary where any amendment,
variation or departure does not exceed in any one year an
aggregate amount equal to ten per cent (10%) of the amounts of
the Operating Expenses for the particular year as set out in
the Initial Business Plan for the period of five (5) years
from the date of this Agreement and thereafter five per cent
(5%) of the amounts of the Operating Expenses of the Company
for that particular year;
(b) approve any third party who is to become a Shareholder (either
by acquiring, issued or granted an option to acquire Shares)
other than either an
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<PAGE> 11
Associate of JPC, a Subsidiary of JPC or (subject to JPC
retaining fifty one per cent (51%) of the Shares) any
broadcaster or services/systems provider;
(c) make any material change to the Articles (other than a change
relating to the share capital of the Company and related
Shares resulting from the implementation of the Initial
Business Plan and any Business Plan);
(d) other than in the ordinary course of business enter into any
contract with a Shareholder or Director which is not on arms
length and bona fide terms and which is for an annual amount
in excess of ten million yen;
(e) enter into any sub-license or contract with a third party for
the use of the HSN Trademarks;
(f) make any material change in the nature of the Business;
(g) other than in the ordinary course of business merge or
amalgamate with any third party or transfer the whole or any
material part of the undertaking, property and/or assets of
the Company (or any interest therein).
(h) other than in the ordinary course of business create, acquire
or dispose of any subsidiary or otherwise acquire or dispose
of any shares, securities or other interest in any company or
business or permit any subsidiary to issue or allot any share
or security or grant or create any option or right to acquire
any share or security except to the Company;
(i) take or permit the taking of any step to have the Company
voluntarily wound up or voluntarily to take advantage of any
provisions of winding up legislation or similar legislation;
(j) other than for the protection of the Company institute any
material litigation, arbitration or tribunal proceedings
against any person (other than HSN for whom no approval shall
be necessary).
8.2 Where appropriate, if the Directors shall not have approved any
Business Plan for the Company before the commencement of the period to
which it is to relate, the Shareholders shall procure that the Company
shall continue to carry on the business on the basis of the Last
Business Plan of the Company but with the amounts of the Operating
Expenses as set out in the Initial Business Plan for the year in
question and thereafter from the Last Business Plan increased by five
per cent (5%) until the matter is resolved pursuant to Clauses 8.3 and
8.4.
8.3 In the event that the relevant Directors or Shareholders (as the case
may be) do not approve any of the matters as required in Clause 8.1
then they will use all reasonable endeavours to reach agreement. If no
agreement is reached within ten (10) business days from the date the
matter is put to the Board or the Shareholders (as the case may be) for
approval then the President of each Shareholder (or an authorised
representative designated by such President) will use all reasonable
endeavours to try and reach agreement.
8.4 Where the matter requiring agreement is pursuant to Clause 8.1(a) then
if no agreement can be reached within a further fifteen (15) business
days after the expiry of the ten (10) business days referred to in
Clause 8.3 JPC shall forthwith be entitled
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<PAGE> 12
(which HSN and any other Shareholder hereby acknowledges) to treat the
failure to reach agreement as the deemed confirmation by HSN and the
other Shareholder(s) whose President or representative does not agree
with JPC's President or representative that HSN and such other
Shareholders (and its/their Directors) will upon the expiry of such
fifteen (15) business day period no longer have a right of approval
under Clause 8.1 in respect of those matters requiring approval
pursuant to Clause 8.1(a) for the remaining term of this Agreement
and this Agreement shall be construed accordingly.
8.5 Where the matter requiring agreement is pursuant to Clause 8.1(i)
then if no agreement can be reached within a further fifteen (15)
business days after the expiry of the ten (10) business days referred
to in Clause 8.3 the Shareholder who does not agree that the Company
should be wound up ("the Acquiring Shareholder") shall be entitled (by
written notice within ten (10) business days after the expiry of such
fiurther fifteen (15) business day period) in its entire discretion to
treat the occurrence of the failure to reach agreement as the deemed
service by the other Shareholder(s) of a Transfer Notice pursuant to
Clause 10.6 the provisions of which shall accordingly apply mutatis
mutandis save that:
(i) there shall be no right to withdraw the Transfer Notice;
(ii) the Prescribed Price shall be determined in accordance with
paragraph (b)(i) of the definition of "Prescribed Price" in
Clause 1.1; and
(iii) the provisions of Clause 10.6 shall be construed on the basis
that there is no proposed third party purchaser of the Shares
other than the Acquiring Shareholder,
and if the Acquiring Shareholder is HSN and it does not serve notice as
aforesaid then it shall forthwith no longer have a right of approval
under Clause 8.1 in respect of those matters requiring approval
pursuant to Clause 8.1 (i) for the remaining term of this Agreement and
this Agreement shall be construed accordingly.
9. CONFIDENTIALITY
9.1 Each Shareholder shall at all times keep secret and confidential and
shall not use (and shall procure that its Subsidiaries, officers
employees and agents shall keep secret and confidential and shall not
use) any information which it may have or acquire in relation to the
customers, business, finances, assets or affairs of the Company or in
relation to each other and their Subsidiaries or which, in consequence
of the negotiation or operation of, or the exercise of rights under,
this Agreement it may have or acquire in relation to the customers,
business or affairs of each other or their Subsidiaries, save for any
information:
(a) which is publicly available or becomes publicly available
through no act of that Shareholder;
(b) which is disclosed to that Shareholder by a third party which
did not acquire the information under an obligation of
confidentiality;
(c) which is independently acquired by that Shareholder as the
result of work carried out by an employee to whom no
disclosure of such information had been made;
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<PAGE> 13
(d) which (after full consultation with the other Shareholder) is
required to be disclosed by any law (including any order of a
court of competent jurisdiction) or the rules of any stock
exchange or governmental, revenue or other regulatory
authority, whether or not having the force of law; or
(e) which any Shareholder feels necessary to disclose in relation
to the development of the Business provided that such
Shareholder shall first obtain consent from the Board for the
proposed disclosure.
9.2 The provisions of this Clause shall survive for a period of five (5)
years after termination of this Agreement.
10. TRANSFER OF SHARES
10.1 The Shareholders agree and undertake with each other that they shall
procure that a Transfer or purported Transfer of Shares may only be
made or registered in accordance with this Agreement and the Articles.
10.2 The Shareholders shall procure that the Company does not and the
Company shall refuse to register any Transfer of any Share other than a
Transfer permitted by or made in accordance with the provisions of this
Agreement.
10.3 The Shareholders agree and undertake that no Transfer of any Shares may
be made or registered prior to _______ (save pursuant to Clauses 10.4,
10.9 and 11).
10.4 JPC may at any time transfer or sell all of its Shares to a Subsidiary
of JPC or some of its Shares to an Associate of JPC or (subject to
approval pursuant to Clause 8.1(b) where JPC is not retaining fifty one
(51) or more percent of the Shares) to any broadcaster or
services/systems provider in whatever multiples and on whatever terms
it desires.
10.5 If any Shareholder proposes to Transfer any Shares to any person ("the
Transferee") then it shall be a condition precedent to the
effectiveness of such Transfer and the registration thereof that the
parties to this Agreement, the Transferee and (if required by the
Board) a guarantor acceptable to it of the Transferee's obligations
hereunder shall execute a Deed of Adherence in the form set out in
Schedule II and deliver a legal opinion in a form, and from legal
counsel, acceptable to the other Shareholders concerning the issues
warranted and represented by them in Clauses 2 and 3 of the Deed of
Adherence.
10.6 Save pursuant to Clauses 10.4, 10.9 and 11, any Shareholder must
comply with this Clause 10.6 before selling or transferring its Shares:
10.6.1 Any Shareholder who wishes to sell or transfer its Shares (a "Vendor")
after _______ shall give notice in writing to the Company and the other
Shareholders of such wish (a "Transfer Notice") identifying:
(a) the party to whom it proposes to sell all (but not some only
of) its Shares which person must be an Approved Public Company
if it is not a Shareholder pursuant to the provisions of this
Clause 10 (the "Proposed Transferee");
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<PAGE> 14
(b) the name of the Proposed Transferee's ultimate parent company
and controlling shareholder(s), if any;
(c) the Prescribed Price and other terms of the proposed sale.
The Transfer Notice shall not be effective if it does not
contain such information (unless it is a deemed Transfer
Notice pursuant to Clause 11). The Transfer Notice shall
constitute the Company as the Vendor's agent for the sale of
all, but not some only, of the Shares held by the Vendor (and
in the case of a Foreign Shareholder those shares (if any)
also registered in the name of a third party nominated by the
Foreign Shareholder pursuant to Clause 10.8 ("the Sale
Shares") to the other Shareholder(s) or any person procured or
nominated by the other Shareholder(s) (as it may in its
absolute discretion determine) at the Prescribed Price. The
Transfer Notice shall be accompanied by the Vendor's share
certificates and a duly executed transfer in blank in respect
thereof and (save as hereinafter provided) may not be
withdrawn.
10.6.2 In any case where there is a Transfer Notice (whether deemed or not)
and the determination of the Prescribed Price has been referred to the
Referees, the Company shall as soon as it receives the Referees'
certificate serve a certified copy thereof on the Shareholders. The
fees and expenses of the Referees shall be borne as to one half by the
Vendor and as to the other half by the purchasers (if any) of the Sale
Shares.
10.6.3 Within ten (10) business days of receipt of the Transfer Notice by the
Company or, where a Referees' certificate is required, within ten (10)
business days of receipt by the Company of the Referees' certificate,
the Company shall give notice in writing to the other Shareholder(s)
specifying the number of Sale Shares and the Prescribed Price therefore
and offering the Sale Shares for sale to the other Shareholder(s) at
the Prescribed Price. Such notice shall be accompanied by a copy of the
Transfer Notice and, if applicable, the Referees' certificate and shall
require each other Shareholder to state in writing within thirty (30)
days of the date of the notice:
(a) that it is willing to purchase a stated amount of the Sale
Shares at the Prescribed Price; or
(b) (except in the case of a deemed Transfer Notice pursuant to
Clause 11) that it consents to the sale of all of Sale Shares
within ten (10) days thereof to the Proposed Transferee at the
Prescribed Price.
In the event that no notice is received within the said period of
thirty (30) days or (except in the case of a deemed Transfer Notice
pursuant to Clause 11) notice(s) have been given pursuant to Clause
10.6.3(a) but not collectively in respect of all the Sale Shares then
such other Shareholder(s) shall be deemed to have served a notice
pursuant to Clause 10.6.3(b) at the end of such thirty (30) day period.
10.6.4 In the event that a notice is served pursuant to Clause 10.6.3(a) in
respect of all of the Sale Shares the Company shall, by notice,
allocate the Sale Shares to (or amongst) the other Shareholder(s) or
its (their) nominees in accordance with its willingness as stated in
the notice given pursuant to that clause and (if more than one) pro
rata to the number of Shares for the time being held by it (but so that
no such other Shareholder shall be obliged to purchase more than the
Sale Shares so notified by it) as aforesaid). Such Shareholder(s) as
aforesaid shall within fifteen (15) days thereafter complete the
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<PAGE> 15
purchase from the Vendor of the Sale Shares so allocated to them at the
Prescribed Price. The Vendor shall be bound to transfer the Sale Shares
comprised in the notice to the other Shareholder(s) or its (their)
nominees at the Prescribed Price, and if it makes default in so doing
the Company may receive the purchase money and the relevant Directors
appointed to the Board by the other Shareholder(s) may authorise some
person to execute a transfer of the Sale Shares in accordance with the
aforesaid allocation in favour of the other Shareholder(s) or its
(their) nominees as aforesaid ("the Shareholder Purchaser") and the
Company shall hold the purchase money in trust for the Vendor. The
receipt by the Company of the purchase money shall be a good discharge
to the Shareholder Purchaser and after its name has been entered in the
Company's Register of Members in exercise of the aforesaid power, the
validity of the proceedings shall not be questioned by any person. If
such purchase is not completed (for any reason other than the Vendor's
default) within such period of fifteen (15) days, then the
certificates and duly completed transfer in respect of the Sale Shares
shall be returned to the Vendor and consent shall be deemed to have
been given pursuant to Clause 10.6.3(b) and the provisions of Clause
10.6.3 shall apply.
10.6.5 In the event that a notice is given or deemed to be given by the other
Shareholders pursuant to Clause 10.6.3(b) the Vendor shall be at
liberty to sell all of the Sale Shares at any time within fifteen (15)
days after the date of such notice (or, if no actual notice is given
pursuant to Clause 10.6.3, the expiry of the period of thirty (30) days
provided for under Clause 10.6.3) to the Proposed Transferee at the
Prescribed Price and otherwise upon no more favourable terms than those
offered to the other Shareholder(s) and as stated in the Transfer
Notice PROVIDED THAT: -
(a) if prior to completion of the said sale an event has occurred
in relation to the Proposed Transferee which, if the Proposed
Transferee had been a member of the Company at the date of the
Transfer Notice, would have meant that a deemed Transfer
Notice arose under Clause 11 then the identity of the
Proposed Transferee shall need to be reapproved and failing
such re-approval the Transfer Notice shall be deemed to have
been withdrawn by the Vendor and such sale shall not take
place. At completion of any such sale the Proposed Transferee
shall deliver to the other Shareholder an undertaking that no
such event has occurred; and
(b) if any Shareholder (other than JPC) has with its notice
Pursuant to Clause 10.6.3(b) stated that it wishes the
Proposed Transferee to also purchase all (but not part only)
of its Shares at the Prescribed Price then the Vendor shall
procure that the Proposed Transferee shall also purchase such
Shares at the Prescribed Price in the event that the Vendor
does actually sell its Shares to the Proposed Transferee.
10.6.6 The Board shall refuse to register any Transfer of any Share other than
a Transfer permitted by or under and made in accordance with the
preceding provisions of Clause 8.5, 10, or Clause 11, which Transfer
the Board shall register.
10.6.7 All Shares Transferred pursuant to Clauses 8.5 and 10.6 shall be
transferred as beneficial owner and free from all Encumbrances together
with all rights, benefits and advantages attached thereto as at the
date of the Transfer Notice or deemed Transfer Notice except the right
to any dividend declared but not paid prior to the date of the relevant
Transfer Notice.
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<PAGE> 16
10.6.8 Immediately upon completion of the Transfer of any Shares by any
Shareholder pursuant to the provisions of Clauses 8.5 and 10.6 the
Vendor shall procure the resignation of any Director appointed to the
Board by the Vendor without any claim or compensation for loss of
office of any kind whatsoever.
10.6.9 The Shareholders shall together procure that at all times during the
continuation of this Agreement the Board acts in accordance with the
provisions of Clause 10.
10.7 The Shareholders shall procure that the Company maintains an executed
copy of this Agreement on file and that the Company shall not transfer
any certificates representing Shares or issue any certificates in lieu
thereof unless all the conditions therein have been complied with and a
purported transfer not in accordance with the terms hereof shall be
null and void.
10.8 Notwithstanding that a Foreign Shareholder may at any time be prevented
from increasing its shareholding in the Company by reason of any
Applicable Law, decree, regulation, law directive or other requirement
of the Japanese Governmental Authorities any Shareholder proposing to
transfer any Shares shall nevertheless be obliged to serve a Transfer
Notice on the Foreign Shareholder and the Foreign Shareholder shall
(notwithstanding any other provision of this Agreement or the Articles)
be entitled within thirty (30) business days of the notice served by
the Company pursuant to Clause 10.6.3 to nominate in writing any third
party approved by the other Shareholder(s) (such approval not to be
unreasonably withheld or delayed) to acquire the relevant Shares which
would otherwise have been offered to the Foreign Shareholder (provided
that such acquisition by such third party does not itself infringe any
Applicable Law, decree, regulation, law directive or other requirement
of the Japanese authorities and such third party executes a Deed of
Adherence) and such third party for all purposes shall be the
transferee of such Shares on completion of the above procedures.
10.9 HSN may transfer all (but not part) of its Shares to a wholly owned
subsidiary of HSN subject to obtaining the approval of JPC (such
approval not to be unreasonably withheld) and to HSN guaranteeing the
obligations of that subsidiary on terms satisfactory to JPC.
11. DEEMED TRANSFER OF SHARES
11.1 If any Shareholder ("the Defaulter");
(a) goes into receivership, liquidation or administration or
passes a resolution putting it into voluntary liquidation
(other than for the purposes of amalgamation or
reconstruction) or some analogous procedure; or
(b) shall commit a material breach of any provision of this
Agreement to which it is a party or the Articles and shall
have failed to remedy such breach, if capable of remedy,
within sixty (60) days after the date of a notice from any
other Shareholder specifying the nature of the breach and
requiring it to be remedied; or
(c) shall become Controlled by another person or persons acting in
concert (other than by such person or persons who are
shareholders (or who are shortly to become shareholders
pursuant to an offer made prior to the date hereof) in the
relevant Shareholder at the date of this Agreement);
15
<PAGE> 17
then in any such event (without prejudicing or in any way
limiting their other rights) the other Shareholder(s) ("the
Non-Defaulter(s)") shall be entitled (by notice) in its entire
discretion to treat the occurrence of any such event as the
deemed service by the Defaulter of a Transfer Notice pursuant
to Clause 10.6 the provisions of which shall accordingly apply
mutatis mutandis save that;
(i) there shall be no right to withdraw the Transfer
Notice; and
(ii) the Prescribed Price shall:
(1) in the events referred to in Clause 11.1(a)
and (c) be determined in accordance with
paragraph (b)(i) of the definition of
"Prescribed Price" in Clause 1.1; and
(2) in the events referred to in Clause 11.1(b)
be determined in accordance with paragraph
(b)(ii) of the definition of "Prescribed
Price" in Clause 1.1.
To be effective, such notice shall be given to the Defaulter within
thirty (30) days of the Non-Defaulter (or the last of them if more than
one) becoming aware of the occurrence of such event.
11.2 The provisions of Clauses 10.6.7 and 10.6.8 shall apply to any Transfer
pursuant to the provisions of this Clause.
11.3 Any notice given by the Non-Defaulter(s) pursuant to Clause 11.1
shall have the effect that (notwithstanding any provision of the
Articles) until further notice from the Non-Defaulter(s):
(a) any transfer by a Defaulter of its Shares ("the relevant
Shares") (other than to or at the direction of the
Non-Defaulter(s)) shall be void;
(b) no voting rights shall be exercisable by the Defaulter in
respect of its Shares;
(c) no further Shares shall be issued or need be offered to the
Defaulter;
(d) except in a liquidation, no interest, dividend or other
payment shall be made of any sums due from the Company on the
Defaulter's Shares (whether in respect of capital or
otherwise) to the Defaulter;
(e) all the Defaulter's rights under this Agreement shall be
suspended; and
(f) the Defaulter or its nominee (as appropriate) shall not be
required to be present to make a quorum for general meetings
of the Company or meetings of the Board.
The Non-Defaulter(s) may by notice remove or relax such restriction in
whole or in any particular case at any time.
12. NEW SHARES
If the Company at any time issues new Shares, the Shareholders shall
(subject to Clause 4.5) subscribe for such new shares in proportion to
their respective
16
<PAGE> 18
shareholding ratios in the Company at that time. No new shares may be
issued to any third party without the approval of the Board.
13. TERINATION
This Agreement shall continue in full force and effect from the date
thereof until:
(a) all the Shareholders agree in writing to its termination; or
(b) all of the Shares become beneficially owned by one Shareholder; or
(c) the Company goes into liquidation whether voluntary or compulsory
(other than for the purpose of an amalgamation or reconstruction
approved by all the Shareholders) or is wound up;
whereupon this Agreement (with the exception of Clauses 9, 16 and 29)
shall automatically terminate with neither Party having a claim against
the other save for any breach by a Party prior to the date of
termination.
14. REPRESENTATIONS AND WARRANTIES
14.1 Each of the Parties hereto represents warrants and undertakes to each
other that:
(a) it is a company duly incorporated and validly existing in all
respects under the laws of the jurisdiction or its
incorporation with full power and authority to own its assets
and to carry on its business as it is now being conducted and
no action has been taken or threatened (whether by it or any
third party) for or with a view to its or their liquidation,
receivership or analogous process;
(b) so far as it is aware having made reasonable enquiry no
litigation or administrative or arbitration proceedings before
or of any court, judicial, administrative or governmental
authority, arbitrator(s) or other body is taking place,
pending or threatened against it or against any or their
respective assets which might have a material adverse effect
on its business, assets, condition or operations taken as a
whole, or might adversely affect its ability duly and
punctually to perform and observe all its obligations
hereunder.
15. REGULATORY
15.1 In connection with the Company, JPC shall be primarily responsible for
dealing with all Japanese Governmental Authorities and regulatory
issues and seeking to obtain all necessary Japanese approvals which may
at any time be required for the Company (but not HSN) for whatever
purpose, with HSN providing such support and assistance as may be
necessary.
15.2 In so far as HSN may itself require any Japanese Governmental
Authority approvals for investing in the Company then JPC will use
reasonable endeavours to assist HSN subject to HSN paying JPC for all
costs it may incur in providing such assistance.
16. COMPETITION
16.1 The Shareholders agree that the Company will be the sole vehicle
through which all Business opportunities are conducted in the Territory
and that they will not invest
17
<PAGE> 19
manage or otherwise participate in any Business opportunity which may
compete with the Business without first offering such opportunity to so
invest manage or otherwise participate to the Company and if the
Company (by way of a simple majority Board decision) should decline
only then will the particular Shareholder be free to invest manage or
otherwise participate in such Business.
16.2 It is the intention of the Parties where and when practical and
appropriate to discuss and offer new Business opportunities in Asia to
the Company.
16.3 The provisions of this Clause 16 shall continue to apply to any
Shareholder for a period of one year from the date it ceases to be a
Shareholder.
17. MANAGEMENT/SERVICES AGREEMENT
The Parties agree that:
(i) JPC will support the management of the Company by providing
the services pursuant to the terms of the Management
Agreement; and
(ii) HSN will provide services to the Company pursuant to the terms
of the Services and Trademark Licence Agreement.
18. NO ASSIGNMENT
No Party may assign its rights under this Agreement.
19. WAIVERS, REMEDIES CUMULATIVE, AMENDMENTS, ETC.
19.1 No failure or delay by any of the parties hereto in exercising any
right, power or privilege under this Agreement shall operate as a
waiver thereof nor shall any single or partial exercise by any of the
parties hereto of any right, power or privilege preclude any further
exercise thereof or the exercise of any other right, power or
privilege.
19.2 The rights and remedies herein provided are cumulative and not
exclusive of any rights and remedies provided by law.
19.3 No provision of this Agreement may be amended, modified, waived,
discharged or terminated, otherwise than by the express written
agreement of the parties hereto nor may any breach of any provision of
this Agreement be waived or discharged except with the express written
consent of the parties not in breach.
20. INVALIDITY
Should any provision of this Agreement be or become ineffective for
reasons beyond the control of the parties, the parties shall use
reasonable efforts to agree upon a new provision which shall as nearly
as possible have the same commercial effect as the ineffective
provision.
21. COSTS
Each of the parties hereto shall pay its own costs, charges and
expenses connected with the preparation and implementation of this
Agreement and the transactions contemplated by it.
18
<PAGE> 20
22. CONFLICT WITH ARTICLES ETC.
To the extent permitted by Applicable Law, in the event of any conflict
between the provisions of this Agreement and the Articles, the
provisions of this Agreement shall at all times prevail and the Parties
shall exercise all voting and other rights and powers available to them
so as to give effect to the provisions of this Agreement and shall
further if necessary procure any required amendment to the Articles as
may be necessary to eradicate such conflict or any conflict between
this Agreement and the Articles.
23. NOTICES
Any notice or other communication given or made under this Agreement
shall be in writing in English and, without prejudice to the validity
of any other method of service, may be delivered via facsimile or
personally or by courier addressed as follows:
(a) If to JPC:
Jupiter Programming Co., Ltd
Tokyo Opera City Tower 35F
20-2, 3-chome
Nishi-Shinjuku
Shinjuku-ku
Tokyo 163-14
Japan
Attention: President
Fax: 81-3-5353-7040
(b) If to HSN:
2501 118th Avenue North, St. Petersburg
Florida 33716
U.S.A.
Attention: President
Fax: 813-573-0866
or to such other address or facsimile number as the relevant addressee
may hereafter by notice hereunder substitute.
24. ENGLISH LANGUAGE
Where this or any other English language agreement between the parties
or referred to herein is translated into Japanese for the convenience
of the parties or some of them the English language version
hereof/thereof shall for all purposes be deemed to be the definitive
and binding version thereof. Conversely where the Articles are
translated into English for such convenience, the Japanese language
version shall for all purposes be deemed to be the definitive and
binding version thereof.
25. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of Japan. As required by the Applicable Law of Japan, this
Agreement will be filed with the Japanese Fair Trade Commission.
19
<PAGE> 21
26. DISPUTES
26.1 Other than as provided in Clauses 8.3, 8.4 and 8.5, in the event of a
disagreement among the Parties, including a disagreement regarding this
Agreement, or any breach thereof, each Party will use its best efforts
to resolve such disagreement amicably and where applicable the Party in
breach shall promptly take all reasonable steps to remedy such breach.
If, at the end of 15 days from the occurrence of such disagreement or
breach, no resolution has been reached the President of each Party or
an authorised person designated by the President of each party will
meet to resolve the matter. If they, too, are unable to reach a
mutually agreeable resolution within 30 days of the matter being
referred to them, the matter will be arbitrated in accordance with
Clause 26.2
26.2 Any and all disputes with respect to which such authorised persons
failed to reach a mutually agreeable resolution pursuant to Clause 26.1
shall be finally settled by arbitration conducted in London under
UNCITRAL Arbitration Rules by three (3) arbitrators (none of whom shall
be Japanese or US citizens) in the English language. The award shall be
final and binding upon the Parties.
27. ENTIRE AGREEMENT
This Agreement (including the Articles which are incorporated herein by
reference) and the Subscription Agreement replaces, supersedes and
cancels all other previous and contemporaneous arrangements,
understandings, representations or agreements between the Parties
either oral or written with respect to the subject matter of this
Agreement and the Subscription Agreement and expresses and constitutes
the entire agreement between the Parties with reference to the terms
and conditions of the constitution and operation of the management of
the Business and affairs of the Company.
28. NO PARTNERSEHIP/AGENCY
Nothing herein contained shall be construed or deemed to constitute a
partnership or joint venture between the Parties and save as expressly
herein provided no Party shall hold itself out as the agent of the
other.
29. SURVIVAL OF PROVISIONS
The expiry or earlier termination of this Agreement shall not operate
to terminate any provisions which are expressed to continue in force
thereafter.
30. EXECUTION
This Agreement may be executed in counterparts (which may be exchanged
by facsimile transmissions) each of which shall be an original and
which together shall constitute one document. Without prejudice to the
foregoing, if this Agreement shall initially be exchanged by facsimile
transmissions as aforesaid the Parties shall as soon as reasonably
possible thereafter arrange for the signature and exchange of original
signed copies of this Agreement.
20
<PAGE> 1
EXHIBIT 10.8
DATE 12th December 1996
(1) HOME SHOPPING NETWORK INC.
(2) JUPITER SHOP CHANNEL CO;.LTD
---------------------------------------------
SERVICES AND TRADEMARK LICENCE AGREEMENT
---------------------------------------------
<PAGE> 2
THIS SERVICES AND TRADEMARK LICENCE AGREEMENT is made the 12th day of December
1996.
BETWEEN:-
(1) HOME SHOPPING NETWORK INC. a company incorporated in the State of
Delaware United States of America whose principal place of business is
at 2501 118th Avenue North, St. Petersburg, Florida 33716, USA
("HSN").
(2) JUPITER SHOP CHANNEL CO;.LTD a company incorporated in Japan whose
principal place of business is at Tokyo Opera City Tower 35F, 20-2
3-chome, NishiShinjuku, Shinjuku-ku, Tokyo 163-14 Japan ("the
Company").
WHEREAS:-
(1) HSN owns thirty per cent (30%) of the Shares.
(2) HSN has agreed to provide the Services and support to the Company as
provided in this Agreement.
NOW IT IS HEREBY AGREED as follows:-
1. DEFINITIONS
In this Agreement and the recitals hereto the following words and
expressions shall save as otherwise specifically provided have the
following meanings:
"APPLICABLE LAW": with respect to a Party, any domestic or foreign,
federal, state or local statute, law, ordinance, rule, administrative
interpretation, regulation, order, writ, injunction, directive,
judgement, decree or other requirement of any Governmental Authority
applicable to such Party or its properties, business or assets;
"BUSINESS": the Business as defined in the Shareholders Agreement;
"FEES": those fees as referred to in Clause 4;
"HSN PRIVATE LABEL TRADEMARK": the trademarks for which registration
applications have been or may in the future be filed and/or for which
common law rights have been or may in the future be established
through use belonging to HSN or any of its subsidiaries which relate
solely to HSN's private label products with the exception of those
relating to HSN's private label products with the brand label "Essence
of Time";
"HSN TRADEMARKS": the trademarks (including Home Shopping, Home
Shopping Network and The Home Shopping Network) registered or for
which applications have been or may in the future be filed and/or for
which common law rights have been or may in the future be established
through use belonging to HSN excluding the HSN Private Label
Trademarks;
"PARTY" or "PARTIES": a party or the parties to this Agreement;
<PAGE> 3
"SERVICES": the services to be provided by HSN to the Company as set
out in Clause 2;
"SHAREHOLDER": a holder of Shares;
"SHAREHOLDERS AGREEMENT": the Shareholders Agreement dated
--------
and made between Jupiter Programming Co., Ltd(l), HSN(2) and the
Company(3);
"SHARES": ordinary shares of the Company;
"TERRITORY": the country of Japan;
"TRADEMARKS": the HSN Trademarks and the HSN Private Label Trademarks
together.
2. HSN SERVICES
HSN shall provide the Services for the duration of this Agreement
(including any renewal of it whether in full or on some other basis)
exclusively to the Company in the Territory as follows:
2.1 HSN shall at all times (and at no cost to the Company):
2.1.1 provide to the Company photos or samples of products as and
when available;
2.1.2 inform the Company of on-going marketing trends identified in
its customers by item by season and by general market
segments;
2.1.3 provide to the Company either at HSN's principal place of
business or in a manner as may be agreed between HSN and the
Company lists of its best selling products, and the following
information with respect to those products:
(a) product description, specifications and background
information;
(b) selling price(s) and product cost;
(c) time of day airings;
(d) frequency of airings;
(e) return rates;
(f) quantities of the products sold;
(g) whether the product attracted new buyers or repeat
buyers;
(h) sales of units per minute; and
(i) gross profit per minute.
<PAGE> 4
2.2 HSN will use all reasonable endeavours to:
2.2.1 obtain for the Company access to all HSN products (including
obtaining product rights for the Territory when HSN purchases
new products from its various vendors).
2.2.2 provide that the Company shall have access to the lesser of 15%
of an item's SKUs or 500 units per SKU of HSN's inventory, HSN
will provide such merchandise at HSN's cost for the particular
product. HSN and the Company expect that products that are
subject to check fallout will also be available for allocation
to the Company.
2.3 Without prejudice to HSN's obligations hereunder, the Company will be
permitted to have one of its employees located at HSN to help with the
flow of information and communication between HSN and the Company.
The Company will take reasonable steps to ensure that the information
is kept confidential and that persons with access to such information
will be limited.
2.4 HSN and the Company will work together to minimise, wherever possible,
shipping costs to the Territory. The Company will undertake its own
quality control in the Territory unless HSN does on site inspections
at the point of shipment or has already performed this function. HSN
will be reimbursed for any reasonable incremental costs that it may
properly incur for quality control inspections on behalf of the
Company.
2.5 HSN will use all reasonable endeavours to encourage its vendors to
offer identical pricing and terms to the Company to those that HSN
receives and to assist the Company in refining and/or altering
products to meet the marketing needs of the Territory.
2.6 Any products that are identified for liquidation by HSN will be made
available by HSN to the Company at HSN's liquidation value.
2.7 For all products that HSN is buying for its own purposes, all contacts
with vendors should be through HSN. HSN will use all reasonable
endeavours (having regard to the circumstances) to ensure that the
vendors provide the Company with similar quantities, prices, product
information, and specifications to those that are made available to
HSN. HSN and the Company will use their mutual discretion in
addressing unusual issues.
2.8 HSN will use all reasonable endeavours to ensure that products
requested to be tested and aired by the Company will receive a fair
airing on HSN in the hours between 10 a.m. and midnight. HSN will air
for the Company a minimum of five products per month that the Company
identifies it wants aired. In addition, products in excess of five
items per month may be aired by HSN based on the desirability of the
product from HSN's perspective. Any product of the Company to be aired
must reasonably satisfy basic standard HSN product requirements (for
example quality assurance approval, regulatory compliance).
2.9 HSN will allow the Company to broadcast 3-hour remote programs from
the HSN campus twice per year at times requested by the Company. HSN
will determine
<PAGE> 5
whether the program should be simultaneously broadcast on one or more
of HSN's programming services. The Company will reimburse HSN for
any reasonable incremental costs that HSN may properly incur in
respect of this broadcast.
2.10 With regard to HSN employees:
(a) The Company shall remains HSN for its reasonable out of pocket
expenses (e.g., travel, hotel, food) incurred in coming to the
Territory in connection with the Services so long as they have
been approved by the Company before they are incurred;
(b) HSN will provide full time two HSN employees dedicated to the
Company at no cost to Company. Such employees may be hired
specifically for these positions, subject to the approval of
Company, whose approval shall not be unreasonably withheld;
(c) All communication between the Company and HSN will generally
be coordinated through the two HSN dedicated employees for day
to day operational matters and through HSN offices for other
general operational matters. Any communication relating to the
Company and its business in Japan will be coordinated by and
through the Company;
(d) The Company will reimburse preapproved reasonable and proper
expenses, including salaries, relating to extended assistance
requested by the Company from other HSN employees other than
the two dedicated HSN employees. Extended assistance means 12
days of work, excluding travel days, in any 6 month period;
(e) The timing of requests by the Company for assistance from
other HSN employees is subject to mutual agreement of the
Parties; and
(f) Neither Shareholder will hire employees of the other
Shareholder.
2.11 With regard to shipping any products direct from the United States of
America to Japanese consumers in the Territory:
(a) HSN will be given reasonable notice;
(b) Assistance given by HSN must be during times reasonably
acceptable to HSN;
(c) The volume of shipments must be approved by HSN (not to be
unreasonably withheld) so as not to interfere with HSN's
ongoing operations;
(d) The Company must provide shipping labels to HSN unless
otherwise agreed;
(e) HSN will use a carrier designated by the Company and
reasonably acceptable to HSN and the Company shall be
responsible for payment, delivery, and all other matters
directly related thereto; and
<PAGE> 6
(f) Any reasonable incremental costs properly incurred by HSN for
such services will be paid by the Company within 30 days of the
Company receiving an acceptable invoice from HSN.
2.12 HSN will use all reasonable endeavours to secure all on-air rights for
products and related materials for the Territory. If HSN has these
rights, it will provide these to the Company at no cost to the
Company. In addition, HSN will provide at no cost to the Company, all
audio, music, graphics, product B-roll, animated show opens, show
titles, logos, and promotional materials that HSN has from time to
time. Videos will be provided as and when agreed between HSN and the
Company.
2.13 HSN will provide to the Company at no cost to the Company access to
any promotion, production technology equipment or software that HSN
owns so long as the technology access relates to television shopping.
HSN must own any rights prior to sublicensing any technology to the
Company.
2.14 The terms of this Clause 2 shall survive termination of the
Shareholders Agreement and HSN shall continue to comply with such
terms (irrespective of whether it remains a Shareholder or not) until
this Agreement expires or terminates pursuant to Clauses 5 or 6.
2.15 HSN hereby agrees to indemnify and hold the Company harmless on demand
from and against any and all costs, liabilities, obligations, losses,
damages, penalties, actions, judgments, expenses and disbursements of
any kind or nature whatsoever in any way relating to or arising out of
this Clause 2.
2.16 The Company hereby agrees to indemnify and hold HSN harmless on demand
from and against any and all costs, liabilities, obligations, losses,
damages, penalties, actions, judgments, expenses and disbursements of
any kind or nature whatsoever, which HSN suffers as a result of a
default by the Company in complying with its direct contractual
obligations to vendors and third party service providers under orders
for goods and/or services (as appropriate) placed directly by the
Company, or to customers of the Company in the Territory, provided
that this Clause 2.16 shall not apply where HSN also has a contractual
relationship with such vendor, third party service provider or
customer and has not complied in full with its obligations to that
vendor, third party service provider or customer or where HSN's actions
or failure to act have caused or contributed to the Company's default.
2.17 Without prejudice to HSN's obligation to provide the Services, the
Company shall:
(a) communicate its product selection to HSN promptly;
(b) where it has any communication with HSN's vendors, communicate
in a professional manner, provided that this Subclause shall not
apply to a vendor with whom the Company is in dispute;
(c) notify HSN promptly of any problems it encounters with the
performance by HSN of HSN's obligations under this Clause 2
(and for this purpose HSN shall inform the Company of the person
or persons at HSN to whom such matters should be addressed and
will keep the Company informed of any change); and
<PAGE> 7
(d) not intentionally do anything to frustrate the due performance
by HSN of its obligations under this Clause 2.
3. NAMES, LOGOS AND TRADEMARKS
3.1 So far as it proves necessary the Company grants HSN the right subject
to the Company's prior approval to use the appropriate names and logos
of the Company which the Company may designate as being appropriate
for HSN carrying out the Services subject to HSN complying with any
guidelines and conditions imposed by the Company relating to such use.
3.2 Clauses 3.4, 3.5 and 3.7 shall apply for the purposes of Clause 3.1 as
if references to the Company therein were to HSN and vice versa and
references to the HSN Trademarks were to the names and logos of the
Company as referred to in Clause 3.1.
3.3 In consideration of the Company agreeing to pay the Fees to HSN, HSN
hereby grants, to the Company for the duration of this Agreement
(including any renewal of it whether in full or on some other basis)
as follows:
(a) the Company shall have a nontranferable, exclusive licence to
use the HSN Trademarks in the Territory in connection with the
Business;
(b) the Company shall have a nontransferable licence to use the
HSN Private Label Trademarks in the Territory in connection
with selling HSN's private label products in connection with
the Business, which licence shall be exclusive to the Company
except to the extent that a licence or licences or other right
to use the HSN Private Label Trademarks has been granted to
the infomercial joint venture company established by the
Parties and others; and
(c) HSN hereby reserves all rights to the Trademarks, except as
specifically granted herein to the Company, and HSN may
exercise such reserved rights at any time.
3.4 Ownership of Trademarks
The Company acknowledges and agrees that:
(a) HSN is and shall at all times remain the exclusive owner of
the Trademarks;
(b) it will not act inconsistently with HSN's ownership interests;
(c) nothing in this Agreement shall give the Company any right,
title or interest in the Trademarks other than the right to use
the Trademarks on the terms of this Agreement;
(d) it will not attack the validity of HSN's ownership of the
Trademarks;
(e) any goodwill arising solely out of the Company's direct use of
the Trademarks shall inure to the benefit of HSN;
<PAGE> 8
(f) it shall not register (directly or indirectly) any trademark,
trade name or logo identical or substantially similar to any
Trademark. Any registration effected in contravention of this
subclause shall be deemed conclusively to have been effected
on behalf of HSN and upon request shall be transferred to HSN;
(g) the nature and quality of all services rendered in conjunction
with the Trademarks shall conform to reasonable quality and
usage standards set by HSN;
(h) it shall not use the Trademarks in connection with
prescriptions, medications, or pornographic materials without
the prior consent of HSN;
(i) it shall at HSN's request submit samples of materials
containing the HSN Trademarks to enable HSN to confirm that
the Company's services conform to HSN's quality standards.Upon
written notice from HSN, the Company shall take such steps as
are reasonably necessary and which do not unreasonably delay
or otherwise interfere with the Company carrying on the
Business in the ordinary course to bring all services into
conformance with HSN's quality standards; and
(j) it will use the Trademarks in compliance with Applicable Law,
and
(k) it will use the Trademarks in a form approved by HSN (such
approval not to be unreasonably withheld or delayed). Any
requirement imposed by HSN as a condition of their approval
shall be limited to matters necessary to ensure that the
Company's use of the Trademarks complies with this Clause 3.4
and shall not be such as to cause any unreasonable
interference or delay with the Company carrying on the
Business in the ordinary course.
3.5 Infringement
(a) The Company agrees to notify HSN Of.
(i) any unauthorized use or practice of the Trademarks by
third parties as soon as practical after discovery by
the Company of such third party use or practice;
(ii) any legal action or claim alleging a violation of any
of the Trademarks filed, threatened, or asserted
against the Company; and
(iii) any other act, matter or thing that has occurred or may
occur in connection with the licence that the Company
has knowledge of and that may adversely affect the
interests of HSN in the Trademarks.
(b) HSN shall have the right and discretion to bring, control, and
compromise proceedings involving the Trademarks. HSN shall bear
all costs of any such action and any damages or other relief
obtained by HSN as a result of such claim shall be retained
solely by HSN except to the extent that such damages are awarded
in respect of the loss incurred by the Company.
<PAGE> 9
3.6 HSN shall use its best endeavors to secure for the benefit of the Company
rights to use the trademark and trade name rights of vendors and third
party service providers.
3.7 Termination
Except as otherwise provided herein, upon termination or expiration of
this Agreement, the Company will:
(a) discontinue all use of the HSN Trademarks;
(b) cooperate where necessary with HSN to cancel records of the
licences from all government records;
(c) where practical destroy any retained printed or visual
materials in its possession which include a portion of the HSN
Trademarks; and
(d) perform any act or execute any instrument reasonably necessary
to vest in HSN all right, title and interest in and to the
Trademarks and all goodwill associated therewith in the form
reasonably requested by HSN
4. FEES
4.1 Subject to HSN complying with its obligations in this Agreement and to
Clauses 5 and 6 the Company agrees to pay to HSN from the date of this
Agreement an all inclusive fee of twelve (12) instalments of Yen Thirty
seven million five hundred thousand (Y37,500,000) each in arrears with
the first payment due on the date being six (6) months after the date of
this Agreement and each subsequent payment due on the date six months
thereafter up to a total maximum amount of Yen Four Hundred and fifty
million (Y450,000,000),
which without limitation shall include:
(i) all fees, expenses and other costs of any nature whatsoever
incurred by HSN in providing the Services with the exception
of payments under Clauses 2.9, 2.10 (a) and 2.10 (d); and
(ii) any taxes payable by HSN in respect of any of its obligations
under this Agreement or in respect of any costs, fees and
expenses incurred by HSN in connection with this Agreement.
4.2 All payments by the Company shall be made net of any deduction for or
on account of any taxes which the Company is required by Applicable Law
to deduct. If such tax or amount in respect of tax must be deducted
from any amounts payable or paid by the Company under this Agreement,
the Company shall supply to HSN a tax credit, voucher or other receipt
evidencing the deduction.
5. TERM
This Agreement shall continue in full force and effect (unless
terminated pursuant to Clause 6 hereof) for a period of six (6) years
from the date hereof (unless the Parties have agreed by the expiry
of the fifth (5th) year from the date hereof that the
<PAGE> 10
Agreement will continue for a longer period either in full or on some
other basis) or if earlier until the Company ceases trading for
whatever reason whereupon this Agreement will automatically terminate
with neither Party having a claim against the other save for any
breach by a Party prior to the date of termination.
6. DEFAULT
6.1 Either Party may (without prejudice to its other rights and remedies)
by notice in writing to the other Party terminate this Agreement at
any time during the term of this Agreement if the other Party shall:
6.1.1 have committed any material breach of any of its obligations
hereunder and which such other Party shall not have remedied
(or taken substantive steps to diligently rectify the same)
within fifteen (15) days of receipt of written notification
thereof, or
6.1.2 go into receivership or liquidation or some analogous
procedure,
whereupon this Agreement win automatically terminate with neither
Party having a claim against the other save for any breach by a Party
prior to the date of termination.
6.2 Without prejudice to the rights of the Company under Clause 6.1 if HSN
shall commit a breach of any provision of this Agreement in
circumstances where there is a persistent lack of performance by HSN
and/or where HSN fails to provide products or any of the Services to
the Company on a timely basis or where the performance by HSN of its
obligations under this Agreement is in the Company's opinion in any
other way unsatisfactory then HSN shall, at its own cost, promptly
make arrangements to rectify the problem in the manner requested by
and satisfactory to the Company as dictated by the circumstances
(e.g., provide for another shipment of the product by expedited
transportation or by substitution of another substantially similar
type of product for sale by the Company) and the Parties recognize
that facts and circumstances surrounding each breach may vary but the
Parties agree the following:
(i) HSN shall be responsible for paying all additional
costs that may be incurred by it or the Company,
(ii) The Company may at any time in its discretion suspend
payment of the Fees (or such proportion that the
Company considers appropriate);
(iii) HSN shall also provide commercial remedies to the
Company similar to those that it provides to its
vendors or seeks from its vendors in the normal
course of its business;
(iv) In the event that (other than set out in this
Agreement) a remedy to the particular issue cannot be
agreed within a fifteen (15) days of the issue
arising, then the Presidents of HSN and the Company
(or an authorized person designated by such
Presidents) will attempt to negotiate a mutually
acceptable agreement. In the event that no such
agreement can be reached within a further period of
ten (10) days then the Parties agree that the
arbitration provisions set forth in Clause 13.2 shall
be
<PAGE> 11
applicable with instructions to the arbitrators that
the panel may award the Company in its sole judgement
and discretion any form of monetary penalty which it
deems appropriate.
7. REPRESENTATIONS AND WARRANTIES
7.1 Each of the Parties hereto represents warrants and undertakes to each
other that:
(a) it is a company duly incorporated and validly existing in all
respects under the laws of the jurisdiction of its incorporation
with full power and authority to own its assets and to carry on
its business as it is now being conducted and no action has been
taken or threatened (whether by it or any third party) for or
with a view to its or their liquidation, receivership or
analogous process; and
(b) so far as it is aware having made reasonable enquiry no
litigation or administrative or arbitration proceedings before
or of any court, judicial, administrative or governmental
authority, arbitrator(s) or other body is taking place, pending
or threatened against it or against any of their respective
assets which might have a material adverse effect on its
business, assets, condition or operations taken as a whole, or
might adversely affect its ability duly and punctually to
perform and observe all its obligations hereunder.
8. INVALIDITY
Should any provision of this Agreement be or become ineffective for
reasons beyond the control of the Parties, the Parties shall use
reasonable efforts to agree upon a new provision which shall as nearly
as possible have the same commercial effect as the ineffective
provision.
9. FORCE MAJEURE
9.1 On the occurrence of an event which would render compliance by a Party
of its obligations under this Agreement:
(a) illegal according to the law of any jurisdiction in which it
is resident or incorporated or of the country in which
performance of the obligation is to take place; or
(b) otherwise impossible to perform;
and that event is also outside of that Partys control, its relevant
obligations under this Agreement shall be suspended indefinitely until
performance by that Party is no longer illegal or impossible (as the
case may be), at which time that Party's obligations under this
Agreement shall resume in full force and effect.
9.2 If the suspension under Clause 9.1 continues for a period of six (6)
months or longer, either Party shall have the right to terminate this
Agreement upon written notice to the other.
<PAGE> 12
9.3 The Party whose obligations are so suspended shall not be liable to
the other Party for any breach of this Agreement resulting from its
failure to perform those relevant obligations during the period of
suspension.
10. COSTS
Each of the Parties hereto shall pay its own costs, charges and
expenses connected with the preparation and implementation of this
Agreement and the transactions contemplated by it.
11. NOTICES
Any notice or other communication given or made under this Agreement
shall be in writing in English and, without prejudice to the validity
of any other method of service, may be delivered via facsimile or
personally or by courier addressed as follows:
(a) If to the Company:
Jupiter Shop Channel Co;. Ltd.
Tokyo Opera City Tower 35F
20-2, Nishi-Shinjuku 3-chome
Shinjuku-ku
Tokyo 163-14
Japan
Attention: President
Fax: 81-3-5353-7056
(b) If to HSN:
2501 118th Avenue North, St. Petersburg
Florida 33716
U.S.A.
Attention: President
Fax: 813-573-0866
or to such other address or facsimile number as the relevant addressee
may hereafter by notice hereunder substitute.
12. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of Japan.
13. DISPUTES
13.1 Other than as provided in Clause 6.2, in the event of a disagreement
among the Parties, including a disagreement regarding this Agreement,
or any breach thereof, each Party will use its best efforts to resolve
such disagreement amicably and where applicable the Party in breach
shall promptly take all reasonable steps to remedy such breach. If, at
the end of fifteen(15) days from the occurrence of such disagreement
or breach, no resolution has been reached the President of each Party
or an authorised person designated by the President of each Party will
meet to resolve the matter. If they, too,
<PAGE> 13
are unable to reach a mutually agreeable resolution within thirty
(30) days of the matter being referred to them, the matter will be
arbitrated in accordance with Clause 13.2.
13.2 Any and all disputes with respect to which such authorised persons
failed to reach a mutually agreeable resolution shall be finally
settled by arbitration conducted in London under UNCITRAL Arbitration
Rules by three (3) arbitrators (none of whom shall be Japanese or US
citziens) in the English language. The award shall be final and
binding upon the Parties.
14. ENTIRE AGREEMENT
This Agreement replaces, supersedes and cancels all other previous
and contemporaneous arrangements, understandings, representations or
agreements between the Parties either oral or written with respect
to the subject matter of this Agreement and expresses and constitutes
the entire agreement between the Parties.
15. NO PARTNERSHIP/AGENCY
Noting herein contained shall be construed or deemed to consitute a
partnership or joint venture between the Parties and save as
expressly herein provided no Party shall hold itself out as the
agent of the other.
16. SURVIVAL OF PROVISIONS
The expiry or earlier termination of this Agreement shall not
operate to terminate any provisions which are expressed to continue
in force thereafter.
17. EXECUTION
This Agreement may be executed in counterparts (which may be
exchanged by facsimile transmissions) each of which shall be an
original and which together shall constitute one document. Without
prejudice to the foregoing, if this Agreement shall initially be
exchanged by facsimile transmissions as aforesaid the Parties shall
as soon as reasonably possible thereafter arrange for the signature
and exchange of original signed copies of this Agreement.
18. NO ASSIGNMENT
No Party may assign its rights under this Agreement.
19. WAIVERS, REMEDIES CUMULATIVE, AMENDMENTS, ETC.
19.1 No failure or delay by any of the Parties in exercising any right,
power or privilege under this Agreement shall operate as a waiver
thereof nor shall any single or partial exercise by any of the
Parties of any right, power or privilege preclude any further
exercise thereof or the exercise of any other right, power or
privilege.
19.2 The rights and remedies herein provided are cumulative and not
exclusive of any rights and remedies provided by law.
<PAGE> 14
19.3 No provision of this Agreement may be amended, modified, waived,
discharged or terminated, otherwise than by the express written
agreement of the Parties nor may any breach of any provision of this
Agreement be waived or discharged except with the express written
consent of the Parties not in breach.
20. ENGLISH LANGUAGE
Where, this or any other English language agreement between the
Parties or referred to herein is translated into Japanese for the
convenience of the Parties or some of them the English language
version hereof/thereof shall for all purposes be deemed to be the
definitive and binding version thereof.
IN WITNESS WHEREOF the Parties hereto have executed this Agreement on
the date first written above.
HOME SHOPPING NETWORK INC.,
By its duly authorised executive officer
Name: /s/ Michael W.D. McMullen
-------------------------------------
Title: President
------------------------------------
JUPITER SHOP CHANNEL CO;. LTD.
By its duly authorised executive officer
Name: /s/
-------------------------------------
Title: President
------------------------------------
<PAGE> 1
EXHIBIT 10.9
A.Prot. 1997/13 Vorab-Ausfertigung
NOTARIAL DEED
PURCHASE & SALE AGREEMENT
Negotiated at Basel/Switzerland, this 16th (sixteenth) day of January 1997
(nineteen hundred and ninety-seven)
Before me, the undersigned notary
STEPHAN CUENI
in my offices in Basel, Switzerland, today appeared
1. Attorney-at-Law Dr.Hans-Jorg Ziegenhain, born August 9, 1961, German
citizen, with business address c/o DOSER AMERELLER NOACK,
Bethmannstrasse 50-54, D-60311 Frankfurt am Main, and private domicile
at Wilhelm-Bonn-Str. 6C, D-61476 Kronberg, known by person,
not acting on his own behalf, but as representative with authority of
representation and exempted from the restrictions imposed by Section
181 German Civil Code in the name and on behalf of
a) HSN Home Shopping Network GmbH i.Gr., a German company limited
by shares in process of incorporation with head office at
Bethmannstr. 50 - 54, D-60311 Frankfurt am Main, Germany,
to be registered in the Commercial Register at the local
court of Frankfurt am Main, according the attached certified
copy of the Deed of Incorporation dated December 12, 1996, and
the attached written power of attorney dated January 15, 1996
(recte 1997)
-hereinafter "HSN GmbH"-
b) Home Shopping Network Inc., 11831 30th Court North, St.
Petersburg, Florida 33716, U.S.A., according the
aforementioned power of attorney
-hereinafter "HSN"-
<PAGE> 2
2
2. Attorney-at-Law Philipp Blomeyer, born June 8, 1964, German citizen,
with business address c/o Schickendanz Holding - Stiftung & Co.KG,
Nurnberger Str. 91 - 95, D-90762 Furth, and with private domicile at
Hallerwiese 10, D-90419 Nurnberg, identified by his German
Personalausweis,
not acting on his own behalf but
a) as representative with authority of representation and
exempted from the restrictions imposed by Section 181 of the
German Civil Code for Quelle Schickedanz AG & Co., a German
limited partnership with head office at Nurnberger Strasse 91
- 95, D-90762 Furth, Germany, registered with the Commercial
Register at the local court of Furth under HRA 2425,
according the attached certified power of attorney dated
December 17, 1996, and the attached certified extracts from
the Commercial Register concerning the partnership (HRA 2425)
and its unlimited partner (HRB 4990) dated December 13, 1996,
-hereinafter "QUELLE"-
b) as representative without authority of representation and
waiving any personal liability for Mr. Thomas Kirch, born
______________________, German citizen, with private domicile
at Felix-Dahm-Str. 8. D-81925 Munchen, Germany
-hereinafter "KIRCH"-
c) as representative without authority of representation and
waiving any personal liability for Dr. Georg Kofler, born
______________________, German citizen, with private domicile
at Heinrich-Knote-Str. 14, D-82343 Pocking,
-hereinafter "DR. KOFLER"-
The persons appeared requested this Deed including certain Exhibits hereto to be
recorded in the English language. The acting Notary Public who is in sufficient
command of the English language ascertained that the persons appeared are also
in command of the English language. After having been instructed by the acting
Notary, the persons appeared waived the right to obtain the assistance of a
sworn interpreter and to obtain a certified German translation of this Deed
including the English Exhibits hereto.
The persons appeared, acting as indicated, asked for the Notarization of the
following:
<PAGE> 3
3
PREAMBLE
WHEREAS, HSN sells a variety of consumer goods and services by means of customer
interactive electronic retail sales programmes which are transmitted via
satellite to cable television systems, affiliated broadcast television stations
and satellite dish receivers (hereinafter "HSN GmbH Business"). HSN GmbH is a
German limited liability company, newly formed for purposes of engaging in the
German electronic retail market and is indirectly wholly owned by HSN.
WHEREAS, H.O.T. Home Order Television GmbH & Co.KG (hereinafter "H.O.T.") is
Germany's first and only television shopping network, operating a teleshopping
T.V. programme comprising in particular the distribution of products and
merchandise by means of interactive home-ordering television (hereinafter
"H.O.T. Business").
WHEREAS, HSN GmbH intends to acquire a 29% partnership interest in H.O.T. and a
29% share interest in H.O.T.'s General Partner, Home Order Television
Verwaltungs GmbH (hereinafter "General Partner").
WHEREAS, Quelle and Kirch (hereinafter also referred to as "Sellers") are
willing to sell an aggregate interest of 29% in the Limited Partnership and
an aggregate interest of 29% in the General Partner.
WHEREAS, Dr. Kofler acceeds to this Agreement with respect to the provisions set
forth below in Section 2.5, Section 5 and Section 12 in his capacity as
shareholder of the General Partner and in his capacity as a limited partner of
H.O.T.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
Section 1 CURRENT STATUS
1.1 H.O.T.'s aggregate liability capital ("Haftkapital") of DM 5,000,000.00
(hereinafter "Liability Capital") is held as follows:
Quelle holds an aggregate partnership interest ("Beteiligung
am Festkapital") in the amount of DM 2,500,000.00.
Kirch holds an aggregate partnership interest in the amount of
DM 2,000,000.00.
<PAGE> 4
4
Dr. Kofler holds an aggregate partnership interest in the
amount of DM 500,000.00.
The above partnership interests, save for Dr. Kofler's, are hereinafter
referred to as the "Partnership Interests".
1.2 The General Partner's aggregate nominal share capital of DM 50,000.00
(hereinafter "Share Capital") is held as follows:
Quelle holds a share in the nominal amount of DM 25,000.00.
Kirch holds a share in the nominal amount of DM 20,000.00.
Dr. Kofler holds a share in the nominal amount of DM 5,000.00.
The above shares, save for Dr. Kofler's, are hereinafter referred to as
the "Shares".
1.3 Sellers and Dr. Kofler have entered into a cooperation agreement by
written instrument dated December 7, 1995 which amended the former
cooperation agreement, originally entered into by Quelle and Pro 7
Televisions GmbH, in the meantime renamed into ProSieben Media
Aktiengesellschaft (hereinafter "ProSieben") under the notarial deed of
the notary public Dr. Dieter Granicher, Basel, of April 24, 1995 (deed
roll A.Prot. 1995/34), to the effect that, as to the cooperation
agreement, ProSieben was succeeded by Kirch and Dr. Kofler (hereinafter
jointly referred to as the "Existing Cooperation Agreement").
Section 2 SALE AND ASSIGNMENT OF PARTNERSHIP INTERESTS AND SHARES
2.1 Sellers hereby sell to HSN GmbH with economic effect ("mit
wirtschaftlicher Wirkung") as of the Effective Date (as defined in
Section 6.1) and hereby assign with effect of the Closing Date (as
defined in Section 6.4) each a portion of their respective Partnership
Interests in the following amounts:
Quelle DM 950,000.00
Kirch DM 500,000.00
(hereinafter the "Acquired Partnership Interests").
<PAGE> 5
5
The Acquired Partnership Interests in the aggregate amount of DM
1,450,000.00 equal a 29% partnership interest of HSN GmbH in HOT. The
transfer in rem ("dinglicher Ubergang") shall be subject to the
conditions precedent set forth in Section 6.4. and the registration of
HSN GmbH in the Commercial Register as successor in title to the
Acquired Partnership Interests ("Sonderrechtsnachfolge"). No additional
conditions precedent exist as to the acquisition of the Acquired
Partnership Interests. The passing of risk occurred as of the Effective
Date (defined in Section 6.1).
2.2 Sellers hereby sell with economic effect as of the Effective Date and
hereby assign as of the Closing Date by way of partitioning their
Shares in the General Partner the following fractions of shares,
including all rights and obligations pertaining thereto:
Quelle DM 9,500.00
Kirch DM 5,000.00
(hereinafter the "Acquired Shares").
Consent of General Partner to the above partitioning of Shares is
attached in copy hereto as Exhibit 2.2. The assignment of the Shares is
made subject to the compliance with the conditions precedent described
under Section 6.4. No additional conditions precedent exist as to the
assignment of the Acquired Shares. The passing of risk occurred as of
the Effective Date.
2.3 HSN GmbH purchases the above Acquired Partnership Interests and
Acquired Shares and hereby accepts their transfer and assignment
subject to terms and conditions of this Agreement.
2.4 Sellers shall not dispose of any of the above Partnership Interests
sold to HSN GmbH between the Effective Date and the registration in the
Commercial Register of HSN GmbH as successor in law without prior
written consent of HSN GmbH. Further, Sellers shall not exercise any
rights conferred with the Acquired Partnership Interests without prior
written approval of HSN GmbH. Sellers shall account for and shall be
severally liable for any breach of the foregoing undertakings.
2.5 Sellers and Dr. Kofler each hereby waive any rights of first refusal,
preemptive rights or any rights of similar nature granted to them under
the existing H.O.T. partnership agreement (hereinafter "Existing
Partnership Agreement"), or the existing Articles of Association for
the General Partner (hereinafter "Existing Articles of Associations")
<PAGE> 6
6
or the Existing Cooperation Agreement and consent hereby to the
transfer of the Acquired Partnership Interests and of the Acquired
Shares to HSN GmbH.
Section 3 PURCHASE PRICE
3.1 The Purchase Price to be paid by HSN GmbH for the Acquired Partnership
Interests and the Acquired Shares shall be
US$ 15,000,000.00
(in words: 15 million US-Dollars)
(hereinafter the "Purchase Price"). Permission of the Deutsche
Bundesbank pursuant to Section 3 Wahrungsgesetz is attached hereto as
Exhibit 3.1.
3.2 The Purchase Price for the Acquired Partnership Interests and
the Acquired Shares is payable as follows:
3.2.1 The first installment of US$ 5,000,000.00 was placed in escrow
under the escrow agreement dated November 20, 1996, with any
interest on such account payable to Sellers after HSN GmbH
has been reimbursed for all of its escrow-related costs. The
first installment shall be released upon the Closing Date (as
defined in Section 6.3).
3.2.2 The second installment of US$ 5,000,000.00 shall become due
and payable on April 1, 1997.
3.2.3. The third installment of US$ 5,000,000.00 shall become due and
payable on September 1, 1997.
3.3 Any monies payable under these provisions to Sellers shall be paid into
Quelle's account with Deutsche Bank AG, Nurnberg, account no.0191650,
sort code 760 700 12, swift code deutdemm 760. Quelle shall arrange
that the monies received in the above account shall be distributed to
the other Sellers in proportion to their Partnership Interests and
Shares sold hereunder. With payment into the above account, Sellers'
respective payment demands against the HSN GmbH are deemed to be
fulfilled.
<PAGE> 7
7
Section 4 BALANCE SHEET ADJUSTMENT AS OF AUGUST 31, 1996
4.1 Sellers shall make a payment to H.O.T. equal to the net deficit ("nicht
durch Eigenkapital gedecker Fehlbetrag") as shown in the Management
Accounts as of August 31, 1996, attached hereto as Exhibit 4.1, which
have been prepared by H.O.T.'s management in accordance with generally
accepted German principles of accounting and preparation of balance
sheets in keeping the continuity and valuation principles compared to
H.O.T.'s former audited annual accounts (hereinafter "Management
Accounts"). Such payment shall be referred to as Balance Sheet
Adjustment Payment.
4.2 HSN GmbH will not have any responsibility for any liability, which for
purposes of this Clause shall include any liabilities within the
meaning of Section 266(3)(C) HGB, any accruals to be provided for in
connection with employee benefits (such as Christmas and holiday pay),
tax accruals, deferred payments ("erhaltene Anzahlungen") and accruals
for pending or conditional sales ("bedingte Umsatze") (hereinafter
jointly "Liabilities") of which H.O.T. or the Sellers were aware or
should have been aware of, except as reflected in the Management
Accounts. Sellers shall, in lieu of any other remedies, be jointly and
severally liable for putting H.O.T. in the same financial position that
it would have been in if the liabilities were properly disclosed in the
Management Accounts and had thereby increased the Balance Sheet
Adjustment Payment.
4.3 All payments of Sellers and Dr. Kofler identified as partner
contributions ("Gesellschafterzuschusse") provided to H.O.T. since
September 1, 1996, shall be credited against any Balance Sheet
Adjustment Payment determined in accordance with the provisions above.
If and to the extent, the aggregate amount of these partner
contributions exceed the Balance Sheet Adjustment Payment (hereinafter
the "Excess Amount"), such Excess Amount shall be credited against
Sellers' obligation to compensate losses of H.O.T. as from September 1,
1996. In such case HSN GmbH shall make a contribution to H.O.T.
equalling 29/71 times the Excess Amount within ten (10) banking days
after the Closing Date.
Section 5 CHANGES TO THE CORPORATE STRUCTURE AND THE CORPORATE GOVERNANCE
5.1 Immediately after the Closing Date, the parties to this Agreement
<PAGE> 8
8
5.1.1 will cause a general meeting of the partners of the H.O.T. to
be convened and that the Existing Partnership Agreement of the
Limited Partnership shall be amended in accordance with the
approved terms as set forth in Exhibit 5.1.1 hereto;
5.1.2 shall undertake jointly to arrange for filing of the certified
application to the Commercial Register regarding the change of
title in the Partnership Interests and the amendment of the
Partnership Agreement, and HSN GmbH shall take all action to
deliver such application to the Commercial Register received
pursuant to Section 6.4.2 to the competent court for
registration of the above changes.
5.2 Immediately after the Closing Date, the Parties shall cause a general
meeting of the shareholders of the General Partner to be convened and
that
5.2.1 the Existing Articles of Association shall be changed in
accordance with the approved terms set forth in Exhibit 5.2.1
hereto in notarial form before the notary public Dr. Rudiger
Graf von Stosch, Munchen, Maximilianplatz, 10;
5.2.2 the existing rules of procedure for the managing directors
shall be changed in accordance with the approved terms as
set forth in Exhibit 5.2.2 hereto;
5.2.3 the existing rules of procedure for the advisory board shall
be changed in accordance with the approved terms as set forth
in Exhibit 5.2.3 hereto.
5.3 The Parties hereto hereby execute the Joint Venture Agreement as set
forth in Exhibit 5.3 hereto, which shall supersede and replace the
Existing Joint Venture Agreement as from the Closing Date (An English
translation of Exhibit 5.3 is also attached to this deed, but does not
form part of the deed and shall not be deemed to be notarized).
5.4 The Partnership Agreement, the Articles of Association, the Joint
Venture Agreement, rules of procedure for the managing directors and
the rules of procedure for the advisory board, as amended in each case
in accordance with the above provisions, shall ensure that all actions
set forth in Exhibit 5.4 shall require the approval of 90% or more of
the shareholders of the General Partner, the partners of the Limited
Partnership, or their authorized representatives appointed to the
advisory board (hereinafter "Veto Right Issues"). All of the Veto Right
Issues may be amended by the shareholders of the General Partner or the
limited partners of the Limited Partnership by a 90% supermajority.
<PAGE> 9
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Section 6 EFFECTIVE DATE, SIGNING DATE, CLOSING DATE
6.1 Effective Date shall be September 1, 1996, 0.00 hours (hereinafter
"Effective Date").
6.2 Signing Date shall mean the day on which this Agreement shall be
notarized (hereinafter "Signing Date").
6.3 Closing Date shall mean the day on which the conditions precedent
under Section 6.4 are complied with (hereinafter "Closing Date).
6.4 On the Closing Date all of the following conditions must be fulfilled:
6.4.1 premerger clearance of the Federal Cartel Office, Berlin, was
received in accordance with Section 24a GWB or any of the time
periods contained in Section 24a GWB have lapsed without the
issuance of an injunction prohibiting the transaction
contemplated hereunder;
6.4.2 delivery of the duly certified applications to the Commercial
Register pursuant to Section 5.1.2 by Sellers to HSN GmbH.
Section 7 REPRESENTATIONS AND WARRANTS of HSN GmbH AND HSN
7.1 HSN GmbH represents and warrants with regard to Section 7.1.1 and
Section 7.1.2 as of the Signing Date and HSN represents and warrants
with regard to Section 7.1.3 as of the Signing Date
7.1.1 Organization
HSN GmbH is a limited liability company in formation ("GmbH i.
Gr.") duly organized, validly existing and in good standing
under the laws of the Federal Republic of Germany and has the
necessary power and authority to conduct its business.
7.1.2 Corporate Power
HSN GmbH has the corporate power and authority to execute and
deliver this Agreement and to consumate the transactions
contemplated hereunder. The execution and delivery of this
Agreement by HSN GmbH and the
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consummation by HSN GmbH of the transactions contemplated
hereunder, have been duly authorized by HSN GmbH's
shareholders and no other corporate proceeding on the part of
HSN GmbH is necessary to authorize this Agreement or the
consummation of the transactions contemplated hereunder.
7.1.3 No Competitive Restrictions
The execution and implementation of this Agreement does not
constitute a violation of any non-compete restrictions HSN is
subject to in relation to any third parties.
7.2 If and to the extent, that representations and warranties of HSN GmbH
or HSN, as the case may be, are untrue, misleading or broken, HSN GmbH
shall (i) put Sellers in a position as if such representations and
warranties were true by making the representations and warranties true
("Naturalrestitution") or, at Sellers option, shall (ii) pay damages
for nonfulfilment of the representations and warranties
("Schadensersatz in Geld").
Section 8. REPRESENTATIONS AND WARRANTIES OF SELLERS
8.1 Sellers represent and warrant as of the Effective Date, unless provided
otherwise, hereinafter:
8.1.1 Compliance with Articles
The execution of this Agreement and the performance of all
obligations undertaken hereunder have, as of the Signing Date,
been validly authorized by all necessary corporate action, and
the obligations undertaken by Sellers under this Agreement
constitute valid, legal and binding, obligations enforceable
against each of them in accordance with the terms of such
authorization.
8.1.2 Corporate Power
Each of Sellers, as of the Signing Date, is either a
corporation duly incorporated and validly existing in all
respects under the laws of the jurisdiction of their
respective incorporation or an individual with full power
<PAGE> 11
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and authority to own its assets and to carry on the H.O.T.
business as presently conducted.
8.1.3 No Breach of Third Party Obligations
Neither the execution and the delivery by Sellers of this
Agreement nor the performance or observance of any of their
obligations hereunder does or will, as of the Signing Date,
conflict with, or result in a breach or violation of any
judgement, order or decree, indenture, mortgage, trust deed,
agreement or other instrument, arrangement, obligation or duty
in each case by which either Seller is bound at the date
hereof or cause any limitation on any of either Sellers'
powers whatsoever, howsoever imposed, or on the right or
ability of the directors of either Seller to exercise such
powers, to be exceeded.
8.1.4 Existence of Partnership Interests and Shares
As of the Signing Date, all Partnership Interests and Shares
listed in Section 1 above exist in the amounts set out
therein, are fully paid up and have not been repaid; the
Partnership Interests and the Shares and all rights attaching
thereto are free and clear of any third-party rights and have
not been pledged, assigned, charged or used as a security
other than as listed in Exhibit 8.1.4; Sellers have all
right, authority and power to transfer the Partnership
Interests and Shares.
Sellers and Dr. Kofler are as of the Signing Date the only
partners in H.O.T. and the only shareholders in the General
Partner, and there are no options or agreements outstanding
which call for the grant to any other person of any
partnership or other interest in H.O.T. or the General
Partner, as the case may be.
8.1.5 Bankruptcy
As of the Signing Date, no bankruptcy or judicial composition
proceedings concerning the assets of H.O.T. or the General
Partner or any of the Sellers exist pursuant to the Bankruptcy
or Reorganisation Code or the Avoidance Law
("Anfechtungsgesetz") and there are no grounds which could
justify the voidance of this Agreement and that the
participation of each Seller in
<PAGE> 12
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H.O.T. or the General Partner does not represent the whole or
a substantial part of the assets of any of the Sellers within
the meaning of Section 419 BGB.
8.1.6 Powers
As of the Signing Date, H.O.T. is a limited partnership duly
constituted and validly existing in all respects under the
laws of the Federal Republic of Germany with full power and
authority to own its assets and to carry on its business as
previously conducted.
As of the Signing Date, General Partner is a limited liability
company duly constituted and validly existing in all respects
under the laws of Germany with full power and authority to own
its assets and to carry on its business as previously
conducted.
8.1.7 AGREEMENTS
To the best knowledge of Sellers, all material agreements,
rights and duties binding on H.O.T. and/or enforceable against
H.O.T., in particular those specified hereunder, are made in
the ordinary course of business and have no material negative
effect on the financial condition or the H.O.T. Business, and
to the best knowledge of Sellers, those agreements and rights
remain unchanged and no circumstances exist, including the
transaction contemplated hereunder, which will impair or
endanger the unaltered continuation of these agreements. The
foregoing statements apply to all of the agreements of H.O.T.
including but not limited to the following agreements and
obligations:
8.1.7.1 employment agreements and pension and benefit plans
for Kirch, Dr. Kofler, general managers, Prokurists
and senior employees ("leitende Angestellte") of
H.O.T. and/or General Partner;
8.1.7.2 other employment contracts and service agreements
providing for an annual remuneration of more than DM
100,000.00, bonus, commission entitlements or similar
pension and benefit plans or having a termination
period of more than one year;
<PAGE> 13
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8.1.7.3 any consultancy agreements providing for an annual
remuneration of an average more than DM 50,000.00, or
having a termination period of more than six months;
8.1.7.4 any material technical assistance, programming,
licence, and production agreements;
8.1.7.5 material agreements with customers or suppliers as
well as agreements with customers and suppliers
outside the ordinary course of business, in
particular any agreements granting deductions,
discounts, credits or prepayments;
8.1.7.6 material rental and lease agreements, other than
usual leasing agreements relating to office
equipment;
8.1.7.7 loan, credit, guarantee and security agreements,
letters of credit and surety undertakings of any
nature, and loans to employees in excess of two
months' salaries;
8.1.7.8 material sales representative, agency and
distribution agreements;
8.1.7.9 insurance policies taken out by H.O.T. or the General
Partner, other than insurances for company cars;
8.1.7.10 restrictive covenants or agreements limiting any of
H.O.T.'s or General Partner's rights to deal in
certain products or in certain territories, or any
other restrictive covenants or agreements limiting
H.O.T.'s or General Partner's business as carried out
prior to the Signing Date;
8.1.7.11 any material agreements with or other rights and
obligations to Sellers or any of their relatives
according to Section 15 AO or any entity in which any
or several of them has a financial interest of more
than 5%, a list of which is set out in Exhibit
8.1.7.11;
8.1.7.12 any other material agreements and/or commitments
involving a consideration or liability per
agreement or in total of more than DM 50,000.00 per
annum for H.O.T. or the General Partner or providing
for performance beyond June 30, 1997;
<PAGE> 14
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8.1.7.13 works council agreements and agreements with trade
unions, other than industry-wide regional or
supraregional collective bargaining agreements;
8.1.7.14 all rights of third parties regarding the acquisition
of rights to H.O.T. or the General Partner.
8.1.8 Performance of Agreements
H.O.T. and the General Partner have performed and complied,
to the best knowledge of Sellers, with all material
obligations under the agreements referred to in Section 8.1.7
above and have done everything which is necessary in order to
be in a position to meet obligations under these agreements
when they become due. To the best knowledge of Sellers, none
of the parties referred to in Section 8.1.7 above is entitled
to terminate or modify its obligations thereunder as a result
of the execution of this Agreement. To the best knowledge of
Sellers, H.O.T. and General Partner have fulfilled all
requirements of these agreements and no event has occurred
which, but for the passage of time, would constitute a default
of such agreements. Prices on all agreements, bids, orders and
quotes of H.O.T. or the General Partner which were fully
enforceable against H.O.T. or the General Partner or given by
H.O.T. or the General Partner to any affiliates of ProSieben
as of the Signing Date, are calculated above cost and are
negotiated at arm's length.
H.O.T has in effect a transponder lease agreement through
April 2005 for a monthly lease payment not exceeding DM
850,000.00 as from January 1, 1997 per month exclusive of
V.A.T. and that SES has approved and consented to the
sub-leasing of the transponder agreement to H.O.T. in due
form.
8.1.9 Intellectual Property Rights
To the best knowledge of Sellers, H.O.T. owns and/or retains
all intellectual property rights used in the present or
planned business activities of H.O.T. or the General Partner,
including the rights from notifications, and to the best
knowledge of Sellers
<PAGE> 15
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8.1.9.1 these rights are the unencumbered and unlimited
property of H.O.T. or the General Partner and no
rights of third parties to these intellectual
property rights or their use exist;
8.1.9.2 none of the intellectual property rights have been
charged, nor have been threatened to be charged
with infringement and there exists no basis on which
any of these rights are threatened with nullification
or invalidation;
8.1.9.3 neither these intellectual property rights nor their
use infringes upon the intellectual property rights
of third parties;
8.1.9.4 all payment of fees and other measures needed to
maintain the intellectual property rights have been
undertaken fully and in a timely manner; and
8.1.9.5 the business of H.O.T. or the General Partner does
not infringe any intellectual property right of a
third party.
8.1.10 Software
To the best knowledge of Sellers, the software developed, used
and applied by H.O.T. or the General Partner (hereinafter "the
Software"), the copyrights relating thereto and the rights
accruing thereunder are not charged, burdened or encumbered in
any way or any rights of any employees or sub-contractors
whether arising under the Employees Invention Act
("Arbeitnehmer-erfindungsgesetz") or on any other legal basis
attaching thereto. To the best knowledge of Sellers all source
codes relating to the developed Software are the unlimited
property of H.O.T. or the General Partner and have only been
supplied to third parties in the ordinary course of business.
All maintenance agreements relating to the Software have been
duly and completely performed.
8.1.11 Insurances
To the best knowledge of Sellers, H.O.T. or the General
Partner, as the case may be, maintain in full force and effect
for their own benefit, policies of insurance valid for a
period of at least up to December 31, 1996 against fire,
water, theft and any other usually insured business risks, in
particular with
<PAGE> 16
16
regard to statutory liabilities and business interruption in
adequate amounts to provide reasonable protection for the
business and assets of H.O.T. or the General Partner. To the
extent, H.O.T. or the General Partner have benefitted or
benefit of umbrella insurance agreements taken out by Sellers,
ProSieben or any of their affiliates, H.O.T. or the General
Partner do not owe any outstanding premiums nor shall H.O.T.
or the General Partner be charged back for any such premiums
by Sellers or their respective affiliates, relating to periods
prior to the Closing Date.
8.1.12 Assets
To the best knowledge of Sellers, all assets of H.O.T. are in
a condition which is commensurate with the H.O.T. Business or
General Partner's business and in an adequate condition to
carry on the H.O.T. Business in substantially the same fashion
as carried out prior to the Closing Date. To the best
knowledge of Sellers, H.O.T. or the General Partner, as the
case may be, are in the lawful possession or are the
unrestricted owners, as the case may be, of all such assets
which are necessary to carry out the H.O.T. Business in the
same fashion as prior to the Closing Date. Except as disclosed
in Exhibit 8.1.12 each of the material assets of H.O.T. is the
absolute property of H.O.T. free from any mortgage, charge,
pledge, lien, encumbrance, license, lease, right of
pre-emption or any other third party interest and none of the
assets of the same subject to any hire, hire purchase,
conditional or credit sale or any other agreement for payment
on deferred terms.
8.1.13 Permits and Licenses
H.O.T. has obtained all material licenses, permissions and
consents necessary to carry on its business as presently
conducted and is not in breach of any of the same. The current
media law situation, as understood by the Sellers, is
described in Exhibit 8.1.13.
8.1.14 Litigation and Compliance
To the best knowledge of Sellers, there is no litigation or
administration or arbitration proceeding before any court,
judicial, administrative or governmental authority or
arbitrators or other body to which H.O.T. or the
<PAGE> 17
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General Partner is a party, nor to the best of their knowledge
is any of such event pending or threatened against them or
against any of their assets which might have a material
adverse effect on their ability to duly and punctually
perform and observe all of their obligations hereunder,
except as set forth in Exhibit 8.1.14.
8.1.15 Taxes and Accounts
To the best knowledge of Sellers, H.O.T. and General Partner
have duly complied with all material legal requirements
relating to taxation and H.O.T. and General Partner have in
particular
8.1.15.1 properly kept all material records and documents
required to be kept;
8.1.15.2 properly and punctually made all returns and provided
accurate information to the German tax authorities
and any other German body concerned as so required;
8.1.15.3 paid all taxation charged, assessed, levied or
payable in accordance with the relevant statute or
legislation as and when it became due;
8.1.15.4 deducted taxation from all payments where required so
to do by law and accounted to the appropriate fiscal
body for taxation so deducted;
8.1.15.5 not become liable and have not been liable to pay any
interest, penalty, fine or sum or similar nature in
respect of taxation;
8.1.15.6 not entered into any dispute with any fiscal
authority.
8.1.15.7 accrued sufficient amounts at the Effective Date in
the Management Accounts to address any material tax
liabilities.
8.1.16 Foreign Tax Returns
No taxes or tax returns have become due by H.O.T. or General
Partner outside of the Federal Republic of Germany, except for
the Republic of Austria.
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8.1.17 Employee Benefits
To the best knowledge of Sellers, all obligations whether
arising by operation of law, by agreement or by past custom,
for payments and contributions with respect to direct or
indirect pension and retirement benefits or other compensation
or benefits such as anniversary payments to the employees of
H.O.T. or the General Partner and pension fund old age pension
liabilities for the period prior to the Effective Date have
been paid by H.O.T. and the General Partner or full provision
therefor has been made in the Management Accounts to cover
fully their current value.
8.1.18 Business Plan
The business plan exhibited hereto as Exhibit 8.1.18 shows a
substantially accurate view of the state of affairs and the
financial position of H.O.T. based on reasonable assumptions
and projections as of August 31, 1996.
8.1.19 Management Accounts
The Management Accounts as attached hereto in Exhibit 4.1 show
a substantially accurate view of the state of affairs and the
financial position of H.O.T. as at and for the financial
period ending on August 31, 1996, and the profits and losses
of H.O.T. for the period ended on such date. Substantial for
purposes of this Section shall mean any discrepancy at or
exceeding DM. 1,000,000.00 (Deutsche Mark one million) and for
purposes of this Section, the DM 1,000,000.00 basket shall not
constitute a deductible and therefore the whole amount will be
taken into account for determining the remedies in accordance
with Section 9 below, if and to the extent the discrepancy
exceeds DM 1,000,000.00 ("Freigrenze").
8.1.20 Absence of Material Changes
Since the Effective Date, H.O.T. and the General Partner have
carried on their businesses in the ordinary and usual course.
8.1.21 Accurate Disclosure
To the best knowledge of Sellers, there is no material effect
or material matter relevant to the H.O.T. Business, H.O.T.
assets, and H.O.T. or the
<PAGE> 19
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General Partner, as the case may be, which has not been
disclosed to HSN GmbH or which might render any information
contained in the documents attached to this Agreement
materially misleading or inaccurate.
8.2 Sellers shall account for all of the above representations and
warranties jointly and severally with exception of the representations
given under Sections 8.1.1 through 8.1.5.
8.3 If and to the extent any of the above representations and warranties
are made subject to the best knowledge, best knowledge shall mean
actual knowledge of Sellers or any actual knowledge they should have
obtained after due inquiry of the managing directors of General Partner
and Mr. Henning Schnepper, inhouse counsel to H.O.T. Sellers shall not
account for any knowledge they failed to obtain due to slight
negligence ("leichte Fahrlassigkeit").
Section 9 REMEDIES
9.1 In the event of any breach or non-fulfilment by either of the Sellers
of any of the warranties and representations contained in Section 8,
Sellers shall be liable, at the Seller's election, for putting HSN
GmbH, H.O.T. and/or the General Partner, into the same financial
position that it would have been in if the warranties and
representations contained in Section 8 had been correct or had not been
breached, or, at Sellers' election, HSN GmbH can claim damages for
non-performance ("Schadensersatz wegen Nichterfullung"). Any remedies
granted under Section 4 above, shall be without prejudice to those
remedies set forth hereunder, if and to the extent such remedies result
from the breach or non-fulfilment of any of the warranties and
representations contained in Section 8. To the extent any breach or
non-fulfilment of any of the warranties and representations contained
in Section 8 has been remedied by the way of the Balance Sheet
Adjustment Payment, Sellers shall not have to account for hereunder
("no double dip").
9.2 HSN GmbH is entitled to rescind the Agreement only if any of the
Acquired Partnership Interests or any of the Acquired Shares are
legally defective.
9.3 In case of rescission pursuant to Section 9.2 above, the revocation of
the Agreement ("Ruckabwicklung des Vertrages") is made in accordance
with the provisions of the German Civil Code on the condition that
Sellers have to reimburse HSN GmbH for all reasonable costs and
expenses incurred in conjunction with the preparation, the
<PAGE> 20
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negotiation and completion of this Agreement, including all legal, tax
and economic due diligence in connection with this Agreement. Section
352 BGB shall not apply.
9.4 In the event of any breach or non-fulfilment by Sellers of any of the
representations and warranties contained in Section 8 of this
Agreement, HSN GmbH will give to Sellers written notice of such breach
or non-fulfilment stating the nature thereof and the amount involved
to the extent that such amount has been determined at the time when
such notice was given. Section 377 HGB shall not apply.
9.5 Any other remedies of HSN GmbH, regardless of the underlying legal
basis therefor, including but not limited to, reduction of Purchase
Price, recission of contract, damages arising under culpa in
contrahendo or clausula rebus sic stantibus, are expressly excluded
hereby.
9.6 The maximum aggregate liability of each Seller in respect of all claims
arising hereunder shall not exceed the amount of the Purchase Price
plus the aggregate amount of the contributions made by HSN GmbH between
the Effective Date until the Closing Date plus any reasonable attorney
fees spent in connection with the transactions contemplated hereunder
up to an amount of DM 300,000.00, allocable to each Seller in
proportion to the amount of the Purchase Price received by each Seller.
9.7 No liability shall attach to Sellers where the aggregate amount of
claims is less than DM 100,000.00, such claims, however, not being
ignored for the purpose of calculating the liability of Seller under
this Agreement once the threshold is exceeded ("Freigrenze").
Section 10 STATUTE OF LIMITATION
10.1 All claims of HSN GmbH arising under this Agreement against Sellers are
time barred as from March 31, 1998. Exempted herefrom are all claims of
the HSN GmbH in respect of tax liabilities which shall expire six (6)
months after the date of the final, non appealable assessment of the
relevant liability of H.O.T. and/or the General Partner, in any event,
not prior to March 31, 1998.
10.2 As to the defect of title, the statutory provisions shall apply.
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Section 11 ADDITIONAL UNDERTAKINGS
11.1 H.O.T. and ProSieben entered into a sublease agreement regarding
certain transponder services in the format as exhibited hereto in
Exhibit 11.1 (however, the transponder agreement referenced in Section
3 of the "Vereinbarung betreffend Transponderkapazitat will not be
attached as part of Exhibit 11.1).
11.2 HSN guarantees the payment of the Purchase Price owed in accordance
with Section 3.1 above. To the extent the Joint Venture Agreement, as
defined in Section 5.3 above, provides for non-compete undertakings of
the parties to the Joint Venture Agreement, HSN herewith acceedes to
the respective undertakings.
11.3 If the pre-merger clearance referred to under Section 6.4.1 above shall
not be withheld with final effect, this Agreement shall be rescinded in
accordance with the provisions of the German Civil Code. Section 352
BGB shall not apply.
Section 12 MISCELLANEOUS
12.1 Any notices or other communications in connection with this Agreement
need to be made in writing and shall be delivered or sent by registered
mail, fax or telecopy to the addresses below or to such other addresses
which may be specified by the Parties in the future in writing.
to HSN GmbH: Home Shopping Network GmbH
Bethmannstr. 50-54
D-60133 Frankfurt am Main
to Seller 1: Quelle Schickedanz AG & Co.
Nurnberger Str. 91-95
D-90762 Furth
Attention: Dr. Steffen Stremme
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with a copy to
Attorney-at-Law Philipp Blomeyer
Schickedanz Holding-Stiftung & Co. KG
Nurnberger Str. 91-95
D-90762 Furth
to Seller 2: Thomas Kirch
Felix-Dahm-Str.8
D-81925 Munchen
with a copy to
Attorney-at-Law Dr. Bernhard-R. Heiss
Rechtsanwalte Bosebeck Droste
Marstallstr. 8
D-80539 Munchen
to Dr. Kofler: Dr. Georg Kofler
Heinrich-Knote-Str. 14
D-82343 Pocking
with a copy to
Attorney-at-Law Dr. Bernhard-R. Heiss
Rechtsanwalte Bosebeck Droste
Marstallstr. 8
D-80539 Munchen
to HSN: Home Shopping Network Inc.
11831 30th Court North
St. Petersburg, Florida 33716, U.S.A.
Attention: Michael McMullen
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with a copy to
Attorney-at-Law Dr. Hans-Jorg Ziegenhain
Doser Amereller Noack
Bethmannstr. 50-54
D-60311 Frankfurt am Main
12.2 The costs and expenses of this Agreement, including legal, financial
and advisory fees, shall be borne by the party commissioning the
respective cost. The costs incurred with regard to the notarisation of
this Agreement shall be borne by HSN GmbH. The costs incurred with the
premerger cartel clearance are borne by H.O.T.
12.3 All Exhibits to this Agreement constitute an integral part of this
Agreement.
12.4 This Agreement and the Exhibits referred to under Section 12.3 comprise
the Agreement between the Parties containing the subject matter of the
Agreement and replace all oral and written declarations of intention
made by the Parties in connection with the contractual negotiations.
Changes or/and amendments to this Agreement need to be made in writing
or by way of a notarial instrument, as the case may be.
12.5 The Agreement shall be governed by the laws of the Federal Republic of
Germany. As to the dispute resolution the Parties hereto will enter
into a separate arbitration agreement of even date.
12.6 In the event that one or more provisions of this Agreement shall be, or
shall be deemed to be invalid or unenforceable, or this Agreement is
incomplete, the validity and enforceability of the other provisions of
this Agreement shall not be affected hereby. In such cases the Parties
hereto agree hereby on such valid and enforceable provision or on
provisions completing the Agreement which are commensurate with the
commercial intent of this Agreement. The same applies if it turns out
that there are gaps in this Agreement.
(continued on next page)
<PAGE> 24
IN WITNESS THEREOF this Notarial Deed including the Exhibits hereto (except the
English translation of Exhibit 5.3, which is not notarized) has been read aloud
to the persons appeared. The persons appeared then confirmed and approved this
Deed including the Exhibits hereto and signed this Deed. All this was done at
the day herebelow written in the presence of me, the Notary Public, who also
signed this Deed and affixed my official Seal.
Basel, this 16th (sixteenth) day of January 1997 (nineteen hundred and
ninety-seven)
/s/ Hans-Jorg Ziegenhain
/s/ Philipp Blomeyer
/s/ Stephan Cueni
Notary
[NOTARY SEAL]
<PAGE> 1
EXHIBIT 10.10
JOINT VENTURE AGREEMENT
BETWEEN
1. Quelle Schickedanz AG & Co. with its seat in Furth, Germany (hereinafter
referred to as "Quelle") and
2. Home Shopping Network Inc. with its seat in St. Petersburg, Florida,
United States of America (hereinafter referred to as "HSN Inc."),
3. Home Shopping Network GmbH i.Gr. with its seat in Frankfurt am Main,
Germany (hereinafter referred to as "HSN GmbH") (together with HSN Inc. jointly
referred to as "HSN").
4. Thomas Kirch, (hereinafter referred to as "Kirch")
5. Dr. Georg Jakob Kofler, (hereinafter referred to as "Kofler")
Quelle, HSN, Kirch and Kofler are occasionally referred to as "Shareholders" or
"Parties".
PREAMBLE
A. In April, 1995, Pro7 Television GmbH and Quelle have agreed to cooperate
in the area of teleshopping in the form of the joint venture company H.O.T. Home
Order Television GmbH & Co. KG, Unterfohring -- hereinafter referred to as
"HOT-KG" -- and its general partner H.O.T. Home Order Television Verwaltungs
GmbH, Unterfohring -- hereafter referred to as "HOT-GmbH". HOT-KG and HOT-GmbH
are occasionally also referred to hereafter as "HOT Companies".
In December, 1995, Pro 7 Television GmbH was released from certain duties
under the said cooperation agreement. At that time, Pro 7 Television GmbH
divided its share in HOT-GmbH into two shares and transferred them to Kirch and
Kofler. Also, Pro 7 Television GmbH transferred its interests in HOT-KG to Kirch
and Kofler, who joined into the joint venture cooperation agreement described
above.
Now, HSN, Quelle, Kirch and Kofler have agreed that HSN will join the HOT
Companies pursuant to the provisions of the Purchase and Sale Agreement of the
same day and the Articles of Incorporation attached as Exhibit 5.2.1
thereto -- hereafter referred to as Articles of Incorporation" -- for HOT-GmbH
and the Partnership Agreement for HOT-KG attached as Exhibit 5.1.1
thereto -- hereafter referred to as Partnership Agreement" -- as well as the
Rules of Procedure for the General Management of HOT-GmbH attached as Exhibit
5.2.2 thereto -- hereafter referred to as Rules of Procedure for the General
Management" -- and the Rules of Procedure for the Advisory Board of HOT-GmbH
attached as Exhibit 5.2.3 thereto -hereafter referred to as Rules of Procedure
for the Advisory Board" -- as of September 1,1996 hereafter referred to as the
"Relevant Date" -- or as soon as practicable and that HSN will join into the
joint venture pursuant to the provisions of this Agreement.
B. HOT-KG produces teleshopping programs and broadcasts such programs via
cable, satellite and terrestrially in Germany and other German speaking
territories.
C. As there have not been any experiences in Germany with teleshopping as a
new mode of distribution at the time of establishing the Joint Venture, HOT-KG
was entrusted with the development of specific teleshopping formats and systems.
In this respect the HOT-KG also took over the responsibility for selection of
products to be marketed by way of teleshopping.
D. However, in order to enable HOT-KG to set up the teleshopping business
and to operate it successfully, the shareholders are supporting and will support
the HOT-Companies in the areas of their respective specific expertise as
provided hereunder.
E. It is the purpose of this Agreement to govern the relationships among
the shareholders of the venture on the one hand, and the relationship of the
shareholders with the HOT-companies on the other hand in more
<PAGE> 2
detail. This Agreement shall control in the event that there is a conflict
between this Agreement and the other corporate agreements among the parties or
in the event that the other corporate agreements are silent on an issue.
Therefore it is agreed as follows:
PART 1
CONCEPT OF THE PROJECT
SEC. 1 -- PROJECT "TELESHOPPING"
(1) The shareholders have agreed to distribute goods and services by way of
teleshopping through the HOT Companies.
Teleshopping for the purposes of this Agreement is any form of broadcast
which makes direct offers to the public for the purposes of sale, purchase or
renting or leasing of goods or for the purposes of supplying services in
consideration of money.
(2) HOT-KG currently operates, maintains and utilizes the systems required
for the distribution of goods by way of teleshopping. HOT-KG is and will be
responsible in particular for the choice of goods to be marketed by way of
teleshopping.
(3) Furthermore, HOT-KG will rely on the support of the shareholders
pursuant to service agreements insofar as necessary, economically viable and
reasonable. All such related party agreements shall be subject to approval of
the Advisory Board.
(4) The Parties are aware that HSN Inc. is subject to certain restraints of
competition relating to the infomercial business.
2
<PAGE> 3
PART 2
IMPLEMENTATION OF THE PROJECT
SEC. 2 -- ADVISORY BOARD
(1) Currently the Advisory Board consists of Dr. Steffen Stremme
(Chairman), Dr. Gunter Moissl, Dr. Georg Jakob Kofler (Vice Chairman) and
Herbert Schroder.
(2) With effect as of the execution of the Purchase and Sale Agreement, the
number of the members of the Advisory Board will be extended to six. HSN GmbH
will appoint Michael McMullen and James G. Gallagher as members of the Advisory
Board. With effect from the next Ordinary Shareholders' meeting pursuant to
sec. 11 subsection (2) of the Articles of Incorporation of HOT-GmbH a
representative of HSN GmbH will be chosen Chairman of the Advisory Board
pursuant to sec. 10 Subsection (1) of the Articles of Incorporation of HOT-GmbH.
With effect from the point of time set forth in the sentence before, a
representative of Quelle will be chosen Vice Chairman of the Advisory Board.
Otherwise there are no changes to the alternating of the chairmanship among the
representatives of the Shareholders on the Advisory Board of HOT-GmbH as
provided in the Articles of Incorporation.
SEC. 3 -- BUDGET AND INVESTMENT PLAN
(1) The Profit Plan attached as EXHIBIT 8.1.18 to the Purchase and Sale
Agreement (hereinafter: "Profit Plan"), covers the period until December 31,
2000. The Parties undertake to provide HOT-KG with the means necessary for the
implementation of the Profit Plan, subject to the reviews provided for in
sec. 6.
(2) If due to a change of the underlying conditions, facts and
circumstances, the Profit Plan referred to in subsection (1) needs to be
changed, the parties undertake to amend it. Each Party hereof has the right to
request such a change within 3 months of the date of the request.
If the Shareholders do not agree on a change to the Profit Plan as
described above within a further period of 21 days after such a request has been
submitted to the shareholders by the General Manager of HOT-KG the shareholders
will present the matter in dispute to the accountant of HOT-KG who shall act as
mediator. If the mediation fails for any reason whatsoever within a further
period of 21 days, the matter in dispute will be presented to an accountant, who
is not the accountant of HOT-KG -- hereinafter referred to as "Chartered
Accountant" -- who shall render an arbitration decision observing the
limitations set forth under sec. 3 (4) hereunder within a period of 21 days
after the issue is presented to him. If the Parties cannot agree on a Chartered
Accountant, the Chamber of Chartered Accountants in Dusseldorf shall nominate a
Chartered Accountant who shall serve as the arbitrator. The Profit Plan, as
amended by the Chartered Accountant, shall become binding on the Parties hereof.
(3) For the avoidance of doubt, the shareholders are mutually obliged to
provide HOT-KG with the means necessary to continue its business operation in
the ratio respective to their shares and Partnership Interests after Execution
of the Purchase and Sale Agreement if the parameters on which the Investment
Plan is based -- whether in the version attached hereto as EXHIBIT 8.1.18 or in
a version adapted thereafter pursuant to subsection (2) above -- are changed
(e.g., less demand, less turnover of goods or increased costs/expenses). Subject
to any other agreement between the Parties, the required liquidity has to be
provided by payment of money into HOT-KG as a further contribution of the
limited partners. Such duties exist for each shareholder in relation to its
interests and shares in the HOT-Companies in such scope as means are required by
HOT-KG in order to remain solvent after consideration of other means to finance
the business. The shareholders will pass a resolution on such request by the
General Management of HOT-KG after taking into account all facts and
circumstances, including tax considerations, of the HOT-Companies and their
shareholders.
(4) For purposes of the agreed upon Profit Plan the duty of the parties
shall be DM 130 million in aggregate. An amount of DM 68.717.600,-- out of the
amount of DM 130 million has already been provided until November 29, 1996. The
outstanding amount of DM 61.282.400,-- shall be provided by the shareholders
according to their interests in the HOT-Companies except for revisions due to
payments made after
3
<PAGE> 4
November 29, 1996, and except for payments pursuant to sec. 4.3 of the Purchase
and Sale Agreement relating to the Balance Sheet Adjustment Payment. The request
to provide such liquidity cannot be made by HOT-KG itself but only by the other
parties to this Joint Venture Agreement. The amount set out above may be amended
upon mutual agreement of the Parties hereto.
(5) The Parties may consider the establishment of a second shop at home
channel, aimed primarily at a market outside German-speaking territories. In
such event the HOT Advisory Board would vote on the creation of the second
channel. If the vote is approved, the second channel would be developed within
HOT-KG, in which case the above DM 130 million cap would have to be reasonably
raised. If the vote fails, any partners who elect to proceed with a second
channel may form a separate venture to do so which shall not be governed by the
provisions set forth hereunder. In such case the Parties are in agreement, that
all shareholders in HOT-KG will be invited to participate in the second venture
and that additional parties may be brought into the new venture. However, no
third party may be brought in if it competes with a shareholder in a country in
which the shareholder is otherwise engaged in significant business. For purposes
of this subsection a competitor of Quelle shall mean any electronic retailer. As
to the definition of HSN's and Kirch's and Kofler's competitors, reference is
made to sec. 7 (2) below.
SEC. 4 -- SERVICE AGREEMENTS
(1) In so far as necessary, commercially viable and reasonable, HSN and
HOT-KG on the one hand and the other Parties hereto, Quelle and HOT-KG, on the
other hand will enter into service contracts pursuant to the general terms
provided in EXHIBIT (5.3) 4.1 for the services defined in following Subsection
(2).
(2) HSN Inc. will support HOT-KG to the best of its ability in the
performance of the following functions itself or through its affiliates and
subsidiaries:
- Access to, and purchase of, HSN's products and services
- Access to related background information and selling materials on each
item for use by show hosts
- Access to HSN marketing and sales know how: consumer research, on-air
presentation, sales histories of individual items and product
categories, etc.
- Consulting on HSN systems: computer, etc.
- On the job training and consultation for HOT key employees
- Various licenses and trademarks owned by HSN
- Facilitate cooperation with HSN Direct, if mutually valuable.
Quelle, Kirch and Kofler are supporting and will support HOT-KG to the best
of their ability in the performance of the following functions themselves or
through their affiliates and subsidiaries:
- German management (i.e., operating the business in its entirety)
- Equipment
- Facilities and related operational requirements
- Marketplace know how
- Operating licenses (including transponder)
- Inbound and outbound telemarketing (Quelle)
- Governmental compliance and lobbying (federal and local)
- Distribution (cable, satellite) in Germany and other German speaking
markets
- Order fulfillment (processing, accounting, physical distribution and
supply of products) (Quelle)
- Credit card processing (Quelle)
- Customer service (Quelle)
- Upsell marketing
- Check processing (Quelle)
- Ongoing accounting and financial services
- Legal Compliance
- HOT Catalogue/Program Guide
- Access to and purchase of Quelle's products and services (Quelle)
- MIS reports (Quelle)
4
<PAGE> 5
The above list is neither conclusive nor exclusive.
SEC. 5 -- "WINDOW"
(1) Each party is entitled, possibly together with any third party, subject
to its own choice to use no more than 1 hour of broadcasting time per day on the
teleshopping channel for teleshopping activities in consideration of a fee to be
agreed with HOT-KG. Such fee shall cover HOT's cost and a reasonable profit
margin. sec. 8 of this Agreement shall only apply to such teleshopping
activities to the extent that one or more of the other Parties must not allow
such third party to be a mail-order company a broadcasting company, or a
electronic retailer.
(2) In the set-up of the programs, the respective Party must take into
account the image of HOT-KG.
(3) Further details are subject to a separate agreement. This agreement
shall be subject to the approval of Advisory Board of HOT-KG.
SEC. 6 -- REVIEW OF COOPERATION AND NOTICE OF TERMINATION
(1) The parties will jointly review the status of the project in regular
intervals of no more than 6 months.
(2) Each party has the right to terminate this Agreement and the
Participation in the HOT-Companies by giving two months' written notice if
a) the broadcasting has been prevented by administrative action and
legal measures against such administrative action have not been successful
in summary proceedings in a second court instance; or
b) in 1997 the turnover profits (gross sales) are below DM 75 million;
or
c) in 1997 the annual aggregate loss exceeds DM 51 million.
This right to give notice of termination is to be exercised in writing
only within the period from January 1, 1998 until April 30, 1998. Except
as provided below, if such notice is duly given, the Joint Venture
Agreement shall be terminated with effect at the expiration of the above
notice period except for the parties' claims against each other which
have already come into existence, in particular the obligation to
provide the Company with the necessary liquidity pursuant to sec. 3 of
this Agreement. The shareholder giving such notice is obliged to offer
to the other shareholders pursuant to the provisions of the relevant
Articles of Incorporation or Partnership Agreement the
quotas/partnership interests in the appropriate form for purchase. In
such case the compensation shall be determined pursuant to sec. 17 of
the Partnership Agreement of HOT-KG and sec. 19 of the Articles of
Incorporation of HOT-GmbH. If such offer has not been accepted within
one month after receipt of the written notice in the appropriate form,
the shareholders shall undertake to wind up the companies.
(3) The exercise of rights arising from sec. 18 of the Articles of
Incorporation of HOT-GmbH and sec. 16 of the Partnership Agreement of HOT-KG
remains otherwise unaffected.
SEC. 7 -- DISPOSAL OF INTERESTS IN THE HOT-COMPANIES
(1) Subject to sec. 6 of this Agreement the parties undertake not to
dispose of their interests in HOT-GmbH and HOT-KG prior to September 1, 1999.
This applies also to the transfer to affiliated undertakings in terms of sec. 15
AktG (German Stock Corporation Act).
(2) The transfer of a share or a part of a share of HOT-GmbH or a
Partnership Interest of HOT-KG requires the written consent of the other
shareholders or partners, as applicable, pursuant to sec. 5 Subsection (1) of
the Articles of Incorporation of HOT GmbH and sec. 14 Subsection (1) of the
Partnership Agreement of HOT KG in order to be valid. The consent of a party
shall, however, not be unreasonably withheld. Such
5
<PAGE> 6
consent may, in particular, be withheld if the interests and shares are to be
transferred to a competitor of the remaining Shareholders. For purposes of this
Subsection
- Competitor of Quelle shall mean any mail order company,
- Competitor of Kirch and Kofler shall mean any broadcasting company,
- Competitor of HSN shall mean any electronic retailer,
and affiliated entities to the competitors within the meaning of sec. 15
AktG.
Each Shareholder shall grant the written consent and waive any preemption
rights to sec. 5 subsections (1) through (3) of the Articles of Incorporation of
HOT GmbH and sec. 14 of the Partnership Agreement of HOT KG if it
a) is transferred to an entity which is affiliated with the
transferring shareholder within the meaning of sec. 15 Aktiengesetz and
b) such entity does not directly or indirectly compete with the HOT-KG
and
c) it is ensured in an appropriate way that in case of the termination
of the affiliation the share and Partnership Interest shall be transferred
back to the disposing shareholder and
d) the transferring shareholders transfers all of its shares or its
Partnership Interests and
e) the acceding party shall join into this Agreement.
Any such transfer does not affect this Agreement nor any of the obligations
of the respective Party hereunder.
PART 3
MISCELLANEOUS
SEC. 8 -- TERMINATION OF JOINT VENTURE AGREEMENT
In general, each Party has the right to terminate this Agreement by giving
six months' written notice before the end of a calendar year. Such notice may
not be effective prior to the earlier of December 31, 2000 or at the return on
investment, (repayment of any capital contributions of all Parties to HOT-KG
plus interest at a rate of 6% p.a.). This termination shall not affect a
terminating party's interest in any of the HOT Companies nor any agreement
pursuant to sec. 4 of this Agreement. Upon the effective date of termination,
the party terminating shall no longer be party of this Agreement with the
exception of sec. 7 and sec. 9 hereunder which shall survive in relation the
terminating party. The Agreement shall continue in full force and effect among
the remaining parties except for the obligations set forth under sec. 3 (4)
hereunder.
SEC. 9 -- COMPETITION CLAUSE
(1) During the time that a Party holds shares in HOT-GmbH or partnership
interests in HOT-KG and for one year thereafter, that party will neither
directly nor indirectly participate as an owner, partner, shareholder,
consultant, employee, affiliate, officer or director in other teleshopping
activities in terms of sec. 1 subsection (1) of this Agreement targeted at
German Speaking Territories or in the German Language other than those of HOT-KG
or support such teleshopping activities in any other way.
(2) DRTV spots and infomercials broadcast as a part of any other TV-program
which does not have teleshopping as its focus are not affected by this sec. 9.
Not affected either is third party fulfillment unless it is for competitors of
HOT and its affiliated entities within the meaning of sec. 15 AktG which are
engaged in the electronic retailing business and of which the parent company is
based in the Americas.
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<PAGE> 7
SEC. 10 -- GENERAL PROVISIONS
(1) If any provision of this Agreement is invalid or becomes invalid, the
validity of the rest of the Agreement shall not be affected. The parties
mutually undertake to replace the provision which is or became invalid by a
provision which equals the commercial purpose of the provision to be replaced as
far as possible. The same applies if there are gaps in the agreement.
(2) Changes and amendments of this agreement need to be in writing in order
to be valid unless a notarized form is required. The same applies to the change
of this clause. Verbal collateral agreements have not been concluded.
(3) Exclusive place of jurisdiction for disputes arising from this
Agreement is Frankfurt am Main unless prohibited by law.
(4) This Agreement is exclusively subject to German law (unless
prohibited).
(5) This Agreement is executed in German and English. Only the German
version is notarized and shall be binding.
(End of text)
7
<PAGE> 1
EXHIBIT 10.11
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.
LICENSE AGREEMENT
- CONTENTS -
<TABLE>
<CAPTION>
SECTION HEADING PAGE
--------------- ----
<S> <C> <C>
l. DEFINITIONS............................................................. 1
2. LICENSE................................................................. 3
3. CONSIDERATION........................................................... 5
4. REPORTS, PAYMENTS, RECORDS AND AUDITS................................... 8
5. REPRESENTATIONS AND WARRANTIES.......................................... 9
6. DEFAULT................................................................. 10
7. TERMINATION............................................................. 10
8. CONFIDENTIALITY......................................................... 11
9. ARBITRATION............................................................. 11
10. PRESS RELEASE........................................................... 12
11. PATENT MARKING.......................................................... 12
12. NOTICES................................................................. 13
13. INVALIDITY.............................................................. 13
14. ENTIRE AGREEMENT........................................................ 13
15. SECTION HEADINGS........................................................ 13
16. GOVERNING LAW........................................................... 13
17. NO AGENCY............................................................... 14
EXHIBITS
EXHIBIT A............................................................... 15
EXHIBIT B............................................................... 19
EXHIBIT C............................................................... 22
EXHIBIT D............................................................... 24
</TABLE>
HOME SHOPPING NETWORK, INC.
<PAGE> 2
LICENSE AGREEMENT
This License Agreement ("Agreement") is entered as of January 1, 1996 (the
"Effective Date") by and between the Parties, Ronald A. Katz Technology
Licensing, L.P. (Licensor), a California Limited Partnership, having offices
at 9401 Wilshire Blvd., Suite 900, Beverly Hills, California 90212, and Home
Shopping Network, Inc., having offices at 11831 30th Court North, St.
Petersburg, Florida 33716.
WHEREAS, Licensor is the owner of patent and patent application rights
relating to Automated Transaction Processing Utilizing Communication
Facilities and/or Computer Telephone Integration (ACTI patents) and has the
right to grant non-exclusive licenses and covenants not to sue thereunder;
WHEREAS, Licensee desires to obtain certain non-exclusive rights under the
ACTI patents as provided herein;
WHEREAS, Licensor and Licensee (the "Parties") recognize the potential
difficulty and inefficiency to both parties of negotiating and administering
individual licenses to each of such ACTI patents relating to a given activity
of Licensee;
WHEREAS, the Parties have reviewed the activities of Licensee as related to
the ACTI patents and on the basis of their knowledge have selected
appropriate Fields-Of-Use for the activities of Licensee with respect to the
ACTI patents;
WHEREAS, in view of the nature of the ACTI patents, the business and
activities of Licensee, the mutual convenience of and efficiency to the
Parties and the equities of the situation, the Parties have resolved that
specific Field-Of-Use Licenses are proper and appropriate as set forth
herein; and
NOW, THEREFORE, in consideration of the mutual promises and other
consideration as set forth herein, the Parties agree as follows:
1. DEFINITIONS
1.1 "Licensed Patents" shall mean all United States and foreign
patents listed in Exhibit A, as well as all United States and foreign patents
that have issued or may issue on applications whose subject matter in whole
or in part is entitled to the benefit of the filing date(s) of any such
patents or applications on which they are based, including, without
limitation, continuations, continuations-in-part, divisions, reissues and
extensions.
1
<PAGE> 3
1.2 "Licensed Territories" shall mean the United States and its
Territories, and all foreign countries in which one or more of the Licensed
Patents have issued and remain in effect at any time during the term of this
Agreement.
1.3(a) "Field-of-Use" shall mean an activity defined in Exhibit B.
(b) "Field-Of-Use License" shall mean a license to make, have made
and use (but not sell, lease or otherwise transfer for use by others, except as
specified herein) products and processes of the Licensed Patents within one
or more specified Fields-Of-Use. As specified below in detail, the relative
Field-Of-Use of this Agreement is Television Shopping Systems.
1.4. "Carrier" shall mean any entity which transmits a communication
having a voice component over a communication channel.
1.5(a) "Campaign" shall mean automated transaction processing
services provided by Licensee or its Subsidiaries.
(b) "Customers" of Licenses are all those to whom Licensee sell
products during the course of electronic on-air retailing.
1.6 "Elapsed Carrier Time" shall mean, with respect to Campaigns,
the transport minutes, i.e. the aggregate elapsed time of all callers
participating in Campaigns during which each caller is connected to a Carrier
(whether or not Licensee is the customer of record with the billing carrier) in
relation to the Campaign. The following examples illustrate the proper
application of the foregoing definition: (i) if a caller is connected to a
Carrier in the execution of a Campaign and while the caller is so connected, an
outbound call is made by Licensee, the elapsed time during which the outbound
call is connected to a Carrier is not to be added to the elapsed time during
which the caller is connected to his Carrier in computing the Elapsed Carrier
Time of the Campaign, (ii) if ten (10) separate individual callers call Licensee
in connection with a Campaign and each caller is connected to Licensee for ten
(10) minutes, the Elapsed Carrier Time of the Campaign would be the aggregate of
the elapsed time for each Caller is connected through a Carrier to Licensee in
connection with the Campaign (in this example, one hundred (100) minutes), and
(iii) if three, (3) calls were connected to Licensee of the following durations:
first call, one hundred (100) seconds; second call, fifty (50) seconds; and
third call, forty (40) seconds (all as measured by the Carrier) the Elapsed
Carrier Time for these calls would be one hundred ninety (190) seconds
irrespective of any rounding methods that might be applied.
1.7 "Automated Minutes" shall mean all minutes of Elapsed Carrier
Time utilized in the course of Campaigns, other than: (i) minutes spent
automatically answering a call and thereafter immediately transferring the call
to a live operator, without any automated call processing, because the caller
elects not to use the automated system(s); (ii) minutes spent
2
<PAGE> 4
with such live operator; and (iii) minutes spent waiting for connection to, or
talking to, a show host.
1.8 "Subsidiary" shall mean a person or entity controlled by
Licensee; such control being exercised through the ownership or control,
directly or indirectly, of more than 50% of all the voting power of the shares
or other interests entitled to vote for the election of directors or other
governing authority; however, a person or entity shall be considered an
Subsidiary only for the time during which such control exists. Sublicensee's
"Subsidiaries" on the date of execution of this Agreement are: Home Shopping
Club, Inc., Home Shopping Network Outlets, Inc., Home Shopping Services, Inc.,
HSN Capital Corporation, HSN Credit Corporation, HSN Entertainment Events,
Inc., HSN Entertainment Holding Company, Inc., HSN Entertainment Joint Ventures
II Inc., HSN Fulfillment, Inc., HSN Fulfillment of Iowa, Inc., HSN Fulfillment
of Nevada, Inc., HSN Fulfillment of Virginia, Inc., HSN Insurance, Inc., HSN
Interactive, Inc., HSN Lifeway Health Products, Inc. dba HSN Products, Inc.,
HSN Liquidation, Inc., HSN Liquidation of Florida, HSN Mail Order, Inc., HSN
Realty, Inc., HSN Redi-Med, Inc., HSN Television Shopping Mall, Inc., HSN
Transportation, Inc., HSN Travel, Inc., Internet Shopping Network, Inc.,
MarkeTechs Services, Inc., National Call Center, Inc., Ortho-Vent, Inc., Vela
Research, Inc., World Rez, Inc.
1.9 "Arbitrator" must be a patent attorney acceptable to the
parties having an electrical engineering, computer science or similar
background and licensing experience in the field of telecommunications and
experience in alternative dispute resolution procedures.
2. LICENSE
2.1 Licensor hereby grants to Licensee, and Licensee's
Subsidiaries, a non-exclusive, Field-Of-Use License to make, have made, use and
provide services using (but not to sublicense, sell, lease or otherwise transfer
for use by others) products or processes embodying any and all inventions
claimed in the Licensed Patents within the Television Shopping Systems
Field-Of-Use and in the Licensed Territories.
2.2 Although Licensee does not currently conduct activities within the
Television Shopping Systems Via Cable Facilities Field-Of-Use, Licensor hereby
covenants not to sue Licensee if Licensee undertakes such activities in the
future in conjunction with its use of interactive voice response system(s)
within the Television Shopping Systems Field-Of-Use; however, any such
activities shall not convey a license or right of any kind, either express or
implied, to any entity offering cable facilities and/or terminals to access
Licensee's ordering system(s). This covenant not to sue is expressly
conditioned on Licensee's notifying any such entity that the entity's
activities are not licensed under the terms of this Agreement.
3
<PAGE> 5
2.3 Licensor agrees to release Licensee (and its Subsidiaries)
from any and all claims of infringement of the Licensed Patents for acts
performed prior to the Effective Date within the licensed Field-Of-Use of this
Agreement, subject to the following conditions:
(a) payment of the Advance Royalty pursuant to this Agreement;
and,
(b) full and faithful performance of the term of the Agreement by
Licensee or any assigns or successors permitted under the terms of this
Agreement for a period of four (4) years after the Effective Date.
No suit may be brought against Licensee (or its Subsidiary) during
such four (4) year period for infringement of the Licensed Patents in the
Television Shopping Systems Field-Of-Use as long as Licensee continues to
faithfully perform the terms of this Agreement. If this Agreement has not been
terminated within the first four and one-half (4 1/2) years after the Effective
Date, then Licensee's full and faith performance hereunder shall be presumed,
However, nothing in this Section 2.3 alone. shall release or otherwise reduce
the, liability of Customers of licensee or its Subsidiaries.
2.4 Neither this Agreement, nor the rights conveyed hereunder,
may be assigned by Licensee except that the entire license may be assigned
along with an assignment or transfer of Licensee's entire business relating to
the subject matter of the Agreement, provided, however, that: (a) on or before
the date of any such assignment or transfer the assignee executes and delivers
to Licensor an undertaking to assume and perform all obligations of Licensee
hereunder with respect to the business being assigned or transferred, including
maintenance of the systems used by Licensee (or other effective systems) to
determine Automated Minutes for purposes of this Agreement and distinguish them
from unlicensed activities of the assignee, and; (b) the assignee shall derive
no rights under this Agreement with respect to any other business or operations
conducted by it prior to, or after, the date of assignment or transfer, and
nothing contained in this Agreement shall preclude Licensor from making claims
or asserting its rights with respect to such other business or operations
either before or after the date of assignment or transfer.
2.5 Businesses acquired by Licensee (or its Subsidiaries) are
licensed under this Agreement to the extent they satisfy the definition of
"Subsidiaries" in Section 1.8, and accordingly shall bear the appropriate
royalty; however, no covenant not to sue or release granted herein shall be
applicable to the business acquired for activities prior to the acquisition. If
Licensee (or its Subsidiary) merges, acquires or is acquired by another licensee
under the Licensed Patents, the successor may elect as between redundant
agreements. Furthermore, if Licensee contracts with another licensee that has a
royalty bearing license under the Licensed Patents to perform all of the
operations then performed by Licensee which fall within the claims of the
Licensed Patents, Licensee shall be relieved of its obligation to make any
further payments hereunder for the period during which such contract and such
other licensee's royalty bearing license remain in effect, except for Running
Royalties accrued to the date Licensee ceases performing such operations and
any
4
<PAGE> 6
amounts deferred under Section 3.3 or rolled over under Section 3.4. For
purposes of Section 2.3(b) of this Agreement, payments made by such other
licensee under the Licensed Patents shall be deemed full and faithful
performance of the terms of this Agreement by Licensee.
2.6 Subject to the provisions of Section 2.7, if Licensor should
in the future grant a royalty bearing license to QVC or Value Vision ("QV or
VV") under the Licensed Patents for the Television Shopping Systems
Field-Of-Use and QV or VV obtains Lower Running Royalty terms for such
Field-Of-Use, or for any specific portion of such Field-Of-Use, Licensee (and
its Subsidiaries) shall have the right to obtain such Lower Running Royalty
rates for such Field-Of-Use or for the corresponding portion of such
Field-Of-Use, provided that Licensee also accepts any less favorable terms of
the other license, including but not limited to advance royalties, entry fees
or guaranteed minimum royalties. For purposes of this Agreement, "Lower
Running Royalty terms" means lower Running Royalty terms or other more
favorable terms which could result in lower annual payments to Licensor than
the terms of Section 3 of this Agreement. The date that Licensee shall be
entitled to such Lower Running Royalty terms for such Field-Of-Use or any
specific portion of such Field-Of-Use shall be the date of first accrual of
Running Royalty by QV or VV. Licensor shall notify Licensee in writing within
sixty (60) days of QV or VV obtaining a Lower Running Royalty rate, providing
Licensee with a true and correct summary of the aforementioned Lower Running
Royalty rates and any less favorable terms, but not identifying QV or VV by
name. Licensee's (or its Subsidiaries) right to obtain a Lower Running Royalty
rate must be exercised in writing by Licensee within sixty (60) days of the
receipt of written notice from Licensor of the Lower Running Royalty being
obtained by QV or VV. Should Licensor fail to timely notify Licensee of the
Lower Running Royalty obtained by QV or VV, Licensee has the right to apply the
Lower Running Royalty rate retroactively to the date of such other license.
Licensee shall not be entitled, however, to any refund or credit based on other
terms of such other license, and any entry fee or additional advance royalty
due by Licensee shall be payable at the time the election is made.
3. CONSIDERATION
3.1 In consideration of the grants by Licensor, Licensee shall pay
Licensor an Advance Royalty and a Running Royalty as specified below.
(a) Licensee shall pay to Licensor upon execution of this
Agreement a non-refundable Advance Royalty of Two Hundred
Fifty Thousand Dollars ($250,000). This Advance Royalty shall
be credited from January 1, 1996 through December 31, 1996,
against Running Royalties accrued during such period for use by
Licensee and its Subsidiaries in the Field-Of-Use licensed
under this Agreement. If the total amount of Running Royalties
accrued any time through December 31, 1996 exceeds the Advance
Royalty, licensee shall
5
<PAGE> 7
pay the excess to Licensor at the end of the then current
Royalty Reporting Period. No credit shall be given, however,
for any portion of the Advance Royalty greater than the amount
of Running Royalties accrued through December 31, 1996.
(b) During the term of this Agreement, Licensee shall pay to
Licensor Running Royalty, accrued from January 1, 1996,
as follows (it being understood that while it is Licensee's
obligation to pay Running Royalty to Licensor, the Running
Royalty is computed on activities of Licensee and Licensee's
Subsidiaries):
(1) For the period from January 1, 1996 through
December 31, 1999, Running Royalties shall be $.01
(1.0 cent) per Automated Minute of usage by Licensee
and its Subsidiaries within the licensed
Field-Of-Use;
(2) For the period from January 1, 2000 through
December 31, 2002, Running Royalties shall be $.0125
(1.25 cents) per Automated Minute of usage by
Licensee and its Subsidiaries within the licensed
Field-Of-Use;
(3) For the period from January 1, 2003 through
December 31, 2005, Running Royalties shall be $.015
(1.5 cents) per Automated Minute of usage by
Licensee and its Subsidiaries within the licensed
Field-Of-Use.
(c) Licensee shall incur Running Royalties only through December
31, 2005. If this Agreement remains in force beyond December
31, 2005, the license granted hereunder shall become a
fully-paid license, subject only to Licensee paying any
previously incurred Running Royalties which have been rolled
over from prior years to the extent required under Section 3.3.
3.2 Advance Royalty shall be paid by Licensee and credited by
Licensor as required in Section 3.1(a), above. In addition, during the term of
this Agreement, Licensee shall pay Running Royalty as required under Section
3.1(b), above, as follows. At the end of each Royalty Reporting Period (as set
forth in Section 4.1 below) through December 31, 2005, the total accrued Running
Royalty from licensed activities of Licensee and its Subsidiaries shall be
determined. For periods ending no later than December 31, 1996, this amount
shall be reduced by any uncredited portion of the Advance Royalty. The
remaining amount of accrued Running Royalty, if any, shall be paid to Licensor
as set forth below.
3.3 During the first two years following July 1, 1996, in any
Royalty Reporting Period when Earning Before Interest, Taxes, Depreciation and
Amortization (EBITDA) is less than Two and One-Half Million Dollars
($2,500,000), any payments due for such Royalty Reporting Period shall be
deferred to the next Royalty Reporting Period when
6
<PAGE> 8
EBITDA exceeds Two and One-Half Million Dollars ($2,500,000); however, in no
event shall a deferral of Running Royalties last longer than three Royalty
Reporting Periods, nor shall any such deferred royalties be considered in
determining maximum annual payments for any subsequent year as provided in
Section 3.4. For example, if One Hundred Fifty Thousand Dollars ($150,000) in
royalties are deferred under this Section 3.3 for the fourth quarter of 1998,
that amount shall not be applied toward the Six Hundred Thousand Dollar
($600,000) maximum annual payment for 1999.
3.4 There shall be no limit on Running Royalty payments for
activities of Licensee and its Subsidiaries in foreign countries; however,
Running Royalty payments due by Licensee to Licensor for activities in the
United States and its Territories shall not exceed the following maximum annual
payments in the years indicated:
<TABLE>
<CAPTION>
1996-1997 1998 1999 2000-2002 2003-2005
--------- ---- ---- --------- ---------
<S> <C> <C> <C> <C>
$500,000 $550,000 $600,000 $650,000 $750,000
per year per year per year
</TABLE>
Royalties earned in excess of the stated maximums shall be "rolled
over" for payment after December 31, 2005 at a rate of Seven Hundred Fifty
Thousand Dollars ($750,000) per year to the extent set forth in this paragraph.
The first One Million Dollars ($1,000,000) of any rolled over amount shall be
paid in full; of the second One Million Dollars ($1,000,000) rolled over, only
seventy-five percent (75%) of the face amount shall be payable by Licensee;
and of any rolled over royalties in excess of Two Million Dollars ($2,000,000),
only fifty percent (50%) of the face amount shall be payable by Licensee. For
example, if Two and One-Half Million Dollars ($2,500,000) were rolled over
under the provisions of this Section, the full amount of the first One Million
Dollars ($1,000,000) would be paid, Seven Hundred Fifty Thousand Dollars
($750,000) of the second One Million Dollars would be paid and Two Hundred
Fifty Thousand Dollars ($250,000) of the last Five Hundred Thousand Dollars
($500,000) would be paid, in full discharge of the Two Million Five Hundred
Thousand Dollars ($2,500,000) rolled over. Thus, a total of Two Million Dollars
($2,000,000) would be paid after December 31, 2005 at a rate of Seven Hundred
Fifty Thousand Dollars ($750,000) per year until fully discharged. This amount
represents a non-refundable, non-cancellable obligation of the Licensee in all
circumstances.
3.5 All payments hereunder made by Licensee (except overpayments made
in error and identified by Licensee within twenty-four (24) months of erroneous
payment) are non-refundable.
7
<PAGE> 9
4. REPORTS, PAYMENTS, RECORDS AND AUDITS
4.1 Licensees first report of its activities under this Agreement
to Licensor shall be for the period from January 1, 1996 through June 30, 1996,
and reports shall be made quarterly thereafter through December 31, 2005. Such
periods shall be the "Royalty Reporting Periods" of this Agreement.
Licensee has advised Licensor that as of the date of execution of this
Agreement it cannot determine the number of Automated Minutes precisely, but
can make a reasonable estimate. Licensee is undertaking improvements to its
technology which will allow it to accurately determine Automated Minutes by
December 31, 1996. Accordingly, Royalty Reports for 1996, including the annual
statement required under Section 4.2 below, will be based upon Automated
Minutes as Determined under Licensee's available technology, with such good
faith adjustments as Licensee can reasonably make after December 31, 1996 to
give effect to Automated Minutes which may not have been fully reflected in
earlier Royalty Reports.
4.2 The reports of Section 4.1 shall include a statement prepared
by the Licensee stating, on a telephone number and name of activity basis, the
total minutes and the total Automated Minutes utilized in the course of the
activities of Licensee and its Subsidiaries in the Television Shopping Systems
Field-Of-Use, and the EBITDA for the Royalty Reporting Period involved. The
report shall also identify the Subsidiaries benefitting from the license
granted herein and confirm that it is a complete and accurate accounting of all
minutes (including Automated Minutes) and EBITDA for the specified Royalty
Reporting Period. A carrier statement from each of the appropriate
telecommunications carriers must be attached, showing net minutes, and
indicating that these are complete statements for the Licensee and any
appropriate Subsidiaries benefitting from the license granted herein. The
reports must contain enough detail to allow Licensor to reconcile the carrier
statements to the Licensee reports. In addition to reports for each Royalty
Reporting Period, Licensee shall deliver to Licensor an annual statement
confirmed by Licensee's chief information officer stating that the quarterly
statements for the past year have been examined and they correctly and fairly
indicate the amounts due. All annual statements shall contain an accounting of
any royalties rolled over that year as well as the total amount of royalties
rolled over to date.
4.3 Each report of Section 4.1 shall be made prior to the
expiration of forty-five (45) days after the close of the Royalty Reporting
Period to which it pertains, with the first one due within forty-five (45) days
after June 30, 1996. The reports shall be accompanied by all amounts due. The
annual statements referred to in Section 4.2 shall be provided, with payment
due, if any, prior to the expiration of forty-five (45) days following December
31 of the year involved. After December 31, 2005, annual statements and
accompanying payments shall continue to be made until all rolled over royalties
have been paid to the extent required under Section 3.4 above, with the first
such payment of rolled over royalties due prior to the expiration of forty-five
days following December 31, 2005.
8
<PAGE> 10
4.4 Licensee shall maintain regular and complete records for a
period of three years after the expiration of the calendar quarter to which the
records pertain, sufficient to enable verification of the accuracy of reports.
The records shall be maintained at Licensee's regular place of business and, on
thirty (30) days written notice, shall be available for inspection by Licensor's
outside accountants, after executing an appropriate confidentiality agreement,
during normal business hours, for three years immediately following each
calendar quarter while the Agreement is in force. Licensor shall have the right,
once a calendar year on thirty (30) days written notice to Licensee, to have its
accountants audit relevant records, systems and any other documents or things
underlying the calculation of amounts under this Agreement. However, such
outside accountants shall maintain such information in confidence (executing an
appropriate confidentiality agreement) and shall disclose to Licensor only the
proper calculation of amounts. Should any such audit reveal a payment
shortfall, the amount of the shortfall shall be paid by adding that amount to
Licensee's next royalty payment remittance after the discovery thereof, together
with pro rata interest calculated on a yearly basis at the prime rate, as it
appears in the "Money Rates" (or like) section of the Wall Street Journal on the
next business day after the shortfall is discovered. If any such shortfall is in
excess of twelve and one-half (12.5) percent of the amount due, Licensor shall
have the right to have its accountants audit such records, systems and other
documents one additional time in the ensuing year. In the event an overpayment
is detected from such audit, licensee shall be credited an amount equal to the
overpayment in the next monthly royalty statement following the date of such
detection. If licensee disagrees with an audit revealing a payment shortfall, a
determination of whether there is a shortfall and the payment due hereunder
shall be submitted to Arbitration in accordance with Section 10. In any event,
each party shall bear its own costs, fees or expenses associated with any
inspection or audit specified in this provision. Any audits beyond those
specified in this provision shall be at Licensor's expense.
4.5 If Licensee fails to make timely payments of payments of
amounts due or provide timely statements, Licensor may notify Licensee in
writing of such failure within thirty (30) days after such failure occurs.
Licensee shall have sixty (60) days from receipt of Licensor's written notice to
cure such failure; otherwise, such failure shall constitute a material breach
of this Agreement,
4.6 Licensor agrees to hold in strict confidence all information
obtained from Licensee, including or relating to the reports, records, payments
and audits described herein.
5. REPRESENTATIONS AND WARRANTIES
5.1 Licensor represents and warrants that it is the sole owner of
all rights, title and interest (legal and equitable) of the Licensed Patents,
that it has the right to license the Licensed Patents, that it has the right to
enter into this Agreement and that it is not a party to any agreements or
obligations inconsistent with this Agreement. Furthermore, Licensor
9
<PAGE> 11
represents and warrants that there are no previously granted exclusive licenses
granted to any third parties in any of the Fields-Of-Use as defined in Exhibit
B. It is understood that any such license granted by Licensor is subject to the
rights granted by this Agreement to the Licensee and its Subsidiaries.
5.2 This license does not and shall not be interpreted or
construed to include: (1) any warranty or representation as to the validity,
enforceability or scope of any Licensed Patent, (2) any warranty or
representation that any specific apparatus or method used by Licensee in
connection with any Licensed Patent is or will be free from infringement of
patents of others or other intangible rights of third parties, (3) any
requirement to file any patent application, secure or maintain any patent, (4)
any obligation to bring or prosecute any action for infringement of any
Licensed Patent, (5) any obligation to furnish any technical or support
information, (6) any license or right by implication or estoppel, or (7) any
warranty regarding implementations of Licensed Patents as with respect to
merchantability, use or fitness for any particular purpose.
5.3 Licensee represents and warrants that the number of Automated
Minutes it utilized in 1995 in the course of its activities in the Television
Shopping Systems Field-Of-Use is Thirty-Nine Million, Five Hundred Fifty-Seven
Thousand, Two Hundred Fifty-Eight minutes (39,557,258). These activities
include, but are not limited to, order calls ("Tootie") and customer service
calls ("Tooter").
6. DEFAULT
6.1 Upon the occurrence of a default, Licensor may give written
notice of the default to Licensee, identifying the nature of the default, within
sixty (60) days of Licensor having notice of the default. Licensee shall have
sixty (60) days following receipt of such notice to cure the default.
Thereafter, if the default is not cured by Licensee within the time provided,
Licensor may immediately terminate this Agreement by giving written notice of
termination to Licensee.
7. TERMINATION
7.1 Licensee shall have the right after January 1, 1997 to
terminate this entire Agreement at any time by a written notice to Licensor at
km thirty (30) days in advance. Such termination shall be effective on December
31 of the calendar year in which such notice is provided.
7.2 The termination of the license granted herein shall not
relieve the duty and obligation to pay in full all amounts due as of the
effective date of such termination.
10
<PAGE> 12
7.3 If this Agreement is terminated any time Prior to the end
of year 10, all royalties "rolled over" under the terms of Section 3.4 shall,
be paid in full and represent non-refundable, non-cancellable obligations of
Licensee in all circumstances.
7.4 Unless sooner terminated as provided herein, this Agreement
shalt continue until the expiration of the last to expire of the Licensed
Patents.
8. CONFIDENTIALITY
8.1 Except as stated in Section 10, PRESS RELEASE, the parties
hereto agree to maintain the details of this Agreement in confidence and not to
reveal the same to third parties, except officers, directors, employees, agents,
attorneys and partners of Licensee, and except as required by law subject to
the other provisions of this Agreement.
8.2 Notwithstanding the provisions of Section 8.1, Licensor
may disclose a summary of the terms and conditions of this Agreement
to existing or potential licensees, providing such existing or potential
licensees agree in writing to maintain the disclosed summary of terms and
conditions confidential. In addition, Licensor may disclose the names of
Licensee and its Subsidiaries in the normal course of its business.
9. ARBITRATION
9.1 No dispute between the Parties concerning validity of any of
the Licensed Patents, enforceability of any of the Licensed Patents,
infringement of any of the Licensed Patents or the scope of any of the claims of
the Licensed Patents may be Submitted to arbitration unless otherwise agreed by
the parties in writing.
9.2 Except for a dispute concerning the subjects of Section 10.1,
any dispute between the Parties concerning the interpretation, construction
or application of any terms, covenants or conditions of this Agreement shall be
resolved by arbitration.
9.3 Arbitration shall be in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (AAA) by a sole
Arbitrator who shall be appointed by the parties; if the parties do not agree
on an arbitrator within sixty (60) days of notice, the arbitrator shall be
appointed by the president of the AAA. Any other choice of law clause to the
contrary in this Agreement notwithstanding, the arbitration shall be governed
by the United States Arbitration Act, 9 U.S.C. Section 1-16 and insofar as the
proceeding relates to patents, it shall also be governed by 35 U.S.C. Section
294, to the extent applicable. The parties shall have the right to conduct
reasonable discovery in any such arbitration, as determined by the arbitrator.
11
<PAGE> 13
9.4 Any award made (i) shall be a bare award limited to a
holding for or against a party and affording such remedy as is deemed equitable,
just and within the scope of the Agreement, (ii) shall be with a brief statement
(not to exceed ten (10) pages) of the reasoning on which the award rests; (iii)
shall be made within four (4) months of the appointment of the arbitrator; (iv)
may be entered in any court of competent jurisdiction; and (v) any award
pertaining to a patent which is subsequently determined to be invalid or
unenforceable or otherwise precluded from being enforced in a judgment rendered
by a court of competent jurisdiction from which an appeal can or has been taken
my be modified by any court of competent jurisdiction upon application by any
party to the arbitration,
9.5 The requirement for arbitration shall not be deemed a waiver
of any right of termination under this Agreement and the arbitrator is not
empowered to act or make any award other than based solely on the rights and
obligations of the parties prior to any such termination.
9.6 Each party shall bear its own expenses incurred in connection
with any attempt to resolve disputes hereunder, but those related to the
compensation and expenses of the arbitrator shall be borne equally.
9.7 The arbitrator shall not have authority to award punitive or
other damages in excess of compensatory damages and each party irrevocably
waives any claim thereto.
10. PRESS RELEASE
10.1 A mutually approved press release in the form attached hereto
as Exhibit C may be released by Licensor on a date mutually agreed upon. Both
the Licensee, its officers and principals, and the Licensor, its officers and
principals, agree and undertake that any and all future statements by them, or
any of them, to the public, the media or to business associates shall be
entirely consistent with the Press Release as mutually approved. Nothing in
this Agreement shall be construed to preclude Licensee, its officers or
principals from making any disclosures required by law, regulation or judicial
process.
11. PATENT MARKING
11.1 If Licensee or its Subsidiaries at any time during the term of
this Agreement distribute printed materials regarding their automated systems,
such materials shall contain a notice of the Licensed Patents as indicated in
Exhibit D.
12
<PAGE> 14
12. NOTICES
12.1 All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by Federal Express or other
nationally recognized overnight carrier, registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, with written
indication of delivery or tender, when applicable, addressed to the addressee
first set forth above or at such other address as either party may substitute
by written notice provided to the other party in such manner. Such notices
shall be deemed to have been served when delivered, or if delivery is not
accomplished by reason of some fault of the addressee, when tendered.
13. INVALIDITY
13.1 If any paragraph, provision, clause of this Agreement or claim
of any Licensed Patent shall be found or held to be invalid or unenforceable by
a court or other decision-making body of competent jurisdiction, the remainder
of the Agreement or Licensed Patents shall remain valid and enforceable, and to
the extent required in the pursuit of this Agreement, the Parties shall
negotiate in good faith a substitute, valid and enforceable provision which
reflects the Parties, intent in entering the Agreement.
14. ENTIRE AGREEMENT
14.1 The terms and conditions herein constitute the entire
Agreement between the Parties and supersede all previous agreements and
understandings, whether oral or written, between the Parties hereto with
respect to the subject matter hereof, and no prior agreement or understanding
varying or extending the same shall be binding upon either Party hereto.
15. SECTION HEADINGS
15.1 Thee section headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
16. GOVERNING LAW
16.1 This Agreement shall be governed and interpreted in accordance
with the laws of the state of California U.S.A., without reference to conflicts
of laws and principles. Any
13
<PAGE> 15
litigation between the Parties concerning the subjects of Section 9.1 shall
take place in the United States District Court for the Central District of
California and the Parties agree that the Court has jurisdiction over them.
However, in the case of arbitration requested specifically by one of the Parties
under Section 9, the arbitration shall be held in the state of domicile of the
other Party. For these purposes, any arbitration in Florida shall be held in
St. Petersburg or Tampa, at Licensee's election, and any arbitration in
California shall be held in Los Angeles.
17. NO AGENCY
17.1 Nothing herein contained shall be deemed to create or give
rise to an agency, joint venture or partnership relationship, or any
confidential or fiduciary relationship between the Parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Agreement on the dates indicated below.
LICENSOR
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.,
a California limited partnership,
By: A2D, L.P., a California limited partnership,
its general partner,
By: A2D Corporation, a California corporation,
its general partner,
By: /s/ Ronald A. Katz DATE: 6/21 , 1996
-------------------------- --------
RONALD A. KATZ
Its Chief Executive
LICENSEE
Home Shopping Network, Inc.
By: /s/ James G. Held DATE: 6/20 , 1996
------------------------- --------
Name: James G. Held
-----------------------
Its President & CEO
-------------------------
14
<PAGE> 16
EXHIBIT A
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.
UNITED STATES PATENTS
<TABLE>
<CAPTION>
EXPIRED PATENTS
Patent No. Title
------ -----
<S> <C>
4,071,698 Telephone System for Audio Demonstration
and Marketing of Goods or Services
</TABLE>
<TABLE>
<CAPTION>
UNEXPIRED PATENTS
Patent No. Title Issue Date
--------- ----- ----------
<S> <C> <C> <C>
1. 4,792,968 Statistical Analysis 12/20/1988
System for Use With
Public Communication
Facility
2. 4,845,739 Telephonic-Interface 7/4/1989
Statistical Analysis
System
3. 4,930,150 Telephonic Interface 5/29/1990
Control System
4. 4,932,046 Telephone Programming 6/5/1990
System for Automated
Calling
5. 4,939,773 Multiple Party 7/3/1990
Telephone Control
System
6. 4,975,945 Universal Telephone 12/4/1990
Call Relay System
</TABLE>
15
<PAGE> 17
EXHIBIT A - continued
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.
UNEXPIRED PATENTS
<TABLE>
<CAPTION>
Patent-No. Title Issue Date
---------- ----- ----------
<S> <C> <C> <C>
7. 4,987,590 Multiple Party 1/22/1991
Telephone control
System
8. 5,014,298 Voice-Data Telephonic 5/7/1991
Control system
9. 5,0l6,270 Expanded Telephone 5/14/1991
Data Organization
System
10. 5,048,O75 Telephonic-Interface 9/10/1991
Statistical Analysis
System
11. 5,073,929 Voice-Data Telephonic 12/17/1991
Control System
12. 5,091,933 Multiple Party 2/25/1992
Telephone Control
System
13. 5,109,404 Telephone Call 4/28/1992
Processor With Select
Call Routing
14. 5,128,984 Telephone Interface 7/7/1992
Call Processing System
With Call Selectivity
15. 5,185,787 Multiple Party 2/9/1993
Telephone Control
System With Random
Dialing For Polling
16. 5,218,631 Telephonic-Interface 6/8/1993
Game Control System
</TABLE>
16
<PAGE> 18
EXHIBIT A - continued
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.
UNEXPIRED PATENTS
<TABLE>
<CAPTION>
Patent No. Title Issue Date
---------- ----- ----------
<S> <C> <C> <C>
17. 5,224,153 Voice-Data Telephonic 6/29/1993
Interface Control
system
18. 5,251,252 Telephone Interface 10/5/1993
Call Processing System
with Call Selectivity
19. 5,255,309 Telephonic-Interface 10/19/1993
Statistical Analysis
System
20. 5,259,023 Telephonic-Interface 11/2/1993
Statistical Analysis
System
21. 5,297,197 Multiple Party 3/22/1994
Telephone Control
System
22. 5,349,633 Telephonic-Interface 9/20/1994
Game Control System
23. 5,351,285 Multiple Format 9/27/1994
Telephonic Interface
Control System
24. 5,359,645 Voice-Data Telephonic 10/25/1994
Interface Control System
25. 5,365,575 Telephonic-Interface 11/15/1994
Lottery System
26. 5,442,688 Multiple Party 8/15/1995
Telephone Control System
</TABLE>
17
<PAGE> 19
EXHIBIT A - CONTINUED
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.
UNEXPIRED PATENTS
FOREIGN PATENTS
<TABLE>
<CAPTION>
COUNTRIES
PATENT NO. COUNTRY TITLE EFFECTED IN
------------ ------- ----- -----------
<S> <C> <C> <C> <C>
1. 0 229 170 EPC Statistical Analysis Germany
system For Use with France
Public Communication U.K.
Facility (corresponds Netherlands
to U.S. Pat. No. 4,792,968) Sweden
2. 0 342 295 EPC Telephonic-Interface Germany
Statistical Analysis France
System (corresponds to U.K.
U.S. Pat. No. 4,845,739) Netherlands
Sweden
3. 0 230 403 UK Voice-Data Telephonic
Control System (corresponds
to U.S. Pate No. 5,073,929)
</TABLE>
18
<PAGE> 20
EXHIBIT B
RONALD A. KATZ TECHNOLOGY LICENSING, L.P.
FIELDS OF USE
1. GROUP CONFERENCING (including "broadcast services)
One Example: Automated bridging of more than two callers utilizing some
form of "listen only" (unilateral) communication which may be combined
with some form of interactive communication.
2. GOVERNMENT LICENSING REGISTRATION (i.e., automotive registration)
The use of interactive voice services operated by a Government entity or
its designee to handle the process of a caller renewing a license.
3. STATE LOTTERY PREPAID TICKETS OR CARDS
The use of interactive voice services by a State or its designee for the
purpose of allowing a caller to enter a state lottery utilizing
interactive call processing technology.
4. PAY-PER-VIEW
Automated ordering of pay-per-view movies. Typically involves automated
ordering of a movie or event from a cable company utilizing automatic
identification capabilities and/or voice processing capabilities to
capture the number from which the subscriber is calling or the
callers account number, to speed the order and increase security.
5. PRODUCT/SERVICE SUPPORT
The interactive processing of calls operated by the manufacturer of the
product or the provider of the service, for the purpose of offering
customer advice or support. Typically the automated services are used
at the beginning of the call, often to greet callers, collect
information from then via touch tone and queue callers for subsequent
connection to some form of consultant.
6. TELEVISION SHOPPING SYSTEMS (automated ordering)
The use of interactive voice services operated by a television shopping
network, to handle ongoing orders for products or services in an
automated fashion. Typically, this involves the processing of credit
card information for payment. In such cases, the mere utilization and
authorization of credit cards by Licensee, whether with respect to cards
of a third party credit card issuer or cards issued by Licensee itself
in the conduct of its television shopping system business(es), fall
within the Television Shopping Systems Field-Of-Use of this Agreement
and shall not require a separate license for any other Field-Of-Use.
Any time such a third party is involved, however, Licensee shall notify
the third party in writing that it does not receive any
19
<PAGE> 21
license or other right, either express or implied, under the Licensed
Patents by virtue of its participation in Licensee's activities.
In addition, automated promotions (i,e., games, contests, lotteries
and polls) associated with the offering of products over television,
and utilizing Licensee's television shopping system(s), fall within
the Television Shopping Systems Field-Of-Use of this Agreement and
shall not require a separate license for any other Field-Of-Use.
7. TELEVISION SHOPPING SYSTEMS VIA CABLE FACILITIES (automated ordering,
The automated processing of orders (over cable distribution media) for
products or services based on television programming, where the order
processing is offered directly by the licensee without an interactive
voice component.
8. ELECTRONIC PERSONAL CLASSIFIEDS
The use of interactive voice services to allow advertisers and
interested respondents to contact each other. Typically, advertisers
create and store voice messages which can be heard by potential
respondents who can, in turn, leave recorded voice messages for the
advertisers. Finally, advertisers have the ability to retrieve stored
responses. Advertisers may also have the ability to store attributes of
that which is being advertised via touch tone entry, for the purpose of
automatically matching similar attributes or requirements of the
respondents.
9. AUTOMATED SECURITIES TRANSACTIONS (buy/sell)
Interactive call processing on an ongoing basis, operated by the broker
or dealer of the securities, which allows callers to purchase, sell, or
trade securities such as stock and mutual funds, or transfer funds
between such securities. May include automated customer service
functions such as automated order status information and cancellation.
10. AUTOMATED CREDIT & CALLING CARD AUTHORIZATION SERVICES (excluding
prepaid cards) The provision of credit card authorization service by the
credit card firm or designee using interactive voice response as a stand
alone offering. (Note: This is as opposed to the obtaining of an
authorization as a part of processing a call for another purpose, i.e.,
an automated order, which is included in the Service Bureau
Field-Of-Use.)
11. INTERACTIVE TRANSACTIONS THROUGH CABLE COMMUNICATIONS FACILITIES
Automated interactive transactions of various types (e.g., games,
contests, lotteries and polls) conducted over a cable distribution
media (e,g., coaxial or fiber media).
20
<PAGE> 22
FIELDS OF USE
CONTINUED
12. AUTOMATED SERVICE BUREAU
All forms of fully automated call processing or combined automated
and live call processing [except as described in each of the other
Fields-of-Use defined herein] using interactive voice services, where
an independent bureau offers call termination services, often including
transport and call handling, to a sponsoring organization or an
internal group.
This Field-Of-Use includes prepaid card use and automated ordering,
which in turn include the obtaining of a credit card authorization as
part of such an order or other interactive process, at the regular per
minute rates. Ongoing automated ordering on behalf of a television
shopping network would be excluded as it represents another Field-Of-Use.
13. ENHANCED CABLE CUSTOMER SERVICE:
Cable related customer service (not including Pay-Per-View or
Interactive Transactions Through Cable Communications Facilities)
typically involving communications with customers concerning cable
accounting, billing, ordering of service and cable service related
equipment, coordination of installation, repairs or other cable
services. These communications are all related to the provision and
support of cable services only. Communications related to any other
area such as telephony or wireless service would be embraced in another
Field-Of-Use.
14. ENHANCED TELEPHONY CUSTOMER SERVICE:
Telephony-related customer service typically involving communications
with customers concerning local, long distance or other telephony
accounting, billing, ordering of service and service-related equipment,
coordination of installation, repairs, or other services only.
Communications related to any other area such as cable service would be
embraced in another Field-Of-Use.
21
<PAGE> 23
EXHIBIT D
PATENT NOTICE
Home Shopping Network, Inc. is licensed under the following, and related Ronald
A, Katz Technology Licensing, L.P. United Statics Patents: 4,845,739;
5,255,309; 5,259,023; 5,347,633; 5,351,285; 5,365,575; 5,251,252; 5,359,645;
5,297,197; and others.
24
<PAGE> 24
DRAFT
HOME SHOPPING NETWORK LICENSES KATZ PATENT PORTFOLIO
Ronald A. Katz Technology Licensing, L.P. (RAK) announced today that
it has entered into a non-exclusive agreement with Home Shopping Network, Inc.
(NYSE-HSN) to license the extensive Katz patent portfolio of interactive
telecommunications technology. Home Shopping Network is one of many
major companies that have licensed these patents including American Express,
First Data Corp. and MCI Communications Corporation.
The RAK portfolio consists of 26 U.S. patents and 18 patent
applications resulting from Ronald A. Katz's pioneering work in the interactive
field during the 1980's. Katz is the named inventor on more than 30 patents
primarily in telecommunications and computing. He formed Telecredit, Inc., the
nation's first on-line real time credit and check cashing authorization system,
and was awarded a patent at co-inventor of that technology.
"We are Pleased to welcome Home Shopping Network as a licensee and
appreciate their recognition of the importance of our patent portfolio to their
business," said Ronald Katz.
James Held. President and chief executive officer of HSN said, "The
Katz patent license agreement will allow us to continue our leadership in the
use of interactive voice response communications to effectively serve our
customers."
Home Shopping Network pioneered the television shopping industry in
1982. Its 24-hour programming reaches approximately 69 million households via
cable and broadcast station affiliates and satellite dish receivers.
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